Please stand by. Good day, and welcome, ladies and gentlemen, to the Moody's Corporation fourth quarter and fiscal year-end 2013 earnings conference call. At this time, I would like to inform you that this conference is being recorded, and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for question and answers following the presentation. I will now turn the conference over to Salli Schwartz, Global Head of Investor Relations. Please go ahead.
Thank you. Good morning, everyone. Thanks for joining us on this teleconference to discuss Moody's results for the fourth quarter and full year 2013, as well as our outlook for full year 2014. I am Salli Schwartz, Global Head of Investor Relations. Moody's released its results for the fourth quarter and full year 2013, as well as our outlook for full year 2014 this morning. The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moodys.com. Raymond McDaniel, President and Chief Executive Officer of Moody's Corporation, will lead this morning's conference call. Also making prepared remarks on the call this morning is Linda Huber, Chief Financial Officer of Moody's Corporation. Before we begin, I call your attention to the safe harbor language, which can be found toward the end of our earnings release.
Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In accordance with the act, I also direct your attention to the Management's Discussion and Analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31st, 2012, and in other SEC filings made by the company, which are available on our website and on the Securities and Exchange Commission's website. These, together with the safe harbor statement, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. I would also like to point out that members of the media may be on the call this morning in a listen-only mode. I'll now turn the call over to Raymond McDaniel.
Thank you, Salli. Good morning. Thank you to everyone for joining today's call. I'll begin by summarizing Moody's fourth quarter and full year 2013 results. Linda will follow with additional financial detail and operating highlights. I'll conclude with comments on our outlook for 2014, and after our prepared remarks, we'll respond to your questions. Moody's delivered strong financial performance throughout 2013, including revenue growth in all lines of business, margin expansion, and EPS growth of 18%. Fourth quarter revenue of $779 million increased 3% over the fourth quarter of 2012 and reflected growth in Moody's Investors Service despite challenging year-on-year comparisons, as well as continued strong growth from all lines of business of Moody's Analytics. Operating expenses for the fourth quarter were $467 million, a 5% decline from the fourth quarter of 2012.
Operating income for the fourth quarter was $312 million, a 20% increase from the prior year period. Adjusted operating income, which excludes depreciation and amortization, as well as a goodwill impairment charge in the fourth quarter of 2012, was $335 million, up 13% from the same period last year. Diluted earnings per share of $0.94 for the fourth quarter increased 34% from the prior year period. Excluding a legacy tax benefit of $0.09, non-GAAP diluted earnings per share for the fourth quarter of 2013 was $0.85, a 21% increase from the fourth quarter of 2012. For full year 2013, Moody's revenue of $3 billion increased 9% from full year 2012. Revenue at Moody's Investors Service was $2.1 billion for 2013, an increase of 9% from last year. Moody's Analytics revenue of $913 million was also 9% higher than the prior year.
Operating expenses for full year 2013 were $1.7 billion, up 5% from 2012. Operating income of $1.2 billion increased 15% from 2012. Full year 2013 adjusted operating income of $1.3 billion increased 12% from the prior year. Reported diluted earnings per share of $3.60 for the full year 2013 grew 18% from $3.05 in 2012. Excluding a litigation settlement charge of $0.14 in the first quarter of 2013 and a legacy tax benefit of $0.09 in the fourth quarter of 2013, as well as a legacy tax benefit of $0.06 in the third quarter of 2012, non-GAAP diluted earnings per share of $3.65 for the full year 2013 grew 22% from $2.99 in 2012. I'll now turn the call over to Linda to provide additional commentary on our financial results and other updates.
Thanks, Ray. I'll begin with revenue at the company level. As Ray mentioned, Moody's total revenue for the fourth quarter increased 3% to $779 million. The impact of foreign currency translation for the quarter was negligible. Fourth quarter U.S. revenue of $417 million and non-U.S. revenue of $362 million both increased 3% from the fourth quarter of 2012. Non-U.S. revenue represented 46% of Moody's total revenue, compared to 47% in the year-ago period. Recurring revenue of $390 million represented 50% of total revenue, up from 46% in the prior year period. Looking now at each of our segments, starting with Moody's Investors Service, total MIS revenue from the quarter was $523 million, up 1% from the prior year period. U.S. revenue for MIS declined 2% to $300 million over the prior year period.
Revenue outside the U.S. of $223 million increased 5% and represented 43% of total ratings revenue, up from 41% in the prior year period. The impact of foreign currency translation for the quarter was negligible. Moving on to the lines of business for MIS. First, global corporate finance revenue in the fourth quarter declined 1% from the year-ago period to $243 million. In the U.S., revenue was down 9% year-over-year, reflecting contraction in U.S. bond issuance against a strong prior year period. Outside the U.S., revenue was up 15% year-over-year as a result of higher investment-grade issuance in Asia and speculative-grade issuance in Europe, as well as increased revenue from monitoring fees for outstanding ratings. Second, global structured finance revenue for the fourth quarter was $109 million, 6% above the prior year period.
