Good day, and welcome, ladies and gentlemen, to the Moody's Corporation first 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. At the request of the company, we will open the conference up for question 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, and thanks for joining us on this teleconference to discuss Moody's first quarter 2015 results, 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 first 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. Raymond 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 Raymond McDaniel.
Thank you, Salli. Good morning, and thank you to everyone for joining today's call. I'll begin by summarizing Moody's first quarter 2015 results. Linda will follow with additional financial detail and operating highlights. As we have no legal or regulatory updates, I will conclude with comments on our outlook for 2015. After our prepared remarks, we will respond to your questions. In the first quarter, Moody's delivered revenue of $866 million, an increase of 13% over the first quarter of 2014. On a constant currency basis, Moody's revenue was up 18% year-over-year. Excluding the 2014 consolidation of ICRA and our 2014 acquisitions of Lewtan Technologies and WebEquity Solutions, as well as the impact of foreign currency translation, Moody's revenue grew 16% year-over-year. Operating expense for the first quarter was $494 million, up 14% from the first quarter of 2014.
Operating income was $371 million, a 12% increase from the prior year period. Adjusted operating income, defined as operating income less depreciation and amortization, was $400 million, also up 12% from the same period last year. Foreign currency translation unfavorably impacted operating income by 7%. Operating margin for the quarter was 42.9%, while adjusted operating margin was 46.2%. Diluted earnings per share of $1.11 increased 11% from the prior year period. We are reaffirming our full year 2015 earnings per share guidance of $4.55 to $4.65, despite our expectations for uneven global growth as well as the strength of the U.S. dollar at current exchange rates. I will 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 first quarter increased 13% to $866 million. Foreign currency translation unfavorably impacted Moody's revenue by 5%. U.S. revenue of $500 million was up 17% from the first quarter of 2014. Non-U.S. revenue of $366 million was up 7% and represented 42% of Moody's total revenue. Recurring revenue of $424 million represented 49% of total revenue. Looking now at each of our businesses, starting with Moody's Investors Service, total MIS revenue for the quarter was $602 million, up 14% from the prior year period. Foreign currency translation unfavorably impacted MIS revenue by 5%. U.S. revenue increased 18% to $372 million. Revenue outside of the U.S. of $231 million increased 8% and represented 38% of total ratings revenue. Excluding the 2014 consolidation of ICRA, MIS revenue increased 12%.
Moving now to the lines of business for MIS. First, global corporate finance revenue in the first quarter was up 13% to $299 million, reflecting increased investment-grade issuance from heightened M&A activity as well as strong investor demand for high-yield bonds. Partially offsetting these gains was a contraction in bank loan issuance. U.S. corporate finance revenue increased 13%, while non-U.S. corporate finance revenue increased 14%. Second, global structured finance revenue for the first quarter was $101 million, 6% above the prior year period. This increase was primarily the result of strong U.S. commercial real estate issuance. U.S. structured finance revenue increased 13%, while non-U.S. structured finance revenue decreased 6%.
Third, global financial institutions revenue of $94 million increased 10% from the same quarter of 2014, primarily due to increased revenue from U.S. finance companies and insurers. This benefit was partially offset by a decline in revenue from global managed investment issuers who experienced elevated activity in the prior year period. U.S. and non-U.S. financial institution revenue increased 19% and 4%, respectively, year-over-year. Fourth, global public project and infrastructure finance revenue increased 25% year-over-year to $101 million, resulting from increases in U.S. municipal financing activity and global municipal infrastructure issuance. U.S. public project and infrastructure revenue increased 37%, while non-U.S. revenue increased 7%. As a reminder, MIS Other consists of non-rating revenue from ICRA and Korea Investors Service or KIS. MIS Other contributed $8 million to MIS revenue in the first quarter compared to $3 million from the prior year period. Turning now to Moody's Analytics.
Global revenue for Moody's Analytics of $263 million was up 11% from the first quarter of 2014. Foreign currency translation unfavorably impacted Moody's Analytics revenue by 5%. U.S. revenue grew by 17% year-over-year to $128 million. Non-U.S. revenue increased 5% to $135 million and represented 51% of total Moody's Analytics revenue. Excluding the 2014 acquisitions of Lewtan Technologies and WebEquity Solutions, Moody's Analytics revenue grew 7% year-over-year. Moving now to the lines of business for Moody's Analytics. First, global research, data, and analytics or RDNA revenue of $150 million increased 9% from the prior year period. Growth reflected strong sales of credit research and licensing of ratings data, a 96% customer retention rate, and the acquisition of Lewtan Technologies in October 2014. Year-over-year, U.S. revenue was up 13% and non-U.S. revenue was up 3%.
Second, Enterprise Risk Solutions, or ERS, revenue of $77 million grew 29% from last year. This increase resulted from strong project delivery across all product offerings as well as the acquisition of WebEquity Solutions in July 2014. Revenue was up 41% in the U.S. and 22% outside the U.S. Trailing 12-month revenue and sales for ERS increased 28% and 24%, respectively. As 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 decreased 10% to $37 million, primarily due to the year-over-year effect of exiting certain Copal Amba product lines in late 2014. U.S. revenue decreased 4%, and non-U.S. revenue decreased 13%. Turning now to expense.
