Moody's Corporation (MCO) Q3 2013 Earnings Report, Transcript and Summary

Good day, and welcome, ladies and gentlemen to the Moody's Corporation Third Quarter 2013 Earnings Conference Call. At this time, I would like to inform you that this call is being recorded. [Operator Instructions] I will now turn the conference over to Salli Schwartz, Global Head of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's third quarter results for 2013. I am Salli Schwartz, Global Head of Investor Relations. This morning, Moody's released its results for the third quarter of 2013. The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moodys.com. Ray McDaniel, President and Chief Executive Officer of Moody's Corporation, will lead this morning's conference call. Also making prepared remarks on the call this morning is Linda Huber, Chief Financial Officer of Moody's Corporation. Before we begin, I call your attention to the Safe Harbor language, which can be found toward the end of our earnings release. Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In accordance with the act, I also direct your attention to the Management's Discussion and Analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2012, and in other SEC filings made by the company, which are available on our website and on the Securities and Exchange Commission's website. These, together with the Safe Harbor statements, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. I would also like to point out that members of the media may be on this call this morning in a listen-only mode. I'll now turn the call over to Ray McDaniel.

Thanks, Salli. Good morning, and thank you, everyone, for joining today's call. I'll begin by summarizing Moody's third quarter 2013 results. Linda will follow with additional financial detail and operating highlights. Although we have been providing regulatory updates each quarter, at this time, we have no material changes to report. Therefore, after Linda's comments, I will finish by noting our outlook for the remainder of 2013. After our prepared remarks, we will be happy to respond to your questions. Third quarter revenue of $706 million increased 2% over the third quarter of 2012. We're pleased to have achieved growth despite volatile market conditions and challenging comparisons to the prior year period, which, at the time, was a record quarter. Operating expenses for the third quarter were $414 million, a 1% decline from the third quarter of 2012. Operating income for the third quarter was $292 million, an 8% increase from the prior year period. Adjusted operating income, defined as operating income less depreciation and amortization, was $315 million, up 7% from the same period last year. Diluted earnings per share of $0.83 increased 2% from the third quarter of 2012 GAAP EPS of $0.81, and 11% from non-GAAP EPS of $0.75 in the prior year period, which excludes the $0.06 per share legacy tax benefit. As we're approaching the end of the year, we have refined our 2013 EPS guidance to $3.51 to $3.57. Turning to year-to-date performance. Revenue for the first 9 months of 2013 was $2.2 billion, an 11% increase from the first 9 months of 2012. Revenue at Moody's Investors Service was $1.5 billion for the first 9 months of 2013, an increase of 12% from a year ago. Moody's Analytics revenue of $657 million was 8% higher than the prior year period. Operating expenses for the first 9 months of 2013 were $1.3 billion, up 10% from 2012. Operating income of $923 million increased 13% from $817 million in 2012. Adjusted operating income was $993 million, a 12% increase from the prior year period. Operating expenses, operating margin and adjusted operating margin for the first 9 months all include our first quarter litigation settlement charge. Diluted earnings per share of $2.66 for the first 9 months of 2013, which includes the litigation settlement charge of $0.14, increased 14% from $2.34 in the first 9 months of 2012. Excluding the litigation settlement charge in the first quarter of 2013 and the legacy tax benefit in the third quarter of 2012, non-GAAP diluted earnings per share of $2.80 for the first 9 months of 2013 grew 23% from $2.28 for the same period in 2012. I'll now turn the call over to Linda to provide further commentary on our financial results and other updates.

