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 headquarters, as well as to those of you that are here with us on the webcast. My name is Salli 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 three 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-K 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 Zandi, Chief Economist of Moody's Analytics, will provide a macroeconomic overview. Michel Madelain, President and Chief Operating Officer of Moody's Investors Service, and Rob Fauber, Managing Director and Head of our Commercial Group, will speak on behalf of Moody's Investors 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 Tulenko, Executive Director, Enterprise Risk Solutions, will speak on behalf of Moody's Analytics. Linda Huber, Executive Vice President and Chief Financial Officer of Moody's Corporation, David Platt, Managing Director and Head of Corporate Development, and Lisa Westlake, Senior Vice President and Chief Human Resources Officer, will speak to various elements of our financial strategy. Ray McDaniel will end today's event with his closing remarks. 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 rooms 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. We ask that you hold all questions until the Q&A sessions at the end of each presentation. If you need assistance with anything, please look for the volunteers who have red badges on their name tags. There's also an information desk just outside this room. Finally, we've included in your presentation binder a survey. 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.
Some of you may remember that last year we presented a screen of Moody's against the S&P 500, this year we've done something similar, we've actually upped the ante by looking at three years of historical performance. If you look at Moody's, our three-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&P 500. You can read this, right? Okay. That's okay. It's not necessary. We've 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 to 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&P 500. Screening that group against our 16% revenue CAGR, you're down to 38 companies. Then further screening that group for our 39% operating margin, you get four companies other than Moody's, which is here in yellow: American Tower Corporation, CF Industries Holdings, Mastercard, and Intuitive Surgical. Clearly, these companies span a variety of industries. They're different sizes. They have different return profiles. Nonetheless, we're down to less than 1% of the S&P 500 companies that, at least on these metrics, have 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, followed by Mark Zandi, and after that, we'll have our first Q&A session.
Thank you.
Thank you, Salli, thank all of you for joining us either in person or remotely this morning. I hope we are able to provide a valuable session for you this morning. I'm going to make a few brief remarks before turning over to Mark Zandi. As Salli said, both Mark and I will be available for a brief Q&A session after his prepared remarks. I'm going to begin by covering our guidance, then moving to ongoing growth opportunities and some concluding thoughts. We are affirming our second quarter guidance today. This is earnings per share in the $3.49-$3.59 range, excluding our first quarter litigation settlement.
Revenue, we still expect to be in the high single-digit % growth range and operating expenses in the mid-single-digit % growth range, including the first quarter litigation settlement, and an operating margin of 41%-42%, again, including the first quarter litigation settlement. You can see on this slide the other components of our guidance. Because we are affirming these, I will not repeat all of these individual items. Last year, you'll recall that we put up this four-box growth chart. We still believe that strong secular trends will provide long-term growth opportunities. We recognize that Moody's Investors Service remains subject to cyclical issuance activity. The four boxes briefly. First, we expect that on average, debt will grow in line with global GDP.
Second, disintermediation, which has been a powerful driver of the business, 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. 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. There's growth of Moody's Analytics, which is independent of cyclical issuance conditions. 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 % range on average. Let me turn to these components in a little bit more detail. Global GDP is expected to increase, albeit with regional differences.
You can see in this right-hand panel that the growth forecast is about 1% higher in the 2013-2015 period than in the 2008-2012 period, with the advanced economies being about 1.5% higher than they were in the immediate post-financial crisis era. Just looking at this metric, you would expect that better growth in GDP should support more debt volumes. Obviously, there has been a lot of refinancing and a pull forward of maturing debt. That raises the question of whether there is a cyclical downturn in issuance coming. I think the answer to that is it depends. Refinancing has dominated issuance in the last few years. The other historical drivers of bond issuance, mergers and acquisitions activity, share repurchase, capital expenditure, have really been muted.
We are 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. I think this slide may help illustrate what we're talking about here. These are a count of mentions of the reasons why bonds and rated bank loans have been issued. On the left-hand bar, you see the 2009-2013 period. In the right-hand bar, you see the 1998-1999 period, which was also a rising rate environment. When we were able to grow our revenue through a rising rate environment. The green portion of the bars is the number of mentions of debt refinancing. You can see that 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%. 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 versus a rising rate environment. Turning to the disintermediation component. Disintermediation has a couple of drivers. First of all, stress in the banking system, and this is certainly a driver in Europe. As banks are de-leveraging, 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-term cyclical trend, but interest rates are still low, and spreads remain attractive. 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.
We've seen positive inflows more recently. 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. There are short-term and long-term consequences of disintermediation, and this is really more the short-term picture. You can see the newly rated corporate issuers in recent history. And so these are our first-time issuers, first-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 they 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. We maintain those relationships as the companies either refinance or seek additional debt financing for the drivers that I mentioned just a moment ago. 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. The strength of new issuer mandates is a welcome surprise. I think it's worth noting that Europe, which is represented in the green bar, had a step up in 2010 and is having another step up in 2013. We see very good demand for new ratings in both the United States and in Europe.
You can see the emerging markets and the rest of the world at the top of those charts. 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. The longer-term aspect of disintermediation is represented here, and this is really just looking at the % contribution to global GDP by country or region as compared to the % contribution to Moody's revenues. 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 54% of Moody's revenues. Europe is more in line, 33% of global GDP and 29% of our revenues.
You see Asia is very underrepresented in terms of Moody's revenue profile compared to its contribution to global GDP. 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 third box of the 4 boxes. The research part of that business has been resilient through the financial crisis, it is positioned for higher growth, particularly as we penetrate international markets more completely. There's more demand for research and data. Also to the extent that innovation takes a more prominent position, financial innovation in markets.
That has been fairly muted in recent years, 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. Professional services, which provides a more complete package for risk management. Finally, just pricing. Pricing opportunities aligned with value, new product development, which really could be the fifth box in that 4-box chart, we will be talking about that in both the MIS and MA sections. 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. Thank you very much.
I'm going to turn this over to Mark Zandi now, we'll answer any questions you may have. 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? See, this is really why I have a job, because they don't remember what I say. Yeah. Let me remind you, I was optimistic last year. Thought 2013 would be a bit iffy, but that the economy would gain traction as we move to the mid part of the decade. 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 this year. 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%. That's the rate of growth necessary to generate enough jobs to maintain a stable rate of unemployment. We've been below potential for the last two and a half years. We'll be at potential next year in 2014 and above potential in 2015. There will be a significant amount of variability, no surprise, across the globe. You can get a sense of that here in the first chart, which shows real GDP indexed to equal 100 in the first quarter of 2007, 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 by the emerging markets, the EM.
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 account for about 50% of global GDP. The rest of the world, dominated by the EM, will continue to grow relatively strongly, I expect close to its potential of about 5%. The Eurozone, it's a slog. You can see I don't expect great things out of Europe. 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 three 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 in the United States. We're growing about 2% here.
That's what we've been growing since the recovery began four years ago. We'll get about the same this year. Next year, I expect 3% growth and then 4% growth in 2015. Well above potential growth. Unemployment will start to decline relatively quickly. There's a number of reasons for optimism with regard to the United States. Let me mention two. The first is the fiscal drag that'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, 2013, that'll be close to one and a half percentage points of GDP growth.
In fact, the drag is at its apex in the current quarter in Q3, it is almost two percentage points of growth, and that is one of the key reasons why the economy broadly hasn't fully engaged. The good news is, under current law, if policymakers do nothing, I fully anticipate that they will do nothing, that the drag will fade. Next year, the drag will be about seven, eight tenths of a percent of GDP. In 2015, a couple, three tenths of a percent of GDP. In 2016, it is gone completely, zero. We are going to go from a really big negative, one and a half percentage points of GDP, which is the most we have ever tried to digest since just after World War II and the war drawdown. That goes away over the period of the next three, four years.
That big negative just becomes less negative and less the better private economy begin to shine through. The second reason for optimism regarding the U.S. is housing, I am quite optimistic about housing's prospects. A little bit of a pause recently because of the run-up in mortgage rates, the demographics here are incredibly compelling, and you get a sense of that here in this chart. This shows the number of 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 1990 through Q1 2013. You can see I put in the chart a line I am calling trend vacancy. That is the amount of vacancy that would exist in a housing market that is 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 have been struggling with. Take a look at the recent period. We are actually now going from being a very oversupplied market to now an undersupplied market. That is 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 is, again, thousands of units annualized. You can see how that breaks down, multi, single, multi and manufactured housing. Current housing demand, which is household formations. When a household is formed, it has to live somewhere. Obsolescence, that is Hurricane Sandy blowing through, and just normal obsolescence and second vacation homes, 1.7 million units.
You do a little bit of arithmetic, a year or two from now, the market is going to be undersupplied, and we are going to need a lot more homes. I expect housing construction to ramp up quite significantly over the next three, four 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 four jobs over a period of a year. That is construction, manufacturing, transportation, distribution, financial services, Home Depot, Lowe's, retailing, cable hookup, landscaping, a whole boatload of jobs. That is a big part of the story for the U.S. economy to get back to full employment in three or four years down the road. Now, the greatest challenge to my optimism regarding the United States is monetary policy and interest rates. Obviously, housing is very rate sensitive.
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. This chart might give you a sense of how that might work. This shows the Federal Reserve's 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 QE 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-2017. 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 270, 275. I expect that to happen in an orderly way over the next two years, the Fed will be able to 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's my baseline, that's how I get to my optimistic world view. If we don't get that, we got a problem, and this is a challenge. Now, that forecast I just gave you, I would've given that with much more conviction two weeks ago. Unfortunately, last week, given what happened, I'm less convicted with regard to this sanguine interest rate outlook.
I think the Fed's going to be able to manage this, I do think they made a mistake and certainly complicated matters for themselves as they try to manage long-term interest rates going forward. 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, I think we'll get growth. There's a couple reasons for optimism in Europe. First and foremost, policy makers are fully committed to keeping the Eurozone together. That's evident in the actions of the European Central Bank. They're now providing forward guidance with regard to interest rates. We have the OMT, the LTRO. I wouldn't be surprised, the LTRO, 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 surprised if by the end of the year or early next, the 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, clearly the will to do it. I also think key leadership in Europe is fully on board. Most importantly, obviously, is Germany. The re-election of Angela Merkel as Chancellor of Germany is a very positive development in this regard. Her legacy, it depends on the Eurozone hanging together, I don't think there's any prospect that she's going to allow this to go in a bad direction.
