Thank you very much for joining us at Moody's 2012 Investor Day today. I'm Salli Schwartz, Global Head of Investor Relations for Moody's Corporation. Before we start this morning's program, I'd like to spend just a minute thanking my team, the volunteers and event staff, and of course, Moody's management team, who have all helped plan and orchestrate today's event. We've listed our agenda for the day. I won't go through the various presentations. I'm sure you're all familiar with what we're going to do. I'd like to note that in addition to what is listed here, we have two scheduled breaks. The first after Mark Zandi's macroeconomic overview, a second after John Goggins' legal update. Moody's Analytics product demos will be available during the second break and again at the conclusion of the event. After Ray's closing remarks, we'll serve a light lunch.
We'll be in this room through Mark Zandi's presentation move next door, just over here, to room C and D. All refreshment breaks and product demos will take place right where we are now, in rooms A and B. We're going to ask that you hold questions until Q&A at the end of each session. If you need help with anything, there are event staff that have on their name badges, little red tags, so please ask them for what you need. There's also an information booth just outside this door and to the left there. After today's event, we'll be following up via email to ask you to complete a brief survey, we very much appreciate your feedback so that we can fine-tune future Investor Day events. I've got some detail here.
You'll have a copy of the presentation when we move into the next room. Something more fun here. We've listed our recent financial performance, as you know, we did very well last year. We had over 12% revenue growth, 39% operating margin, almost 16% EPS growth, and an 18% total return, which is dividends and share repurchases as a percentage of market cap from 2008 through last year. Goldman Sachs was kind enough to conduct a screening analysis for us, looking at companies in the S&P 500 and measuring how many performed at least as well as we did last year. As you can see here at the top in the green, we start with the S&P 500. We screen for our revenue growth of over 12%, operating margin over 39%, EPS growth over 16%, and total return over 18%.
You can see how the numbers diminish. When we get down to the bottom, leaves us only with three companies, including Moody's. The question is, who are the other two? Curious if anyone has any guesses.
Royal.
No, not last year. Any others?
Apple.
Apple. Good guess. Maybe next year, depending on how they do with their new iPhone today, no. Any last guesses? Well, we're actually not going to tell you today or not going to tell you now. We'll tell you later on today. We'll get back to you with the answer, and you can think on it over the next couple of hours. At a higher level, I don't think I have to tell you that Moody's is a truly exceptional company. We endeavor to share with you today some of the many opportunities we see in the business and help you understand the ways in which we're pursuing our strategy. To that end, I'd like to introduce Ray McDaniel, Moody's CEO, who will provide opening remarks for the day. Thank you.
Okay. Thank you very much, Salli, and welcome everyone who's been able to join in person and those who are participating remotely as well. Salli has got me on a fairly strict timeline here, I'm going to have to move at some speed in order to get Mark Zandi up here for you. I do want to offer some opening remarks for you. I also have just returned from China, a little bit of jet lag, and to the extent that my words come out randomly, just rearrange them in the right order. Okay, the session overview, guidance, and our ongoing growth opportunities first, talking about some capital market considerations that influence our business.
I do want to touch for a moment on our long-term strategy, provide a bit of a spotlight on some key emerging markets where it spans across both the Moody's Investors Service and Moody's Analytics businesses before offering some concluding thoughts. Okay. For those of you who saw our press release this morning, we have updated our full-year 2012 guidance. Revenue and operating expenses are now both expected to grow at approximately 12%-13%. This is from low double digit previously. Just providing some more clarity on our growth expectations. Our operating margin is still expected to be about 39%, and we will have forecast an adjusted operating margin, which is a new metric that Linda Huber will talk about, at approximately 43%.
Our earnings per share guidance is now $2.76 to $2.86 on a GAAP basis and $2.70 to $2.80 on a pro forma basis, which eliminates $0.06 in favorable legacy tax outcome that we have in the third quarter. Share repurchase, we now expect to have about $300 million in share repurchase, up from $200 million previously. The remaining metrics on this slide are unchanged from our previous guidance. Looking beyond 2012 to the longer term, I would characterize these as the deep current drivers of Moody's business. First of all, debt issuance driven by global GDP growth. This is looking outside of cyclical leveraging and de-leveraging and just taking the assumption that global debt and ratable debt will grow essentially in line with global GDP. Secondly, disintermediation of credit markets, and we'll talk a little bit more about this throughout the morning.
Particularly with the stress in the banking sector, disintermediation is alive and well. We have growth in our Moody's Analytics, for instance, and that's driven by further penetration of Moody's Analytics client base. There are good opportunities there. It is a reasonably fragmented market. Also driven by additional regulation that we are able to provide products and services around. Finally, pricing initiatives aligned with value, and it leads, as you can see, to expectations that over time and on average, we will be able to achieve double-digit growth for the company as a whole. Looking at some considerations affecting the capital markets, and that affect our customer base and necessarily so us. Europe certainly is a top-of-mind issue, and is probably going to be for some time.
The uncertainty in Europe has an impact on business confidence on the negative side, but it also has some silver linings for the particular businesses that we operate in, including low interest rates. We have low interest rate environment, both in the U.S. and in Europe. The stress in the banking sector, again, is causing de-leveraging and is causing corporations to move into the bond markets that formerly would have been exclusively in the banking markets. Finally, risk models and regulation. There are changes in regulation going on globally, and those are acting as a catalyst for ongoing needs for better risk models, analytics, and advisory services. Now, all that, obviously the macro influences on our business are important, but we are also not simply a cork bobbing in the ocean. We can navigate these macro conditions, both challenges and opportunities, for the benefit of the firm.
Our proactive marketing and pricing to maximize the benefit from disintermediation. We also have products and strategies that are unrelated to issuance cycles, and ongoing monitoring of our outstanding ratings, for example, generates fees, as do our frequent issuer pricing agreements, and the subscription base that we have for our research and data products. We also have continuing product development and upgrades and the ability to manage costs. We have flex in our incentive compensation programs. We have control over our largest expense line, which is personnel. We have offshoring opportunities, which again, we'll talk a bit more about coming up.
I've talked about guidance, I've talked about growth and some of the macro conditions that we're dealing with, I want to step back and touch just briefly on Moody's role in the financial markets and at a high level, the strategic priorities that we've identified to succeed in that role. Most fundamentally, Moody's helps institutions manage financial risk, especially, but not exclusively, credit risk. In order to do this, accomplish this, we have to first measure the risk. We have to evaluate that. Then we have to make sure that there is a strong and nuanced understanding of what has been measured and evaluated. The measurements include our core ratings product, EDFs through Moody's Analytics, our market implied rating service. Evaluation includes research from Moody's Investors Service, Moody's Analytics, including our recently purchased Copal Partners acquisition, and the software advisory services that go with that.
Customer understanding comes from, for example, our published methodologies, training and certification, and analyst outreach. The point here is that this is not Moody's Investors Service on one side and Moody's Analytics on the other. Both operating companies do all of these things. It so happens that Moody's ratings are hardwired into the global financial system, and so that is considered appropriate for regulation. Otherwise, what we do is complementary and consistent across the organization. At a practical level, our strategic operating priorities, in order to allow us to help institutions manage risk, obviously, we want to be the most respected authority serving risk-sensitive markets. To do that, we have to defend and enhance our core ratings and research business. Ratings accuracy and transparency, our timeliness, outreach, and distribution to make sure that the ratings are received and understood.
We also have opportunities to invest in strategic growth areas. This is leveraging our brand, our skills, and we want to broadly occupy the institutional credit and financial risk management and information vertical. These are mutually reinforcing activities. Defending and enhancing our core ratings business provides us the opportunity to invest and grow outside of that business. Growth in areas where we can lever our brand and where we can lever our skills and expertise fortifies the moat around the ratings business. Looking at our use of capital, we do have twin commitments to supporting growth and returning cash to shareholders. We have strong free cash flow. We enjoy that luxury. If we were able to invest in rating agencies around the world, that would certainly be a very high priority for us, but there are few acquisition targets of scale that are also actionable in that area.
We have organic investment in the rating agency, and we have both organic and acquired investment in Moody's Analytics. We have a methodical approach to acquisitions. We are careful about those. We will talk in more detail later in the morning about how we measure the acquisitions and how we think about both what are attractive targets and whether we are meeting shareholder expectations with the targets that we do pursue. Finally, where we do not have other profit opportunities that we think are in shareholders' best interest, we intend and do return cash to shareholders via a mix of stock buybacks and dividends. Turning to the emerging markets. Just a reminder, first of all, of Moody's global profile. We are present in 28 countries, and we are active in all of the world's financial centers.
Frankly, we're active in some places that really aren't financial centers as well. You can see where we have presence, and you can see our global staffing summary here on this slide. Turning to our presence in key emerging markets. We're pursuing markets such as China and India and Latin America on really a portfolio basis. Moody's Investors Service has presence in these markets. Moody's Analytics has presence in these markets. In China and India, we are also represented through joint ventures, CCXI in China and ICRA in India. We participate in the global cross-border markets. That is the key aspect of our ratings business, but also these domestic markets, in particular through the joint ventures. We participate in the credit rating business in these domestic markets.
Moody's Analytics is offering a range of products and services, which again, Mark Almeida will talk about in more detail, across these markets. It's really a portfolio approach, partly in response to what we think will succeed, partly in response to what we are permitted to do in these markets, and you can see the range of activities. You also see at the bottom of this slide, the revenue that we currently generate from these markets. I put this up not only because it's an attractive set of numbers, but when you look at that compared to our total global revenue, it really is quite small, and the opportunity here is quite large. We're enthusiastic about the long-term opportunities that come from these key emerging markets. Finally, just in conclusion to this introductory set of comments, again, Moody's helps institutions manage risk.
We are distinctively well-suited for a rapidly evolving financial world because we provide both finished products and services as well as platforms, software platforms, and data that allow institutions to do it themselves if they wish to. We are well-suited for the different attitudes and orientations of different institutions around the world to how they think about measuring, evaluating, understanding risk for sound risk management. The diversification of products and services does allow profitable participation in economies at multiple stages of development. We don't have to wait for mature bond markets that demand our global scale ratings. We can participate profitably in markets that are on that long path to getting to a well-developed, deep, and liquid bond market. This allows Moody's not only to survive, but to prosper. You're going to hear more about that in detail from my colleagues.
I thank you very much for joining us today, and I'm going to turn this over to Mark Zandi now. Thank you.
Thank you, Ray. Thanks for the introduction. I'm going to expound for about an hour. No, only kidding. That'd be too much. I'll expound for about 10 minutes, and then we'll take any questions or comments that you might have. The global economic recovery is just over three years old. It's struggling, but I expect it to remain intact. While there'll be a great deal of variability across the globe, I do think it should gain traction by this time next year. By the mid part of the decade, I think we should see solid growth throughout most of the global economy. Let me sort of break that down a bit and take a little deeper look at different parts of the world. First, Europe. Obviously, this is the weakest link in the global economy.
The European economy is in recession, likely to remain in recession through the end of the year into next. It's going to be a slog for Europe for the foreseeable future. I do think, and it is my working assumption, that the Eurozone will remain intact, that it will continue to look like it does today for the foreseeable future. The reason for this view is that I believe European policymakers are fully committed to the Eurozone, and this is most obvious by the recent actions of the European Central Bank, the ECB. You can see how aggressive they've been in this first graphic. This shows the size of their balance sheet. If you go back prior to the recession back in 2007 and 2008, they had about a trillion and a half EUR on the balance sheet.
It's now up to four and a half trillion EUR and rising very quickly. This amounts to about a third of European GDP. Just for context, the Bank of Japan's balance sheet is about 30% of Japan's GDP. The Bank of England's balance sheet's about 25% of U.K. GDP, and the Fed, which of course, has been very aggressive and remains aggressive, its balance sheet's about 15% of U.S. GDP. The ECB has been very aggressive over the past year, cutting rates, cutting reserve requirements, providing very cheap funding to European banks through the LTROs, and of course, most recently, last week, the announcement that they will engage in an open-ended bond buying program to maintain very low interest rates. I think this signals very strongly that the ECB will continue to do what's necessary to keep the Eurozone together.
There's a fair amount of criticism that all the Europeans have been doing is, in a sense, kicking the can down the road, not addressing more fundamentally the economic issues they face and erecting the kind of institutions they need to have a more durable fiscal and monetary union. I would disagree with that assessment. I do think with each round of financial market angst, they are making progress. They're imposing fiscal discipline on the troubled sovereigns, requiring the troubled sovereigns to engage in structural economic reform. The ECB, by its actions, is beginning the process of debt mutualization de facto. The quid pro quo for the open-ended bond buying will be that the troubled sovereigns will have to participate in a more rigorous fiscal process.
I think that's a key step towards developing the institutions Europe needs to have a more rigorous fiscal process that will ultimately succeed. Of course, there's a lot of risk here, mostly political. I think the European leadership knows where they want to go, and they have a rough roadmap in mind. To get the electorate to follow along is obviously going to be tricky. The Germans are really not very happy about having to ante up for all of this. Of course, in Spain and in Greece, the economies are close to depression-like conditions and very close to bailing. I don't want to be Pollyannish about this. Obviously, the risks are very high that the politics will overwhelm the process.
I think there is a strong realization that the costs of not keeping the Eurozone together are very, very high, and at the end of the day, they'll figure out how to do that. Regardless, there's going to be a slog for Europe, but they'll keep it together. In the emerging world, growth has slowed. I think the slowdown in EM is at its most pronounced literally right now. You can kind of get a sense of the slowdown here. This shows real GDP growth from 2011, 2012, and 2013 for four key emerging market economies. You can see the slowdown occurring between 2011 and 2012. The Brazilian slowdown occurred between 2010 and 2011. You can't quite see that, but if you go back to 2010, Brazilian growth was closer to 4% or 5%.
You can also see in the slide that I do expect growth to stabilize soon, we'll see a bit of an improvement as we move into 2013 and 2014. The slowdown in the EM is in part related to the fallout from the European economy. China's economy is much more dependent on Europe than it is on the U.S., that's been a significant weight on growth. To some degree, the slowdown in EM is by design. If you think back a year and a half ago, these economies were overheating. Inflationary pressures were developing. Food prices were rising very rapidly. Fiscal monetary policy turned contractionary, that has succeeded in slowing growth. The slowdown is also in part due to policy errors. I think in some of these countries, they panicked a bit because of the slowdown.
It's been a little bit more pronounced than they wanted, they've responded with policies that have been counterproductive. This is most obvious in countries like India and to a lesser degree, Brazil. I do think the slowdown is at its worst, we will see these economies start turning. The reason for this view is that these economies are now working really hard to stimulate growth. Monetary policy is now much more expansionary. Central banks across the EM are cutting interest rates. We're seeing some additional fiscal stimulus. The Chinese announced stimulus last week that amounts to about 2% of their GDP. The Koreans last week also announced fiscal stimulus. These economies are very sensitive to monetary and fiscal stimulus. I think they'll succeed in turning these economies around by early next year and certainly by this time next year.
One other quick point about the EM. The EM is operating pretty close to capacity. Even when growth accelerates, we're not going back to the kind of heady growth rates we were getting back a couple, three years ago because there just isn't enough capacity to do that. We will see better growth. In the case of the U.S., obviously, the key risk is the fiscal issues. I think the U.S. economy has come a long way since the recession and the financial crisis. We've righted a lot of wrongs in the private sector. Non-financial corporate balance sheets are in excellent shape. Businesses are very profitable. The banking system is very strong, highly capitalized, very liquid. Even households have done a marvelous job of reducing debt. Debt loads are about as low as they've been in the data that we have. Credit quality is improving.
None of that is going to shine through. The better private sector balance sheets and the implications for growth aren't going to shine through unless we address our fiscal issues. Fiscal policymakers obviously have some very significant work to do after the election. They, in fact, have to solve three problems. One is the fiscal cliff. That's the tax increases, spending cuts that are coming in 2013 if there's no change in legislation. Second is the Treasury debt ceiling. That has to be increased again. Do a little bit of budget arithmetic, we're going to bump up against the budget ceiling early next year. Finally, policymakers need to establish what you might call fiscal sustainability.
That is the tax revenue increases, spending cuts over the next 10, 15 years that are sufficient to bring future deficits low enough under reasonable economic assumptions that the nation's debt-to-GDP ratio stabilizes and actually begins to decline. That's pretty difficult to do, you can see the implications if they don't do it here. This shows the effect of the hit to GDP from discretionary fiscal policy. I'm showing you a little bit of history back to 2008. I've decomposed a lot of different aspects of this discretionary fiscal policy to give you a sense of the impact it has on GDP, the line represents the sum of the different bars. You can see, if you go back to 2009, that was the apex of the fiscal stimulus, the Recovery Act. By my estimate, it added about 2.5% to GDP. 2010 stimulus was a small positive.
2011, it was a small negative. By 2012, this year, it's starting to be a meaningful drag, almost 1% to growth. Take a look at 2013 and what happens if we don't get change in policy. The hit to GDP is quite significant and the fodder for economic recession. We need to address this. I'm here to say, I think we will. I'm not going to tell you exactly how, unless you ask. I do think the stars are aligned politically that we will get a reasonably graceful agreement by early next year. There's going to be a little bit of pain and suffering. A fair amount of political brinkmanship is going to feel a little soft in the first part of 2013. I think we're going to navigate through that.
By this time next year, and certainly as we make our way into 2014, 2015, the stronger private sector balance sheet is going to shine through. Our economy's going to perform measurably better, and we'll have very strong growth. On that optimistic note, I'm sure not all of you have bought into the optimism yet. I'll stop and pass it back to you and see if you have any questions or comments that you'd like to make. What's bugging you about what I said? Sir.
Could you-
I think we have a mic.
If you have a view, I don't know if you do, but if you have a view, could you share terms of-
I have a view on almost everything. The only thing I won't give you a view on is the Yankees and the Orioles. I think I'll avoid that.
The prospect and the implications of increased self-sufficiency in terms of energy in the U.S., natural gas, oil, et cetera.
Yeah, that's a very good question. As you know, there's been significant technological breakthroughs, both in terms of shale gas, but also in terms of shale oil. In my economic forecast and outlook, if you look at the numbers, I'm taking a very conservative view with regard to this. I'm assuming that we get some benefit from shale oil and shale gas, but it's relatively modest. Just to give you context, we consume 19 million barrels a day of oil. Of that, we import 10 million barrels a day, 11 million barrels a day. The rest is imported. I'm assuming as we go forward that we see a little bit more domestic production. It goes up to 12, 13 million barrels a day, and so the import bill narrows a bit. Still quite significant, but narrows. I think there's a reasonable argument, though, that I'm being too pessimistic.
That if we're able to get through some of the environmental issues that obviously are very important here, and I think we can. Some really good energy economists, including some on my staff, think that if you look down five, certainly 10 years from now, we'll be still consuming 18, 19 million barrels a day because we're getting better at using oil, particularly in our transportation system. Our imports will be two, three million barrels a day. If that's the case, that has very significant implications not only for the economy, but also in terms of our political relationships with the rest of the world and Middle East, and could have significant implications for defense spending and everything else. I think there's a lot of potential. If we're looking for a potential positive surprise, I think it may very well come from the energy sector.
I'm being conservative. I'm not including that yet into my baseline forecasting. I think that's something that we certainly could be surprised on the upside with. Did I answer your question? Yeah. Okay. Yes, sir. Sorry. It's probably a mistake to have me be the boss of
You said if I asked, you would share your view on what sort of path you thought would be successful in the U.S. in resolving the fiscal cliff issues.