Thanks, Ray. I'll begin with revenue at the company level. As Ray mentioned, Moody's total revenue for the quarter increased 2% to $706 million. Foreign currency translation for the quarter was negligible. U.S. third quarter revenue increased 3% to $391 million, while revenue outside the U.S. grew 1% to $315 million and represented 45% of Moody's total revenue for the quarter. Relationship revenue grew 9% to $376 million and represented 53% of total revenue, up from 50% in the prior year period. Looking now at each of our businesses, starting with Moody's Investors Service. Total MIS revenue for the quarter was $478 million, up 1% from the prior year period. U.S. MIS revenue of $290 million was flat to the prior year period. MIS revenue generated outside the U.S. of $188 million increased 2% and represented 39% of total ratings revenue. The impact of foreign currency translation on MIS revenues was negligible. Moving now to the lines of business for MIS. First, global corporate finance revenue in the third quarter increased 6% from the year-ago period to $233 million. In the U.S., increased revenue from bank loan ratings and monitoring fees was offset by declines in revenue from investment grade and high yield bond ratings, resulting in flat revenue year-over-year. Non-U.S. revenue was up 18%, driven by high yield and bank loan ratings in EMEA, offset by declines in investment grade. Second, global structured finance revenue for the third quarter was $84 million, a decline of 10% from the prior year period. In the U.S., revenue increased 3% year-over-year, primarily due to commercial real estate issuance. Non-U.S. structured finance revenue was down 27% against the prior year period, primarily reflecting weaker issuance volumes across the regions outside the U.S. Third, global financial institutions revenue of $79 million decreased 5% from the same quarter of 2012. U.S. and non-U.S. revenue declined 3% and 6%, respectively, primarily from the decline in activity by funds and smaller banking institutions. Fourth, global public, project and infrastructure finance revenue rose 7% year-over-year to $83 million. U.S. and non-U.S. revenue were up 1% and 20%, respectively, from the prior year period, primarily due to gains in infrastructure finance globally, largely offset in the U.S. by the impact of lower public finance issuance. Turning now to Moody's Analytics. Global revenue for Moody's Analytics of $227 million was up 6% from the third quarter of 2012. 100% of the revenue growth in MA was organic as we've not made any recent acquisitions. U.S. revenue grew by 14% year-over-year to $101 million. Non-U.S. revenue of $127 million was flat and represented 56% of total Moody's Analytics revenue. The impact of foreign currency translation on MA revenue was negligible. And moving now to the lines of business for MA. First, global research, data and analytics, or RD&A, revenue of $134 million increased 8% from the prior year period and represented 59% of total MA revenue. Our customer retention rate remains strong in the mid-90s percent range, and we continue to see solid demand for MA's research offerings. RD&A U.S. revenue was up 10% and non-U.S. revenue was up 5% as compared to the third quarter of 2012. Second, global enterprise risk solutions, or ERS, revenue of $64 million grew 1% against a strong prior year period. ERS revenue was up 26% in the U.S., while non-U.S. revenue declined 9% against the same period last year. As we have previously noted, ERS revenue remains subject to quarterly volatility due to the variable nature of project timing and completion. It is important to note that on a trailing 12-month basis, revenue and sales for ERS have increased 15% and 20%, respectively. Third, global professional services revenue grew 10% to $29 million, reflecting solid growth in revenue from Copal Partners, partially offset by softness in the training and certification business. U.S. and non-U.S. revenue increased 21% and 6%, respectively, year-over-year. Finally, looking at MA's revenue on a subscription basis, which includes RD&A plus subscription products within ERS, was up 8% for the third quarter of 2013. Turning now to expenses for the corporation. Moody's third quarter expenses declined 1% to $414 million compared to the third quarter of 2012, primarily due to lower incentive compensation, partially offset by increased headcount and higher technology expenses. The translation of foreign currency had a negative impact of 1% on operating expenses for the quarter. Moody's reported operating margin for the quarter was 41.3%, up from 39.2% in the third quarter of 2012, an expansion of 210 basis points. Adjusted operating margin was 44.6% for the quarter, up from 42.7% for the same period last year, an expansion of 190 basis points over last year. Moody's effective tax rate for the quarter was 29.1% compared with 29.5% for the prior year period. Next, I'll provide an update on capital allocation. During the third quarter of 2013, Moody's repurchased 6.2 million shares at a total cost of $397 million and issued 855,000 shares under employee stock-based compensation plan. Outstanding shares as of September 30, 2013, totaled 215.1 million, down 3% from the year earlier. At the end of the third quarter, Moody's had $930 million of share repurchase authority remaining under its current program. Year-to-date, Moody's has repurchased 12.2 million shares at a total cost of $748 million or an average price per share of $61.37. As of September 30, Moody's had $2.1 billion of outstanding debt and $1 billion of additional debt capacity available under our revolving credit facility. Cash, cash equivalents and short-term investments as of September 30, 2013 were $2 billion, an increase of $504 million from a year earlier, primarily reflecting Moody's August 2013 bond offering of $500 million of senior unsecured notes, from which we now incur approximately $6 million of incremental interest expense per quarter. Cash holdings outside of -- maintained outside of the U.S. at the end of the third quarter were $1.2 billion or approximately 58% of total cash holdings. Free cash flow of $623 million for the first 9 months of 2013 increased $162 million or 35% from a year ago. And with that, I'll turn the call back over to Ray.

