穆迪 (MCO) 2008 Q3 法說會逐字稿

Good day and welcome ladies and gentlemen to the Moody's Corporation third quarter 2008 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 the conference up for questions and answers following the presentation.

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

Please go ahead.

Thanks, good morning everyone and thanks for joining us on the teleconference to discuss Moody's results for the third quarter of 2008.

I am Lisa Westlake, Vice President of Investor Relations.

Moody's released its results for the third quarter of 2008 this morning.

The earning release and a presentation to accompany this teleconference are both available on our Web site 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 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 a Safe Harbor for such forward-looking statements.

I direct your attention to the managements discussion and analysis section and the risk factors discussed in our annual report on Form 10(K) for the year ended December 31, 2007.

And another SEC filing made by the Company from time to time.

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 statement.

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 results.

Linda will then take you through the quarters operating highlights, pride some commentary on revenues and expenses and update you on our share repurchase program and our latest acquisition.

I will then review recent developments in the regulatory area and finish with Moody's outlook for 2008.

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

The disruptions in uncertainty in the financial markets worsened materially in September under mining credit activity across all assets classes and spreading into areas that had been relatively active earlier in the year.

Moody's results in the third quarter were adversely impacted by the credit markets freeze, which drove global nonGovernment debt issuance for the month of September down more than 40% from already depressed levels a year ago.

Revenue for the quarter was $433 million down 17% from a year ago.

Strength in public and infrastructure finance and growth from Moody's analytics was more than offset by extremely limited issuance of structured finance securities and speculative grade bonds and bank loans.

Operating income for the third quarter was $190 million, a decrease of 24% year-over-year.

Excluding the positive impact from foreign currency translation revenue and operating income decreased 19% and 28% respectively.

Recurring revenue and our ongoing cost management efforts continue to reduce the impact of weak issuance conditions on overall performance.

Diluted EPS for the quarter were $0.46, down 10% compared to $0.51 a year ago.

Excluding primarily legacy tax matters diluted EPS for the quarter declined 12% to $0.45.

Turning now to year to date performance, revenue for the first nine months of 2008 was approximately $1.4 billion, a decrease of 23% from the first nine months of 2007.

Operating incoming of $623 million was down 32% from the same period a year ago.

Excluding the positive impact of foreign currency translation revenue and operating income declined 25% and 35% respectively.

Reported year to date earnings per share of $1.49 included a benefit relating to the resolution of certain legacy tax matters and adjustments made in 2008 related to 2007 restructuring.

Excluding these items diluted earnings per share decreased 24% to $1.44 for the first nine months of 2008.

In recent weeks the financial system has experienced significant additional turmoil as core problems in credit have been amplified by a much wider crisis in confidence and deceleration in macro economic activity.

A range of global responses have been initiate to do contain the damage.

While we expect that these efforts will help stabilized markets the timing for recovery remains uncertain and is probably been extended.

Globally a reduction of debt issuance as a resulted from historically wide interest spreads that caused many issuers to delay transactions.

Spreads for investment grade industrial debt are approaching levels not seen since the 1930s while spreads over US Treasuries respected grade debt reached a record 1600 basis points in mid-October.

In light of these recent developments we have revised our guidance down for the full year 2008 earnings per share to a range of $1.71 to $1.77 excluding legacy tax matters, 2007 restructuring adjustments and the format acquisition.

I would further discuss our revised out look later in the call.

At this point I'll turn the call over to Linda to provide more details on our financial results and other updates.

Thanks, Ray.

I'll begin with revenue for the third quarter.

Moody's US revenue declined 29% year-over-year to $218 million.

Revenue from outside the US was $215 million, about flat with a year ago and represented 50% of Moody's total revenue for the quarter.

Recurring revenue of $268 million was up 8% from the third quarter of 2007 and represented 62% of total revenue for the quarter.

For the first nine months of 2008 recurring revenue grew 12% to $807 million representing 60% of total revenue.

Focusing on details by business segment I'll start with the ratings business.

Moody's Investor Service revenue for the quarter was $297 million, a decline of 27% year-over-year.

Excluding the favorable impact of foreign currency translation revenue was lowered by 29%.

US Ratings revenue was down 38% compared to a 10% decrease in non US Ratings revenue.