At least through the horizon that we have here, mid-part of the decade, I think the odds of the Eurozone going down the wrong path are very low. 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 it's going to be closer to 0.9% of GDP. That mere fact alone is key to why the European recession has ended this year. Next year, it'll be about 0.5 percentage point, and the following year about 0.2 percentage point.
The fiscal drag created by the austerity in Europe is also beginning to abate, and that's a near-term positive for growth. The challenge to this view, this optimistic view about Europe, is shown in this chart, that is the credit flows are still quite constrained. This shows the percent change year-over-year 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, and 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 mid-sized enterprises, are under a lot of pressure. I also think there's significant supply constraints because of the weak banking system. The Europeans are going to be engaged in a significant amount of banking reform in 2014.
They're going to go through an asset quality review, a stress testing process, which I am expecting to be quite stressful this go around. There will be a lot of pressure, and if the banks aren't able to get things together, recapitalize, and improve their liquidity, this picture isn't going to change. If that doesn't change, then my optimism about European growth will be challenged. 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. You can see I do expect growth to re-accelerate. The key here is China, I think it's clear given recent events, the Chinese are fully engaged.
They're not entirely comfortable, I think, with some of the excesses that exist in their economy and their banking system, 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, that's what's shown in the chart. If China can keep it together reasonably well, that'll keep the whole EM economy doing okay and moving forward. The challenge for the EM is rising interest rates in the U.S., clearly we have 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, two countries, India and Brazil, have current account deficits, rely very heavily on global capital. 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. They're going to be under a lot of pressure going forward. 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. Obviously, this is also a challenge to my conviction.
Bottom line, I remain as optimistic as I was last year, but I'm even more convicted this year. Come back. Did you write this down? Come back next year, and we'll see how we did. Thank you.
Okay. 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 Adorino. Could you just talk a little bit more about the politics in Europe that always seems to be a block. Things move along, and Germany or Italy or somebody seems to stall things out. How do you see the political side of your analysis sort of playing out?
Let's see. Can you hear me? Oh, yes, you can. Loud and clear. While the politics in the U.S. are dysfunctional, I'd say they're even more dysfunctional, obviously, in Europe. 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 and 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. I think with Angela Merkel's re-election, that will happen. She's been elected for the third time, and her entire legacy is now wrapped up in the 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.
I think she has the will and the ability, primarily because the German economy is fine. It's running at full employment. Growth ebbs and it flows, obviously, but it's pretty good. 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. It's going to be dysfunctional, some countries worse than others. You've mentioned Italy, obviously quite dysfunctional. 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? 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 in the streets screaming.
You have a lot of screaming, but no one in the streets. That's testimonial to their ability to keep it together politically and is actually quite encouraging.
Okay. I said we'd go to Marshall next. We'll do that. Yeah.
Ray, one of your slides said you may encounter a cyclical bump, and that's fine. I just wonder with the increased resources devoted to regulatory and compliance functions, the degree to which that raises the fixed costs at Moody's and whether a cyclical bump might be steeper this time around than it has been in previous occasions.
Yeah. Can you hear me?
Rich, usually a red light goes on, and there's no red light, so that's why we're confused.
Yeah, exactly. Is this on? There we go.
Yeah.
Okay. Now. Yeah. 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 absorbed already. It is not a variable cost. It's going to be with us regardless of issuance levels. I would point out also that our reaction historically to cyclical movements has not been to take all of the most draconian actions that
We would take in the event of a secular downturn. We do have the 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. We have tools. 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 that 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. Those levers remain in place.
Okay. We're going to go over here first. Go for Rishi first, please.
Yes, Ray. You laid out your long-term growth rate, which is low double digits. In what are arguably very favorable conditions for your business with robust debt issuance, you're only growing at high single digits. How do you square your longer-term, consistent sort of growth rate with the high single-digit growth that you're witnessing?
Yeah. As you saw, our forecast is for high single-digit growth for 2013. Hopefully, that will prove to be conservative. 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. We did have very robust issuance activity. The second half of last year was very strong. 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. That has had to do, as I mentioned, with the pull forward of maturing debt.
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. That's why, as I said, it's on average. We think that those drivers are very much intact. A high single-digit growth rate working off of the above normal growth that we've had in the recent years, I think is still a very positive story.
We'll go to John next and then we're back over here.
There was a phrase up there called pricing for value, I wonder if you could talk a bit about that and give us some specifics.
Sure. The pricing opportunities that we have vary according to our lines of business and geography. 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 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. In emerging markets, as those markets come to use ratings as more of a standard, it becomes more customary to seek ratings to differentiate one rating agency from another in terms of the quality of its opinion and its research and supporting analytics.
All of those are value-based opportunities on the ratings side of our business. On the Moody's Analytics side of the business, and I think Mark Almeida and Steve Tulenko 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. 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. As our products and services grow as standards in the market, we are able to price for that value because there is a value to being a standard.
Okay. 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. I guess specifically, how do you expect debt to grow relative to GDP as you look at the next couple of years?
I think we're just beginning the credit cycle. We've been in a period of significant, what economists call de-leveraging, reducing the amount of debt outstanding. Household debt is $2 trillion below what it was at its peak five 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 de-leveraging. Credit quality is, I don't mean this hyperbole, I think it's about as good as I've ever seen it. There's still some work to be done on first mortgages. Early stage first mortgage delinquency is pristine. There's some issues with student loan debt, but that's a relatively small part of the debt market. Broadly speaking, leverage is low, credit quality is good, and I think we're just beginning the credit cycle.
I think credit growth, debt growth will accelerate. It'll be a slow acceleration, in part because lenders are still chasing and in many cases, regulators are still quite nervous and asking for even more capital, and we have to work through a lot of the new capital standards. It's not going to be a quick ramp-up, but I would think that we're going to see it accelerate, and experience stronger and stronger growth over the next, I wouldn't be surprised if it's not over the next five to seven years, something like that. We're in the early stages of that process.
Go to Peter here.
Thanks. Ray, two questions. Back to the cyclical bump. I'm wondering if you're viewing the probability of this bump as higher today than you did a year ago, given where we are in the cycle. I wonder if you could just give range of probabilities in terms of how you think 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? Then lastly, on disintermediation, I think a year ago in these slides, you said 1%-2%, if I'm remembering correctly. 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. You may have to ask again. Don't leave with the microphone. As far as the disintermediation story, I was optimistic 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. We look at Europe, we look at Asia. 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.
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 potential for a cyclical downturn in issuance, 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. 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. If they do that with a deft touch, that encourages market confidence, that encourages business confidence, 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 think offensively for companies as opposed to defensively. 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.
Hey, good morning. Just a question on Asia. Clearly, Mark, you're optimistic about the growth prospects, where you said you guys were under-penetrated. 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 perspective, and Mark may want to add some additional comments at the macroeconomic level. 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. 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 the economy. It's still much more in the banking system. What we're looking at as we go from country to country in Asia is we're looking at where they are in the development of their capital markets. I'll talk about the banking systems from Moody's Analytics perspective in a moment.
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. In some cases, it's going to be participation via joint venture. 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. 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? 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.
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. That's where our ERS business plays a very important role. It's partly driven by the macroeconomics of an evolutionary condition of the bond markets, and then it's also driven by the current thinking or regulatory impetus for change in the banking sector.
Okay, I'm going to take one more because I think we're just out of time. Patrick, you had a question?
That's been answered already. Thank you.
All right. Then I'll go to John because 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. 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're 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. We win where it's real money investors, and we do our work to the highest possible standard.
Okay. I'd like to thank everyone for their questions and again, for Ray and Mark's presentations. 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, with really three messages I would like to deliver. The first one is that we continue at MIS to execute with success on a three-pronged strategy, which is designed to strengthen our core business and to invest in long-term growth. Two, while we do expect some volatility and uncertainty from the normalization of macroeconomic conditions and policies, we believe that our business momentum remains underpinned by robust and resilient growth drivers. Three, we see significant growth opportunities in our portfolio, and we continue to step up our execution capabilities with discipline and flexibility. I'm here today with Rob Fauber, who heads our commercial group, and we'll talk more about our growth channels, our capabilities, and our results. To start, let me focus on three key themes or goals we have for our strategy at MIS.
The first one, as we've described before, is to strengthen our products and service offerings in our core ratings and research business. The second is to extend into new customer, expand our addressable markets, and the third is to extend into new geographies. Ray discussed some of that earlier in a previous Q&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 debt markets, and also the increasing contribution of non-rating 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. The third is the leading shelf voice MIS has among providers of credit opinions, and I'm sure you can see that every day. Last, and not least, our market positions and the customer acquisition we see across geographies and asset classes, and again, Ray showed you some data on that earlier today. Later, Rob will provide initial insight and illustration on our successes. I'd like to put in front of you three central or critical areas we're focusing 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 issuer investors.
The second, where we spend a lot of time, is how we position our structured finance business for long-term growth and relevance. The third is how we transition our Asian business from what it is today to the next level. 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. Turning to some market fundamentals. Here, my message would be that as Ray said earlier, some of our lines of business may experience cyclical bumps on the roads from what we see are the inevitable changes of economic policies and short-term shocks that may temporarily slow down our growth.
The important point here is that we do have good tailwinds that come from the combination of global economic recovery, improved macroeconomic activity in developed markets, but also in developing markets. In those, we do expect slower growth going forward. Also, again, as something that was discussed earlier, the impact of increasing disintermediation. We believe that together, these tailwinds will continue to provide strong underpinnings for our top-line growth. The competitive landscape has not really changed from last year. We still face seeing competition on standards and rating levels. This remains largely the case in selected market segments where retail investors are less active or where in geographies or asset classes where we're facing greater commoditization in 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 or domestic rating agency in Europe has receded. Finally, the fact that the legal 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 2007. For 2013, our guidance suggests that the revenues will be crossing the $2 billion mark, which is $800 million above where we were at the low of $1.2 billion in 2008. 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 three other lines of business.
