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Moody’s Corporation (NYSE:MCO)

Q2 2014 Results Earnings Conference Call

July 25, 2014 11:30 AM ET

Executives

Salli Schwartz - Global Head of IR

Ray McDaniel - President and CEO

Linda Huber - Chief Financial Officer

Michel Madelain - President and COO of Moody’s Investor Service

Mark Almeida - President of Moody’s Analytics

Analysts

Tim McHugh - William Blair & Company

Joseph Foresi - Janney Montgomery Scott

Andre Benjamin - Goldman Sachs

William Bird - FBR

Manav Patnaik - Barclays

Peter Appert - Piper Jaffrey

Craig Huber - Huber Research Partners

Doug Arthur - Evercore

Patrick O'Shaughnessy - Raymond James

Edward Atorino - Benchmark

Bill Warmington - Wells Fargo

Operator

Good day, and welcome, ladies and gentlemen, to the Moody’s Corporation Second Quarter 2014 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 the conference up for questions and answers following the presentation.

I will now turn the conference over to Salli Schwartz, Global Head of Investor Relations. Please go ahead ma’am.

Salli Schwartz

Thank you. Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody’s second quarter results for 2014 and our outlook for full year 2014. I am Salli Schwartz, Global Head of Investor Relations. Moody’s released its results for the second quarter of 2014 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, 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 towards the end of our earnings press 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, 2013 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 the call this morning in a listen-only mode. I'll now turn the call over to Ray McDaniel.

Ray McDaniel

Thank you, Salli. Good morning, and thank you everyone for joining today's call. I'll begin by summarizing Moody's second quarter 2014 results. Linda will follow with additional financial detail and operating highlights. We have no legal and regulatory update to report therefore I will then conclude our comments with our outlook for 2014. After our prepared remarks, we'll be happy to respond to your questions.

Second quarter revenue of $874 million increased 16% over the second quarter of 2013, both Moody's Investor Service and Moody's Analytics delivered mid-teen percent revenue growth. Operating expenses for the second quarter were $462 million, a 14% increase from the second quarter of 2013. Operating income for the second quarter was $412 million, a 17% increase from the prior year period.

Adjusted operating income defined as operating income less depreciation and amortization was $434 million, up 16% from the same period last year. Diluted earnings per share of $1.48 for the second quarter increased 48% from $1 in the second quarter of 2013 and included a $103 million non-cash pre-tax gain resulting from Moody’s acquisition of a controlling interest in ICRA Limited, a leading Indian credit rating agency.

On June 26, 2014, Moody’s increased its stake ICRA from 28.5% to more than 50%. U.S. GAAP requires a re-measurement to fair value of non-controlling shares when a controlling interest is obtained. As a result of the transaction, Moody’s recorded a gain of $0.36 per share in the second quarter of 2014. Non-GAAP EPS of $1.12 which excludes the ICRA gain increased 12% from $1 in the prior year period.

Turning to year-to-date performance, revenue for the first six months of 2014 was $1.6 billion, a 10% increase from the first six months of 2013. Revenue of Moody’s investor service was $1.1 billion for the first six months of 2014, an increase of 8% from a year ago. Moody’s analytics revenue for the first half of 2014 of $493 million was 15% higher than the prior year period.

Operating expenses for the first six months of 2014 were $896 million, up 5% from 2013. Operating income of $745 million increased 18% from $631 million in 2013. Adjusted operating income was $790 million, a 17% increase from the prior year period. First half 2013 operating expenses, operating margin and adjusted operating margin all include a first quarter litigation settlement charge.

Diluted earnings per share of $2.47 for the first six months of 2014 which included $0.36 related to the ICRA gain increased 35% from the prior year period which included a litigation settlement charge of $0.14. Excluding the 2014 ICRA gain and the 2013 litigation settlement charge, diluted earnings per share of $2.11 for the first six months of 2014 -- $2.11 for the first six months of 2013 grew 7% year-over-year.

I will now turn the call over to Linda to provide further commentary on our financial 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 16% to $874 million. Foreign currency translation favorably impacted revenue by 2%. Second quarter U.S. revenue increased 13% to $461 million while revenue outside the U.S. grew 19% to $412 million and represented 47% of Moody’s total revenue for the quarter. Global recurring revenue grew 12% to $412 million and represented 47% of total revenue, down from 49% in the prior year period.

Looking now at each of our businesses starting with Moody’s Investor Service. Total MIS revenue for the quarter was $622 million, up 16% from the prior year period. U.S. MIS revenue of $353 million increased 13% from the prior-year period. MIS revenue generated outside the U.S. of $269 million increased 20% and represented 43% of total ratings revenue. Foreign currency translation favorably impacted MIS revenue by 1%.

Moving to the lines of business for MIS. First, global corporate finance revenue in the second quarter increased 22% from the year ago period to $321 million, primarily reflecting strong rated bank loan and speculative-grade bond issuance in both the U.S. and Europe. U.S. and non-U.S. corporate finance revenue was up 20% and 24%, respectively.

Second, global structured finance revenue for the second quarter was $111 million, an increase of 14% from the prior-year period, primarily reflecting increased ratings of CLOs in the U.S. and Europe. U.S. and non-U.S. revenue increased 17% and 8% respectively against the prior year period.

Third global financial institutions revenue of $92 million increased 9% from the second quarter of 2013 despite an increase in the issuance activity from U.S. banks, U.S. revenue declined 4% year-over-year due to a shift in issuance mix.

Non-U.S. revenue increased 19% against the prior year period as a result of increased issuance from banks across all regions. Fourth, global public and infrastructure finance revenue increased 6% year-over-year to $98 million. U.S. revenue was down 2% primarily due to continued weakness in public finance issuance which was partially offset by increased in structure issuance.

