Good day, welcome, ladies and gentlemen, to the Moody's Corporation fourth quarter and fiscal year-end 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. At the request of the company, we will open the conference up for questions and answers following the presentation. I will now turn the conference over to Salli Schwartz, Global Head of Investor Relations. Please go ahead.
Thank you. Good morning, everyone, thanks for joining us on this teleconference to discuss Moody's fourth quarter and full-year results for 2015, as well as our outlook for full-year 2016. I am Salli Schwartz, Global Head of Investor Relations. This morning, Moody's released its results for the fourth quarter and full year 2015, as well as our outlook for full year 2016. 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 31st, 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 statement, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. I would also like to point out that members of the media may be on the call this morning in a listen-only mode. I'll now turn the call over to Ray McDaniel.
Thanks, Salli. Good morning, thank you to everyone for joining today's call. I'll begin by summarizing Moody's fourth quarter and full year 2015 results. Linda will follow with additional financial detail and operating highlights. I will then conclude with comments on our outlook for 2016. After our prepared remarks, we'll be happy to respond to your questions. In the fourth quarter, Moody's delivered revenue of $866 million, a decline of 1% from the fourth quarter of 2014, but an increase of 2% on a constant currency basis. Operating expense for the fourth quarter was $533 million, flat to the fourth quarter of 2014. Operating income was $333 million, down 3% from the prior year period, and adjusted operating income, defined as operating income less depreciation and amortization, was $362 million, also down 3% from the same period last year.
Operating margin for the fourth quarter of 2015 was 38.5%, and the adjusted operating margin was 41.8%. Diluted earnings per share of $1.09 was down 3% from the prior year period. For full year 2015, Moody's achieved revenue and EPS growth for the sixth consecutive year, despite difficult market conditions. Moody's revenue was $3.5 billion, an increase of 5% from the prior year, or 9% on a constant currency basis. Revenue at Moody's Investors Service was $2.3 billion, an increase of 3% from 2014, or 8% on a constant currency basis. Revenue at Moody's Analytics was $1.2 billion, 8% higher than the prior year period, or 12% on a constant currency basis. Operating expense for full year 2015 was $2 billion, up 6% from 2014. Foreign currency translation favorably impacted operating expense by 4%. Operating income of $1.5 billion increased 2% from 2014.
Adjusted operating income of $1.6 billion increased 3% from the prior year period. Operating margin for full year 2015 was 42.3%, and the adjusted operating margin was 45.5%. On a constant currency basis and excluding our 2014 and 2015 acquisitions, operating margin and adjusted operating margin would've increased approximately 40 and 50 basis points, respectively, year-over-year. Full year 2015 earnings per share of $4.63 increased from $4.61 in 2014. Non-GAAP EPS of $4.60 was up 9% from $4.21 in 2014. In both years, non-GAAP EPS excluded a $0.03 benefit from legacy tax matters. Full year 2014 non-GAAP EPS also excluded a $0.37 gain resulting from Moody's acquisition of a controlling interest in ICRA Limited in the second quarter of 2014. I'll now turn the call over to Linda to provide further commentary on our financial results and other updates.
Thanks, Ray. I'll begin with revenue at the company level. As Ray mentioned, Moody's total revenue for the fourth quarter decreased 1% to $866 million, but was up 2% on a constant currency basis. U.S. revenue of $481 million was up 1% from the fourth quarter of 2014. Non-U.S. revenue of $385 million was down 4%, but up 4% on a constant currency basis. Revenue generated outside the U.S. represented 44% of Moody's total revenue. Recurring revenue of $446 million represented 51% of total revenue. Looking now at each of our businesses, starting with Moody's Investors Service. Total MIS revenue for the quarter was $545 million, down 4% from the prior year period, but flat on a constant currency basis.
U.S. revenue decreased 2% to $338 million. Non-U.S. revenue of $206 million declined 7%, but was up 2% on a constant currency basis. Revenue generated outside the U.S. represented 38% of total ratings revenue. Moving now to the lines of business for MIS. First, global corporate finance revenue in the fourth quarter was $246 million, down 7% from the prior year period, or 4% on a constant currency basis. This result reflected lower levels of non-U.S. investment grade and global speculative grade bond issuance, partially offset by improved levels of U.S. and European bank loan issuance. U.S. corporate finance revenue increased 1%, while non-U.S. revenue decreased 20%. Second, global structured finance revenue for the fourth quarter was $114 million, down 4% from the prior year period, but flat on a constant currency basis. Increased activity across most areas of structured finance partially offset lower CLO issuance.
U.S. structured finance revenue was down 3%, non-U.S. revenue was down 5%. Third, global financial institutions revenue of $92 million was up 8% from the prior year period, or 13% on a constant currency basis. This revenue was driven primarily by the U.S. insurance and European banking sectors. U.S. financial institutions revenue was up 7%, and non-U.S. revenue was up 8%. Fourth, global public project and infrastructure finance revenue of $85 million was down 5% versus the prior year period, or 2% on a constant currency basis, primarily as a result of decreased U.S. public finance activity. U.S. public project and infrastructure finance revenue was down 10%, while non-U.S. revenue was up 4%.
MIS other, which consists of non-rating revenue from Moody's majority-owned joint ventures, ICRA and the Korea Investors Service, or KIS, contributed $7 million to MIS revenue for the fourth quarter, compared to $8 million in the prior year period. Turning now to Moody's Analytics. Global revenue for MA of $321 million was up 3% from the fourth quarter of 2014, or 6% on a constant currency basis. U.S. revenue of $143 million was up 6% year-over-year. Non-U.S. revenue of $178 million was up 1%, or 6% on a constant currency basis. Revenue generated outside the U.S. represented 56% of total MA revenue. Moving now to the lines of business for MA. First, global research data and analytics, or RD&A, revenue of $161 million was up 8% from the prior year period, or 11% on a constant currency basis, and represented 50% of total MA revenue.