Our international revenues now make up about 40%, 41% of MIS total revenues. Generally, we do expect these to be relatively stable in the shorter term. Turning to our portfolio. If we look at our portfolio, we release 3 types of roughly similar size. Each of these 3 types have different growth dynamics, and those different growth dynamics are reflecting really different demand drivers. In the first segment, the blue segment here, we see robust drivers that we expect will be supporting higher growth rates. 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 one example of that would be financial institutions. Finally, the third group is a type where we see greater uncertainty in the short and medium term. In this segment, we face really a greater uncertainty in term 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. For very different reasons, U.S. CFG, where we have, as you know very well, very strong comparatives and also a rising rate environment. This obviously will be offset, we hope, by an improving economy.
I know that everyone in this room 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 FOMC will decide to taper 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. The Fed's recent decision of last week may give a short-lived pause, but this transition will happen. To be clear, we do expect some impact on issuance volumes, mainly for U.S. non-financial corporates and emerging markets.
However, having said that, I think we are comforted by five different considerations. The first one is really that not all periods of rates have actually led to a reduction in issuance. For example, if we contrast what we saw as a sort of a muted impact in the 1998/2000 period with what we experienced in 1994, where investment grade held up, but we had a contraction of high issuance, we see two 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 and 2017. The stock of debt of 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 7.3 years, as you see from this chart, we were at 6.5 years in 2008. Five years ago. Another consideration is where we are 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 rates. Again, we see the potential for increase as, again, has to be considered in the context of, again, this historical background. Finally, something that Ray alluded to, again, is the fact that we have observed a sustained trade in disintermediation in non-U.S. markets, also we continue to see a strong client acquisition in the U.S. In Europe, the step-up in demand for public and non-public ratings is a very encouraging sign.
Having said all of that, I think we all recognize that probably the most important factor or variable will be the pace of economic growth over the very short, medium term. The improvement in economic activity will reduce the drag of issuance coming from higher rates, this will happen through the various ways. The financing of increasing investments, other types of spending, increased M&A activity, and increased rate of consumption. All of that feed into the bond market, as you know. Let me turn to three segments where we see significant growth potential in the medium term for MIS. 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. We do see this market as a significant opportunity. 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 scenario today at MIS calls for growth rates for G20 advanced economies of between 1.5%-2.5%. The same rates for developing economies is between 5%-6%. Clearly, a sort of a clear positive gap in terms of economic growth. The second is the volume of unrated debt that we see in this market, which is above 20%. Also the low level of disintermediation, 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 and revenues in this region, the yield we're getting from rated debt, which is really revenues over the volume of rated debt, is much smaller than what we see in other parts of the world. The numbers are shown here, what you can see is that we really have a factor of 5 to 1 between the yield we have in the U.S. and what we have in Asia. Again, significant room for expansion here. We all recognize that operating a rating agency and running rating 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 what type of assets we're effectively deploying to pursue those strategy. These are also a market that highly fragmented. There's no one Asia. There's a collection of individual sub-region and sub-countries with all different dynamics. We are also in emerging market territory, we should expect greater volatility, both in term of revenues and issuance. I think on the other end, we also recognize that we have very valuable assets in the region, either directly with our platforms in Hong Kong, Singapore notably, but also with our affiliate, CCXI, in China and our presence with KIS in Korea and ICRA in India. This is why we are committing increasing management and financial resource 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 this 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. The combination of two 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. Last, I want to talk about structured finance. We see that as a significant opportunity. Here I'd like to make two 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. Second is that we committed to successfully position our business for long-term success. On the first point, I would say that, 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, term issuance for structured finance runs at about 15% of 2006 levels in the U.S., about 43% in Europe, and about 55% in Asia. Overall, the volume of debt being rated now is about a third of what it was in 2006. Clearly, a significant gap.
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 wild card, clearly for us, is the privatization of the U.S. mortgage market and what will happen in that space. Also, we see the strength of the U.S. economic recovery, because that will be an important variable for what happens in CDOs and ABS, for example. In Europe, we've seen a continued contraction of volumes, actually steeper than what we had expected. This is really continued to be driven by a combination of very abundant 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 end, 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. Having said that, I'd like to move to the second point. What is our commitment to the structured finance business? We see that as a line that remains the most challenging for us. Part of it is because in several segments, our market position has been impacted by increased competition, by rotation that has 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&P and Fitch, who are in the mid-60s. On the other end, we have leading position in other asset classes such as commercial real estate, structured credits, or cover bonds globally. 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. We're doing that through 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. Also, we want to focus to deliver stronger execution, both to issuers and investors. That's how we think that longer term will come out with a favorable outcome in this line of business.
I just want to make a couple of points or 4 points actually about the impact of regulation and what is happening and how it's impacting our business. 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 offers 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 standards that will be issued. This is quite a unique spot compared to what we've been through over the last several years. John will provide additional insight in a few minutes in his next session on that.
To a point that was raised earlier, our cost of doing business has increased as a result. We've been implementing a number of new requirements. 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. I think as Ray said, they are really, for most of them are today reflected in our current financial performance. I would point out also that we believe 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.
Last, that we continue to work with policymakers and regulators to deliver really a way of complying in the most effective way for MIS. In summary, before turning to Rob, I'd like to say again that we continue to successfully execute on our strategy. We acknowledge cyclical headwinds, but we believe our business momentum remain really underpinned by very strong and robust drivers. Third, we see a significant growth opportunity, and we're working to execute on those. Let me turn to Rob, who discuss in more detail what are our avenues for growth and also our execution capabilities.
Thanks, Michel. I'm going to take a few minutes to talk 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, extending our business where there are attractive opportunities. That's leveraging our brand, our market position, our analytical capabilities, and our global distribution. I think the punchline 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. We will seek ways to produce additional research and analytic content that can be sold through our existing channels. A 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, 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 and our market position. We are currently exploring opportunities for middle market Credit Assessment. Given the trend of bank disintermediation and de-leveraging, 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 being a core customer of Moody's. 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, also to provide a dedicated global team to sell and service our customers. The relationship management function really has two primary functions, if you will. First is business development. This is primarily an emerging market activity, again, which has a slightly different competitive landscape outside the U.S. than inside the U.S., where we have more domestic agencies, in some cases one-rated versus two-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, 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 2013. 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. You can see in support of our business development activities, we opened a Warsaw office in the third quarter of 2013. In Asia, two office openings, one in Mumbai in the third quarter of 2013, and planned an office opening in Shanghai in the fourth quarter, which will give us two offices, one in Beijing and one in Shanghai for business development and account management activities.
Ray showed this slide earlier, 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. 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 2008. I would just note two things. One, 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 fourth quarter. I think it's interesting again to note the strength of first time issuers in Europe.
Ray touched on that briefly, 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 introduction of new products and services, 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. 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 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.
Gives us an opportunity to have effectively a company rating rather than a security rating. That really extends the MIS relationship with companies earlier in the financing life cycle. 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 real success with that. 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. 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 excludes our affiliates and joint ventures internationally. 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 a sovereign rating initiative that has allowed us to then follow with corporate and bank ratings. 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. 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. As you can see, again, driving high single-digit growth.
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. [That's all].
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 think our strategy has been validated by strong performance. 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 a regulated business. 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. 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.
Also we have the positive impact of a number of initiatives we've built over the last years, both in terms of geography and product development. Last, I would say that, yes, we do expect volatility and certainty from the normalization of the monetary policy we had for several years. Again, we're very confident that our long-term growth drivers are intact. With that, I want to thank you, I think we'll be taking some questions.
All right. Great. Thank you again to Michel 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 mic. The webcast needs to 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. I think when 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. 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? 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 yield and maybe other business like bank loans that might grow no matter what. Any additional comments would be helpful.
Thank you.
Okay. Can you hear me? Yeah. Okay, good. I'll start then, Rob, you. I think you're right. We see really two areas of exposure to increased rates. One is the U.S. corporate finance, the second is really emerging markets. I think you've seen what happened over the summer, and you've seen that those are the 2 really type of segments that are more exposed to this. I think for emerging market, the question will be more the switch potentially from global issuance dollar-based to more domestic issuance to the extent that the drivers again in term of funding needs would still be there. We'll be able to capture that in different ways, but probably with different type of economics. I think the second aspect is the one I described before, which is U.S. corporate finance, basically.
There it's really around the amount of opportunistic refinancing we've seen and to what extent that will taper off. I just, again, want to emphasize the fact that the key variable for us will be the growth in the economy and improving economic 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&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. We think that with the return of the M&A market and capital expenditures, the growth in that bank loan market should be sustainable.
We'll go to Doug.
Yeah. Michel, just to follow up on your comment about regulatory requirements and IT investment. Linda's given some figures out in the past and sort of the annual embedded costs. If you sort of look back at your cost structure over the last five, 10 years to meet the regulatory requirements, et cetera, what % of your employee mix is now kind of directed at that, and how has your cost structure changed to meet those requirements around the world? I guess your comment is sort of it's starting to flatline. Just trying to get some context.
As I mentioned to you before, the impact of regulation has been around building infrastructure in terms of people, process, and technology. In terms of people, clearly we have now a number of individuals working in control functions we didn't have. 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 5 years ago. If I had to give a number, I would say that we're talking about probably 10% of headcount in different functions. That's the sort of range I would give. There's no real science around that, basically.
Actually, I would argue that a number of these different positions 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. We'll go to Steve.
Hi, thanks. Two questions, actually. One, 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 frequent issuers of banks and so forth, what's the range of scenarios for how much your revenue could be affected? Would a blip be negative aggregate revenue growth, or would the stable parts of your revenue likely prevent that from happening? Then second question, specifically on structured products. On the chart there on page 46, ABS still obviously is way below where it was.