My sense is that the election matters to some degree. Broadly speaking, regardless of who wins the election, under most scenarios with regard to the election results, we're going to address the fiscal cliff and the Treasury debt ceiling and fiscal sustainability issues in roughly the same way. We're going to address them largely because both parties, Democrats, Republicans, have significant leverage in this debate. Both parties have leverage with regard to sequestration. As you know, sequestration are the automatic spending cuts that will kick in. We agreed to this as part of the Treasury debt ceiling we achieved last August. It's $1 trillion over 10 years, $500 billion defense, $500 billion non-defense. Both Republicans and Democrats have a real strong incentive to negotiate with regard to that.
The Democrats have a lot of leverage over taxes because by law, the Bush era tax cuts expire at the start of 2013. Tax rates are going up on everybody if there is not a piece of legislation. Whichever party loses the presidency, that party will have leverage with regard to the Treasury debt ceiling. For example, last summer when we were debating the Treasury debt ceiling, House Republicans used that as leverage. Whichever party is not in control with the presidency, they'll be able to use and in all likelihood, would use the Treasury debt ceiling as leverage. In this context, when you have both sides with significant leverage, I think that's the basis for an agreement. We actually came pretty close back last August when we were raising the Treasury debt ceiling the first time.
I don't think this is going to happen. It's going to be very difficult for this to happen. It's not going to happen before the election. It's going to be very difficult for this to happen in the lame duck. I do think when we get into early next year, when and after the tax rates rise and after some of the spending cuts begin to take effect, this is going to have an impact on the economy. The economic pressure, along with the political pressure, will be the fodder for an agreement. I think the agreement, it's not going to solve our fiscal problems forever, but they'll solve them sufficiently over the next decade that I think that will be sufficient in terms of investors and in terms of what it means for U.S. economic growth. We'll have to come back and revisit.
We've got a lot of other significant problems to address, including our healthcare costs, I think that's a problem for another day. I will say, obviously, there's a lot of risk around that as well, and again, I don't want to be too Pollyanna-ish about it, but I think the odds are better than even that we'll get a scenario that's close to what I'm describing. Yeah. Yes, sir.
Capital raising activity has been at a high level in the context of low rate environment. What does your forecast say about debt issuance volumes over the next couple of years, and can you tie that into your rate expectations? Thank you.
I think the working assumption that Ray used in his slideshow is a very reasonable one that we'll get debt issuance growth that's consistent with the rate of nominal GDP growth. I'll say, I think Ray's assumption on nominal GDP growth is very conservative. If you look back at the slide, it's 3%-4%. I think most long-term economic projections for global growth are for growth that's closer to 4%-5%. I think that's a very conservative kind of an assumption. I think it is though appropriate to forecast debt issuance consistent with nominal GDP growth because I think regulators globally are now focused on credit growth as a metric with respect to risk-taking in the banking and financial system.
They're going to calibrate capital ratios, liquidity requirements to ensure that credit growth in its aggregate form is going to be consistent with overall GDP growth. They're looking at the debt to GDP ratio. That's a key metric in their thinking. You can kind of sense it when you listen to them talk about cyclically adjusted capital ratios. That's what they're talking about. I think this is sort of a number that they're focused on, and I think prudent forecasting would assume that that's the kind of growth rates we're going to get. Obviously, in any given year, we're going to be a little bit above that, a little bit below that. Some of that will depend on economic growth, risk appetite, and of course, the interest rate environment.
I think it's fair to say that interest rates are going to remain low for a long time. In fact, I think the Fed's words are exceptionally low for an exceptionally long time. They're saying late 2014, very likely tomorrow, they extend that out into mid-2015. Will they actually wait that long to raise rates? Maybe not, only because growth is taking off at that point. I think the spirit of what they're saying is we should buy into that. I think it's real that the rate structure is going to remain low for a long time, at least over the next couple, three, four years. Just one final point. When the U.S.
economy is operating at full potential, meaning we're growing at potential, the unemployment rate's at the natural rate, 5.5%, 6%, the equilibrium 10-year Treasury yield, where it should be, in theory, is somewhere around 4.5%, 5%. At some point, we're going to go from 1.7%, where we are today, to 4.5%. That's a long road that we're going to have to go down. It's going to take some time to go down that path. Great. Yes, sir. I'll go in the middle. Yep. Go ahead, I can paraphrase.
Oh, okay.
Yeah. Yes, the Philadelphia Phillies will get into the playoffs. Not a chance.
I'd be curious to hear your thoughts on the U.S. economy when we're going through this time period when the politicians are dealing with the fiscal cliff and the debt ceiling and this huge uncertainty with the election and all that. Do you think it'll still be downward pressure on the economy the latter part of this year going into early next year, given all the problems in Washington, D.C.?
Yes. I think it's going to be tricky over the next six to nine months. I think it's going to get very soft early next year. Q1 is going to be a soft quarter. My sense is that policymakers aren't really going to sign on the dotted line until we come right down to the wire, and the wire is the Treasury debt ceiling. If you do, again, as I said earlier, if you do a little bit of budget arithmetic, it's probably not until late February, maybe early March, when the Treasury runs out of accounting techniques to avoid an actual default on the debt, or more likely they miss a Social Security payment or a Medicare payment. That's the drop dead date. My guess is policymakers will engage in a fair amount of brinkmanship and back and forth in January and in February.
Of course, in that period, tax rates have gone up, so our withholding schedules are going to change. We're going to see less in our paycheck. The spending cuts are going to start to bite. That takes more time, but they're going to start to hit. That's going to weigh on growth. Of course, confidence is going to start to erode just like it did back last July and August in the lead up to the agreement on the Treasury debt ceiling in that period. Q1 is going to be a tricky quarter. Just to give you a number, in our outlook, we have 1% GDP growth in Q1. You wouldn't have to push me very hard to say it could be negative in Q1, a small negative.
I do think that's well worth the cost, the economic cost, if in fact, on the other side of that, we get an agreement like I've described. Again, I think that's what we're going to get. It reduces a great deal of uncertainty, fiscal uncertainty, and I think it lays the foundation for a much stronger economy as we move into the latter part of 2013 and particularly into 2014, 2015, when we've got a lot of other positive cyclical dynamics that will start to kick in.
Do you not think in the second half of the fourth quarter the uncertainty will there?
That's a good question. It's already weakened by the fiscal uncertainty. Although I can't prove that, the circumstantial evidence and the anecdotal evidence would suggest that hiring rates are very low and investment spending weaker because of the uncertainty created by the fiscal cliff and these other fiscal issues. This uncertainty will, I don't think it will intensify until after the election. In the lame duck, depending on how the election goes, the impact will be more or less significant. I'm speculating. I always speculate, but I'm speculating more now. Suppose Mitt Romney wins the election, and this isn't a forecast, I'm just saying suppose, then I would think that would buy time for him because he's not going to be president until the middle of January.
Likely the people would, and investors would give him more time to figure it out. If Barack Obama wins, the dynamics are a little bit different. I think there'd be more pressure to do something more quickly, and the fiscal uncertainty would intensify more rapidly. The impact on Q4 will be more significant in that kind of a scenario. Of course, we've got the iPhone 5. That could bail us all out in Q4. All right. Yes, sir. I think we have time for one more question. We'll take it right here.
A classic analyst style, a two-part question from a last question. The first you showed the slide that showed the tripling of the European balance sheet from 2007 to today. Is there a mark to market on that balance sheet? What happens to the European economy when and if that happens? First question, the second is, if you just comment on the U.S. housing market. Some very low interest rates driving very high refi. When does that refi cycle slow? Does the purchase cycle pick up? Is there a smooth handoff or not?
Well, there's likely to be some credit losses here. Particularly on the new bond buying, the OMT. As part of that arrangement, the ECB is now pari passu with other investors. Unlike their previous bond buying where the ECB was at the top of the hierarchy, they're now on a more level playing field with the rest of bond investors. I think there's a fair amount of credit risk. This is the central bank, and I think they'll be able to navigate around that reasonably gracefully. You make a very good point, and that is that of course the ECB is Europe. The Germans are 27% of the ECB's capital base. When the ECB is expanding its balance sheet and essentially buying debt You're buying bonds. This is Germany, and this is France, and this is everyone else committing and buying in.
To a very real degree, true dollars and cents, Germany is already committed to this. They've got a lot already invested, and it's rising by the day. When this OMT kicks in, it's going to be rising very rapidly, presumably. That just, in my view, increases the odds that they figure out how to keep it all together, because the cost of allowing it to come unraveled will be too high, largely because it'll come out of their hide through the ECB's balance sheet. In terms of the housing market, U.S. housing market, the refi boom is quite significant, obviously, in part because of the 3.5% fixed mortgage rates for prime borrowers. The HARP program is doing good business. The administration made some big changes to the HARP plan late last year that have been implemented this summer.
Timing was pretty good, we're getting a boatload of HARP. HARP is the program for GSE loans, underwater GSE loans, and that's working quite well. There's been about 1.4 million HARP refinancings. When it's all said and done, we could get something that's closer to 2.5 million HARP refinancings. It will expire end of next year. That's significant and very positive development. The purchase market is starting to kick in. Slowly but surely, we're seeing housing demand pick up. Investor demand is very strong because rents have increased, you're seeing strong demand in stress markets. Bottom line, I think the housing market is off bottom. It's going to improve. It's not going to be a straight line.
We may see a little bit of softness later this year or early next in the context of what's going on with our fiscal situation and implications for the job market and what that does to confidence and uncertainty. My view, by this time next year and certainly by 2014, 2015, the housing market, the commercial real estate market are going to be booming. That's a key reason for my optimism in the mid part of the decade. The construction cycle, which is so key to every economic recovery, has been neutered in this one for obvious reasons. In fact, it's been a drag. It's going to start kicking in, and that's when we're going to get the true cyclical boost, and we start to get GDP growth rates that are not 2%, but 4%.
That's when we really create a lot of jobs and bring down unemployment. I'm going to end on a really optimistic note. I think when we're in this room in 2015, 2016, we're going to all be feeling a lot better about how things are going. With that, I'm going to stop. We're going to reconvene in the other room and restart up in there. Unfortunately, this is a little early for cocktails, but there is coffee over there as well. Thank you very much.
Here you go.
Oh, thank you.
I think the program has changed the company in a very deep way. 10 years ago, corporate social responsibility was not a theme that was central to Moody's. It is today. Every employee knows about it, knows about the program. The level of engagement is extremely high, everyone recognizes the value of this program to Moody's and to us individually.
Corporations are really nothing more than the collection of individuals that work in that corporation. We do have responsibilities as individuals, as companies, to identify the means by which social responsibility can be implemented. We have committed to use some of the financial resources of our company to bring together the aspirations of our employees as well as our local community giving. It is ultimately a benefit to the company because it's a benefit to the environment in which we operate in.
The Moody's Foundation is integral to the efforts of Moody's Corporation. We are blessed by having a company that is a key participant in the financial markets and is able to provide good profitability. It's incumbent upon us to give back to the community. Some of our groundbreaking work has been in such areas as the Moody's Mega Math Challenge, the National Academy Foundation, various charter schools, and other educational opportunities.
The foundation has a very specific strategy. We focus on education in math, economics, and finance. We look for opportunities that encourage boys and girls to excel in math and to understand how math can be applied to anything.
Moody's Mega Math Challenge is our signature program. It has been for a number of years, and it has grown very substantially. It has been a phenomenally successful program. It's an online program in applied math modeling. They are attempting to use math skills and modeling skills to solve a real-world problem and take what they are learning academically and see what kinds of solutions can come from the knowledge that they are gaining through an applied math program like Moody's Mega Math Challenge.
The winners of Moody's Mega Math Challenge, in addition to winning some scholarship funding, are also offered jobs to come work with us for the summer. We've had some real superstars come and work on special projects.
Our mission is to serve the financial markets and risk-sensitive markets. I can't think of a better way to serve the markets than to be facilitating financial literacy and education. The afternoon of service program is an afternoon where a team at Moody's mobilizes to the local community and tries to do something for the community. I've managed three groups in three different offices. All of us have participated, in many cases, multiple times in these activities. This is a big program.
The Cook Center is one of the largest providers of educational opportunities for developmentally challenged kids. The idea today is to work with kids who are in the skills program, which is a transitional program for kids 18-21, to teach them life skills so that they can lead independent lives. We work with them to teach them some of the basic skills that they will need, like interviewing techniques.
It's definitely very exciting and humbling to be a part of a company that puts employee time to volunteer for a really great cause like this, like today. It says a lot about Moody's and makes me realize I made the right decision to come work for Moody's.
Well, what I tell new employees about our afternoons of community service is that it provides a really unique opportunity for them to connect the work they do here at Moody's with the needs of the broader community. Moreover, it gives them an opportunity to interact with their colleagues in a very different setting than what they would see day in and day out.
All the food we're growing up here at the moment, we're donating to soup kitchens, one right below us and one at a church a couple blocks away. Volunteers serve a number of purposes. In addition to doing some great work that needs to be done, it also helps raise awareness with the staff for the kinds of things that go on in New York that are not often recognized, like hunger.
In thinking about corporate philanthropy, it's not just about giving grants. In many ways, we have the opportunity to give the expertise of our employees.
I find Moody's is our only corporate donor who truly has four levels of participation. We are honored to have a Moody's director on our board of trustees. They also give us in-kind, what we call capacity building. Moody's did a wonderful business plan just for the SeaGlass, which is going to be a ride to the bottom of the sea. Third is we get an annual grant. Never to underestimate the power of those hands, those thousands of hours, and those great hands working in the soil, working on things that we really need to do, and cut our operating budget by substantial percentages.
Moody's Corporation was one of the first major companies to return to Lower Manhattan during 9/11's aftermath. Through the Moody's Foundation, the company has also generously supported Lower Manhattan's renaissance. On behalf of the hospital, it is my honor to present this year's Corporate Leadership Award to Moody's and to the company's President and CEO, Ray McDaniel, Jr.
This program started essentially as a U.S. program, very quickly, I think across the world, people have been extremely keen to embark on similar initiatives. I think that it's the right thing to do because we are part of a community. We're part of society. We are not on our own. We're not something standing alone outside of the world, and we need to be part of that world.
I have a lot of questions. Yeah. I think this is still going. Are you still going, Ray? I have a question, Maureen, about connecting systems. It may be in the terms of this. This is one of the database ones. The first one is going to play out through the website, or it's the perfect work from the website. In a later point, they will make an ideal direct connection to provide service. There is no requirement to connect these two locations outside of the studio. The only thing maybe
Good morning, everyone. This is a much more frugal setting than next door, but I hope what we'll be discussing this morning will be as attractive as the first glimpse we had. I'm here this morning with really three messages. The first one is that Moody's ratings are and will continue to be an important market tool. The MIS franchise, our market positions, the business opportunities we have are solid, and in some aspects have actually improved over the last several years and in a number of key markets. My second message today is that our strategy continues to be focused first on the products and operational performance of MIS. Second is on addressing and creating additional value for the users of our ratings. Third is to position MIS on the most attractive market that Ray described this morning.
My third message also to all of you is that we're managing MIS actively to mitigate both the uncertainties, the risk, and the additional costs that are caused by the regulatory environment and the change in the competitive landscape we're facing. Joining me today this morning is Mike Rowan, who is here, who heads our commercial group, and he will be talking about the growth drivers and the opportunities that MIS is facing today. To kick this off, I'd like to first address a question that I'm sure is on top of your mind. It is, to what extent ratings that we see today being removed or displaced from regulation are losing relevance in the marketplace. My answer is that Moody's ratings and ratings in general will remain highly relevant to the marketplace and to fixed income markets.
They will remain relevant also, we believe, to policymakers and regulators. Now, we'll have to recognize that we have to be ready for a world where there will be less use of ratings and regulation. I want to reiterate today that we do not view regulation, and we've said that for a long time, as the underpinning our franchise and our future. We have a long-standing view on the use of ratings and regulation, and our strategy is geared to really develop and grow this business without the uplift of regulation. Now, let me say it again, Moody's is relevant. I believe this relevance is best evidenced by the four factors that you will see on this slide. The first one is the growth rate we've seen in the rate and the mix of earning revenues we have.
We had double-digit growth in 2010, in 2011, and we have a high single-digit guidance for 2012. The second is the strong performance we've seen in the ratings related research and data revenues that Moody's Analytics is booking. The third is the strong and improving market position MIS is having, and the fourth is really around the improving share and tone and coverage we see in the media. Let's step back and go to the first slide on rating revenues. Step by step, we're getting closer to getting back to the revenues we had at the peak in 2007. This was $1.8 billion you see on the left of this slide. This is despite a significant contraction of issuance we've seen in a number of asset classes. You know, you're familiar with those numbers.
Issuance in structured finance, financial institutions, even on bank loans in the U.S. have contracted significantly. This is really the result of both the global deleveraging we've seen as well as the dislocation in the structured finance markets. Today, we have a more balanced mix of revenues than we had across asset classes, and we have higher yield. In the last two years, our growth rate has exceeded the growth rate that our competitors have been seeing, and we have posted the strongest operating margin. The second factor I'd like to go to relates to the revenues generated by Moody's Analytics from the distribution of Moody's data and research content. This is a subset of the figure you're seeing on this slide. Those revenues have been posting a high single-digit growth.
This is driven by a strong focus of both organizations on enhancing the content and our delivery platform, as well as focusing on customer service and retention. A third factor relates to our market position. This is a topic that Mike will cover much more extensively in a few minutes, but what I would like to stress is that MIS has been maintaining its lead in terms of coverage in a number of markets and closing the gap in markets where we were lagging against competition. In the U.S. and Europe, as Mike will discuss later, we have retained very strong positions for fundamental ratings. You see the numbers here. In structured finance, you see a drop in share.
That drop in share reflects the collapse of activity we're seeing in that market, the fact that we have a much more limited investor base, and also some of the new competitive dynamics. Mike, again, will cover that later. The actual access of issuers unrated remains actually unchanged. It's actually declining in a number of markets, notably in the U.S. and Europe. Very often, those issuers remain associated with either sovereign-guaranteed debt or some issuers that benefit from a very strong reputation in their local domestic markets. In Asia, the phenomenon is somehow more prevalent, and this is really due to the emergence and the very rapid growth in recent past on domestic markets. Whereas in the cross-border markets, we continue to enjoy very strong share. We're taking steps to address this in a number of ways.
One, through marketing and direct marketing, something that our commercial group is doing very actively. Also, we are leveraging our affiliates in the regions as well as introducing new product and product innovation that are designed to address the coverage of these domestic markets. I'd like to cover a point that I'm sure some of you have paid attention to, is the fact that we are seeing request and a limited number of requests to withdraw ratings, in financial institutions and in some cases, also, as illustrated by the market share number on structured finance, we're seeing rotation of agencies taking place. Those are, in most cases, driven by what I would describe as rating shopping as well as in many of those cases by the impact of the recent bank downgrades.
Our policy, let me be clear, is that we maintain ratings wherever we have rated debt outstanding, and we have sufficient information to do so. We think that the value of this is to really continue to bring a differentiating perspective to investors. We're able to do so in most asset classes. There's one exception we're facing today, which is the covered bond market in Europe, where in some instance, we have to, without the cooperation of the issuer, to actually withdraw our ratings. A fourth factor I like to talk about is really the improvement we see in our position in term of media coverage and share of voice. Both the tone and the frequency of the coverage has improved dramatically. We continue to have a leading share of voice, as you can see on the left chart here.
The drivers of coverage are essentially our opinions and ratings, which is what we want it to be. Again, those in term of volume and quality of coverage, we have seen significant improvements. To sum up, while I do not want to underestimate some of the challenges we're facing and some of the uncertainty that I will discuss later on the regulatory front, the MIS ratings continue, as I said, and are playing a very important role in marketplace. We see no reason for that to go away. The disintermediation continue to increase, as Ray pointed out this morning. The economies of scale we're providing to the marketplace and to the participants are significant. Last, the demand for a measure of risk that is both accurate but also widely available, easy to understand, and globally comparable, remain very strong.