Growth was mainly due to strong new sales and product upgrades, coupled with record customer retention. U.S. revenue was up 10%, and non-U.S. revenue was up 5%, or 11% on a constant currency basis. Second, Enterprise Risk Solutions, or ERS, generated record revenue of $122 million and was up 1% from last year, or 4% on a constant currency basis. Growth was driven by strength in the credit assessment and originations and stress testing businesses. U.S. and non-U.S. ERS revenue were each up 1%. Trailing 12 months revenue and sales for ERS increased 14% and 11% respectively. As we've noted in the past, due to the variable nature of product timing, excuse me, project timing and completion, ERS revenue remains subject to quarterly volatility. Third, global professional services revenue of $38 million was down 10% from the prior year period, or 6% on a constant currency basis.
This result was primarily due to lower net new business at Copal Amba, as well as the unfavorable impact of foreign exchange on the credentials and licensing business. U.S. professional services revenue was down 7%, while non-U.S. revenue was down 11%. Turning now to expenses. Moody's fourth quarter expense was $533 million, flat to the prior year period. An increase in compensation expense for merit increases and hiring was entirely offset by reduced incentive compensation. Foreign currency translation favorably impacted expense by 3%. Operating margin for the fourth quarter of 2015 of 38.5% was down from 39.3% in 2014. Adjusted operating margin of 41.8% was down from 42.4%. On a constant currency basis and excluding our 2014 and 2015 acquisitions, operating margin for the quarter would've been flat year-over-year, and adjusted operating margin would've increased approximately 20 basis points.
Moody's effective tax rate for the fourth quarter was 29.4%, compared with 28.1% for the prior year period. This increase was primarily due to a reduced percentage of income from lower tax rate jurisdictions, primarily offset by the favorable resolution of tax audits. Now I'll provide an update on capital allocation. On December 15th, 2015, Moody's increased its quarterly dividend by 9%, from $0.34 to $0.37 per share of common stock. Over the course of 2015, Moody's returned $272 million to its shareholders via dividend payments. With regard to share repurchase, during the fourth quarter of 2015, Moody's repurchased 2 million shares at a total cost of $193 million, or an average cost of $100.09 per share, and issued 261,000 shares as part of its employee stock-based compensation plan.
For full year 2015, Moody's repurchased 10.9 million shares for $1.1 billion, or $101.14 per share, and issued 3.2 million shares under employee stock-based compensation plans. Outstanding shares as of December 31st, 2015 totaled 196.1 million shares, down 4% from December 31st, 2014. In December 2015, the board of directors authorized a $1 billion share repurchase program to commence following the completion of the existing program. Including this incremental program, as of December 31st, 2015, Moody's had $1.5 billion of share repurchase authority remaining. Turning now to Moody's leverage. In November 2015, Moody's issued $300 million of 5.25% senior unsecured notes due 2044. At the end of 2015, Moody's had $3.4 billion of outstanding debt and $1 billion of additional debt capacity available under its revolving credit facility.
Total cash equivalents, and short-term investments at quarter end were $2.2 billion, up $555 million from December 31st, 2014. As of December 31st, 2015, approximately 68% of Moody's cash and cash equivalents were maintained outside the U.S. Free cash flow for the full year of 2015 was $1.1 billion, up 13% from full year 2014, primarily due to changes in working capital. With that, I'll turn the call back over to Ray.
Thanks, Linda. I'll conclude this morning's prepared comments by discussing our full year guidance for 2016. Moody's outlook for 2016 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. Moody's guidance assumes foreign currency translation for the British pound of $1.42 to the pound, and for the euro of $1.09 to the euro. For all other currencies, Moody's assumes end of 2015 exchange rates. Although we expect continued market volatility, we are projecting mid-single digit % revenue growth in 2016, as well as EPS of $4.75-$4.85. Operating expense is expected to grow in the mid-single digit % range.
Moody's projects an operating margin of approximately 42% and an adjusted operating margin of approximately 45%. The effective tax rate is expected to be 32%-32.5%. 2016 free cash flow is expected to be approximately $1.1 billion. Moody's expects share repurchases to be approximately $1 billion, subject to available cash, market conditions, and other ongoing capital allocation decisions. Capital expenditures are projected to be $125 million-$135 million. Depreciation and amortization expense is expected to be approximately $130 million. For MIS, we expect 2016 revenue to grow in the mid-single digit percent range. Both U.S. and non-U.S. MIS revenue are also expected to increase in the mid-single digit percent range. Corporate finance revenue is expected to be flat. Structured finance revenue and public project and infrastructure finance revenue are each expected to grow in the high single-digit percent range.
Financial institutions revenue is expected to grow in the mid-single digit percent range. For MA, 2016 revenue is expected to increase in the mid-single digit percent range. U.S. revenue is expected to grow in the high single-digit percent range, and non-U.S. revenue is expected to be flat. Research data and analytics revenue is projected to grow in the mid-single digit percent range. Enterprise Risk Solutions revenue is expected to grow in the low single-digit percent range following earlier than anticipated recognition of revenue in the fourth quarter of 2015. Professional services revenue is expected to decline in the low single-digit percent range. This concludes our prepared remarks, joining us for the question and answer session is Michel Madelain, President and Chief Operating Officer of Moody's Investors Service, and Mark Almeida, President of Moody's Analytics. We'd be pleased to take your questions.
Thank you. If you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press *1 to ask a question. Our first question comes from Manav Patnaik from Barclays.
