Q3 2021 Moody's Corp Earnings Call
Okay.
Good day, everyone and welcome to the Moody's Corporation third quarter 2021 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 question and answers. Following the presentation I will now turn the call over to <unk>.
<unk> Tec industrial Ovenbird head of Investor Relations. Please go ahead.
Thank you good morning, and thank you for joining us to discuss Moody's third quarter 2021 results and our revised outlook for full year 2021.
<unk> head of Investor Relations. This morning, Moody's released its results for the third quarter of 2021 as well as our outlook for full year 2021.
The earnings press release, and a presentation to accompany this teleconference are both available on our website at IR Moodys Dot com.
Rob Fauber, Moody's President and Chief Executive Officer will lead this morning's conference call.
Also making prepared remarks on the call. This morning will be Mark Kaye, Moody's Chief Financial Officer.
During this call we will also be presenting non-GAAP or adjusted figures. Please refer to the tables at the end of our earnings press release filed this morning for reconciliation between all adjusted measures referenced during this call in U S. GAAP.
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.
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, 2020 and in other SEC filings made by the company, which are available on our website and on the SEC'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.
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 will now turn the call over to Rob Fauber, Thanks, Giovanni and good morning, everybody and thanks for joining today's call.
To begin by providing a general update on the business, including Moody's third quarter 2021 financial results and then following my commentary Mark Kaye will provide further details on our third quarter 'twenty, one 2021 performance as well as our revised 2021 outlook and after our prepared remarks as always we'll be happy to take your.
<unk>.
Rudi's delivered robust financial results in the third quarter of 2021 revenue of $1 $5 billion grew 13% due to strong customer demand for our mission critical products and insights in both operating segments revenue increased in the double digit percent range for M. I S attractive market conditions continue.
To drive opportunistic refinancing and M&A activity for leveraged loans and structured finance issuance. Meanwhile, EMEA experienced strong growth across our subscription based products, which now comprised 93% of total EMEA revenue on a trailing 12 month basis.
We remain focused on delivering our integrated risk assessment strategy through innovation and investment in high growth markets and I will spotlight a few examples later in the call.
As a result of our strong third quarter performance, we've revised our full year 2021 guidance and now forecast Moody's revenue to grow in the low teens percent range. Additionally, we've raised and narrowed our adjusted diluted EPS guidance to be in the range of $12 15 to.
The $12 35, which at the midpoint of $12 25.
<unk> represents an approximate 21% annual growth rate.
In the third quarter Am I asked revenue was up 12% from the prior year and EMEA revenue was up 13% organic MA revenue increased 8%.
Moody's adjusted operating income rose, 2% to $737 million during the third quarter expense growth was higher than revenue as we invested significantly in our capabilities and product development in order to better serve a number of high growth use cases.
Adjusted diluted EPS was $2.69 flat to the prior year period, and Mark will provide some additional details on our financials shortly.
Favorable market conditions led to the strongest third quarter in over a decade in terms of both mis revenue and rated issuance leverage loan issuance was very strong supported by low default rates and robust private equity activity and investor appetite for floating rate debt amid higher inflation and rising interest rate expectations.
As we anticipated in our prior guidance investment grade supply moderated given the tough prior year comparable however volumes were still substantial and remained above the 10 year historical average for mis rated debt.
Additionally, after a muted 2020 structured finance issuance reverted back to levels seen in 2017, and 18 ongoing favorable market conditions, including tight spreads drove both CLO refinancing activity and new CLO creation as well as new see MBS and RMB as insurance.
As you can see on the chart on the left.
Tight credit spreads combined with low default rates created an attractive environment for opportunistic refinancing and M&A activity in the third quarter. The U S default rate is forecast to fall below 2% by year end.
A significant reduction from a pandemic high of nearly 9% while.
Meanwhile, the uses of proceeds were weighted towards refinancing earlier in the year heightened M&A activity continued in the third quarter as issuers used acquisitions to support growth.
We frequently comment on our views on long term issuance drivers, which include GDP growth ongoing disintermediation trends.
Coming refinancing needs.
Based on our annual research published by Moody's Investor Service earlier this month.
<unk> walls over the next four years for U S and European issuers have increased 9% to approximately $4 one trillion.
An investment great supply remains the biggest asset class. Despite the recent surge in leveraged loans. This is slightly above the compound annual growth rate and is supported by.
Historical compound annual growth rate and is supported by 19% growth in U S leveraged loan for maturities and 7% growth in U S investment grade for maturities, providing a solid underpinning for medium term issuance.
Now moving to Moody's analytics.
<unk> recurring revenue grew 18% in the quarter as it and as I mentioned earlier now represents 93% of total EMEA revenue on a trailing 12 month basis. This is supported by new customer demand and strong retention rates, which is really a testament to the mission critical nature of our product suite.
The chart on the REIT illustrates the strong organic recurring revenue growth on a trailing 12 month basis across some of our key operating units. Each of these businesses currently represent at least $100 million of annual revenue with growth rates above 10% versus the prior year.
Starting with credit research and data feeds recurring revenue improved in a low double digit percent range through a combination of increased yields and sales to new and existing customers.
