穆迪 (MCO) 2003 Q1 法說會逐字稿

Good morning and welcome Moody’s Corporation first quarter 2003 results tele-conference.

At this time would I like to inform you that this conference is being recorded, and that all participants are in a listen-only mode.

At the request of the company we will open the conference up for questions and answers after the presentation.

I will now turn the conference over to Michael Courtian Vice President of Investor Relations and Corporate Finance.

Please go ahead sir.

Thank you.

Good morning everyone and thank you for joining us on this teleconference to discuss Moody's results for the first quarter of 2003.

This is Michael Courtian Vice President of Investor Relations and Corporate Finance.

Moody's released its results for the first quarter of 2003 after the market closed yesterday and the earnings released is available on our website at IR Moody's.com.

As required by recently issued securities and exchange commission regulations we furnished a form 8-K to the SEC containing our earnings release.

The earning release contains certain non GAAP financial measures and we may discuss our results in terms of these non GAAP financial measures during this call.

Information reconciling our non GAAP financial measures to our reported GAAP resulted is presented in the earning release and we encourage you to refer to that information in connection with our discussion on this tele-conference.

John Rutherfurd Jr. the President and Chief Executive Officer of Moody's Corporation will be leading this morning's call.

Also on this morning is Raymond McDaniel Jr., president of Moody’s investor service, and Jeanne Dering, Chief Financial Officer of Moody's corporation.

They will be available to answer questions following John's remarks.

Before we get started I'd like to call your attention to the cautionary language set out at the end of our earnings release.

Certain statements my colleagues and I make today maybe forward looking within the spirit of the Private Securities Litigation Reform Act of 1995.

This act provides the safe harbor for such forward-looking statements.

I would like to direct your attention to the management's discussion in analysis section and the risk factors discussed in our annual report on form 10-K for the year ended December 31st 2002 and other filings made by the company from time to time with the FCC.

I'd also like to point out our safe harbor statements under the private securities litigation reform act of 1995 contained in our press release issued yesterday evening.

These set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements.

I should point out that some members of the media might be on this call in a listen-only mode this morning and I'm pleased to turn the call over now to John Rutherfurd.

Thank you Mike.

I thank you all for joining us on today's call.

Before commenting on our results I'd like to mention that yesterday Raymond McDaniel Jr. was selected to the Moody's board of directors and also named Executive Vice President of Moody's Corporation.

We congratulate Ray on these appointments which are very well deserved based on the performance of Moody's investor service of which Ray continues to be president.

Now I'll discuss the highlights of our results and comment on Moody's US business.

I will also review results from Moody's KMD or quantitative credit assessment business and Ray will review our international results and comment on regulatory development.

Following Ray's comments I will give you an update or our share repurchase program and conclude by discussing Moody's outlook for 2003.

After the prepared comments my colleagues and I will respond to questions.

Let me start by putting the quarter into perspective.

At Moody's investor service our results were completely on plan for the quarter.

Also our forecast is to be on plan for the full year.

MKMB revenues were modestly less than planned but we're cautiously optimistic that MKMB will achieve its target for this year.

From an operating standpoint we're very much on track that we communicated at the beginning of this year.

We're also going to have a lower tax rate which will add 4 cents to EPS and had a nonrecurring insurance recovery which adds 5 cents.

Moody's reported revenue and earnings per share for the first quarter of 2003, revenues rose to $278.2m, an increase of 20% from $231.6m for the same quarter last year.

On a pro forma basis, assuming that Moody's April 2002 acquisition of KMB had taken place on January first, 2002, revenue growth would have been 14%.

Diluted earnings per share for the first quarter of 2002 rows to 55 cents before a nonrecurring gain on insurance recovery related to September 11th, an increase of 20% from 46 cents for the first quarter of 2002.

On a reported basis, including the nonrecurring insurance gain, diluted earnings per share for the quarter were 61 cents.

Earnings per share included a 1 cent impact related to the company's previously announced decision to begin expensing stock options and other stock based compensation plans in 2003.

