Good morning. I think we're going to get started here. Welcome to Moody's 2013 Investor Day, both to those of you that are in the room here at Moody's Headquarter as well as to those of you that are here with us on the webcast. My name is Sally Schwartz, and I'm Moody's Global Head of Investor Relations, and I'll also be your host for today's event. Before we begin, I'd like to call your attention to the Safe Harbor language here on slide 3 of our presentation.
Our remarks today 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 ks for the year ended December 31, 2012 and in other SEC filings made by the company. 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. Let me now turn to the agenda for today. In a few moments, Ray McDaniel, President and Chief Executive Officer of Moody's Corporation will provide his opening remarks.
Following Ray, Mark Sandy, Chief Economist of Moody's Analytics will provide a macroeconomic overview. Then, Michelle Madeleine, President and Chief Operating Officer of Moody's Investor Service and Rob Fraubert, Managing Director and Head of our Commercial Group We'll speak on behalf of Moody's Investor Service. Finally, before our break, John Goggins, Executive Vice President and General Counsel will provide a legal and regulatory overview. After a 15 minute break, Mark Almeida, President of Moody's Analytics and Steve Talinko, Executive Director, Enterprise Risk Solutions will speak on behalf of Moody's Analytics and then Linda Huber, Executive Vice President and Chief Financial Officer of Moody's Corporation David Platt, Managing Director and Head of Corporate Development and Lisa West Senior Vice President and Chief Human Resources Officer will speak to various elements of our financial strategy. Ray McDaniel will end today's event with his closing remarks and then we invite you to join us for a light lunch and refreshments in the adjoining rooms.
A few comments on logistics. All of the presentations will take place in room C and D where you're sitting now. All the refreshment breaks will take place in rooms A and B to your right when you exit this room where you ate breakfast this morning. Please look for the volunteers who have read badges on their name tags. There's also an information desk just outside this room.
And then finally, we've included in your presentation binder a survey. And for those of you on the webcast, we have a link that will show up at the end of the broadcast. Please do take a few minutes. It's really brief and provide us with your feedback before you leave today. We do value your input and We do try and incorporate it in future events.
Now some of you may remember that last year, we presented a screen of Moody's against the S and P 500. And this year we've done something similar. But we've actually upped the ante by looking at 3 years of historical performance. So if you look at Moody's, our 3 year revenue compounded annual growth rate or CAGR for 2010 through 2012 was 16%. Our EPS CAGR for the same period was 19% and our average operating margin over that period was 39%.
Here we have all the
tickers for the S and P 500. You can read this, right? Okay. That's okay. It's not necessary.
We started the screen with Moody's 19% EPS CAGR understanding that for some companies over the last several years, it's been a lot easier manage expenses than it has been to grow revenue. If you screen for our EPS CAGR, you're down to 148 companies out of the S and P 500. Screening that group against our 16% revenue CAGR, you're down to 38 companies. And then further screening that group for our 39% operating margin, You get 4 companies other than Moody's, which is here in yellow, American Tower Corporation, CF Industries Holdings, Mastercard and Intuitive Surgical. Now clearly, these companies span a variety of industries.
They're different sizes. They different return profiles. But nonetheless, we're down to less than 1% of the S and P 500 companies that at least on these metrics has performed as well as Moody's over the past several years. Clearly, we're stewards of an exceptional business and we endeavor to keep managing it well. With that, I'd like to turn it over to Ray McDaniel
Thank you, Sally, and thank all of you for joining us either in person or remotely this morning. I hope we are able to provide a valuable for you this morning. I'm going to make a few brief remarks before turning over to Mark Zandy. And as Sallie said, both Mark and I will be available for a brief Q and A session after his prepared remarks. So I'm going to begin by covering Our guidance then moving to ongoing growth opportunities and some concluding thoughts.
We are affirming our 2nd quarter guidance today. This is earnings per share in the 3 point $0.49 to $3.59 range, excluding our 1st quarter litigation settlement. Revenue, we still expect to be in the high single digit percent growth range and operating expenses in the mid single digit percent growth range including the 1st quarter litigation settlement and an operating margin of 41% to 42%, again including the 1st quarter litigation settlement. You can see on this slide the other components of our guidance And because we are affirming these, I will not repeat all of these individual items. Last year, you'll recall that we put up this 4 box growth chart.
We still believe that strong secular trends will provide long term growth opportunities. And we recognize that Moody's Investor Service remains subject to cyclical issuance activity. The 4 boxes briefly. First of all, we expect that on average debt will grow in line with global GDP. Secondly, disintermediation, which has been a powerful driver of the business and which I'll talk about a bit in just a minute, is going to contribute several more points of growth on average.
This is a movement of debt from the banking systems into the bond market. So the first two boxes put together, you can see that we're anticipating growth in debt and growth in the portion of debt that's represented in the bond markets rather than in the banking system. Then there's growth of Moody's Analytics, which is independent of conditions and cyclical issuance conditions and pricing initiatives that we seek to align with value. We think in aggregate that this provides a revenue growth opportunity in the low double digit percent range on average. So let me turn to these albeit with regional differences.
You can see in this right hand panel that our growth the growth forecast is about 1% higher in the to 2015 period. Then in the 2008 to 2012 period, with the advanced economies being about 1% and half higher than they were in the immediate post financial crisis era. So just looking at this metric, you would expect that better growth in GDP should support more debt volumes. But obviously, there has been a lot of refinancing and a pull forward of maturing debt. So that raises the question of whether there is a cyclical downturn in issuance coming.
And I think the answer to that is it depends. Refinancing has dominated issuance in the last few years. And the other historical drivers of bond issuance, Mergers and acquisitions activity, share repurchase, capital expenditure have really been muted. So we're looking at whether improved economic activity in a rising rate environment is going to cause these other drivers to become more prominent as opposed to refinancing, which has been the subject of the pull forward in recent years. So I think this slide may help illustrate what we're talking about here.
These are account of mentions of the reasons why bonds and rated bank loans had been issued. On the left hand bar, you see the 2009 through 2013 period.
And in
the right hand bar, you see the 1998, 1999 period when which was also a rising rate environment and when we were able to grow our revenue through a rising rate environment. The green portion of the bars is the number of debt refinancing. And you can see the debt refinancing has dominated the recent history. That's fully 60 of the debt that has been issued has mentioned refinancing as the purpose. That's compared with 20% in Orange for mergers and acquisition activity and another 20 combined for share repurchase and capital spending.
Going back to the 1998, 1999 period, you see that difference in mix with refinancing only being mentioned 44% of the time with mergers and acquisition activity at 31% and share repurchase capital expenditure at 25%. So obviously this is not a prediction of the coming years. But it does show historically how that mix changes in a low rate environment or a falling rate environment a rising rate environment. Okay. Turning to the disintermediation component.
Dismediation has a couple of drivers. First of all, stress in the banking system and this is certainly a driver in Europe. As banks are deleveraging that forces or encourages companies to move into the bond markets. Secondly, economic growth, where demand for capital outstrips banking system capacity and that's more of a feature of the Asian markets. Both of these though lead to increased financing through the bond markets.
And we think that these are very long term secular trends that are going to drive a portion of our business. The financing costs are more of a short cyclical trend, but interest rates are still low and spreads remain attractive. And if we have an environment where official rates are rising, but it's off of the back of strong economic growth and business confidence, we would expect spreads to remain tight, perhaps narrow even in the rising rate environment, so that all in costs are not moving up to the extent that official rates are. Also, We have investor demand. We did see some outflow from bond funds early in the summer, but we've seen positive inflows more recently.
And there's also more investor demand for variable rate paper, which helps drive the rated loan market and then indirectly supports the collateralized loan obligation market as those loans are packaged and put into the capital markets. So, there are short term and long term consequences of disintermediation and this is really more of the short term picture. You can see the newly rated corporate issuers in recent history. And so these are our 1st time issuers, 1st time rated entities coming to Moody's for ratings. You see the step up in 2010 and then the continuation of that flow of new business in 2010 through 2013 that remains very strong in the current year.
It's also what I would characterize as some of the highest quality revenues that we generate. They're not the highest margin revenues because there are new relationships, we have to hire employees to rate new companies. It's a fairly intensive process. However, once those companies are rated and have established a relationship with Moody's, those relationships are very sticky. And so we maintain those relationships as the companies either refinance or seek additional debt financing for the drivers that I mentioned just a moment Also on this slide, somewhat surprisingly to me is the strength in the U.
S. Component of this chart because the U. S. System is already the most disintermediated in the world. And so the strength noting that Europe, which is represented in the green bar had a step up in 2010 and is having another step up in 2013.
So we see very good demand for new ratings in both the United States and in Europe. You can see emerging markets and the rest of the world at the top of those charts. And I expect that those are going to grow compared to the U. S. And Europe over time as those markets move to more mature stages as the bond components of those markets become a more important element of capital raising and financing.
Now the longer term, Now the longer term aspect of disintermediation is represented here. And this is really just looking at the percent contribution to global GDP by country or region as compared to the percent contribution to Moody's revenues. So you can see that the U. S. Continues to be very overrepresented in terms of our revenues compared to the size of U.
S. GDP. 24% of global GDP versus 53 54% of U. S. I'm sorry of Moody's revenues.
Europe is more in line, 33% of global GDP and 29% of our revenues. But then you see Asia is very in terms of Moody's revenue profile compared to its contribution to global GDP. So really what this would point to again is I think the long term opportunity coming out of Asia coming out of other parts of the emerging markets as well. And why we are putting our resource and a lot of our focus into Asia, as you will hear from my colleagues when they discuss their businesses in just a short while. Moody's Analytics, which is really the 3rd box the four boxes.
The research part of that business has been resilient through the financial crisis. And it is positioned for higher growth, particularly as we penetrate international markets more completely, there's more demand for research and data. But also To the extent that innovation takes a more prominent position, financial innovation in markets, that has been fairly muted in years. And that innovation is a source of demand for research, demand for analytics. Enterprise Risk Solutions, the Financial Services regulation is driving the need for solutions.
And then professional services, which provides more complete package for risk management. Finally, just pricing, pricing aligned with value and new product development, which really could be the 5th box in that 4 box chart. And we will be talking about that in both the MIS and MA sections. So long term secular drivers for our business remain intact and robust. We may see a cyclical bump in the road.
We don't know. We are focused on execution, enhancing our core ratings and research businesses, investing in strategic growth opportunities and returning capital to shareholders. So thank you very much. I'm going to turn this over to Mark Zandy now and Mark? Thank you, Ray.
Good morning. How many
of you saw me last year at the Investor Day? How many of you remember what I said? This is right why I have a job because they don't remember what I say. But let me remind you, I was optimistic last year, But 2013 would be a bit iffy, but that the economy would gain traction as we move to the mid part of the decade. And I'm sticking to the script.
I'm still very optimistic about the economy's prospects going into 2014 and through the mid part of the decade in 2015. Just to give you some numbers, global GDP, it's growing about 3% real, 1% in the developed world, about 5% in the emerging markets. That's what we're going to grow that's what we grew last year. Next year, I expect growth of about 3.5% and closer to 4% in 2015. Just for context, Global potential GDP growth is about 3.5%.
So that's the rate of growth necessary to generate enough jobs to maintain a stable rate of unemployment. So we've been below potential for the last 2, two and a half years. We'll be at potential next year that here in the first chart, which shows real GDP indexed to equal 100 in the Q1 of 2,007 just before the recession hit. The fastest growth will be in parts of the world outside of the Eurozone in the U. S.
That's largely dominated the emerging markets, the EEM. Just for context, the U. S. Accounts for 22%, 23% of global GDP on a purchasing power parity basis. The Eurozone about 17%, 18%, which is about the size of China.
And the emerging markets for about 50% of global GDP. So the rest of the world dominated by the EM will continue to grow relatively strongly. I fact, close to its potential of about 5%. The U. S.
End will be it's a slog. You can see I don't expect great things out of Europe. But the good news here is that the European recession is over and we will get growth. Not a lot of growth, at least not for the next couple of 3 years. There's a lot of work to do and I'll come back to that, but growth nonetheless.
I am most enthusiastic about growth prospects the United States, we're growing about 2% here. That's what we've been growing since the recovery began 4 years ago. We get about the same this year. But next year, I expect 3% growth and 4% growth in 2015. So well above potential growth, unemployment will decline relatively quickly.
There's a number of reasons for optimism with regard to the United States. Let me mention 2. The first is The fiscal drag, it's been a very heavy weight on the economy. That's the government spending cuts, the sequester would be part of that. And the tax increases, that drag has been very significant.
This year in 2015 excuse me, in 2013, That will be close to 1.5 percentage points of GDP growth. In fact, the drag is at its apex in the current quarter in Q3.
It's almost 2 percentage points
do nothing and I fully anticipate that they will do nothing that the drag will fade. So next year the drag will be about 7, 8 tenths of a percent of GDP in 2015, a couple of 3 tenths of a percent of GDP. In 2016, it's gone completely 0. So we're going to go from a really big negative 1.5 percentage points of GDP, which is the most we've ever tried to digest since just after World War II and the word drawdown, that goes away over the period of the next 3, 4 years. So that big negative just becomes less negative and less the private the better private economy begin to shine through.
The second reason for optimism regarding the U. S. Is housing and I'm quite optimistic about housing's prospects. A little bit of a pause recently because of the run up in mortgage rates, but the demographics here are incredibly compelling and you get a sense of that here in this chart. This shows the number of units, housing units out there that are vacant.
This is for sale, for rent, held off market. This is thousands of units. The units here aren't showed, but it is thousands of units from 19.90 through Q1, 2013. And you can see I put in the chart a line I'm calling trend vacancy. The amount of vacancy that would be in a that would exist in the housing market that's functioning normally, a well functioning housing market.
You can see we were well overbuilt back in the wake of the bubble. Vacancy was well above trend. This goes to the foreclosure issues that we've been struggling with. But take a look at the recent period, we're actually now going from being a very oversupplied market to now an under market. And that's going to mean a lot of juice for economic growth and you get a sense of that in the back of the envelope calculation in the northwest corner of the chart.
That shows current housing supply to the market. That's again thousands of units annualized. You can see how that breaks down multi single multi in manufactured housing. In current housing demand, which is household formations,
when a home is a household is formed, it
has to live somewhere, obsolescence that's Hurricane Sandy blowing just normal ops license and second vacation homes, 1,700,000 units. You do a little bit of arithmetic, a year or 2 from now, the market going to be undersupplied and we're going to need a lot more homes. And I expect housing construction to ramp up quite significantly over the next 3, 4 years. And that provides a lot of economic activity, a lot of jobs. Just one rule of thumb.
For every single family home that is constructed that creates 4 jobs over a period of a year. So that's construction, manufacturing, transportation, distribution, Financial Services, Home Depot, Lowe's, retailing, cable hookup, landscaping, a whole That's a big part of the story for the U. S. Economy to get back to full employment in 3 or 4 years down the road. Now the greatest challenge to this to my optimism regarding the United States is monetary policy and interest rates.
So obviously housing is very rate sensitive. And my working assumption here is that the Federal Reserve is going to be able to essentially land the plane on the tarmac in a reasonably graceful way. And this chart might give you a sense of how that might work. This shows the The reserves balance sheet and how it's exploded in the wake of the recession. This represents all the quantitative easing that's occurred and will occur.
You can see where history ends and forecast begins. I do expect the tapering in to begin in December, the tapering to end by the fall of 2014 for interest rates short term interest rates to begin rising by the summer of 2015 and for short term interest rates to normalize, which would be consistent with a 4% funds rate target by sometime by mid-twenty 17. I also expect long term rates to rise ahead of the funds rate in a normal well functioning economy. The 10 year treasury bond should be somewhere close to 5%. As you know, we're 2.70%, 2.75%.
I expect that to happen in an orderly way over the next few years and the Fed will be manage this, so that they allow interest rates to rise consistent with an improvement in the job market and a decline in unemployment. If we don't get that, That's my baseline. That's how I get to my optimistic worldview. If we don't get that, then we got a problem and this is a challenge. Now that forecast I just gave you, I would have given that with much more Conviction 2 weeks ago, unfortunately, last week, given what happened, I'm less convicted With regard to this sanguine interest rate outlook, I think the Fed is going to be able to manage this, but I do think they've made a mistake and certainly complicated matters for themselves as they try to manage long term interest rates going forward.
But nonetheless, I do think they'll be able to manage this in a reasonably graceful way.
Let me quickly turn to Europe.
As I said, I think the recession in Europe is over, and I think we'll get growth. There's a couple of reasons for optimism in Europe. 1st and foremost, policymakers are fully committed to keeping Eurozone together. That's evident in the actions of the European Central Bank. We're now providing forward guidance with regard to interest rates.
We have the OMT, the LTRO. I wouldn't be surprised LTR, of course, is the program to provide long term funding for European banks. That's going to expire in a couple of years. I wouldn't be priced if by the end of the year or early next ECB decides to extend the LTRO program. The point though is that the European Central bank is all in and now has all the tools that's necessary to keep the Eurozone intact for the foreseeable future and clearly the will to do it.
I also think key leadership in Europe is fully on board. Most importantly, obviously, is Germany. The reelection of Angela Merkel as Chancellor of Germany is a very positive Bill in this regard. Her legacy, it depends on Eurozone hanging together. And I don't think there's any prospect that she's going to allow this to go in a bad direction.
So at least through the horizon that we have here mid part of the decade, I think the Eurozone odds of the Eurozone going down the wrong path are very low. And so that risk has abated and that takes a lot of pressure off the economy. The other reason for optimism, of course, is fiscal policy. The fiscal austerity in Europe also is abating. Just to give you context there, the fiscal drag in Eurozone hit an apex in 2012 of 1.7 percentage points of GDP.
This year is going to be closer to 0.9 percent of GDP. That mere fact alone is key to the end of the European why the European recession has ended this year. Next year, it would be about 0.5 percentage point and the following year 2 tenths
of a percentage point. So the fiscal
drag created by the austerity in Europe is also beginning to abate and that's a near term The challenge to this view, this optimistic view about Europe is shown in this chart and that is the credit flows are still quite constrained. This shows the percent change year ago in growth in loans outstanding. Corporate loans are shown in the orange line, household loans in the green. And you can see that household lending basically has come to a standstill corporate lending is actually still declining. Now there's a lot of factors going on here.
Demand is weak. It's obviously a tough economy. SMEs, small and midsized enterprises are under a lot of pressure, but I also think there's significant supply constraints because of the weak banking system. And the Europeans are going to be engaged in significant amount of banking reform in 2014, are they going to go through an asset quality review, a stress testing process, which I am expecting to be quite stressful this go around. So there will be a lot of pressure.
And if the banks aren't able to get things together, recapitalize and their liquidity, this picture isn't going to change. And if that doesn't change, then my optimism about European growth will be challenged. But I think they'll get it together. That's in my baseline. Finally, let me just end by quickly reviewing the emerging markets.
I am relatively optimistic here. You get a sense of that In the final chart that I'm going to show, this is GDP growth year by year from 2011 through 2015 for the BRICS. And you see I do expect growth to reaccelerate. The key here is China. And I think it's clear given recent events the Chinese are fully engaged.
They are not entirely comfortable I think with some of the excesses that exist in their economy and their banking system, but I don't think they're going to push too hard in the current context. They're going to provide enough support to the economy through credit flows and fiscal policy to keep the economy growing at target, which is about 7.5% GDP growth and that's what's shown in the chart. And if China can keep it together reasonably well, that will keep the whole EM economy doing okay and moving The challenge for the EM is rising interest rates in the United States. And clearly, we've seen that over the last few months. As U.
S. Interest rates rise, capital flows begin to move away from EM Economies with current account deficits. In this chart, 2 countries, India and Brazil, have current account deficits rely very heavily on global capital. And as interest rates rise in the developed world in the U. S, it drags capital away from them, puts pressure on their currency, which creates inflation and they get into a stagflation environment, weak growth and high inflation and it puts the central banks in a very difficult spot.
They have had some trouble navigating through that in the last few months. I think they've learned from the recent experience. They got a little bit of respite from what the Fed did last week, But they're going to be under a lot of pressure going forward. But I think they're learning, they're bringing in professional management and I think they'll be able to navigate. That's my baseline scenario.
But obviously, This is also a challenge to my conviction. So bottom line, I remain as optimistic as I was last year, but I'm even more convicted this year. So come back did you write this down? Did you write this down? Come back next year and we'll
see how we did. Thank you.
Thank you to both Ray and Mark for the presentations. We'd like to open it up for questions from the audience. Just a few instructions here. Just ask that you raise your hand if you have a question. I'll try to get to everybody and call on you.
And we do need you to wait for a microphone both for the benefit of the people in the room as well as for the people that are on the webcast. We do have some mic runners here at the back. So, they'll get to you as quickly as they can. Any questions? We had this one right in the back and then we'll get to you Marshall.
Hi, Ed. Adarino. Could you just talk a little bit more about the politics in Europe that always seems to be a block? Things move along in Germany or Italy or somebody seems to stall things out. How do you see the political side of your analysis sort of playing out?
