穆迪 (MCO) 2010 Q1 法說會逐字稿

Welcome, ladies and gentlemen, to the Moody's Corporation, first quarter, 2010 earnings conference call.

(Operator Instructions) I will now turn the conference over to Liz Zale, Vice President Investor Relations.

Please go ahead.

Thank you.

Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's results for the first quarter of 2010 .

I'm Liz Zale, Vice President of Investor Relations.

Moody's released its results for the first quarter of 2010 this morning.

The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moodys.com.

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

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

Before we begin, I call your attention to the Safe Harbor language which can be found toward the end of our earnings release.

Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

In accordance with the Act, I also 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, 2009, and in other SEC filings made by the Company which are available on the website and on the Securities and Exchange Commission website.

These together with the Safe Harbor statement 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 may be on the call this morning in a listen-only mode.

I will now turn the call over to Ray

Thank you, Liz.

Good morning and thank you to everyone for joining today's call.

I will begin by summarizing Moody's first quarter 2010 results.

Linda will follow with additional financial detail and operating highlights.

I will then speak to recent developments in the legislative and regulatory area and finish with comments on Moody's outlook for 2010.

After our prepared remarks we'll be happy to respond to questions.

Moody's results for the first quarter reflected strong corporate and financial institution debt issuance particularly in the high yield sector of the corporate market.

Total revenue $477 million up 17% year-over-year.

Excluding the favorable impact of foreign currency translation revenue rose 14%.

Operating income for the first quarter was $197 million, 32% above the prior year period, with negligible impact from foreign currency translation.

Excluding the restructuring charge in 2009 and minor adjustments to this charge in 2010 operating income increased 22%.

Diluted earnings per share for the quarter were $0.47, an increase of 24% year-over-year.

Excluding restructuring items in both periods diluted EPS grew 15%.

Our performance in the first quarter reflected the strength in corporate and financial institution issuance that I just noted as well as improved stability in the markets and customers served by Moody's analytics.

But we also saw deeper than expected weakness in European structured finance we are reaffirming our full-year 2010 EPS guidance of $1.75 to $1.85 due to uncertainty that issuance levels later this year will continue to overcome weakness in some areas of structured finance.

I will now turn the call over to Linda to provide further commentary on our results and other updates.

Thanks, Ray.

I'll begin with revenue at the Company level.

As Ray mentioned Moody's total revenue for the quarter increased 17% to $477 million.

Excluding the favorable impact of foreign currency translation revenue grew 14%.

US revenue grew 22% to $255 million while revenue outside the US rose by 11% to $222 million and represented 47% of the total.

Recurring revenue of $281 million represented 59% of total revenue compared to 67% in the prior year period.

Looking at each of our businesses Moody's investor service revenue for the quarter was $335 million, a 24% year-over-year increase.

Excluding the favorable impact of foreign currency translation NIS revenue grew 21%.

US revenue was up 30% over the prior year period.

Outside the US revenue grew 17% and represented 44% of total ratings revenue.

Global corporate finance revenue in the first quarter increased by 50% from a year ago to $126 million and was primarily driven by strong high-yield bond and loan issuance.

Revenue growth was 49% in the US and 53% outside the US.

Global structured finance revenue for the first quarter was $71 million, 1% below the prior year period.

US revenue grew 21% reflecting increased issuance activity in asset backed securities and commercial real estate finance.

Non-US structured finance revenue was down 17%.

The decline was due to weak issuance across most asset classes in Europe as better credit market conditions improved issuers access to liquidity and reduced issuance of new securitizations for central bank sponsored programs.

Global financial institutions revenue of $76 million rose 35% from the same quarter of 2009 primarily due to gains in the bank and insurance sectors.

Revenue was up 39% in the US and 33% outside the US.

Global revenue for pubic projects and infrastructure grew 7% year-over-year to $61 million.

Revenue grew 6% in the US due to stronger public finance issuance across most sectors as well as improved project financed market conditions.

Non-US revenue rose 8% primarily driven by investment grade activity within project and infrastructure finance.

Turning now to Moody's analytics global revenue of $141 million was up 2% from the first quarter of 2009.

Excluding the favorable impact of foreign currency translation revenue increased 1%.

US revenue of $65 million rose 3% over the first quarter of 2009.