I wonder, is your view that that has potential to return at some point to where it used to be, or is the way that, for example, credit card is financed 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 would leave that to Linda to cover that in her presentation. I'll speak to the second point. I'm sure Rob would want to add some comments here. I think you're right. ABS has been actually, this year, somehow disappointing in relation to what we've seen in CMBS, for example, on CDOs. Some of the reasons are what you just described, the fact that some of the financing today is different from what it used to be. I think also that we just have an environment that is not necessarily conducive to a high level of activity. That's where, when I was talking about improving economic conditions, higher consumption and so on, that would drive basically a high level of activities.
Outside of the U.S., ABS, the other part where we have a significant portfolio is Europe. There we have really, again, the impact of macroeconomic conditions and also the fact that the traditional banks, the channels for distribution for these products are basically today no longer exist. All this is going to basically ECB essentially for repo transactions. So I would not call that a true market, basically. I don't know. Do you want to?
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 were rated for the first time. I think through the first eight and a half months, it was nearly the equivalent of full year 2011, 2012. I'd be curious to hear from you, how much incremental dollars can you capture from a first-time company that you're rating? For example, if you do a run-of-the-mill $500 million corporate debt issuance investment-grade company, I think you get five and a half basis points. How much on top of that for a first-time issuer would you be able to charge?
I've talked briefly in very general terms about the economics of our business, then maybe Linda or Rob can cover that later on. When you think about first-time issuer, you think about we have effectively the one-time fee. We have the fee that is related to the size of the issue. Then you have an annuity, basically, that you're building. I think it's very important, I see Ray alluded to that somehow, is that when we are bringing on board new issuers there is a high degree of stickiness in that relationship. I don't have precise data on the actual length of the relationship we have, but these are very long relationships.
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.
Yeah, that's exactly right. In fact, we thought about that and struggled a bit with whether we could put something together that we felt comfortable sharing with everyone. I think Michel's right. There's the first-time issuer fee, there's the per-issuance fee, obviously. There's the monitoring. There's the future issuance. As Michel said, it's not just the fee we earn on that first security that's issued, but the future issuance and the overall life of that relationship, which in many cases extends well beyond the duration of the initial security.
The volume of withdrawal of ratings or termination of relationship in relation to our total stock is a very small number.
I know we said we'd move over here, I saw one more. We're just going to pick up Tim here, and then we'll move back.
All right. Just two questions on the structured products area. One is, you mentioned one of the positives being the privatization of 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? 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 you expect that trend line to look like that.
Do you want to take that, Michel?
Yeah. I think one of the issues that the market is struggling with is around the sunsetting of the reps and warranties. 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.
Yeah. I think, I would say the worst thing would be probably the status 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 and financing market is to be resolved in the very short term. There's a number of initiatives that are already taking place around risk-sharing and other approach to offload some of the risk that the GSE is having. We are a long way from seeing a return to the sort of private market engagement that we had historically in that marketplace. A lot of uncertainty around that. In Europe, as you say, our view is that in order for this market to restart, we need 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. More importantly, 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. As Mark Zandi pointed out, although things are improving, we don't see that as a sharp turn taking place, and therefore, next year will probably be a year of stability somehow bottoming out rather than a strong recovery.
We'll go this way. We'll go to Mr. Lipper 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?
Well, I would have a very sort of I would 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 calls for agency not to participate in that marketplace, basically.
What I'm focusing on, as that market may shrink and the need of the issuers do 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 conduits, basically, for financing and rather than bank being funded through a money market fund, they may use other vehicles that we be part of, we may end up rating. If they issue short-term debt directly instead, for example, it's difficult to really look at today, and we haven't really made an assessment of the implication of that on our business. US, I don't know if you want to add anything.
Thank you.
Back here.
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? How big do you think that market is?
Yeah. 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 loan 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 and issuers have pulled back from the markets. 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 monitoring relationship rather than simply pull back from the market? It'll put you in a state of readiness to tap market windows as they come along." Second, you could imagine, again, significantly sized companies. We've put together a fairly significant target list of large public companies, capital-intensive companies that we know may be looking for forms of financing. Interesting opportunity, I think, for us.
We'll go to André.
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 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.
Again, very candidly, I think for us, the point of reference we have are, one, what happened over the summer in terms of the most immediate reaction to some of the announcement, and two, some of the comparison we can make to previous environments of rising rates, basically. In situation of uncertainty, we see typically issuers have a tendency to stay on the sideline and wait for clarity. 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 driven by an improving economic environment, basically, and how those two 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, we'll go to Peter here.
Thanks. Michel, both you and Rob called out competitive dynamics as a headwind. There's three parts to this. One is, has the competitive environment changed from your perspective from where you were a year ago? Two, 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.
You want to
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 ebb in European corporate. There's been very robust issuance there, maybe at the lower end of the rating spectrum. In terms of pushback from pricing, we haven't seen significant changes in our exception levels and pushback.
Maybe just one point to add to that. I would say that really, I think as I said before, I would not say there's been change really in terms of from where a year ago. We have very strong position in the U.S., very strong position in Europe. Emerging markets are more challenging for us to the extent that in a number of these, some of the rating activity is related to regulatory use of ratings. In those situations, effectively, it's a more commoditized marketplace, and therefore, 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 more of a effectively what I would call a true market, which would be where ratings are being used effectively for risk analysis.
In those markets, we have leading positions in terms of cross-border flows, and that's where credit matters, basically. We're very comforted by that. I think as I said earlier in my comments, I think for us, the most tricky part is the structured finance business, basically, because of some of the specific competitive dynamics we see. Both in terms of how the ratings are being used, and the lack of really investor basically a force to support basically our engagement in some cases.
Michel, maybe one thing I'd add. Michel 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. We're focused on really reinforcing the investor demand pull around ratings. We do see certain segments like the dim sum market, the Reg S market, where there is an unrated component. That's an area that we're very focused on in terms of converting into rated issuance from unrated issuance.
Thank you again to Michel 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. 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 two 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. In the other category, shareholders' derivative suits. Those suits are brought on behalf of the corporation, and Moody's directors and senior executives are named as defendants. In the securities class actions, the turning point in those cases occurred in March 2011 when the district court judge denied the plaintiffs' motion for class certification. Once that motion had been denied, these lawsuits basically moved into the nuisance suit category.
What was originally stylized as a class action purporting to represent all the shareholders who purchased between February 2006 and October 2007 instead became a suit involving three individual plaintiffs whose alleged total damages are approximately $55,000. Then just last month, the judge ruled in our favor on our motion for summary judgment. Just yesterday, the plaintiffs filed a notice of appeal to the Second Circuit. The plaintiffs will be appealing both our win on summary judgment, also denial of class certification in 2011. As you see here, the shareholder derivative suits were resolved almost a year ago. The court granted final approval of these suits in September of last year. In 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 attorneys' fees and expenses of approximately a little under $5 million. Those settlement agreement basically implemented certain corporate governance changes and will expire next year. Anyone who's interested, the details of the settlement agreement are included in an 8-K we filed last year. On the ratings-related front, we've made significant progress in resolving ratings-related litigations filed since 2007. In the U.S., nearly five dozen cases have been filed, and more than two-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, seven of those have been dismissed or withdrawn.
All of the '33 Act cases brought under the Securities Act of 1933, have been dismissed. The Second Circuit has ruled that 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. We also have two favorable Federal Court of Appeals decisions affirming dismissals of non '33 Act cases. You'll see that there have been a number of different bases for dismissal of non '33 Act claims, including lack of any actionable misrepresentation, lack of any duty to plaintiffs, and lack of jurisdiction. It's worth noting that of the 20 cases that have been dismissed by the court, zero have been on First Amendment grounds.
While we take that as 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. Among the reasons why they are interesting is prior to 2007, all of our ratings-related litigation involved issuer lawsuits, issuers who were 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 Second Circuit. Two important holdings. A 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. As we just discussed, the Second Circuit also held that a rating agency's limited involvement in the securitization process cannot give rise to either underwriter or control person liability under the federal securities laws. Our two non '33 Act appellate decisions, the Anschutz case, which involved auction-rate securities. There, the Second 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 Sixth 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, that the rating agency is committed fraud. 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 2006. Some of those 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 remain 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 of Credit Ratings within the SEC, Congress required that the SEC conduct annual examinations of rating agencies and NRSROs. To date, we've had a number of examinations by the SEC, there have been no material deficiencies 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 Franken Amendment, in which Moody's participated. The SEC is considering, in addition to the Franken proposal itself, a number of alternatives, including amending existing SEC Rule 17g-5. We're supportive of those amendments.
17g-5 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 permits unsolicited ratings by those not 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 third round of rating agency rules that we refer to as CRA III, 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. 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 first scaled back to only apply to structured finance ratings and then scaled back further to only apply to re-securitizations, which is a small subset of our EU structured finance market, primarily EU-assigned CDO ratings. There are also certain ownership restrictions that apply to 5% and 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 our liability by contract. There are a handful of CRA III provisions that remain subject to ESMA rulemaking. As is the case with the new Dodd-Frank rules, Moody's has made substantial IT and other enhancements, including significant investments in additional compliance personnel, so that we're able to comply with these new regulatory requirements. 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, then it was subsequently settled, she seemed to challenge the First Amendment protection that ratings were simply opinions. I'm wondering if you have any thoughts on that and whether you've seen any other existing cases start to incorporate her opinion into their case. Then I'm wondering if you could update the status of CalPERS. Thanks.
Sure. You're correct that there were news accounts that seemed to indicate that Judge Scheindlin said the First Amendment doesn't apply to our rating opinions. In reality, what she actually said in responding to our motion to dismiss is that there are two exceptions to First Amendment protection, both of which we agree with. One 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 them and also had research on the ratings.
When a judge rules on a motion to dismiss, the judge has to assume that the facts alleged by the plaintiffs in its complaint are correct. In fact, that fact was not correct. From our point of view, Judge Scheindlin is just restating what the law is, 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 anti-SLAPP statute, which is some additional protection that ratings enjoy in the state of California.
That appeal has been fully briefed, no date has been set for oral argument yet, we don't know when that's going to happen or when the appellate court will rule. The good news on CalPERS is while that appeal is pending, there's no discovery taking place, we're not wasting any more shareholder money on that case right now.