Can you hear me? Oh, yes, you can. Loud and clear. Well, the politics in the U. S.
Are dysfunctional. I'd say they're even more dysfunctional obviously in Europe, and it slows down the reform process. But I don't think it short circuits the process. I think the key to reform is German leadership in German commitment, because Germany has the resources necessary for this to work out. They need to be fully committed and willing to put up the resources necessary to keep it all together and moving forward.
And I think with Angela Merkel's reelection, that will happen. She's been elected for the 3rd time. And her entire legacy is now wrapped up in Eurozone. When you think Angela Merkel, She's going to be thought of in the context of whether the Eurozone succeeds or fails. And I think she'll make it succeed.
And I think she has the well and the ability primarily because of the German economy is fine. It's running at full employment. Growth is it ebbs and flows obviously, But it's pretty good. And so as long as she's able to keep the German economy running at full employment, she'll have the political ability to keep her population behind her and she'll continue to move forward on Eurozone integration. So it's going to be dysfunctional.
Some countries worse than others. You mentioned Italy, obviously, quite dysfunctional. But I think the key here is Germany. I'll say one last thing and I'll be quiet. I've actually been quite surprised that there hasn't been more dysfunction in some of the periphery countries, right?
I mean, think about 25%, 30% unemployment in places like Spain and Greece. If that were happening, it seems to me in any other country you'd have people on streets screaming. You have a lot of screaming, but no one in the streets. And that's testimonial to their ability to keep it together politically and is actually quite encouraging.
I said we'd go to Marshall next, so we'll do that.
So Ray, one of your slides said you may encounter a cyclical bump and that's fine. And I just wonder with the increased resources devoted to regulatory and compliance functions, Whether that the degree to which that raises the fixed costs at Moody's and whether a cyclical bump might be steeper in this time around than it has been in previous occasions.
Yes. This is Can you hear me?
Usually, a red light goes on and there's no red light. So that's where we're confused.
There we go. Okay. Yes,
With respect
to the consequences of a cyclical bump, yes, we do have Regulatory and compliance costs that we did not have in the past, much of that has been already, but it is not a variable cost. And so It's going to be with us regardless of issuance levels. But I would point out also that Our reaction historically to cyclical movements has not been to take all of the most draconian that we would take in the event of a secular downturn. So we do have levers to manage costs in terms of incentive compensation, the pace at which we are hiring, how we manage any attrition As employees naturally leave, so we have tools. But one of the tools that we do not have would be managing a compliance cost down because those costs are going to remain fixed.
That being said, I think The flexibility we have is very similar to what we would have had in the past in terms of responding, because the big drivers are not coming out of those compliance costs, the big drivers have to do with incentive compensation, personnel, the rate of hiring and how we manage attrition. So those levers remain in place.
We're going to go over here first Rishi first please.
Yes. Ray, so you laid out your long term growth rate, which is low double digits. But in what are arguably very favorable conditions for your business with robust debt issuance, you're only growing at high single digits. So how do you square your longer term consistent sort of growth rate with the high single digit growth that you're witnessing?
Yes. As you saw, our forecast is for high single digit growth for 2013. Hopefully, that will prove to be conservative, but there are enough uncertainties through the remainder of the year that We feel it is an appropriate forecast. The reason why we are looking at high single digits as opposed to double digits this year has a lot to do with last year. And we did have very robust issuance activity.
The second half of last year was very strong. And so we are growing off of a very strong base. The rate of growth that we have seen in recent years has in fact been better than low double digit. And that has had do as I mentioned with the pull forward of maturing debt. So I actually am very pleased that We believe we are going to be able to grow at a high single digit rate as we absorb the fact that debt refinancing has occurred over the last few years and has pulled forward issuance that would have occurred in 2013 or 2014.
So that's why as I said, it's on average. We think that Those drivers are very much intact and a high single digit growth rate working off of the above normal growth that we've had in the recent years, I think it's still a very positive story.
We'll go to John next and then move back over here.
There was a phrase out there called pricing for value. And I wonder if you could talk
a bit about that and give us some specifics.
Sure. We are I mean the pricing opportunities We have a very according to our lines of business and geography. And so it's not a uniform price opportunity for us from year to year. What we look for is where we are providing particular value and that would include where The ratings that are received are help the marketability of bonds in a particularly strong way. I would cite the speculative grade bond market, the rated bank loan market as being two examples of that.
Also as The ratings become more embedded in market infrastructure around the world. We have increasing value that comes from that. So in emerging markets, as those markets come to use ratings as more of a standard, It becomes more customary to seek ratings to differentiate 1 rating agency from another in terms of the quality of its opinion and its research and analytics, all of those are value based opportunities on the rating side of our business. On the Moody's Analytics side of the business and I think Mark I'll maybe and Steve Talenko will talk to this. We also have opportunities that comes from not just The development and building the base of our proprietary data, but the analytics that go along with that.
And So the proprietary nature of what we are offering the value of that increases as we build that business. Also where we are installing risk management software, the more sales we make, The more installations we have of that software, the more of a standard that becomes. And as our products services grow as standards in the market, we are able to price for that value because there is a value to being a standard.
We're going to come over here and then we'll come back this way. I know there were a few maybe we'll go to Bill first.
Mark, I was wondering
if you could give us your perspective on where you think we are in the U. S. In the credit cycle? And I guess specifically, how do you expect debt to grow relative to GDP as you at the next couple of
years? Well, as you know, the I think we're just beginning The credit cycle that we've been in a period of significant what economists call deleveraging, reducing the amount of debt outstanding. Household debt is $2,000,000,000,000 below what it was at its peak 5 years ago. Corporate debt is up marginally from where it was before the recession. Obviously, there's a lot of public debt, but from the private economy, there's been significant deleveraging.
Credit quality is I don't think it's hyperbole. I think it's about as good as I've ever seen it. There's still some work to be done on 1st mortgages, but early stage 1st mortgage delinquencies is Pristine. And there are some issues with student loan debt, but that's a relatively small part of the debt market. So broadly speaking, leverage is low, credit quality is good and I think we're just beginning the credit cycle.
So I think credit growth will debt growth will accelerate. It will be a slow acceleration in part because lenders are still chasing and in many cases regulators still quite nervous and asking for even more capital and we have to work through a lot of the new capital standards. So it's not going to be a quick ramp up. But I would think that we're going to see it accelerate and to be experience stronger and stronger growth over the next I wouldn't be surprised if it's not over the next 5 to 7 years, something like that. So we're in the early stages of that process.
Go to Peter here.
So Ray, two questions. Back to the cyclical bump. I'm wondering if you're viewing the probability of bump as higher today than you did a year ago given where we are in the cycle. And if you could just give range of probabilities in terms of how you think this This may play out from a revenue perspective for Moody's over the course of the next year or so. A point of clarification, the revenue forecast low double digit is meant to be organic revenue growth, Correct.
And then lastly, on disintermediation, I think a year ago in these slides you said 1% to 2%, if I'm remembering correctly, so you've upped that. Does that mean you're a little more optimistic in terms of the sustainable revenue growth rate for the company overall? Thanks. Okay. I hope I'll remember all these.
So you may have to ask again. Don't leave with the microphone. Yes. As far as the disintermediation story, I am more optimistic. I was optimistic about it
last year. I am more
optimistic about it this year. About it last year. I am more optimistic about it this year as being a long term trend that can contribute several points of revenue growth per year. This is we look at Europe, we look at Asia, Those the drivers in each of those regions are really Still in the very early stages. Banking system restructuring and reform in Europe and economic growth in Asia are going to be a story that we're talking about for a number of years.
And once the banking system story has run its course more, I would at least look to the notion that the more traditional form of disintermediation, which is what we're seeing in Asia, moves back to Europe, where economic growth is outstripping capacity and encouraging bond issuance. In terms of the cyclical the potential for cyclical downturn in issuance, it's I won't handicap that because there are some, I think, very important macro factors that are going to influence whether we see any contraction in issuance. And it goes in part to what Mark was discussing, which is the rather delicate act that policymakers have in moving from this period of very accommodative monetary fiscal policy to a more normal environment. And if they do that with a depth touch, that encourages market confidence, that encourages business and the associated borrowing for non refinancing purposes. If that's not done as well, then I think there's going to be more market anxiety and less of a willingness to I think offensively for companies as opposed to defensively.
So we will have to see how well that is handled. And I think Mark expressed his confidence that it would be handled well, but this is somewhat uncharted territory.
Okay. We'll go over to Manav.
Good morning. Just a question on Asia. I mean, clearly, Mark, you're optimistic about the growth prospects. Ray, you said you guys were underpenetrated. Can you help just elaborate a little bit more on what your footprint there is today?
And what the general strategy is to get that contribution from Asia up to a higher level?
Sure. I'll take it from Moody's And Mark may want to add some additional comments at the macroeconomic level. But and one of the challenges in discussing Asia is we really do have to look at individual countries as much as we look at the region. And what we see are countries in which the debt markets are in different stages of evolution, with some of the more important economies such as China, Having a relatively large fixed income capital market, but certainly not large compared to the size of Economy. It's still much more in the banking system.
So what we're looking at in as we go from country to country Asia is we're looking at where they are in the development of their capital markets. And I'll talk about the banking systems from Moody's Analytics perspective in a moment. But from a bond market perspective, we're looking at where they are in that evolution, how we are permitted to participate in those markets and then executing around that combination. So in some cases, it's going to be via joint venture. And that's what we're doing in Korea.
It's what we're doing in China. We have an investment in India. In other cases, we have standalone operations, such as in Japan. So it's partly deciding how we can participate and then what kind of participation is relevant at this point in time. Is it credit ratings or are credit ratings not yet that important and we need to engage in training and certification, raising the awareness of credit and the understanding of credit, which is what we do through the Moody's Analytics business.
And then again, looking specifically at the banking systems, we are looking at the demand, whether it's regulatory or internally driven at the banks for enhanced risk management solutions. And that's where our ERS business plays a very important role. So it's partly driven by the macroeconomics an evolutionary condition of the bond markets. And then it's also driven by the current thinking or regulatory This is for change in the banking sector.
Yes. I'm going to take one more because I think we're just out of time. Patrick, All right. And then I'll go to John, if I saw his hand go up.
Thanks. It's a question for Ray. As the structured finance markets repair themselves, how do you think about the balance between imposing high standards on issuers with the commercial realities
of running the business?
Thank you. It's always going to have to be the proper standards. And the proper standards articulated With high quality communications and compelling analysis should drive the real money investors to use the provider of the ratings research analytics that support a healthy market. Where securitizations are not represented by real money investors, where they are being conducted for a firm's own balance sheet management purposes or for contributing assets to a central bank or some sort of central authority, there is more of a competition on standards and that's not where we win. So we win where it's real money investors and we do our work to the highest possible standard.
I'd like to thank everyone for their questions and again for Ray and Mark's presentation. We're going to go ahead and move on to our next session.
Good morning, everyone. I'm here with you today in front of you to with really 3 messages I would like to deliver. The first one is that We continue at MIS to execute with success on a 3 pronged strategy, which is designed to strengthen our core business and to invest in long term growth. 2, while we do expect Some volatility uncertainty. From the normalization of macroeconomic conditions and policies, We believe that our business momentum remains underpinned by robust and resilient growth drivers.
And 3, we see significant growth opportunities in our portfolio and we continue to step up our execution capabilities with discipline and flexibility. And I'm here today with Rob Fauber, who heads our commercial group and will talk about more about our growth channels, our capabilities and our results. So to start, let me focus on 3 key themes of goals we have for our strategy at MIS. The first one as we've described before is to strengthen our products and service offerings and in our core ratings and research business. The second is to extend into a new customer and expand our addressable markets.
And the third is to extend into new geographies. And Ray discussed some of that earlier in a previous Q and A session. We think we can measure and you can measure the relevance and the effectiveness of this strategy by a number of metrics. The first one is the growth of our top line in terms of revenues measured against the growth of the global end markets and also the increasing contribution of nonwaning products in our top line. Just to illustrate this point, in the first half of the year, total market issuance grew by less than 6%.
MIS revenues increased by 18%. The second metric is the high single digit growth of MA revenues derived from the distribution of our ratings, research and data and the third is the leading shelf voice MIS as among providers of credit opinions and I'm sure you can see that every day. And last and not least are the our market positions and the customer acquisition we see across and asset classes and again Ray and show you some data on that earlier today. Later Rob will provide initial insight illustration on our successes, but I'd like to put in front of you 3 central or critical areas we focus on at the moment and I'll go back to that later. The first one is how we expand our range of products and services to existing issuers and institutional investors.
The second where we spend also a lot of time is how we position our structured finance business for long term growth and relevance. And the third is how we transition our Asian business from what it is today to where to the next level. And I will again discuss that later on. Less visible but also equally important is the fact that we are continuing to improve our execution capabilities and controls through change management, investment in technology, people and process within MIS. Now turning to strong market fundamentals.
Here my message would be that as Ray said earlier that Some of our lines of business may experience cyclical burns on the roads from the what we see as the inevitable changes of economic policies and short term shocks that may temporarily slow down our growth. But the important point here is that we do have good tailwinds That comes from the combination of global economic recovery, improvement in economic activity in developed market, but also in developing Although in those we do expect slower growth going forward. But also again as something that was discussed earlier the impact of increasing disintermediations. We believe that together these tailwinds will continue to provide strong unimpiddings for our top line growth. In addition, the competitive landscape has really not really changed from last year.
We still face extreme competition on standards and rating levels. This remained largely the case in selected market segments where real investors are less active or where in geographies or asset classes where the we're facing greater commoditization the use of our ratings. Typically, it would be the case where the most common use is regulatory use. I would also mention that the threat of an official domestic rating agency in Europe has receded and finally, the fact that the and regulatory environment has largely stabilized and that we are now proactively adapting to this new set of rules. If you look back over the last few years, you see that last year in 2012, MIS revenues have regained the ground basically lost after the crisis and our historic high of 2,007.
We for 2013, our guidance suggests that the revenues will be crossing the $2,000,000,000 mark, which is €800,000,000 above where we were at the low of €1,200,000,000 in 2,008. A word about the mix of our revenues at June 30. Non financial corporates generate today about half of our revenues And the other half is broadly evenly split between the 3 other lines of business. Our international revenues now make up about 40% 41 of MIS total revenues. And generally, we do expect this to be relatively stable in the shorter term.
Now turning to our portfolio. If we look at our portfolio, we release 3 types of roughly similar size. But both each of them each of these three types have different growth dynamics. And those 2 different growth dynamics are reflecting really different demand drivers. In the first segment, the blue segments here, we see robust drivers that we'll expect will be supporting higher growth rates.
And in this group, We see U. S. Structured Finance, EMEA and Asia Corporates and Global Infrastructure Finance. Common trends here include the impact of disintermediation, pent up demand for infrastructure, improving economic factors and global economic growth. The second type in orange here is the segments where we expect greater stability.
In these segments, we have activities where we don't expect increase in issuance of the same magnitude or where we have a pricing framework, which effectively makes our revenue less sensitive to change in issuance volume. And this one example of that would be financial institutions. Finally, the 3rd group is a type where we see weather uncertainty in the short and medium term. And in this segment, we face really a greater uncertainty in terms of the pace and the timing of growth. This includes non U.
S. Structured finance because of the market dislocation we currently see in Europe. And for very different reasons in U. S. CFG, where we have as you know very well very strong concierges and also rising rate environment.
Now this obviously will be offset, we hope, by an improving economy. Now I know that everyone is a rumor has one thing in mind and that's the impact of rising rates on MIS. What I would say that in some way, it really doesn't matter exactly when the LFAMC will decide to tapper the pace of its asset purchase program, I think this move is expected and the impact of this move has already been felt. Over the summer, we've seen price and rate corrections and we've seen also issuers staying on the sideline for a couple of weeks in that context. This suggests that investors and issuers are expecting at some point to be in a world of flat liquidity and higher rates.
And the Fed's recent decision of last week may a short lived pause, but this transition will happen. To be clear, we do expect some impact on insurance volumes, mainly for U. S. Non financial corporates and emerging markets. However, having said that, I think we are confounded by 5 different consideration.
The first one is really that not all areas of rates have actually led to reduction in efficiency. For example, if we contrast the what we saw as a sort of a muted impact in the 20,08, 2000 period With what we experienced in 2019 4 where investment grade held up, but we had a contraction of high additions, we see 2 different scenarios having played out. A second consideration is the fact that we have Significant refinancing needs ahead of us for non financial corporates especially in 2016 2017. And the debt of Stock of debt at maturities over the next 10 years is as you know very significant. Another consideration is the fact that despite the high volume of opportunistic refinancing we have seen.
The actual average years to maturity has remained fairly stable. We're now at 7 point 3 years. And as you see from this chart, we were at 6.5 years in 2,008, 5 years ago. Another consideration is where we were in terms of all in financing costs Compared to historical levels, we are at low levels, something similar to what we see also for mortgage Great. And again, we see the potential for increase as a gain has to be considered in the context of again this historical background.
And finally, something that Ray alluded to again is the fact that we have also have a sustained trade in disintermediation in non U. S. Markets. And also we continue to see a strong client acquisition in the U. S.
In Europe, This step up in demand for public and non public ratings is a very encouraging sign. Now having said all of I think we all recognize that probably the most important factor variable will be the pace of economic growth of L and X on the very short, medium term. The improvement in economic activity will reduce the drag of insurance coming from higher rates. And this will happen through the various ways, the financing of increasing investments, other capital step Spending, increased M and A activity and increased rate of consumption all of that feed into the bond market as you know. Growth potential in the medium term for MIS.
And those are the Asian bond market, infrastructure finance and last securitization. Let me start with Asia. Asia currently makes up less than 10% of MIS revenues. But we do see this market as a significant opportunity. And there are really three reasons for that.
The first one is again the economic growth potential of the region and its comparison to what we see in other regions. Our central Now here today at MIS call for growth rate for G 2020 advanced economies of between 1.5% 2.5%. The same rates for developing economies is between 5% 6%. So clearly, sort of a clear gap positive gap in terms of the clinical growth. The second is the volume of unrated debt that we see in this market, which is above 20%.
And also the low level of This is in the remediation as you can see from the bottom chart here. The third element of growth for us is the fact that today when we look at our income in revenues in this region, the yield we're getting from rated debt, which is really revenues of the volume of rated debt is much smaller than what we see in other parts of the world. The numbers are shown here. And what you can see is that we really have a factor of 5 to 1 between what the yield we have in the U. S.
And what we have in Asia. So again, significant room for expansion here. Now we all recognize that operating rating agency and running raining activities in the region in Asia is more complex and maybe more challenging than other regions. We have to look at what we can do not only what we'd like to do. And we have to be smart about how what type of assets we effectively deploying to pursue those strategy.
These are also our markets that are highly fragmented. There is no one Asia. There's a collection of individual sub region and sub countries with all different dynamics. And we are also in emerging market territory and so we should expect greater volatility both in terms of revenues and issuance. I think on the other hand, we also recognize that we have very valuable assets in the region either directly or with our platforms in Hong Kong, Singapore notably, but also with the our affiliate in China and our presence in with Keith in Korea and ICRO in India.
So this is why as We are committing increasing management and financial resources to Asia and we are very excited about that opportunity. The second area I'd like to touch on is Infrastructure Finance. Really here the story is fairly simple. We see pent up demand in infrastructure finance. This is a market segment that has been historically financed by the loan market.
There is significant pressure on banks and other lenders to disengage from that segment. There's also a lot of public policy support for increased spending. So the combination of 2 and the fact that Some are impacted by increased regulatory capital charges, others by their own credit stresses means that there's an opportunity for the bond market to finance this and we want to be part of that play. I want to talk about structured finance. We see that as a significant opportunity.
And here I'd like to make 2 points. The first point is that The level of activity we see in that market is still a fraction of what we've seen historically, although we see opportunities for growth against the current level of issuance volumes. 2nd is that we committed to successfully position our business for long term success. Now on the first point, I would say that and this is no news to you that issuance to date in Europe, Asia and the U. S.
Is really a fraction of what we've seen historically. If we go back currently our TEM issuance for structured finance runs at about 15% of 2,006 levels in the U. S. About 43% in Europe and about 50% 55% in Asia. So overall, the volume of debt being rated now is about a third of what it was in 2006.
So clearly significant gap. Now When we look at the U. S, we've seen meaningful improvement in most sectors with the exception of RMBS. We've seen resumed growth. The white card clearly for us is the privatization of the U.
S. Mortgage market and what will happen in that space. And also we see the strength of the U. Economic recovery, because that will be an important variable for what happens in CDOs and ABNs for example. In Europe, we've seen continued contraction of volumes actually steeper than what we had expected.
And this is really continued to be driven by a combination of abundant variable and liquidity, the regulatory hurdles that exist for structured finance issuance as well as the overall macroeconomic conditions that are prevailing in the region. On the other hand, we see also that increasingly, structured finance is being seen by public policy officials as Something that needs to be restarted that will be critical to the growth of the economy. This is something that the ECB has been very focused on, but also the Council of Finance Ministers and we expect public policy initiative and support for that in the short term. So having said that, I'd like to move to the second point. What is our commitment to the Structured Finance business?
