穆迪 (MCO) 2015 Q3 法說會逐字稿

Good day and welcome, ladies and gentlemen, to the Moody's Corporation third quarter 2015 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.

(Operator Instructions)

I would now 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 third quarter results for 2015, as well as our updated outlook for full-year 2015.

I am Salli Schwartz, Global Head of Investor Relations.

This morning, Moody's released its results for the third quarter of 2015, as well as our updated outlook for full year 2015.

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

Moodys.com.

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

Also making prepared remarks on the call this morning is Linda Huber, Moody's Executive Vice President and Chief Financial Officer.

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, 2014 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 statements, 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 will begin by summarizing Moody's third quarter and year-to-date 2015 results.

Linda will follow with additional financial detail and operating highlights.

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

In the third quarter, despite uneven capital markets activity and foreign exchange headwinds, Moody's achieved revenue of $835 million, a year-over-year increase of 2%.

On a constant currency basis, Moody's revenue grew 7%.

Operating expense for the third quarter was $485 million, up 4% from the third quarter of 2014.

Foreign currency translation favorably impacted expense by 4%.

Operating income was $350 million, flat versus the prior year period, but an increase of 5% on a constant currency basis.

Adjusted operating income, defined as operating income less depreciation and amortization, was $378 million; an increase of 1% compared to the same period last year.

Operating margin for the third quarter of 2015 was 41.9%.

Adjusted operating margin was 45.3%.

Both GAAP and non-GAAP EPS increased 14% from the prior year period to $1.14 and $1.11, respectively.

Non-GAAP EPS excludes a $0.03 benefit from a legacy tax matter in the third quarters of both 2014 and 2015.

Turning to year-to-date performance, Moody's revenue for the first nine months of 2015 was $2.6 billion, an increase of 7% from the first nine months of 2014 or 11% on a constant currency basis.

Revenue at Moody's Investor Service, MIS, was $1.8 billion, an increase of 5% from 2014 or 10% on a constant currency basis.

Moody's Analytics, or MA, a revenue of $829 million was 10% higher than the prior-year period or 15% on a constant currency basis.

Operating expense for the first nine months of 2015 was $1.5 billion, up 9% from 2014.

Foreign currency translation favorably impacted expense by 4%.

As we mentioned last quarter, this year-to-date growth reflects incremental expense from our 2014 and 2015 acquisitions.

As we approach the end of 2015, the impact of acquisitions on expense growth will moderate; therefore, we are maintaining our full-year guidance for expenses to grow in the mid single-digit percent range.

Operating income of $1.1 billion increased 4% from 2014 or 10% on a constant currency basis.

Adjusted operating income of $1.2 billion increased 5% from the prior-year period.

Operating margin for the first nine months of 2015 of 43.5% was down from 44.5% in 2014.

Adjusted operating margin of 46.8% was down from 47.3%.

On a constant currency basis and excluding our 2014 and 2015 acquisitions, operating margin and adjusted operating margin would have increased approximately 50 and 60 basis points, respectively, year-over-year.

GAAP EPS for the first nine months of $3.54 was up 2% from $3.48 in the prior-year period.

Non-GAAP EPS of $3.51 for the first nine months of 2015 grew 14% from $3.09 for the same period in 2014.

Non-GAAP EPS excludes a $0.03 benefit from a legacy tax matter in both the year-to-date 2015 and 2014 periods.

Year-to-date 2014 non-GAAP EPS also excludes a $0.36 gain resulting from Moody's acquisition of a controlling interest in ICRA Limited in the second quarter of 2014.

We are reaffirming our full-year 2015 EPS guidance of $4.55 to $4.65, which now includes a $0.03 benefit from a legacy tax matter.

I'll 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 third quarter increased 2% to $835 million and was up 7% on a constant currency basis.

US revenue of $482 million was up 7% from the third quarter of 2014.

Non-US revenue of $353 million was down 4% and represented 42% of Moody's total revenue.

Recurring revenue of $447 million represented 54% of total revenue.

Looking now at each of our businesses, starting with Moody's Investor Service, total MIS revenue for the quarter was $548 million, flat to the prior year period, but up 5% on a constant currency basis.

US revenue increased 7% to $353 million.

Non-US revenue declined by 10% to $196 million and represented 36% of total MIS revenue.

Moving now to the lines of business for MIS: first, global corporate finance revenue of $248 million in the third quarter was down 5% from the prior year period.

On a constant currency basis, revenue declined 1%.

This result reflected lower levels of global speculative grade issuance, partially offset by strong US investment grade issuance, primarily from increased M&A activity.

US corporate finance revenue increased 5%, while non-US corporate finance revenue decreased 22%.

Second, global structured finance revenue for the third quarter was $113 million, up 10% from the prior-year period, or 15% on a constant currency basis.

Growth was primarily the result of strength in US commercial real estate finance, as well as an increase in structured credit monitoring revenue.

Additionally, we saw increased structured finance issuance in EMEA, primarily in RMBS and structured credit.

US revenue was up 12% and non-US revenue was up 6%.

Third, global financial institutions revenue of $90 million decreased 3% compared to the prior year period, primarily given unfavorable foreign currency translation on a weaker euro, partially offset by stronger US bank rating revenue.

On a constant currency basis, financial institutions revenue was up 4% year over year.

US financial institutions revenue was up 8%, while non-US revenue was down 10%.

Fourth, global public project and infrastructure finance revenue increased 2% year over year to $91 million.

On a constant currency basis, revenue increased 7% year over year.

