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Moody’s Corporation (NYSE:MCO)

Q1 2010 Earnings Call Transcript

April 21, 2010 11:30 am ET

Executives

Liz Zale – VP, IR

Raymond McDaniel – Chairman and CEO

Linda Huber – EVP and CFO

Michelle Madelain – COO, Moody’s Investors Service

Analysts

Peter Appert – Piper Jaffray

William Bird – Bank of America/Merrill Lynch

Michael Meltz – JP Morgan

Craig Huber – Access 342

Sloan Bohlen – Goldman Sachs

Brian Shipman – Jefferies

Edward Atorino – Benchmark

Operator

Good day, and welcome ladies and gentlemen to the Moody's Corporation first quarter 2010 earnings conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company we will open up the conference for questions-and-answers following the presentation.

I will now turn the conference over to Liz Zale, Vice President of Investor Relations. Please go ahead.

Liz Zale

Thank you. Good morning, everyone and thanks for joining us on this teleconference to discuss Moody's results for the first quarter of 2010. I am Liz Zale, Vice President of Investor Relations.

Moody's release its results for the first quarter of 2010 this morning. The earnings press release and a presentation to accompany this teleconference are both available on our website at IR.Moodys.com. Ray McDaniel, Chairman 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 31st, 2009 and in other SEC filings made by the company, which are available on our website and on the Securities and Exchange Commission website.

These, together with the Safe Harbor statement set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. I should point out that members of the media may be on the call this morning in a listen-only mode.

I'll now turn the call over to Ray McDaniel.

Raymond McDaniel

Thanks, Liz. Good morning and thank you to everyone for joining today's call. I'll begin by summarizing Moody's first quarter 2010 results. Linda will follow with additional financial detail and operating highlights, and I'll then speak to recent developments in the legislative and regulatory area and finish with comments on Moody's outlook for 2010. After our prepared remarks we'd be happy to respond to your questions.

Moody’s results for the first quarter reflected strong corporate and financial institution debt issuance, particularly in the high-yield sector of the corporate market. Total revenue was $477 million, up 17% year-over-year, excluding the favorable impact of foreign currency translation revenue rose 14%.

Operating income for the first quarter was $197 million, 32% above the prior year period with negligible impact from foreign currency translation. Excluding the restructuring charge in 2009 and minor adjustments to this charge in 2010 operating income increased 22%. Diluted earnings per share for the quarter were $0.47, an increase of 24% year-over-year. Excluding these restructuring items in both periods diluted EPS grew 15%.

Our performance in the first quarter reflected the strength in corporate and financial institution issuance that I just noted, as well as improved stability in the markets and customers served by Moody’s Analytics. But, we also saw deeper than expected weakness in European structured finance. We are reaffirming our full year 2010 EPS guidance of $1.75 to $1.85, due to uncertainty that issuance levels later this year will continue to over come weakness some areas of structured finance.

I’ll now turn the call over to Linda to provide further commentary on our results and other updates.

Linda Huber

Thanks, Ray. I’ll begin with revenue at the company level. As Ray mentioned Moody’s total revenue for the quarter increased 17% to $477 million. Excluding the favorable impact of foreign currency translations revenue grew 14%. US revenue grew 22%, $255 million; while revenue outside the US grows by 11%, $222 million and represented 47% of the total. Recurring revenue $281 million represented 59% of total revenue compared to 67% in the prior year period.

Looking at each of our businesses, Moody’s Investor Service revenue for the quarter was $335 million 24% year-over-year increase, excluding the favorable impact of foreign currency translations and IS revenue grew 21%. US revenue was up 30% over the prior year period; outside the US revenue grew 17% and represented 44% of total ratings revenue.

Global corporate finance revenue in the first quarter increased by 50% from year ago to $126 million and was primarily driven by strong high-yield bonds and loan issuance. Revenue growth was 49% in the US and 53% outside the US. Global structure finance revenue for the first quarter was $71 million, 1% below the prior year period.

US revenue grew 21% reflecting increase issuance activity and asset tax securities and commercial real estate finance. Non-US structure finance revenue was down 17%, the decline was due to weak issuance across most asset classes in Europe and better market conditions improved issuer’s excess to liquidity and reduced issuance of new securitization for Central Bank sponsor programs.