Recurring revenue in banking solutions within the <unk> business grew at a similar pace as customers continue to leverage our products to support a wide range of functions everything from lending to portfolio management and accounting and reporting requirements.
Occurring revenue for our insurance and asset management business within <unk> increased in the mid 20% range and was driven by ongoing demand for our actuarial modeling and IR for US 17 solutions and finally <unk> compliance built on its strong start to the year also growing the mid 20% range. This continues to be an important growth.
Ivor from Moody's that I'll expand on further.
Last quarter I summarized a few key trends underpinning growth in the <unk> market.
I described how our differentiated offerings are driving organic growth rates north of 20% and let me give you a few examples that illustrate the value that we provide across a variety of customer applications.
In banking one of our core use cases is to support customer due diligence requirements by providing transparency and the counterparty relationships and beneficial ownership structures and the accuracy quality and linkage of our data enables us to be a trusted partner with banks in complying with the regulatory requirements and managing reputation.
Risks across the financial sector.
Turning to our large automotive leasing company. They previously relied on manual processes, but now have automated their supplier due diligence activities by using our orbis database to onboard and monitor tens of thousands of suppliers and they're beneficial owners and.
And last worldwide Transportation company was looking for an integrated supplier risk solution to comply with anti bribery and corruption laws and to automate their risk assessment procedures. They chose our compliance catalyst solution to help them onboard and monitor almost 20000 suppliers, primarily because it provided them with a single tool.
From which to source high quality compliance financial and ESG data.
Last month, we closed on the RMS acquisition, we're very excited to welcome our new colleagues to Moody's and our teams have begun to work to jointly advance our integration plans recently I had the opportunity to spend a couple of days together with the MAA in RMS management teams to get to know each other and to align on priorities and it's.
It's clearly a great cultural fit and we see interesting opportunities across our combined life and P&C businesses potential for new solutions that empower integrated risk assessment, and an opportunity to sink and upgrade our technology platforms.
And we're focused on three key areas to drive incremental revenues.
And achieve our targets.
First as cross selling to our respective customers and we've already begun conducting joint customer meetings to start to identify opportunities and I have to say the dialogues are encouraging.
Second is the transition of RMS customers to their new SaaS platform, where RMS will benefit from.
Recent experience and which represents an opportunity for some revenue uplift and.
And third is new product development and integration when I was with the team they identified a wide range of opportunities from simple integrations to enhance our insurance analytics to new products, serving new customer segments and in fact, we have a teams working specifically on identifying opportunities for corporates and governments across climate and cyber.
Our work with RMS has begun and we're looking forward to the future together.
At the beginning of this year I highlighted our strategic priorities as a global integrated risk assessment firm that included collaborating modernizing and innovating to meet our customers' rapidly changing needs and I want to showcase a few examples of how we're delivering on our strategy across the company.
Beginning with ESG and climate, we recently launched new capabilities to help customers using our credit scoring tools. So they can integrate and understand the financial impact of physical and transition risks.
That new module enhances our award winning models and covers 40000 public companies and millions of private firms.
Within our ratings business, we recently expanded our ESG credit impacts scores to include financial institutions. This is the next step in building out comprehensive coverage on a rated universe and furthering our efforts to help investors clearly understand the impact of E S and G factors on credit.
In EMEA, we're leveraging cloud and SaaS technologies to improve the customer experience for example, as part of our data Alliance Consortia. We recently released our first set of Cecil dashboards and that enables banks to benchmark themselves against their peers and enhances the value of our products.
And we're integrating commercial property data and cash flow analytics into our credit <unk> suite of solutions to help commercial real estate lenders make better decisions and this marks an important expansion of our offering serving the commercial real estate sector.
Finally, the exponential increase in cyber attacks and ransomware or threaten the stability and reputation of businesses across the world and to help our customers understand this evolving risk we made a significant investment in bid site leader in cyber security rating space, we see many potential opportunities for us to integrate their data and analytics into.
Our products and solutions and together, we will help market participants better measure measure and manage their cyber risks across supply chain and portfolios.
With Cop 26, beginning in a few days I want to underscore the importance of ESG and climate to both our stakeholders and to the Moody's organization and this is evident in a way that climate considerations are embedded across our company.
Within our products, we offer market participants the tools they need to better identify measure and manage climate resilience.
We've developed a comprehensive suite of climate risk data scores and insights to measure of physical exposure to climate hazards to analyze the companys transition risk and also to understand how climate risk translates into credit risk and the addition of RMS will meaningfully enhance the quality of our offerings to help deliver world class analytics to the market.
And as part of Moody's corporate commitment to sustainability, we announced several significant actions in the quarter. We brought forward our commitment to achieve net zero across our operations and value chain to 2040, that's 10 years earlier than our original target. Additionally, we're very proud to have achieved recognition as a 2021 global.
Compact we'd company the major distinction from the world's largest corporate sustainability initiatives.
And its founding member of the Glasgow Financial Alliance for net zero, we're committed to align all of our relevant products and services to achieve net zero greenhouse gas emissions.
All of these efforts underscore our strong commitment to address the climate crisis and to drive positive change in.
