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Moody's Corporation (NYSE:MCO)

Q3 2012 Earnings Call

October 26, 2012 11:30 am ET

Executives

Salli Schwartz - Global Head, Investor Relations

Raymond McDaniel - President and Chief Executive Officer

Linda Huber - Chief Financial Officer

Michel Madelain - President and Chief Operating Officer, Moody's Investors Service

Mark Almeida - President, Moody's Analytics

Analyst

Peter Appert - Piper Jaffray

William Bird - Lazard

Craig Huber - Huber Research Partners

Manav Patnaik - Barclays

Doug Arthur - Evercore

William Warmington - Raymond James

Operator

Good day, and welcome ladies and gentlemen to the Moody's Corporation third quarter 2012 earnings conference call. (Operator Instructions) I will now turn the conference over to Salli Schwartz, Global Head of Investor Relations. Please go ahead.

Salli Schwartz

Thank you. Good morning everyone. And thanks for joining us on this teleconference to discuss Moody's third quarter results for 2012. I am Salli Schwartz, Global Head of Investor Relations. Moody's released its results for the third quarter of 2012 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 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, 2011, 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.

Raymond McDaniel

Thank you, Salli. Good morning and thank you to everyone for joining today's call. I'll begin by summarizing Moody's third quarter 2012 results. Linda will follow with additional financial detail and operating highlights. I will then finish with several comments on the current regulatory environment and our outlook for the remainder of 2012. After our prepared remarks, we'll be happy to respond to your questions.

Third quarter revenue of $689 million, increased 30% over the prior-year period, and was the highest quarterly revenue Moody's has achieved in its history. We benefited from double-digit revenue growth in all lines of business at MIS, with particularly strong performance in corporate finance, as well as continued strong growth in all areas of Moody's Analytics.

Expenses for the third quarter were $419 million, a 25% increase from the third quarter of 2011. Operating income for the third quarter was $270 million, a 38% increase from the prior-year period. Adjusted operating income for the third quarter was $294 million, up 36% from the same period last year.

Diluted earnings per share of $0.81 for the third quarter, which included a $0.06 legacy tax benefit, increased 42% from the prior-year period. Excluding the legacy tax benefit in the current quarter, diluted earnings per share of $0.75 for the third quarter of 2012, were up 32% from the prior-year period. Based on strong third quarter performance, we are raising our 2012 EPS guidance range to $2.95 to $3.05, or $2.89 to $2.99, excluding legacy tax benefit in the third quarter.

Turning to year-to-date performance. Revenue for the first nine months of 2012 was $2 billion, a 15% increase from the first nine months of 2011. Revenue of Moody's Investor Service was $1.4 billion for the first nine months of 2012, an increase of 14% from a year ago.

Moody's Analytics revenue of $609 million was 19% higher than the prior-year period. Expenses for the first nine months of 2012 were $1.2 billion, up 16% from the prior-year period. Operating income of $817 million increased 14% from $716 million for the same period of 2011. Diluted earnings per share of $2.34 for the first nine months of 2012, which included the $0.06 legacy tax benefit increased 14% from the prior-year period.

I'll 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 30% to $689 million. U.S. third quarter revenue increased 37% to $375 million, while revenue outside the U.S. grew 22% to $313 million and represented 45% of Moody's total revenue, down slightly from 48% in the year-ago period. Recurring revenue of $346 million represented 50% of the total, down from 59% in the prior-year period.

Looking now at each of our businesses, Moody's Investors Service revenue for the quarter was $474 million, up 35% from the prior-year period. Foreign currency translation unfavorably impacted MIS revenue by 4%. U.S. revenue for MIS increased 45% over the prior-year period. Revenue outside the U.S. increased 21% and represented 39% of total ratings revenue.

Global corporate finance revenue in the third quarter increased 71% from the year-ago period to $221 million. Revenue was up 81% year-over-year in the U.S., primarily driven by issuance in the speculative grade market, including high-yield bonds and bank loans. Investment grade issuance was also strong in the U.S. The corporation is taking advantage of historically low rates. Outside the U.S., corporate finance revenue grew 53%, primarily reflecting increased investment grade issuance across all regions.