Global financial institutions revenue of $76 million grow 35% from the same quarter of 2009, primarily due to gains in the banking and insurance sectors. Revenue was up 39% in the US and 33% outside the US. Global revenue for public project and infrastructure grew 7% year-over-year to $61 million.

Revenue grew 6% in US due to stronger public finance issuance across most sectors as well as improved project finance market conditions. Non-U.S. revenue grows 8%, primarily driven by investment grade activity within project and infrastructure finance.

Turning now to Moody's Analytics, global revenue is $141million was up 2% from the first quarter of 2009. Excluding the favorable impact of foreign currency translation, revenue grew – increased 1 percent. US revenue of $65 million grew 3% over the first quarter of 2009. Non-US revenue increased 1% to $76 million and represented 54% of total analytics revenue.

Globally, revenue from research, data and analytics of $105 million increased by 3% from the prior-year period represented over 70% of total MA revenue. The return to growth for these businesses reflects gradual stabilization amongst our capital market customers as destructions for the financial crisis received. In our more transaction sensitive businesses, revenue from risk management software was $33million grew 4% and revenue from professional services of $3 million declined 30%.

Growth rates in both of these business units are subject significant quarter-to-quarter volatility due to the variable nature of project timings and the concentration of revenue and relatively small number of engagement.

Turning now to expenses, Moody’s first quarter expenses were $280 million, 8% above the prior year period. Excluding the restructuring charge in 2009, a minor adjustment to this charge in 2010, expenses were up 13%. The increased was primarily due to higher accruals were performance-based compensation and increased expenses for consulting and professional services. Without the unfavorable impact of foreign currency translation reported expenses grew 5% from the prior period.

Operating margins for the quarter was 41.3% or 41.1%, excluding the restructuring adjustment. Our effective tax rate for the quarter was 37.2% compared with 35.7% for the prior year period. The difference between quarters was primarily due to reductions in tax and tax related liabilities in the prior period that did not occur this quarter.

Now I would like to turn to an update on capital allocation stock buybacks and capital expenditures. During the first quarter of 2010 Moody’s repurchased 1.1 million shares at a total cost of $30 million and an average price below $27 per share and issued 1.4 million shares under employees stock-based compensation plan.

Outstanding shares as of March 31st, 2010, totaled 237 million a 1% increased from the year earlier. We remain committed to using our strong cash flow to create value for shareholders while maintaining sufficient liquidity. In 2010, we expect to continue share repurchases at modest level subject to available cash flow another ongoing capital allocation division.

At quarter end Moody's had 1.1 billion of outstanding debt and more than 600 million of additional debt capacity available under our revolving credit facilities. During this quarter we used a portion of our cash flow to reduce total debt outstanding are approximately $70 million. And net debt position has decreased by approximately $95 million to approximately $625 million.

For full year 2010, we now anticipate capital expenditures in the range of 80 million to $100 million primarily reflecting greater spending on technology initiative.

And with that I will turn the call back over to Ray.

Raymond McDaniel

Thanks Linda. I’ll continue with an update on legislative and regulatory developments starting in the US.

Legislative and policy making activity on financial reform is ongoing. In March the senate banking committee voted on the financial reform bill, which we expect to be considered for discussion and debate on the Senate floor soon. As if retains the regulation of Nationally Recognized Statistical Rating Organizations or NRSROs that include measures to increase accountability and transparency, strengthen the management and disclosure of conflict of interest and further empower the SEC's oversight of NRSROs. We support most aspects of the bill, we remained concerned that bill's liability provisions to meet the unattended consequences that could negatively impact the credit market.

As such we do not believe that these are partisan issues and continue to recommend alternatives that will enhance rating agency accountability while reducing the likelihood of adverse outcomes in market and market participant.

While the passage and timing of the financial reform bill remained uncertain. President Obama has indicated his goal to sign the financial reform bill into law by the end of May. As a result it's possible that both chambers of commerce could agree on some form of the bill over the next few weeks.