Okay, we'll go to Miles here.
Thank you. Of the one-third or so outstanding cases, can you give us a sense of what's the most near term that could hit the headlines? Are there any ones that are notably risky, or are they all 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 motion to dismiss, we have filed one and are waiting for a ruling, we're in the discovery stage. There's really none that are more significant than others. Obviously, if at any point in time we believe any of our ratings-related cases are material, we would disclose them in our SEC filings.
Great. 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, actually I combined both questions. The statute of limitations as it applies to the DOJ, they have plenty of time to bring a lawsuit under FIRREA. The statute is for 10 years. 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 statute of limitations varies depending on the jurisdiction, then the specific facts of the case. Unfortunately, there is no answer you can give generally. It's very case-specific and fact-specific. With respect to the DOJ lawsuit, we're obviously not a party to that.
We basically only know what we've read in the newspaper and accounts and in the DOJ's complaint.
We'll come over here to Craig.
John, just talk a little bit further about the DOJ case that S&P is dealing with right now. From your perspective at Moody's here, has your level of discussions with DOJ are similar, changed all here in recent months? If it has, aren't you obligated to have to report that in your SEC filings?
Well, 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&P. You're absolutely right. If we did have knowledge of that lawsuit, that would be a material development, and we'd disclose that in our SEC filing.
Over here to Rishi.
Could you speak to any particular areas of focus that the SEC examines you on? Also, the second part of the question is, let's say if this Office of Credit Ratings had been established prior to 2007, 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 Agency Reform Act of 2006, as well as the newer rules that have been put in place under Dodd-Frank. 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 in issuers they rate, those sorts of process and corporate governance rules. Importantly, the SEC 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've 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 CDOs securities where we, like many other market participants, didn't predict the severity of the housing bubble burst and 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 us. As Michel mentioned, though, of course, we think it's been helpful. Many of the rules, both in the U.S. and in the EU, are helpful from the business point of view and for setting standards more generally for the industry.
They wouldn't have had any helpful benefit as far as deterring the kinds of litigation we've experienced since the crisis started.
Okay. We'll go to Jim first and then Marshall.
Yeah. Just the 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 fraud claims. The only claims that have completely gone away as a result of the Second Circuit ruling are the 33A claims.
We'll go to Marshall here.
I'm looking at one slide in particular, the one with the headings Dodd-Frank Act and Franken Amendment. It 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 the continuing effort to try to inject a 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. Do you think the regulatory world as a whole has an awareness of what it's doing in that respect, and do 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 SROs rating agencies with an investor-pay business model. Part of that, all rating agencies recognized by the SEC had an issuer-pays model. The emphasis has really shifted since then, and that 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 the European Commission and some other parties are interested in seeing greater competition by domestic EU rating agencies. 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, that potential conflicts of interest are managed appropriately and not really focused on competition.
You're right, though that the costs of complying with the new regulatory mandates are significant, particularly for smaller rating agencies, and that may create a regulatory barrier to entry. 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% and 10% owners. 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 two main ones are one 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, and you own more than 5% of Moody's, you can't also be a shareholder, for example, in McGraw-Hill. You have to pick. Then with respect to 10% shareholders, in addition to the 5% requirements, there's an additional prohibition, as opposed to mere disclosure, on us assigning 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 regulators may actually get around to doing something that would actually cast more daylight on the practice of ratings shopping?
Yes. I think the amendments to 17g-5, as we discussed, would be helpful. I think to the extent that the rating agencies have information available to them so they can do unsolicited ratings and unsolicited research, that'd be helpful. Moody's has also encouraged the SEC, and this is true in the EU as well, to provide more fulsome disclosure by issuers in the structured finance space. From our perspective, the gold standard is U.S. corporate disclosure. Basically, any analyst or any investor for 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. We think that'd be even more helpful than amending 17g-5. There are a number of steps that would cause us to be optimistic on that.
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. We will start again at 10:35 A.M. We do have refreshments in rooms A and B to your right when you walk out the door there. Thank you.
Yeah.
You'll be mad. Sorry.
Would you like me to say we'll get started?
I can do that if you want. Let's see. Would you like to say when we're going to get started?
Get everyone-
If everyone could take their seats, we're going to go ahead and get started again.
Okay. 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 sixth year as being a separate legal entity, and I think we're making very good progress financially and reputationally. Importantly, I think there's a very attractive opportunity ahead for Moody's Analytics. 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. There are three core messages. First, as I said, we have been doing very well in this business over the past five and a half 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. 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 Service in the bond markets. 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 institutions 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 three 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. 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, 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., about 60% of our staff is based outside the U.S. This is a global opportunity. In order to realize that opportunity, we have a worldwide distribution organization, 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 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 specific problems that our customers have. 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 million of revenue in Moody's Analytics since we launched the company at the start of 2008. That translates to about a 12% average annual growth rate.
Remember, that was in a very weak environment. For a business that sells exclusively into the financial markets, we realized a 12% average annual growth against very challenging operating conditions. As you can see here, as I'll elaborate on more briefly, the three businesses of Moody's Analytics represent quite a mix of scale and growth rates. The way those businesses have grown has come through a variable combination of both organic and acquired growth. The RD&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 five years. I would note that is all organic growth. We've done no acquisition in that segment. That is a very profitable business.
I'll talk more about 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. It has delivered the most dollar growth over the last five 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. 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, then we've chosen to make some acquisitions. 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. Finally, the blue segments of the bars, that represents our professional services unit. That's an area of our 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.
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 five years of just under 7%. About 60% of our growth over the last five 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. We're seeing a bit of an improvement in our organic growth this year relative to our recent trend. 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, and it's a very solid foundation. We expect to realize over half a billion dollars 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 capital markets. Much of what we sell in RD&A is what is sourced from the rating agency. We are consuming and commercializing and distributing the by-product of the Moody's rating process. 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.
We have an opportunity here to repurpose content that is generated in the rating process, and again, commercialize that, package that, and distribute that to our customers. This is a 100% subscription business with 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. We're very pleased to see that we've now got that up as high as 95%. The good news is our retention's 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, 95% is a pretty good retention rate for any subscription business. The drivers of demand in RD&A 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 those network effects make for very powerful demand in this business. 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.
As a mature business, the growth rates we've had in RD&A are good. We're currently running at high single digits. As you saw over the last five years, we've been running at, we had a CAGR of 6%. The high single-digit growth that we're delivering now, we think that compares very favorable with other subscription businesses that you might compare us to that serve the capital markets. We think we've been doing quite well. We 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 2009 when the fixed income markets cratered and we had major customers that spent millions of dollars with us literally disappear. 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&A in 2009. I think that speaks to the resilience of this business. I'd like to think, I hope, that 2009 is about as bad as it's ever going to get in this business. Certainly, I've been doing this for 25 years now, and that's as bad as it's been. 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. 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. 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. 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. Product innovation in fixed income capital markets is a very good growth driver for the RD&A business. Let me 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. You can see that ERS is contributing a disproportionate amount of revenue growth. 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. Whereas RD&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. 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. 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. We saw an opportunity to use modern technology, modern software engineering as a more effective delivery platform of those analytical tools. 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&I portfolio. 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 score is 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. 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 things, demonstrate to their 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. 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&A, the regulation, banking regulation and regulation of insurance companies, particularly around capital management, is driving tremendous demand for our ERS business.
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 here. 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. We are 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. That's what we're doing. Steve will talk about this more in a moment, but I will note that given the 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 a lot of variability in our quarterly revenue results. 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. Finally, I mentioned that we've been building the professional services business primarily through acquisition. 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.
The idea here is to acquire those businesses, sustain those good businesses, while leveraging 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&A, ERS, and professional services, have really been run to hone their businesses, to hone their capabilities, build our reputation for expertise in those areas, and deliver growth. 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&A business, those are represented by the blue items, or in professional services, which are reflected in the orange items, or in Enterprise Risk 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.
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. 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. 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 recently opted to deploy our loan origination system. They're deploying that with literally thousands of loan officers around the world who will 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. The training and certification capabilities that we have in MA are able to be applied here and again enable us to embed our solution more deeply in that organization. I think that's a pretty good example of how we're using all of the various things that we do in Moody's Analytics in a holistic way. I often get a lot of questions from people about how our various products and services fit together, this is the concept.
This is the method behind the madness of what we've been building in Moody's Analytics. 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, coordinated sales and customer service effort. 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.
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're able to respond with the right capabilities and deliver it 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. 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 well, and it represents an important reason why we're confident in our ability to continue to realize this opportunity.
It's the success that we've had with our customers that has helped us achieve the strong financial results that we have over the last couple of years and establish 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. Given the scale of the opportunity that's out there, we expect great things of this organization over the coming years.
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. We want to give you a little more insight into that business, and I'm going to turn it over to Steve Tulenko. 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.
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. With that, Steve, why don't you take over here?
Thank you, Mark. Good morning, everybody. I, Steve Tulenko, responsible for 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 2007. 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. It 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 big advantages 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.
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 ERS. Mark referred to this earlier. This slide's a spotlight on 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 see quarterly growth numbers, year-on-year numbers for each of the quarters. You can see that there's a couple of quarters there where we have relatively low numbers. We have 0%-5% growth in three of those quarters. I think there's something like six quarters where there's growth between 5% and 15%, and then another nine quarters where we're growing beyond 15%, sometimes approaching 40% and 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 DNA and the subscription base of that business. That's a very predictable stream of growth where you have sales that are recognized over and 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 advisory projects that we do for people. A big chunk of the business within ERS is dependent on client and customer timelines, and as a result, creates revenue deferrals that correspond with the timing of that project going into production or actually being used and put into service. 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's a multi-year project, the revenue deferrals that are created there can go on for quite some time. 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 impact of timing on some of the results. 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 months 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 three years, each of the years is showing an annual growth 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. While we do have revenue deferrals that are created 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 four-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 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 two 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 are closely associated with a 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's going. That's a fantastic opportunity for us. In addition to that, the regulators are also very aware of what happened in 2008 and 2009. 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.