Revenue from outside the US represented 48% of total Ratings revenue.

Global Structured Finance revenue for the third quarter was $98 million, down 50% year-over-year.

US Structured Finance revenue decreased 65% due to issuance declines led by residential mortgage bank securities, commercial real estate finance and derivatives.

NonUS Structured Finance revenue was down 25% from the prior year period.

Declines in the European credit derivatives and commercial real estate finance sectors were partially offset by growth in asset backed and residential mortgage backed securities as banks took advantage of favorable arrangements with the European Central Cank by securitized balance sheets.

Global Corporate Finance revenue of $75 million for the third quarter declined 19% from a year ago.

US Corporate Finance revenue decreased 22% year-over-year led by a significant decline in bank loan ratings and a decrease in investment grade issuance to levels last scene in 2005.

Outside the US Corporate Finance revenue was down 14% due primarily to declines in revenue from speculative grade bond and bank loan ratings.

Global Financial Institutions revenue of $64 million increased 2% from the same quarter of 2007.

US Financial Institutions revenue was down 10% as revenue declined from the insurance and finance and securities sectors more than offset growth in the banking and management investment sector.

However, outside the US Financial Institutions revenue grew 12% primarily due to higher revenue from European bank ratings.

Global revenue for public project and infrastructure finance increased 11% to $60 million.

US revenue for these sectors increased 3% from the third quarter of 2007 with solid double-digit growth in revenue from US municipal ratings.

NonUS revenue rose 30%, driven by increased project and infrastructure finance activity primarily by European utilities.

Turning now to Moody's analytics, global revenue of $137 million increased 14% from the third quarter 2007, excluding the positive impact of foreign currency translation the revenue grew by 12%.

US revenue was up 7% to $65 million while nonUS revenues were 20% and represented 52% of total revenue.

Within analytics, global revenue from subscriptions rose 10% to $119 million, while both software and consulting businesses saw strong double-digit revenue growth driven primarily by software licensing fees and consulting projects for customers outside the US.

Turning now to expenses, Moody's third quarter operating expenses were $244 million, 11% lower than the prior year period.

We continue to manage the business prudently and maintain rigorous control of nonessential costs.

Lower incentive and stock-based compensation expenses positively impacted these results.

Nonoperating expense for the quarter included a one time benefit of approximately $5 million or about $0.01 per share relate to go resolution of certain legacy tax matters.

Operating margin for the third quarter of 2008 was 43.8%, 390 basis points lower than the third quarter of 2007.

Our effective tax rate for the quarter was 38.6% compared with 43.3% for the prior year period.

The decrease was due primarily to a larger proportion of consolidated taxable income being generated from outside the US, which is taxed at a lower rate than the US statutory rate and the realization of credits and deductions available for US based manufacturing and research activity.

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

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

Although transaction revenue has declined this year due to lower issuance, Moody's recurring revenue continues to generate significant and stable cash flow.

We intend to continue returning capital to shareholder in a manner that is consistent with maintaining sufficient liquidity in this uncertain environment.

During the third quarter of 2008 Moody's repurchased 4.2 million shares at a total cost of $145 million, and issued 394,000 shares under employee stock-based compensation plans.

For the quarter we repurchased shares at an average price of $34.25.

Share repurchases during the quarter were funded primarily from free cash flow.

Outstanding shares as of September 30, 2008, totaled 239.8 million, representing 7% reductions from a year ago.

In the first nine months of the year, Moody's repurchased a total of 13.4 million shares at a total cost of 473 million, and issued about 2.1 million shares under employee stocked-based compensation plans.

Year to date we repurchased shares at an average price of $35.22.

For this period share repurchases were funded using a combination of free cash flow and borrowings.

At quarter end, Moody's had 1.4 billion of outstanding debt with approximately 350 million of additional capacity available.

Also as of September 30, 2008, Moody's had 1.6 billion of share repurchase already remaining under its current program.

Before I turn the call back over to Ray I'd like to discuss our most recent acquisition.

On October 9, we closed the acquisition of Fermat International a leading provider of risk and performance management software to the global banking sector.

The combination of Moody's credit portfolio management and economic capital tools with Fermat's expertise in risk management software positions Moody's to deliver a comprehensive analytical solutions for financial institutions worldwide.