With that, I'd like to turn it now to Mike Rowan, who will cover the next topic about the opportunities we have as an organization.
Thanks, Michel. In this section, I'll start with the corporate segment. The corporate ratings business is the largest business segment in MIS. While revenue growth slowed in the second quarter, this business has benefited for the last three and a half years from historic levels of issuance driven by very low interest rates and ample liquidity as investor demand for corporate bonds has been strong. In fact, this trend continued for the past several weeks, and we've seen historic levels of issuance in August and the month to date in September. One would naturally question if corporate issuers have satisfied their funding needs, and if refinancing has been pulled forward into the current periods. A good way to consider the answer to this question is to look at the U.S. market, which is the largest of the global fixed income markets.
Our studies of forward debt maturities, which are published at the beginning of each year, confirm that issuers have been pre-funding their maturities. If you look at the maturities in 2014 and 2015, you can see that they step down in the graph. At the same time, our annual studies show that the forward maturities in 2016 have been pushed out. These maturities reflect both the investment grade and speculative grade corporate bond markets and the leverage loan market. What you're seeing is the pushing out of that leverage loan market in 2016. Another point to consider is that record levels of issuance in the past three years have been at historically low rates. They represent about one-third of the total stock of outstanding corporate debt in the U.S., which was about $5.2 trillion at the end of 2011.
There's still an ample amount of debt that needs to be refinanced and addressed in forward periods. It's also noteworthy to consider that a significant portion of the capital that has been raised, has been raised to increase liquidity reserves as corporate treasurers prepare for market disruption and raise excess capital in periods such as this. We know from Moody's research that corporates that we rate have accumulated substantial cash balances in excess of $1 trillion, which has strengthened their balance sheets and positioned them well for the future. With interest rates likely to remain low next year, this trend will probably continue. Interest rates will probably increase when the economy gains firmer footing, and at this time, it's reasonable to expect that issuers will raise capital for investment in mergers and acquisitions. We expect that many banks, particularly in Europe, will deleverage and shrink their balance sheets.
This will reduce their debt funding needs. They will also use central bank funding to supplement some of those needs. As a result, it's likely to expect that issuance trends will continue to decline, and overall funding needs will remain below pre-crisis levels. Nonetheless, we note that our revenue from financial institutions is not correlated with debt issuance. Although banks are active users of our ratings for debt issuance, our ratings are also used in the interbank market for a number of reasons. Our value-based pricing programs recognize that these institutions are high-frequency issuers with alternatives not related to debt. As a result, we have greater recurring revenue streams in this segment. In some respects, our revenue in this segment is better gauged by the number of institutions that we rate rather than issuance volumes.
We are expecting to see the number of financial institutions that use our ratings decline, particularly in markets that are consolidating like Europe. However, we're engaging with new customers in developing markets. These will provide growth in the future. We anticipate deleveraging in this market will cause some disruption, but not a significant decline in our revenue from financial institutions. For the first half of this year, we've seen good growth in our public infrastructure and project finance segment. The key driver of this has been the resurgence of the U.S. public finance market. The drop-off in U.S. public finance issuance in 2011 reflected the pull forward of maturities in 2010 as the Build America Bond program expired and the uncertainty facing many municipalities given the general economic conditions.
This uncertainty caused many municipalities to defer capital spending for infrastructure, which is a key driver of issuance in the U.S. public finance market. We've seen activity return to more normalized levels in 2012, and we expect that to continue for the following reasons. Issuance for refunding will likely remain active as interest rates remain low. Many municipalities still need to invest in infrastructure spending that was deferred in 2010 and will ultimately need to be undertaken. Given ongoing fiscal pressures at many municipalities, we expect that this will occur in moderation and over time. The need for roads, schools, and other public works is ongoing. Overall, we see strong demand for ratings in the U.S. public finance segment given increasing credit risk evidenced by recent municipal defaults.
At Moody's, we expect to continue to distinguish ourselves in this area through insightful research and thought-provoking analysis that helps investors navigate through these difficult periods. The global structured finance business has been able to achieve moderate growth in recent periods, with activity in the U.S. offsetting weakness in Europe. The U.S. business has positive trends in several segments. U.S. asset-based securitization has been very active, particularly in consumer segments such as auto receivables and credit card financing. Investor demand for these asset classes has been strong and issuance is expected to continue. The commercial mortgage-backed securities market has demonstrated good growth in issuance in the first half of this year. We have good coverage of this market, and in fact, we lead all rating agencies in CMBS.
Within the derivative structured credit market, the CLO segment, which are collateralized loan obligations or pools of high-yield loans, has been very active. This is another segment where we have a solid market position. One area in the U.S. that is still largely dormant is residential mortgage-backed securities. We expect this market to return at some point, but probably not in the near term. In Europe, we're facing some headwinds, as the ratings related to ECB funding represent a significant portion of the market. In addition, issuance and investor demand remain very sensitive to credit issues related to sovereigns and banks. We expect greater uncertainty in Europe than the U.S. and could see activity decline. We also expect ongoing regulatory uncertainty and legislative changes to continue to hamper growth in the structured finance market.
This is occurring in many markets around the globe, most notably in the U.S. and Europe. We have adapted our processes to meet these new requirements, and many issuers have also adapted their processes. Structured finance has always been a highly competitive market. We expect this to continue as new competitors focus on this market segment. Competition has been most evident in the U.S. CMBS market, where there are now 6 rating agencies providing services. We've continued to distinguish ourselves based on the quality of our work, analysis, and service, and we continue to lead in coverage. We look to endeavor to perpetuate that, but don't discount the fact that many others are looking to build expertise in this area.
The other place where we have seen notable developments in the entry of emerging competitors has been in Europe, where DBRS has established a position and is making progress in building coverage. Overall, we expect pressure on our current market position in Europe. In this morning's news release, we revised our outlook for MIS, noting that we now expect MIS revenue to increase in the high single-digit % range. Nonetheless, we believe that MIS has the potential to be a double-digit growth company looking beyond 2012. Opportunities present themselves in a number of areas. For example, our outlook incorporates the current market turmoil in Europe. Should the European market rebound, we believe that debt issuance will increase and our business is well-positioned to provide the services in those markets.
Disintermediation will also support growth as banks de-leverage, shrinking their balance sheets, and many companies will turn to the bond market for financing thus increasing the demand for our rating services. Our current outlook also reflects slow growth around the globe. As Ray mentioned earlier in his comments, Mark Zandi repeated in his euphoric outlook, when global economies recover, demand for ratings will likely increase as debt issuance is used for capital investment and acquisitions. Emerging markets also present opportunities for ratings as their fixed income markets evolve and companies look to global bond markets for financing. Our current footprint of 26 offices around the globe leaves us well-positioned to service these issuers that wish to use the global fixed income markets to raise capital.
We also offer our services directly in many domestic markets and through joint ventures in certain key markets, as Ray had mentioned earlier in his comments on China and India. Finally, the resurgence of the structured finance market, particularly the mortgage-backed securities market, would present significant opportunity to drive double-digit growth at MIS. The European non-financial corporate market is poised for growth. Many companies had historically used the bank market to a much greater extent than the bond market for funding. This is changing. The shift from bank loans to bonds has occurred at a modest pace for the past several years, with 9% compounded annual growth for bonds being greater than the 5% growth rate for loans. Loans still account for more than 80% of the funding for corporates in Europe, versus only 50% for corporates in the U.S.
We expect the shift to bond financing will accelerate. According to Dealogic, European companies raised more money from bonds than loans in the first half of this year. As banks in Europe shrink their balance sheets and look to improve their returns on capital, it's reasonable for corporate treasurers to turn to the bond market to diversify funding sources and strengthen their liquidity. This trend in disintermediation of the loan market will likely continue. While funding in Europe won't shift overnight to 50% bonds as in the U.S., it will move in that direction over time. Given the activity that we're seeing in Europe in the first half of this year, we've estimated that disintermediation has contributed about 10% to our corporate revenue base in Europe, both from our existing customers refinancing loans with bonds and from new customers looking to access the bond market for the first time.
We expect that this will represent about 20% of our corporate business in Europe going forward. We expect that multiple defaults or exits from the Eurozone by peripheral countries would result in a prolonged period of market disruption. It's likely that issuers from affected countries would lose market access during this time. To provide a perspective on how this might affect MIS' revenues, we've looked at the actual market disruption in 2008 following the collapse of Lehman Brothers and the AIG restructuring. While we have no assurance that a disruption in the Eurozone would have a similar effect on our business, it is a reasonable benchmark for your consideration. During this period, MIS transaction revenue declined for two consecutive quarters and then slowly recovered over an extended period as the economic recession eased and market conditions improved.
Through this period, recurring revenues provided stability and cushioned the effect of declining transaction revenue. We can give no assurance that a future event in the Eurozone would have a similar impact on MIS, put this forward as an example of how market disruption has impacted our revenue in the past. Now turning to the competitive landscape in a little more detail, as Michel Madelain had mentioned in his comments. The competitive dynamics in the global credit rating agency industry remain largely unchanged. In the global fundamental business, which is an aggregation of corporate finance, financial institutions, and project and infrastructure financing, you can see that MIS retains leading coverage in the Americas, Europe, and Asia. While the dynamics of each of these markets are somewhat different, our focus is consistent.
We provide ratings that are globally comparable and to a rigorous standard, deliver our service in local markets with a local presence in each region through our footprint of 26 offices around the globe. In the structured finance market, conditions are different in each region. In the U.S. market, coverage is the same across the major three rating agencies. Emerging competitors such as DBRS, Kroll, and Morningstar are gaining a toehold in some market niches. DBRS has made the most notable progress in the commodity-like ratings, such as repackaged mortgage-backed securities. One area that all six rating agencies participate in is the commercial mortgage-backed securities market, where MIS is the leading agency, new entrants are also gaining opportunity to provide ratings. In Europe and Asia, the structured finance markets are where MIS continues to maintain the leading position.
With credit stress in Europe, many structured finance transactions are for ECB purposes. With sovereign and bank credit levels changing, it's likely that ECB-related ratings will remain a factor in the near future. Since there is no end investor that's specifically looking for a Moody's Investors rating in those instances, new credit rating agencies can gain entry into this market through this type of rating service. Notwithstanding these developments, we're confident in our ability to compete based on the quality of our work, the thoughtfulness of our research, and the persuasiveness of the rationale for our ratings. Now I'll turn back to Michel Madelain for discussions on strategic themes.
Thank you, Mike. Let me now turn to my second theme today. It's about our strategy, which I'm sure you've seen shaping out through the comments we made earlier. This management group has really 4 critical priorities. The first, as I said before, is to enhance the value of our product and services in all key markets where we operate. We're working very closely with Moody's Analytics to continue to introduce a number of new developments in terms of content, in terms of delivery platform, and in terms of frequency and quality of analytics. This is aimed at strengthening the performance and impact of our ratings and research product. The second priority is to position our assets and resources in growth markets to best address the opportunities we described. We are doing so in a number of markets.
Asia is obviously an area of focus for us. We have work in front of us to do that. A third priority is to improve our financial performance. This is back through a number of initiatives from commercial and marketing and pricing initiatives, all designed to improve our financial performance. Finally, also a very important goal for us is to build a resilient and compliant operating platform. As I mentioned to you before, the key measure of this success will be our performance metrics in terms of credit and research, but also more importantly, or as importantly, our ability to sustain and develop the growth rate you've seen in MIS and Moody's Analytics ratings and research-related revenues. Finally, another important dimension would be our track record with the new regulators that have oversight on our operations.
To execute this strategy, we continue to invest in MIS, both in terms of resource and infrastructure. I know this is a question that many of you have on your mind, how much and for how long? Our investments are centered on technology and head count. They're really dedicated on a range of initiatives, some to servicing our new customers, creating the technology and infrastructure that we need to comply with the new environment that I will describe in a minute. We also want to build the capacity in some of the most rapidly growing regions. We also need to continue to make sure that we adapt our efforts and our surveillance effort on the credit challenges that certain asset classes are facing. One example I would mention is U.S. public finance, for example.
Last but not least, we also want to continue to dedicate resources to product innovation and new product development. To support this investment, we are, as I described before, improving our revenue yield, both through commercial and pricing initiatives. We're also focusing on a number of initiatives designed to improve our cost structure and bring greater improvements in our operating efficiency. I will now turn to my next and last theme, which is really the increasing impact on regulation in our research and rating operations. This pyramid illustrates the 3 dimensions or the 3 levels of impact we're facing. The first is in the U.S. and globally through the implementation of the Dodd-Frank Act. As you know, this act has required the commission to adopt a large number of new rules. They are wide-ranging.
They are centered on our internal controls, specific procedures around design to manage the potential conflict of interest, a very important set of disclosure requirements that range from performance to methodologies, assumption we're using, deal-specific disclosure for certain asset class. Very important set of disclosure we'll have to put in the marketplace. Last, also, we need to develop and introduce a specific program of analyst training and testing. As you know also, the act requires the federal agencies to review existing regulation and identifies situations that refer to credit ratings and find substitutes to that. The SEC has published comments and proposals earlier in 2011, and we expect the final rulemaking based on the SEC website to really take place by the end of 2012. We are working very actively, as you imagine, to implement these rules in the U.S. and globally.
This work involves the development and rollout of a large number of policies and procedures that are supported by a significant amount of technology-enabled solutions and dedicated staff. As we've discussed to you previously, we continue to expect that incremental and direct regulatory costs, as well as compliance costs, to be about $10 million-$15 million in 2012. A second big building block in terms of our regulatory infrastructure is linked to the initiative taking place in Europe with what is called CRA3. This is the third wave of regulation for rating agencies in Europe. This is a process that was launched in 2011, and it's expected to be closed by the end of this year.
The discussions are currently taking place between the European Commission, the European Parliament, the member states, and we expect, again, as I mentioned to you earlier, to see a conclusion of this process by the end of the year. In addition to some of the similar themes we've seen through the Dodd-Frank Act and through previous regulation, there are really three topics, key themes that are really left on the table at the moment. The first relates to the liability regime that will apply to rating agencies. The second is about the limitations that could be imposed on CRA activities, either through rotation or other tools such as shareholder restrictions. Finally, there are discussions about specific rules that may apply to sovereign ratings or certain categories of agents.
There's a large number of other features that are being discussed at the moment between the Parliament and the Commission, but those are the three most important for us. As you can imagine, we've been very significantly engaged directly at senior management level, but also through our regulatory effort teams and through this process. We're seeing reasonably good progress that has been made, when you look at the initial proposals and where we are today. We have also still very meaningful concerns regarding the outstanding points that need to be resolved. Again, as I said before, we expect a decision later this year. In the interim, we're working very actively to work on various scenarios, and that will be required to adjust our operations depending on the outcome.
In doing so, we're really trying to balance the risk and returns we see with the various options that are being shaped. This may include exiting some of our activities, restructuring some of our work process, operations, and transferring some of the activities we currently have ongoing outside of Europe. Finally, on this chart, you see we also have a set of very idiosyncratic, basically regime and features that are really put in place by various countries, effectively every country now where we operate. Those that range from Canada to Brazil, from Singapore to Japan. In most of these cases, the features of these regimes are about, again, disclosure, governance, reporting.
While they're not really widely different from some of the themes that have been introduced by the Dodd-Frank Act, they do add basically, effectively, operation and administrative requirements on top of what we have to do as a result of both the Dodd-Frank and CRA3. In closing my remarks today, what I'd like to reiterate is first that, as I said before, our franchise market operation positions and business opportunities are very solid. We have seen improvements and opportunities emerging in many aspects. Second, we are managing our business to address the changing regulatory environment we're facing.
Third, and probably most importantly, The state of play we have today really reinforces the strategy we have deployed now for several years, which is really to focus on our market position, the product performance, and creating additional value for the users of our ratings and our research and data product. This view is really based on, one, the resilience of our business drivers, but also the strong current and anticipated performance of MIS. Having said that, I can tell you that I am very confident in the success of MIS going forward. Sorry. That was a really concluding remark. Thank you very much. Now I think Mike and I will be in a position to Thank you very much. Mike and I will Do I need to do anything?
Mike and I The next speaker is John Goggins on legal issues. That's why we lost Having said that, now I think some of us are here, and we'd be happy to take your questions. Do you want to be the Why don't I You were the first, why don't you go ahead?
Yeah. Two questions, one on issuance and the second one on the liability standard in CRA3. How much impact on U.S. corporate issuance have you seen from European companies accessing the U.S. market? I guess that's the so-called Yankee bond phenomenon. How big an impact has that had, and where do you see that going? On liability, obviously, outcome is uncertain. Do you expect that to be, if it is adopted, be a pan-European adoption, or will be a country-by-country standard, and therefore you can kind of move operations around depending on where it's more or less optimum to operate? Thanks.
Maybe Mike, you want to take the first and I'll take the second.
Maybe I'll borrow this. I'll take the first question. In terms of European issuers accessing the U.S. market, it's a trend and phenomenon that has started in the most recent weeks. I would expect it to continue to the extent particularly that they're established issuers that are understood, and risks are known. I think that credits at the margin probably would have more difficult access than credits that would be well-recognized, established issuers. At the same time, we've seen a resurgence across the business in European corporates. Again, I think it'll be fairly credit selective, and not broad reaching down into the lower ranges of the spec-grade market.
Thank you. On the liability question, maybe I give a John, do you want to start?
I can come up here.
Oh, okay. Let me give you the
Yes, it's a pan-EU proposal. The objective is to have this private right of action, at least the Commission's version, apply across the EU. Not being in any particular jurisdiction within the EU wouldn't be helpful. John?
What I would add maybe just is that the outcome is still.
Are we on?
I just want to make sure we can hear. Okay.
Sure. On that, there's been a lot of movement, as Michel mentioned, from the commission's original proposal. There are basically three competing versions. The Council of the EU has a version that we feel we can live with, and we're optimistic that's the version that will also prevail in the trilogue. The discussion among the three EU bodies, that's now resuming this month, and hopefully will be resolved by the end of the fourth quarter. I don't know if you want to add anything else to that.
Thank you. Peter. Yeah.
Thanks. I'm wondering how confident you are in the 4% pricing benchmark that had been outlined earlier, particularly in these asset categories where you're seeing more competition, like in CMBS. What's the level of pushback you're getting on pricing, both from issuers, and what's the level of competition on pricing you're seeing from some of these newer players in the market? That was question one. Question two, I was hoping you might speak broadly about just scale of opportunity that you see in the structured finance market over the next couple of years in terms of some of these newer product offerings, how big they potentially could be for you, and maybe translate that into how big the revenue opportunity in structured finance might be in the next couple of years for you guys. Thanks.
Yeah. Maybe I'll take a shot at the second. I'll leave you with the first one.
Okay.
On the structured finance market, Mike alluded to, there are a number of optionalities, including what happens with RMBS and how we see things. The situation in Europe is also one which will very much depend on the unfolding of the current crisis and to what extent we see a return to more normalized, basically, source of funding for financial institution and recourse again to securitization. What we're seeing today is we have certain asset classes where we have a fairly sort of a good level of visibility in term of what is a sustainable level of activities. There is a lot of uncertainties as to how some of the other asset classes may develop. That's really linked to macro condition as well as regulatory development that may take place.
We still have to navigate that environment with that in mind. On the pricing, would you mind?