Moody's first quarter expense increased 14% to $494 million, primarily due to hiring in 2014 and the first quarter of 2015, as well as added operating expense from our 2014 acquisitions. Foreign currency translation favorably impacted expense by 4%. Excluding the 2014 consolidation of ICRA and our 2014 acquisitions of Lewtan Technologies and WebEquity Solutions, Moody's expense grew 9% year-over-year. Moody's reported operating margin and adjusted operating margin were both down slightly in the quarter to 42.9% and 46.2%, respectively. Excluding the 2014 consolidation of ICRA and our 2014 acquisitions of Lewtan Technologies and WebEquity Solutions, Moody's added more than 100 basis points of operating leverage year-over-year. Moody's effective tax rate for the first quarter was 32.9%, compared to 28.9% for the prior year period, primarily due to a benefit from the resolution of a foreign tax audit in the prior year period.
Now I'll provide an update on capital allocation. During the first quarter of 2015, Moody's repurchased 3.8 million shares at a total cost of $366 million and issued 2.3 million shares under its annual employee stock-based compensation plan. Outstanding shares as of March 31st, 2015, totaled 202.2 million shares, down 5% from the prior year. As of March 31st, Moody's had $1.2 billion of share repurchase authority remaining. On March 9th, 2015, Moody's issued €500 million of 12-year senior unsecured notes at 1.75%. This transaction provides both cost-effective financing and a partial hedge for the company's euro exposures. At quarter end, Moody's had $3.1 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 billion, down $50 million from a year earlier.
Free cash flow in the first quarter of 2015 was $242.8 million, up 54% from the first quarter of 2014 due to the increase in net income and changes in working capital. As of March 31st, 2015, approximately 63% of Moody's cash holdings were maintained outside the U.S. On April 17th, 2015, Moody's announced a quarterly dividend of $0.34 per share of Moody's common stock payable on June 10th to the stockholders of record at the close of business on May 20th. With that, I'll turn the call back over to Ray.
Thanks, Linda. I'll conclude this morning's prepared remarks by discussing our 2015 full year guidance. 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. Moody's guidance assumes foreign currency translation at end-of-quarter exchange rates, including $1.48 to the GBP and $1.07 to the EUR. Moody's still expects full-year 2015 revenue to grow in the mid-single-digit % range. However, on a constant dollar basis, Moody's full-year 2015 revenue and operating expense growth rates would now both be 4%-5% higher, up from the approximately 3% higher that we communicated in February.
The company still expects diluted earnings per share in the range of $4.55-$4.65. For Global MIS, Moody's still expects 2015 revenue to grow in the mid-single-digit % range. However, MIS's U.S. revenue is now expected to grow in the high single-digit % range, while non-U.S. revenue is now expected to increase in the low single-digit % range. Within MIS, both structured finance revenue and financial institutions revenue are now expected to grow in the low single-digit % range. For Global MA, 2015 revenue is still expected to increase in the mid-single-digit % range. However, MA U.S. revenue is now expected to grow in the low double-digit % range, while non-U.S. revenue is now expected to increase in the low single-digit % range. Within MA, professional services revenue is now expected to decrease in the low single-digit % 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 any questions you might have.
Ladies and gentlemen, if you would like to ask a question or comment over today's session, please do so by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is off to allow the signal to reach our equipment. Once again, that is star one if you would like to ask a question or comment, we'll pause for a moment to allow everyone an opportunity to signal. We'll take our first question from Manav Patnaik with Barclays.
Yeah, hi. The first question I had was just around the constant currency improvements. Generally, maybe you can tie that, was that increase more driven by the Moody's Analytics side, or is that just more of it should be better than it came in your outlook situation some color there?
Manav, I apologize. I didn't hear the beginning of your question. If you could repeat that, I'd appreciate it.
Yeah. It was just around the increased guidance on a constant currency basis. Just what the main drivers there were.
The underlying operating business is performing very well. If not for the decline of the euro against the dollar, obviously as we communicated, we would have had even stronger performance in the first quarter. Our current outlook, as we said, assumes $1.07 to the euro, that's absorbing some of the strength of the underlying operating performance. I think that's really the story.
Okay. Then, Linda, on the expense side, you cited a favorable benefit of the FX on the expenses. Still it looked like it was up double digits. A, is that mainly just because of the contribution of acquisitions? Then can you help us bridge what you've given us before in terms of how we expect the expense to move quarterly to the end of the year?
Yes, Manav. Your point is correct that the FX impact actually benefits us on expenses, it's a 4%-5% benefit for the rest of the year, we think, on the expense line. In terms of the ramp for expenses for the rest of the year, this is one of the trickiest calls that we make, there are many things that can cause this number to move around. The expense number for the first quarter has been $494 million, from there, now we're looking at a ramp of about $30 million. Again, I would emphasize that could be $25 million, it could be $35 million, it's impacted by a number of things, including our IT projects. Of course, that is absent any changes to incentive compensation if we end up doing better.
A good central scenario would be about $30 million, there is some flexibility around that, please keep in mind it's one of the tougher numbers to predict that we have to give you.
Okay. Fair enough. Just last one from me. It seems like you guys have had a pretty steady stream of these small tuck-in type deals. Is that pipeline still pretty active? Should we be expecting more of these going forward?