We believe this is a particularly attractive opportunity given the current environment of heightened sensitivity to capital risk management and expect this business to generate annual revenues in excess of $70 million by 2010.

And with that I'll turn it back over to Ray.

Thanks, Linda.

I'll provide a brief update on regulatory developments at this point.

We continue to have active communications with regulatory authorities on both a global and regional level.

At the global level the G7 Finance Ministers recently stated they would accelerate the implementation of the financial stability form recommendations which include several points on credit rating agencies and the roll and use of ratings.

Related to these recommendations the International Organization of Securities Commissions or IOSC, has published a revised code of conduct for credit rating agencies.

We expect to publish a revised Moody's code of professional conduct in the coming weeks that will address changes in the IOSC code.

Turning to the US , as many of your aware last week I participated in a heating held by the US House of Representatives Committee on Oversight and Government Reform.

This is one of a series of hearings that had been planned during the months of October and November by both the House and Senate.

We anticipate that there will be additional hearings over the next year as US Policy Makers and Regulators seek to restore confidence in the stability and resiliency of the US Financial System.

Early in October the President's Working group release ad project update on policy statements on financial markets developments.

The update summarized policy initiatives taken over the past several months including the proposed rules for nationally recognized statistical rating organizations published by the Securities and Exchange Commission earlier this summer.

It's expected that the SEC will publish its final set of rules by the ends of this year.

Turning to Europe, this past summer the European Commission published a proposal for the oversight of rating agencies in the EU, which drew comments from over 90 market participants including Moody's.

It is expected that this commission will publish a revised 'proposal buy midNovember for review by the European Parliament and the Counsel of the European Union.

Moody's supports the ongoing efforts undertaken by global policy makers and regulators to restore confidence in the credit markets.

We will continue to communicate our messages and address issues and concerns that various authorities may have in our mutual goal of greater market stability and return of investor confidence.

I'd like to conclude this morning's prepared remarks by discussing our outlook for the remainder of 2008.

Moody's outlook for 2008 is based on assumptions about many macro economic and capital market factors including interest rates, corporate profitability and business investments spend.

Merger and acquisition activity, consumer spending, residential mortgage borrowing and refinance activity, securitization levels, capital market issuance and the impact of government sponsored economic stabilization initiatives.

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 materially from our current outlook.

In light of difficult current conditions in the global debt markets and uncertainty regarding the pace of recovery, we've revised our outlook downward for the full year 2008.

For Moody's overall, we now expect full year 2008 revenue to decline in the low 20% range, this decline excludes any revenue relating to the acquisition of Fermat and assumes foreign currency translation in 2008 at current exchange rates.

We are maintaining rigorous focus on expense management and planning conservatively for the business in light of lower revenue expectations.

Full year operating expenses are now expected to be about 11% lower on an as reported basis compared to full year 2007.

Excluding the impacts from restructuring in the Fermat acquisition we now project full year expenses for 2008 to decline about 8% from 2007, and we expect full year 2008 operating margin to be in the low 40% range down from our previous guidance of mid 40% due primarily to lower revenue.

Excluding the items previously mentioned as well as legacy tax matters, earnings per share for 2008 are now projected in the range of $1.71 to $1.77 versus the previous range of $1.90 to $2.

For the Global Moody's Investor Service business we now expect revenue for full year 2008 to decline in the low 30% range in anticipation of poor market conditions for the remainder of the year.

For the full year 2008 we now project Moody's Investor Service revenue in the US to decrease in the low 40% range and revenue outside the US to decrease in the mid-teens percent range.

We expect Structured Finance revenue in the US to decline in the mid 60% range, reflecting significant percent declines across all asset classes.

However, we expect the percent decline outside the US to be about half the US rate.

Corporate Finance revenue for the US is expected to decrease in the low 30% range with weakness across all asset classes led by declines in speculative grade bond and bank loan ratings.

International Corporate Finance revenue is also project to do decline by at a much slower rate.

We now project a low single-digit decline in Global Financial Institutions revenue with US revenue expected to decrease in the low to mid-teens percent range partially offset by international growth.

We anticipate slight growth in the global public project and Infrastructure Finance sectors with US revenue expected to be about flat and low double-digit percent growth expected outside the US.