So overall Moody's revenue and EPS are off to a good start for the year.

Let me take a few minutes now to review some additional highlights.

Moody's revenue in the United States totaled $183.3m for the first quarter.

A year over year increase of 14% on a reported basis.

On a pro forma basis, assuming that we had -- KMV for the first quarter of 2002 US revenue growth would have been 10%.

International revenue was $94.9m for the first quarter of 2003. 33% higher than the prior year period on a reported basis and 22% higher assuming that we had owned KMV in the first quarter of 2002.

International revenue accounted for 34% of Moody's total in the quarter, up from 31% for the quarter of 2002.

These revenue growth rates for the Moody's investor services business 10% in the United States and over 20% in international markets are in line with our (inaudible) targets for geographic growth rates.

Within the US rating's business, structured finance revenue was on plan, although it's high single digit percentage growth rate was less than last year’s growth rate.

We had good growth in revenue from rating asset back securities, residential mortgage back securities and credit derivatives.

Revenues from asset back commercial paper grew at a lower rate partly in response to accounting rule changes that may require some sponsors of these programs to consolidate commercial paper programs back on to their own balance sheets.

Our US corporate finance business showed year over year growth after several quarters of contraction.

Investment great issuance increased in the first quarter compared to the fourth quarter of last year, but was weaker than the first quarter of 2002.

Speculative grade issuance and bank loans showed growth based on both comparisons.

As investors became more comfortable with a risk return profile speculative grade credits.

Financial institutions revenues showed strong growth, as issuers took advantage of favorable interest rates and narrowing spreads reflecting lower perceived credit risk in this sector than in corporate.

Public finance revenue was up 12% year to year.

This line of business continued to benefit from the favorable interest rate environment and continued weakness in municipal tax receipts.

On a year to year basis, issuance was up over 20%, although it declined from the fourth quarter of 2002.

In our research revenue continued to grow very nicely.

This growth was attributable to strong sales volume of new products to existing clients in late 2002 and early 2003 with increases in new client acquisition.

We have also seen success from new products such as ratings interactive, a web based tool that allows investors to retrieve list of ratings in real time.

Our clients have also responded very positively to the expansion of our default research services and to our new focus that facilitate monitoring the performance of the underlying assets in structured finance transactions.

Finally we continue to find strong demand among large financial institutions and third party information providers for rights to incorporate our ratings into their internal systems and client extra net sites.

We are also making good progress bringing on board and integrating our teams of specialists in financial reporting off balance sheets, securitizations and risk transference and corporate governance.

We expect to start publishing reports on these subjects for leading US corporations and financial institutions beginning in July of this year.

At Moody's KMV revenue totaled $24.8m for the quarter, equivalent to 16% year-over-year growth assuming we had owned KMV for the first quarter of last year.

MKMV’S first quarter revenue growth was less than our full year target, however, we are optimistic that MKMV will reach its revenue start for 2003.

MKMV generate revenues in two principals ways, from subscriptions and software sales.

For the first quarter ever 2003 we had a strong increase in subscription revenue related to the sale of credit risk assessment products.

The software sales element of our business has a seasonal element but the fourth quarter of each year usually the largest in terms of revenue.

Our first quarter 2003 software sales at MKMV declined year-over-year because the first quarter of 2002 was unusually strong.

Despite overall first quarter revenue growth at less than our target rate we continue to expect that MKMV will make good progress in 2003 towards the financial targets we announced at the time of the acquisition.

I'd like to turn now to a discussion of Moody's expenses and margins for the quarter.

Moody's operating margin was 54% in the first quarter, down from the exceptionally high 58% we achieved in the first quarter of 2002.

First quarter spending that we highlighted in our earnings release included spending on enhanced rating practices and product development, both important investments that we are making to extend our franchises.

Also as mentioned in our earnings release our first quarter expenses included $2m dollars related to stock based compensation plans.

Mainly for stock options.

Since the options were granted in February, the first quarter reflects 2 months of expense.