Increased US public finance activity was partially offset by a decline in project finance issuance.

US public, project, and infrastructure finance revenue was up 2% and non-US revenue was up 4%.

MIS other, which consists of non-rating revenues from ICRA and Korea Investor Service, or KIS, contributed $7 million to MIS revenue for the third quarter compared to $4 million in the prior-year period.

This increase over the prior year period was primarily due to consolidation of the non-ratings business lines of ICRA.

Turning now to Moody's Analytics, global revenue for MA of $287 million was up 6% from the third quarter of 2014 or 11% on a constant currency basis.

US revenue grew by 8% year over year to $130 million.

Non-US revenue increased 5% to $157 million and represented 55% of total MA revenue.

Moving now to the lines of business for MA: first, global research data and analytics, or RD&A, revenue of $158 million increased 10% from the prior year period or 15% on a constant currency basis.

Growth was mainly due to strong performance in the credit research and content licensing businesses.

Additionally, the October 2014 acquisition of Lewtan Technologies contributed approximately 3 percentage points of growth in the quarter.

US RD&A revenue was up 16%, while non-US revenue was up 3%.

Second, global enterprise risk solutions, or ERS, revenue of $92 million grew 14% from last year or 18% on a constant currency basis.

This growth was driven primarily by strong project delivery in the regulatory solutions and loan originations verticals.

US ERS revenue was up 7% while non-US revenue was up 17%.

Trailing 12-month revenue and sales for ERS increased 27% and 12%, respectively.

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

Third, global professional services revenue declined 19% to $37 million.

On a constant currency basis, revenue declined 14%.

This result reflected the impact of exiting certain Copal Amba product lines in late 2014, as well as attrition outpacing sales growth at Copal Amba as global banks adjusted their business activities.

US professional services revenue was down 28%, while non-US revenue was down 13%.

Turning now to expenses, Moody's third quarter expense increased 14% to $485 million, primarily due to incremental costs from 2014 and 2015 acquisitions, additional compensation expense for merit increases and hiring, as well as investments in technology.

Foreign currency translations favorably impacted expenses by 4%.

As Ray noted, Moody's operating margin and adjusted operating margin were 41.9% and 45.3%, respectively, for the third quarter.

On a constant currency basis, and excluding our 2014 and 2015 acquisitions, operating margin and adjusted operating margin would have increased by approximately 40 basis points and 70 basis points, respectively.

Moody's effective tax rate for the quarter was 32%, down from 33.5% in the prior-year period.

The year-over-year decline was largely due to reduced state and local taxes, resulting from changes in New York State and New York City tax laws.

I'll now provide an update on capital allocation.

During the third quarter of 2015, Moody's repurchased 2.9 million shares at a total cost of $304.9 million or an average cost of $105.03 per share and issued 295,000 shares as part of its employee stock-based compensation plan.

For the first nine months of 2015, Moody's repurchased 8.9 million shares at a total cost of $905.6 million or an average cost of $101.37 per share.

Outstanding shares as of September 30, 2015 totaled 197.7 million, down 5% from the prior year.

As of September 30, 2015, Moody's had $658 million of share repurchase authority remaining.

At quarter end, Moody's had $3.1 billion of outstanding debt and $1 billion of additional debt capacity available under our revolving credit facility.

Total cash, cash equivalents, and short-term investments at quarter end were $1.9 billion, up $263.7 million from December 31, 2014.

Free cash flow in the first nine months of 2015 was $827.6 million, up 27% from the first nine months of 2014, primarily due to changes in working capital.

As of September 30, 2015, approximately 75% of Moody's cash and cash equivalents were maintained outside the US.

On October 21, 2015, Moody's announced a quarterly dividend of $0.34 per share of Moody's common stock payable December 10 to stockholders of record at the close of business on November 20.

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

Thanks, Linda.

I'll conclude this morning's prepared comments by discussing the changes to our updated full-year guidance for 2015.

A full list of Moody's guidance is included in our third quarter 2015 earnings press release, which can be found on the Moody's Investor Relations website at IR.

Moodys.com.

Moody's outlook for 2015 is based on assumptions about many macroeconomic and capital market factors, including interest rates, foreign currency exchange rates, corporate profitability, and business investment spending, mergers and acquisitions, consumer borrowing and securitization, and the amount of debt issued.

These assumptions are subject to some degree of uncertainty and results for the year could differ materially from our current outlook.

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

Specifically, our forecast reflects exchange rates for the British pound and the euro of $1.52 to GBP1 and $1.12 to EUR1, respectively.

As I noted earlier, we are reaffirming our full year 2015 EPS guidance of $4.55 to $4.65, which now includes a $0.03 benefit from a legacy tax matter.

However, certain components of our 2015 guidance have been modified to reflect our current view of business conditions.

Global MIS revenue for the full year 2015 is still expected to increase in the mid-single digit percent range; however, non-US revenue is now expected to decline in the mid-single digit percent range.

Within MIS, corporate finance revenue is now expected to be approximately flat and public, project, and infrastructure finance revenue is now expected to increase in the high single-digit percent range.

Global MA revenue for full year 2015 is still expected to increase in the mid-single digit percent range; however, non-US revenue is now expected to be approximately flat.

Full-year 2015 capital expenditures are now expected to be approximately $90 million.

This concludes our prepared remarks and joining us for the question and answer session is Michel Madelain, President and Chief Operating Office of Moody's Investor Services, and Mark Almeida, President of Moody's Analytics.

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

(Operator Instructions)

We'll take our first question from Manav Patnaik with Barclays.