Yeah, just to respond to your question on pricing. Generally, as you would anticipate, many customers want to talk about price and you used the term pushback. The way I think about it is, there's a discussion around price, and then there's a movement of the customer towards the list price. Our success rate around achieving our pricing strategies is quite high, in fact. I have a very high degree of confidence in achieving the numbers that Ray had put up in his earlier discussion. I think that if you look at our broad business around the globe, it's a blend. The position is different in every market, in every segment. You had asked specifically about the structured finance market.
In the asset class that you asked the question about CMBS in particular, where there are a large number of competitors, we deliver a premium service and a premium position, even in that market, based on the quality of our brand and execution and our position within CMBS as a thought leader, really, in analysis. It's based on that we're able to negotiate, and achieve our list pricing in that particular asset class.
Okay.
The Dodd-Frank suggestion that the borrowers reduce their dependence on ratings. What are they going to do, and does this reduce your liability in any way if the guy that reduced the dependence on ratings will lose a lot of money on bonds?
I'll leave John on the liability question here.
Sure. On the liability question, there was no change in our liability under Dodd-Frank, is the short answer. We've always favored, for over a decade and a half now, reducing regulatory reliance on ratings. We think that should be a decision among private sector.
The borrower is reducing his reliance on your rating.
Well, first of all, we don't encourage investors in general, especially retail investors, to rely on our ratings. The emphasis of Dodd-Frank was to eliminate the regulatory reliance on ratings, removing references to ratings in the securities laws and the banking laws. The bottom line is Dodd-Frank, unlike the proposal in Europe on CRA3, did not change our liability standard in any way.
First, sort of a light question. Does your French nationality help in terms of the European political pressures?
I don't think so.
With the DBRS increase in competitive pressure, is that more a matter of adding, if the issuer traditionally did, say, a Moody's and S&P rating, is that more of a matter of adding a DBRS rating, or is it a matter of using DBRS instead of Moody's in the European context?
May I try and please step in, Mike. I think what happening in Europe is simply that we have a market today that is very commoditized. It's essentially an ECB based, to a large extent, marketplace where there's no preference, basically. There is no investor preference, or the real value of the ratings is simply eligibility criteria to the ECB. Basically, in terms of value proposition in that being a recognized rating agency gives you access to that marketplace, and that's really what we see happening here.
I think that's why the rapid ramp-up we've seen into market share from DBRS in that market, which I think has been largely taken out from other participants more than from Moody's, actually, is driven by simply the fact that what would be in a normal functioning market, a key value proposition, is simply not there, and therefore you're just competing on effectively, largely, the eligibility criteria and the fact that you have a license to participate in that business. Yep.
Thanks. You talk about increasing or heightened competition. Are you talking about the establishment of new rating agencies versus inroads? I was just wondering if you could comment there, because obviously in the U.S. we have 10 or 11 nationally recognized statistical rating organizations. It hasn't made much of a market impact. Just differentiate between the establishment of new competition versus actual inroads from competition. Second, are you talking about issuer pay models primarily, or investor pay models? In other words, are these subscriber type businesses or are they actually getting rating slots on bonds? Whose share are they taking?
Thank you.
Do you want to take that?
Yeah, sure. I think if you look at the emerging competitors that are coming in, most of them are following an issuer pays model. Right? They're looking to replicate the business model that we have. The places where new entrants look to come into the ratings business are areas where it's established already that a third or fourth rating agency might be acceptable. Instances where there isn't a differentiation based on the quality of rating. As Michel made the point before, the DBRS example in Europe is a perfect one. As I said in my comments, there's no investor on the other side that's looking specifically for Moody's rating. That's not a circumstance where our brand and premium position and our historic basis for differentiation plays out.
That's an area where there's a regulatory use of rating and, as Michel said, a licensed rating agency that can provide that service can provide that service. That's also a commodity-driven business. It's not a high price point business. The other areas are circumstances where there's a trading use for ratings, and there isn't an actual issuer customer on the other side. There's actually a trader looking for an arbitrage transaction. Most instances where emerging competitors are coming in, given that circumstance, is structured finance, where it has historically been acceptable for multiple rating agencies. There isn't a customer relationship on the other side that would become sticky the way you would expect to see a relationship with a corporate or a financial institution, where the management company makes a considerable investment in the rating relationship over time, and the relationship becomes sticky for that reason.
You don't see the new entrants in that area. The other place where new entrants are looking to find a way in is public finance. Again, that's a three-rating agency market with a very large segment of unrated small municipalities, where there's an opportunity for other rating agencies to play in. It's not a circumstance, to your point earlier, of making inroads in the corporate business or the financial institutions business. It's really those other elements of the business that I just referred to.
Yeah, please.
In an earlier presentation, it was shown to us that your revenues this year are tracking very similar to what 2007 revenues were. However, as you know better than us here in the room, that your costs are up significantly since 2006, 2007 levels as a company, partly for regulation legal, but also some small acquisitions, much of it by your own choice. As you think forward, once all the regulation costs are in your numbers, we've annualized that once the CRA3 is put in, for example. Let's say your top line grows, say, 7%-10% for a few years. Does your costs have to necessarily grow that high each of those years as you think about how you budget your business here?
I think, we clearly are in a ramp-up phase in terms of the cost of regulation, and I would expect that once we've reached basically or funded effectively the development of the technology and the infrastructure that I've been discussing, I think that we should have a stabilization of those costs, clearly. I think if you look at where we've invested in terms of headcounts and technology is clearly related to a large extent to regulation, but also to solutions that are enabling our business to perform better. You will see on that part, you will continue to see an ongoing investment in the business. I think we expect also to continue, as I mentioned, to continue to invest in new geographies and product development, but those should be supported in sync with the revenue projection that you would expect.
To summarize, we are in a ramp-up phase at the moment, both in terms of adjusting our basically infrastructure to this new environment and responding to the need we feel we need to meet in order to support our strategy. I think at some point, we would expect to see a stabilization of that growth, basically.
Is that to say once we get through this period, higher regulatory costs could, as you increase your margins, the cost growth being slower than the 7%-10% long term.
I think Linda will talk about the margin later on, I leave that to her. The message I would give to you is that we are in an investment phase at the moment to respond to some of the demands on the business that I have discussed. As this demand phase out, we should go back to a reduced level of spend in terms of IT and headcount growth, basically.
Thank you.
In the back.
Yeah.
Just two follow-up questions. Just on the issue of competition in areas where you mentioned that you don't have a relationship with an issuer and you can have multiple ratings. What percentage of your revenue does that represent, and what is your response to that? Ultimately, what do you think will happen there? The second question is on the Dodd-Frank reducing the reliance of government agencies on ratings. You mentioned that you expect something at the end of this year. Understanding that we have no foresight into what will happen there, what is your most likely outcome? Is it possible that you will see government agencies reducing their reliance on ratings? If so, what is your response to that?
I will take the second and maybe, Michel might to address the first. On the second point, I think in term of the rulemaking from the SEC, we expect it to be very much in line with the proposal that were initially issued. It's really, for us, really a question of implementation of procedures and policy as I described to you. We don't expect, and John may want to comment on that, but at this stage, we don't expect surprise from this process, basically. In term of the reduction of reliance, which is the other aspect of Dodd-Frank, I think it's going to be a long process. Again, I think for us, it's very important that we stress the fact that we don't see that regulatory usage as really the driver of our future and growth.
Really what we want to do is make sure that we bring in value to market participants and our growth and our sustainable position in the marketplace is really driven by that value. Do you want to?
Yeah, I'll try and take a shot at that. The transaction-related revenues that don't have an issuer customer on the other side are a subset of our structured finance business and to some degree, some portion of our project finance business. The structured business has a number of different dimensions associated with it. The non-relationship piece is a subset, and I don't have a specific number for you. There are also relationship-type credit arrangements that have that same ECB purpose, that don't have the end investor on the other side. That's actually the more important piece in terms of differentiating the European market from the U.S. market, where the U.S. market is largely an investor-driven market. Therefore, it's got a different dynamic. How do I think that plays out? I think it plays out based on the quality of service and execution and rating level.
As a result, there are opportunities for other rating agencies to provide services. As I said in my comments, I think that that means that in that business segment, we'll face increasing pressure from competition.
Thank you.
Good morning. How does the MIS goal of 1% to 2% growth from disintermediation compare to the experience of the first half? Can you comment just in general on what you see in the ratings pipeline right now?
Mike?
Yeah. In my comments on disintermediation, I had taken a very narrow slice of our business and communicated that in the context of our corporate business in Europe. In Ray's earlier comments, for MCO overall, he was speaking about the MCO business broadly. Even within the MIS business, disintermediation is relevant even in the U.S. context and the U.S. market. We do see issuers using the bond market to reduce their reliance on bank funding, even for liquidity purposes. I mentioned that $1 trillion cash reserve earlier. I would put that in the same category of disintermediation. In Europe, it's a little more pronounced in that the banks are more actively or more apparently shrinking their balance sheets and de-leveraging. The 80/20% corporate financing dynamic in Europe that I put up on the slide was purposely just to draw that out.
Ray's comment about 1% to 2% was much broader in terms of MCO. The piece that I was talking to was a slice within that.
I recognize that 1% to 2%. You mentioned that your corporates in Europe had 10% growth, I believe, from disintermediation. What does that relate to the total for Moody's? Did that add 2% or 3% to growth for disintermediation? I am not sure how big corporates are in Europe as a proportion of the whole.
We don't break down and disclose corporates in Europe versus corporates in the U.S. It's a much smaller business in Europe than it is in the U.S., and it would be a fraction of the broader number that Ray was talking about for MCO. It'd be very small.
Just to be clear, is the one to two, is that kind of where you're throttling at now from disintermediation?
At the MCO level?
Yeah.
I can't really speak to the MCO level. Do you want to speak to the MCO level, Ray?
Yeah. Excuse me. The one to two, in terms of current conditions, is probably on the low side. What I was doing was looking at the overall long-term opportunity, from disintermediation. The one to two, also includes the fact that as the rest of our businesses grow, the corporate disintermediation component will be a smaller piece of the overall business in the longer run. That's why I put in a number that under present circumstances, would look conservative.
Thank you.
Sorry.
I had the same question, the whole corporate disintermediation in Europe, there's a big delta between where Europe is and where U.S. is.
Yes.
Can you talk a little bit about can the gap be closed? What needs to happen? Do you think, let's say 3-5 years, we reach closer to 50%? What do you see are the drivers going forward?
I think some of the drivers, I may give a try, and then you.
You may want to elaborate on that. I think clearly one of the drivers is really what is happening in the banking market today, with banks basically being constrained in terms of their ability to lend. Corporations looking at the bond market as a substitute to banks, which historically and traditionally have been the most active. If you look at the largest corporates in Europe, and you look at their level of usage of bonds versus loans, you probably are much closer to the picture you see in the U.S. I think the question is really around us moving down basically in terms of scale and deepening the penetration of the bond market into smaller companies and different geographies. I think that's really what needs to happen.
The pressures I described to you that are currently existing on the banking system are, in our view, going to be very helpful in accelerating that transformation.
Yeah. Got it. We're good.
We're out of time. Well, thank you very much for your time, and we'll be around for the rest of the morning. Thank you.
Thank you. All right. Good morning. I want to cover two topics. The first, just a very quick update on our MCO litigation matters, and then spend a little more time on our MIS ratings-related litigation matters. On MCO, not much new to report on our shareholder class action. The big news, of course, in this case, was last year when the plaintiffs failed to have their class certified. As a result of that, what they were hoping would be a billion-dollar class action is now only allowed to proceed with the three individual plaintiffs. Those plaintiffs are very small, and while they haven't actually told us what their alleged damages are, based on the amount of shares they own, we believe they're less than $100,000 in aggregate, basically. Now this is a very small case. It continues to slog on.
We've been engaging in discovery since last year, and motions for summary judgment are due in October, next month. On our shareholder derivative suits, we recently settled all of those. We agreed to a settlement implementing structural and governance changes. That settlement was approved by the court just last week. No money was paid to the plaintiffs, but the court did award plaintiffs' counsel approximately $4 million in fees and also reimbursed them approximately $1 million for their expenses. For those who are interested, the full terms of the settlement, we filed an 8-K disclosing that on July 24th, so you can read that if you're interested. A large number of the cases that have been filed, ratings-related cases that have been filed since the financial crisis, were what we refer to as 33i cases.
These are cases where the plaintiffs' lawyers alleged that Moody's and other rating agencies were acting as underwriters, with the hope that we then have liability under the Securities Act of 1933. That was a novel theory, every judge that heard it rejected it, six different judges. In May of last year, we got a favorable decision from the Second Circuit upholding the dismissal of one case, making it very clear that rating agencies can't be sued as underwriters under the '33 Act. Importantly, the court also affirmed that ratings speak merely to the agency's opinion of the creditworthiness of any particular security. Okay, just a summary of where we are. Again, since 2007. Oops, I thought I switched the slide. Made good progress.
Of the more than four dozen, a little more than four dozen cases that have been filed in the U.S., nearly three dozen of those have now been dismissed or voluntarily withdrawn. Outside the U.S., there have been approximately 19 cases that have been filed to date. Of those, eight have been dismissed or withdrawn. In addition to our 33i cases, we've been making good progress on other ratings-related matters. Cases have been dismissed on several grounds. Give a couple of examples here. In half a dozen cases, case has been dismissed because the court found that ratings are opinions. They are not actionable as misrepresentations of fact unless the plaintiff's able to prove that our analysts actually didn't believe the opinion they made at the time of issuance. We've also had a number of cases dismissed on the absence of a duty to the plaintiffs.
Importantly, one of those cases, Anschutz, just last month. The Second Circuit upheld that opinion and a very favorable precedent on what you need to prove to keep a negligent misrepresentation claim against the rating agency. We've also had success in one case on personal jurisdiction. That first community case was in Tennessee, we have a number of other cases where that defense is also pending. Turning to some specific cases. In the Abu Dhabi case, there's been a lot of activity this year. Nine of the 11 original claims have been dismissed, the only two claims remaining are a fraud count and a negligent misrepresentation claim. As you see here in June of 2010, class was also denied in this case. Most recently in August, the court ruled on our summary judgment motion on the fraud claim.
The court dismissed the fraud count as to three plaintiffs in its entirety and a significant part of another plaintiff's claim. The effect of those dismissals substantially reduced the amount of the alleged damages claimed by the plaintiffs. With respect to the remaining claims, our motion was denied. For those four counts, we're going to go to trial on that. The court just yesterday at a conference, scheduled the trial for February 11th of next year, so relatively soon for a trial. On the remaining negligent misrepresentation claim, the recent Second Circuit decision we believe is a controlling precedent. The court, in light of that decision, has ordered the plaintiffs to show cause why they shouldn't have their negligent misrepresentation claim now dismissed. Plaintiffs filed a brief at the end of August, we're in the process of filing our response.
We're expecting a ruling by the judge on the negligent misrepresentation claim in light of this favorable and swift decision by perhaps as early as October. At the same time, plaintiffs took the opportunity to ask the judge to reconsider the dismissal of three of the four fraud claims. We're also obviously responding to that. In the CalPERS case, another case we get a lot of questions about. Very little progress to report there. At the end of last year, we finally finished litigating what's called an anti-SLAPP motion, which is another protection that California has for certain types of opinion. Had a favorable ruling from the judge on the first prong of that, holding that our ratings are protected speech under the anti-SLAPP statute. Didn't have a favorable ruling on the second prong, so we appealed that.
We're not expecting a decision on the CalPERS appeal until sometime in 2013. That's our update. Happy to take any questions you might have.
With regard to Abu Dhabi, it's fairly unprecedented to move one of these cases to trial with the incumbent risks of a jury, potentially. What is your position on settlement and a sealed settlement which would not establish any sort of precedent going forward?
Sure. Well, our strategy has been not to settle ratings-related matters. With respect to the Abu Dhabi case, we're very confident that we're going to prevail ultimately. We're not expecting at all to settle this case. The rating opinions that Moody's put forth in the Abu Dhabi case on the Cheyne SIV, the analysts always believed them at the time, and there was no fraud, and that's a factual matter, and we expect to be able to demonstrate that at the trial.
If there was an unfavorable outcome in the jury trial, are there enough unique aspects to the Abu Dhabi situation that precedent risk sort of awakening other sleeping dogs is limited in your view, or unclear?
Well, two things. First, if we aren't successful at trial, we do have the right to appeal, and we're very confident that given the lack of any evidence, really, much less clear and convincing evidence, which is the standard for fraud in the Second Circuit, that we would prevail in the Second Circuit. Given that in any fraud case, you have to prove fraud with respect to that particular rating, we don't feel it's necessarily a precedent that could You certainly couldn't argue that because if there was a finding of fraud in Abu Dhabi, that meant there was a fraud in any other ratings-related case. Obviously, if we were not to prevail in the Second Circuit, that might encourage other litigation, but it certainly wouldn't be evidence of fraud.
Do you have a sense of what that number is? If it went against you, is that something that's also tax-deductible?
Don't know the tax answer. The exact dollar amount, it's been reduced significantly. For three of the plaintiffs, roughly $200 million. One of the plaintiffs' damage award is still confidential. As I mentioned, the plaintiffs have now asked the judge to reconsider three of those four dismissed claims. We'll have a better sense hopefully by October. A significant reduction from the original $800 million that was alleged. I should mention, even with respect to the $800 million, we think that's a very inflated number. They're asking for an incredible amount of interest. The other thing worth noting, of course, is there are co-defendants in the case, so there's no realistic scenario we think we'd be the only defendant that could be held liable.
John, do you have any visibility on when legal expenses might start declining? Could you give us any benchmark in terms of the level of expenses currently? That's question one. Question two, which you might have addressed this earlier, but I might have missed it, the changes that are being talked about in Europe in terms of legal liability, just some more color on what that might mean to you guys. Thanks.
Sure. With respect to the proposal on CRA3, as Michel mentioned, I mentioned briefly, there are basically three competing versions. The original proposal from the European Commission would, in effect, create a private right of action where investors or issuers would be able to bring a case if they believe there was a breach of the European regulation. The primary objection that we have to that, which is corrected in the Council's version, the EU Council that is the reversal of the burden of proof. We're optimistic that the Council's version will prevail, but that's something that's still yet to be resolved, and hopefully will be resolved by the end of this year.
Do you expect an increase in the number of suits just as this is resolved? Are suits pending, waiting to see how this goes?
In Europe?
Yeah.
No, the private right of action hasn't been created yet, so this would be.
Right.
In other words, in the U.S., for example, only the SEC has authority to bring an action if there's an alleged breach of any of the SEC rules. With respect to the rules for rating agencies in Europe, the idea would be that in addition to ESMA and other securities regulators, individuals would be able to enforce the securities regulations.
Right. What about the burden of proof issue, though?
The burden of proof issue is basically, we think that's important because if the burden is on the rating agencies, it could be difficult to demonstrate that there was no wrongdoing even in fact, when there was no wrongdoing or no breach of the regulations. That's an important point for us. As I said, that's reflected in the council's version, so we're working to make sure that our views are heard as this process continues. I'm sorry, remind me of the first part.
Legal costs when.
Yeah. We don't disclose our legal costs. Unfortunately, on these rating-related cases, they're going to continue for the foreseeable future, at least the next two or three years. There's not likely to be any drop-off for those expenses.
John, do you have any knowledge whether that Anschutz case is going to be appealed to the U.S. Supreme Court, and also of any other circuits ruled on this negligent misrepresentation issue?
I don't know if they're intending to follow and appeal with the Supreme Court, as you probably know, the Supreme Court only takes a relative handful of cases. It seems unlikely this would be a case that would interest the Supremes, even if they were to file a notice. No, I don't know what their plans are on that. Sorry, you had a second part?
Any other circuits that they ruled on?