Finally, it is important to note that part of the margin reduction in our first quarter was due to growth in KMV, which is the lower margin than our ratings business.

Over time we expect that MKMV will grow at a higher rate but our lower margin than our ratings and research business.

So the total Moody's corporation margin will come down as a portion of our total revenue from MKMV growth.

Next I would like to provide some commentary on Moody's tax rate.

Moody's effective tax rate declined to 41.5% in the quarter down if 44.2% a year ago.

Our target is to reduce our tax rate to the 40% range over time.

We have made faster progress in reaching that target than we had anticipated.

Two important factors contributing to the year-over-year improvement in the tax rate are the continued operating growth in jurisdictions with lower tax rates than New York and the establishment of a New York captive insurance company which was approved by the state insurance authorities during 2002.

Now I'd like to ask Ray to talk about our international business and the status of the FCC’s review of credit rating agencies.

Thank you, John.

Moody's again achieved strong revenue growth in international markets during the first quarter.

As John mentioned Moody's international revenue grew to $94.9m in the first quarter an increase of 33% on reported basis and 22% pro forma as if we had owned MKMV in the first quarter of 2002.

International revenue was 34% of Moody's total revenue in the quarter up from 31% in the first quarter of 2002.

As we have seen over the pass two years, international markets continue to achieve both strong near term growth and to present some of the most attractive long term opportunities for Moody's.

In the Moody's investor service or MIS, ratting and research business we achieved international revenue growth of over 20% with double digit growth across all major business lines.

Once again overall growth was led by our European business which achieved revenue growth of more than 25%.

International structured finance saw another quarter of growth although not at the exceptional but unsustainable rates seen in 2002.

Overall revenue growth in international structured finance was mid teens, reflecting a solid increase in Europe partially offset by weakness in Latin America and to a lesser extent southeast Asia.

Our international company ratings achieved double digit growth in both corporate an financial institution sectors.

Revenue growth in both areas in Europe was around 25% benefiting from strong long term issuance infectivity in the European medium term note market.

Our international research business achieved exceptional revenue growth of over 40% with especially strong growth in Europe.

Finely we expect strong international growth to continue at MKMV as companies adopt and refine tools for credit risk management and as Banks respond to the new regulatory environment known as bezel (ph) 2.

I would also like to give a brief update on the US government's examination of the credit ratings agencies.

As.

Of you know Moody's participated in a hearing before the capital market subcommittee of the house financial services committee last month.

Based on what we heard from the FCC at that hearing, we expect the commission to issue it's concept release soon although we do not have a specific date.

We expect the concept row less will include a broad range of questions for public comment and may contain recommendations for guiding the future roll and function of rating agencies.

The concept release will invite comments from market participants, other regulators and the public and may be followed by proposed regulations and/or legislation later in the year.

We continue to work closely with the FCC to assist them with their review.

Internationally Moody's has also been invited to participate on a panel at the annual meeting of the international organization of securities commissioners in May.

We have been asked to share our views about the ratings industry and the international regulatory environment for rating agencies.

We are of course pleased to be a participant and have an opportunity to share our perspectives.

Now I'd like to turn the call back to John.

Thank you, Ray.

Let me now give you an update on our share repurchase program.

As you know, Moody's is committed to returning excess capital to shareholders through share repurchases.

During the first quarter of 2003, Moody's repurchased 1.2 million shares at a total cost of $51m.

That brought our cumulative stock buy backs since Moody's spun off from Dun and Bradstreet in September 2000 to 20.7 million shares at a total cost of $759.8m.

This includes 6.7 million shares repurchased to offset stock issuance under employees stock plans.

At a year end, Moody's had approximately $290m remaining under the $450m share repurchase program that the board of directors authorized in 2002.

We continue to anticipate completing the current share repurchase authorization by mid 2004.

I'd like to conclude my comments this morning by discussing our outlook for 2003.

The economic environment in which Moody's currently operates is not changed significantly since the company provided its 2003 revenue and earnings guidance in February.

