Moody's Corporation (MCO)

Investor Day 2014

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Sep 30, 2014

Welcome to Moody's 2014 Investor Day. My name is Salli Schwartz, I'm Moody's Global Head of Investor Relations. I'd like to review a few of our logistics with you. First, for those of you here in the room, we'll be holding all of today's sessions here in rooms C and D. For our break, also for lunch, we'll be in rooms A and B, which is next door, where you had breakfast this morning. During the presentations, we ask that you hold all of your questions until the Q&A sessions. If you need any assistance during the day, please look for our speaker helpers who are wearing red tags on their name badges. For your convenience, we've also set up an information desk just outside this room. Finally, for all of our attendees, we're going to have a survey come out. For those of you on the webcast, you should see a link at the end of the presentations today. For those of you in the room, you're going to get an email, please take 5 minutes, fill it out, send it back to us. It very much helps us. Before we begin, I'd like to go through today's agenda. In just a few minutes, Ray McDaniel, President and Chief Executive Officer of Moody's Corporation, will make his opening remarks. We ask that you hold your questions for Ray until the end of the event after his closing remarks. Directly following Ray, Mark Zandi, Moody's Analytics Chief Economist, will provide a macroeconomic overview as our first session. As our second session, Michel Madelain, President and Chief Operating Officer of Moody's Investors Service, and Tom Keller, Managing Director, Geographic Management and Sovereign Ratings, will speak with you regarding our ratings business with a spotlight on developing markets. After Michel and Tom, John Goggins, Executive Vice President and General Counsel, will provide a legal and regulatory update. Following John's presentation, we'll take a short break. When we come back from the break, our fourth session will be with Mark Almeida, President of Moody's Analytics, and Steve Tulenko, Executive Director of Enterprise Risk Solutions. Mark and Steve will be updating you on our Moody's Analytics business with a spotlight on Enterprise Risk Solutions. Our last session of the day covers various aspects of our financial strategy and will be presented by Linda Huber, Executive Vice President and Chief Financial Officer of Moody's Corporation, David Platt, Managing Director and Head of Corporate Development, and Lisa Westlake, Senior Vice President and Chief Human Resources Officer of Moody's Corporation. After that session concludes, Ray will make a few closing remarks. Today's presenters have been with Moody's for many years, an average of over 16 years, in fact. Many have worked for Moody's in various different capacities and in multiple geographies. They have some really great things to share with you today. With that, we'd like to get started. Please enjoy the event and thank you for taking the time to be with us today. Ray? Okay. Welcome, everybody. Thank you, Salli, for the introduction. I hope that you're going to find today's activities informative. To the extent that there are any questions at the end of the session, I will be happy to address those. I'd like you to hear from my colleagues first, so that I would expect you will probably have many of your questions answered in their prepared remarks. To begin, what I'd like to do is offer some comments on a couple of updates. First of all, our guidance, and secondly, our announcement on Copal Amba. Both of these updates are also included in press releases in the back of your packages, but I will briefly walk through the highlights. I'd like to review Moody's mission, which will be familiar to many of you, and preview Moody's business drivers and financial profile, which my colleagues will talk about in more detail. That will then lead to a few summary thoughts, and as I said, happy to answer any questions at the end of the session. The first update is our guidance. Most of our guidance has not changed, but you can see in the bold that we have increased our non-GAAP earnings per share guidance to $3.95-$4.05 from $3.90-$4.00. This updated guidance is non-GAAP because it excludes the gain that we had on the acquisition of majority stake in ICRA of $0.36. It does include our mergers and acquisition costs associated with WebEquity, ICRA, and the anticipated Copal Amba share purchase. We are also updating our guidance with respect to share repurchase, where we now believe we may repurchase up to $1.25 billion worth of shares this year, up from $1 billion previously. A more detailed list of our guidance is included in the press release that we issued this morning, which has some other modest segment adjustments, but these are really the headline items. The second update is with respect to Copal Amba. We expect to purchase the outstanding shares of Copal Amba pursuant to a call option as disclosed in our securities filings. Copal Partners has performed very well since our acquisition in 2011. With the addition of Amba late last year, we now believe we have a complete research product and service offering for financial institutions globally. The businesses have performed well in terms of acquisition and service to third-party clients, but it's also served as a useful offshore platform for Moody's. For both reasons, the business has proven to be very successful. You will hear more about Copal Amba later, but at this point, the purpose of bringing this up is to say that we will complete our acquisition of shares, moving from two-thirds majority to 100% ownership of Copal Amba. That is anticipated to be in late fourth quarter 2014, and is not expected to have any impact on our EPS for the year. We will be using international cash for that completion of share purchase at Copal Amba. Okay, moving to our mission. Many of you have seen this slide before. Our mission is to be the world's most respected authority, serving risk-sensitive financial markets. First and foremost, we believe that means we need to defend and enhance our core ratings and research business, the quality and transparency of our ratings product, the insight and timeliness of our research. Around that, we believe we have significant opportunities to expand our business, increasing our scale in the non-ratings businesses, as well as moving into attractive near adjacencies. We do that primarily through our Moody's Analytics business. We can leverage the competencies that we have, our worldwide brand. We can extend our thought leadership and play a more comprehensive role in credit and risk-sensitive markets, and enhance our relevance in emerging markets. Again, you're going to hear more about the emerging markets going forward. What all this says is, first of all, we like the businesses we're in. It really places a priority on effective execution around keeping up with changes, developments, the evolution of the markets that we are already serving, because those markets, we think, provide a very attractive opportunity for us. As I said, we also see opportunities to increase our scale in some other businesses that we have, and to move into adjacencies with an emphasis on effective disciplined execution. Let's look at our progress over the last few years against this mission. First of all, I'll start with recognition. Both Moody's Investors Service and Moody's Analytics have enjoyed repeated prestigious recognition from a variety of sources for the work we do in ratings, risk analytics, risk modeling, and research. We've had greater clarity in the last few years around the regulatory situation globally, as well as progress on the legal front. There, it's certainly not completely stabilized, but we have a much better understanding of the terrain for our business from a regulatory perspective. Much of the litigation that we have been dealing with post-financial crisis has been resolved. John Goggins will speak to that. We have expanded Moody's geographic reach and our product offerings. The business expansion through Moody's Investors Service, most recently with the majority stake in ICRA in India, and through Moody's Analytics with the acquisitions of Copal Partners, Barrie & Hibbert, Amba Research, and WebEquity. For 2011 through 2013, you can see we have compound annual growth in revenue, operating income, and earnings per share of 14%, 18%, and 20% respectively. We have returned almost $2 billion of capital to shareholders over this period through share repurchases and dividends. What are our opportunities in the current environment? I emphasize that changes really in the banking sector are having an influence over Moody's very broadly, really across all areas of our business. Disintermediation, which many of you have heard me speak to a number of times before, is a powerful driver of new rating mandates. Risk capital requirements, stress testing that is affecting banks, changes in the regulatory infrastructure that addresses risk retention and business activities at financial institutions, has a side effect of curtailing the availability of capital and liquidity through loans and bank facilities for borrowers worldwide. Naturally, they look for alternatives to maintain their access to capital and liquidity, and the bond markets are a very ready source of capital. That means new rating mandates. We have had a very steady and substantial flow of new rating mandates coming not only out of Europe and the international markets, but also the U.S. market, which many of you may think of as a more mature market over the last few years. That disintermediation has been driving our ratings business to a substantial degree. There's also regulatory risk measurement and risk management reporting, and software for stress testing and risk management analytics. This is driving our Enterprise Risk Solutions business. Finally, we have the offshore resources to supply banks with research and other business services so that they are able to continue to service clients and customers effectively with high-quality research but at lower cost points. That's where our Copal Amba business comes into play. You can really see across the ratings, research, Enterprise Risk Solutions, and Copal Amba research services, the changes in the environment for the financial institution system globally are providing multiple opportunities. Turning to the key emerging markets, and we're including China, India, and Latin America as key examples of this. We have opportunities both in cross-border bonds and ratings for cross-border bonds, the development of domestic bond markets, and then other financial services, as well as offshoring. We are serving these markets in a variety of ways, through Moody's Investors Service, through Moody's Analytics, and through a number of joint ventures. These opportunities are situational. They are jurisdiction-specific in many cases. We are using a variety of strategies, tactics, and tools in order to realize these opportunities in these, as I said, key emerging markets. Looking forward, we are sticking with our mission. It is about ratings quality and transparency. Thought leadership on issues of interest to credit market participants is vital to maintaining that sense of quality and the predictive content of our ratings and research. Further extending our businesses and considering select adjacent markets with discipline, but looking at where we are not that we think we can be with our competencies and our brand remains very important for us. On the financial side, we have the realization of additional operating leverage as an opportunity and the continued return of capital to shareholders. This has been part of our communications to you in the past. It continues to be part of our communications going forward. We think opportunities remain in both of these areas on the financial side. This slide should look familiar. It is our four-box revenue growth slide. This is our explanation, our attempt to show why we think that over the long term, on average, we have a double-digit growth business from a top-line perspective. It's a matter of growth in global debt as a result of growth in global GDP, disintermediation, the growth in Moody's Analytics, and pricing opportunities both at Moody's Analytics and Moody's Investors Service. This is a slide that, as I said, most of you have seen before. The message here is that this is intact, in our opinion. What does this mean beyond the top line? You take the four-box slide and you add to that the opportunities that we've identified for ongoing margin expansion and share repurchase, which we have committed to, and that informs a view that we believe we have a mid-teens opportunity for growth in earnings per share on a long-term basis. Again, that part of our message is intact. Finally, just a couple of summary thoughts. Our mission guides intelligent decision-making. The mission provides discipline to our thinking processes about the opportunities we have. It does mean that execution is critical. Disciplined, effective execution is absolutely essential to the future of this business. The business has financial resilience, and we source constraint. We can pursue the opportunities that are in front of us. The financial resilience will be explained in more detail by some of my colleagues. Again, I will be very happy to answer any questions that remain open once we are completed with this morning's discussion. I want to thank you again for joining us, and I want to turn the podium over now to Mark Zandi. Mark. Thank you, Ray. Good morning. It's my task to consider the outlook for the global economy to provide context to today's sessions. Broadly speaking, I'm optimistic about global prospects. Global GDP that's been growing about 3%. That's what it'll grow this year. That's what it grew last year in 2013 and in 2012. I expect that to grow about 3.5% in 2015 and about the same in 2016. A bit of a bump up in growth. Just for context, the global economy's potential rate of growth, that rate consistent with a stable rate of unemployment, is just below 3%. We've been growing just above that, and I expect that growth to accelerate as we move into 2015 and 2016. Leading the way will be the United States. The U.S. economic growth prospects already much improved. Throughout most of the recovery, which is now just over five years old. The U.S. economy's been growing about 2%-ish in terms of GDP. Feels like most recently, growth has accelerated on a sustained basis to closer to 3%. I would anticipate by this time next year, we'll see even stronger growth in the United States, probably closer to 4% as we're moving into 2016. There are many reasons for that optimism. I'll get back to that in a few minutes, try to document that for you a little bit more rigorously. I should point out that the U.S. economy, as you can see from this slide, is very important to global economic growth. This is some results based on simulations of our country models. We maintain 55 models for countries across the globe. Based on that simulation, this shows the impact on global GDP growth from an acceleration of GDP of 1% in each of the respective countries. If you look at the first bar, the U.S., a 1% acceleration in U.S. growth results in an acceleration in global GDP growth of 0.8%. The U.S. economy is still the most important, largest economy on the planet. Accounts for about 20% of global GDP. A 1% acceleration in U.S. GDP directly adds 20 basis points, 0.2 percentage points to global GDP growth. That's the green part of the bar. That's the direct impact from the acceleration in growth in the specified country. You can see because of trade linkages through investment, through financial markets, the stronger U.S. growth leads to stronger growth elsewhere. The light blue part of the bar represents growth in the rest of the developed world. For the U.S., the rest of the developed world would include Europe, Japan, Canada, Australia. The rest of the bar represents the impact on growth in the emerging economies, I've broken that down into EM Asia, EM Latin America, and EMEA. You can kind of get a sense of it. You'll note that China and Europe are also very important to global growth. In my outlook for the global economy, I'm anticipating that the Chinese are able to hit their growth targets. As you know, the Chinese are working hard to address significant imbalances in their economy. As they try to address those imbalances, growth tends to slow. My working assumption is that they won't allow the economy to grow too significantly, that when push comes to shove, they'll use fiscal and monetary stimulus to reflate the economy, they will hit their growth target. Just to give you a number, this year the Chinese growth target is about 7.5%. I expect them to hit that. Over the next several years, which is the horizon that we're considering here, I think they have the resources, the will, and the ability to hit those targets. There's certainly risk around that's my expectation. I'm not expecting a whole lot out of the European Union or Japan. All I'm hoping for these economies is that they continue to grow, that they avoid recession. Growth will be 1% to 1.5%, not enough to really bring down unemployment to a significant degree, particularly in Europe. I am expecting the European economy, the Japanese economy, to continue to push forward over the next several of years. You add it all up, it's a global economy that should see some improvement as we make our way to mid-decade. Now, turning to the U.S. Just to reinforce my optimism about the U.S. because this is so important to global economic growth over the next several of years. There's a number of reasons to be optimistic. Fading fiscal austerity. I expect more out of the housing market as we move forward. I think the most important reason for optimism most recently is it feels like American businesses are engaging and beginning to expand more aggressively in their operations. That for most of the economic recovery, businesses have been focused on maintaining low-cost structures, bringing in costs, and maintaining that low-cost structure. Much more reticent about taking risk and looking for revenue opportunity, for growth opportunity. That seems to have changed at least since the beginning of the year, it feels like businesses are now increasingly focused on how do I grow my business? New products, expanding their footprint. You kind of get a sense of that here. The green line, left-hand scale, represents the job opening rate. That's the number of open positions that are out there in the labor market as a percent of the labor force. I'm showing you data all the way through July. That's the last data point from the BLS, the Bureau of Labor Statistics, I'm showing you all the historical data that's available from the BLS. You can see the surge in job openings that's taken place since the beginning of the year, now we're back pretty close to pre-recession levels. Job openings are a very good leading indicator of hiring. I would anticipate we're going to see more hiring, more job growth, very positive development. Investment has also picked up. Businesses are not only picking up their hiring, they're also picking up their investment. That's illustrated by the orange line, right-hand scale. That's shipments of core capital goods. That's kind of the basic machinery, computer equipment that makes the economy tick. You'll note that that's also picked up since the beginning of the year, and we're above pre-recession levels. This is key to the thinking that growth in the U.S. has jumped from the 2% that has prevailed through most of the recovery to closer to 3% now. Feels like we're off and running. Another reason for some optimism, more fundamentally is, in my view, the U.S. has essentially righted the wrongs that were the fodder for the Great Recession and the weak economic recovery. The U.S. economy has delevered. You can see that in the context of household debts, for example, the household debt service burden, the proportion of after-tax income that households must devote to servicing their debt to remain current on it is at a record low, at least in the data that we have from the Federal Reserve Board back to 1980. The banking system, as you can see here, is in very good shape, very well capitalized. I'm actually very proud of this chart, so just soak this in for a second. This is based on a simulation of our U.S. macro model, and I've simulated the model at each point in time, assuming that a Great Recession-like downturn occurred at each point in time. Same severity, same length as the Great Recession, and based on that simulation, determined how much capital the banking system is over or undercapitalized relative to that Great Recession scenario. It's kind of like a CCAR stress test using our macro model. No surprise, if you go back to right before the financial crisis in 2007, 2008, it shows that the system was significantly undercapitalized, and at the worst of the undercapitalization, the banks needed about $550 billion in capital, based on my simulation. We had TARP force the banks to recapitalize about $300 billion, and improvement ever since. You'll note that in the last quarter, that's Q1 2014, according to the simulation, the system is now overcapitalized. The banking system, the U.S. banking system, in contrast to the European or other banking systems, which we'll come to in a minute, is very well capitalized. One other point to take away from the chart is the trend line. The trend lines are firmly in place, and my sense is that a year from now, certainly two years from now, the U.S. banking system will be significantly overcapitalized. Actually, this will make it difficult for the system to compete with the so-called shadow system, the non-bank system, part of the financial system, just because they won't be cost competitive. They'll have to hold a lot more capital that will make it very difficult for them to compete. One other reason for optimism, again, a fundamental reason, is I would argue that American companies are in about as good a financial shape as I've ever seen them. They've done a marvelous job of reducing their cost structures. Profit margins are at record highs. Earnings growth has been very strong. The best measure of that is probably unit labor cost. That's labor compensation per unit of output, which is we account for labor compensation and the productivity of the workforce. If you look economy-wide in the U.S., unit labor costs today are about where they were 10 years ago. If you look at manufacturing, where the competition is most fierce, unit labor costs today are about where they were 35 years ago. American companies, I think, are very well poised in global competition, and that should help to foster continued significant growth. If you throw in the energy story, it's incredibly compelling, and you get a real clear sense of that here. This shows the cost of electricity. That's on the X-axis, the cost of natural gas, that's the X-axis, the horizontal axis. That's in dollars per millions of BTU. If you look at the Y-axis, the vertical axis, that's the cost of electricity in dollars per kilowatt hour, and showing a number of our competitors in the U.S. The U.S. is far and away the cheapest source, has the cheapest energy across the planet. Just in contrast, you can take a look at Japan at the other end of the spectrum. That's largely due to the effects of the tsunami and the effect on its nuclear program. This picture is not going to change for a long time. The U.S. is in a very enviable position. If we are actually able to get the natural gas into our transportation network, our trucking system, the benefits to the economy will be quite substantive. Broadly speaking, I think we can be optimistic about U.S. growth prospects and, by extension, the global economy, just because how important the U.S. still remains to global economic growth. How are you feeling? This is it. This is the pinnacle. Now we're going to talk about the risks. I am an economist. I have two hands, right? I gave you the one hand, now I'm going to give you on the other hand. There are a lot of risks to this economic outlook. I don't want to bring you down too far, so I'm going to consider three risks to the outlook. The first is interest rates. If you buy into my story, my narrative of stronger growth, particularly in the U.S., an economy that's moving to full employment over the next two to three years, that will mean the Federal Reserve Board will need to tighten monetary policy. Long-term interest rates will rise. This is my baseline outlook for monetary policy, Fed policy. Very consensus-oriented. The Fed begins raising short-term interest rates by mid-next year, June 2015 to be precise. Normalizes interest rates over the next two and a half years. The federal funds rate, which is shown here in the orange line, right-hand scale reaches its equilibrium value by the end of 2017, somewhere around 4%. If you told me it was somewhere between 3.5% and 4%, I wouldn't argue with you. Then settles in at the equilibrium value. The 10-year yield, it's not shown in the chart, but let me just articulate that for you. The 10-year bond sitting at 2.5% today. If you told me it was 3.5% by the end of 2015, 4.5% by the end of 2016, and somewhere between 4.5% and 5% at its long run equilibrium value by the end of 2017, that sounds about right to me. That's the baseline forecast. You can see I'm motivating the tightening of monetary policy with a stronger economy and somewhat higher inflation. The core consumer price index is the green line, right-hand scale, and the shaded part of the bar represents inflation that's above the Federal Reserve Board's target. As measured by core CPI, that's about 2.5%. You can see that I do expect inflation above target for a period as we move into 2017, later in the decade, and that puts increasing pressure on the Fed to be more aggressive. Obviously, the risk here is that interest rates, particularly long rates, rise more quickly than I'm anticipating. We got a sense of the possibility of that this time last year when Chairman Bernanke started talking about tapering QE. Long-term rates jumped. That did a fair amount of damage, hurt the housing market, growth was impacted. I think the Fed has all the tools that are needed to gracefully raise rates as the economy improves and as we approach full employment. Certainly have the will to do it, the right person and place to do it. Nonetheless, the risk is there that this is going to be tricky. The Fed's never gone down this path. We'll have to see how it works out. One other quick point about this, though. I think the risks with regard to the interest rate outlook are not completely asymmetric. It is possible, with a meaningful probability, that particularly long-term rates end up being lower than I'm anticipating in my baseline. We've got a good case study of that this year. The long bond came into the year at 3% expectations that were that it would continue to rise. My