穆迪 (MCO) 2011 Q3 法說會逐字稿

Good day, and welcome, ladies and gentlemen, to the Moody's Corporation Third-Quarter 2011 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 will now turn the conference over to Salli Schwartz, Vice President, Investor Relations.

Please go ahead.

Thank you.

Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's third-quarter results for 2011.

I am Salli Schwartz, Global Head of Investor Relations.

Moody's released its results for the third quarter of 2011 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, 2010, and in other SEC filings made by the Company, which are available on our websites, and on the Securities and Exchange Commission's 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 would also like to point out that members of the media may be on the call this morning in a listen-only mode.

I'll now turn the call over to Ray McDaniel.

Thank you, Salli.

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

I'll begin our remarks by summarizing Moody's third-quarter 2011 results.

Linda will follow with additional financial detail and operating highlights.

I will then speak to recent regulatory developments, comment briefly on one of our litigation matters, and finish with an update of our outlook for 2011.

After our prepared remarks, we will be happy to respond to your questions.

Third-quarter revenue of $531 million increased 4% over the prior-year period, with strong performance by Moody's Analytics offsetting a modest revenue decline at Moody's Investors Service.

Operating income for the third quarter totaled $196 million, also 4% above the prior-year period.

Diluted earnings per share for the quarter of $0.57 decreased 2% year over year, and included a benefit of $0.03 from the favorable resolution of a state tax matter.

The volatile market conditions in the US and Europe may continue.

We are reaffirming our 2011 EPS guidance of $2.38 to $2.48, and we expect to be at the upper end of the range.

Turning to year-to-date performance, revenue for the first 9 months of 2011 was $1.7 billion, a 17% increase from the first 9 months of 2010.

Expenses were $997 million, up 12%, and operating income of $716 million increased 24% from the prior-year period.

Revenue at Moody's Investors Service for the first 9 months of 2011 was $1.2 billion, an increase of 18% from the year-ago period.

Moody's Analytics revenue was $512 million, 15% higher than the prior-year period.

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 4%, to $531 million.

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

US third-quarter revenue decreased 1%, to $274 million, while revenue outside the US grew 9%, to $257 million, and represented 48% of Moody's total revenue, up from 46% in the year-ago period.

Recurring revenue of $314 million represented 59% of the total, compared to 55% in the prior-year period.

Looking now at each of our businesses, Moody's Investors Service revenue for the quarter was $351 million, a 2% decrease year over year.

Excluding the impact of foreign currency translation, revenue was down 5%.

US revenue decreased 4% over the prior-year period, while outside the US, revenue increased 1%, and represented 43% of total ratings revenue.

Global corporate finance revenue in the third quarter decreased 11% from the year-ago period to $129 million.

Revenue was down 11% in the US, while outside the US, revenue was lower by 10% year over year.

The decline in global corporate finance revenue reflected weaker issuance, primarily in speculative grade bonds, in both the US and Europe.

Global structure finance revenue for the third quarter was $82 million, 17% above the prior-year period.

In the US, revenue increased 20% year over year, primarily due to strength in commercial real estate.

Most other areas of the US structure finance market remained weak, including residential mortgage-backed securities.

Non-US structure finance revenue rose 14%, driven primarily by European covered bonds and residential mortgage-backed securities in Europe and Asia.

Global financial institutions revenue of $72 million decreased 2% from the same quarter of 2010, with US revenue declining 1%, while non-US revenue fell 3%.

Global revenue for the public, project and infrastructure finance business declined 2% year over year, to $68 million.

Revenue decreased 8% in the US, reflecting a reduction in new financing for project and Infrastructure programs.

Non-US revenue increased 13%, primarily due to gains the infrastructure sector.

Turning now to Moody's Analytics, global revenue for Moody's Analytics of $180 million was up 16% from the third quarter of 2010.

The impact of foreign currency's translation was negligible.

US revenue grew by 6% year over year, to $76 million.

Non-US revenue increased by 24% to $104 million, and represented 58% of total Moody's Analytics revenue.

Globally, revenue from research, data, and analytics of $115 million increased 9% from the prior-year period, and represented about 64% of total MA revenue, as we continued to see good demand for products across our portfolio.