There's demand out there in 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. 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. We think that's a pretty important 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.
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. 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. 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. 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 am going to try to blast through the next couple of slides because we are running short on time. This slide is really here for illustrative purposes. A bit like Salli Schwartz's slide before, I am not going to try and walk you through this entire thing. Think of this as a radar map. What we have attempted to do is identify all of the financial regulation that is affecting what we think is our business, whether it is in Asia, Europe, or America. At the bottom center, that is where we are sitting. As you go out through time, you reach out into the different bands. In the immediate timeframe, right around the origin of that radar map there is a bunch of regulations that have been passed and are now required of banks and financial institutions to take care of.
On the bottom left, you will see a bunch of flags, bottom left and in the center. Those are flags representing countries 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 will see a 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. As you move out through time, you do not have quite as much certainty, but you can start to see there is a lot to do.
Banks, insurance companies, investment managers all over the world have a lot to think about, and we can help them in a lot of ways. 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 are taking advantage of these tailwinds. This is intended to be an example of how that regulation can create a business opportunity for us. What we have attempted to show you here is a graphical depiction of what you have to do when you are undertaking a Dodd-Frank Act stress test. 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&L, and ultimately your capital position over nine 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? The regulation is asking banks to do that, and they need a lot of help. We are spending a lot of time doing that, providing benchmark databases, providing models, providing software to help them automate that process, to enable them to do that in a much more efficient way. In a lot of ways, this is exactly the thing that Mark Almeida 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, the stress tests are 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. I'll leave you with this slide, just as a couple closing comments on the impact and the traction that we've enjoyed here within the ERS business. In a very cost-conscious world, every one of you can attest to that, we've managed to find some 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 million with us. There's another 110 banks out there that have spent between $1 million and $5 million with us over that same period of time. We have some demonstrations of success.
We're relevant in that we're delivering products that they need, and 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, we're also working in the smaller ones or the emerging ones. 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 million-dollar deals in places like that. There's fantastic relevance in that these banks are trying to do a better job. The regulators are requiring they do it, and 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. Anytime we do work with a bank, it goes into production. Finally, we have the reach to actually be important all over the world. When you take relevance and need to have products with a reliable track record, and you have reach, you have a pretty good combination. With that, Mark?
We're good.
Yep.
Let me wrap up. I'll just make one point before we wrap up, 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 presence in a very big market. 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.
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. 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. 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. Think of this as, I think, a pretty good peer group for us. We lead the pack, led the pack last year in top-line revenue growth. While we certainly didn't have the highest margin, I think we delivered margins that were quite respectable given the kind of business we are. 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. This is very much what you can expect from us as we look out over the next several years.
Let me just wrap up by saying, over the last 40 minutes or so, that Steve and I have really only said a couple of things to you. We said first, we've been doing quite well in this business. This is a business that we've been operating and reporting financial results for five and a half years. In those five and a half years, we've delivered 22 consecutive quarters of year-on-year revenue growth. 13 of those quarters have been at double-digit rates. As we said, over that period, over the last five years, we've delivered 12% compound annual revenue growth. We're running at a decent margin. Last year's operating margin was 22%. We think we've done well financially. At least as importantly, we've done very well reputationally. We have really carved out a solid market position for ourselves.
I think the success we've had, the relationships we've built with customers, 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 well. One of our larger customers, it's a bank that's headquartered in the Asia-Pacific region. It's a top 50 bank globally. Two 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.
While they were in New York, I met with them and I said, "What was the purpose of the trip to the U.S.?" They said, "Well, we wanted to meet with our most important partners." I said, "Well, who's that?" They said, "IBM, Oracle, SAS, and Moody's Analytics." To think that they are thinking of Moody's Analytics as important a partner as IBM, Oracle, and SAS, I think is very powerful. 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. I think that is a very nice anecdote. Very happy to share it. 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. I think we are extraordinarily well-positioned, probably far better positioned than you might have guessed. 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. I will stop, and I'm going to let Salli control the mob.
All right.
Yes, you're good.
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've been over here a lot. Please.
You gave the organic revenue growth for RD&A. I didn't hear the organic growth for ERS and Professional Services. Could you provide that? Then could you give a little breakdown, maybe overall on organic growth, how it breaks down in terms of pricing, new customers, and upselling existing customers?
Yeah. We said that, again, looking over the last five years, about 60% of our growth in ERS has been organic. In RD&A it's 100%. 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? Unfortunately, there's not a short answer to the question. It's very different from business to business. In RD&A, we get very healthy. Again, given the embedded nature of the product and 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. Within reason, we tend to take advantage of that. We see good growth from pricing in RD&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's part of the growth in RD&A. Frankly, in RD&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. Honestly, because of the scale of that business, it tends not to move the needle very much. Most of the growth you see in RD&A 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?
How you define the customer, yeah.
Yeah. New customers. In ERS, we tend to sell more and more to the people that we're working with. 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. It's not so much new customers as it is new projects, new engagements. Professional services, there we have, particularly in our outsourced research and analytics business, we have pretty good pricing power. 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. It looks like I actually have to move the slide. All right, we'll go to Doug here.
Mark, following up on professional services. What is the game plan there? Can you disaggregate the performance of Copal versus the Canadian training and certification business, and have they met your expectations, I guess, is the question.
Dave will talk about this more in a minute when he does a little bit of an acquisition review. Copal 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. We're not happy about the softness on the top line, but the EBITDA has held up 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. 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.
Okay, we just have time for one more here.
Oh, come on.
Sorry. All right.
You never get questions. Now you're going to shut them down?
I'll go with Jim.
Okay, Mark, you referred at one point during your remarks that there's no problem with demand, that the challenge is really executing and meeting the demand. I'm just wondering, is there a need possibly to hire more people, or is it more a need to develop the products that are sort of uniform across more client? What are sort of the constraints there? Do you need to acquire something even?
Yeah. Well, I'll look at Steve. If you ask Steve that question, you always have to hire more people.
Yeah, I would say-
You just can't stop hiring people. I'm not sure there's an acquisition required. 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. I don't think there are no obvious gaps in the product offering or in the business that are preventing us from realizing this opportunity. The challenge, Jim, is really that these risk management solutions that banks are looking for from us, these are some very new concepts. The banks are doing this. They are integrating their loan origination workflow with their risk scoring, with their portfolio analytics, with their regulatory reporting. They've never done that before. 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. They take a long time, and frankly, these are not the most efficient projects we've ever run. I'm hopeful that as we do five, six, 10 of these on a big scale, we'll start to figure out what the best practice is. As we do projects 11 through 20 and 20 through 50, this will go, I wouldn't say it'll be cookie cutter, but it'll be much more systematic and efficient.
Right. Sorry to leave the other questions unanswered. Both Mark and Steve will be here after the event if anyone wants to talk with them then. We do appreciate your interest. Thank you again. We're going to go ahead and move to our next session.
Morning, everyone. I'm Linda Huber. 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. He'll be going through our acquisition criteria and strategy, as well as some of that post-acquisition work that Mark had referred to. 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's doing. I know that it's 52 degrees Fahrenheit outside. It's about 32 degrees Fahrenheit in here. It is 52 degrees Fahrenheit outside. 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. When we did this presentation last year at this time one year ago, our stock price was $42.50. Not one of the legendary analysts here writing on us today called that. Not one of you. Some of you even said the price would go down. For those of you, just think about that a little bit. We'll talk some more. Okay, what we're going to talk about is the company has had a very strong performance in the first half of 2013. The diversification of our core business provides a significant amount of ballast across our businesses. The question we keep getting is: What happens if issuance goes down?
Issuance this year is flattish. Our revenue is going up in the high single digits. 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. It's a little bit of lazy thinking. I'm going to get you to understand that. Now, if everything else doesn't go right, we've got our cost-saving strategies. We do have an interest in driving margin expansion. We're not driving margin expansion hugely. We've had good progress this year, 150 to 250 basis points in margin expansion. I hope that my colleagues have demonstrated to you that growth is what we're doing in this business.
After some impassioned and lengthy discussions with Mark and Michel, 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. Lastly, we're going to talk about our focus on return of capital to shareholders. In April, we noted that we had $1.6 billion of cash on our balance sheet. 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. Salli started out with a very nice chart here in terms of only four other companies have done what we've done over the past three years. American Tower and CF Industries, year-to-date, their stock price has been pretty flat. Intuitive Surgical, perhaps not intuitively, its stock price is down 24%. MasterCard and Moody's are up 39%. 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, five turns less.
If you want like financial performance to MasterCard, may we suggest you might want to look at Moody's. 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. Again, look at us side by side with MasterCard, doing just about as well, and we are five PE turns cheaper. 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 two businesses, the Moody's Analytics business, and I think Mark and Steve captured the enthusiasm we feel about that business, and also the Corporate Finance business.
The other three in the middle, Structured, Financial Institutions, and Public, Project and Infrastructure Finance , not too much different in size than where we were. You can see again, we're guiding toward high single-digit growth for this year, 2013. 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. 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.
If you look at the rating agency businesses, clearly the Corporate Finance business has been the giant for the first half of the year. Revenue's up 33%. Structured Finance, the laggard, with revenues up only 3%. FICC and PPIF up 9% and 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. For Moody's Analytics, RD&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. This slide is the single most important slide in this whole package that you have today. I'm going to make you all do some work, so get out your pencils. We're going to circle some things here.
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 three periods. The first period, look at the change from the second quarter of 2011 to the third quarter of 2011. Issuance dropped from about $1 trillion to about $625 billion. About a 35%, 40% drop. If you look at our revenue on the right-hand axis, we dropped from about $600 million to about $525 million. Issuance is down about 35%, revenue is down about 12.5%. Second passage through the most in a few recent quarters. First quarter of 2012 to second quarter of 2012. Issuance dropped from $1 trillion 300 million to about $800 million. Again, about a 38% drop. Revenue, if you look at the orange line from the first quarter of 2012 to the second quarter of 2012, just about flattish.