For Moody's Analytics we now expect revenue growth in the low double-digit percent range as market weakness among Financial Institutions is leading to longer sales cycles and somewhat higher customer attrition.

US revenue is expected to grow in the high single-digit percent range while nonUS growth is still projected in the mid-teens percent range.

Growth in the subscription business is anticipated at a low double-digit percent range.

In the software business we now expect revenue to be about flat with 2007 and in the smaller consulting business we continue to anticipate strong growth reflecting sustained demand for professional services and credit training projects.

While sales cycles are lengthening due to financial market uncertainty robust demand continues for Moody's expertise in credit education, risk modeling, and score card development.

That concludes our prepared remarks and joining Linda and me for the question and answer session are Michele Madelain, the Chief Operating Officer of Moody's Investor Service and Mark Almeida, President of Moody's Analytics .

We would be please to take any

(OPERATOR INSTRUCTIONS) We will go first to Michael Meltz, JP Morgan.

Thank you, I just have two questions, Linda, can you give us, you gave a breakdown for recurring revenues.

Can you give that for each segment but kind of separate from that because I kind of backed in with a number?

Ray, can you just talk about what you are kind of seeing in the fourth quarter here?

Is there obviously there's some issuance but what are you seeing and how does it differ from what you saw in Q3?

Sure, I'll start, Michael.

What we are seeing so far in Q4 reflects what we were seeing in the latter part of Q3.

The earlier part of the third quarter issuance activity was certainly, I couldn't characterize it as strong but there were areas that had been active through the year and remained active for the first couple of months of the third quarter including investment grade bond issuance in the US and in Europe.

And that has slowed and the areas that have been slow continue to be slow so we are at a very low point in terms of bond issuance both in the US and we've seen slow down in issuance activity in Europe as well.

So October looks a lot more like the latter half of September than it does like the earlier part of the third quarter.

Michael, on your question on transaction revenues and then relationship revenues for the corporation as a whole, we are at 38% transaction revenues for the third quarter and 62% relationship revenues.

Let me break down the rating agency for you and then I will add analytics to it.

Restructured finance transaction revenues are 54% of structured finance revenues and relationship revenues are 46%.

Corporate finance is 53% transaction, 47% relationship, for FIG, it's 37% transaction and 63% relationship.

PPIF is 61% and 39%.

For the rating agency as a whole since right now we are running 51% transaction and 49% relationship.

Moody's Analytics of course is much more relationship based.

It's 9% transaction revenues for the quarter and 91% relationship revenues and that all averages out to 38% transaction revenues and 62% relationship revenues.

So that and that's basically what I had backed into so your guidance, Ray, can you talk a little bit about how you're guiding here for the end of the year?

I mean, it's a wide range for Q4 obviously given the couple basis, 100 basis points of for the full year, it turns it into a wide range for Q4 but you are still expecting 100 million plus of transaction revenues, right?

Is my assumption based on your guidance.

There continues to be some activity in the market.

Utilities, some investment grade issuance, the slow down internationally has not been as significant as the slow down in the US.

So we are trying to forecast a very weak issuance environment but not a nonexistent issuance environment and, you're right, we do have a wide range for the point in the year that we are at and the reason for that is I think the potential downside would have to do with a greater freezes occurring outside the US than we have seen so far and the upside would be if credit spreads come in somewhat there is a significant amount of potential volume that could enter the market quickly.

Got it.

Okay.

And then my final question, I promise, Linda, can you talk a little bit about what you're doing on the cost side?

I know your cost comp or the hurdle gets harder in the fourth quarter because you did pull back last year but guidance implies I think expenses up year over year in the fourth quarter.

Can you talk about that, please?

Yes, Michael, you're right.

Guidance does imply that.

We took a heavy axe to cost in the fourth quarter of last year when we were somewhat out of line at the end of the third quarter so frankly we took out thing that were easier to take out at the end of the fourth quarter last year so this year you're right it's going to be a little bit more challenging.

We've been very conservation in how we've handled incentive compensation and that's down for the third quarter.

We would expect if conditions continue to be bad in the fourth quarter it would look similar obviously to the third quarter.

And we are working on all the other lines of noncomp across the P&L.

