Good day, welcome, ladies and gentlemen, to the Moody's Corporation fourth quarter and fiscal year-end 2012 earnings conference call. At this time, I would like to inform you that this conference is being recorded, and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for question and answers following the presentation. I will now turn the conference over to Salli Schwartz, Global Head of Investor Relations. Please go ahead.
Thank you. Good morning, everyone, thanks for joining us on this teleconference to discuss Moody's results for 2012 and our outlook for 2013. I am Salli Schwartz, Global Head of Investor Relations. This morning, Moody's released its results for the fourth quarter and full year of 2012, as well as guidance for full year 2013. The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moodys.com. Ray McDaniel, President and Chief Executive Officer of Moody's Corporation, will lead this morning's conference call. Also making prepared remarks on the call this morning is Linda Huber, Chief Financial Officer of Moody's Corporation. Before we begin, I call your attention to the safe harbor language, which can be found toward the end of our earnings release. Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
In accordance with the act, I also direct your attention to the management's discussion and analysis section, the risk factors discussed in our annual report on Form 10-K for the year ended December 31st, 2011, and in other SEC filings made by the company, which are available on our website and on the Securities and Exchange Commission's website. These, together with the safe harbor statement, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. I would also like to point out that members of the media may be on the call this morning in a listen-only mode. I'll now turn the call over to Ray McDaniel.
Thank you, Salli. Good morning, thank you to everyone for joining today's call. I'll begin by summarizing Moody's fourth quarter and full year 2012 results. Linda will follow with additional financial detail and operating highlights. I will then speak to recent regulatory and legal developments and finish with comments on our outlook for 2013. After our prepared remarks, we'll be happy to respond to your questions. Fourth quarter revenue of $754 million increased 33% over the fourth quarter of 2011. We benefited from double-digit revenue growth in most lines of business, driven by robust corporate finance ratings activity at Moody's Investors Service and continued strong growth across Moody's Analytics.
Operating expenses for the fourth quarter were $494 million, a 25% increase from the fourth quarter of 2011, and included a non-tax-deductible goodwill impairment charge of $12 million, or an EPS impact of about $0.06 related to our training and certification business. Operating income for the fourth quarter was $260 million, a 51% increase from the prior year period. Adjusted operating income for the fourth quarter was $296 million, up 54% from the same period last year. Diluted earnings per share of $0.70 for the fourth quarter increased 63% from the prior year period. For full year 2012, Moody's revenue of $2.7 billion increased 20% from full year 2011. Revenue at Moody's Investors Service was $1.9 billion and increased 20% from last year. Moody's Analytics revenue of $844 million was 19% higher than the prior year period. Approximately half of Moody's Analytics' 2012 revenue growth was organic.
Operating expenses for the full year 2012 were $1.7 billion, up 19% from 2011. Operating income of $1.1 billion increased 21% from $888 million in 2011. Full year 2012 adjusted operating income of $1.2 billion increased 22% from the prior year period. Diluted earnings per share of $3.05 for 2012, which included a $0.06 legacy tax benefit in the third quarter, increased 22% from the prior year period. Excluding legacy tax benefits in both years, diluted earnings per share of $2.99 for the full year 2012 also grew 22% year-over-year. I'll now turn the call over to Linda to provide further commentary on our financial results and other updates.
Thanks, Ray. I'll begin with revenue at the company level. As Ray mentioned, Moody's total revenue for the quarter increased 33% to $754 million. Foreign currency translation for the quarter was negligible. U.S. fourth quarter revenue increased 40% to $401 million, while revenue outside the U.S. grew 26% to $353 million, and represented 47% of Moody's total revenue, down slightly from 50% in the year ago period. Recurring revenue grew 10% to $351 million and represented 46% of total revenue, down from 56% in the prior year period. This was primarily the result of faster-growing transaction revenue driven by robust investment-grade and speculative-grade issuance. Looking now at each of our businesses, Moody's Investors Service revenue for the quarter was $519 million, up 42% from the prior year period. Foreign currency translation for the quarter unfavorably impacted MIS revenue by 1%.