Didn't come down too much at all. If you look at 2013, the first quarter to the second quarter, issuance down again. We're down from about $1 trillion 200 million, maybe $1 trillion. You can eyeball it. There, if you look at that, despite a drop in revenue, drop in issuance, excuse me, revenue has gone up. Okay? 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. If you think it does, you're not looking at the numbers closely enough. Any of you can recreate this chart, and we would urge you to do so. We tried to make this very simple. You can see what we're doing. How are we doing that?
Rob Fauber 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. That fee is high figure five figures. They probably issue debt. What we've heard is more than 90% of them issue debt, usually within the first year of having a rating. We're trying to figure out what that will mean over the average life of a security, which is eight or nine years. Frankly, we haven't gotten that together too well yet, but suffice it to say, that's a six-figure number. 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 $2.7 billion 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. As Michel said and Rob said, we don't see significant pushback. That is how we are moving revenue line at a different slope than the issuance line. Again, before you write that we could have a hiccup, and the revenue's going to suffer, and everything's going to be terrible, so that you're not surprised at the next quarter's earnings, you might want to think about this chart a little bit more. Hope that's enough said on that. We're going to go on to where are we on issuance and what's the pipeline look like.
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, you have spec-grade loans in blue. 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 second weakest month of the year, generally. Saying that August was weak, we know that. We got it. Always happens. Come back to September. Lot of concern about what's going on with September. 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. I'm going to talk to you a little bit about what the pipelines look like. For U.S. high-grade, last week, $26 billion of issuance from 21 deals. This week, expected $20 billion in issuance, but yesterday we saw $6 billion, and today there are nine deals in the market already, $5 billion or more. September, $118 billion of U.S. high-grade issuance to date. Third busiest month ever. Involved in that also was the Verizon deal, largest ever bond deal. 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 billion of U.S. high-grade bond issuance. That's up from $690 billion last year by 9.7%.
Several of the banks are increasing their fourth quarter views. Generally, it was thought we'd do a trillion 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. It looks like people are moving up on that view. One bank moved up from $200 billion in expected issuance in the fourth quarter to $270 billion just yesterday. They're now calling for $1.1 trillion in U.S. high-grade for this year. Things move fast, trends move quickly, we understand that tapering is probably coming. 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, things may be worse. This is the reason why we're very thoughtful about our views on where we're going, we'll have to see how things play out. You can make a case for the downside, and you can make a case for the upside. For high yield, we've had very active time recently, September, $30 billion in high-yield issuance. Q4, looking for $60 billion-$85 billion. Full year 2013, $350 billion of high-grade issuance. Loans, the product du jour. People want flexible rate paper in rising interest rate environment. September, $35 billion-$45 billion of issuance. Q4, $85 billion-$120 billion. That's a wide spread. For the full year, $425 billion to I'm sorry, $425 billion- $500 billion. What we're looking at on our next slide is going to the topic of margin.
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 Michel mentioned. With some work and some work on our top line, our margin is now 41%-42% guidance for this year. Looking at, again, expansion of 150-250 basis points. Could we do more? Yes, we probably could. Again, we're driving growth, reinvestment is the right thing for the shareholders. There are very few companies that have margins that are higher than ours. You've seen that. If you find other ones that we haven't charted, let us know because we might want to look at them. We're very pleased with this 41%-42% margin. Again, growth trumps margin expansion. On the EPS side, we're doing very well.
You can see that EPS is growing at 13%, we expect to continue that this year. We're aided by a few other things that I'll talk about with capital allocation in a minute. 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, we have to hire people to drive a growth business. We have to manage risk and regulatory compliance. We have to invest in IT. Fortunately, we hope that litigation costs may be somewhat behind us, but we always have that risk. There's some things that we're doing as a matter of course. We're shifting our internal processes to global partners, some of them.
We're looking to standardize processes, as Michel said, we are managing our vendors, 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. If things take a turn for the worst, we can reduce incentive compensation. We can slow down hiring. We can reduce compensation increases. We can decrease or postpone investment spending. We had a very bad time from 2007-2008. 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.
We can manage expenses. We think we do it pretty well. Again, our focus is on feeding the growth of the company. 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. Just something that you can expect. EPS growth, I talked a little bit about this. That has been double-digit. If you look at EPS in 2008, it was $1.87. This year, $3.49-$3.59. You can see that 62% of that growth, $1.07 of that comes out of the operating business. $0.23 or 13% of it comes from just more effective tax planning. We've dropped our tax rate with the expansion of our international business from 37% to 32% for this year is our guidance.
We repurchased 30 million shares during that period of time, which has added $0.42 or 25% of the growth in EPS during that time. Last but not least, cash flow remains an important part of this story. $850 million 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 million this year in CapEx. You can see CapEx as a percentage of revenue is rather lower. 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 350 calls. We've met with 200 different groups so far this year. We're out on the road all the time, and we're very proactive in terms of returning calls, answering questions.
If you need to reach us, we are happy to speak to you. It doesn't matter if you're long, short, or what, we're happy to speak to you in any case. The shareholders of the company are listed. You see Berkshire Hathaway remains our number 1 shareholder with 24.9 million shares, 11.3% ownership. Followed by Capital World, 16.9 million shares, 7.7% ownership. The third over 5% is Vanguard, which is an index fund at 6.3% 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% ownership. BlackRock is an index position as well. These are momentum index funds, and they're not under active management. Number 8 is Baillie Gifford out of Scotland, 2.3% of our shares, and Morgan Stanley out of the U.K., 2.1% of our shares.
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. 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 or GARP holders. GARP is growth at a reasonable price. Value investors down to 5%. If you're a value investor, we are happy you're here, but the focus may be not right in your sweet spot. We're sorry the stock price has increased so dramatically. 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 2008 at 36%.
Again, with the stock price up 39% this year and 60% since this time last year, we're very happy with our price-earnings ratio, and we are a growth stock. We survey twice a year, and we call. We have a third-party call, and we ask people, holders, "What do you want us to do with our capital?" If you get a call and you want to have a voice, answer the call. That's the important lesson here. 80% of you have said, very important that we repurchase shares. 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 the dividend, very important. Both 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. Making a major acquisition, 87% of you have said not as important. 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 $1.00. In July, we announced that. We doubled our share repurchase plan from $500 million to $1 billion.
Through this point in the year, we've repurchased 11.88 million shares, almost 12 million shares, at an average price of $61.14. Again, stock price right about now is about $71. If you multiply that's about $725 million. 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. We've increased our leverage by 0.3 of a turn, and this is by Standard & Poor's view, and I'm going to explain this in a minute, via a $500 million bond deal, 4.78% coupon on that deal. Interest expense will move up because we've just done a bond deal. Let me talk a little bit about what we have decided to do here. On August 12th, 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&P has said is a 2.5 times adjusted debt to EBITDA level that they'd like us to maintain. Maintain our BBB+ rating from S&P. Now, S&P does things a little bit differently than equity analysts. I'm going to try to explain this. Oh, pencils out because Salli's going to get a million questions about this going forward. We have to make a couple of adjustments. Oh, EBITDA, we have to add back for contractual obligations, interest on contractual obligations, and stock compensation. Okay? You want to add back about $100 million there. 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 million.
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 an investment-grade credit. BBB+ is fine. We would like to potentially be rated a bit higher, we like this leverage level. That's where we are, and that's how S&P thinks about it. We do have a little bit of room. Maybe we have $600 million of room, maybe a little bit more. We don't intend to use it because we like having some capacity and dry powder. We also have $1 billion of untapped bank lines. Our debt maturities, we've handled these, I think, pretty well. We have nicely laddered maturities. Nothing comes due at one time. They're well spread out, and we don't have anything that we have to deal with next year.
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? 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%. We like this concept of a landing zone. At current leverage, in other words, we're not looking to change the leverage, we're looking at perhaps a payout ratio of 25%-30%. Maybe we have a little bit more we could do there. We'll think about that in December. That's the board's decision. It's 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. 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. Our landing zone here, what are we trying to do? We're thinking about 1.4%-1.8%, get us closer to where growth companies are, and we'll see what we want to do with this again in December. Stay tuned. That's our thinking, and we'll see where we go. Share repurchases. I know this is going to be a little bit frustrating, bear with me. Share repurchases come last. They are the remainder in the equation. The first thing we're going to do, liquidity goes to reinvesting in the business. We're going 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, 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. What we're doing this year is $1 billion of intended share repurchase. As I said, we've done 725 so far. Looking at this in the future, this is a trickier thing to guess. We've been as high as in a 10-year average, about half a billion dollars, on a five-year average, 269. We've bounced around. We acknowledge that.
A $1 billion this year. We're thinking, look at a sweet spot, a landing zone of $400 million-$750 million. 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 what our opportunities are and other uses of capital. 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. Our guidance, which you've seen. Ray took you through this. I'm not going to repeat it because it has not changed.
I think the best thing to do before I turn it over to Dave and Lisa is to say that we're very proud of our very strong performance in the first half of the year. You'll note we've had the same management team in place since 2008. I would like to commend my colleagues, particularly Mark and Michel, who've done an amazing job running these businesses. John and Ray have done a great job with the regulatory and legal situation for this company. Right now, we are happy to say we are able to focus on driving these businesses, and I think we've done a relatively good job, and we intend to keep that up. We diversified the business model. We have more strength. We have more pricing power.
We have this 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. 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. 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. We'll take some questions when Lisa's concluded.
Thank you, Linda. I'm very glad to be here today, and I wanted to offer a few thoughts on our M&A program and approach and what we're doing in corporate development. M&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 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. M&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.
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. 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. Copal, 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. I've heard it a few times, recognize that there's been no transactions in the last seven quarters. 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&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. Ours sort of has and remains being the world's most respected authority serving risk-sensitive markets.
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&A. In terms of the sort of the overall approach to the corporate development in M&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 a good steward of shareholder value.
As a matter of fact, again, with respect to the use of money for M&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&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 million-$700 million over the last five years. Bolt-on, principally middle market. 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 the increase in size of the company.
The M&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+ opportunities. We're actively engaging with the market. Again, we're careful when 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 3-5 years, cash payback within 7-9 years, and obviously, we seek to do accretive transactions.