It's still uncertain that final version of any legislation would be, but if the law is passed to the current liability provision we will implement appropriate changes to manage our operations prudently to correspond to a different environment. The SEC also continues to be active and its rule making related to NRSROs. During the process of implementing a final rule regarding rating agency disclosure of information related to the structured finance rating process and has submitted comments regarding other proposed rules and concept releases that relate to our industry. As the legislator focus on financial reform continues many of them studying the market crisis including congressional committee.

Moody's has participated in number of hearings and meetings held by legislators and regulators in the US and other jurisdictions and we will participate in a hearing on Wall Street on the financial crisis held by the US Senate Permanent Subcommittee on Investigations this Friday. We remained focus on planning a constructed discussion of partisan issues related to our industry and the broader financial markets.

In Europe as noted on previous calls we are in the process of implementing the new European Union credit rating agency regulation and in doing so we will continue to communicate with national and regional authorities charged with providing guidance and oversight for this regulation.

Finally, as regulatory reviews and activity occur in other jurisdictions we will continue to advocate for globally consistent approaches that recognize the international nature of our ratings and align with the G20 statements in the International Organizational Security Commission or IOSCO framework.

I’ll conclude this morning’s prepared remarks by discussing our full year guidance. Moody’s outlook for 2010 is based on assumptions about many macro economic and capital market factors, including interest rates, corporate profitability and business investments spending, merger and acquisition activity, consumer borrowing and securitization and the eventual withdrawal of government sponsored economic stabilization initiatives.

There is an importance degree of uncertainties surrounding these assumptions and if actual conditions differ, Moody’s results for the year may differ materially from our current forecast. Our full year outlook assumes foreign currency translation at exchange rate as of the end of the first quarter 2010.

As I said earlier, we are reaffirming our full year 2010 EPS guidance in the range of $1.75 to $1.85. We still expect revenue growth in the high single to low double-digit percent range from Moody’s Investor Service and growth in the mid single digit percent range for Moody’s Analytics.

However, our 2010 guidance for certain components of our business has been modified to reflect our current view on credit market conditions and implications for the company.

My comments only address those components that have been revised and we refer you to our earnings release for a full review of our guidance.

At Moody’s Investors Service, we now expect non-US revenue growth in the low single digit percent range. Corporate finance revenue is now projected to increase in the low 20s percent range with anticipated growth and speculative grade bond and loan activity partly offset by moderation of investment grade issuance from the high volume in 2009. Based on a current visibility, we are also expecting a stronger level of high yield activity in the first half of the year our investment grade is forecast to improve slightly in the second half.

Structured finance revenue is now expected to decline in the low-single digit percent range primarily reflecting lower European issuance activity in asset back securitization and derivatives when previously anticipated. Total recovery in securitization is partly dependent on the resolution of rules and policies within and outside the US and CapEx including disclosure by issuers accounting and regulatory capital treatment of securitized assets and retention of risk.

Actually this is a qualified; Moody is affecting our application and the possible impact on issuers and investors in different jurisdictions. The Moody’s analytics we now expect full year revenue growth in the high single to low double digit percent range in risk management software and in the mid to high single digit percent in professional services.

Sales in both businesses remain inline with expectations, however revenue is subject to significant quarter-to-quarter volatility or into the business is still modest scale and revenue concentration in a relatively small number of large projects. In the software business for example, we across several larger than expected transactions which has extended both of sales cycle and the implementation timeframe.

That concludes our prepared remarks and joining us for the question-and-answer session are Michelle Madelain, the Chief Operating Officer of Moody’s Investor Service and Mark Almeida, President of Moody’s Analytics, will be please take any questions you may have.

Question-and-Answer Session

Operator

(Operator instructions) We’ll take our first question from Peter Appert with Piper Jaffray.

Peter Appert – Piper Jaffray

Thanks. Linda, question on the cost dynamics here. Your guidance obviously suggests an accelerated rate of costs grows here over the balance of the year. I’m wondering if you give us any granularity in terms of what drive and particularly after your organic costs growth look relatively modest in the first quarter?

