穆迪 (MCO) 2014 Q1 法說會逐字稿

Good day, and welcome ladies and gentlemen to the Moody's Corporation first quarter 2014 earnings conference call.

At this time, I would like to inform you that this conference is being recorded.

(Operator Instructions)

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

Please go ahead.

Thank you.

Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's first quarter results, and our outlook for full-year 2014.

I am Salli Schwartz, Global Head of Investor Relations.

Moody's released its results for the first quarter of 2014 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 this morning's call 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, 2013 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 maybe on the call this morning, in a listen-only mode.

I will now turn the call over to Ray McDaniel.

Thanks, Salli.

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

I'll begin by summarizing Moody's first quarter 2014 results.

Linda will follow with additional financial detail and operating highlights.

I will then concluded remarks about our outlook for 2014.

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

First quarter revenue of $767 million increased 5% from the first quarter of 2013, and reflected continued strength in Moody's Analytics, as well as modest growth in Moody's Investors Service, despite variable market conditions and challenging year-on-year comparisons.

Operating expenses for the first quarter were $434 million, a 4% decline from the first quarter of 2013.

Operating income for the first quarter was $333 million, a 19% increase from the prior-year period.

Adjusted operating income, defined as operating income less depreciation and amortization was $356 million, up 17% from the same period last year.

Diluted earnings per share of $1.00 for the first quarter increased 20% from $0.83 in the first quarter of 2013, and on a non-GAAP basis excluding litigation settlement charge in 2013, increased 3% from $0.97 in the prior-year period.

We are reaffirming our full-year 2014 guidance of high-single-digit percent revenue growth, and EPS in the range of $3.90 to $4.00.

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

Thanks, Ray.

I will begin with revenue at the Company level.

As Ray mentioned, Moody's total revenue for the quarter increased 5% to $767 million.

The impact of foreign currency translation for the quarter was negligible.

First-quarter US revenue increased 4% to $426 million.

Of revenue outside the US, grew 6% to $342 million and represented 45% of Moody's total revenue for the quarter.

Recurring revenue grew 12% to $397 million, and represented 52% of total revenue, up from 49% in the prior-year period.

Looking now at each of our businesses, starting with Moody's Investors Service, total MIS revenue for the quarter was $526 million, up 1% from the prior-year period.

US MIS revenue of $316 million increased 1% from the prior-year period, and MIS revenue generated outside the US of $210 million also increased 1%, and represented 40% of total ratings revenue.

The impact of foreign currency translation on the MIS revenue was negligible.

Moving to the lines of business for MIS, first, global corporate finance revenue in the first quarter increased 2% from the year-ago period to $264 million, and reflected increased US investment grade bond issuance, as well as higher revenue from rated US and European bank loans.

We also saw increased monitoring revenue across all regions, as the result of more companies becoming rated to access the global bond market.

These gains were partially offset by a contraction in global speculative-grade bond issuance.

In the US, year-over-year revenue was up 5%, while non-US revenue declined 3%.

Second, global structured finance revenue for the first quarter was $95 million, an increase of 2% from the prior-year period.

In the US, revenue increased 5% year-over-year, primarily due to commercial real estate ratings.

International structured finance revenue was down 3% against the prior-year period, with gains in certain assets classes in Europe more than offset by weakness in Asia.

Third, global financial institutions revenue of $85 million decreased 1% from the same quarter in 2013.

US revenue declined 3%, while non-US revenue was flat to the first quarter of 2013.

Fourth, global public project and infrastructure revenue declined 3% year-over-year to $81 million.

US revenue was down 14%, primarily due to weakness in public finance.

Non-US revenue increased 19% from the year -- the prior-year period, reflecting increased infrastructure and sovereign rating revenue across all international regions.

Turning now to Moody's Analytics, global revenue for Moody's Analytics of $241 million was up 15% from the first quarter of 2013.

The impact of foreign currency translation on MA revenue was negligible.

US revenue grew by 14% year-over-year to $110 million.

Non-US revenue of $132 million increased 16% from the prior-year period, and represented 54% of total Moody's Analytics revenue.

Excluding the December 2013 acquisition of Amba Investment Services, revenue increased 10% year-over-year.

Moving to the lines of business for MA, first, global research data and analytics or RD&A, revenue of $141 million increased 9% from the prior-year period, and represented 58% of total MA revenue.

RD&A's customer retention rate remained in the mid-90s percentage range, and we continue to see strong performance in credit research sales and content licensee.

RD&A's US revenue was up 7%, and non-US revenue was up 11%, as compared to the first quarter of 2013.

Second, global enterprise risk solutions or ERS revenue of $60 million grew 13% against the prior-year period due to growth in subscription revenue and software maintenance fees.

US and non-US revenue increased 14% and 12%, respectively, against the same period last year.

As we have noted in the past due to the variable nature of project timing and completion, ERS revenue remains subject to quarterly volatility.