Non-U.S. revenue increased 21% from the prior year period reflecting increased infrastructure revenue across all regions as well as higher sovereign and sub-sovereign revenue in EMEA.

And turning now to Moody’s Analytics, global revenue from Moody’s Analytics of $252 million was up 15% for the second quarter of 2013. Foreign currency translation favorably impacted EMEA revenue by 3%. U.S. revenue grew 14% year-over-year to $109 million. Non-U.S. revenue of $143 million increased by 16% from the prior year period, and represented 57% of total Moody’s Analytics revenue. More than 65% of revenue growth in the quarter was organic with the remainder coming from acquisition.

Moving to the lines of business for MA, first, global research, data and analytics or RD&A. Revenue of $145 million increased 11% from the prior-year period driven by strong performance in credit research and content licensing. RD&A represented 57% of total MA revenue and our customer retention rate remained strong in the mid 90% range. RD&A’s U.S. U.S. revenue was up 9% and non-U.S. revenue was up 13% as compared to the second quarter of 2013.

Second, global Enterprise Risk Solutions or ERS revenue of $67 million grew 12% against the prior year period, due to growth in subscription revenue and services revenue. ERS U.S. and non-U.S. revenue was up 13% and 11% respectively against the same period last year. As we’ve noted in the past, due to the variable nature of project timing and completion, ERS revenue remains subject to quarterly volatility. Trailing twelve months revenue and sales for ERS have increased 8% and 15% respectively.

Finally, global professional services grew 41% to $40 million, primarily reflecting the December 2013 acquisition of Amba Investment Services. U.S. and non-U.S. revenue increased 67% and 33% respectively year-over-year.

Turning now to expenses, Moody’s second quarter expenses increased 14% to $462 million, compared to the second quarter of 2013. This increase was primarily due to higher compensation and real-estate expense attributable to increased headcount, increased incentive compensation and acquisition related costs. Foreign currency translation unfavorably impacted operating expenses by 1% for the quarter.

Moody’s reported operating margin for the quarter was 47.1%, up 70 basis points from 46.4% in the second quarter of 2013. Adjusted operating margin was 49.7% for the quarter, up 20 basis points from 49.5% for the same period last year. Moody’s effective tax rate for the quarter was 33.1% compared with 32.2% for the prior-year period.

And now I’ll provide an update on capital allocation. During the second quarter of 2014, Moody’s repurchased 3.2 million shares at a total cost of $258 million or an average of $80.39 per share and issued 0.7 million shares under employee stock-based compensation plans.

Outstanding shares as of June 30, 2014, were 211.2 million reflecting a 4% decline from a year earlier. As of June 30, 2014, Moody's had 1.3 billion of share repurchase authority remaining under its current program. At quarter end, Moody's had 2.1 billion of outstanding debt and 1 billion of additional debt capacity available under its revolving credit facility.

Total cash, cash equivalents, restricted cash and short-term investments at quarter end of $2 billion, an increase of $308 million from a year earlier. As of June 30, 2014, approximately 69% of our cash holdings were maintained outside the U.S. Free cash flow for the first half of 2014 of $419 million increased $68 million or 19% from the same period a year ago.

And finally on July 7, 2014, Moody's issued a total of $750 million of debt including $450 million of five year note with a coupon of 2.75% and 300 million of 30 year notes with a coupon of 5.25%. We intend to use the proceeds to redeem our senior unsecured notes during 2015, totaling $300 million as well as for general corporate purposes.

And with that, I'll turn the call back over to Ray.

Ray McDaniel

Thanks, Linda. I'll conclude this morning's prepared comments by discussing the changes to our full year guidance for 2014. Additional details on Moody's guidance are included in our second quarter 2014 earnings press release, which can be found on Moody's Investor Relations website at ir.moodys.com.

Moody's outlook for 2014 is based on assumptions about many macroeconomic and capital market factors including interest rates, corporate profitability, business investment spending, merger and acquisition activity, consumer borrowing and securitization and the amount of debt issued. There is an important degree of uncertainties 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.

The company now expects full year 2014 revenue to grow in the low-double-digit percent range. Full year 2014 operating expenses are now projected to increase in the high-single-digit percentage range. These expenses now include costs related to our acquisitions of a majority stake in ICRA and of WebEquity, as well as additional incentive compensations. We now expect operating expenses to ramp between $80 million and $90 million from the first quarter to the fourth quarter of 2014.

Full year 2014 non-GAAP EPS guidance is in the range of $3.90 to $4. Our non-GAAP EPS guidance now includes costs related to our acquisition of the majority stake in ICRA and of WebEquity and additional incentive compensation and financing costs associated with our July 2014 bond offering.

Global MIS revenue for the full year 2014 is now expected to increase in the high single-digit percent range. Within the U.S. MIS revenue is now expected to increase in the mid single-digit percent range while non-U.S. revenue is expected to increase in the low-teens percent range. Corporate finance revenue is now projected to grow in the low double-digit percent range. Revenue from structured finance is now expected to grow approximately 10%, financial institutions revenue is now expected to grow in the low single-digit percent range.

With regard to the Moody’s controlling stake in ICRA company will report ICRA’s operating results within Moody’s investor service on a three month lag beginning in the fourth quarter of 2014.

ICRA is expected to contribute approximately $12 million of revenue to MIS in the fourth quarter. For Moody’s Analytics full year 2014 revenue is now expected to increase in the mid-teen percent range. Including the acquisition of WebEquity, revenue for enterprise risk solutions is now expected to grow in the mid-teens percent range. Professional services revenue, including Amba Investment Services, is now projected to grow approximately 40%.

This concludes our prepared remarks and 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’ll be pleased to take any questions that you have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We'll take our first question from Tim McHugh with William Blair & Company.