Global structured finance revenue for the third quarter was $93 million, 14% above the prior-year period. In the U.S., revenue increased 27% year-over-year, primarily due to strong issuance of commercial mortgage-backed securities and collateralized loan obligation. International structured finance revenue was essentially flat to the prior-year period.

Global financial institutions revenue of $83 million increased 15% from the same quarter of 2011. U.S. revenue was up 22% as compared to the third quarter of 2011, primarily driven by increased insurance company issuance, corporate financing and debt-funded M&A activity. Non-U.S. revenue was up 10%, primarily due to increased issuance in Latin America and Asia, prompted by refinancing of short-term debt, credit expansion due to economic growth, and reduced lending by European banks in this regions.

Global revenue for the public, project and infrastructure business rose 13% year-over-year to $77 million. Revenue was up 11% in the U.S., primarily due to gains in public and infrastructure finance, while non-U.S. revenue increased 16%, reflecting growth in European infrastructure finance.

And turning now to Moody's Analytics. Global revenue for Moody's Analytics of $215 million was up 20% from the third quarter of 2011. Slightly more than half of the growth was from the late 2011 acquisitions of Copal Partners and Barrie & Hibbert. Excluding the impact of foreign currency translation, revenue grew 21%. U.S. revenue grew by 14% year-over-year to $86 million. Non-U.S. revenue increased by 23% to $129 million, and represented 60% of total Moody's Analytics revenue.

Globally, revenue from research, data and analytics of $124 million increased 7% from the prior-year period and represented 58% of total MA revenue. We continue to see demand for credit research via our CreditView offering as well as new sales of our other analytic data and analytics product.

Revenues from enterprise risk solutions of $64 million grew 26% from last year, reflecting the December 2011 acquisition of Barrie & Hibbert, and strong growth in products and services that support the regulatory compliance needs of our financial services customers. Due to the variable nature of project timing, enterprise risk solutions revenue remain subject to quarterly volatility. Professional services revenue grew 97% to $27 million, reflecting the acquisition of a majority stake in Copal Partners in November 2011.

Turning now to expenses. Moody's third quarter expenses were $419 million, an increase of 25% compared to third quarter of 2011 or a 27% increase, excluding the impact of foreign currency translation. Higher accruals for incentive compensation and Moody's profit sharing plan, reflecting a stronger full year outlook accounting for about half of the year-on-year expense growth.

More specifically, we recorded additional incentive compensation in the third quarter to align with stronger than expected year-to-date financial performance, and the increased full year outlook as reflected in our updated guidance. Therefore, incentive compensation for the third quarter was $59 million versus $28 million in each of the first and second quarters.

Additionally, in the third quarter, we recorded approximately $8 million of profit sharing expense, given the increase in our EPS guidance. As you may remember, our 2012 compensation plan were profit sharing, when our pro forma EPS grows more than 10% from the prior-year period. Our current pro forma EPS guidance results in a growth of over 10% from 2011's pro forma EPS, whereas our guidance at the end of the second quarter did not.

Excluding growth in incentive compensation and profit sharing, expenses for the third quarter were 15% higher from the prior-year period, primarily due to increased headcount from growth in our existing businesses and from acquisitions in late 2011. Moody's reported operating margin expanded 230 basis points year-over-year from 36.9% in the third quarter of 2011 to 39.2% for the current quarter. Adjusted operating margin was 42.7% for the quarter, up from 40.5% for the same period last year.

Our effective tax rate for the quarter was 29.5% compared with 28.5% for the prior-year period. The increase in the effective tax rate is primarily due to lower taxes in 2011 resulting from the settlement of state tax audit, partially offset by the favorable impact of foreign tax planning initiatives in 2012.

Now, I'll provide an update on capital allocation. During the third quarter of 2012, Moody's repurchased 600,000 shares at a total cost of $25 million and issued 1.2 million shares under employee stock-based compensation plan. Shares outstanding as of September 30, 2012, totaled 223 million, essentially flat from the year earlier.

As of quarter-end, Moody's had $700 million of share repurchase authority remaining under its current program. We now expect full year 2012 share repurchases of approximately $225 million, subject to available cash, market conditions and other ongoing capital allocation decisions.