Yeah. As we've said before, Manav, we certainly are looking for opportunities to add attractive assets to the portfolio that we have. Yes, we are actively looking. The opportunity to make good acquisitions at what we think are fair prices is lumpy. We had a series of those last year, more than we would normally have or have normally had in an individual year. I would not draw from 2014 and try to extrapolate that into 2015.
Okay. Fair enough. Thank you, guys.
We'll take our next question from Andre Benjamin with Goldman Sachs.
Thank you. Good morning. The question is on ERS. I know it's up 29% in the first quarter. I was just wondering if you could remind us why you're assuming such a sharp deceleration to hit mid-single digit growth for the year, and how we should think about the puts and takes that would drive upside or downside to that guidance.
Sure. I'll ask Mark Almeida if he wouldn't mind commenting on that.
Sure. Andre, I think it's just a matter of our looking at the projects that we've got underway in the ERS business, and having pretty good visibility into what work is going to get done, and when it's going to be completed, and what kind of revenue recognition we're going to have. The first quarter was very strong. It was largely in line with our expectations. Again, it's really pretty straightforward, and it's a function of the schedule of work that's being done and when we expect it to complete.
I'd just add to that it's also as much of a story about 2014 as it is 2015, in that we had a very strong fourth quarter in 2014 in ERS, which is making for more difficult comparables in the back half of the year.
Right. The other thing to add to that, Andre, is that we did have the WebEquity acquisition mid-year last year. We're getting some benefit from that in the first half of this year. We won't get as much benefit from it in the second half.
Same business. The Global Professional Services, I know you said part of the reason it was down was because of exiting certain products. I was wondering maybe a little color on what that would've looked like if you had kept those products. I don't know how much FX is weighing on that business in particular, given it's more international exposed.
Andre, it's Linda. Mark and I are going to tag team on this because I'm managing Copal Amba, he'll comment on some other factors. As you saw in the earnings release, also on the script, we had exited part of a business for Copal Amba. That leaves us a revenue deficit of about $8 million-$9 million that we're looking to catch up from, which makes it a little harder to have growth on that line. Mark wants to talk a little bit more about the other components of professional services.
Yeah. The other big piece in professional services is our certification business in Canada. The Canadian dollar has fallen pretty sharply. We took a very big FX hit in Canada. Between what Linda described and the FX impact on the training and certification business, it created a lot of headwind for professional services overall.
Thank you.
We'll take our next question from Alex Kramm with UBS.
Hey, good morning. Yeah, Linda, I think every quarter you kind of remind us what the pipeline is looking like. Pretty straightforward question. Any updates you want to highlight in particular?
Sure, Alex. We can have it be pipeline time. What I'll do is I'll note that these are the comments we've gotten from a collection of U.S. capital markets desks. It doesn't align with how Moody's thinks about revenue and expenses. I want to talk about three different areas, investment grade bonds, high yield bonds, and then leveraged loans. Then I'll provide some comments on Europe. Let's look at investment grade bonds first. For the first quarter of 2015, we had $350 billion of U.S. issuance, which was up 20% year-over-year. For the full year, the banks are now expecting $1.1 trillion of U.S. high-grade issuance.
Note that that's up 10% from the forecast that we received in the beginning of the year that we had said at that time were about flat. You'll note that these forecasts at the beginning of the year are always very speculative, and they always move around. The state of the U.S. high-grade market is very strong. First quarter of 2015, it was a new single quarter record for issuance in the investment grade bond market in the U.S. There were jumbo acquisitions from AT&T at $17.5 billion, and Oracle at $10 billion. We're anticipating a very busy May as investor demand remains strong. That's being driven by M&A financing, financial company and bank issuance, and opportunistic activity if, in fact, there is a Fed raise later in the year.
The current pipeline is described as robust, and we don't see that word too often, with many jumbo transactions expected. The thought is that May could rival March in terms of high volumes. Again, March was at $140 billion. We've had some pretty heavy quarters here for U.S. investment grade. Let's look at high yield bonds. For the first quarter of 2015, $100 billion of issuance. That's up 20% year-over-year. For the full year, we're looking at $300 billion of issuance. Again, the about flat outlook there is an upgrade from the prior down 10% view that we had seen at the beginning of the year. The state of the market is very strong. Positive funds flows throughout the year so far. Spreads are performing well, and the pipeline is described as average to robust.
Leveraged loans, which in some sense are a substitute for high yield bonds, are not looking as robust. This is a result of some changes in what we're seeing from the Fed. If you look at the Shared National Credit Program and a press release from November 7th, you see that the Fed has some concerns about high leverage levels in syndicated loans. Again, this program covers loans of $20 million or more with three or more banks in the deal. The Fed talked about its concerns, and that has had downward pressure on leveraged loans. In any case, $100 billion for the first quarter of 2015, down 45% year-over-year, $350 billion forecast for the year, which is down 20%. The market continues to see a little bit of weakness, as I said, because of the Fed oversight.
