穆迪 (MCO) 2012 Q3 法說會逐字稿

Good day and welcome, ladies and gentlemen, to the Moody's Corporation third-quarter 2012 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 for questions and answers following today's presentation.

I will now turn the conference over to Salli Schwartz, Global Head of Investor Relations.

Please go ahead, ma'am.

Thank you.

Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's third-quarter results for 2012.

I am Salli Schwartz, Global Head of Investor Relations.

Moody's released its results for the third quarter of 2012 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, President 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, 2011, and in other SEC filings made by the Company, which are available on our website 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 to everyone for joining today's call.

I'll begin by summarizing Moody's third-quarter 2012 results.

Linda will follow with additional financial detail and operating highlights.

I will then finish with several comments on the current regulatory environment and our outlook for the remainder of 2012.

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

Third-quarter revenue of $689 million increased 30% over the prior-year period, and was the highest quarterly revenue Moody's has achieved in its history.

We benefited from double-digit revenue growth in all lines of business at MIS, with particularly strong performance in Corporate Finance, as well as continued strong growth in all areas of Moody's Analytics.

Expenses for the third quarter were $419 million, a 25% increase from the third quarter of 2011.

Operating income for the third quarter was $270 million, a 38% increase from the prior-year period.

Adjusted operating income for the third quarter was $294 million, up 36% from the same period last year.

Diluted earnings per share of $0.81 for the third quarter, which included a $0.06 legacy tax benefit, increased 42% from the prior-year period.

Excluding the legacy tax benefit in the current quarter, diluted earnings per share in of $0.75 for the third quarter of 2012 were up 32% from the prior-year period.

Based on strong third-quarter performance, we are raising our 2012 EPS guidance range to $2.95 to $3.05; or $2.89 to $2.99, excluding the legacy tax benefit in the third quarter.

Turning to year-to-date performance, revenue for the first nine months of 2012 was $2 billion, a 15% increase from the first nine months of 2011.

Revenue at Moody's Investors Service was $1.4 billion for the first nine months of 2012, an increase of 14% from a year ago.

Moody's Analytics revenue of $609 million was 19% higher than the prior-year period.

Expenses for the first nine months of 2012 were $1.2 billion, up 16% from the prior-year period.

Operating income of $817 million increased 14%, from $716 million for the same period of 2011.

Diluted earnings per share of $2.34 for the first nine months of 2012, which included the $0.06 legacy tax benefit, increased 14% from the prior-year period.

I'll now turn the call over to Linda to provide further commentary on our financial 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 30% to $689 million.

US third-quarter revenue increased 37% to $375 million.

While revenue outside the US grew 22% to $313 million, and represented 45% of Moody's total revenue, down slightly from 48% in the year-ago period.

Recurring revenue of $346 million represented 50% of the total, down from 59% in the prior-year period.

Looking now at each of our businesses, Moody's Investors Service revenue for the quarter was $474 million, up 35% from the prior-year period.

Foreign currency translation unfavorably impacted MIS revenue by 4%.

US revenue for MIS increased 45% over the prior-year period.

Revenue outside the US increased 21%, and represented 39% of total ratings revenue.

Global corporate finance revenue in the third quarter increased 71% from the year-ago period, to $221 million.

Revenue was up 81% year over year in the US, primarily driven by issuance in the speculative grade market, including high-yield bonds and bank loans.

Investment grade issuance was also strong in the US, with corporations taking advantage of historically low rates.

Outside the US, corporate finance revenue grew 53%, primarily reflecting increased investment grade issuance across all regions.

Global Structured Finance revenue for the third quarter was $93 million, 14% above the prior-year period.

In the US, revenue increased 27% year over year, primarily due to strong issuance of commercial mortgage-backed securities and collateralized loan obligations.

International Structured Finance revenue was essentially flat to the prior-year period.

Global financial institutions revenue of $83 million increased 15% from the same quarter of 2011.

US revenue was up 22% as compared to the third quarter of 2011, primarily driven by increased insurance company issuance [forward] financing, and debt-funded M&A activity.

Non-US revenue was up 10%, primarily due to increased issuance in Latin America and Asia; prompted by refinancing of short-term debt, credit expansion due to economic growth, and reduced lending by European banks in the these regions.