Linda Huber

Peter. You recall but, we have said that we’re expecting ramping our expenses throughout 2010. A pattern probably so much similar to what we saw last year but the causes would be different. Last’s year revenue if you remember, first half performance was chap and second half performance was strong. So, we had add compensation accruals in the second half of the year. This year, we expect the compensation accruals to be flattered and then at higher level because the business is doing well. But, as you know, we are looking at potential hiring increases in the single digit. So, it would reflect those potential increases. Now, we’re not exactly certain how those increases were lay out. We are looking at potentially, we’re deploying some people internally and we’ve got to see how our balances is out with new hires but that would be the main caused of the expense ramp for the back half of the year coupled with some increased IT expenses and compliance expenses as we move fairly implementation into the EU growth for example.

Peter Appert – Piper Jaffray

So, it sounds like whether you have some flexibility on this in the hiring plans?

Linda Huber

We do. And, again, Ray may want to comment further on this, Peter. It certainly depends how many people we move and how many people we hire from the outside.

Raymond McDaniel

Yeah. Peter, the only thing I would add to that is well, we do have flexibility in certain areas. There’s some other things that we have to do that in fact affect hiring. And so we are going to follow through with those hires, regardless of the environment. And that have to do with as we’ve talked about before compliance and certain kinds of personal additions for technology project that have to do with the regulatory environment that were going to be in both in Europe certainly and increasingly expected in the U.S.

Peter Appert – Piper Jaffray

Great. And then Ray, on the separate topic, you’ve mentioned alternative liability, alternative provisions to align the rating agencies better I guess with investor desires. Can you talk about what some of those provisions might be what they might look like?

Raymond McDaniel

What I can tell you at this point is first of all it’s going to be dependant on what any final language in reform bill or in proposed – currently proposed SEC rules turned out to be, so I can’t say with certainty what we would do to accommodate in different environment until we have more clarity around what that environment is? But that being said we are currently studding other industries that have different standards of liability than our just currently. We’re looking at how they manage their business prudently and safely. And we are looking at changes that maybe appropriate in terms of our interactions with users of ratings whether we even if we believe there is a market good to providing rating services for as many small and perhaps marginal issuers as possible whether that is prudent to do in a different environment, those kinds of things and those are just illustrations of broader range of potential actions.

Peter Appert

Got it. Great. Thanks, Ray.

Operator

We will take our next question from William Bird with Banc of America.

William Bird -Banc of America/Merrill Lynch

Yes, Ray. I guess we are on the same line, I was just wondering if you could elaborate on senate's current language and as the current language were on a hold what kind of specific adjustments one might make?

Raymond McDaniel

Well, I don't think – I don’t think I am ready to talk about specific adjustment under just one side of the current congressional legislator proposals. We would have to see what finally comes out of the senate and then obviously most importantly what would be produced in conference between the house and the senate on credit rating agency of reform because the bill is currently do not line up in all respect.

William Bird -Banc of America/Merrill Lynch

Fair enough. Also Linda one of you could just talk a little bit about the pipeline and as you look at the pipeline, I am just wondering how Q2 growth is likely to compare to Q1 growth?

Linda Huber

If you are looking for pipeline view and revenue I think I might turn it and back over to Ray. On the expense side those as I said we are expecting gradual ramp over the year and expenses as I heard reply to a Peter's earlier question, let Ray take a shot at the revenue pipeline.

Raymond McDaniel

Yes, in terms of – I think right now, it looks like more of the same in terms of what we saw in the first quarter. We did see starting with structured finance, we did see a growth on the US side versus the prior year period, but that was offset by the weakness that we talked about in international structured finance, and that was particularly concentrated in Europe. And I think that probably is going to continue for some time. On the corporate side, as we remarked in our prepared comments, we expect that the first half of the year, speculative grade is going to be relatively stronger and then investment grade picking up the second half of the year versus spec grade. We had a very strong quarter for financial institutions and I would be surprised if we see that momentum continue throughout the rest of the year. And I would expect to see a relative stability in the public project and infrastructure line. On the Moody’s Analytics side, if you look at the seasonal pattern that we’ve had there in the past, you see that revenue has historically grown through the year and I don’t think there is anything we’re looking at that would contradict that at this point.