expectations as well, and here we are sitting at 2.5%. Lots of possible reasons for that that may persist, and therefore, we could see long-term interest rates remain lower. Of course, that may also mean the Federal Reserve will have to be more aggressive in tightening monetary policy to get the same growth trajectory. That would mean a flatter yield curve. Nonetheless, a key risk is interest rates. Adding to the concern about rates is adjustments in the emerging markets. As you know, this time last year when long-term interest rates, global interest rates jumped, it put a significant amount of pressure on emerging economies with current account deficits. It showed up in the emerging market debt market here. You can see the orange line represents yields on emerging market debt relative to treasuries, and you can see how the spread jumped last year. I'm just showing you the U.S. high yield corporate treasury spread just for context, to give you some context here. Brazil, Indonesia, India, Turkey, South Africa, all emerging economies with large current account deficits. As global interest rates rose, put pressure on capital inflows, their currencies fell in value, generated inflationary pressures. Central banks had to tighten monetary policy. Those economies have slowed quite substantively. In my baseline optimistic worldview, I think most of the adjustment to these higher rates has already been baked in. The currencies have adjusted. The central banks have adjusted. Going forward, I don't anticipate that the adjustment will be quite as significant as it has been to date. Obviously, a lot of risk around that, too. The rising rate environment is something that poses a threat to my optimism. A second reason for nervousness around my baseline is Europe. As I articulated, I do expect the European economy to hang tough. I do think policymakers are working hard to keep the economy moving forward. The European Central Bank is being quite aggressive and will probably have to announce further actions to stimulate that economy. Fiscal policy has become less austere. I think that's a positive thing in the near term. I do expect the European economy to hold together and to generate growth and remain out of recession, at least over the next several years. Again, the horizon that I'm considering here. The risk is that this goes badly astray. One big test of the European economy is the European stress tests, which are now being completed. We're going to get the results of this year's round of stress tests in October. This gives you a sense of what to expect. This shows the common Tier 1 equity ratio for the 24 largest banks in Europe. The green bar represents their current capital ratio. The orange bar represents the ratio after applying the stress scenario. This is our estimates of what happens to these top four European banks. The blue line, that represents the minimum. If under the stress scenario, the capital ratio falls below the blue line, then you fail the test. You can see in the chart, two banking institutions actually fail. Another dozen or so institutions are very close to that blue line. We'll have to see how this plays out. I actually think it would be quite therapeutic if a number of institutions didn't make it through and were asked to make changes and to recapitalize. I think that would be indicative of a truly stressful stress test, we'll have to watch this very carefully. I think it's a good litmus test for my baseline outlook. Obviously, a lot of risk around this. Finally, one other set of risks to consider is geopolitical instability. This is obviously very hard to handicap. A lot of things going on out there. The mayhem in the Middle East. Kind of forgot about Iran and its nuclear program, I'm sure that's going to come back to the fore. Russia, Ukraine, you can see why that's important from this chart. This shows oil production by country in 2013. Russia's at the top of the list, obviously, if things go astray in Russia, that's a problem for global energy markets, which is a problem for the global economy in my outlook. Just looking at Asia, if you sit in Asia for any length of time, you get a real sense of a lot of tension. What's going on in Hong Kong today is just symptomatic of that. A good example of that. In my optimistic worldview, I'm basically putting all those things aside and saying, I don't think they're going to boil over and become macroeconomic events. I think they'll remain manageable. Obviously, these things run on their own dynamics and difficult to gauge. Thus, certainly could go off the rails and derail my optimistic outlook. I'll end this way because I don't want to end on a down note. I think it's fair to say that there are risks. They abound. I've been a professional economist now for 25, 30 years, and I'd have to say the environment feels about as less risky as it has in those 25 or 30 years. There's always risks, and there always will be. It feels like they're just much less threatening today than they have in a long time. I think our prospects are quite good. With that, I'll stop. I think we have a few minutes for questions, comments. I see a hand immediately. Can you wait? I think we have a mic. Yes, we do. The question is right over here. We're doing this because we have a bunch of folks on the web. There we go. Mark, when you talk about sort of slow growth in Europe, can you break that down in terms of Germany, U.K.? I mean, just some granularity, Northern Europe versus Southern Europe. How do you see that playing out over the next couple of years? What's going to lead it? What's going to be a drag? Sure. Well, there's this town in Italy. No. There is a lot of disparity, a lot of variability in performance across Europe. I think the best growth prospects are in the U.K., Ireland. Primarily because the British Irish have put their banking system, financial system on solid ground pretty quickly, much like we did. I think that's the distinguishing factor here between economies that are recovering quickly and those that are not. Because a sound financial system, particularly in Europe, because the banking system in Europe is much more important. If you don't have a sound banking system, financial system, then credit's not going to flow. If credit's not going to flow, you got a problem. That's key to economic growth. That just drives everything. In the case of the U.K. and the Irish, they were much quicker, more diligent to force their banks to recapitalize, very similar to the U.S. experience. Thus, their economies are now more engaged, and we're seeing growth. In contrast, if you go into Europe, this is the third stress test the European banks have been engaged in. First two were not therapeutic at all. There was nothing therapeutic about them. After the first one, the Irish banking system went belly up. After the second one, within a few days, Dexia, the big French Belgian bank, went belly up. Obviously, they were not a stressful stress test. This one feels much better to me. I highlighted that because that's the key. We'll see what the results look like in a few weeks to get a better gauge of that. If you look across continental Europe and their banking systems, and financial systems more broadly, it feels like to me the Spanish are ahead, primarily because they were forced to recapitalize. Their system nearly collapsed back in 2012, and their banking system had to restructure and a lot of capital came in. They're on much sounder ground. They're a more dynamic economy anyway compared to many other European economies. In contrast, the Italian banking system is well behind, and it needs to recapitalize. That's going to grow more slowly. Obviously, this now leaves Germany and France. I think French prospects are pretty poor. I think they'll be able to navigate through and see some growth. They've been very slow to engage in labor market reforms and reforms to the product markets, and it's going to be much more difficult for them to grow more quickly. The German economy should be fine, and that's how you basically get a European economy moving forward, right? That's why I expect growth. That is a very competitive economy, particularly as the euro goes south. We were at EUR 140, we're now at EUR 120, closing in on EUR 125. If you told me a year from now we're at EUR 115, I'd say that sounds about right to me. That makes the German economy ultra-competitive. I think they'll be able to continue to move forward. As long as they continue to move forward, the European economy in aggregate will move forward. A lot of variability across the various countries. Yes, sir. Oh, can you wait? Here we go. There you go. Okay, thanks. Mark, could you just give us your perspective on where you think we are in the debt issuance cycle? You mentioned kind of a general growth outlook of 3.5% for global GDP for kind of 2015, 2016. Do you think debt issuance will be at or around that level? Yeah. Ray put up a really nice chart. Remember that chart that says, how do we get the growth at Moody's? The first part of the chart is global GDP of, it was like 3%-4%, I believe. No, it was 2%-3%. I can't remember. Four. 2%-4%. You'll note my forecast was 3%, right? That's how we-. Yeah. There you go. Yeah. A happy coincidence. There's a piece for pricing, so inflation, a piece for disintermediation, and because we're very good at what we do, a piece of growth for that. I think that's roughly right. From my perspective, that feels roughly right to me. You get 2%-4% global growth, say 3% is down the middle of the distribution. You get a couple 3% for global inflation. Our pricing is probably 3%-4%. You throw in the piece related disintermediation, which is what you're asking, 2%-3%. That sounds exactly right to me. It goes back in the U.S. in the context of what's happening to the U.S. banking system. I'll just use that as a good example. If the system is going from being appropriately capitalized today, which will almost definitely be over-capitalized one, two, three years down the road, that's going to make the banking system uncompetitive. It's just not going to be able to compete. You can already see that, and I'm just using this as a case study, in the residential mortgage market. The large U.S. banks are exiting the mortgage business, not doing as much FHA lending, GSE lending. There are lots of reasons why, obviously, but one of the reasons is capital and the cost of capital relative to non-banks. A lot of the origination business is just moving from these big banks that dominated the mortgage market five, six years ago to non-banks, institutions you don't even know who they are. They're just popping up everywhere. That's symptomatic of that process of disintermediation. That's happening here in the U.S. That definitely is going to happen in Europe too, almost by fiat, right? Because the European Central Bank has now made it a priority to develop the non-bank part of the system, the asset-backed securities market, the covered bond market, those kinds of things. I think that's, in terms of where we are in this credit cycle and this process of disintermediation, I think we're still in the early days. There's a long way to run here, I think. Hard to that. Mark, two quick questions if I could. One, what's your updated thoughts on the U.S. budget deficit and also with $15+ trillion absolute federal debt? That's point 1. Point 2, follow on to Bill's question. Your interest rate outlook for the U.S. 10-year rate for the next three years or so, do you think at all if that plays out that way, that'll upset the apple cart at all on the debt issuance front for corporates and financials in this country? Thank you. To the first question about the fiscal outlook, I think I'll say two quick things. First is, I think lawmakers, Congress, the administration, have done the minimum they need to do with regard to tax and spending policy to stabilize the fiscal situation over the next three to five years, my horizon for this discussion. The deficit is going to come settle in around 2.5%, 3% of GDP. That means the nation's debt-to-GDP ratio will stabilize at a high level, but it'll stabilize around 75%. That means, from my perspective, Washington will not be on the front pages. We're not going to see the kind of battles we've been seeing because the fiscal situation is stable. The second thing I'd quickly say is, we've not solved our long-term fiscal problems, right? If you look out into the next decade, under prudent assumptions about the growth in healthcare demand and more importantly, the cost of healthcare, the Medicare, Medicaid programs are going to grow, and it's going to swamp us. We're going to have to take another crack at healthcare reform and our fiscal issues. That's just not going to happen between now and the end of the decade. That's something for the next decade. We've done just enough to stabilize things and get it out of the way so we can let the private economy to shine through. That's basically what I'm arguing here. In terms of interest rates and its impact on debt markets, my thinking is, my view is that essentially the Federal Reserve can engineer both short-term and long-term interest rates higher, consistent with an improvement in the economy. As we get more growth, we get more jobs, we get more investment, we get declining unemployment as we approach full employment. The Fed allows interest rates to rise. What that means is the better economy, broadly defined, will trump the ill effects of the higher interest rates and we'll be fine. We'll get the kind of growth outlook that I'm anticipating, and the impact on debt markets will be modest. The stronger growth will, again, trump the higher rates in terms of its impact on issuance, and we'll be golden. We'll be good. On that happy note, I've taken my time. Appreciate the great questions, I'm now going to turn the podium over to Michel and to Tom. Great. Thank you. Thank you, Mark. Good morning, everyone. I think the session we just had provided a very helpful background to my own comments and you'll find a lot of touch points between what Mark just covered and what I will be covering. My message today, I really center on three points, and they relate to the confidence we have about the business, the growth opportunities we see, and the importance of execution, something that Ray mentioned earlier. Why are we confident? One, because the credit and economic cycle are supportive to our business. Mark made some of these comments before. We have a good business momentum, and this momentum is underpinned by robust and resilient growth drivers. We expect that the impact of the normalization of the U.S. military conditions that under the scenario that Mark just described earlier, will be manageable for MIS. My second message today is that we are seeing significant growth opportunities in our business and our portfolio of activities. Accordingly, we continue to step up our origination capabilities, our execution capabilities, and our footprint accordingly. The third point I want to make today is that we continue to successfully execute our business strategy, and that strategy is redesigned, 1, to strengthen our core business operation, and 2, to invest in the long-term growth of the business. Tom Keller will join me in a few minutes, and will provide a more direct spotlight on developing markets and what do we do in those markets. Before that, I want to go back to the environment we're operating in. As I think you did get from Mark's comments, we believe that the environment for Moody's has actually improved over the last 12 months. This improvement is really driven by several factors. The first is the fact that we have a slow but gradual recovery of global economies, developed economies, with the U.S. leading the way, and the U.S., as Mark alluded to, is really also impacting economies outside of this region. Second, we're seeing an extension actually of the duration and a slower pace of transformation of the accommodative monetary policies, and that's positive for our activities. We also see a diminished tail risk in Europe, following the ECB intervention of the last year and the messaging we did get recently around quantitative easing or the potential for quantitative easing. Fourth, we see also an increasing demand of complex and higher-yielding assets, which is also favorable to our activities. You see that in the growth of new capital instruments for financial institutions, for example, but also you see that in the level of activities we have in asset classes such as speculative grade bonds and loans or CLOs, for example. Now, as Mark said, I also have two hands and we have the plus and the minuses, and we have some sources of volatility and vulnerability. The first is obviously the impact that a lifting of the QE will have on emerging markets and the more risky asset classes. Another is the fact that there is a downside risk to the baseline scenario Europe is having today of fragile and recovery. Part of the reason for the recent action of the ECB are directly addressing actually this risk. Third, also something that Mark mentioned, are the importance of the geopolitical risk we see in Eastern Europe and the Middle East. Probably for us, Eastern Europe is the area that is one we'd be the most focused on, at least in the short term. I think what is important to note is despite those risks, we believe that the impact of a downside scenario and the timeline of such a scenario has somehow receded. The chart you have in front of you at the moment really position our activities along basically four quadrants of the credit cycle: slow down, repair, recovery, and expansion. What you see on this chart is that the vast majority of our activities, by revenue, are actually positioned on the two quadrants, expansion and recovery, where we expect to see credit expansion effectively, which is obviously a favorable position. I would also note that we do see a high volume of activities in the other quadrants, this is largely driven by factors that are not cyclical but are more structural in term of the evolution of these credit markets. Two other points I would like to make. The first is that we are operating today, in a more stable and predictable regulatory environment, we have had the final readings on Dodd-Frank. The provisions that were finally implemented are very close to what we had already put in place. Again, in Europe, we are basically past the stage of new rule-making, and we have also implemented the features of the new regulations. This is a window of stability. Things may change. We have to be ready for that. In interim, I think we are coping with additional measures that come from rule-making or the examinations. We are subject to other things that lead us to introduce changes in our business processes. Those are really minimum in relation to what we've experienced before. Again, this is an important point to note. The second relates to the competitive landscape, here I would point out that the situation today is actually very close to the one we are observing over the last year or so. No change to report here. Now, a good question to ask relates to issuance volumes and whether or not the current level of activities we have today is sustainable. The chart you have in front of you here is trying to address this question. What you see, you basically have three lines to look at. One, a blue line, reflects the historical peak of issuance we have seen in each of these asset classes. The yellow or orange line refers to the level of activity we've seen over the last 12 months, trailing 12 months. The green activity relates to the average for the last three years. The distance between each of these three points give you a gauge of the level of activities we have. What you see here is that we have three segments that are actually large and meaningful, that are currently at a high-water mark. This is U.S. investment grade, U.S. infrastructure finance, and EMEA high yield. You also see on this chart that in investment grade in EMEA, we are still in infrastructure. We're still far from the peak. You see that in structured finance, we actually have plenty of room to grow to get back to volumes we had experienced historically. Now, the question is really, are we or should we be concerned by those high-water marks? Again, the point I'd like to make here is that obviously, we are paying a lot of attention to that, but there are a number of factors needed to be considered in making that assessment. First is that we have a gradual recovery in the economies of a number of countries where a lot of activities is taking place. Two is that we do not expect rapid migration from a low-interest environment for a number of reasons that were mentioned before. The lower tail risk in Europe is also an important consideration. The pursuit of disintermediation, which I'll address later, contributes also to this comfort. Finally, the fact that we see a sustainable demand for complex and high-yielding instrument in a context of low rates also contribute to our assessment of the situation. Moving to MIS revenue growth. In this context, we continue to deliver strong revenue growth. For 2014, our guidance suggests that we will be crossing the $2.2 billion mark, which is an increase of about $1 billion from the revenues we had at the low point in 2008. A word about the mix of our revenues. About half of our revenues today is derived from non-financial corporates. The balance is really spread almost evenly across the three other lines of business. International versus domestic, we are hovering around 40% for international revenues today. Part of that is due to the strength of our U.S. business, obviously. Overall, we don't expect really a strong shift from those numbers in the short term. This is a slide you've seen before. You should be familiar with it. It was in last year's presentation. The key points to make is simply that the two higher growth, the blue segment and the medium growth segment, are actually larger this year than last year. This is really due to different factors. Overall, we now have a portfolio whose mix is oriented to higher growth. I want to now really discuss briefly three important They are low, and we expect them to stay low over the medium term. Just a point of reference, we expect U.S. speculative-grade default rates to increase moderately from 2.5%-2.9% within the next 12 months. Just The peak we saw end of 2009 was 15%, and we've seen a lower level of default now for several years. Mark made some comments about the strength of balance sheets in the U.S., and that comment actually applied to many of the regions where we're operating today. Now, interest rates. A year ago, all of us were thinking about the events of the summer and the prospect for a more rapid increase in rate and the implication for issuance. This obviously continues to be a relevant consideration. There are 2 notable difference, actually, from where we were a year ago, that result in the impact of such increase being pushed out, and actually a slowing down of the pace of change to be expected. It's very clear today that the priorities and concern about growth and sustainable growth is taking a clear precedent over the urgency to change the rate environment, and Mark made a number of comments on that. That's true for the U.S., but if you look at the situation in Europe, also obviously an important market for us, you can see that the EU is very now much closer to a QE program and has made very strong statement about its intention to continue to maintain very low rates for an extended period of time. Now, we all expect at some point to see an environment of higher rates and lower liquidity, we also expect that to happen in an environment where the economic conditions will be improved, and will mitigate effectively the impact of rising rates. Now, a point to make is that as U.S. yield rise, we should expect that the appetite for riskier assets will diminish, and the impact will be on emerging market debt and also on some of the most riskier assets we're seeing today, and we should expect some dampening of the demand for such assets. To be clear, we do expect, therefore, that this transition will have some impact on the growth efficient volume from the unwinding of QE. Again, the impact will be mostly centered on non-financial corporates, and with a focus on speculative grade and emerging market debt. Turning to a second factor that continues to underpin our confidence, and that's relates to disintermediation. In EU, the share of bonds as a proportion of total financing of corporate debt continue to progress. The chart you have here illustrate the adverse trends we see between bonds and bank debt in term of expansion and contraction. Just to give you a point of reference today, when we look at the universe of speculative grade issuers we have in Europe, banks are providing about 40% of the financing of these companies. 60% is provided by the bond market. This type of mix is also one you find with the very large corporates. What you see really is an expansion, which it does not translate into the stock figures you see here in term of ratio of bond over total debt. That trend is happening, and it's happening very visibly. Now, this is a long-term development. This is not something that is happening overnight. If just to step back, the divergence between the financing structure of the U.S. economy and Europe economy started 50 years ago. 50 years ago, they were more or less at the same level. We had a divergence with the U.S. relying increasingly very heavily on the public debt market, and Europe staying really very close to its bank as a source of funding. 