In the U.S., revenue increased 15% year-over-year, primarily due to increased CMBS and reissuance as interest rates, credit spreads, and risk appetite were favorable. International structured finance revenue was down 8% against the prior year period, driven by declines in revenue of European RMBS and Asian CMBS. Third, global financial institutions revenue of $89 million increased 3% from the same quarter of 2012, primarily reflecting increased revenue from asset management companies. U.S. revenue was up 6%, and non-U.S. revenue was up 1% as compared to the fourth quarter of 2012. Fourth, global public project and infrastructure finance revenue declined 3% year-over-year to $83 million. Revenue was down 6% in the U.S., primarily due to declines in public finance and project finance issuance, partially offset by increased issuance in infrastructure finance, while non-U.S. revenue increased 1%. Turning now to Moody's Analytics.
Global revenue for MA of $256 million was up 9% from the fourth quarter of 2012. U.S. revenue grew by 21% year-over-year to $117 million. Non-U.S. revenue increased by 1% to $140 million and represented 54% of total Moody's Analytics revenue, down from 59% in the fourth quarter last year. The impact of foreign currency translation was negligible. Moving now to the lines of business for MA. First, global research data and analytics or RD&A revenue of $138 million increased 9% from the prior year period and represented 54% of total MA revenue. We continue to see a mid-90s% customer retention rate as well as strong new sales of research products. U.S. revenue was up 8%, and non-U.S. revenue was up 10% as compared to the fourth quarter of 2012.
Second, Enterprise Risk Solutions, or ERS, revenue of $85 million grew 7% from last year, driven by strong growth in products and services that support bank stress testing activities. Revenue was up 48% in the U.S., while non-U.S. revenue was down 10% against the prior year period. As we have previously noted, ERS revenue remains subject to quarterly volatility due to the variable nature of project timing and completion. On a trailing 12-month basis, revenue and sales for ERS have increased 8% and 14%, respectively. Third, global professional services revenue grew 16% to $33 million, reflecting continued growth within Copal as well as the acquisition of Amba Investment Services in December 2013. U.S. revenue increased 54%, and non-U.S. revenue increased 6% year-over-year. Turning now to expenses. Moody's fourth quarter expenses were $467 million, a decline of $27 million or 5% compared to the fourth quarter of 2012.
This decline was primarily due to lower incentive compensation expense, lower legal accruals, and the absence of a goodwill impairment charge in the fourth quarter of 2013 as compared to the fourth quarter of 2012. The year-over-year reduction in expenses was partially offset by increased compensation expense due to additional headcount and pension costs in 2013. The impact of foreign currency translation on operating expenses for the quarter was negligible. Moody's reported operating margin for the quarter expanded 550 basis points year-over-year from 34.5% in the fourth quarter of 2012 to 40% in 2013. Adjusted operating margin was 43% for the quarter, up from 39.3% in the same period last year, an expansion of 370 basis points. Moody's effective tax rate for the quarter was 30.6%, compared with 31.5% for the prior year period.
The decline in the effective tax rate was primarily due to lower U.S. taxes on foreign income. Now I'll provide an update on capital allocation. Moody's increased its quarterly dividend on December 17th by 12% to $0.28 per share of common stock. During the fourth quarter of 2013, Moody's repurchased 2 million shares at a total cost of $146 million and issued 0.9 million shares under employee stock-based compensation plans. For the full year 2013, Moody's repurchased 14 million shares at a total cost of $893 million, or an average price of $62.90 per share, and issued 5.5 million shares under employee stock-based compensation plans. Outstanding shares as of December 31st, 2013, totaled 214 million, a 4% decline from the prior year period. As of December 31st, 2013, Moody's had $784 million of share repurchase authority remaining under its current program.
Also as of December 31st, Moody's had $2.1 billion of outstanding debt and $1 billion of additional debt capacity available under its revolving credit facility. Total cash equivalents, and short-term investments at year-end were $2.1 billion, an increase of $333 million from a year earlier, due in part to Moody's August 2013 bond offering of $500 million of senior unsecured notes.
Full year 2013 free cash flow was $885 million, an increase of $106 million or 14% from a year ago. Cash holdings maintained outside of the U.S. at the end of the fourth quarter were $1.2 billion, or 59% of total cash holdings. With that, I'll turn the call back over to Ray.
