穆迪 (MCO) 2006 Q4 法說會逐字稿

Good day, and welcome, ladies and gentlemen, to the Moody's Corporation fourth quarter 2006 earnings conference call.

At this time, I would 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 for questions and answers following the presentation.

I will now turn the conference over to Lisa Westlake, Vice President, Investor Relations.

Thank you.

Good morning, everyone.

Thanks for joining us on this teleconference to discuss Moody's results for the fourth quarter and full year of 2006.

I am Lisa Westlake, Vice President of Investor Relations.

Moody's released its results for the fourth quarter of 2006 and the full year this morning and the earnings release is available on our website it at ir.moody's.com.

Ray McDaniel, Chairman and Chief Executive Officer of Moody's Corporation, will lead this morning's conference call.

Also on the call this morning, is Linda Huber, Chief Financial Officer of Moody's Corporation.

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

Certain statements my colleagues and I make today may be 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 direct your attention to management's discussion and analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2005, and in other filings made by the Company from time to time with the SEC.

I would also like to point out, the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995 contained in our press release issued this morning.

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 members of the media might be on the call this morning in a listen-only mode.

And now, I'm pleased to turn the call over to Ray McDaniel.

Thank you, Lisa.

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

I'll begin our prepared remarks this morning with a brief summary of Moody's fourth quarter and full year results for 2006.

Linda will then take you through the quarter's operating highlights, provide some commentary on revenue and expenses, update you on our share repurchase program and discuss several investments we have made since our last earnings conference call including the 2007 move of Moody's headquarters in New York City.

I will then review developments in the regulatory area and finish with Moody's outlook for 2007.

After that we will be happy to respond to your questions.

Moody's reported strong results for the fourth quarter and full year of 2006.

Revenue in the quarter rose to $590 million, 25% higher than the fourth quarter of 2005.

We generated strong revenue growth across most business lines including structured finance and corporate finance ratings as well as in global credit research.

Reported operating income for the fourth quarter was $463 million which included a one-time gain of $161 million on the sale of Moody's 99 Church Street building in New York.

This gain reduced operating expenses for the quarter.

Excluding the gain, fourth quarter operating income of $303 million rose 25% from $242 million a year ago.

Net income was $279 million and diluted earnings per share were $0.97 including $0.33 per diluted share related to the one-time gain on the building sale.

Excluding the gain, diluted earnings per share for the quarter of 0.64 rose 28% from the prior year.

Foreign currency translation positively impacted revenue and operating income, contributing approximately 170 and 90 basis points to growth respectively.

Earnings for the fourth quarter of -- for the fourth quarters of 2006 and 2005 included $0.05 and $0.02 respectively of expense related to stock-based compensation.

Other non-GAAP financial measures can be found in the tables that accompany our earnings release.

Turning briefly now to full year 2006 results revenue of just over $2 billion for the year was 18% higher than the full year of 2005.

Operating income for all of 2006 was $1.3 billion, and net income was $754 million.

Excluding the gain on the building sale operating income for 2006 grew 17% and net income grew 18% versus the prior year.

Diluted earnings per share of $2.58 for the full year included $0.32 related to the gain on sale.

Excluding the gain, 2006 earnings per share were $2.26, 23% higher than the prior year.

Earnings for the full years of 2006 and 2005 included expense of $0.17 and $0.10 respectively of stock-based compensation.

At this point I will turn the call over to Linda who will provide some detail on revenue and expenses for the quarter.

Thanks, Ray.

I will provide details for the quarter starting with our U.S. businesses.

Moody's U.S. revenue was 361 million in the fourth quarter, up 22% year-over-year.

At Moody's Investors Service U.S. ratings revenue rose 22% year-over-year and U.S. research revenue grew 26%.

U.S. structured finance was once again the largest contributor to growth both in the dollar and percentage basis with revenue increasing 27% compared with the prior year.

U.S. structured finance benefited from strong growth in a number of ratings segments including credit derivatives and commercial mortgage-backed securities which were more than offset -- excuse me, which more than offset a decline in revenue from residential mortgage-backed securities.

U.S. corporate finance revenue increased 22% from the prior year period reflecting sharply higher levels of rated loan and bond issuance for both investment grade and speculative grade securities.

U.S. financial institutions rating revenue was flat with the prior year period following three consecutive quarters of moderate growth.

Favorable results in insurance and real estate finance ratings in the U.S. were offset by declines in the banking and the finance and securities sectors.