U.S. revenue for MIS increased 49% to $307 million over the prior year period. Revenue outside the U.S. of $213 million increased 32% and represented 41% of total ratings revenue.
Within MIS, global corporate finance revenue in the fourth quarter increased 73% from the year-ago period to $245 million, primarily driven by record issuance in both investment-grade and speculative-grade markets globally as corporations continued to take advantage of historically low interest rates. Revenue was up 72% year-over-year in the U.S. and up 76% outside of the U.S. Global structured finance revenue for the fourth quarter was $103 million, 18% above the prior year period. In the U.S., revenue increased 50% year-over-year due to strong issuance of commercial mortgage-backed securities and collateralized loan obligations. International structured finance revenue was down 9% against the prior year period, primarily reflecting weaker issuance in residential mortgage-backed securities in Europe. Global financial institutions revenue of $86 million increased 29% from the same quarter of 2011, primarily reflecting increased banking issuance activity from issuers taking advantage of improving market conditions.
U.S. revenue was up 39%, non-U.S. revenue was up 23% as compared to the fourth quarter of 2011. Global revenue for the public projects and infrastructure finance business rose 19% year-over-year to $85 million. Revenue was up 9% in the U.S., primarily due to gains in project finance, while non-U.S. revenue increased 36%, reflecting growth in European infrastructure finance as issuers increasingly sought financing from the bond markets as compared to banks. Turning now to Moody's Analytics. Global revenue for Moody's Analytics of $235 million was up 17% from the fourth quarter of 2011. Approximately two-thirds of MA's growth in the fourth quarter was organic. Excluding the impact of foreign currency translation, revenue grew 18%. U.S. revenue grew by 16% year-over-year to $94 million. Non-U.S. revenue increased 18% to $141 million and represented 60% of the total Moody's Analytics revenue.
Globally, revenue from Research Data and Analytics of $126 million increased 9% from the prior year period and represented 54% of total MA revenue. We continue to see good demand for credit research via our credit review offerings, as well as strong customer retention rates in the mid-90th percent range. U.S. revenue was up 11%, non-U.S. revenue was up 7% as compared to the fourth quarter of 2011. Revenue from Enterprise Risk Solutions of $79 million grew 31% from last year, reflecting strong growth of products and services that support bank regulatory and compliance activities, as well as the December 2011 acquisition of Barrie & Hibbert. Revenue was up 19% in the U.S., non-U.S. revenue was up 36% against the prior year period.
Organic subscription revenue, which includes MA's Research Data and Analytics segment, plus certain products within MA's Enterprise Risk Solutions segment, was up 10% for the fourth quarter of 2012. Professional services revenue grew 21% to $30 million, reflecting the acquisition of a majority stake in Copal Partners in November 2011. U.S. revenue nearly tripled, while non-U.S. revenue increased 11% year-over-year. Turning now to expenses. Moody's fourth quarter expenses were $494 million, an increase of 25% compared to fourth quarter 2011. Incremental compensation expense, which accounted for slightly less than half of the year-on-year expense growth, was primarily driven by higher accruals for incentive compensation and Moody's profit-sharing. This reflected the stronger full-year results as well as increased headcount from our growth in our existing businesses and from acquisitions in late 2011.
Fourth quarter expense growth also reflected an accrual to cover future estimated legal defense costs for our upcoming Abu Dhabi and Rhinebridge trials. Expenses also included the previously mentioned non-tax-deductible goodwill impairment charge of $12 million. Excluding growth from incentive compensation and profit-sharing, as well as legal and impairment costs, expenses for the fourth quarter were 10% higher than the prior year period. The impact of foreign currency translation on operating expenses for the quarter was negligible. Despite increased costs, Moody's reported operating margin expanded 420 basis points year-over-year from 30.3% in the fourth quarter of 2011, 34.5% for the current quarter. Adjusted operating margin was 39.3% for the quarter, up from 34% from the same period last year. Moody's effective tax rate for the quarter was 31.5%, compared with 37% for the prior year period.