Thanks, Linda. I'll conclude this morning's prepared remarks by discussing our full-year guidance for 2014. Moody's outlook for 2014 is based on assumptions about many macroeconomic and capital market factors, including interest rates, corporate profitability, business investment spending, mergers and acquisition activity, consumer borrowing, and securitization and the amount of debt issued. There's an important degree of uncertainty surrounding these assumptions, and if actual conditions differ, Moody's results for the year may differ materially from the current outlook. Our guidance assumes foreign currency translation at end-of-quarter exchange rates. While we anticipate variable market conditions in 2014, we nonetheless expect revenue growth across all areas of our business. For Moody's overall, we expect full-year 2014 revenue to grow in the high single-digit percent range.
Full-year 2014 operating expenses are projected to increase in the mid-single digit % range, reflecting the full-year impact of 2013 hires as well as investments in our business. These include product development initiatives, particularly in credit research and Enterprise Risk Solutions, where demand for our capabilities is particularly strong. We're also expanding our presence in important international markets. Even including these investments, our full-year 2014 operating margin is expected to expand 50-150 basis points to be between 42% and 43%, up from 41.5% in 2013. Adjusted operating margin is expected to be between 45% and 46%, up from 44.7% in 2013. The effective tax rate is expected to increase to approximately 33% due to various tax law changes. The company expects diluted earnings per share for the full year 2014 of $3.90-$4.
We have endeavored to return capital to shareholders through a combination of dividends and share repurchases. Over the course of 2013, Moody's increased its annualized declared dividend by 40%, from $0.80 to $1.12. For 2014, we expect share repurchases of approximately $1 billion, subject to available cash, market conditions, and other ongoing capital allocation decisions. Full-year 2014 capital expenditures are projected to be approximately $90 million, reflecting ongoing infrastructure maintenance, fit out of additional floors at our Seven World Trade Center headquarters, and investments in our business for efficiency and growth. We expect approximately $100 million in depreciation and amortization expense. Growth in compliance and regulatory expense is projected to be less than $5 million. Free cash flow is expected to be approximately $900 million. For the Global MIS business, revenue for full-year 2014 is expected to increase in the mid-single digit % range.
Within the U.S., MIS revenue is expected to increase in the low double digit % range. Corporate finance and public project and infrastructure finance revenues are both projected to grow in the high single digit % range. Revenue from structured finance is expected to grow in the low single digit % range, while revenue from financial institutions is expected to grow in the mid-single digit % range. For MA, full-year 2014 revenue is expected to increase in the low teens % range, inclusive of our December 2013 acquisition of Amba Investment Services. On an organic basis, MA revenue is expected to expand in the high single digit % range. Within the U.S., MA revenue is expected to increase in the high single digit % range. Non-U.S. revenue is expected to increase in the high teens % range.
Revenue from research data and analytics is projected to grow in the high single digit % range, while revenue for Enterprise Risk Solutions is projected to grow in the low teens % range. Revenue for professional services is projected to grow in the mid-40s % range, which includes the recent acquisition of Amba. Organically, professional services revenue is expected to increase in the low double digit % range. This concludes our prepared remarks, and joining us for the question and answer session is Michel Madelain, the President and Chief Operating Officer of Moody's Investors Service, and Mark Almeida, President of Moody's Analytics. We'd be pleased to take any questions you may have.
Thank you. To ask a question, press the star key followed by the digit 1 on your touch-tone telephone, and please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1 for a question, and we will take our first question today from William Bird with FBR. Please go ahead.
Ray, I was wondering if you could talk about just how you see debt issuance developing in 2014 and what you view as some of the key swing categories as you think about your outlook. Thank you.
Sure. As I think you can glean from our guidance, we do expect international activity, particularly in the corporate sector, to be stronger than growth in the U.S. Looking at the market consensus, we would expect in the U.S. to see modestly down volumes and issuance counts, and Linda may wish to give some additional color on that. It's really, in terms of the variables here, for corporate finance, as we've talked about before, it's really a question of both interest rates and how that affects refinancing activity, as well as if we do have a rising rate environment, is that associated with business confidence and borrowing for non-refinancing reasons, whether it be M&A or capital expenditure or share repurchase. That would be a significant swing factor.
I would also say that, as always, the amount of activity in the securitization markets and the question about whether there's going to be a recovery in European securitization off of what was a relatively quiet year last year would be the second area I'd look to as an important variable.
Bill, it's Linda. I think we see unusual differences between U.S. and non-U.S. trends in the issuance markets right now. Let me go through within the U.S. for this week, we see about $15 billion of issuance, but we would remind everyone that we're still in blackout period at this point. January looks like about $100 billion of U.S. investment-grade issuance, which may be down 10% year-over-year. For the full year, most projections are at about $900 billion, which is sort of flattish, down 5%, again, in the U.S. We've seen very good funds flows into bond funds so far this year. $9 billion has moved into bond funds. Interestingly, as the market has wobbled and there have been a resurgence of risk factors, interest rates have come back in.