As of September 30, Moody's had $1.7 billion of outstanding debt and $1 billion of additional debt capacity available under our revolving credit facility. Cash and cash equivalents were $1.5 billion as of September 30, 2012, an increase of $664 million from a year earlier, largely due to our $500 million bond deal in August this year. As of September 30, 2012, approximately 52% of our cash holdings are maintained outside the U.S.

For the first nine months of 2012, free cash flow was $461 million, a decrease of $152 million from a year ago, due in part to payments of approximately $121 million related to the settlement of state and local tax matters as well as movement in other working capital accounts. We remain committed to using our strong cash flow to create value for shareholders, while maintaining sufficient liquidity.

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

Raymond McDaniel

Thanks, Linda. I'll continue with comments on our regulatory environment, which has not changed materially since the update we provided during our second quarter earnings call.

In the U.S., the SEC's rulemaking pursuant to Dodd-Frank is pending. The timing is uncertain regarding final rules relevant to NRSROs as well as the feasibility study on establishing an alternative system for allocation rating assignments for structured finance products. Both banking and securities regulatory authorities continue to assess their use of ratings and regulation and are in the process of developing potential alternative measures as replacements.

Turning to Europe, as discussed on previous calls, in November 2011, the European Commission released new regulatory reform proposals for the rating agency industry, commonly referred to as CRA3. The European legislative process requires that the European Parliament and the Council of Finance Ministers of the individual EU member states, each produce its own version of the text, and then enter into discussions with the Commission. During these discussions, the three institutions seek to resolve any differences among their respective drafts, and once the compromised document is produced, put to a vote.

In May and June of 2012, the Council and the Parliament respectively finalized their positions on CRA3. The discussions among the three institutions are underway. However, currently we can't predict the timeline for finalization of CRA3 with any degree of precision. Additionally, it's still too early to assess what the likely outcome of these deliberations will be. As always, we will continue to advocate for globally consistent approaches that aligns with the G20 statements and directives.

I'll conclude this morning's prepared remarks by discussing our full year guidance. Moody's outlook for the remainder of 2012 is based on assumptions about many macroeconomic and capital market factors, including interest rates, corporate profitability and business investment spending, merger and acquisition activity, consumer borrowing, and securitization, and the amount of debt issued.

There's an important degree of uncertainty surrounding these assumptions, especially as they relate to Europe. And if actual conditions differ from these assumptions, Moody's results for the year may differ materially from the current outlook. Our guidance assumes foreign currency translation at end of quarter exchange rates.

As I mentioned earlier, we are raising our 2012 EPS guidance to a range of $2.95 to $3.05 from the previous range of $2.76 to $2.86. Full year pro forma EPS, which excludes the impact of a legacy tax benefit, is now expected to be in the range of $2.89 to $2.99.

Certain components of our 2012 guidance have also been modified to reflect our current view of credit market conditions. For Moody's overall, the company now expects full year 2012 revenue to grow in the mid-teens percent range. Full year 2012 expenses are also now projected to increase in the mid-teens percent range. Full year 2012 operating margin is now projected to be approximately 40% and adjusted operating margin for the year is still expected to be approximately 43%. Our effective tax rate is still projected to be approximately 32%.

As Linda mentioned earlier, we now expect full year 2012 share repurchases of approximately $225 million, subject to available cash, market conditions and other ongoing capital allocation decisions. Capital expenditures are now projected to be approximately $40 million to $50 million, and we still expect approximately $100 million in depreciation and amortization expense. Incremental compliance and regulatory expense is now projected to be approximately $15 million.

For the global MIS business, revenue for the full year 2012 is now expected to increase in the mid-teens percent range. Within the U.S., MIS revenue is now expected to increase in the low-20s percent range, while non-U.S. revenue is now expected to increase in the mid-single digit percent range.

Corporate finance revenue is now projected to grow in the mid-20s percent range. Revenue from structured finance is expected to grow in the mid-single digit percent range. Financial institutions revenue is now expected to grow in the mid-single digit percent range. And public project and infrastructure finance revenue is now expected to increase in the mid-teens percent range.

For Moody's Analytics, full year 2012 revenue is still expected to increase in the high-teens percent range. Within the U.S., MA revenue is expected to increase in the high-teens to 20% range. Non-U.S. revenue is now expected to increase in the high-teens percent range. Research, data and analytics is now projected to grow in the high-single digit percent range.