Well, We see that as something that remains a line that remains the most challenging for us. And part of it is because in several segments, Our market position has been impacted by increased competition by rotation that have been introduced by some issuers And most notably as Ray alluded to by the lack of real money investors. As it stands today, if we take U. S. ABS For example, our coverage is in the high 50s.
It trails S and P and FEED. We're in the mid 60s. And on the other hand, we are leading other asset classes such as commercial real estate, structured credits or cover bonds globally. So on and this For this my key message is I think as Ray said that our strategy is to focus on improving our traction with investors and issuers. And we're doing that working to improve the rating performance and the quality of analytics.
We want research that is more insightful. We want data and also that is helpful. And also we want to focus to deliver stronger execution both to issuers and investors. And that's how we think that longer term We'll come out with a favorable outcome in this line of business. Now I just want to make Couple of points or 4 points actually about the impact of regulation and what it is happening and how it's impacting our business.
And I think I should start by saying that for probably the first time in many years, we have a regulatory environment that has somehow stabilized and offer greater visibility. We have largely implemented the provision of Dodd Frank And the regulation in Europe has now been finalized as you know. This gives us a window of stability obviously subject to rulemaking that's still to come and technical standard that will be issued. But this is quite a unique spot compared to what we've been through over the last several years. And John will provide additional insight in a few minutes in his next session on that.
Now to a point I was raised earlier, our cost of doing business have increased as a result. We've been implementing a number of new requirements. And one reason is we had to build a significant infrastructure including IT, process, people and staff to meet this regulation as well as other national requirements. These are not going to go away. They're there.
But I think as Ray said they are really for most of them are today reflected in our current financial performance. And I would point out also that we believe that that has contributed to really creating a more robust and resilient organization within MIS something we should not ignore. The other comment I would make in term of regulation is that to date regulation has not really meaningfully impacted our opportunity globally. And last, Louis, is that we continue to work. And last Louis is that we continue to work with policymakers and regulators to deliver really a way of complying in the most effective way for MIS.
So in summary before turning to Rob, I'd like to say again that We continue to successfully execute on our strategy. We are underledged cyclical headwinds, but believe our business momentum remain really underpinned by a very strong and robust drivers. And third, we see a significant growth opportunity and we're working to execute on those. Now let me turn to Rob, who will discuss in more detail what are our revenues for growth and also our execution capabilities.
Thanks, Michelle. I'm going to take a few minutes to about the Global Commercial Group, which I manage and how we think about and execute on growth opportunities within MIS. Our approach to growth is consistent with the overall strategy for MIS and more broadly with the strategy for Moody's. It's quite simple. It's to strengthen the offerings in our core business and I think of this in some ways as continuing to deepen the moat and extending our business where there are attractive opportunities that's leveraging our brand, our market position, our analytical capabilities and our global distribution.
So I think the punch line here for me is that, we think there are further opportunities for us to invest in what we think is a very attractive ratings business in several different ways and I'll take you through that for the next few minutes. In regards to enhancing the core, we've embarked on an initiative to identify opportunities to both enhance our value proposition to customers and better communicate our activities with investors on behalf of our issuer customers. We think ultimately that this will help support our pricing initiatives that Ray discussed briefly. We've invested in improvements to our research production, processes and platforms, and we think and we will seek ways produce additional research and analytic content that can be sold through our existing channels. Good example of this is our high yield covenant database, which I'll touch on in a minute.
In addition to investing in the core, there are opportunities to extend our business. Geographically, We look to both support our global cross border business as well as expand our share of important current and future domestic markets. We're focused on new customer acquisition and in particular international markets where there's a slightly different and more competitive landscape. We've had success in launching new ratings products and services, again leveraging our core competencies in our market position. And we are currently exploring opportunities for middle market credit assessment.
Given the trend of bank disintermediation and deleveraging, in Europe and the continued financing needs of corporates there, companies are seeking alternative ways to obtain financing beyond traditional bank relationships. One example of this would be direct lending from funds, funds being a core customer of Moody's. So we're in the early days of exploring whether there's an opportunity for us to leverage again our core credit capabilities and extend into this market. 2010, we formed the Global Commercial Group, both to comply with regulation and industry best practices, but also to provide a dedicated global team to sell and service our customers. The relationship function really is divided into 2 has 2 primary functions, if you will.
1st is business development. This is primarily an emerging market activity, again, which has a slightly different competitive landscape outside the United States than inside the United States, where we have more domestic agencies, In some case, 1 rated versus 2 rated markets and in some cases, like in Asia, a segment of the market that's unrated. We have an account management team, which is focused on servicing and retaining our existing customers, cross selling and upselling as appropriate and driving price capture, which again is supported by our new initiative around driving more value for our customers. To help with this, We installed a customer relationship management platform in the first half of twenty thirteen. This gives us the opportunity to better manage the pipeline, have more visibility into our pipeline and obviously gives us enhanced relationship management capabilities.
As you can see on the right, we have 117 staff spread throughout the world, about 35% of that is in the U. S, again primarily account management, about 65% Rest of World, a mix of business development and account management. And you can see in support of our business development activities, We opened a Warsaw office in the Q3 of 2013. In Asia, 2 office openings, 1 in Mumbai in the Q3 of 13 and planned office opening in Shanghai in the Q4, which will give us 2 offices, 1 in Beijing and 1 in Shanghai Ray showed this slide earlier, but I'd be remiss if I didn't mention it as it's a very key focus of the commercial group. I'll touch on it briefly.
This shows our new issuers and speaks obviously both to the healthy issuance environment that we've had over the last several years as well as the disintermediation trends that you've heard a bit about. But I think it also speaks to our success in securing a very strong share of new issuers, the time issuers leading to a 22% compound annual growth rate since 2,008. I would just note 2 things. 1, We are on track, knock on wood, to exceed 2012 for 2013 in terms of new mandates from first time issuers, barring some sort of dislocation in the Q4. And I think it's interesting again to note the strength of first time issuers in Europe.
Touched on that briefly, but you can see the green bar there. Again speaking to that disintermediation trend and that's something that we think is a sustainable trend into the future. We've been successful in extending our business through new products introduction of new products and services And this really is an important source of new revenue growth for MIS beyond just public issuance. We have a small dedicated team that's focusing on identifying, evaluating and implementing new product initiatives. And to date, we've had several.
I'll give you a few examples. We've launched a suite of private ratings products over the last couple of years that includes loans, private placements and more recently our customer base beyond simply public debt issuance gives us an opportunity to have effectively a company rating rather than a security rating. And that really extends the MIS relationship with companies earlier in the financing life cycle. So we're excited about that. We have a suite of assessment services.
We've launched for new issuers, a very strong value proposition around those assessment services. Potential issuers approach us on a confidential basis under certain conditions and with rapid turnarounds and we've had some success with that. And finally, we have launched the Moody's Credit Assessment product earlier this year. It's subscription based Asian research service. It generally covers unrated names and extends Moody's share of voice in Asia where there is a segment of the population that's unrated.
It leverages a low cost offshore platform. Again, Another initiative in its early days shows the focus for us on building our business in Asia and also in terms of expanding our coverage beyond traditionally MIS rated companies. We continue our strong revenue growth from emerging markets, a 21% CAGR since 2008 and this is a story I think everyone in the room is quite familiar with. This is largely a cross border story here on this page. It our affiliates and joint ventures internationally.
And just touching on how we are focused on international growth. In terms of emerging Asia and Latin America, that is both a cross border and a domestic story. We're focused on localizing our presence instance, in Latin America to bolster our coverage in the market on the cross border side, we're also focused on extending our presence and footprint And again, these high value and significant domestic markets in Asia, that's China, it's Korea, it's India, some of the ASEAN countries, in Latin America, the next tier of countries beyond kind of the big three, which would be Chile, Peru and Colombia. Africa has been a successful business development story for us from a cross border standpoint with a sovereign rating initiative that has allowed us to then follow with corporate and bank ratings. And finally, we continue to make investments research, which as you know is monetized via our Moody's Analytics business.
These initiatives drive more content and functionality for our subscribers and again support our ability to grow revenue beyond just number of subscribers. A few examples here wanted to touch on credit focus is a new type of credit research report that we introduced this year, a much more in-depth type of report based on feedback from our subscribers and it's been very well received this year. CreditView is a product that you may have heard Mark or Steve talked about in the past, really an upgrading of our overall MIS research platform and interface, aggregating of additional content, which allowed us to drive additional functionality for our customers. And then as I touched on earlier, the high yield covenant database, we've had significant interest from subscribers around this product. And I think not only is this an enhancement to our high yield research, but also a differentiator versus our competitors.
And as you can see, again, driving high single digit growth. So in conclusion, We continue to identify and invest to both enhance and extend what we think is a very attractive ratings business, which should support our ability to drive revenue beyond just public debt issuance.
Thank you. Before taking some questions, I think I just wanted to In closing, we state a couple of comments. The first one is, as I said before, I think our strategy It's been very gated by strong performance. We continue to we move forward with that. We focused on product performance.
We focused on creating additional value for the users of our ratings and research and data. We want to effectively manage the regulated business. And as importantly as Rob mentioned, we want to invest in growth. My second point would be that we believe our franchise market and business opportunities are robust. We have a more in fact, if we compare to a year ago, we have improved conditions in different ways.
We have a more settled regulatory environment. We have improved economic activity in the U. S. And early signs of stabilization or recovery in Europe. And also we have the positive impact of a number of initiatives we've built over the last years and both in terms of geography and product development.
And last, I would say that, yes, we do expect volatility uncertainty from the normalization of economic of the monetary policy we had for several years. But again, we are very confident that our long term growth drivers are intact.
In regards to enhancing the core, we've embarked on an initiative to identify opportunities to both enhance our value proposition to customers and better communicate our activities with investors on behalf of our issuer customers. We think ultimately that this will help support our pricing initiatives that Ray discussed briefly. We've invested in improvements to our research production, processes and platforms. And we think and we will seek ways to produce additional research and analytic content that can be sold through our existing channels. An example of this is our high yield covenant database, which I'll touch on in a minute.
In addition to investing in the core, there are opportunities to extend our business. Geographically, We look to both support our global cross border business as well as expand our share of important current and future domestic markets. We're focused on new customer acquisition and in particular international markets where there's a slightly different and more competitive landscape. We've had success in launching new ratings products and services, again leveraging our core competencies in our market position. And we are currently exploring opportunities for middle market credit assessment.
Given the trend of bank disintermediation and deleveraging particularly in Europe and the continued financing needs of corporates there, companies are seeking alternative ways to obtain financing beyond traditional bank relationships. One example of this would be direct lending from funds, funds being a core customer of Moody's. So we're in the early days of exploring whether there's an opportunity for us to leverage again our core credit capabilities and extend into this market. In early 2010, we formed the Global Commercial Group, both to comply with regulation and industry best practices, and also to provide a dedicated global team to sell and service our customers. The relationship management function really is divided into 2 has 2 primary functions, if you will.
1st is business development. This is primarily an emerging market activity, again, which has a slightly different landscape outside the United States than inside the United States where we have more domestic agencies, In some case, 1 rated versus 2 rated markets and in some cases, like in Asia, segment of the market that's unrated. We have an account management team, which is focused on servicing and retaining our existing customers, cross selling and upselling as appropriate and driving price capture, which again is supported by our new initiative around driving more value for our customers. To help with this, We installed a customer relationship management platform in the first half of twenty thirteen. This gives us the opportunity to better manage the pipeline, have more visibility into our pipeline and obviously gives us enhanced relationship management capabilities.
You can see on the right, we have 117 staff spread throughout the world, about 35% of that is in the U. S, again primarily account management, about 65 Rest of World, a mix of business development and account management. You can see in support of our business development activities, We opened a Warsaw office in the Q3 of 2013. And in Asia, we have 2 office openings, 1 in Mumbai in Q3 of 2013 and planned office opening in Shanghai in the Q4, which will give us 2 offices, 1 in Beijing and 1 in Shanghai for business development and account management activities. They showed this slide earlier, but I'd be remiss I didn't mention it as it's a very key focus of the commercial group, I'll touch on it briefly.
This shows our new issuers and Speaks obviously both to the healthy issuance environment that we've had over the last several years as well as the disintermediation trends that you've heard a bit about. I think it also speaks to our success in securing a very strong share of new issuers, of first time issuers, leading to a 22% compound annual growth rate since 2,008. I would just note 2 things. 1, we are on track, knock on wood, to exceed 2012 for 2013 in terms of new mandates from first time issuers barring a some sort of dislocation in the 4th quarter. And I think it's interesting again to note the strength of first time issuers in Europe.
Ray touched on that briefly, but you can see the green bar there. Again, speaking to that disintermediation trend, that's something that we think is a sustainable trend into the future. We've been successful in extending our business through new products introduction of new products and services and this really is an important source of revenue growth for MIS beyond just public issuance. We have a small dedicated team that's focusing on identifying, evaluating and implementing new product initiatives. And today we've had several.
I'll give you a few examples. We've launched a suite of private ratings products over the last couple of years. That includes loans, private placements. And More recently, this month, we launched a private monitored rating product. That private monitored rating product and those private rating products in general extend our customer base beyond simply public debt issuance.
This is an opportunity to have effectively a company rating rather than a security rating. And that really extends the MIS relationship with companies earlier in the financing life cycle. So we're excited about that. We have a suite of assessment services, we've launched for new issuers, a very strong value proposition around those assessment services. Potential issuers approach us on a confidential basis under certain conditions with rapid turnarounds and we've had some real success with that.
And finally, we have launched the Moody's Credit Assessment product earlier this year. It's a subscription based Asian Research Service. It generally covers unrated names and extends Moody's share of voice in Asia where there is a segment of the population that's unrated. Leverage is a low cost offshore platform. Again, another initiative in its early days shows the focus for us on building our business in Asia and also in terms of expanding our coverage beyond traditionally MIS rated companies.
Continuing our strong revenue growth from emerging markets, a 21% CAGR since 2,008 and this is a story I think everyone in the room is quite familiar with. This is largely a cross border story here on this page. It excludes our affiliates and joint ventures internationally. And just touching on how we are focused on international growth. In terms of emerging Asia and Latin America that is both a cross border and a domestic story.
We're focused on localizing our presence for instance in Latin America to bolster our coverage in the market On the cross border side, we're also focused on extending our presence and footprint in again these high value and significant domestic markets. In Asia, that's China, it's Korea, it's India, some of the ASEAN countries. In Latin America, the next tier of countries beyond kind of the big three, which would be Chile, Peru and Colombia. Africa has been a successful business development story for us from a cross border standpoint with the sovereign rating initiative that has allowed us to then follow with corporate and bank ratings. And finally, we continue to make investments in research, which as you know is monetized via our Moody's Analytics business.
These initiatives drive more content and functionality for our subscribers and again support our ability to grow revenue beyond just number of subscribers. A few examples here I wanted to touch on. Credit Focus is a new type of credit research report that we introduced this year, a much more in-depth type of report based on feedback from our subscribers and it's been very well received this year. CreditView is a product that you may have heard Mark or Steve talk about in the past, really an upgrading of our overall MIS research platform and interface, aggregating of additional content, which allowed us to drive additional functionality for our customers. And then as I touched on earlier, The high yield covenant database, we've had significant interest from subscribers around this product.
And I think not only is this an enhancement to our high yield research, also a differentiator versus our competitors. And as you can see, again, driving high single digit growth. So in conclusion, we continue to identify and invest to both enhance and extend what we think is a very attractive ratings business, which should support our ability to drive revenue beyond just public debt issuance.
Thank you. Before taking some questions, I think I just wanted To in closing restate a couple of comments. The first one is, as I said before, I you know our strategy has been vacated by strong performance. We continue to we move forward with that. We focused on product performance.
We on creating additional value for the users of our ratings and research and data. We want to effectively manage the regulated business. And as importantly, as Rob mentioned, we want to invest in growth. My second point would be that, We believe our franchise market position and business opportunities are robust. We have more in fact, If we compare to a year ago, we have improved conditions in different ways.
We have a more settled regulatory environment. We have improved economic in the U. S. And early signs of stabilization or recovery in Europe. And also we have the positive impact of a number of initiatives we've built over the last years and both in terms of geography and product development.
And last, I would say that, yes, we do expect volatility uncertainty from the normalization of economic of the monetary policy we had for several years. But again, we are very confident that our long term growth drivers are intact. So with that, I want to thank you and I think we'll be taking some questions.
All right. Great. So thank you again to Michelle and Rob. We'll go ahead and take questions from them. Same protocol as before.
Just one request. We just ask that you speak directly into the mics. The webcast needs pick up more on the volume. I'll go to Alex first.
Hey, thank
you. Just coming back to the interest rate question. Obviously, I think you did a very thorough job of talking through your business and where it impacts. And I think you look at that chart, you really I think make a point that it's really only U. S.
Corporate where we should be thinking about interest rate headwinds. So maybe first of all, can you just Reiterate, is that really the way to think about it? Or are there other areas in your business where we should be thinking about rate sensitivity a little bit more as well? And then on the corporate side, can you also break that down a little bit more between areas that have been fairly frothy, I guess, and like high yields and maybe other businesses like bank loans that It might grow no matter what. So any additional comments would be helpful.
Thank you.
I will can you hear me? Can you hear me? Yes. Okay. Good.
I'll start and Rob, I think in term of the you're right. I mean, we see really 2 areas of exposure to increased rates. 1 is the U. S. Corporate Finance and the second is really emerging markets.
And I think you've seen what happened over the summer and you've seen that those are the 2 really type of segments that More exposed to this. I think for emerging markets the question will be more The switch potentially from global issuance dollar base to more domestic issuance to the extent that The drivers again in term of funding needs will still be there and we'll be able to capture that in different ways, but probably with different of economics. I think the second aspect is the one that I described before which is U. S. Corporate Finance basically.
And there it's really around The amount of opportunistic refinancing we've seen and to what extent that will be will taper off. I just again want emphasize the fact that the key variable for us will be the growth in the economy and improving current conditions, because I think Rate is only part of the story. The other part of the story is really to what extent that is going to be mitigated or offset effectively by more M and A, more investments and therefore more bond financing basically. You want to talk about the only thing I would add
to that Michel is just around bank loans Just to kind of echo your point, we've seen real strength in the bank loan market this year. I think there's some attraction to the floating rate nature of bank loans. There's been a lot of refi activity obviously this year, but we think that with the return of the M and A market and capital expenditures the growth in that bank loan market that should be sustainable.
We got it, Doug.
Yes. Michelle, just a follow-up on the your comment about regulatory requirements and IT investment. And Linda has given some figures out in the past and sort of the annual embedded costs. But if you sort of look back at your cost structure over the last 5, 10 years to meet the regulatory requirements etcetera, How many what percent of your employee mix is now kind of directed at that? And how have your has your cost structure changed to meet those requirements around the world?
And I guess your comment is sort of it's starting to flat line. Just trying to get some context.
I think if I As I mentioned to you before, the impact of regulation has been around building infrastructure in term of people, Process and Technology. In term of people, clearly we have now A number of individuals working in control functions we didn't have. And I would give you an example. We now have a credit policy function who have I think the headcount is around 80 individuals or north of that. And this is a group that was much smaller before 5 years ago.
Overall, if I had to give a number, I would say that We're talking about probably 10% of headcount. That is probably around in different functions that are around just that's the sort of range I would give. But this is there's no real science around that basically. And actually, would argue that a number of this different position could have been or would have been created basically as part of the infrastructure we think we need to operate our business basically. I don't know if that gives you a sense of
We're going to come over here for just a second. I'll go to Steve.
Hi, thanks. Two questions actually. 1, just to stick with the Interest rate questions that were asked earlier. I understand you may not be able to answer it this way, but if you could, When you think about different scenarios for what rates could do to the refinancings and then obviously other parts of your revenue that are unaffected like the issuers of banks and so forth. What's kind of the range of scenarios for how much your revenue could be affected?
Is a blip meaning would a blip be negative aggregate revenue growth? Or would the stable parts of your revenue likely prevent that from happening? And then second question, Specifically on structured products, on the chart there on page 46, ABS still obviously is way below where it was. And I wonder is there is your view that that has potential to return to at some point to where it used to be? Or is the way that, for example, credit card Is finance now structurally different so that history is not a good guide to the potential there?
On the first point I'm sorry. Okay. On the first point, I really will leave that to Linda to cover that in her presentation. So I'll speak to the second point. I'm sure Rob would want to add some comments here.
I think the you're right ABS has been actually this year somehow disappointing in relation to what we've seen in CMBS for example on CDOs. And some of the reasons are what you just describe the fact that some of the financing today is different from what it used to be. But I think also that the We just have an environment that is not necessarily conducive to a high level of activity. And that's where when I was talking about improving economic conditions, higher consumption and so on that will drive basically a high level of activities. Outside of the U.