Strategic, again, common sense, industrial logic, financial services customer bases, 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. 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 say more or less generally on track. M&A, about the long term. Mark had made some comments with respect to CSI. Somewhat behind, not exactly what we had hoped. We're still seeing flux in the Canadian securities industry with respect to employment.
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 the Middle East, we believe that the business is positioned well for the long term as a standards provider in financial services certification and education. Copal, again, leading outsourcer of 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. Having spoken with a few of you during the break, I think we all appreciate the cost pressures that we're all under. B&H, Barrie & Hibbert, fully integrated into ERS and the thesis was 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 broaden the embedded suite of products for beyond the banks and into insurance. Post-acquisition monitoring. Our approach is to try and preserve as many unique and entrepreneurial attributes of our acquisitions as possible. Again, common sense. We spend a lot of time post-acquisition, making sure we monitor transactions, know how things are progressing and in most part, working. Just, if not more importantly, 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 the board. Quarterly financial dashboards, annual deep dives, impairment analysis, and our culture and 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 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 can continuously improve what we're doing, both pre- and post-acquisition. With that, we'll turn it over to Lisa Westlake. Thank you.
Thank you, Dave. 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 Salli's job seven years ago. There's still a lot of familiar faces in the audience and certainly familiar voices on the phone. We certainly appreciate your longevity with the company. With that, let me move on to executive compensation. We're really trying to do three 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.
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. Finally, we're trying to provide a competitive compensation package to our executives. Number one, so they work hard for you and deliver the operating results that you've heard about today with respect to the strategies that Michel and Mark and their colleagues spoke about, and certainly the results that Linda was reviewing with you. In terms of structure, our compensation has three major components. It's a common structure. You might be familiar with it. You may be paid that way yourself. We've got base salary, annual cash incentives for our executives, those are bonuses, we have stock-based compensation.
We disclosed last year, the two right-hand boxes, bonuses and equity, are roughly 75% of the total compensation package for our named executive officers. In the case of our CEO, it's 85%. Between 75% and 85% of everyone's compensation is at risk. We feel that that also helps drive the alignment with shareholders. Let me tell you a little bit more about our bonus plan. This chart talks about how does the bonus plan fund. 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 two components in common, operating income performance and Moody's EPS performance. You can see the two 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. 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 to in terms of customer value goals. That's in there as well. The allocation of these funds is based on each individual's performance. Did they meet their specific objectives? Did they exceed them or not? 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 engaged in this process. We do routine benchmarking. They have an independent outside compensation consultant. Management has a different one.
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. Everyone else receives restricted stock. In terms of the restricted stock, it vests ratably over four 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 three years. 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 four years and then expire after 10. Our performance shares are based on, we set three-year targets, then we look to see have we achieved those medium-term targets. That will fund the plan. Despite what some outside services might think, we fully believe that stock options are performance-based. If 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. Those fund, if you will, or pay out, if you will, based on performance of three things. Depending on your role in the company, you have a different combination.
You can see the middle and the right hand, actually all bars, everyone has a profitability metric. That is taken into account in terms of the performance shares. The head of the rating agency has a ratings quality component, and that is effectively a measure of are our ratings as predictive as we expect them to be. The head of the Moody's Analytics has an MA sales component. You heard how revenues and sales track one another, but sales come first and are often the year behind. What we're trying to do there is to get a nice tension between driving sales and driving profitability. 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 interests with shareholders, we do have share ownership requirements. You can see them here. Our CEO is required to hold six times his salary, and the remaining executive officers are expected to hold three times. Our board of directors are also expected to hold five times their annual cash retainers. We routinely review this as well. I'm pleased to say that each of our named executives own significantly more shares than they're required to. The last slide, let me leave you with four main points. The first one is that our comp programs are directly aligned with 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.
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. With that, I think I'm going to hand back over to Salli for Q&A.
All right. Last opportunity for questions here, at least in this forum. All right. We'll go right ahead with Doug here. If you'll just wait for a microphone, please.
Linda, I'm just curious. You mentioned the Verizon deal, you could argue chicken and egg as to what it says about the quality of the market. If you take the Verizon deal out of September, how does September look? 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 billion out of the $118 billion and then you add back what looks like is going to be $20 billion-$25 billion this week, I think we'll be somewhere from that $80 billion-$100 billion number, which is fine. The Verizon deal unto itself is a nice thing. It's not material to us in terms of revenue for the third quarter. It's great to see that deals of that size can be brought to the public markets and executed without a hiccup. I think we see that September looks pretty good. It's a sort of typical September, which is a very strong month typically. The question for the rest of the year is going to be how the fourth quarter shakes out, whether it breaks to the upside or the downside, as I described.
Craig, please.
Thank you. I think it's a two-part question. The 4% price hike across your entire business you talked about earlier in the day here. Isn't it true that where you're actually raising prices is actually higher than that because there'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. My second question about the pricing leverage you guys might have on the ratings business, charging at five and a half 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 for their 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. Some areas we may take a bit more than 4%. In some areas, we take less. We're very thoughtful about 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 far so good on that. We expect that we're going to be able to continue at that kind of a trend. The second part of your question, I'm sorry, we lost the mic. You wanted to know about Go ahead, I'm not sure.
What 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 hear you compare that.
There's a reason why I focused 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 third quarter 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.
Let me ask you this way, Linda. Do you have a ballpark figure you think?
Is the safe.
If you had to ballpark, do you think an average company, if they got rated versus not being rated, might save, say, 25 basis points or a little bit higher? What's your general sense?
I'm really not sure. 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. 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 their credit quality to be very clear to the marketplace and allows them to hit those windows quite rapidly. I'd say probably the greater differentiator there would be for the speculative-grade credits. 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.
Thank you. Linda, a couple 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 the state of business, momentum in business, et cetera, versus Ray, much more reserved. I understand part of this is just personalities.
Ray doesn't have the pink dress, Peter, that's the issue.
I just want to understand that difference, please. Some other specific questions. I'm just going to throw them all at you. Number one, the midterm target of 40% margin, I want to understand is midterm like two years? Is that how you think about it? Number two, tax rate. Is there more to be done, or have we seen the benefit from that already? 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 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. I wrote them all down because Peter is the king of the four or five-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. 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. There are two mergers and acquisitions that were announced today.
One is potentially BlackBerry. The second is in the technology space. It's about an $8 billion deal. It's starting to feel like things are becoming unstuck. Perhaps my enthusiasm is due to my experience being an M&A banker. We're more optimistic by nature, David and Rob too. In terms of what's midterm for the margin, Peter, we think of that as three to five years. Again, low to mid-forties over three to five 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. We're happy with where we are.
Despite your encouragement, Peter, I think we're going to have to leave the legal and regulatory costs undisclosed. We are hopeful that we may have seen the worst of that. We'll have to keep in close touch with John and see what he has to say about that going forward. Sorry about that.
We'll go over here to Manav, please.
Just a quick question. You clearly have a lot of cash on the balance sheet. You talked about looking at M&A all the time. On the rating side, you talked about growing in the emerging market areas. You already have some JVs in India, China. What's the process? 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. Just curious on your thoughts around that.
Go ahead.
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 some of our share positions, depending on the local facts circumstances. It's also, I think, sort of relative to the M&A that I've done for many years in the emerging markets. It's frankly very complicated abroad. Depending on which jurisdiction you're talking about, there is a dichotomy, or 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 due diligence review and making sure that we've 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? Secondly, what drives a need to increase headcount in Moody's Investors Service? In other words, to what extent can your existing base of analysts cope with higher levels of issuance?
Okay. Susie?
With respect to wage inflation, we routinely benchmark what are the local market expectations around the world where we operate. We do a weighted average and look at that. 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. We do start out with some pure data. With respect to hiring needs in MIS, a few things are going on, and I can also defer to Michel. 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 them free up their time and do their analytical work. At some level, there's only so many credits that any one analyst or analyst team can cover.
As the mandates increase, we need to increase staff in terms of doing that. Two reasons then, business growth on one side and also business efficiency on another. That's driving investment. Michel, did you.
No, just probably from what you just said, I think for MIS, the key variable is not the volume of issuance, it's actually number of credits we cover. As we expand our coverage, we need to add people. Somebody who follows the company can very typically absorb the flow of issuance that derive from that.
Do we have any further questions for the panel? All right, then. Thank you to Linda, to Lisa, and to David for the presentations, and appreciate all the questions. That concludes our Q&A. 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. This video commemorates that anniversary and really highlights some of the great work that we've been doing. Please go ahead with the video.
We became a public company about 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 for 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 become.
It's really great to have a relationship with a platinum brand. The story of Moody's is a great story for us.
I think what makes me the most proud is not any one event, but the fact that the foundation is much more impactful 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 way the world sees Moody's in many different ways. I think it first starts with people who've been directly affected by the work of the foundation.
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. I think that has allowed them to kind of turbocharge 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 business 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 business.
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.
Given initial proportion of people in a population who recycle, we go through our lattice, and we make the same number of cells recycle.
Financial literacy is absolutely central 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. 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 financially, they also give our children internships at Moody's and ultimately hire some of them after.
Our summer internship program 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 work.
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 here.
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 long way, and it's really very impressive. There aren't that many things that you get to see in business where you see that kind of progress made in that short a period of time.
It's the 10th anniversary of The 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, it's very important that we give something back.
Great. That was nice. All right. Well, finally, I'll turn it over to Ray for his closing remarks. Thank you.
Okay. I have about three 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. We can't count on me being able to do that. 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 categories, one of them being their brand is better than their credit fundamentals. They would rather sell debt based on their name recognition, their brand, their historical presence in a market than on the credit fundamentals.
There you wouldn't see the kind of difference because they, in fact, might be an inferior credit to the market perception of that credit. 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. Just finally Sorry. I'm being told to Oh, okay. Closing. Well, I was in the video. That's still relevant. Just in closing, we showed the four box growth chart. We 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 fifth box that's not on there, it relates to the evolution and innovation of markets themselves. 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. 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, 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. 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, 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 Salli and the investor relations team for doing a great job. The amount of preparation that goes into this is just extraordinary. 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.