As of this morning, the 10-year's at 2.67%, the five-year's at 1.47%, that is helpful in terms of issuance trends. We would expect that perhaps even beginning next week, things will start to pick up. Thus far in the year, we've seen investment grade skewed heavily towards financials in the U.S., we've seen very heavy issuance from Yankee issuers. In other words, issuers coming from outside the U.S. Pipelines at investment grade in the U.S. right now would be characterized as light to average. Looking at high yield, we've seen about $10 billion this week. January looks to be at about $30 billion. The year is projected at about $300 billion. Again, in the U.S., that's down a little bit from last year. I'll ask Michel Madelain to comment as we move through this. Again, it's a different story outside the U.S.
The issuance levels all in for high yield are at 5.91% this morning. Again, issuance levels under 6% are very helpful to the high yield market. We'll see what happens with M&A activity and so on, pipelines are characterized as average. Leveraged loans continue to be very much the bright spot this week, $15 billion of leveraged loans. January at $50 billion, which is up 40% year-over-year. The year's forecast is $400 billion, which is down a bit, we'll see how that plays out. Leveraged loan market has started the year in great shape. Inflows have been very strong, $460 million for the week. The asset class has not seen a weekly outflow since June 2012, as investors continue to look at floating rate papers, the attractive place to be. The pipeline there is termed to be robust in leveraged loans.
With all of that, it might be interesting for you to hear from Michel, to hear his observations on the difference between U.S. and the international markets.
Thank you, Linda. Really, I think that's the main point we have in front of us is this contrast between the U.S. and non-U.S. U.S., what we have is a situation with obviously more challenging comparables because of what we've seen this year, and an expectation of a contraction of issuance in investment grade and also high yield bonds. Internationally, what we see, especially in Europe, is the fact that we expect benefits from a continuation of disintermediation and bringing new transaction, as well as improving economic conditions. Again, both factors are helping to generate additional flow of new bonds, I think.
Bill, that might be more than what you wanted, that's the story.
Well said, well spoken. How do you expect expenses to phase in in 2014?
Sure. As we said, expenses growing in mid-single digits for 2014. The reason for that, though, we've got businesses which are performing very strongly here. We're very pleased with our businesses' performances in 2013 and the outlook for 2014. We think we have some good opportunities. So looking at expense growth in the mid-single digits. For the first quarter, I'll make this easy. I think what we'd look at on a GAAP basis is probably expenses in the first quarter, somewhere around $450 million. Then we're looking at a ramp again over the course of the year, probably $35 million-$40 million of increase by the time we get to the fourth quarter.
Again, modest increase in expenses over the course of the year with the fourth quarter being the highest, again, with the traditional ramp that Moody's sees of $35 million to $40 million, starting off of the base at around $450 million in the first quarter, if things play out as we expect.
Thank you.
Our next question is from Peter Appert with Piper Jaffray. Please go ahead.
Thanks. Ray, the international numbers are particularly impressive, I think. Is it possible to break out the impact or quantify the impact of this whole disintermediation thesis versus just secular growth or cyclical growth in the market? Then I'm wondering also related to that, if you have any statistics you can share with us on number of new issuers you're seeing in the international markets.
Sure. The contribution from disintermediation is, again, probably two to three points of revenue, as we've talked about previously. That has been fairly steady over the last few years. We had a particularly strong year last year for new mandates. I think the number of new mandates was over 500 last year. It was a strong year. The trends that are influencing that, the de-leveraging pressure on financial institutions, particularly in Europe, continues. I think that also the interest of corporate borrowers to diversify their access to capital continues. It looks like a powerful story and a long-term story as opposed to a cyclical story.
Peter, it's Linda. I think as we finished the fourth quarter, our new mandates might have even been a bit higher than what Ray stated, maybe around 800 new mandates. That has been wind at our backs, as we said, and we're pleased with the international issuance pace also in Asia as well as in Europe.
How would that 800 compare with 2012, Linda? Do you know?
Let me just clarify the numbers. We have net and gross numbers, and so we have to be clear about that. I'm sorry, your question, Peter?
Whichever number it is, how it compared to the prior year.
It was up by several hundred.
Okay. Excellent. Then in terms of the stepped-up pace of buyback activity, if I'm calculating this right, if you do $1 billion of buyback and call it $200 million of dividend payments that will likely exceed the free cash flow. Should I read into this a willingness maybe to use a little bit more leverage, not just near term, but over the next several years in terms of maintaining a higher level of buyback? The question really is the $1 billion level a number we might expect on a continuing basis?
Well, that's going to be subject to a number of factors. Ongoing review of how our financial performance is, what our other opportunities are for use of capital. I will say that I think we have the capacity to continue to repurchase at that rate absent something unexpected. There's certainly that potential.
Okay. Great. Thanks. Last thing. Pricing, anything different in 2014 than what you've done in the last couple of years?
Peter, it's Linda. I don't think so. As we have guided in our previous discussions with investors on the four-box growth chart, we've said pricing is 3%-4% of our growth, and we continue to look at that for 2014.