No, this is the first. The good news is, prior to the financial crisis, there was very little case law out there on what the liability standard should be for rating agencies, particularly for claims brought by investors. We now have two favorable Second Circuit decisions, one on the '33 Act claims, and now one on negligent misrepresentation. So far, that's it. Of course, no negative circuit court rule as either.
You and I have talked about this in the past, for the benefit of all, can you just explain about the statute of limitations across these different court cases buckets in case you lose some cases along the way, some other cases come out of the woodwork against you? We're past that time here.
Sure. As we have discussed in the past, the statute of limitations question, which is basically the issue of how long you can wait before you file a claim with respect to claims arising in the financial crisis, is a complicated question. It varies depending on the claim. A fraud claim, you might have six years in one jurisdiction and two years in another. Breach of contract or negligence claim would have a different statute of limitations. Broadly speaking, the outermost range for most claims is six years. As we get close to the six-year anniversary of the start of the financial crisis, it could be more difficult to bring those type of claims. They're also very fact-specific. It's a question of oftentimes, when did the plaintiff become aware of something.
Just going back to CRA3 for a second. The proposal for mandatory three-year rotation on ratings or rating agencies has lost a lot of momentum. What do you think is the most compelling reason why it's lost momentum, and what do you think the odds are that some form of it will surface when the final recommendations are made?
Sure. Well, we have a good sense of why it lost momentum. If it was just the rating agencies objecting to rotation, I think we'd probably have rotation. Many issuers and investors, fortunately, were quite outspoken that they thought this was not a good idea. The commission's original approach basically operated under the assumption that there are 10 licensed rating agencies, or 15 licensed rating agencies in Europe, and that they're all basically fungible. If Moody's rotated off of an issuer, that they could just get a rating from a Bulgarian or Greek rating agency. Issuers were very quick to point out that in the real world, that's not how it works. There was a lot of pushback, and again, the council's version, we think makes the most sense, and they limit rotation to basically a subset of securitizations.
A subset of structured finance, rather re-securitizations, and that is perhaps the more likely outcome. Again, just like the liability issue on CRA3, that still needs to be worked out in what they refer to as the trialogue process that's just started up again. It needs to be worked out in what they refer to as the trialogue process that's just started up again. Okay. No other questions? Well, thank you. That's great.
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Yeah, I think we're going to get started. We're definitely going to get started.
I'll take a drink of water.
Am I on? I'm not on.
Do you want anything? Real rhyme. Let me just scoot in. Oh, sorry. Excuse me.
We are still stressing the AV model here, bear with us, but we're going to get started. We're going to turn the program to a discussion of Moody's Analytics. We're going to do that principally through a panel discussion with a number of my colleagues. In preparing for this, I actually had an idea. I was thinking about bringing an empty chair up next to the podium and having a conversation with an imaginary shareholder. Salli rejected that idea. She said, "No, go with the panel." We're going to go with the panel. However, before we dive into the panel, there are a few key themes, a short list of things that I think everybody should know about Moody's Analytics. I'm just going to touch on those very quickly.
First, our business is doing very well, and it has been for some time. If you look at us relative to our peers, you'll find that we're performing at a very high level. Second, in a short period of time, we've built out a very solid position in the market. The rich product portfolio that we've created has allowed us to greatly expand our footprint with our customers and obtain a larger share of their spend on risk management tools and services. Third, there's a lot of opportunity ahead of us at Moody's Analytics, and we think we're exceptionally well positioned to build on our reputation and realize good growth in this business over the next several years. I'm going to quickly run through a few slides to reinforce these points.
It's well known that at Moody's Analytics we serve financial institutions almost exclusively, and we get a lot of questions about how business conditions at banks, particularly in the form of headcount reductions, are impacting the Moody's Analytics business. As you can see from this chart, sales of our research and data product have been very strong despite weakness in financial services employment. The short story here is that except in periods of extreme stress where you have failures of major customers, our business is not vulnerable to headcount reductions on Wall Street. There are two principal reasons for this. First, in periods of stress, there tends to be very strong demand for risk management tools like those sold by Moody's Analytics. Secondly, our pricing model limits the downside to our fees when customers reduce headcount.
Combined with our unusually strong retention rates and our pricing power, these factors allow us to realize meaningful growth even from large and mature customers, and even in periods where they are under intense cost management pressure. This is one of the reasons why we've delivered seven consecutive quarters of double-digit growth. I also get questions about how the components of our increasingly broad product portfolio fit together. This chart attempts to show which functions within financial institutions are served by our various product sets. You can see that there's considerable overlap in the customer base, which gives us much opportunity for cross-selling and otherwise leveraging our long-standing relationships with these accounts. This allows us to embed our information, tools, and services ever deeper with these customers.
We're serving a more extensive set of needs and winning a larger share of wallet with our customers as we extend our penetration across the account base. While our current penetration is good, our opportunities for growth are far from exhausted. In this chart, you can see that we've achieved solid penetration across our primary customer segments. At worst, we have an established presence with about one-fifth of the target market. Importantly, within the top tier in each segment, you can see that our penetration is near or well in excess of half the potential customers. This speaks to our credibility and our relevance. Lots of institutions are customers of Moody's Analytics, and they're customers in a substantial way. The average price point is a six-figure fee and is well over half a million dollars in the very important banking segment.
This is why we feel good about what we've built and why we're confident about our prospects. We have a substantial presence with a lot of customers, but there are still plenty of opportunities to expand our penetration and deepen our relationships. To put some numbers around the size of our opportunity, our market research tells us that across all of our business lines, the total market is worth about $12 billion. In some markets, we have a better position than in others, but we're not active in any market where we aren't the leader or a very strong competitor. Again, given the progress we've made to date, we feel very good about our prospects for achieving further growth in these segments. In short, we believe we can continue to win more and more of that $12 billion market.
One way to illustrate our relevance and growth trajectory is to look at our recent experience with some of our largest customers. This chart shows trailing 12-month sales for six of our largest accounts. Over the past three years, sales to this half dozen accounts has grown by more than 22% annually, 12% on a purely organic basis. That 12% organic growth represents nearly $20 million across just six customers. Given the size of these accounts and the difficult environment that they've been operating in over this period, 12% organic growth is extraordinarily good. Again, this reflects the relevance of our product offering to deeply essential activities within these firms. It tells you that we're selling need-to-have products because nice-to-have products can't generate this kind of growth in this kind of an environment.
When you drill down on the individual institutions, you start to see some interesting things going on. For two of them, we've realized significant growth in the RD&A segment. One grew RD&A at a 10% annual rate, rising to more than $10 million. The other has average growth of 15% a year after declining in 2009 as the company went through a major restructuring. You can see that in the first case, Copal adds significantly to the scale of our relationship. The work that Copal is doing with this customer connects very directly with their use of our RD&A products. It's a perfect example of why we feel very strongly about the industrial logic of including Copal in our product portfolio.
In the case of another customer, which happens to be MA's single largest account with more than $25 million in trailing 12-month sales, RD&A has been flat over three years. We've still generated nearly $14 million in organic growth, largely driven by the bank's adoption of our enterprise risk solutions to assist in their compliance with the Basel capital rules. This is a great example of how relevant our software business is to an institution like this. We sell mostly licenses and services in ERS, the business tends to be rather lumpy, as you can see. You see this variability in the ERS sales volumes in both examples on this slide. With Copal in the product lineup, we expect more recurring revenue to offset the lumpiness of ERS, and this is nicely illustrated in the second case on this slide.
These case studies demonstrate how different segments of our product offering are relevant to different customers at different times. Over the long run, we would expect that our customers will tend to adopt our products to a substantially similar extent. This gives us confidence that we can continue to grow these large accounts by deploying our products and services as they align with the most critical priorities of each customer. In addition to financial results and numbers like these, there's other evidence of our growing relevance and credibility. I think of this slide as our trophy case. It's a list of awards and other acknowledgments that Moody's Analytics has picked up recently from a wide range of trade media and industry bodies. As we build out this business, we're getting more and more recognition in third-party surveys of customers and a variety of industry publications.
With growing awareness of MA's capabilities, the market is increasingly recognizing us as a category leader. With this higher profile, we're better able to sell into our various opportunities while contributing to the overall value of the Moody's brand. Of course, it's good to be acknowledged and well-respected by customers, but it really helps when what you're selling is essential to those customers. Delivering tools and services that are need to have rather than nice to have is a core part of the Moody's Analytics product strategy. By doing this, we're able to take advantage of several dynamics that make our offerings essential. The first and most powerful is regulation.
Much of what we sell is directly relevant to enabling our customers to meet their regulatory requirements, whether we're talking about banks that need to comply with Basel rules and undertake stress testing projects, or insurance companies that are working to meet the Solvency II regulations. We also offer products and capabilities that take advantage of network effects. The best example here is our distribution of research and data that are produced by analysts in the rating agency. The widespread use of Moody's ratings in the fixed income market creates enormous demand for supplementary information about those ratings. Our position as the exclusive distributor of that information is very powerful. In many of our businesses, we are able to sell into demand for capabilities that help customers compete better in their industries. Examples here include our training services and Copal's outsourced research services.
These offerings enable our customers to ensure that their staff stay current in their professional disciplines and that they manage the expense of their analytics staffs as efficiently as possible. Again, while naturally we want to have good products and ensure that our customers are satisfied, we also want to focus very specifically on those opportunities where we can enjoy the most demand by taking advantage of regulatory developments, network effects, and competitive conditions that stimulate demands for our products. Finally, I am going to close with a very brief discussion of our profitability. Linda will talk about this more later, but this chart shows our revenue and adjusted operating income over the past two and a half years. The key takeaway here is that the business is growing in scale, and we are generating good returns even while we've been establishing ourselves and focusing on top-line growth.
At a mid-20s kind of margin, we fall squarely in the middle of our peer group. We feel good about where we are and about sustaining the margin at this level over the near term. I realize this was a very quick tour of Moody's Analytics, but I just wanted to cover a couple of major themes before we drill down in the panel discussion. To summarize, those themes are that the business is performing well, we've established ourselves as a major player in risk management products and services, and we believe we are very well positioned to continue to generate good growth. With that, let's move on into the panel discussion, and then we will take your questions. Let me start the panel by introducing my colleagues. We've got Jeff Feit here.
Jeff runs our enterprise risk solutions business, and that of course is a very high growth business for Moody's Analytics and the business in which we've made the most investment over the last several years, and frankly, have made the most progress. Next to Jeff is Dan Russell. Dan is responsible for the research business within Moody's Analytics, and he is here to talk about what's going on in the research data and analytics segment. The research business in Moody's Analytics is our single largest business. It's our most mature business, but still growing at a very respectable high single-digit rate. Finally, at the end of the table, we have our newest colleague, Rishi Khosla. Rishi is the CEO and founder of Copal Partners. He has joined our team since the end of last year. Salli, you are going to moderate this, correct?
Yes.
Very good.
Thanks, Mark. My intention is to serve as the voice of the investor and ask some of the questions that we most often hear from you and/or that you submitted when you registered for the event. Try to get some information out that can be helpful to you here. I'll go ahead and jump right in with Jeff. Mark showed us a little while ago that on the trophy page, as he said, that Moody's Analytics was named a firm of the future as a leading provider of risk management technology. Moody's Analytics has built a pretty good position in the risk management software space. How did Moody's get involved in the space, and why did you think it would be successful?
Sure. Well, we started with a leading position in quantitative risk models through the Moody's KMV business, as well as deep domain expertise in banking. As we looked forward, we saw regulatory change and the implementation of enterprise-wide solutions being the vehicle for future improvements in risk management and in analytics generally. We decided to embark on building software-based and services-based solutions so that we would not be disintermediated by software companies that would eventually develop the ability to build risk models. That's how we got in.
Sounds very good. How would you say you're doing today?
I think we're doing very well. We embarked on an audacious plan to build out a pretty broad suite of solutions. We've executed on the product pipeline of product plans that we've had. We've signed many customers, both large and small, all over the world. We have an unbroken track record of successful implementations and consulting projects. We've been recognized in the industry, both in industry publications as well in referenceable clients as a leader in the space.
Understood. Rishi, what about you? Mark mentioned that you are the most recent member of the team. I know Moody's acquired Copal last year. What are the benefits that you saw or that you were expecting when you joined Moody's?
Some of the benefits that we were expecting and some of the benefits which have actually come to fruition to date are actually going to market together to jointly sell products. For example, on the RiskAnalyst tool, actually being able to provide financial spreading services packaged along with RiskAnalyst. As another example, helping Moody's actually launch new offerings into the market, for example, research on Asian private companies and covenant analysis. I think over a longer term as well, as more of our buy-side clients actually look at conducting more and more in-house credit research, the ability for Moody's to actually supplement the ratings research, which is provided by customized credit research services, which Copal offers its clients, I think would be a strong value proposition.
I'd say those are the external sort of client-facing opportunities as well as the ability just to add cost efficiencies across the existing Moody's businesses, i.e. MIS, shared services, and MA.
Just to make sure I understand, is Copal's business different from a traditional outsourcing business?
I think the traditional outsourcing business is known. As people look at outsourcing, they think of things like payroll outsourcing, HR, IT services, call centers, et cetera. That's typically what people's impression of outsourcing is, which are very standardized, typically non-core functions which have been outsourced for tens of years, typically to on-site players and then over the last decade, more to offshore players. Copal's pretty significantly different. I think Copal really works on front and middle office functions, which are much more core to what a client does and much more non-standardized. As examples, within investment banking divisions, we'll help clients on client coverage, on origination of deals, on execution of deals within the sell side. We'll help clients with macro credit equity research, as well as risk management support.
For the buy-side clients, we'll help them on investment screening, diligence, as well as monitoring. I'd say pretty different to what traditional outsourcing is known for, and I'd also say a very nascent business as an overall industry. We see pretty substantial growth opportunities.
Nascent, okay. Do you have a sense of the size of the market opportunity for you?
We estimate the current market to be circa $1 billion today and estimate it to grow at about a 30% rate over the next 5 years on a CAGR basis. That's a subset of what we define as a much larger category of what we define as research outsourcing, consulting, research and analytics, and market data services, which is circa $150 billion market today. I think as we look at the current environments and growth drivers for the business as a value proposition for our clients, we tend to save around 75% of their fully loaded internal cost. Given the current environment, if you look at the areas which we play in, for example, within investment banking divisions, the fact that on average, they need to pitch five or six times more to win the same dollar of revenue.
If you look within sell-side research, the fact that over the last decade, research budgets have been cut by 60%-80% on most bulge bracket firms. Then at asset management firms, the need to actually conduct deeper diligence as well as continually reevaluate the investment hypothesis. All of that just drives for more demand for our services, which we feel will help accelerate the growth of the industry.
I'm going to ask one more while I'm on you. Is the only reason clients come to Copal just to save costs?
I think, again, the type of clients we service are clearly a number of the major financial institutions. I think a number of them will be represented in this room, maybe not in the same divisions, but for sure the same clients. The main driver is cost is the main driver why they look at the model, but the reasons why they choose to buy and actually execute on this model is the ability to actually get process improvements. As a firm with circa 1,700 people today, the functions which we actually address, we typically have more scale in any single function than any one of our clients. Therefore, the ability to bring best practice and drive consistency and quality.
Second to that, the fact that we're operationally taking control of those functions, which means that all the recruiting, training, retention problems which management typically spend a reasonable amount of their time on actually get dealt with by a third party, freeing them up to actually focus on more revenue-generating activities. It's substantially more than cost.
Rishab, could you just repeat that anecdote you told me about the unnamed investment bank and their experience with the class they had recently recruited?
Sure. As an example, we have a number of clients who clearly are focused on cost reductions across the middle and back office. In the front office, there's been continuous sort of headcount reductions. Clearly, the example I gave of needing to sort of pitch five or six times more to win the same dollar of revenue within investment banking divisions drives the need to actually have a certain amount of resources. There are a number of factors which are at play. First of all, recruiting into the banking industry is becoming harder for a number of our clients because the overall pay opportunities in terms of the investment of the five or 10 years to hopefully make money at the end of the line is not necessarily as bright as it was.
What's typically happening is that a lot of the analysts which are recruited into, again, investment banking divisions are lost within the first two years. Circa 80% or 90% of some of the banks actually turn over to either outside the industry or into private equity, again, previously hedge funds and less so today. I think a lot of that's driven use of Copal and also the drive to reduce class sizes going forward. Actually reduce graduate intaking because of the use of Copal as a replacement.
Banks do seem to be in cost-saving mode. It's a clearly challenging time for them. They are still spending on some things. I know we mentioned our CreditView offering in our last earnings call. Dan, what's CreditView, and why is it selling so well, even in this environment?
Sure. Let me take what CreditView is, then I'll take a stab at why it's selling so well. At its core, what CreditView is a repackaging, a repricing, and a representation of our core content back out to the market. You can almost think of it as a relaunch of our content. It's based on the content the rating agency creates, but we also add components that are manufactured in some of our other business units to provide a comprehensive view of credit. Really what has changed is historically we had taken the position that as we added new content to our product offering, each component was treated as a separate product with a separate price. Over time, what that drove was an overly complex, cumbersome product offering that became overly difficult for our customers to digest and think about and just too many decisions.
What CreditView does is it dramatically simplifies the offering and at the same time dramatically upgrades the content that's available in our packaging. I think that leads to why it's selling so well. One thing we believe and that we've learned in an information overload market that we live in, the content producers that are going to win are those that can deliver high-value content to their customers the way they want it, when they want it, and how they want it. CreditView takes a big step in doing that for us, and I think in the end, that's why people are paying us for it.
You've had 9% revenue growth in RD&A over the last year to date. You've got a fairly mature business. How long do you think you can keep doing that?
Well, that's a great question. We clearly agonize over that on a regular basis. At the risk of oversimplifying, let me give you a little bit of how we think about that question. We think about the demand side and the supply side. On the demand side, what we look at is overall activity in the credit markets, and that's activities like issuance, secondary trading, overall risk appetite of firms, not just quantity but also variety of risks they're willing to take. Then finally, and very important, is what I'll call innovation. The new capital markets products being brought to the market that folks will need assistance in researching and analyzing. From where we sit right now, we see the current environment extending for the next couple of years.
Not the most robust credit market activity over the next couple of years, but enough activity to give us opportunities for growth. On the supply side, we remain very confident in our ability to deliver value-added content into the market. I think what that means, or put another way, is when we look at our new product pipeline it is very strong and very robust. We're quite confident we can deliver high value-added content and sustain growth over the near term.
Well, there is only one place to buy Moody's research, if that's what you're looking for.
That is true.
On the other hand, Jeff, you're competing against IBM, SunGard, Oracle. How have you been able to penetrate the market, and what do you think Moody's competitive advantage is to compete against those names?
Sure. Yeah, they're a somewhat ominous list of competitors, to be sure. Well, we're different, first and most. We combine domain expertise in banking and more and more insurance with quantitative analytical capabilities. We've developed enterprise-class software capabilities. We're just as serious a builder of software and engineering products as SunGard and Oracle are. When we compete with them, we compete on the basis that we understand the business of banking or the business of insurance, depending on our customer and who we're selling to and how they're using our products, in ways that Oracle, SunGard cannot. We also have enough breadth to be able to understand each regional difference that we have in our customers globally. We're able to implement locally wherever our customers may be.
We're on par with them, and in some cases even surpass some of these firms in our ability to be where our customers need us to be when they need us to be there.
Can you talk a little bit about internal competition?
Yeah.
Internal development.