S, ABS the other Part of where we have portfolio is Europe. And there we have really again the impact of conditions macroeconomic conditions and also the fact that the traditional banks The channels for distribution for these products are basically today no longer existent and all this is going to basically ACB essentially for reporting So it's not really I would not call that a true market basically. Okay.
Okay. We'll move to Craig and then head back to this side.
Thank you. You showed a chart twice here this morning. I think the latest time on page 51 That shows the total number of companies that are rated for the first time. And I think through the 1st 8.5 months is nearly the equivalent of full year 2011, 2012. I'd be curious to hear from you, how much incremental dollars can you capture from the first time company that you're rating?
I mean, for example, if you do a run-in the mill $500,000,000 Corporate debt issuance investment grade company, I think you get 5, 5.5 basis points. How much on top of that for first time issuer would you be able to charge?
I just talk In very general terms of the economics of our business and then maybe Linda or Rob can cover that later on. But when you think about first time issue, you think about We have effectively the one time fee when the relationship. We have the fee that is related to the size of the issue. And then you have an annuity basically that you're building. And I think it's very important and I think Ray alluded to that somehow is that When we are bringing onboard new issuers, there is a high degree of stickiness in that relationship.
So we were the I don't have precise data on the actual length of The sort of the length of the relationship we have, but These are very long relationships. So when you think about this, you need to think about not only the first time, But also the fact that you have an annuity with a high degree of stickiness on that?
Yes. That's exactly right. In fact, we thought about that. It struggled A bit with whether we could put something together that we felt comfortable sharing with everyone. But I think Michelle is right.
There's the first time issuer fee. There's per issuance fee obviously. There's the monitoring. There's the future issuance. And as Michel said, it's not just the fee we earn on that first Security that's issued with the future issuance and the overall life of that relationship, which in many cases extends well beyond the duration of The initial security?
I mean the share the volume of withdrawal of ratings or termination of relationship in relation to our total stock It's a very small number.
I know we said we move over here, but I saw one more. So We're just going to pick up Tim here and then we'll move back.
Just two questions on the structured products area. One is you mentioned one of the positives being the the mortgage market, there's been a lot of ideas thrown around lately on what can happen there. As we watch that, what would be potential positive versus negative ways that they might reform mortgage financing in terms of what you've seen out there? And then secondly, On Europe, it sounds like you expect structured revenue to probably be down again next year, but then to bottom out. I guess, What are you looking at?
I guess that expects you expect that trend line to look like that? Do you
want to take that?
Yeah. I think one of the issues that the market is struggling with is around the sunsetting of the reps and warranties and that seems to be something that hasn't been entirely settled. And I think when that issue is settled. We may see more robust issuance. I think there's also an issue with just supply that can be securitized as well.
Yes. I think I would say what the worst thing would be probably the stretch is quo somehow just in terms of scenario. We don't see a scenario where this situation is going to be resolved and the role of the GSEs and the role of the private market in finance markets to be resolved in the very short There is a number of initiatives that are already taking place, one risk sharing and other basically approach to and offload some of the risk that GIS is having. But we are a long way from Seeing a return to the sort of private market engagement that we had historically in that marketplace and a lot of uncertainty around that. I mean in Europe, as you say, we our view is that In order for this market to restart, we need 1 2 a number of different things.
One is we find that the public Policy support will be helpful obviously because there are some regulatory dimensions around that. But more importantly, we this is all about also the improving market in macroeconomic conditions both at the sovereign level and in term of consumer demand and that again. So As Mark Zandi pointed out, this is not although things are improving, we don't see that as a sharp turn basically taking place basically. And therefore, next year will probably be a year of stability somehow bottoming up basically rather than a strong recovery.
Mr. Lipa here.
Good morning. There are changes in the attitudes and regulations on prime money market funds both here in the U. S. And more importantly in Europe, does this create a significant opportunity for you?
I would have a very sort of I will speak about Europe and then Rob, maybe you want to talk about the U. S. In Europe, if the proposal of European Commission goes forward, it won't be an opportunity because basically the EU is a proposal course for a rating agency not to participate in that marketplace basically.
What I'm focusing on as that market may shrink and the need of the issuers not shrink does that create the opportunity?
No, I understand. I'm sorry, I didn't Get your question in the first time. I think it does to the extent that there will be other conduit basically for financing. And rather than bank being funded through Money market funds they may use other vehicles that we be part of we may end up bringing. If they issue short term debt directly instead.
For example, that would be something that would be it's difficult to really look at today and we haven't really made an assessment of the implication of on our business. U. S, I don't know if you want to add anything. Thank you.
On product development, you talked about private ratings. What do some of those companies look like? How big are they? Are there any reasons why they're more receptive to ratings now? And what are you doing to get them more interested in ratings?
And how big do you think that market is? Yes.
These are typically significantly sized companies. These are the potential public issuers of tomorrow or these are companies that could issue public debt today. In some cases, this may be companies who have decided that they want to have a sense of what a rating would look like. They want to enter into the discipline of a rating relationship without having a public rating outstanding. They may be predominantly bank owned and funded and know that over time they're going to change that financing mix.
You can think about the opportunity in a couple of ways. One is there's been some market turbulence issuers have pulled back from the market first time issuers pulled back from the market as we saw in late June early July, we're able to go out to issuers and say, hey, we've done some of the analytical work. How about enter into a private monitor relationship rather than simply pull back from the market? Help put you in a state of readiness to tap market windows as they come along. 2nd, you can imagine again significantly sized companies.
We put together a fairly significant target list large public companies, companies that we or capital intensive companies that we know may be looking for forms of financing. So Interesting opportunity I think for us.
Look good, Andre.
Thank you. Good morning. Two questions. The first, I know you spoke a bit about the response of corporates to the interest rate environment or the outlook. I want to specifically focus on the slow or the pullback of the tapering comments by the Fed.
The fact that it's not likely to happen as quickly, less on what Moody's interpretation and maybe more specifically on what some of your companies may have said in response to that and whether or not you feel it's pretty consistent or there's a wide range of views there?
I don't I think the again, Very candidly, I think for us the best the point of reference we have 1, what happened over the summer in terms of the most immediate reaction to some of the announcement And to some of the comparison we can make to previous environments of rising rates basically. We've seen in situation of uncertainty, we see typically issuers have a tendency to stay on the sideline and wait for clarity. And that's something we expect to happen here basically. The real question for us again as I said before is around how much of the opportunistic refinancing we've seen taking place in the recent past is going to be replaced by effectively financing required by driven by an improving economic environment basically and how those 2 will play out Basically that's the best answer I can really give you at this stage.
I think we have time for one more here. All right. Peter, we started with you Alex, so we'll go to Peter here.
Thanks. So, Michelle, both you and Rob called out competitive dynamics as a headwind. I'm wondering if it's 3 parts to this. One is, has the competitive environment changed from your perspective from where you were a year ago? 2, would you call out any geographies or asset classes other than structured finance where you're seeing the impact of this competition?
Then lastly, what's the flow through to pricing? Are you seeing more pushback from pricing perspective in the context of this competitive environment you highlighted? Thanks.
In terms of the competitive environment, I'd say that in our business there are natural ebbs and flows in our coverage. I don't think we've seen major shifts other than as you alluded to, we've obviously seen Challenges in the U. S. Structured market. I think we've seen
A bit
of an add in European corporate. There's been very robust issuance there maybe at the lower end of the rating spectrum. And in terms of pushback from pricing, we haven't seen significant changes in kind of our exceptional levels and pushback.
Jim, maybe just one point to add to that. I would say that really I think as I said before, I would have said it's been changed really in term of from where we're going. We have very strong position in the U. S, very strong position in Europe. Emerging markets are more challenging for us to the And that in a number of these some of the rating activities related to regulatory use of ratings.
And for those in those effectively it's a more commoditized marketplace and therefore you are effectively the competitive dynamics are no different. It's not worse. It's not better. It's something that's here and it's likely to stay until these markets evolve to a more of effectively a true what I a true market, which would be where ratings are being used effectively for risk analysis. In those markets, We have leading positions on in term of cross border flows and that's where credit matters basically.
So we're very comfortable about So I think the as I said earlier in my comments, I think for us the most tricky Key part is the Stroker Finance business basically because of some of the specific competitive dynamics we see both in terms of how the rings are being used and the lack of really investor basically force to support basically our engagement in some cases.
Michelle maybe one thing
I'd add.
Michelle and I both just got back from Asia a couple of weeks ago. And there I think the use of ratings by investors is in its earlier days as opposed to the United States. So we're focused on really reinforcing the investor demand pull around ratings and we do see certain segments like the Demstone market, the RAS market where there is an unrated component. And that's an area that we're very focused on in terms of converting into rated issuance from unrated issuance.
Thank you again to Michelle and Rob for the presentations and to all of you for
the questions. We're going to
go ahead and move to our next section.
Good morning. I'd like to start today with an update on Moody's Corporation and MIS litigation. And then we'll discuss where we are on the regulatory front. In what is unfortunately a rite of passage for public companies, once we experienced the sudden drop in our stock price in 2007, We were hit with the 2 types of related lawsuits that you see on this slide. The first, securities class actions.
In those cases, Moody's corporation itself is named as a defendant. And the other category, shareholders' derivatives suits, those suits are bought on behalf of the corporation and Moody's Directors and senior executives are named as defendants. And the securities class actions, the turning point in those cases occurred in March 2011 when the district court judge Denied the plaintiff's motion for class certification. Once that motion had been denied, These lawsuits basically moved into the nuisance suit category. What was originally finalized as a class action purporting to represent all the shareholders who purchased between February of 'six October of 'seven instead became a suit involving 3 individual plaintiffs whose alleged total damages are approximately 55,000.
We continue to litigate the case for 2 years. And then just last month, the judge ruled in our favor on our motion for summary judgment. And just yesterday, the plaintiffs filed a notice of appeal to the 2nd Circuit. And the plaintiffs would be appealing both the denial of Both are win on summary judgment, but also denial of class certification in 2011. As we see here the shareholder derivative suits resolved almost a year ago.
Court granted final approval of these suits in September of last year. And all four cases both the state and federal claims were dismissed with prejudice. No money was paid to any of the plaintiffs, but the court did award attorney's fees and expenses of approximately a little under $5,000,000 and those settlement agreements the settlement agreement basically implemented certain corporate governance changes and will expire next year. Anyone who's interested in the details of the settlement agreement are included in an 8 ks we filed last year. On the ratings related front, we've made significant progress in resolving ratings litigations filed since 2007.
In the U. S, nearly 5,000,000 cases have been filed more than 2 thirds of those have been dismissed voluntarily withdrawn or consensually resolved. Outside of the U. S, We have 15 open cases, although 10 of those are relatively small cases filed by individual Korean plaintiffs relating to a single bank rating by our Korean subsidiary. Of the international cases, 7 of those have been dismissed or withdrawn.
All of the 33 cases brought under the Securities Act of 1933 have been dismissed. And the 2nd Circuit has ruled The rating agencies cannot be sued as underwriters or control persons under the 33 Act. We've also made good progress on our non 33 Act cases. Many of those have been dismissed or withdrawn. And we also have 2 favorable Federal Court of Appeals decisions affirming dismissals of 933 cases.
You'll see that in a number of different bases for dismissal of non-33I claims including lack of any actionable misrepresentation, lack of any duty to plaintiffs and lack of jurisdiction. It's worth noting Now that of the 20 cases that have been dismissed by the court, 0 have been on First Amendment grounds. While we I think that is one of our arguments. We've been able to have all our cases dismissed based on these more traditional defenses. I thought it would be worth spending a little time on looking at the favorable appellate court precedents that have resulted from dismissals of our cases since the crisis began.
The reason why these are interesting among the reasons why they were interesting is prior to 2007 all of our ratings related litigation involved issuer lawsuits, issuers who complaining about their ratings. There really was no case law or common law regarding the question of CRA liability to investors. In this first case here, the Lehman Brothers MBS litigation, that's our 33 Act case in the 2nd Circuit. 2 important holdings, Rating issued by a rating agency speaks merely to the agency's opinion of the creditworthiness of a particular security. That's important because the court acknowledged that ratings are in fact opinions.
They're not historical facts and they're not investment advice. And then as we just discussed, the 2nd Circuit also held that rating agencies limited involvement in the securitization process I cannot give rise to either underwriter or controlled person liability under the federal securities laws. Our 2 non-33I appellate decisions. The Anschutz case, which involved auction rate securities, there the 2nd Circuit held that a rating agency that publishes its rating opinion to a broad audience cannot be sued for negligent misrepresentation under New York law given the lack of direct contact with investors. In the Ohio AG case, which involved RMBS ratings, The 6th Circuit held that a credit rating cannot be an actionable misrepresentation, lest the rating agency actually disbelieve the rating that it issued.
Or Put another way, the rating agency is committed for it. Moving to the regulatory front. As Michel mentioned, we are in a period of relative clarity and stability on the regulatory front. The Dodd Frank Act had a number of provisions that relate to our industry, but those are mostly By and large incremental to the rules that were put in place with the Credit Rating Agency Reform Act of 2,006. Similar provisions took effect immediately upon the passage of the Dodd Frank Act.
Other provisions remain subject to SEC rulemaking. The SEC has Promulgated proposed rules for everything relating to our industry under the Dodd Frank Act, but some of those rules are made to be finalized. We've made a number of IT and other enhancements, so that we're fully ready to comply immediately with the Dodd Frank rules once they're finalized. One of the other changes under Dodd Frank was the establishment of a new Office credit ratings within the SEC. And Congress required that the SEC conduct annual examinations rating agencies of NASROS.
And to date, we've had a number of examinations by the SEC and there have been no material these identified to date. Another Dodd Frank requirement was that the SEC and other federal agencies conduct studies of the CRA industry. One of those studies colloquially referred to as the Franken study was completed by the SEC last December. The SEC also in May conducted an all day roundtable on the Franklin Amendment in which Moody's participated. The SEC is considering in addition to the Franklin proposal itself a number of alternatives including the amending existing SEC Rule 17 gs5.
We're supportive of those amendments. Basically 17 gs5 requires structured issuers to post on their website the information they provide to a rating agency that they selected to assign a rating. So that information is available to all other NRSROs. The problem with the rule currently is it only provides permits unsolicited ratings by those non selected rating agencies, it'd be more helpful we think if you could also provide unsolicited research So that rating agencies that haven't been selected are able to explain the reasons for their different rating opinions. In the EU, the most recent 3rd round of rating agency rules that we refer to as CRA 3 basically augment the existing regulatory framework that has been put in place for CRAs since the crisis.
Those rules became effective in June of this year. And some of the more important provisions include As you'll see here additional procedural requirements regarding Sovereign Ratings. Those are purely procedural. They don't affect the substance of how we assign Sovereign Ratings involve such things as setting up a calendar each year. The original proposal had a rather draconian provision regarding mandatory rotation for credit rating agencies.
That was 1st scale back to only apply to structured finance ratings and then scale back further to only apply to resuperitizations, which is a small subset of our EU structured finance market primarily EU assigned CDO ratings. There were also certain ownership restrictions that apply to 5% 10% shareholders of credit rating agencies. We currently only have 3 shareholders that fall into those categories and we've been in contact with them about the meaning of the new regulations. We've also posted a summary for anyone who's interested of this particular rule on the IR website for Moody's. Last provision we note here.
There is a new liability provision where there's been a breach of the CRA regulations And that breach also had an impact on the rating. The burden of proof here is on the plaintiff. And the rules also allow us to limit we can't eliminate our liability we're allowed to limit our liability by contract. There are a handful of CRA 3 provisions I remain subject to ESMA rulemaking. And as is the case with the new Dodd Frank rules, Moody's has made IT and other enhancements including significant investments in additional compliance personnel so that we're able to comply with these new regulatory requirements.
And I'll be happy to take any questions you might have.
Start with Doug over here.
John, in the judge's order in Abu Dhabi to proceed to trial and it was subsequently settled, She seemed to challenge the First Amendment protection that ratings were simply opinions. So I'm wondering if you have any thoughts on that and whether you've seen any other existing cases start to incorporate that her opinion into their case. And then I'm wondering if you could update the status of CalPERS.
Thanks.
Sure. You're correct that there were news accounts that seem to indicate that Judge Schindler said the First Amendment doesn't apply to our rating opinions. But in reality what she actually said in responding to our motion to dismiss is that there are 2 exceptions The First Amendment protection both of which we agree with. 1 is if there's fraud. Obviously, if a rating agency commits fraud, they can't find protection by wrapping themselves in the First Amendment.
The second point she made though and this was based on a factual mischaracterization by the plaintiffs in their complaint was that our ratings in the Abu Dhabi case were not publicly disseminated. In fact, they were. We had press releases disseminating and then also had research on the ratings. And so when you a judge rules on a motion to dismiss, they have the judge has to assume that the facts alleged by the plaintiffs and its complaint are correct. In fact, that fact was not correct.
So from our point of view, Judge Sheindlin is just restating laws which is you don't publish a rating. You obviously can't have First Amendment protection if you commit fraud. That's not a defense to fraud. With respect to CalPERS, very little to report on the CalPERS front. No real changes in many months.
As you probably recall, we have appealed the denial of the trial court's decision to deny our motion to dismiss under what's called an SLAPP statute which is some additional protection. The ratings enjoy in the state of California That appeal has been fully briefed, but we no date has been set for oral argument yet and we don't know when that's going to happen or when the appellate court will rule. So The good news on CalPERS is while that appeal is pending, there's no discovery taking place. So, not wasting any more shareholder money on that case right now.
Okay. We'll go to Manav here.
Thank you. Of the 1 third or so cases. Can you give us a sense of like what's the most near term that could hit the headlines? Like Are there any ones that are notably risky? Or are they all sort of back in the pipeline where we don't have to really worry about this for a couple of years or so?
Yeah. Unfortunately in the pipeline we'll be dealing with them for a couple of years or so. Basically all our remaining cases are either In the motion to dismiss stage, we are either in the process of filing a new motion to dismiss or we have filed 1 and waiting for a ruling or in the discovery stage. There's really None that are more significant than others. And obviously, if at any point in time, we any of our ratings related cases are materially disclosed in our SEC filings.
We'll go to Bill here.
I'd ask if you could comment on the statute of limitations as it relates to any new potential lawsuit filings. And then if you could comment Specifically, as it relates to the DOJ's suit against McGraw Hill, Any potential implications there?
Sure. With respect to the statute of limitations, Akshay, combined both questions. The statute of limitations as it applies to the DOJ, they have plenty of time to bring a lawsuit on the FIRREA. The statute is 10 years. So but more generally, the question of whether a claim is barred by the statute of limitations is very fact specific.
You need to know both the nature of the claim whether it's a breach of contract claim or a tort claim, what jurisdiction it has been because the special varies depending on the jurisdiction. And then the specific facts of the case. So unfortunately there is no answer you can give. Generally, it's very case specific In respect to the DOJ lawsuit, we're obviously not a party to that. And you basically only know what we've read in the newspaper and accounts and in DOJ's complaint.
We'll come over here to Craig.
John, just talk a little
bit further about the DOJ case that S
and P is dealing with right now. From your perspective at Moody's here, Has your level of discussions with DOJ or similar changed at all here in recent months? And if it has, aren't you obligated to have to report that in your SEC filings?
At this time, we have no knowledge of any impending complaint by the DOJ against Moody's that raises similar claims to those in the DOJ's lawsuit against S and P. But you're absolutely right. If we did have knowledge of that lawsuit that would be a material development and we disclosed that on our SEC filing.
Over here to Rishi.
Could you speak 2, any particular areas of focus that the SEC examines you on? And also, the second part of the question is, let's say, if this Office of Credit Ratings had been established prior to 2,007. These examinations were being conducted annually. Do you think a proportion of your litigation would not have had a basis to proceed based on their examinations? Thank you.
Sure. Well, basically the SEC their goal in the examination process is to make sure we're complying with the various SEC rules under both the Credit Rating and Civil Form Act of 2006 as well as the newer rules that have been put in place on the Dodd Frank. And those rules are as you may know primarily procedural making sure that we manage our conflicts of interest properly that we document what we've done that we protect material non public information that we receive on a daily basis from issuers that our Employees don't own securities and issuers they rate those sorts of process and corporate governance rules. Importantly, the SEC has does not have the jurisdiction and does not try to interfere with the substance of how we assign our ratings. It's truly making sure we comply with the rules.
As far as whether it would have made a difference if there was an office of credit ratings prior to the financial crisis, Not really, primarily because all of our ratings related litigation generated from the crisis has to do with RMBS securities where we many of the market participants predict the severity of the Housing below burst in nationwide decline in home prices by 30% or 40%. That really has nothing to do with the procedural rules that have been put in place and what the Office of Credit Ratings now particularly examines for. So as Michel mentioned though of course, we think it's been Many of the rules both in the U. S. And the EU are helpful from the business point of view and setting standards more generally for the industry, but they wouldn't have had any helpful benefit as far as deterring the kinds of litigation we've experienced since the should start it.
We'll go to Jim first and then Marshall.
