穆迪 (MCO) 2007 Q3 法說會逐字稿

Good day, everyone and welcome, ladies and gentlemen to the Moody's Corporation third quarter 2007 earnings conference call.

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

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

I will now turn the call over to Lisa Westlake Vice President of Investor Relations.

Please go ahead.

Thank you, [inaudible].

Good morning, everyone and thanks for joining us on this teleconference to discuss Moody's results for the third quarter of 2007.

This is Lisa Westlake, Vice President of Investor Relations.

Moody's released its result for the third quarter 2007 this morning and the earnings released is available on our website 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.

In addition, Brian Clarkson President and Chief Operating Officer of Moody's Investor Service and Mark Alameda Senior Vice President and head of Moody Analytic will join us for the question and answer portion of this call.

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

Certain statements of my colleagues and I make today maybe forward looking with 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 the 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, 2006 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.

This 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.

I'm now 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 third quarter result.

Linda will then take you through quarter's operating highlights, provide commentary on revenues and expenses and update you on our capital structure and share repurchase program.

I will then review our business reorganization, 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 third quarter revenue rose to $525 million, 6% higher than in the third quarter of 2006.

Despite significant deterioratation in credit market activity in August and September, Moody's achieved double digit revenue growth from our corporate and public finance ratings areas as well as strong growth from our global research business.

This growth was somewhat offset by a 6% decline in global structured finance revenue versus the prior period reflecting a deterioration and issuance of U.S.

residential and mortgage back securities including securitizations of home equity loans and relating derivative instruments.

Operating income in the third quarter declined 7% year-over-year to $251 million.

The impact of actions we took to manage expenses lagged the pace of reduced market activity.

Foreign currency translation positively affected revenue and operating income growth by approximately 170 basis points and 150 basis points respectively.

Earnings per share for the quarter were $0.51 versus $0.55 in 2006 representing a 7% decline year-over-year.

Turning now to Moody's results for the first nine months of 2007.

Revenue totaled $1.8 billion, an increase of 21% from $1.4 billion for the same period of 2006.

Through September 30th, operating income of $919 million was up 15% from $796 million for the same period of 2006.

Currency translation had a positive impact on these results, increasing revenues growth by approximately 190 basis points and operating income growth by approximately 170 basis points.

Reported earnings per share for the first nine months of 2007 were $2.08, 29% higher than the reported $1.61 for the prior year period.

Earnings per share for the first nine months of 2007 included a $0.19 per share benefit from the resolution of certain legacy tax matters.

At this point I'll turn the call over to Linda who will start with in detail on revenues and expenses.

Thanks, Ray.

I'll provide details on the third quarter starting with our U.S.

businesses.

Moody's U.S.

revenue was $307 million for the quarter essentially flat with the same period in 2006.

Within Moody's investor service total U.S.

ratings revenue decreased 5% year-over-year driven by declines from structured finance while U.S.

research revenue increased $9 million or 24% versus the prior year period.

Within the ratings business, U.S.

corporate finance revenue rose $4 million or 6% compared with the prior year period.

U.S.

revenue growth of 67% from rating investment grade debt was largely offset by a 43% decline in revenue from rating high-yield securities.

U.S.

financial institutions revenue increased 4% driven primarily by strong issuance in the banking sector and new relationships in the insurance sector, partially offset by weakness in the residential mortgage and related credit market that's negatively impacted issuance activity and caused to decline in real estate revenue.

U.S.

public finance revenue increased 12% compared with the third quarter of 2006 reflecting good growth in the municipal and healthcare sectors of the business.

U.S.

structure finance performance in the quarter, completely offset revenue gains across the other U.S.

rating in research business, declining 14% year-over-year.

Within U.S.

structured finance, revenue growth of 29% from rating commercial mortgage back securities was more then offset by revenue declines across all other asset classes led by a 52% decreased in revenue from rating residential mortgage back security.

Turning now to our international operations, Moody's generated solid growth outside of the U.S.

Total international revenue was $218 million in the third quarter, 18% higher than in the prior year period.

Growth in the quarter reflected favorable foreign currency translation which increased the growth rate by about 450 basis points.

International revenue accounted for 42% of Moody's total in the quarter compared with 37% in the year ago period.

For Moody's investor service international revenue increased 20% year-over-year.