Yeah. Good afternoon. My first question, which I'm sure you're anticipating, is just around the issuance assumptions, particularly on the ratings business. Could you just help give us a little bit more color on your underlying assumptions in terms of a global issuance volume forecast and just maybe some of the moving pieces within those categories? Because it sounds like other than Corporate Finance, everything else is up nicely, which is sort of contrary to I think what a lot of us were expecting. Just hoping you could shed some color on those pieces there.
Sure. Let me let Linda start this off, and if I have anything to add, I will.
Sure. Manav, Salli is going to put up a new slide which looks at the summation of views we've gotten from a number of investment banks. We received this on the afternoon of February 3rd. This is solely U.S. issuance information, though, and it is for both financial and non-financial bonds and leverage loans. I'll go through each of the categories that hopefully you can see up on the screen. Finally, I'll conclude by making some quick comments on the European outlook. Firstly, investment grade. For January, we saw about $125 billion of issuance, and it was the fourth highest volume month ever. However, $46 billion of that issuance came from one deal, the Ambev deal. We are encouraged by approximately $200 billion in the visible M&A pipeline, but volatility is impacting the pace of that issuance.
The pipeline is healthy, but we do seem to have some backup in the issuance pipeline. All-in funding costs are generally quite attractive. Lastly, the last point there, in addition to M&A, shareholder-friendly activities continue to be cited as a use of proceeds. For the year, we see about $1.2 trillion in investment-grade issuance in the U.S., which is about flat year-over-year. That's a reasonable outlook that we can work with. Moving on to the speculative grade categories, high yield bonds, January, about $7 billion of issuance. The leverage market was soft in December. That tone has continued into January, and that makes us cautious. 35 billion is in the forward pipeline. Again, we see two classes of issuers. Those with higher quality speculative grade names have access, and those with lower ratings don't.
Continuing headwinds coming from the commodities volatility issues and default rate concerns. Last week we saw inflows back into high yield funds, which we hadn't seen since the start of the year, which may indicate that perhaps we're establishing some stability, which would be helpful. For the year, estimates range pretty widely on high yield bonds. About $240 billion is the sort of mean number that we're seeing. That's down 15% year-over-year. Last year, I think we did about $275 billion, and this number's come down as we've moved to this point in time. Leveraged loans, we saw $20 billion of issuance last in January, expecting $260 billion, which is down 10% for the year. We've seen low volumes in the high yield bond market, and loans are about on pace with 2015.
Leveraged loan activity was consistent week to week in January, banks expect this to continue. We can see $45 billion in the forward pipeline, but the timing of that is very much open to discussion. An uptick in defaults could cause the loan space to be impacted negatively, but less so than the high yield bond market. Investment grade, in summary, in the U.S., about flat this year, high yield bonds down 15%, and leveraged loans down about 10%. In Europe, just in terms of what we're seeing there, generally, we see broader views as to what could happen this year in terms of issuance. Generally for Europe, from the banks, we're seeing investment grade up about 10%, high yield bonds down about 10%, and leverage loans up about 5%.
In terms of what we're seeing, the tenor is quite tame at this point, about 184, 185, and spreads on U.S. investment grade bonds about 216 basis points, and in high yield, about 765 basis points. Spreads have widened, but the tenor's come in, so we think all-in financing costs are relatively attractive. In Europe, the spread numbers are about 154 basis points for investment grade and for high yield, about 538 basis points. With that, I'll turn it over to Ray, and potentially Michel may have some other color as well.
The only thing I would add is with respect to new rating mandates. We did have a healthy pace of new mandates throughout the year in 2015, coming in at about 770 new mandates. That has continued to be a healthy pipeline early this year. There's obviously going to be decisions by potential new issuers about when and if they want to get in the market. I agree with Linda's comments, some stability will encourage them in. We take that as a good sign in terms of the pipeline of new activity of fresh names.
Fair enough. Thanks for that. Just one follow-up. In terms of just clarifying your mid-single-digit guidance for the total company and then for the divisions as well, what is the exact FX impact you're assuming in both those for the total? I presume MA has a bigger hit to the numbers.
The overall impact of FX would be about 1% unfavorable on revenue and about 2% favorable on expense. I don't have the breakdown by the individual business units, but that's for the overall corporation.
Manav, just to sort of put a stake in it for you. We budgeted, as we said, at $1.09 on the euro. The euro, as a fact, moved up a bit from there, and $1.42 on the pound. The net impact is if the euro moves down from $1.09 by about $0.01, that hits us about $0.01 in EPS. As we said, since we finished putting this together, in fact, the euro has appreciated versus the dollar. I don't know if anyone else has any more specific comments.
Okay. All right. Thanks, guys. I'll jump back in the queue.
Good.
Thank you.
We'll take our next question from Andre Benjamin with Goldman Sachs.
Thank you. Good morning.
Good morning, Andre.
My first question is, I guess the one area you didn't talk about in that detailed rundown is the structured finance market. I was wondering what you're seeing that makes you assume that accelerates to high single digit from mid-single digit guidance last year and reported, and then how much of that is being driven by a U.S. versus a Europe view?
Sure. We're really looking at strength in multiple areas of structured finance in 2016, with an offset coming from the CLO sector, which we think is going to be softer. Really, I think the most important driver in the structured side is the refinancing that has to occur for commercial real estate. We expect to have a strong year for CMBS in particular, but also we expect to continue to see growth in the asset-backed and residential mortgage-backed security sectors. That improvement we anticipate in really all geographies, probably stronger in the U.S. except for the CLO area than in Europe, but we do expect to see growth around the world.
You guys have always done a very good job of controlling costs and delivering on the margin. I guess, as no one has the perfect crystal ball on issuance for the year. If the view in issuance changes to the upside or, God forbid, to the downside, how should we think about how much room left you have there to continue to manage costs, since you've already run the ship so tight so far?