Within the ratings business we expect moderate growth in global structured finance revenue.

In the United States we continue to expect a decline in residential mortgage refinancing in the second half of 2003.

What will this likely occur later in the year than we originally thought.

We expect continued slow growth in consumer spending, which should affect the asset backed market as well as continued weakness in asset backed commercial paper.

All of this will result in lower structured finance growth in the United States in 2003 than prior years.

In international structured finance markets despite weakness in Latin America and a cautious outlook for Asia after slow growth on the first quarter.

We still expect that long term forces will continue to drive revenue growth at or near 20% for the year.

In our corporate finance business, we expect moderate revenue growth in 2003, driven by speculative grade markets at United States and international activity.

In particular US investment grade data issuance will likely remain sluggish versus the prior year as the volume of debt still to be refinanced declines and the needs for new about ocean to fund investment and merger an acquisitions is expected to remain weak.

Financial institution issuance should decline if the very high levels of the first quarter.

In the US public finance sector we now expect issuance to be flat to modestly higher in 2003.

We think issuers will continue to rely on public debt to fund their budgets as tax receipts remain weak.

But this will be partly offset by decline in refinancing activity.

We believe growth will remain strong in our research business and finally we expect healthy growth in our MKMV business and pretax margins in excess of 10% before acquisition related amortization.

Overall for 2003, although there are some pluses and minuses, our revenue expectation is unchanged from our February guidance.

We expect percent revenue growth in the mid to high single digits on a pro forma basis as if KMV had been acquired at the beginning of 2002.

And the high single digits on a reported basis.

As discussed in our earnings release we expect that expense growth in 2003 will be higher than revenue growth and our full year 2003 margin will be approximately 150 basis points lower than our 2002 margin of about 52.5%.

And that's before the impact of expensing options.

The key reasons for this were discussed in the release.

Continued spending on important initiatives in the rating business, particularly the specialist teams, that accounts for about 50 basis points of the expected 2003 margin reduction.

And the higher growth but lower margin MKMV business should account for the remaining 100 basis points.

In addition, the full year impact of expensing options and other stock compensation plans which we estimate will be 10 to $11m which cause a further margin decline to about 100 basis points.

As a result we expect Moody's operating margin in 2003 to be about 250 basis points lower than 2002, in the range of 50%.

When we provided our 2003 guidance in February, we expected that diluted earnings per share would grow in the low double digits to a range of $2.01 to $2.07 before the estimated 4 cent per share impact of expensing stock based compensation plans.

That guidance did not reflect the 5 cent per share gain on insurance recovery as it was not known with certainty at that time.

The lower tax rate in the first quarter of 2003 is expected to persist for the full year, and should provide an incremental 4 cents in earnings per share for the year compared with our prior guidance.

Overall we now expect full year 2003 diluted earnings per share in the range of $2.05 to $2.11 before the impact of expensing options and before the gain on insurance recovery.

And $2.06 to $2.12 after those items.

This 2003 EPS range is relatively narrow given the inherent difficulties in forecasting economic and capital market conditions and the impacts of Moody’s revenue and the early point that we're at in the year.

Although this range represents our best thinking about the most likely range of outcomes for 2003, over the reminder of the year there could be important sources of variance, either positive or negative, which is closest to be out of the currently expected range.

We expect earnings per share to be moderately higher in the first half of the year than the second half, but will limit our quarterly comments to that.

Now my colleagues and I will be happy to take any questions you may have.

Thank you, sir.

The question-and-answer session will begin at this time.

If you are using a speaker phone, please pick up the hand set before pressing any numbers.

Should you have a question, please press star one on your push button telephone.

If you wish to withdraw your question, please press star 2.

Your question will be taken in the order it is received.

Please stand by for your first question.

Our first question comes from Lauren Fine with Merrill Lynch.

Please state your question.

Thank you.

And wonderful quarter.

A few questions.

One very quick one.