Great. Thanks very much.
We'll go to Patrick O'Shaughnessy with Raymond James.
Hey, good morning, guys. My first question is, obviously, we've had a pretty big upheaval in the emerging markets to start 2014. Have you seen any of that have an impact on new issuers kind of coming to market or your conversations with companies that are based in emerging markets?
Yeah. The turmoil in the emerging markets certainly has had an impact on short-term pipelines and issuance levels. I don't think that that is going to remain a story for the full year. I would expect that we're going to continue to see good activity in the Yankee market, as Linda mentioned. Also I think with the realization that interest rates in the U.S. may not be moving as far as fast as people had feared will bring some more stability to the emerging market side of the equation.
Patrick, it's Linda. I think as I had mentioned in the earlier remarks, the elevation in the VIX and various other things has resulted in U.S. rates coming in about 30 basis points, which is attractive for issuers. We'll see how that is viewed. We thought that the markets might be waiting for some of this end-of-year data before issuers take another step. We will see how things pan out as we move through February.
Great. Thanks. Then a second question from me. I think there's been a number of articles these last few days about the Volcker Rule and its impact on CLOs, it certainly looks like the CLO market has dried up a little bit. From your commentary, it sounds like the leveraged loan market still remains pretty robust. Can you just provide some commentary on your level of concern about how the Volcker Rule is impacting CLOs and what the banks can hold and how you see things playing out there?
Yeah. I think we have seen a market reaction both in terms of pull forward of CLO activity and quite a bit of debate about how the Volcker Rule will ultimately impact this market. I'm pretty optimistic that a resolution is going to be found that is going to allow banks to continue to issue CLOs and to have the treatment of that economically work for them in terms of what's on the balance sheet. The commentary from policymakers and regulatory officials, I think, has recognized that challenge, and they're looking for a solution that's not going to be disruptive to the market.
The last one from me, just on your fourth quarter repurchases, at about $145 million, to get to $893 for the year. Obviously came in a little bit below your billion-dollar guidance. Was there something about the market conditions in the fourth quarter that slowed the pace, or what was going on with that?
Sure. It's Linda. As we've talked about before, we put in place our repurchase grid shortly after we give the previous quarter's earnings. We have to do that during the window period. Our stock price, we were very fortunate, had a rather dramatic increase in the fourth quarter, we didn't get as much done as we wanted to. We'll take another look as we move through this period and see how we do for 2014.
All right, great. Appreciate it. Thank you.
Next is Timothy McHugh with William Blair & Company.
All right. Yeah, thanks. Just wanted to ask a few about Moody's Analytics. To start with, I guess, the RD&A part, I know you said it was kind of high retention and strong new sales. Can you give us a little more color on what type of products? Are there new products? I guess, what's driving the strong new sales right now? Anything you've done or what's behind it, just to know if it's sustainable?
Sure. I'm going to turn this over to Mark Almeida.
Yeah. In the RD&A business, we've seen good sales volume really across the product portfolio. Demand continues to be very strong for the rating agency research and data, which are the biggest pieces of the business. When they do well, the RD&A segment does well. We've also seen good new sales production in the economics business, particularly in the fourth quarter. I think that overall, there's just been very good demand for what we're doing in the business. We've done a bit of new product innovation, and have introduced a couple of new ways of delivering our content in a packaged way. That's helped as well. The retention has really been quite strong, and given the size of the business, that's very beneficial.
Okay, great. My only other question here, ERS, you gave the commentary about U.S. versus international revenue, I guess, which can be lumpy, if we looked at the bookings numbers or trailing sales numbers that you gave, is there a similar distinction between U.S. versus international performance, or was that just the timing of revenue recognition for that business?
No, it's entirely a timing phenomenon there. The sales production is much more consistent from region to region. The revenue results can be wildly different because they're driven by what projects get done and when they get completed. We just had a number of very large projects that got completed in the fourth quarter in the U.S. By contrast, in the fourth quarter last year, we had some very big projects outside the U.S. getting done. As you said, purely a timing phenomenon.
Okay. I guess one more if I could too. I forgot, and I may have missed it, can you tell us what the incentive comp was for the quarter?
Sure.
Sure. Let me dig that out. Incentive compensation for the quarter was $47 million, that was down from about $60 million in this quarter last year. The actual change was 12.7. While we had a good and strong fourth quarter, it was not as strong as last year's fourth quarter, where we had to catch up a bit on our incentive compensation.
Okay, thank you.
We'll go to Doug Arthur with Evercore.
Yeah. You've made a couple of comments about expanded headcount going into 2014. Linda, is there any numbers you can give around that?