U.S. public finance revenue grew 18% compared with the fourth quarter of 2005 reflecting an increase in refunds from issuance in the quarter as well as issuers took advantage of the low long-term interest rates and the relatively flat yield curve.

Finally, U.S. research revenue rose at a healthy pace increasing 26% from the prior year period.

Turning now to our international operations, Moody's continues to generate strong growth outside the U.S.

Total international revenue of 230 million in the fourth quarter was 28% higher than in the prior year period with foreign currency translation increasing growth by approximately 450 basis points.

International revenue accounted for 39% of Moody's total in the quarter compared with 38% in the year-ago period.

Focusing first on Moody's investor service this segment reported 31% growth in the international revenue.

International structured finance ratings revenue was 40% higher than in the prior year period and benefited from strong growth across all asset classes particularly in Europe.

International corporate finance revenue rose 45% due largely to bond issuance volume in Europe and Canada.

International financial institutions revenue grew 13% year-over-year reflecting strong performance in the banking sectors in both Europe and Asia.

Moody's research business delivered strong international performance with revenue rising 17% year-over-year.

Turning to Moody's KMV on a global basis we generated 40 million of revenue up 11% compared to the fourth quarter of 2005.

Revenue growth from professional services and an increase in revenue from the sales of risk product subscription were partially offset by declines in revenue from the licensing of credit processing software during the quarter.

Moody's KMV produced 5 million in operating income for the quarter compared with a loss of 2 million a year ago.

Next, I will discuss operating expenses.

Moody's Corporation's operating expense for the quarter totaled 127 million which reflected a reduction in expense due to the gain on sale of the 99 Church Street building.

Excluding the gain, fourth quarter operating expenses of 287 million was 24% higher than in the prior year period.

The higher fourth quarter expense is primarily related to higher personnel cost including performance based compensation expense and the final phasing in of expense related to annual stock-based compensation awards.

The quarter's stock-based compensation expense is 23 million compared with 12 million in the 2005 period.

Excluding the gain the quarter's operating margin was 51% equal to the margin for the same period in 2005.

I would like to turn now to an update on capital allocation and stock buybacks.

Moody's remains committed to using its strong cash flow to create value to shareholders by investing in growing areas of our business, making selective acquisitions in related businesses, repurchasing our own stock, and paying a modest dividend.

During the fourth quarter 2006 Moody's repurchased 2.3 million shares at a total cost of $150 million.

Partially offsetting these buybacks we issued 1.1 million shares in stock based compensation plan.

For the full year 2006, Moody's repurchased 18 million shares at a total cost of 1.1 billion with 6.5 million shares issued under stock based compensation plan.

At year end we had roughly 1.8 billion of share repurchase authority remaining.

Since our last conference call Moody's has also made several investments that I would like to mention briefly.

During the fourth quarter we acquired Wall Street Analytics, a provider of software tools and analytical models for the structured finance industry.

The terms of the transaction were not disclosed and the near term financial impact to Moody's is not expected to be material.

As we noted when we announced this acquisition Wall Street Analytics is a good fit with Moody's because it broadens our offerings for the analysis and monitoring of complex structured debt securities and increases Moody's analytical and product development capabilities for structured finance.

In particular the acquisition enhances Moody's current product suite for collateralized debt obligations and software capabilities for mortgage backed and asset backed securities.

We have rebranded the Company as Moody's Wall Street Analytics.

It will continue to operate as a separate entity at its headquarters in San Francisco.

Revenue for Moody's Wall Street Analytics is included in the Moody's research results.

In January we acquired 99% of PT Kasnic Credit Rating Indonesia, which is the second largest rating agency in Indonesia.

The firm will operate as Moody's Indonesia based in Jakarta.

We continue to see good long-term growth opportunities in a number of developing markets around the world, including Southeast Asia.

Moody's Indonesia will allow us to provide enhanced customer service to both domestic and cross border Indonesian issuers and to offer high quality credit ratings for Search, Analysis, and training to local market investors.

The terms of the transaction were not disclosed and the financial impact to Moody's will not be material.

Before I turn the call back over to Ray I will provide a brief update on the relocation of Moody's headquarters.

As we've discussed on previous earnings calls Moody's has outgrown its current headquarters building in downtown Manhattan where we have been located for more than 50 years.

In mid-September we signed a 21-year lease for 15 floors in the newly built 7 World Trade Center building located two blocks from our current offices.

In December we sold the headquarters building through a sale/lease-back transaction that allows us to remain in our current offices until the move is completed in the third quarter of 2007.

With that I will turn the call back to Ray.

Thanks, Linda.

I will now briefly summarize developments in the regulatory area.