Last quarter you commented on the likelihood that you would term out your debt and I'm wondering if you could give us an jut date on when whether you still plan to do that and any timing and second, also if you could comment on the impact foreign exchange had on your reported revenue growth both overall for the company and on the international side and then third, you know, you're very clear on what your cost outlook is.

If the revenues were not to materialize the way you thought they would, do you have in cost contingency plans in place as well?

Hi Lauren, this is Jeanne Dering.

I'll take the first 2 questions and I'll ask John to respond to the third question on the cost contingencies.

First in terms of long term financing we are still thinking about that as we were at the beginning of the year.

We have not clearly done anything yet.

We are still borrowing on our short term bank facilities and it's possible that we could do a longer term financing later on in the year.

So we have no update at the moment but

-would that likely to be in the second quarter, would you say?

given that it's the end of April already, it's unlikely we would have something done by the end second quarter.

Okay.

In terms of foreign exchange the year to year impact in exchange rates had a positive effect on revenue of roughly 2 and a half or so points of growth.

And since we don't actively hedge at the moment because our cost exposures is similar to our revenue exposure in non-US dollar currencies, the foreign exchange also had resulted in an increase in our expenses year to year so that it had a lower effect on operating income.

Just to be clear, the 2.5% is on consolidated revenue growth, correct?

Yes.

Turning to the question of what we would do if there was revenue softness in the second half of the year, I think that there are certainly investments that we have in our budget that we would not commit in the second half of the year.

Those are relatively small.

So the major effect would be on lower incentive compensation or bonuses together with potentially reduced hiring and one might point to Asia, which was a little weak in the first quarter and where the economic situation is quite uncertain at this point.

Okay.

One last question.

I guess, Ray, could you expand on your thoughts on what the FCC could potentially recommend in terms of any structural changes in the industry, just sort of a range of possibilities that you're hearing when you talk to them?

What we are hearing, Lauren, is really what I think everyone is hearing in terms of the FCC's public comments.

I think we are expecting the concept release to raise a wide range of questions, probably along the lines and perhaps amplifying some of the questions raised in the January report on the roll and function of rating agencies.

I think we have less of an expectation that the concept release will take important positions on the FCC's part.

I think they will be using the concept release as an information and public comment process for gathering sentiment from the important market players.

So I think we would expect that -- I think we would expect any proposed rule this might follow from the concept release and that might follow from public comments to be much more directional and that would be at the earliest I would think coming out several months following the concept release.

I would also just add that I think we would not be surprised to see additional nationally recognized rating agencies designated by the FCC similar to what they did with the recognition of a fourth rating agency in the first quarter.

But at this point you don't see anything particularly punitive on the horizon?

I think our expectation is that the FCC is going to again ask a number of questions but that their approach has been cautious in terms of statements or recommendations for fundamental change around an industry which they have made public comments I believe worked quite well.

Okay.

Thank you.

The next question comes from Douglas Arthur with Morgan Stanley.

Please state your question.

Two questions.

Just a follow-up on Lauren’s questions.

It would seem to me that Representative Baker in the house was much more agitated at the slow pace of the FCC work than senate was 6 months ago, so there any risk -- to the extent the FCC comes out with a vaguely worded broad document that says nothing, that to me could lead to a back lash on the hill, based on the house hearings.

So I'm wondering if you could comment on risk there.

And then, John, you talked about the sort of slowdown in commercial paper asset backed business did you to accounting changes in soft balance sheet stuff.

Is there some concern that may spread to other components of the structure finance market?

Because as tremendous as those growth numbers have been, it looked like structure slowed materially for the first quarter and that's not surprising versus your expectations, but it doesn't seem to be in sync with the issue numbers in the first quarter which again why terrific so I'm wondering if you could comment on that.

John Rutherfurd Jr.

Let me first comment on I think generally you do see the house taking somewhat more aggressive positions than senate generally.

So obviously I agree with you that the gist of the hearings is clearly that the house would like the FCC to do something, but I think that's generally the house's nature.