Sure. There's always, in any institution, when they're looking at implementing infrastructure that helps them manage risk, and that infrastructure involves technology. There are always elements or people within those institutions that would like to consider building it themselves. We always face that. We provide a fairly compelling case. We help our customers with total cost of ownership and return on investment analysis of how they're doing it. In some cases, our customers do decide to build their own. When they do, we find that we often have something to offer them while they're doing that. They may purchase some consulting services and advisory services from us, some models from us, et cetera.
In that case, in the event that these internal projects don't go as planned, which is generally 50% of the time or better, we're there and ready to come in and help them fix it.
That's great. Well, Rishi, I only gear up against IBM, who are your competitors? Don't know your market as well, I think, for this audience. Who are you positioned against?
I think somewhat like Jeff, we have two categories of competitors. One is actually the bank's internal divisions within places like India, and then the other are third-party competitors. The third-party competitors are people like S&P CRISIL, Evalueserve is probably the two largest competitors that we have in the space. The largest single competitor for us are actually the in-house divisions of our clients. Firms like Goldman, JP Morgan, et cetera, all have sort of Indian outsourcing or internal outsourcing centers based in India, which typically focus on back and middle-office functions and IT. Typically, they'll try actually putting a lot of the research and analytics work into those centers, sometimes prior to using third parties. Often we have the same struggle. We sort of help, we're consultative through the process of them trying to do it themselves.
Typically we're there to pick up the pieces on the other end.
You've got cases where maybe even your largest customer has a substantial captive in India, right?
Without a doubt. Every, again, we service most of the major global bulge bracket banks. Nearly all of them, well, pretty much all the top 10 have large presences in India. Our largest client has about 20,000 people in their shared services center in India, they definitely have scale. Yet they still have a significant team with us of 150 people.
I'm going to go back around to this again, just to make sure I understand. Outsourcing is not a low margin business here?
Outsourcing as Copal places not a low margin business.
Okay.
The work we do is non-standardized. The way to think about it is that look at something like payroll from one organization to another. There's pretty little difference in terms of how one organization from the other actually executes payroll. Then you look at something like investment research, I think, or at least a lot of firms would argue there's a substantive amount of difference between the broker research you receive from one house and the other. We really focus on the non-standard work. As well, Copal's really positioned itself as the premium provider in this market. We're typically pricing at a 10%-20% premium to our other competitors. We're able to do that because you're already saving circa 75% on the fully loaded cost for a client.
When they're making a buy decision, the ability to buy the confidence of a brand and obviously further reinforced by the Moody's relationship, but also the reputation which we built up of delivering high quality on a consistent basis is worth them paying that 10% or 20% premium.
It tends to be very sticky, right?
Once you win a client, there has to be a very good reason for them to actually switch because they typically desize that particular function internally. Therefore, it's highly disruptive for them to change. I would go as far as saying we've not had a major client switch to another competitor for the last, I don't know, five, seven years. Given we've been around for nine years, that's a pretty good metric. Once we win a client, it's very sticky.
Makes sense. What about you, Jeff? Can you talk about the expectations for your profitability of your business?
We are a profitable business today. If you look at just our operating expense, the dollars that we spend to build product and serve customers, we're operating in the low 20s. I expect that we will increase that margin somewhat over the next few years, not dramatically. One thing about providing software solutions and risk management is it's something of an arms race in that you have to keep current on regulatory change. You constantly have to be innovating and building new product. You have to be careful about sitting back and hoping that a single product you've already launched is going to extract revenue for a very long time. You have to continually reinvest in the business. The way you get scale in this business, though, is by building recurring revenue streams. That's not an easy thing to do.
We are working hard to build products that can warrant subscription-based pricing and subscription-type services. Some of our customers are adopting those. We provide subscription and one-time license pricing for all of our products today. Some of our customers are adopting subscription basis, and some aren't, depending on how they spend their capital. That's the key. As you start to gain scale in this business, in addition to increasing our recurring revenue rates, then you start to increase your margin.
The finances of your business are a bit different. Maybe at a higher level, how does ERS fit into Moody's overall and Moody's Analytics specifically? What's the industrial logic, to use a Mark phrase?
Insofar as Moody's provides ratings and credit research, and risk management solutions, it's in the business of managing risk. Especially with regulatory change in the implementation of risk management practices into the operational aspects of running a bank or an insurance company. In other words, using risk management less as a retrospective view on how we've been doing business, but more as a real-time input into decision-making on originating a loan or writing a policy, et cetera. Software and infrastructure becomes the vehicle for risk management.
Yeah.
In that way, to the extent that Moody's is working hard as it is to improve the risk management generally and make the financial markets safer and more reliable, this business is right in that wheelhouse.
Great. Dan, I want to go back to you for a second because I haven't asked you anything in a while. Content-wise, I know that we sell, and MIS research has been mentioned a couple of times today, but I know we sell more than that through our D&A. What other products are in your portfolio?
Sure. It's a great question because the portfolio's got, in my view, some very outstanding products. I'd mention just three of them. First is our quantitative credit metrics. There we look at market prices, equity market, credit default swap bond prices, and can extract a credit assessment out of those prices. That serves customers very well because, one, it gives us the ability to provide credit assessments on names that the rating agency may not rate, so we can expand coverage. Also it's a great complement to the fundamental research done in the rating agency for our customers to look at a market view of credit as well. That's one. Second, our structured products. Even though that segment is struggling a bit, our product array is quite successful. Many significant customers rely on that and we help them manage and value their portfolios there.
Last but not least, I would mention our economics and consumer credit business, perhaps more broadly known as where Mark Zandi works. Nonetheless, he is backed up by a team of outstanding economists, analysts, and data professionals that provide outstanding economic forecasting and research to a large number of customers around the world. It's a very robust product portfolio in our D&A.
Great. I'm getting the cue that we have just a few minutes left, so I'll ask one of these broad questions. I'm curious to hear from each of you what you're most worried about, what keeps you up most at night. Maybe I'll go back to Dan first.
Well, I think one that probably we'll all talk about is a big negative downside surprise out of Europe. That seems to be where we're looking at the most risk. If something like that were to occur, it would probably put a lot of pressure on European institutions. They're a very big piece of our customer base. Any pressure on them to reduce costs or reduce purchasing would be a negative event for us. Secondly, I would go back to one of the comments I was making, just a lack of vigor and creativity and innovation in the credit markets broadly. If the credit markets persist the way they are and they perhaps even diminish a little bit, that would be a limiting factor on our ability to grow the business.
Cool. Jeff, do you want to go next?
Yeah. Well, in addition to Europe, I'm a little bit concerned about China and fast-growing economies. The fast-growing economies have been a big piece of our growth for us, I'm always concerned about disruption and slowdown in Asia particularly. On a day-to-day basis, I'm concerned and worried about how we continue to drive recurring revenue growth in this business, that's first and foremost for us as we think about how we build products and serve our customers.
Maybe I'll go to Rishi next.
I think for us, our biggest challenge is, as we've mentioned, our business tends to be very sticky. Clients have actually focused a lot on taking costs out of the middle and back office. They're looking for other ways to take costs out, taking costs out of the front office is clearly a logical place. For us, it's actually keeping up with demand. What we're potentially experiencing with a number of clients is sort of potentially step increases in our relationship size. Because again, once we're in and have proved ourselves within a client division, the ability to actually propagate across the organization is much greater. It's really keeping up with that demand. Again, on the buy side, we just see a continued drive to actually conducting higher levels of diligence actually before making investments.
As I mentioned, sort of more robust investment monitoring processes. Again, leading to high demand for our services. I think a case in point is during 2008 and 2009, which was probably the depths of the financial crisis, we saw continued robust growth across our client base. Even if there is a large negative event in Europe, we still feel that we'll continue growing.
Well, in fact, as Mark mentioned earlier, Moody's Analytics as a whole, weathered the financial crisis relatively well. I think we're out of time in terms of our prepared questions, but wanted to go ahead and open it up to the audience for questions. Before I do that, just thank the panelists for their time and input thus far. Start with John Neff up here.
Hi. With you all up there, I thought I'd ask, could you just give us a sense, maybe take us into the meeting room. Give us a sense of how, to what extent, and if, but really how you go about discussing competing for capital to sort of feed your businesses and sort of support your individual domains that you oversee. Thank you.
Yeah. Why don't
Competing for capital to sort of feed your businesses and sort of support your individual domains. Competing for capital to sort of feed your businesses and sort of support your individual domains that you oversee. Thank you.
Yeah. Why don't I take a crack at that, and maybe you guys want to fill in. John, we focus on what do we need to add to the product portfolio in order to realize our strategy and grow the business. That's sort of what we start from. Frankly, one of the benefits we have, being part of this corporation, is that we've got a fair amount of capital. When we've identified opportunities for us to do things to accelerate our growth, to expand our product offering, we are, I think, very rigorous and very disciplined about evaluating those opportunities and making the case for them. I don't think we've ever been prevented from doing anything because, gosh, we don't have the money. That's never been an obstacle to our building out the Moody's Analytics business.
I think it's fair to say that if you push that down to the individual operating businesses within MA, that continues to be the case. I look to Jeff to tell us to make recommendations about what he needs to do to build out his product offering, whether it's through M&A or through organic investment, in order to take advantage of the opportunities that he's gotten from them. That would be true of the other businesses as well. Is that fair?
Within Enterprise Risk Solutions, we look at use of capital in two ways, in M&A, and then our ongoing operating expense and product development. On the M&A side, the acquisitions have to stand on their own. It means that the business case that we use for valuation of the acquisition, we need to execute against that business case, and it needs to fold into our existing operation. We haven't run anything as a standalone within ERS. We incorporate the products and services and people as quickly as possible. Thus far, with the two major acquisitions that we've done, Fermat and Barrie & Hibbert, we've been executing against the plans that we used as the basis for the valuation. That's on the M&A side. On the product development side, we go through a fairly rigorous S-curve analysis.
In other words, we have expectations for every $1 that we spend today in new product development with respect to how it's going to return, when the products will become profitable on their own, what our return on capital invested on the product or product level is. We go through that rigorous analysis, and we have expectations for that. That's used as the basis for how we spend our operating dollars in building new products.
You can go to Peter here.
Thanks. Ray talked earlier about 2%-3% incremental revenue growth contribution from Moody's Analytics, which I think would imply sort of 6%-9% top-line growth rate for the businesses. The question is that, Mark, how you think about it in terms of realistic organic growth, and is that an organic growth rate number? Then two, you talked about the adjusted margin in the low 20s and maybe could go a little higher. What are the constraints to higher margins? Why shouldn't it be higher? I think looking back, this was a mid-20% margin business. I'll just throw another part in here.
Yeah.
This might be more for Linda later. You were talking about adjusted margins. The market really looks at GAAP results for you.
Right
Is that a fair way to think about the business?
Yeah. Let me address your first question first. You're going to have to remind me what it was.
Organic-
Yes. Quite right. No, your math is right. Ray talking about us contributing 2%-3% to the overall top line. That would imply mid to high single digits on an organic basis, and I think that that's very much what we've organized the business to do. That's what our strategy would suggest we should do. If anything, our aspirations and our expectations would be a bit higher than that. With respect to margin, why isn't it higher, I think is the short version of your question. The reality is, Peter, that we see a lot of opportunity, particularly in Jeff's business right now, to win a lot of business from a lot of customers. There's a tremendous amount of regulatory-driven demand from banks and insurance companies for us to help them meet the new Basel requirements, to help them meet the Solvency II requirements.
There's a great opportunity. I think we're very well-positioned, I think that opportunity is going to be relatively short-lived. It's only over the next couple of years, we are bound and determined that we're not going to miss that opportunity. We want to make sure we take full advantage of that wave. As Jeff said, his is a business in which we've got to continually be investing in order to be able to continue to grow. The other thing is, if you look at the margin of this business over time, one of the things that you're observing, Peter, is just it's the reality of the math. Back in the day when Moody's Analytics was really just the rating agency research, that is, as you might guess, a phenomenally high-margin business.
As we do other things, as we build out other aspects of the Moody's Analytics business, if Jeff's growth rate is twice that of Dan's, by definition, our margin's going to go down. As we continue to build out the top line, I think that's just the nature of building a larger business that serves more customers in more ways.
Question from Stephen Frick. Phone back there.
Is this on? Just a follow-up to Mark and Jeff. Can you just help us understand, you talked about the opportunities on the KMV side with regulatory capital, where are we exactly on the S-curve? Is it that you guys, the banks and insurance companies, have been grappling with this for the last several years, you've been selling a lot of subscriptions and a lot in this area, it's just a continuation of the runway rate? Or as the regulatory requirements get finalized, you've really been investing in building your capabilities, we're likely to see more of an explosion in terms of the new business opportunities?
Yeah. The products that we started with when we embarked on our mission are the most profitable products that we have today. They're RiskCalc, single obligor risk models, and spreading and scorecard solutions, our RiskAnalyst product. They're very mature, and they're very profitable. We take the revenue and the profit from those products, and we've poured it into, through acquisition and internal development, regulatory capital products. Those are becoming profitable on their own, meaning that the maintenance streams that we make on those products is paying for the ongoing development we have to do to sustain them. Every additional sale and implementation we do provides more revenue over time. As we look at that, though, we say, okay, now we want to grow more into loan origination for banking. We are very early on the S-curve there.
It will be a number of years, maybe five, six years, before the investments that we're making in that product today have paid for themselves, and we start to accrue long-term profitability on that product. As we get into insurance, we have early S-curve products in insurance and other areas. Every product is on its own cycle. Some products are very mature and paying for the development of the other products. Over time, the firm will move up that S-curve, and we take less and less new profit dollars and put them back into product development.
Steve, to your question about regulation, you're quite right. Banks have been complying with Basel for many years now, really. What we're seeing right now is sort of a next-generation Basel. Basel III sort of changes everything for all the banks. All the banks that had already adopted a Basel II solution, they're now going back and saying, "All right, well, we now need a new and different solution." We're really well-positioned to be able to sell into that new wave of opportunity.
Got a question up front.
This might be excuse me, for Mark. To what degree does the intellectual capital that you develop and deploy to clients also feed back to Moody's Investors Service in terms of improving the quality of what they produce?
Yeah. I think it does to a degree. Certainly some of the content and some of the analysis that is indigenous to Moody's Analytics, like Mark Zandi's work and the work of his people. MIS is a consumer of that information. They are consumers of that analysis. MIS is a consumer of the market-implied ratings work that we create. They're consumers of some of Jeff's tools. The Moody's Analytics product is used within MIS. I guess I'd defer to Michel as to the extent of that usage. I wouldn't characterize MIS as a big customer of Moody's Analytics. The one exception to that may be frankly in Rishi's area, where we're talking about doing a fair amount of work with them.
Any other questions? I'm thrilled with the interest that we've had from the group and again, with the panelists, and appreciate your comments. We're going to go ahead and move to the next session. I'll introduce Linda Huber, who is our Executive Vice President and Chief Financial Officer of Moody's Corporation.
Good morning, everyone. We're hoping we can get through this before the introduction of the iPhone 5. We'll try to stay on schedule. I have with me today Robert Fauber, Senior Vice President of the corporation, who runs corporate development.
We get a myriad of questions about what we're doing in corporate development. We thought we'd let Rob present for himself today. He's going to do that. Following Rob will be Lisa Westlake, SVP of Human Resources. We get questions as well about our executive compensation. Lisa will take you through that quickly so you can understand what we're trying to do. What I'd like to talk about today is our financial overview in terms of how we've done for the first half of the year. I'd like to emphasize a very strong first half growth across Moody's businesses. I want to explain why a diversification strategy makes sense and why we should do that as Moody's rather than having the investors do that. I want to talk a little bit about cost-saving strategies.
We're very proud of our double-digit EPS growth, and we want to explain that. For Peter's benefit, we want to talk about our new non-GAAP measures. This is very exciting for Moody's. We don't come out with new financial measures very often. In fact, this is the first time in eight years. We're moving into different businesses, and we think it provides better comparability, so I'll explain that. Lastly, capital allocation, always a very popular topic. We're going to explain the balance for that and how we think about it. We're going to talk a little bit about cash flow, which remains a very strong feature of this business. For the first half of the year, against extremely difficult comparables, the rating agency, which is the top set of graphs, did quite well.
Corporate finance grew 3%, even against historically high first half growth last year. Structured finance, a business which we were told was left for dead, actually is growing at 5% for the first half of the year. Financial institutions remains flat in revenue, despite the fact that issuance has come down. That's pretty interesting. Public project and infrastructure is up 17% over this period of time. The rating agency up 5% for the first half. Very nice growth by the rating agency against tough comparables. MA, the main purpose of this event today is to make all of you appreciate what's going on in the Moody's Analytics business. One of the things we are concerned about is that the analysts, frankly, focus obsessively on the rating agency. It's time for that to change.
It's time for people to appreciate what's going on with Moody's Analytics. Just take a look at these numbers. RD&A, which is a business which resells research from the rating agency, revenue's up 9% for the first half of this year when investment banking budgets are shrinking. A pretty phenomenal achievement. Enterprise risk software revenue's up 17%. This is a $100 million revenue business. There are other companies that are buying these businesses at a fantastic rate. If we were to look at that, the value of this business by a 14 times EBITDA standard, which is what other big companies have been snatching up these businesses at, would put about a $600 million valuation on enterprise risk software. We have built a very nice business, created real value for shareholders there, and we love the growth opportunities in this business.
17% this year, half organic, half acquired. Lastly, professional services, which now includes Copal. It is not a body shop business. It is a high-end business. It's replacing the work of investment banking analysts at a much more efficient cost. The professionals at Copal are CFAs, they are CPAs, and they're very highly qualified people who work specifically for those investment banks. It's very sticky and there are very high conversion costs. The people who are working in those businesses would have to change out SAS 70 requirements, if you know what those are. That relationship is very strong. Moody's Analytics businesses have done a tremendous job, driven growth of 19% for the first half of the year, and we're very proud of what's going on with Moody's Analytics.
We would hope that the sell-side analysts would share our enthusiasm and write about this a little bit more. Now, going back to the ever-popular obsession with the issuance outlook for the MIS business. Last year, as I said, first half, very strong issuance. Second half of the year, rather weaker issuance. This was a difficult period to manage through. First quarter of this year, again, very strong. Second quarter, pretty good. The third quarter looks like, and this is an estimate, that it'll be somewhat better than the second quarter. Third quarter, as you know, historically strong issuance earlier this week, $20 billion high-grade issuance day on Tuesday. The markets are running very strong right now. It's too early to tell what will happen in the fourth quarter. I heard yesterday that the October high-grade pipeline may be $100 billion.
Again, unclear, and we have a lot of factors which could cause this to break the wrong way. Fourth quarter, we're not quite sure about that. We've seen views that are as strong as the third quarter. We've seen views that are quite a bit weaker, so you can make your own call there. What is important is we have historically low issuance costs, and that is going to continue to bring treasurers to the market. Now, for those of you who really like the MIS business, it has a lot of great attributes. It is a high-margin business. The revenue view is a bit variable. This is a high amplitude around the revenue line for MIS. Back to the financial crisis, we saw shrinking revenue lines coming out of MIS. As we came through that, we saw very strong growth on the MIS line.
Again, we at Moody's are sort of takers on what issuance rates look like. For this year, because we had such strong growth last year, the growth has kind of dampened and moderated for MIS. You see broad swings in revenue from down 35% to up 30% on the revenue line. Now, if you superimpose MA, what does it look like? Much more stable, nice ballast for the business. Good growth, but steady growth, and growth that we can drive through the sales effort with products. We can do that to some degree on MIS, but again, issuance is something that we don't control. The combined business is dampened in its amplitude. It's a little bit more predictable, and it's easier for us to manage through. That's one of the reasons why we have two businesses.