15 years ago, that trend has been reversed, obviously this is something that takes time. We expect that as the economy in Europe improves, because the situation of the banking system, as a point that Mark made earlier, bond markets will be a privilege as a source of financing. We see actually a lot of policy initiative at the moment being made by policymakers in Europe to facilitate the development of the bond market. Now, the third element of the source of confidence relates to the maturity structure of the debt we rate. Here, three observation. One is what you see here, the green chart here shows you that we have a fairly sort of a well-spread level of maturities when it comes to investment-grade issuance. We have strong peaks in front of us in term of refinancing for spec-grade bonds and loans, and that's obviously more important in the U.S. A point I also like to draw your attention to is that despite the level of refinancing we've seen over the last several years, when we look at the volume of debt to be refinanced over the next 4 years, in the U.S., that volume has increased by 13%. You would not expect that figures when you look at what has happened, that's what we're seeing. In Europe, by contrast, what we've seen actually is that the volume of debt to be refinanced has contracted by 1%, but still at a comfortable level. Now, I want to say a word about structured finance. First, I think from the chart I showed earlier, you could see that the volume of issuance we're seeing is still very far from historical benchmarks and the peak coefficients we saw earlier. We are seeing growth, and you could see that by comparing actually the last 12 months to the last three years. That's happening across all asset classes. Obviously, there is one exception, U.S. RMBS. There as you know, the wild card is really the reform that may or will take place in that space. We don't expect that to be happening in very short-term, so we expect that asset class to remain very subdued in term of activity. The second point I'd like to make is the asset classes where historically we have had very strong position, are performing very well. Those are CMBS and CLOs. We are also benefiting from the improved economic environment, and through the growth of the ABS market, basically. In Europe, there's been a lot of discussion by policymakers about measures that can be taken to restore a functioning market for structured finance securities. There are several objective in mind. Some are about credit expansion and providing avenues for funding for corporates large and small in Europe. The other is also related to the asset purchase programs that the ECB is contemplating, and there will be some announcement very shortly by ECB about plans around the ABS purchase programs. All of that continues to support our commitment to position this business for success, and we're continuing to invest in number of ways financially and non-financially to make it successful. A few words about our coverage in this segment. As it stands today, our volume of coverage is a concept that relates to market share for many of you. As it stands today, the volume of U.S. backed in ABS in the U.S., we are in the low 60s in term of coverage, and that coverage continue to improve. On the other end, we have leading positions in other asset classes such as real estate, CLOs, cover bonds, and we are leading in Europe in term of coverage. That said, I think it's clear to all of us that structured finance remains a challenging market for us. We have increased competition, we have rotation by issuers. We have, in some cases, the lack of real money investors, and all of that make it obviously challenging. The message I want to leave with you is that we are executing our strategy with discipline, and this strategy is delivering results through improved analytics, improved engagement, and improved financial performance for that line of business. A year ago, Rob Fauber, who works with us, and is responsible for commercial and strategy within MIS, presented growth channels, capabilities, and results at MIS. Rob was actually on his way back from Asia and could not be here with us today. I try to build on his comments and really stress the importance of the work this group is doing to drive our customer engagement in support of growth. This will be providing actually a good segue into the comments that Tom will be making in a few minutes. We have a group of 140 associates who are devoted to relationship management functions in the organization. We have this group across 22 countries. Really, their mission is centered around three things. One is for new business development, two is really around account management, and the third is focusing on new product development. I've just returned from Asia, actually, where we had a regional management meeting, and I want to use that region to give you an illustration of some of the dynamics that are taking place in that group. In Asia, our accounts for the commercial group increased by 50% over the last three years. The number of companies we're touching every year has tripled, and we now have a program of reaching out to about 1,000 companies in Asia annually. Then, in terms of new mandates, the volume of new mandates has increased by 50%. That's what this group is delivering, and that's why we believe that it's very important that we continue to develop their capacity and their footprint in order to generate that level of growth. In order to do that, we need to obviously be able to create value, and I'll come back to that in a minute. Before that, I want to share with you two things that I think make this international operation particularly valuable. The two things are, one, that we see, obviously, a lot of new mandates, I just alluded to that, but also importantly, that there's a significant potential in terms of the differential between the revenue we're generating from the debt we rate in those countries compared to what we are generating in the U.S. The U.S. being first our benchmark. What you see on this chart is our revenue for a million of debt outstanding in the U.S. is about $34. In Asia, it's about $6. Our goal is obviously to see convergence with these two numbers. It won't happen overnight. It's a long-term play. You can see here that if you combine that with the growth potential in terms of volume, this is something that offers a significant opportunity. As I said, in order to do that, we need to be able to create value and to the investors and issuers and all the users of our ratings. We obviously are very focused on that. I'm sure you may have read some research from FBR Capital was really comparing the cost of a rating fee, an average rating fee of six basis point to 30 basis points differential between the yield on a rated and unrated securities. We want to make sure that that value remains or is expanded, and we are very engaged through a number of initiatives to create that further value in monetary and non-monetary aspects. I think we are getting significant traction and some of the awards that Ray alluded to earlier today are a good sign of that. To summarize, what I've been discussing today is really the confidence we have in our future, is the opportunities we have in our portfolio. The third point I wanted to make is really, was around a successful execution of our strategy that you can see through today our financial performance and the quality of our execution. With that, I want to turn to Tom, who is going to discuss what we're doing in the international space. Thank you, Michel, and good morning, everyone. I'm here with three messages to spotlight on the developing markets. First, we are doing very well in all the large domestic markets. Second, we have developed robust plans to enter new developing markets. Third, we have the organizational capability in place to execute well everywhere we are. We can start by taking a look at our extensive global network. We have a strong global footprint providing ratings in over 120 countries. Also, we have offices in 22 countries around the world and have additional coverage of domestic markets through seven affiliate relationships in key markets, including India and China. Third, in India, we recently increased our stake in ICRA, a leading domestic credit rating agency. As you can see, we've had strong revenue growth from developing markets. Since 2008, developing markets have delivered a CAGR in the high teens. Also, over the past few years, growth has been very good, particularly strong in developing countries in Asia and Latin America. On top of this, which is not on the slide, we have additional revenue from our affiliates in Korea, India, and China, which is substantial. Let's take a few minutes to review how we're deepening MIS participation in developing markets. Emerging markets offer substantial opportunities for continued growth. A personal example, when I moved to Hong Kong in 2002, we had about 40 people in that office. Today, we have about 300. That's an increase of some 700%. Emerging markets have strong forecasted GDP growth and significant financing needs, as illustrated by the rapid credit expansion observed over the past five years. Traditionally, banks have provided most of the financing, but as the savings, trade, and investment flows grow, we typically see the share of cross-border bonds gradually increasing in domestic and cross-border financings. Consequently, we expect domestic bond markets and companies accessing cross-border markets to continue to grow substantially in these regions. In the newer domestic markets, ASEAN in particular, we have a window of growth opportunity in the next several years that we need to move through. We'll be able to take advantage of the future growth. We are positioning MIS to take advantage of the long-term shift in economic power of these developing markets. In these markets, there are two distinct segments. One is the global cross-border market, the other is the domestic market. Global cross-border markets are defined as when a debt security is sold in one of the global financial centers to investors located either in that market or another market. Domestic markets are defined as where the debt security is sold in local currency to mostly local investors. The key is that these investors in these markets will also migrate from the domestic market to the cross-border markets as they grow. All of this is why we need to begin our relationships early in these markets. We have identified three major areas of investment, and these are critical markets in which we have. First is that area of significant investment. These are critical markets in which we have a strong presence, and we will continue to execute successfully. For example, take India and China, these countries where we have already made significant investments in affiliates in order to position MIS for potentially very large domestic markets. Second, enhancing the footprint. These are countries and regions where we have existing presence and are actively evaluating tactical expansion opportunities. These include countries in Central and Eastern Europe, Latin America, and the Middle East. Third, early stage. These are regions, ASEAN and Africa, where we have strategies to establish our presence now so we can capitalize on future growth. Let me summarize our strategy. We want to focus on areas with significant growth potential for MIS. First, in cross-border markets, we will take actions to continue to strengthen our position. Second, in domestic markets, we are increasing our activity by establishing new offices or working through affiliates. Third, we're becoming more local. I should point out that the engagement model with key market participants and policy makers is different than in cross-border markets. In particular, since the use of ratings in domestic markets is relatively new, there is much more educational and foundation work to do. For example, we have to explain what a rating is and how our methodologies work. In addition, our corporate activity must ensure that we have the right management and control structure in place to manage risk in these remote domestic operations. Now let's turn to India and ICRA. In June, we acquired an additional stake in ICRA, which is a domestic rating agency in India. This investment took us to a majority position and is key component of our international strategy. We're very excited about completing this acquisition because ICRA has a very good reputation for ratings quality and service. ICRA is currently the third-rated player in the market behind CRISIL, which is an S&P affiliate, and CARE, which is a local credit rating agency. We are currently conducting an extensive strategic and operational review with the management team there to maximize our opportunity. Like other developing countries, India's credit rating market has been driven by regulation. Finally, let's turn to China and what we're doing with our domestic market and cross-border strategies. In China, we participate in the market in two ways. One is directly through offices in Beijing, Shanghai, and Hong Kong, and this is how we serve the cross-border market issuing ratings out of Hong Kong. The other is through CCXI, which is our affiliate in China, who issues domestic ratings and where we have a 49% stake. It's important to note that MIS has the number 1 position in the cross-border market, and that CCXI has the number 1 position in the domestic market. In addition, MIS has expanded our China business development team and opened a second office in Shanghai. Finally, we built a dedicated research team to support our outreach to new issuers. Overall, the Chinese market continues to grow substantially, and there still is a significant disintermediation opportunity because outstanding corporate bonds are approximately 15% of GDP. We believe there is very good growth potential for fixed income markets. To summarize, first, although developing markets are volatile compared to developed markets, we are very well positioned to capitalize on the long-term growth opportunity in these important markets. Second, we've had strong revenue growth in developing markets and fully expect that to continue. Third, we believe the power of economic growth and disintermediation will continue to offer good growth opportunity. Finally, it's a very exciting time to work in rapidly growing large developing markets, as well as to increase our growth in the smaller developing markets. Thank you, and I'll now turn it back to Michel for closing remarks. Thank you, Tom. Just to close this session, I just want to again stress that MIS has an experienced management team, strong, has delivered, and is executing well on the strategy we have assigned. We are very focused on being disciplined in our execution to the point Ray made earlier. We also are very focused on our position in developed market as well as the opportunities that Tom mentioned earlier. We have a strategy that has been validated by our strong performance. We have a franchise that is robust, and really, we are very confident in the long-term opportunity and growth for MIS, and that's the message we want to leave with you today. With that, I think we have some time for question. Salli, I don't know how much time we have or how we want to organize. 15 minutes. Okay. plenty of time. Thank you, Michel and Tom. Just a few reminders, if you could raise your hand if you have a question, and then wait for the microphone so that we can allow our webcast viewers to also hear the questions. I'll start right back there in the back of the room. Thanks. Earlier in the presentation, you talked about the growing economy offsetting rising interest rates, and then I see this chart where it seems like there's a direct inverse correlation between interest rates and debt issuance. Could you just connect the disconnect, if that makes sense? We've been discussing at length the impact of increasing rates and volume of issuance. I think the point we're trying to make here is that raising rates in the absence of economic growth will be a negative factor for issuance activities. Although we've seen historically that impact varies. We've seen periods where rising rates did not translate into lower issuance. We've seen situations where the impact was actually differentiated between investment-grade and spec-grade issuance, and I think we covered that last year in our presentation. I would refer you to that, if that's helpful. The point we're trying to make here is that And that's the difference with where we were last year, is that we see this year, the increased rate environment shaking hands somehow with basically an improved economic environment, which is conducive to higher level of issuance. The point that both Mark and I think Ray made earlier when relating GDP growth to issuance volume. Okay, great. One other. The couple slides after about the debt maturities providing a tailwind, does that move the needle? I just don't know how big of a % of the business that is. Is that a big deal, or is that just modest? Well, refinancing is an important- Right factor, provides, I would say, a bench basically to issuance. For us, to have a level of refinancing activities prospectively is an important consideration, yes. Okay, we'll go over here to Manav. Thank you. Just on the structured finance category. In the U.S., it seems like if you leave RMBS aside, it's been sort of slow and steady. I don't think anyone expects it to get back to the pre-crisis levels. What needs to happen, if anything, to get that growth rate to move up a little higher? Just comments around regulation of the business market. Just related to that, do you see any risk with everyone talking about the auto loan market maybe at a bubble, student loan, those kind of things, anything there that we should be looking out for? Again, I'll go back to the comment I made earlier. I think a good and improving economic environment is what will be supportive to these activities in this segment. I think that's what we're looking for. There is clearly, you have some asset classes or some segments of structured finance where there are signs of overreaching. You mentioned subprime auto loans as one of them. Obviously, we are attentive. They are very small in relation to overall opportunity. Again, I think for us, the key underpinning factor of the growth of this segment will be an improved economic environment, ABS is really where we would see that delivering the most results, basically. Okay. Just one more quick one. In one of the slides you had global rollout of the new private rating products. Can you maybe just help us frame the size today and the opportunity there? I don't think we disclosed actually the actual, and I would refer you to Salli on the actual number. It remains a small number in relation to the overall activities, the public ratings. We do see that as an element of growth. There's a lot of demand actually through either the use of private placements or through different instruments that are being issued that are effectively using non-public ratings where we see actually an opportunity. That's true actually in every market. In Asia, where we were last week, for example, there is an increased use of private placements based on reverse inquiries for large corporates and private ratings, this is an area where private ratings could be helpful in the short term. It's not going to supplant our public ratings, obviously, but this is a nice addition to our suite of products. I think last year we actually did enumerate the new products as a total set. It is relatively small, but as Michel said, exciting new opportunities and good growth there, generally. Just one note before we gather any more questions. If you could keep your question just to one, then we'll come back around again if we have more time. Thanks. We'll go up here to Peter. You said we wanted to Sorry, Peter. This is one question with two parts. Michel, you mentioned damping effect on demand for speculative grade credits. It really feels bubble-like in the high-yield market. I'm wondering your opinion on that and implications for growth out of high yield over the next couple of years, if we get some normalization in that market. The quasi-related question is, in the structured finance market, definitely feels like there's a lot more competition than there has been historically, and I'm wondering how that impacts your view of pricing and profitability in that market. Thank you. Thank you. On the spec-grade market, I think you saw on the chart that we have a high level of elevated activity at the moment. I think it's also fair to say that some of the credit characteristic we see around the issuance that are taking place, whether it's via the covenant structure we see or the actual rating level these bonds are issued at, we are trending down in terms of the risk curve, basically. Just different way to say, issuance today is riskier more broadly than it has been historically, at least than it was a year ago. This is a trend we've seen not only in the U.S., but also we see in Europe. This is not new. The real question for us is that, is there room for further growth in this market? I would go back to the point that, if I take Europe, for example, we see growth because we see more and more issuers accessing the bond market to be financed. Now, they are financing with terms and conditions that may be more lenient because of the rate environment and the appetite for yield. Fundamentally, this is driven by a need for these companies to access financing, and the bond market is delivering that. Similarly in the U.S., I think going back to the underlying economic growth and level of economic activity we see in this country, we continue to believe that to the extent that there is growth, that market will be able to be supported. As I mentioned to you, we also note that this is the market segment that is the most exposed to a correction in a situation of increased rates. We know that, we believe that can be mitigated by a favorable economic environment. I should go to your second question, which relates to struct finance. I think for us, the question is really centered around, in terms of the competitive landscape, is really around the importance of an active investor base and a real investor base. We believe that in situations where we have a real investor base and we have products and debt that is being issued to end up in portfolios by asset managers and not end up in central banks for repo transaction or asset purchase program, we are able to actually maintain the sound economics in our activities despite that competition level. I point to the situation in Europe, for example, when we've seen most of the activities being driven by central bank programs, or we see a commoditization in the use of ratings, there the economics are more challenging, basically. That's something that is very specific to some situations, such as the one we have in Europe at the moment. All right. Go ahead. Thank you. The revenue per debt issuance is quite striking, the $34 in U.S., $18 in Europe, $6 in Asia. That must be made up of different level of coverage, different amount you can charge, and the share of the economics you actually have where you don't own 100%. Can you try and explain which of these factors drive this $34 to $18 to $6? Sorry, I missed the first part of your question. Can you? You have the chart of the different level of revenue relative to the debt issuance. Relative, yeah 34 against 18 and six. Presumably, that's made up. The differences are made up of different levels of coverage or share or whatever you want to call it, a different amount you can actually charge, and a different level of the economics you actually have by not owning the whole company. Can you talk us through which of these factors are driving this 34, 18 and six? Right. The issue is not a matter of necessarily of coverage. It's actually, I think it's really linked to the level of maturity of those markets and the complexity of the products that are being rated. Really the level of maturity we have, we're seeing in those markets. Again, if I contrast Asia today, and sort of developing Asia, for example, is the market where effectively, there is less differentiation between the supplier of ratings than we have in the U.S. This is due to maybe Tom, you may want to comment on that. This is due to the history of the development of ratings, how they're being used, the lack of a developed investor base. A number of these ratings are used in the context of regulatory, as a regulatory use. That has an impact on the economics effectively of these activities. The sweet spot for us is to be in a developed market with activities that are really driven by, and value that is driven by a very strong investor base, that favor the use of Moody's rating. That's where we want to be, and all markets have not reached that level of development. Yeah, I think that covers it. The investor demand is an important feature. We have time for a few more here, so maybe we'll go front to Rishi. Thank you. I had a question on the topic of European disintermediation, which all of you have touched upon in all the presentations this morning. The slide you presented showed that the share of the corporate bonds in Europe went from about 9% to 11% as a percentage of total debt over the last eight years, from 2006 to 2014. That does not suggest, given all the challenges the European banks have been facing, de-leveraging, that the movement to corporate bond issuance is very rapid. It suggests a rather slow glacial pace of disintermediation. What do you think is going to change? Do you see that accelerating? If so, what are the factors that are going to cause that? How do you then compare the relative size of the disintermediation market in Europe relative to the emerging market growth opportunity? If you could just touch upon those two. First, I would say that the numbers you've seen here are stock numbers, and they cover basically a wide range. They're all non-financial corporates, so they cover basically from the moment of SME to the very large corporate group. The numbers are actually very much differentiated when you look at the different stratas of non-financial corporates. When you look at the very large non-financial corporates, you have numbers that are very close or even higher sometimes than the numbers you see in the U.S. I think this chart is to some extent misleading. The fact that it's a slow process, it is slow process. It's something that have started, as I said, 15 years ago, but it's a process that is constant and gradual. As I say, we should not expect to see a big breakup and sudden transformation, but what we see is that in term of new financing that goes to these non-financial corporates, the bond market is an increasing share. The other thing you saw on that chart is the fact that the bond market has shown positive growth quarter on year after year versus the bond market, we see the construction of what I'm saying. I think to your point, the direction is there. It's a gradual phenomena, but we also see that in segments that are very important to us, which are large corporate groups, speculative-grade issuers, there disintermediation is taking place. We're not addressing today the SME market. There is no, today, capital market solution to the SME markets in Europe. There will be at some point, possibly. The ECB and others are really trying to make that happen. To date, it's a very small market. To some extent, to provide a clearer picture of what happened, we should really break down by layers of size what is happening in terms of disintermediation. There you will see what's going. I provided a data point, which is for the speculative issuers we're rating, bonds are 60% of their financing today. The banks are only providing 40%. That's a meaningful number. You had a second one? Yeah. Which was, how does the European disintermediation opportunity compare to the emerging growth opportunities in India and China? Right. Well, the bond market in China and India are probably at the same level. It's about between 10%-15%. I think it's about 11%. Correct in one case and 15% the other. It's a little behind in terms of the activity we've seen. The flow is quite good. The teams are very busy. I agree with the point about the stock. The other thing I'd add is for infrastructure finance in particular, the long dated maturities that the bond market offers are very attractive