Tim McHugh - William Blair & Company

Yes, thanks. I guess just wanted to ask a little bit more about I guess the higher expenses you expect for this year. How much of that can you help us break that down a little bit in terms of added incentive comp versus I guess any drag from upfront expenses related to ICRA and I guess how much dilution from WebEquity? I guess I'm trying to understand what how much that's offsetting what was better than expected performance this quarter and the impact on the full year guidance?

Linda Huber

Sure Tim, it's Linda. Let's first look at second quarter expense increase versus last year. And for the second quarter, our expenses were $57 million higher than last year up, 14%. And I'll give you the reasons for why that is. The largest component of that is compensation increases and that was fell $42 million. Compensation for new hires over the course of the year was about $15 million merit and stock based compensation for the staff we have was about $12 million and the expenses related to Amba acquisition we did last year were about $8 million.

Non-comp was about $15 million and that included acquisition some other expenses of about $6.5 million and some occupancy changes of $4.1 million. As you may remember, we have leased additional -- two additional floors and a third coming on line in this building here. So that would be the reason for the higher expenses second quarter over second quarter.

And as we move to the end of the year, we had said expenses were going to ramp about $55 million. We’re adding another 30ish to that, we said $80 million to $90 million expense ramp between the first quarter and the fourth quarter. The additions would be the cost of the acquisitions at about $20 million, we're thinking incentive comp to add about another $4 million, and expenses that we're spending in the second half rather than what we thought were going to come in the first half were about 6ish. So that adds about $30 million to the expense ramp in the second half.

Now just to be really clear, under GAAP, deal costs are expensed as they are incurred regardless of when or whether deals close. So as we look at deals and when we incur deal expenses, we expense those and we’ve included those. And revenues come a little bit more slowly but that's U.S. GAAP. So we’re looking at three months lag on revenues for ICRA which as we disclosed in our table and the press release, will give us about $12 million in the fourth quarter of this year for ICRA.

But also purchase accounting adds haircuts to revenue. So we are in the position of recognizing the expenses right away and the revenues a little bit later. Now on ICRA, we are taking a three months lag because if ICRA reports on Indian GAAP and we've also always reported ICRA's results on a three months lag. We have to convert those to U.S. GAAP and it takes a quarter to do that transition.

And so we will see the ICRA revenues coming on in the fourth quarter. But again, we closed the deal on June 26th, so you see the expenses and the web equity deals closed on July 17th. So you can kind of think through what the acquisition costs mean there. So generally, we’re thinking it’s about 5ish cents for the deal activity and about $0.04 for the financing that we did. Your call is to whether you want to think about that those our GAAP expenses, so whether you want to think about those in the run rate or not. So, I hope that thoroughly answers everything that you’re interested in.

Tim McHugh - William Blair & Company

That’s great, that’s very helpful. I guess just one follow-up to make sure I understand it correctly. On ICRA, you’re talking about you read away or have to recognize the transaction or kind of upfront expenses, but do you have to recognize the operating expense from ICRA right away or is that tied to when you start recognizing the revenue and that’s delayed by three months as well?

Linda Huber

That’s delayed by three months as well, exactly.

Ray McDaniel

What we were recognizing immediately were the transaction related costs.

Tim McHugh - William Blair & Company

Okay. And then guys, just on ERS, I think trailing 12 months sales activity was up 9% last quarter and so up 15% this quarter, so pretty healthy step up. I don’t know if the comp got easier or I guess as you rolled forward a quarter or did you see a particular pick-up in sales activity that I should read into that?

Ray McDaniel

I’ll let Mark Almeida address that.

Mark Almeida

We had a very strong quarter on sales this past quarter. And we had a number of very good transactions and we had one very, very large transaction as well. So it wasn’t a question of an easy comp so much, it’s just very strong results in the quarter.

Ray McDaniel

And just as we normally comment, we expect to see quarterly volatility and that’s why as you have done, we encourage looking at the 12 month period.

Tim McHugh - William Blair & Company

Okay. And can you give any color on as a stress testing related type of work that you're winning with and I guess particularly you said there is one very large deal. I guess what would -- can you give us any more color on what type of project that is?

Ray McDaniel

Stress testing continues to be good for us and we're doing a lot of business there and we have a healthy pipeline. But just in the normal course business, we're having a lot of continued success. And the large transaction that we did really has nothing to do with stress testing, it's just a very big project that a particular customer is undertaking and they selected us to take the lead on that project.

Tim McHugh - William Blair & Company

Okay. Thank you.

Operator

We’ll go next to Joseph Foresi with Janney Montgomery Scott.

Joseph Foresi - Janney Montgomery Scott

Hi. With the change in the issuance business, has your expectations for the overall environment, particularly on the interest rate side changed at all? I know they’ve dipped down recently. Do you expect them to be lower to exit this year or how should we think about the relationship there?

Ray McDaniel

Yes. I know Linda has some detail on this, but just as an introductory comment. Yes, rates have been lower than we were anticipating earlier in the year. We think they are probably going to remain lower than we had expected through the second half. But that there are number of factors relating to that including the flight-to-quality in respect of some of the geopolitical tensions that we're seeing.

So we're going to be paying close attention to what's happening, not just with benchmark rates but also spreads. And the good news is we continue to see low default rates and that's keeping spreads reasonably tight. Linda, I don't know if you wanted to add some commentary.

Linda Huber

Sure Joe, if you want to look at the U.S. issuance trends I will talk about investments grade bonds and then high yield bonds and average loans just very quickly. The second quarter obviously was very strong investment grade bond issuance and for the first half of the year in the U.S. again we are running about 600 billion of issuance which was up about 10% year-over-year.

For the full year expecting 950 million or 1 billion of investment grade issuance in the U.S. which will be about flat so June was very busy July slows down because of earnings blackouts and we think the technical backdrop remains positive, M&A activity is picking up and running at a pace that we haven’t seen since 2007. And for corporate refinancing high coupon bonds remains very popular. So we expect that the pipeline will come back to strength in August and September.