During the quarter we had several developments.

In the U.S., the Credit Rating Agency Reform Act of 2006 which was enacted this past September, requires the SEC to complete its implementing rules by late June 2007.

Earlier this week the SEC published for comment its proposed rules.

In line with our expectation, the proposed rules closely follow the framework established by Congress and the Act.

The rules address four broad areas.

Application and registration for credit rating agencies wishing to be designated as nationally recognized or NRSROs, record keeping, financial reporting, and requirements designed to protect NRSROs impartiality with respect to issuing credit ratings.

We are in the process of reviewing the proposed rules and intend to submit comments within the 30 day comment period that the SEC has established.

We look forward to working constructively with the SEC on the implementation of the rule making.

In Europe, CESR the Committee of European Securities Regulators, published its first annual report on rating agency compliance with the code of conduct published by IOSCO, the International Organization of Securities Commissions.

We published our own code of professional conduct pursuant to the IOSCO code in June 2005.

CESR's report was based, among other things, on discussions with individual rating agencies about their own codes of conduct and a survey of market participants regarding rating agency practices.

CESR's conclusion was that overall credit rating agencies are compliant with the IOSCO code.

CESR also noted some areas where they believe improvements can be made.

Both in rating agencies application of the IOSCO code and in the IOSCO code itself.

CESR will follow-up on these areas as well as the effect of the U.S. legislation and rulemaking on the operation of rating agencies in the European Union in their next annual review.

Based on the CESR report the European commission reiterated its conclusion reached in early 2006 that regulations specific to rating agencies in the European Union is not required at this time.

We look forward to continued dialogue with CESR as we consider the results of their review.

I'd like to conclude this morning's prepared comments by discussing Moody's outlook for 2007.

Our outlook is based on assumptions about many macro economic and capital market factors including interest rates, corporate profitability, and business investment spending, merger and acquisition activity, consumer spending, residential mortgage borrowing, and refinancing activity, securitization levels, and capital markets issuance.

There is an important degree of uncertainty surrounding these assumptions and if actual conditions differ from these assumptions Moody's results for the year may differ from our current outlook.

For Moody's overall we project low double-digit revenue growth for the full year 2007.

This growth assumes foreign currency translation in 2007 at current rates which would result in no material full-year Impact from currency translation.

We expect the operating margin to decline by up to 150 basis points in 2007 compared with 2006 this reflects investments we are continuing to make to sustain business growth including international expansion, improving our analytical processes, pursuing ratings transparency and compliance initiatives, introducing new products, improving our technology infrastructure, and relocating Moody's headquarters in New York City.

Our 2007 and long-term operating margin target continues to be in the low 50% range.

For 2007 we project year-over-year growth in non-GAAP diluted earnings per share in the low double-digit percent range.

This expected growth excludes the 2006 gain on sale of the 99 Church Street building from the non-GAAP 2006 diluted earnings per share.

In the U.S., we expect low double-digit percent revenue growth for the Moody's investor service ratings and research business for the year.

In the U.S. structured finance business we expect revenue for the year to rise from the high single to double-digit percent range including solid double digit percent growth in revenue from credit derivatives and commercial mortgage backed securities ratings.

Partially offsetting this growth, we are projecting a decline from 2006 to 2007 in revenue from residential mortgage-backed securities including home equity securitization and we again note a divergence in market views about the 2007 outlook for this business.

In the U.S. corporate finance business we expect revenue growth in the low double digit percent range for the year including good growth from rated bonds, bank loans, and new products.

We anticipate a stronger first half of 2007 followed by a weaker second half due in part to an expected moderation in the pace of leveraged buyout transactions.

In the U.S. financial institution sector we expect revenue to grow in the low teens percent range with moderately strong issuance and continued growth in the number of rating relationships.

For the U.S. public finance sector we expect revenue for 2007 to grow only modestly.

We forecast strong growth in the U.S. research business at about 20%.

Outside the U.S., we expect ratings revenue to grow in the high teens percent range with mid to high teens percent growth in all major business lines led by corporate finance in Europe and Asia, financial institutions in Europe, and growth in structured finance across all regions Internationally.

We also project about 20% growth in international research revenue.

For Moody's KMV globally, we expect growth in sales and revenue from credit risk assessment subscription products, credit decision processing software and professional services.

This should result in low double-digit percent growth in revenue with greater growth in profitability.

That concludes our prepared remarks.

We will be pleased to take any questions that you may have.

[OPERATOR INSTRUCTIONS] We'll go first to Karl Choi at Merrill Lynch.