Just remaining U. S. Cases, would you say
those are all or nearly all allegations
of fraud or are some of them being brought under the theories that have now been ruled on by some of the circuit courts that you cited?
It's a mix. The CalPERS case which we were discussing for example has one claim and that's a claim for negligent misrepresentation. Other cases have negligent misrepresentation claims or forward claims. The only claims that have completely gone away as a result of the 2nd Circuit ruling of the 33A claims.
And then we'll go to Marshall here.
Looking at one slide in particular,
the one with the heading Dodd Frank Act and Frank Amendment. Almost strikes me as if the regulatory posture at least in the U. S. And perhaps in Europe as well is a bipolar one. On the one hand, there's a continuing effort to try to inject greater degree of competition into the ratings industry.
And on the other hand, the hurdles are raised, so that it makes it Certainly challenging for existing competitors, but all the more challenging for any potential new entrant. You think the regulatory world as a whole has an awareness of what it's doing in that respect? And Did you see any change from that overall posture coming?
Well, I think it's fair to say in the U. S, The 2006 Reform Act had an emphasis on increasing competition in the CRA industry and in fact required that the SEC recognize as NRSROs rating agencies with an investor pay business model. Part of that all rating agencies recognized by the SEC and issuer pays model. The emphasis has really shifted since then. And that is certainly wasn't at all a priority either for Congress on the Dodd Frank or regulators currently.
I think in the EU, it's fair to say that New York King Commission and some other parties are interested in seeing greater competition by domestic EU rating agencies. But in general competition has not been a priority there as well. It's more focused on Ratings quality and making sure as we talked about potential conflicts of interest are managed appropriately and Not really focused on competition. You're right though that the cost of complying with the New regulatory mandates are significant particularly for smaller rating agencies and that may create a regulatory barrier to entry. But that's really an issue in Europe.
You can be a rating agency in the U. S. Without registering with the SEC and there are a number of smaller rating agencies that aren't registered.
I think we just have a little bit
of time left. We'll go to Mr. Lipper here.
Thank you. You mentioned the restrictions on the 5% 10% owners. Is that can you briefly identify those restrictions? Are they on the owners or on the firm?
They're unfortunately on both even though we obviously don't have any control over what our shareholders might do. The 5% rules the 2 main ones are 1 a disclosure rule. We have to disclose who our 5% shareholders are and then Any entities we rate that they also have a 5% interest in. There's a restriction if you're a shareholder In Moody's more than 5% of Moody's, you can't also be a shareholder for example in McGraw Hill you have to pick. And then with respect to 10% shareholders In addition to the 5% requirements, there's an additional prohibition as opposed to mere disclosure on us signing new ratings out of the EU for 10% shareholders or subsidiaries of 10% shareholders.
As I said, if you want more detail, that's on our IR website.
We have time for one more. We'll go to John here.
John, are you at all optimistic have any optimism at all that Regulars may actually get around doing something that would actually cast more daylight on the practice of bathing shopping?
Yes. I think the amendments to 17 gs5 as we discussed would be helpful. I think to the extent that rating agencies have information available to them so they can do unsolicited ratings and unsolicited research that would be helpful. Moody's has also encouraged the SEC and this is true in the EU as well to provide more fulsome disclosure Buyer issuers in the structured finance space. So from our perspective, the gold standard is U.
S. Corporate disclosure. Basically any analyst or any investor from that point of view can make an informed decision based on all the material information that U. S. Corporate issuers have to put in the marketplace.
The structured finance disclosure regime isn't really anywhere close to that. So we think that'd be even more helpful Mending 17 G5, but there are a number of steps that would cause us to be optimistic against it.
Great. Thank you again to John for taking time with the presentation and also for the questions from everyone. We do have a 15 minute break scheduled now. So we will start again at 10:35 and we do have refreshments in rooms A and B to your right when you walk out the door there. Thank you.
Okay. It
Okay.
It. It it it it Okay.
I can do that if you want. I mean, it's up
to you. Would you like to say we're going to get
I think we're going to resume the program now. We're going to switch gears and we're going to spend some time talking about Moody's Analytics. We are the Smaller and newer and less well known, I think it's fair to say less well understood piece of the Moody's Corporation. We're now in our 6th year as being a separate legal entity. And I think we're making very good progress financially and reputationally.
And importantly, I think there's a very attractive opportunity ahead for Moody's Analytics. So we're going to spend a little bit of time this morning not going into enormous detail about the business, but trying to send some very high level messages about what's happening at Moody's Analytics. And there are 3 core messages. 1st, as I said, we have been doing very well in this business over the past 5.5 years. Secondly, there's a big opportunity for growth in this business, owing to some important structural phenomena that are driving demand to Moody's Analytics.
And finally, our track record, the experience we've had over the last few years with our customers around the world gives us enormous confidence that we can win that opportunity and we can execute very effectively. To try to capture this opportunity in a simple, but I think fairly compelling way, we believe that Moody's Analytics can enable Moody's to become as relevant to risk management practices at Financial Institutions as Moody's Investors Services in the bond markets. And so we're going to spend a little bit of time today talking about that and talking about how we think This is a perfect brand extension opportunity for Moody's. It's a standards business. It's related to risk largely to credit risk And we serve financial institutions.
I think in that context, this is a very appropriate opportunity for Moody's to pursue. And I think one that represents some very important opportunity for us to expand the scale of the company, build out the range of products and services that we offer and add significant value to the corporation. Now I think most of you know that we're in the business of helping financial institutions manage risk and we do that in a number of different ways. We have a rather broad portfolio of products and services. But everything that we do is aimed at providing capabilities so that financial can do a better job of managing risk.
Whether we're talking about serving the buy side and the sell side in the debt capital markets or increasingly talking about helping to facilitate better risk management practices at commercial banks and with insurance companies, Our focus is very much on risk management. Broadly speaking, we have 3 major classes of product. We have information products, research and analysis about individual companies as well as industries and countries and economies and markets. We also provide infrastructure. This is technology systems and analytics that are delivered through modern technology platforms that enable our customers to better use our information and also to generate and manage their own proprietary information.
And thirdly, we offer ways for our customers to obtain skills, either by providing training and education in finance and risk disciplines or by providing analytical staff through our offshore platform in India. In a short time, we've gained much experience with our customers. We've built very strong relationships with financial institutions all over the world. And our customers trust us and they increasingly rely on Moody's Analytics to provide these kinds of capabilities. This is very much a global business.
About 60% of Moody's Analytics revenue is sourced from customers outside the U. S. And about 60% of our staff is based outside the U. S. So this is a global opportunity.
In order to realize that opportunity, we have a worldwide distribution organization and that's designed to take advantage of the power of the Moody's brand. The Moody's brand has, as you know, enormous visibility and gives us access to customers all over the world. As a strategy as a product strategy, we are very focused on building products that our customers need to have. We exert an enormous amount of discipline on our product development processes, so that we're very focused on doing things that go beyond being clever or interesting ideas, but instead address very specifics, very specific problems that our customers have. And the idea here is we want to be in the need to have products business.
We think that that's a core part of our strategy and it's one that will drive growth for us. We think we've had a lot of success Thus far taking this approach, we think we've laid a solid foundation for us to continue to grow the Moody's Analytics business. Just to summarize What we've achieved financially over the last couple of years, we've added about $365,000,000 of revenue in Moody's Analytics since we launched the company at the start of 2,008. That translates to about a 12% average annual growth rate. And remember that was in a very, very weak environment.
For a business that sells exclusively into the financial markets, we realized 12% average annual growth in a very against very challenging operating conditions. As you can see here and as I'll elaborate on more briefly, the three businesses of Moody's Analytics represent quite a mix of scale and growth rates. And the way those businesses have grown has come through a combination and a variable combination of both organic and acquired growth. The RD and A business, our research data and analytics business, which is represented in green, is our biggest most mature business. It's the thing we've been doing the longest.
That business has been growing at a 6% compound annual growth rate over the last 5 years. I would note that that is all organic growth. We've done no acquisition in that segment. And that is a very profitable business. I'll talk more about that the economics of the business in a moment.
In Enterprise Risk Solutions, which is represented by the orange segments of the bars, That's a business where we've been gaining considerable scale. We've it has delivered the most dollar growth over the last 5 years. And it's the area where we are investing heavily because that's the area where we see a very important growth opportunity and strategic opportunity for the corporation. So in ERS, we have achieved that growth of that 20% CAGR over the last few years through a combination of Organic growth and acquisition. That was a very deliberate strategy that we pursued.
We have a very clear idea of what it is we want to accomplish in ERS. And we look at acquisition as a means of accelerating our progress along our product development roadmap. When we see opportunities to acquire assets or acquire capabilities that can help us build out our platform more quickly and deliver it more readily to our customers than we've chosen to make some acquisitions. But in the absence of a compelling opportunity to do that, We feel very confident that we have the right capabilities in place to continue to realize the ERS opportunity. And then finally, the blue segments of the bars that represents our professional services unit.
That's an area of product portfolio that we've been building out rather aggressively through acquisition. That's a very deliberate strategy. Again, there are important And I would argue essential opportunities for us to add capabilities that allow us to deliver a more comprehensive risk management solution to our customers and we've pursued an acquisition approach in the professional services segment. So we've had good growth in Moody's Analytics since our inception, a combination of both organic and acquired Revenue growth? That translates to organic growth over the last 5 years of just under 7%.
So about 60% of our growth over the last 5 years has been the result of organic growth and the balance has come from acquisitions. For 2013, we've told you to expect high single digit top line growth. Again, this year, there is no acquired revenue in our results. That's purely organic growth. So we're seeing a bit of an improvement in our organic growth this year relative to our recent trend.
So at a very high level, that's the quick story of what we've done on the top line in Moody's Analytics. Let me spend a little bit more time going into some detail on each of the units. First, research data and analytics. As I said, this is the thing we've done the longest. It's the foundation of Moody's Analytics.
It's very it's a very solid foundation. We expect to realize over $500,000,000 in revenue from this business in 2013. This is the area of the risk management solution in Moody's Analytics that is oriented almost exclusively to the debt markets. And much of what we sell in our DNA is what is sourced from the rating agency. So we are consuming and commercializing and distributing the byproduct of the Moody's rating process.
And as a result of that, the economics of this business are very compelling. The manufacturing costs are effectively borne by the rating agency. These are activities that to a very large extent MIS would be engaged in anyway. So, we have an opportunity here to repurpose content that is generated in the rating process and again commercialize that, package that and distributed that to our customers. This is a 100% subscription business with very, very high retention rates.
You see that at the end of the second quarter, we had or in the second quarter this year, we had 95% customer retention. That's an all time high for us. There's been a very steady increase in our retention over the last several years. And we're very pleased to see that we've now got that up as high as 95%. The good news is our retention is at 95%.
The bad news is
I don't know how much more we're going to
be able to improve on that. That's about as good as it gets I'm afraid. Not that we won't try, but 95% is a pretty good retention rate for any subscription business. Now the drivers of demand in our DNA very much relate to the embedded use of Moody's ratings in the debt capital markets. If you're active on the buy side or the sell side in bond markets around the world, you pay attention to Moody's.
And that drives an enormous amount of demand for the kind of information that we're able to deliver. Market participants are very motivated to get access to information coming out of Moody's to try to understand the direction of ratings, the rationale for ratings. And that's those network effects make for very powerful demand in this business. So this is a business where the more people who pay attention to Moody's ratings, the more demand there is for the research and associated product that we deliver in Moody's Analytics. Now as a mature business, The growth rates we've had in our D and A are good.
We're currently running at high single digits. As you saw over the last 5 years, have been running it we had a CAGR of 6%. But the high single digit growth that we're delivering now, we think that compares very, very favorable with other subscription businesses that you might compare us to that serve the capital markets. So we think we've been doing quite well. I think that success speaks to the power of the franchise and the importance of the content that we're selling.
Again, this idea of delivering need to have products to our customers is very essential to how we approach the business. The other thing to keep in mind here and Ray touched on this earlier, there's limited downside in this business in our experience at any rate. If you go back to 2,009 when the fixed income markets cratered and we had major, major customers that spent 1,000,000 of dollars with us literally disappeared. And we had as a result of that a rather high spike due to customer failures and consolidation in our cancellation rates. In spite of that phenomenon, we still managed to maintain flat revenue in RD and A in 2,009.
So I think that speaks to the resilience of this business. I'd like to think, I hope that 2,009 is about as bad as it's ever again in this business. Certainly, I've been doing this for 25 years now and that was that's as bad as it's been. And so if we can hold up and maintain flat revenue in that environment, we feel very good that the downside in this business is quite limited. I think that's an important point because you might think that this business is highly correlated with the rating business.
And it is, but certainly not to the degree that the rating business is. For example, You've seen very healthy growth in rating revenue in recent quarters, a result of very healthy bond issuance. That doesn't really translate into increases in demand for research. The reality is you don't have more customers. There aren't more buy side participants entering the market.
And to the extent that we've penetrated the market to a very extensive degree, again going back to this notion that if you're in the bond market, you're paying attention to Moody's ratings and you're paying attention to our research. We don't see growth opportunities associated with new issuance activity in the bond market. By the same token, when issuance declines that tends not to have a big impact on our top line either. In fact, it tends to have virtually no impact on our top line. So just something to keep in mind when you're thinking about the research business, it doesn't really correlate especially well with the flow of revenue in the rating business.
And then I'll just make one other point that Ray had raised earlier, where we do have opportunities to grow this business and where we think we are very well positioned to seize those opportunities is as new product innovation comes into the fixed income capital markets. That will create demand for additional research on additional asset classes and additional instruments that we believe we will be able to monetize very effectively. As MIS rates those instruments, as MIS generates research on those instruments, we'll be able to charge for the distribution of that content to our customers. We certainly saw that 15 years ago as the securitization markets heated up, the creation of more research on the structured finance markets and the sale of that research to more and more investors and intermediaries who are getting involved in those markets was a very healthy growth driver for Moody's Analytics. If you go back to the late 90s and the early part of the last decade.
So product innovation in fixed income capital markets is a very good growth driver for the RD and A business. We move on to Enterprise Risk Solutions. As I said, this is the real growth engine of Moody's Analytics. You see here that ERS represented about 30% of Moody's Analytics revenue last year and it represents almost 45% of our year to date revenue growth this year. So you can see that ERS is contributing a disproportionate amount of revenue growth.
And there are a number of things going on here. But In the ERS business, what we're doing is applying Moody's analytical expertise to bank risk management. So this is whereas RD and A is a debt capital markets business, the ERS business is very much oriented to supporting risk management activities at commercial banks and insurance companies. So if you think about all of the infrastructure around managing a commercial and industrial loan portfolio at a bank. We are offering the analytics and the technology tools to help support those activities.
And we're finding that that is a very attractive business. Steve will talk about this more in a moment. But we got into this business several years ago because Moody's had a reputation and a legacy of providing advanced analytical capabilities, modeling capabilities, particularly around credit risk management to financial institutions. And we saw an opportunity to use modern technology, modern software engineering as a more effective delivery platform of those analytical tools. So rather than delivering a probability of default model to a bank that they could use to analyze their exposures, We wanted to embed those default models in a larger enterprise wide system that would link all of the various aspects of the development and management of a C and I portfolio.
So everything from the loan origination process where a lending officer gets financials on a prospective borrower and spreads those financials in our platform and that data feeds into a risk scoring system that the institution uses. The data and the risk scores captured in Central Data Warehouse, which then feeds portfolio analytics, it feeds loan pricing mechanisms, It drives regulatory reports that the bank has to deliver to its regulators on a periodic basis. The idea of the ERS business was to wrap and integrate all of those activities together, taking activities that were previously managed really in silos and bringing them together and using technology to bring them together in a more integrated fashion. So we started out in this business because we thought That was a good idea. It made sense to us.
As luck would have it, there was a global financial crisis and a global banking crisis, which gave rise to a whole raft of new banking regulation that requires banks to do all those things in a much more rigorous way and report to their regulators that they're doing those demonstrate to the regulators that they're doing those things in a much more rigorous way. All of that banking regulation is driving enormous demand for exactly the solutions that we set out to build in the Enterprise Risk Solutions business. And so That wave of regulation is an important demand driver in ERS. Where the network effects of the use of Moody's ratings drives demand in RD and A. The regulation banking regulation and regulation of insurance companies, particularly around capital management is driving tremendous demand for our ERS business.
So in short, we have a remarkable opportunity here because I think it's fair to say that in the ERS business demand is not a problem. I mean we have tremendous opportunities coming at us from institutions all over the world. Steve will talk about this more in a moment. But we have a very good problem to solve in ERS, because as I said demand is not our problem. Meeting that demand and frankly working with our customers to figure out how to deliver these solutions in a systematic way, in a way that is easily replicable from customer to customer around the world, that's our big challenge.
So again, there's an enormous opportunity here. And I think we are very well positioned to go after that opportunity. But it's not going to be easy and it's not going to be quick. This is going to take some time. But we are very, very Very, very optimistic about the opportunity to the point where we see so much opportunity that we feel like it would be irresponsible for us not to use the Moody's brand, not to use the IP that we've developed in this organization to go after it in a very aggressive manner.
So that's what we're doing. Steve will talk about this more in a moment, but I will note that Given the sizable component relatively sizable component of non recurring revenue in the ERS business And the I'll call them arcane, maybe they're not arcane, they're just complex rules around GAAP revenue recognition For software licensing businesses, you're going to see some a lot of variability in our quarterly revenue results. And I think Steve will make this point. But what you want to do is don't pay attention to discrete quarters. Don't really mean very much.
You really need to take that variability out of the quarterly results and look at trend. We tend to look at last 12 months kinds of revenue growth as a much bigger better indicator of the health of the business than is the results for any discrete quarter. And then finally, I mentioned that we've been building the professional services business primarily through acquisition. And what we've been doing here is we've been acquiring good businesses with strong franchises that provide capabilities and expertise and experience that we believe can be additive to the creation of a broader risk management solution. Our focus Thus far has been on training certification and outsourced research and analytics.
And the idea here is to acquire those businesses, sustain those good businesses, while leveraging those capability the capabilities that they bring in the service of further embedding Moody's Analytics in our customers' risk management practices. The idea is to deliver a more holistic risk management solution and deepen customer reliance on Moody's Analytics. I'll talk about this a little bit more in a moment. But the core message here is that Since we created Moody's Analytics in 2008, each of our businesses, RD and A, ERS and Professional Services have really been run to hone their businesses, to hone their capabilities, build the reputation our reputation for expertise in those areas and deliver growth. And I think going back to our financial results, we've been successful on that front.
Now we're beginning to add more focus in building solutions that draw on capabilities from across Moody's Analytics to enable the development of larger more far reaching risk management solutions that will make our customers more reliant on us. This slide is a very, very simplistic illustration of how we're trying to bring the portfolio of Moody's Analytics capabilities to bear on the risk management opportunity. Many of the things that we do, whether in the RD and A business, those are represented by the blue items or in professional services, which are reflected in the orange items or in enterprise solutions, which are the green circles. Many of these things that we do across Moody's Analytics represent elements of a complete risk management solution for financial institutions. And we can point to actual customer engagements where we are drawing on these diverse capabilities to build an integrated risk management framework that meets the broad needs of our customers.
Now typically what happens in this business is that our customers don't buy everything at once, but they tend to sequentially add components or elements to further realize the advantages of what we're offering them. Now this is not just sort of some fantasy that we cooked up. We have real live examples of customers who are doing these very things. One large customer that's using they've recently opted to deploy our loan origination system. They're deploying that with literally thousands of loan officers around the world.
We'll use the Moody's Analytics front end loan origination system to spread the financials on their borrowers, capture that financial information and pass that through to their risk scoring systems. That customer has asked us to use our training organization to develop an online training program and certification program, so that they can drive adoption of this system among all of their loan officers around the world. As you know, when you undertake these massive IT projects where you're changing workflows, Getting adoption and getting usage and people complying with the new process can be a very big challenge. So the training and certification capabilities that we have in MA are able to be applied here and enable again enable us to embed our solution more deeply in that organization. So I think that's a pretty good example of how we're using all of the various things we do in Moody's Analytics in a holistic way.
I often get a lot of questions from people about how our various products services fit together. And this is the concept. This is the method behind the madness of what we've been building in Moody's Analytics. Now another place where we try to bring everything together in Moody's Analytics is in our customer facing organization. Again, if we're going to realize the opportunity to meet the risk management challenges of our customers, we're going to need a very integrated and coordinated sales and customer service effort.
So we've organized a customer facing organization where we combine account management with product specialization with reactive and proactive customer support mechanisms, so that we can ensure that we've got strong distribution All over the world, we are engaging our customers to drive usage of our products, to drive reliance on our products. That's a very important part of our strategy. Again, this notion of embedding what we do in the workflows and the practices of our customers. And the other important thing that this organization does is it continues to identify emerging customer needs and making sure that as customer needs evolve, we are able to respond with the right capabilities and delivered in the right way. The main message here is, we see a big opportunity.