Revenue from risk management software, at $48 million, increased 12% over last year's third-quarter performance.

Due to the variable nature of project timing, risk management software revenue remains subject to quarterly volatility.

Professional services revenue more than doubled to $17 million, primarily reflecting the acquisition of CSI Global Education in November 2010.

Turning now to expenses, Moody's third-quarter expenses were $335 million, an increase of 3%, compared to third quarter of 2010, or a 1% increase excluding the impact of foreign currency translation.

Moody's reported operating margin for the third quarter was 36.9%, essentially flat to the third quarter of 2010.

Our effective tax rate for the quarter was 28.5%, compared to 24.4% for the prior-year period.

The increase in effective tax rate was primarily due to a tax benefit associated with foreign earnings in 2010, partially offset by a tax benefit from the settlement of state tax audits in the current period.

Now I'll provide an update on capital allocation and stock buybacks.

During the third quarter of 2011, Moody's repurchased 6.8 million shares, and issued 0.1 million shares under employee stock-based compensation plans.

Outstanding shares as of September 30 totaled $222 million, representing a 5% decline from the year earlier.

As of quarter end, Moody's had $0.9 billion of share repurchase authority remaining under its current program.

As of September 30, Moody's had $1.2 billion of outstanding debt, and $1 billion of additional debt capacity available under our revolving credit facility.

Cash and cash equivalents were $854 million, an increase of $61 million from a year earlier.

Approximately 80% of our cash holdings are maintained outside the US.

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

Share repurchase remains subject to available cash flow, and other capital allocations decisions.

And with that, I'll turn the call back to Ray.

Thanks, Linda.

I'll continue with the update on regulatory and litigation developments.

In the US, following the SEC's August comment deadline for rule proposals relative to NRSROs under the Dodd-Frank Act, the SEC is expected to adopt final rules by June 2012.

Pursuant to the Dodd-Frank Act, regulatory authorities have begun reviewing their use of ratings and regulations, and considering alternative measures as replacements.

In September, a separate SEC comment period closed regarding a Dodd-Frank mandated study about, among other matters, the feasibility of establishing an alternative system for allocating credit rating assignments for structured finance products.

The study, which the SEC expects to complete by December 2012 stems from what is known as the Franken Amendment.

Also in September, the SEC released its first annual report summarizing is examination of NRSROs as mandated by the Dodd-Frank Act.

It did not determine that any finding discussed in the report constituted a material regulatory deficiency.

Turning to Europe, transfer of oversight of registered credit rating agencies to the European Securities and Markets Authority, or ESMA, became effective in July.

We expect a decision on Moody's registration application of our EU-based entities to be made before year end.

As many of you know, the European Commission is expected to propose new rules for the rating agency industry, drafts of which have been commented on by the media and some European officials.

We also understand that the Commission intends to release a formal proposal by mid to late November.

Once the proposal is published, it will then be debated among members of the European Parliament, the Commission, and members of the European Council of Finance Ministers.

The suggested measures that have been reported on by the media address sovereign ratings, the use of ratings and regulation, business models, rotation of rating agencies, liability, and competition.

We will continue to consult with relevant authorities and others as to the specifics of these draft proposals.

While new rules globally entail various changes in our rating agency processes and operations, and require us to adapt our business, we will not alter our fundamental business objective to provide the highest quality independent credit opinions, research, and analysis.

We will also continue to advocate for globally consistent approaches that align with the G20 statements and directives.

Finally, as some of you may know, a hearing is scheduled for tomorrow in one of our litigation matters, a case brought in California by CalPERS, regarding certain of our SIV ratings.

At that hearing the judge is expected to rule on whether the case should be dismissed under California's Anti-SLAPP statute, which defends free speech on matters of public interest.

While we don't know how the judge will rule, we are obviously hopeful that we will prevail on our motion, at which point the case would be dismissed.

Even if we do not ultimately prevail on our motion under the Anti-SLAPP statute, there will be further opportunities to seek dismissal.

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

Moody's outlook for 2011 is based on assumptions about many macroeconomic and capital market factors including interest rates, corporate profitability, and business investment spending, merger and acquisition activity, and consumer borrowing and securitization.

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 the current outlook.

