All right, we can go ahead and get started. Good morning, everybody. For those of you who do not know me, I'm Patrick O'Shaughnessy. I cover capital markets here at Raymond James. And up next, we have Moody's Corporation. And on their behalf, we have Michael West, President of Moody's Investors Service. That's the ratings side of the house. And we have Shivani Kak, Head of Investor Relations. Thanks for joining us today, guys.
Thank you.
Thank you.
So to kick things off, for the benefit of the folks in the room who are a little bit less familiar with Moody's, can you spend a few minutes describing the company as you see it today? And in particular, touch on the symbiosis between the Ratings side of the business and Moody's Analytics. And then also, as you're touching on Moody's Analytics, if you can walk through or share an update on your Gen AI solutions?
Thank you.
Thanks, Patrick. Good morning, everyone. My name's Michael West. I'm the President of Moody's Ratings, and to just kick things off here is that Moody's Corporation is a global integrated risk assessment firm, and very simply, two operating companies: Moody's Ratings and Moody's Analytics. Moody's Ratings is what people generally associate with the company, which has the heritage of over 100 years of providing credit ratings and assessments on creditworthiness for corporations, for banks, for sovereigns globally. To put that into context, Moody's Ratings rates on an annual basis approximately $6 trillion of debt and has a stock of over $70 trillion, and that, as you imagine, turns over, and then there are new pools of debt that we continue to rate, and I'll touch on that. Some of these are in private credit. Some are in transition finance, digital infrastructure, and broader emerging markets.
We feel very good about the trends in the debt markets. And I'll touch a little bit more after. Perhaps you want to touch on Moody's Analytics.
Moody's Analytics was founded in 2008. It started off very much as just the sales function of the ratings research. It's grown to be so much more. It has three distinct divisions. It has Data and Information that sells the raw data feeds from both the rating agency and from our Orbis database that is about 575 million public and private company kind of data points. It also then has Research and Insights, which is Moody's.com, or CreditView, as we call it. That is the research that the analysts are publishing and webinars, events, as well as Economy.com and EDF-X, which is our algorithmic implied ratings product. Then finally, the third part of Moody's Analytics is Decision Solutions, which is three fantastic workflow solution businesses in banking, KYC, and insurance.
Together, all of them leverage data and reference one another and really make the whole much larger sum of the parts, which is a great part of the business. To touch, I'll just touch on Gen AI before handing back to Michael on the symbiosis. From Gen AI, we launched back in December 2023 our first Gen AI-enabled product, which is the Research Assistant. We talked about our Gen AI strategy as having a combination of kind of navigators and assistants. Some of those products are embedded within. They're not being sold as a standalone, but they're enhancing the kind of value that they bring to our customers. There are others that we're selling on a standalone basis, such as the Research Assistant. On our fourth quarter earnings call, we talked about in terms of contribution.
Research Assistant supported the growth in Research and Insights, and this is something in 2024, and the way that we quantified its contribution was to say that 25% of the growth in Research and Insights ARR was generated by the cohort of customers who subscribed to CreditView and Research Assistant during that year, and to be clear, this 25% includes all relationship expansion factors contributing to the growth from these customers over the course of the year, so that was just a point to clarify. But symbiosis.
Yeah, but when you think about the two businesses, is that Moody's Analytics is actually the sole distributor of all content that comes out of the rating agency. So whether that is the ratings, the research, the data that we generate, and then over time they have built and acquired their own separate data sets, which we then use in our own analysis. A good example of this was the most recent and probably largest acquisition that we did of RMS. And RMS has significant data sets and modeling for natural disasters. So when we think about positioning of real estate, when we're rating real estate or CMBS, we can work specifically with RMS to locate every property in areas such as wildfires.
So we were able to produce research that identified every one of the properties that we rate, whether or not it was in fact in the zone where the fires were, how close, what the risks were. And if you're a property investor or a CMBS investor, that is the key question that you would be asking. Is the property I fund safe? And through those data sets, through those relationships, we want to be more accurate with providing assessments and evaluation on credit risks down to the asset level, which is really important to the end investor.
Terrific. That's a very helpful introduction. You kind of touched on your fourth quarter earnings call and what you guys spoke about in terms of Gen AI. But also, you guys provided your initial issuance outlook for 2025. What are the puts and takes that you guys see that could impact issuance this year?