William Bird -Banc of America/Merrill Lynch

And Linda, you mentioned that you expect the incentives comp growth to be kind of flattish for the year, kind of more level. What level was it at in the first quarter and kind of what do you expect for the year?

Linda Huber

Sure, Bill. For the first quarter incentive comp as about $21 million for the first quarter of 2010 and that compares to that $9.3 million last year. So obviously the stronger performance of the business and affect that we returned bonus targets to a 100%, if we hit this years business objective will running filler number there. That runs 11% of total compensation for the first quarter, which will be about on par for what we are expecting for the year, we are expecting incentive comp run 11 or 12% for the year. Our stock based compensation should run 7-8% for the year. And salaries and benefit should be the remainder on the compensation expense, which runs the mid 60 or 63 or 66% of total expenses.

William Bird -Banc of America/Merrill Lynch

Great. Thank you very much.

Operator

We will take our next question from Michael Meltz with JP Morgan.

Michael Meltz – JP Morgan

Great. Thank you. I think, I have four questions. Well, I’ll asked the liability question in different way is it – you might not want to discuss how you might change approach is it fair to assume you would probably increase your pricing commensurate with increase risk?

Raymond McDaniel

Well, to the extent that cost for operating in business wise, I think it is, it would not be unexpected to fix perhaps those cost of operations along.

Michael Meltz – JP Morgan

Okay. Secondly on the pricing side, can you talk about what you did with pricing this year and if that something that kicks mostly in January or sales throughout the year?

Linda Huber

Michael, we were closely at pricing and I think we are pretty thoughtful about it, we do have complexity in our pricing schedules and I think we are looking to have modest rates of increase that provide value to both the issuers and to the investors using a rating those schedules usually go into affect with the beginning of the year and yes, you will see them over the course of the year. It’s not something now that you’re going to be able to call out given the increased volume that we’re seeing particularly in corporate and in high yield. It will just be a part of the mix.

Michael Meltz – JP Morgan

Okay. On structure, can you talk a little bit more about Europeans structure and just I mean, I guess the simple question would be, I can’t imagine your expecting blew out activity two months ago. So, what is the different today versus a little over two months ago when you actually gave for those guidance were 4% structured growth?

Raymond McDaniel

Well. I can confirm that we were not expecting to see blew out at activity several months ago. But to answer most specifically, let me ask Michelle Madelain to make his comment.

Michelle Madelain

Yeah. I think that, you know, what is happened in Europe is that, as you know that the activity we’ve seen is at last we agreed that effectively all reason by access to reprocessed [ph] from the bank with England and although there are central banks and that level of activity is effectively contracted due to you know, improved access to liquidity for fiancé issuance. And the fact that overall, they need for refinancing and refining have actually been reduced. So, that’s really was in Europe.

Raymond McDaniel

And, just to add that, the – in a broader prospective, the improved liquidity profile in Europe is good for financial institution for corporate but it is having an effect on the securitization that was going on last year.

Michael Meltz – JP Morgan

Okay. And then last question. On the – I don’t know what you call, but the other expense line which is interest expense, that I think came in a little high or higher than I had model to the quarter. Can you just talk about Linda what had pushed that number up and what’s the expected run rate for 2010?

Linda Huber

Michael if you take a look at the earnings release that we did this morning we’ve got a schedule in there that is consolidated adjust income, which we hoping out. The expense and borrowings on that schedule was $10.8 million. We’ve got a small income number and then unrecognized tax benefits and other tax so $3.5 million to the negative. What we probably unable to trace there we mentioned in our prepared remarks is the absence of the benefit that we had in 2009 that took that number to the positive by about $7.5 million, so basically you’re seeing as when there it’s the absence of the benefit that we had last year.

Michael Meltz – JP Morgan

And so the question is that swing is that a Q1 issue or is that for fiscal year?

Linda Huber

I think we would – this number is a reasonable number though Michael this is the hardest number to forecast probably that we work with because that includes tax and OpEx. And I think something around that number is reasonable to look at for once in a while we do have a tax event as we did at this time last year, which is quite helpful to us but we can’t count on those.