Our guidance assumes foreign currency translation at end-of-quarter exchange rates.

As mentioned earlier, we are reaffirming our EPS guidance for the full year of 2011 of $2.32 to $2.48, and we now expect to be at the upper end of the range.

For Moody's overall, the Company now expects full-year 2011 revenue to grow in the low-double-digit percent range.

Full-year 2011 expenses are now projected to increase in the high-single-digit percent range.

Full-year 2011 operating margin is now projected to be approximately 39%, due to the planned increase in expenses and lower expected revenue in the fourth quarter.

The effective tax rate is now expected to be approximately 31%.

Share repurchase remains subject to available cash flow and other capital allocation decisions.

At Moody's Investors Service, revenue for full-year 2011 is now expected to increase in the high-single-digit percent range.

Within the US, MIS revenue is now expected to increase in the mid-single-digit percent range, while non-US revenue is projected to increase in the low-teens percent range.

Corporate finance revenue is now forecasted to grow in the low-double-digit percent range.

Revenue from structured finance is now projected to increase in the mid-teens percent range.

Financial institutions is now forecasted to increase in the mid-single-digit percent range, while public, project and infrastructure finance revenue is still expected to be about flat.

For Moody's Analytics, full-year 2011 revenue is still expected to increase in the low-double-digit percent range.

Revenue growth is still projected in the mid-single-digit percent range for research, data, and analytics, and in the low- to mid-single-digit percent range for risk management software.

Professional services revenue is still projected to more than double, primarily reflecting revenue from the late 2010 acquisition of CSI Global Education and very strong performance in the risk management advisory business.

Moody's Analytics revenue is now expected to increase in the high-single-digit percent range in the US, and in the mid-teens percent range outside the US.

That concludes our prepared remarks.

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

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

Thank you.

(Operator Instructions)

We'll go first to William Bird with Lazard.

Thank you.

Looks like your guidance implies a further step-down in MIS in Q4.

Just wanted to understand if you're seeing this in the pipeline, or if this is just being conservative, given the world we live in.

I think it's a mix, Bill.

We see good pipeline, but uncertainty I would say is in the corporate finance area, particularly the high-yield sector, and I think that good pipeline is going to be, whether it's executed on in the fourth quarter, is going to be subject to whether there's some additional spread contraction and maybe some additional economic activity to the extent that there is greater confidence in growth both in the US and in Europe.

I think it's worth noting also the structured finance area where we've had strength throughout the year in the commercial real estate sector, and we do think that that pipeline is a little lighter for the fourth quarter than what we've seen earlier in the year.

So, that's an area where we would expect a decline as well.

I was wondering if you could talk a little bit about cost.

What was the incentive comp accrual in Q3, and what will your cost profile look like in Q4?

Is there anything anomalous in costs in Q4?

Sure, Bill, it's Linda.

The incentive compensation accrual for the third quarter was $25 million, which was down from $35 million in the second quarter of last year, and that's probably a reasonable number to use for the fourth quarter, if we come in as we expect.

Now, if we do, of course, have higher particularly operating income than we've guided to, of course, incentive compensation might move back up.

But sequentially we're expecting relatively flat unless we're surprised to the upside.

Thank you.

We'll go next to Michael Meltz with JPMorgan.

Thank you.

Ray, can you speak a bit more about -- I appreciate your comments on regulation, and what's happening in Europe.

The press accounts have been inconsistent, but they're talking about lots of changes.

Can you talk about some of the things that are out there?

And perhaps it's premature, but I'm just interested to hear more of your views in that regard.

And then also, Linda, on the tax rate, this tax rate has been jumping around -- what do you consider your run rate, tax rate, specifically at this point what should we be modeling for next year?

Yes, sure, Michael, I'll start.

With respect to the regulations, particularly in Europe, we are only aware of some draft proposals that have been made.

We haven't seen any formal proposals at this point.

But I would say that the issues being addressed in the proposals in Europe are very similar to what we have been dealing with over the last few years in the US, and in some other jurisdictions, around competition and conflicts of interest.

The issue about over-reliance on credit ratings by market participants, enhanced transparency in the system, whether the liability standards for assigning credit ratings are appropriate or should be changed.