Secondly, to amplify on that, it seemed to me that what the house was saying was either get in the game or get out of the game.

If you get in the game, you're going to need to regulate these entities that you have designated.

If you get out of the game, you will no longer designate those entities but you will need to find a way to regulate directly and in effect find a way to do directly what you have been doing indirectly through using the NRSO ratings.

So at least that's the way I read the house hearings.

Is that --

You know, that's fair.

It just seems to me if the FCC does knowledge come out with anything that there could be some more hearings based on lack of -- in any event, the asset backed question?

Yes, we are certainly seen a slowdown in asset backed commercial paper.

We will expand to other asset backed classes.

We don't think it will expand to regular asset backed which are primarily cars, manufactured housing.

We do think it may have some effect on CDOs.

Especially those sponsored by financial institutions.

Great.

Thanks, John.

Thank you, Doug.

If next question comes from Kevin Gruneich from Bear, Stearns & Company.

Please state your question.

A few questions on the cost side.

I was wondering if you could provide FTEs at the end of Q1 relative to where they were a year ago and also the incentive compensation was of total compensation expense Q1, '03 versus Q1 of '02.

And finally you indicated some of these initiatives including enhanced ratings practices would clip your margin by about 50 bips for the year.

Is the impact pretty smooth throughout the year?

Would you respond, Jean?

Kevin in response to your first question on head count at the end of the first quarter we're at about a 2,070 employees and that compared with roughly 1,750 in the first quarter of last year.

And thinking about the year to year increase, that's about evenly divided between KMV and then growth in head count in the ratings and research business.

So about 150 were due to KMV and 150 due to growth in the business.

And that head count doesn't include about another 100 that relate to Korea and Argentina, which both of which we are now consolidating because we have majority interest in those ventures, so that would add about another 100 to our head count at the end of the first quarter.

In terms of incentive comp for the first quarter of this year, it was a bit over 15% of total compensation.

And putting that in the context of our results, the growth in operating income was just about at our normative target of growth in earnings share before the insurance recovery was a bit above our normative targets.

Compared with the first quarter of last year, the compensation, incentive compensation as percent of total compensation was closer to 25% because we had much stronger year-over-year growth.

Your third question related to the expenses related to investments and the rating business, that will result in a bit of a margin decline this year.

We started spending in the second half of last year particularly on the specialist team, so if you think about a quarter to quarter impact on expense growth, the impact should be lightly higher in the first part of the year than it would in the second part of the year.

Thank you.

The next question comes from Joe LaManna with William Blair.

Please state your question.

Yes.

I realize there's no quantitative answer to this question but to what extent do you feel that bond issuance in the first quarter in the market reflected an acceleration in advance of the war that may take away from bond issuance in the second quarter and thinking you might have a particular insight into this, you know given that you know what's happening in April since we don't have any numbers yet in April, are you seeing kind of a lack of bond issuance in general because of people having accelerated treasures issuing more bonds in January, February?

Joe, it's Raymond McDaniel Jr..

I would divide the market at least into two parts in trying to answer that.

And I think we did see an acceleration of activity for certain sectors, for example large financial institutions which considered stable credits and had tight margins in addition to an overall low interest rate environment or tight spreads, I'm sorry, in the first quarter, and I think we did see some acceleration for financial institutions and for some of the securities firms, insurance companies.

Where I think we probably saw some issuers waiting on the side lines, however, might have been in some areas of structured finance and including European structured finance were some of the larger more complex (inaudible) transactions, transactions that might be more sensitive to changes in positively or negatively in the overall global economic environment.

We're waiting for a better visibility in terms of, you know, how the geopolitical situation was going to play out in Q1.

Do you think net it was a wash or would you say one of those two effects was greater than the other?

I don't have a good view for you on that sitting here.

I have to chew on that a little bit.

Okay.

My other question relates to the accounting change and the aspec (ph) commercial paper program slowdown.

Can you in any way quantify that a little more in terms of how big that either in terms of how big it is part of structured finance or in terms of you saying that there was a slowdown in the growth rate, can you quantify that in any way?