Non-US revenue increased 1% to $76 million and represented 54% of total analytics revenue.

Globally revenue from research data and analytics of $105 million increased by 3% from the prior year period and represented over 70% of total MA revenue.

The return to growth for these businesses reflects gradual stabilization amongst our capital markets customers as disruption from the financial crisis recedes.

In our more transaction sensitive business revenue from risk management software of $33 million grew 4% while revenue from professional services of $3 million declined 30%.

Growth rates in both of these business units are subject to significant quarter to quarter volatility due to the variable nature of project timing and the concentration of revenue in a relatively small number of engagements.

Turning now to expenses.

Moody's first quarter expenses were $280 million, 8% above the prior year period.

Excluding the restructuring charge in 2009 and minor adjustments to this charge in 2010 expenses were up 13%.

The increase was primarily due to higher accruals for performance-based compensation and increased expenses for consulting and professional services.

Without the unfavorable impact of foreign currency translation reported expenses grew 5% from the prior period.

Operating margin for the quarter was 41.3% or 41.1% excluding the restructuring adjustment.

Our effective tax rate for the quarter was 37.2%, compared with 35.7% for the prior year period.

The difference between quarters was primarily due to reductions in tax and tax related liabilities in the prior period that did not occur this quarter.

Now I would like to turn to an update on capital allocation, stock buybacks and capital expenditures.

During the first quarter of 2010 Moody's repurchased 1.1 million shares at a total cost of $30 million and an average price below $27 per share.

And issued 1.4 million shares under employee stock-based compensation plans.

Outstanding shares as of March 31, 2010, totaled 237 million, a 1% increase from a year earlier.

We remain committed to using our strong cash flow to create value for shareholders while maintaining sufficient liquidity.

In 2010 we expect to continue share repurchases at modest levels subject to available cash flow and other ongoing capital allocation decisions.

At quarter end Moody's had $1.1 billion of outstanding debt and more than $600 million of additional debt capacity available under our revolving credit facility.

During the quarter we used a portion of our cash flow to reduce total debt outstanding by approximately $70 million.

Our net debt position has decreased by approximately $95 million to approximately $625 million.

For the full year 2010 we now anticipate capital expenditures in the range of $80 million to $100 million, primarily reflecting greater spending on technology initiatives.

And with that I will turn the call back over the Ray.

Thanks, Linda.

I will continue with an update on legislative and regulatory developments starting in the US.

Legislative and policy making activity on financial reform is ongoing.

In March the Senate Banking Committee voted on a financial reform bill which we expect to be considered for discussion and debate on the Senate floor soon.

As it pertains to the regulation of nationally recognized statistical rating organizations or NRSROs the bill includes measures to increase accountability and transparency strengthen the management and disclosure of conflict of interest and further empower the SEC's oversight of NRSROs.

We support most aspects of the bill but we remain concerned that the bills liability provisions would lead to unintended consequences that could negatively impact credit markets.

As such, we do not believe that these are partisan issues and continue to recommend alternatives that would enhance rating agency accountability while reducing the likelihood of adverse outcomes for markets and market participants.

While the passage and timing of the financial reform bill remains uncertain President Obama has indicated his goal to sign a financial reform bill into law by the end of May.

As a result it is possible that both chambers of Congress could agree on some form of the bill over the next few weeks it is still uncertain what the final version of any legislation would be but if a law is passed with the current liability provisions we would implement appropriate changes to manage our operations prudently to correspond to a different environment.

The SEC also continues to be active in its rule making related to NRSROs.

We're in the process of implementing a final rule regarding rating agency disclosure of information related to the structured finance ratings process and have submitted comments regarding other proposed rules and concept releases that relate to our industry.

As the legislative focus on financial reform continues many have been studying the market crisis including congressional committees.

Moody's has participated in a number of hearings and meetings held by legislators and regulators in the US and other jurisdictions and we will participate in a hearing on Wall Street and the financial crisis held by the US Senate permanent subcommittee on investigations this Friday.

We remain focused on playing a constructive part in the discussions of issues related to our industry and the broader financial markets.

In Europe, as noted on previous calls, we're in the process of implementing the new European Union Credit Rating Agency regulation and in doing so we will continue to communicate with national and regional authorities charged with providing guidance and oversight for this regulation.