Linda, I just wondered if you can talk a little bit more about the headquarters relocation cost and if you can quantify the amount and the timing of the costs that would be great.

Okay, Karl, as we said the overall guidance is that we're asking everyone to plan for margins to go down 150 basis points in '07.

That's comprised of a number of things including the building move and on a cash basis generally the proceeds from the building sale will be used to fit out the new building, so we'll come out about flat in that regard.

We are not going to give too much further detail in terms of the components of the margin change but just to say that given the number of investments that we need to make in '07 we'd like to continue that guidance on 150 basis points down.

Okay.

And, Ray, I wonder if you can talk a little bit about the pipeline in the first quarter, what you're seeing out there.

Sure.

Let me start with our company ratings business side, and I think we, in large part, continue to see the same story that we saw late in the year last year, with merger and acquisition activity, leveraged buyout activity, remaining reasonably strong, and that's associated with the liquidity in the market, the tight spreads that are available in the market, and as we mentioned in our prepared comments we do expect the M&A activity and the leveraged buyout activity to moderate throughout the year.

So we do expect it to be stronger earlier in the year rather than later.

On the structured finance side, it's also, I think, the story is more of the same.

The areas where we have seen strength in 2006 are strong.

As far as the pipeline is concerned, in early 2007, that includes the CDO areas business and the commercial mortgage backed security areas.

We have not seen a significant decline year on year in the RMBS pipeline, so that is approximately flat with the very early period of 2006.

And we are seeing a lighter pipeline in the asset backed securities area.

This would be the credit cards and vehicle receivables area.

Just to wrap up on that, the asset backed commercial paper market also has a reasonably strong pipeline in the early weeks of 2007.

Great.

Last question.

Any color on why you think financial institutions will rebound in 2007 after a little bit of a softer '06?

Yes, '06 performance in the financial institutions area was first of all working off of a fairly difficult comparable back to 2005.

But as a result now in 2007, we are looking at that business coming off of a somewhat easier comparable in 2006.

And we are expecting particularly good growth for that business internationally in Europe specifically, and that is going to support our global growth for the business, and in Europe, a lot of the growth is coming from institutions in Central and Eastern Europe, institutions that are not necessarily bond issuers but maybe financial institutions that are seeking ratings for greater participation in the interbank market and in bank to bank transactions.

Great.

Thank you.

Next we'll go to Michael Meltz at Bear Stearns.

Karl took all the good questions yet again.

I just wanted to ask you two questions.

Linda, what are you assuming for a tax rate in '07, and then also I would think -- or what should -- can you just talk a little bit more about your comment on the relocation?

I know you have said this before about funding the move through the cash you got from the headquarters but what is the implication for your interest expense line in '07?

Okay.

Going with your first question first, Mike, tax rate you want to model for '07 will be just slightly north of 41, maybe going up to 41.5, somewhere in that neighborhood would be a good place to start.

And again, regarding the building, we had a gain on sale, and on the cash basis, as I said, to fit out the raw space, which is the state in which we leased the building, we have some work to do.

So we have been careful to match those costs so that we come out about flat on a cash basis.

We'll not be borrowing any money for any of this so the implication there would be frankly none.

And the timing will be from sort of the June time frame maybe through the third quarter and probably around that period of a year, but there shouldn't be any further implications other than just what I've already said.

Okay.

So what is your CapEx budget for the year?

I don't have that right in front of me for '07, but again, this is -- it's not a major item, and any implication on the margin is considered in that guidance to take it down 150 basis points for '07.

Last question.

What is the EPS base you're using for your '07 guidance?

Is that that 2.26 adjusted that you have in here?

Meaning what we're using to work from?

We're using 2.25.

Okay.

Thank you.

Our next question comes from William Bird at Citigroup.

I was wondering if you could just talk about just general thoughts on sustainability of strength in CDO issuance?

Secondly are you seeing any new emerging categories of growth in structured?

Thank you.

Sure, Bill.

The CDO issuance, as, again, I mentioned previously, at least pipeline, is strong for the early weeks of 2007.

In terms of things to look out for in the CDO area, first of all, because a significant amount of the CDO business is resecuritization of asset backed securities, and RMBS, if there is a significant decline in the performance of residential mortgage-backed securities or in consumer borrowing, an increase in default rates beyond what is expected, that could have a flow-through effect to the CDO business and might dampen issuance.

But I should add that while we are seeing defaults up in the mortgage sector, they are not outside of our expectations at this point.

The default rates are up off of historically low default rates in the last couple of years and are actually reasonably well in line with what we saw back in 2000, 2001, and within our expectations.