We want to be sure that the lack of reach doesn't prevent us from seizing those opportunities. Again, the brand gives us lots of access to customers all over the world, but we also need people to go out and engage with them. So the idea here is that together with our powerful brand, this model of combining account management, product specialization and customer service that has served us very, very well. And it represents an important reason why we're confident in our ability to continue to realize this opportunity. It's the success of our customer it's the success that we've had with our customers that has helped us achieve the strong results that we have over the last couple of years and establishing an increasingly robust reputation for Moody's Analytics.
Let me just wrap up here and turn it over to Steve, offer some further evidence that we're having an impact on the market. A wide range of industry surveys, trade publications and market research studies have identified Moody's Analytics as a highly valued provider of a wide range of products, services and expertise. We are very proud of this recognition that we've gained. It gives us a lot of confidence that we're well positioned for further growth, both financially and reputationally. And again, given the scale of the opportunity that's out there, We expect great things at this organization over the coming years.
So with that as a high level survey of where we've been and how we've performed, I thought we should drill down a little bit further on the Enterprise Risk Solutions business, given its strong growth, the sizable investments we've made there and the very robust demand that we're seeing. So we want to give you a little more insight into that business. And I'm going to turn it over to Steve Talanco. Steve has been with Moody's for over 20 years. He's had a number of senior positions in our customer facing organization, most recently running our global sales and customer service organization.
Earlier this summer, he took responsibility for the Enterprise Risk Solutions business. And I think that given how that business has developed, given how we build out the product offering, I think it's exactly the right time for us to bring Steve's external perspective to bear on making sure that we realize the opportunity in ERS.
So with that, Steve, why
don't you take over here?
Thank you, Mark. Good morning, everybody. I Steve Stylenko, responsible that Enterprise Risk Solutions business, I'm very happy to be here this morning. There is really no greater pleasure than to talk about a business that has a 20% CAGR since 1,007. It's a fantastic opportunity to address you, especially in light of the fact that I've just joined the group here.
This is an important growth engine for Moody's. Is one of our most important initiatives. We are investing heavily in terms of effort, In terms of resources, we're trying our best to seize an opportunity here to realize some take advantage of some of the demand that's out there in the market. I'm going to talk about the prospects for growth. I'm going to talk about the drivers of demand.
I'll hit the theme of regulation again. And but before I go there, I will address some of those revenue related and some of the dynamics that affect the numbers that we actually report within the ERS. Mark referred to this earlier. This slide is a spotlight on the some of the revenue recognition dynamics that are related to the business that we call Enterprise Risk Solutions. If you take a look at the chart on the left, you can see quarterly growth numbers, year on year numbers for each of the quarters.
And you can see that there's a couple of quarters there where we have relatively low numbers. We have 0% to 5% growth 3 of those quarters. I think there's something like 6 quarters where there's growth between 5% 15% and then another 9 quarters where we're growing beyond 15%, sometimes approaching 40% 45% growth on a quarter over quarter basis. That is different than what you see in the rest of Moody's Analytics. We talked about our G and A and the subscription base of that business.
That's a very a predictable stream of growth where you have sales that are recognized over amortized over 12 months. In the ERS business about 65% of the business is subscription based. About 35% is based on projects that we do for customers, whether those are software implementations or project advisory projects that we do for people. So a big chunk of the business within ERS is dependent on client and customer time lines and as a result creates revenue deferrals that correspond with the timing of that project going into production or actually being used been put into service. So you can envision making sales today that might not show up as revenue for several months and even several years.
Mark talked about that one customer before that's rolling out an origination system where we're supporting a big effort with thousands of bankers around the globe. That project is a multi year project. So the revenue deferrals that are created there can go on for quite some time. And you see that dynamic in this chart. And that's why Mark said before, revenue in any one quarter may not be the best indication of how well we're doing.
If we go to the next slide, you can see another look at the same kinds of numbers, but here we've taken out some of those timing impact of timing on some of the results. So on the top left, you've got a on the top line, you've got a trailing 12 month sales production. And then the green line, which is below there, shows you trailing 12 month revenue production. The good news first of all is that both lines are going up and they're going in the right direction. The sales numbers show you over the last 3 years each of the years is showing an annual rate in the mid teens.
That's a very nice number to examine there. The other thing that's very nice to see is that the revenue number follows basically the same shape over that same period of time. So while we do have revenue deferrals that are created in the because of these project dependent revenue recognition events, the revenue line tends to follow the sales line pretty closely. The shape is almost exactly the same over this 4 year period of time. And Revenues are just a little bit behind the sales production.
The other good news, another observation from this is that sales is higher than revenue on this measurement, which is an indication of future growth. You can expect to see revenue coming in, in the next several quarters to follow along with the sales numbers. I'll add one other quick comment here, which is that the future looks very bright. When you look at our pipeline and our demand, we expect very solid growth in future quarters as well. Here is a slide where we review one of the reasons why that demand is so attractive.
You've heard the words regulatory and regulation and from various different speakers today, this is a very big driver for demand within the ERS business. If you think about the financial crisis and maybe divide it into 2 dynamics that are affecting us in a relatively important way. The first one is the financial crisis has created let's put it this way, a spiritual belief that risk management is a good thing. Banks are spending more. And if I look around the room, there's a bunch of you who are either working for a bank or closely associated with the bank.
You know how much money people are spending on risk management today. When you look at the proportion of their budgets, this is where the money is going. That's a fantastic opportunity for us. In addition to that, the regulators are also very aware of what happened in 2,008, 2009. And They're also very aware that they have some responsibility to try and shore things up.
And their intention to provide stability in the system has created a great sense of urgency in the form of regulation. So there's demand out there and that the banks are spending more money in order to improve their ability to manage risk. There's urgency, which is the key in the form of regulation, which is asking them to take that on right now. So You see many regulations that are driving decisions and forcing banks and insurance companies and investment managers as well to take decisions today that they might put off until another day, if it weren't quite the same regulatory environment. So we think that's a pretty important a driver for us.
I will add that when I go out and see customers and when I visit with regulators, there is a true convergence happening. I think it's primarily because regulators are trying to improve the stability of the systems. So when you go to see people in Europe, they're desperately interested to hear what the Fed is doing with stress testing on the American banks. And when you go to see American banks, they're really trying to learn what the European banks have done with respect to Basel III in light of the fact that the new regulations related to Basel III have just been finalized. So some of the European influence is coming over here.
Some of the American influence is heading over to Europe. And the good news is that it's right in our sweet spot in terms of helping people analyze, understand and project capital adequacy. So in terms of the opportunity, the regulation is driving us to a point of success. We are going to be big beneficiaries of this. I'm going to try to blast through the next couple of slides because we're running short on time.
This slide is really here for illustrative purposes. I'm not attempting to a bit like Sally's slide before. I'm not going to try and walk you through this entire thing. Think of this as a radar map. What we've attempted to do is identify all of the financial regulation that is affecting what we think is our business, whether it's in Asia, Europe or America.
So at the center at the bottom center is so the that's where we're sitting. As you go out through time you reach out into the different bands. So in the immediate time frame right around the origin of that radar map there, there's a bunch of regulations that have been passed and are now required of banks and financial institutions to take care of. So on the bottom left, see a bunch of flags, bottom left and in the center. Those are flags representing country where the Basel III regulations have been passed and are formally put into effect and deadlines have been set.
If you move a little bit to the right, still on the lower point of that radar map, you'll see of the U. S. Flag that indicates CCAR, which is of course another one of those abbreviations you need to get to know and DFAST, the Dodd Frank Act stress test. That flag is an indication that there is true regulation in effect and deadlines have been set. And as you move out through time, don't have quite as much certainty, but you can start to see there is a lot to do.
Hanks and insurance companies and investment managers all over the world have a lot to think about. We can help them in a lot of ways. So this is in a lot of ways a good example of how we tailor and drive our product development efforts and our business development efforts to make sure that we're taking advantage of these tailwinds. Now the this is intended to be an example of how that regulation can create a business opportunity for us. What we attempted to show you here is a practical depiction of what you have to do when you are undertaking a Dodd Frank stress Act stress test.
So basically What the regulator is asking us to do or asking the banks to do is project and understand their capital adequacy over multiple quarters. You can think about it, how do you project your balance sheet and your P and L and ultimately your capital position over 9 quarters? How does that change? And what do you need to do to model your risks, model your cash flows in order to do that well. So the regulation is asking banks to do that and they need a lot of help And we're spending a lot of time doing that, providing benchmark databases, providing models, providing software to help them automate that process enable them to do that in a much more efficient way.
In a
lot of ways, this is exactly
the thing that Mark was referring to before. Our vision for ERS, which was to help banks think about themselves in a more integrated way to cut across the different divisions of the banks and enable them to understand the implications of credit on cash flow, for example. We have the tools to do that and the stress tests We're asking them to do that right now. The opportunity is fantastic for us to respond to an urgent need and a need that is supportive of better risk management. So I'll leave you with this slide just as a couple of closing comments on the impact and the traction that we've enjoyed here within the ERS business.
In a very cost conscious world and every one of you can attest to that, We've managed to find some very, very big customers and help them with very important projects. We have customers out there, 28 of them in fact that over the last few years have spent over $5,000,000 with us. There's another 110 banks out there that have spent between $1,000,000 $5,000,000 us over that same period of time. So we have some demonstrations of success. We're relevant in that we're delivering products that they need, not just products that are nice to have.
We also see that we have the reach to make progress and to help banks all over the world. We're working in the big economies, but we're also working in the smaller ones or the emerging ones. But we've got 11 customers in Saudi Arabia. We've got 11 customers in the United Arab Emirates. We've got customers in China.
We're doing $1,000,000 deals in places like that. So there's fantastic relevance in that these banks are trying to do a better job. The regulators are requiring they do it we have products to help them meet those needs. We have a very reliable track record. We have not done a project that hasn't been put into production.
That is the kind of thing that software businesses are very proud of and we're very proud to say that. So anytime we do work with a bank, it goes into production. And then finally, we have the reach to actually be important all over the world. So when you take relevance and need to have products with a reliable track record you have reach. You have a pretty good combination.
So that Mark?
So let me make let me wrap up. I'll just make one point before we wrap up. And that is that I think as we've tried to communicate here, you get the message that we are very focused on driving top line growth in this business. There is a big opportunity here at the risk of sounding a little grandiose. You could argue that the kinds of demand we're seeing for what we do coming from the global regulatory environment represents I think a historic opportunity for Moody's to build a major, major presence in a very big market.
And so as we've discussed, we're very focused on winning that opportunity. This is a unique opportunity. There's a wave of regulation driving demand to us. We have to make sure that we take advantage of that. So we're very focused on growing the top line, building this business and we're making the investments that are required to help us succeed at that.
In view of that, we have not focused and we are not delivering an enormous amount of EBITDA margin. That's a conscious choice that we've made that we're focusing on growth and to some degree at the expense of margin. We could drive higher margins in this business. No problem. But there is a direct trade off between the top line growth and the margin.
There is no doubt about that. We have chosen to focus on top line growth. And you see here, If you compare the performance of Moody's Analytics last year with other businesses that I wouldn't say these are competitors necessarily, some of them are, but these are businesses that I think are comparable to us in some way. They have similar kinds of products. They sell into similar markets.
These are companies that by and large serve financial markets. So we're think of this as a I think a pretty good peer group for us. We lead the pack, led the pack last year in top line revenue growth. And while we certainly didn't have the highest margin, I think we delivered margins that were quite given the kind of business we are. So I think this speaks to the fact that our strategy is We are being successful.
We're delivering growth. We're maintaining margins at a respectable level for the kind of business that we're in. And this is very much what you can expect from us as we look out over the next several years. So let me just wrap up by saying over the last 40 minutes or so, Steve and I have really only said a couple of things to We said, first, we've been doing quite well in this business. This is a business that has we've been operating and reporting financial results for 5.5 years.
In those 5.5 years, we've delivered 22 consecutive quarters of year on year revenue growth. 13 of those quarters have been at double digit rates. And as we said over that period over the last 5 years, We've delivered 12% compound annual revenue growth. And we're running at a decent margin. Last year's operating margin was 22%.
So, we think we've done well financially. And at least as importantly, We've done very, very well reputationally. We have really carved out a solid market position for ourselves. And I think the success we've had, the relationships we feel with customers that the recognition that we get in markets all over the world puts us in a very good position to go after this very significant opportunity that we think is ahead of us. I will leave you with one anecdote that I think represents this very, very well.
One of our larger customers, it's a bank that's headquartered in the Asia Pacific region. It's a top fifty bank globally. 2 of their executives that we've been working with quite closely, one from the risk group and one from the IT group, They took a trip to the U. S. A couple of months ago.
And while they were in New York, I met with them. And I said, so what was the purpose of the trip to the U. S? They said, well, we wanted to meet with our most important partners. And I said, well, who's that?
And they said, IBM, Oracle, SaaS and Moody's Analytics. And to think that they are thinking of Moody's Analytics as important a partner as IBM, Oracle and SaaS, I think is very, very powerful. And it's something that I think is very representative of the kind of impact that we're having in this business of providing very comprehensive integrated risk management solutions for financial
institutions. So
I think that it's a very nice anecdote, very happy to share it. And there are other institutions that I think would say similar things about us, institutions where we are doing very large scale, very important projects. These are not just interesting little activities that are going on in a small part of the institution. I've had experiences recently where CFOs of massive financial institutions are calling me, because we're working on an important project for them and they want to make sure that we're in regular contact, so that if any issues arise on their side or on our side, We're in communication and we're addressing those quickly. So I think we are extraordinarily well positioned, probably far better position than you might have guessed.
And so I hope that what Steve and I have talked about this morning has helped provide a little bit of insight into where we've been, what we've accomplished and what's ahead for us. So I will stop and I'm going to let Sally control the mob.
All right. Thanks, Steve, and to Mark. We just have a few minutes here, so try and get through as much as we can. I'm going to start here with Susie, because I I've been over here a lot. You gave the organic revenue growth for RD and A.
I didn't hear the organic growth for ERS and Professional Services. So could you provide that? And then could you give a little breakdown maybe overall on organic growth how it It's down in terms of pricing new customers and upselling existing customers?
Yes. So we said that Again, looking over the last 5 years, about 60% of our growth in ERS has been organic. In RD and A, it's 100%. And in professional services, frankly, it's about 0%. All the growth we've delivered in professional services has been through acquisition.
We've been building out that portfolio. How does that break out? I mean, unfortunately, there's not a short answer to the question. It's very different from business to business. In our DNA, we get very healthy.
Again, given The embedded nature of the product and the kind of the network effects that we have in delivering rating related research to our customers, we have a good deal of pricing power in that business. And we within reason, we tend to take advantage of So we get we see good growth from pricing and RD and A. We also see growth from adding additional content, content that is produced within Moody's Analytics and it supplements The rating agency content to deliver a more complete product that is that's part of the growth in RD and A. Frankly in RD and A, you don't see tremendous growth from new customers. You see that a bit in parts of the world like Asia where we're seeing good growth.
But honestly, because of the scale of that business, it tends not to move the needle very much. Most of the growth you see in our DNA is price and selling additional things to more people in our existing customer organizations. In ERS, virtually all the growth is new customers, new projects, right? And again You define the customer, yes. Yes.
I mean new customers in ERS we tend to sell more and more to the people that we're working with. I mean some of the large banks that we've been working with for years tend to consume more and more mostly because they're sort of on the cutting edge of putting in this more integrated infrastructure. So there it's not so much new customers as it is new projects, new engagements. And professional services, there we have particularly in our outsourced Research and Analytics business, they have pretty good pricing power. And but most of the growth we're seeing in professional services, I would say, is new customers and new engagements.
Sorry, that was a really long answer to your question.
All right. Just a couple more here. And it looks like I actually have
to move the slide. All right. We'll go to Doug here.
Just Mark, following up on our professional services. I mean, what is the game plan there? And can you disaggregate the performance of Copel versus the Canadian Training and Certification business And have they met your expectations, I guess is
the Dave will talk about this more in a minute when he does a little bit of an acquisition review. But Purple has definitely met our expectations. The training and certification business that we acquired in Canada has been Soft on the top line, but it's come through on the EBITDA line. So we're not happy about the softness on the top line, but the EBITDA has held up very, very well. The game plan though really Doug is We want to sustain those businesses as they exist today and run them as well as we can.
But it's really the big opportunity for us is to use those assets and use those capabilities in the service of these larger risk management solutions that we're building for our customers.
We just have time for one more here. Sorry. All right.
I'll go with Jim.
Okay. Mark, you referred
at one point during your Remarks that there's no problem with demand. If there's a challenge, it's really executing and meeting the demand. I'm just wondering, do you need to is there a need be to hire more people or is it more a need to develop the products that are sort of uniform across more clients? What are sort of the constraints there? Or is it you need to acquire something?
Yes. Well, I'll look at Steve.
I mean, the if you
ask Steve that question, you always have to hire more people.
I mean,
You just can't stop hiring people. But I don't I'm not sure there's an acquisition required. Again, we're always looking at Are there things that we can acquire? Are there capabilities that would help us accelerate what we're doing? We're always looking for those.
But I don't think there's any there are no obvious gaps in the product offering or in the business that are preventing us from realizing this opportunity. But the challenge Jim is really that these risk management solutions that banks are looking for from These are some very new concepts that banks are doing this. They are integrating their loan origination workflow with their risk scoring, with their portfolio analytics, with their regulatory reporting, they're doing it they've never done that. Now we've got the wherewithal to help them do that, but we have to figure that solution out together. In a lot of cases these are sort of you might characterize them as co development projects.
And so they take a long time. Frankly, they're not these are not the most efficient projects we've ever run. I'm hopeful that as we do 5, 6, 10 of these on a big scale, we'll start to figure out what the best practice is. And then as we do projects 11 through 2020 and 2020 through 50, this will go I wouldn't say it will be cookie cutter, But it will be much more systematic and efficient.
All right. Sorry to leave the other questions unanswered, but both Mark and Steve will be here after the event if anyone wants to talk with them then and we do appreciate your interest. Thank you again. And we're going to go ahead and move to our next session.
Good morning, everyone. I'm Linda Huber. And I'd like to introduce the people sitting to my right. We have David Platt, who's joined us in the last year, who is Managing Director and Head of Corporate Development for Moody's and he'll be going through our acquisition criteria and strategy as well as some of that post acquisition work that Mark had referred to. His right is Lisa Westlake, who is Senior Vice President of the Corporation and our Chief Human Resources Officer.
My proudest achievement for today is we've finally gotten in our elevators the news feed that tells you the news, the temperature and how the stock market is doing. I noted it's 52 degrees outside. It's about 32 degrees in here, but it is 52 degrees outside and the market's off a little bit today. What it doesn't tell you though is what is Moody's stock price today, which when I last looked at it $71.18 And when we did this presentation last year at this time 1 year ago, our stock price was 42 $0.50 And not one of the legendary analysts here writing on us today called that, not one of you, not one of you. Some of you even said the price would go down.
So for those of you who just think about that a little bit and we'll talk some more. Okay. So what we're going to talk about is the company That's had a very strong performance in the first half of twenty thirteen. The diversification of our core business provides significant amount of ballast in our across our businesses. And the question we keep getting is what happens if issuance goes down.
Issuance this year is flattish and our revenue is going up in the high single digits. And we hope that I can show you in a few slides that if issuance does go down, you may be overestimating what's going to happen to revenue to the negative. It's conventional wisdom. It's frankly not looking at what we're doing recently and it's a little bit of lazy thinking. So I'm going to get you to understand that.
Now if everything else doesn't go right, We've got our cost saving strategies and we do have an interest in driving margin expansion, but We're not driving margin expansion hugely. We've had good progress this year, 150 to 250 basis points in margin expansion. But I hope that my colleagues have demonstrated to you that growth is what we're doing in this business. And after some impassioned and lengthy discussions with Mark and Michelle, Reinvestment in these businesses is really the right way to go for the shareholders because these are very good businesses we have and we have to feed them. We also have solid EPS growth performance.
We are driving every line of the income statement. Most of that EPS growth comes from the business about 60%. But 40% comes from the finance team, tax planning and share repurchase strategy and we'll talk about that. And lastly, we're going to talk about our focus on return of capital to shareholders. In April, we noted that we had 1,600,000,000 Cash on our balance sheet, it seemed like a lot.
We decided to undertake a mini recapitalization. We did that on our own. Didn't take anyone to tell us that we had to do that. We figured that out ourselves. We've added some leverage.
We've increased our dividend by 25% And we've increased our intention on repurchasing shares by 100%. We are in the market repurchasing shares today. And we'll talk a little bit more about what we're doing. Now Sally started out with a very nice chart here in terms of only 4 other companies have done what we've done over the past 3 years. American Tower and CF Industries year to date their stock price has been flat.
Intuitive Surgical perhaps not intuitively, its Stock price is down 24%. And Mastercard and Moody's are up 39%. Now Mastercard is a fine company, very well run, up in Purchase New York and it's trading at a forward PE of 22.7, which it probably deserves. Moody's with very like financial performance is trading at a forward PE of 17.6 times, 5 turns less. So if you want like financial performance to Mastercard, may we suggest you might want to look at Moody's.