Global revenue for the public, project and infrastructure business rose 13% year over year to $77 million.

Revenue was up 11% in the US, primarily due to gains in public and infrastructure finance, while non-US revenue increased 16%, reflecting growth in European infrastructure finance.

And turning now to Moody's Analytics, global revenue for Moody's Analytics of $215 million is up 20% from the third quarter of 2011.

Slightly more than half of the growth is from the late 2000 (sic -- see press release -- 2011) acquisitions of Copal Partners and Barrie & Hibbert.

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

US revenues grew by 14% year over year to $86 million.

Non-US revenue increased by 23% to $129 million, and represented 60% of Moody's Analytics revenue.

Globally, revenue from research, data and analytics of $124 million increased 7% from the prior-year period, and represented 58% of total MA revenue.

We continued to see demand for credit research via our CreditView offering, as well as new sales of our other analytic data and -- excuse me, data and analytic products.

Revenue from enterprise risk solutions of $64 million grew 26% from last year, reflecting the December 2011 acquisition of Barrie & Hibbert, and strong growth in products and services that support the regulatory compliance needs of our financial services customers.

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

Professional services revenue grew 97% to $27 million, reflecting the acquisition of a majority stake in Copal Partners in November 2011.

Turning now to expenses, Moody's third-quarter expenses were $419 million, an increase of 25% compared to third-quarter 2011; or a 27% increase, excluding the impact of foreign currency translation.

Higher accruals for incentive compensation, and Moody's profit sharing plan, reflecting the stronger full-year outlook, accounted for about half of the year-on-year expense growth.

More specifically, we recorded additional incentive compensation in the third quarter to align with stronger-than-expected year-to-date financial performance, and the increased full-year outlook, as reflected in our updated guidance.

Therefore, incentive compensation for the third quarter was $59 million, versus $28 million in each of the first and second quarters.

Additionally, in the third quarter, we recorded approximately $8 million of profit sharing expense, given the increase in our EPS guidance.

As you may remember, our 2012 compensation plan awards profit-sharing when our pro forma EPS grows more than 10% from the prior-year period.

Our current pro forma EPS guidance results in a growth of over 10% from 2011's pro forma EPS, whereas our guidance at the end of the second quarter did not.

Excluding growth in incentive compensation and profit-sharing, expenses for the third quarter were 15% higher than the prior-year period, primarily due to increased headcount from growth in our existing businesses, and from acquisitions in late 2011.

Moody's reported operating margin expanded 230 basis points year over year, and 36.9% in the third quarter of 2011 to 39.2% to the current quarter.

Adjusted operating margin was 42.7% for the quarter, up from 40.5% for the same period last year.

Our effective tax rate for the quarter was 29.5% compared with 28.5% for the prior-year period.

The increase in the effective tax rate is primarily due to lower taxes in 2011, resulting from the settlement of state tax audits, partially offset by the favorable impact of foreign tax planning initiatives in 2012.

Now I'll provide an update on capital allocations.

During the third quarter of 2012, Moody's repurchased 600,000 shares at a total cost of $25 million, and issued 1.2 million shares under employee stock-based compensation plans.

Shares outstanding as of September 30, 2012, totaled 223 million, essentially flat from a year earlier.

As of quarter-end, Moody's had $700 million of share repurchase authority remaining under its current program.

We now expect full-year 2012 share repurchases of approximately $225 million, subject to available cash, market conditions, and other ongoing capital allocation decisions.

As of September 30, Moody's had $1.7 billion of outstanding debt and $1 billion of additional debt capacity available under our revolving credit facility.

Cash and cash equivalents were $1.5 billion as of September 30, 2012, an increase of $664 million from a year earlier, largely due to our $500 million bond deal in August this year.

As of September 30, 2012, approximately 52% of our cash holdings are maintained outside the US.

For the first nine months of 2012, free cash flow was $461 million, a decrease of $152 million from a year ago, due in part to payments of approximately $121 million related to the settlement of state and local tax matters; as well as movement in other working capital accounts.

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

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

Thanks, Linda.