Issuers, however, have strong demand, are showing strong demand for the paper. The pipeline is judged to be average at this point, and we still see strong year-to-date CLO issuance. $30 billion for the first quarter of 2015 versus $23 billion in the first quarter of 2014, and the last two weeks have seen positive fund flows into leveraged loans. Let's look at Europe and what we're seeing in Europe. Investment grade in Europe, first quarter saw very heavy supply, driven particularly by a surge in issuance from U.S.-based issuers wishing to lock in historically low rates. As you probably saw, Moody's was part of that. The pipeline looks to be above average in May. Some of that attractive spread level and the attractive issuance conditions in Europe has weakened a little bit.
The best conditions were probably in the first quarter, but we continue to see above-average pipeline. Now high yield, a bit different. Market is very strong in Europe, up 30% over the same time last year. A record Q1, strong April, good inflows into European high yield, and that market looks to be quite attractive right now. Overall, U.S. investment grade, very robust. High-yield bonds, robust. Leveraged loans, not so much. Europe investment grade, pretty good, but maybe we saw a peak opportunity in the first quarter, and high yield continues to look pretty good in Europe. Is that sufficient, Alex?
As detailed as anyone can hope for. Maybe just a couple of things just to add there. Obviously, you highlighted the leveraged loans and the Fed. You also, I forgot the word that you used, but you said that high yield and leveraged loans sometimes work countercyclical, if that's the right word to use. If leveraged loans come into continued pressure, do you think the high-yield market can absorb that? Is that from a margin profitability perspective, in particular, if you add the CLO side, are you comfortable that those two businesses, that the high-yield market will be enough from your perspective? Sorry for the long question. On the European side, am I reading it right that you're actually feeling better about how Europe is going so far, but that it's really the FX that's the impact there?
To deal with your first question, Alex, I would say that high-yield bonds and leveraged loans are substitutes for each other. They're not countercyclical. That's a little bit of a different thing. Substitution effect. We are pretty indifferent as to whether we rate bonds or loans. Any kind of speculative-grade security we're able to price a little higher for, so we're happy with either. We released a piece of research yesterday on this situation with the Fed and leveraged loans, and it might be interesting for people on the call to get that. What we see is that more capital has to be allocated to those leveraged loans, and there's stricter lending guidance on the bulk of those leveraged loans, and it applies even if a loan is sold to a CLO vehicle.
We would expect that that would continue, and we're fine with the bonds being stronger. Now in Europe, issuance conditions are pretty good. We would also note that we think that that market continues to look good from an issuance point of view. I'll let Michel Madelain talk a little bit about what we're seeing potentially in terms of new mandates and some other things.
Thank you, Linda. Yeah, in term of new mandate, I think we've seen a bit of a slowdown in the first quarter. We see that as really something that is cyclical, essentially. Overall, the level of growth in Europe is still very much subdued. There continues to be some corporate deleveraging. Against that, obviously, we have very low rate environment, and we have a banking system that continues to struggle somehow. Overall, we were very satisfied with the volume we've seen in the first quarter. A bank loan, we see a similar contraction to the one we've seen in the U.S. Overall, I think we continue to see the structural trends in our favor in Europe, basically unchanged.
All right. I'll leave it at that. Thank you very much.
Thanks, Alex.
Next, we'll move on to Denny Galindo with Morgan Stanley.
Good morning, guys.
Good morning.
Hey, Denny.
Can you talk a little bit about the share repurchases? You bought back at an aggressive pace this quarter. You paid a good price. I know you use a grid to figure out exactly how much to buy at what prices, but can you talk about the kind of metrics that would cause buybacks to go up and down in the quarter? Does the fact that you bought more shares this quarter have any bearing on how much you might buy in Q2?
We do use a grid, Denny, as you point out. The details around that and exactly the pace at which we're going to be buying under that grid as well as opportunistically outside that grid is not something we would want to telegraph.
Yeah, Denny, our guidance has been around $1 billion for this year, the pace was a little heavier in the first quarter. We are pleased with the price that we achieved in the first quarter, $95.20 per share. The stock crossed $110 briefly this morning, we're pretty happy with that. We'll have to see, as we always say, the total amount of buybacks is subject to a lot of different factors. The pacing is something, as Ray said, the actual grid prices are not something that we disclose.
Okay, moving on to the PPIF group within MIS. It sounded like that was pretty strong. It's sometimes hard to get good information on that space. Do you expect public financing to remain fairly strong over the next few quarters? What types of issues are really driving that strength there?
Yeah. The real strength in the first quarter was coming from the U.S. municipal sector of PPIF. That's municipalities taking advantage of a couple of things. Obviously low rates and attractive borrowing conditions. Also the fact that a lot of the volume from the mid-2000s is coming off of lockup and is able to be refinanced is a driver as well. We do think we're going to see a good year for PPIF for the full year. Realistically, the pace that we saw in the first quarter, I don't think that's the central scenario.
Okay, just one more longer-term question. Longer term structured, we're starting to see some innovation in the STACR deals from the GSE or securitizing single-family rentals, which are both kind of ways to bring private money into financing single-family homes. Could you talk about these deals or any other areas of structures which could kind of boost the growth rate in structured products or in that kind of RMBS bucket specifically?