Sure, Andre. Couple of comments. I would note that in the fourth quarter, expenses were flat, with incentive comp, we offset any other increase in compensation. We're pretty aggressive about managing expenses as you had noted. Just a couple of comments. If in fact the top line does pick up, we get pretty good operating leverage on those increases in the top line. The only incremental piece that we really need to pay would be incentive compensation. We look at maybe $0.60, $0.70 on a dollar of revenue. That is very helpful. As you pointed out, the top line's the tricky part for this year, we're looking at margin being about flat. We finished last year at 42.3%, we're saying that we'll be about flat this year.
To be perfectly honest, it's a little tough for us to have the margin come in exactly at where we expect it to. We are reinvesting in our business, we think flat margin is fine. From an FX adjusted basis, we're planning for expenses to increase by about $100 million in 2016, those are about evenly split between three different things. The first is the roll-forward of the hiring we did in 2015. Second would be the hiring we're doing in 2016. The third would really be around technology and real estate changes that we're making. On the technology piece, we are investing in our systems. Cybersecurity is a piece of that, which I think every financial corporation's looking at right now. We do have a bit heavier than usual real estate piece.
I think you've probably seen we've taken two floors over at One World Trade Center at very attractive rates. The 52nd floor here in this building at Seven World Trade, also at very attractive rates. We do need to get those new floors online here, and there'll be some expense associated with that. Nothing very exciting, but to drive the top line, which we think is pretty healthy given what other companies are putting up. To drive mid-single digits, we do need to spend some money. Our plans are modest, but we are thinking revenue will be about flat. I don't know if Ray or the division heads had anything more to say on that.
No. The only reminder I would make is that our reaction to cyclical changes is going to be less material than anything we see happening that's more structural in nature. If we do see structural changes in our markets where we are going to react more aggressively on the expense side.
Thank you.
Sure.
We'll take our next question from Alex Kramm with UBS.
Hi, Alex.
Hey, good morning.
Hey.
Hey. Coming back to the guidance for a second. Can you talk about the recurring fees on the rating agency a little bit? First of all, what are you expecting there? More importantly, when you talk about monitoring fees in particular, I think that's the biggest piece. How should we be thinking about that from a cyclically challenged perspective, if there is one? I guess what I'm trying to say is, if there are defaults in the high yield market that are picking up, if issuance slows, at what point do monitoring fees start to kind of roll off? How should we be thinking about that?
Alex, maybe Ray and I can take a start at that, and then we'll ask Michel to think about it. The monitoring fees are the most constant part of our business.
The average life of debt right now is about seven years. They move very slowly. We do have price increases on those fees year-over-year on new mandates that we bring on. We would expect that line would move to the upside and would move gradually. I'm not sure that defaults would have much of an impact on that. They're really two different things. I'll ask Ray for his comment.
Yeah. It would not be material. I think as Linda mentioned, we have a trailing 12-month default rate for high yield at a little over 3%, and we're expecting that to increase by year-end 2016 to about 4.5%.
That 1.2%-1.3% difference in default rates is not going to be material to the overall monitoring fees we get in, which obviously include not only the high yield sector, but the investment grade sector and non-corporate monitoring fees as well.
Okay, great. Secondly, this is a small part of your business, but was a little surprised in the professional services guidance. It seemed like last year there was the tough comps from shutting down some businesses. Having that down again this year, anything else going on? Is it just a very tough environment, or why is this not accelerating now that you kind of right-sized the business, it seems?
Sure. Alex, I'll take a shot on that for Copal Amba, and then I'll turn it over to Mark on the training business. What's behind this at Copal Amba, we had attrition of one large customer account. Now, as you're aware, you're quite aware, Alex, the global banks are having some challenges right now, and some of them are responding to that by increasing headcount at Copal Amba. One large bank went the other way, so we have to lap that. We're working very hard on restructuring the sales function and broadening away from the global banks in terms of the customers that we serve. That's going well. We're encouraged by our early progress there. We did make very good strides integrating the business last year. We've really ramped up our internal efforts of having Copal Amba support both Moody's Analytics and the rating agency.
We're very encouraged by that. As I said, we did have one large bank go the other way, and we've got to work through that. Maybe Mark wants to talk a little bit about training.
Sure. Alex, in the training business, we had a very good year in 2015 on the sales side in training, which is going to result in much better revenue out of that business in 2016. That's the good news. We still have a pretty sizable FX hit in the training business, though, which is going to hold down the reported growth rate. I think we've got much more strength on the training piece of professional services in 2016 than we saw in 2015.
Okay, helpful. Thank you.
We'll take our next question from Peter Appert with Piper Jaffray.
Thanks. Good morning. Maybe for Mark Almeida, the strength in the Enterprise Risk Solutions business was noteworthy. I know you point out that some of it is timing, but this is the second year in a row we've got this timing benefit, I'm wondering why you're not a little more upbeat in terms of the revenue growth potential there.
I'm not more upbeat about 2016 because we had two consecutive years of benefit from timing. We had a big revenue recognition event in the fourth quarter. We knew that was coming, we just didn't know when it was going to come, and it happened to come through in the late part of 2015 rather than in early 2016. That was good news for 2015, of course it impacts the 2016 outlook. The other thing we have going on, Peter Appert, is that we continue to take some FX hits as we roll into 2016 as well. We're a bit modest in our expectations for ERS in 2016. I'd just remind you that over the last, we had 1% growth in the fourth quarter in 2015. That was off of a very strong 42% growth in the fourth quarter of 2014. That was pretty good.