Thank you, Linda. I'll now discuss our full year guidance for 2013 and then make some closing remarks. Moody's outlook for 2013 is based on assumptions about many macroeconomic and capital market factors, including interest rates, corporate profitability, business investment spending, mergers and acquisition activity, consumer borrowing and securitization and the amount of debt issued. There's an important degree of uncertainty surrounding these assumptions and if actual conditions differ, Moody's results for the year may differ materially from the current outlook. Our guidance assumes foreign currency translation at end of quarter exchange rates. As I mentioned earlier, we are -- as we're approaching the end of the year, we have refined our 2013 EPS guidance to a range of $3.51 to $3.57. For Moody's overall, the company still expects full year 2013 revenue to grow in the high-single-digit percent range. Full year 2013 operating expenses are still projected to increase in the mid-single-digit percent range. Full year 2013 operating margin is still projected to be 41% to 42%, and adjusted operating margin for the year is still expected to be 44% to 45%. Guidance ranges for operating expenses, operating margin and adjusted operating margin all include the first quarter 2013 litigation settlement charge. The effective tax rate is now expected to be approximately 31%. Full year 2013 total share repurchases are still expected to be approximately $1 billion, subject to available cash, market conditions and other ongoing capital allocation decisions. Capital expenditures are still projected to be approximately $50 million. We still expect approximately $100 million in depreciation and amortization expense. Incremental compliance and regulatory expense is now expected to be $5 million to $10 million. Free cash flow is still expected to be approximately $850 million. We have modified certain components of 2013 guidance to reflect the company's current view of business conditions. For the global MIS business, revenue for full year 2013 is still expected to increase in the high-single-digit percent range. U.S. MIS revenue is still expected to increase in the high-single-digit percent range, while non-U.S. MIS revenue is now expected to increase in the mid-single-digit percent range. Corporate finance revenue is now projected to grow in the mid-teens percent range. Revenue from structured finance is still expected to decrease in the low-single-digit percent range, while revenue from financial institutions is still expected to grow in the low-single-digit percent range. Public, project and infrastructure finance revenue is now expected to increase in the mid-single-digit percent range. For MA, full year 2013 revenue is still expected to increase in the high-single-digit percent range. Within the U.S., MA revenue is still expected to increase in the low-double-digit percent range. Non-U.S. revenue is still expected to increase in the mid-single-digit percent range. Revenue from research, data and analytics is still projected to grow in the high-single-digit percent range, while revenue for enterprise risk solutions is now also expected to grow in the high-single-digit percent range. Professional services revenue is now expected to grow in the mid-single-digit percent range. In closing, I would like to point out a few additional positive developments at Moody's. Moody's Investors Service was once again voted the Best Credit-Rating Agency in a 2013 poll of U.S. fixed income investors conducted by the well-known publisher Institutional Investor. MIS was also was also named Asia's Most Influential Rating Agency in a similar poll conducted by the publisher FinanceAsia. Additionally, Moody's Analytics ranked first in economic capital calculation management and second in regulatory capital calculation management in the 2013 Asia Risk Technology awards. I appreciate the market's recognition of our efforts, and I applaud the accomplishments of both the MIS and MA businesses. This concludes our prepared remarks. Joining us for the question-and-answer session are Michel Madelain, President and Chief Operating Officer of Moody's Investor Service; and Mark Almeida, President of Moody's Analytics. We'd be pleased to take any questions you may have.

[Operator Instructions] The first question will come from Alex Kramm with UBS.

Just maybe starting with the outlook a little bit here. I mean, obviously, you have pretty tight guidance, but that, obviously, gives us a little bit to work with here. But talk a little bit more of what's going on in the ratings business. I mean, we had a very slow October start. We had like, obviously, some debt ceiling issues and government shutdown. So maybe you can talk a little bit about what you're hearing when you talk to desks. Is there pent-up demand that's coming back? Obviously, the 10-year has moved a lot. So maybe a little bit more than you usually discuss given what's been going on in October.

Sure. I'll offer some introductory comments and then my colleagues may wish to add some color. As you described, we had a period in early October where there was pretty significant disruption associated with the debt ceiling and budget negotiations that were going on in Washington. So we did not see a lot of activity here in the U.S. That has more recently shifted. We have seen strong bond issuance and good pipelines building. Investment-grade issuance here in the U.S. in particular has been strong. I'd note that in Europe, in the third quarter and into the fourth, the bank loan market and high yield markets were strong. And so the -- some of the disruption that we saw in the U.S. has not had a significant impact on the European side. That being said, some of the issues that we've seen in structured finance in Europe in terms of very low volumes continue. And we don't really expect a big jump in that in the fourth quarter. Let me see if Linda has any other comment she'd like to add to this.