And before I hand, the call over to Mark to discuss discuss our financials on behalf of the entire executive team I want to thank all of our employees for their hard work and dedication in helping us achieve yet another great quarter.
Thank you very much sure Rob.
In the third quarter, <unk> revenue and rated issuance increased 12% and 11%, respectively, an elevated leverage loan and CLO activity.
<unk> finance revenue grew 6% compared to a 2% increase in issuance heightened demand continued for leveraged loans as issuers opportunistically refinance debt and funded M&A transactions.
Additionally, we observed lighter investment grade activity compared to the record levels in the prior year period, as well as well as a decline in high yield bonds as investors pivoted to floating rate debt.
Financial institutions revenue rose, 14% supported by 25% growth in issuance transaction revenue was up 24% as infrequent bank and insurance issuers took advantage of the attractive rates and spread environment.
Revenue from public project and infrastructure finance declined 2% compared to a 17% decrease in issuance as U S. Public finance issue is largely fulfilled their funding needs in prior periods.
Structured finance revenue was up 63% supported by strong recovery in issuance. While this was primarily attributable to CLO refinancing activity. The third quarter also had a high level of new deals driven by a surge in leveraged loan supply.
In addition, see MBS in our MBS formation further boasted overall results.
Adjusted operating margin benefited from approximately 190 basis points of underlying expansion more than offset by the impact of higher incentive compensation associated with our improved full year outlook, our legal accrual adjustment in the prior year and a charitable contribution via the Moody's Foundation.
Moving to EMEA third quarter revenue rose, 13% or 8% on an organic basis.
Ongoing demand for our <unk> compliance solutions as well as data seats. So the 15% increase in our DNA revenue or 12% organically.
This is further supported by mid Ninety's percent retention rates and robust renewal renewal yields for our credit research and data products.
<unk> revenue rose, 8% in the quarter organic recurring revenue grew 13% driven by customer demand for our banking products as well as insurance analytics solutions.
This was more than offset by an expected decline in onetime revenue and led to a 2% decreasing in overall organic revenue.
As a result of our strategic shift towards SaaS based solutions recurring revenue comprised 90% of total <unk> revenue in the third quarter up 12 percentage points from the prior year period.
<unk> adjusted operating margin benefited from approximately 210 basis points underlying expansion more than offset by acquisitions completed in the last 12 months.
Non recurring transaction costs associated with RMS and the charitable contribution via the Moody's Foundation.
Turning to Moody's full year 2021 guidance.
<unk> outlook for 2021 is based on assumptions regarding many geopolitical conditions macroeconomic and capital market factors.
These include but are not limited to the impact of the COVID-19 pandemic responses by governance regulators businesses and individuals as well as the effect on interest rates inflation foreign currency exchange rates capital markets liquidity and activity in different sectors of the debt market.
The outlook also reflects assumptions regarding general economic conditions, the company's own operations and personnel as well as additional items detailed in the earnings release.
Our full year 2021 guidance is underpinned by the following macro assumptions.
2021 U S. GDP will rise in the range of five five to six 5% in Euro area GDP will increase in the range of four five to five 5%.
Benchmark interest rates will gradually rise with U S high yield spreads remaining below approximately 500 basis points.
U S unemployment rate will remain below 5% through year end and the global high yield default rate will fall below 2% by year end.
Our guidance also assumes foreign currency translation at end of quarter exchange rates, specifically, our forecast for the balance of 2021 reflects U S exchange rates for the British pound of $1 35.
And $1 16 for the Europe.
These assumptions are subject to uncertainty and results for the year could differ materially from our current outlook.
We have updated our full year 2021 guidance for several key metrics.
Moody's revenue is now projected to increase in the low teens percent range and we have maintained our expectation for expenses to grow approximately 10%.
As such with an improved revenue outlook and ongoing expense discipline, we've expanded Moody's adjusted operating margin forecast to be approximately 51%.
We raised and narrowed our diluted and adjusted diluted EPS guidance ranges to $11 65 to $11 85 and.
And $12 15 to $12 35.
Prospectively.
We forecast free cash flow to remain between $2 <unk> and $2 3 billion and anticipate that full year share repurchases will remain at approximately $750 million subject to available cash market conditions, M&A opportunities and other ongoing capital allocation.
For a complete list of our guidance. Please refer to table 12 of our earnings release.
Moving to the operating statements within.
Within Mis, we now forecast full year revenue to increase in the low teens percent range and rated issuance to grow in the high single digit percent range.
<unk> issuance guidance assumes that full year leveraged loan in structured finance issuance will both increase by approximately 100% up from our prior assumption of 75% growth for each of these asset classes.
Investment grade issuance is forecast to decline by approximately 35% an improvement from our prior assumption of a 40% decrease.
High yield bond issuance is expected to increase by approximately 20% slightly lower than our prior outlook.
Additionally, we are raising our guidance for first time mandates to a range of 1050 to 1150. This is significantly above recent levels and will enable us to generate incremental revenue through future annual monitoring fees.
We are also increasing mis's adjusted operating margin guidance to approximately 62%, which implies approximately 200 basis points of margin expansion compared to 2020 full year result.
This operating leverage is driven by continued top line outperformance and well controlled expenses.