If you look at the prior seven quarters, four of those quarters we came in at 24% or better, and the other three were 12%, 13% and 14%. We've had a pretty long run now of very strong growth in the ERS business. We're just going to settle out a little bit in 2016 as the timing normalizes, if you will.
What does that suggest then, Mark Almeida, in terms of the sustainable growth rate in that business?
We continue to feel very good about the sustainability of the business. If you look on the sales side, sales growth was very healthy in 2015, despite our having taken about two points of FX hit. The other thing I would just remind you of, and we've spoken about this before, but we've told you we are de-emphasizing the implementation services business. That's the relatively low-margin piece of the ERS business, which has been driving a lot of top-line growth for us, but hasn't been doing much on the margin. As we back away from that, we're going to give up a couple of points of growth on the top line to set ourselves up for more profitable growth going forward.
That's a little bit, again, if these plans work out the way we've organized them, that's going to be, again, a bit of a one-time hit to top-line growth in 2016, but should set us up for good growth going forward and more profitable growth going forward.
On that front, Mark, you've talked in the past about this mid-20% margin target. The margin's up just a little bit in 2015. Is the mid-20% target still
Relevant. Will we see progress towards that goal in 2016? I'm asking this partly in the context of Linda's earlier comment about sort of being comfortable with flattish margins. Are you backing away at all from the expectation of margin upside in analytics?
As we've said, we view the margin expansion program for MA as something that is going to take place over several years. We view it as a marathon rather than a sprint. We still have those plans in effect. There are a variety of things that we're doing that we believe will position us to run a more profitable business. The other thing I would note, however, Peter, just to keep in mind in the context of Linda's comments, is that as MA grows and grows faster than the rating agency, as we saw in 2015, we do attract more corporate overhead. We've got that offset going on as well. Nevertheless, our plans for driving more profit out of the business are still intact. We're executing on those plans, and we feel good about what we're doing.
Okay, thanks. I'll follow up later. Thank you.
We'll take our next question from William Bird with FBR.
Good morning. Just as a follow-up, Mark, I was wondering if you could size the timing benefit to revenues in ERS on the deliverable that was referenced. Secondly, just wondering if you're seeing any change in client behavior in terms of their willingness to buy, given the context of world volatility. Thank you.
Yeah. As to the first piece, it was about $20 million that we pulled from 2016 into 2015. Just to give you a sense of the scale of that thing. With respect to your second question, the short answer is no. Demand continues to be very healthy. We really haven't observed any meaningful change in customer behavior. We haven't observed sales cycles lengthening or anything like that. The sales pipeline is very healthy. Honestly, I can't say that we've observed anything that would suggest that what we're reading about in the newspapers is impacting demand for what we're selling.
Just as a follow-on, can you give us a sense of just the rough size of the implementation business that you're de-emphasizing?
I don't think we've disclosed that in the past. If you think about that as kind of the non-recurring portion of the ERS business, or at least a substantial piece of it, you can look at it in those terms, and I think we've talked about that.
I would also just add that we're not stepping away completely from implementation services.
Yeah.
We will still do some of that, because it supports the product sales.
Yeah.
It's difficult for us to give you a precise number on that, because we don't know exactly what that interaction between implementation services and product sales will continue to be.
Yeah. That's exactly right. To be clear, we're not taking implementation services to zero. We're planning to keep it flat in 2016. As Ray observed, and he's quite right, we don't have complete control over that. A lot of that will be down to what the customers want and what we think is the right thing to do in order to drive growth in the licenses and subscription sides of the business.
Great. Thank you.
We'll take our next question from Timothy McHugh with William Blair & Company.
Yes. Thanks. I wanted to ask, emerging markets, just in the past, my math was it added almost a point to growth the last couple of years just in general. Obviously, choppier markets there. Can you talk about what's the outlook there? Have you seen a slowdown in your ability to add new mandates and grow in those markets?
Michel, do you want to comment on the emerging markets?
Yes. I think, clearly these markets have been, as you know, subject to a fair amount of stress, and we've seen impact notably in Latin America, post-Petrobras. In Asia, actually, we continue to have a good pipeline of new mandates coming out of China, notably. Although the region clearly is subject to some of the economic pressures that you're very familiar with. Rest of emerging market, that's really the Gulf States and Middle East, and those are small businesses, really.
Okay. As we think about price, I know you target 3%-4% over time, I guess in the context of the current macro, is it still fair for us to think about three or four points of growth from price in the type of environment that we're expecting for 2016?
Yeah. We have built in pricing assumptions for 2016 that support our outlook, we are still able to factor in price. As I've
We've said in the past, some of the price does relate to issuance volumes. If we change fees and bonds are not issued, then changing the bond fee doesn't really matter. We're going to have to see what the mix is in terms of issuance, and how that aligns with where we feel we are adding particular value and think that we can adjust pricing. I would stick with our long-term comment that we think we can get three to four points on average, and we'll see this year based on volume.
Okay, thanks.
We'll take our next question from Craig Huber with Huber Research Partners.
Yes, hi. Thank you. Ray, you talked about default rates for high yield. I believe you said in the U.S., 3% going to 4.5% a year out. What are those numbers, please, if you exclude the energy sector?
If you exclude energy, as of year-end 2015, the 12-month default rate was actually quite low. It was about 1.6%. We don't publish a speculative grade default forecast by industry. You can look at that 1.6x oil and gas and metals and mining as compared to the overall default rate of 3.2% as of December.
Okay. Also, Ray, just in general, when you look at the corporate debt market out there, both in the U.S. and Europe, are you seeing anything out there that makes you think there's too much debt in the system out there, whether the coverage ratios relative to EBITDA, what have you, relative to GDP?