While revenue growth is still projected in the low-20s percent range for enterprise risk solutions, reflecting the December 2011 acquisition of Barrie & Hibbert as well as growth in the base business. Professional services revenue is now projected to grow by approximately 70%, reflecting revenue from the late 2011 acquisition of a majority stake in Copal Partners.

In closing, I'd like to point out a couple of additional positive developments at Moody's. Moody's Investors Service was voted the best credit rating agency in 2012 poll of U.S. fixed-income investors, conducted by the well-known publisher, Institutional Investor. Also this past week, Automatic Data Processing Incorporated, a leading provider of business outsourcing solutions announced that it has chosen to collaborate with Moody's Analytics to enhance widely followed ADP National Employment Report. I am extremely pleased with the accomplishments of both businesses and appreciate the market's recognition of our efforts.

This concludes our prepared remarks. And joining us for the question-and-answer session is, Michel Madelain, the President and Chief Operating Officer of Moody's Investors Service; and Mark Almeida, President of Moody's Analytics.

We'd be pleased to take any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from Peter Appert with Piper Jaffray.

Peter Appert - Piper Jaffray

Ray, based on the guidance, obviously it implies you're seeing some pretty good momentum going into the fourth quarter. Anything interesting or different you can share with us in terms of what you're seeing in the fourth quarter in terms of assets classes or other activity in the market?

Raymond McDaniel

Not a whole lot of additional color I can give you, Peter, other than we continue to see good issuance pipelines, especially in corporate finance, it's obviously in terms of sequential growth from the third quarter. It's going to be difficult to achieve that matter, because the issuance was so robust in the third quarter, and we have some external events, such as the election in a couple of short months, in the fourth quarter. But nonetheless, we still see healthy pipelines. And barring something really unanticipated, I think we believe the fourth quarter will be another good quarter.

Linda Huber

Let me speak a little bit about what we're seeing in pipelines, and then in high yield and leveraged pipeline. First looking at high grade and all this information comes from Morgan Stanley as of this morning.

October, right now, stands at $78 billion of issuance for U.S. high grades and that has been the strongest October on record. The month could break $100 billion, if some big deals that are said to be in the pipeline come next week. But we did experience a warning regarding potential weather delays, which is something new.

For November, expectations are about $70 billion for U.S. hybrid issuance, last year it was $77 billion and the average is about $63 billion, so a little bit above the average for November. For high yield and leveraged, last week we saw $12 billion in high-yield issuance and $9.3 billion in leverage loan, that's still very active. This week we've seen $7.5 billion both in high yield and in leverage loan. October saw $41 billion in high yields and $32 billion in leverage loans. Our Q3 issuance was a record post of financial crisis for the leveraged area, $112 billion in high-yield issuance for the third quarter and $81 billion in leverage loans.

As Ray said, the fourth quarter will not be as strong as the third quarter, but will still be very active. The list of pipeline so far that can be seen for November is $19 billion in high yield and $10 billion in leverage loans. And again, a bit of concern that the first week of November could be low, due to the weather and then following with the elections, and obviously the usual watch outs for anything changing in the European situation.

Peter Appert - Piper Jaffray

I thought it was particularly noteworthy that it looked like the structured finance market seems like it's got some signs of life. Do you have a view on the sustainability or a broadening of that recovery going into '13?

Raymond McDaniel

The structured finance market has been showing year-over-year sequential growth, pretty steady. And I think that's an indication of good, if not spectacular recovery in that market. Commercial mortgage-backed securities, CLOs, the asset-backed market, covered bonds are the more promising sectors.

We still don't anticipate a big rebound in 2013 in the residential mortgage-backed securities area. But I guess the further reason for optimism in that sector is, we seem to be moving away from some of the more regulatory-driven causes of issuance into more real market issuance, and I would take that as a sign of health.

Peter Appert - Piper Jaffray

And I guess all this gets to the big issue, Ray, which is you've enjoyed very robust performance here in the second half of '12, making the comps more challenging in '13. So do you have any early thoughts in terms of how next year could play out?

Raymond McDaniel

We will provide our outlook for 2013 at the beginning of the year, as we do normally. And so I'll refrain from commenting on our outlook at this point.