Corporate finance ratings revenue was 40% higher in the prior year period reflecting growth across all asset classes led by exceptional growth from rating investment grade debt and bank loans.

International structure finance revenue grew 10% and benefited from strength across most asset classes including a 40% increase in revenue from rating credit derivatives and a 32% increase in revenue from rating residential mortgage back security.

International financial institutions revenue increased 10% in the third quarter based largely on good growth in the European banking and insurance sectors.

International research revenue grew 35% from the prior year period reflecting strength across all segments of the business, especially in Europe.

Globally, moody's KMV generated $37 million of revenue up 3% compared to the third quarter of 2006.

Revenue growth from professional services and risk product subscriptions was somewhat offset by a year-over-year decline in revenue from licensing credit processing software and the related software maintenance fee.

Moving onto operating expenses, expenses in the quarter grew 21%.

About half of the increase was driven by additional lease expense related to Moody's headquarters move and international expansion as well as incremental technology investments.

The other half was attributable to a higher personnel cost mostly associated with the impact of hiring from late 2006 and the first half of 2007.

The quarter's operating margin was 47.7% compared with 54.2% in the prior year period as the impact of action we've have taken to manage expenses lagged the pace of reduced market activity.

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

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

On September 13th, Moody's announced it completed a new private placement of $300 million and on October 1st, the company announced it would establish a $1 billion commercial Paper Program.

P-program, which was rated A1 by standard enforce is support by a five-year $1 billion involving credit facility negotiated with Moody's relationship banks.

A $1 billion CP program, its backup revolver and a private placement transaction are continuation of changes the company has made in its capital structure over the last two years.

At the end of the quarter, Moody's had $1.6 billion of existing debt capacity of which $600 million remains available under its credit facilities.

We believe our current capital structure provides Moody's with the financial flexibility to continue to efficiently return capital to shareholders through share repurchases while also supporting business operations and our corporate development activities.

During the third quarter of 2007, Moody's repurchased $9.1 million shares at a cost of $484 million with an average price of $53 per share, which more than offset approximately half a million shares issued under employee stock-based compensation plans.

As of September 30, 2007, Moody's had $2.3 billion of share repurchase authority remaining under its current program and with that, I'll now turn the call back to Ray.

Thanks, Linda.

Before I address what's happening in the regulatory arena, I would like to discuss brief Moody's business reorganization.

On August 7th, we announced that Moody's corporation was being reorganized into two new operating divisions.

The first Moody's investor service, the rating agency, will continue to conduct credit ratings business and author credit research.

Brian Clarkson, former executive Vice President and CEO chief operating officer of Moody's Investor Service was named [inaudible] and Chief Operating Officer of this business.

The second unit, newly named Moody's analytics will bring together Moody's KMV, Moody's economy.com and other businesses outside of the rating agency.

In addition, this new unit will provide sales and marketing services for all of Moody's operations.

Mark Alameda former senior managing directer and head of the investor services research group was named senior Vice President and head of Moody's Anayltics.

This new structure is design to better capture of broad range of growth opportunities and debt markets worldwide and reinforce the independence of the company's rating systems.

I turning to the regulatory front, on September 24th, the SEC designated Moody's Investor Service and Nationally Recognized Statistical Rating Organization or NRSRO presumed to its rules implementing the credit rating agency reform act.

Moody's investor service is now subject to the SEC in oversite roles which addressed record retention, financial reporting, protection of material non-public information, management of conflicts of interest, and prohibited acts and practices.

Separately.

The issues related to subcrime residential mortgages and securitizations have prompted significant focus on the role and performance of rating agencies by global and national regulatory authorities and policymakers.

Moody's has been pro actively meeting with authorities to discuss matters such as our role in the structured finance market and the meaning of our ratings.

Our rating in monitoring a subcrime residential mortgage back to securities or RNBS.

Steps that Moody's is taking to enhance our rating processes and enforce the independence of the rating agency as well as steps that the market and regulators might consider in response to the credit market disruption.

We believe that we're making good progress in communicating our messages and understanding the issues and concerns that various authorities may have.

A number of reviews are in process focusing on the role and function of rating agencies.

These include the annual review of rating agencies being conducted by [inaudible], the committee of European securities regulators to assess the effectiveness of the current industry self-regulatory approach in Europe the review of rating agencies role in structured finance by [inaudible]--the international organization of securities commissions, that was announced earlier this year, and a review by the U.S.