Finally, as regulatory reviews and activity occur in other jurisdictions we will continue to advocate for globally consistent approaches that recognize the international nature of our ratings and align with the G-20 statements and the international organization of securities commissions, or IOSCO framework.

I will conclude this morning's prepared remarks by discussing our full-year guidance.

Moody's outlook for 2010 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 borrowing and securitization and the eventual withdrawal of government sponsored economic stabilization initiatives.

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

Our full-year outlook assumes foreign currency translation at exchange rates as of the end of first quarter 2010.

As I said earlier, we're reaffirming our full year 2010 EPS guidance in the range of $1.75 to $1.85.

We still expect revenue growth in the high single to low double digit percent range for Moody's investor service and growth in the mid single digit percent range for Moody's analytics.

However, our 2010 guidance for certain components of our business has been modified to reflect our current view on credit market conditions and implications for the Company.

My comments will only address those components that have been revised and we refer you to our earnings release for a full review of our guidance.

At Moody's investor service we now expect non-US revenue growth in the low single-digit percent range.

Corporate finance revenue is now projected to increase in the low 20s percent range with anticipated growth in speculative grade bond and loan activity partially offset by moderation of investment grade issuance from the high volume in 2009.

Based on our current visibility we are also expecting a stronger level of high yield activity in the first half of the year while investment grade is forecast to improve slightly in the second half.

Structured finance revenue is now expected to decline in the low single-digit percent range primarily reflecting lower European issuance activity in asset backed securitization and derivatives than previously anticipated.

Further recovery in securitization is partly dependent on the resolution of rules and policies within and outside the US on topics including disclosure by issuers, accounting and regulatory capital treatment of securitized assets and retention of risk.

As these issues are clarified Moody's is assessing their application and the possible impact on issuers and investors in different jurisdictions.

In Moody's analytics we now expect full-year revenue growth in the high single to low double-digit percent range in risk management software and in the mid to high single-digit percent range in professional services.

Sales in both businesses remain in line with expectations.

However, revenue is subject to significant quarter to quarter volatility owing to the businesses still modest scale and revenue concentration in a relatively small number of large projects.

In the software business, for example, we have closed several larger than expected transactions which has extended both the sales cycle and the implementation time frame That concludes our prepared remarks.

Joining us for the question-and-answer session are Michel Madelain, the Chief Operating Officer of Moody's investor service and Mark Almeida, President of Moody's Analytics.

We'd be pleased to take any questions you may have.

(Operator Instructions) Well take our first question from Peter Appert with Piper Jaffray.

Thanks.

Linda, question on the cost dynamics.

Your guidance obviously suggests accelerated rate of cost growth here over the balance of the year.

Wondering if you can give us any granularity in terms of what drives that particularly after organic cost growth looked relatively modest in the first quarter.

Hello, Peter.

You will recall that we had said that we're expecting ramping of expenses throughout 2010.

A pattern probably somewhat similar to what we saw last year but the clauses be different.

Last year's you will remember first half performance was choppy in second half performance was strong so we had to add compensation accruals in the second half of the year.

This year we expect compensation accrual to be flatter and at a higher level because the business is doing well.

But we are looking at potential hiring increases in the single-digits.

So it would reflect those potential increases.

Now, we're not exactly certain how those increases will lay out.

We are looking at potentially redeploying some people internally and we've got to see how that balances out with new hires but that would be the main cause of expense ramp for the back half of the year coupled with some increased IT expenses and compliance expenses as we move through implementation of the EU rules for example.

So sounds like you have some flexibility in these hiring plans.

We do.

Again, Ray may want to comment further on this, Peter.

It sort of depends how many people we move and how many people we hire from the outside.

Peter, the only thing I would add to that is while we do have flexibility in certain areas there are some other things that we have to do.

In fact -- that affect hiring.

And so we are going to follow through with those hires regardless of the environment, and that has to do with-- as we have talked about before, compliance and certain kinds of personnel additions for technology projects that have to do with the regulatory environment that we're going to be in, both in Europe, certainly and increasingly expected in the US.

Right.

And then, Ray, on a separate topic, you mentioned alternative liability, or alternative provisions to align the rating agencies better with investor desires.

