Moody’s Earnings Call Insights: 4th Quarter Guidance, the Fiscal Cliff, and Share Repurchasing
4th Quarter Outlook and Beyond:
Peter Appert – Piper Jaffray: So, Ray, based on the guidance, obviously, it implies you are seeing some pretty good momentum into the fourth quarter, anything interesting or different you can share with us in terms of what you are seeing in the fourth quarter in terms of assets classes or other activity in the market?
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Raymond W. McDaniel Jr. – President and CEO: Not a whole lot of additional color I can give you Peter, other than, we continue to see good issuance pipelines, especially in corporate finance, obviously, in terms of sequential growth from the third quarter it’s going to be difficult to achieve that in that area because the issuance was so robust in the third quarter and we have some external events such as the election and a couple of short months in the fourth quarter, but nonetheless, we still see healthy pipelines. Barring something really unanticipated, I think we believe the fourth quarter will be another good quarter.
Linda S. Huber – EVP and CFO: Let me speak a little bit about what we are seeing in pipelines and then in high yield and leveraged pipeline. First looking at high grade, and all this information comes from Morgan Stanley as of this morning; October, right now, stands at $78 billion additions for U.S. high grades and that has been the strongest October on record. The month could break $100 billion if some big deals that are said to be in the pipeline come next week, but we did experience a warning regarding potential weather delays, which is come something new. For November, expectations are about $70 billion for U.S. hybrid issuance, last year it was $77 billion and the (eight) year average is about $63 billion. So, a little bit above the average for November. For high yield and leveraged, last week we saw $12 billion in high yield issuance, and $9.3 billion in leverage loan, that’s still very active. This week we have seen $7.5 billion both in high yield and in leverage loan. October saw $41 billion in high yields and $32 billion in leverage loans. Q3 issuance was a record post of financial crisis for the leverage area, $112 billion in high yield issuance for the third quarter and $81 billion in leverage loans. As Ray said, the view is that fourth quarter will not be as strong as the third quarter, but would still be very active. The list of pipeline so far that can be seen for November is $19 billion in high yield and $10 billion in leverage loans. Again, bit of concern that the first week of November could be low due to the weather and then following with the elections and obviously the usual watch outs for anything changing in the European situation.
Peter Appert – Piper Jaffray: I thought it was particularly noteworthy that it looked like the structured finance market seems like it’s got some signs of life. Do you have a view on the sustainability or a broadening of that recovery going into ’13?
Raymond W. McDaniel Jr. – President and CEO: Yeah, the structured finance market has been showing year-over-year sequential growth, pretty steady, and I think that’s an indication of good, if not spectacular, recovery in that market; commercial mortgage-backed securities, CLOs, the asset-backed market, covered bonds, are the more promising sectors. We still don’t anticipate a big rebound in 2013 in the residential mortgage-backed securities area. But I guess the further reason for optimism in that sector is, we seem to be moving away from some of the more regulatorily-driven causes of issuance into more real market issuance, and I would take that as a sign of health.
Peter Appert – Piper Jaffray: And I guess all this gets to the big issue, Ray, which is, you’ve enjoyed very robust performance here in the second half of ’13, making the comps more challenging – I’m sorry, second half of ’12, making the comps more challenging in ’13. So, do you have any early thoughts in terms of how next year could play out?
Raymond W. McDaniel Jr. – President and CEO: We will provide our outlook for 2013 at the beginning of the year as we do normally, and so I’ll refrain from commenting on our outlook at this point.
Peter Appert – Piper Jaffray: One last try then; on the cost side of the equation, Linda, the rate of cost growth obviously has been pretty robust this year in the context of all the reasons you guys have laid out. How do we think about that going forward?
Linda S. Huber – EVP and CFO: Sure, Peter. I just wanted to touch on the actual expense growth for this year. And if you look at the Q3 year-over-year, you’ll see that last year we had $335 million of expenses. This year in the third quarter we have $418 million of expenses. The vast majority of that change; $59 million or 70% of that is compensation. So, very important to remember that three times this year we have increased guidance and the main driver of expense increase is in fact the over performance and the resulting incentive compensation, which results. Another cause of expense growth is our acquisitions, which added $18 million to the expenses in the third quarter. Now, some of that breaks out into compensation for new people, about $10 million of it. We had the increase in depreciation and amortization and some other non-comp expenses and then we have two other things in there, but again if you look at the expense increase, which is 25% year-over-year, it would be 15% without the incentive compensation. So, probably the best way to think about it is, if we normalize back to more normal performance last year, we try as hard as we can to have expense growth not exceed and in fact, be less than revenue growth. So, we will see where get to, as Ray said, for that in 2013, but we are mindful of expense growth, but this is a very fast growing business and we are continuing to support it.
The Fiscal Cliff and Share Repurchasing:
William Bird – Lazard Capital Markets: Ray, I am curious if you think you are seeing much pull forward effect from fiscal cliff dynamics. Second, I was wondering, if you could just discuss what needs to happen to buyback more stock?
Raymond W. McDaniel Jr. – President and CEO: I will start with the pull forward. I think it is clear that we have seen pull forward throughout this year including in the third quarter. So, firms are looking at the potential for some market uncertainty around the fiscal cliff potentially as developments occur in Europe and they are taking advantage of low official rates and good spreads, not historically tight spreads, but good. That being said, much of the activity that we have seen this year, most of the activity continues to be refinancing, as opposed to issuance for mergers and acquisitions and business expansion, share repurchase, et cetera. So, similar to comments I’ve made in the last couple of quarters, it has been a very powerful refinancing engine that we have been experiencing over the course of the year, but many of the traditional, most of the traditional drivers of debt issuance have really not been very strong this year and so, that’s what we’ll be looking for going into 2013, 2014. Linda, did you want to take the share repurchase?
Linda S. Huber – EVP and CFO: Yes. So, on share repurchase for the third quarter, as we said, we set $25 million which is frankly less than we had hoped. We couldn’t place our systematic share repurchase program and following our Investor Day stock price moved quite rapidly and in fact out of our repurchase zone. Because we realized that our performance was pretty good, we could not go back into the market opportunistically. So, given the revised guidance, we’re hoping to get back into share repurchase markets here in the fourth quarter and be able to make some progress, but all of that of course is depended on market conditions.
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