Sure. Happy to do that. We're looking at for 2013, we had a headcount increase of about 9% for the previous year, and that excluded the acquisition that we had done with Amba. Looking to 2014, we're looking at sort of a similar rate of headcount increase. One of the things that we're noting is that about 80% of that increase is to the lines of business. In other words, not the support function. That 80% ratio is important. We're looking to make sure that the businesses are appropriately staffed for the investments we're making and the strong growth that we've seen.
Okay, great. Just one follow-up on revenues. I think the press release implied that roughly 43% of MIS revenues in the quarter were international. When you look specifically at the corporate finance, where international was particularly strong, is it a similar % there, or is it slightly higher?
Sure. For the corporate finance line for Q4 of 2013, international was 39% of the total, and U.S. was 61% of the total for the fourth quarter of 2013. The year's numbers, the % look about the same.
Okay, great. Thank you.
Next is Edward Atorino with Benchmark.
Ed?
Yes. No, my question's been answered.
Okay. Thank you.
Thanks, Ed.
About four times.
Thank you. If anyone else's question has been answered and you'd like to remove yourself from the queue, just press star two. We'll now go to Manav Patnaik with Barclays. Please go ahead.
Hey, good afternoon, everybody. Just wanted to try and understand the operating expense guidance that you gave by division and maybe more specifically, I guess the skew, with the contribution of Amba. How should we think about what the incremental expense contribution there would be on the MA side?
Sure, Manav. You may not be too happy with this answer, I think we're going to stick with our mid-single digits. You can probably infer from what I said.
Okay
regarding the headcount numbers that we're looking to have the stronger growth rates in expense be in the operating division lines, which we think is appropriate to drive the growth. We'd rather not get into that level of detail, if that's okay.
Okay. Fair enough. I guess in terms of the issuance pipeline, et cetera, that you guys see, I think last year you had taken a shot at sort of the initial quarterly phasing maybe of how that might play out. Do you care to take a shot at that now?
I think the revenue pattern, which is going to relate to the issuance pattern, is going to be similar to what we saw in 2013, with relatively stronger quarters in the second and fourth quarter. That is a typical pattern. It has not been consistently followed in recent years, but it has been a pattern we've seen historically, and we are anticipating that 2014 is going to look somewhat like 2013 in terms of that sawtooth.
Okay. Last one for me. I guess you didn't have any slide on any regulatory or any other update. Nothing to report there, basically?
No. We are in process of being inspected and reviewed, examined by regulators in different jurisdictions around the world. We've gone through a significant effort to make sure that we're complying with new rules and regulations. Those are largely complete, although not fully complete, and we'll have to continue to develop some new compliance programs. It's nothing that I think is at the policy level at this point. It's really more about inspections, examinations, and compliance.
Okay. Thanks a lot, guys.
We'll go to Craig Huber with Huber Research Partners. Craig?
Yes. Hi. I've got some housekeeping questions here. First, Linda, this 33% tax rate guidance for 2014, can you just give us a little further update of why it's gone up roughly 150 basis points?
Sure, Craig. We did extraordinarily well on the tax rate in 2013, and we had some things that we don't expect to repeat break our way. Predicting the effective tax rate is one of the hardest things that we do because at this point in the year, the tax rate is difficult to forecast because we have some tax law changes that are said to be happening, and they are in flux. For example, there are two pieces in the U.S. that you might want to look up. One is the extension of look-through provisions, and the second is R&D tax credits. Both of those, at the present time, are not expected to be extended in the U.S. That may change. That has changed in previous years. We're taking a conservative view, and we're planning that those two factors will not be extended.
Those things, along with a couple of other factors, are causing us to ask you to look at an effective tax rate of 33% for 2014. We understand that's up from 2013, and we'll continue to work on it in our usual conservative manner. That's what we're working with right now, and we can only plan for the best that we know.
Also, just what are your thoughts here, Ray or Linda. As you know, your main competitor, S&P's transaction revenues were down about 12% in the quarter. Yours are down about 5.5%. Do you guys view that as just noise, or is there some market share you're picking up that you want to really highlight here?
We've had some improvements in market share, for example, in European structured finance. I can only speak to our numbers. I wouldn't speak to our competitors. Trying to look at this on a longer-term basis, though, I think we have to look at the mix both geographically and by security type and areas where we are traditionally strong, are more active in certain quarters than in others, and vice versa. It does take some time to try and get through the noise, and so I'm cautious about predicting any long-term trends out of this.
A couple more questions, please. Could you just give us an update on the legal front, particularly the CalPERS case, please?
Not a lot to report on the CalPERS case. The matter is still in the California courts. We filed a court appeal seeking a reversal of the lower court's decision, denying our motion to dismiss under this anti-SLAPP statute. The briefing on the appeal was completed a few months ago, and we don't know when the case will be argued or decided at this point.
My last question. Linda, can you just help break apart the revenues, a little finer detail here within your ratings business, like within corporate finance, for example. Could you break out the percentages or dollars for high yield versus bank loans, and also the other three large categories, please?