The decrease in the effective tax rate was primarily due to the favorable impact of tax planning initiatives related to foreign income in 2012. Now I'll provide an update on capital allocation. Moody's increased its quarterly dividend on December 11th, 2012 by 25% to $0.20 per share of common stock. During the fourth quarter of 2012, Moody's repurchased 1.5 million shares at a total cost of $71 million and issued 1.9 million shares under employee stock-based compensation plans. For the full year 2012, Moody's repurchased 4.8 million shares at a total cost of $197 million for an average price of $40.58 per share and issued six million shares under employee stock-based compensation plans. Shares outstanding as of December 31st, 2012 totaled 223 million, essentially flat from a year earlier. As of year-end, Moody's had $677 million of share repurchase authority remaining under its current program.
Moody's is currently in the market repurchasing shares under our systematic repurchase program. As of December 31st, 2012, Moody's had $1.7 billion of outstanding debt and $1 billion of outstanding debt capacity available under our revolving credit facility. Cash and cash equivalents were $1.8 billion as of December 31st, 2012, an increase of $995 million from a year earlier, due in part to Moody's August 12th bond offering of $550 million of unsecured notes. As of December 31st, 2012, approximately 50% of our cash holdings were maintained outside the U.S. Free cash flow for 2012 was $778 million, an increase of $43 million from a year ago. We remain committed to using our strong cash flow to create value for shareholders while maintaining sufficient liquidity. With that, I'll turn the call back over to Ray.
Thanks, Linda. I'll continue with an update on regulatory and legal developments. In the U.S., in December 2012, the SEC published and delivered its report under Dodd-Frank on matters relating to assigning credit ratings for structured finance products, which is commonly referred to as the Franken Amendment study. After an analysis of the benefits and concerns of the various business models, SEC staff identified potential courses of action, but noted that any changes through commission rulemaking would require additional study of relevant information. In this respect, commission staff recommended that a roundtable be convened at which proponents and critics would be invited to discuss the study and its findings. The timing of this roundtable has not yet been announced. The remainder of the SEC's rulemaking under Dodd-Frank is expected later this year.
Turning to Europe, as discussed on previous calls, the European Commission proposed in November 2011 to expand regulatory oversight of credit rating agencies operating in the EU and to address issues such as reliance on ratings and regulation, accountability, competition, transparency, and managing conflicts of interest. After a year of dialogue among political institutions, regulatory authorities, and market participants, last month, the European Parliament voted on and adopted a third round of legislation related to credit rating agencies known as CRA3. A few additional steps remain in the legislative process before CRA3 is finalized. We expect that CRA3 will come into effect sometime in the second half of 2013. Moody's is presently taking the necessary steps to prepare for the implementation of the new regulations. As always, we will continue to advocate for globally consistent approaches that align with the G20 statements and directives.
Finally, we have received a number of questions from shareholders and analysts about the U.S. Department of Justice's civil complaint filed this week against McGraw-Hill and S&P. As we have been disclosing in our 10-Q and 10-K filings, Moody's, like other financial services firms, has been subject to heightened scrutiny, increased regulation, ongoing investigation, and civil litigation. As such, Moody's routinely receives inquiries in response to requests for information, as well as hosts inspections and reviews by authorities and jurisdictions worldwide. Where we believe specific matters are material, we communicate those matters in our filings and other disclosures to the market. Moody's has not been named as a party in the Department of Justice's complaint against McGraw-Hill and S&P, and we have no basis to comment on that matter. I'll conclude this morning's prepared remarks by discussing our full-year guidance for 2013.
Moody's outlook for 2013 is based on assumptions about many macroeconomic and capital market factors, including interest rates, corporate profitability, business investment spending, merger and acquisition activity, consumer borrowing and securitization, and the amount of debt issued. There's an important degree of uncertainty surrounding these assumptions, and if actual conditions differ, Moody's results for the year may differ materially from the current outlook. Our guidance assumes foreign currency translation at end-of-quarter exchange rates. Despite ongoing economic uncertainty, we anticipate generally favorable market conditions will remain in place in 2013. As a result, we expect growth across all areas of our business this year. For Moody's overall, the company expects full-year 2013 revenue to grow in the high single-digit % range. Full-year 2013 operating expenses are projected to increase in the low single-digit % range.