Yes, Alex. First, looking at investment-grade issuance. A lot of the points that you made were right on. This week, we heard issuance expected at $25 billion. And for Q4, projections are around $175 billion, but they seem to be moving upward a bit. As you said, the 10-year has been through 2.5%. Today, it's bouncing around that level. So it's looking like the full year projections for investment grade will be about flat to 2012 to possibly up 5%. There is a piece in The Wall Street Journal today talking about low rates bring bond bonanza. So we'll see about that. The state of the market is good. The pipelines are good. Investors and issuers, I'm told, are relatively calm. And to the recent unexpected drop in rates provided issuers with a good opportunistic window. Headwinds and tailwinds, we continue to deal with the issue of the debt ceiling, as you had mentioned, which has been pushed out. But that also results in there being less clarity on what the Fed will do regarding tapering. We spoke to a lot of sources, both in the firm and outside the firm. It looks like the median view right now is that tapering won't begin until March of next year, although there is some dispersion around when that will happen. Tailwinds include the rally in rates and a lot of discussions right now on opportunistic refinancings and some pickups in the M&A rate. So again, pipeline looks pretty good. For high yield, we're still seeing high yield through 6%, below 6%, which is good. October projections of $25 billion. Quarter projections of $60 billion. And looks like last year will be up slightly -- this year will be up slightly from last year, which was about $350 billion in issuance. Market fundamentals are described as strong and expectation is that rates will be lower for longer than expected. Leveraged loans are really the star of the show. For October, $20 billion to date. October projection of $30 billion and quarterly projection of $70 billion. What's really interesting is the full year projection is $600 billion for leveraged loans, which is fully twice, 200% of what it was last year. The market's been strong all year. And it looks like things are continuing on that front. So all in all, pretty good pipeline, rates breaking unexpectedly lower, and we'll have to see what happens from here. And I'll ask if anyone else had any further comments on that.

I think that's it.

Yes, that's pretty thorough. But you just mentioned in terms of the uncertainty being out there, when I think about your business in particular from the margin perspective, Linda, maybe you can talk a little bit more about where we are in terms of, what you've accrued for the year? How that's been running relative to expectations? I think we've had prior years where the fourth quarter has been really strong and then that certainly has been impacting comps. So where are we right now? And like, kind of what's the environment? A maybe like the up a couple of percent, down a couple of percent and how that would be impacting the margin, if you know what I'm trying to get at.

Yes, I do. You've got many questions in there. So let me try to -- I think I just want to start it out with incentive compensation first. And good to note that, yes, the margin has expanded 210 basis points third quarter this year over last year, which is, we think, pretty phenomenal progress. I think your point is right, Alex. Much of this is coming from the difference in incentive compensation. 2012 was a very strong year, and the third quarter, as Ray explained, was a record quarter at that time. For the third quarter of last year, we had to put up about $130 million of incentive compensation and profit-sharing by that point. This year, unfortunately, we have no profit-sharing to date, and we've put up about $100 million in incentive compensation for this year. So that number is down by 22%. At the pace at which we're running and given the expectations we've just outlined, it does not appear that we will have profit-sharing for this year. And last year, that was about $12 million. So we have previously guided that incentive compensation should be about flattish over the course of this year. We had guided to around $35 million a quarter, and we still think that makes sense. So we are seeing the difference in incentive compensation and profit-sharing really driving this, and that is a considerable difference versus last year.

That's great. Just if I can squeeze in one last one, a very brief one. On the fixed side, that surprised me a little bit. And I think you spoke to it a little bit from the funds and I think something in Europe. But we usually look at this as a very stable kind of recurring business, so any shift there? Was this kind of like an unusual occurrence this quarter? Or how should we be thinking about that business in particular? That's it for me.

Now the banking was soft compared to the third quarter of last year, but it was not because of a shift this year. It was rather that last year, we had an usual amount of activity from smaller regional banks, especially in Europe, following some supportive comments that had come out of the ECB in July of last year. So there was more transaction revenue in Q3 of 2012 than we would normally associate with the FIG business.

We'll move next to William Bird [ph] with FBR.

Ray, I was wondering if you could talk about just how you think about putting cash to work for greater buybacks. And then Linda, you touched on ERS lumpiness. Were the factors that depressed growth, were those temporary factors?

Well, with respect to use of cash, the first priority is investment back into what we believe will be profitable opportunities, whether it's organically in the existing businesses or through acquisitions that we think are strategically aligned with the direction of the business. As you know, we are disciplined about M&A activity. And so we have periods where we are not active. We have not acquired anything in over 7 quarters now. So that allows us to return capital to shareholders. We have guided to $1 billion in share repurchase for this year. We believe that we are on target to do that. And we have also increased our dividend. And we intend to maintain that balance, as I think Linda has discussed before.