Hi, thank you.

I just wanted to clarify, just on the organic growth for the quarter and also implied in guidance, so the 7% total constant currency, what's the organic number?

And I guess is that just ICRA and Lewtan or is there anything else in there?

And just on the guidance, what the contribution assumption is?

Sure.

As you noted, the constant currency growth for Moody's was 7%, and if we look at constant currency growth organic only, it would be 5%.

That excludes ICRA, Lewtan, and we had the small acquisition earlier this year of Equilibrium.

Got it, okay.

And then I just wanted to understand, maybe get a little more color on how you guys are looking at the environment today.

Obviously, I think guidance implies fourth quarter will be another uninspiring issuance environment.

And then I just wanted to try and get your initial feelings of what 2016 trends might look like, with the context of what you have talked about before in terms of heavy maturity and refinancing pipeline coming sort of in the back half of the year.

Just trying to get an understanding, is it going to be a tale of two halves?

Any sort of color you can give would be helpful.

I'll let Linda start off with this.

I know she has some information.

And then I'll add some color as appropriate.

Sure, Manav.

I'll go through the three sectors that I usually go through: US investment grade bonds, US high yield, and US leverage loans, with the reminder, again, that this is a consensus view from speaking to a number of the investment banks' trading desks and does not represent a Moody's view, but rather, again, the consensus of these investment banks.

Now, this has been a particularly difficult period, which makes our job for the end of the year here a little bit more difficult to forecast, which is what we're trying to work through.

Now, for investment grade bonds, the expectation for October now is about $126 billion of US issuance in investment-grade bonds.

It has been very choppy, however.

Late August and early September had three weeks of zero issuance and October, until this week, had been quite light for supply.

Only recently, only this week, have we seen issuance pick up.

We're looking at about $38 billion for this week.

Yesterday, of course, with the Microsoft deal, we did see $19.5 billion in issuance.

Now, a lot of this is caused by spreads.

Spreads widened out and in fact, now they're 5 basis points higher than their lows in August and they've retraced or come back in 15 basis points from the highs in early October.

So it is possible that, with spreads coming back in and only being 5 bps points up from August, that we could continue to see heavier issuance as we move out of November out of the blackout periods.

And in fact, the pipelines look pretty good for next week.

We're offsetting that against the view with the potential for the December rate hike.

The futures curves are now showing 50% possibility of the December rate hike.

But again, we think that the rate hike is not all the news, that in fact, the spread piece is very important, as well.

Those are some of the factors that we're looking at and the pipeline is described as robust.

So the pipeline we can see currently is $200 billion.

So some mixed, mixed views there, but some very good improvement for next week.

But again, we feel we have probably six more weeks for this year for issuance, maybe seven.

High yield is a different story.

October month to date had been about $3 billion.

Year to date, about $230 billion, which is down 15%.

The market's been quite subdued.

September and October were the two lowest volume issuance months in 2015 and the issue here is spreads and spreads are 40 basis points wider than at the August lows, but they have come in 100 basis points from their recent highs in October.

So you might want to think of this as spreads have come in sort of 2/3 from their recent highs, which is a good trend.

We're seeing very good funds inflows into high yield bond funds, which is good.

And we're expecting some activity pickup in November, given that the technical backdrop is improving.

There are a lot of deals in the market and that should be helpful.

The pipeline is described as moderate.

And finally, leverage loans month to date, $15 billion in the US, year to date $290 billion, which is down 30% year over year.

Since early August, volumes have been low, but leverage loans have withstood volatility in the market better than high yield bonds.

Some stability looks to be helpful and we see that CLO creation continues, which is helpful to us.

On the leverage loan front, weak fund inflows and a slow-ish new issue calendar.

We're still working with the new Shared National Credit, or SNC rules, and the pipeline here is described as moderate.

Interestingly, if you look to Europe, we've seen some improvement in the tone to Europe in the past seven to 10 days.

Mr. Draghi's comments regarding the ECB and the potential for more QE has been helpful and we're seeing good reverse Yankee issuance.

Proctor & Gamble had a big deal this week.

However, as the euro US dollar basis widens, that may back off a little bit.

Interestingly, we would note, with about 2/3 of the companies reporting, that top line sales ex-energy for US companies reporting in the third quarter is only 0.4%.

In that regard, we're actually feeling pretty good about these numbers that we've put up.

And I'll let Ray go to the prognostications of 2016, which is still a ways off, Manav.

Just a little bit more color.

I would also note that the pipelines in structured finance are good, but the movement through those pipelines is, again, going to be sensitive to spreads.

And so we'll have to see if spreads continue to move in from where they were earlier in October.

Secondly, we still think that the non-US business is going to be probably more challenged overall than the US business through to the end of the year.

The good news looking ahead to 2016 is, at least where exchange rates are today, we will not have the same material impact on performance in 2016 that we've had from the movement that we saw about a year ago on the euro and the pound against the dollar.

Obviously, that's an assumption that rates stay about where they are now.

Looking ahead to next year, to the extent that we see an increase in federal funds rates, and that's an indication of a belief that we have some sustainable economic growth here in the US, I think that's a good news story.

We don't expect to see rates move rapidly or dramatically, but we would like to see a signal that the economy looks like it's on a sustainable growth path and I think that's going to help both the US and non-US businesses.

And also, looking out into 2016 as we get later in the year, we begin to approach the refinancing walls that have built up in the corporate finance sector in particular.

So I would keep an eye out for that, looking out over the course of next year.

Okay.

Thanks, guys.