Full-year 2013 operating margin is projected to be between 42% and 43%, and adjusted operating margin for the year is expected to be between 46% and 47%. The effective tax rate is expected to be approximately 32%. The company expects diluted earnings per share for the full year 2013 in the range of $3.45-$3.55. We expect full-year 2013 share repurchases of approximately $500 million subject to available cash, market conditions, and other ongoing capital allocation decisions. These repurchases are meant to substantially offset the impact of employee stock-based compensation plans. As you are aware, we strive to strike a balance between share repurchases and dividends, which have increased in line with earnings. Capital expenditures are projected to be approximately $50 million. We expect approximately $100 million in depreciation and amortization expense. Incremental compliance and regulatory expense is projected to be in the $10 million-$15 million range.
For the global MIS business, revenue for full-year 2013 is expected to increase in the high single-digit % range. Within the U.S., MIS revenue is expected to increase in the high single-digit % range, while non-U.S. revenue is expected to increase in the mid-single-digit % range. Corporate finance revenue is projected to grow in the high single-digit % range. Revenue from structured finance is expected to grow in the mid-single-digit % range, while revenue from financial institutions is expected to grow in the low single-digit % range. Public project and infrastructure finance revenue is expected to increase in the low double-digit % range. For Moody's Analytics, full-year 2013 revenue is expected to increase in the high single-digit % range. Within the U.S., MA revenue is expected to increase in the high single-digit % range. Non-U.S. revenue is expected to increase in the low double-digit % range.
Revenue from research data and analytics is projected to grow in the high single-digit % range, while revenue for enterprise risk solutions and professional services are each projected to grow in the low double-digit % range. This concludes our prepared remarks. Joining us for the question and answer session is Michel Madelain, President and Chief Operating Officer of Moody's Investors Service, and Mark Almeida, the President of Moody's Analytics. We'd be pleased to take any questions you may have.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask your question. We'll take our first question from William Bird with Lazard.
Good morning. Thank you. Ray, given what your stock is doing, are you likely to front-load stock buybacks this year?
I think we're going to have to look at how the stock performs over a bit longer period of time. Our thinking had been to be fairly balanced in our share repurchase throughout the year. We haven't made any different decision at this point.
Also, I guess at a higher level, you touched on recent legal developments. I was wondering if you could just give your perspective just on how one gets comfortable with recent legal developments.
Well, I think the matter that I mentioned in our prepared remarks, as far as the Department of Justice's complaint, really all I can say is that we are not a party to that. We are not really able to comment because we don't have any information other than what is publicly available. I would add that we don't have any knowledge of any impending complaint by the Department of Justice raising similar claims against Moody's.
Thank you.
We'll take our next question from Patrick O'Shaughnessy with Raymond James.
Good morning, everyone.
Morning.
One first question for you is, there was some news this morning that the European Central Bank said banks will be repaying €5 billion of its emergency three-year loan over the next week. Just wanted to ask about that. Sorry, that's €5 billion. About $6.7 billion U.S. How about that as a driver of the financial institution issuance in Europe in 2013?
Sure. I guess it's probably worth reminding everyone that, in the financial institutions area in particular, our business is more heavily weighted towards recurring revenue, and annual pricing agreements. We are not as susceptible either on the positive or negative side to changes in issuance volumes. That being said, any indications of repaying loans would be an indication of potential market stability and some improved economic activity, and we would have to look at that as a positive. At the same time, we do expect that de-leveraging in the banking sector, particularly in Europe, is going to continue, and that's a positive.
Okay. On the share repurchases, just wanted to ask if the intent there is to offset dilution or to create a net reduction. In that sense, wanted to ask your thoughts on what the fully diluted shares exiting 2013 are that are built into the 345 to 355 guidance.
Sure, Bill. It's Linda. Our intent with doing $500 million of share repurchase in 2013 would be to first cover dilution from employee issuance plans, secondly to hopefully have some reduction in the overall share count. That depends on a lot of things. Little tricky to model because, as you may have noticed, our share price has been a bit volatile of late. At this point, we are modeling a slight reduction, but we're going to have to see how it goes. Very tricky to model at this point.