Sure. I'll make a couple of comments, Michel or Linda may wish to make remarks as well. Certainly, innovation has always been a feature of the securitization market. As you said, some of the new product that we're seeing is bringing private money into portions of that market. Also, changes in regulation are going to have an impact on that market going forward, it will undoubtedly drive further innovation. Whether it's the rules for 2016 that are impacting the CLO market and how the market adjusts to that, the leverage limits that are being put on banks, the activity in the banking sector that's being curtailed that may move capital raising and liquidity raising into the structured sector should all be characteristics of this market going forward.
Really, though, for the shorter term, looking out over the next couple of quarters, I think we'd be looking for upside coming from existing product and from a resumption of securitization activity at more robust levels coming out of Europe. Michel, I don't know if you want to add anything to that.
Just one quick correction.
Maybe if I may, just one comment on single-family rental. It's a sector where we have been active. Just in terms of number of transactions, I think that remains a fairly small sector. Although, again, we've seen innovation with new structures. We have multiple originator deals, and so that's a sector where we are present, yes.
Denny, we'll double-check this, but I think you may have confused one concept. STACR deals are deals that come out of the existing portfolios. There's a similar type between Fannie Mae and Freddie Mac. That is to move from the government balance sheet into the capital markets. That's not really a new product, and it has nothing, zero, to do with private capital. That's moving balance sheet exposure for the U.S. government into the private markets. It's not new private market origination. You might want to just think about that a little bit. We're not super excited about the innovation in the RMBS market at this point. There are some of those products, including single-family rental, but these things are few and far between. What we're really looking for is a resumption of the jumbo mortgage markets, the private label jumbo markets. But the U.S.
government is still backing the vast majority of mortgages in the U.S. Still rather limited private capital participation at this moment.
Thanks for taking my question.
Sure.
We'll move on to Joseph Foresi with Janney. Please go ahead.
Hi. I wonder if we could talk first about just the trajectory of the margins in the analytics business. I know it's been an area where you're trying to scale up on the software side, and this quarter might have been affected by some one-time changes. Could you give us a little color on sort of what you think that might look like through the back half of this year?
Mark, would you like to comment on that?
Yeah. I'll comment on what we're doing with the margin generally.
As you observed, as Linda explained earlier, we had some changes that we made in the Copal Amba business and some integration costs that we were dealing with there. If you exclude Copal Amba from Moody's Analytics, the margin for the rest of the Moody's Analytics business actually went up in the quarter. That's even taking into account the drag we had from the two acquisitions that we made. We did have margin expansion on that basis in the quarter. That's the third consecutive quarter of margin expansion in MA. I think it's consistent with what we've been talking about and the efforts we've been making to drive margin in MA. That continues to be a focus.
We think it's achievable, as we've described before, we expect this to be a very long-term effort and something that is going to occur in a meaningful way over a number of years, and not something that you're going to see a dramatic change in over the next couple of quarters.
Okay. Should we think of that as a small creep? I think what that implies, unfortunately what you see in our models sometimes, we extrapolate some of the historical and just kind of run it through going forward. Is that a small creep year-over-year, or do you think that momentum each quarter, obviously excluding the one-times, carries through the back half of the year?
Well, again, what I'm describing was a modest increase in the MA margin, ignoring the Copal Amba business in light of the changes that we were making over there. I think given that we don't really guide to margin for the business, I think that's pretty much all we can say there.
Okay.
There will continue to be some noise on a quarterly basis just based on the mix of activity that we're seeing there.
Got it. Okay. Then just a larger question on the issuance side. For a number of years, people have been talking about the amount of corporate debt out there. I think starting next year and heading into the back half of that year and going forward, that's all going to come due. Do you have any sense of how that plays out from an interest rate perspective and then mixes it to the issuance market?
Yeah. We've talked before about the refinancing walls that we can see on the horizon. This is particularly pronounced in the U.S. and particularly in the spec-grade area. Beginning in 2016, really more of a 2017 and 2018 story, we are going to see substantial refinancing needs in the corporate sector. That's true also in Europe and in Asia, albeit to a lesser degree than what we see in the U.S. I'm not anticipating a dramatic increase in interest rates over this period, certainly at the longer end. I think even though I keep saying this and I keep being wrong, even though I would expect rates to increase on a going forward basis, I don't expect that to be the kind of increase that would make absolute financing terms unattractive.
Got it. Okay. Then last one from me, any comments you have, I know you said you really didn't have anything on the regulatory changes. Any comments or updates there? Thanks.
Nothing really new to report on the legal regulatory side. We'll be filing our Q very shortly. Again, nothing notable that I would point you to as of right now.
Thank you.
From FBR, we have Bill Bird. Please go ahead, sir.
Good morning. Ray, I was wondering if you could talk about what you're seeing right now in the reverse Yankee bond market. Are you seeing that pipeline build? Do you anticipate more companies following your lead and tapping this market? Thank you.
Sure, Bill. I'm actually going to hand this over to Michel and let him offer his thoughts on this.
Thank you, Ray. I think this is really a matter of two factors. One, the currency play, and two, the rate differential that exists between, and the spread differential between the U.S. and European markets. I think on both of these fronts, I think we continue to expect to see favorable factors for such a trend. We don't have a number to offer here, but I think the conditions that have been favorable to date are expected to remain in place, at least for the foreseeable future, for the short term, medium term.