For EMEA, we are maintaining our revenue growth projection in the mid teens percent range supported by strong retention rates and the continued growth of SaaS and subscription products.
We are also reaffirming the adjusted operating margin guidance of approximately 29%.
These metrics include the impact of the deferred revenue haircut related to the <unk> acquisition as well as the nonrecurring transaction related expenses I noted earlier.
Excluding the impact of acquisitions completed in the prior 12 months EMEA revenue is anticipated to increase in the high single digit percent range and the adjusted operating margin is forecast to expand by approximately 300 basis points.
As I mentioned previously we are reaffirming our full year 2021 expense growth guidance of approximately 10% for.
For the third quarter operating expenses rose, 19% over the prior year period.
Of which approximately 16 percentage points.
Were attributable to operational and transaction related costs associated with recent acquisition, including RMS.
As well as higher incentive and stock based compensation accruals, a $16 million charitable contribution via the Moody's Foundation any movements in foreign exchange rates.
The remaining expense growth of approximately 3% was comprised of organic investments as well as operating costs, such as hiring and salary increases and was partially offset by ongoing cost efficiency initiatives.
We are on track to reinvest approximately $110 million back into the business in 2021.
These organic investments are concentrated in the areas, we've mentioned throughout the year, including ESG and climate.
<unk> compliance CRE as well as technology improvement and geographical expansion.
Before turning the call back over to Rob I would like to underscore a few key takeaways.
First we're pleased to have raised our full year guidance across several key metrics, primarily due to robust third quarter performance.
Second economic recovery and constructive market conditions continue to support issuance levels and refunding activity.
Third.
<unk> high proportion of recurring revenue and retention rates, along with growing customer demand for our award winning product suite positions Moody's for sustainable long term success.
Both our ongoing key organic investments in high growth markets accelerate our integrated risk assessment strategy across a wider range of use cases, and finally, our focus on innovation and product enhancement delivers best in class ESG and climate solutions to stakeholders, enabling them to make better decisions.
And with that let me turn the call back over to Rob.
Thanks, Mark This concludes our prepared remarks, and Mark and I will be pleased to take your questions operator.
Thank you if you would like to ask a question. Please.
These style star one on your telephone keypad, if you're on a speakerphone. Please pick up your handset and make sure. Your mute function is turned off so that your signal reaches our equipment. We will ask that you. Please limit yourself to one question with a brief follow up more than welcome to rejoin the queue for any additional questions. You may have again that is star one.
Wanted to ask a question. Our first question comes from Manav Patnaik with Barclays.
Please go ahead. Thank you.
Thank you.
Question, just on Moody's analytics.
If you could just help us with how much our managed specifically contributed in terms of revenue to the quarter and how we should model that out.
Yeah.
And the margin impact basically.
Hey, Manav good to have you on the call I'm going to start kind of big picture with RMS because I think that will be useful to everybody on the call and then we'll get mark to to drill down into some of the numbers.
I want to say that while we've owned RMS for less than 45 days I think we're very excited about the prospects of what we can do together and one thing that we found.
Is that RMS the combination of RMS and Moody's has made us a very important vendor to the largest insurance companies in the world and Thats, leading to some really good dialogues and opening up some new opportunities for us.
<unk>.
We've got a plan.
Two to integrate RMS Thats really focused around four key pillars first is go to market strategies.
In our insurance business, including cross sell.
Second is our roadmap for integrating our <unk> capabilities across Moody's.
And that very importantly includes climate.
As well as cyber and commercial real estate the Senate to name a few we've got some opportunities to think and combine our tech stacks and Roadmaps and then of course corporate integration, but to give you a sense of the cross selling opportunity.
And the core insurance space less than 10% of our combined total insurance customers are currently served by both Moody's and RMS. So there's a lot. We think we can do there.
Give you a couple of examples manav.
Of of where we see some relatively low hanging fruit in terms of cross selling and product integration and in the insurance space. RMS has got something called life risks and that focuses on mortality.
Mortality and longevity solution.
And we think we're gonna be able to integrate that into our life insurance actuarial modeling platform and sell that to our life insurance customers and I think that.
RMS essentially.
Essentially had zero sales effort into life insurance, so that's going to be a great opportunity for us to take that to several hundred life insurers.
Another places in our asset and capital modeling solution, that's available for life insurers and integrating that into Rms's risk intelligence platform, serving P&C companies. So there are a number of other things that we've identified but that gives you a flavor for it and then we're looking at leveraging our <unk> capabilities to serve new <unk>.
Customer segments, and new ways and that was really a lot of what we talked about on the investor call when we announced the transaction and.
For instance, helping financial institutions and corporates to start to assess the potential impacts of climate change and weather risks across their portfolios in their facilities.
Certainly with governments and I'm sure on this call we will talk more about the infrastructure and build back better bills theres going to be an enormous amount of investment into building climate resilience and so we think our RMS is really going to position us well to.
To help organizations.
Organizations with with that so in some ways.
One of our biggest challenges is really just kind of properly prioritizing all the opportunities and get the teams focused on the on the <unk>.
Things are going to deliver the biggest bang for the Buck. So we're off to a good start much more to be done and of course, we'll keep you posted.