On the positive side, we are continuing to see evolution of financial technology flowing through the CDO area.

The use of hybrid CDOs is becoming increasingly popular.

Those are CDOs that combine both synthetic and cash asset elements.

And there is an increase in areas such as CPDOs, which describe it at a high level would include a market value component to CDO transactions, and are built off of indices.

So we continue to see the evolution of financial technology, the use of the CDO market to channel this financial technology, and that's a good news story.

And then finally, I would just add that we also are continuing to see good growth in the CDOs of commercial real estate sector.

And that is supporting a lot of the growth that is going into our commercial mortgage-backed securities outlook, and we expect that to continue both in the U.S. and in Europe.

Just for completeness, I should also add that because the loan market continues to be strong, the CLO component of the CDO market is also a contributor to the strong pipeline.

If we see a material drop-off in loan origination, the stock of loans available for CDOs would similarly fall off.

Thank you.

And just as a follow-on, was wondering if you could give us the full year and Q4 incentive comp accrual as a percent of comp expense?

Thank you.

Yes, Bill, we have got that.

Incentive comp as a percentage of total compensation for fourth quarter 2006 was 18%, and comp expenses, a total as expense, excluding the gain on the sale of the building, would be 64%.

Thank you.

We'll go next to Peter Appert of Goldman Sachs.

Thanks.

Ray, the very impressive revenue momentum that Moody's has enjoyed in the second half of the year in particular suggests that you're probably gaining market share with the ratings market.

So I was wondering if you could talk about where you think those gains might be coming in terms of whether it's geographic or product-specific that's driving that performance, and if you think there's further upside?

It is somewhat difficult for me to give you market share information at a very granular level, because of different levels of reporting for the different business segments across rating agencies.

But we have had gains, first of all, just in terms of our coverage levels, in a couple of areas that I think are noteworthy.

One is in the corporate loan sector where an increasing number of loans are getting rated rather than going into the market unrated.

That is certainly supporting Moody's growth.

It may be supporting the growth of other firms as well.

And secondly, growth in -- or the performance in the residential mortgage-backed securities sector is in part reflective of more mortgages going into the securitization market.

So again, going from the unrated market into the rated market, and from some modest declines in market share by the GSEs and those securities going into the private market.

So those are two areas where we are, I would say we are gaining market share, but the market share gains are against the unrated marketplace, and I can't really comment on whether they are against other credit rating firms.

Your revenue growth is certainly -- it would appear your revenue growth is certainly higher than both Fitch and S&P's, so it would seem that you are gaining share.

How about geographically?

Is there something happening in terms of entry to new markets or particularly rapid growth in markets you hadn't been in previously?

Probably the highlight there is our growth in Europe coming from Eastern Europe and Central Europe.

We have had very good performance in the Company ratings area and more so than -- particularly than we would have anticipated coming from the bank segment in the Company ratings area.

And that has -- we think is going to contribute to growth not only as it did in '06 but through '07 as well.

As far as our other activities, we had good growth in all regions internationally in '06.

We are expecting good growth in all regions in '07, and that -- it's attributable to a number of factors.

It's attributable to our international expansion, the joint ventures that we have entered into and acquisitions we have made, and those are almost uniformly performing well.

And an increase in our business development activities in both Europe and in Asia with -- and by business development, I mean people on the ground, in the local jurisdictions who are talking to potential issuers about the value of getting ratings from Moody's and also talking to institutional investors about how they can use ratings and why it may be useful for them to rely on ratings.

And no obvious holes, right, in terms of your international coverage at this point, right?

No, none that I'm aware of.

Then last thing, Linda, is the cost of the incremental U.S. regulations a meaningful number, obviously it's already factored into your guidance, but just wondering how significant that cost is.

I think it's fair to say, Peter, it's something that we consider, but we planned for this, and it was something that we saw was going to happen and in this environment obviously it's just prudent to ensure that you have an appropriate compliance staff, which we do at this time, but we started that effort several years ago and we think we've got it relatively well baked in at this point.

So would it be fair to say that the margin decline anticipated is more about the staff and the building, obviously, than it is the regulatory costs?

Yes, I think that would be fair.

As you see in compensation expenses remain 64, 70% of our expenses, so that would continue.

As we said, investments in technology and also business development, as Ray had talked about, which are paying off well, and the building move as well.

Great.

Thank you.

We'll go next to Lisa Monaco at Morgan Stanley.

Hi, yes, Ray, could you just elaborate on your expectations for international growth, your guidance is for high teens growth in '07, and that compares to fourth quarter growth of 28%.