This is super helpful.

I'll get back in the queue.

Thanks, Manav.

And we will now go to Bill Bird with FBR.

Thank you.

Ray, was wondering if you could talk a little bit about structured finance.

Looks like you had a nice uptick in growth.

Do you think that uptick is durable?

And then separately, for Linda, how do you think about managing expenses in the context of trends being a little bit slower and maybe you could give us the incentive comp accrual?

Thank you.

Sure.

Yes, we do think that the growth we've seen in structured finance is durable.

As I mentioned a couple of minutes ago, it is going to be sensitive to spreads and so we have to keep an eye on that.

We've seen particular strength in commercial real estate and that strength has been really because the transactions that are being brought to market are conduit transactions, which is where we have our strength and there is a significant amount of refinancing that has to occur there.

We've also seen some good growth in European RMBS and we're going to look to see how sustainable that is, but it was a good news story in Q3.

Overall, again, I think we would expect to see more strength in the US than we will see outside the US for the near term, but see some promising developments with respect to European structured finance.

And Bill, on your expense question, we are very carefully moderating our expenses in light of these conditions, and we think we've shown pretty good discipline down the P&L.

The fact that 2% revenue growth is 14% EPS growth, we're pretty pleased about that.

What we see is that operating expenses in the third quarter were up 4% and we worked hard to make sure we keep the level reasonable.

I think we would note first that our head count is up 4% period over period and we're very careful on the hiring front.

Most of that hiring has gone to the lines of business that are the revenue producers, as opposed to shared services where most of our head count has been in the lower cost jurisdictions.

Secondly, you'll see that our CapEx, we're looking at about $90 million for this year.

That's down a bit from what we had expected when we first did guidance.

So we're being very, very careful about our CapEx and being cautious about what we're doing with our projects.

The reason for that CapEx spending being pulled in is because our projects are actually coming in at a lower cost than we expected, which is remarkable and positive, and we are also looking at our performance and our incentive compensation, as you noted.

Very important that everyone understands that incentive compensation is the first line of defense to protect the margin.

Again, the margin was 41.9% in the quarter, which we're pretty pleased about.

So we flexed the incentive compensation line and given our views on the fourth quarter and what's happened here in the third quarter, last year, in fact, during this period, we put up almost $47 million of incentive compensation.

This year, for third quarter, we put up $33 million in incentive compensation, so there is $14 million of savings, which goes back to the shareholders, which, in fact, is very helpful in protecting the margin.

So incentive compensation is, in fact, only 10% of comp in this quarter and last year at this time, it was 15%.

So again, incentive compensation flexing down $14 million, that's 30%, which is a pretty heavy adjustment, but just shows what we do in the incentive comp line in order to make sure that we're doing the right thing.

Now, sequentially, if you want to think about incentive comp, we are looking at a level that probably should be about the same if the fourth quarter looks like what we expect it to.

However, Bill, I would very strongly caution that if things break to the upside, we may have to accrue a little bit more for incentive compensation in the fourth quarter.

So flattish, if things come in as we expect.

But as I just said, as conditions are seemingly improving a bit, we could flex to the upside and that would take incentive comp up a bit.

So it's a pretty full answer to your question and hope that hits everything you wanted to know about.

Thank you very much.

Sure.

We will now go to Andre Benjamin with Goldman Sachs.

Thanks.

I guess now it's good afternoon.

My first question, we can all observe a lot of the macro factors and issuance numbers to come out daily or weekly, but I'm wondering, is there anything that you're doing that's new in terms of the value proposition that you're offering the clients and a way of capturing more of the value in the form of price as opposed to just being driven by the volume trends that we should be mindful of as we forecast.

We have communicated at a high level of the contribution that we expect price to make and certainly, we are looking at what we can do in terms of the value proposition to support price increases and this is our research, our communications, the quality of our insights.

All of that is a package on the ratings side of the business in order to maximize the value proposition.

We are also looking at costs in terms of thinking about pricing, but really, the priority is the value proposition.

That's the same story on the Moody's Analytics side as well.

That is the amount of information we can deliver, the data that we can deliver, how useable we can make that data, and really, looking at the overall utility value that we give through the data and service projects that we have on the Moody's Analytics side.

So it's both sides of the business.

Andre, it's Linda.

I would note that in terms of the research we're putting out, we note specifically very high interest in our comments, specifically on Volkswagen, Glencore, the City of Chicago, Commonwealth of Puerto Rico, also the pieces we've been putting out on the banking system, and also China and India.

So our research effort has really been beefed up and we feel it's very helpful to the investors.

We had commented on, at investor day, 3% to 4% price increases.

Again, we're very thoughtful about how we handle that.

We would note there's good pricing power in Moody's Analytics, as well as Moody's Investor Service.

But again, we do feel that getting a rating provides 25 to 50 basis points of better spreads for issuers as we hear from various capital markets desks.

So we do believe that ratings provides real value for issuers in the marketplace.

So hope that helps you.

Are you seeing any change in the structured finance competitive environment?

I know one of your main competitors that had some settlements in that area has been investing to improve and there may be some other smaller players out there that are looking to go after this business as well.

So are you seeing any changes out there?

That's true and that's not a change.

It has always been a business that's been an area of interest for our competitors, not surprisingly.

But it's also a business that is very interested in the quality of opinion and insight, especially in more distressed markets and that works to Moody's benefit.

So we certainly want to maximize the value of our commentary and the predictive comment of our ratings in that area.

And ironically, we do benefit from some of the stress in the market because that's when Moody's ratings matter most.