to those matching the asset class. That's another thing that helps us. The BIS published some data over the summer you may want to look at, and it was interesting because if you look at emerging markets, the banks have been financing very heavily. The banks are actually, by contrast to what we see in developed market, banks have been extremely aggressive in providing lending in emerging markets. Again, we don't need to have the bond market to be providing all of the funding to the economy to be a successful company. I think the trends we're seeing are providing growth, as I said before. Okay, great. We're going to go to the back of the room here because I know you've had your hand up. Constraints in China because of nationalistic kind of stuff and establishing. Okay. Here we go. Now I'm on. Oh, by the way, I am very disappointed. I remember a couple of years ago, you guys had a beautiful leather thing for the conference. I'm a little disappointed in that, anyway. You should speak to Linda and discipline in managing our costs. That was 2010 with the Moody's embossed leather thing that I received, which I loved. Anyway, do you see any constraints in places like China in terms of nationalistic sort of regulatory stuff in terms of establishing your position over the long term? Sure. Thank you. There's two points. The cross-border market. We serve out of our Hong Kong office with the local offices mainland that I mentioned before, and that's really unconstrained. In the domestic market, we have a 49% share in CCXI, the largest rating agency. By law today, that's the limit. As things might change in the future, liberalization, opening the economy, we're very happy to own effectively half of the largest Chinese domestic rating agency, thinks that that positions us very well. That combination lets us get introduced to companies on the mainland early that our business development team gets to talk to and then provide a pipeline to the cross-border market. I think we have time for maybe two more. Bill, go ahead. Alex, I'll get you. A follow on on China. You mentioned you have 90% of the cross-border market through CCXI. What is your domestic market share? I guess also on China, just looking at that slide 52, it looks like you've had a bit of leveling off in domestic corporate bonds as a percent of GDP. Do you see anything ahead that could produce a change in that trend, a re-acceleration? Do you want to take it? Sure. It's the shares in the cross-border market, I believe, for MIS. Was the first question. No. Can you- You mentioned 90% cross-border share. Right. I was curious, if you look at CCXI. What is their share of the domestic bond market in China? Yeah. There are a number of Chinese domestic rating agencies. The top three or four have begun to share more equally in that pie. Can we talk about roughly what that is? Sure. Yeah. It's in the high 30s, 40%. CCXI does not operate cross-border, purely domestic, so all the activities and the 90% we were discussing, those are MIS. MIS cross-border rating coverage. Technically, we do not issue domestic ratings, MIS. Our affiliate does that. Do you see the level of corporate bonds as a percentage, do you see that rising again? It looks like it's leveled off in the last year or so. We expect the long term it will continue to rise. It will slow and level off and go up again. We've seen the markets go down from time to time. We think the long-term trend is positive. Domestic issuance in China is really policy driven, as you know. This is really linked to the role that the Chinese government wants to give the bond markets versus the bank market. This is not something that is market driven or something we can really influence. Okay, we'll move on to Alex. I guess I'll take the last one. I just want to come back to structured for one minute. I think there's been a lot of questions. You pointed out the European change in thinking from the policymakers. Can you talk about that a little bit more in terms of what the expectations are, specifically, how quickly you think some of these changes could play out? Is this a long-term story or is this something that could actually move the needle a lot given what they're trying to do in QE and so forth, how meaningful that could be? Well, I think there's a number of dimensions to this question. First, let's talk briefly about the asset purchase program that will be taking place shortly. We don't have the detail of this, that will be communicated. The question would be whether or not these purchases are focused on existing issuance that are in the market or retained by the banks, or whether or not they will be designed to foster new issuance. Depending on that, you will have different type of implications. In terms of the restart of securitization in Europe, I think what has happened to date is really that we are in an environment where policymakers and regulators were largely hostile to that asset class, very vocal. Some of the countries, in particular Germany and France, were leading the way. Tone has changed. That's not going to make the market work or make issuance grow. Covered bond market is doing well. We have seen a lot of activities. We have a strong position in the market. The question really is around other ABS and RMBS. There the real question is going to be around the growth of the economy again and the appetite of the banks and the economics of securitization for the banks that are holding or originating those assets. It's very early to say. We'd rather be in an environment that is supportive to securitization than not. That's where we are. Do we expect a transforming event from this measure? No. I think all of that is going to be conditioned to either the growth of the economy and the economics of securitization on an end. Two, how these programs are going to be configured and we'll see that in the next few weeks, basically. Okay. Sorry, we're going to have to move along just to keep the day rolling. Thank you again to Michel and to Tom. Thank you very much. We'll move ahead to John J. Goggins, our General Counsel. Good morning, everyone. Let me see if I can get to the right slide. I'd like to cover two things this morning. I'd like to give an update on ratings-related litigation developments since our last Investor Day, and also spend a little bit of time giving some updates on recent regulatory developments. On the ratings-related front, we've made significant progress in resolving ratings-related litigation filed since 2007. In the U.S., nearly 5 dozen cases have been filed and less than one quarter of those remain. Of those remaining cases, they're either in the motion to dismiss stage, we're waiting for a judge to rule on a motion to dismiss, or in a discovery stage. None of the cases are anywhere near summary judgment yet. Outside of the U.S., we have six open cases, and 18 cases have either been dismissed or withdrawn. In the U.S., all of the cases that report under the Securities Act of 1933 have been favorably resolved. The Second Circuit, which is the federal appellate court here in Manhattan, has ruled that rating agencies cannot be sued as underwriters or controlled persons under the '33 Act. We've had success as well. Many non-'33 Act cases have also been dismissed or withdrawn, and we also now have three federal appellate court decisions affirming the dismissal of non-'33 Act cases, one in the Second Circuit, another in the Sixth Circuit, and most recently, one in the Ninth Circuit. This is a slide that you'll see these appellate decisions. They go back to 2012 and 2011, we showed this slide last year. It's worth emphasizing for two reasons. With respect to the specific cases, they affirm dismissals, which were great, and we had some helpful rulings that basically confirm that ratings are opinions. They're not factual, historical facts or investment advice. Importantly, that as stated by the court in the Sixth Circuit and the higher pensions, that the right standard of liability for rating agencies with respect to investors is a fraud standard. Pre-financial crisis, there were virtually, in fact, there were no cases that we're aware of on the question of the liability of rating agencies to investors. We're hopeful that these favorable decisions will help to deter frivolous litigation in the future. Turning to the regulatory update, many of you probably read in the press that just last month, the SEC voted to approve the final rules for rating agencies under Dodd-Frank. Those rules track fairly closely the proposed rules that had been out for a number of years now. Two substantive areas where there were some differences were having to do with sales and marketing activities. We have to be able to demonstrate that our analysts are not influenced in any way by sales and marketing considerations. Finally, there were some very specific, 17 specific risk factors that we have to consider when we're designing our internal control process, and there will now be an annual report on internal controls. The first one will be for 2015. Most of the deadlines for complying with the new rules are fortunately nine months from now, we've had many years advance notice from the proposed rules, and we believe we're in very good shape to comply with those rules. As part of the Dodd-Frank process that we mentioned before, we now have annual exams conducted by the SEC, no material deficiencies have been identified to date. There's one remaining possible rule pending by the SEC, that has to do with the Franken Amendment. The Franken Amendment, you'll recall, is Senator Franken's attempt to address the issue of rating shopping, which unfortunately was a significant issue, not just prior to the financial crisis, but continues to be an issue in structured finance today. We think a better alternative to the Franken proposal would be to amend existing SEC Rule 17g-5. Under 17g-5 currently, rating agencies that aren't selected by a structured issuer can assign unsolicited ratings, but we really don't have the ability to publish unsolicited research due to confidentiality restrictions that issuers might impose. We're hopeful that when the SEC addresses this, it'll be along the lines of amending 17g-5, we don't really know what the timing on that will be. In the EU, it's been over a year now since the final round of CRA regulation, or what you've heard of as CRA3, has gone into effect. This past June, ESMA promulgated two proposed rules that are currently being considered by the European Commission. Once the Commission decides either to adopt or amend them, they need to be approved by the European Parliament and the Council, and it's possible that both these rules, the establishment of European ratings platform and periodic reporting of fee information, will go into effect by the end of this year. Similar to the U.S., ESMA has also been conducting regular examinations of Moody's since 2011. As in the U.S. No material deficiencies have been identified to date. That's pretty much it on both those fronts, but very happy to take any questions you might have. Craig? Thanks, Sean. A quick question. What is your best sense what year your legal costs peaked or will peak? That's really hard to say. As I said, our remaining cases are even in the motion dismiss stage. If they get dismissed, obviously legal costs are minimal. If they go to discovery would be incredibly expensive, and that's really a function of how much discovery the judge permits. It's really hard to say if they've peaked or when they'll peak. John, I don't think you touched on CalPERS. My understanding was you guys were trying to get the case thrown out on anti-SLAPP appeal. That did not happen. Where are we in discovery at this point? What's the timing and what's the liability, potentially, in that case? I sort of lost track of the numbers there. Thanks. Sure. You're quite correct. As we discussed last year, this case has been going on since 2009. We had appealed a decision where the trial court had denied our anti-SLAPP motion, which is basically our second motion to dismiss. The Court of Appeals in California denied our appeal in May. Most recently, just a couple of weeks ago, the California Supreme Court elected not to review the appellate court's decision. Where we are now is basically back to square one with the discovery phase. We also have a new judge. The timing is uncertain as far as how extensive discovery will be. Ultimately, once discovery's over, we're going to file a summary judgment motion. As far as alleged damages, hasn't really been any discovery on that point yet. All we know is what CalPERS has alleged in their complaint, and between Moody's and S&P, it's in the hundreds of millions in alleged damages, that kind of number. I'm sorry, you said there's a new judge. Is it still in district court in San Francisco? It's still in state court in California. We have a new judge now. Okay, thanks. Do you have a view on the changes in the attorney general's office and if that could have any impact on them looking at the whole sector broadly in any different way? Not really. We don't have any comment on personal changes at the DOJ, but obviously, DOJ is a very large institution with thousands of attorneys, and there's turnover. That's a regular occurrence. On the regulatory stuff, both domestically and internationally, you've indicated that you feel comfortable. I think that you're pretty far along in the implementation. Can we read into that there's not going to be significant step-up in terms of implementation costs associated with getting the final U.S. stuff in place? In our updated guidance today, we mentioned that there's no change to our estimate of what incremental compliance costs would be. Still less than $5 million. Particularly on the setting of controls under the new Dodd-Frank rules, we're still analyzing how much that's going to cost. There'll be costs in 2015, but certainly for 2014, that's- That's actually what I was thinking more about. It seems like there's a lot of reporting requirements under these new rules that probably you were not under in 2014. I'm thinking about a step-up in 2015 in terms of the cost. Again, we'll have to figure out exactly how much it is, but we've had three years, basically, to prepare for them, and we've been investing in both compliance and technology to be ready to comply with the rules on day one. We've already made quite an investment in that area. As I also mentioned, there haven't really been all that many material changes from the proposed rule. Many of the things we're already doing. It's just a question of perhaps documenting differently. Can I ask you another one on the legal front? You've got some fairly important decisions from the federal courts and some reaffirmations, I think, in the appeals process. Can you speak to your level of confidence in the ability to get the rest of these things cleaned up and closed out over the couple of years? Then sort of related to that, are we far enough along on statute of limitations that you're reasonably comfortable that there are no more suits to come or small number of suits to come? Well, of the existing, the remaining cases we have in the U.S., we believe they are without merit, and we're going to continue to prosecute them. Again, as far as the timing, it's really hard to say. A large part, it's a function of the judge's calendar and his timetable. On statute of limitations, you're quite correct. At this point in time, other than cases brought by the government, we think we'd have a very strong statute of limitations defense. Again, it's very fact-specific. It depends on the claim that's brought, which jurisdiction it's brought in. The facts and circumstances of the allegations. We can't really say definitively that all new claims would be time-barred. Certainly, if someone were to bring a case tomorrow, we think we have a very strong statute of limitations defense. No, don't see any other hands. Well, thank you, everyone. Okay. I think we're running just a little bit ahead of schedule, we'll go ahead and start our break now, reconvene at 10:30, if that's all right with everyone. Thank you. Okay. Good morning, everyone. We're going to resume our program now with a discussion about Moody's Analytics. For Moody's Analytics, our messages today are pretty simple. First, the business is performing well, very well, we believe, especially when you compare our growth rates to others in our peer group. Secondly, we believe there are good growth opportunities for us to sustain this business for the foreseeable future. Third, as we continue to grow the business, we also plan to drive margin expansion, primarily through Enterprise Risk Solutions, where we expect to realize more operating leverage as our product offering matures, as the needs of our customers become more standardized. Our discussion today will focus on the Research, Data & Analytics and the Enterprise Risk Solutions segments of Moody's Analytics, as they represent the largest and most dynamic areas of our business. I'm going to start by talking about our product strategy in RD&A and the levers that we have to sustain good growth rates in this large and profitable business. Steve Tulenko will drill down on the work that we're doing in ERS, including a discussion of our recent acquisition of WebEquity Solutions. After that, I'll wrap up with a discussion of a specific example of how bank regulation is driving growth opportunities for Moody's Analytics. Let me start by quickly reviewing how the business is performing. Through the first half of the year, Moody's Analytics revenue is up 15%. On an organic basis, excluding the Amba acquisition of late last year, we're up 10%. We feel very good about 10% organic growth. When we look around at our peer group, we just don't see anyone delivering double-digit organic growth. We're pleased to be overachieving on the top line. The one exception, of course, is Michel's business in MIS, but I've long since given up on trying to compete with those guys. I would note that we're doing well because we're executing well. Other than good, solid, better-than-most kinds of results, there's nothing especially remarkable about what we're doing. I put our success down to good solid execution, a very strong brand, and a generally favorable, although far from spectacular, environment for the kinds of products and services that we offer. Looking ahead, we believe that we have good opportunity to sustain our strong performance over the coming years. We expect that ERS will continue to lead the way, and Steve will elaborate on what we're doing in his business and why we expect to continue to grow there at a healthy clip. In parallel, we are confident about sustaining the good results we've been seeing in our RD&A, where we are pursuing several paths to continue our push for high single-digit organic growth. I'll elaborate on those in a moment. In professional services, we expect strong growth from Copal Amba, which Linda will discuss shortly. Our training and certification businesses, while relatively small, are delivering much improved performance this year. As we pursue our growth opportunities, we have set a goal of driving margin expansion in Moody's Analytics over the next several years. We'll realize this primarily by driving operating leverage in ERS. We expect that our product offering will mature as customer demand evolves toward a more common set of solutions, and this will allow us to shorten our customer implementation cycles and reduce our delivery costs. Successful execution in this area could have a meaningful impact on the overall Moody's Analytics margin in the coming years, potentially driving expansion in the Moody's Analytics operating margin into the mid-20s% range. Steve will elaborate on what's happening in ERS that can get us there, so let me spend a few minutes on RD&A. You'll recall that RD&A represents Moody's Analytics' information product set, while ERS comprises our infrastructure offering, and professional services is the segment through which we deliver skills in the form of training services and outsourced analytics staff to our customers. RD&A is our largest segment and also the most profitable, sold almost entirely on a subscription basis. Here you see a little bit about how we monitor the performance of the RD&A businesses. We maintain a very rigorous set of metrics that we review every month to help us identify what's going well and where we may need to make product adjustments or tweak our sales deployment to address emerging risks or exploit opportunities. This is a very simplified view of the complete range of metrics that we calculate, analyze, and monitor, but I think it gives you some insight into how we manage our performance in near real time. Let me walk you through how to interpret this chart. We're showing you RD&A sales performance. That's sales booked, not GAAP revenue, for calendar year 2012 and 2013, and for the first half of 2014. We decompose our sales production into its component parts, renewals of existing business, net product upgrades, the impact of price increases, and the contribution from new sales. We do this analysis at various levels of aggregation by product, by customer, and by geography so that we can identify the trends that are driving the business. This chart shows you our overall aggregate results. The first column shows how much of the business from the prior year we renewed. As you can see, our renewal rates have been strong, they've been rising. In the first half of this year, we've renewed close to 96% of the business we sold in the first half of last year. We add to that retained business the net impact of product upgrades and downgrades, the effect of price increases, and the contribution from new sales, either to wholly new customers or new sales of new products to existing customers. These metrics tell a very good story about how well the business is performing. It's important to note that the contribution rates are generally quite stable from period to period, which implies that we are able to steadily grow the business through a combination of upgrades, price, and new sales. You should note a couple of other highlights here as well. First, you see a solid and consistent contribution from price increases, which reflects the value that customers place on our product. We get a very sizable contribution from new sales production every year. This reflects the breadth of our product offering and the effectiveness of our distribution capacity. Finally, if you look at the 2012 results, you see a big contribution from product upgrades. That was the result of a very specific product enhancement program that we launched back then, it demonstrates the kind of impact that we can realize from product development initiatives. I'll talk more about how we use product strategy to drive growth in a moment. One thing that this chart illustrates is the power of the sales machine that we've built. We consistently drive higher volume through that machine, allowing us to deliver consistently solid performance in a relatively mature business. We believe that the distribution capacity that we get from our sales mechanism is a differentiating feature of the Moody's Analytics business. Recognizing its power, we keep very close track on how the machine is running, we are able to tweak it and tune it using diagnostics like the ones we've summarized for you here. A powerful sales machine isn't of much use if you don't have a good product. Fortunately, we have a very good set of information products in RD&A. The content that we sell, whether produced by the rating agency or by various units within Moody's Analytics, represents a very unique and valuable asset, we go to great effort to protect and nurture that asset. Let me talk to you about our product strategy in the Financial Information business. The research and data that is produced by the rating agency is at the core of the RD&A product set. Because MIS ratings are so deeply embedded in how the bond markets operate, there is very strong demand for this content among market participants on both the buy side and the sell side. We want MIS' ratings and data and opinions to be readily accessible in order to reinforce awareness and reliance on Moody's ratings. We make investments in our website, moodys.com, to ensure that we have an effective distribution platform for our content, and we make the content accessible through alternative channels, such as Bloomberg, so that our information is readily available to all users. Ease of access and ubiquity are central to how we manage the distribution of the rating agency content. By making good quality content easily and readily available, we are able to monetize this unique information set, while at the same time reinforcing the relevance of MIS' ratings. We further embed the use of our ratings and related information by providing content that supplements and/or elaborates on the information that comes out of the rating agency. Examples of this include the economic analysis produced by Mark Zandi's team, as well as the data and cash flow tools that come from our structured analytics unit. These businesses, while a good bit smaller than the MIS content business, are growing very well because they respond to customer demand for information that goes beyond the output of MIS. We can realize powerful synergies from delivering this kind of research and data that complements or extends the insights that are produced by Michel's team in MIS. What I'm saying here is that the core information that we offer, that is the rating agency content, which is in very high demand in its own right, is made more relevant and more useful by the additional content that we provide in MA. In parallel, that additional content becomes more credible and authoritative because it is positioned alongside the MIS product. This gives us more relevance to more customers and adds to our pricing power. The success that we've had with this strategy is reflected in the high retention rates that we're seeing, which as you saw in the previous slide, are now above 95%. The strategy suggests that we should be adding more and more content to supplement the MIS research and data. That's very much our objective. Having said that, we have to be very disciplined in identifying, building or acquiring content that, A, meets our quality standards, and B, addresses the needs of our customers. We have a powerful platform, but we have to be vigilant about protecting the premium quality perception of Moody's brand and the associated premium price that we command. There are many alternative types of information and lots of independent providers of research and data, all of which could be delivered through our platform. There are relatively few providers that represent truly incremental value that would enable us to execute on this strategy in RD&A. That's why you see us being very selective about acquisitions and very deliberate about investments in new product development. This is a simplified depiction of our product strategy for RD&A. We're trying to illustrate the