I'll continue with comments on our regulatory environment, which has not changed materially since the update we provided during our second-quarter earnings call.

In the US, the SEC's rulemaking pursuant to Dodd-Frank is pending.

The timing is uncertain regarding final rules relevant to NRSROs, as well as the feasibility study on establishing an alternative system for allocating rating assignments for Structured Finance products.

Both banking and securities regulatory authorities continue to assess their use of ratings in regulation, and are in the process of developing potential alternative measures as replacements.

Turning to Europe, as discussed on previous calls, in November 2011 the European Commission released new regulatory reform proposals for the rating agency industry, commonly referred to as CRA3.

The European legislative process requires that the European Parliament and the Council of Finance Ministers of the key individual EU member states each produce it own version of the text, and then enter into discussions with the Commission.

During these discussions, the three institutions seek to resolve any differences among their respective drafts; and, once a compromised document is produced, put to a vote.

In May and June of 2012, the Council and the Parliament, respectively, finalized their positions on CRA3, and the discussions among the three institutions are underway.

However, currently, we can't predict the timeline for finalization of CRA3 with any degree of precision.

Additionally, it still too early to assess what the likely outcome of these deliberations will be.

As always, we will continue to advocate for globally consistent approaches that align with the G20 statements and directives.

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

Moody's outlook for the remainder of 2012 is based on assumptions about many macroeconomic and capital market factors, including interest rates, corporate profitability, and business investment spending; merger and acquisition activity; consumer borrowing and securitization; and the amount of debt issued.

There is an important degree of uncertainty surrounding these assumptions, especially as they relate to Europe.

And if actual conditions differ from these assumptions, Moody's result for the year may differ materially from the current outlook.

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

As I mentioned earlier, we are raising our 2012 EPS guidance to a range of $2.95 to $3.05 from the previous range of $2.76 to $2.86.

Full-year pro forma EPS, which excludes the impact of a legacy tax benefit, is now expected to be in the range of $2.89 to $2.99.

Certain components of our 2012 guidance have also been modified to reflect our current view of credit market conditions.

For Moody's overall, the Company now expects full-year 2012 revenue to grow in the mid-teens percent range.

Full-year 2012 expenses are also now projected to increase in the mid-teens percent range.

Full-year 2012 operating margin is now projected to be approximately 40%.

And adjusted operating margin for the year is still expected to be approximately 43%.

Our effective tax rate is still projected to be approximately 32%.

As Linda mentioned earlier, we now expect full-year 2012 share repurchases of approximately $225 million; subject to available cash, market conditions, and other ongoing capital allocation decisions.

Capital expenditures are now projected to be approximately $40 million to $50 million, and we still expect approximately $100 million in depreciation and amortization expense.

Incremental compliance and regulatory expense is now projected to be approximately $15 million.

For the global MIS business, revenue for the full-year 2012 is now expected to increase in the mid-teens percent range.

Within the US, MIS revenue is now expected to increase in the low-20s percent range; while non-US revenue is now expected to increase in the mid-single-digit percent range.

Corporate finance revenue is now projected to growth in the mid-20s percent range.

Revenue from structured finance is expected to grow in the mid-single-digit percent range.

Financial institutions revenue is now expected to grow in the mid-single-digit digit percent range.

And public, project and infrastructure finance revenue is now expected to increase in the mid-teens percent range.

For Moody's Analytics, full-year 2012 revenue is still expected to increase in the high-teens percent range.

Within the US, MA revenue is expected to increase in the high-teens to 20% range.

Non-US revenue is now expected to increase in the high-teens percent range.

Research, data and analytics is now projected to grow in the high-single-digit percent range; while revenue growth is still projected in the low-20s percent range for enterprise risk solutions, reflecting the December 2011 acquisition of Barrie & Hibbert, as well as growth in the base business.

Professional services revenue is now projected to grow by approximately 70%, reflecting revenue from the late 2011 acquisition of a majority stake in Copal Partners.

In closing, I'd like to point out a couple of additional positive developments at Moody's.

Moody's Investors Service was voted the best credit rating agency in a 2012 poll of US fixed income investors, conducted by the well-known publisher, Institutional Investor.