Can you talk about what some of those provisions might be what they might look like?

What I can tell you at this point is first of all it is going to be dependent on what any final language in reform bill or in proposed -- currently proposed SEC rules turns out to be.

So I can't say with certainty what we would do to accommodate different environment until we have more clarity around what that environment is.

But that being said, we are currently studying other industries that have different standards of liability than ours does currently.

We are looking at how they manage their businesses prudently and safely, and we are looking at changes that may be appropriate in terms of our interactions with users of ratings, whether we -- even if we believe there is a market good to providing ratings services for as many small and perhaps marginal issuers as possible, whether that is prudent to do in a different environment, those kinds of things, and those are just illustrations of a broader range of potential actions.

Great.

Thanks, Ray.

We'll take our next question from William Bird with Banc of America.

Ray, I guess along the same lines I was just wondering if you could elaborate on the Senate's current language and if the current language were to hold what kinds of specific adjustments one might make.

I don't think I'm ready to talk about specific adjustments under just one side of the current Congressional legislative proposals.

We would have to see what finally comes out of the Senate and then obviously most importantly what would be produced in conference between the House and the Senate on credit rating agency reform because the bills currently do not line up in all respects.

Fair enough.

Also, Linda, I was wondering if you could talk about the pipeline and as you look at that pipeline, I'm just wondering how Q2 growth is like toll compare to Q1 growth.

If you are looking for pipeline view and revenue, I think I might throw that one back over to Ray.

On the expense side though, as I said, we're expecting a gradual ramp over the year in expenses as I had replied to Peter's earlier question.

But let me let Ray take a shot at the revenue pipeline.

In terms of -- I think right now, it looks like more of the same in terms of what we saw in the first quarter.

We did see, starting with structured finance, we did see growth on the US side versus the prior year period, but that was offset by the weakness that we talked about in international structured finance, and that was particular concentrated in Europe.

And I think that probably is going to continue for some time.

On the corporate side, as we remarked in our prepared comment, we expect that the first half of the year for speculative grade is going to be relatively stronger and then investment grade picking up in the second half of the year versus spec grade.

We had a very strong quarter for financial institutions, and I would be surprised if we see that momentum continue throughout the rest of the year.

And I would expect to see relative stability in the public project and infrastructure line.

On the Moody's analytics side, if you look at the seasonal pattern that we've had there in the past, you see that revenue has historically grown through the year and I don't think there's anything we're looking that it would contradict that at this point.

Linda, you mentioned that you expect the incentive comp accrual to be kind of flattish for the year, kind of more level.

What level was it at in the first quarter and kind of what do you expect for the year?

Sure, Bill.

For the first quarter incentive comp was about $21 million for the first quarter of 2010, and that compares to about $9.3 million last year.

So obvious the stronger performance of continues and the fact that we've returned bonus target to 100% if we hit this year's business objectives we're running a fuller number there.

That runs 11% of total compensation for the first quarter, which would be about on par for what we're expecting for the year.

We're expecting incentive comp to run 11 or 12% for the year, stock-based compensation should run 7, 8%, for the year and salaries and benefits should be the remainder of the compensation expense which runs the mid-60s, 63, 66% of total expenses.

Great, thank you very much.

We'll take our next question from Michael Meltz with JPMorgan.

Thank you.

I think I have four questions.

Ray, I will ask the liability question a different way.

You might not want to discuss how you might change approach, is it fair to assume would you probably increase your pricing commensurate win creased risk?

Well, to the extent that costs for operating a business rise, I think it is -- would not be unexpected to seek to pass those costs of operations along.

Okay.

Secondly, Linda, on the pricing side, can you talk about what did you with pricing this year, and is that something that kicks in mostly in January, or it's phased throughout the year?

Michael, we look closely at pricing and I think we're pretty thoughtful about it.

We do have complexity in our price schedules, and I think we're looking to have modest rates of increase that provide value to both the issuers and to the investors using the ratings.

Those schedules usually go into effect with the beginning of the year and yes you will see them over the course of the year.

It is not something you are going to be able to call out given the increased volumes that we're seeing particularly in corporates and high yield.

It will just be a part of the mix.

Okay.

On structure, can you talk a little bit more about European structure?