Got you. That $12 million amortization charge that you mentioned, I just want to confirm, that works out to be about $0.05 after tax?
I think we're thinking it's about $0.06 after tax.
$0.06.
Subject to rounding, Bill. Yeah, $12 million not to be tax affected.
One last question. Are you seeing any evidence of a shift in corporate debt issuance motives? It seems up until now, the issuance has been very oriented towards refinancing. Are you starting to see any issuance for other purposes, M&A, plant expansion, something like that?
Sure. Let me talk a little bit about issuance, and I'd like to first talk about investment grade, and then I'd like to talk about high yield. We've polled a couple of the banks going into this earnings call, and I think the general comment would be issuance so far in 2013 has been stronger than expected. January, for U.S. high grade, we saw $112 billion of issuance. That was the fifth largest month on record. The expected volumes for February, polling three different banks, and again, we talked to Bank of America Merrill Lynch, Citi, and Morgan Stanley. We're looking at an average of $67 billion for the U.S. for February. If you look at the last seven years average, that was about $61 billion. That skews a little bit towards the higher end.
For the first quarter, we're looking at an average of $262 billion of U.S. high-grade issuance. Again, compared to what we might see over the seven-year average, that was $234 billion. Again, first quarter in high grade is looking pretty healthy. What we're seeing so far in terms of use of proceeds, it's mixed. We're seeing some pre-funding, some share repo, some pension funding, some M&A, some refinancing. A bit of a mix across the use of proceeds scale. Overall, the banks are generally viewing that issuance will be down a bit, 2013 over 2012. We're seeing a range sort of ranging from flat-ish to down 10%-ish. We are modeling revenues down for high grade in sort of the high-ish single digits. We'd like to comment that every week we've seen positive funds flows for high grade this year, a total of $7.8 billion.
Incoming funds flows into bond funds are good. Now, turning to high yield, activity in January has been robust, and the quote is, "It's as good as it's ever been." $41 billion of high yield issuance in January, and volumes for February, about $23 billion of high yield issuance. Again, we're seeing a call of about 10% reduction in high yield issuance in 2013 versus 2012. On use of proceeds, basically the same things we've seen before, refinancing, repricing, M&A, dividends, not a lot of event-driven deals yet, but we may see some move in that. Again, for high yields, we are modeling revenues down 2013 over 2012 in sort of a high single-digit range. Though we would note, again, fund flows into high yields, bond funds have been positive as well. Market trends are quite good. Use of proceeds, mixing it up a bit.
Overall, the market looks pretty good for the first quarter. Hope that answers everything you had, Bill.
More. All right. Thank you very much.
Sure.
We'll take our next question from Peter Appert with Piper Jaffray.
Thanks. Ray, can you talk at all about the situation with the various state attorneys general? I think you guys are named in a few of these suits.
Yeah. There are a couple that we have been named in. They've been around for a while. As I at least touched on in the prepared remarks, we get inquiries from regulators and various other authorities, including the state attorneys general. We obviously cooperate with those inquiries, and we will continue to do so. It's something that is ongoing, and we have been as responsive as we can be in trying to cooperate with the state AGs when they make information requests or have inquiries.
My understanding is that they're approaching this a little bit differently than the fraud charges that you've seen from other players. Does that change the legal complexion at all from your perspective in terms of the potential risk?
Well, as you know, there's a very high standard for fraud that is a higher standard than exists for some other potential claims that could be raised. Again, to the extent that these are information requests and inquiries, it's a matter of us making sure we get the proper information back to the authorities at the proper time.
Got it. Sorry to dwell on this, Ray, one last thing on this. The situation with New York State, you've got some sort of a settlement from a few years ago. What kind of protection does that give you from further action by them?
Well, the settlement agreement itself is confidential. The New York Attorney General did issue a press release summarizing some of the terms back in 2008. You might want to go back and look at that. We take that agreement very seriously and certainly believe that we are complying with that. As for that matter, we think we have done everything that we have been asked to do in reaching the agreement with the AG.