Peter Appert - Piper Jaffray

One last try then. On the cost side of equation, Linda, the rate of cost growth obviously has been pretty robust this year in the context of all the reasons you guys have laid out. How do we think about that going forward?

Linda Huber

I just wanted to touch on the actual expense growth for this year. And if you look at the Q3 year-over-year, you'll see that last year we had $335 million of expenses, this year in the third quarter we had $418 million of expenses. The vast majority of that change, $59 million or 70% of that, is compensation. So very important to remember that three times this year we've increased guidance, and the main driver of expense increase is in fact the over-performance and the resulting incentive compensation, which results.

Another cause of expense growth is our acquisitions, which added $18 million to the expenses in the third quarter. Now, some of that breaks out into compensation for new people, about $10 million of it. We had the increase in depreciation and amortization and some other non-comp expenses, and then we have a few other things in there. But again, if you look at the expense increase, which is 25% year-over-year, it would be 15% without the incentive compensation.

So probably the best way to think about it is, if we normalize back to more normal performance last year. We try as hard as we can to have expense growth not exceed, and in fact be less than revenue growth. So we'll see where get to, as Ray said, for that in 2013. But we're mindful of expense growth, but this is a very fast growing business and we are continuing to support it.

Operator

And we'll take our next question from William Bird with Lazard.

William Bird - Lazard

Ray, I'm curious, if you think you're seeing much pull-forward effect from fiscal cliff dynamics. And then second, I was wondering, if you could just discuss kind of what needs to happen to buyback more stock?

Raymond McDaniel

I'll start with the pull forward. I think it's clear that we have seen pull-forward throughout this year, including in the third quarter. So firms are looking at the potential for some market uncertainty around the fiscal cliff, potentially as developments occur in Europe. And they are taking advantage of low official rates and good spreads, not historically tight spreads, but good.

That being said, much of the activity that we have seen this year, most of the activity continues to be refinancing, as oppose to issuance for mergers and acquisitions, and business expansion, share repurchase, et cetera. So similar to comments I've made in the last couple of quarters, it has been a very powerful refinancing engine that we have been experiencing over the course of the year. But most of the traditional drivers of debt issuance have really not been very strong this year and so. And that's what we'll be looking for going into 2013, 2014. Linda, do you want to take the share repurchase?

Linda Huber

On share repurchase for the third quarter, as we said, we set $25 million, which is frankly less than we had hoped. We couldn't place our systematic share repurchase program and following our Investor Day, the stock price moved quite rapidly and in fact out of our repurchase zone.

Because we realized that our performance was pretty good, we could not go back into the market opportunistically. So given the revised guidance, we're hoping to get back into share repurchase market here in the fourth quarter and be able to make some progress. But all of that of course is depended on market conditions.

Operator

And we'll continue on to Craig Huber with Huber Research Partners.

Craig Huber - Huber Research Partners

I appreciate you guys breaking out the transaction versus relationship across the categories in your press release, I do have one of those similar question. If you could break apart within your four main categories, like the corporate finance breakout for high yield revenues, bank loans, investment grade by percentages, each of the categories?

Linda Huber

Sure, Craig, we can do that. We were thinking of calling Page 14 in the earnings release, the credit table. But going on to the revenue for corporate finance third quarter of 2012; total dollar corporate finance issuance $220.7 million; investment grade comprised of $55 million of that or about 25%; high yield was $52 million or 24% of the corporate finance total; bank loans $36.5 million or 17%; and other accounts $77 million or 35%. The big movement there year-over-year for the third quarter increased in the high-yield percentage, which basically doubled as a component from last year to this year, Craig. So that's a strong driver as well as the increase in the bank loans line.

Craig Huber - Huber Research Partners

Like we do it for structured finance and financial institutions, et cetera?

Linda Huber

Going on to structured for third quarter: total issuance $93.1 million, up from $82 million of this quarter last year; so asset-backed securities $25.7 million, 28% of the total; residential mortgage-backed securities, which does include covered bonds, $20.3 million, 22% of the total; commercial real estate finance $23.6 million, which is 25% of the total; and derivatives $23.4 million, which is 25% of the total.

Now, the bigger changes there would be, as Ray had noted in the commercial real estate lines, and also interestingly in the derivatives line, we saw more CLO issuance thus far in 2012 than we did in the entire period of 2008 to 2011. In fact, last week, there were five CLOs. So that market is doing quite well.