For high yields bonds, we are running about 200 billion in the U.S. which is about flat year-over-year and expecting little bit less than that in the back half of the year maybe 150 billion full year to be about 330 billion which is flat year-over-year.

A little bit about utility in June because the headlines, and we do see that as Ray said rates remain attractive the pipeline is about average at this point for high yield bolds. And in leverage loans about 270 billion for the first half of the year down 5%. For the full year expecting about 425 billion which is also down 5% year-over-year. Calendar is very active there and majority of that activity is related to M&A issuance and we have seen for the first time from outflows from loans funds but that’s offset by very heavy issuance of collateralized loan obligations, and issuance for the first half there has been $67 billion compared to $46 billion for the same time last year.

And the pipeline continues to be as I said above average due to that LBO and M&A activity in leverage loan. So, bit of a mixed bag and the traditional sort of July earnings black out lag here, but rates remain pretty attractive and as Ray said default levels are low.

Joseph Foresi - Janney Montgomery Scott

Got it, very helpful. And then just you went through a very slow and also helpful discussion of cost and expenses and how they are looking for the going forward. But are ICRA and WebEquity diluted margins in the short-term and do you expect to have them step up corporate average if that is so? I mean, I understand that the expenses versus the revenues are a little bit mix in those businesses, but I'm trying to get a feel of what exactly dilution is from them if any? And then how long you would take to get that can be average?

Linda Huber

The EPS impact for this year, yes equity is a little bit dilutive. You might recall that about $0.03 and WebEquity about $0.02 and again you might want to think about how you want to factor that in.

Joseph Foresi - Janney Montgomery Scott

Okay. And just so, am I making the assumption that we're going to get them up to corporate average over a extended period of time?

Ray McDaniel

From a margin perspective, first of all WebEquity is a small business. It's a business we think is a nice fit, but it is small and it will not be margin dilutive to Moody's Analytics. ICRA while it is an attractive business does not have the same margin that Moody's Investor Service does. So there will be a modest drag from ICRA, but again it is a nicely profitable business.

Joseph Foresi - Janney Montgomery Scott

Got it. Okay. Last question from me, obviously some news out regarding the regulatory environment for your new competitors, any update you can give on that or any thoughts that you think are appropriate. Thank you.

Ray McDaniel

Not much to say all we know is what has been discussed in the public markets. So really nothing to add to what you would have already read.

Joseph Foresi - Janney Montgomery Scott

Thanks.

Operator

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

Andre Benjamin - Goldman Sachs

Thank you good morning. Two quick questions, first how much of the second quarter reported revenue growth in corporate finance was driven by more of the volume growth and high yield in investment grades which we can observe versus other things that are a little bit harder for us to see publicly like pricing or new customers or additional revenue from other stuff like monitoring?

Ray McDaniel

Yes. I mean obviously volumes were strong in the second quarter. But we also did have a pickup in other non-issuance related components of revenue that includes price. It includes monitoring fees which relate to relationships that we have grown new rating relationships that we have grown in the prior year and earlier in this year. And the pipeline of new rating relationships has remained strong both in the U.S. and in Europe this year. So it's a multi fast did growth story for the corporate sector.

Linda Huber

Andre, it's Linda. The specifics on the corporate finance area investment grade revenue was $63 million, which is 20% of the whole line and that was up 5% from last year. Third grade bonds $77 million with 244% of the total corporate line. That was up 36% from last year's 57 million. Bank loans about $76 million from last year's $53 million represents about 24% of the total line and that’s up 43% from last year. And other accounts about $105 million up from $93 million last year, that’s 33% of the total line and up 13% from last year.

What we see here is a pretty wide hot speculative grade market and as we go into the second half we’ve tone that down a touch because this is really remarkable speculative grade issuance. And we expect that favorable conditions will continue, but we will take to this degree and this strong, we have to think about that a little bit for the back half of the year. And I don’t know if Ray or Michel would like to comment further on that.

Ray McDaniel

No, the only comment I would add is just reinforcing Linda’s remarks. We don’t see anything on the horizon that looks like it’s going to have a chilling effective on the market but the likelihood that it’s going to remain at the pace we saw in the second quarter in spec rate. We don’t think that’s the central case. Michel if you have anything to add please do?

Michel Madelain

No nothing to add Ray.

Ray McDaniel

Okay. Thank you.

Andre Benjamin - Goldman Sachs

Thanks. And a quick follow-up a little bit longer-term. We have run some numbers on some of representative U.S. companies and see that leverage ratios as measured by net debt to EBITDA kind of at the lowest level in about 15 years. I guess as you talked to CEO customers do you feel like we will likely remain and more of a structurally lower then for leverage going forward or could we potentially be at something like a cyclical trough where all the risk erosion and political issues could go away and as the economy improves we can actually see people meaningfully adding leverage again?

Ray McDaniel

Yes. I mean certainly I think what we’re seeing from a geopolitical standpoint REITs caution. But beyond that, looking longer term and assuming that is resolved in some non-catastrophic way. Look, we look primarily I think to economic momentum around the world and the business confidence associated with the strong economic momentum and what that does for borrowing for M&A and capital expenditure as oppose to the refinancing that we've been seeing. So that's if there is a re-leveraging, I think it's going to come off of greater global business confidence.

Linda Huber

Yes, Andre, it's Linda. We saw pretty strong durable good number this morning, which is encouraging. The CapEx picture has been mix though, it has strengthened a bit, but it's very sector specific. So we probably peaked in terms of CapEx additions for the natural resources industry that commodity prices have come up. But for other industries there sort of looking to increase their CapEx spending. So overall it's moved a bit, but perhaps not as robustly as it could and we'll see it's a historical goods order number lease that up which would be helpful for us.