And the others on here, we frankly know less about the last company CF Industries, which is a fertilizer manufacturer And American Tower is a cell phone tower REIT, so not exactly comparable. But again, look at us side by side with Mastercard doing just about as well and we are 5 PE turns cheaper. Now over the past few years, despite a lot of doubt, a lot of questions, We've grown revenue here by 12% and most of that has come from 2 businesses, the Moody's Analytics business and I I think Mark and Steve captured the enthusiasm we feel about that business and also the Corporate Finance business. The other 3 in the middle Structured, Financial Institutions and Public Project and Infrastructure Finance, not too much different in size than where we were. And you can see again, we're guiding toward high single digit growth for this year, 2013.
Now all of the businesses, as I said, had a very strong first half of the year. Our growth in the U. S. Is really carrying us right now 18% growth in the U. S, 12% growth outside the U.
S. The people who cover this company tend to take a very U. S.-centric focus on how we're doing. And we find it pretty refreshing to travel around to Europe to Asia and take a different view because the different parts of the world move in different cycles and we think that that's going to help us in the future. You look at the rating agency businesses, clearly the Corporate Finance business has been the giant for the first half of the year, revenues up 33%.
Structured Finance the laggard with revenues up only 3%, big and PPIF up 9% 10%. If you look at financial institutions recently, issuance recently has been down, revenue has been up. That is an example of what we're trying to do in moving the revenue line here. And for Moody's Analytics, RD and A up 8%, ERS up 14% and Professional Services up 7, all the businesses putting up at least high single digit growth except for structured finance. Now this slide is the single most important slide in this whole package that you have today.
And I'm going to make you all do some work, so get out your pencils. We're going to circle some things here. So the bars show quarter over quarter global issuance changes and the orange line is Moody's MCO revenue. I'm going to ask you to look at 3 periods, okay? The first period, look at the change from the Q2 of 2011 to the Q3 of 2011.
Our revenue dropped from about $1,000,000,000,000 I'm sorry, issuance dropped from about $1,000,000,000,000 to about $625,000,000,000 at a 35%, 40% drop. But if you look at our revenue on the right hand axis, we dropped from about $600,000,000 to about 525. Revenue is down about 35% I'm sorry, issuance is down about 35%, revenue is down about 12.5%. 2nd passage through the most the few recent quarters, Q1 of 2012 to Q2 of 2012. Issuance dropped from $1,300,000,000 to about $800,000,000 again about a 38% drop.
Revenue, if you look at the orange line from the Q1 of 2012 to the Q2 of 2012, just about flattish, didn't come down too much at all. Then if you look at 2013, the Q1 to the Q2, issuance down again And we're down from about $1,000,000,000 $200,000,000 maybe $1,000,000,000,000 you can eyeball it. And there, if you look at that despite a drop in revenue drop in issuance excuse me, revenue has gone up, Okay. So what we're trying to show you here is that the job of several of us is to change this equation. The issuance line does not have to tie to the revenue line.
And if you think it does, you're not looking at the numbers closely enough. And any of you can recreate this chart and we would urge you to do so. We try to make this very simple. You can see what we're doing. Now how are we doing that?
Rod Faber talked a lot about new mandates. Single most important thing we're doing here is 700 new mandates each year. That's the new stock coming into the company. As Ray says, it's the highest quality. We are able to charge companies when they get a new mandate and that fee is high five figures, 5 figures.
And then they probably issue debt. What we've heard is more than 90% of them issue debt usually within the 1st year of having a rating. Now we're trying to figure out what that will mean over the average life of a security, which is 8 or 9 years. Frankly, we haven't gotten that together too well yet, but suffice it to say that's 6 figure number. And each year, we're adding 700 new mandates.
You can't be newly rated more than one time, just one time. We have new mandates. We have new products and we have pricing. Our job is to get 4% on that $2,700,000,000 revenue line each and every year. Will we do it this year?
Yes, I think we will. Can we do it next year? Yes, I think we can. And as Michelle said and Rob said, we don't see significant pushback. So that is how we are moving revenue line at a different slope than the issuance line.
So again, Before you write that we could have a hiccup and the revenue is going to suffer and everything is going to be terrible, so that you're not surprised the next quarter's earnings, you might want to think about this chart a little bit more. Hope that's enough said on that. Now we're going to go on to Where are we on issuance and what's the pipeline look like? So the left hand chart we talk about all the time. This is U.
S. Issuance and you have Investment grade issuance in green. You have high yield bond issuance in orange. The spec grade loans in blue. So if you blow out the map on the right hand side, you can see July was pretty good.
August was weak, but here's a news flash to everyone who worries about August. August is generally always weak. It is the 2nd weakest month of the year generally. So saying that August was weak, We know that. We got it.
Always happens. So come back to September. A lot of concern about what's going on with September. And what we found is that in September after what the Fed said last week, the markets are back being variously described by bankers yesterday as very strong and very robust. The 10 year for those of you who haven't looked is at 2.67 this morning.
And I'm going to talk to you a little bit about what the pipelines look like. So for U. S. High grade, last week, dollars 26,000,000,000 of issuance from 21 deals. This week expected $20,000,000,000 in issuance, but yesterday we saw $6,000,000,000 and today there are 9 deals in the market already $5,000,000,000 or more.
September, dollars 118,000,000,000 of U. S. High grade issuance to date, 3rd busiest month ever. And involved in that also was the Verizon deal, largest ever bond deal. So for those of you who want to make the call that the bond markets are dead, you probably might want to think about it and look at the evidence.
2013 year to date 757,000,000,000 of U. S. High grade bond issuance that's up from $690,000,000,000 last year by 9.7%. And several of the banks are increasing their 4th quarter views. Generally, it was thought we'd do $1,000,000,000,000 this year in U.
S. High grade, which is about flat to last year, again, flat issuance in U. S. High grade, Moody's revenue up high single digits. But it looks like people are moving up on that view.
1 bank moved up from $200,000,000,000 in expected issuance in the Q4 to $270,000,000,000 yesterday. And they're now calling for $1,100,000,000,000 sorry $1,100,000,000,000 in U. S. High grade for this year. So things move fast, trends move quickly and we understand that tapering is probably coming.
But if that's a December phenomenon, There may be a feeling that perhaps there's a bit of a reprieve and again pull forward may occur from 2014 back into 2013. It may not. The U. S. Government may shut down and things may be worse.
So this is the reason why we're very thoughtful about our views on where we're going and we'll have to see how things play out. But you can make a case for the downside and you can make a case for the upside. High yield, we've had very active time recently September $30,000,000,000 in high yield issuance. Q4 looking for $60,000,000,000 to $85,000,000,000 full year 2013 $350,000,000,000 of high grade issuance. Loans, the product du jour, people want Flexible rate paper in rising interest rate environment September $35,000,000,000 to $45,000,000,000 of issuance Q4 $85,000,000,000 to $120,000,000,000 that's a widespread and for the full year $425,000,000,000 to I'm sorry, 425 to 500.
And what we're looking at on our next slide is going to the topic of margin. Now you see that the margins bottomed out at Moody's. I'm looking at just the EBIT or operating margin at 38% in 2010 as we absorbed the regulatory costs as Michelle mentioned. With some work and Some work on our top line. Our margin is now 41% to 42% guidance for this year.
And looking at again expansion of 150 basis points to 2 50 basis points. Could we do more? Yes, we probably could. But again, we're driving growth and reinvestment is the right thing for the shareholders. And there are very few companies that have margins that are higher than ours.
You've seen that. And if you find other ones that we haven't charted, let us know because we might want to look at But we're very pleased with this 41% to 42% margin and again growth trumps margin expansion. Now on EPS side, we're doing very well. You can see that EPS is growing at 13% and we expect to continue that this year. And we're aided by a few other things that I'll talk about with capital allocation in a minute.
Now if things turn down, there are a number of things we can do. We do have cost pressures. We want to hire more people. We're driving a growth business and we have to hire people to drive a growth business. We have to manage risk and regulatory compliance.
We have to invest in IT. And fortunately, we hope that litigation costs maybe somewhat behind us, but we always have that risk. So there's some things that we're doing as a matter of course. We're shifting internal processes to Cobalt partners, some of them. We're looking to standardize processes as Michelle said and we are managing our vendors and we're putting a real focus on our procurement efforts, kind of things we haven't really done as energetically before as we could have.
Now if things take a turn for the worst, we can reduce incentive compensation. We can slow down hiring. We can reduce compensation increases and we can decrease or postpone investment spending. We had a very bad time from 2,007 to 2,008. Our revenue dropped by more than 20%.
We took expenses down by more than 12%. At that time, we took our bonus compensation down by 50% to 50% of the bonus pool. That's the kind of thing we can do in an extraordinary circumstance. We don't see that in the offing. We don't see any kind of a draconian downside as we did during that time.
So we can manage expenses, we think we do it pretty well. But again, our focus is on feeding the growth of the company. And again, we reiterate in the midterm, we expect the operating margin to expand into the mid-40s and we will have quarter to quarter volatility. So just something that you can expect. Now EPS growth, I talked a little bit about this.
That has been double digit. And if you look at EPS in 2,008, it was $1.87 this year, $3.49 to $3.59 and you can see that 62% of that growth $1.07 of that comes out of the operating business And $0.23 or 13 percent of it comes from just more effective tax planning. We've dropped our tax rate with of our international business from $0.37 to $0.32 for this year is our guidance. And we repurchased 30,000,000 shares during that period of time, which has added $0.42 or 25 percent of the growth in EPS during that time. And last but not least, cash flow remains an important part of story $850,000,000 of free cash flow we're guiding toward for this year.
That's cash flow from operations less CapEx. We're still a rather limited CapEx business only $50,000,000 this year in CapEx. And you can see CapEx as a percentage of revenue is rather lower. So, on to capital allocation. Our top 10 shareholders at Moody's own 45% of the company.
We spend a lot of time on Investor Relations at Moody's. We've made 3 50 calls. We've met with 200 different groups so far this year. We're out on the road all the time and we are very proactive in terms of returning calls, answering questions. If you need to reach us, we are happy to speak to you.
And it doesn't matter if you're long, short or what, we're happy to speak to you in any case. And shareholders of the company are listed. You see Berkshire Hathaway remains our number one shareholder with 24,900,000 shares, 11.3 percent ownership followed by Capital World, 16,900,000 shares, 7.7 percent ownership and the third over 5% is Vanguard, is an index fund at 6.3 percent ownership. Some other index funds in the offing here State Street is as well. Notably, we have the Children's Investment Fund in the U.
K. At 3.5 percent ownership and BlackRock is an index position as well. These are momentum index funds and they're not under active management. Number 8 is Bailly Gifford out of Scotland, 2.3% of our shares and Morgan Stanley out of the U. K.
2.1% of our shares. So we're very well represented by U. K. Ownership. Our global shareholders are closing in on about 15% of the company, which is something we're trying to maximize.
Now The whole reason why we're driving so hard against growth is because that's what you tell us you want us to do. When we talk to the shareholders, 77% of them are growth for GARP holders, GARP is growth at a reasonable price. Value investors down to 5%. So if you're a value investor, We are happy you're here, but the focus may be not right in your sweet spot and we're sorry the stock price has increased so dramatically. So it's growth in GARP and that's what we're trying to do right now.
Value was a big percentage of the holders in 2,008 36%. But again, with stock price up 39% this year 60% since this time last year, we're very happy with our price earnings ratio and we are a growth stock. So we survey twice a year and we call we have a 3rd party call And we ask people, holders, what do you want us to do with our capital? And so if you get a call and you want to have a voice, answer the call. That's important lesson here.
So 80% of you have said, very important that we repurchase shares. And you didn't have to choose one thing, which is good, because obviously this doesn't add up. Investing in product development, 47% of you said very important increase to dividend, very important bolt on acquisitions, very important or somewhat important about what is that 66%. Reducing the debt, not important. That's good, because we've gone in the other direction.
And making a major acquisition, 87% of you have said not as important. So we get this. There's not good investor support for making a major acquisition. Now I talked a little bit about what we've done on our capital allocation. I think I may have missed one here.
No? Okay. On our capital allocation, we made a decision earlier this year to move a little bit more aggressively on capital allocation. And that's because many of you told us loud and clear that's what you thought we should do. We decided to increase the dividend from $0.80 a share to $1 In July, we announced that we doubled our share repurchase plan from $500,000,000 to $1,000,000,000 And through this point in the year, we've repurchased 11,880,000 shares almost 12,000,000 shares at an average price of 61.14 price right about now is about $71 And if you multiply that that's about $725,000,000 We are continuing to repurchase shares.
We do have dollar cost averaging in effect. We buy more shares when they're cheaper and fewer shares as the price moves up. And we've increased our leverage by 3 tenths of a turn and this is by Standard and Poor's view and I'm going to explain this in a minute via a $500,000,000 bond deal, 4.75% coupon on that deal. Interest expense will move up because we've just done a bond deal. And let me talk a little bit about what we have decided to do here.
So on August 12, we issued our bond deal. We increased our U. S. Cash balance, so we have a little bit more flexibility. We're well within what S and P has said is a 2.5 times adjusted debt to EBITDA level that they'd like us to maintain maintain our BBB plus rating from S and P.
Now S and P does things a little bit differently than equity analysts. I'm going to try to explain this pencils out because Sally is going to get a million questions about this going forward. Okay. So we have to make a couple of adjustments. EBITDA, we have to add back for contractual obligations interest on contractual obligations and stock compensation, okay?
So you want to add back about $100,000,000 there. And then you have to also add to the debt part of the calculation. You add back discounted operating leases and post retirement obligations, okay? That's about $650,000,000 So with that, with our bond deal, our current adjusted debt to EBITDA is about 2 times. We're happy at 2 times.
We intend to stay in investment grade credit. BBB plus is fine. We would like to potentially be rated a bit higher, but we like this leverage level. So that's where we are and that's how S and P thinks about it. We do have a little bit of room.
Maybe we have $100,000,000 of room maybe a little bit more. But we don't intend to use it because we like having some capacity in dry powder. We also have $1,000,000,000 of untapped bank lines. Now our debt maturities, we've handled these I think pretty well. We have nicely laddered maturities.
Nothing comes due at one time. So they're well spread out And we don't have anything that we have to deal with next year. So we thought it might be helpful to you because we get this question all the time. What do we think we're doing regarding dividends? So if you look at dividends for growth companies, dividends generally are about 31% of earnings per share.
For MCO in the last 12 months, because we have a high class problem with the stock price increase and our earnings growing, we've been at about 22%. So we like this concept of a landing zone. And at current leverage, in other words, we're not looking to change the leverage. We're looking at Perhaps a payout ratio of 25% to 30%. So maybe we have a little bit more we could do there.
We'll think about that in December. And that's the Board's decision. Not Ray's decision or my decision, it's the Board's decision. Dividend yield, again, which is the dividend over the share price. Again, share price has moved up.
The most growth companies are about 1.7%. We're right now at about 1.4%, even though we've recently raised our dividend. That's because the stock price has moved so quickly and so far. So our landing zone here, what are we trying to do? We're thinking about 1.4% to 1.8%, get us closer to where growth companies are and we'll see what we want to do with this again in December.
So stay tuned. That's our thinking and we'll see where we go. Now share repurchases. I know this is going to be a little bit frustrating, but bear with me. Share repurchases come last.
They are the remainder in the equation. So the first thing we're going to do liquidity goes to reinvesting in the business, to pay our dividends and we're going to do attractive acquisitions. The issue is though we're through 7 quarters close to through 7 quarters. We haven't found any acquisitions recently. So our cash has tended to accumulate.
That is the reason why we've decided to increase our share repurchase this year. We're aware it is the capital that belongs to the shareholders. If we don't have a better use for it, we should return it to the shareholders in the form of share repurchase, which is what the majority of the shareholders prefer. So what we're doing this year is $1,000,000,000 of intended share repurchase. As I said, we've done $725,000,000 so far.
And looking at this in the future, this is a trickier thing to guess. But we've been as high as in a 10 year average $500,000,000 on a 5 year average $269,000,000 So we've bounced around and we acknowledge that and $1,000,000,000 this year. So we're thinking look at a sweet spot, a landing zone of $400,000,000 to $750,000,000 Now we may break on either side of that And it's going to depend on where the stock price is. It's going to depend on what our opportunities are and other uses of capital. But that's sort of how we're thinking about it.
And it's just sort of a rule of thumb, a landing zone idea as to where we want to go. We want to repurchase enough stock to cover issuance for compensation and we do want to reduce our share count. Now our guidance, which you've seen, Ray took you through this. I'm not going to repeat it because it has not changed. And I think what's the best thing to do before I turn it over to Dave and Lisa is to say that we're very proud of a very strong performance in the first half of the year.
You will note, we've had the same management team in place since 2,008. I would like to commend my colleagues, particularly Mark and have done an amazing job running these businesses and John and Ray have done a great job with the regulatory and legal situation for this company. But right now, we are happy to say we are able to focus driving these businesses. And I think we've done a relatively good job and we intend to keep that up. We've diversified business model, we have more strengths, we have more pricing power, we have just better upside, I believe, than many of you may appreciate.
And again, urge you to look at that issuance versus revenue chart. We can endeavor to do cost saving strategies if we need to. Again, we're not looking to move this business dramatically from quarter to quarter, but we do have things we can do if the situation gets more difficult. We've driven EPS pretty effectively through a variety of tools and we have again returned our capital to shareholders in a way that we think speaks pretty strongly to our ability to listen to what all of you want us to do. And to follow-up on that for further details and all the hard questions on the acquisition strategy, I'm going to turn it over to the gentleman to my right, David Platt.
Thanks very much. And we'll take some questions when lease is concluded.
Thank you, Linda. I'm very glad to be here today and I want to offer a few thoughts on our M and A program and approach and what we're doing in Corporate Development. So, M and A as I think many of you are aware has meaningfully expanded the total addressable market in which we now participate and will selectively be used to do so in the future. We like our focus on being a standards provider in financial services. We like being embedded deeply embedded in our customers' decision making, workflow processes and the data and analytics and content to make those decisions.
As you've heard, We have an attractive and enviable growth profile and M and A will continue to be a strategic tool to grow the top line, leverage our brand, our distribution capabilities and our content. We'll continue to pursue opportunities to build scale across both MIS and MA where we can find them. And again, as an example in Enterprise Risk Solutions, we've created a valuable and globally recognized leader and standards provider workflow data analytics serving banks insurance across the credit risk management spectrum And again in the regulatory radar that Mark showed you, a long path of Basel CCAR solvency and other requirements that the regulators are trying to figure out and have as we manage a complicated world. We're going to continue to consider opportunities in the emerging markets, which we believe have attractive long term growth attributes, A wide range of pace of disintermediation and demand for the data analytics and content that we offer. It's going to require time and patience as every country and opportunity that we see is unique by definition.
Copel, again as an example, a leading knowledge process outsourcer serving the financial services industry. It's been beneficial for both our core clients as well as ourselves. We So I've heard it a few times recognize that there's been no transactions in the last 7 quarters. And frankly, this is fine. We have very extensive screens and ways that we look about strategic and financial metrics for what we think makes sense and we're picky.
If you sort of step back and you think about M and A and really the company and what we're about. The program is about common sense. It's about knowing what you're good at and sort of understanding where you're going and sort of sticking to a mission and vision. And ours sort of has and remains being the world's most respected authority serving risk sensitive markets. So, and in turn that tracks and syncs up with our stated approach as well to defend and enhance the core ratings business and sensibly invest for growth in M and A.
In terms of this sort of the overall approach to the corporate development in M and A, We work collaboratively obviously with all of our lines of businesses. Our activities encompass a broad scope and range of activities, which you would expect and includes business and strategic plan development, extensive market attractiveness, competitive review, buy versus build analysis and of course proactive outreach and transaction execution. Philosophically, as a group, as a team, we try to be impartial and simply offer well considered advice, make the best possible decisions based on the facts at hand and always in the long term strategic commercial and financial interest of the business and to be good steward of shareholder value. As a matter of fact, again with respect to the use of money for M and A as a capital allocation matter, Again, approximately 20% of cumulative free cash flow as a historic matter. As a prospective matter, again, we don't have a target dollar amount for M and A, But the bottom line is we'll undertake it if it makes and it passes those screens as an attractive risk and return option relative to other uses of capital.
In terms of the historic acquisition activity, spent circa $600,000,000 $700,000,000 over the last 5 years, Bolt on principally middle market, again no targets per se. We'll transact where it makes sense. Might offer that we continue to evaluate transactions across the size range, probably undertake to increase slightly given our the increasing size of the company. The M and A program has added meaningful revenues and believe we have acquired well given the information space is not cheap And that's particularly so for scale assets with good margin and growth profiles. We look at a lot.
The team historically has looked at over 500 plus opportunities. We're actively engaging with the market. But again, we're careful and we pick our spots. That said, when we see something we really want to do, we run it at heart. In terms of the acquisition criteria, I think Many of you have seen this before, meaningful IRR.