three principal ways that we realize demand for the information content that we have at Moody's. Starting in the center, you see MIS research and data at the core of our offering. The rating agency content is very much the foundation of the RD&A business. As I've said, there's very strong demand for that information among institutional participants in the credit markets. On the left side of the page, we show you some of the information offerings that we currently create in Moody's Analytics. As illustrated here, this information can be delivered independently to specialized customers, it can be embedded and delivered with the MIS content, and it can be integrated into large-scale solutions that we build for our customers, such as what we're currently doing to respond to banks' requirements for stress testing exercises. We have specific programs for pursuing all three of these opportunities for monetizing the range of content that we produce at Moody's. Generally speaking, when we're evaluating an acquisition or an investment in new product development in RD&A, we look for content that will be relevant to at least two and preferably all three of these channels. The power of our sales organization and the effectiveness of this product strategy gives us confidence that we have multiple levers for sustaining good, solid growth in RD&A. With a large and deep customer base and long experience in running this business, we're optimistic that by continuing to execute on our distribution plans and product development programs, we'll continue to drive better than average growth in this highly profitable segment. With that, I'm going to turn the program over to Steve Tulenko. Steve has been with us for nearly 25 years, and he took responsibility for the Enterprise Risk Solutions business a little over a year ago. Prior to that, Steve ran our global sales and customer service organization since the creation of Moody's Analytics. He's initiated a number of programs aimed at sustaining the very strong growth rates that we've delivered in ERS, and he's also focused on driving more profit in the business. He's going to take a few minutes to talk to you about those initiatives, then I'll come back up here and wrap up our part of the program. Steve? Thank you, Mark. Good morning, everybody. My name is Steve Tulenko. Thanks for the introduction. It's a great pleasure to be here this morning to talk to you about some exciting things we have going on in our business unit called Enterprise Risk Solutions, often called ERS. I have a few slides to review today, where I'll be talking about recent performance, I'll be talking about growth prospects for the business, and I'll be talking about some of our efforts to expand margin over the coming years to support MA's efforts there. I'll jump right into my first slide, which provides some numbers that we're very proud of. Mark mentioned some of these before. You've got two curves on this slide that indicate growth, a very healthy growth trend. The sales numbers over the past five years indicate a CAGR of around 17%, and the revenue numbers indicate a CAGR of around 15%. Sales production has been very strong due to the healthy demand that's out there for our credit and risk management products in the wake of the credit crisis. There's been a lot of healthy efforts among banks to improve their risk management practices, and there's also been a lot of influence and pressure from their regulators to encourage them to do so. We'll talk a lot more about the fact that regulation is driving demand for our business in a few slides. Let me hit the revenue line for one second. You can see there again, we're growing at a nice clip. They follow a very similar pattern to the sales results, but they do lag them just a bit. The primary reason for that lag between the sales numbers and the revenue numbers is that we often will do large projects for customers. When you go and do software implementations for customers, projects might take 1 year or 2 to deliver, and the revenue is deferred along the way, until the project gets completed. The sales numbers show up immediately, and then the revenue takes a little while to show up on the books. It is fair to say that that green line is a very, very strong indicator of future growth on the blue line. You can see they follow almost exactly the same pattern, and that's good news. I will note that there is a nice uptick in Q2 of 2014 in that green line. We actually made our biggest sale in the history, I think, of the company, in the early part of the summer. That has, I think, positive indications of what will be happening with revenue in the future. Let me move on to the next slide. Okay, just a couple more minutes of detail on these numbers. On the left-hand side of this slide, you'll see sales by quarter going back from 2011. Then we show revenues on the right-hand side. We've broken up the numbers into 3 categories so that you can see how these different categories contribute to our numbers. The 1st is the green section of those bar charts, which represents annual software maintenance. The light blue section represents subscription products, and then the dark blue section represents those project licenses and services related to software implementations. You can see on the sales side of things, the numbers are a little bit more variable and seasonal. You can see the seasonality in the business showing up there as well. That is just the way that people buy products from us and the way that the customer patterns have formed over the years. On the right side of the chart, you can see the subscription products and the annual software maintenance delivering very steady growth. The core of the ERS business is driven by products that generate recurring revenue. Then you've got the dark blue portion of the bar chart on the right contributing big bumps in the revenue along the way as software implementation projects are completing. You've got some variability and seasonality in the business, but a lot of that is driven by the project timing. I wanted to highlight, just before I turn away from this slide, that two-thirds of the revenue associated with ERS is driven by these products that create recurring revenue, the green and the light blue portion of those bar charts. That business that represents two-thirds of the business has grown at a 20% CAGR over the lifetime of this chart. Over those past three years. That in itself, I think, is an important thing to note that at the core and the foundation of ERS is a very attractive recurring revenue base. What's driving all of this demand? You may remember, I think I showed you this chart last year. This is what I like to call our regulatory radar screen. I'll just take a minute to orient you to the way this works. The center of that chart where it says 2014, think of that as the origin. Each of the bands that moves away from the center represents time, then we've sectioned off the chart into segments that represent the regional areas in which we're focused here. Each of the icons on the chart represents an individual regulation or an accounting standard that a bank, an insurance company, or another type of financial institution is facing, an obligation they're facing from a regulatory perspective. We've identified those regulations or those accounting standards where we believe we have products that help them to comply or help them to address the calculations that are required to comply. Each of those points on this chart represent a place where we can make a sale, and in many respects, I think are a good representation of the demand that we face and some of the regulatory tailwinds that support the demand for our products. We're going to take another look at this chart in a second. I thought I'd take a second just to simplify it and give you an example of one of our larger customers. This happens to be a multinational bank in Europe. They are actively engaged with us in all of these activities that are represented here. I've grouped all the Basel-related activities into one icon. I've grouped all the ECB-related activities into one icon so that it's a little easier to approach the diagram. The point here is with just one institution, we are literally working with them in many ways and in many places around the globe. It's also interesting to note that there are lots of similarities between the regulations that you see across the different regions. With similarity, there's a chance to actually use a product more than once. We are a solution that they have decided to adopt, an infrastructure that they are implementing and building in order to satisfy these regulations around the globe, and to do so in a very efficient way. For example, you can think of the Basel III capital regulations that are at the top of that diagram there. Those will be implemented, and they will be facing reporting requirements, calculations requirements, and regulatory compliance requirements for those Basel III capital calculations everywhere they do business, basically. Our product will help them to satisfy those requirements across the globe. This is a good example of how deeply embedded we can become with an important and a large institution. The other thing I'll note just before I turn the slide here is we just received word last night that we landed another transaction with these guys worth about $5 million in project revenue over the course of the next couple of years. It gives you an example of what kind of scale we're talking about when you're dealing with a bank, a large bank, granted, but on projects like these, those are the kinds of numbers you can talk through. Okay. One more moment on that diagram. Again, I like the diagram because it gives us a sense for how much demand we have out there. We're helping banks to face challenges that are interdisciplinary and interdepartmental. We're bringing those banking departments together and enabling them to use one source of information and one set of tools in an integrated platform so that they can answer important business questions and deliver on their obligations to their regulators. What's changing a little bit in terms of the demand right now is we're seeing bank executives, insurance executives generally, looking at their infrastructure that they use to support their regulatory compliance as a tool to improve their operating efficiency. Another important sale we made recently, that one that happened to be in the Q2 of 2014, was a good example of this, where our origination software is being used not just to support their loan processing and their loan origination efforts and provide information and better credit scoring capabilities to that bank, but also support their risk data aggregation requirements under Basel III. That's a good example of one of our products providing both regulatory compliance capabilities as well as operating efficiency. Those kinds of needs are starting to develop, and we're seeing patterns develop that indicate that there's some standardization that's occurring among the needs of the banks that we work with. That leads us to the opportunity we have before us in terms of margin. As Mark mentioned, ERS is making many very intentional efforts to expand margin over the coming years. We're at a point now where we're turning a little bit away from the land grab mode we've been in. We've been heavy mode of product expansion, building out feature sets in order to be there so that we can grow with customers as their needs develop. We're now setting our sights toward refining those products, building out features that maybe make things better, instead of brand-new functionality that we might not have had before. That enables us to develop more operating leverage in the business. Our objective is to simultaneously continue to grow the kinds of rates that you've seen before and grow the margin, and that isn't always the easiest thing to do in the world. We're going to do it basically in three ways. First, we're going to sell more off-the-shelf products and sell more software products as a subscription. We will invest and are investing now already in product quality, in modularity, in compatibility, and making sure that our products are easy to integrate with the rest. We need to do that in order to make sure it's easier to install them and it takes less labor to actually get that software implemented. When that happens, our costs are driven down. Cost for the customers may be driven down as well, but the value proposition might increase. The third thing we plan to do and we are doing now is we need to develop the next generation of products and make sure that our software solutions can be delivered as a service. This concept of SaaS-delivered risk management products is something that we need to develop now in order to be there when the banks are ready to adopt those kinds of solutions. I have a slide dedicated to that topic. Here I've taken the WebEquity acquisition from the summer, and we're using this as a good example to highlight the importance of the SaaS product set and the importance of SaaS as a delivery channel for us. To provide a bit more color, we've got really three important things to highlight. First of all, when you have your software delivered as a service, your customers will benefit. One, their cost of implementation will be lower. Two, the value proposition to provide could actually be richer because Moody's can spend its time developing one source of code and developing one application that incorporates best practices from across the client base. Then third, you don't need to spend so much time with your friends in IT to try and convince them that now's the time to do a project. Right? That comes in handy because it's easier to decide to actually pull the trigger on the product. In addition to that, from Moody's perspective, it's better. We can develop one source of code. I mentioned that before. We can spend our time enriching our value proposition rather than building out customizations for specific customers. We also benefit greatly in that software as a service is often sold and usually sold on a subscription basis. The recurring revenue base will be enhanced by moving to this kind of platform as well. In the WebEquity case, we now have, combined with WebEquity and joining forces with them, we've got the largest set of small banking customers in the origination software market. We have well over 1,000 customers now between us, the Moody's customer base that was there, and the WebEquity customer base. With that, we have a very nice footprint, and we can learn a lot from what the customers like and what they prefer. We intend to leverage that position and move upmarket, starting with the smaller and community banks, where they can actually make decisions about software as a service today. They are not beholden to some of the concerns around information security, and maybe they don't have quite as many constraints in terms of the way things work with their IT budgets. Working with a bank where they can actually make a decision and pull the trigger on moving to an application that's hosted. Enables us to save money in terms of infrastructure. They can roll it out much more quickly, and we can add value almost immediately. We believe that's the way in. Some of the bigger banks are still a little worried about information security. They don't want other people to be managing their data. Some of those bigger banks were also concerned about maybe using, or allowing someone else to manage their CRM data or perhaps their HR data. Firms like salesforce.com or maybe Workday have certainly made a lot of progress in terms of changing their minds. We believe software as a service is a trend that will definitely dominate the industry over the next couple of years, and we're looking forward to being a part of that and growing with the banking industry as they do it. Just a few takeaways. First of all, growth remains strong in ERS. We continue to see mid-teens kinds of growth, and we're looking forward to continuing to do that over the foreseeable future. Regulation is proliferating. Our radar chart is more crowded today than it was before. The tone of the regulation is more intense. Mark's going to talk a little bit more about that. The product platform within ERS has expanded greatly over the last couple of years. Our strategy is shifting. We're refining our applications, investing in those applications to deliver higher quality, more compatibility, more integratability, so that they can be investments that can be leveraged across departments within a bank and make them easier to implement throughout those institutions. Armed with those three things, we're hoping that we can also contribute greatly to the MA efforts to expand margin. With that, I'll hand back to Mark. We're here for questions. Thank you. Thanks, Steve. Steve spoke about the importance of regulation as a driver of demand for his ERS solutions, I'd like to wrap up with a discussion about a specific regulatory trend that is creating very important opportunity, not just for ERS, but for Moody's Analytics broadly. As you're probably very aware, banking regulators around the world are imposing requirements on institutions to conduct rigorous analyses of their capital adequacy under hypothetical economic scenarios. Mark Zandi alluded to this earlier, but the roots of this trend in bank stress testing date back to 2009, when regulators required the largest banks in the U.S. and Europe to conduct such tests as a means of restoring market confidence in the banking system. The idea was that bank liquidity could be enhanced if the banks disclosed publicly how their balance sheets would hold up in response to an economic shock. In this sense, the 2009 stress test was a transparency exercise on the part of banking regulators. The test seemed to work well, especially here in the U.S., the Federal Reserve decided to make the stress test an annual exercise for the largest U.S. banks. They've created a program called CCAR, which stands for Comprehensive Capital Analysis and Review, which now applies to the 30 largest banks in the country. Since then, stress testing has been further extended to the next tier of U.S. banks under a program called DFAST, which stands for the Dodd-Frank Act Stress Test. DFAST applies to about 60 institutions. Very simplistically, CCAR and DFAST require banks to go through an annual exercise to analyze and report on the impact of adverse economic scenarios on their capital position. Having now been conducted five times for the largest U.S. banks, stress testing is rapidly becoming embedded in how regulators oversee large banks. This is especially true of the Federal Reserve, but stress testing has been adopted by the U.K. regulator, which mandates an annual stress test for the eight largest U.K. banks. In addition, the European Central Bank is now stress testing nearly 125 banks on the continent. In the U.S., the Fed is taking stress testing very seriously, and in fact, failing the stress test has come to mean that an institution will be prohibited from raising its dividend or executing on its share buyback plans. This means that failing the stress test has real consequences for bank executives. They're taking significant steps and making major investments to avoid failing the tests. Very significantly, there are two ways to fail a stress test. One way, a quantitative failure, comes about when an institution's capital buffer falls below the regulatory minimum under the adverse scenario. Even if your capital level is sufficient, banks can and do still fail the test if the Fed isn't satisfied with the rigor of the bank's process. Increasingly, such qualitative failure is becoming more common. In the last CCAR round, the one conducted at the end of last year, for which results were released this spring, five of the 30 banks failed the test, but only one failed because of insufficient capital. The other four all failed on qualitative grounds. This leads us to the conclusion that stress testing is no longer about ensuring that banks have enough capital to deal with an economic shock. In our view, the Fed is generally satisfied with bank capital levels. After the experience of 2008 and 2009, they recognized that bank risk management processes need to be upgraded. Stress testing and permission to pay dividends and execute share buyback programs represent the stick that the Fed is using to drive banks to make investments in technology and processes that will modernize their infrastructure and improve their operational management. This chart offers some evidence that the specific quantitative results are no longer the point of the stress test. These are the loan loss estimates for six large banks, as estimated by the Fed's independent analysis in the last CCAR round, compared with the bank's own estimates. You can see that there are substantial differences between the Fed's view in blue and the bank's analysis in green. The bank's estimates were between 25% and 50% lower than the Fed's. Despite those very substantial differences, five of these six banks passed the test, including Wells Fargo, which estimated that its losses would be less than half what the Fed calculated. This suggests to us that the regulator is focused on ensuring that the banks are putting in place the processes and infrastructure that are required to conduct the tests rather than focusing on the quantitative result of the test. Moreover, we observe that the Fed is focusing on different aspects of infrastructure and process with each annual exercise. They recognize that banks will require some time to implement the analytical and risk management enhancements that they are driving towards. In many cases, large banks have grown significantly through acquisition, establishing consistent systems and streamlining their data and analytical processes will be achieved only after some years of investment. In the meantime, the stress testing process is very time and labor intensive, and banks need assistance in putting the pieces in place so that they can improve their ability to conduct the test and report their results to the regulator. This is a simplified illustration of how a stress test is conducted. If you decompose a stress test into its primary component parts, you see that it starts with the economic scenario set by the regulator, which have to be calibrated to each bank's product and geographic mix. The calibrated scenario is then used to drive the bank's loss models for its various asset classes. The results of which need to be reflected in projections of the institution's financial statements over a multi-quarter horizon. Finally, the results of the test need to be summarized and submitted to the supervisory authorities by way of a set of regulator-defined reporting templates. What's interesting to us is that each of these four principal activities, economic scenario analysis, default modeling, financial statement projections, and regulatory reporting, are all areas in which Moody's Analytics has been active for a number of years. We have well-established expertise, credibility, and product offerings in each of these areas. As banks have been seeking assistance with meeting their increasingly challenging stress testing requirements, we've been winning a lot of business in this space. That's been good for our business, but we believe the longer-run opportunities are even more compelling. Recognizing that stress testing is proliferating around the world and that it is becoming a fundamental part of how banks are regulated, we've undertaken a large-scale project to integrate our capabilities so that we can deliver a comprehensive stress testing platform for banks globally. This platform will give banks the means to make the enduring enhancements in their risk infrastructure and analytical processes that the regulators are looking for. In addition to addressing their regulatory requirements, our platform will provide the real operational benefits that will enable them to better manage their institutions. That combination of facilitating regulatory compliance and enabling operational improvements is very much consistent with our vision of the role of Moody's Analytics. Because we have substantially all of the raw materials that are required to create such a solution, Moody's Analytics is unusually well-positioned to become the standard provider of stress testing capabilities and realize a significant commercial opportunity in this area. You can think about just between the U.S., the U.K., and Europe, you've got roughly 250 banks that need to go through the process and undertake the kinds of infrastructure improvements that we're talking about. That represents a very sizable and very attractive market for us that we are very focused on. That's a little bit of insight into a specific example of how a regulatory initiative creates demand for Moody's Analytics capabilities among our customers. It's certainly not the only such example, and I believe that we've become very good at identifying these opportunities and positioning our capabilities accordingly and achieving revenue growth. It's one of the reasons that we're confident that MA can continue to deliver solid revenue growth over the coming years. While we continue to aggressively pursue those growth opportunities, as Steve described, we're also concentrating on delivering higher operating margins. Steve talked about the steps that he's taking in ERS. Success on our margin expansion efforts there will be critical to the overall MA operating margin, given the scale and expected growth rate of ERS. In short, we like where Moody's Analytics is right now. We're delivering good results. We expect to sustain those results, and we believe there's opportunity to do so even as we improve on our margins. The current environment is good for us, with important trends driving demand for our capabilities. As we discussed, initiatives like stress testing have the potential to make an enormous difference for our business, and we have the expertise and the operational disciplines in place to ensure that we make the most of those opportunities. I'm going to stop there, and I'll ask Salli to come up and manage our Q&A session. Thanks very much. Okay, great. The same rules apply with regard to Q&A, please just raise your hand and then wait for the microphone before you ask a question. Bill, I saw you first, we'll go to you. Just one second for the microphone, please. Thank you. Mark, how would you size the bank stress testing opportunity? Is there a timeframe on the mid-'20s margin goal? Yeah. On the stress testing market, we've estimated that that is probably expressed in half a billion USD of spend annually over the next number of years. This has a fairly long tail on it. This is a big, complicated transformation that banks are going through to put these systems in place. It's going to take some time. This is not a big bang kind of process. It'll be an incremental process over a number of years. In terms of the timeframe for our margin expansion, I