Andre Benjamin - Goldman Sachs

Thank you.

Operator

We'll go next to William Bird with FBR.

William Bird - FBR

Good morning. I was wondering if you can talk a little bit about Europe, what kind of trends are you seeing? How is the pace of dissent remediation going? And then secondly could you talk about just your plans for deploying the access 450 million that you raised in July? Thank you.

Ray McDaniel

Right. Michel would you like to comment on what you're seeing in Europe.

Michel Madelain

Yes. Well, I think we continue to see the trends we describe in prior quarters. Dissent remediation continue to run through, we see new issues coming to market, we see high level of activity across the board, basically and specially around high yield basically and also bank loans which is really the speculative way segment of the marketplace. So nothing is putting that in question, as you know that ECB is launching a program of targeted LTRO program which will provide liquidity to banks that are lending to the market place. So that will provide some more lending capacity of the part of the banks, but we don’t expect that to really derail that momentum.

Ray McDaniel

Thanks Michel.

Linda Huber

And Bill it’s Linda. You are right we did a $750 million bond deals while back and $300 million of that we are looking to redeem a private placement 10 year piece of paper that comes due in 2015 with a 4.98 coupon on that. So once we do that the rest the remaining 450 will be used for general corporate purposes, the usual stuffs working capital, CapEx, acquisitions repayment of other debt and share repo.

Interestingly on the deal that we did we had a 5 year piece and a 30 piece, we were trying to access markets and investor that we hadn’t been able to achieve before. The deal was massively oversubscribed. And we were able to tighten the pricing. We were very, very pleased about that and pleased that we were able to access the debt markets at rates which has been very attractive for us. So we are just doing some management here in terms of how we are handing and in fact as compared to one of our competitors maybe even a 100 basis points tighter. So we are pleased with how all that’s going.

William Bird - FBR

And Linda could you give us the actual number on the incentive comp accrual in the quarter?

Linda Huber

Yes, hang on just one second Bill, while we find that. So, incentive compensation for the second quarter was $44 million up from $34 million last year, so about $10 million increase. Stock-based compensation moved up as well, $20 million versus $16 last year or $4 million heavier. And salaries and benefits were $238 million versus $210 million last year, which is $28 million heavier or 13% higher. So, that's the incentive compensation view.

And we’ve been asked a lot about that incentive compensation. The main driver of incentive compensation is really operating income. Keep in mind, operating income was up 17%. So if we are able to put up good operating income, we do increase our incentive compensation pool. Note that we do not get paid incentive compensation on that ICRA gain, that is not included, we have to have real results in order for us to have the incentive compensation pool move up.

So, for the rest of the year, because we probably get that question, we had asked people to look at maybe $35 million a quarter for incentive compensation. And it's probably better if you pump that up to more like $40 million per quarter for the rest of the year. Does that help?

William Bird - FBR

Great. Thank you. Thanks a lot.

Operator

We’ll go next to Manav Patnaik with Barclays.

Manav Patnaik - Barclays

Yes, hi. Just one clarification on all the cost detail that you gave out. So the $0.05 impact from the deal cost and then the $0.04 from the financing, that was just for the second quarter and then for the remainder of the year, call it another $0.06 from the acquisition cost. Did I get that right?

Ray McDaniel

The $0.05 and the $0.04 are built into our full year outlook of $3.90 to $4.

Manav Patnaik - Barclays

Okay, fine. That's great. And then Linda, like you talked about different components in corporate finance, just in structured finance, can you just talk about the CLO market, I guess seems like what's driving most of the growth and how that breaks out in just some commentary there?

Linda Huber

Yes sure. I’ll go ahead and do the other two sectors after that as well because we usually get asked. So let's start with structured. So structured for the quarter is $110 million; asset backed securities about $244 million, it was actually down a little bit from last year's second quarter, about $25.5 million and after tax are about 22% of structured line.

RMBS about $20 million, up from last year's about $19 million and about 18% of the line. Commercial real-estate is at $30 million, about flat to last year’s $30 million as well and that's 27% of the structured line. And structured credit, you are right about this Manav is $37 million that's 34% of the structured line; it's up from $22 million last year or about a 70% increase. So structured credit CLOs have been very helpful to us on the structured finance line.

Would you let me just go ahead and go through FIG and…

Manav Patnaik - Barclays

Yes sure.

Linda Huber

Okay. So FIG was $92 million for the quarter and that was up from $84 million last year. So banking is about $64 million, up from 57 last year, it’s about 11% increase and banking close to 70% of the FIG line. Insurance $24 million, up from $23 million last year, pretty flat it's about 26% of the whole FIG line and managing investments about $4 million, pretty flattish from last year and that's only 5% of the big line. PPIF, we did $98 million in the second quarter and public finance and sovereigns about $40 million, that’s actually down from last year’s $43.5 million. And PFG and sovereigns represents 41% of the PPIF line. Structured munis, $4.3 million, exactly flat to last year and that’s 4% of the line. And project and infrastructure add about $54 million, up from last year’s $45 million, it’s a 20% increase and that represents 55% of the PPIF line.

So, you can see we had good growth particularly as we mentioned in the script in the project and infrastructure line. The structured credit CLO line, banks a little bit weaker than perhaps because of the nature of the issuance, the big banks issuing and then we’ve talked about the very strong results in the spec grade lines in corporate.

Manav Patnaik - Barclays

Okay, thanks a lot. And then just one more on the cash balance, the percentage held offshore ticked up nicely at least from what I had for the full year ‘13, clearly you guys are raising some debt in the U.S. and so forth. But just any thoughts around how you’re going manage that international cash?