SEC of NRSROs active and subprime RMBS ratings.

We're participating constructively in these and other reviews but its premature the forecast of the ultimate outcomes.

I would like to conclude this morning's prepared remarks by discussing Moody's assumption and outlook for the remainder of 2007.

Moody's outlook for 2007 is based on assumptions about many macroeconomic 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 and securitization levels.

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 its current outlook.

Based on expectations of continued weakness in the global debt markets, we have revised our outlook downward for the full year of 2007.

The Moody's overall the company now projects revenue growth in the high single digit to double digit percent range for the full year of 2007.

This growth assumes foreign currency translation for the fourth quarter of 2007 at current exchange rates.

We are pursuing a program to bring expenses more in line with projected revenue for the fourth quarter and to all of 2008.

As such, we expect to take a restructuring charge for the fourth quarter of 2007 in addition to cutting other run rate expenses.

Before any restructuring charge, we expect the total dollar amount of operating expense in the fourth quarter of 2007 to be approximately 7% lower than the third quarter amount.

Excluding any 2007 restructuring charge, the one time gain on the sale of Moody's 99 Church Street building from 2006 results and the effects of legacy tax matters in both years.

We now project the full year non-GAAP operating margins to decline by approximately 220 basis points in 2007 compared with 2006, which is a greater decline than the 150 basis points we were projecting previously.

For 2008, we are targeting full year operating margin of approximately 50% the achievement of which will necessarily relate to the revenue outlook for the year, which we are currently developing.

We also note that the margins for the first half of 2008 is very likely to be lower than the full year target.

Earnings per share in 2007 are now projected to be about flat compared to 2006 results.

However, excluding any 2007 restructuring charge, the one time gain on the building sale from 2006 results and the impacts of legacy tax matters in both years.

We now expect earnings per share in 2007 to grow in the mid to high single digit percent range.

In the U.S., Moody's continues to project high single digit percent revenue growth for the Moody's Investor Service rating and research business for the full year of 2007.

In the U.S.

structured finance business, the company now expects revenue for the year to be about flat to 2006 including low double digit percent growth in commercial mortgage back securities and low teen percent growth in credit derivative ratings offset by a decline in revenue from the U.S.

residential mortgage back securities ratings including home equity securitization and the low of 30s percent range which is a greater decline than the high teens percent range previously forecast.

In the U.S., corporate finance business, Moody's now expects revenue growth for the year in the high teens percent range which is lower then the mid-20s percent range previously forecast.

This assumption anticipates continued good growth and investment grade issuance offset by a decline in revenue from speculative grade and bank loan ratings.

We note considerable uncertainty in the speculative grade and bank loan segment for remainder of the year In the U.S.

financial institution sector.

The company now expects revenue to grow in the low teen percent range down from previous guidance of mid teens percent growth.

The U.S.

public finance sector Moody's now forecast revenue for 2007 to grow in the low double digit percent range up from previous guidance due to stronger issuance expectations from the positive impact of lower interest rates.

The company now expects growth in the U.S.

research business to be in the low 20s percent range, modestly up from previous guidance of about 20%.

Outside the U.S., Moody's now expects ratings revenue to grow in the low teens percent range with low double digit to 20% growth across all major business lines led by growth in Europe in corporate finance and financial institution ratings.

The company also now projects growth in the 30% range for international research revenue up from previous guidance of mid to high 20s percent range.

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

This should result from mid to high single digit percent growth in revenue with significantly greater growth in profitability.

That concludes our prepared remark.

We would be pleased to take any question you may have.

Thank you, to ask a question, please press star one on your telephone keypad.

If you are using speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Again, press star one if you have a question.

We will go first to Peter Appert at Goldman Sachs.

Thank you, Ray can you give us any additional color on what this restructuring charge might look like in the fourth quarter in terms of certain arrange of magnitudes we could be thinking about.

What kind of run rate savings you might be thinking about?

Have you changed your thinking.

Historically Moody's has been adverse to adjusting head count in the context of [inaudible] capital changes in the market.

Have you changed your thinking on that?

Sure, Peter.

With respect to the restructuring charge, there's not a whole lot more we can tell you right now.

If we had reached final conclusions on restructuring it would have been something that would appear in the third quarter rather than the fourth quarter.