If you look at the corporation as a whole for the past 18 quarters, we've been successful in exceeding 40% margin in half of those quarters. We've not been successful in the other half of the quarters, we do try to manage the business to match revenues and expenses. We don't always get it right. We plan over a year's period of time, we don't always know what we're going to get. Much to Craig Huber's disappointment, we do not hit 39% margin every single quarter. We would like to, but it's a little tough to manage the business with issuance bouncing around as much as it does. We want to assure you that we pay very good attention both to cost management and also to revenues. We would love to have near-term margin expansion, but I don't think that's particularly realistic.
We are managing some cost pressures of becoming a heavily regulated business, that's expensive. We need to run this business now to be bulletproof in the face of some pretty heavy regulatory scrutiny, that costs money. What we're doing is investing in IT. We're investing for Dodd-Frank. We're investing for CRA3. We can't give you any numbers on CRA3 because we don't know what we're up against yet. On the other side, we're trying to manage this. We're looking to right source. We are using Copal ourselves as a way to reduce our own expenses. We're standardizing processes across the organization, we're pushing very hard on our vendors. We just don't take these cost increases lying down. We're looking to offset them as much as we can.
If we do have a slowing in the cost of the regulatory expenses over time in the midterm, that's three years out, we may see some expansion of the margin, but that's not a goal of ours immediately. The goal is to make the business bulletproof in the regulatory situation and to support the growth in Moody's Analytics. On the EPS line, we have been able to grow EPS at double-digit rates since 2008. If you look at this, we have had 54% of that come from what the business has driven with its double-digit revenue growth. We've provided the other 46% of that below the line. The finance and tax teams have been very busy. 28% comes from share repurchase. We've reduced the share count by $40 million or 16% over this period of time.
Through really good tax planning, which is an incredibly important thing for Moody's, we've reduced the tax rate as well. 46% of the EPS growth comes from what we've been able to do below the line. What you need to take away is that we work every single line hard at Moody's. We appreciate the opportunities we have above and below the line, we work on all of them. The new non-GAAP financial measures. The controllers team has submitted this contribution as to why we're doing this. I would like to have the group study this at its leisure. What we're trying to do is provide better comparability across periods and in comparison to other companies. What we'd like to explain on adjusted operating margin, all we're doing here is taking the normal EBIT margin and adding back D&A.
39% margin on an adjusted basis, if you add back $80 million of D&A, becomes 43%. Why are we doing this? It's because this is the way the competition in the Moody's Analytics space shows its margins, and we need to be able to compare more directly. Looking at this on an EBIT margin view, really frankly discriminates against MA and how well it's doing against other companies. We decided to make the change. If you want to study the detail of what we're doing, page 117 has a lot of tables on reconciliation and what we're up to. Cash flow. Normal measure of cash flow here in orange, which is operating cash flow. Subtract out the blue CapEx line and you get the yellow free cash flow line. Over this period of four years, our free cash flow has grown 17%.
The mean for most of the companies in the S&P 500 is 10%, but the median is only 4%. Again, cash flow is a very important feature of this company, and we continue to do really well on that front. Capital allocation. We get a lot of questions about this. We thought we would give a big shout-out to everybody who owns our stock here, so we hope to see you prominently featured on the list. Our top 10 investors own 54% of the stock, led by Berkshire Hathaway, which owns 28.4 million shares. Berkshire Hathaway has not sold any shares since October 21st, 2010, when they sold the stock at $26.10. Our stock just went through $43 this morning, so that's interesting. ValueAct Capital is well represented here. We welcome everyone from ValueAct, all 12 of you.
That owns now 17 million shares of our stock. CapWorld has lost its second-place position. We'd encourage them, though, to battle that out. 16.8 million shares. Vanguard is fourth. T. Rowe, Manning & Napier, BlackRock, and State Street are index investors. IFP is here. Hassan's here from London. We have global investors, which is great, and then MFS. We work very hard at our relationship with the shareholders. We had more than 200 calls and meetings with 120 institutions this year. We view this as a competitive differentiator. We know that some of our competitors are a little bit more shy, a little bit more reticent. We're very happy to meet with everyone, anyone who wants to come talk with us. We hit the road. We've been in 11 cities this year. We do non-deal roadshows on other continents, and we also participate at investor conferences.
A hint would be if we have sell-side analyst coverage, we feel better about going to conferences. For those who are contemplating, please keep that in mind. Who owns our shares? It's very interesting. If you go back to 2008, 36% of our holders were value investors. Times were dark, stock was cheap, and value investors owned about a third of our stock. Things have gotten better. The majority of holders in Moody's now are GARP investors and growth investors. Only 12% are value folks. What we see here is we are a GARP stock. We don't view ourselves as a value stock, and our multiple has moved accordingly. If we don't get enough out of meeting with investors constantly, we survey them as well.
We survey investors twice a year and the sell side analysts, and we ask them, "What would you like us to do? What is your preferred capital deployment strategy?" We hear from investors that the very important thing that they want us to do is either repurchase shares, invest in product development, or increase the dividend. We understand that each of those things are important to different shareholders. Bolt-on acquisitions are also something that is considered somewhat important. Reducing our debt is not considered important, and making a major transformational acquisition is considered not as important. We have no intention of making a transformational acquisition. Rob will speak a little bit more about our criteria in a minute. Within the repurchase shares and increase the dividend view, we have hawks on either side of the question.
We have people who call us up and tell us to repurchase many more shares, and we have people who meet with us and tell us to greatly increase the dividend. We are not going to make everyone happy. We're trying to find the right balance. What we have here is a chart of our capital allocation since 2008, over four years. This is $2.5 billion of capital we've had to work with. Of that, you see that $1.6 billion has been returned to shareholders. Two-thirds has been returned to shareholders, and over this period, it's tended toward share repo. Dividends at 17%. Rob's going to talk about the acquisition slice of the pie, which is $0.6 billion, and in fact, is a smaller piece of the pie. Two-thirds of the capital going back to the shareholders.
Our goal here is to keep our leverage about as it is. We are rated BBB+ by Standard & Poor's. Like every other company, we think our rating is too low. We're comfortable with our leverage levels, and we are looking to maintain that strong investment-grade rating. Being in the business that we're in, that's important. We want to maintain the balanced approach of returning cash to shareholders. Our balance sheet has had some activity this year. We did a $500 million bond deal in August at a 4.5% coupon. It was five times oversubscribed. It traded 20 bips through our existing deal. We're very proud of that. We have $1 billion of the bank line, which is completely undrawn at this point, and no major maturities until 2015.
The bond deal will be used partially to pay off the term loan that you see on the bottom left. Our debt to EBITDA is reasonable and well within our rating. Our cash has moved from very heavily offshore with the bond deal to about 50/50 back onshore. We have about $550 million of cash offshore. The cost to bring that back, to bring back $550 million, would be about $100 million. I don't think it's prudent to spend $100 million to bring back $550 million. We did a bond deal. We issued at a very reasonable price. We have some more flexibility, and we will see what happens with the elections and where U.S. tax policy goes.
On share repurchases, on the left-hand side, you see we've come to a sort of moderated view where we do $200 million-$300 million a year of share repurchase. If you missed it in our guidance this morning, we've upped our share repurchase view for this year from $200 million to $300 million, and our dividends have been increasing at a nice clip. We took it up 20% last year. We are increasing dividends in line with earnings, and we'll talk more about what we're doing with dividends in December. We are aware that some of you would like us to increase the dividend. We've heard that. Got it. Recent tax planning has been very helpful to us. In 2004, this company paid a 41% effective tax rate. We are located in New York.
It's a high tax jurisdiction, as a 50% international company, there was a lot of room to do more. What we've done is we've planned very effectively, we've planned very conservatively, and we've gotten our tax rate down. In 2010, we were at 28%. This year, we're guiding to 32%. If you look at some of our competitors, our tax rate for companies that are in like businesses in like jurisdictions, we're doing pretty well, and we feel pretty proud of that. On the other hand, Moody's will never undertake any sort of aggressive tax planning. We are very conservative, and we are only moving on strategies which are very well-tested and really above reproach. We will continue that. Savings of $350 million since 2004 by reducing the tax rate. Back to the funnel.
I hope you've all had a good long time to think about the funnel, no going ahead. I see Brad's going ahead. You start with 500 companies in the S&P 500. Four of them were kicked out because their market cap is less than $2 billion. Of those, look at this, only 40% have revenue growth that's equal to or in excess of ours. Only 40% have the growth on the top line that Moody's has. Take that group and you cut it again, only 12% of them have the operating margin that we have, okay? You're down to 25 companies. EPS growth of greater than 15.8%, you get about half of those, 13 companies. Total return greater than 18.2% over this period, only three companies, okay? Who are they? If you guess this, you get extra points. Okay.
It's Philip Morris International, which is not domiciled in the U.S., and Visa. Compared to these guys, I would submit that we are still a bargain at 15.2 times forward PE. Philip Morris International at 16 times, Visa at a very healthy 19 times. Again, we're very proud of our performance, and we think we do represent a growth at a reasonable price opportunity. With that, I'll give you the guidance again. You see, as Ray had said, revenue and OpEx at 12%-13%, tax rate down to 32%, EPS guidance Ray went through. Share repurchase, please note the extra $100 million, other things remain the same. The longer-term targets, low double-digit revenue growth and the adjusted operating margin, which is the EBIT margin plus the D&A in the low 40s.
With that, I'll turn it over to Rob to answer all questions on corporate development.
Thanks, Linda. When I first joined from Citi about seven or eight years ago, my boss reminded me that I was going to a company full of credit rating analysts, and I think he thought that didn't bode well for M&A. We've gotten some M&A done, but I can assure you that the approach here at Moody's is analytical, it's rigorous, and as you would expect from Moody's, conservative. I'm going to talk to you a little bit today about how we spend, how we evaluate, execute, and track on that 20%-25% of free cash flow that Linda talked about. Corporate development team, really three primary functions. One is to facilitate corporate portfolio decisions. John, you asked the question about how do we allocate capital.
One of the things that we do annually, we have a market analysis framework where we look at both the markets in which we operate today as well as adjacent markets within business information services. We look at forward growth rates, profitability, size, and market structure, and we make decisions about where we want to invest further and where we may actually want to consider divesting. We review that framework with our board annually. Second, we lead geographic expansion in high-growth markets. This really is in Asia, to a lesser extent, Latin America. We have a good bit of experience in both diligence and structuring in some of these jurisdictions. Finally, we assist our lines of business in executing their strategies. All of the deals that we do at Moody's are led by the business.
These are not corporate-led deals, but we do want to make sure we ensure some corporate consistency. We also want to ease the execution burden on the businesses. You'll see I mention here target screening and proactive outreach. We want to make sure that we're not sitting around competing in auctions. We do everything we can to find opportunities that are directly in line with the strategies of our businesses. I get asked all the time, how do we source deals? How selective are we? Do we compete in auctions? And so on. In keeping with Linda's funnel theme, since January 2005, we've analyzed roughly 475, just under 500 companies. That has resulted in, as you can see, 14 majority transactions. It's interesting to look at the difference in the transactions between ratings and analytics.
As Ray mentioned when he started, if we could invest in sizable ratings opportunities around the globe, we would do that all day long. Unfortunately, there are very few opportunities of scale that are also actionable. You can see that we've done a handful of minority investments, oftentimes or really always dictated by the foreign ownership restrictions in the countries in which we're investing. We've made several small majority acquisitions. You can see the purchase price on the ratings deals, very small on average. The Moody's Analytics deals would be more what you expect in terms of a typical control transaction. Still very much in the bolt-on. We've done transactions ranging from $2 million-$200 million. Since 2005, we've only done four transactions with a purchase price of greater than $40 million. How much have we spent? We spent about $680 million since 2005.
That's about $85 million a year on M&A. There is no quota. There is no objective in terms of the number of deals that we'll do in any given year. Some years we've done no deals. Some years we have done as many as five. For that $680 million, we have acquired about $225 million in first-year revenues. That's an average multiple on a revenue basis of about three times, and we think that compares quite favorably to the multiples that are paid in the business information space. I just literally did a data dump from our database. We're showing about 3.4x, a little under three and a half times revenues paid in this space. As you know, transactions in this space tend to be quite expensive. How do we choose what and when to invest?
As Linda mentioned, we get this question frequently, so we decided to answer it today. We have some financial parameters, and we have what I'd call kind of operating and strategic parameters. Around the financial parameters, no real magic here. We have several different things that we look at in every transaction. We obviously are seeking an internal rate of return in excess of the cost of capital of the target which we are acquiring. That ranges depending on the size of the business, the location of the business, and the type of the business. Very importantly, we look at cash-on-cash return, and we seek to have a greater than 10% cash-on-cash return within three to five years. Why not one year? Because we're acquiring growth companies. They're growing into these returns. Why 10%? Because that roughly approximates our cost of capital.
We also look at, but I wouldn't say a primary metrics, payback periods, as well as GAAP EPS accretion. We like for these deals to at least be GAAP accretive within three years. In terms of what kinds of companies do we like to buy. Again, we seek ratings or standards businesses. That would be the highest priority for us. Those are relatively few and far between. We then have this market analysis framework, this is just kind of a sanitized snapshot of that, where we seek to invest in high growth markets. Obviously, we're seeking to invest towards the top and towards the right. We're also looking to make investments in companies that have a financial services client base that leverages our distribution, our brand, and our credit expertise, and analytical rigor. We also look for demonstrable synergies in every transaction.
That's both top and bottom line. We see that as really a proxy for the degree of fit with our organization. Every time we're acquiring a company, we're asking ourselves, are we the best owner? If we can't drive significant synergies, it's telling us that we're probably not the best owner for the asset. We are looking for repeat or recurring revenue streams. I think you heard from Rishi today about the nature of that business and how we think of that as really a recurring revenue business. Just like you saw on Linda's slide with the low capital expenditures, we're looking for businesses that have low capital intensity. You should not be expecting transformative acquisitions from us. How do we know how we're doing?
Once we acquire a business of greater than purchase price of $10 million, we have some periodic tracking that goes on. Really, that's twofold. First, you have to understand that we typically integrate, except for Copal, really, which we're, I'd say, have kind of a collaborative approach on. We typically integrate every business that we acquire. We do that because we think that that creates a more coherent product and services offering for our customers. The downside to that is that it makes it difficult to track earnings. We can obviously still track revenues, we can still track other key performance indicators. It gets more difficult to track earnings of the acquired business when it's fully integrated. We have a quarterly dashboard. We have a set of key performance indicators that are both financial and operational.
In every deal, as you would expect, as we do our revenue builds, we make assumptions around client retention, employee retention, and the like. We track that on a post-closing basis. We do that quarterly, and we share that with both the management team and with the board. We also do annual acquisition reviews. I get the pleasure of going in front of the board every year and talking about the performance of our acquisitions, how they're tracking against the acquisition model, what worked, what didn't work like we expected, why, and how are we going to incorporate those lessons learned into the acquisition process going forward. Also a discussion about, is there still a strategic fit? Is the strategic rationale still valid?
Finally, we also get to do with our accountants, our annual impairment testing process, where we compare our assumptions around fair market value of the asset to the purchase price. That's how we track it. How are we doing? In terms of the key performance indicators, which are really, again, financial and some of the operational metrics. Let me first touch on Copal and B&H. These are really our three largest transactions since the Fermat deal back in 2008. I wanted to focus on these. Copal and B&H, we consider those to be on track with our acquisition models and our assumptions. CSI is slightly behind. The training market has softened. Even though CSI exceeded its first-year KPIs in the second year, as we've seen a slowdown in Europe, which has actually impacted the training business and even the training business in Canada.
We have seen some slowdown. What have we done about it? We've made some management changes. We've accelerated the integration of the CSI business with our legacy training business so that we can drive more top and bottom-line synergies in order to get back to hopefully achieving that cash-on-cash return of 10% within a five-year window. I think as you get more understanding of the businesses that we've acquired, you can start to see how they fit in terms of what we're looking for. We think of CSI as really a standards business that anchored our training business, a must-have, a need-to-have product in training. We see both the Copal and B&H acquisitions as primarily investing in growth.
I will close with, in addition to the $225 million of revenue that we've added to the company, what else has our $680 million and our corporate development effort gotten us? Why should you care? We've expanded the addressable market. I think Mark alluded to an addressable market of about $12 billion versus what we think of the core addressable market for the ratings business of closer to $4 billion. We've expanded that addressable market into high growth markets as well. We've supported double-digit top-line growth for Moody's. We are leveraging some of the competitive advantages that we have in regards to brand and global distribution. We're building scale in a high multiple, high growth analytics business, primarily the enterprise risk solutions business. We believe that we have created a top five global player in that business.
We're adding capabilities, as Mark talked about, and Mark and the team, to further penetrate our existing financial services client base. We've also added a back office platform, which we'll be able to leverage in terms of cost management. Finally, we've developed a local presence in certain key emerging markets, and we feel very good about our position with our joint venture in China. With that, I'll turn it over to Lisa and happy to answer questions afterwards.
Thank you, Rob. This morning you've heard a lot about our business strategy. You just heard about our financial strategy. What I'd like to do in the next few minutes is tell you how we pay our people and how we incent them to deliver on that strategy. What I'm going to be discussing is targeted at our named executive officers, so those that appear in our proxy, but broadly for the top 50 senior managers at the company, what I'm describing exists for them as well. To get started, what's our compensation philosophy? We're really trying to do three things. First, we're trying to link realized compensation with business success and also each person's individual contribution to that success.
We're also looking to align executives' rewards with the shareholders' interests because the shareholders own the company, and we are working for you at the end of the day. Thirdly, we are very cognizant of offering a competitive package to our executives, in terms of motivating them to deliver superior performance, but also to retain them. We've got smart people. I hope you can see that. They do have other opportunities, and we want to make sure that they're incented to not only work well here but stay here. In terms of corporate governance, we've got, I would say, very strong oversight of our executive compensation. The governance and compensation committee of the board is responsible for the comp structure at the end of the day, also for evaluating executives' performance and setting their goals. That committee is comprised entirely of independent directors.
They also work with a comp consultant, Meridian Compensation Partners. He really provides a wealth of information in terms of emerging trends in the executive comp arena, gives us a sense of what best practices are, and most importantly, helps us and the committee to benchmark our compensation versus our peer group and also versus the broader financial services industry. How do we pay people? What are the components? We really have two components, although you see three boxes up here. We've got a base salary, and we have incentive compensation. Base salary is just what it appears. On the incentive side, we have short-term incentives in the form of annual cash bonuses, and then we have medium and long-term incentives denominated in equity.
Our equity on the medium term, we have three-year performance shares, and I'll take you through those momentarily. On the longer term, we've got stock options. We focus on benchmarking the total comp package first, but we do pay attention to mix as well in terms of our mix of comp as opposed to our peer group. In terms of that mix, our CEO comp is structured this way, and these numbers again are reflecting what's in our latest proxy, 2011 proxy. Base salary is about 18% of total target compensation. That means the amount of compensation that's at risk for our CEO is 82%. 32% of that is in the annual bonus, and then the other 50% is equity-based. The numbers shift slightly for the other named executive officers. You can see there's a range here.
Base salary goes from a low of 18%-30%, the annual bonus target around 30% overall, and then the equity-based incentives between 40%-50%. Those named executive officers who have operational roles, like the heads of our businesses, have more compensation at risk than those who have more corporate roles. In terms of how do we fund these various incentives, we have a variety of targets. You can see here on this chart for CEO, CFO, and General Counsel, we have two main targets for the annual bonuses. We're looking at company-wide operating income performance, and we're looking at company earnings per share performance. In terms of the heads of our businesses, you can see they share those metrics at a lower percentage, and they each have 50% of their target based on the operating income performance of the area that they're managing directly.