Linda Huber

Sure. Your observation is right. For the second quarter, we had about $600 million of cash in the U.S. at the end of the second quarter, which keep in mind was before we did the bond deal. And internationally we had about a $1.4 billion, $1.368 billion of international cash, that’s 70%. So we did the U.S. bond deal of course to help our U.S. cash position. And we’ve run a little bit heavier in terms of cash being generated by the international part of the business. So, how will we manage it? We manage it to support international acquisition opportunity. And we are happy with the balance that we have, given that our business is about 50% outside the U.S. So we are fine with the balance that we have and we have plenty of U.S. cash to support our dividends and our share buybacks and liquidity needs that we have in U.S. as well.

Manav Patnaik - Barclays

Okay. Thanks a lot guys.

Linda Huber

Sure.

Operator

We'll go next to Peter Appert with Piper Jaffrey.

Peter Appert - Piper Jaffrey

Thanks. So Linda, just staying on structured finance for a sec. I think this is the best quarter you guys have done for revenue perspective since the financial crisis. I’m wondering if you guys read anything into this in terms of beyond CLOs or we have an inflection point in terms of life in the structured finance market.

Ray McDaniel

Peter, it's Ray, I'll start. We obviously were very pleased with structured for the quarter. It is really being driven by the CLO market both in the U.S. and in Europe. We’ve seen growth in some other areas, but that really is the dominant driver of growth in CLO and structured at this point.

The commercial real-estate sector has been pretty good, but we still are not seeing a lot of activity in RMBS and covered bonds in Europe, student loans, some of the areas that we saw pre-financial crisis are still not showing much of a pulse.

So I think that’s going to moderate the rate of growth in structured finance although I think we are going to continue to see growth in that area. But I would not anticipate any kind of explosive growth coming out of structured at this point.

Linda Huber

Peter, as I noted RMBS is actually been down year-over-year and I think it was noted in this morning’s economic results but new housing sales were down. So we continue to see perhaps a weaker housing market than might we hope for. Around the world though we do have governments starting to talk about the need to get the securitization market for housing, for residential mortgaged backed securities functioning again and that is something that is those conversations have also taken place in Europe and perhaps Michel might want to comment a little bit on covered bonds which we also include in this line and RMBS potential in Europe as well. Michel, did you want to say a few words?

Michel Madelain

You are right I think there is a lot of discussion in Europe about restarting the securitization market trading the right condition to do the ECB, the Bank of England and number of governments and policy makers are functioning on that. The reality is that as Ray said, it remains a very anemic market at the moment covered bond also is facing the challenge of the federal banks have very ample source of funding and actually ECB is adding to that. So I think the politically and there is a lot of discussion around that but the dynamics of the markets remains behind what we have seen in the past and the CLO is similar to the U.S. has been really the major driver of the improvement together with better activity in RMBS actually in Europe.

Peter Appert - Piper Jaffrey

Okay, that’s helpful.

Ray McDaniel

Thanks Michel.

Peter Appert - Piper Jaffrey

And Linda can you remind me the relative profitability of the different asset classes for you guys I think the impression in the market is that high yield issuance is generally going to be more profitable for you probably structured financed as well. So, I'm wondering if some of your conservatism and with regard to the second half guidance like the function of just this mix issue and an expectation of weaker trends and high yield.

Linda Huber

Peter, we price a little bit higher for speculative grade ratings and that's because that is a tremendous amount of credit work required in bringing those ratings to the market. So, whether it's more profitable is a different question and we try to run profitability pretty similarly across all of our business months. So, I'm not sure, it's much more profitable.

Structured finance is not more profitable, that's bit of an urban myth, we've had it in place for many years here at Moody's. So I think the issue in the back half of the year and I'll let Ray comment on this, it's just really what we are thinking about regarding speculative grade activity. And as we said, we've taken guidance up, but on the spec rate front, we had a white hot second quarter and we're cautious, as we're usually cautious about whether that pace can continue. And I'll let Ray correct….

Ray McDaniel

No, the only thing I would add is which I think you already know Peter. Our structured business and the spec rate business are more transaction based business as opposed to recurring revenue businesses. So we are, we do enjoy the benefit of high volume periods, but there is a bit more volatility when issuance activity slows.

We see much less of that in investment grade, in financial institutions, but it is the characteristic of the spec rate and structured market.

Peter Appert - Piper Jaffrey

That's helpful. Thanks very much.

Operator

We'll go to next to Craig Huber with Huber Research Partners.

Craig Huber - Huber Research Partners

Yes hi there guys. Few questions I guess first, your total headcount of your company what is it today and what percent of that's up from a year ago?

Linda Huber

Sure, the answer excluding the acquisition Craig is that headcount is up 10% year-over-year and if you include the acquisitions, I think we've got in the press release where we're running approximately 9,500 people now. Most of our acquisitions have been in the revenue generating businesses and we're being very careful in the share of services part of the business to ensure that we have our more routine functions in lower cost jurisdictions.

So headcount is up to about 9,500 with everything considered without the acquisitions we had about a 10% increase.

Craig Huber - Huber Research Partners

And secondly, you gave a lot of detail on cost, but I am just curious back in the second quarter were there any one time costs you can quantify for us during the quarter, any deal related transaction costs could you may be quantify to stuff like that?

Linda Huber

Craig, we don't really want to get into that. I think we had talked about looking forward there is sort of $0.05 there from acquisitions and deal cost and $0.04 from the financing costs. We don't want to tell the analysts what to think if you want to think about that as the part of the run-rate please do that, but we're very cautious to make sure that we give the GAAP numbers and give those first so that those are well understood.

So I don't think we want to get into particular sense associated with various deals.

Craig Huber - Huber Research Partners

Was there anything else Linda that you want to highlight other than this $0.05 and $0.04 that made you keep your full year EPS guidance the same?