Yes, Bill. As we said on the call, 12.2 million shares bought in so far this year at an average price of $61.37. We're pretty happy about that, and we will continue on our pace here. Regarding ERS, and I'll invite Mark Almeida to comment afterward. I think the comparison might have been viewed as light because last year's third quarter was unusually strong for ERS. And again, we say it on every call, this is a lumpy business. We really mean that. We have variability from quarter to quarter. I did note, and I'm sure Mark may point to it again, that the trailing 12-month numbers are, in fact, are very strong. And so I think that pretty much sets it out, but I'm sure Mark may have some more color.

Yes, that's exactly right, Linda. The whole issue here is one of the timing of project completion and associated revenue recognition. We have pretty good visibility into what projects are coming toward completion and will trigger revenue recognition events. And as she said, there's a lot of lumpiness associated with that. But you're quite right, sales growth is very strong. Trailing 12-month sales are up 20%, running well ahead of revenue growth. So I think we're setting ourselves up for very healthy revenue growth in ERS over the longer term, but we are going to have this kind of variability over shorter periods.

We'll move next to Peter Appert with Piper Jaffray.

So Ray, you guys have grown -- the MIS business has grown considerably faster than some of your competitors for the last couple of years. And I'm just noticing in the current quarter, you're growing a little bit slower. Anything we should read into that from a market share perspective?

Well, I guess the first thing I would direct you to rather than the year-on-year is the sequential second quarter to third quarter. And there you see that for the ratings businesses, the move in revenue between Moody's and our principal competitor is identical. So really, what we're looking at is the fact that we had a very strong Q3 of 2012, and we were working off of a number in 2012 that had produced higher growth than our competitors.

Fair enough. Second, you talked at the Investor Day very confidently about the prospect for roughly 10% long-term growth. The comp in '14, obviously, is pretty challenging. So do you have any preliminary thoughts on how we should think about how '14 might play out?

No. I think we're going to wait and talk about 2014 later in the year. We, obviously, are paying attention to the macroeconomic conditions, looking for self-sustaining growth here in the U.S., looking at developments in Washington and whether longer-term solutions can be put in place so that we don't have to revisit what we were looking at in early October every 3 months for 2014. And I would hope and expect to be able to comment on that more definitively as we get to the new year.

That might imply though that the -- well, obviously, the comp is tougher in the first half of the year and the political stuff will be an overhang in the first half. So I guess the implication might be that first half a little more challenging than second half?

Well, it -- well, the comps are challenging -- will be challenging in the first half of 2014. But again, there are a lot of moving parts. We've seen some more positive news coming out of Europe more recently. The movement in rates in the U.S. has been favorable, and the discussion about when the taper begins has been pushed out by economists and commentators. So again, I think it would be premature for me to try and make predictions on this and provide a 2014 outlook, but that's what we have our eyes on.

Sure, great. And then last thing, the -- anything new you can talk about in terms of the legal environment?

No. There have not been a lot of developments in the litigation environment. The cases that we are still dealing with, none of those are set for trial, and we are continuing the process of seeking dismissals. And we will update you, of course, when there is any news.

We'll go next to Doug Arthur with Evercore.

Two questions. Linda, just a clarification. Did you say that based on the sources you cited on the outlook for issuance in the fourth quarter, you were looking for $175 billion of investment grade, and then that would be flattish? Is that what you said?

I did say $175 billion. I don't have '12 in front of me. I think that, that may actually be a little bit lower than last year, but I did say that -- the comments on that number had sort of been moving a little bit more to the upside. So I think probably everybody should recheck this next week when companies come out of blackout and look up and see that the 10-year is still in a very attractive place, around 2.5%.

Yes, no doubt. Okay. And then, Ray, you touched on the sequential drop in the ratings Q3 over Q2. Now in most years, not every year, you have a fairly strong sequential pickup in the fourth quarter, which I assume is somewhat tied to kind of the year end balance sheet activity at companies, particularly in the structured market. Do you sense that normal seasonality will occur again, notwithstanding tough comps or not? Or is the seasonality theory wrong?