Yeah, I'll take that and add on to that. So just coming off the back of a very high volume year in 2024, as I said, we rated $6.2 trillion. What we're indicating and forecasting for this year is a low single-digit increase in that issuance. And then you add in our pricing. And our indication is for a mid- to high single-digit revenue growth for the rating agency for 2025. And embedded in this is, first and foremost, GDP growth, low growth, but still continued growth, asset formation. And that asset formation then needs financing. And that financing tends to be long term. And then we will be rating that. There's an expectation that rates will come down. We still have an embedded two rate cuts in the second half of the year. And that will bring down the overall cost of funding.
And then we've got these deep currents. These deep currents are starting to ramp up between now, 2028, 2030, 2035. And those are in the private credit world, transition finance, and digital infrastructure, as well as the growth in local and domestic debt markets. And I'm happy to touch on that in a little while. And then what you have is a stock. When you think about a rating agency, there is that stock of debt. And that stock of debt turns. And that's what we call refinancing. And we have what we call refinancing walls. We put into our IR decks a refinancing wall assessment for four years. And the amount of debt that is coming due in the next four years is approximately $4.9 trillion.
Our expectation that we would rate that $4.9 trillion is up from $4.4 trillion in the year before because there's more issuance in that stock. Then there is M&A. One of our assumptions this year, and one that we're watching really closely, is that M&A by debt volume, not number of transactions by debt volume, will increase by about 50%. There's a lot of pent-up M&A in the market. We had anticipated about a 50% increase in that. When I think about the tailwind, I'll talk about M&A as my first tailwind because if there is any uncertainty, whether it's regulatory, whether it's market, whether it's geopolitics that will stall M&A, the extent to which M&A would come down and impact revenue, I'll give you a scenario.
If the M&A was only 25% up versus the 50%, that would have an impact of about two to three percentage points on revenue. And that's how sensitive the M&A is. And when I think about other headwinds that we face, I mean, we're reading it every day in the markets. And these impact spreads. And this is news flow, geopolitics. And for you, you'll likely pause. And if we have a pause, there's only 365 days in a year. Every pause day is not a good day.
So you just mentioned credit spreads. They have been historically tight in recent months, particularly in high-yield markets. To what extent do you think this is structural versus cyclical?
When I think about spreads, I'll give you the punchline. I actually think it's cyclical and just to give you a context, spreads have been in around about 260-270 basis points over the reference rate, giving you then the overall cost of debt. Our expectation for this year is that there will be a normalization. A normalization in our expectations will those spreads go out over 100 basis points to about 400 basis points. And that is embedded in our default study and the way that we think about that. That is still actually below the historical average, which is closer to about 500 basis points for high-yield so there will be a gradual widening of those spreads.
But again, if we anticipate that rates come down, you're looking the one thing to look at as a debt investor is the all-in rate that you're going to pay.
So you mentioned earlier the evolution of the capital markets. And let's dig into a few of those subtopics there, starting with private credit. There's a lot of initiatives underway right now at Moody's to provide rating services in the broad private credit arena. What are some of those initiatives? And how do you think about the potential long-term upside for Moody's?
Yeah, yeah, one of our key tailwinds, not just for this year, but over a few years, is private credit. And just to level set, what do we mean by private credit? In the way that we think about that, that is funds coming from investors that will go into direct lending into corporations or to finance companies. Ultimately, direct lending leads to the creation of BDCs, business development companies, and broader funds. The other element is fund finance itself. The formation of funds requires certain advanced financing, whether that is subscription lines or back-end financing, such as NAV lines or some type of feeder lines. And then what you've also got is an increase in securitization.
The demand for assets to be funded in the private space is that there will be a generation of additional securitization on the assets that are currently out there, whether it's on bank balance sheet or whether it's on individual fund finance, and then you've got additional project finance and infrastructure finance, and I'll touch on a little bit about what I mean in that, and the way that we're organized is that we have a dedicated commercial unit for private credit, analytical teams. We have a head coordination group for private credit because when you think about the asset classes that these debts come in, they then fall into our normal sector teams, but we have to have that coordination because we are engaging with all of these players in the ecosystem to see where they want to go.