Linda Huber

I think that’s most of it Craig. We will see where we get to or the next time I’ll be speaking you markets at Investor Day September 30th and we’ll take another look at that time, but from a GAAP perspective we do have include these costs. So again, the analysts can choose a different path if that’s what they prefer to do. Ray, I don’t know if you have any color you want to add.

Ray McDaniel

No.

Craig Huber - Huber Research Partners

Sorry, a couple more if I could, the WebEquity revenue, so can you just quantify that for us for modeling purposes sort of small?

Linda Huber

Right. I’ll turn it over to Mark, I am not sure we’d disclosed that.

Mark Almeida

Yes. We haven’t really talked about WebEquity in any detail because that wasn’t a second quarter event, just closed last week.

Ray McDaniel

And it is -- as I said before we like the company quite a bit, we like its fit in Moody’s analytics and the position it gives us with the smaller U.S. banks which has not been an area that we have been as involved as historically. So their loan origination solutions for smaller bank is a very nice fit we think strategically, but again it’s a small company. So, the materiality of the revenue is not there.

Linda Huber

Craig one other thing that we should note on the run rate to the extent that we said expenses the estimated tax rate is 33% and in the first half of the year we ran a little bit lower. So by math it’s going to potentially run a little bit higher in the back half of the year. So, in the first half of the year we had a resolution of some international tax matters and in the second half we are expecting somewhat higher rate absence any other of these individual resolved matters. So we do expect for the tax rate to average 33% for the year. But again it would run a little lower in the first half so that means by the map we would have to run then higher in the back half. So make sure that you factor that in as well.

Craig Huber - Huber Research Partners

Also would ask you professional services. What was the revenue growth there excluding the Amba transaction?

Ray McDaniel

It was almost entirely from the acquisition.

Craig Huber - Huber Research Partners

Okay. I guess my last question if I could sneak this in. Your main competitor S&P always has been in the news a lot here last 48 hour with their wells notice. I'm just curious Ray or Linda or the ones who answer this, how often does a company like yours have to make significant methodology or criteria changes to tier ratings methodology, that’s something that it seems we focus and with that S&P right now I'm just curious if you just talk a little about that how often you’ve to make it the material way?

Ray McDaniel

I don't think there is a -- I mean we review our methodologies annually. But there is not a schedule for changing methodologies. And frankly that is really dependent on the ratings performance, how well our ratings accuracy is being measured and external events. If there are changes in regulation, in some industry structure that dictates or review the methodology we obviously will do that. But I don't even know what the pace of change in methodologies has been historically other than we review them regularly.

Craig Huber - Huber Research Partners

Just curious you suggest is it’s pretty rare do you have change the criteria methodologies?

Ray McDaniel

No, I mean, we've changed methodologies in some sectors this year and we did so last year as well. And minor changes are more common than material changes, but as I said really we are not trying to set a pace for change so much as making sure that we are responsive to what’s happening in the market and what we think is the ongoing quality of the methodologies that we are using.

Craig Huber - Huber Research Partners

Great, thank you.

Operator

We will go next to Doug Arthur with Evercore.

Doug Arthur - Evercore

Yes great. Just one question, clarification Ray. On the $12 million that your second to recognize from ICRA in the fourth quarter, is that in the revised MIS guidance or is that extraneous to that?

Ray McDaniel

That is in the revised MIS guidance.

Doug Arthur - Evercore

Okay, great thank you.

Operator

We will go next to Patrick O'Shaughnessy with Raymond James.

Patrick O'Shaughnessy - Raymond James

Hey good morning. So my first question is where do you think we are in terms of M&A being a meaningful contributor to bond issuance? And I asked because although we have seen M&A pickup, the commentary from a lot of the advisory shops is we are seeing announcements right now, but a lot of deal closings are late this year, they are going to be 2015 events. And so do you think there is still a lot more room to go in terms of bond issuance related to M&A?

Ray McDaniel

Yes I think there is potentially. And I take your point that the announcements predate debt financing and so we are pretty optimistic about what we anticipate on the M&A front and obviously we will keep our eye on that.

Linda I don’t know if you have anything else you wanted to add to that.

Linda Huber

Yes. That’s one of the factors Patrick that encourages us about the back half of the year and also next year as well. If you look in our investor deck there is a chart in there that co-relates M&A issuance to bond issuance which might help you out. And as we said, M&A deals have been running at the fastest pace for the first half since 2007, it's been quite a strong surge. And obviously companies are aware of low interest rate and also record high equity prices. So that creates a really terrific deal environment. And we've been talking about this now for quite a while, but we are finally seeing it which is terrific.

But the point that you make that some of this financing will spill over into 2015 is correct. And that will be helpful to us next year as well.

Patrick O'Shaughnessy - Raymond James

And then if you can remind me, where does M&A financing typically fall? I would imagine a lot of the sponsored financing is going to be high yield. But the corporate M&A, is that mostly investment grade or is it a mix, where is that historically fallen?

Linda Huber

You are correct that most sponsored deals are generally high yield deals and they can either fall in bank bond deals or loan deals. Private equity firms can even kind of run it up to the day, the financing, the size what the balance is going to be between those two. And for big corporate, those probably would tend toward investment grade issuance. You are right about that, particularly the strategic as they are acquiring, that would generally be investment grade financing. I don’t know if Ray wants to add anything.

Ray McDaniel

No, I was just going to say, the financials would tend towards the spec grade and the strategics would tend towards the investment grade.

Patrick O'Shaughnessy - Raymond James

Alright, that's helpful. Thank you. And then lastly from me, how is the tone of your interactions with the SEC been recently, if you can provide any commentary there? And I asked because the SEC's [important] Director has made public comments about they might be more active with their oversight of rating agencies. And just want to know, is anything that you said has been reflected in some of the tone of your interactions with the SEC.