They're tied both to making sure the company overall does well but also focusing on the areas of their responsibility. An important component to this. You could say we've got a real financial focus here. We do. It's true. We do have a customer focus as well. We have a modifier. Every year we do a blind survey of institutional investors, those who are focused on investing in the debt market, and we ask them, how are we doing compared to our competitors? Depending on overall how we're doing, but also how we're differentiating ourselves among the competitors that we have, we adjust funding for bonuses up or down up to 10%.
In terms of long-term equity, the first thing I would want to emphasize here is when we're thinking about how much equity to award, we look certainly at competitive value, so what are our peers awarding, but probably even more importantly, we look consistently at share utilization. Again, how are we positioned versus our peers, and how are we using the shares overall? Starting with stock options, these are fairly typical, probably something that you have yourself or you're aware of. These are options that are priced on the day of grant. For us, they vest ratably over four years, and then they expire after 10. If there's no stock price appreciation between the day of grant and 10 years later, these have no value. Our performance shares, this is something that we introduced about three years ago in 2010.
What those are, they're basically a promise to pay an executive a certain number of shares in three years, depending on our performance against various targets, and it's cumulative three-year performance. Those performance targets that we have as a measure of Moody's profitability overall, the rating agency's accuracy in its ratings, so that's something that we do track. It's actually something we publish as well, and Moody's Analytics sales. Now, depending on what you do at the company, your weights are different, and that's what you see on this slide here. Again, for the folks that have broader, more corporate roles, each individual has each of those three targets, and you can see the weightings.
It's primarily weighted toward profitability, but given that the top three individuals listed here also have impact into investment funding, et cetera, for the rating agency, there's the ratings accuracy piece is part of their goals, and in addition, the Moody's sales. For the heads of the businesses, slightly different mix. It doesn't make a lot of sense for the head of Moody's Analytics to have a ratings accuracy goal, so he doesn't. Likewise, we've got, for the head of the rating agency, a profitability and a ratings accuracy goal. One of the things that I wanted to mention here is, since this is a three-year program that we started in 2010, we haven't made any payments yet. We'll be making our payment based on the performance at the end of 2012. That will be the first full three-year piece of this program. We also have stock ownership guidelines.
These have been in effect for quite some time. Executive officers are expected to own a certain multiple of their base salary at all times. Our CEO is expected to hold six times his salary. That was increased from five times in July. This is an emerging trend that we're seeing in executive comp. More companies are shifting toward six times, and some are even greater than that, but very few. Right now, depending on what survey you look at, between 20% and 30% of companies have six times or higher. We feel that we're more on the forefront there. The rest of the named executive officers are required to hold three times their salary in terms of stock ownership. Our non-management board directors are expected to hold five times their annual cash retainer.
They've got skin in the game, too, in terms of ownership in the company. We also have a hold until met requirement. What does that mean? For us, this means that if you're an executive officer and you haven't yet achieved your stock holdings, you must hold 75% of all the shares you are awarded until you reach that requirement. We're helping people along, getting to where they need to be in terms of stock ownership. Also, stock options and any unearned performance shares do not count. You really must hold the shares yourself. Because 2013 is the first time we're going to be paying out on these performance shares, we expect, based on performance over the last two years and the latest guidance we just provided, that we will pay our performance shares.
After that, you should see a significant increase in share ownership by named executive officers of the company. In summary, four key points we'd like you to walk away with. First, that our comp plans are directly aligned with shareholders' interests. We feel that's important. We have robust and independent governance around executive compensation. We routinely benchmark, and we are in line with our peers in the broader financial services industry. I guess most importantly, we're very pleased that shareholders last year approved our executive comp program by 98%. With that, I'm going to invite Linda back up and we're open to questions.
Okay, we'd be happy to take questions unless they're about our very complicated compensation plans, which I'm going to turn back over to Lisa. We'll start with Peter.
Linda, I don't think I fully understood your comments on margin.
Sure.
Are you suggesting that you're guiding to or anticipating flat margins on a go-forward basis versus previously, I think you'd talked about on the old metric, low 40% margins achievable in the business?
I think we haven't moved from what we said before, but let me look at the last slide that we had. For 2012, EBIT margins, as we've traditionally reported, 39%. That is our guidance for 2012. As everyone knows, we haven't given guidance yet for 2013. That will come in our February earnings call that covers the fourth quarter of this year. For the longer term, we would expect both revenue to be double digit, Peter, and the longer-term adjusted operating margin in the 43%. We're saying that would be 39-ish. Again, if things break correctly and we are able to do better, we would hope for margin expansion. In the nearer term, I think we're going to be facing some headwinds in order to achieve that.
In the longer term, it would be our goal to have margin expansion, but we're not going to specifically speak to 2013. Yes, I think we are looking to get there, but we're now thinking about this in the new way of looking at the EBITDA margin, and so we're saying the low 40s% there.
If this is a corollary, then can you talk about, we know about the regulatory costs, the incremental costs there. Where do the other cost pressures come in that would prevent you from seeing a little bit more margin leverage in the context of your double-digit revenue target?
Sure. There are a couple of things. For this year, most immediately, when we're moving up guidance, we're doing better than we had expected at the beginning of the year. That results in greater incentive compensation. Looking at this increased guidance view, we're probably looking at about $20 million of additional incentive compensation of all forms, which will probably cheer the employee group sitting over there. We have done better than we expected, so that would be one item. We are facing, as Michel had spoken about, increased IT costs in order to handle the regulatory side, and we have added headcount to drive the very strong top-line growth that we've seen. The main components would be the additional headcount.
Very much below that would be the IT costs. If we're doing better than expected, we do have additional incentive compensation, which will come into effect for the rest of this year. Yes, down at the end.
I don't know if this is as much of a question as it is a comment, but one of the things that you referred to the Moody's Analytics business, and you want people to look at it in different way, and you cited higher multiples for that business and where acquisitions are being made. On the other hand, I think Ray, this morning in his prepared comments, said, "Look, these are not separate businesses. They're integrated. There's big cross synergies between the businesses. Presumably, unless you're going to sell that business, what's the use of placing that high multiple on it?" How do you look at the value of the business overall? Because it seems to be some conflict from what I've heard this morning.
I don't think there's any conflict, I'm sorry if we left you with that impression. The businesses are mutually reinforcing, we only have two business lines, and we think that they do help each other out quite a bit. What I was trying to explain is that the Moody's Analytics business perhaps may not be fully appreciated in terms of when, for example, someone might do a sum-of-the-parts valuation, which might be one way to look at how you would aggregate our value to get to our stock price. I think what we're trying to explain is that our job in redeploying capital to Moody's Analytics is to make sure that we're providing appropriate returns to shareholders and that we're being appropriate stewards of that capital.
What I was trying to explain is that if we did take a market view, we have done a very good job, particularly in enterprise risk software, of developing a business which has perhaps underappreciated value. I was just using it as a point of illustration. Sorry if we caused any confusion. Is that Bill? Yes. Hi.
Linda, do you have a sense at this stage what the incremental regulatory costs could be in 2013? Clearly, your cost of doing business has gone up, I just wonder if there's going to be any kind of change in thinking on pricing as we get into 2013. Thank you.
Sure. This is a question that Michel and I get several times a day in terms of what will be the regulatory cost for 2013. We have a pretty good idea, as Michel and John explained earlier, what's going on with Dodd-Frank. That is a roll forward of rules that have been written. The SEC has got to comply with what was approved by the Congress and signed by the President, we know where that's going. That's something we can easily determine and bake in. CRA3 is a bit of an open question, Bill. It's very difficult for us to know where that's going and what it's going to cost.
It would probably be less than helpful for us to put out any type of number when we don't know where that's going. Michel, I don't know if you wanted to comment any further. We're not even going to take a swag at that at this point. On pricing, we believe in pricing appropriately for the value we're providing. You saw that Ray had said approximately 4% price increases. You heard Michael Rowan speak about how that varies across geographies and products. We're very effective at getting the yield on those price increases. We are aware that we would like to cover increased costs, but we think more about providing value for the issuer than anything else. Yes, John.
I'll just ask you. Thank you. A transformative acquisition is not currently a high priority for your investors. My question is, if you came across an opportunity and you had very high conviction, would you do it?
I'll probably ask Ray to comment on that when he gives his closing remarks. I think amongst management teams, we're probably uniquely humble and realistic. We're probably not the best suited for taking on a transformative acquisition. I think we're running a business right now, which is in a period of intensive change as we move from an unregulated environment to a heavily regulated environment. We're doing a pretty good job growing Moody's Analytics. I think Mark and Michel and I would say we've pretty much got our plates full with what we're trying to do right now. I think Rob would probably echo that, but never say never. We don't have huge expertise at handling those transformative acquisitions, and I think the risks go up as you're betting the ranch on a transformative acquisition.
All the literature and history on big acquisitions would be that they're very seldom value-creating. I think that would cause us to be even more cautious. I think it's just the nature of the beast that we're pretty conservative here. If you see something we should look at, John, let us know, but I wouldn't hold your breath. Craig's going to ask me a hard question.
Actually, it's pretty easy, I think. The $700 million or so on your balance sheet that's tied up overseas.
Right.
Assuming the federal government does not give you and other companies a tax holiday.
What is your plan for that going forward? Just to continue to do these small bolt-on analytics acquisitions outside the U.S. where you can get to that cash?
Well, the numbers are, I think at the end of the second quarter, we had $770 million outside the U.S., and a good chunk of that is what's called permanently reinvested. We can dividend some of that money back to a limited extent within the arrangements that we have offshore. I think our view would be to use that, yes, for bolt-on acquisitions. The majority of the ones we've done recently have been outside the U.S. In some sense, those acquisitions are paid for in lower taxed dollars, which makes it a more efficient way to do those acquisitions. If we do have a tax holiday, we would obviously be prepared to change our plans. We've done that analysis, and we'll have to see what the future brings.
For right now, we think the situation we have is probably the most tax effective and the best for the shareholders. Yes.
Is there a scenario where you'd list your shares on the London Exchange or another exchange to take advantage of the cash held overseas?
It's a good question, Andrew. We've looked at that. You have to look far to find analyses we haven't done on these questions. It costs quite a bit to list in London, and there's real question as to whether that would be effective. There's also a question of whether that would subject us to yet more additional regulatory overview and oversight, which at this moment is not something we have a huge appetite to engage in. I think our view was that it would probably be relatively expensive and unwieldy to do, and we don't have a huge outstanding float. I think at this point, we'll probably stay where we are. We've looked at that, and we thought it doesn't make particular sense. Situations change. We look at it every so often, but it's a good question.
Yeah. Thanks.
Sure. Douglas Arthur has a question back here.
Yeah. This may be more appropriate for Michel or Michael, but you talked about the outlook for the financial institutions sovereign risk area. That ratings area has been really essentially flat for you for four straight quarters. It sounds like based on the comments, that's not going to change much near term. What will eventually get that area rolling again?
Sure. I'd invite Michael Rowan to add to this. I think the first issue there, Doug, has been that spreads have been very wide for financial institutions of late, which has caused them to delay coming to market for as long as they possibly can to see if those spreads would come back in. I think some banks recently have come to market. The FT had cited that Santander, for example, was able to come to market last week. Spreads are quite high, and that's what's really dampening issuance. Mike may have something more to add to that.
Yeah, Linda, the only thing I would add is that the growth in our customer base in developing markets over time starts often with the financial institutions themselves. As that customer base builds, then I would expect to see some growth over time in that particular franchise.
Yes.
Sometimes we've gotten these nutty stock prices because of headline sort of risk. Do you envision a scenario where the multiple is so low and the pre-tax yield so high that it would be considered to take the tax hit on a share buyback in a more opportunistic way? Is one question. The second question is, as a long-term shareholder, we're really happy to see the continuity of people here tonight or today. Have you noticed, because of the downsizing in the industry and the financial services in general, less of a-
Of a competitive threat in terms of people being lured away or maybe easier to recruit quality people? Thank you.
Sure. For the first question, we haven't discussed that analysis since yesterday. Literally yesterday, we discussed that analysis. Yes, we know exactly at what point the stock price would become attractive to do that trade. One of the things we would note is we could borrow more money. We have a revolver, which is untapped. There are other ways to go about it. I would view, again, that $550 million permanently reinvested offshore as an expensive way to do something like that, which is why we did a bond deal in August when we were able to finance very cheaply. Yes, we know exactly the answer to that question, and we're not in the zone. In terms of are we able to hire and are we able to keep people? Absolutely. We don't have deferred compensation. Our paychecks clear. Our bonuses are paid in cash.
It's great, which is a real competitive advantage at this point. What we're finding is that we're able to talk to lots of different people who might have perhaps felt that they had a higher calling a few years ago. Now are very interested in working for Moody's. We're not having a great deal of difficulty hiring people right now. In fact, certain jobs we've been looking at, we have literally hundreds of resumes. Hundreds. I'd let Lisa comment on that further, if you would like to.
Linda has got it right. The job markets, certainly all around the world, are not as robust as they have been in the past. Even Asia has slowed down in line with the GDP numbers that you saw. Our retention is higher. That is probably true for financial services in general. Although, they are jettisoning people in the banks, and we are not. Linda reminds our employees of that all the time quite honestly. It still takes us the same amount of time to find the right people with the right skills and fit for Moody's. We are picky.
We are happy to accept any resumes if you have any thoughts. Anything else we can answer for anyone before I turn it back over to Ray to do the concluding remarks? Okay. Well, thank you very much. Back over to Ray.
Okay. I will be brief. First of all, want to see if there are any other questions that you have that have not been answered in each of the segments that we have addressed today. I would be happy to take Yeah, Peter.
This is back to the M&A question. How do you think about M&A as a driver of growth? Should we be thinking of this as another 1% or 2% to the top line beyond the 10% organic? Second, maybe just more commentary. I personally thought that the 10% cash-on-cash return metric did not seem that challenging. It seems too low. Can you think about that or talk about that, please?
Well, sure. I can invite Rob to comment on that. This is a threshold that we're looking to clear, and it's over a period of time. Obviously, the returns would be expected to increase over time. The 10% is a rate at a point in time that we're using as a metric. Actually got that from Berkshire Hathaway as one of the metrics that they had historically used. I'm sorry, you had another part of the question.
How we do M&A.
Oh, M&A. Yeah, I did not include M&A in that build. Although that certainly would act as a catalyst for the top line to the extent that we continue to do bolt-on acquisitions. The opportunities are not certain there. We look at an awful lot of potential acquisitions for a relatively low hit rate. I feel that rather than identify that as a deep current driver for the business, I would put that more in the category, almost the way we might describe the mortgage-backed securities market at this point is there's upside or optionality that comes from that, if we do pull the trigger on additional acquisitions. With respect to, just to complete the loop on the transformative acquisitions, I would very much echo the comments that the management team made. I think it's unlikely that we are going to pursue a transformative acquisition.
If we find a high-growth opportunity that's very cheap with no auction of size and a highly certain return, okay. We're not holding our breath on that. Yes.
When you look back on the period between now and then, how will you judge your success?
20 years in terms of Moody's financial performance, or-
Your tenure as CEO
Oh, well, I'm not going to have to wait 20 years to look back on my tenure as CEO, I guarantee you that. First and foremost, just given the point in time that I've been in this position, it's going to have to include a heavy dose of managing through the financial crisis. Will Moody's position be as relevant, as important in the financial marketplace when I retire as it was when I came to the job? I think certainly we want to have a larger, more diversified business that still aligns with our brand value, expertise, and skills. We are going to have a greater global presence in the future. This goes to some of the comments I was just going to sum up with. I don't do hype real well, and many of you who know me know that.
I feel better about this business today than I have, not only since the financial crisis, but since before the financial crisis. We have weathered a very tough storm. Our relevance is probably at a high watermark. In some respects, we may be too important. If we're too important to speak, we're too important. The expansion of the business into long-term growth geographies, Asia, Latin America, the Middle East, is very promising for the long-term future of this business. The diversification, not only into new products and services, both at Moody's Investors Service and Moody's Analytics, but also into more recurring revenue. Subscription-based revenue, recurring ratings revenue, is going to bode very well for the long-term future of this company.
I will judge our ultimate success, or at least the success as of my departure, not only financially, clearly financially, but also by how relevant we are to the financial marketplace that we operate in. As I said, right now, that's probably at a high-water mark.
Can you talk a little bit more about financially?
Well, you've seen the growth rates that we've put forward. All you have to do from that is extrapolate the growth over my remaining tenure. We don't know what that is yet.
Ray.
Yeah. Right behind you. Sorry.
Over the next few months, you're going to get a much more focused competitor in S&P. How is Moody's preparing for the new environment going forward?
Sure. I do expect we will have a more focused competitor. Ironically, I think that's probably good. I think that in the credit ratings industry, certainly that side of the business, it is somewhat difficult to differentiate ourselves from them over time. I think the better we both operate, the more accurate and timely and insightful our analysis, that creates a halo effect for the industry. Certainly, I have to pay attention to them as a competitor. I've talked to a number of you about this before. When I think about competition, especially in ratings, it's first and foremost the unrated marketplace that I think about. I am happy for other rating agencies to provide their services as broadly as they can, as long as I am providing comprehensive comparative coverage through that side of the business.
I think they're going to be a good competitor. They're going to be a tough competitor. That's probably good for the industry as a whole. Yes.
Ray, just going back to the pie chart on capital allocation, where it's gone over the last few years. Leaving aside the very low probability of a big transformative transaction. Could we have you talk just a little bit about the portion of capital that gets used for those smaller transactions, and whether you think about the outcome of the last few years as purely a bottom-up happenstance, the result of what's been available and the alternative with buying back stock, or some kind of a normal that we should think of as a benchmark when we look at many years in the future that may be somewhere between a quarter and a fifth of the capital gets used for these kinds of acquisitions?
I'll answer it in two ways, Hassan. It's probably not a bad benchmark to use. I would frankly be somewhat surprised if we found more opportunities or at a more rapid rate, find opportunities going forward than we have going back. If anything, I will invite Linda, Rob, and the team to weigh in on this, or Mark Almeida. Certainly with respect to some areas of the Moody's Analytics business that we felt were really more need to have than nice to have. We move forward on those, and I think there are fewer need to haves going forward. We feel we've got that business built out well. There may be a couple of areas that there would be some nice tuck-ins, and I certainly wouldn't ignore those. We've moved largely down the path from need to have to what might be nice to have.
If anything, that probably has a dampening effect on the pace at which we'd be acquiring. That's probably even more true on the ratings side of the business. We've made investments in rating agencies in a number of jurisdictions around the world. We have not been able to make 100% acquisitions in every case, and that's why we have joint ventures and minority investments in some cases. We would like to build those up to where we have majority or 100% control. The opportunities to acquire or invest in additional rating agencies in domestic markets around the world, I think has clearly gone past its high water mark. Michel, I don't know if you have anything to add to that. You'll see fewer of those as well. From the management team, anyone want to contradict me? That'd be fun. Anything else?
Let me just first of all, thank everyone who has participated this morning. We really appreciate that you're taking a serious amount of time out of your day to listen to us talk to you. You get to hear from Linda and me, and Salli on a regular basis, but this is an opportunity to hear from the rest of the management team. We did put a lot of thought and effort into trying to address the kinds of questions we hear from you when we meet with you one on one. I hope we have done that to a satisfactory level. We appreciate that you have a lot of things you can invest in. It's a great business. It's got challenges. It's always going to have challenges. Everybody does, but the opportunities are sizable.
Salli and the IR team, I want to thank you very much for putting this together. A tremendous effort, and to everyone on the management team, thank you for your very thoughtful commentary. Thanks a lot, everybody.