Also, this past week, Automatic Data Processing, Inc., a leading provider of business outsourcing solutions, announced that it has chosen to collaborate with Moody's Analytics to enhance its widely followed ADP National Employment Report.

I'm extremely pleased with the accomplishments of both businesses, and appreciate the market's recognition of our efforts.

This concludes our prepared remarks.

And 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'll be pleased to take any questions you may have.

(Operator Instructions).

Peter Appert, Piper Jaffray.

Great, thanks.

Ray, based on the guidance, obviously it implies you are seeing some pretty good momentum going into the fourth quarter.

Anything interesting or different you can share with us, in terms of what you're seeing in the fourth quarter in terms of asset classes or other activity in the market?

Not a whole lot of additional color I can give you, Peter; other than we continue to see good issuance, pipelines, especially in corporate finance.

It's obviously, in terms of sequential growth from the third quarter, it's going to be difficult to achieve that in that area.

Because the issuance was so robust in the third quarter, and we have some external events, such as the election and a couple of short months in the fourth quarter.

But nonetheless, we still see a healthy pipeline.

And, barring something really unanticipated, I think we believe the fourth quarter will be another good quarter.

Peter, it's Linda.

Let me speak a little bit about what we're seeing in pipelines, and then in high-yield and leveraged pipelines.

First looking at high-grade -- and all this information comes from Morgan Stanley as of this morning -- October, right now, stands at $78 billion of issuance for US high-grade.

And that has been the strongest October on record.

The month could break $100 billion if some big deals that are said to be in the pipeline come next week; though we did experience a warning regarding potential weather delays, which is something new.

For November, expectations are about $70 billion for US high-grade issuance.

Last year was $77 billion.

And the eight-year average is about $63 billion -- so a little bit above average for November.

For high-yield and leveraged, last week we saw $12 billion in high-yield issuance and $9.3 billion in leveraged loans.

That's still very active.

This week we've seen $7.5 billion both in high-yield and in leveraged loans.

October saw $41 billion in high-yield, and $42 billion in leveraged loans.

Q3 issuance was a record, post the financial crisis, for the leveraged area -- $112 billion in high-yield issuance for the third quarter, and $81 billion in leveraged loans.

As Ray said, the view is that the fourth quarter will not be as strong as the third quarter, but will still be very active.

The listed pipeline so far that can be seen for November is $19 billion in high-yield, and $10 billion in leveraged loans.

And, again, a bit of a concern that the first week in November could be slow due to the weather, and then following with the elections; and, obviously, the usual watch-outs for anything changing in the European situation.

That's great, thank you.

I thought it was particularly noteworthy that it looked like the structured finance market seems like it's got some signs of life.

Do you have a view on the sustainability or a broadening of that recovery going into 2013?

Yes, the structured finance market has been showing year-over-year sequential growth, pretty steady.

And I think that's an indication of a good, if not spectacular, recovery in that market.

Commercial mortgage-backed securities, CLOs, the asset-backed market, covered bonds, are the more promising sectors.

We still don't anticipate a big rebound in 2013 in the residential mortgage-backed securities area.

I guess the further reason for optimism in that sector is we seem to be moving away from some of the more regulatorily driven causes of issuance into real market issuance.

And I would take that as a sign of health.

Right.

And all this gets to the big issue, Ray, which is, you've enjoyed very robust performance here in the second half of 2013, making the comps more challenging -- I'm sorry, second half of 2012 making comps more challenging in 2013.

So do you have any early thoughts in terms of how next year could play out?

We will provide our outlook for 2013 at the beginning of the year, as we do normally.

So I'll refrain from commenting on our outlook at this point.

Okay.

One last try, then.

On the cost side of the equation, Linda, the rate of cost growth obviously has been pretty robust this year in the context of, well, all the reasons you guys have laid out.

How do we think about that going forward?

Sure, Peter.

I just wanted to touch on the actual expense growth for this year.

And, if you look at the Q3 year over year, you'll see that last year we had $335 million of expenses.

This year, in the third quarter, we have $418 million of expenses.

But the vast majority of that change, $59 million, or 70% of that, is compensation.

So, very important to remember that three times this year we've increased guidance.