Trailing 12 month sales and revenue for ERS have increased 9% and 11%, respectively.

Lastly, global professional services revenue grew 45% to $41 million, primarily reflecting the December 2013 acquisition of Amba Investment Services, and continued growth in revenue from Copal Partners.

US and non-US revenue increased 70% and 35%, respectively, year-over-year.

Excluding Amba Investment Services, professional services revenue increased 7% from the first quarter of 2013.

Turning now to expenses, Moody's first-quarter expenses declined 4% to $434 million compared to the first quarter of 2013, primarily due to lower legal expenses, partially offset by increased compensation expenses for additional headcount.

The impact of foreign currency translation on operating expenses was negligible for the quarter.

Moody's reported operating margin for the quarter was 43.4%, up 510 basis points from 38.3% in the first quarter of 2013.

Adjusted operating margin was 46.4% for the quarter, up 490 basis points from 41.5% for the same period last year.

Moody's effective tax rate for the quarter was 28.9%, compared with 25 -- excuse me -- 28.5% for the prior-year period.

The first quarter 2014 tax rate included a benefit from the resolution of a foreign tax audit, while the first quarter 2013 tax rate included benefit from the litigation settlement charge, and the retroactive extension of certain US tax benefits.

Now I will provide an update on capital allocation.

During the first quarter of 2014, Moody's repurchased 2.5 million shares at a total cost of $202 million or an average of $79.21 per share, and issued 2.9 million shares under our annual employee stock-based compensation plan.

Outstanding shares as of March 31, 2014 were 213.7 million, reflecting a 4% decline from the year earlier.

In the first quarter of 2014, the Board of Directors authorized a new $1 billion share repurchase program, which will commence following the completion of the existing program.

Including this new program, as of March 31, 2014, Moody's had $1.6 billion of share repurchase authority remaining.

At quarter-end, Moody's had $2.1 billion of outstanding debt, and $1 billion of additional debt capacity available under our revolving credit facility.

Total cash, cash equivalents, restricted cash and short-term investments at quarter-end were $2 billion, an increase of $275 million from a year earlier.

As of March 31, 2014, approximately 65% of our cash holdings were maintained outside the US.

Free cash flow for the first three months of 2014 of $158 million, decreased $56 million from the same period a year-ago.

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

Thanks, Linda.

I will conclude this morning's prepared remarks by discussing our full-year guidance for 2014.

Moody's outlook for 2014 is based on assumptions about many macroeconomic and capital market factors, including interest rates, corporate profitability, business investment spending, mergers and acquisition activity, consumer borrowing and securitization, and the amount of debt issued.

There is an important degree of uncertainty surrounding these assumptions, and if actual conditions differ, 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 I mentioned earlier, our full-year 2014 EPS guidance range remained $3.90 to $4.00.

For Moody's overall, the Company still expects full-year 2014 revenues to grow in the high-single-digit percent range.

Full-year 2014 operating expenses are still projected to increase in the mid-single-digit percent range.

Full-year 2014 operating margin is still projected to be 42% to 43%, and adjusted operating margin for the year is still expected to be 45% to 46%.

The effective tax rate is still expected to be approximately 33%.

Full-year 2014 total share repurchases are still expected to be approximately $1 billion, subject to available cash, market conditions, and other ongoing capital allocation decisions.

Capital expenditures are still projected to be approximately $90 million.

The Company still expects approximately $100 million in depreciation and amortization expense.

Growth and compliance and regulatory expense in 2014 is still projected to be less than $5 million.

Free cash flow is still expected to be approximately $900 million.

We have modified certain components of 2014 guidance to reflect the Company's current view of business conditions.

For the global MIS business, revenue for the full year 2014 is still expected to increase in the mid-single-digit percent range.

Within the US, MIS revenue is still expected to increase in the low-single-digit percent range, while non-US revenue is still expected to increase in the low-double-digit percent range.

Corporate finance revenue is now projected to grow in the mid-single-digit percent range.

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

Financial institutions revenue still expected to grow in the mid-single-digit percent range, and public project and infrastructure finance revenue is still expected to increase in the high-single-digit percent range.

For Moody's Analytics, full-year 2014 revenue including the December 2013 acquisition of Amba Investment Services is still expected to increase in the low-teens percent range.

Within the US, MA revenue is now expected to increase in the low-double-digit percent range.

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

Excluding Amba Investment Services, revenue for Moody's Analytics is still expected to grow in the high-single-digit percent range.

Revenue from research data and analytics is still projected to grow in the high-single-digit percent range, while revenue for Enterprise Risk Solutions still expected to grow in the low-teens percent range.

Professional services revenue including Amba Investment Services is now projected to grow in the low 40%s range.

Excluding Amba Investment Services, revenue for professional services is now expected to grow in the high-single-digit percent range.

This concludes our prepared remarks.

And joining us for the question and answer session are Michel Madelain, President and Chief Operating Officer of Moody's Investor Service, and Mark Almeida President of Moody's Analytics.

