S&P Global and Moody's Have Rated Debt for More Than 100 Years. Here's Why That Moat Still Holds.

S&P Global (NYSE: SPGI) and Moody's (NYSE: MCO), two of the world's largest aggregators of financial data, have both rated debt for over a century. Poor's Publishing, which eventually merged with Standard Statistics to become S&P, sold its first bond ratings in 1916. Moody's launched its modern bond ratings business in 1909.

Today, S&P Global and Moody's both provide a much broader range of financial data, analytics, and credit rating services. However, both companies still typically generate more than 30% of their revenue from their industry-leading credit rating services. Let's see how those legacy businesses maintain their moats -- and how they support their other businesses.

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Why do S&P Global and Moody's have wide moats?

In 1975, the Securities and Exchange Commission (SEC) informally classified a handful of trusted ratings agencies --- including S&P, Moody's, and Fitch -- as Nationally Recognized Statistical Rating Organizations (NRSROs). In 2007, that classification was written into law.

Under that law, any issuer that wants to sell bonds to institutional buyers must get a rating from an NRSRO. Pension funds, mutual funds, insurance companies, and banks are also barred from holding any debt that doesn't carry an investment-grade rating from an approved NRSRO.

Newer and smaller ratings agencies, even if approved as NRSROs, would struggle against S&P, Moody's, and Fitch for three simple reasons. First, investors wouldn't trust their ratings. Second, issuers wouldn't pay them because an unknown rating wouldn't help them sell more bonds. Lastly, the big three agencies have built massive databases of financial data over the past century. Newcomers, even armed with the latest AI tools, can't aggregate that much data.

Most debt issuances require at least two NRSRO ratings. Together, S&P and Moody's control over 80% of that market. The rest mainly goes to Fitch, a subsidiary of the private Hearst Corporation. Therefore, it's practically impossible for a newcomer to cross that moat.

S&P Global and Moody's both use their debt rating businesses to acquire new customers. Any company that wants to issue debt must use their rating services, and that stickiness allows it to cross-sell its market data, risk-management software, research terminals, workflow tools, and other subscription-based services. Both companies leverage the reputation of their credit-rating services to sell other products, which in turn feed even more data into their ecosystems.

Can S&P Global and Moody's overcome their near-term challenges?

S&P Global and Moody's both seem like reliable long-term investments, but they've both underperformed the S&P 500 (SNPINDEX: ^GSPC) by a wide margin this year. Rising interest rates and Treasury yields mainly caused that pressure.

In mid-September, the Federal Reserve raised its benchmark rates for the first time in three years to tame inflation. The 10-Year Treasury yield also recently rose to 5.2% -- its highest level since 2007. That pressure will drive more issuers to throttle or halt new debt offerings, since they'll need to issue new debt at yields higher than those on CDs or Treasuries to remain competitive.

But even if near-term demand for their credit-rating services dries up, their market data and analytics services will continue to thrive through bear and bull markets. Regardless of the market's direction, investors will still need to use data from S&P Global and Moody's to analyze their investments. It will also continue to collect index licensing fees (for the S&P 500, Dow Jones, and other indexes) from fund managers and institutional investors.

In other words, S&P Global and Moody's -- which have weathered plenty of market downturns over the past century -- will continue to grow as the financial sector evolves. Both stocks are still reasonably valued at 23 and 26 times next year's earnings, respectively, and they should remain reliable stocks to buy, hold, and forget for the next few decades.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Moody's and S&P Global. The Motley Fool has a disclosure policy.