As we as we think about the outlook RMS is implicit impact to the full year 2021, adjusted margins and adjusted EPS was slightly larger than we previously forecast back in August really due to three primary I think about them as nonrecurring items.
First was increased transaction related expenses of around $22 million.
Second was a higher expected deferred revenue haircut in 2021 of $18 million.
And then the third one would be $13 million loss on the British pound purchase price hedge if I take those three factors together with the underlying operating it.
Performance expected in 2021, we're looking at roughly a 29% at.
Diluted impact to our full year EPS outlook. So if you put that in perspective that will give you an idea of what needs to be adjusted out to <unk> from your models.
Okay got it and then just from.
Margin standpoint, though.
Maybe on <unk>.
I think last quarter, you told us at the operating expense should be.
Similar to the first half of this year.
Wanted an update if that's still the case or not.
Yes, maybe I'll spend just a couple of minutes to give a little bit more detail on the mis margin. So we are guiding to a full year 2021.
Adjusted operating margin outlook of approximately 62%.
And that really means if you back into the fourth quarter of the year ago margin, we're looking at roughly 54.5% and that would be great.
<unk>, a little bit over 600 basis points from the 2024th quarter margin of that 48% of that approximately 600 basis points. You could think about almost 400 basis points is coming from underlying business performance.
Think about ongoing favorable rate environment and need for continued M&A financing et cetera that all set of around 250 basis points from the non recurrence of some of those expenses that we saw in the fourth quarter last year like severance I also wanted to point out one item here that we are assuming historical.
Fourth quarter issuance seasonality trends at which will imply a lower absolute fourth quarter Mis revenue result.
As earlier quarters, specifically in line with 2017 to 2020 quarterly seasonality we're assuming.
Of 2021 full year <unk> revenue in the last quarter of.
The year.
Okay. Thank you.
Our next question comes from Alex Kramm with UBS. Please go ahead.
Yes, Hello, everyone.
Hoping that you could give us a little bit of an update or more detailed update and you already did on kind of like your expectations on the on the ratings and issue inside as we head into fiscal year 'twenty two I understand.
You didn't you haven't given us any sort of look yet, but it is November and clearly everybody is kind of already moved on focusing on next year and.
Everybody can't ignore that the last couple of years have been really really strong. So I. Appreciate your comments in terms of refi wall as being a lot higher than from a multiyear perspective that looks really really good.
When you think a little more near term in terms of fiscal year 'twenty. Two what are the puts and takes that you're thinking about.
As you know as Youll get into the budgeting process.
Hey, Alex and I understand congratulations maybe in order that you may have a new member of the family. So that's.
That's super and we appreciate you are still dialing into the call.
I would say thank you very much.
I was actually looking back at the transcript from last year's third quarter call I knew I was going to get this question.
And I realize I'm, probably going to sound a little bit like a broken record. So let me just give you some insight into how we're thinking about it and Youre right, Alex where we're not ready to give an official guide on our 2022 issuance outlook, we'll do that on the next call.
But.
I think fundamentally while the conditions are very very conducive to issuance right now and.
And you noted in your question.
We have to take into account the very robust issuance environment. We've had over the last now two years in.
Kind of like I said last year from where we're sitting just right now.
It feels like they're a little bit more headwinds than tailwind going into 2022, and I'll give you a sense of.
Both of those so in terms of tailwind.
Certainly we've got a rebound in economic activity. We've always said that that is good for our business and assumption. Our assumption is that inflation will in fact be transitory.
And we've got a we assume there's going to be a continuation of the very strong pace of M&A, that's going on right now.
And.
I think that's going to be particularly true in the case of sponsor driven LBO activity you've got.
Private equity funds it just have huge amounts of money.
To deploy.
Got an assumption there is going to be a continued low rate and low default environment.
And the low default environment is important because thats going to be supportive of of tight spreads so even as rates start to move up a little bit.
That all in financing rates will be historically attractive and then I guess I might also add that.
And we're going to see a continued uptick in sustainability focused.
Financing, that's going to grow dramatically next year, although that may be a little bit more of an issue of mix than volume now.
Now in terms of headwinds.
It really does start with just the comps and obviously last year. It was investment grade. This year. It is leveraged loans. So the outlook for leverage loans, the sustainability of issuance and leveraged loans and in turn CLO is going to be very important and I think ultimately.
Our outlook.
Like I said there are some very good drivers for leveraged loan volumes to continue M&A.
Gradually rising rate environment.
Mark noted, we expect issuance to be up over 100% versus last year and so like investment grade last year. That's just it is a hard act to follow and the question is will there be a period of AV market digestion. After all of this issuance I would also say Alex in general issuers have got pretty healthy balance sheet.
Seats in liquidity, so they can be a bit patient theres been lots of refinancing over the last few years.
So issuers are in good shape around maturities and I hope. This is one of the last time I say this but COVID-19 is still a bit of a wildcard it can be so in the <unk>.
Last thing I would say, Alex and acknowledge you noted this in your question.
So that gives you a sense of how we're thinking about the quarters ahead, but as we think about the years ahead and that's why we wanted to highlight the <unk>.