would characterize it, Bill, as over the next several years. Okay, great. We'll go right here to Joseph Ferlisi. On the margin expansion process, out of the three pieces that you laid out, what is the biggest opportunity? Can you give us some idea of how that breaks down numerically? I'm going to sneak one more in. How do you measure the penetration rates of the overall business as well? I'll take a crack at the margin thing. You probably should elaborate or correct me. Certainly, the work that Steve is doing in ERS is, frankly, it's pretty much the whole story for how MA is going to achieve margin expansion. It's really, I would say, it's primarily going to be the result of the product standardization that Steve's driving in his organization. However, it's also important to note we're also dependent on the market maturing in the sense that a lot of what Steve's team is selling are technologies that are new. Again, stress testing is a pretty good example of this, where what each bank needs to do to comply with its stress testing requirements in the aggregate, they all need to do the same thing. Bank A's priority, where they may want to start their efforts, may very well be different from what Bank B does. Because banks are undertaking these projects for the first time, we haven't yet seen a common set of best practices emerging and being adopting across many banks. That has inhibited our ability to scale the business. Over time, we think those best practices will begin to emerge. Frankly, we'll play a big role in that because as we do a lot of these initial projects for large institutions, we'll sort of become the bearer of that best practice experience. We'll sort of, I think, contribute pretty significantly to setting those standards. Again, the evolution of the product as well as the evolution of the market is what's going to be required for us to realize scalability in the business. How'd I do? Exactly right. The core margin expansion dynamic is if it's easier to implement the product, you don't need to pay people to do it. That's basically it. If the product can stand on its own, and in the stress testing example, that is a very big undertaking, but the more the product can stand on its own, the less you need labor to actually install and implement. That's where you can generate leverage. If the product delivers the value proposition by itself, you will see operating leverage, Bill. I forget what part B was. How you measure the penetration. Oh, how we measure penetration. We do it the old-fashioned way. Broadly, we define our customer base as being financial institutions, we segment that by commercial banks and insurance companies and securities firms and investment banks and so forth, and we do that by geography. We go through a painstaking exercise of identifying what we have sold into which institutions. On its face, it's simplistic. In fact, it's a little challenging because trying to measure what is the optimal penetration of each institution is pretty tricky because each institution, and again, it also varies by product line. A good example is in Steve's area. Different institutions, their propensity to consume different things within his product portfolio will vary from firm to firm. I think we can say with a straight face that very simplistically defined, we have 100% market penetration because virtually every financial institution on the planet buys something from us. It really becomes a fairly complicated exercise to try to identify what is the optimal penetration by product, by institution, by segment. It's pretty tricky. Rest assured, coming as we do from a very analytically oriented firm. We put a lot of time and energy into trying to develop those metrics. Okay, great. I'm going to move over to this side of the room just to give others a chance. Just back there in the third row, I think there are two questions there. Thanks. On page 71 and 72 of the slides, you laid out quite a number of different regulations that are coming in the next, say, four years or so. I guess from those sitting on the outside, is there any way that you can help us handicap, and clearly you talk a lot about stress testing, as these roll in, how we should think about the magnitude of those contributing to your growth relative to what you've been doing the last couple of years? Any way to handicap the volatility in particular years where you expect a big uplift? Many of those initiatives carry through multiple years. If you look, I don't know if you can actually see it on the chart. If you look at that slide, and I'm sorry, I'm not sure which slide number it was. It's one of the radars. Yeah, the second radar chart where it's simplified a bit. All right? You'll see the word liquidity show up multiple times, right? It shows up close to the origin. It shows up far away from the origin. Some of these regulations are being rolled out over time. For example, with the American liquidity regulations, there'll be targets that are set in the near term and then further targets that are set out in 2018. The compliance with those will take time. People are building systems in order to automate as much of those calculations as they can, and then roll them out throughout that period. The things that are most interesting, I think, from a growth perspective, Basel has been something that's been with us for years, right? Many banks have already done a lot of work there. In the United States, Basel is a growth opportunity because it's now being rolled out across more than just maybe 10 or 12 institutions. Liquidity regulations are a big deal globally. They are relatively new, and they're relatively robust. That sale I mentioned earlier to that large multinational bank, that is liquidity related. We're doing a bunch of calculations for them and providing regulatory responses to support their analysis of their liquidity positions and give the regulators a sense for what they should be, well, give the regulators the ability to monitor them. Those are two important trends. IFRS 9 is going to be a global thing that affects virtually every bank around the world, GAAP accounting is going to adopt many of the same provisioning and impairment objectives or analytic objectives related to impairment and provisioning. We think that will be another big dynamic. Stress testing is the other one. There's sort of families of need and families of regulation that I think you'll see a lot of. Basel's one that's been around for a while, but some of these others are new and I think going to be bigger opportunities for us and for the banks to work together. Yeah. Andre, I'd add to that I think the real utility of that chart is more really to inform the product development that needs to go on in Steve's area because as new regulatory requirements are put into place, we need to be able to capture those requirements in the product and be able to facilitate our customers reporting out on those. For thinking about the business opportunity, I think this is more thematic. Rather than obsessing over one particular point on that chart, I think the message is that regulation's an important growth driver for this business, and there are lots of different sources of that touch lots of different institutions in different parts of the world. We've got one back here. As you talk about the push to standardize more of the product set, how do we think, and I guess drive margins, I guess, how does pricing play into that as you think about the ERS product as well as competition? You haven't mentioned that. What's the threat of leaving open the door to someone who's willing to continue to customize the product more over time, and compete with you in that fashion as you push that? pricing, the richer your value proposition, the more you can charge, right? When you can aggregate best practices for a particular sector or for a particular initiative and develop a product that delivers against those or with those in mind, we think we can provide a very rich offering, a better value proposition, and enjoy or benefit from higher price points. That, of course, helps you with margin. We face competition in terms of price with respect to these products, but we have a very healthy track record and a very healthy brand to support us. It does, I think, give us a little bit of pricing power compared to the others. In terms of competition, there's a lot of ways to address that question. Our biggest competitor, without a doubt, is the internal build. Many of you would work for banks who you don't do third-party software. You build your own applications within those institutions, and the largest banks are often the ones that do that the most. That's our biggest competition, and then depending on which particular application we're talking, which product we're talking about, which regulatory initiative we're talking about, there's various competitors out there that we work against. You're absolutely right in the sense that we are very disciplined, increasingly disciplined about not taking on work and not responding to customers' requests for customization, particularly if the economics don't work. We're being very rigorous and looking at on a deal-by-deal basis whether what the customer's prepared to pay is going to justify the amount of resource that we have to commit to doing whatever customization they're asking for. We would like to get ourselves into a position where we just say no, where we just don't do customization. We're a ways from that yet, but that's the direction we're headed. Yeah. The market's a ways from that too. Right. Did we answer? We're good? Yeah. To the extent there is external competition, are they trying to move in the same direction as you are? Or is there a risk you're trying to say no more often and others are willing to say yes to that customization? I think everybody in the industry faces the same challenge as we do. Some are more accommodating than we are, frankly. I think that's a reflection of as we feel better and better about our position and the uniqueness of our offering, we're going to be inclined to say no, more and more often. Okay. We just have time for a few more. I know I told Bruno I'd come to him next. Thanks. In ERS, you have been driving a lot of growth by investing heavily both in M&A and CapEx. I think by most people's calculations, the margins are close to zero at the moment, though you don't disclose them. When do you think the ERS business can cover in its all-in cost of capital, including acquisitions? I think the response to that is a very carefully worded statement Mark made before, which is we expect over the next several years to be able to achieve those kinds of numbers. Right? To pinpoint a point in time when there's an inflection point in the curve, I think would be a little tricky. When you get to the 25% margin, when ERS is covering its cost of capital, including acquisitions? Yeah. Yep. Okay. Just a couple more here. We'll go to Craig first and then Bill Warmington. Just wondering if you could just talk about your margins in your large research business. You talk about your goal of trying to continue high single-digit revenue growth. Are you trying to signal, though, you can't raise margins or not willing to raise margins, there's so much internal spending you have to do against that to keep that growth rate going? Thank you. The margins are very high. It's going to be tough to raise them, honestly. First of all, we just don't have that much direct operating expense associated with the business. It's pretty tough to raise margin in that business. Most of our expense there is going to be. We have a small amount of operating expense, and we have some sales expense. We don't have a lot of room there. I think we are very comfortable with sustaining the margin in our DNA around where it is. I wouldn't expect to see that go up much. The opportunity for margin expansion in MA comes from ERS. Just over here, Bill Warmington. Thanks. Thank you. You talk about a scalable, auditable, and replicable stress testing solution being ready. When does that actually hit the market? A clarification, the $500 million market opportunity, just wanted to clarify, that's annual spend or cumulative? Yeah. We're in the market now with a product and a platform. There's a lot more work we have to do. We have an important release at the end of the year, right? It'll be the second one. We'll build out the platform further, but we have a multi-year roadmap for when we'll get to the complete solution. In the interim, we are winning business, and we will continue to win business in this space. The $500 million estimate that we gave you, that's based on our own analysis. It's based on some third-party estimates. It's meant to reflect an annual spend. It reflects internal, as Steve discussed, internal costs that the banks are incurring as well as spend on external providers. We should put one more caveat there. There are other things that banks will do in terms of stress testing that are not included in that number. It's intended to be the addressable market for us and for our product set. That's it. That's what we're trying to say. That's it. Okay. Just to stay on schedule, I think we're going to go ahead and move on. Thank you to Mark and Steve. Next up we have Linda Huber, followed by Dave Platt and Nick Fanandakis. Okay, good morning. As Salli said, I'm going to take the first three parts of this, the financial overview and the capital allocation strategy and update, as well as the Copal Amba update. I am managing the Copal Amba business, which is an exciting new opportunity for me, and we'll talk about that in a moment. Dave Platt will join us to talk about the corporate development part of the business. Lisa Westlake has the heavy lift, which is to explain how our compensation programs work in 10 minutes to all of you. We'll see if Lisa can pull that off. The key messages that I want to make sure that everyone gets. We've had a very strong first half performance here at Moody's. 10% revenue growth, 45.4% margin in the first half, which is mid-40s by anyone's view. We have good diversification of our businesses. You've heard about what Mark and Steve are doing in their business, which is very exciting indeed. We have strength and momentum even during tough parts of the cycle. We continue to focus on capital allocation. I think most of you probably saw that we are increasing our guidance on the share repo we're going to try to do this year to $1.25 billion. We're doing that because we have confidence in the stock price and confidence in the execution as to how this company is performing. Last year, the stock price was around 70 on the day we did this presentation. We're up about 35% to $94.60 when I just checked. If we can continue the same progress, that will put the stock price next year at this time at about $125. We'll see how we do. For all of you who ask me each year, why are we buying stock when it's at such a high price? The reason is because I'm always thinking one year ahead. Our dividend right now is $1.12. I'll talk some more about that. We have done a good job optimizing our leverage capacity. One of you has said we're sort of doing a slow, perpetual leveraged recap, which is one way to think about it, and I'll talk a bit about that. We have our opportunistic acquisitions, which Dave will talk about. We wanted to really give you three things to work with today. We had heard from one of you, one of the sell-side analysts who will not be named, that perhaps we shouldn't have Investor Day because maybe we didn't have anything new to say. We thought we would actually have something new to say. Peter, we won't call you out on that. Anyway, we're very pleased with the performance of the business. Our first plank is really how is the business performing. $0.05 of increase in 2014's EPS. We have one caveat on that. We're watching the EUR very closely. If the EUR moves 3%, which would be $1.29 down to $1.25, we're going to lose $5 million of revenue, and conversely, if it does move up. We're watching foreign exchange very carefully, and that would be the leading caveat there. We are looking for, we think, $0.05 in EPS for this year, 2014. We continue to be thoughtful about capital allocation. As we said, we're looking at $1.25 billion is our goal for this year for share repurchase. That will give us next year for 2015, all other things being equal, $0.05-$0.06 of EPS accretion for 2015. Lastly, on the acquisition front, we're making good progress. We've decided to execute on buying in the rest of the Copal Amba business. We're going to do that in the beginning of December. Because we're reducing the minority interest component in 2015, that will give us about $0.05 next year. $0.05 this year on the guidance increase, $0.05-$0.06 from the additional share repurchase, and $0.05 on owning all of Copal Amba. That's $0.15 times our present 22x multiple should be $3.30 on the stock. Let's see how we do. That's looking at our present PE of 22x. What I'd like to show you is a bit of a reason why we think our multiple should actually be higher and perhaps 25x. Let's see if we can convince everyone of that. If we look at how Moody's compares to the S&P 500, we're going to look at a couple of different measures. The first is revenue growth. If you look at the top decile, revenue growth has got to be above 18%, and for the top quartile, above 9%. Where does Moody's fit in? We are at 14% over this period of time, 2011-2013. Pretty strong performance. Operating margin. The top decile is 32%, and our margin, as you know, is quite strong, 40% over this period of time. Again, strong top decile performance. I think we were, in fact, at one point 14th in the S&P 500 in margin for one measure this year. EPS growth, the top decile is 41%, and the first quartile is 19%. Here we're at 20%. Free cash flow conversion, top decile 29%, and we are at 30%. Forward PE ratio within the S&P 500, the top decile is at 27%, and the first quartile is at 21%, and we're at 22x. Looking at that performance in which two indicators are in the top decile, it would seem that perhaps our multiple should also be in the top decile. Just something for everyone to think about and write about if you're so inclined. Information services peer group. Let's do the same thing because it's a pricey group. Revenue growth, you can see here, 18% for top decile. We're above the first quartile at 14%. Our operating margin, again, top decile. EPS growth, top decile. Free cash flow conversion, top decile. Our forward PE multiple, again, for the corporation is 22. Again, I think if you look at where we fall on these other measures, you can make a pretty good case that maybe the multiple should be at 25 times. That's the proposal I'm making to you today. Looking actually backward, we've done pretty well in terms of our performance over the four key indicators in the last five years. Our compound annual growth rate on the upper left is 13%. Our non-GAAP EPS is 21%. Our operating margin performance, we've guided to 42%-43%, and thus far this year, we're at 45%. Our free cash flow conversion over five years, we take $1 of revenue and we create $0.30 of cash flow, which is half again better than our information services peers and three times as good as the S&P 500. Cash flow generation, you can see here, if you run CAGRs on these numbers, the free cash flow growth is about 12%. Net income growth is about 19%. We're a little bit behind this year because of some interesting things going on in cash flow generation, but we do expect that these numbers will look like the numbers as the other years do when we get to the end of the year. One of the challenges we face in terms of getting to that higher multiple is variability. The ratings business in particular can tend to be somewhat variable, and I'll talk about this in a moment. I want to take a minute out to talk about what we're seeing in the markets at this moment and give you some idea of how the rest of the year looks. For investment grade, the month of September, and this is U.S. investment grade, we saw $120 billion of issuance. I think most of you know $100 billion is a good month. $120 billion has been a very strong month. For the year, we're expecting $1 trillion of U.S. investment grade fixed income issuance, which is up 5%. The pipeline is described as very robust, this week we've had a peculiar dislocation in the fact that some guy named Bill Gross decided to change firms, thus far, we've had relatively little issuance this week. Once Bill Gross gets settled in, we're optimistic that the bond markets will continue their path of good issuance and the robust pipeline will continue moving. This is a classic case of that we can't control when issuance actually comes to the market, we know it's there. On the high yield front, $40 billion of issuance in September, quite strong. For the year, $325 billion expected. That's down 5%, as some of you had noted. Bit of indigestion in the high yield market in September. We expect that year to date, looking forward, that will improve a bit. Leveraged loans, $20 billion in the month of September. Expecting $500 billion this year, which is about flat. We do note that CLOs have had a very strong year this year, $91 billion of CLO issuance so far this year versus $58 billion last year. That has been a 57% increase in CLO issuance, which has been very helpful. Of course, those come from leveraged loans. Taking on the volatility argument, let's see what's going on here. A lot of lines to look at, but what we want to show you is when the rating agency in the green line is having a tougher quarter. We are very much helped by the addition of Moody's Analytics, which is getting big enough to help pull up the growth for the whole company. If you look at certain periods, the third quarter of 2011, the third quarter of 2012, at those points, the rating agency growth was down to -2% or 1%, or in the first quarter of this year, also 1%. Moody's Analytics is chugging along at 16% growth or 19% growth or 15% growth. What I think all of you are not really realizing is the growth of Moody's Analytics is strong enough to pull the whole corporation up well into the single digits. During those periods for the corporation, we saw growth of 3% and 6% and 5%. We often see many people writing that our issuance is slow, their growth is going to be negative or their growth is going to be flat. You have to keep in mind what Moody's Analytics is doing for us, providing ballast and offset. Moody's Analytics is getting larger and larger, and it's a very helpful business to the corporation as a whole. Very strong growth characteristics. The business also would have a very high valuation attached to it because of what it does. Again, we see very good offsets there. Think about that. What you can also see is when issuance sometimes stalls for a bit in a given quarter, that issuance usually springs back in the quarter following. Moody's is a tough stock to buy and to trade quarter-over-quarter, but the long-term view is very good and in fact, quite steady. Now, why is that? Part of that is because we have a much stronger recurring revenue base than is generally understood. If you look at the monitoring fees and the price increases for the rating agency in the colored layers, and then the gray piece of Moody's Analytics, which is the subscription businesses, these are growing in the high single-digit growth rates each year and will continue to do so going forward. One of the things we like to say when we meet with investors is if we didn't rate another thing for a year, the revenue would still continue to grow at around this high single digit, sometime we call it 8%. That's a pretty good business if you can keep growing at 8%, and we wouldn't really have to have any issuance to raise. That's a very positive trend. Now, we take on this issue here of what happens if interest rates move up. This chart is very important because it challenges the conventional wisdom. This is one of the more difficult things that we have to deal with. On the left-hand side, we're looking at two periods where the 10-year rate jumped almost 200 basis points. In the first case, 1993 to 1994, the 10-year did jump 200 basis points. Moody's revenue barely dipped. If you look at 1998 to 1999, 180 basis point increase in the 10-year, Moody's revenue continued to move up. At this period of time, the company was much smaller, much more U.S.