I wouldn't say we've seen anything that we'd characterize as a bubble. There obviously are some parts of the market that have more leverage than others, and obviously there is stress in the energy, metals, and mining sectors. Looking at the market more broadly, there's nothing that I would say we've identified as being a particular red flag.
Okay, also, in your guidance for ratings up mid-single-digit revenue for the year, would you characterize that as back-half of the year weighted? If so, are you also expecting more than normal pull forward of any debt issuance from the refinancing wall in 2017 coming into the back-half of 2016? How do you sort of see this year playing out in terms of the cadence of the revenue growth or lack thereof as the year progresses to get to that mid-single-digit number for ratings? Thanks.
Yeah, I've thought for a while that the second-half of the year offers more potential probably than the first-half of the year, in part because we do have the refinancing build from 2017 through 2019 coming closer on the horizon. Also just because we've been through a recent period of really strong volatility in the markets, I think markets looking for more stability in energy and seeing where spreads settle. The stability itself will encourage issuance in addition to the refinancing walls that will be coming closer.
Okay. My last question, Linda, that I like to typically ask you. Can you break down the revenues by your 4 major categories within ratings, high-yield versus bank loan versus investment-grade in the fourth quarter?
Sure, Craig. We are doing Q4 2015, and the first line of business is corporate finance. We are going to look at four different areas, investment grade, spec grade, bank loans, and other. The total revenue for this category for the fourth quarter was $246 million. Investment grade was $71 million, about flat from the fourth quarter last year in terms of percentages, a little bit down on dollar basis. Spec grade decreased to $26.5 million from last year's $34.1 million in the fourth quarter. Bank loans interestingly increased in the fourth quarter of 2015 to $44 million from last year's $37 million, and bank loans were 18% of this total corporate line. Other was $104.4 million, down from last year's $112 million, and represented 42% of the split. Again, corporates represented 45% of the MIS revenues for the fourth quarter of 2015.
Moving on to structured. We will go through five different lines. The total for structured was $114 million in 2015. First, we will look at ABS, and that was about $24 million, up a little bit from last year's $22 million. Second is residential mortgage-backed securities, $23 million, up a bit from last year's $20 million. Commercial real estate, $37.5 million, up from last year's about $36 million. Structured credit at about $30 million, down from last year's $40 million. Others, pretty negligible. Again, that all sums to $114 million. If we move on to FIG, total is about $92 million for the fourth quarter, and we will look at banking, insurance, managed investments, and other. Banking is about $61 million, about flat from last year's $60 million. Insurance at about $24 million is up nicely from last year's $19 million.
Managed investments at $4.4 million was flat to last year, and other at $2 million and change was also flat to last year. Lastly, we go to PPIF. Total is $85 million here. We have got three categories, which include PFG and sovereign first, which is about $46 million. Last year, we were about $48 million on this line for the fourth quarter. Project and infrastructure is the second category, about $40 million here, which is down from last year's $42 million. Other is negligible, really, in both periods. I think that is the total split of the big categories, Craig. Does that get it done for you?
Yes. Perfect. Thank you.
Sure.
We'll take our next question from Doug Arthur with Huber Research.
Linda, you mentioned that you dropped incentive comp or controlled it pretty aggressively in the fourth quarter. Can you give us some idea of the numbers there? Thanks.
Sure. For fourth quarter of 2015, incentive compensation was 13% of our total comp expenses of $336 million for the quarter, which was just about flat to what we did for last year, but the components were quite different. This year, we put up $44 million in the fourth quarter for incentive compensation. Last year, we put up $53 million. This was a delta of almost $9 million. The fourth quarter of 2015 didn't come in as strong as we might have liked, and therefore, the incentive compensation accrual backed off by quite a bit. Also, what was interesting is last year, we did have $7 million of profit sharing in the fourth quarter. For this fourth quarter, we did not have any profit sharing. That saved another $7 million. Really $16 million there, reduction in those two lines.
Now, on salaries and benefits, we did move up from $255 million last year to about $272 million this year. Again, that increase in salaries and benefits was completely offset by what happened with the incentive compensation. Stock-based comp was about flat at $20.5 million. Not much going on differently there. I think what we want to demonstrate here, Doug, is we pull the incentive comp lever pretty hard if things are a little bit weaker than we think. The first reduction there goes unfortunately to the employees. That's how we handled it. I hope that's helpful.
Yeah. No, that's great. Thank you.
We'll take our next question from Bill Warmington with Wells Fargo.
Good afternoon, everyone.
Hi, Bill.
I have a question for you on MIS. If you look at total MIS growth rate on a two-year basis, and by that I mean you just take the growth rate of a quarter and add it to the growth rate of the quarter a year ago, it had been moving at about mid-teens for the first three quarters of 2015. The fourth quarter just reported, it dropped to about 4%. That 4% would line up with the guidance for MIS for 2016. If we assume that 4% two-year comp is kind of a target for 2016, we go through by the quarters and keeping that 4%, it would imply Q1 would be down about 10%, Q2 up about 2%, Q3 up about 4%, and Q4 up about 7%-8%.
I just wanted to run that by you to see if that methodology was okay, or maybe you could suggest a better one in terms of looking at how to think about the progression of MIS throughout the year, given the uncertainties in the market.
Bill, it's Ray. I have to be honest, I didn't quite keep up with all the math. Maybe what I can do to be helpful is to remind listeners that our revenue typically follows a sawtooth pattern with the second and fourth quarters being stronger, first and third quarters being softer. We did not see that pattern strongly in 2015 because of weakness in the fourth quarter. I would anticipate at this point in time that we would be back to more of the traditional sawtooth going into 2016. Second and fourth quarters. I would also anticipate that, as I had mentioned a little while ago, that we may see momentum picking up in the second half of the year this year.