Michael Meltz – JP Morgan

So the current 13 million, let there 13 million expenses in Q1 at this point it feels like a good run rate because that feed or so?

Linda Huber

We can both 13, 15 something like that?

Michael Meltz – JP Morgan

Thank you for your time.

Operator

Take our next question from Craig Huber with Access 342.

Craig Huber – Access 342

Yes, good morning. Linda, couple of questions for you, as always typically ask can you break out the transaction verses non-transaction revenues for your four main segments?

Linda Huber

Well, Craig Huber we were just flipping to the page to get ready for your question. We do this as we always do we go through the rating agency first, the four components and then we will go through analytic and company as a total. I think the headline would be Craig that transaction revenue is up substantially because of high yield and loan issuance, so let me take a shot at this. For structured finance the first quarter of 2010 our transaction revenue was 41%, our relationship revenue was 59%. For corporate for CFG, transaction revenue was 71%, very strong showing as I mentioned and 29% relationship revenue. Financial Institutions were 43% transaction and 57% relationship and public project and infrastructure was 55% transaction and 45% relationship.

So for the rating agency as a whole we are running 55% transaction and 45% relationship. It's pretty interesting both two reversal where we were at this time last year. Now for analytic we are running 8% transaction, 92% relationship and for the company as a whole – excuse me 41% transaction, 59% relationship given the strength in issuance.

Craig Huber – Access 342

You know the other way you guys break out your revenues you were pleased in these three to four different buckets like within corporate finance, what percentage was high yield versus bank loans or some investment grade the other four segments as I will appreciate?

Linda Huber

Sure. Let me look at CFG for you, Craig. I am looking at this for the first quarter totaled CFG revenue was about a $126 million which was the strong performance. Investment grade was about 20% of that, high yield was 27% of that number of that a $126 million number, very strong performance compared to the 7% at this time last year. Bank loans 14% of the CFG number, also very strong performance compared to last year’s 3% and other which is variety of things, medium term notes, which are commercial paper and so on, that was 39%.

Craig Huber – Access 342

And if you do the same for structured finance for PPIF you would?

Linda Huber

Let deal with structured finance, the total number was $71.5 million of revenue, asset backed was 33% of that, residential mortgage backed securities was 20%, commercial real estate class as we call it was 17% and derivative was 31% and structured encompass 21% of total Moody’s Investor Service revenue for this quarter. That pretty much everything you wanted Craig.

Unidentified Participant

In fact, did you have finance institutions in PPIF…

Linda Huber

I do, we set it off. First quarter, $76.3 million revenue for FIG, we have banking 69% of that which is starting, we were at this time last year. Insurance 24%, managed investments 7%, and FIG was 23% of total MIF revenue for this quarter, up from 21% last year. And since I manage to give it you, while I am doing it Greg, PPIF was $61.4 million, PFG and severance were 51%, municipal structured was 8% and project and infrastructure was 41%. All of those are running approximately where they were at the first quarter last year though the total number is up.

Craig Huber – Access 342

And then also if you could switch over to your operating margin guidance, I guess the 38% to 39% for the year, obviously your first quarter your margin was 41.1%, we are going to keep in mind closer cost were not level actually, did increase year goes on lastly significantly, how there is some increase issuer cost was year goes on but not quite to the same extend, it sounds like. Can you talk about what you think here if you truly do believe; I know you guys are very conservative by nature 38 to 39% operating margin guidance. What you think would bring it down to that level for the full year given 41.1 in the first quarter, just simply meaningfully slower top-line here or just could you walk me through the components?

Linda Huber

Sure Craig, just to be clear year last year the difference in fourth quarter expenses versus first quarter expenses was about $40 million. And we are looking for similar ramp this year given all the component, so make sure you are able to model that and if we have revenue outside as well I stated before were more likely to have the margin exceed 40%. And also if we gain in better expenses we will now also be able to do a little bit better but we got to scale those two things depending on how the revenue is looking to come in. So we are going to continue to guide in that high 30s number but in some quarters where we are lucky enough that the margin goes about 40. But I would say that is the benefit of having a strong quarter and I will ask Ray to come and look further.