-centric, much more public finance driven. We would submit that it may be hard for the Fed to raise interest rates more than 200 basis points on the tenure in a year's period of time. We think this is actually a pretty good indicator of what could happen. If we look at the recent past, you can see on the right-hand side, we've been talking about increasing interest rates for the past six quarters. This is sort of like waiting for Godot. We've never actually gotten there. We do have to talk about it a lot. If you look at this, interest rates made their way up to 3% on the tenure. We're back down to 2.5% this morning. Over this period of time, rates have gone up 60 basis points. Not insignificant. Our revenues keep moving up. A little bit lumpy, but they keep moving up. What is going to happen to issuance when rates go up? One of the guys I want to quote is a managing director who sits in the debt capital markets desk at Morgan Stanley, a guy named Wylie Collins. He's an old-timer like me. I've been doing this now for 28 years, he has got some gray hair as well. I asked him the question, what happens when rates move up? He said, "At 2.75% on the tenure, issuers will take a deep breath and continue issuing. At 3%, they'll pause, maybe for a day, maybe for a week, they'll keep issuing. At 3.25%, they'll pause, maybe for a month, maybe for a quarter, they'll keep issuing." Issuers adjust to these higher rates because they've got to refinance their debt books. We, as Michel has said and Ray has alluded to and Mark Zandi has alluded to, if we see higher rates because of stronger growth, that is not a bad scenario for us. That's a fine scenario. We'll see how we do. The next thing that we want to talk about here is that revenue doesn't tie directly to issuance, another sort of piece of folk wisdom that we have to combat. If you look at the charts here on the left-hand side, over five years, issuance looks pretty flat. Those bars are global issuance over five years. In fact, if you look at the gray grid, issuance during this time is actually down 1%. Yet, thanks to the incredible efforts of my colleagues, revenue is up 13% over that period. How do we take a flat issuance environment and drive revenue up 13%? The answer to that is the strength of the brand, the strength of Moody's Analytics in helping us balance the businesses, the product mix, and our pricing efforts. The job of this management team is to drive the revenue line at double-digit growth rate or better despite the issuance outlook. We take that job very seriously. In the first half of this year, the two bars on the right, issuance has gone up 9%, and as I said, our revenue has grown 10%. We're doing pretty well with this year's progress. Capital allocation strategy. We survey our shareholders. You may feel that we survey you constantly, but in fact, we do it twice a year. If you don't respond to the survey, we don't really know what you want us to do. Please respond to the survey. What we see is that the majority of holders, 80+% of which are growth and GAAP holders, really would like us to continue to repurchase shares. We get that. Why are we repurchasing more shares? Because you, the shareholders, tell us that's what you want us to do. What you do not want us to do is make a major acquisition, down at the bottom, and you don't want us to reduce our outstanding debt. We'll talk about leverage in a minute. We are out all the time talking to investors, 300 calls in the past year, 190 meetings, 18 non-deal roadshows, participation at six conferences. We are out talking with our shareholders and investors all the time. I think we have a pretty good idea of what you would like us to do. Perhaps somewhat remarkably, we try to actually do it. We have done a pretty good job of returning capital to shareholders, particularly recently. Our share count over this period of time has come down from 240 million shares to about 210 million shares. Last year, you can see that we returned capital to shareholders in a rather generous way, a little over $1 billion. You saw that this year we're guiding to $1.25 billion, and our current dividend is $1.12. Looking forward, what do we intend to do with the dividend? The dividend payout ratio is really what is more the governor for us. The S&P 500 pays out 32% of income in dividends, and in the last 12 months, we've paid out about 25%. Our landing zone, what we'd like to guide to, is about 25%-30%. Dividend yield is an interesting problem for us. Our dividend yield has come down to about 1.3%. That is because we have a rather excellent problem that our share price keeps going up. Given that problem, that's one that I'm happy to have to wrestle with. We note for the S&P 500 for growth companies, the average yield is about 1.5%. We have been a little bit on the light side. Come December, we'll look at the dividend, and the board of directors will decide what it wants to do. We do intend to be somewhere within these landing zones, and again, it's the payout which is more important to us than the yield. Share repurchases. We've said, we've bounced around a bit here. The 10-year average is about $600 million a year. Last year, we did $893 million of share repurchase. Average price was about $64 last year. This year to date, as of yesterday, we're just under $800 million of share repurchase this year. It's about 9.4 million shares, and the stock price is about $84 that we've paid. Again, we're at $94.60 right now, I think we've done pretty well. We're very thoughtful about how we execute on share repurchase. We have a pricing grid we put in place after we do our earnings announcements. We buy back more shares when the price is lower. We use a tiered pricing grid which works automatically. It works very well. We're really pleased with that. We think we can make good use of the extra $250 million in share repurchases this year. We think we have a good opportunity given what we see going forward with our strategic plan and with the market environment. Let's talk a little bit about leverage. This gets complicated. Our present rating from S&P is BBB+. S&P would like us to stay within about 1.5 times adjusted debt to adjusted EBITDA. Right now, we're somewhere in the neighborhood of one times to 1.2 times. On July 16th, we did a bond deal. We issued $750 million of debt. We retired a private placement that was to come due next year, 2015. We're very pleased we were able to issue 30-year debt at a 5.25% coupon. It was six times oversubscribed. We sold it in an hour, which is an astonishing statement for this company. We're very proud of that. We are able to issue debt. The market is very pleased to purchase our debt. Our bonds are trading at 100 basis points tighter than our primary competitor. That is a measure of differences in legal risks between the two companies. In order to think about how you want to look at our leverage, there are a couple of things that you have to take into account. I'll try to run through this. I'll try to repeat it once. You start with our debt on the balance sheet. According to S&P's methodology, this is somewhat mysterious to us, we get credit for 75% of our cash, not 100% of our cash, but 75%. Why is it that number? We don't know. We have to add back our pensions, pension obligations, and our leases. Pension's about $125 million. Lease is about $500 million. S&P's view of our adjusted debt might be greater than what you are looking at as equity analysts because you've got to add back pensions and leases. We get a haircut on our cash. Adjusted EBITDA, just take a look at what you think our EBITDA is. We also get credit for about $150 million of other things. You take those two numbers and you come out somewhere between one times and 1.2 times. We view we have about $750 million of leverage of debt issuance we could do, additional leverage we could put on the company. We don't want to be right up against our rating guideline. We like having some room to move in case we see something that we really would like to do. We are comfortable continuing to issue debt. We are comfortable buying back shares. We think we're managing the capital allocation process quite well. Our shareholders tell us that they're pleased with it. Again, you're seeing fewer shares, a little bit more debt, and we're very mindful though of our rating, and we intend to stay comfortably within that rating guideline of 1.5 times. The key message is here again, very strong performance in the first half and over the last year. Stock price up 35%. We've diversified well. Moody's Analytics is a nice offset if the rating agency is having a tougher quarter. We think we've been pretty generous with our return of capital to shareholders. Now I want to change focus a bit and talk about our Copal Amba business. The Copal Amba business is one that has performed very well for us. The return, the IRR on this business since we bought it in 2011, and I've tracked this very closely, is in the low to mid-20s. We're very pleased with this business. We had purchased two-thirds of it. We had a very complicated ownership situation with the founders who built this business from nothing. We've decided that it's a good use of our offshore capital to buy back in this business. You'll note we haven't told you what the acquisition price is going to be because we don't really know. This is all determined formulaically, but we expect slightly below $200 million. We'll let you know more about that as we get there. Again, offshore cash, which is a very efficient thing for us to use, and the deal will close sometime in December. For those of you who haven't really dialed into Copal Amba, what it does is we have 2,700 employees, generally based in India, who do research support for investment banking pitch books and also for equity research. Most of you actually make use of these businesses right now. Most of our employees in India are CPAs, CFAs, and MBAs from the top schools in India, and they are very highly qualified employees, and they're doing a really good job working for the big banks. They're connected to them by T1 lines. What we find is that bankers can talk to their teams in India, give instructions, and have a pitch book sent back to them over email or the in-house system for the next morning. It's very efficient to work with your team in India, which is considered part of your normal team. If you're doing equity research, you can have a specialty team or you can have a person-by-person team to support you. Many of you will be making use of Amba as you write up your research notes about this meeting today. We think that these guys have done a great job and the penetration in this business continues to increase. The opportunity here for us is that Copal Amba is the second-largest player in the third-party pure-play knowledge process outsourcing business. If you look to the left There are three ways to run this business. One is you use a third party. The second is you have sort of an integrated in the middle model, and a number of companies have captives. For banks, having captives is an increasingly bad idea because you've got to count the headcount against all of your allocations and your ratios, and generally it's an inefficient model. Most banks, frankly, should not be in the business of running third-party outsourcers in India. We can do that really quite well. What you see on the right-hand side is that Copal Amba is the number 2 in this space. There are 2 other competitors who are sizable. There is a real opportunity for consolidation in this space because there are many smaller companies who are taking part in it. It is consolidated at the top, this type of business. We are definitely amongst the top 4, in fact, number 2. It is very fragmented at the bottom, so plenty of acquisition opportunities for us, and we do see opportunity to consolidate further. In a business that is already growing at very Moody's-like growth rates, that would be double digits plus, and has very attractive margins. We like this business. We are going to buy in the rest of it, and we think this is a great way to support our expansion in India. We do have more than 100 of these employees working with us in shared services to reduce our own cost base, and that has been going very, very well. With that, while we are on the acquisition front, I am going to invite Dave Platt up who will speak a little bit more about what we are doing on that front, and then we will take questions on all of this once Lisa has explained the mysterious process of compensation. Dave? Thank you, Linda. Good morning, everyone. To start, I am very pleased to report that we have been very busy the last year and have successfully executed several strategic transactions. Taking things in order. First, December, we acquired Amba Research through Copal. Copal Partners, now Copal Amba, which added scale and capabilities in investment research and asset management. Second, in June, we acquired majority control of ICRA to let us be an active participant in the growth of the Indian debt capital markets. Third, in July, we acquired WebEquity to further add scale and capabilities to our growing ERS risk management business. Finally, as Linda just said today, given our outlook for Copal Amba and our growth efforts generally in India, we are pleased to have reached an agreement to now own 100% of the company. Our approach to M&A is straightforward. We use M&A as a tool to selectively expand the market and revenue opportunity for the company. We look for high-quality content and solutions that leverage the strength of our brand, our global reach, and deep credit and risk expertise. We have a great core business, and deals have to clear a very high bar. Every deal must have solid industrial logic, and the numbers simply must work. In short, we use common sense. We ask ourselves, are we defending and enhancing our core ratings business? Or, and and, are we investing in growth where we can improve or expand our market capability? We estimate that our core market opportunity is about $18 billion. Obviously, the other rating agencies, economic information, structured finance, Enterprise Risk Management, knowledge process outsourcing, and training and certification. In our core markets, we have had solid organic growth, successfully executing transactions to add scale, new geography, and capabilities, and are actively looking for new deals. We estimate our adjacent market opportunity to be approximately $27 billion. There we see indexes, pricing and reference data, information for small and medium-sized enterprises, SME, bank financial information, insurance and real estate analytics, and consumer credit. Generally speaking, we keep an open mind and think about potential opportunities that could or might make sense in adjacent markets. We are all very proud of this page. Each deal is strategic and met our investment requirements. Again, we're very happy to be acquiring all of Copal Amba. We like the business. This was, as a contractual matter, our first opportunity to gain 100%, so we took it. We have offshored work to Copal Amba. This has gone well, and we will continue to do so. Amba Research, it added scale to now what we call Copal Amba, provided diversification, and again, added KPO capabilities serving investment management and investment research. The integration, which was begun immediately, has gone as planned. We achieved majority control of ICRA. We're committed to India, and we wanted to be more than a financial investor at 28.5% ownership. Majority control lets us actively participate in managing the business and realizing the growth opportunity that we see in India. We acquired WebEquity. It strengthens ERS's leadership position in providing analytical and workflow solutions to small and mid-size financial institutions. As was discussed, we very much like their SaaS model and cloud-based delivery capabilities. Making a few comments on our acquisition approach. First, we have multiple financial screens to make sure that we are using our shareholders' capital well. Obviously, we're looking for IRRs in excess of our cost of capital. We are looking at returns on an unlevered basis. We look at cash-on-cash returns. Bottom line, across all these methods and others, the numbers need to work. Second, the transactions need to be strategic. Again, we look for opportunities that offer standard to our essential information, the ability to clearly leverage our brand, global reach, data and analytics expertise, and line up or logically expand our financial services-oriented customer base. At the bottom half of the page, third, we actively monitor and watch what our peers are doing. We recognize that our peers may transact more frequently. We think about what they're doing. Our approach is to stick to our knitting. In short, we transact carefully, and we believe based on how the company is doing in the marketplace, we are doing just fine. Few observations here. Again, selective, but increasingly active. We spent over $1 billion since 2008 now including our commitment to acquire Copal Amba, which will close in early December. Far this year, have looked at well over 40 or so different opportunities with varying degrees of intensity. M&A is helpful to contributing to revenues, but we are careful. The information sector, as we all know, is expensive, and that is particularly true for quality and scale assets. We have an active dialogue with the market, with bankers, other intermediaries. Obviously, where possible, we like to try and transact on a confidential and proprietary basis. We have no size targets. Generally, we do what would make sense. We've generally transacted in the middle market as a size matter on the margin. Given our size and how we've grown, we would like to find slightly larger deals. Among other things, we try to deploy our offshore cash. Bottom line, we are and will continue to be in the market. In terms of transactions and how they're doing, overall, the early returns for our recent acquisitions are all good. At WebEquity, the integration into ERS is underway. There has been solid collaboration with our new colleagues, and we have gotten very strong feedback from our customers about the combined capabilities of the organization. We are obviously busy in India. The Amba integration is on track and doing well. We have teams working with ICRA management. Our shared goal there is to deepen connectivity and opportunities for collaboration. Finally, our post-acquisition approach is straightforward. We integrate as quickly and as practically as possible. We make sure that we keep what makes the business special. We actively monitor and analyze performance. We make sure that we are in front of potential issues, and we understand and learn from each experience to do better. To sum up, our business is solid, the bar for acquisitions is high. We have an active M&A program, and we're in the market. We're busy. Our mission and common sense guides our approach to M&A and how we will transact, and we are careful and thoughtful with our shareholders' capital. Thank you, and I'll turn the discussion over to Lisa Westlake. Thanks, Dave. Well, good afternoon, everyone. I'm very pleased to round out today's prepared remarks by demystifying a little bit of our compensation programs. Basically, I want to concentrate on how do we incent management and everyone else at the company to deliver the business performance that you've seen, and the business strategies that we've set before you. As a reminder, Moody's compensation structure has three components. There's base salary, there's an annual cash bonus. If you're a salesperson, you get a commission. We also have forms of equity. As many of you likely recall, compensation expense is roughly 65% of our total expense base. Within that, 11%-15% of that is incentive compensation. If you do the math, incentive compensation accounts for roughly 7%-10% of our total expense base. All right. In terms of incentive comp specifically, and that's what this slide focuses on, talking about annual cash bonuses and equity. We offer 3 different types of equity. We have restricted shares for the majority of the population, and then we offer a combination of options and 3-year performance shares, to what we term the top 50 at the company, and that's basically the 50 most senior managers at the company. Let's start with annual cash incentive. How do we determine how much money to make available to pay our bonuses each year? Well, that really depends on who you are and what business you're aligned with at the company. In the top table, you can see the NEOs and other direct reports to our CEO. This is basically the C-suite. You can see the metrics there. Funding is based upon our performance against targets that the board sets for us, I'll take you through an example of that in a moment. The other folks underneath the C-suite, you can see the various metrics there aligned by business area. In terms of equity, again, the top 50 participate in this performance share plan, you can see the various metrics there and how they differ depending on what business people are aligned with. These charts are basically the same information you just saw, that shows the mix, or the weighting of the various metrics and how those roll up to our various funding. Important thing to note on this chart is that all of our funding is subject to both threshold performance and is capped. That's best practice in compensation world. If we don't meet a certain minimal level of performance, we do not pay bonuses, or our bonus plan doesn't fund. That actually happened in 2008 as we went into the throes of the financial crisis. Our thresholds are meaningful. We also cap. After a certain level of performance, people can't earn any more, we believe that that's useful. It prevents people from betting the ranch for a short-term gain. They're not going to get anything more as a result of that. I'll also point out the yellow bar in the chart. You'll see, that's for our people in compliance and credit policy. Their bonus funding is actually not company performance-based. That plan funds automatically, each individual receives his or her payout based on achievement of their personal objectives. We do this so that we can help manage any potential conflicts of interest, given what the compliance and the credit policy people do here at the company. For the top 50 that I mentioned before, we also have a modifier. That modifier you can see in the last bullet point here can increase funding by up to 10%, it's based upon a survey of debt investors that we do every year. It's a blind survey, we look in terms of how are we doing versus our competition. Okay. We often get questions in terms of how does the accrual process work for incentive compensation. We've put together here what I would say is a very simplified example. It is illustrative. I wouldn't walk away saying this is how our plan works, it gives you a sense of how the math will work. Let's talk about the base case. At the beginning of the year, the board sets our objectives, in this instance, they've set an objective for us to achieve $400 million of operating income for the year. Further, we say, how do we think that income is going to come in over the year? In this example, we think it's going to come in evenly every quarter. What our plan says is if we achieve $400 million in operating income, the company will make available $40 million in order to pay out in bonuses. Again, each individual will get his or her portion of that bonus based upon how they've achieved their individual objectives. The first quarter rolls around, we ask ourselves a few questions. We say, "Are we still on pace to deliver the $400 million?" If the answer is yes, we also say, "Are we still on pace in terms of expecting that operating income is going to come evenly over the year?" If the answer to that is yes, we're a quarter of the way through the year, we accrue a quarter of the bonus amount of the $40 million. We put up an accrual of $10 million for the first quarter. Second quarter rolls around. We go through the same process. We ask ourselves, "Are we still on pace to deliver the $400 million?" If the answer is yes, we say, "Are we still on pace to achieve that evenly over the year?" If our answer to that is yes, we say, "All right, well, how much of the $400 million have we achieved during the first half of the year?" In this example, we've achieved half. Therefore, we have to make sure that our cumulative accrual is half of the $40 million that we're trying to get to in terms of bonus funding. That's how it works. It seems fairly straightforward. Let's go to scenario 1 now. Say we're at the end of the second quarter, we say to ourselves, "Well, do we expect to reach $400 million?" Actually, we say, "No, business is doing better. We expect to achieve $440 million. Well, the way our plan works, it says if you achieve $440 million, we will pay out in aggregate $60 million in bonuses. All the other assumptions are the same. We expect that we've achieved half of the $440 million after the first six months of the year. Therefore, we need to have accrued half of that $60 million bonus pool. We put up an accrual of $10 million in the first quarter, now we have to put up an accrual of $20 million to get to the 50%. Pretty straightforward. In scenario 2, it's the opposite. We hope never to have to deal with this scenario, unfortunately, from time to time we do. In this scenario, at the end of the second quarter, we say, "Are we still on pace to achieve the $400 million?" We say, "Unfortunately, no." We actually think we're going to fall short. We think we're going to deliver $380 million by the end of the year. Therefore, our bonus plan says, if you only deliver $380 million, you only get $30 million to hand out in bonuses. In this example, we've already accrued $10 million. We need to get to half of $30 million or $15 million. In that quarter, we only put up $5 million. The most important takeaway from this slide is the last bullet point. When we change guidance, that's often a time when we're going to be changing our accruals. Another point here is, now that you understand this very well, it's essentially impossible for you guys to model this. You just don't have enough information in terms of how our plans work. My recommendation would be to go back to the 7%-10% of our total expenses, is really where incentive compensation is. If we're raising guidance, it's indicating we're doing better than we originally expected, so we're probably on the higher end of that range, and conversely, you'll know when we're on the lower end. Okay, back to equity. Briefly, in terms of the performance share plan, I showed you the metrics before. These are the weightings of the metrics for the top 50 folks. Again, the funding here is subject to thresholds and caps. For equity, we also have a dollar maximum that any individual can earn in any one year. All of that is considered best practice. This slide is meant to illustrate how all of our metrics work together. They reinforce one another in order to ensure that we're aligning management's incentives with shareholders' interests, and also working together to achieve the various strategies that you've heard about. Our metrics also span one year, three years, and 10 years. Not the metrics, but the options span 10 years. We feel that we have an appropriate short-term, medium-term, and longer-term structure so that we're not making short-term decisions, but that all of our business decisions are equally balanced. We are also effective stewards of the company's stock. The board routinely benchmarks compensation, including equity compensation, with our proxy peer group. Also we monitor our share utilization. You can see in these charts here that over the last three years, our share utilization has run between the 25th and the 50th percentile of our proxy peer group. We're not overpaying with stock. To further reinforce our alignment between management and shareholders, we do have stock ownership requirements. Our CEO is required to hold six times his base salary in Moody's stock. The rest of the C-suite are expected to own three times. What's not on this chart is the rest of the top 50 are each required to own one time their base salary. Finally, our independent board members are required to hold five times their cash retainer. I'm pleased to say that all of our NEOs hold substantially more than their requirements here, and each of our board members is in compliance with the guidelines. To finish up, some key messages I'd like to leave you with. First, our compensation plans are directly aligned to shareholders' interests. We have robust independent governance around our executive compensation. Compensation is routinely benchmarked by an outside independent compensation consultant that reports directly to the board of directors. Our comp is also in line with that of our peers, our proxy peer group, and also the financial services industry in general. Finally, I guess what I'm most pleased about is shareholders seem to like what we're doing. They approved our executive compensation programs with a 95% favorable vote this last April. With that, I'm going to turn it back to Salli, and we'll be open for questions. Okay. Second to last opportunity to ask questions. Although, as you know, I'll always take more. We'll go with Peter first here in the front. Just one second for the microphone, please. Thank you. Linda, you've talked in the past, I think about mid 40% operating margin target. I'm wondering in the context of the better numbers you're seeing from Moody's Analytics or the more optimistic expectations there, if you're now thinking a higher number than mid-40s. We have said