As the size of private credit continues to grow, there is more desire to have the transparency and overall understanding for buyers of the creditworthiness going in. We're very organized around engaging to make sure that we are one step ahead and that all our methodological suite fits and suits the growth of that industry.
Can I just add that there's also on the Moody's Analytics side of the business, if you think about private credit assets, they tend to be very long-dated. So it's buy and hold. And Moody's Analytics is in the business of helping people monitor their portfolios, measure, and understand that risk. And we've been doing it for decades. So there is then a natural opportunity for some of our products and solutions within the M&A universe to also support the private credit players. So it's a nice opportunity for both sides of the business.
I would say that one of the indicators that Rob, our CEO, put out at the earnings call is that we saw approximately 400 new mandates that we were working on from private credit last year.
So it sounds like lots of interesting opportunities in private credit. Are there any drawbacks? So for example, is every bond or loan that might migrate from the public markets to the private markets going to end up with some sort of credit rating from you guys over time and at kind of the equivalent economics?
Yeah, I mean, if I break it into two parts there, I think, first of all, where is the market going, private or public, and then the economics. And I think it's important to address both of those. First of all, I think the market will firstly determine the price. You often find that the efficiency of the public markets, particularly on direct lending, will determine where the funding originates from. And when you speak to many of the alternative asset originators, they're somewhat indifferent. They want to make sure that they have the right price for their structures. At the same time, when you think about why is this happening, there are assets coming off bank balance sheets as bank balance sheets become more constrained.
And this is why Basel Endgame is really important to watch when it comes to credit, whether there's more constraint on the bank balance sheet. And then who is the buyer? And if the buyers are insurance, they are very sensitive to their own capital allocation, which in many respects is also determined by what the credit quality is. Ratings are one indicator. So whether you go into an alternative asset or in a normal asset fund, the desire to understand the creditworthiness, particularly as this market gets bigger, because there's also a resource constraint on everybody being able to actually do that assessment. The good thing about ratings and why they're enduring is that they're very simple to understand: AAA, single A, double A, investment grade, non-investment grade.
Therefore, when we think about the users, we feel very confident about the utility of ratings, both in public and in private. Do you want to talk about the economics?
I was going to say when you rate a credit, the methodology and the process are exactly the same, regardless of whether it's public or private. The only difference from a process flow is with a private rating, it's not being published. And there are restrictions on who you can share it with. So the economics are pretty much the same. But also, you had asked about will everything come to Moody's? There may be things that we don't want to rate or that we don't fit up. And we'll say, sorry, this is not something that fits our methodology or that we can get to the rating level. And we stand by the integrity of our ratings.
So let's move on to another growth area, which you guys touched on a little bit earlier, which is sustainable and transition finance. How do you see the opportunity for Moody's in that arena? And does the current pushback against ESG impact your outlook?
Yeah, and I think it's important when you think about transition finance to think about it in a global context. We're a global company. We provide ratings across the globe. We rate over 150 sovereigns and everything below that. So it's a truly global business. And if you just take a few indicators of transition finance, over 150 countries worldwide representing 93% of global GDP have signed up to some form of carbon reduction. And on top of that, you have climate and the amount of investment that needs to go into climate, whether it's repairing seawalls, providing new protections, whether, in fact, it is reparation after natural disasters. It all needs funding. So if you put this under the broader umbrella of transition finance over the next years, up to 2030, you're really looking at over $3 trillion of additional money that is required.
And that's probably a conservative estimate. And then you have to invest in the energy to support all of this nature. So if you just put that number out there and you think about the number of the funding number and what it is going towards, it's long-term assets. Long-term assets need long-term financing. Long-term financing is where ratings play a part. And we have the methodology suite that can address that from a project basis to a corporate or through a securitization. So when I think about the years to come and the energy transition that has to happen, or even just factories that need to adhere to new regulations globally, that funding will be required. So I feel very good about the element of transition finance.
Another current event topic is digital finance and the need to fund digital infrastructure. What role is Moody's playing there?
So we have a methodological suite because, again, when you think about digital infrastructure, you hear a lot about data centers being built. We put out a report recently that estimated between now and 2028, there would be approximately $2 trillion spent on data centers. And again, they could be at the project stage. They could be at a corporate cash flow. They've already got customers, or they're much more mature, and you want to securitize those. So even if I just took that slice, irrespective of the energy requirements that need to go into that, then you're really, again, looking into a deep seam of trillions of dollars. And then you start to replicate this by countries outside of the U.S., and you're starting to see some very significant numbers. And then when you actually take digital finance beyond digital infrastructure, there is tokenization.