But we are still working on that, and the two components we're working on obviously are the operational savings that we can realize and then the appropriate accounting treatment that would be associated with those savings and we will certainly communicate that as we have more information.

With respect to head count, we have had what I would characterize as a soft freeze in place since early in the third quarter.

We are still filling essential positions where they need to be filled, but we have dramatically slowed the pace of hiring and the net adds to staff and I expect that is going to continue.

Okay, what's the typical annual turnover you see, Ray.

Year-to-date we have about 15% turnover.

Okay, and then lastly, the longer term margin expectation you cite 50% for next year.

You basically still comfortable aside of a longer term target that's sustainable.

I believe so.

And setting that as a preliminary target for 2008, we do expect that debt market conditions are going to continue to be challenging, but as I mentioned in the prepared remarks, we are still developing our outlook for revenue expectations in 2008, and whether that 50% target proves to be liberal or conservative is going to depend on the final development of that revenue outlook.

We do expect it is going to be a challenging year, particularly in the first half where the comps are difficult.

Right.

And then one actually last thing, Linda, can you remind me what the cost components are on the debt or what the average cost are for the different pieces?

Sure.

First of all, Peter, we did want also to point out regarding your margin question.

If you look at our investor presentation from August, if everybody looks at page 34 of that, you will see that we had said that we thought the third quarter margin would be down from the rest of the year and in fact would be the lowest point of the year.

So we did caution everybody that we would expect this pattern at this point in the year.

So, we would request that everybody take a look at that.

Peter, you were asking about the components of -- I'm sorry.

Yes, the components of the debt and what the average cost are from the different parts.

Sure.

Right now, we have $1 billion in debt outstanding right now and we have the $600 million in private placement, and we have the billion dollar commercial paper facility, which gives us $1 billion [inaudible] in capacity and of that $600 million is still available.

Okay, and what's the rate on it?

We only have a rating on the commercial paper --

I'm sorry, I meant the average interest rate.

Oh!

I'm sorry.

The blended cost on all of that is about 5%, Peter.

Ok!

Great.

Thank you.

Next to John Neff at William Blair.

Hi, could you give us a little sense of your effective tax rate assumptions for the fourth quarter and maybe looking out into 2008?

Sure, Peter -- it's Linda -- I'm sorry, John.

We had the third quarter's tax rate, unfortunately had a bit of a negative comparison because we had a particularly low tax rate in the third quarter of last year.

For the rest of the year going forward, we would recommend that everybody models 41% but we just had a tough comparison in the third quarter this year versus the third quarter of last year.

Okay, and can we assume that's probably a good rate for '08 as well?

I think that's probably fair, but as Ray said we haven't finished work on '08 yet.

Okay.

And then you're weighted diluted share count, $267.6 million for EPS purposes.

But the balance sheet data shows shares outstanding on September 30th of $258.4.

Is that basic or diluted and does -- I'm assuming that reflects share of buyback activity very late in the third quarter?

Yes, we've got the actual is the 258 number, and I believe we also have the diluted number there as well.

Okay.

Great.

With the expense growth, half of that coming from the least expense.

Is there any duplicative least expense at this point or is that just a new run rate given the headquarters move.

Yes.

We had the duplicative least expense through the third quarter and we completed our move if that will come off and the fourth quarter, John that runs at about $3 million a quarter.

It is about $10 million for this year-to-date which is duplicative cost for having both the 99 Church Street and here at 7 World Trade Center but as a I said, that ended with the third quarter.

You said $3 million in a quarter would be the duplicative?

Yes.

Okay.

Year-to-date, and then question on the margin, the targeting 50% for 2008.

Why might that not be higher just in terms of the wiggle room you have with incentive comp which I'm assuming is about -- if I'm correct if I'm not, about 13% of total expenses, and can you talk about the revenue component of calculating that incentive comp accrual?

Sure.

I think it's fair to say, John to say the revenue piece is the tougher thing to forecast here.

Let me just step back and go over the margin assumptions and then I'll turn it over to Ray and we'll have comments on that, 2008.

For 2006, the margin number was 53.9%.

You see, we've guided down 220 basis points so for 2007 we're looking at approximately 51.7%.

We do have room in incentive comp but of course that depends on the revenue and operating income that we put up.

So, a little bit difficult to say going forward but I would invite Ray to say anything else.

that might were going to ask.