Thank you.

We'll now go to Alex Kramm with UBS.

Good morning.

Good afternoon, rather.

Just want to come back to the earlier questions around the environment and issuance trend.

I appreciate all the color.

I guess the comment and question I would make is obviously, we've seen this movie several times over the last two or three years, that issuance dries up, credit spreads blow out, and then things stabilize and everything is good again.

So I guess, and also, with the highlight of flows into bond funds have been increasing again.

So it seems like we might be on that normalization pace again.

But just wondering that when you're talking to DCM desks and others, is there anything that they highlight that might be changed or different this time around that gives you a little bit more concern about maybe not the same deck that we've seen over the last few years several times or nothing new?

Alex, I think this is -- as you've pointed out, these are ebbs and flows in the marketplace that we're quite used to.

I think we would say, generally, we feel we're observing somewhat better information regarding investment grade, as I said earlier, and high yields.

With spreads having retraced 100 basis points, things could break to the positive side, somewhat less so with leveraged loans.

Now, obviously, the short answer is it all depends.

If we get some market stability, that would be terrific and this week has been more stable than October to date, but first three weeks of October were very, very choppy.

So this could go either way and that makes forecasting a little bit more difficult than it usually is, particularly at this late point in the year.

I'll let Ray comment a little bit further on what he thinks.

No, I'm really just echoing Linda's comments.

There has not been any new, and I would characterize distressing, news.

The market uncertainty that built in the late summer/early fall with volatility in Chinese equity markets with uncertainty about the fed's movement on interest rates clearly transmitted through the bond market in terms of volatility and spread widening and now that's beginning to settle.

I would anticipate it's going to continue to settle, absent new and unexpected news.

So, we just have to see.

The fed, I think, has tried to provide clarity.

The ECB has provided clarity.

And broadly speaking, I think those are the kinds of things that are going to help market issuance activity going forward.

It's just, we're late in the year now.

So, we'll have to see how much of a difference it makes.

Alex, one other footnote on the investment grade side.

You're probably aware, the big banks report first as we move through the reporting cycle and as a result of that, they were first to market in October.

So for the first three weeks of the month, 50% of supply came from the FIG issuers and many of those are larger, some of them are on frequent issuer pricing programs.

So that has caused October to be very back-end loaded for us and the corporates would probably be looking to issue now if they come through the blackout periods.

So again, we could see a very heavy November.

Anything over $100 billion in issuance, we view in US the investment grade market as a very good month.

But we've got to see how issuance stacks up against how much more year we have left and we'll see how that goes.

Thanks for that additional color.

But then I guess switching gears, I guess one of the things I think you've talked about as well is there's obviously different reasons why people issue and I think a lot of us always focus on refinancing wall and things like that.

But this year, I think M&A has been a much bigger component than in past years and everybody can make assumptions about the M&A pipeline, but it looks like there's a deal every day and it's certainly different than what we've seen over the last few years.

So just curious if, in terms of the money you make on some of these deals, just broadly speaking, I know it's very detailed, but broadly speaking, any difference between the, quote-unquote, normal issuance from refinancing, CapEx, things like that, normal growth versus M&A.

Maybe the deals are larger, maybe it's more levered to IG, but just generally speaking, do you like one better than the other or no difference?

No, I mean, there's going to be specific instances where we prefer one or the other, but generally speaking, no.

We, we would be indifferent, but welcome activity coming from either source of issuance.

Okay.

Good enough.

Thank you.

We will now go to Denny Galindo with Morgan Stanley.

Hi, there.

Thanks for taking my questions.

It sounds like Europe is driving some of the conservatism on your corporate issuance guidance and rates are lower there and it would seem like it would drive issuance.

Are there any particular countries that are just not issuing as much as you think that they usually would?

Is there any regional weakness over there that you can talk about?

Let me see if Michel Madelain would like to comment on that.

Michel?

Sure.

Thanks, Ray.

No, I don't think there is.

The trends within Europe are pretty generic across the region.

We had investment grade activity in the first quarter.

Since then, it's been very, rather slow.

What we see in [IE] also is shared across the board.

The largest country in terms of issuance than to be UK, France, Germany, and Italy and the trends are very much shared across the board.

Okay.

And then just also on those lines in Europe, could we have an update on disintermediation in terms of like new issuer mandates, that sort of thing?

Is that still growing year-over-year?

Are you still getting new companies to get a new issuer rating or any change in the trend there?

Yes, it's, it's continuing to grow very nicely.

The expectation at this point is we would have probably about 800 new rating mandates, maybe a bit more for the full year 2015.

For those of you who follow this closely, you know that's down from the peak of about 1,000 that we had last year, but it is still very strong compared to the historical new mandate rate.

We're very pleased to see that.

Denny, also, I would note that, as the global banks go public with their new strategies under new leaders, and there are three of those that I can think of right away, you'll notice, and I'm not going to name them, but certain of those global banks have said that they're stepping back from certain markets in certain areas that they feel are not providing appropriate profitability, particularly where capital requirements are high in certain of those market activities.

So we would see that would be a pretty clear view about what's going on, particularly with disintermediation.

But we are seeing changes in strategy with a number of the European banks.

It's just something that should be watched.

That's a perfect segue into my last question.

Professional services, how much exposure do you have to some of these banks that are cutting their employment in professional services?

And are you seeing when they cut employment that they increase your work from professional services or decrease?

I know that you can make the argument that it's helping them save costs by kind of outsourcing more to your professional services group, but any comments there on how much exposure it has to the big bank layoffs and also if you're seeing -- is that positive or negative for you?