Bill, let me just add something. We show in terms of our revenue performance, the revenues based on the location of the issuer rather than the market into which it is issued. Think about that in the context of our U.S. versus European corporate revenues.
Thanks for that clarification. Linda, could you also give us the incentive comp accrual for the quarter year-over-year?
Sure, Bill. Just a second while we look that up. For the first quarter of 2015, the incentive comp accrual was about $38 million.
That's up from last year's $29.5 million. We're running about on target with where we expect it to be at this point in the year. That number is one that obviously bounces around. If we're doing worse, that number's smaller. If we find ourselves doing better, of course, that number would become a bit heavier. $38 million for the first quarter.
Just one final question. Your more moderate growth outlook for structured and financial institutions, is that just currency or is this something else?
That's really currency. As a matter of fact, most of the outlook story, the changes relate to currency.
Thank you.
Next, we have Bill Warmington with Wells Fargo.
Good afternoon, everyone.
Hi, Bill.
I wanted to start out by asking about the very strong muni issuance, up 37%. Just wanted to see if you could talk a little bit about the conditions that have produced that and your thoughts on the pipeline there going forward for the rest of 2015.
Yeah. The 37% growth is really driven again by the U.S. municipal market, which had a very strong quarter. We expect that the U.S. market is going to continue to be strong through the year, although not at first quarter levels, as I think I mentioned earlier. Again, it's a combination of refinancing with the opportunity to do so in an attractive rate environment, and the expiration of lockup periods for some of the municipal bonds.
Got it. I noticed the MIS relationship revenue growth at about 3.7%, just seemed particularly low. I wanted to ask how much of that's being distorted by FX and if there's anything else going on there that would explain that.
No, it is, again, an FX story. I know this starts to sound like a broken record. We have reasonably large recurring revenues coming out of Europe. A lot of frequent issuer pricing arrangements, and the monitoring fees that go along with that. We're seeing growth, but that growth is really being impacted by the decline of the euro.
Got it. One last question for you on the research data and analytics there. Just wanted to ask about how price increases were trending so far in 2015, what your expectations were going to be there for the year.
Yeah. They're running pretty much in line with the way they were through 2014. We continue to get a nice kick from price, and we anticipate that continuing.
Excellent. Thank you very much.
Next, we have Peter Appert with Piper Jaffray.
Ray, your market share performance relative to peers has been really strong, certainly in the first quarter, and I think even for the last several years. Can you call out anything in terms of what you see driving that performance? Or any particular categories where you think you're picking up share?
Yeah. Our coverage has been strong. Obviously, we would attribute that to a combination of the work we're doing on our analytics and the demand that that is creating from the institutional investor community for issuers to get Moody's ratings. Beyond that, I think it's really a matter of operational execution, and we're paying a lot of attention to executing well. Nothing fancy about that.
No particular asset class? I was thinking about, for example, in CMBS, that one of your competitors has had some issues. Maybe that's helping you?
Ironically, not really in that area. You're correct, the structured finance area in particular shows some coverage volatility. It always has. Rating shopping is more prevalent there. The area where we are strong in the commercial mortgage-backed securities area, in terms of multi-family or multi-property deals, we've been strong in even before there was a moratorium on the ratings from one of our competitors. The strength continues, but it hasn't really changed in terms of the mix we're picking up because of external events.
Okay, great. Thank you. Just one other thing. Feels like maybe the banks in Europe are getting a little bit healthier, or at least they seem to be scraping by on their version of the stress tests. I'm wondering if you think that has any implications in terms of this whole disintermediation thesis, in terms of just the competitive pressure from banks being able to better serve lending requirements.
I guess the short answer, Peter, is no, I don't think so. The demands on financial institutions globally, in terms of meeting stress tests, capital requirements, liquidity requirements, the businesses that they have been curtailed from are all continuing to put pressure on profitability, willingness to make loans, and I think also are increasing the awareness from corporations and municipal entities that they need access to multiple forms of liquidity and capital.
The bond market is not a substitution for bank relationships, an alternative and an addition to the banking relationships.
Sure. 2%-3% is still the right number in terms of incremental revenue from disintermediation, or you think maybe even better than that?
No, I think that's probably a fair number. It's going to vary quarter-to-quarter cyclically, but structurally-
Right
I think that's very much intact.
Great. Thanks, Ray.
Thank you.
We'll take Craig Huber with Huber Research Partners.
Yes. Hi, I've got a few questions. Linda, if I could ask you just to break down the revenues by your four segments, high-yield versus bank loans, investment-grade, and the other three sectors too to start off, please.
Yeah, sure, Craig. We're looking at the first quarter of 2015 over 2014. Investment-grade at $87 million is running at 29% of the almost $300 million we saw in CFG for the first quarter. That 29% is up from last year's 18%. As we said, investment-grade's been running hot and strong, and the jumbo deals are really terrific. Spec-grade at about $63 million is up from last year's $53 million. Percentages are about the same, 21% versus 20%. Bank loans are down both absolutely and in percentage terms, about $45 million versus last year's $67 million. 15% of the total versus last year's 25%. Other is at $104 million, which is up from last year's $97 million, but on percentage terms, down to 35% versus last year's 37%. The big change there is the increase in percentage from investment-grade.