And the main driver of expense increase is, in fact, the overperformance and the resulting incentive compensation which results.

Another cause of expense growth is in our acquisitions, which added $18 million to the expenses in the third quarter.

Now, some of that breaks out into compensation for new people, about $10 million of it.

We have the increase in depreciation and amortization, and some other non-comp expenses, and then we have a few other things in there.

But, again, if you look at the expense increase, which is 25% year over year, it would be 15% without the incentive compensation.

So probably the best way to think about it that is if we normalize back to more normal performance last year, we try as hard as we can to have expense growth not to exceed, and, in fact, be less than revenue growth.

So we'll see where we get to, as Ray said, for that in 2013.

But we're mindful of expense growth, but this is a very fast-growing business and we are continuing to support it.

Got it.

Thank you.

William Bird, Lazard.

Good morning.

Ray, I'm curious if you think you're seeing much pull-forward effect from fiscal cliff dynamics.

And then second, I was wondering if you could discuss what needs to happen to buy back more stock?

Thank you.

Okay.

I'll start with the pull-forward.

I think it's clear that we have seen pull-forward throughout this year, including in the third quarter.

Firms are looking at the potential for some market uncertainty around the fiscal cliff, potentially as developments occur in Europe.

And they're taking advantage of low official rates and good spreads; not historically tight spreads, but good.

That being said, much of the activity that we have seen this year -- most of the activity -- continues to be refinancing, as opposed to issuance for mergers and acquisitions and business expansion, share repurchase, et cetera.

So, yes, similar to comments I've made in the last couple of quarters, it has been a very powerful refinancing engine that we have been experiencing over the course of the year.

But many of the traditional -- most of the traditional drivers of debt issuance have really not been very strong this year.

So that's what we'd be looking for going into 2013, 2014.

Linda, did you want to take the share repurchase?

Yes, so, on share repurchase for the third quarter -- as we said, we spent $25 million, which is, frankly, less than we had hoped.

We put in place our systematic share repurchase program.

And following our Investor Day, the stock price moved quite rapidly; and, in fact, out of our repurchase zone.

Because we realized that our performance was pretty good, we could not go back into the market opportunistically.

So, given the revised guidance, we're hoping to get back into the share repurchase market here in the fourth quarter, and be able to make some progress.

But all of that, of course, is dependent on market conditions.

Thank you.

Craig Huber, Huber Research Partners.

Yes, good morning, thanks.

My first question is -- and I appreciate you guys breaking out the transaction versus relationship across the categories in the press release.

I do have one other, similar, question.

If you could break apart, in your four main categories like corporate finance, breaking out high-yield revenues, bank loans, investment grade -- by percentages for each of the categories.

Sure, Craig, we can do that.

And we were thinking of calling page 14 in the earnings release the Craig table.

Going on to the revenue for corporate finance, third quarter of 2012 -- total dollar corporate finance issuance, $220.7 million.

Investment grade comprised $55 million of that, or about 25%.

High yield was $52 million, or 24% of the corporate finance total.

Bank loans, $36.5 million, or 17%.

And other accounts, $77 million or 35%.

The big movement there year-over-year for the third quarter is the increase in the high-yield percentage, which basically doubled as a component from this year -- from last year to this year, Craig.

So that's a strong driver, as well as the increase in the bank loans line.

Think we could do it for structured finance and financial institutions, et cetera?

Sure.

Going on to structured for third-quarter, total issuance -- $93.1 million, up from $82 million at this quarter last year.

Asset-backed securities, $25.7 million, 28% of the total.

Residential mortgage-backed securities, which does include covered bonds, $20.3 million, 22% of the total.

Commercial real estate finance, $23.6 million, which is 25% of the total.

And derivatives, $23.4 million, which is 25% of the total.

Now, the bigger changes there would be, as Ray had noted, in the commercial real estate line.

And also interesting in the derivatives line, we saw more CLO issuance thus far in 2012 than we did in the entire period of 2008 to 2011.

In fact, last week, there were five CLOs.

So that the market is doing quite well.

Let me go on, and go to financial institutions group.

Total revenue, for the quarter, $82.7 million.

