MCO — Q3 2026 Financial Report Analysis

Ratings revenue dips 1% as junk-bond and leveraged-loan deals dry up; a divestiture gain lifts reported EPS 18%

Moody's revenue rose 0.8% to $2,023 million in the third quarter of 2026, after growing 15% in the second quarter. The two halves of the company went in opposite directions. The credit-ratings arm, Moody's Investors Service (MIS), slipped 1% to $1,087 million against what Moody's calls "a record prior-year comparison," mainly because fewer risky companies issued new debt. The software, data and research arm, Moody's Analytics (MA), grew 3% to $936 million, or 8% after stripping out businesses it has sold and currency moves.

Reported diluted EPS (profit per share) rose 18% to $4.24, but that figure includes a one-off $115 million pre-tax gain from the sale of MA's Regulatory Solutions business. Moody's adjusted diluted EPS, which excludes that gain along with acquisition amortization, restructuring and a few other items, rose 6% to $4.14. This report is written from the earnings release (Exhibit 99.1 to the October 21, 2026 Form 8-K). The full 10-Q has not been filed yet, so the management discussion that usually explains each line in more detail is not available.

Key figures

Operating margin is the share of revenue left after running the business, before interest and tax. "Adjusted" figures are Moody's own non-GAAP measures. Adjusted operating income excludes depreciation and amortization, restructuring and some one-off costs.

Ratings: investment-grade up, risky debt down

MIS earns money two ways. Transaction revenue is a one-time fee paid when a company, bank or government issues new debt and has it rated. Recurring revenue is mostly annual monitoring fees on debt Moody's already rates. This quarter recurring revenue rose 8% to $373 million, while transaction revenue fell 5% to $714 million. Recurring revenue was 34% of MIS revenue, up from 31% a year earlier. Total rated issuance, meaning the dollar amount of new debt Moody's rated, was down 2%.

All of the decline came from corporate finance. The other three rating lines grew:

Moody's gives revenue growth for the three corporate sub-categories but not their dollar amounts.

• Leveraged finance turned down. High-yield ("junk") bonds come from companies with weaker credit, and leveraged loans are loans to companies that already carry a lot of debt. In Q2 these were among the fastest-growing areas: leveraged-loan volume rose 50% and high-yield volume 33%. In Q3 high-yield volume fell 21% and leveraged-loan volume 35%. The release puts the MIS decline down "primarily" to "lower Leveraged Finance issuance."
• AI borrowing kept investment grade strong. Investment-grade debt comes from the strongest borrowers. Its revenue rose 18%, which Moody's links to "issuance associated with AI-related financing and hyperscaler investments." Hyperscalers are the large cloud companies borrowing to build data centers.
• Data centers also helped PPIF. PPIF grew 11%, driven by "U.S. Public Finance, Sovereign and data center-related financing."
• Structured finance (bonds backed by pools of loans, such as mortgages) grew on higher ABS, RMBS and covered-bond issuance. Its organic constant-currency growth was 3%, because $3 million of its revenue came from an acquired business.

Operating leverage, which helped MIS in Q2, worked in reverse this quarter, though only slightly. MIS revenue fell $10 million (including intersegment revenue) while its costs rose $6 million. Compensation rose 5% to $299 million, and non-compensation costs fell 8% to $103 million. MIS adjusted operating income fell 2.1% to $733 million, and its margin slipped 0.8 points to 64.4%.

Analytics: steady underneath the divestitures

MA's reported growth of 3% is held down by two businesses Moody's has sold: Learning Solutions and Regulatory Solutions. These contributed $42 million of revenue in Q3 2025 and none this quarter. Excluding them (and a $2 million currency effect), MA grew 8%, the same organic rate as in Q2. Recurring revenue was 99% of MA revenue and grew 9% on that organic basis. One-time "transaction" revenue fell 76% to $8 million, mostly because of the Learning Solutions sale.

ARR, the yearly value of MA's active subscription contracts, rose 8% to $3,688 million. That is up $27 million from $3,661 million at the end of June, but annual growth slowed from 9% in Q2.

Banking shows the biggest gap between the measures. Reported revenue fell 16% because $41 million of last year's Banking revenue came from the divested businesses. Organic revenue rose 19%, but ARR rose only 8%. The Q2 10-Q explained a similar gap as "the timing of revenue recognition for installed software subscriptions," meaning some revenue was recognized earlier than it would be under a simple monthly subscription. The Q3 release gives no explanation, so the 8% ARR growth is the safer guide to Banking's run-rate until the 10-Q is filed. KYC ("know your customer," compliance screening data) had the fastest ARR growth at 12%. Research & Insights is still the slowest line.

MA adjusted operating income rose 5.8% to $331 million and the margin reached 35.3%. Compensation costs were flat at $352 million despite the revenue growth, which fits with the restructuring program and the smaller post-divestiture business.