Okay. Ray or Linda, the accrual for legal costs, I'm not sure if you've done this before. Have you, can you quantify what the number is?
Sure, Peter. It relates to our insurance accounting. Let's be very clear about what's going on here. Because of that insurance accounting, we were able to take a look at our most fulsome estimate of what's going on with the upcoming trial expenses, which will take place in 2013, and take that expense in 2012. We have taken the provision in 2012 for the 2013 expenses. The amount that we think that comprises in the quarter-over-quarter view would be $21.5 million.
Great.
Thank you. Linda, the structured finance business in the current quarter was quite robust. Where's the strength coming from, and how do you think about the sustainability of that too?
Sure, Peter. Appreciate the questions about the business. The structured finance business had a very strong fourth quarter. We're seeing the strength, as we mentioned in the script, coming from CMBS issuance and also from CLO issuance, which has been very heavy. We would expect both of those to continue. If we look at the breakdown in the structured finance business for the fourth quarter, a total of $102.9 million, which is the best number we've seen in quite some time. 27% came from ABS, 19% came from RMBS, 28% of that came from commercial real estate, and 25% from derivatives.
Yeah. I would just add that the strength is really coming out of the U.S. market as opposed to the European market. We will be keeping an eye on the European side in particular to see whether there's going to be a pickup there in 2013.
Got it. Ray, I'm sorry, one last thing. On the regulatory front, the SEC rulemaking, any thoughts in terms of what might come out of that?
We think that most of the thinking around this has been completed, we had been engaged really over the last year or so in implementing compliance and transparency process changes that we think are going to be aligned with the final rules. Our expectation is that the communications that have come out of the SEC to date are going to be very consistent with the final rulemaking.
Got it. Thank you.
As a reminder, it's star one to ask your question. We'll take our next question from Craig Huber with Huber Research Partners.
Yes, good morning. I have some more questions on fundamentals as well here. Linda, would you be so kind to break out some more segment detail here on high yield bank loans, investment grade, et cetera, for each of the 4 segments, just the % of revenues for each?
Sure.
The quarter.
Craig, with the note that I already did structured, we'll consider that one already in the transcript. Let's go to corporate. Total corporate revenue for the fourth quarter 2012 was $244.9 million, investment grade comprised 23% of that. High yield comprised 24% of it, bank loans 20%, and other accounts, which is MTNs and other things, 34% of it. What we're seeing is that high yield is running quite strong, investment grade is running strong as well. We went through structured for a previous inquiry, we'll go through FIG. Total issuance of $86.2 million in the quarter. Banking was 73% of the revenue, insurance 22% of the revenue, and managed investments 5% of the revenue. Again, that's relatively similar to what we've seen. FIG does not move around all that much.
Lastly, public project and infrastructure was $85.4 million for the fourth quarter in revenue. PFG and sovereign comprised 47% of that revenue, muni 6%, and project and infrastructure 47%. Compared to a year ago, a little bit heavier on the projects and infrastructure, and a little bit lighter on the PFG and sovereign. Also that area is running pretty strongly for us right now. Do you want me to do Moody's Analytics as well, Craig?
Sure.
Okay. $234.8 million for the quarter. 54% from Research, Data and Analytics, 34% from Enterprise Risk Solutions, and 13% from professional services. From a year-ago, running a little bit heavier on Enterprise Risk Solutions. Last year was 29% of Moody's Analytics total, and this year, 34%. I think that covers it all.
Also on the cost front in the quarter, can you tell us, please, what the incentive compensation accrual was in the fourth quarter here?
Sure. Incentive compensation for the fourth quarter was $60.1 million, which is up from $31.9 million in the same quarter last year. Obviously, we had an historically strong performance in the fourth quarter, so incentive compensation moved up. Profit sharing, which we cover in a different line, Craig, was also higher as well for the fourth quarter.
How much was that one up?
That was $2.6 million last year and $4.3 million for this year.