Sure.

Denny, it's probably frustrating for you, the answer on professional services and Copal Amba more specifically is, it depends.

The banks react differently to these sorts of stresses and some are increasing their Copal Amba teams and some are making other decisions.

While I've got the floor here for a minute, I'll talk a little bit about professional services.

That business includes basically two things: Mark's training business in particularly, his Canadian Securities Institute business, and the Copal Amba business that I'm running.

So we've had a few issues in this area and as you note, we've been thoughtful about what we're doing with the guidance there.

The year-over-year changes for the third quarter look at about an $8 million decline 2015 versus 2014, and Mark and I have worked through this and about 1/3 of this relates to CSI and mainly, that's due to the FX effect of the weak Canadian dollar.

About 2/3 of what's going on is Copal Amba and we thought we should be clear that last year, we had a reversal of a reserve in the third quarter from the prior period, which, if you take that out, that makes up about half the difference of what's going on with Copal Amba.

So we didn't have any such reserve reversals this year.

So that made the comparable tougher.

Some of this is just -- that's a one-off and that's timing.

So we're seeing good new sales, but there has been some attrition.

And we are seeing some good opportunities, as we said, because banks are laser-focused on costs.

But it takes a bit for all of that to work through the system.

And Copal Amba is being used very energetically within our own Company for Moody's Investor Service and particularly Moody's Analytics and Shared Services.

We're very much growing our own Moody's Shared Services India and that is very helpful to us.

So we think we're in the right place with Copal Amba, but we've got just a bit of choppiness as the global banks adjust what they're doing.

So I hope that helps you out, Denny.

Thanks.

I'll hop back in the queue.

Okay.

Thank you.

And we'll take our next question from Peter Appert with Piper Jaffray.

Thanks.

Good morning.

So the progress on the margin front at Moody's Analytics has been pretty impressive thus far this year.

Basically, I was hoping you'd talk a little bit about the key drivers.

I know the revenue performance has been good.

And also, just confidence in timing and getting to that mid-20% margin target you've laid out.

Mark, do you want to address that?

Sure.

Peter, it's just that we are making good progress.

As we've noted repeatedly, I think, this is a work in progress.

It's going to occur gradually over time, but we've had very good performance on the top line this year, which is -- has certainly helped the margin and has illuminated the good work that we're doing on the expense side.

So I think you're seeing that in the margin expansion so far.

But we will see choppiness in this over time, depending upon how the top line performance, which as you know, is variable from quarter to quarter.

But we're very pleased with where we are and the progress we're making.

But this is going to continue to play out over a number of years.

Peter, it's Linda.

Mark and I are working together pretty closely.

We're starting to see the first inklings, the first positive contributions that the Copal Amba team is able to support some of Mark's efforts in a more cost-effective way, given that those resources are lower cost.

So our goal here is for all of us to work together to help Mark with the margins in the ERS business and we're just getting going on this effort.

Okay.

That's helpful.

Thanks.

I was wondering if mix shift is a significant driver of the margin performance we're seeing this year?

Yes, and it will continue to be a driver of that.

Again, we talked about that at investor day.

It's a very deliberate part of the strategy for us to focus an ERS on emphasizing sales of our higher margin products and our higher margin services and deemphasizing some of the lower margin, more commodity-type services that we've been involved in pretty heavily in the recent past.

But again, that's something that's not going to happen in a big bang type of fashion.

It's going to play out progressively over time.

Is it mainly ERS that's driving the margin upside this year?

Yes.

Okay, and then one last small item, I know China's not a big market for you guys, Ray, on the ratings side, but could you talk about what you're seeing there?

Yes, we're involved in China through our joint venture in the domestic market and then Moody's is also active with the large issuers that enter the cross border markets and get Moody's global ratings, and Moody's analytics is also very much involved in that market.

That being said, yes, there has certainly been some market volatility in China.

It's been primarily focused on the equity markets.

We continue to see growth in our joint venture and in our cross border business so that has not -- neither one of those legs of our China strategy have been harmed or had a decline in business as a result of the volatility.

What we would be more concerned about is if some of the areas where there have been concerns about bubbles such as perhaps the property sector or municipal debt in China, if those areas became under acute stress and that would be a more direct, have a more direct impact on our fixed income business over there.

Thank you, Ray.

We will now go to Craig Huber with Huber Research.

Yes, hi.

Thank you.

Ray, could you just comment, if you would, on the debt issuance trends for your -- that you're seeing in the non-US, non-European geographies around the world?

Any general statement you could make, in particular on the corporate finance side?

Yes, in the third quarter, we had good growth, double-digit growth in Asia corporate finance.

But that was, in part, supported by our acquisition last year or majority, taking majority control of ICRA so that was a contributor.

We -- because we will have ICRA in the year-on-year numbers in the fourth quarter, I wouldn't expect to see the same kind of growth coming out of Asia.

The Americas were soft in the third quarter and I don't expect a robust recovery in the Americas in the near term.

So overall, the international story and the non-Europe international story on the corporate finance side is that we're dealing with some headwinds.

We're getting the benefit of ICRA but we're dealing with some headwinds.

Okay.

Also, Ray, I wanted to ask you or Linda, just generally, when you look at the balance sheets in general out there of corporations in the US and Europe and the debt loads that the companies are carrying now relative to profits or interest expense or just GDP in general, is there anything you're getting increasingly worried about with the debt loads out there of various corporations, about high yield investment grades just generally out there?