I guess the simple question would be, I can't imagine you were expecting blow-out activity two months ago.

So what is different today versus a little over two months ago when you actually gave guidance for 4% structured growth?

I can confirm that we were not expecting to see blow-out activity several months ago, but to answer more specifically let me ask Michel Madelain to make his comments.

I think what is happening in Europe, as you know, the activity we've seen was largely driven effectively all driven by access to (inaudible) Bank of England, other central banks, level of activity has effectively contracted due to improved access to liquidity for financial institutions and the fact that overall their need for refinancing and (inaudible) has been reduced.

So that's really what is in Europe.

Just to add, in a broader perspective, the improved liquidity profile in Europe is good for financial institutions for corporate, but it is having an effect on the securitization that was going on last year.

And then last question, on the -- I don't know what you call it, but the other expense line, which is interest expense, that, I think, came in a little high, or higher than I had modeled for the quarter.

Can you just talk about, Linda, what had pushed that number up and what's the expected run rate for 2010?

Sure.

Michael, if you take a look at the earnings release that we did this morning we've got a schedule in there that is consolidated interest income, which will help you out.

The expense on borrowings on that schedule was $10.8 million.

We've got small income number, and then unrecognized tax benefits and other tax about $3 .5 million to the negative.

What you are probably unable to trace through, we mentioned in our prepared remarks, is the absence of the benefit that we had in 2009 that took that number to the positive by about $7.5 million.

So basically you are seeing a swing there.

It is the absence of the benefit that we had last year.

And so the question is that swing is that a Q1 issue or does that persist all year?

This number a reasonable-ish number.

Michael this is the hardest number to forecast probably that we work with because it includes tax and FX.

I think something around that number is reasonable to look at, but once in awhile we do have a tax event as we did at this time last year, which was quite helpful to us, but we can't count on those.

So the current $13 million expense in Q1 at this point feels like a good run rate?

Is that fair to say?

Reasonable.

13 to 15, something like that.

Thank you for your time.

We'll take our next question from Craig Huber.

with Access 342

Yes.

Good morning.

Linda, couple questions for you.

As I typically ask of you can you break tout transaction versus nontransaction revenues for your four main segments?

We were just flipping to the page to get ready for your question.

We will do this asa we always do, go through the rating agency first.

Four components, then through analytics and the company as a total.

I think the headline would be, Craig that transaction revenue is up substantially because of high yield and loan issuance so let me take a shot at this.

For structured finance first quarter 2010, our transaction revenue was 41%, relationship revenue was 59%.

For corporate, for CFG, transaction revenue was 71%, very strong showing as I had mentioned, and 29% relationship revenue.

Financial institutions was 43% transaction and 57% relationship.

And public project and infrastructure was 55% transaction and 45% relationship.

So for the rating agency as whole we're running 55% transaction and 45% relationship.

It's pretty interesting close to reversal of where we were that it time last year.

Now, for analytics we're running 8% transaction , 92% relationship so for the company as a whole we're at 41% transaction, 59% relationship given the strength in

The other way you guys break out your revenues, if you would please, three to four different buckets, like within corporate finance what percent was high yield versus bank loans, versus investment grade, the other four segments as well?

I appreciate it.

Let me look at CFG for you Craig.

Looking at this for the first quarter total CFG revenue was about $126 million, strong performance.

Investment grade was about 20% of that.

High yield was 27% of that number of, that $126 million number.

Very strong performance as compared to the 7% at this time last year.

Bank loans, 14% of the CFG number.

Very strong performance compared to last year's 3%.

Other, which is a variety of things, medium term notes, shelf, commercial paper, and so on, that was 39%.

Then if would you do the same for structured finance, financial, PTIF, if would you.

sure.

Let me do structured finance.

Total number was $71.5 million of revenue.

Asset backs was 32% of that.

Residential mortgage-backed securities was 20%.

Commercial real estate, CRES as we call it, was 17%, derivatives were 31% and -- structured encompassed 21% of total Moody's investor service revenue for this quarter.

That pretty much everything you wanted?

Did you have financial institutions and PT any?

I do!

I do!

We've got it all.

First quarter, $76.2 million revenue for FIG.

We have banking at 69% of that which is about equal to where we were at this time last year.

Insurance 24%.