Yes.

I mean there are obviously a number of moving forwards at this early date and looking at 2008 and I think-- I realized this is just probably somewhat frustrating as you've tried to think about 2008.

But the clarity that we have around likely debt more for the activity is not high right now and particularly for the structured finance business which has been the high grow business.

So we are working on developing what that outlook is going to be.

We have never provided a succeeding year outlook in October and I think given the uncertainty in the markets right now this would probably not be the best time for me to start trying to do that.

You know?

Understandable.

Just a quick question, if I could one more, I'll get back in the queue.

Residential mortgage back securities as a percentage of total revenue.

From my understanding, in the past was that has been I believe in the realm of about 15% and can you reconcile what's happening there with the decline in total structured finance revenue?

Thank you.

Well the residential mortgage back revenue, global residential mortgage backed revenue is percent of global Moody's Corporation revenue is about 8.5%.

That has obviously been declining quarter on quarter throughout this year, and as you might expect we would anticipate it's going to decline in the fourth quarter as well, and become a very small -- at least the U.S.

component of that.

A very small contributor to global revenue.

Next we'll go to Karl Choi at Merrill Lynch.

Hi!

A few questions here.

The first one along the lines of the last question, Ray, can you tell us as a percentage of the total revenues, how much CDOs contributed in the third quarter and then also in terms of compensation expense percentage of total expenses from compensation in the quarter, and also from incentive compensation.

Thanks.

The I'll take the CDO question and what I have in front of me, Karl is the U.S.

CDO information.

The U.S.

CDOs in the third quarter were about 16% of U.S.

revenue, and again, that has been a declining percentage quarter on quarter throughout the year.

And Karl, for incentive comp as a percentage of total comp for Q3 that was 9% of total comp which is compared to 17% for the third quarter last year and 19% in the second quarter of this year and 16% for year-to-date.

So you can see there that the incentive comp as a percentage has come off almost to the point of half.

In fact more then half for the the second quarter comparison, and total comp to total expenses is 67%.

And Karl, since Linda's answer gave me time to calculate.

The global CDO revenue was also about 16% of global Moody's Corp revenue.

Great, regarding your comment about operating expenses to be down, I think 7% sequentially speaking in the fourth quarter.

Can you just give us a little bit more color where the decline is going come from, apart from the least expenses going away.

What are the major components.

Karl, a lot of that will come from the trueup of incentive compensation if our revenue view hold.

Basically, with the expenses will come off about $20 million in the fourth quarter and that approximately.

A lot of that will come from the room we have because of the trueup in incentive compensation.

Again, if the revenue view that we've forecast holds.

And, lastly Linda, can you give me the percentage of revenues from corporate finance in the quarter that were from high yield and investment grade in the components.

Sure.

The percentage of revenues from high yield were 8%.

That was total of global corporate finance.

That's down from 13% at the same time of last year, Karl, on a numerical basis it's a dropped of about 31% from $12 million last year to 8.3 this year.

That's the bond -- high-yield bonds.

High-yield bonds.

Yes.

If you include loans, it would be the total would be about 30%, I believe of corporate finance revenue.

What about investment grade.

Investment grade was 22% of total corporate finance.

That's up from 15% for the same period last year and a change of 76.7%.

And again, we're talking a bond issuance.

So, that does not include with the frequent initial pricing fees and commercial paper medium term note programs.

That would be in the other category.

Okay.

Great, thank you.

We're going next to Michael Meltz at Bear Stearns.

Great.

Thank you.

I think I have three questions.

Can you clarify for me your actual-- your full year guidance.

What implies for the fourth quarter?

In terms of revenue and EPS, and then secondly on Karl's question on the cost cut.

So you're saying, Linda, that you are essentially assuming just a big dropdown in incentive compensation and I assume some discretionary cost but not head count reduction?

I think going into the second question first, Michael.

A lot of it will come from the incentive compensation change and I think it's fair to say that we're also looking at head count across the firm.

We're looking at all costs across the firm.

We want to be very clear that we understand that we have to bring expenses in line with the new revenue picture.

So we are looking at everything and we do expect that there will be some selective staff reduction.

As far as the fourth quarter expectations for for revenue, if you back into it from the year-to-date and the full year that we've given, you can see a mid teens to low to mid-20s expected decline in revenue in the fourth quarter.