So it's not a change in the topics that are being debated in the regulatory area, although from what I understand some of the proposals in Europe would -- for how to address those issues would be different than what we've seen, for example, in the US.

I don't think I can go into a whole lot of detail on this at this point, because, again, we haven't seen any formal proposals introduced, and we don't know what any formal proposal is ultimately going to look like.

But from what I understand, there are some things that we would believe are good ideas, and some things that we would think are probably not such good ideas.

Included in the former category would be reducing over-reliance on rating agencies and improving information transparency.

I think those are workable ideas.

I think they can develop some useful solutions in those areas.

Some of the ideas that we probably wouldn't be as supportive of, I think are also probably more unworkable.

Okay.

Let me take a shot at your tax question, and we apologize for our bouncy tax rate.

For the third quarter, as we said, our GAAP view of the effective tax rate was 28.5%.

And for the year, we are at 29.9% year to date; and for the full-year guidance, we are guiding to 31%.

The issue for us is we're not always sure -- we don't know when separate state audit matters will be resolved, which is what causes the uncertainty, and frankly, makes it very difficult to predict where the tax rate is going.

I would be particularly hesitant to comment on 2012 tax rates, because as you know, there are some pretty significant proposals floating around out there in terms of changing the entire corporate tax structure for the US.

So I think it would be pretty Draconian of us to try to look at where our tax rates are going to go for next year before we have some greater clarity on the overall federal corporate rates.

So, I think you are going to have to wait until February when we give guidance for the year to get more information on that; sorry about that.

Maybe I'll ask it this way -- I think your guidance implicitly, to get to 31% for the year, it's perhaps 35% in the fourth quarter.

Is that fair?

I think we're looking for it to tick up in the fourth quarter, but again, 31% is our rate for the year, and we'll have to see how we do and some timing on some issues.

Okay, thank you.

We'll go next to Peter Appert with Piper Jaffray.

Hello, this is George Tong for Peter Appert.

Thanks for taking my questions.

Could you give us some color on MIS's market share performance versus S&P?

Yes, this is Ray, and I'll make some preliminary remarks, but Michel Madelain may want to offer some comments as well.

We have not seen any significant changes in market coverage.

We continue to provide broad comprehensive ratings coverage both in the US and internationally.

So, there are areas in certain asset classes or in certain geographies where that is not the case.

I've mentioned in previous calls, based on our credit analysis, we have generally not been rating the junior tranches of collateralized loan obligations, for example.

So, there are some areas where we don't have the broad comprehensive coverage that I think characterizes our global business, but I also would say that we have not seen significant changes globally in market coverage.

And, Michel, if there's anything we should add to that, please weigh in.

The only thing I would add is a full set of segments, the volume of transaction is very limited, and therefore, you may see changes from quarter to quarter that are really not really meaningful.

But apart from that, I can confirm there is no real -- no change that are taking place next quarter.

Got it.

And how would you characterize the sustainability of Moody's margins in an environment with little to no revenue growth?

Hello, George, it's Linda.

Let me take a shot at that.

As usual, two components that we want to look at for margin for the rest of the year.

The first component is revenue, where frankly, we have the most uncertainty, and obviously we are guiding down on revenue.

You can get it from the math for the fourth quarter.

And 3 out of the 4 of the business lines in Moody's Investor Service we expect could come off in the fourth quarter.

Moody's Analytics, however, we expect to be moving upward in the fourth quarter.

Now expenses, we started the year at $327 million in the first quarter.

We told everyone we would ramp expenses around $40 million over the course of the year.

And that looks to be about right.

Actually expenses will be down, we think, perhaps, a little bit from where we were fourth quarter last year.

So, we're watching our expenses.

We did a pretty good job with expense control in the third quarter.

We'll continue to work on that.

Again, uncertainty around the incentive compensation piece.

But we would expect that the fourth quarter margin, if you do the math, is probably going to be in the low 30%s, given what we're expecting right now.

Now we do have unusual uncertainties for the fourth quarter of the year.

We could see revenue come off further, which would obviously be hurtful to the margin.

We could see revenue move up by a similar amount.

Our guidance incorporates that we could see as much as a $40 million swing to the downside, and still hit the bottom end.

We could see that swing to the upside, and obviously we might do better, but it's just extremely difficult to tell at this time.