We will be pleased to take any questions you may have.

(Operator Instructions)

Manav Patnaik, Barclays.

Hello, everybody.

So the first question on the ratings business, you mentioned on the structured finance side, that you had some benefit on the commercial real estate side.

I thought the CMBS activity was not that great this quarter.

So I was just wondering is that an implication that there is some share gains happening, or maybe there is some other dynamic that I am not picking up?

Manav, this is Ray.

Yes.

No, you are correct.

We did have strong coverage in the commercial real estate sector in the first quarter.

So that benefited us.

Okay.

And was that specific to, I guess, just the US?

Right?

I mean, is, what is the sort of outlook on Europe in terms of how that performs?

You are correct.

This was a US story in the first quarter.

Commercial real estate in Europe and Asia was not strong in the first quarter.

But the US market is substantial.

And so overall it contributed to the growth in securitization for Q1.

Got it.

And then just a question for Mark, in terms of the -- instead of a bigger strategic vision for professionals services, is Copal, Amba basically with your testing business, whatever, the complete suite?

Or is there something else that needs to be added on to this long-term.

Just trying to understand what the vision is for that particular business?

Manav, I think I'd say that we like what we are doing in that area.

We like the -- we added Amba last year to build out the Copal platform, and we like where that business is going.

We see a lot more growth opportunity there.

In the training and certification business, we, similarly like where we are positioned there.

That business has been a little bit soft for us over the last couple of quarters, and I think that mostly reflects some of the banks having other priorities in other areas that they are funding, rather than focusing on training and development of their staff.

But, I guess, the short answer is, we like where we are in professional services, and we particularly like what we're doing in the outsource, research and analytics side of the business.

(Multiple Speakers).

I think we should probably just point out, that we own two-thirds of the Copal Amba group.

So just want to make sure that everybody is aware of that ownership structure.

Okay.

Fair enough, and actually Linda, if I can just squeeze in one, on the expense side of the glass quarter you talked about it coming in at $450 million, and then ramping up another $40 million by the end of the year.

It came in a little better this quarter.

How should we adjust that for the rest of the year?

Yes, Manav, your observation is exactly correct.

We did do better than we expected on the expense side in the first quarter.

So we still expect the same end point.

So we would ask that you look at a little bit of a steeper ramp.

So we'd like you now to look at $50 million to $55 million of ramp specifically, from $434 million this quarter to -- $490 million for the end of the year.

Okay.

Thank you all.

Andre Benjamin, Goldman Sachs.

Hello.

Good morning.

I first want to follow up on Manav last question.

In terms of the cost beat lower than expected this quarter, do we get a little more color on what exactly drove that?

Was it just a timing issue?

Was it lower comp accrual rates?

Just what makes you believe that you are still going to spend the same amount of money for the full year?

Sure, Andre.

The factors to the positive were lower legal costs, and lower incentive compensation.

I think we had said previously, you might want to look at $35 million for incentive comp for each quarter.

We ran shy of $30 million this quarter, because of the top line was close and EPS was good, but we were a little bit lighter on incentive comp.

Those two positives were offset by overall higher compensation expenses, because we have added more people over the course of the year, and some consulting and IT costs for some of the things that we are looking to do to improve efficiencies around here.

So given what we see now, we do think we will have that ramp over the course of the year.

We are intending to increase headcount to support our revenue growth over the course of the year.

And again, we can't predict exactly what's going to happen with the incentive compensation, but probably that $35 million a quarter is a good as number to use as any.

Thanks.

And for a follow-up, on the RD&A business, could you maybe talk a little bit about how much of the growth, which has been sustained in high-single-digits for the last year or so on a quarterly basis, how much it of that is driven by say, new product innovation versus growth and demand from some of the existing products and pricing?

And are there any things on the horizon that you are seeing, as you talk to customers that would make you lead to believe that you can maybe even see a higher growth rate?

Mark, why don't you address that if you would?

Yes, Andre, I think that what's has been going on in RD&A, which we think has been performing quite well for us is a function of a couple of things.

You had mentioned pricing.

That has been a nice contributor for us.

We have done, I think some very good work on upgrading the product offering, and providing a more complete product, delivering more content through our core research delivery platform, Moodys.com.

So I think that has driven lots of demand.

We've seen very good customer retention.

Linda mentioned that was running in the mid-90%s.

It is as high as we have ever seen it.

So that has helped us very well.

So I think just generally the business is doing quite well, along all of those dimensions, pricing, coverage, and the breadth of the product offering.

It's just performing very well.

Honestly, the underlying growth in the market is fairly limited.

We don't have a lot of new entrants coming into the office market.

So it's not like we are selling to lots of new customers, but we are finding very good demand with the customers that we've got, and we're finding that they've got a very good appetite as we are able to deliver more content through the platform.

Thank you.

Bill Warmington, Wells Fargo.