We think were are doing quite well with that as you see perhaps, an 11% expense reduction so we've done quite a good job on expenses and we plan to continue that.

On the other hand ratings quality is paramount and we want to make sure that we continue to be able to get the ratings right.

So we've got to get this balance right and it's an important topic for us.

Great.

Thank you for your time.

We will move next to Craig Huber at Barclays Capital.

Yes, good morning.

First question on cost.

How much year over year did you safe from lower incentive and stock based compensation?

Sure, Craig.

From last year, I'll do a quarter over quarter, first of all I'll give you absolute percentages and then wheel look at the comparison year over year for the third quarter.

Incentive comp is 7% of total compensation for the third quarter, stock compensation is 11%.

And salaries and benefits are the remaining 82%.

That brings the total comp top 66% of expenses.

Last year at this time the numbers were running incentive comp at 7%, stock comp at 9% and salaries and benefits at 83%, comp was at 67% of total expenses.

So that basically gives you the break out.

I'm sorry , in terms of dollars how much did you save?

Do you have that?

Year-over-year?

Year-over-year,.

For incentive and stock-based.

Yes, we are, on incentive comps this year we are down about 33% year-over-year in incentive compensation, the numbers go from 17.7 last year's to 11.8 this year.

And then stock compensation goes from 23.4 to 16.9 which is 28% savings.

Salaries and benefits down 141 to 131 which is a 7% savings.

Also do you mind updating us on your full time equivalent employees end of this quarter versus three months ago?

Sure, we are at 3582 at the end of the third quarter.

That's actually up ten heads from the end of last year.

Let me see, from the end of, that's what I've got as most recent comparison.

We do expect to add to that, though, Craig, the addition of Fermat, which is going to be another 275 heads.

And speaking of that acquisition can you just give investors a little more detail on that, the revenues, you talked about 2010 but what are the trailing 12 month revenues there, EBITDA margins to

We are not at this point disclosing the trailing revenue and margins for that business.

We are looking at this on a going forward basis and the reason we are pointing out to 2010 is because while we will have good revenue and cash from that business in 2009, we have to work through the accounting of having purchased software business and having that business on a GAAP basis.

What should we assume for D&A then for the fourth quarter because there's something here obviously, bring this dilution for what, 5 to $0.07 for the quarter.

Yes, 5 to $0.07 dilution.

What is the D&A impact here, is there anything into the fourth quarter or is it all just lack of profits?

Craig, I don't think we've disclosed that, were are taking a conservative view of converting an IFRS-based business over at a GAAP business and we'll have more to say on this in the fourth quarter when we are ready to talk about the final financials for Fermat.

That's fine.

My last, on the interest expense line, can you just talk about the moving pieces there?

Sure.

Basically interest expense is up a little bit.

If you want to look at the components of nonoperating expense, the main cost there would be interest expense on the borrowings.

We don't break out the details on that.

That's offset so by some upside on legacy tax and some gains on foreign exchange, so basically those are the main components of what's going on.

Foreign currency exchange, how much of that impact the quarter versus a year ago.

It's about $2 million positive and last year we were about less than $1 million positive.

Great.

Thank you very much.

Thank you, Craig.

Next, Peter Appert at Goldman Sachs.

Thanks, Ray, based on the tone of the hearings with Mr.

Waxman it feels like the folks in Washington are getting even more up about the rating agencies which might imply more serious legislative action.

How do you read that, number one?

Number two, how do you place probability on investor pay model becoming the standard in the industry?

How would that affect the economic business for (inaudible)?

Sure, I mean, the, I'm sure for those listeners who heard the hearing, they would note that there were pointed questions, pointed statements about the ratings industry and the performance credit rating agencies.

We expected that there would be frankly.

My expecting in hearings that we participate in 2009 I think our participation is probably inevitable and I expect there will be pointed questions there as well.

I think the tenor is going to be for the Financial Services industry as a whole it's probably going to be skepticism and criticism about how we got to the position we are in.

And that rhetoric is going to be harsh.

I think what we have to do though is separate harsh rhetoric from an effort to find solutions which leads total second part of your question which is how likely does the investor pay his model.

In my opinion it is unlikely for a number of reasons.