Managed investments 7%.

And FIG was 23% of total MIS revenue for this quarter, up from 21% last year.

And since I might as well give it to you while I'm doing it, Craig, PPIF was $61.4 million, PFG and sovereign were 51%, municipal structured was 8%, project and infrastructure was 41%.

All of those are running approximately where they were at the first quarter last year, though the total number is up.

Then also if we could switch over to your operating margin guidance I guess 38 to 39% for the year, obviously first quarter your margin was 41.1%.

Keeping in mind your costs were not level, they did increase as the year goes on last year significantly, sounds like it's going to increase as well as the year goes on but not to the same extent, it sounds like.

Can you talk about what you think here, if you truly do believe, I know you guys are very conservative by nature over the years, but your 38 to 39% operating margin guidance for the year.

What do you think would bring it down to that level for the full year given that you had 41.1% in the first quarter, just simply meaningfully slower top line?

If you could walk me through the components.

Sure Craig.

Just to be clear, last year the difference in fourth quarter expenses versus first quarter expenses was about $40 million.

And we're looking for similar ramp this year given all the components so make sure ear able to model that in.

If we have revenue up side, as Ray stated before, we're more likely to have the margin exceed 40%.

Also, if we reign in a bit on expenses we may also be able to do a little bit better but we have got to scale those two things depending on how the revenue is looking to come in.

So we're going to continue to guide in that high 30s number but in some quarters we're lucky enough that the margin goes above 40.

But I would say that that is a benefit of having a strong quarter and I would ask Ray to comment further.

The only thing I can add to Linda's comments, Craig are that if we are -- we are sensitive to the top line at this point, in terms of the margin.

And if we are -- do not see the kinds of top line growth that would have margins up in the 40s, we're, one, still facing some investment in the business that we need to make, and two, there's going to be an important element of why we are not seeing top-line growth if we are not.

Is it because of cyclical factors and we want to continue to invest through that, or because of some other more enduring changes and we would be more inclined to react to that.

We can't tell you the answer to that at this point in the year.

When you talk about up 8 to 9% revenue growth guidance for this year and 8 to 9% for costs, when everything is said and done, I've got to think to match your cost growth with your revenue growth this year, I've got think a few percentage points at, 8 to 9%, you don't have to actually spend when everything is all said and done.

If you only--I say only, but 8 to 9% top line, I assume it's not set in stone, and it can do 8 to 9% cost growth for this year , if you only grow 8 to 9 it's a meaningful slow down, for three quarters of the year,

I think the most I can tell you at this point, Craig, is that the guidance is the guidance, and we've tried to give you some color around that, and hopefully we will have more clarity as we move through the second quarter.

Is that guidance pretty much right on top of what your internal targets are for bonus accruals and all that?

Including your own, et cetera everything right on target?

I think it's importance that our guidance reflect our best estimate of what we're going do for the year, the central scenario.

So I hope, as you have remarked, that we prove to be conservative but it is our best estimate.

Okay, thank you very much.

Thanks, Craig.

We'll take our next question from [Sloan Bohan] with Goldman Sachs.

Thank you, just three quick questions.

First for Ray, you mentioned a little about changes that you would recommended with regard to the accountability or I guess liability standards in the current financial reform.

I was wondering if you could elaborate a little bit on that and maybe talk about what the receptivity has been to those suggested changes.

Sure.

I think the principal issues that we're grappling with is that there is a very strong and not surprising interest in making sure that NRSROs are appropriately accountable, and so the idea of changing liability language in legislation or regulation is really an effort to enhance the accountability of rating agencies.

There are other ways to enhance accountability, whether it's through fines or sanctions, prohibitions on operating in certain parts of the ratings business, if work product is not of sufficient quality, there are a number of things that can be handled through enhanced oversight with teeth in the oversight that I think would satisfy a greater sense of accountability and would allow the industry to operate in a way that is going to be as constructive for credit markets as possible.

So that's really where we would urge lawmakers and regulators to focus and we'll see how that works out.

And do you get a sense that that focus has changed at all, whether it be what the SEC.

did last week or Obama pushing for a time frame?

Due feel like that maybe gets lost in the broader bill?