Banking, about $57 million of that, or 69%.

Insurance, $21 million, 26% of it.

And managed investments, $4.6 million, about 6% of the total.

And each of those lines are pretty consistent to what we saw last year.

For PPIF, $77 million for the quarter.

$38 million in public finance and sovereign, 49% of the total.

Munis, $4.4 million, 6% of the total.

And project and infrastructure, $34.5 million, about 45% of the total.

So everything there looks relatively similar; a little bit of an increase in project and infrastructure.

Interestingly, some of that out of Europe, we understand that ECB bond buying has created a bit of a more favorable environment for that type of issuance in Europe.

Is that everything you need, Craig?

On that front, yes.

If I could ask a couple other questions, please.

One on incentive compensation; you mentioned $59 million up from a year ago -- or the total number is $59 million versus $28 million each of the first two quarters.

First off, how does that break down between operating costs and SG&A within the quarter, please?

So we can get a sense --

We don't disclose that, Craig.

Generally, commissions go in SG&A and the incentive comp tracks to what each individual person is doing for the Company, but we don't have that split up.

Can you say if it's -- generally, is it heavier one way or the other?

No, we don't disclose that, Craig.

Sorry.

Okay.

And then how should we think about that number for the fourth quarter, assuming you hit, say, the midpoint of your new guidance here?

Sure.

You should think about it -- we did $28 million, $28 million, and $59 million for the third quarter.

We're thinking that for the fourth quarter, if we hit the midpoint of our guidance, you'd probably want to look at about $40 million for incentive compensation, which also includes a piece for profit sharing.

Okay.

And then I also want to ask just, generally, just big picture here -- when you guys look at your costs, aside from incentive compensation, what else do you consider variable?

For example, you do, let's say, an incremental 10 extra debt issuance deals here, what's your variable cost aside from incentive compensation?

Maybe a little bit extra T&E expense, but is there anything else, really?

I think the main majority of it would be what goes through the bonus line.

I think I've heard it said that each additional $1 of revenue, once we've covered the fixed costs, would probably still come down to about $0.60 on the margin line.

But it depends if there's anything unusual going on for that quarter, Craig.

And pacing of hiring, and whether we dial that back or dial that up, is a source of flexibility.

But to the extent that we think the market conditions are reacting to short-term cycles, we would want to continue to invest back in our personnel and our business.

And similarly for various kinds of projects, whether they are IT-related or other projects, we have the ability in some areas to accelerate or decelerate in response to conditions.

Craig, something that might interest you.

Since year-end last year, excluding our acquisitions, we've hired about 330 people.

That's 7% growth, excluding acquisitions.

Interestingly, about 200 of those are for Moody's Analytics.

110 or so are for the rating agency, and only 20 of those are for shared services.

So, 90%-plus of the people that we've added this year are all for the revenue driving part of the business, not for the staff part of business.

So that kind of gives you some idea as to the balance there, and what we're trying to achieve.

And my last question, please.

You gave the -- for the backlogs out there, I'm curious if you could talk a little bit further about the fiscal cliff issue.

The debt ceiling limit has got to get raised here in Washington, DC; the election -- just in general, what's your thoughts as we get later in this year and into early next year?

Do you sense any hesitation out there on the debt issuance front?

Do things get pushed out?

Or is it all being pulled forward?

I do think there is some pull-forward.

I think firms are being somewhat opportunistic -- issuance.

The environment is good for issuance right now.

And so if you're thinking about issuance in the near-term, this is a good time to be doing it.

Historically, we have not seen any correlation in bond issuance activity based on election outcomes.

So that -- at least in terms of what we've seen in the past, would not be an important determinant of issuance activity going forward.

And, again, the fiscal cliff is going to, inevitably, create headlines; just as some of what's going on in Europe create headlines.

And that creates windows, very short-term windows -- week to week -- where the market participants are feeling more optimistic or more pessimistic.

So I expect we're going to see choppiness going into the new year, but nothing that's going to freeze up the markets.

Great, thank you.

(Operator Instructions).

Manav Patnaik, Barclays Capital.

Good afternoon, everybody.

Congratulations on the quarter.