Yeah. Okay. A couple of housekeeping items then. I wanted to just double-check to see what the organic constant currency growth was for the company. I know that we don't have a lot coming in from acquisitions with Lewtan and Copley, I thought I'd ask for that.
I don't have the organic constant currency. We had quoted that overall growth was 9% for the corporation on a constant currency basis. We picked up about 4.5 points on a constant currency basis. I don't have the organic, inorganic breakout. Mark, do you have?
Yeah.
For MA, as reported, we were up 8% for the year. Organic constant currency would've been almost 10.
Got it. Thank you. The last question was, on the mandate, you mentioned 770 in 2016 for the year. I just wanted to double-check, what were the mandates in 2014, 2013, if you happen to have those?
I don't have them in front of me, they were about 1,000 each year. We were down from those peak years, and those were peak years. Those were record years for new mandates. The 770 compares quite favorably to years prior to 2013. We're sort of in a middle range at this point between the peak and the historical run rate.
Got it. All right. Well, thank you very much.
Thank you.
We'll take our next question from Warren Gardiner with Evercore ISI.
Hey, good morning. Thank you. I know that M&A can kind of drive bespoke kind of services, and we kind of saw that in 2015. It was a nice benefit to revenue for ratings. I was just curious, if we stay in kind of a choppier backdrop, how you guys could potentially benefit, if at all, from restructuring related services.
Warren, it's Linda. I think you had said M&A activity, I'm assuming you mean for the economy as a whole, has been helpful to us in terms of bond issuance. You wanted us to comment on that. I'm not sure we were quite clear on the second part of your question there.
I was just saying if sort of additional services related to M&A may have kind of helped you guys this year, and I was wondering if that was somewhat true with respect to potentially restructuring, if things were to get choppier.
M&A has been a wind at our back. As I noted earlier, we've got about $200 billion in the investment-grade M&A pipeline, and we've got about $35 billion in the high yield pipeline that's kind of sitting there waiting to move. We've seen this situation before. We're in a risk-off part of the market. We've had a lot of volatility. These pipelines will move eventually. We'll wait and see where things go with the Fed potentially in March. When we can see the pipelines there, it does give us some view to be a bit more optimistic. The timing is the tricky thing, and that's why at Moody's we don't give quarterly guidance because it's very difficult to predict.
We do expect that M&A is continuing and that a lot of companies have bridge loans in place for financing, and eventually they're going to have to be taken out. It's a matter of when, and I'll let Ray say some more about that.
I was just going to ask Michel Madelain if he wanted to comment on our rating assessment services and the materiality of that compared to the overall MIS business.
Ray, thank you. Typically, in M&A transaction, we sometimes provide some rating assessment designed to provide some indication of the impact of the transaction on the rating we have outstanding. Those are small. The overall amount of fees and total fees for those services are really small in relation to the overall revenue line, and they're not really moving the dial basically from that perspective.
Okay.
Warren, I'm not sure if that's what you were getting at, if it was, I hope that was satisfactory.
Yeah, no, that was helpful. Thanks a lot. That's all I had, though.
Once again, if you would like to ask a question, please press star one. We'll take our next question from Joseph Foresi with Cantor Fitzgerald.
Hi. Just wanted to come at issuance a different way to kind of close out the call. As far as swing factors are concerned on the issuance question for what the outlook could be for 2016, what do you think the most important swing factor is? Is it stability? I assume you're expecting one or two interest rate hikes. Is it M&A? Is it the back half of the year? I'm just wondering, as an outsider, what we should think about as being kind of the most important thing to look at.
I think it's first of all, some stability so that companies feel that they have visibility in what their issuance would look like. Obviously, rates and spreads are relevant. I don't think that movement on the short-term rates is going to be particularly impactful. It's really looking more at the long-term rates for the bond issuance. It also has to do with economic momentum in the economy and refinancing needs. If we have relatively wide spreads or volatility in the market and we don't see a lot of economic momentum to encourage capital expenditure and business expansion. We don't have refinancing needs, then issuance is going to be more subdued.
When that combination of factors starts to come into better alignment, stability spreads narrowing and the need to finance, either for refinancing or business expansion, that's the virtuous cycle.
Got it. Okay.
Let me just comment a little bit more on our various sectors here, and Michel may be helpful to this discussion. We said for investment grade, issuance looks to be about flat. In high yield bonds for 2015, we did $183 million of revenue. That's about 5% of the corporation's revenue. Again, high yield in 2015, only 5% of the corporation's revenue. Bank loans, a little over $200 million, about 6% of the corporation's revenue. In the fourth quarter of 2015, as I had said to Craig, our spec-grade revenue was down to $26.5 million. We've thought very hard about high yield for 2016, and we think that the Q4 run rate in 2015, we hope, is low. We have reduced our high yield view.
We've been very thoughtful about that, but we don't think it's going to be quite as bad as it was in the fourth quarter of 2015. We're watching this very carefully. It's probably the trickiest line we have to work with here. I might invite Michel to say a little bit more about his thoughts on that, because that really has been, I think, the biggest challenge for us in terms of how we're thinking about 2016. Michel, you want to add some color?
Yeah. What I would say is that really, when you think about investment grade, the factors that Ray mentioned and you discussed earlier, which M&A, the economy are clearly the key drivers here. I think when you go to high yield, the impact of market sentiment and the overall spreads and the risk-on, risk-off sort of changes we've seen are probably much more impactful and therefore it's much more difficult to predict the volumes that we should expect. There, the sort of idiosyncratic credit factors are playing a bigger role.
Got it. Just building on it, I'm going to take a crack at this question because I know it's a difficult one.
Is there anything in particular you'd point out when you went through your guidance process this year versus other years that you did differently that might shed some light on how comfortable we can become with the issuance guidance for 2016?