Good morning, everyone.

Hello, Bill.

I wanted to ask if you could give us some color on your bank clients.

Specifically where they are spending money, where they are not spending money, and how that's impacting your guidance?

In terms of banks purchasing services from Moody's Analytics, or in the ratings side?

The former.

Okay.

Sure.

I'll turn this over to Mark in just a moment, but it's really going to touch on all three areas of the Moody's Analytics business, and has been a significant driver for the Enterprise Risk Solutions component.

But Mark might want to give some more detail on that

Yes.

That's exactly right, Bill.

The -- there is, banks represent a very sizable share of our overall customer base, and we've seen very good demand from the customer set, again owing to some of the things that I mentioned a moment ago in the RD&A area in response to Andre's question.

But also Ray mentioned Enterprise Risk Solutions.

All of the work that banks are doing to meet regulatory requirements, whether that be BASAL III requirements outside the United States, or stress testing requirements in the US, there has been very, very healthy demand from those customers.

We have been doing a lot of work.

We have been getting very good traction in that area, and we continue to be very optimistic about the outlook for demand for our product offering across the product portfolio.

Okay.

And I also wanted to ask for your thoughts on issuance trends, as you are seeing them in the US, and Europe and Asia?

Sure.

I think it was pretty apparent that there was a difference in the first quarter, between what was happening in investment grade and speculative-grade bond issuance, a lot more strength in the investment grade sector.

Speculative-grade was soft really globally.

So it hit us in the US, and Europe in particular, because those are our largest markets for spec grade.

But it was also a factor elsewhere around the world, so we were soft on spec grade.

That was offset though by the strength in the bank loan area.

And the demand for an increase in ratings in bank loans was very beneficial for us.

And I expect we are going to continue to see that, both in terms of demand for variable rate product like bank loans, and the demand for ratings in that sector.

I guess, the last thing I would add to this, is that we also benefited from growth in monitoring fees.

And those monitoring fees are growing along with the new rating mandates, and you will recall this 2013, we had a very healthy growth in new rating mandates globally.

A lot of those were spec grade issuers.

And so, even though spec grade activity was lower, we were gaining from those new relationships in the monitoring fees, rather than the bond issuance fees.

Linda, I don't know if you have anything you wanted to add to that but?

Sure, Bill.

If you want to look at US trends, speaking first about investment grade.

Long dated US corporate bonds were the best returning asset in the first quarter at 7.75%, despite some very negative initial outlooks on the investment grade sector at the beginning of the year.

Issuance for the year, the first quarter in US has been about $300 billion, which was up 10% year-over-year.

We are still looking at sort of flattish for the whole year.

Fund flows have continued to be positive into investment grade, and we would hope to see some shifting of proceeds towards M&A or CapEx.

We haven't fully seen that.

Year-to-date issuance has been about financials, and the three to five year part of the curve has been the largest share of issuance.

Investor demand is also very high there, shorter duration, because of concerns about a rising rate environment.

Now if we had to split it into headwinds and tailwinds, headwinds would be potentially slowing growth in China, reduced stimulus from the Fed, escalation of the Ukraine/Russia situation.

Tailwinds would be that rates remain near record lows,10 year at 2.64% this morning, good investor demand.

And again, the asset class has been performing well.

We've had some funds with strength in Europe as well.

The current pipeline is a little bit on the lighter side, because of earnings blackouts, but we are expecting to pick up on that in May.

And then, the spec grade side, as Ray said, we do see an offset of high-yield bonds by leveraged loans.

Leveraged loan fund inflow continues to be strong, and we have continue to see that trend for a very long time.

The main drivers of the loan market have continued to be refinancing.

But last week we saw some pick up on the leverage side in M&A.

79% of loans syndicated last week were earmarked for acquisition.

So that is an interesting trend.

We will see if that holds.

And we are seeing M&A activity at about 37% of the calendar going forward.

And 59% of the combined and announced calendar.

So again, we will see what happens.

Yields continue to be helpful.

CLO issuance is also healthy, but again that is not set to the high-yield market for straight bonds.

And we continue to see that, that is a little bit weaker, $75 billion of issuance versus $100 billion last year.

So I think -- those are some of the overall trends and what we are seeing, in terms of the strength and weakness in the various markets.

Any other detail you might need?

Very helpful.

Thank you.

Sure.

Peter Appert, Piper Jaffray.

Linda, actually I need one more detail, please?

And that is the -- we saw that mega deal, this week or last week I can't remember where in the international high-yield market?

Did you read anything into that, in terms of maybe using up the logjam in the high-yield market?

I think that we might want to have Michel comment on that.

Michel, any thoughts on whether that is a trend starter?

Well, I think that -- we view it as really something that is a bit of a game-changer in terms of scale and size of the deal, and the opportunity to create for -- sending of large transactions in Europe and some other markets.

So from that perspective, I think that was a very welcome event, and you have seen it, it has been a very successful deal as described, and in a good condition.