Well, in terms of the original proposals that were put forth by the Obama administration, they did not recommend any change in the liability standards which I think is important, and underscore's the fact that why see this as a partisan issue so much as a credit markets issue.

So is I think, in some ways, perhaps as you identify, the risk is that we have very extensive financial reform legislation proposed and there are a lot of people working to try to resolve some very significant issues and questions around that overall package, and having the attention on the issues that are important to us is part of the challenge that we have to overcome.

Okay.

Fair enough.

And then just one question on issuance.

You talked about appear ramp for investment grade in the second half of the year.

Do you gate sense that the pull forward of refinancing activity is largely done, and that that second half ramp is more to do with economic growth and opportunistic capital?

I think there's still a lot of debt that needs to be refinanced.

You can see that over the next few years that there remains significant refinancing requirements.

When that is refinanced, though, is less certain and how much of it is pulled forward again is uncertain.

So the investment grade issuance I would characterize as perhaps less opportunistic than what we're seeing in the spec grade market right now and the very strong momentum in spec grade, and I think that's why the -- in our estimation there's going to be a reversal in the level of activity between the first half and the second half investment grade to spec grade.

So the ramp is more relative to spec grade, not the fact -- I was trying to get an idea why the ramp for second half for investment grade as opposed to not now, for instance.

Yes, I think it's -- you might think of it as more normalized calendar of issuance in investment grade..

Okay, great.

Thank you, guys.

We'll take our next question from Brian Shipman with Jeffreries.

Thanks.

Couple questions.

Linda, you bought back some stock in the quarter, a modest amount, but issuance for stock been based comp got shares dust standing inching higher.

Should we expect this trend to be going forward?

Do you think you will be a net repurchaser at some stage?

I think we're looking at it, Brian, as owe throughout this year to see how the price goes and so on.

We've committed to modest share repurchase and we're balancing that with slight reduction in our debt, and paying our dividend which we increased by 5% in December.

We are close.

We bought back 1.1 million shares and we issued few more than that.

So over the course of the year I would expect that we might catch up, but it depends where the price level goes.

Thank you.

Also, Brian, just so you know, we vest our options in Q1 so the heaviest issuance of shares for compensation purposes would be in Q1.

You shouldn't look for that level throughout the rest of the year.

That's helpful, thank you.

Just sort of a big picture question.

Have you as a ratings agency seen a change in the number of unrated fixed income securities being marketed or offered to investors compared with previous years?

In other words, have issuers changed their appetite for the use of ratings at all?

Then lastly, Ray, if you have any comments on this most recent California subpoena, that would be helpful.

Thank you.

Sure.

The quick answer on issuers and investors use of ratings that we have not seen any change.

We continue to have an increase in the number of rated entities globally with new ratings requests, and that is more of a phenomenon outside the US where markets are less mature than it is inside the US, but we are seeing a net increase in the number of rated entities, and in terms of the entities that we have rated historically we continue to do so, so no changes there.

In terms of the California attorney general, I don't think there's anything unusual in terms of the process that we are undergoing with the California AG except perhaps that a press conference was called.

We've been in steady communication with his staff.

I know our attorneys have made sure that we've produced thousands and thousands of documents as requested by the AG, and we'll continue to cooperate.

So we'll make sure that we're doing what we need to be doing in terms of satisfying the request there and go from there.

Thank you.

We'll take our next question from Edward Atorino with Benchmark.

I got on late.

On the interest number is it all interest or is there some other stuff in there?

Ed, the interest expense number is 13.3 and 10.8 of it is expenses on borrowing and 3.5 of is it tax.

There are some small off sets totaling about a million dollars, so I guess would you say, yes, most of it is interest expense.

You said would it stay at that level throughout the year?

Yes, I think I told Michael.

I got that.

And with no further questions I will turn the conference back over to Ray McDaniel for any closing remarks.

Thank you.

Before we end the call I just wanted to announce that Moody's will host its fourth annual investor day on Thursday, June 10th in New York City.

Attendance is by invitation only and the event will be accessible to all investors by webcast.

Further details will be provided on our Investor Relations website.

So thanks a lot for joining the call today and we look forward to seeing you in June.

Thank you.

This concludes Moody's first quarter earnings conference call.

As reminder a replay will be available at 4:00 PM Eastern Time on Moody's website.

Thank you.