Spec-grade bonds in percentage terms up a little bit. Bank loans down. Very important for everyone to note. We can do okay with a changed mix, and we're doing pretty well despite the fact that the investment-grade piece was stronger in the first quarter. Looking at structured first quarter 2015 versus 2014. Looking at asset-backed securities. Absolute number is about $21 million, about flat from last year's $23 million. Percentages, it's 21% of the total for structured of $101 million, down from last year's 24%. Residential mortgage-backed securities, which does include covered bonds, about $18 million, flat from last year's $18 million. Percentage-wise, down to 18% versus last year's 19%. Commercial real estate up $33 million from last year's $29 million. Percentage terms, it's also up to 33% versus last year's 31%. Structured credit, which is primarily CLOs, up to about $29 million from last year's $25 million.
Percentage-wise, up to about 28% versus last year's 26%. FIG first quarter 2015 versus 2014. $94 million in revenue versus last year's $85 million. Banking, about $63 million, up from last year's $57 million. That stays flat at about 67% of the percentage total. Insurance at about $25 million versus last year's $21.5 million is up to 27% from last year's 25%. Managed investments, $3.5 million versus last year's $6.6 million, is down. That's 4% of FIG's total versus last year's 7%. Others, about 2%. Lastly, PPIF. Total is $100 million versus last year's $80 million. That's a big jump. PFG and Sovereign up absolutely to $56 million from last year's $41 million. Up in percentage terms, 56% versus last year's 51%. Project and infrastructure also up about $45 million from last year's $40 million. Percentage-wise, down to 44% from last year's 49%.
That's the total for PPIF. That's the whole view on the ratings business. We do have the MIS other line, which is something kind of new-ish, Craig. That includes KIS and ICRA. That's up a little bit from last year because the ICRA consolidation, $7.8 million versus last year's $3.3 million. Of course, the ICRA percentage at 56% of the total is higher because we didn't have that view as of last year.
Sorry, just for clarification, the MIS other is ICRA's non-ratings businesses.
Correct.
The ratings agency has its revenues rolled up into the lines of business that we have for MIS already.
Thanks for that clarification, Ray.
If I could ask a simpler question. On the currency side, Linda, I think last quarter, you had about 100 basis points spread between the impact on revenues versus your costs. I believe you said on the second quarter, you are expecting the impact of 4%-5% for each. Is it just rounding, or you really are thinking almost on top of each other this quarter?
It is rounding, Craig. This is pretty hard for us to forecast. What we are looking at is it is a negative 4%-5% in revenue. It is a positive 4%-5% in the operating expenses. As we have talked about before, our main exposures are the euro and the British pound. At the end of the first quarter, the pound was at $1.48, and the euro was at $1.07. We had run this year with the euro at $1.15 with what we have had in our forecast. Now, a very happy phenomenon for me as the CFO is the euro this morning is at $1.12. Ray and I talk about the euro every day.
What that all boils down to is, if you were to see euro to further weaken, a $0.05 decline in the euro would cost us another $20 million in revenue, but help us $4 million on the expense side. The net would be, we would be down $16 million or about $0.05 on EPS. This is actually pretty simple. The shorthand we use is if the euro falls another $0.05 versus the dollar, it will hit us $0.05 in EPS, which is a pretty simple metric for you to use.
I guess I'm also asking, Linda, the 7% hit as you guys calculated it on your operating profit line in the first quarter from currency, expecting a similar type hit here on the profit line from currency?
It could be, Craig. It depends what happens going forward. As I said, we're slightly cheered by the fact that the euro's up a little bit. This is bouncing around far too much for us to put a tight range around this. As you saw, we held guidance, and we don't like to move guidance after the first quarter. That would be a correct observation. This currency piece makes it a little bit harder to know where we're going to go. We're going to have to just watch it. The euro could continue to strengthen, or it could weaken from here. Those two situations don't look the same. That's why we're being a little bit thoughtful, and we'll see where we get to as the year goes on.
Lastly, Linda, is there anything else besides your incentive compensation that you would call out on the variable cost side to help offset any potential weakness at some point down the road on the revenue side? Anything else of significance?
I think we do, Craig. We always have our sort of $50 million in expense flexibility. If things really got difficult, we can slow down on things, and certainly slowing hiring would be the first thing. I always want to put some perspective on this because Moody's is a growth company, and you need to think about us that way. We're looking at 72% of the S&P 500 have reported so far. Sales growth for the S&P 500 all in is minus 4.1%. If you take out the energy companies, if you want to make that argument, the growth is up 2%. We just put up 13% growth and 18% on a constant currency basis. In order to do that, we are spending some money. As you know, our shareholders have been telling us if we can get growth, we should do that.
I think we've demonstrated pretty effectively we're able to do that despite some pretty hefty currency headwinds. We think we've had a pretty good quarter.
Understood. Thanks, Linda.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please signal by pressing star one on your telephone keypad. We'll continue with Timothy McHugh with William Blair & Company.
Thanks. Most of my questions have been asked, but two quick ones. Copal, you said the $8 million-$9 million hit from shutting down products. Since there's different pieces in there with the certification business, I just want to circle back to an earlier question. What's the underlying trend there? Are they seeing still good growth, good demand, if you adjusted for that? Is it possible to strip that out and look at how it's performing without that change?