We have not seen, broadly speaking, I don't think we've seen a big increase in leverage.

But we are paying attention, obviously, to corporate profitability and we will have to continue to do so.

As far as the impact on our Analytics, I'll see if Michel has any additional color he would like to add to that.

Thanks, Ray.

I think as we -- I think we've discussed in investor day we expect a moderate increase in default rates and a year from now, see that levels that are historically low.

Overall, when we look at the various metrics, we follow and we publish on a number of those, we still view a fairly benign environment, basically in relative terms.

That's true not only in the US, but also outside of the US.

They are, obviously, sectors that are under a lot more, that are under stress.

Obviously, energy and oil -- oil and gas sectors are where wee see a much higher level of tensions, but more broadly speaking, I think we continue to see a more benign environment.

Then lastly, Linda, just a housekeeping question, if you could just break down the revenues within four areas in ratings, high yield investment grade, et cetera.

Sure, Craig.

So we'll look at MIS.

We'll look at corporate finance first, so for the third quarter of 2015, total global corporate finance revenue was $248 million.

What we have is investment grade is about $63 million of that, 25%, which is up significantly from last year's third quarter's 15%.

High yield was about $33 million or 13% of total corporate revenues, which is down from last year's 21%.

Bank loans, about $48 million, 19% of total corporate finance revenues and down from last year's 24%.

And other is about $105 million, which is 43% of this year's quarter's issuance and that's up from last year's 40%.

So the total number is $248 million, which is down 5% from last year's $260 million.

Moving on to structured, total structured revenue of $112.5 million, up from last year's $102 million, by 10%.

Again, echoing what Ray said, we're pretty pleased and surprised with the progress of structured finance, our second largest business.

Asset-backed securities, $20.5 million, that's 18% of total structured revenues, down a bit from last year's 23%.

Residential mortgage-backed securities at $18.5 million, almost flat to last year and 17%.

Commercial real estate finance, $37.2 million, up very nicely from last year's $26.9 million; a 38% increase and it's 33% of the structured revenue.

So again, the commercial real estate line is helping us out quite a bit.

Structured credit is at $36 million, up from about $34 million last year and it's 32% of the total structured lines and we have a very small de minimus other in there.

So structured story is really about the strength in commercial real estate.

Moving on to FIG, FIG is usually our most consistent business line.

It remains so, about $90 million for this quarter.

Last year, was about $92 million in the quarter.

Banking at about $58 million and 65% of the FIG revenues, about flat to last year.

Insurance at about $26 million is 29% of FIG revenues, about flat to last year.

Managed investments, about $3 million, which is 4% of last year, of the quarter total, excuse me, and flat to last year and other is about $2 million and 2%.

And lastly, Craig, PPIF, total of $90.6 million for this quarter, up from $88.5 million last year, a 2% increase.

Overall, the PFG and sovereign line at $46 million is 51% of PPIF revenues and that's a 5% increase from last year, 51% of total revenues.

Project and infrastructure, $44.5 million, which is just about flat to last year and 49% of total PPIF.

And other is de minimus to come to, as I said, almost $91 million.

So -- and we talked about MIS other, which includes the consolidation of ICRA so I think that's the main story there, Craig.

Great.

Thank you.

We will now go to Bill Warmington with Wells Fargo.

Good afternoon, everyone.

Hi, Bill.

A question for you on cash flow.

You mentioned year to date, up 27% and attributed to changes in working capital.

The cash flow margin, the trailing free cash flow to revenue has been very strong, 31%, the top of the group that we cover.

And I wanted to ask if there was, if there was anything that would keep that metric from continuing to grow over time and maybe give us a little thought in terms of what's been making it particularly strong?

Sure, Bill.

This is a pretty hard one for us to predict.

I would tell you that we have invested in our collections area to keep our receivables very strong and to keep them current and so we've been very careful to make sure that we work hard on our collections.

So that would be one focus area.

Generally, cash flow should probably grow in line with earnings and that would just be the best indicator that we can give you.

We watch our cash flow very carefully.

I think you can see from the results we put up this morning, we work on every line up and down the P&L and we look hard at changes in our cash flow, but this is a little bit tricky for us to predict.

So as a rule of thumb, just look at it growing in line with earnings.

I think that's probably the best measure that we can give you.

Excellent.

All right.

Well, thank you very much.

Sure.

We'll now go to Tim McHugh with William Blair.

Hi.

This is actually [Samir] calling in for Tim.

Hi.

Just to build on some of the commentary earlier about the disintermediation in Europe with a lot of the larger big banks kind of cleaning up their balance sheets and exiting some businesses.

Is that something that you're expecting an uplift from next year or is that just kind of a longer-term trend you're kind of aware of?

I think it's really a long-term trend, a secular trend.

I mean, we do see some cyclicality in terms of the pace of new rating mandates or overall rating relationships that we have, but, but the disintermediation story has really been a very, very long-term story and I think will continue to be.

Looking at the financial assets in Europe, in particular, that are in the banking system versus in the capital markets, there's a lot of runway there if it's even going to get near to the allocation of financial assets that we see in the US.

And it may never get that far, but there are trillions of euros in play that are available to go into the fixed income markets and out of the loan markets.

So I, I would just say it's a long-term story and it will continue to support our business.

Okay.

Thank you.

That's all I had.

We will now go to Doug Arthur with Huber Research.

Thanks.

Two questions, one, a number question and then a big picture question.

Linda, what explains, in this particular quarter, the divergence between operating expense being flat, I know currency was a factor there, and SG&A being up 7%.