Okay, and on the EPS side though, you using the 224 base from last year?

You're saying that you're going to grow that excluding all of the non-recurring items.

Is that the number you're using?

I'm not sure I heard the question.

I just want to make sure Ray.

I understand on what EPS you're talking about in terms of this guidance.

Are you using?

What are you using as a base for 2006 and that you're growing?

Yes.

The--

Mid to high single digits.

Okay, I just didn't hear you before.

The basis is $2.25 for Q4 -- I'm sorry for full year 2006.

Okay.

Okay and then lastly, I just want to ask about the margin assumption for next year.

Is it your -- I'm not sure how you can guide to a margin assumption by not guiding to revenues since they kind of go --

I'm sorry.

It's because they kind of go hand in hand.

I just want them to understand, is your point of saying that just to assure people you think Moody's can continue to operate at a 50% type of margin going forward?

Yes.

I would not characterize this as guidance on the margin.

As I said, we are targeting a 50% margin.

We think that we can continue to maintain a 50% margin even in a much-slower revenue growth environment but there are obviously limits to that, and so what I'm telling you at this point is what I am working on in terms of a goal for our cost management once we have taken care of any restructuring that we will be doing in the fourth quarter and aligning the growth in head count which is the lion's share of our expense with the revenue outlook that we are developing.

So that's the goal and in a range of performance environments for the debt markets, I think we will be able to achieve that but obviously not in all environments and I don't know what our central case will be for the revenue environment in 2008.

Thank you, Ray.

Next we move to Fred Searby in JP Morgan.

Thank you.

A couple of questions.

One, I wondered if you could help me, Ray and Linda think about you saw growth still structure finance in Europe.

Given the issues that seem to be manifesting themselves in the housing market.

How much of an impact do you think that's going to be on structured finance?

In Europe and then I wondered if you could give us some sense as to what you baked in a structured finance implied Q4 or projection in turns of CDO issuance and then if you have any thoughts on this rescue fund -- that's a wild card but it could all mean?

Thank you.

Sure, Fred.

I'm going to invite Brian Clarkson to comment on most of this, but let me just give you the expectation for the fourth quarter on the CDO side.

In the U.S., CDO market we're expecting a decline of 40 to 50% and that includes both CLOs and asset-back CDOs.

We expect the decline in the asset-back CDOs to be greater than 40-50% and decline in the CLO market to be somewhat less.

Globally, we would expect a decline for CDOs to be between 30% and 40%, and I'll ask Brian to add any comments that he can on the European structure finance side and on the rescue fund.

Sure this is Brian Clarkson.

On the European structure finance side, particularly CDOs we don't see is the same type of decline in the same [inaudible] that we have seen in the U.S.

with respect to the housing market.

The big reason for that, is you don't really see ABS CDOs that include housing securities.

And even if you did in Europe, we haven't seen the same downturn in the housing market.

And, so we're still seeing some growth in the overall structure finance market in Europe but also in CDOs because of that, and also CLOs.

With respect to the rescue fund, we're certainly involved.

We've been talking to people with respect to it.

We haven't assigned a rating.

We're listening to the proposal.

The outcome is fairly uncertain at this point.

Although I will say that if they are successful at setting this up, that it will actually -- it should provide some liquidity to the market and also help the SIVs that are trying to sell good assets to the extent that they can sell them it, you know, in fair prices that will ask to provide liquidity in the market.

And for those SIVs that may either to attempt to may wind down.

They can wind down in an orderly faction and what it overall does is if it is successful it will enable them to -- for those that want to restructure they can restructure themselves into a different type of vehicle and those that actually want to wind down they can do in six month or 12 month period.

Thank you, and just one followup.

In terms of some of your emerging areas of growth that you've highlighted.

Hedge fund ratings.

The insurance category.

Is there any breakout story there that you see materializing.

Thank you.

And as far as the two areas that you just mentioned.

I would say no, there is not a breakout story there.

We're continuing to assign ratings.

We're continuing to get growth out of those areas, but it is it steady growth, off of a small base rather than breakout opportunity.

At least as of yet.

Where we are expecting good growth in the fourth quarter is on the investor services side of the business, and as we move to integrate investor services, our global sales of research with our other non-ratings businesses.

I expect we are going to see good growth out of what will be the Moody's Anayltics business in 2008.