So I would qualify that as a positive sign.

But no indication that the backlog is specifically picking up in the context of the favorable response?

This is an M&A driven transaction.

So you have seen there's a number of -- this is obviously something that tends to be very event-driven.

And to the extent that we see more M&A activity, is what it means that we'll see more of these transactions.

But again, we view that as a positive development for the market.

Great.

Understood.

And Peter, I would just add that with the ability of potential M&A transactors to see the degree of market appetite for these larger deals, you have to put that in the positive category.

Right.

Absolutely.

And then, I wanted to if I could ask Mark a question.

Since this is Mark Almeida day, on the things call, clearly.

I saw year-to-year improvement in the Analytics margins in the current quarter.

The numbers had been drifting lower over the last couple of years.

I am wondering, Mark, if you would call that a trend?

Are we -- at the point where we are going start to see some leverage from the investments you made in the last couple of years?

Well, let's -- our goal is certainly to move the business to higher margins over time, and we are doing an enormous amount of work to get us there.

I would just caution you a little bit, Peter, on the timing of that.

I think for us to get to the margins that we are aiming for, we have still got a lot of work to do.

And we have got to build more scale into the business, and also we have got to make a number of our product offerings, particularly in Enterprise Risk Solutions more scalable, and more easily configurable and replicable from customer to customer.

So there is a fair amount of work going on there.

So again, that is clearly our objective.

We are very focused on that.

But I would be real blunt to declare victory on that, just on the basis of what you have seen in this quarter.

I actually thought that -- the first quarter was interesting, because it is with dilution from Amba, correct?

What was the impact of Amba on the margin?

Peter, I'm not sure were going to break out the impact of the Amba on the margin, other than that we said that the Copal Amba group has Moody's-like growth rates, and Moody's-like margins.

So you might want to do a little reverse engineering there, but I am not sure we are going to in for that specifically

So Amba theoretically was accretive to the margins.

So I guess, Mark, the message is that it is really about the risk software business, in terms of where that margin leverage is going to come in?

Absolutely.

And again, there is a whole program of activity in that line of business to get us there.

But that program is a program that is going to start to have meaningful impact on the bottom line over a period of years, rather than quarters.

And then, just one quick last thing.

Linda, should we assume the share repurchases are relatively even through the year?

Yes, Peter.

We do adjust a bit, based on what we have seen from market conditions, a couple of comments there.

We do have heavy issuance of shares in the first quarter.

That is when we primarily do the issuance for our previous year compensation plan, so that is particularly heavy in the first quarter.

And if we move through the year, we are pretty well-balanced out.

I would say, that for the number of trading days we've had in the year, we would note that, to this point we are on pace to achieve $1 billion for the year.

Thank you.

Hamzah Mazari, Credit Suisse.

Hello.

This is Flavio.

I am standing in for Hamzah today.

Thank you for taking my question.

I just wanted to turn back to costs a little bit very briefly.

I was just wondering, when thinking about the leverage you can pull to reduce costs, if there is any relationship between MIS and Copal in the sense of using Copal services, in order to drive down costs of research?

If that's something that you have looked into before?

Fabiola, it's Linda, and Ray or Michel may want to comment on this.

We think we are managing our costs pretty well, while making the required investments in the business.

As you can see, this quarter we have had some particularly strong results from Moody's Analytics.

But we have always felt Moody's Analytics has been a little bit undersung, in terms of its performance.

So we are watching our costs pretty carefully.

But we do want to make sure we make the strategic investments to keep these businesses growing, at the pace that they have been growing.

For the Moody's shared services side, we do use the Copal Amba group.

We have about 100 people that we are using for shared services, and most of the increases in our headcount for shared services would be offshore at this point.

So the whole company is making use of those assets, but particularly in Moody's shared services.

So we have had tremendous margin expansion year-over-year.

We are also guiding to 50 to 150 basis points of further margin expansion this year.

So we like where we are, and we are particularly cautious about the rating agency, and how we handle operations in the rating agency.

So with that preamble, I will let Ray and Michele perhaps add any comments that they want to.

Yes.

Michel, anything you would like to add to that?

No.

I would say that we are effectively looking at the options that the acquisition of Amba and the addition of Copal are bringing to us.

We are already using outsourcing to some extent.

But there are opportunities, and we are working on that.

Perfect.

That's very helpful.

Thank you for the color.

And just as a quick follow-up, when we were talking about leveraged loans making up for some of the drop in high-yield issuance.

And we know that loans have -- rating of loans have lower margins.

Should we look this as also the opportunity of rating those loans, when they come back as CLOs, and those are additional revenues at a much higher margin?

And if you look at leveraged loans, combined with the potential for the CLOs, is that enough to offset the mix of lower high-yield and more loans that come first?

Before we get into the mix issue, one of our jobs here is to correct the urban myth, and that is an urban myth.