Ray McDaniel

We, as you would imagine, we have frequent contact with the SEC staff through their inspection and review procedures, the office of credit rating agencies. I would characterize those interactions as being constructive. There are things that the SEC expects us to do from a process standpoint, from a reporting standpoint and we do everything we can to meet those expectations. But I would not characterize the relationship as half stone in anyway, I think it is constructive.

Patrick O'Shaughnessy - Raymond James

Alright, great, thank you.

Operator

We'll go next to Edward Atorino with Benchmark.

Edward Atorino - Benchmark

Could you review the numbers you gave on the bank loan ratings? That's a category that sort of exploded in recent years and what's now pretty good chunk of business. Can you give me on the percent basis something like that year-to-year growth, margins on the business?

Linda Huber

Sure Ed, I'll give you the growth, we’re less interested in talking about margins. But last year bank loans were $53 million of revenue for us and this year it's close to $76 million. So it’s an increase of almost $23 million or 43%. So you are right that line is a healthy contributor to our corporate finance business. And as Ray said, a lot of that is driven by merger and acquisition activities. And we also note that because investors like floating rate paper right now given their concerns about potential interest rate increases, bank loans are really where the action is primarily in the U.S. but also to some degree in Europe. So you are right. Those are the high points.

Ray McDaniel

Yes. That Ed…

Edward Atorino - Benchmark

I think banks big enough to do.

Ray McDaniel

I would just underscore the comment that we are seeing strong activity in Europe in the bank loan area. That is a line that in years past I would not have highlighted because it wasn’t large enough to be more exciting but it has come on very strongly and is a nice part of the corporate business now.

Edward Atorino - Benchmark

Is it totally separate or is it sort of displacing traditional issuance if you know what I mean?

Ray McDaniel

I think it’s really part of the disintermediation story…

Edward Atorino – Benchmark

Got you, yes.

Ray McDaniel

The rating on the bank loans makes it easier to syndicate and transfer those loans. And so yes there is a trade-off between rated bank loans and bonds, particularly spec rate bonds. And as Linda said, depending on appetites for fixed rate versus floating rate paper and the decisions about whether to enter the bond market or remain in a banking relationship by a corporate, drives that mix over time.

Edward Atorino - Benchmark

You may have given this, are they priced about the same as bonds or premium or discount in terms of your rate that you charge?

Linda Huber

Speculative grades area is priced a little bit higher, Ed…

Edward Atorino - Benchmark

So they went to speculative grade area, yes got you.

Ray McDaniel

For the most part, yes.

Linda Huber

Yes.

Edward Atorino - Benchmark

Thanks very much.

Operator

And we’ll go next to Bill Warmington with Wells Fargo.

Bill Warmington - Wells Fargo

Good afternoon everyone. So, a question for you. Now that your operating margins have reached the mid 40s, I think you’ve made some comments in the past about trade-off between investing that incremental profit going forward into revenue growth versus margin expansion, if you could share your thoughts with us on that.

Linda Huber

Sure. I’ll take a crack, it’s Linda, then Ray to take a shot at it as well. We are executing on margin expansion here at Moody's and as I read in the prepared remarks the operating margin for the first quarter was 47.1% that was up 70 basis points from last year's quarter 46.4%.

So again, this is not a marketing campaign and not promises, we are expanding our margin and 70 basis points so I would committed pretty healthy year-over-year. We have said that over the mid to longer term we were looking to the end of low to mid-40s and we continue to be happy with that view, we do want to invest back in our businesses, as you can see our businesses are performing really well, we're very please with the growth rates were putting up. And our shareholders are 80% growth and they've told that they want top-line growth above everything else, but we are able to have margin expansion as well. But I think we feel pretty happy about this balance and our shareholders do as well from what we can see and Ray may have some other thoughts.

Ray McDaniel

No, just obviously it's going to be influenced by mix the pace of growth with Moody's Analytics versus Moody's Investor Service. And the pace of growth inside the U.S. versus outside the U.S., particularly whether it's in develop markets or emerging markets. But where we see opportunity for top-line, we're going to go after that and we're still going to be prudent in managing the margin, but we want the top-line growth.

Linda Huber

Yes. We'll talk a little bit more about this when we get to Investor Day quite frankly we haven't started our process yet to think about what if anything we might to say or change at Investor Day, but potentially we can talk about that. But we would note we're running this business very efficiently and we are very pleased with the progress we have been able to make on our margin line. So I think that pretty much covers it.

Bill Warmington - Wells Fargo

So a question for you on Copal on the knowledge process outsourcing side can you just comment on what you are seeing for the pace of outsourcing at the U.S. banks so that you are seeing that increase, decrease, stay the same?

Linda Huber

Copal Amba has very nice margins and Moody’s like growth rate is what we have said in the past. We feel that we are in the right place at the right time having very high end knowledge process outsourcing capabilities. And I think it would be fair to say there is very active dialog going on with all of just about all of the U.S. banks who are looking to cut cost. You can see those stories everyday in the press and also looking to increase their return on equity. So it is a terrific business for us to have but particularly at this point of the cycle I don’t see if Ray or Mark want to say anything else.

Mark Almeida

I think that about does it from my perspective.

Bill Warmington - Wells Fargo

Thank you very much, appreciate it.

Linda Huber

Sure.

Operator

And that will conclude our question-and-answer session I would like to turn the conference back over to Ray McDaniel for any closing or additional remarks.

Ray McDaniel

Okay, just quickly before we end the call, I want to announce that we will host our annual investor day on Tuesday, September 30th here in New York. Attendance is by invitation only and the event will be webcast. Further details will be provided on our Investor Relations website ir.moodys.com as get closer to the event.

So thank you for join the call today and we look forward to speaking to you again at investor day and then in October.

Operator

This concludes Moody's second quarter earnings call. As a reminder, a replay of this call will be available after 4 pm Eastern time on Moody’s website. Thank you.

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