I guess the short answer is no. We really didn't do anything differently than we normally do. It's a combination of internal work and speaking with other market participants to get their consensus views, we build our forecast off of that.
Okay. Thank you.
We'll take our next question from Denny Galindo with Morgan Stanley.
Hi there.
Hi, Denny.
Just real quickly since we've been on here for a while, but wanted to talk a little bit about that high yield line item. It does seem like it might be a swing factor this year. Could that actually benefit if you have this big wall of investment-grade maturities in 2016 and 2017, and some of that's downgraded into high yield? It's almost like a fallen angel effect. Is that something that could end up helping you in the high yield line item this year? Or maybe you could comment on that idea.
Well, I guess it would help the high yield line item. It wouldn't help the investment-grade line item. I think the serious part of an answer to your question would be that we really wouldn't expect a material commercial difference based on investment-grade names falling into the spec-grade range. We have both frequent issuer pricing agreements, and we have transaction-based pricing. So it's possible to see more frequent issuers dropping into the spec-grade range, but I think that would be very much at the margin and would not impact the financial part of our business as opposed to the analytics.
Okay, that's helpful. Then lastly, someone did ask about restructuring, and it's kind of the credit assessment part of the fee. You said that that was kind of minimal as it relates to M&A. Are there any additional revenue streams you would benefit from if they had a distressed debt exchange or a default or anything that occurs in a more difficult credit environment that doesn't typically occur in a more favorable credit environment? Is that a meaningful amount or could that move the needle at all or is it relatively small as well?
No, I think it's really as Linda was pointing out, that to the extent that having companies in distress drives a portion of the mergers and acquisition activity we see in the market, that can be helpful in terms of new financing to handle that M&A. Otherwise, no, I don't think it really is going to have a big impact.
Okay, that's it for me. Thanks, guys.
Thank you.
Our next question comes from Vincent Hung with Autonomous.
Hey, how's it going?
Hi, Vincent.
Sorry, to go back to high yield again. Within the flat corporate finance guidance, what is the actual revenue growth assumption you have in there? I gather pricing is harder to take in this sort of environment.
In terms of our outlook, we made, as you saw, we expect corporate finance to be flat. We would expect the investment grade sector to be a bit stronger than the spec grade or bank loans. We haven't broken that out into further detail. The second part of your question, I apologize, just slipped my mind.
Just around pricing in high yield and bank loans, probably more difficult.
Oh, yeah. No. The pricing opportunities are similar. I think we provide a lot of value in the spec grade market with our research and ratings. So, yes, these are companies that have more difficult financial circumstances in many cases. It's also where the marketability of their bonds and the commentary that we offer, I think provides quite a bit of value to them.
Great. Thank you.
We'll take our next question from Patrick O'Shaughnessy with Raymond James.
Hey, good afternoon. Kind of a high level question for you here. If you look at the S&P 500 median firm net debt to EBITDA, I think it's at the highest level since 2004. U.S. corporate debt outstanding has gone up by about 50% since 2008. I guess given that backdrop and given where we are in the credit cycle, how does your view of corporate leverage kind of influence your medium and long-term view of the issuance outlook?
Michel, do you want to offer any initial comments on that?
Yes. I think you're right in pointing to the fact that a number of metrics point to relatively high leverage in the system today for these entities. I think what we're more focused on obviously are the sort of indicators of credit stress. We're looking at liquidity and covenant protections and prediction of defaults. There what we see is a slight uptick. We've seen a significant movement in the energy and mining space, and we have a slight uptick in the other sectors. They remain, compared to historical standards, well controlled. In terms of the size of the debt, to the extent these companies continue to operate, this debt will end up to have to be refinanced, and that's obviously a positive element.
As we've said before, we continue to build our portfolio of credits we have in CFG, and that's also a positive for this line of business.
Thank you.
It appears there are no further questions at this time. I'd like to turn the conference back to Raymond McDaniel for any additional or closing remarks.
Sure. Just before I close, I want to turn to Linda for a moment.
We didn't get any further questions on expenses for 2016. Just to make sure that we're level setting, we often comment on the expense ramp at this time of the year, and we hadn't done that yet. I want to make sure that everybody's on the same page with that. Over the course of 2016, we're looking at expenses to generally ramp from $35 million to $45 million from the first quarter to the fourth quarter. We would caution everyone that expense timing, FX movements, and particularly incentive compensation can move that number around as we've seen in previous years. We'll continue to manage the costs carefully. We have about $50 million of expense flexibility that we can move on. If we did encounter a more dramatic situation, we could probably about double that, but we're not expecting anything like that.
As the year progresses, of course, those amounts come down. Similarly, we didn't have any questions on the tax rate. We're looking at 32%-32.5%. We can't do exactly the same thing on the tax rate every year because we are impacted by individual audit results. We do expect with the U.S. being the balance of our income potentially for 2016, that we might have a little bit more to pay on the tax rate. Again, 32%-32.5%. Our CapEx guidance, I think most of you saw, had moved up a bit. That is primarily because of some of the things that we're doing in technology and real estate, as we had said before. Just wanted to make sure that everyone was aware of those numbers so that can assist in your modeling effort.
With that, I'll turn it back over to Ray.
Okay, thanks, Linda. Just in ending the call, I do want to announce that we will be hosting our annual Investor Day this year on Wednesday, September 28th here in New York. More information about that will be available on the investor relations website as we get closer to the event. Thanks for joining the call today, and we look forward to speaking with you again in April. Thank you.
This concludes Moody's fourth quarter and fiscal year-end 2015 earnings call. As a reminder, a replay of this call will be available after 3:30 P.M. Eastern Time on Moody's website. Thank you.