So I do feel confident that we're going to have a good story there in 2008.

Thank you, guys.

And once again, if you do have a question, please press star one.

We'll go next to Creag Hiewber at Lehman Brothers.

Yes.

Hi.

Thank you.

A couple of questions.

Historically, I think you've had roughly a 60/40 revenue split between revenues based on new issue volume and on the other side the reoccurring monthly revenue support..

Can you tell us, how did those revenues break out this quarter?

Sure.

It hasn't changed dramatically.

The transaction related revenue in the third quarter was about 70% of ratings revenue with the relationship revenue being 30% and then if you keep in mind that about 20% of our business is outside of the ratings area, Moody's KMV and our research business, what you've got is transaction revenue that is about 70% of 80% or in the mid 50 percent range.

So it's still about a 55/45% split between transaction and relational revenue.

And that 70% number you talk about specifically in the ratings business.

How does that differ across to different asset classes?

Particularly the structured versus high yielded versus investment grade in loans?

Yes.

The--As we have commented before, the structured finance and public finance businesses are much more transactionally based.

The corporate finance and financial institutions businesses, having more waiting towards relationship with the financial institution business being most heavily weighted to relationship fees.

And just switching back to the variable cost for a second side from the incentive compensation.

There are any material available costs you can point to hear the even it is to get to dial down if the top line doesn't perform?

Yes, I think Craig, is trying to say, we have some flexibility, but it's not limitless.

We have some choices we can make for example on technology project spending, and things like that, that we can dial down if we see revenue softness, but again, 70% of our expenses are actually 67% for this quarter.

Our compensation related and so that's why we have to take such a hard look at the comp line.

Is that remaining for the total that roughly 5% to 8% range?

I'm sorry.

Could you repeat that question?

It that IT-type stuff roughly in the 5% to 8% range of cash cost?

That's fairish, yes.

Yes.

Okay.

And then lastly, if I could just comment a little bit about what you're seeing in the month of October that might be better or worse across asset classes versus what you saw in September?

Thank you.

Well we do not obviously have a full month of October in, but I would say the story in October is not dramatically different than what we have seen in September.

There continues to be significant stress in some important sectors of the debt markets including important sectors of structured finance and most of the activity that we're seeing on the corporate finance side continues to be investment grade activity.

So not a dramatic change in the profile from what we were seeing in the end of the third quarter.

Okay.

Thank you.

And just a final reminder if you have a question please press star one.

We'll go to Katarina Fallon at City.

It's Katrina Fallon from city.

We just wanted to follow up on Craig's question about the monthly seasonality.

But in the past, credit crunches that we've seen and I think you've talked about this in previous presentations.

You've talked about how long the credit crunches have lasted and how long the decelerating growth rates occur before we start to see a turn around back towards growth again.

How would you compare this credit crunch to what you've seen maybe with the Worldcom or with the 2001 recession and 9/11?

Sure, Katrina.

While it's a little bit difficult to see a long distance in the middle of the storm.

I would say that right now, I would expect the recovery from this credit tightening to be more protracted than what we saw with either the recovery from the LTCM period in 1998 or in the post Worldcom period.

I sort of put the 2001 period to the side because we had very strong performance through that period and so I don't think it's as good as a comparer.

The reason I think, we will probably have a more retracted recovery period is that the credit issues that have come up in the structured finance area.

I think we're probably going to drive some more basic rethinking about certain asset categories or classes of structured finance.

Obviously, the areas that had been most hard hit are the subprime residential mortgages.

The short-term markets, particularly the part of the market represent by the structured-investment vehicles and the knock on effect to the credit derivatives market.

I think it's not unreasonable to expect that we will probably see more standardization coming out of this market going forward with some of the more complex securities being more difficult to place for a longer period of time.

So, the combination of the market having to digest the on-going problems with the housing market in the U.S.

and to think about the adjustments that will be made to securities and potentially creating more standardized security classes in structured to accommodate more liquidity, more transparency, I think is going to take some time and that's why we're being cautious about the pace of recovery coming out of this crunch.

Okay.

Thank you very much.

And at this time we have no further questions Mr.

McDaniel turn the conference back over to you.

Okay.

I want to thank everyone who joined us this morning and we look forward to speaking with you after we get our year-end results.

Thank you.

And that does conclude today's conference.

Again, thank you for your participation.