Well, I don't think it's wrong, but we have seen some conditions that caused the seasonal patterns that we might naturally expect to see to not show up in some recent quarters. Now the third quarter did behave more like we would expect seasonally. Whereas last year, our third quarter was actually our second strongest quarter, and that is quite unusual. The -- what I think we're anticipating for the fourth quarter though is some offsetting conditions. We have rates back down. That's a positive. We see good pipelines in the corporate area. That's, obviously, a positive. On the other hand, with rates having been low throughout this year, some issuers that might have normally issued in the fourth quarter are going to have pulled their issuance forward into the earlier quarters this year. So we, as you can tell from our guidance, we are not expecting a big increase in revenues for the remainder of the year on a year-on-year comparison basis. But things don't look bad either. So it's -- the commentary is a set of offsetting conditions.

We'll move next to Manav Patnaik with Barclays.

Let me -- I want to ask you 2 questions on -- just on the cost side. I mean, clearly, on the -- in MIS at least in the expense side, you guys seem to have done a pretty good job of controlling that. I was wondering if there's anything specific this quarter, maybe why it was down nicely year-over-year. And looking forward, how should we think about that run rate?

Sure, Manav, it's Linda. I think I covered the main driver on what was going on with cost. In fact, incentive compensation and profit-sharing being lower and nonexistent, respectively, was very helpful to the expense rate this year. Again, we base our bonus programs off of the midpoint of our outlook. And if we're not doing great, the bonuses fund at a lower level. And that's what we're seeing right now. We did have a bit of an offset based on new hires that we've had over the past year and a little bit of merit increase in salaries. But all told, we were very happy with the expense control. Now last year, because of the strong pop-up in incentive compensation, which was $60 million in the fourth quarter, that would probably look a little bit heavy for this year given that I said that we're thinking we're going to run a bit more evenly quarter-over-quarter on bonuses, more toward $35 million. But it remains to be seen. Again, if things break to the upside, the number could be a little bit heavier. So hopefully, that will help you. But expenses look like they're still going to be well under control for the fourth quarter.

So if you were to take out sort of the incentive comp, the variable component of that, over the long term, how should we think about just how the expense moves either with issuance activity or without it?

Let me try to answer the question in a different way. We had said back in the first quarter call that we would have a $50 million expense ramp over the course of the year, and we think that's about right. We started at 395 in the first quarter, and it will be somewhere around that $50 million for the year. Expenses generally do tend to trend up over the course of the year, excluding the compensation line, Manav. But again, the comp line will not be -- we don't believe at this moment looking like it did in last year's fourth quarter. So I think that's about as much as we need to spell out there.

Okay. Fair enough. And then just the reason for the change in the compliance -- incremental compliance expense, is that just pushing things out in '14 or it just came in lighter than expected?

It came in a bit lighter than expected. We still will have, I believe, some incremental compliance cost in 2014. But as you can see, the incremental growth is trending down as we expected it would. And I think that's good news for the longer run.

We'll move next to Tim McHugh with William Blair. Timothy McHugh - William Blair & Company L.L.C., Research Division: Just want to ask for an update on the structured products area. You had said at the Investor Day, I believe, you thought '14 would kind of be a bottom for that market but -- and also, obviously, sounds like Q4 -- or Q3 was a tough quarter particularly in Europe there. I know you probably knew most of those results at the Investor Day. But I guess can you contrast those to kind of what you saw in Q3 and why you think it's still going to bottom, kind of going pretty soon here?

Let me ask Michel to comment on this, if he will, in particular on what they're seeing in Europe.

Yes, I think we clearly have a divide between the U.S. and Europe here. We're seeing actually improving conditions in the U.S., both in terms of volumes and market position. Europe is a different story. We have a sharp contraction of volume across-the-board. And we don't expect that to resume next quarter. And as we said at Investor Day, I think next year is going to be another year, a challenging year for that market. And the reason is really around -- it's linked to the monetary conditions that prevail and the overall economic environment in Europe and the lack of effectiveness of sort of finance products there. Both are issues for investors. So that's here to stay through '14.

And yes, I'll just add that policymakers in Europe have started to offer more positive commentary about restarting the securitization market. But at the same time, they are providing significant liquidity to the banking system. And so for the near term, we believe that, that liquidity provision and the availability of inexpensive capital is going to keep the longer-term market from growing quickly. Timothy McHugh - William Blair & Company L.L.C., Research Division: Okay. Great. And then just on the bank loans and, I mean, it's obviously a strong area for you, as well as S&P right now. What -- I guess can you talk about how much of that's a structural shift and how much you still see room for a structural shift in terms of more deeply penetrating that, such that you can continue to see kind of above average growth from that product area?