Just wanted to see what's causing the moderation there in expectations.

Thanks.

Okay.

I think probably the most important contributor to our more modest expectations for international are that we are not anticipating the very strong growth that we saw in the structured finance business, particularly in the fourth quarter.

We are expecting good growth across structured finance internationally, but in our outlook just not at the rates we saw in 2006.

We are, as you know, we are expecting good growth in the Company ratings sector, but again, in the Corporate part of that sector, which is a material part, particularly in Europe, we don't think the growth will be at the rates that we saw in 2006.

Offsetting that partially is we do think that financial institutions revenue will grow at a better pace in 2006, particularly in Europe.

Okay.

And just with respect to the structured finance internationally, is that just because you think the growth -- or the size of the market is maturing a bit, or -- I mean, is there something else driving that?

Well, there was very good growth in all of the asset classes in structured finance in 2006, and it spanned both Europe and Asia.

Again, we are expecting good growth in 2007.

Probably the biggest anticipated drop-off would be in the asset backed component of that market, with the residential mortgage, commercial mortgage, and derivative sectors continuing to be quite strong.

Then just in the fourth quarter on derivatives can you quantify what the growth was in your revenues related to derivatives in the fourth quarter?

Then for the full year can you quantify what credit derivatives accounted for as a percentage of the total structured finance segment?

Thanks.

I'm sorry, give me the second question a gain.

Credit derivatives as a percentage of total structured finance for full year '06.

Okay.

Let me start with the credit derivatives.

For the full year '06 -- give me just a minute -- global credit derivatives was about 16% of Moody's Corporation's revenues.

And the the component of the credit derivatives market, the international credit derivatives market, you're going to have to -- I'm going to have to come back to you in a minute on that one.

I don't have the calculation right in front of me.

Okay.

And then can you just quantify what the growth in derivatives was in the fourth quarter?

Sure.

Growth in our global derivatives for Q4 was -- it was about 75% over 2005 fourth quarter.

And do you happen to have that for the full year?

Yes, just short of 60% for the full year.

Okay, great.

Thank you.

We'll take our next question from Brandon Dobell at Credit Suisse.

Kind of leveraging on the last couple of questions.

I wanted to get a sense of, if we look at the CDO global revenue stream, how -- if could you break that down into how much would be, let's call it mortgage related, or how much would be consumer related versus other structures.

I'm trying to get a sense of that risk profile relative to what you're talking about with the RMBS issuance?

A fair question but I'm going to have to tell you I don't have that break out in front of me, so we'll try and follow-up on that.

Okay.

And a quick guidance question.

What kind of share repurchase have you built in for the earnings guidance for '07?

Brandon, we're actually working on that right now.

I think you should continue to look at our free cash flow, less any acquisitions we might make would primarily be devoted to share repurchase.

We haven't actually locked that down right at this moment but the ranges I have seen built into most of the analyst models look pretty reasonable.

That's fair.

And then looking at the leveraged loan market, which grew pretty nicely last year, any differential there in terms of pricing on a similar size transaction, leveraged loan versus different kind of structure?

Are those priced similarly?

Are they priced differently?

Then maybe your outlook, if we get a continuation of a decent M&A or LBO environment, are there other sources of growth for a leveraged load, or is it really just related to M&A and LBO activity?

With respect to the outlook for the activity, I think we really should be looking at the LBO market for corporate loans.

To the extent that those loans are contributors to the CDO market, that helps encourage issuance in the loan market, but to some extent that is offset by slower growth in the bond market.

So it's not just an overall gain.

And, I'm sorry, if you could repeat the first question again.

Yes, just thinking about pricing on the leverage loan versus--?

Oh, yes, I'm sorry.

Sure.

We have a higher revenue yield on our bond ratings than we do on our loan ratings.

Historically, that was a fairly large difference, but that gap has been closed pretty substantially in the last couple of years, and so we are not seeing a large difference in the pricing between bonds and loans at this point in time, and again to the extent that either the bonds or the loans then become assets that are contributed into the structured finance market, that's another opportunity to -- for us to generate revenues through the analysis of those transactions.

Okay.

Perfect.

Thanks a lot.

We'll go next to John Neff at William Blair.

A question for you off of your business development comment, Ray.

Are you saying that Moody's now has a ratings sales force?

That would not be the way I would characterize it, but we do have people who are making sure that firms that are interested in approaching the public debt markets understand the value of Moody's ratings on the one side and that institutional investors understand the best way to use those ratings on the other side.