Let me go on and go to financial institutions group, total revenue for the quarter $82.7 million, banking about $57 million of that or 69%; insurance $21 million, 26% of it; and managed investments $4.6 million, about 6% of the total; and each of those lines are pretty consistent to what we saw last year.

For PPIF, $77 million for the quarter, $38 million in public finance and sovereign, 49% of the total; munis $4.4 million, 6% of the total; and project and infrastructure $34.5 million, about 45% of the total; so everything now looks relatively similar, little bit of an increase in project and infrastructure. Interestingly some of that out of in Europe, we understand that the ECB bond buying has created a bit of a more favorable environment for that type of issuance in Europe. Is that everything you need, Craig.

Craig Huber - Huber Research Partners

On that front, yes. And If I could ask couple of questions please. One on incentive compensation, you mentioned $59 million up from a year ago, or you have the total numbers, $59 million versus $28 million, each of the first two quarters. First off, how does that breakdown between operating costs and SG&A within the quarter please, so that we can get a sense?

Linda Huber

We don't disclose that Craig. Generally commissions go in SG&A, and the incentive comps attracts to what each individual person is doing for the company, but we don't have that split out.

Craig Huber - Huber Research Partners

Can you say if generally is it heavy the one way or the other?

Raymond McDaniel

No, we don't disclose that Craig.

Craig Huber - Huber Research Partners

Then how should we think about that number for the fourth quarter assuming you had, say the mid-point of your new guidance here?

Linda Huber

Sure. We did $28 million and $59 million for the third quarter. We're thinking that for the fourth quarter. If we hit the mid-point of our guidance probably want to look at about $40 million for incentive compensation, which also includes a piece for profit sharing.

Craig Huber - Huber Research Partners

And then I also want to ask you generally, just big picture here, when you guys look at your cost aside from incentive compensation, what else do you consider variable. For example, you do or save an incremental 10 extra debt issuance deals here. What's your variable cost aside from incentive compensation, going over little bit extra top T&E expense, but was there anything else really?

Linda Huber

I think the main majority of it would be what does go through the bonus line. I think, as Ray just said that each additional dollar of revenue, once we've covered the fixed cost would probably still come down to about $0.60 on the margin line, but it depends if there is anything unusual going on for that quarter, Craig.

Raymond McDaniel

And pacing of hiring and whether we dial that back or dial that up, it's also source of flexibility, but to the extent that we think the market conditions are reacting to short term cycles, we would want to continue to invest back in our personnel and our business. And similarly for various kinds of projects, whether they are IT-related or other projects, we have the ability in some areas to accelerate or decelerate in response to conditions.

Linda Huber

Craig, something that might interest you, since yearend last year, excluding our acquisitions we've hired about 330 people, that's 7% growth excluding acquisitions. Interestingly, about 200 of those are for Moody's Analytics, 110 or so are for the rating agency, and only 20 of those are for shared services. So 90% plus of the people that we've added this year are all for the revenue driving part of the business, not for the staff part of the business. So that's kind of give you some idea as to the balance and what we're trying to achieve.

Craig Huber - Huber Research Partners

And my last question please. Just you gave out your the backlogs out there. I'm curious, if you could talk a little bit further about the fiscal cliff issue, the debt issuance that's going to get raised here in Washington D.C. The election, just in general, what's your thought as we get later in this year and into early next year? You sense any hesitation out there in debt issuance front, if things get pushed out, or is that all being pull-forward?

Raymond McDaniel

I do think there is some pull-forward. I think firms are being somewhat opportunistic. The environment is good for issuance right now. And so if you're thinking about issuance in the near-term, this is a good time to be doing it.

Historically, we have not seen any correlation in bond issuance activity based on election outcomes. So that, at least in terms of what we've seen in the past would not be an important determinant of issuance activity going forward. And again, the fiscal cliff is going to inevitably create headlines just as what's going on in Europe creates headlines, and that a very short-term windows week-to-week, where the market participants are feeling more optimistic or more pessimistic. So I expect we're going to see choppiness going into the New Year, but nothing that's going to freeze up markets.

Operator

And we'll go to Manav Patnaik with Barclays.