In fact, leveraged loan pricing, speculative-grade pricing in general is helpful to us, and does run a bit favorable to investment grade pricing.

So you should not make that assumption that margins are lower on leveraged loans.

So please make that change.

And in terms of mix, we do like leveraged loans because we rate them, and then as you said we are able to rate them again if they are packaged into CLOs.

But I may have missed a little bit of the color for your -- to your -- back to your comment.

And I will ask Ray if he wanted to add anything?

No.

I think your -- Linda's correction on the profitability of the two different areas is important.

But otherwise, your observation is correct, Fabiola, about the fact that these loans at least have the potential for being repackaged into additional securities.

Great.

That's very helpful.

Thank you.

Sure.

William Bird, FBR.

Hello, Bill.

On your guidance, maybe you could speak to what accounts for the slight downward tweak to your Corporate Finance revenue outlook.

And then, I have a follow-up.

Sure.

There are a couple of things, and I would say the first is that the market -- I would observe that the market has not changed in the direction that I think the consensus view was earlier in the year, in terms of higher interest rates characterized by stronger global economic momentum.

In fact, we are seeing something of the opposite.

Now that's good for refinancing, but refinancing has really been the driver for the last few years.

And so, while the refi part of that market continues, it difficult for us to project that as being a source of strong growth in the corporate sector at this point.

So what we are really looking at is whether these other drivers, M&A and capital expenditure are going to take on a more prominent role, and we'll see.

There is some reason to be optimistic about what is going on in M&A, but that was pretty recent.

So we are -- as I said, on some previous calls, I hope we are being cautious on that, but we'll see.

The other two things I would just point to are, that we have seen some slower growth in Asia, and the geopolitical uncertainty coming out of Russia and the Ukraine is not helpful.

So again, we have factored that into our outlook.

And maybe you could just speak to Europe?

How would you characterize this state of your business right now in Europe?

Well, I will invite my colleagues to make some comments, but I think the business in Europe is quite healthy.

The regulatory situation in Europe has been somewhat challenging, as we have talked about on previous calls.

But there has been increased stability in Europe, and that is encouraging -- and stability in the public sector, and that is encouraging for increasing confidence in the private sector, and encouraging business activity and borrowing in the private sector.

So for the outlook, that stability is clearly a precursor to better activity, and we are going to have to see whether the economic momentum picks up on the European side.

Michel or Mark -- let's start with Michel, just from a capital markets perspective, and see if there is anything you wanted to add.

I mean, the only point I really would add, is something you have both forward and in previous calls is really that in Europe, the size of the continued benefit from business [remediation], and that is really a very important favorable development for us.

But that is the only point I would make.

Just --

Final question -- just given just the spike in your revenue growth in MIS in the year-ago quarter, is it reasonable to think MIS revenues could be down in Q2?

Well, it is certainly possible, but we do think we are going to be able to put points on the board in Q2.

So our central case is for growth.

Thank you.

Craig Huber, Huber Research Partners.

Great.

Thank you.

Can you -- just first question, can you just comment a little further on what you are seeing on the ratings business over in Asia?

Yes.

The -- I think we have to separate cyclical from secular.

I think the long-term story in Asia is very positive, and I think we feel that we are well-positioned in the key Asian markets, whether it's through our own offices, or through joint ventures, or investments in places like Korea, China, and India.

Cyclically, we have seen some softness in the first quarter.

The securitization market in Asia was weak.

And really because of among other things, the downturn in speculative-grade issuance globally, we also saw some weakness in the Asian market on this spec grade side.

So I think we are going to continue to be dealing with some of these short-term issues in Asia, but the long-term story is something we are very enthusiastic about.

My second question, please.

Your non-transaction revenues within your ratings business had a very strong quarter, both sequentially and year-over-year.

Can you just touch upon what's been driving that?

Sure.

There is -- I am the growth in the monitoring fees is probably, I think the most important driver there.

We do have some growth in program relationships, large frequent issuers that are paying annual fees, and that' is certainly helpful.

But the growth in new rating mandates that we have been picking up the last couple of years, and the fact that those rating relationships translate into annual monitoring fees has been a big pickup for us.

Craig, it's Linda.

Before I get into the usual conversation that you and I have, having spent the better part of the last three weeks in Asia, and Michel may want to comment on this further -- we continue to be pleased in what we are seeing regarding our business in China, both domestic with CCXI and cross border.

I think our China compendium says, we have about 140 cross-border rated companies now coming out of China.

And I think, if I have got, and my memory serves, we are adding about 30 of those a year.

They start off in our CCXI business as domestic issuers, and then as they grow in size and scale, they become cross-border issuers, as they move over to our MIS business.

On part of both MIS and Moody's Analytics, and for that part Shared Services as well, we are investing in China.

It is a growth area for us.

And we have an effort afoot to make sure that we have our Greater China strategy correct, and that we are supporting the growth particularly in that part of the region.