The reason I wouldn't characterize it as a sales force is I think that we have less of an ability to cause firms to decide to enter into the debt markets than we do to cause firms that are entering into the debt markets to understand the value of ratings in that process.

And so I want to make sure that it's understood that the business development activities are really focused on making sure that the use of ratings is as widespread in international markets as it is in the U.S. market, and that the reasons the ratings are being used are fully appreciated, because that, frankly, supports the prices that we charge for those ratings.

And again, that's an initiative that's really taking place outside the United States?

Primarily, but we do have business development officers in the U.S. as well.

And there was no -- I was looking for the typical fourth quarter mention of a contribution to the Moody's Foundation.

Was there one made this year?

Yes, we did make a contribution to the Moody's Foundation of $6 million.

Great.

And kind of piggybacking on some of the more recent questions, just trying to get a little bit of a sense for what these things represented as a percentage of revenue, you mentioned last quarter's CDO is 34% of structured finance revenue in third quarter.

What did CDOs represent in the fourth quarter for the full year and what was that on an annual basis in 2005?

Same question for RMBS.

Okay.

Well, the CDO revenue as a percentage of -- the numbers I have for you are the U.S.

CDO revenue as a percentage of U.S. structured finance revenue.

That was about 39%.

And for the year, it was about 33%, maybe 32%.

Okay.

And in 2005 it was?

I don't have the 2005 numbers in front of me.

Sorry.

Okay.

And then RMBS, same breakdown?

RMBS for the fourth quarter was U.S.

RMBS was about 22% of U.S. structured finance revenue, and for the year, it was about 28%.

Okay.

Great.

And I just was wondering if you could comment -- this is kind of a big picture question -- just comment briefly or maybe give us some historical context for the current very tight spread environment seemingly across all geographies and debt types.

The implications for your business and how do these things typically -- are we at an extreme level that we're in danger of a reversal.

Thank you.

Sure.

Well, I think there are two primary contributors.

One certainly is that we have been in a benign part of the credit cycle.

Defaults have been extremely low, and in a low absolute interest rate environment, the interest in getting some additional yield when the default profile is as low as it is and as a result risks are viewed as being relatively modest is certainly a driver.

And the second is the very ample amount of liquidity that is available in both the U.S. and internationally from both traditional investment, institutional investors, and alternative investment vehicles.

There's just an exceptional amount of cash that is looking to be put to work at this point.

Another contributor that is somewhat more difficult to quantify is the transmission of these assets into the asset securitization market, and so that the lenders or the institutions that are making the capital available have the ability to move those assets through the financial markets via the financial technology and structured finance, and that is allowing them to recycle the capital.

Thank you very much.

[OPERATOR INSTRUCTIONS] We'll go next to [Jim Bakker] at Neuberger Berman.

I have a few very quick, focused questions.

Do you have a number for cash flow from operating activities for 2006?

I think we might want to wait a bit, Jim, until we put out our 10-K on March 1, and talk a little bit more about the cash flow activities at that time if we could.

No problem.

My estimate for the after-tax impact of the gain on sale and the stock options, which you sort of combined in the non-GAAP table, were 94.1 million after-tax for the gain on sale and 13.8 offsetting for the stock options expense.

Could you just verify if that's correct?

My team here says that your arithmetic is pretty good.

Fair enough.

The next one, I just wanted to know, Linda, if you could give us a break down of interest income and expense and foreign exchange.

Jim, we always anticipate that you will ask this question and we have gotten pretty good at getting ready for it.

Maybe the uneventful news here is that the total summary of these lines comes to exactly 0.

Right.

I noticed that.

So the details might be a little anticlimactic but the foreign exchange piece is down $300,000, interest income is up 4.5, interest expense is down $3.8 million, and other expense is off 400,000, which if we did this right, comes to 0.

Okay.

That sounds pretty good.

Another thing I just wanted to know if you could give us your best estimate of what might happen to stock options expense next year and perhaps into '08, because we had this phase-in now, we're kind of getting to normal, so what might sort of be the increment going forward?

Well, I think you're right to note that we have pretty much finished the phase-in.

We would see keeping our equity utilization relatively constant, which is under 2%, and so I think that we would see the impact that we had this year would roll forward pretty well to next year.

Now a couple of questions on dilution of stock options would turn on, of course, the Black-Scholes valuation of those which would include where the stock price goes, and then also some other technical questions that would have to consider.

So not exactly capable of predicting where that will go but I think you could look at the number for '06 and be relatively close.

That's very helpful.