Just for the benefit of all, can you maybe give us the incentive comp for each of the first three quarters? I have it, but I think it'd be helpful for people to see how it's progressed through the year.
Sure. For 2012, it laid out, and this is both bonus and profit sharing. It was $30.8 million in the first quarter, $28.2 million in the second quarter, $70.7 million in the third quarter, and $64.4 million in the fourth quarter for a total of $194 million for the year. For next year, we're going to normalize back to 100% of bonus targets. You should see this number come off, Craig. What we think we'd like you to do is model about $30 million a quarter for total incentive compensation if it runs flat across the year. 30-ish, maybe a little higher incentive compensation for each of the quarters in 2013 should be $120-$125 million if we hit our targets at 100%. If we do better, incentive compensation and profit-sharing will be higher.
Also-
So if you're-
No, I got a couple more little minor ones, if I could.
Sure
What's your expectation for pricing for surveillance fees, for new fees, and also for transaction this year?
Sure. We don't go into the line by line. I think we would say mid-single digit price increases across the board. That comprises a variety of complexity. Higher in some areas, lower in some areas. It really depends on the region, the product, the geography.
I'd just add, Craig, that again, remember, it still does relate to volume of issuance. If we have heavier issuance volume, the pricing that relates to transaction-based revenue obviously goes up. If the issuance is lighter, we're going to see less benefit from pricing.
The pricing increase this upcoming year is what's driving maybe half of this 8%-9% increase you're talking about for Research, Data, and Analytics for 2013? It's roughly half that pricing?
I don't think it's going to be that much, no.
The rest volume, then, you're saying?
Yeah, mix.
Craig, as we said in the script, very high retention rates in that business. High mid-90% retention, which is great.
Very good. Thank you.
Okay, thanks.
We'll take our next question from Doug Arthur with Evercore.
Yeah. Ray, just sort of looking at, you've had a few questions on this already, on issuance trends. The comps do get quite tough as you go up against 2002, 2012 numbers as the year evolves between high grade and high yield in the U.S. It looks like your international, and particularly Europe, is picking up in a number of your sectors, project finance, infrastructure. We talked about banking. Also, it looks like the structured market is slowly coming into form. I guess I'm just curious as to your thoughts on kind of new areas of growth that you're starting to see and what that might mean for 2013.
Sure. Let me ask Michel Madelain if he would like to comment on this, particularly on the European side, since you raised that.
Yeah. I think in Europe, really, if you look by different asset classes, I think in structured finance, as we say the volume this year has been disappointing against what we've seen in the U.S. The mix between U.S. and non-U.S. business has shifted, actually. I think the U.S. is about 60% in term of revenues versus international, and it was a different number last year. We don't expect next year necessarily a rapid uptick of volume in structured finance in Europe, for a variety of reasons. In term of CFG, I think the main driver continues to be disintermediation. That's more than refinancing. I think that's the difference against with what we're seeing here. In term of infrastructure, I think there we have similar trends than the one we're seeing on the corporate side, basically. Again, disintermediation and demand for credit, basically, which is adverse, basically.
Financial institutions, the story there is really a question of return to confidence. I think again, with confidence coming, return to market access, especially from the less frequent issuers, which are impacting our revenue line.
Okay, great. Thank you.
Doug.
Yeah.
Doug, it's Linda. I just wanted to comment. We've got every quarter up quarter-over-quarter for the rating agency this year. We would take your point that the fourth quarter of 2012 was pretty strong. The fourth quarter may be a little bit softer than the fourth quarter of excuse me, 2012. Every other quarter, we've got up for rating agency revenue, if that helps you.
Yeah, that's great. Thank you.
Sure.
We'll take our next question from Edward Atorino from Benchmark.
Mine was sort of answered, with the financing and stuff, will interest expense be much different in 2013 from 2012?
Sure. Interest expense, Ed, looking at non-operating expenses, it's pretty simple. The main thing will be we did our bond deal for $500 million back in August. We're carrying slightly higher expenses on borrowings for that. We were running about $16 million a quarter last year, Ed, for that. This year we're going to be running about $21 million-$22 million. That's the main difference in that line.