And before we go on to on to other things, maybe I will pause for a minute, and just see if Michel or Mark want to comment a little further on China specifically?

Michel, anything from your?

No.

I think you pretty much covered it, Linda.

Okay, Mark?

Yes, and I guess we would also note that Craig, that we are tendering for the 55% of ownership of our IKRA business in India.

Those who are reading carefully, page 12 of the balance sheet, you will see item on there, which is restricted cash which is cash by regulation we had to set aside for that tender, which is for everyone information going through its usual regulatory review processes.

And we will update as we have something further to say if that opens, and that moves along.

So I just wanted to make sure everybody is aware that that's going on.

But that would be another indication of our investment in our business in Asia.

So with those commercials, Craig, what else can we do for you?

I would like to ask you, Linda, if you could break down on a percentage basis in dollars if you would, high-yield versus bank loans versus investment grade within Corporate Finance, and then also the three main sub segments -- ?

Sure.

We will start with corporate finance for you, Craig, as we have said, $264 million for this quarter.

That is up from $258 million last year.

The percentage breakdown, investment grade was 18% of revenues which is about flat to last year.

Spec grade high-yield bonds, down to $52.9 million.

That's 20% of the corporate finance line versus last year's 29%.

Bank loans, the opposite, were up to about $67 million, which is 25% of the Corporate Finance revenue versus 22% last year.

And again, those lines offset each other.

And other accounts, as you had noted correctly, Craig, that line has moved up to $97 million from $82 million, and that is 37% of the total.

Again, it's important to call out, that globally across all of Moody's, investment grade revenues represent only 7% of Moody's corporate revenues.

And that is just something that we think sometimes is not fully appreciated.

And we do also see an over-focus on the US.

So it is important that these trends are looked at on a global basis, and that spec grade and investment grade are considered in total.

We go on to the SSG, Craig, first of all, the total for structured was $95 million, up from $93 million last year.

ADS, about flat at 24% of revenue.

It's about $23 million.

RMBS, is still about flat at $18 million.

That is 19% of revenue, about the same to last year.

Commercial real estate, at 31% versus 28% last year, up to $29 million this year.

And Structured credit, which includes CLOs, $25 million.

That is 26% of the structured revenue line, versus 29 % at the same time last year.

Moving on to SIG, $85 million revenue for the first quarter of this year.

And banking constituted 67% of that, $57 million.

Insurance constituted 25%, $21 million, and managed investments, up to 8%, $6.6 million, which is up from last year's 4%.

And then lastly, public projects and infrastructure, $80 million for the quarter.

And as Ray had talked about public finance and sovereign, $37 million, down from last year's $42 million.

That is 46% of the PPIF line.

[Munis].

$3.8 million, which is 5%, same as last year.

And then, project and infrastructure, $40 million is up from last year, and that's 49% of revenue.

And again, we have talked about -- we have seen project and infrastructure being one of the beneficiaries of the disintermediation that Michel spoke about.

We are seeing that a number of these deals are coming through the bond market, in project and infrastructure finance, which previously would have been funded by banks.

So that's a helpful trend for us.

So I think that's it, Craig, if we have got everything you need.

Okay.

Thank you very much.

Joseph Foresi, Janney Montgomery Scott.

Hello.

My first question here is, how should we think about the impact from the Ukraine?

What is built into guidance from an outlook in that region?

And how do you kind of risk adjust the numbers for that?

Well, it's difficult.

It's fairly easy for us to look at our business in Russia, and that is modest.

So that is not a large driver of any change in outlook.

But beyond that, geopolitical tensions are always difficult to address in an outlook.

Simply because there is the direct consequence of tension, and how widespread that is.

And then there is the collateral impact on business confidence, and willingness to engage in business activity and focus on growth during periods of stress.

So we have factor that into our modest reduction in outlook for the corporate finance area.

And beyond that, we are really just going to have to comment, as views change depending on what happens on the ground.

And Joe, as usual, to take the other side of that, for you, the flight to quality to US Treasuries has made them a very strong returning asset class for the first quarter as well.

It's about the same, 7.75% that I mentioned for long-duration corporate bonds.

So the flight-to-quality has [upped] the price of US Treasuries, and has resulted in the10-year remaining at 2.64%.

We have been happily surprised to see the 10-year at under 2.7%, which I think is perhaps a bit different than many pundits had been calling for at this point in the year.

So a bit of a mixed bag for us, in terms of how it affects our business.

And I hope that gives you kind of both sides of the story for how we think about that.

Yes, that's definitely helpful.

On the Analytics business, obviously there was a positive uptick there.

How sustainable is that step-up in the business?

Should we think of this as accelerating?

Or is there a reason to be maybe a little bit more modest in our thoughts regarding?

Mark, do want to address it?

Sure.

I think that I would characterize it as pretty much in line with our expectations, to be honest.

We had a good quarter organically.

We were at 10%, which we feel very good about.