First of all, I think there is a growing appreciation as I have talked about before that the avoidance of conflicts of interest in this business by moving to an investor pays model is fiction and the question really is how do we demonstrate that we are are managing potential conflicts properly and transparently so that people have confidence in the independent of our work.

The investor pays model has a number of other issues with it including the willingness and interest of investor to pay because their interest is in the general existence of ratings as opposed to the rating on any particular bond.

So there is some practical questions as well but I think the real issue around investor pay is philosophically, is this somehow better and as I testified in the house committee hearing I think one of the bigger mistakes that could come out of a review of this industry is a belief or an assumption that moving to an investor pays model somehow cures the potential for conflict of interest and for people either at the rating agencies or among oversight authorities to then take their eye off the ball of properly managing those potential conflicts.

Ray, one unrelated item you gave us some catalectic could drive essentially your recovery in issuing volume and the investment grade category but what do you think happens to bring some life back to the structured finance market?

I think right now the structured finance market to the extent that there are securitizations being issued a significant portion of that are securitizations that allow collateral to be pledged to central authorities for liquidity purposes.

And I consider that not a really a continuation of prior structured finance or reassumption of activity.

I think that's more in a, that's a temporary category of issuance.

I think what we need to see are simpler and more similar structures.

Simpler is going to help more people understand what the mechanics of the securitization are and more similar is going to allow investors to learn about a category of asset rather than learning about an individual security which allows them more confidence in buying and more confidence that there be a secondary market to trade in because of greater familiarity about the mechanics of those securities.

The absolute critical element though and I've said this repeatedly is to have enough information in the hands of the investing public about the securities structures and the underlying assets so that there is not a blind investment or an investment that relies only on the opinion of a rating agency where in fact we are not in a position to put confidential information into the market either.

So I would very much favor a regulatory regime that requires assets, asset information and securities structure information to be clearly transparently communicated to the investment public.

Peter, just to follow up a little bit you had also talked about investment grade and in terms what have we would need to see to see some of these markets moved our credit trends group has done some work on this and our view and others may have different views, of course, for the investment grade market we think that 100 basis points drop in spreads could lead to approximately 40 to 45 billion in monthly origination of investment grade.

That would compare to a monthly average of 61 billion during the period of 2005, 2006.

For high yield, we are thing that a 250 basis points drop in spreads could lead to about 12 billion in monthly originations, which is about equal to the 2005 and 6 average, but wouldn't be sustainable unless spreads came in further.

We are thinking that it may take awhile to get back to those levels but that can give you some sort of view as to where the upside might be if and when spreads do come in.

Great.

That's very helpful.

Thanks.

We will move next to Catriona Fallon at Citi.

Yes, hi, most of my questions have actually been asked and answered but could you give us a quick update on any of the lawsuits and if anything has moved forward there?

No, there's really no new news to report on the litigation front.

We are continuing to handle the items that we've already talked about and if we had any new information we of course would be communicating that.

Okay.

And then I guess I do have two questions.

I guess I'm surprised the headcount is up year-over-year in that there were kind of discussions of maybe 275 headcount reductions over the course of the year and those have definitely been slow, we've been slow to see those and it seems like that's not actually happening yet you still have been able to bring OPEX down.

I'm just wondering what are the plans there as far as headcount and how have you been able to achieve cost cuts without reducing headcount?

Katrina, it's Ray, first of all we did make the headcount reductions that we said we were going to make and that was part of the restructuring charge that we took and we completed that.

We were going to make.

There are other areas though where we feel it is appropriate to be adding headcount and we continued to so because we are planning for the future of this business outside of the storm that the credit markets are currently in.

We have added people to our Moody's Analytics business.

We have added people in the compliance and regulatory area for the rating agency because we do have additional obligations there.

And we've been adding headcount in monitoring and surveillance because of the very active market that we've had in terms of demanding rating actions.

And then finally we have made several acquisitions over the last 12 months including credit quotes and merging and those added to the headcount total.

And Catriona, just to follow up also we added headcount internationally.

Basically we are moving the heads to support the revenue growth and that's caused us to come out about flat to this point.

Then my last question is just on kind of outstanding issuance backlog, I mean we hear, I hear numbers of 85 billion in backlog.

Is that number growing?

It seems that things continue to get pushed out but is that number, the amount of backlog continues to grow or are some of those ideas just kind of going away?