The, as you know, the FIN or FIN 46 had the effect of causing bank sponsors of these programs to have to consider consolidating the SPEs back on to their balance sheet.

The overall asset backed paper market in the US is a little over 50% of the total commercial paper market so it's very substantial.

That number, this is a rough number but it would be about 700 billion in outstandings.

And it is the asset backed commercial paper portion of our US structure finance business is about 20%.

And so the impact that I think we would see would be against that 20% of the US business.

Some of that will be offset by commercial paper issuance, asset backed paper issuance moving to Europe potentially.

We would also expect to see the potential for program amendment or new types of program structures in the second half of the year as the ranges of these deals think about how they want to address FIN 46

Thank you.

That was helpful.

The next question comes from Brandon Dobell with Credit Suisse First Boston.

Please state your question.

Hi.

Good morning.

Maybe get similar comment to what you talked about in US between the SEC and congress.

Comments on what is going on overseas, particularly in France and Germany with all the rhetoric there they have been making about the rating agencies and more governance, more oversight.

I just wanted to see if the timing of that panel is kind of connected to those events.

I wanted to get an idea of your thoughts within that context and the context of US markets on how you view or set up incentive comp relative to how the regulators might take that, certainly in the context of what the investment banks (inaudible).

A comment, a broad comment on foreign regulators with particular reference to Continental Europe would be that the United States regulators are primarily interested in market efficiency and invest or protection.

The regulators -- and I think that's broadly true in the UK and Canada and a number of other -- Australia as well.

On the continent there is also more interest in a State industrial policy an in the management of information.

Much of the concern that has arisen in Europe has arisen with respect to industries that are viewed as nationally very important and may have received a government assistance in the past.

The EU treaty basically limits the amount of assistance which national governments can give as a matter of industrial policy.

That makes it more difficult for national governments to pursue their industrial policies and there is some concern that by making what national government view as untimely announcements that Moody's may and other rating agencies may impede national industrial policy.

I think that's the broad views of at least some participants in countries like France and Germany.

We were asked in France to see if the rating industry could come up with a code of conduct which is a typical Continental device of financial interest industries by the authorities in France and we have been discussing that.

We think broadly speaking that we do pursue the right policies not only in the United States but around the world and so we have broadly submitted a statement which restates the policies that we do follow in the United States, and we think that over the rest of this year that there will certainly be discussion of those in Europe and in the international securities regulatory forum that Raymond McDaniel Jr. mentioned.

Okay.

The next question comes from Peter Appler(ph) with Goldman Sachs.

Please state your question.

2 questions, please.

Number one is a follow on something earlier.

I was hoping you could share with us any indicators you're seeing here in terms of the start of the second quarter and just the pace of activity, maybe backlog or something that would give us a better sense of how the quarter is starting an secondly, unrelated to that, just wondering if you're seeing any changes in terms of competitive dynamics in terms of some of the players in the market with regard to the changing regulatory environment.

Are any of your competitors changing the way they do business, are you seeing any evolution in the business model in that regard?

Thanks.

Peter, I think you may have struck us out here.

We really have not been seeing anything that is particularly notable, either in terms of pipe lines, backlog, issuance.

Obviously corporate high grade issuance remains relatively low.

But that's not a new indicator.

So I don't think there's much that we see after the end of the first quarter, and we also do not see any major changes in competitive practice within our industry.

Our industry is primarily an industry that focus on service, competition, quality competition and that description of competition within the industry continues as it has in the past

Great.

Thank you.

The next question comes from John Neff With William Blair.

Please state your question

High, a question related to Moody's KMV.

Could you just explain the difference in the relationship between subscription revenues and software revenues in that business?

Surely.

The -- we got into the business with entity that we eventually ended up calling Moody's Risk Management Services and their main product was a software product to help Banks engage in commercial lending and in monitoring portfolios of commercial credit.