Four year forward maturities they've grown.
At a rate of about 9% versus last year. So all of that is going to give us a very good underpinning for medium term issuance we think.
Excellent thanks, great color here.
And then a quick one just on the MA side I know you talk about.
ESG climates increasingly I think it's still pretty early in terms of revenues.
In terms of where you actually having success right now can you actually give us a few examples where you we actually do in sales and and like what kind of customers what kind of products are resonating the most and to what degree.
You are having competitive wins or what your win rate is because everybody is obviously trying to add to.
<unk>.
To jump at this and grab as much as they can but it's becoming a cloud of CLO. So curious in terms of how you're doing levels the competition and why youre winning the most.
Thanks, very much for the question here.
Go ahead, and maybe do a little bit of the holistic perspective, and then I'll dive right in specific areas that we're having success and sort of where our competitive advantage is here.
Overall, the market itself is really co leasing around while we think of as two really important and ESG themes.
The first is really consistency and thats really the need for more harmonization and standardization and the thinking is really around integration right to the integration of ESG climate and sustainability data.
Tools analytics into our financial and risk workflows and product and services.
These two themes that could lead you to think about ESG is having a <unk>.
<unk> and a deeper understanding.
The important characteristics of who youre investing with or youre lending to or who you're working with.
With that let me highlight sort of those three customer examples to the heart of your question.
First is in the CRE space.
They're our customers one on demand scoring capabilities to screen properties globally.
And they want sustainability considerations to be integrated into that that screening and so we've developed a solution that provides those forward looking risk assessments property exposures do floods hurricanes wildfires and other climate hasn't overtime and that's incredibly valuable and we are gaining significant traction there.
With our clients.
Take an example, you can think about as banks and insurance companies and Theyre looking for climate data.
Really to be integrated into economic scenario modeling and stress testing to really help them meet regulatory and other requirements and they also need an integrated into how they are assessing risk across the air wholesale banking credit portfolios and so we are doing that we're helping to integrate those climate and ESG factors into our model.
And Thats again enhancing out.
Competitive.
Value proposition, including our lending software and other risk solutions that we provide to those financial institutions and then maybe third is a third example customers ultimately want to integrate data they really want to co mingle.
Their data with ALS and to enable that we've made our data available on our new data platform for customers to access our data alongside their own in house data and then to work with that data using some of the advanced data science tools.
Mark Let me just build on that too.
Alex If you think about where do we think we have source of competitive advantage you're right. It's a crowded field I'll give you. One example.
We have developed what we call our ESG score predictor that SKU.
Got scores on 140 million companies nobody else has that kind of coverage and we're leveraging that orbis database that we have we've got over 100 sales opportunities in the pipeline right now for organizations, who want to be able to understand the ESG profile of tens of thousands of suppliers for instance, so there's one example second.
Climate.
<unk>.
With the addition of RMS and we are just in the process of figuring out how we're really going to leverage that we think we probably have some of the best climate modeling capabilities anywhere on the planet and there's going to be a lot of demand for that so in addition to.
What we already had across the company and now layering in RMS and all of their capabilities. We think we're really going to be able to compete and win in the climate space.
Excellent thanks for the color there.
We will take our next question from Ashish <unk> with RBC capital markets.
Thanks for taking the question I just wanted to focus on the <unk>.
And thanks for flagging that this accelerated growth there.
I was also wondering how does ESG driving increase demand.
<unk> mentioned, a couple of times about increased demand for third party, so adding more incremental color there. Thanks.
Yes, great Great question Ashish.
Let me just start with KFC in financial crime compliance.
As you can see we're continuing to have very robust demand, we've got 26% constant dollar organic revenue growth in the third quarter feel very good about that.
And we've got these foundational data assets with Orbis $400 million companies.
<unk> 5 billion total ownership links and then our grid database with more than 14 million profiles. So that that is a really comprehensive.
Offering and we've talked about the multiple use cases that are driving demand for for all of this.
And it goes back to what Mark just said organizations want to understand who theyre doing business with one of the risks of doing business with them and how can they make better and faster decisions to deliver immediate operational returns and it's going beyond regulatory requirements and it's going beyond banks.
And so to give you a sense of that.
We're hearing from customers that they can do screens up to five times faster.
Up to a 70% reduction in false positives using our tools at some anecdotal feedback we get from our customers, that's really important to them and to give you a sense ashish of the kind of scale of operations in our <unk> business. We're now processing more than 700 million screens a day so.
We've.
And we're now building on this position we've confirmed at least 10, what we call innovation partners, which represent a range of well known financial institutions technology companies and corporates, who we are now working with to co create and shape industry, leading solutions and.
Those partners represent not only obviously attractive commercial opportunities, but they give us really unique insights into industry trends and customer needs and.
As part of all that we're progressing on new product opportunities things like <unk> scores and networks, which I think youll youll see some of that coming to market in 2022 across the globe. We have recently expanded our sales team that's focused on cable IC in financial crime compliance and we really are concern.
Entering to refine our value proposition and expand our reach so we feel very good we're going to keep investing organically, we're going to keep investing inorganically to make sure. We've got a leading position in what is a very attractive market and then to touch on the last part of your question. How is ESG integrating you think about we call it <unk>.