So, margin, we've guided 38% to 40%, and we've guided for the year, and we have been pretty thoughtful about that.

Got it.

That's very helpful.

Going back to the Analytics business, could you provide some details on what's driving that growth, and how sustainable that growth is going forward?

Yes, why don't I ask Mark Almeida to comment on that, if you would, Mark.

Sure.

We're seeing good strength across all of the Moody's Analytics businesses, particularly Research, Data, and Analytics.

That business has firmed very nicely throughout the course of this year.

So we're getting very good growth, growth from RD&A, and of course, that's the largest segment within Moody's Analytics.

The software business continues to perform very well.

We like what's been happening there, and we expect to see continued good growth in software.

But of course, that is a lumpy business, and so we are going to see some volatility from quarter to quarter.

You'll recall that the fourth quarter of 2010 was very, very strong in software.

And it is going to be quite a challenge for us to keep up with that in the fourth quarter this year.

And then finally, we are seeing a nice boost from the acquisition of CSI Global Education, which we closed last November.

Long story short, we've had very solid organic growth in the business, aided by the acquired revenue from CSI this year.

Got it.

And last question, on a very preliminary basis, how favorable do you think the operating environment in 2012 will be to generating revenue growth acceleration?

To follow up on Linda's comment, we do feel that we are in a period of relatively high uncertainty.

But high uncertainty does not mean that we don't see the opportunity for revenue growth in 2012.

We have some parts of our business that are more subject to capital market activity, and issuance trends, and some parts of the business particularly over in Moody's Analytics side, which are relatively immune to issuance cycles.

I'd just add that we have been in a period of low issuance for the last few months, and as you can tell from our guidance for the full-year 2011, we are not expecting a large pick-up in the fourth quarter, but I also commented that the pipelines, particularly in corporate finance, are pretty strong.

And that is issuance activity that is looking for an opportunity with spreads narrowing to get into the market.

So there's reason to feel pretty good about the future, it's just predicting exactly which quarter that that's going to happen, that we are finding the difficulty with.

That's very helpful.

Thanks, everyone.

Thank you.

We'll go next to Craig Huber with Access 342.

Yes, good morning.

First off, Linda, I'd like to ask a typical question I always like to ask.

Your transaction versus non-transaction break down for your 4 areas -- could you go through that with us, please?

Sure.

For third quarter, starting with the rating agency as a whole, we are at 52% transaction and 48% relationship for the whole business, and let me break that down.

We'll do CFG first -- 62% transaction and 38% relationship.

For structured -- 49% transaction and 51% relationship.

For FIG -- 30% transaction and 70% relationship.

And for PPIS -- 58% transaction and 42% relationship.

And for MA, we are at 19% transaction and 81% relationship.

And for the whole Company, 41% transaction and 59% relationship -- 41% and 59%.

My other housekeeping question, Linda, if you could just break down the revenue break down in corporate finance and the other 4 areas, high yield bank loans, et cetera, and do it for financial institutions, too, if you would, please?

Sure.

For investment grade, 21% of the total $129 million was investment grade.

The place where we have -- there are two places where we have challenges here, which is interesting to look at, Craig.

For spec grade, we're running at 12% of the whole CFG line in high yield.

That compares, if you want to look at it sequentially, in the second quarter of last year, we were at 23% of that line running high yield.

The numbers in terms of the absolute numbers, $15 million for third quarter down from $45 million in the second quarter.

So that is where we have a revenue issue.

Bank loans similarly, 16% of overall CFG issuance at $21 million, and if you look at the second quarter, it was 22%.

So, the absolute number was $43.6 million in the second quarter.

So, again, we've had a considerable drop in bank loan ratings.

Other accounts, 51% for this quarter versus 37%.

And that's looking a little bit flatter from second quarter to third quarter.

So, again, from $200 million second quarter to $129 million in third quarter, that's the tricky part of what we're wrestling with here, and that's where it makes it more difficult to know where we're going for the fourth quarter.

Let me give you a structured -- you want structured, as well as FIG, Craig?

Yes.

All three, please.

Okay.

So, $82 million for all of structured finance for third quarter, 29% is SFX, 25% is RMBS, 23% is real estate, and 23% is derivatives.