low to mid-40s, and I think we're going to stick with that. We are pleased that Moody's Analytics is going to be focusing on its margin profile. I think as Mark and Steve said, it's going to take us a couple of years to get there. We're pretty pleased that we're performing in the mid-40s level at this point, and we'll see if we can do a little bit better. We expect it to be incremental from this point, and we're going to stick to that mid-40s number. We should think about the ratings business basically as optimized at current levels? I don't think Michel would ever view the ratings business as optimized. He's a pretty tough taskmaster. We're always looking for efficiencies, and those are some of the things that we're thinking about now. We will continue to try to do better in that business, but we had said low to mid, and we find ourselves in the happy circumstance of being at mid right now. Right. That's a pretty good achievement, and we are investing very heavily in the businesses, both the ratings business and Moody's Analytics, because the core businesses are terrific businesses. Job one is really making sure that we're investing sufficiently. One of the things you can see, the investment in research is frankly paying off in spades, given how Mark's RD&A business is performing. The heavy lift there is being done by Michel's team in the writing of the research. We are investing, and we're seeing good results from that. I think we're going to continue on that balanced path rather than trying to do a whole lot better on the margin line. Just one other thing. On the buyback, you're well above sort of the run rate numbers of recent years based on what you're doing in 2013 and 2014. Investing more than your free cash flow. In the context of what you discussed about how you're thinking about the leverage ratio, should we anticipate then that perhaps the pace of buyback activity has to slow in 2015, 2016 to normalize things? I don't think we're thinking that way, Peter. I think the landing zone that I showed is $750 million to $1 billion, and I think we're comfortable in that range. We're going to have to look at what competing expenditures we're making in a given year. If, for example, Dave had a heavy shopping list and found a number of things that we needed to buy, we might dial back a bit. As kind of a base case, I think we'd want to look at that $750 million to $1 billion number, which has moved up from what we had said last year. Okay. We'll come over here to Manav. Thank you. Just in terms of the M&A opportunities, clearly it sounds like you guys are still finding the mid-market type deals, but as you guys grow bigger, what are your thoughts or visions around entering an adjacent, I guess, line item that you throw into Moody's Analytics, which would get you some sort of a larger acquisition in there? The way that we generally think about things are sort of first, we have plenty of things that we can do, Manav, in the core markets. There are opportunities that folks I think are aware of. Indexes is an example where there's the prospect to consider moving to adjacent markets. We sort of actively think about where we could also go over time. On the other hand, again, the core business is so strong that to prospectively impose very large-scale diversification, which our shareholders have indicated they're not supportive of, is something we're mindful of. I think generally speaking, we're going to continue to be on course to find opportunities selectively for the rating agency and then across Mark's business and Linda and Copal Amba. We will continue to sort of study what in the adjacent area would be an opportunity where we thought we could really bring something special as a strategic buyer and see if that makes sense. Manav, to follow up on that, we probably could handle a larger deal size, the fact is, there's kind of a barbell effect that most companies are private companies, and their value might be sub $500 million, or they become very large public companies. While with our market cap being $20 billion now, perhaps we could step up to that level. That's not a place that we've chosen to go. We don't want to bet the ranch, and again, we have really terrific core businesses. There are places for us to step out. You heard Mark and Steve talk about regulatory risk. We can, for example, extend that to insurance, and there are some other things that we can do in that space, insurance risk reporting. Dave mentioned the index businesses, which are trading at nosebleed kind of multiples. We're not really interested in giving ourselves nosebleeds around here. We think that buying an equity index business is really questionable for us because we're a fixed income shop. If we look at that, we might want to think about that from a greenfield perspective, and the fixed income area, of course, is more interesting to us than the equity area. We would have to see. We don't have any synergies because we're not in those businesses right now, and I'm not sure that paying an astronomical price is really the thing that we think is a very smart thing to do. Okay. A lot more here. I'm going to go to Doug. Linda, just going back to Copal Amba for a second. The KPO addressable market, where do you think, obviously you feel pretty good about the market having done this transaction, but where in sort of the life cycle of that market are we right now? Do you still think it's early stage? Do you think it's maturing? Is it slowing down in terms of the addressable market? Thanks. I guess if we'd keep the Yankees-Derek Jeter baseball theme, we're probably in the third or fourth inning. All the banks are under tremendous pressure to increase their returns on equity and to reduce their costs. I think a number of the banks are looking at whether running captives really make any sense for them. If you can take advantage of pretty terrific service and a strong labor arbitrage, a lot of the banks are looking at that. It's no secret the investment banks are having a hard time holding on to their junior employees. You see the phenomenon of reduced hours and increased compensation. One of the initial inroads that we have with many players is to provide weekend service so that their analysts in the major financial centers are able to take some weekend time off. Those are the types of things that we're able to do, and we see that there's greater comfort with the outsourcing model. We are doing very high-end work. This is analytical work. This is not data loading. This is really doing valuation and analytical work and really doing it in an outstanding way under very careful circumstances regarding confidential information and things like that. We see that there's a lot more room to run in this business. I've done quite a few of these marketing calls with many of the major firms myself, those are very robust discussions that we're having. I don't think I need to say too much about the state of the equity research part of the business. We see that as an opportunity as well. Okay. We'll come up to the front row here, maybe we'll start with Rishi, and then we'll move to Alex. Thank you. As the proportion of your revenues and earnings from other adjacent and ancillary businesses grows, how do you manage conflicts of interest, and do you see regulators focusing more on conflict of interest concerns, i.e., you providing more businesses to companies you rate? Similar to what happened to the accounting firms in the late 90s, 2000s, do you see more regulatory scrutiny on your ability to transact and conduct business in these adjacent areas? Thank you. Rishi, since I'm sitting here, I'll take an initial shot at that, then I'm going to ask for a lifeline to one of my colleagues here from either Ray or John from the regulatory area. Back in, I believe it was 2007, we separated the company into the regulated part of the business, which is Moody's Investors Service. Then we also created the Moody's Analytics business, which is generally not regulated. We are very serious about that separation. In fact, the employees can't access each other's areas of floors. We generally have separate floors in this building. We're very cautious about ensuring complete separation of those activities. In addition to that, maybe I'll toss it over to Ray or John to see if anybody else would like to take a shot at that. I can pick it up. Sure. Yeah. Okay. Ray will have more to come. Just up front here with Alex. For those of you on the webcast, what Ray said is that he'll address that further when he is up here in a short while. Just coming back to the M&A discussion from earlier. I don't know if you addressed this, can you talk about the appetite to also scale up on the ratings side a little bit? I don't know how specific you want to be, obviously, there's been some news around DBRS. I don't know if you can talk about antitrust considerations you would have or if something like that might actually make sense. Very quick for Linda, the $5 million on the euro, that was just your revenues. How would that impact the bottom line? Go ahead. On the rating agencies item, I'll sort of bifurcate it as follows. We spend a fair amount of time with Michel's team trying to evaluate opportunities, particularly in the emerging world. India, obviously. There are other regions where we've been spending a fair amount of time thinking the opportunities are obviously smaller. They're smaller entities. Some of them are privately owned. The point of view we take is that's a sort of a long-term process as those debt capital markets and economies develop. That takes a fair amount of our time. Really, the bottom line is we look for opportunities there where we can find them, where others aren't, where we have a bringing edge and think we can be a good collaborative partner. On the larger scale, it's obvious that DBRS is in the market. Clearly, regulators would take a look at that, and the real question for us and for any of our other peers looking at that would be what's the relative overlap and whether or not that makes sense from a synergy or dyssynergy perspective. Yeah. Alex, I think to echo what Dave said, on any of the ratings acquisitions, I think the question you'd want to ask us and ask Ray and Michel is what is our coverage of the entities rated by that company already. If it's 100%, we're taking on expense for no purpose. I think we would have to think long and hard about whether we would want to do something like that. The $5 million that I talked about if the EUR moves probably would be $0.01 or so if that happens, It depends on how the rounding works. It's not going to be a lot. Okay, looks like we have time for a couple more, I'll go to John here up in the front. Thank you. Linda, it's a question for you. The value of the Copal put call was raised by about 50% when the Amba acquisition was made, Now that you're acquiring the rest of Copal, I'm assuming you're not paying for Amba twice as a result of the increase in the put call. I just wonder if you could explain what was going on with that. Dave, did you pay attention to that? Yes, I paid attention. Maybe I'll sort of answer it sort of in this direction. No, we are not double counting or double paying for- We don't like to buy bridges twice here for Amba. In fact, when we did the Amba acquisition, there were really, in candor, two transactions. There was one, the process of buying Amba, and then there was two, the process to re-architect the original shareholder agreement, to make sure that the economics made sense, i.e., it's bought for X, and it's accounted for X as we go through, and that the formulaic valuation that was sort of contractually agreed upon between the parties, and sort of was logical looking at then the increased value of the business. That's in terms of recalibrating the agreement, we took pains to do that. We also again, had to engineer other mechanics around attributing part of the cost to do it to the minorities. In short, no double counting and the put call to buy the remaining minority interest reflected that value, and not more. I think we had a few other hands back over here. Can we get a microphone over? Hi, thanks. You mentioned two things. One, the repurchases, that it's higher than a year ago. I guess you talked about some of the puts and takes, but is that a different view on M&A or a different view on the leverage model, or just a result of the feedback from shareholders? I guess why is the view different? As it relates to the guidance, the outlook for the non-U.S. MIS came down. Is that currency related? I guess as well, just broadly what we can see the segments or the breakdown of your guidance, but what really changed in your outlook, I guess, in terms of the guidance increase? On the guidance, regarding the MIS question, I'll defer either to Michel or to Ray. I'm not sure that we see the increase in share repurchase as a change in the M&A outlook view. Rather, we want to make sure that we have an appropriate leverage level on the company. We would like to be above one and below 1.5. We have some opportunity there to make sure we've got the leverage right and to apply some of the very strong operating cash flow that we have back to capital allocation for the shareholders. I think it has much more to do with that. It also implicitly is a view on our thoughts on the attractiveness of the share price now and in the future. Again, we've talked about the confidence we have in this business, and we're really pleased with how the company's been executing. We see that as an opportunity now and going forward as well. As Dave said, eternal vigilance on the M&A front, but we don't like auctions. We don't like to overpay. We want to make very sure that we're hitting the right strategic areas, and we're really thoughtful about what those are. We don't want to go into unknown businesses. We don't see that as a wise thing to do, and we have a very disciplined approach as Dave has outlined. Maybe I'll let Ray or Michel speak a little bit about the MIS change. Well, maybe. Session of Q&A. As far as the MIS outlook, I think that's really two drivers. A little bit more softness in Europe for the rest of the year than we had anticipated earlier. Related to that is FX, and the weakness in the euro as against the dollar. It's not large movements in either case, but the two combined were influencing our outlook for MIS. On the flip side, you see the strength in the U.S. economy and the growth there, and the continued robust debt issuance. That led to a more optimistic outlook for the U.S. Just before we move on to whatever the next questions might be, I will be happy to try and answer the question that was raised a few minutes ago about the diversification of the business, the diversification of our revenue streams from the customers that we may have historically had rating relationships with, and what does that mean in terms of managing conflicts of interest and drawing regulatory interest potentially. I can't presume to speak for regulatory authorities, but what I would urge authorities to think about is really a two-part question. The first is whether the total fees we are receiving from any given source are growing as a percentage of our total revenue. Is any one source of revenue becoming more important to Moody's in terms of our overall profile? I can tell you that the largest sources of revenue that we have, single sources of revenue, are a very low single-digit Perhaps fractional % of 100. We have no revenue concentration. The second question is, well, if there is little revenue concentration, would you rather have all of the fees we are getting from an entity come from a rating fee or from a series of rating and non-rating fees? I think it actually protects the business to diversify those revenue streams so that the rating fee is not significant for the individual institution, relationship with Moody's, and is not significant as a part of our overall revenue profile. Answering those two questions, I would actually think, frankly, we should be encouraged to continue to diversify our revenue streams from institutions around the world. That would at least be my argument to regulatory authorities if I were asked the question. Let me see what other questions we might have, either for the team here or myself or other colleagues. Mana? I guess just one for you, Ray. With the legal and regulatory pressures having subsided quite a bit over the last five years or so, where are you most focused now today and what's your next worry in terms of what keeps you up at night, or where's your efforts focused on today? What keeps me up at night from a regulatory perspective or just generally what keeps me up at night? Just generally, yes. I think probably one of the more interesting questions for our business globally is really looking at how developing markets, emerging markets, the bond markets, the debt markets around the world, are going to evolve. Are they going to evolve in a manner in which risk is permitted to be revealed in the market, whether it's through distress, insolvency, bankruptcies, or are risks going to be socialized, absorbed by the banking system, ultimately absorbed by the government and the taxpayers, or are firms going to, in distress, be permitted to fail? For the ratings side of our business, it's absolutely essential that failure results in loss to investors. Otherwise, what's the point of a credit rating, really? If an insolvency is absorbed ultimately by taxpayers, it's really more of a beauty contest for credit ratings than anything else. That also has implications for risk management, risk measurement practices on the Moody's Analytics side of the business, where again, the greater the sensitivity around risk, the greater the discipline around managing risk, the more beneficial for the development and sale of our risk management platforms. Similarly, the research that we provide, the insight that we provide, has to relate to something in the real world. What's going wrong, what's going right, and how does one predict that and assess and analyze it. Really the evolution of markets that are in their, at best adolescent stages of development is, I think, one of the more interesting questions for the company over the long run, looking out over the next decade or so. Yes, John. Wait, I have to get a microphone. Thank you. Ray, question for you is, can you give us some instances, or maybe Michel, if you could give us some instances in the last, say, year or so that Moody's has consciously maintained ratings discipline at the expense of market share. Well, the areas where it's probably most evident would be in the securitization markets. It comes to the fore more quickly. It's more readily identifiable. In that area, just to give an anecdote, I would point to where we have been rating the senior tranches of securities in different categories of asset securitization, but not the mezzanine and the junior tranches because our views have been more conservative. So our competitors have more flattering ratings for mezzanine and junior tranches. As a result, the rating requests are restricted to the senior tranche. That will change from time to time. There are areas where we have more optimistic views. There are areas where our competitors have more optimistic views. There's nothing wrong with that. That's actually exactly what should be happening. What we need is for the institutional investor community to demand the highest quality of views and for the selection of rating agencies to be driven by the institutional investor, the buy side who is making the decision, rather than the issuer who naturally and obviously will want the most flattering opinion it can get. Yes, sir. It was very interesting to hear about how Moody's Analytics has embedded itself in the risk management function of financial institutions, and I wonder if that portends a broader penetration of the business of helping financial institutions cope with an ever-growing regulatory hydra. One reads about JP Morgan hiring 5,000 attorneys at a clip. Moody's has been known to employ one or two attorneys. I wonder if that's a strategic initiative for the company. Well, first of all, I look forward to the day when other institutions can have all of our attorneys. That would be fine. Your question is important because there are going to be additional opportunities coming from regulatory expectations, regulatory mandates around the world. As the whole risk infrastructure, risk management expectations rise, there are going to be new demands, new rules, new regulations that firms are seeking to comply with. Where we view our opportunities are in the areas that relate pretty closely to where we are already. I don't see us going into the outsourced attorney business in order to provide legal services. For risk management, credit risk management, obviously, but also you hear our expansion into other areas of asset liability management, liquidity risk management, et cetera, we see very clear opportunities there. The filter that we really want to put these opportunities through, among other filters, are whether there's an opportunity, if we're successful, to become a standard. That if we are used by five institutions, it's more likely that we're going to get used by the sixth, seventh, and eighth institution than if we were new to the market. We don't look to be in businesses that have what the economists would call negative networking effects. We want to be in the part of the market that has positive networking effects. That's why the regulatory-driven aspect of risk management is so interesting to us, because once what we provide to institutions is an acceptable standard from a regulatory overview perspective, that is something that other institutions are naturally going to want, because they're seeking to clear the same hurdle that the first institutions were. That's at least a little bit of color on how we think about parts of the Moody's Analytics business. Yes. Wait, you have to As your mix shifts within Moody's Analytics and MIS, is it reasonable to believe that the pressures on Moody's Analytics margins are going to be upwards, and they'll be downwards on MIS as the developing market becomes a bigger and bigger part? Yeah. That is one of the components of looking at margin contribution. My colleagues have been very articulate in talking about margins, I think. We have a lower margin business in Moody's Analytics. We have a higher margin business in the rating agency. Even as Moody's Analytics increases margin, to the extent that it is a faster-growing business than the rating agency, we may not see margin expansion. There's the question of relative pace of growth between the higher and lower margin business. We have expectations for Moody's Analytics to grow more quickly than the rating agency. Moody's Analytics, to date, has met our expectations, but the rating agency has exceeded our expectations. That's a very good problem to have. We get into questions within each business about mix, and that's what makes this a more challenging question to answer definitively. If what we're seeing from Moody's Investors Service is a lot of repeat issuance, increased leverage coming from corporations and banks and municipalities that we already rate, already have teams following, already know well, that's a high margin business, and we probably would see margin expansion coming out of the rating agency. If our growth, as you posit, is more associated with the developing markets and where we have to put in more new personnel and it's more first-time ratings and there are the bricks-and-mortar costs of expanding in new jurisdictions, that's going to be more of a drag on margin. I think that's a very high-quality business. That's the kind of business we want to get because, in the long run, it's going to be a contributor to top line, to profit, and to margin. It would act over the short to medium term as more of a governor on margin expansion. I think we've got a question over here. Can you talk about price increases in the ratings business philosophically over a long-term time horizon, and the pushback that you receive from customers with regards to price increases, and perhaps how those conversations have changed over the last five years? Sure. I may ask Linda to weigh in a bit on this also because she has responsibility for our global pricing in her area. As an opening statement, certainly we are looking to price for value. We get the least pushback from issuers where there is an obvious demonstration of incremental value, whether it's through the predictive content of the rating or the marketability of the bonds that an issuer has in global markets. There are a variety of ways for us to be able to demonstrate enhanced value. We also do have increasing costs associated with regulation, being a regulated entity. Regulations in many markets are in their early stages, less so in the U.S. and Europe. As we move into Asian markets, Latin America, Middle East, those are in more informative stages. We do look to price for cost where we have increases in costs. The approach is not to price with an expectation that we must avoid all pushback, but to have cogent and demonstrable arguments for what drives our pricing and to be persuasive around that. Linda, I don't know if there's anything else you wanted to add on the pricing side. Yeah, I think we think about this and our strategies are informed by Michel's thoughts on this and his colleagues'. We're really viewing it as very important that we have coverage of the greatest number of ratings and the greatest number of entities that we can. In our minds, coverage will always trump price. Michel said something that was very important earlier that I'm not sure that everyone assessed, which is we had quoted one capital markets desk as saying that it's a 30-basis point differential if a company goes out unrated. We've even heard numbers as high as 50-basis point differential if a company goes out unrated. The cost of a rating is generally five to six basis points. That is a pretty strong indication of value in the marketplace for what we're doing, and it does give us some ability to think about price constructively. We're looking to have very long-term relationships with these issuers, and we want to make sure, as Ray said, that the nod is always to value and coverage rather than to price. The service we provide is a very important one to companies as a whole. We have now overrun our time, and we do want to be respectful of the fact that you all have other things to do besides listen to us. I want to thank you very much for joining, everyone who was able to join either in reality or virtually. I want to thank my Moody's colleagues for their presentations today, and in particular, the investor relations team who did all of the work to get this organized. Very much appreciated by me, and I'm sure by you. Look forward to speaking with you again next year, and to speaking with many of you in between now and next year. Again, thank you very much.

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