Manav Patnaik - Barclays

First question, given the hiring statistics you just gave out, is that a good sense of how over the long term, sort of the break out investments being made into the businesses are going to be, just in terms if trying to model where the expense growth is going to come next year and the years forward?

Linda Huber

Manav, looking at my colleagues here who are running the lines of business that generate revenue, I think they are probably pretty happy with those total splits. We have had increases on the staff side for regulatory compliance, IT and other such things. And we hope we've come largely thorough that as we have said on previous calls.

We will continue to add headcounts to drive very strong growth in both of these businesses. But it does take investment in people and resources to achieve double-digit revenue growth, which is pretty unusual in terms of the companies that have been reporting this week. We're feeling pretty good about these numbers, but we will need to continue to invest. And hopefully yes, that will continue to go to the revenue generating part of the business.

Manav Patnaik - Barclays

In terms of the regulatory compliance expansion of the $15 million that you have got or incremental $15 million that you guided for this year, I understand Europe, we don't know yet, but excluding that, does that incremental $15 million imply that, other than that there is not much more incremental expense required for what we already know about?

Linda Huber

I think we've come through some of that, but not all of it. As Ray stated in his prepared remarks, we do not yet have fully final rules on Dodd-Frank from the SEC. So it would be premature for us to say that we're through everything, yet. And as Ray also said, we don't know what the timing or the final shape of the CRA3 will be which makes it pretty difficult to put numbers on things.

Raymond McDaniel

At this point it's been a bit easier for us to plan and spend around the anticipated SEC rules, because we feel we have a better idea of what the final rules are likely to look like. The CRA3 situation in Europe again is more uncertain, in more of a speculative stage in terms of what the final product is going to look like, and how we will have to react at over what timeframe.

Manav Patnaik - Barclays

And one last one, I think you explained why I guess the share buyback guidance came down from what you said last month. I was just curious, if you could explain why the CapEx number is dropping so much?

Linda Huber

Sure. We've basically just re-scheduled some of the things we're planning to do here going into the end of the year. We wait for final Dodd-Frank Rules, and frankly we've held some capacities to deal with that. So it's nothing more than just trying to figure out what has to go first, and what we can do going next year.

Operator

Our next question comes from Doug Arthur with Evercore.

Doug Arthur - Evercore

So two questions, Ray, I'm wondering if you can just update us on CalPERS. There has been a lot of motions and moves between district court and appellate court. And so I'm just interested as to where that stands right now on a timing point of view? Then Linda, there seems like there's a lot of different trends in your financial area right now. Insurance was very strong in the third quarter. Was that a one-off thing or do you see that continuing? And this de-leveraging issue with the banks. Is that likely to keep the banking side of financial institutions slow for a while? So I'm just kind of interested in different trends there.

Raymond McDaniel

Sure, I'll start with CalPERS. There's not a lot new in recent months in the CalPERS litigation. As we mentioned on a prior earnings call, we filed an appeal in the California Court of Appeals seeking reversal of the lower court's decision, which deny our motion to dismiss under this anti-SLAPP statute in California. And the briefing on that appeal is not going to be completed until the end of the year. And after that the court will set a date for all arguments. So currently we don't know when the case will be argued or when it will be decided. So it's moving along quite slowly.

With respect to de-leveraging and the banking sector, I'll make just a quick comment and then Linda or Michel may wish to add to that. The de-leveraging is continuing. We are seeing reduction in bank loans, particularly in Europe and the de-leveraging that's associated with that. We believe that is going to continue for a relatively long time as the banking system retrenches.

The benefit of that as we've talked about is that that encourages corporations and municipal entities to go to the bond market and seek ratings. And our financial institutions area is the area that is most dominated of the ratings businesses by recurring revenue. Majority of our revenue in that area is recurring, and so we are less sensitive to the de-leveraging in that area. We also don't get the benefits of banks leveraging up when they do that, but in this environment we get the benefit of not having revenue reductions in the same degree that there is de-leveraging or retrenching.

Linda Huber

And to follow-up Doug, insurance year-over-year in Q3 moved from $18.5 million last year to $21.3 million this year. So it's a whole $2.8 million difference. It's not enormous. The guidance for FIG now is to increase in the mid-single digits for this year, which is up from flat to slightly up, which is what we had previously. So we expect that the activity will continue. It's not the biggest grower amongst our revenue lines.

