Moody’s Earnings Call Insights: Stock Buybacks and European Bank Loans

Moody’s Corporation (NYSE:MCO) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Stock Buybacks

William Bird – Lazard Capital Markets: Ray, given what your stock is doing, are you likely to front-load stock buybacks this year?

Raymond W. McDaniel Jr. – President and CEO: I think we’re going to have to look at how the stock performs over a bit longer period of time. Our thinking has been to be fairly balanced in our share repurchase throughout the year and we haven’t made any different decision at this point.

William Bird – Lazard Capital Markets: Also, I guess at a higher level, you touched on recent legal development. I was wondering if you could just give kind of your perspective just on how one gets comfortable with recent legal developments

Raymond W. McDaniel Jr. – President and CEO: Well I think the matter that I mentioned in our prepared remarks as far as the Department of Justices’ complaint is, really all I can say is that we are not a party to that and so we are not really able to comment because we don’t have any information other than what is publicly available. I would add that we don’t have any knowledge of any impending complaint by the Department of Justice raising similar claims against Moody’s.

European Bank Loans

William Warmington – Raymond James: First question for you is, there were some news this morning that the European central banks will be repaying EUR5 billion of its emergency three year loan over the next week. Just wanted to ask about – sorry, that’s EUR5 billion, about $6.7 billion U.S. How about that as a driver of the financial institution issuance in Europe in 2013.

Raymond W. McDaniel Jr. – President and CEO: Sure. I guess it’s probably worth reminding everyone that in the financial institution, (indiscernible), in particular, our business is more heavily weighted towards recurring revenue and annual pricing agreements. So, we are not as susceptible either on the positive or negative side to changes in issuance volumes. That being said, the indications – any indications of repaying loan would be an indication of potential market stability and some improved economic activity and we would have to look at that as a positive. At the same time, we do expect that deleveraging in the banking sector, particularly in Europe is going to continue and that’s a positive.

William Warmington – Raymond James: Then on the share repurchases, just wanted to ask if the intent there is to offset dilution or to create a net reduction? In that sense wanted to ask your thoughts on what the fully diluted shares exiting 2013 are that are gulped into $3.45 to $3.55 guidance?

Linda S. Huber – EVP and CFO: Sure, Bill. It’s Linda. Our intent with doing $500 million of share repurchase in 2013 would be to first cover dilution from employee issuance plan and then secondly to hopefully have some reduction in the overall share count. Now, that depends on a lot of things. A little tricky to model because as you may have noticed our share price has been a bit volatile of late. So, at this point, we are modeling a slight reduction, but we are going to have to see how it goes; very tricky to model at this point.

William Warmington – Raymond James: That $12 million amortization charge that you mentioned, I just want to confirm that works out to be about $0.05 after-tax?

Linda S. Huber – EVP and CFO: I think we are thinking it’s – yes, it’s about $0.06 after-tax, but just a rounding, Bill; but yeah, $12 million not to be tax effective.

William Warmington – Raymond James: Then one last question. Are you seeing any evidence of a shift in corporate debt issuance motives? It seems (up to turn) now the issuance has been very oriented towards refinancing. Are you starting to see any issuance to other purposes, M&A, plant expansion, something like that?

Linda S. Huber – EVP and CFO: Sure. Let me talk a little about issuance and I’d like to first talk about investment grade, and then I’d like to talk about high yield. We’ve polled a couple of the banks going into this earnings call and I think the general comment would be issuance so far in 2013 has been stronger than expected. January for U.S. high grade we saw $112 billion of issuance. That was this largest month of record and the expected volumes for February polling three different banks and again, talk to Bank of America Merrill Lynch, Citi and Morgan Stanley; we’re looking at an average of $67 billion for the U.S. for February. If you look at the last seven years’ average, that was about $61 billion. So that skews a little bit towards the higher end. For the first quarter, we’re looking at an average of $262 billion of U.S. high-grade issuance, again compared to what we might see over the seven year average. That was $234 billion, so again first quarter and high-grade is looking pretty healthy. What we’re seeing so far in terms of use of proceeds, it’s mixed. We’re seeing some prefunding, some share repo, some pension funding, some M&A, some refinancing, so a bit of a mix across the use of proceeds scale. Overall, the Banks are generally viewing that issuance will be down a bit, 2013 over 2012. We’re seeing range – sort of ranging from flattish to down 10%ish. We are modeling revenue down for high-grade in sort of the high-ish single digits. We’d like to comment that every week, we’ve seen positive fund flows for high-grade this year, total of $7.8 billion, so incoming fund flows into bond funds are good. Now turning to high yield activity in January has been robust and the quote is, it’s as good as it’s ever been. $41 billion of high-grade – excuse me high yield issuance in January and volumes for debt were about $23 billion of high yield issuance. Again, we’re seeing call of about 10% reduction in high yield issuance in 2013 versus and on use of proceed, basically the same thing we see before refinancing, repricing, M&A, dividend, not a lot of event-driven deals yet, but we may see some move in that. Again for high yield, we are modeling revenue down 2013 over 2012 in sort of a high-single digit range. Though we would note again funds flows into high yield bond funds have been positive as well. So market trends are quite good. Use of proceeds mixing it up a bit and overall, the market looks pretty good for the first quarter. So, I hope that answers everything you had, Bill.