<unk>, but increasingly this is no your counterparty know your customer or know your supplier and as I said, it's going beyond I need to understand whether they are on a sanctions list. So I now want to understand are they on a sanctions list is the reputation risk does this company have the same kind of ESG profile that I want to do <unk>.
With.
Is my data secure with them and so we're seeing as part of this no your counterparty space.
Desire from customers to start integrating more and more content to give them a more 360 degree view of who they're connecting to and ESG as a part of that.
That's very helpful color, maybe just on my follow up I was wondering if you could provide any update on your China operations and any incremental color with what's happening that thanks.
Sure.
So I think everybody on the call knows we're committed to our investment in <unk>, we have a 30% stake it's the leading domestic rating agency.
I know that the market is opened up to a number of financial services companies, but we'll see.
How successful those companies are relative to.
Chinese incumbents.
What we do know is the Chinese want to attract more foreign investment into the domestic bond markets.
And they need more transparency and more global comparability, that's what that's what international investors want So let me let me give you ashish.
Two ways that we are delivering.
What we think international investors want in order to facilitate investment into China's bond markets. The first.
As we are about to launch something called China credit view, we expect to launch it in November and we think that's going to really address some critical needs across four areas first of all is going to provide very wide coverage. So the platform is going to is going to cover the top thousand plus Chinese corporates.
<unk>.
And it will have global comparability, that's something else, that's very important standardized financials credit metrics and model in slide ratings on a global scale because that then allows for peer comparison globally.
Which is very important across both mis rated.
And they are kind of model rated firms, it's going to provide transparency and some end up analysis with.
<unk> financial statement quality scores and interactive scorecards so.
That's very very helpful to international investors. The second thing I would say is given the credit stress in some of the regulatory actions across a range of Chinese set.
Sectors I.
I would say that the demand for high quality insights into China's credit Mark has probably never been higher.
And to give you a sense you have by year end, our event activity covering greater China will be up over 20% from last year, we will have done 160 events.
And we're increasingly really working under a a one Moody's banner a great example of that is our Moody's ESG China series, we're innovating in terms of our local delivery there were active on wechat.
Got a special China channel.
So a lot we're doing to drive.
Engagement, we're even.
Call it, bringing the world to China, where we're including live Chinese translations into our global programs and also to give you a sense of the activity levels. There is a.
A lot of analytical and commercial engagement between our analysts and our commercial teams with issuers and prospective issuers.
Over 1000 analytical meetings and thousands of commercial meetings and then we've done a number of events with Chinese intermediaries. So we feel like we've got some very good initiatives focused on the China market opportunity that are responsive to what the market wants and needs.
Thank you all for the color. Thank you.
Our next question comes from Toni Kaplan with Morgan Stanley.
Thank you.
Actually I just wanted to follow up on that last point you made Rob in the China credit view can you just confirm.
It sounds like is that more of an investor pays model.
Within China.
Or maybe I'm not understanding it correctly.
Yes, certainly that's right you think are we have a flagship product called credit view for.
For fixed income investors.
This is a I would say a special China focused module of that with our broad coverage on Chinese corporates as I just talked about so yes. It would be a subscription based model targeted primarily at our core international Investor.
Customer segment.
Perfect Okay.
Also.
<unk> had some really.
Totally to a different topic, you've had some nice double digit organic growth within our DNA for the past five quarters, a lot of moving pieces in there you've got RTC bvd the legacy business is.
Slide 10 was really helpful for showing the drivers by theme. When you just think about the next one to three years, how would you rank order the areas of opportunity that you are most excited about within M&A and just on the sort of investment side.
All of this these initiatives and innovation going on right now.
It's really early but should we think about that continued pace of investment.
Similar next year to what you've done this year.
Anything on sort of the opportunities in the investment would be great. Thanks.
Yeah, Tony I'll start and then Mark is probably going to want to chime in as we as we think about investment.
But let me start with rdna, because I think Thats, where your question started yes, we've got some very strong organic growth coming out of that and Youre right. There is a number of things that are included in that segment.
The <unk>, obviously I talked about that at some length, but let me also talk about what else is driving growth there and thats, our research and data feeds.
We've got very strong retention something like 96% in the third quarter of 'twenty, one and that growth is supported by deepening our penetration at existing customers and adding new logos.
And.
We're making I was talking to Tony about our flagship credit view.
Research platform, we're making some significant investments and enhancements to be able to support our value proposition and obviously, our pricing opportunity over the coming year. So to give you a little bit of a flavor for that.
We're now going to be aggregating insights and analytics that we've developed across all of Moody's so that our customers can access.
You hear this term integrated risk capabilities in one place.
We're going to be upgrading and delivering more of a true digital experience that is.
It's going to enable our rdna users to consume are really credit view users to consume content.
Where when and how they want it and I think very importantly, we're going to be servicing the entire breadth.
Of the ESG and climate content across Moody's to be able to integrate enable integrated risk assessment on credit risk and dual materiality. So theres. Some theres some very good investments there than maybe the last thing and I'll hand, it to Marcus and Youre right. There are a number of great places for us to be investing across EMEA.