What the headline numbers hide

• The 18% GAAP EPS growth is mostly the divestiture gain. The $115 million pre-tax gain (about $0.47 per share after tax) was recorded below operating income. Without it, diluted EPS would have been about $3.77, up 4.7%. Pre-tax income without the gain was $853 million, down 1.6% from $867 million.
• Adjusted EPS growth came mainly from fewer shares and a lower tax rate. Adjusted net income rose only 1.8% ($717 million vs. $704 million), but the diluted share count fell 3.5% to 173.3 million after $2.6 billion of buybacks this year. That share-count drop accounts for most of the 5.6% adjusted EPS growth. The effective tax rate also fell to 24.0% from 25.4%. Moody's attributes this to "the lapse of a statute of limitations related to tax exposures assumed in a prior-year M&A transaction" and non-U.S. tax benefits, which may not recur. Adjusted operating income, the core measure of the business, was flat at $1,064 million vs. $1,062 million.
• The adjusted measures leave out a lot. The 7.8-point gap between GAAP and adjusted operating margin comes from depreciation and amortization ($124 million, about 6.1 points), restructuring ($27 million, about 1.3 points) and, for the first time, duplicate rent on Moody's new New York headquarters ($7 million). Restructuring charges are part of a multi-year program and have appeared every quarter (from $21 million a year ago), so treating them as one-off is generous.
• Cash flow is strong and not inflated. Year-to-date operating cash flow was $2,471 million, up 21%, and free cash flow (operating cash flow minus capital spending) was $2,200 million, up 22%. Net income includes $296 million of divestiture gains that are not operating cash (the $200 million of sale proceeds appears under investing). Measured against net income without those gains (about $1,980 million), operating cash flow was roughly 1.25 times profit. Part of the improvement came from smaller working-capital outflows ($118 million vs. $397 million a year earlier). Accounts receivable fell to $1,830 million from $2,024 million at year-end, so there is no sign of sales being booked faster than cash is collected.
• Buybacks are being paid for partly from cash on hand. Cash fell to $1,513 million from $2,384 million at the start of the year, and shareholders' equity fell to $3,268 million from $4,054 million. Debt was little changed at about $6.9 billion, of which $568 million is now due within a year.

Did last time's read hold up?

Yes, on both points it flagged. Our Q2 report said keeping MIS full-year growth at "high-single-digit" after 16% first-half growth meant management expected second-half ratings growth to be "much slower, and possibly close to flat." It also said leveraged-loan and high-yield activity "would weaken first" if conditions turned. In Q3 MIS revenue fell 1%, and high-yield and leveraged-loan revenue were the two biggest declines. The other item to watch was whether MA's margin would rise toward the 34–35% full-year target as restructuring savings came through. It reached 35.3%, up from 33.6% in Q2.

Takeaway: Moody's third quarter showed that its ratings arm's lift now depends on what kind of debt is issued, not just how much. Investment-grade and data-center borrowing kept growing, but the drop in high-yield and leveraged-loan deals left MIS revenue down 1% and total adjusted operating income flat. Reported EPS growth came from a divestiture gain, buybacks and a lower tax rate. The part of the business that grew on its own was MA, with 8% organic revenue growth and a higher margin.

Outlook

Moody's reaffirmed every line of its full-year 2026 guidance:

• Revenue: growth in the high-single-digit percent range. Year-to-date revenue is up 8% ($6,287 million vs. $5,829 million).
• Diluted EPS of $16.00–$16.50 and adjusted diluted EPS of $16.50–$17.00. Against nine-month EPS of $12.98 (GAAP) and $13.14 (adjusted), this implies Q4 adjusted EPS of about $3.36–$3.86.
• Operating margin of 44–45% and adjusted operating margin of 52–53%.
• Operating cash flow of $3.15–$3.35 billion and free cash flow of $2.7–$2.9 billion. Against $2,200 million of free cash flow so far, that implies $500–700 million in Q4.
• Share repurchases of up to $3.0 billion, which leaves room for about $0.4 billion more in Q4 after roughly $2.6 billion so far.
• MIS: high-single-digit revenue growth and an adjusted margin of about 65%. MIS revenue is up 10% year-to-date, so this implies Q4 growth below that pace.
• MA: revenue up mid-single-digits (high-single-digits organic), ARR growth in the high-single-digits and an adjusted margin of 34–35%.

The assumptions behind the guidance became more cautious about credit. Moody's now expects the global speculative-grade default rate (the share of lower-rated borrowers that fail to pay their debt) to finish the year at around 3.8%, up from about 3% assumed in July. It expects U.S. high-yield spreads to widen to around 300 bps in the coming quarter; in July it assumed they would widen to about 330 bps over two quarters. A spread is the extra interest a risky borrower pays compared with the government. It still assumes the Fed and the ECB each raise rates once more by the end of 2026, and it kept its assumption of a mid-single-digit percent rise in global rated issuance.

Our read: The guidance for Q4 does not require much from the ratings business. That matters because Moody's own assumptions (more defaults and still-tightening central banks) point to a weak market for the high-yield and leveraged-loan deals that drove Q3's decline. The AI and data-center borrowing that kept investment grade and PPIF growing is the main support for MIS, and it has now held up for two quarters. The more predictable story is MA: 8% organic growth for two quarters running and a margin that rose 1.7 points from Q2. In the next quarter we will watch three things: whether ARR growth stays at 8% or slows further, whether the full 10-Q explains Banking's 19% organic revenue growth against 8% ARR growth, and how much of Q4's EPS comes from buybacks rather than operating profit.