So it was a software product which the Banks would buy and install at the Banks and it had license fees as many software products do and then it had a maintenance which was say around 15% of the original license fee.

So that business, the MRMS business, which was somewhat smaller than the KMV business, I would say was at least two-thirds, maybe more a software type business and the rest was some training and some installation services.

That's where it came from.

The KMV business has generally sold its estimates of credit risk, which they call EDFs, estimated default frequencies on a subscription basis.

So there we have both the KMV products and we have the risk management services products which competed with the KMV products.

So overall maybe I could ask Jean o no, Jean says no.

Overall I would say that the revenue mix is probably around two-thirds subscription and a third software sales model and a bit of training.

Okay.

So would it be fair to interpret the fact that the growth wasn't quite up to what you wanted as being due mostly to the old Moody's Risk Management Services product as opposed to the KMV product?

That is correct.

Okay.

Thank you.

Although there are some substrings in the MR (inaudible)t too.

A little more complicated.

But broadly it was a lack of the old MRMS software product.

The next question comes from William Bird from Smith Barney.

Please state your question.

As you look at KMV in its addressable market I was wondering if you could talk a little about its client penetration rate and any effort under way trying to increase its penetration.

Also on KMV software I was wondering if you could elaborate a little more on the weakness and whether you see that persisting?

And final question on structured finance, can you indicate what proportion of your structured finance business is now generated in the US?

Thank you.

John Rutherford, Jr.: Okay.

The first question was about penetration rate.

The penetration rate of KMV depends on the size of the financial institution.

At the very largest financial institution, especially in Europe, penetration rates are pretty good.

They are about I would say 50% or more of the very largest organizations.

As you go down the size of the organization of the penetration rate of a KMV product are very much falls off and as an example of that, on the MRMS side we had, as I remember, about 1500 institutions using the MRMS software product whereas the number of institutions using the KMV product when we bought them was only around a 100.

So there's an awful lot of room in smaller financial institutions.

In addition, there are two other markets.

The first other market is corporations that have a significant amounts of receivables from industrial rather than consumer clients.

We are just starting to offer services to that market and we have had some good response rate.

And then the third market is the money managers where we have relatively small penetration and we think that penetration can grow quite rapidly in that segment.

And that segment in addition to our EDS are estimated to fall frequencies we're also offering, well in all segments a product which focus more on the valuation of credit sensitive assets.

So I hope that gives you a broad feeling on the penetration rate.

On the soft wear, the seasonality for our plans this year are very consistent with the seasonal it that we have experienced over the last few years, so while the fourth quarter is always the strongest quarter in the software business, we don't have more of a hoy stick, fulfill, than we have experienced over the last few years.

And then the last question was about the percentage of US structure and I'll ask Ray to comment on that.

Unknown Speaker: US structure last year was about two-thirds of our global structured business.

We would expect it to be a bit less than that this year based on the fact that our international structured business is growing more quickly

Thank you.

Once again, ladies and gentlemen, if you would like to ask a question, please press star one or your push button telephone at this time.

Our next question comes from Jack Valasus (ph) with Gapes (ph) Capital Management.

Please state your question.

Yes, most of my questions have been answered but cash in total debt at the end of the quarter.

Jean, can you comment on that?

Sure.

At the end of the first quarter, the total cash was a little under $60m dollars and that a substantial part of that cash is outside the US.

And then in addition to our $300m dollars of long term debt we had about a bit over $90m of short term bank borrowing.

Okay.

And does the guidance that you provided contemplate the -- you know, moving that revolver into a fixed structure later this year?

We have thought about that possibility in putting together our guidance and we don't think that moving that later in the year into a longer term structure would have a significant effect on the range of guidance that we have given.

Understood.

Thank you.

Ladies and gentlemen, if there are no further questions, I will now turn the conference back to Mr. Rutherfurd to conclude.

Thank you all very much for joining us and we appreciate your support.

Ladies and gentlemen, this concludes our conference for today thank you all for participating and have a nice day.

All parties may now disconnect.