Yes, I think it's both structural and cyclical. The structural component is that the rated bank loan market is associated with banks wanting to have the ability to transfer loans off their balance sheet. And as they deleverage, that remains a priority. The cyclical component would be, I think, more appetite from the investor community for floating rate paper in anticipation of a rising rate environment. The good thing here, assuming that we don't have any shocks in terms of large, unexpected movements in interest rates, is that the bank loan market and the speculative grade bond market somewhat offset each other. Now we happen to be in a period of good activity for both. But if we see more appetite or better financing conditions for spec grade companies in the bond market, I would expect they would shift out of their banking relationships for additional capital raising. Timothy McHugh - William Blair & Company L.L.C., Research Division: I guess just one follow-up. I mean, can you -- do you have any rough sense of how much you would attribute to cyclical versus the more structural growth for the bank loan area?

No. I mean, I don't have educated answer for you on that. So it would be just my speculation, and I'd rather not fall for that.

We'll move next to Craig Huber with Huber Research.

Just to be clear, your incentive compensation, pure incentive comp this quarter, Linda, what was it? I think you said it was $59 million to $60 million a year ago?

Yes, the pure incentive compensation for third quarter of 2013 was $35 million. And last year, it topped $60 million. Profit-sharing is carried in a separate line. And this year, we didn't have any. We have not had any profit-sharing year-to-date. And last year, profit-sharing was about $8 million, Craig.

Okay. And then like I had said [ph] people would like to ask you, Linda, can you break out the revenues a little bit finer here for your 4 areas within structured finance and corporate finance, et cetera?

Sure. You went out of order for us, Craig. We had flipped to that page already. Hang on just a second. Okay. So starting with corporate finance, investment grade was 14% of total revenues for the third quarter. Again, for all of global corporate finance, the number was $233 million. So again, 14% was investment grade. 20% was speculative grade. Bank loans was 24%, which is up from 16% last year. So you see the significant shift over to the bank loans line. And other was 42% versus 35% last year. Going on to the other areas for structured. Total global structured, $83.5 million. 25% of that was ABS. 20% of that was RMBS. Commercial real estate was 31%, notably up from 25% last year. So that was the line that was running heavier. And derivative, about flat at 24% of that line. Going on to FIG. Total FIG was about $79 million. And 66% of that was bank issuance. 30% was insurance issuance, which was up from 26% last year, so some increase in the insurance revenue. Managed investments was 4%. So that's FIG. And moving onto PPIF, public finance and sovereigns was 44% of the total of about $83 million for this line. Municipal structured deals were 5% of revenue for this year. And project and infrastructure saw the big increase at 51% of that $83 million. So again, the big shift there was to project and infra. And we note that municipal issuance actually comes in the first line, which is the PFG and sovereigns line. So just make sure that everybody has that reflected accurately. And I think, Craig, that does it.

It sure does. Another follow-up question, if I could. Within your public finance, project infrastructure area, can you just talk a little bit further about what you're seeing there? And obviously, you've lowered your guidance here for the year. But what you're seeing there and what your outlook is? What were the puts and takes, please?

Well, the project and infrastructure finance had a good quarter in the third quarter, and that was true both in the U.S. and in Europe. And to the extent that what we've seen in that area is refinancing, we would expect that a lot of that has been completed. And so what we're looking for is new project, new infrastructure activity to carry the growth in that line. And there's a degree of uncertainty around how quickly that will reach the market. So that's informing our current view.

Yes, to follow-up a little bit, Craig, we had talked about disintermediation being important. And the actual dollar numbers for project and infra, it was $34 million last year, and it's $42 million this year. So I think that increase speaks to disintermediation as some of the banks, particularly European banks, step back from infrastructure projects, particularly in Latin America. And we're seeing more of those deals come to the capital markets. Also, we've had a little bit of a stall in muni issuance probably brought about by the federal conditions. So that has come off a little bit. Last year, we saw $38 million. This year, about $36 million. So usually, that's just a matter of timing. But again, the uncertainty in the third quarter made a lot of things a little bit challenging and certainty made forecasting more challenging. So I think that would cover the puts and takes in PPIF.

And also Ray or Linda, when you think about the corporate finance market here and all the refinancings that certainly have happened here at the low rates here the last 2 to 3 years. What is your bullish outlook, if you have one on this, as you'd think out for corporate finance. Why it should be sustained at even a higher level next year and perhaps the year afterwards in terms of debt issuance, please?

Yes, Craig, this is the "it depends" answer. And as we look at current activity, we still see the refinancing component of issuance running 70%-plus of total issuance in terms of reasons cited in offering documentation. Contrast that with, as we have done previously, with, say, the late '90s and the rising interest rate environment of the late '90s, when less than half of issuance was associated with refinancing activity. So if we have economic confidence, business confidence so that the other elements of issuance, M&A activity, capital expenditure, share repurchase, et cetera, become more prominent as they were in the previous rising rate environment of '98, '99, we're in good shape. If that doesn't happen, then we will be on a soft patch for corporate issuance, I would think.