Sure, Craig. What we're looking at here is fourth quarter of 2013 as compared to the fourth quarter of 2012, and I'll start with the corporate finance line, as you asked for, Craig. Investment grade, it was 23% of the total CFG line, which was about $243 million. The high yield portion of 2014's revenue was 21%, or $50 million, which is down from 24% in 2012. Bank loans were at 20%, which is the same as last year, and other was 37%, up a bit from last year's 34%. Moving on to the other lines of business now, turning to structured finance. Asset-backed securities, 25% of structured revenue line of about $109 million for the fourth quarter of 2013. That was down a bit from last year's 28%. RMBS was 19% of structured revenues for the fourth quarter. That's flat to last year.
Commercial real estate finance was 32%, up from last year's 28%. We had spoken about that earlier. Structured credit, what's also known as derivative, was 24% of that total, about flat to last year's 25%. Going on to financial institutions. About $89 million of revenue for the fourth quarter of 2013, and banking was about 71% of that total, or about $64 million. That was down a bit from last year's 73%. Insurance was 22% of the number, flat to last year's 22%, and managed investments was 6% of the total, which was up a bit from last year's 5%. Moving on last to public projects and infrastructure. Total number for the quarter was about $83 million. Public finance and sovereign, 43%, or $35 million, which was down from last year's 47%. Munis was about 5% of the total, down a bit from last year's 6%.
project and infrastructure, as we had noted, at about $43 million, up to 52% of the total, up from last year's 47%.
Linda, if I could just ask-.
Sure.
Sorry, Linda, if I could just ask one follow-up there. The sovereign piece of that public finance and sovereign line, how insignificant right now, I guess, for the full year was sovereign?
I think we've-.
We don't disclose the dollar figures, it's small.
Yeah, I think a few %, Craig, is what we've said before. It's frankly not particularly material.
Okay. Hasn't changed. Okay. Thank you.
Thanks.
We'll go to Alex Kramm with UBS.
Hey. Hello. I was going to say good morning, but I guess it's afternoon already. Real quick, I guess only a couple follow-ups. On the guidance, I think the one thing to dig in a little bit, if you may, on the structured side, obviously that's the lowest growth, and you talked about a little bit. Is it just conservatism and considering that that business has been so lumpy and so uncertain? There's been times when we thought there were green shoots and then markets like RMBS kind of collapsed again, and maybe more recently, it's like ABS has been a little bit more in demand. Can you just talk about what you're seeing out there, what we should be looking for, and if there is a resurgence, where you expect it to come and what we should be looking for?
Well, I guess to answer the beginning part of your question, I hope our guidance is conservative on structured. There are a lot of uncertainties. As we talked about earlier, what happens with CLOs from a regulatory perspective. What is going to happen with the residential mortgage-backed securities market and its pace of growth. The European market, which has been very soft, and whether that's going to experience a recovery in 2014. There are some good reasons to believe that each of these can break in a favorable way, but they remain uncertainties at this point. I guess the last item I'd just point to is actually the economics of doing these transactions, which can be subject to interest rates and spreads between high-grade and lower-grade securities. There is just an economics question in terms of when it's attractive to issue these securities.
Yeah, Alex, it's Linda. I'd also continue to point out that, as you said, the greatest strength we're seeing is in the commercial real estate line, which had moved up nicely in the fourth quarter, and also REITs. Those are the places where we've seen strength. As you pointed out, RMBS for the fourth quarter was about flat from last year. It would probably be fair if we ask Michel if he had anything further that he could add that Ray and I have not mentioned.
No, I think you've covered pretty much. I think the other place where you see some potential improvement is ABS in Europe, basically.
Okay, great. Maybe just lastly, just to come back on the tax rate, and maybe it's not a fair question, but obviously, thanks for the incremental color there. When I think about your guidance, and you're looking at stronger growth next year or this year in outside of the U.S., and I think about tax rate changes in the U.K., for example, rates are going down, then in general, rates seem to be lower outside of the U.S. Shouldn't conceptually that still be a helpful driver, or do you think you've exhausted all those opportunities already?
Well, Alex, we're going to continue to work hard on it and look region by region at what we can do on the tax rate. Again, we take a conservative approach to this. I spoke a little bit about some of the U.S. things that are pending, but for right now, we don't have an extension of previous provisions. In Europe, we do see some countervailing trends. There have been some changes in the U.K., which have had the result of moving things up a bit in terms of rates in the U.K. You might want to take a look at that. Again, if we have progress on the tax line and if we have a change to the estimated tax rate, we will be happy to tell you about that in future quarter calls if we get there.
Again, we understand that this is an important factor. If you look at the difference, it looks like it'll cost us about $0.12 in EPS, and we're mindful that that is a change that's not helpful. We'll continue to work at it, as we said.