But we have always thought of this business as a high-single-digit growth kind of business.

So we didn't -- while we are very pleased with the quarter, we didn't feel like the quarter was wildly out of line with our expectations.

So again, Joe, to make sure you understand,10% organic, 15% with the acquisitions.

Again, we would urge everybody to take another look at Moody's Analytics, and what it is able to do.

And as we said earlier, regarding the fact that one of our major customers are banks, and they are looking to use a lot of our services.

We have done very well in the Moody's Analytics in the first quarter.

Perfect.

And then, just the last one for me, just kind of a general question.

How should we think about issuance versus rising interest rate environments?

Is there any sort of rule of thumb, that you could provide, as we look out over -- different commentary from the Fed on the changes in those rates?

Is there a base level for this business, and how do we kind of correlate those two?

We've looked at this historically, and in our investor presentation, you would be able to see some of the historical data that we have been able to collect.

And long story short, is we have had periods in the past of rising interest rates that did have a negative affect on the business, in terms of lower or no growth.

But in more recent periods, we have been able to grow through rising interest rate environments.

I think the reasons for that, include the fact that we have a much more global business over the last 10 to 15 years, than we did back in the early 1990s.

We have a much more substantial business in Moody's Analytics, which is not as susceptible to volatility based on movements in interest rate.

But that all being said, I would still go back to the kind of fundamental idea, that in a rising rate environment, assuming that rate environment is rising because of economic strength, there are going to be substantial -- there is going to be substantial bond market activity and borrowing, for reasons unrelated to refinancing.

So for share repurchase and capital expenditure, mergers and acquisitions, those are all important drivers of issuance in a stronger economic scenario.

And, Joe, it's Linda.

I can recite this from memory.

In 1993 to 1994, interest rates went up 200 basis points over that year long period.

And Moody's revenue, which as Ray said, was much more US-centric at that time barely dipped.

I believe it's 1997 to 1998, interest rates went up 180 basis points, and Moody's revenue continued to trend up.

When we do our first-quarter slide, you will see revenues for the Corporation up 5%.

I would be surprised, if overall global issuance has been up from the fourth quarter of last year.

It is probably going to be flat to down.

So once again, global issuance can be flat to down, and our revenues move up.

So it's very important that you understand that, that interest rates also continue to have trouble breaking above 3% in the 10 year.

We are able to see that in January.

We saw it in September, but we have not seen the 10-year come back through 3% for any sort of sustained period of time.

And there is a piece in the Journal today, that higher interest rates are causing some real issues in the housing market.

So again, rates may move up.

But they surprised us for being lower longer, than perhaps we and a lot of market participants might have expected.

So I think we will end our very long comments there.

Thanks.

Doug Arthur, Evercore.

Yes.

Ray, just on the legal front, it seems like there was some developments in the Calpers case in the first quarter.

Can you just bring us up to date on kind on what inning that's in, and what's the next step?

Thank you.

Sure.

You will recall that we had filed an appeal in California, seeking reversal of the lower court decision denying our motion to dismiss the case, under this, what is called the Anti-Slapp statute in California.

And there was oral argument on that in early April, I think it was April 9. And according to what I have been told, are the rules in California, a decision on that appeal and the oral argument would be expected within the 90 days following that argument.

So nothing is going to move forward, until there is a decision on that?

Correct.

And as we have talked about before, that is just one small piece of a much broader cake, but it is still, in many respects in very early stages.

Okay.

Thanks.

Tim McHugh, William Blair.

Hello, it is Stephen Sheldon for Tim.

Most of my questions have been answered.

But just in terms of headcount growth, you have talked before about expecting roughly the same growth in 2014 as you saw 2013, which I think was roughly 9%.

Any changes to that?

And maybe, just add some additional color on where you are planning to add?

Sure.

Glad to have you on, Steve.

The headcount growth excluding Amba, year-over-year has grown 10% here at Moody's, and a lot of that growth has been offshore in lower-cost jurisdictions.

If you split it out, the majority of the additions have been in the lines of business.

And we do expect probably 9% headcount growth this year, and again a number of those -- that growth will be offshore.

But again, we are driving 10% and 15% growth in Moody's Analytics, and we have been putting up double-digit growth on the revenue line.

And in order to support that, it is important that we are able to add headcount to support, both the ratings and the Moody's Analytics side.

So, yes, we would continue to expect about 9% headcount growth, but we are judicious about where we are adding those additional jobs.

Okay.

Thanks.

And it appears there are no further questions at this time.

I would like to turn the conference over to Mr. Ray McDaniel for any additional or closing remarks.

Okay.

I want to thank everyone for joining us, and I would also like to remind you that Tuesday, September 30, we will be hosting our annual investor day at our headquarters here in Manhattan.

For more information on this, go to the Investor Relations website as we get closer to the event.

And again, thank you all for joining.

We will talk to you in July.

This concludes Moody's first 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.