We look at things on an unlevered basis. We have an expectation and a goal to try and achieve 10% cash on cash returns within 3 to 5 years, cash payback within 7 to 9 years And obviously, we seek to do accretive transactions. Strategic, again, common sense industrial logic, Financial Services customer basis, standards, leverage the brand, leverage the distribution, leverage our core capabilities in data and analytics, Ideally recurring revenue and low CapEx. Again, there's a variety of good information services related businesses that one could look at and that we have looked at from time to time. But again, do they make strategic and financial sense for us?
Again, a lot of analysis careful with shareholder capital. In terms of Recent transactions performance, I'd sort of say more or less generally on track. M and A about the long term. Mark had made some comments with respect to CSI, not as we somewhat behind, not exactly what we had hoped. We're still seeing flex in the Canadian Securities Industry with respect to employment.
But you control the things that you can and with active cost management applying the experience and experience of their team and content in emerging markets such as China and Middle East, we believe that the business is positioned well for the long term as a standards provider and Financial Services Certification and Education. Copel, again, leading outsourcer to Financial Services space, our core clients. We're a consumer and we believe that that company is going to continue to be a beneficiary of the cost containment initiatives in the financial services space and having spoken with a few of you during the break, we I think we all appreciate the cost pressures that we're all under. B and H, Marion Hebert, fully integrated into ERS and has been the thesis has increase our presence in the insurance space. It's a thought leader in economic scenario generation and it is doing well as we continue to sort of broaden the embedded suite of products for beyond the banks and into insurance.
Post acquisition monitoring, The our approach is to try and preserve as many unique and entrepreneurial attributes of our acquisitions as possible. Again, common sense. We spent a lot of time post acquisition making sure we monitor transactions, know how things are progressing and the most part working, Just and if not more importantly how we're working if things are not working, we want to know early, we want to understand what the issues are, make good decisions and timely decisions about what needs and can be done. We have a very regular and formal dialogue with senior management and board, quarterly financial dashboards, annual deep dives, impairment analysis and our culture in our DNA is to be thoughtful and provide usable information for decision making. We're always trying to learn from the deals we consider and not and don't pursue, what we pursued and what's working and then where we're not making sure that we have a game plan so we continuously improve what we're doing both pre and post acquisition.
And with that, we'll turn it over to Lisa Wessel. Thank you.
Thank you, Dave. And it is afternoon. So I guess I'm the first one to be able to bid you. Good afternoon. My task today is to round out the prepared presentations by giving you an overview of our executive compensation.
Before I start, I just would like to say, every year I look forward to Investor Day. It gives me this opportunity to reconnect with many of you when I had Sally's job 7 years ago. And there's still a lot of familiar faces in the audience and certainly familiar voices on the phone. So we certainly appreciate your longevity with the company. So with that, let me Move on to executive compensation.
We're really trying to do 3 things in terms of our executive compensation. The first is, we're looking to link the achievement of Moody's financial and operating objectives with what we pay to management. And by doing that, we believe we can do the second thing, which is to align management's interests with shareholders' interests. We think that is very important. And then finally, we're trying to provide a competitive compensation package to our executives.
Number 1, so they work hard for you and deliver the operating results that you've heard about today with respect to the strategies that Michelle and Mark and their colleagues spoke about and then and certainly the results that Linda was reviewing with you. In terms of structure, our compensation has 3 major components. It's a common structure. You might be familiar with it. You might be paid that way yourself.
We've got base salary, annual cash incentives for our executives. Those are bonuses. And then we have stock based compensation. We disclosed last year the two right hand boxes bonuses and equity are roughly 25% or sorry, 75% of the total compensation package for our named executive officers. And in the case of our CEO, it's 85%.
So between 75% 85% of everyone's compensation is at risk. We feel that that also helps drive the alignment with shareholders. So, let me tell you a little bit more about our bonus plan. This chart talks about how does the bonus plan fund. And you can see here depending on the person's role in the organization, there are different components to the funding of the plan.
Every one of the named officers share 2 components in common, operating income performance and Moody's EPS performance. And then you can see the 2 operating unit presidents have an additional component and it's a fairly significant one, which is the operating performance of the divisions that they're managing. We also do an annual blind survey of institutional investors that's done by a third party. And depending on the results of what they tell us, We can modify the funding upwards or downwards regarding their feedback in terms of have we achieved what we want in terms of customer value goals. So that's in there as well.
And then the allocation of these funds is based on each individual's performance. Did they meet their specific objectives? Did they exceed them or not? So that's how the annual bonus works. Now let's talk about equity.
A few points I'd like to make here. I can tell you in compensation overall and certainly equity based compensation, our Board is very, very engaged in this process. We do routine benchmarking. They have an independent Outside compensation consultants, management has a different one. So we get lots of expert advice to help us inform our decisions.
We grant long term incentives to approximately 25% of the employees at the company. The top 1%, so that includes the named executive officers plus many of their direct reports receive their equity in a combination of stock options and performance shares. And I'll take you through a little bit more detail shortly. And then everyone else receives restricted stock. In terms of the restricted stock, it's it invests ratably over 4 years.
The chart here shows you what our equity utilization has been both our current utilization rate and what has it been over the annualized last 3 years? And you can see it's roughly 2%. From a benchmark perspective that falls between the 25th percentile and the median of our proxy peer group. How do the performance shares work? I'll take you through that in a moment, just a little more detail.
Stock options, they vest ratably over 4 years and then expire after 10. And then our performance shares are based on we set 3 year targets And then we look to see do we have we achieved those medium term targets and that will fund the plan. Despite what some outside services might think, we fully believe that stock options are performance based. We don't drive the stock price up, we don't get any value. And certainly our performance shares are performance based as well.
In terms of the performance shares, you can see the components below. So those fund, if you will, or payout, if you will, based on performance of 3 things. And depending on your role in the company, you have a different combination. You can see the middle on the right hand or actually all bars, everyone has a profitability metric that is taken into account in terms of the performance shares. Then the Head of the rating agency has a ratings quality component.
And that is effectively a measure of our ratings as predictive as we expect them to be. And then The Head of the Moody's Analytics has an MA sales component. And you heard how revenues and sales track one another, but sales come first and are often the year behind. And so what we're trying to do there is to get a nice tension between driving sales and driving profitability. And then over on the left hand side, you can see the rest of the named executives actually have a component of all three of those elements.
In terms of again further aligning interest with shareholders, We do have share ownership requirements. You can see them here. Our CEO is required to hold 6 times his salary and the remaining executive officers are expected to hold 3 times. Our Board of Directors are also expected to hold 5 times their annual cash retainers. We routinely review this as well.
Pleased to say that each of our named executives own significantly more shares than they're required to. So my last slide, let me leave you with 4 main points. The first one is that our comp programs are directly aligned shareholders' interests. The second is that we do have robust and independent governance with respect to our executive compensation. We do routinely benchmark what we do in line with our proxy peers and also looking at the broader financial services industry.
And what we're most pleased about is the fact that shareholders like what we're doing. We received a 95% approval rating on last year's proxy with respect to compensation. So with that, I think I'm going to hand back over to Sally for Q and A.
All right. Last opportunity for questions here at least in this forum. All right. We'll go right ahead with that. If you'll just wait for a microphone please.
Linda, I'm just curious. You mentioned the Verizon deal and you could argue chicken and egg as to what it says about the quality of the market. But If you take the Verizon deal out of September, how does September look? And then One thing about the Verizon deal is that the number of issuers in September so far seems to be down quite a bit from a year ago. How does that play out on the revenue side?
Thanks.
Doug, if you take the $50,000,000 out of the $118,000,000,000 and then you add back what looks like is going to be $20,000,000,000 to $25,000,000,000 this week, I think you will be somewhere from that $80,000,000,000 to $100,000,000,000 number, which is fine. The Verizon deal unto itself is a nice thing. It's not material to us in terms of revenue for Q3. It's great to see that deals of that size can be brought to the public markets and executed without a hiccup. So I think we see that September looks pretty good.
It's a sort of typical September, which is a very strong month typically. And the question for the rest of the year is going to be how the Q4 shakes out whether it breaks to the upside or the downside as I described. Craig, please.
Thank you. I guess a 2 part question. The 4% price hike across your entire business you talked about earlier in the day here, isn't it true that when you're raising prices actually higher than that because it's a good portion of your business where you're not raising prices year in year out your surveillance fees I'm
talking about? That's my first question.
And my second question about the pricing leverage you guys might have on the ratings business charging at 5, 5.5 basis points for your investment grade typical ratings and stuff. What does your research show in terms of how much savings a typical investment grade company gets in terms of basis points to the interest rates they can get out there in the marketplace by being rated versus not being rated?
Sure. I think to your first question Craig, the 4% is on average across the company. We're working on pricing as Mark described in Moody's Analytics as well as the rating agency. And some areas we may take a bit more than 4%. In some areas we take less.
And we're very that how we do that. We're always sure that we add value for those price increases and that we're thoughtful in how we execute them. So, so far so good on that. And we expect that we're going to be able to continue at that kind of a trend. And then the second part of your question, I'm sorry you we lost some mic.
You wanted to know about go ahead.
What's your research Linda shows your ratings research shows how much savings a typical CFO will save at interest costs in terms of basis points year in and year out by being rated versus not being rated. I really want to continue to compare this.
There's a reason why I focus on your first question because on the second question, I'm not aware of any such research immediately. We have seen anecdotally that companies and countries and sovereigns that come to market without ratings have a much more difficult time pricing their issues. I will check with my colleagues and we'll certainly make a note to perhaps in the next Q3 call to talk a little bit more about that if we have any such information. I'm just looking to see if anybody else knows anything more about this. Not seeing any hands raised immediately.
I could ask this Ballpark, do you think average
company is
the safe if you had a ballpark, do you think an average company fit out rated versus not being rated might save say 25 basis points A little bit higher? What's your general sense?
I'm really not sure and I think it would differ tremendously for a speculative grade company versus an investment grade company. The difference might be less for an investment grade company than for a speculative grade company. And I think for spec grade companies that are trying to hit issuance windows in the marketplace, getting a rating is a particularly good deal, because it allows them their credit quality to be very clear to the marketplace and allows them to hit those windows quite rapidly. So I'd say probably the greater differentiator there would be for the speculative grade credit. But again, I'm not sure that we have anything handy that I'm aware of right now to more specifically answer that.
It's a good topic though.
We'll come over here to Peter.
So Linda, a couple of things. First, I detect a bit of a dichotomy between what you said and what Ray said starting out. You seemed really vibrant in terms of your commentary on state of business, momentum in business, etcetera versus Ray much more reserved. And then I understand part of
this is just personalities, but
Ray doesn't have the pink dress, Peter. That's the issue.
So I just want to understand that difference please. And then some other specific questions just going to throw them all at you. Number 1, the midterm target of 40% margin. I want to understand is midterm like 2 years? Is that how you think about it?
Number 2, tax rate. Is there more to be done or have we seen the benefit from that already? And then lastly, I know you haven't quantified the legal and
regulatory cost, but I'm thinking today would be a great day to do that, because
it will be cost. But I'm thinking today would be a great day to do that, because it would be very helpful for investors to understand just what the burden is and understand what leverage might be in the model from that? Thank you.
Okay. I'll take a shot at some of those and I wrote them all down because Peter is the king of the 4 or 5 part question. I think it's pretty normal that different officers of the company may have a bit of a different perspective. I'm encouraged by the fact that the markets have really rebounded since last week and I think that may be a temporary phenomenon and we may be in for a period of extreme choppiness particularly with the budget discussions. But it does show that there are bonds to be issued if the market conditions are right and companies are still very interested in doing that.
A number of things happening. There's been a big Sprint deal. Right now, there's also a big GM deal in the market that just came today. And there are 2 mergers and acquisitions that were announced today. 1 is potentially BlackBerry.
The second is in the technology space. It's about an $8,000,000,000 deal. So it's starting to feel like things are becoming unstuck and perhaps My enthusiasm is due to my experience being an M and A banker, we're more optimistic by nature, David and Rob too. In terms of what's mid term for the margin, Peter, we think of that as 3 to 5 years. So again low to mid-40s over 3 to 5 years.
Our tax rate we brought down by quite a bit for your third question. We're comfortable at this 32% level. Moody's is always going to take a very plain vanilla, very conservative tax approach. And We're not really interested in setting the standard or being on the edge of tax strategy. So we're happy with where we are.
And despite your encouragement, Peter, I think we're going to have to leave the legal and regulatory costs undisclosed, but we are hopeful that we may I have seen the worst of that, but we'll have to keep in close touch with John and see what he has to say about that going forward. So sorry about that.
Okay. We'll go over here to Manas please.
Yes. Just a quick question. So you clearly have a lot of cash on the balance sheet. You talked about looking at M and A all the time. On the Ratings side, you talked about growing in the emerging market areas.
You already have Some JVs in India, China. So what's the process? Like what's holding you back from increasing those stakes, increasing that footprint? Because it seemed like at least China and India were two countries that you wanted to grow in. So just curious on your thoughts around that.
Well, We do have a lot of cash and we do have aspirations to increase our footprints there, generally speaking. That being said, there's a general sort of pace at which there's sort of the acceptance for increasing our some of our share positions depending on the sort of local tax circumstances. It's also I think sort of relative to the M and A that I've done for many years sort of in the emerging markets. It's frankly very complicated abroad. There's depending on which jurisdiction you're talking about, there is a dichotomy where dichotomy is probably too strong.
There's just a wide range of considerations around tax regulatory legal compliance And it just means that there is a long path that the diligence review and making sure that we sort of checked all the boxes about transacting and transacting well will work.
Okay. Come over here to John, please.
How should we think about wage inflation in your business? And secondly, What drives a need to increase headcount in Moody's Investor Services? In other words, to what extent can your existing base of analysts cope with higher levels of issuance.
Okay. It's on?
Okay. With respect to wage inflation, we routinely benchmark what are the local market expectations around the world where we operate. And we do a weighted average and look at that. So we aim to meet market expectations in general. And then we might dial that up or down depending on what we're expecting our business to do and the needs of the business.
But we do start out with some data, some pure data. With respect to hiring needs in MIS, There's well, a few things are going on and I can also defer to Michelle. In terms of
We're doing a lot
of things to try to make our analysts as productive as possible, including building out, if you will, kind of shared operations that will help free up their time and do their analytical work. But at some level, there's only so many credits that any one analyst or analyst team can cover. So as the mandates increase, we need to increase staff in terms
of doing
that. So two reasons then business growth on one side and also business efficiency on another. That's what's driving investment.
Michel, do you want to speak?
No, yes. I just
fully confirm what you just said. I think for MIS the key variable is not the volume of issuance. It's actually number of credits recover. So I would expand our coverage. We need to add people and but somebody who follows the company can We typically absorb the flow of issuance that's arrived at that.
Do you have any further questions for the panel? All right then. Thank you to Linda, Lisa and to David for the presentations and appreciate all the questions. That concludes our Q and A. And I think before we move on to Ray's closing remarks, we wanted to take a few minutes to share with you a brief video about the Moody's Foundation.
Moody's believes that it is not only important, but also our responsibility to give back to the communities in which we work and live. In 2012, we celebrated the 10th anniversary of the Moody's Foundation. And this video commemorates that anniversary and really highlights some of the great work that we've
12 years ago. At that time, we really began thinking about our mission, our values, how we wanted shareholders, employees, customers, our communities to think about us. And that really was the idea or our foundation.
When I look back at all that the Moody's Foundation has accomplished over the last 10 years. It's really impressive how much more we've contributed, how much broader our activities have
It's certainly great to have a relationship with a platinum brand. So the story of Moody's is a great
I think what makes me the most proud is not any one event, but the fact that the foundation is much more in the communities, not just in the New York area where it started, but throughout the world. We've created a mechanism for everyone to get involved. And I'm really proud of the fact that so many people have expressed such passion and interest. The activities of the foundation have changed the
We have forged some really terrific partnerships and that really is what a lot of this is about.
They've been very smart in aligning their own, as I say, their own corporate values, their own corporate skills with their grant making. And I think that has allowed them to kind of turbo the impact that they've been able to have.
In 2010, Moody's and some partnering institutions committed and have now followed through on a commitment to develop a methodology to rate microfinance Institutions on the basis of their social performance.
There's one thing that I'm the most proud of and that's the microfinance initiative. That's a real intersection between philanthropy and in my mind and it's been a great success. It started with a very innovative grant and commitment to the Kiva Foundation. We then followed with a business initiative where we developed a product and service offering around social performance assessments for microfinance institutions to support that commitment
and we've now developed that into a There's nothing more foundational than providing good quality education to the young people of the world. Everything else that's good that happens in a civil society comes out of education.
And so given initial proportion of people in a population who recycle, we go our Lattice and we make the same number of sales cycle.
Financial literacy is absolutely essential in today's world. You cannot understand the world if you don't understand the way finance and the economy interact with your daily life. And this is what Euro Challenge is about.
Our relationship with Moody's is a true strategic partnership. It is complete in so many ways. Not only do they support us
is truly a demonstration of our belief in corporate social responsibility, giving students opportunities that they might not have otherwise.
Moody's is made up of individuals who want to use their skills to help others in the communities in which we live and Regardless of your level in
the organization, there's a tremendous need out in the nonprofit world for skills that we really incorporate into our day to day operations.
What is actually quite interesting is to see how easy it is to leverage things that you use in a completely different environment or context
to the benefit of these organizations. The corporate volunteerism creates a real esprit de corps.
I think people have fun. There are
a lot of newer employees it gives them an opportunity to really learn about our culture, our values and really build a sense of team and community.
What makes me so proud is that over the past 10 years, we have developed a body of work as a corporate citizen that has been recognized by important Civic leaders from Mayor Mike Bloomberg of New York City to the Ambassador of the European Union to the Chancellor of New York City schools to President Clinton himself.
We've come a very, very long way and it's really very impressive and there aren't that many things Do you get to see in business where you see that kind of progress made in that shorter period of time?
It's the 10th anniversary Moody's Foundation. And over that time, I think that corporate social responsibility has become much more important to us and to the corporation as a whole. We're lucky enough to have grown rapidly and be very profitable and to have really an honored place in American Finance and it's very important that we give something back. Great. That was nice.
All right. Well, finally, I'll turn it over to Ray
Okay. I have about 3 minutes for closing remarks to get us out of here on time. So I'll try to hit that. Let me just quickly answer a couple of the questions that came up at the end. First of all, Peter, if you need me to be able to do a Linda style presentation I'll just faint.
And so we can't count on me being able to do that. So style points aside and Linda's superior style points, you just have to take our personalities as they come. I did want to answer the question on the rated, unrated market that was asked and say that my view would be if A random sampling of investment grade quality companies were to come to the market instead on an unrated basis. That 25 basis point number that was speculated I think would be very conservative in terms of the additional spread that would be paid. The reality though is companies that tend to come to the market without a rating are companies who fall into one of a couple of categories.
One of them being their brand is better than their credit fundamentals. And so they would rather sell debt based on their name recognition, their brand, their historical presence in a market than on the credit fundamentals. So there you wouldn't see the kind of difference because they in fact might be an inferior credit to what they the market perception of that credit. So it is a bit of a difficult question to answer. It's a good question to ask.
It's something that we are doing some research on as a matter of fact and hope to have a more comprehensive answer to that in the future. And then just finally,
Sorry.
I'm being told to okay. Closing.
I was in the video.
That's still relevant. So just in closing, we showed the 4 box growth chart. We've talked about that last year. We talked about it this year. Those are the very tangible what we feel are quantifiable and specific areas of long term growth drivers.
I mentioned very briefly in my introductory remarks the sort of 5th box that's not on there and it relates to the evolution and innovation of markets themselves. And the reason the box isn't on there is because it's not as quantifiable. Saying that we are going to get business in the future and expand what we do with products and services based on things that don't exist today is speculative. But history indicates that it is in fact itself a powerful perhaps the most powerful driver of our business, Whether it's in structured finance, whether it's in reforms around the money market fund industry in the U. S.
Or Europe, regulatory demands on financial institutions and insurance companies, the lateral transfer of information technology into the emerging markets, which causes that innovation to spread and be something that we can leverage off of on a much wider basis. Innovation itself is a huge driver of our business historically and I will be amazed if it's not a very material driver of our business in the future. Innovation almost by definition exploits gaps in the existing market structure, whether it's regulatory rules or market behaviors. But innovation the fact that it is working around existing market structures and existing rules also increases the demand in that innovative space for standards, parameters, a common vocabulary to understand the performance and risk assessment of the area of innovation. That common vocabulary, which we can provide, is what deepens market participation, improves the marketability of securities, transparency, all of that I think is a very powerful box that is not on that chart that we should look forward to in the years to come.
And hopefully, we'll be talking about the developments by this time next year. I want to thank all of the presenters. I want to thank Sally and the Investor Relations team for doing Great job. The amount of preparation that goes into this is just extraordinary. And very, very importantly, I want to thank you for giving us your time.
We know it's valuable. We hope we made it worthwhile. Thanks a lot.