All right. I think that's all for me. Thank you.
You're welcome.
We'll now go to Hamzah Mazari with Credit Suisse.
Good afternoon. Thank you. Just a question, Ray, on how you're thinking about M&A and whether your pipeline going into 2014 is stronger versus 2013. It seems like there are a lot more assets out on the market. Maybe give us a sense of what your feel is there.
I think our internal pipeline would look similar in 2014 to 2013. We've talked about this before. We look at a lot of potential opportunities, and we think we're very rigorous in the assets that we actually choose to pursue. I've said before also I think the likelihood of doing something transformative is relatively low. We would be looking more for assets that have the kind of size and synergies that we've seen with our recent acquisitions, whether it's Amba, Copal, or going back a couple of years to some of the acquisitions we made in the Enterprise Risk Solutions business.
That's very helpful. Just a quick follow-up, I'll turn it over. Could you maybe compare your competitive positioning and exposure within the U.S. versus the European structured finance market?
Sure. I'll ask Michel to offer his views on this. At a high level, we have a very good position in both markets. There are areas where we have traditionally been stronger and that includes commercial mortgage-backed securities, CLOs, the residential mortgage-backed securities market in Europe. So you can see where we're strong and the markets are active, we obviously benefit from that. Conversely European RMBS, which has been quite dormant, especially in the U.K., is an area where if we're more active, I think the strength we have in that market would come and help our top line, certainly. Michel, did you want to-
No, I mean, only to point out is covered bonds. Mainly, we have a very strong position, and ratios have been very soft lately, and we benefit again from that too.
Great. Thank you. Have a good weekend. Thank you. Appreciate it.
Thank you.
Thanks.
We'll now go to Andre Benjamin with Goldman Sachs.
Hi, good afternoon.
Andre.
First question. Mentioning your current views on the opportunity to rate debt in Asia, how much of the international revenue did that account for in 2013? Do you have any view on where that could go based on either the macro or conversations that you're having with clients in the region?
Our Asian revenue is still relatively small. I'll put out a number, and my colleagues will correct me. I think it's about 13% of our total. It's an area of growth, but it's an area where disintermediation has been lagging behind what we've seen in Europe and certainly the U.S. We've got good opportunities there. They are multiple types of opportunities, though. Some of it on the ratings side of the business. In the ratings side of the business, some of it in domestic markets such as Korea, China, India. Obviously, the cross-border markets as large firms in those countries access the international bond markets. We also have good opportunities in Moody's Analytics in the Asian markets, both with research and in particular with our Enterprise Risk Solutions business.
Yeah.
Do we have a number on that?
Yeah. We've got for the overall corporation for the year, Ray's right, we're looking at low double digits for international growth. In terms of what we're seeing with the two businesses, I think we might invite Michel and maybe Mark to speak a bit more about that if they'd like to.
Yeah. In Asia, for us, corporate finance is really where we see the biggest opportunity and the biggest growth. Actually last this year, we've seen among the highest growth finance business in that region, actually. That's what I have. I don't know if Mark wants to say more.
In M&A, I'd endorse what Ray said. It's a good market for us. In particular, the research business in Asia has picked up nicely in 2013. Still relatively small scale, but very healthy growth rate. That's very good to see. Very profitable business.
Andre, I think, in total, we're looking at 9% revenue growth for the company, and we've just said low double digits. You might infer that Asia's growing a little bit more rapidly on the whole across the businesses, than maybe we're seeing in some of the other regions. Again, I would caution it's coming off a small number, as Ray has said.
Thank you. Any light that you'd be able to shed on what gives you confidence that the public project and infrastructure finance business is going to grow high single digits next year? I know we just came off the first down quarter in some time. It's been pretty strong previously. Is it just the macro trends, or is there something else specific that you're seeing in the pipeline?
What you have in that segment is really several businesses who have very different dynamics. You have U.S. public finance, where we actually expect continue to see a contraction of volumes this year. This is offset by positive development in infrastructure and projects outside of the U.S., similar to what we've seen this year.
Andrew, going from memory, oftentimes, U.S. municipalities have to get their budgets in order. I think traditionally we see that that business is stronger toward the middle of the year than in the first quarter. That's a trend we'll have to watch as well.
Thank you.
At this time, I'd like to turn the conference back to Raymond McDaniel for any additional or closing remarks.
Okay. Thank you very much. I just want to mention that on Tuesday, September 30th, we'll be hosting our annual Investor Day. It will be at our headquarters here in Lower Manhattan. More information will be available on the investor relations website as we get closer to the event. Thank you all for joining the call today, and we look forward to speaking to you again in April.
Thank you very much. This concludes Moody's fourth quarter and fiscal year-end 2013 earnings conference call. As a reminder, a replay of this call will be available after 3:30 P.M. Eastern Time on Moody's website. Thank you, and have a great day.