I mean we here numbers similar to the kinds of numbers you're quoting, 65 billion to 80 billion have been quoted to us from various market sources.

And eye, broadly speaking I don't think we would expect to see a decline in that pipeline.

Because I think this is largely companies that are either interested or are going to need to at that point the debt markets and they are waiting for the opportunity to do so.

So I don't think these are nonessential capital raising opportunities that would constitute the majority of the pipeline right now nor do I think it's importantly comprised of structured securities at this point.

I think that would be a longer-term rebuilding of pipeline and structured finance.

Okay.

Thank you.

We will take our next question from John Neff at William Blair.

Hi, guys, I have a few for you.

Linda, if I heard you correctly 49% of MIS revenue is relationship based in the third quarter?

That's right, John, 49% is MIS revenue in the third quarter relationship based.

And then what is, how long is the average sort of run off of those revenues at the rate and the rate approximate rate of that run off?

Very considerably long life on those deals.

It's 8 to 10 years primarily and the rate of run off is for this point very modest.

We are still dealing with the big revenue years that came in '06 and '07 so we are not seeing, it's basically flat what we are looking at for the fourth quarter and going forward into next year.

Okay.

That's very helpful.

And then I'm not sure what you're assuming in the way of debt issuance in terms of putting debt into your fourth quarter guidance.

Would it be, I realize it's early would it be fair to say that the fourth quarter earnings and sort of the run rate off of that level, are you thinking that's a potential trough?

In other words, can issuance get much lower than what you're sort of anticipating in your fourth quarter guidance?

John, I guess the, I guess the answer to that is yes, I would consider it a potential trough but if you had asked me that in any of the other recent quarters I might have said the same thing.

But consistent with what I did say earlier in the year, we, a lot is going wrong but not everything is going wrong.

So there is still the potential if everything goes wrong for us to have another leg down.

But we are increasing the number of areas of the capital markets that are not functioning very effectively and so there are fewer things left that could dysfunction.

So that increases the likelihood that we are at a trough.

Okay.

And then any change to sort of the longer-term view on operating margins?

I think that include the 5 to $0.07 in dilution from the Fermat acquisition I'm getting an operating margin for the quarter and sort of the upper 20s?

Any changes to the long-term view?

John, I think you might have hit that a little bit hard for the fourth quarter.

We'll go down potentially into the 30s if the weaker side of this forecast prevails for the fourth quarter.

I'm not sure that we will get all the way into the 20s.

And in terms of the longer-term view, if the issuance activity remains as constrained as it is, we will see more growth coming out of the Moody's analytic side of the business than we will out of the rating agency side of the business.

That will have some effect on margin and we will also probably have some additional margin erosion on the rating agency side of the business, again if this is an extended seizing up of the market.

On the other hand if activity begins we could see a rapid step up in margin because a lot of the queue of potential debt issuance is associated with companies or municipalities that we already follow as rating analysts and as a firm and so this would be incremental issuance activity associated with companies that we already are dedicating significant analytical resource toward.

John, I would say also some interesting changes here in the margin for the third quarter so you can think about this a little bit.

Looking versus last year, the rating agency part of the business was running at 53% margins last year for the third quarter.

This year it's running at 47.

But the good news part of the story conversely the analytics for third quarter of 2007 was 24% and that's increased to 30% which is a pretty healthy increase in the margin for the analytics business.

So that's how you got to the blended rate.

But we are working hard to include the margin in the analytics business and in the ratings business some additional revenue here would be helpful but our longer-term goal would be to get back to close to 50% level again, we can't do that in many we have some market recovery and some revenue recovery.

That's helpful.

Thank you.

Maybe a quick question for Michele, international revenues so far has held up relatively better than the US.

Do you expect that to continue?

I think international is (inaudible) much stronger support due to better conditions, the benefit of some of the government programs for finance and there's no reason really to see that moving away at this stage.

But I think Ray, alluded to the fact that there was obviously a risk of seeing those support softening in the last quarter of the year.

Then maybe the last question here for Linda, I realize that the Fermat acquisition from a revenue contributions standpoint is unclear at this point but do you have any preliminary sense of the contribution in terms of incremental amortization expense and incremental operating expenses in terms of operating G&A?