Sure. I'll comment a little bit. Mark may want to comment. I guess we've had the confluence of two frustrating events in the professional services line. I'm managing the Copal Amba business. Mark is managing the rest of professional services, which includes CSI. The two really have nothing to do with each other than that they're reported up through the same line in Moody's Analytics. I did mention the product line that we decided to reduce in scope for Copal Amba. We very much like the trends and the outlook for Copal Amba. I think I've mentioned before it has generally Moody's-like growth rates and close to Moody's-like margins. Right now, as banks are looking to reduce costs, being able to offshore knowledge processes is growing at a pretty terrific rate. We're very pleased with what we're seeing at Copal Amba.
We were just out in India last week, a group of us. We're very pleased with the opportunity that that business presents. Just a little bit of a lapping problem. I don't know if Mark has anything more to add about CSI than what he's already said. Mark?
I would just add that in training and certification, ignoring the currency impact, which is quite substantial, I'd say the underlying business is okay. It's not growing as well as the rest of Moody's Analytics. It's below trend in that respect. It's all right.
Mark, I guess on ERS, I don't know if I missed it. I think in the past you've given kind of a trailing 12-month sales activity or sales growth rate. Can you give that? I apologize if I missed it.
Yeah. I think Linda did mention it. Trailing 12-month sales is 24%.
Growth of-
Does that include WebEquity or is that an organic?
Yeah, that includes WebEquity as well.
Which would be a small piece.
Yeah, it's a small piece. A couple of points.
Okay. Thank you.
We'll take Vincent Hung with Autonomous.
Hi, good afternoon. I just want to piggyback on the question on market share from before. I'm really curious as to your strong growth in MIS. It's up 12% excluding ICRA versus 6% at S&P. I think one of the sources of dispersion is your non-U.S. result, where you saw a good year-on-year increase, even if you exclude MIS. S&P saw a year-on-year decline. Can you give us some color on the non-U.S. trends you saw this quarter?
I can talk about Moody's. I don't really know anything more than you do about how other firms got to their performance levels in the first quarter. We have talked about the Moody's story pretty extensively here. Vincent, I actually don't have a lot to add to that. I apologize.
Okay, fair enough. Just last question. Do you think it would be harsh to say that leverage lending is structurally impaired?
Yeah. I think that the banks have got to work through an evolving regulatory and profitability environment. That is going to have an impact on lending. It's also, I think, going to continue the disintermediation trend that we've been seeing. I think that's structural as well.
Vincent, it's Linda. I'm going to read to you from the Fed's press release on this topic from November 7. It says, "The annual Shared National Credit Program review found that the volume of criticized assets remains elevated at $340.8 billion or 10.1% of total commitments, which is approximately double pre-crisis levels." Let's assume that the banks are listening to the Fed on that front, and perhaps they're tamping down leverage lending in this higher risk category because they've got to hold more capital against these loans, as we said, even if they put them into CLOs later. It's pretty important that that situation be understood. I'd urge you to take a look at what the Fed is saying and also at the research we've written on this topic.
Okay, thanks a lot.
We have Doug Arthur with Huber Research. Please go ahead.
One quick question. Linda, can you just clarify, I think you threw out a figure of $35 million. I believe you were referring to the quarterly trend in costs Q1 to Q4. Can you just clarify that figure? Is that revised given the somewhat heavier Q1 costs, or there's no change? Thanks.
First of all, congratulations, Doug, on your joining Huber Research.
Thank you.
The mid case, the base case we're looking at now is $30 million of expense ramp. Our first quarter expenses were $494. I think on an earlier call, we had said maybe $500 for the first quarter, and I think we had a steeper ramp originally that might have even been $40 million-$50 million. We're kind of backing off on that. Again, I'd caveat this is probably the number I dislike giving the most because it can vary based on a whole bunch of different things. This is cutting it pretty finely to give that midpoint of $30 million of expense ramp Q1 to Q4. That's our best guess as of right now.
Great. Thank you very much.
We'll move on to Patrick McMahon with Raymond James.
Hey, good morning, or good afternoon, I guess, for you guys. The first question is, with the reverse Yankees, I appreciate you saying that you book it as U.S. revenue, but how are you charging for reverse Yankees? Are you actually generating revenues in euros on that and having to translate it back to dollars?
No. If these are U.S. issuers, U.S. domicile companies, we would be charging those in dollars.
Okay, great. Thanks. A follow-up. S&P or McGraw Hill on their call talked about how the dollar issuance environment was very strong, but the breadth of issuance was not very good. That kind of had ramifications on their growth. Certainly, that doesn't seem to be something that you guys talked about or showed up in your results. Can you just maybe talk about, do you tend to have a preference for a lot of smaller deals versus a few bigger deals? What's the recent environment look like in that regard?
Yeah. When we look at volume and we look at count, obviously we're pleased when both are up. Because of the way the pricing is structured, I would say as a general rule, seeing more smaller issuers, a higher count would make more of a difference than a higher dollar volume.
All right, thank you.
At this time, this concludes Moody's first quarter 2015 earnings conference call. As a reminder, a replay of this call will be available after 3:30 P.M. Eastern Time on Moody's IR website. Thank you.