Douglas Arthur - Evercore

And just as a follow-up on the de-leveraging in Europe. The Yankee Bond situation where corporations in Europe are coming over to the U.S. to issue, I mean that has been strong, and is that becoming a really sizable sector for you now or not yet?

Raymond McDaniel

Yes, it has been strong this year and much stronger than we've seen in previous years. How enduring a phenomenon that would be I think is somewhat uncertain. Right now, more than interest and risk coming from the U.S. investors than European investors, and so the European issuers have taken advantage of that. Whether that is going to change and the issuance will revert back to the EU going forward is uncertain, but I think we're in a position to rating in either case.

Operator

Bill Warmington with Raymond James, have the next question.

William Warmington - Raymond James

A question for you on Copal, and the strong growth that you're putting up there. Once you anniversary the acquisition, what kind of organic growth rate do you think you can generate there?

Raymond McDaniel

I'll let Mark Almeida address that, Bill.

Mark Almeida

I don't think we've disclosed an outlook for the professional services business, which is where the Copal segment wise for 2013. But it's a relatively high growth business. It won't be our highest growth business, but it's a good strong double-digit growth business. I think that's better as much insight as we can offer at this stage.

William Warmington - Raymond James

Then one question for you on the residential and mortgage-backed security market, just your thoughts on what needs to happen there before we see that market come back in size?

Raymond McDaniel

I guess I'll put it in two categories. One, there are some incremental things that can be done in terms of reducing mortgage qualification limit for that converted Fannie and Freddie. And that would move more of the market to the private label market, and would be more likely to be rated. But then there is the bigger structural question of the role that the government is going to play in the mortgage market on a long-term basis. And that is a politically, and fiscally, very, very changeling side of issues that the government is going to have to deal with. And so that's why we are cautious about any sizable expansion of the RMBS market in the near-term because of the dismal political dynamics.

William Warmington - Raymond James

And then one final question on enterprise risk. Just what products within that segment are driving the growth and how long is the tails on those products?

Raymond McDaniel

When you say tail on the products, do you mean the sale or the actual product placement?

William Warmington - Raymond James

And the ongoing of revenue generated by the product?

Mark Almeida

Yes, well the ERS segment is doing very, very well, largely driven by regulatory driven demand that we're seeing from our banking and insurance customers. And we would expect to continue to see very healthy demand for that product at over the next couple of years.

Operator

And we'll take a follow-up from Peter Appert with Piper Jaffray.

Peter Appert - Piper Jaffray

So Ray, just a follow-on to your comments earlier about what's going on in Europe. Is it possible to get any quantification around this concept of disintermediation, and how big you see the market opportunity from that?

Raymond McDaniel

Well, we've talked about it not specifically in the European sense, but in terms of the impact of disintermediation on our overall revenue growth is being a couple of points. And it's both anticipating what is happening from de-leveraging, but it's also looking at the pace at, which we have been getting new rating mandates over the last few years and that has been a reasonably steady pace.

And in Europe coming, it's associated more with the stress in the banking sector, and in places like Asia it has been associated more with economic growth outpacing banking system capacity. So the underlying drivers of the disintermediation changed a bit by geography, but the consequence, the overall number of ratings mandates has been increasing, as I said at a pretty steady rate.

Peter Appert - Piper Jaffray

I guess I was wondering if maybe given the turmoil in Europe, the one or two percentage point incremental revenue from disintermediation, that seems like that potentially could be conservative on the near term basis. What do you think?

Raymond McDaniel

No, I don't think so. I hope I am wrong. But part of the turmoil in Europe is also corporations taking a conservative posture with respect to borrowing and business. And so even though, if they were to need additional capital, or desire additional capital, they are more likely to go to the bond market. They are also in a defensive mode, and so that's an offset.

Operator

Thank you. Ladies and gentlemen, we have no additional questions. I would like to turn things back over to our speakers for any additional or closing remarks.

Raymond McDaniel

I just want to thank you for joining the call today. We look forward to speaking with you, again after the New Year. Thank you.

Operator

Thank you, sir. And ladies and gentlemen, that does conclude today's conference. Thank you all for your participation. And have a great weekend.

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