Thanks so much.

John, we are going to have to table that one until we do fourth quarter because we are literally going through bringing this thing on now.

We have to do the conversion as we discussed so we would rather we've got everything nailed down and we will talk about it next quarter if that's okay.

Sure.

Next, Charlie Murphy at Morgan Stanley.

Thanks, I was wondering if you could discuss the outlook or your outlook for the regulatory environment in Europe over the next couple of months?

Sure.

We will see the European Commission proposal as I mentioned in our prepared remarks and we expect to see that I think in mid-November.

That will begin a period of debate at the European parliament level about is the appropriate form of oversight and registration in this industry.

I would expect to see a registration requirement and European oversight of the industry on a going forward basis which would bring Europe more in line with what we now have in the US in terms of oversight for the SEC.

What is less predictable is how that oversight mechanism might work in terms of a coordinated European approach or more of a country by country approach.

As you might imagine we would prefer to see a coordinated approach because it gives us an, in effect one source of oversight and one source that we would have spoke to respond and communicate with.

So to the extent that we are going to be moving into an oversight environment in Europe that's different than what we've had in the past we would hope that it would be on a coordinated European basis.

As far as the details of that oversight I think we are just going to have to wait until mid-November and see what comes out of the European Commission proposal and what the reactions on the continent are to that.

Okay.

Great.

And as a quick follow up I want to ask about relationship based revenues in MIS.

If we were to take an average deal this year versus last year and consider the relationship based revenues, would you say those revenues are higher per deal this year versus last year, and any extent would be helpful?

That's a little bit of a tough question to answer but I'll give you my instinctive answer based on my understanding of the relationship revenues.

I think that we would see -- we'd see an increase in the absolute dollar of relationship revenues from 2007 to 2008.

But as a percentage it's going to be importantly relate to do character of who is issuing.

Are they large investment grade issuers which tend to have a greater proportion of recurring revenue associated with them or is it more a speculative grade market which tends to be more transaction based and the revenues more heavily weighted to that thought.

Because we have seen more investment grade activity this year I would expect that we have a greater proportion of recurring revenue associated with the mix of issuance that we've seen.

So both absolute dollars and percentages would be my estimation just without having reviewed that in detail.

Thanks very much.

Next, Edward Antorino at Benchmark.

Good afternoon, first of all, Ray, I want to congratulate you on surviving the inquisition.

As a taxpayer I was thoroughly embarrassed by the activity of the commission.

Any way, if I look at the fourth quarter, the third quarter expense and project it for the fourth quarter would that be a run rate to go into the early part of next year?

We are working on putting together our operating budget for 2009, Ed, and I think the risk of giving you have misleading information if I try to talk about the run rate for 2009 probably a little too high for me to comment on that.

And I probably should not comment on your original comments about.

No, please don't, they might be listening.

In fact I have to worry about myself now as I lever the office, I may get kidnapped by the Gestapo..

Any other questions, Ed?

No, thank you.

We will go back to Craig Huber at Barclays Capital.

I do have a follow-up question, Ray, as you think out in the future here what asset classes would you expect to come out first when you get a a sign or is it too hard to tell?

In the securitization area?

Just overall.

I ask this question going back to the Spring of this year and as you know investment grade picked up substantially in April and May of this year.

A lot of people thought that was leading to the falling of the credit markets it turned out to a head fake and got significantly worse since then.

Yes, I would expect to see the return of activity at the investment grade and the higher ends of investment grade first then working down to the lower investment grade and into speculative grade from there and similarly from more well known names more vanilla bond issues and more complex issues overtime.

So I think just as the ceasing up of the credit markets there was a flight to quality to the upper ends of the credit spectrum.

I think that was the last part of the market to go into the freeze and I think it will be the first part of the market to come out of the freeze.

One last thing, in your fourth quarter guidance I guess taking the midpoint of your guidance are you basically assuming a lack of transactions you saw in the month of October that continues in November and December?

Yes, we are not expecting a significant pick up in activity.

That's accurate.

Okay.

Thank you.

Thank you.

Then does conclude today's question and answer session.

Mr.

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

I just want to thank everyone for joining us and we look forward to speaking to you after the close of the found.

Thank you again.

That does conclude today's conference.

Again, thank you for your participation