80s for the year?
much more exciting than that.
In the 80s for the year?
Yes.
$80 million, yeah.
Yes.
One final question. I don't want to belabor this. There was another story that the New York, somebody is going to go poking around. Have you heard from these people, or is this just a press story?
I'm sorry.
The New York Attorney General, I think, or somebody's going to go poking around. Is this for real, or is this just a story in the news?
Well, as I said, we receive inquiries from authorities, including the attorneys general, from time to time, and so they may very well have information they would like us to make available, and if they do, of course, we are going to be responsive to that.
You haven't received any notices or anything like that?
No, there are inquiries, information requests in-house on an ongoing basis. We continue to make the information requested available, and we'll do so.
Thanks.
We'll take our next question from Manav Patnaik with Barclays.
Thank you. Good afternoon, everybody. If I can just shift the focus away from ratings for a minute. On the Moody's Analytics side, can you remind us just sort of in terms of what the M&A pipeline looks like? There was some press where you guys are probably looking at another one of those outsource services things, just generally, I know we went through some of that at the Investor Day, if anything has changed in terms of what the pipeline there is.
I'll invite Mark Almeida to add any comments that he would like. At a high level, I think as we communicated at Investor Day last year, we feel like we have filled out the need to have components of that business. The business is positioned to grow nicely. That being said, if we do find opportunities for synergistic complementary businesses at reasonable prices, we would look at that. Mark, I don't know if there's anything else you want to add.
No, I think that's exactly right. We're always looking at things, either things that we proactively are intrigued by or things that are brought to us. Beyond that, I can't really say much about the pipeline. It looks a lot like what it usually looks at. We have a lot of different things that we're thinking about and considering, but nothing particularly remarkable to report beyond that.
Manav.
And one of the-
Yes.
We continue to look at what we term tuck-in or bolt-on acquisitions of the sort of size we've been doing before. I don't think any of us are excited about anything transformative. Sort of the same kind of scales we've been looking at previously.
Okay, just two more in there. On the RD&A line item, it seems like that moves somewhat alongside, I guess, how ratings generally does. I just wanted to know if that's the right way to think about it. On the ERS side, clearly you guys, based on the guidance for this year at least, guiding some good growth. It seems like in that segment, though, I guess where you're helping everyone with the compliance needs, there's been, if I Google something, I can see a lot of different companies doing a lot of things in that area. I was just wondering if there was a way to frame competition around that, share maybe, or how to visualize the opportunity there.
First on RD&A, I don't think looking at revenue trends in the rating agency is going to be particularly helpful there. You'll tend to see, I think, more volatility in the rating revenue lines, either up or down, and relatively more stability on the RD&A line, just given the fact that it's a subscription business with very high retention rates. I don't think you can really correlate very well with activity levels in the rating business. In the enterprise risk solution space, we do feel good about that business. That's a business where we've been making a lot of investment. We feel like we're getting very good traction there, and expect to continue to grow that at a very good clip. It is a highly competitive business. There are lots of people that we compete with in that space.
Not the least is internal development that our customers, which are typically large banks, they do a lot of their own internal development. We're up against other providers as well as internal build within our customer organizations. It's very competitive, but it's a very big and fast-growing market. We've been talking to a number of market analysis sources about expectations for the size of that market, and you get some very big numbers. We've had estimates of the size of the risk management software business anywhere from $5 billion-$25 billion. Either of those numbers for us are big numbers, and we think there's a lot more share that we're going to win there.
Yeah, this is Ray. I would just add to that not only do we feel we have strong expertise in the software development area, but the scope, the breadth, and depth of the data that we have available is really, we think, unparalleled, and that is supportive of that business.
All right. Thanks a lot, guys.
With no further questions in the phone queue, I would like to turn the conference back to Ray McDaniel for any additional or closing remarks.
Thank you. Just want to thank everyone for joining the call today. We'll be speaking with you again in April. Thanks.
This concludes Moody's fourth quarter and fiscal year-end earnings call. As a reminder, a replay of this call will be available after 4:00 P.M. Eastern Time on Moody's website. Thank you.