And then for FIG, total line is $72 million, 70% of that is banking, 26% is insurance, and 5% is managed investments.

And PPIS, if you would.

Sure.

You're very thorough, Craig.

Every quarter, my friend.

Every quarter.

Well, we're always prepared.

We have a total of $68.3 million, and 50% is PFG in sovereign, 7% is munis, and 42% is project and infrastructure.

Okay.

And Ray, can you comment a little bit further if you would on structured finance?

I mean, this year certainly seems like it's done a lot better than you originally expected, 9 months ago, say.

Could you talk a little bit about that, what you're seeing out there, and perhaps what your outlook is for the next 6 months, say?

Sure.

You're right, it has been stronger than we anticipated.

Even after the first quarter, as you know, we were fairly cautious about the remainder of the year because of the one-off activity in the first quarter.

We have seen strength throughout the year in both CMBS and in covered bonds, and we've seen strength in European RMBS, including covered bonds.

That is -- we do not expect, as you heard from my comments before, the commercial real estate area to continue at the pace that it has earlier in the year.

If we have some upside surprise, it might come from there.

I am a bit more optimistic about the run rate for structured finance than I was because of what we've seen in the second and third quarters.

But we do not think that it is going to be as strong in the fourth quarter as what we've seen in Q2 and Q3.

Nonetheless, I would point to that area as a potential for some upside.

And my last question if I could -- what was the percent change for your revenues for your Asia operation for ratings, and also what was that number for Europe, please?

In the third quarter?

Yes.

Our growth in Europe in the third quarter for Moody's overall was 5%, and for other international was about 18%.

Very good.

Thank you.

We'll go next to Edward Atorino with Benchmark.

Hello.

Covered bonds, those sort of came out of left field.

Could you talk more about whether that's a one-time event, or is that the only way Europe is financing its banking system these days?

Ed, this is Ray.

This is a perfect question for me to turn over to Michel Madelain, and I'm going to do that.

Well, it was scripted.

Thank you.

I think what is happening in covered bond is two things -- one is that we've seen an increased number of programs we are rating, and that's a long-term trend we are seeing now for many months.

So we are benefiting from that.

We have a very strong market position.

In terms of issuance, the issuance has actually been adversely impacted by the macro trend that have impacted all credit markets in Europe.

So, the actual issuance has been down, but that has been largely offset by the increased number of programs we are rating and our market position.

So the dollar amount was down, but the number of programs was up?

You're talking about issuance?

Yes.

Yes.

That's quarter on quarter, yes.

Year on year, it's been up significantly.

Yes, because the first part of the year actually issuance was quite robust.

And what is it -- I mean, Europe is, I don't know, frozen or whatever they call it.

Can they do covered bond issuance in this environment in the fourth quarter?

Yes.

Actually, Ed, I would be pretty optimistic about the future of covered bond issuance, because it is considered a safer form of financing.

Yes --.

It does have the backing of the financial institution and the collateral.

So it is a secured form of financing, and is particularly useful for institutions that need liquidity.

So in a stressed environment, I think it's going to continue to be a favored instrument class.

I understand there's some regulatory proposals or whatever to get covered bonds into the US?

Where is all that stuff right now?

There had been proposals for the medium future, I would not anticipate that that would become a significant market.

US institutions are generally in good position from a liquidity standpoint, and this form of financing is probably most effective if there is a risk-averse environment or a liquidity-demanding environment.

And how does the rest of the structured world look these days?

Anything -- any light on the horizon?

Yes, there are, I would say, several lights on the horizon.

That's also areas of darkness.

I think the CLO market has both been showing signs of life, and the economics that support that market in terms of spreads, I think, have an opportunity to encourage issuance going forward, particularly if spreads come in.

The commercial real estate market, although, as we said, we're not expecting a strong year end, still has a great deal of real estate financing that needs to occur, and the auto receivables sector has been strong throughout.

You know, some areas where issuance is more in doubt, we're going to all be waiting for more permanent resolution of US residential mortgage-backed securities, and how -- what role the private market will play in that sector.

And also, areas such as credit cards and student loans have been under more pressure, either because of the performance of the asset classes or because of changes in regulation.