Raymond McDaniel

Yeah. The only thing, I can add to Linda’s comments Craig are that, if we are sensitive to the top line at this point in terms of the margin, and if we do not see the kind of top line growth that would have margins up in the 40s. We are one still facing some investment in the business that we need to make. And two, there is going to be an important element of why we are not seeing top-line growth if we are not. And is it because of technical factors and we want to continue to invest through that or is it because of some other more in doing changes and we would be more going to react to that. And we can’t tell you the answer to that at this point in a year.

Craig Huber – Access 342

When you talk about up 8% to 9% revenue growth guidance for issuance and you know, 8% to 9% for costs. I mean everything you said and done, apart we’re going to think you to the match or costs growth with your revenue growth this year. I’m going to think a few percentages point to 8% to 9%. You don’t have to actually spend whether these all set and done. If you only, I think only but 8% to 9% top line, I assume it if I have said, and still they can do it to 8 to 9% cost growth this year. It might grow 8 to 9. I mean, it will slow down for many three quarters of the year?

Raymond McDaniel

I think the most I can tell you at this point Craig is, is that the guidance is the guidance and we’ve tried to give you some color around that. And hopefully we will have more clarity as we move through the second quarter.

Craig Huber – Access 342

Is that guidance pretty much right on top of what your internal targets or for a bonus accruals and all that?

Raymond McDaniel

I think…

Craig Huber – Access 342

Including your own etcetera, everything on target?

Raymond McDaniel

No. I think it’s important that our guidance reflect our best estimates of what we’re going to do for the year, the central scenario. So, I hope as you remark that we prove to be conservative. But it is our best estimate.

Craig Huber – Access 342

Okay. Thank you very much.

Raymond McDaniel

Thanks. Craig.

Operator

We will take our next question from Sloan Bohlen with Goldman Sachs.

Sloan Bohlen – Goldman Sachs

Hi, thank you. Just three quick question first one just for Ray. You’ve mentioned little bit about changes that you’d recommended with regard to the accountability or I guess liability standards in the current financial reform. I was wonder if you could elaborate a little bit on that and may be talked a little bit about what the risk activities is spent to those adjusted changes?

Raymond McDaniel

Sure, the – I think the principle issue is that, that we’re grappling with or that there is, there is a very strong and not surprising interest and making sure that NRSROs are all appropriately accountable. And so the idea of changing the liability language in legislation and regulation is really an effort to enhance the accountability of rating agencies. There are other ways to enhance accountability whether it’s through our fines or sanctions, probations on operating in certain parts of the ratings business if book [ph] product is not of sufficient quality as a there are number of things that can be handled through oversight, enhanced oversight with piece in the oversight. But I think would satisfy a greater sense of accountability and would allow the industry to operate in a way that’s going to be as constructive for credit markets as possible, so that’s really where we would urge law makers and regulators to focus and then we will see how that works out.

Sloan Bohlen – Goldman Sachs

And do you get a sense of that focus has changed at all whether it would be – you know what the SEC did last week or Obama pushing for a timeframe do you feel like that maybe get lost in the broader bill?

Raymond McDaniel

Whereas in terms of the original proposal that was put forth by the Obama administration, they did not recommend any change in the liability standard, which I think is important and undisclosed the fact that I don’t see this as our partisan issues so much as a credit market issue. So, I think the in some ways perhaps as you identify the risk is that we have very expensive financial reform legislation proposed and there are lot of people working to try to resolve some very significant issues and questions around that overall package, and having the attention on the issues that are important to us is part of the challenge that we have to overcome.

Sloan Bohlen – Goldman Sachs

Okay. Fair enough. And then just one question on issuance you talked about a ramp for a investment grade in the second half of the year, do you get a sense that the go [ph] forward of refinancing activity is largely done and that second half ramp is more to do with economic growth and opportunistic capital?

Raymond McDaniel

I think there is still a lot of debt that needs to be refinanced, you can see that over the next few years that they are remained significant of refinancing requirement, when that is refinanced, so is less certain and how much of it is pulled forward, again is uncertain. So the investment grade issuance I would characterize as perhaps less opportunistic than what we are seeing in the spec grade market right now and the very strong momentum in the spec grade. And I think that’s why in our estimation there is going to a reversal in the level of activity between the first half and second half investment grade to spec grade.