And obviously, as you go into the fourth quarter, incentive comp will play into that, but is this trend in SG&A likely to continue?

That's the first question.

Sure.

I think we're keeping a careful eye on operating expenses, Doug.

There's nothing more to it than that.

On the sales side, we are investing on that front.

Mark and Michel may have more to add, but as we've talked about in our commercial group, we've been investing there, and the kind of top line we're able to put up at 2% is a little bit slower than we would like.

But again, with the S&P 500 average at 0.4%, we're running five times better than other companies and that requires that we continue to look at what's happening on the sales front.

Mark has a very nice set of fast-growing businesses and that requires that we keep the sales focus going.

I guess lastly, what I would say, before I ask if the others would like to comment, the FX sort of help on the expense line doesn't help quite as much on SG&A as it does on operating expense.

That's just a peculiarity of the way the expenses lay out.

I hope that helps you a bit.

I'd ask Mark or Michel if they have anything else to add.

Ray?

I think that's about it, Doug.

Okay.

And then that's very helpful.

And then, we've kind of attacked this question from a lot of different ways today.

But if you step back and look at year to date in the ratings business, you're up 14% year to date in the US, which I think, choppiness in the third quarter notwithstanding, is still a very good year.

You're down 7% overseas.

Some of that's currency.

But Ray, it sounds to me like you don't really expect that to change unless the economies, particularly in Europe, start to grow again strongly.

Is that fair?

Yes.

I mean at the end of the day, the provision of liquidity and quantitative easing may be helpful, but we're really looking for economic growth to drive increased fixed income activity.

There are things that can help catalyze that.

The European Central Bank and other central banks around the world have been engaged to try and encourage growth.

But especially at this point in the cycle, I would rather see, frankly, I would rather see some increase in interest rates as a result of greater confidence in the global economy and that is -- it looks to be a more likely scenario for the US than it does for some non-US economies going into 2016.

Okay, great.

Thank you.

We will now go to Vincent Hung with Autonomous.

Hi.

How much were the merit comp increases you put through?

Merit comp increases are sort of 3%-ish, Vincent.

Maybe a little bit less than that.

Okay.

And just last one, when it comes to the M&A-led issuance, how many of those deals did you get extra fees for accelerating your rating if the issuer just wants to get the deal done quickly so they can close?

Vincent, we don't break that out.

Suffice it to say that if an issuer is in a great, great hurry, we can potentially charge a little bit more for that.

But that's not a percentage that we would want to comment on mostly because it moves up and down so dramatically.

But it's all [prominent]?

Not particularly.

Okay.

Thanks a lot.

Sure.

And we will take our last question from Patrick O'Shaughnessy with Raymond James.

My first question was with ESMA report they put out in early October, talking about concerns about the competitive environment in Europe, what do you make of that and how are your conversations with ESMA going?

I think our relationship with ESMA is very professional and constructive.

They are our regulator and they're doing inspections, making inquiries and we have to respond to those, and we do.

They also are required to produce certain reports and analyses pursuant to the regulations in Europe and the reports that they have produced this fall are along those lines and they've been asked to comment on, among other things, competition.

I think it's fair to say that they would encourage competition, but that they also believe that they have the tools necessary to appropriately regulate the market in Europe and are not, at this point, encouraging additional legislation pursuant to the reports that they've prepared.

Got it.

Appreciate that.

And then last one real quickly for me, your full-year guidance for enterprise risk solutions kind of implies flattish, I think slightly up quarter-over-quarter revenues in the fourth quarter.

I know that typically the fourth quarter is very seasonally strong for that business.

Last year, probably a little bit more so because there was some pull-forward.

Are you expecting a little bit less seasonality in enterprise risk solutions in the fourth quarter this year?

No.

We think the fourth quarter is going to be a strong quarter, it's just that last year, the fourth quarter was an extraordinary quarter.

And so the comparable is very tough.

But in absolute dollars, the fourth quarter's going to be a big quarter.

Got it.

Thank you.

So it's Linda.

Just a couple housekeeping items to make sure we've got everybody working through their models on the same page.

We've talked about where we see the year going.

A view might be sort of flattish fourth quarter to last year, which means we have to work on our expenses.

We often talk about our expense ramp and we often benchmark this to our second quarter actual expenses, which was about $500 million.

At this moment, we're expecting an expense ramp of maybe $20 million to $25 million in the fourth quarter over the second quarter.

That's a little bit lighter than what we did last year.

It's just very important that everyone knows that if things break favorably and we start seeing issuance really, really pick up, we could have to put up some more money for incentive compensation.

Moving against us is, as Ray said, we're working with the pound.

We budgeted at $1.52 and the euro at $1.12.

Unfortunately, the euro is now at $1.10 and that makes our lives more difficult.

So we'll see where the euro goes, but it has moved down a bit with more recent comments on quantitative easing.

So given these softer conditions, we're working very hard on our expense line.

We continue to repurchase our shares, as we've said, and we are awaiting what will happen with conditions here in the fourth quarter, but this week we have seen things improving a bit.

So, that's, I think, about everything we have to say.

I'll look to see if Ray or any others have anything else that we need to wrap this up.

Just want to confirm there are no more questions.

Is that correct?

There are no other questions at this time.

Okay.

Want to thank everyone for joining us today.

We look forward to speaking with you again in the new year.

Thank you.

This concludes Moody's third quarter earnings call.

As a reminder, a replay of this call will be available after 3:30 PM Eastern Time on Moody's website.

Thank you.