I don't know if I missed this -- could you give an update generally on issuance, say high yield corporate in October or almost through October, I think, if my calendar is right?

Still depressed, I presume?

It's Linda.

Let me take a shot at that.

Yes, through October, it has been depressed.

There is a pipeline out there.

There are a couple of different things that we watch.

We watch the VIX Index, which is --.

Ah, the VIX Index, yes.

-- market stress, which had been as high as 50, and has now come down to 30.

When we were doing -- we're having strong issuance in high yield, it was down to 15.

We would like to see that come in a little bit; hopefully you'll get there.

The other thing is -- we need spreads to come in, probably 75 to 100 basis points.

And today looks better in the markets.

We are noticing 7 deals in the markets this morning, none of them high yield that I can see yet.

But we need spreads to come in, we need people to get back into more of a risk-on mode, and we'll see what happens.

But our revenue line is sensitive to what happens in high yield and bank loans, and those two can swing us in one direction or another.

Can you talk about what's been driving Analytics?

That's a fantastic track record in the last couple of quarters.

Thank you.

Maybe we'll let Mark do that.

Mark, you want to take that?

Sure.

As I said earlier, the research business has firmed very nicely, so that's helping us.

Software has been performing well.

So, organically the business is firing on all cylinders, to be honest.

And then we also have the additional revenue from CSI, which we acquired last November.

Did you give an organic growth rate, did I miss that for the quarter?

We did not.

Would you give one?

We have not disclosed that.

Oh, okay.

Thank you.

Thank you, Ed.

We'll take our next question from Doug Arthur with Evercore.

Linda, I'm sorry, can you go back over the breakdown of quarter finances?

Sounded for a second that you were moving dollars and percentages around.

I think what I was trying to do was to explain a little bit about what the differences were second quarter to third quarter, which we think is instructive for everyone.

So, let me run through this again, and let me look at the big dollar changes, because I think that would be helpful.

So, in the second quarter of 2011, obviously issuance was very, very strong.

We had, I believe, a record quarter in corporate finance of $200 million of issuance.

For corporate finance for this quarter, third quarter, we're down to $129 million.

So, we lost about $70 million.

Investment grade didn't suffer quite as much, we went from about $38 million to about $27 million.

But again, the high yield business went from $45 million to $15 million, and the bank loan business went from almost $47 million to $21 million.

Other accounts, a little bit more stable as well, from $74 million to $66 million.

So, of the $70 million difference, the change is attributable, $52 million of that is high yield and bank loans.

Again, we would like to see those two sectors come back.

Again, we could see a revenue swing to the upside, or we could see a revenue swing to the downside, depending on what happens in the fourth quarter, particularly with the corporates business.

It's the toughest one for us to forecast right now, because markets are obviously choppy.

We have weeks which are very strong in terms of issuance.

We have weeks which are almost closed down in terms of issuance.

The general view on November, we're hearing for just high grade expectations are running around $80 billion of issuance for high grade, which would be about $20 billion a week, which is good.

But we are also cognizant, Doug, that we have only got sort of 6 more weeks of the year to go here.

Obviously, we're moving into the holiday period.

So, we're trying to be thoughtful about this, but it is pretty tricky to forecast.

Got it.

Thank you.

We'll go next to Sloan Bohlen with Goldman Sachs.

Hello there.

A follow-up question with regard to issuance, particularly with investment grade.

How should we think about the upcoming maturity schedule, specifically as it means to refis?

Now that corporate balance sheets are as flush with cash as they have ever been, should we think about the amount of that issuance relative to what's maturing coming down, as cash is used to de-lever, and how do you think about that for projecting your pipeline?

Sloan, I don't have that information right in front of me.

I would urge you to look at our third quarter investor deck, which we will be putting up after we file the 10-Q, which will be middle of next week, I think.

We will have that chart in there, so you might want to take a look at it.

The trend would be, while we saw pull forward in the first and second quarter, we saw an air pocket or sort of a stalling out in the third quarter.

You can tell by the numbers that I just gave to Doug and to Craig about what the magnitude of that was.

So, we're hoping, as we said, that we'll get back to a more typical high-grade issuance month of $80 billion for the month of November, running about $20 billion a week, but again, we have to wait and see.