First question -- given the hiring statistics you just gave out, is that a good sense of how, over the long term, the breakout of investments being made into the businesses are going to be?

Just in terms of trying to model where the expense growth is going to come next year and the years forward?

Manav, looking at my colleagues here, who are running the lines of business that generate revenue -- I think they're probably pretty happy with those sorts of splits.

We have had increases on the staff side for regulatory compliance, IT, and other such things.

And we hope we've come largely through that, as we've said on previous calls.

We will continue to add headcount to drive very strong growth in both of these businesses.

But it does take investment in people and resources to achieve double-digit revenue growth, which is pretty unusual in terms of the companies that have been reporting this week.

We're feeling pretty good about these numbers, but we will need to continue to invest; and hopefully, yes, that will continue to go to the revenue-generating part of the business.

Okay.

In terms of the regulatory compliance expansion, the incremental $15 million that you guided for this year, I understand we don't know yet.

But excluding that, does that incremental $15 million imply that, other than that, there's not much more incremental expense required for what we already know about?

I'll take a shot, and then Ray can answer more.

I think we've come through some of that, but not all of it.

As Ray stated in his prepared remarks, we do not yet have fully final rules on Dodd-Frank from the SEC.

So it would be premature for us to say we're through everything yet.

And, as Ray also said, we don't know what the timing or the final shape of CRA3 will be, which makes it pretty difficult to put numbers on things.

And at this point, it's been a bit easier for us to plan and to spend and the anticipated SEC rules, because we feel we have a better idea of what the final rules are likely to look like.

The CRA3 situation in Europe, again, is more uncertain, in more of a speculative stage, in terms of what the final product is going to look like, and how we will have to react and over what time frame.

Got it.

And one last one.

You explained why the share buyback guidance came down from what you said last month.

I was just curious if you would explain why the CapEx number is dropping so much.

Sure.

We basically just rescheduled some of the things we're going to do here, going into the end of the year.

We await the final Dodd-Frank rules; and, frankly, we have held some capacity to deal with that.

So it's nothing more than just trying to figure out what has to go first, and what we can deal with next year.

All right.

Thanks a lot, guys.

Doug Arthur, Evercore.

Yes.

Two questions -- Ray, I'm wondering if you can update us on CalPERS.

There's been a lot of motions, moves between district court and appellate court.

So I'm interested as to where that stands right now in a timing point of view.

And then, Linda, there seems like there's a lot of different trends in your financial area right now.

Insurance was very strong in the third quarter.

Was that a one-off thing, or do you see that continuing?

And this deleveraging issue with the banks, is that likely to keep the banking side of financial institutions slow for a while?

I'm interested in the different trends there.

Sure.

I'll start with CalPERS.

There's not a lot new in recent months in the CalPERS litigation.

As we mentioned on a prior earnings call, we filed an appeal in the California Court of Appeals seeking reversal of the lower court's decision, which was denying our motion to dismiss under this Anti-SLAPP statute in California.

The briefing on that appeal is not going to be completed until the end of the year.

And after that, the court will set a date for oral arguments.

So, currently, we don't know when the case will be argued or when it will be decided, so it's moving along quite slowly.

With respect to deleveraging and the banking sector, I'll make just a quick comment and then Linda or Michel may wish to add to that.

The deleveraging is continuing.

We are seeing reduction in bank loans, particularly in Europe, and the deleveraging that's associated with that.

We believe that is going to continue for a relatively long time, as the banking system retrenches.

The benefit that of that, as we've talked about, is this that that encourages corporations and municipal entities to go to the bond market and seek ratings.

And our financial institutions area is the area that is most dominated -- of the ratings businesses -- by recurring revenue.

The majority of our revenue in that area is recurring.

And so we are less sensitive to the deleveraging in that area.

We also don't get the benefits of banks leveraging up when they do that.

But in this environment, we get the benefit of not having revenue reductions in the same degree that there is deleveraging or retrenching.

And to follow up, Doug, insurance year-over-year in Q3 moved from $18.5 million last year to $21.3 million this year, so it's a whole $2.8 million difference.

It's not enormous.

The guidance for FIG now is to increase in the mid-single-digits for this year, which is up from flat to slightly up, which is what we had had previously.