Craig, it's Linda. Also for the fourth quarter, more immediately, we could, of course, see pull forward from 2014 issuance into the fourth quarter of this year. But we're not sure. And as I had said in my earlier comments, the center point right now in terms of what we've heard is that tapering begins in March. But we do note that tapering is perpetually 6 months away from the present point. So we'll see how that plays out. And the bull case would be, that the 10-year stays around 2.5%, doesn't go back up to 3%, and that provides pretty attractive issuance environment for us. The bear case would be, that we go through the whole thing again with the debt ceiling in February. And that is challenging as issuers might step away. So we can really see it go either way. And it sort of depends on how everything breaks. And we'll have more to say about this when we do guidance for 2014.

We'll move next to Andre Benjamin with Goldman Sachs.

Just maybe a pair of questions for Mark on the color of demand for how demand is trending for the Analytics franchises. I guess, on enterprise risk solutions, we talked about the lumpiness, so less of a focus on the fourth quarter and more just looking out on a rolling 12-month basis, how are you looking at the momentum for that business into next year? Maybe help us understand what products or categories of solutions are seeing the strongest demand trends versus some that maybe are growing a little bit less than the overall average?

Yes, Andre, demand for ERS is very strong. As we said at Investor Day, frankly, demand is not the problem in this business. We're seeing plenty of demand, particularly heating up in the U.S. related to banks that have to engage in these stress testing exercises. The bank regulators have extended stress testing requirements beyond the largest banks in the country and down to the next tier. And that's driving a tremendous amount of demand for exactly the kinds of things that we offer in MA. So it's been -- demand's been very, very good for us. And we anticipate that continuing well into next year.

So I know you didn't formally -- there's no formal guidance, but I guess when we look back at this point next year, should we assume a similar trailing 12-month rate or is it too early to say?

It's certainly too early to say, but that's how we're managing the business. We see very healthy demand. We're very actively engaged. We're talking to banks all over the country and, of course, overseas as well. So I'd be surprised if we see a shift in the other direction.

Similarly on the RD&A business, is there any color you can provide below just the top line on what solutions are probably selling with a little bit stronger growth versus some that are maybe trending a little bit below?

Well, the strongest area in RD&A has been the demand for the rating agency content. That continues to be very, very strong. We've sustained very good growth in RD&A at getting up to high-single digits, which we think is very good for that business given the scale of it and our very strong penetration, particularly in developed markets. So that continues to perform quite well, and we're very happy with that business.

[Operator Instructions] And we'll go next to Edward Atorino with Benchmark.

Interest expense jumped up, but your net debt didn't jump up. Can you sort of -- I hate to say the word explain, but explain the jump in interest. And is this now the run rate going forward? And second, on the bank loan ratings or whatever they are called. Are the margins on that the same as the traditional issuance? And that just seems to be a market that's exploded. And is this a sort of a -- is this a sustainable level? Or is it going to go away if something changes? Not go away, but go back to normal.

Ed, it's Linda. Let me take the question on interest expense first and then we'll talk a little bit more about bank loans. As I said in the script, we did do a $500 million bond deal. And we did that in early August. So we carried the expense, extra interest expense, which is $6 million a quarter. We have the pro rata of that expense for the quarter. So the interest expense number is, if you look at the press release, it's about $24 million. And that's up about 4.5% from last year. And that just reflects that new bond deal that we have, so that we have plenty of liquidity here in the U.S. And of course, we hold that in cash. So that's what's going on there. But look for $6 million per quarter going forward.

And with respect to the margins and the bank loan rating business, they are roughly similar to what we would see in the bond area. It is, again, influenced by whether the companies are companies that we might already have a relationship with or not or whether they are new mandates. Certainly, we think the bank loan market is a good growth market for us going forward. That's true both in the U.S. and in Europe. But it has benefited, as I mentioned earlier, both from some structural and some cyclical conditions. So I would not put forward that it can continue to grow at the pace that it's currently growing at.

And it appears we have no further questions at this time. I'd like to turn the conference back to our speakers for any additional or closing remarks.

I just want to thank you for all joining the call today, and we look forward to speaking to you again near the new year. Thank you.

This concludes Moody's third quarter earnings call. As a reminder, a replay of this call will be available after 4 p.m. Eastern Time on Moody's website. Thank you.