What we've seen is as markets open up, opportunistic strong issuers jump back in.

And they are continuing to finance.

Given that many corporates have a lot of cash offshore, we think that people are still looking to finance, and we see some cases of people financing for share buy backs, also for CapEx, and to a lesser extent but still there for M&A activity.

So, the well of refinancing still exists, but take a look at that next week when we put up the new investor deck.

Sloan, just to add a little bit of color to Linda's comments, there is a very significant amount of refinancing that we can see having to occur over the next 3 to 4 years.

It has been pushed out from -- the height of the wall is lower in 2012 than it was early this year, and that's not surprising.

So what I think -- I think we would describe this as the refinancing that is going to occur is going to have an opportunistic flavor to it.

And if rates come in, and there is an opportunity to refinance early at good spreads, that's going to be done.

What we're also looking to is the degree of financing that is going to occur out of the refi market as a result of M&A activity, general -- capital raising for general corporate purposes, share repurchase and the like, and that's what we would associate with issuance activity in a reinvigorated economic environment.

So, it's a trade-off between the very low rates that we might see in more of a pure refi environment, and perhaps higher rates, but more narrow spreads in a stronger overall economic environment that would draw financing for different reasons other than just refi.

Okay.

That's all very helpful, and I think the one other bit of my question would be though, as we look at the wall of financing, as we look at those numbers about what's maturing in each of the upcoming years, should we think about the ratio being 1 to 1, so, say, if $100 was maturing, should $100 be issued, or is it going to be something less than that as companies de-lever?

I think it's going to depend on how companies feel about the overall economic environment and business expansion at the end of the day.

I don't think they're going to be de-levering if they are in a business expansion mode, and we would see more of a 1 to 1.

If they continue to feel that risk is bad, as they did in August and September, then we may very well see them using some of their cash to de-lever.

I think also that a lot of finance executives that have come through this period are thinking about having more cash on hand on a permanent basis than they would have before the financial crisis, and so I don't think that a return to historical cash-on-hand levels is necessarily the central case.

Okay.

That's helpful.

And then just one other question on the Moody's Analytics.

I was wondering if you guys could touch on Wall Street cost cutting, potential headcount reduction, what impact that might have in that segment.

Sure.

I think -- I'm going to let Mark add color to the remarks I have, or correct them if I misspeak, but I think there are two things that act in somewhat offsetting ways.

One is, if there is reduced headcount at our customers, fewer number of seats, that may limit the number of licenses that we have for those seats, and a reduction in users per customer.

On the other hand, the reduction in workforce at firms impacts what they are able to do themselves.

And they go outside and look for expertise in risk management, risk modeling, risk metrics that we provide, and that provides a very good sales opportunity for us.

And I think we would characterize the second factor as being more powerful than the first.

Ray, it's Mark.

I agree with that.

I think that's a correct characterization of where we are.

Thus far, we haven't seen the headcount reductions that have been announced at the banks, have not affected the business.

We haven't seen any kind of a material pullback on spending at our big financial institutions customers.

Certainly the stories we're reading in the press, and hearing about the large numbers of staff reductions, and what appears to be more emphasis on expense management, that doesn't make us feel great.

But as a practical matter, it has not yet presented itself or manifested itself in undermining any of our sales activities.

Okay.

And Mark, is there a time seasonally when you would expect that to come through, if it did?

Well, I would reflect back on what we went through in late 2008 and through most of 2009.

I don't think that was seasonal, that was more event driven.

You had the very aggressive pull back post-Lehman and so forth.

Certainly as we move into 2012, people are now putting their budgets together, and making their spending commitments for next year.

If we saw a sharp pull back, we would start seeing it now.

And as I said, we have not yet seen that.

But obviously it's something we're going to be looking at very closely over the next couple of months.

Okay.

Great.

Thank you, guys.

Thank you.

At this time, I would like to turn the conference back over to Mr.

Ray McDaniel for any additional or closing remarks.

Okay.

This concludes our third-quarter earnings call.

As a reminder, a replay of this call will be available after 3.30 PM Eastern time on Moody's website.

Thank you very much, everybody.

Thank you, ladies and gentlemen, for your participation.

This will conclude today's conference call.