And then the other thing I wanted to understand, is you allude to the pressure on margins in '07, and it seems as if some of the things you are talking about are ongoing, like the hiring of new headcount, expanding in more geographies, that sort of thing.

You mentioned a couple of acquisitions you've done.

But also, some of them seem like they're one-time in nature, relating to the headquarters move.

Would it be reasonable to expect for margins to actually bounce back in '08, just given that fact?

Jim, that's something we think a lot about around here.

We have got a pretty healthy business that's growing pretty well, and we want to make sure that we're caring for it and feeding it properly so I think we'd like to say that we'd like to guide everybody toward that 150-basis-point margin decline as a way to go.

We'll talk more about that as we go into '08 and '09.

But we really want to make sure that given the business conditions we have right now, that we're putting enough against the business to ensure that continued healthy top-line growth.

That's a great idea.

Then the last thing is just on KMV.

I think you mentioned about a $5 million -- I don't know if you have a more precise number, but a $5 million operating profit.

For the fourth quarter, yes.

That would be $5 million, and that was over, compared to a loss of $2.2 million in '05.

Right.

But of course, last year had some one-timers.

I believe a big write-off or something last year.

And that struck me as a little lower than it usually would be seasonally.

Any comment on that in terms of the mix of revenue there?

Yes, I think it the's probably better to look at M KMV on a year on year basis rather than the fourth quarter just because of the noise in the fourth quarter from 2005, and on a year-on-year basis, the operating income for KMV increased from -- in 2005 just a bit above $3 million, to about $16.5 million in 2006.

Right.

And that's a great improvement.

Just -- I think there was a time, Ray, you talked about maybe a 20% margin before amortization.

Of course, you've had the stock option expensing since then that had been implemented.

Do you still see that as something that maybe can be accomplished over time?

Yes, I think we probably have -- still have some margin expansion opportunities in the M KMV business.

Certainly in 2007 and probably into 2008 as well.

Thank you very much.

We'll go next to Michael Lipper at Lipper Advisory Services.

Good afternoon.

Circling back to the margin question, and perhaps you can help me with this.

The 150 basis point decline that you are using, couldn't we divide that into three categories, one investment, two profit mix, and three, deterioration in profitability due to any sort of competitive factors?

I think that might be perhaps putting more thought into it than might actually be necessary.

I think the majority of what we're doing here is very simply investing in our business for the growth for the long term.

Ray, in his prepared remarks, talked about what those investments were about.

I don't think that going to any deterioration would be a reasonable way to look at it.

Again, we have got a business that's growing at better than 20%.

It's tough to keep that going without providing appropriate investment to ensure particularly with our people that we're doing the right thing, and it really nothing more than that.

I would very much stress that we still have a pretty healthy margin on Moody's business as a whole, and we're looking to maintain that.

Michael, it's Ray McDaniel.

Let me just add a quick comment on to Linda's.

In terms of your breakout of the components in your question, I don't think it has really anything to do with profit mix.

We went through a period a number of years ago when we were doing some of our most aggressive international expansion in the major developed economies, where the -- that might have been a true statement, but our investments in those areas internationally now are much more incremental, and as far as the different business lines that we have, we don't expect any important change in the mix of contribution from the different businesses in 2007 versus 2006.

And as for competitive factors, that is always a risk.

And if we are not able to provide a differentiated premium service that has the best attributes of what credit ratings and research should be we will face more competitive pressure, but we are very focused on making sure that Moody's is a differentiated service provider and is going to be a must-have rating and research service, not just this year but forever.

Would it be fair to say that the spending -- and I'm not questioning whether it makes sense or not, but the spending itself is discretionary?

Well, yes, it is -- much of the spending is discretionary.

Much of the spending is committed.

I mean, we have, for example, signed a lease on a building at 7 World Tade Center, and that's no longer discretionary, but we do have quite a bit of flexibility.

I would emphasize, though, that if we see short-term cyclical conditions that are less favorable, I would be less inclined to reduce our investment spending than if we see changes that we think are going to be long cycle or secular changes in the outlook for our business, in which case we are going to have to take different actions.

But I don't want to react to a quarterly downturn in one or more of our markets if we still think that the opportunities in the global debt markets and for Moody's in those markets is strong in the long run because it's not going to be in the best long-term shareholder interest.

Thank you.

Thank you, Michael.

And that does conclude the question and answer session.

I will turn the conference back over to management for any closing remarks.

Okay.

I just want to thank everyone for joining us, and we look forward to speaking with you after the first quarter of 2007.

Thanks again.

And that does conclude today's conference.

Again, thank you for your participation.