So I think we expect that the activity will continue.

It's not the biggest grower amongst our revenue lines, though.

Yes, fair enough, but -- and just as a follow-up on the deleveraging in Europe -- the Yankee bond situation, where corporations in Europe are coming over to the US to issue -- that has been strong.

Is that becoming a really sizable sector for you now, or not yet?

Yes, it has been strong this year, and much stronger than we've seen in previous years.

How enduring a phenomenon that will be, I think is somewhat uncertain.

Right now there is an interest -- more of an interest in risk coming from US investors than European investors.

And so, the European issuers have taken advantage of that.

Whether that is going to change, and the issuance will revert back to the EU going forward, is uncertain, but I think we're in a position to rate in either case.

Okay, great.

Thank you.

(Operator Instructions).

Bill Warmington, Raymond James.

Good afternoon, everyone.

A question for you on Copal, and the strong growth that you're putting up there.

Once you anniversary the acquisition, what kind of organic growth rate do you think you can generate there?

I'll let Mark Almeida address that, Bill.

I don't think we've disclosed an outlook for the professional services business, which is where the Copal segment lies for 2013.

But I say it's a relatively high growth business.

It won't be our highest growth business, but it's a good, strong double-digit growth business.

I think that's about as much insight as we can offer at this stage.

Okay.

And then one question for you on the residential mortgage-backed security market.

Just your thoughts on what needs to happen there before we see that market come back in size.

I would put it in two categories.

One, there is some incremental things that can be done, in terms of reducing mortgage qualification limits that can go to Fannie and Freddie, and that would move more of the market to the private-label market, and would be more likely to be rated.

But then there is the bigger, structural question of the role that the government is going to play in the mortgage market on a long-term basis.

And that is a politically -- and, a fiscally -- very, very challenging set of issues that the government is going to have to deal with.

That's why we are cautious about any sizable expansion of the RMBS market in the near-term, because of the difficult political dynamics.

Got it.

And then one final question on enterprise risk.

What products within that segment are driving the growth?

And how long are the tails on those products?

Well, when you see a tail on the products, do you mean the sale or the actual product placement?

The ongoing revenue generated by the product.

Okay, sure.

Mark, do you want to --?

Yes.

Well, the ERS segment is going, doing a very, very well, largely driven by regulatory-driven demand that we are seeing from our banking and insurance customers.

And we would expect to continue to see very healthy demand for that product set over the next couple of years.

Got it.

Thank you very much.

Peter Appert, Piper Jaffray.

Ray, just a follow-on to your comments earlier about what's going on in Europe.

Is it possible to get any quantification around this concept of disintermediation and how big you see the market opportunity from that?

We've talked about it, not specifically in a European sense; but in terms of the impact of disintermediation on our overall revenue growth as being a couple of points.

It's both anticipating what is happening from deleveraging, but it's also looking at the pace at which we have been getting new rating mandates over the last few years.

And that has been a reasonably steady pace.

In Europe, it's associated more with stress in the banking sector.

In places like Asia, it has been associated more with economic growth outpacing banking system capacity.

The underlying drivers of the disintermediation change a bit by geography.

But the consequence, the overall number of ratings mandates, has been increasing, as I said, at a pretty steady rate.

I guess I was wondering if maybe, given the turmoil in Europe, the 1 or 2 percentage point incremental revenue from disintermediation, it seems like that potentially could be conservative on a near-term basis.

What do you think?

No, I don't think so.

I hope I'm wrong.

Part of the turmoil in Europe is also corporations taking a conservative posture with respect to borrowing and business expansion.

And so, even though if they were to need additional capital or desire additional capital, they're more likely to go to the bond market.

They're also in a defensive mode; and so that's an offset.

Got it.

Okay, thanks, Ray.

Thank you.

Ladies and gentlemen, we have no additional questions.

I would like to turn things back over to our speakers for any additional or closing remarks.

I just want to thank you for joining the call today.

And we look forward to speaking with you again after the new year.

Thank you.

Thank you, sir.

And, ladies and gentlemen, that does conclude today's conference.

Thank you all for your participation, and have a great weekend.