Sloan Bohlen – Goldman Sachs

Okay, so, ramp is more relative to spec grade, not the fact that – I was trying to get an idea of why the ramp for second half for investment grade is suppose to not now for instance?

Raymond McDaniel

Yes, I think it's – you might think of it as more normalized calendar of issuance in investment grade.

Sloan Bohlen – Goldman Sachs

Okay, fair enough.

Raymond McDaniel

And we are opportunistic in the spec grade.

Sloan Bohlen – Goldman Sachs

Great. Thank you guys.

Operator

We’ll take our next question from Brian Shipman with Jefferies

Brian Shipman – Jefferies

Thanks. Couple of questions. Linda first, you’ve bought some stocks in the quarter or the amount but issuance or stock based comp still got shares outstanding, inching higher, should we expect this trend to continue going forward, do you think you will be a net repurchaser at some stage?

Linda Huber

I think we’re at look the plan throughout this year to see how the price goes in and so on. We committed to modest share repurchase and we are balancing that with slight reduction in our debt and paying our dividend which we increased by 5% in December. We are closed, we had that 1.1 million shares and we issued pretty more than that, so over the course of the year I would expect that we might catch up, but it depends where the parts several goes.

Brian Shipman – Jefferies

Okay. Thank you.

Raymond McDaniel

Also I want to say you know we adjust our options in Q1 so the heaviest issuance of shares for compensation purposes would be in Q1, you shouldn’t look for that level throughout the rest of the year.

Brian Shipman – Jefferies

Okay. That’s helpful thank you. Just total big picture question and it is yours as a rating agencies team and change in the number of unrated 15 comp securities being market or offered conductors and compared with previous years and another words of issuers change appetite for the user rating get off and than lastly Ray if you have any comments on this most recent California, so that will be helpful, thank you?

Raymond McDaniel

The quick answer on issuers and investors use of rating that we have not seen any change, we continue to have an increase in the number of rated entities globally with new ratings request, when that is more the phenomena outside the US where market are less matured than it is inside the US. But we are seeing a net increase in the number of rated entities and in terms of the entities that we have rated historically we continue to do so, so no changes there. In terms of the California attorney general, I don’t think there was anything unusual in terms of the process that we undergoing with the California AG except perhaps that a press conference was called. The – we’ve been in steady communication with his staffs, I know our eternities have made sure that we produced thousands and thousands of documents as requested by the 8G and we’ll continue to corporate. And so we’ll make sure that that we’re doing what we need to be doing in terms of satisfying the request there and go from there.

Brian Shipman – Jefferies

Okay. Thank you.

Operator

We’ll take our next question from Edward Atorino with Benchmark.

Edward Atorino – Benchmark

Hi. I’m going to delay on the interest numbers, is it all interest or is it from other stuff in there?

Linda Huber

Ed the interest expense number is the 13.3 and 10.8 it is expenses on borrowings and 3.5 to that is a check from small offset totaling about a $1 million. So, I’d guess you say yes most to that is interest expense.

Edward Atorino – Benchmark

And you’ve said it would sort of stay about that level throughout the year.

Linda Huber

Yeah. I think, I told Michael.

Edward Atorino – Benchmark

Yeah. I got that.

Linda Huber

To finish that.

Edward Atorino – Benchmark

I got it. Thank you.

Operator

And, with no further questions, I'll turn the conference back over to Ray McDaniel for any closing remarks.

Raymond McDaniel

Okay. Thank you. Before we end the call, I just want to announce that Moody’s will host its fourth annual investor day on Thursday June 10th in New York City. Attendance is by invitation only and event will be accessible to all investors by webcast. Further details would be provided on our investor relations website. So, thanks a lot for joining the call today and we look forward to seeing you in June. Thank you.

Operator

That concludes Moody’s first quarter earnings conference call. As a reminder, a replay of this call will be available at 4:00 p.m. Eastern Time on Moody's website. Thank you.

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Source: Moody’s Corporation Q1 2010 Earnings Call Transcript
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