Today, there may be certain limitations on what assets that can be funded and syndicated into markets. If you start to think about tokenization and the number of assets that could be funded and then split up and sold into different markets, that we may see a whole new realm, something that we haven't specifically quantified yet, but I think is very exciting. As the world shifts onto digital ledger, which I think is an inevitability, then the opportunity to tokenize assets will continue to grow.
What's your outlook for developing and emerging debt markets? You guys have made investments in India in the past. You made a big push in China. What are you guys seeing on that front right now? And where are the opportunities for material economics for Moody's?
Yeah, so again, just to try and keep it super simple, is that the way we think about ratings. You've got cross-border. That's when you're issuing in dollar and other that you can fund into different countries. And they are subject to exchange requirements and such like that. And then you have separate markets, which are domestic markets, which are essentially a rank ordering of credit and funded in local currency. So what we've been doing is increasing our investment and our stakes in those domestic markets because what we are seeing is that local jurisdictions are becoming more sophisticated. They want their own pension. They want their own investment requirements in the local markets. And the pool of capital that is available for larger corporates and banks is growing. And therefore, when it's growing, rating agencies in India and China.
And as those markets grow and as those companies grow, they will also issue in both cross-border and domestic markets. There's a natural hedge to what we're doing in these areas. And the amount of money that needs to go in for, again, transition. And I think about China. Between now and 2035, there's about $4 trillion that needs to go into energy transition. If I even think about smaller markets in Australasia, like Australia, you still need to put in about $75-$120 billion. And then India needs about another $750 billion in energy transition. So there's a lot of funding that is required. And ratings can provide a rank ordering and a simplicity to the risk that anybody wants to take in these markets.
Do you want to call out Moody's Local in LatAm? We mentioned on our earnings call that revenue for Moody's Local grew about 16% last year. You are seeing the smaller markets, but they're growing at a fast pace.
Yeah.
Taking a step back for a moment, how do you think about the long-term building blocks of growth for Moody's Ratings?
In our investor deck, if you turn to that particular page when you get an opportunity, there's three building blocks. Those have been pretty consistent over time. The first building block is economic growth, GDP, as I mentioned, asset formation. If you're getting growth in markets, you're getting growth in debt markets. Then there's the price component, which is the second component. And we always say that we look to have a pricing opportunity of about 3% to 4% on average. It doesn't mean it's spread evenly across each year. And then the third component is this development of the debt capital markets in its broadest sense. And again, keeping it really simple, private credit, transition, digital finance, and emerging and domestic markets. And then on top of that, you've got digital infrastructure and things.
So the more development you get, that propelling of that and a growth of the overall franchise.
No, I think we kind of say that's overall in the mid to high single digits as we look through cycles through the long term.
Yeah.
An interesting notion that I've heard you guys speak about recently is you're working towards a volume agnostic within a range of issuance model. Can you talk about what that means and how is that going to lead to taking some of the volatility out of your ratings revenue over time?
Yeah. So this is a bit of an internal statement that I like to make is that the one thing about a rating agency is that you can't determine what volumes you're going to get each year because that is determined by the debt capital markets. You are a taker, and you have to make sure that your coverage and your capability is there, and therefore, you don't want to be ramping up costs at a time when rates are rising, sorry, the volumes are rising significantly, and then you're adjusting when you have lower volumes. The opportunity now through technology to ensure that we have efficiency in our processes, and if you think that we are processing and rating $6.2 trillion of debt, there's an opportunity in that operational engine to think about your data sets, to think about your processes, to think about the overall technology applications.
More modern technology applications allow us to think very differently about using a technology set that will allow us to have our resources remain relatively steady, focus on credit, and use technology in the processes to accommodate those shifts and swings in volume. When you hear becoming increasingly agnostic to the volumes, that's what it is. It's an internal operation that we can get efficiency with controls.
All right. On that note, I think we are up against the clock. So we'll wrap it up there, but we'll have a breakout session downstairs. Thank you, everybody, for joining us.
Thank you.
Thank you.