We've got the bubble chart that shows you got a number of businesses doing more than $100 million in revenue. So I would go back to <unk> is a very attractive place for us to invest given the the growth characteristics in our position and then things like.
Banking and insurance within <unk>.
Sorry, and then climate in ESG.
Tony if I were to just add a couple of numbers around that for the full year 2021, we're looking to invest approximately $110 million and just to give you a feel because it's obviously tied back with the expense calendar ization by quarter, and we spent approximately $30 million in the third quarter and we're looking at somewhere between 45 and 50.
<unk> million dollars in the fourth quarter and a significant portion of those strategic investments as Rob said would be allocated to our <unk> CRE ESG and climate.
Maybe just a quick slide on <unk>, obviously, that's the integration of the acquisitions Mardis Ecotarian acquire media and Thats all about best in class <unk> and financial crime Prevention I just wanted to make a note here, we have really great customer feedback on our new insights around human trafficking alerts and some of the identity identity.
Verification.
On CRE briefly let's around streamlining our customers' workflows lending investments and monitoring I think we've sufficiently spoken about and then lastly in the domestic China and Latin American markets. We are investing in some of the local talent region specific methodologies and more of a holistic suite of products that meet the Pacific market needs.
Thanks, so much.
Our next question comes from Kevin Mcveigh with credit Suisse.
Great. Thanks, so much.
Hey, Mark I wanted to ask that the kind of rate question, a different way I mean, obviously, there's been a nice uptick in structured finance to offset some of the corporate finance weakness, but if I go back you're still condos.
40% below the 780 construction finance REIT. If you look at your revenue yet kind of corporate finances, five X what it was.
Do you have any thoughts as to structured.
Revisit that prior peak.
The dynamics are a little bit different but any thoughts as to does that continue to offset maybe some of the uptick in rates or just I'm asking that more within the context of.
The rating stack relative to how we're thinking about rates little bit longer term I guess.
'twenty one into 'twenty two.
Hey, Kevin It's Rob Let me, let me take a crack at this I guess.
The first thing that comes to mind here is just when you were talking about 2007, if we went back and looked at the size of the RMB us market, that's going to be a very big piece of that it just has not come back to to anything like what it looked like pre global financial crisis, and we get asked from time to time do we.
We think it will and there've been some some proposals around the GSE unis and other things, but the reality is.
It just doesn't seem like something thats, probably in the near to medium term. So it's.
It's hard to replace that amount of issuance in the overall structured market that said you know if we can.
Just look out right now today.
We see especially in the U S pretty vibrant.
Markets' restructure finance across all asset classes, obviously CLO.
So our guidance up about 100%, but avs very tight spreads in that market improving consumer confidence.
<unk> got see MBS, which has been surprisingly resilient coming out of the pandemic.
And of course.
So I think we're going to see good growth in structure finance, but I don't think its going to resume the same kind of absolute size that we had pre financial crisis anytime soon.
That makes a lot of sense and then just real quick.
Given all the incremental commentary from RMS in terms of how it's thinking with climate.
We're still comfortable with that $150 million of incremental revenue by 2025 are you seeing anything as to the pacing of that it sounds like maybe that proves conservative as youre kind of working through the client base.
We are very comfortable to continue guiding towards the incremental rma's related run rate revenue of $150 million by 2025 I'd also just note that connected to that.
The guidance that we are reaffirming around our medium term adjusted operating margin of mid thirties.
Certainly we feel very comfortable sort.
Sort of reaffirming those outlooks and Kevin I don't want to get ahead of ourselves, but we're going to be thinking hard about.
How moody's in RMS together can can play an important role in addressing climate resilience, obviously enormous investments being made.
The <unk> plan I think we got more visibility on that today, so that'll be something we'll be very focused on.
It seems like that's it.
<unk>.
Future opportunity for you for sure.
<unk>.
Okay.
Our next question comes from George Tong with Goldman Sachs.
Hi, Thanks, good morning.
Wanted to drill into margins a bit.
As you think about the attribution of margin performance, how do you expect mis and MA margins to perform in the fourth quarter.
George maybe let me start more holistically at the <unk> level.
Provided a little bit of color a minute to go on <unk> let.
Let me talk about <unk>, and then I'll talk a little bit about EMEA after that.
Updated guidance for full year 2021, <unk> adjusted operating margin is approximately 51%.
That is 130 basis points higher than the actual two.
2020, adjusted operating margin result of 49, 7%.
For context.
This is in addition to the MCM margin expanding by 240 basis points in 2020, so significant expansion.
If we were to break the MTO margin expansion down into its component pieces.
That would translate into an increase in operating leverage by around 300 to 350 basis points.
And that's versus the $1 52 to 50 basis points that we guided to previously.
And this is driven really by better than expected scalable revenue growth.
Underpinning by expense discipline.
We are also able to realize savings and efficiencies of between 160 and 200 basis points.
All the MTO margin.
Activities like the restructuring programs that we implemented last year, increasing automation utilization of lower cost locations procurement efficiencies real estate optimization et cetera.
The idea we spoken about is instead of fully.
<unk>, those savings and efficiencies against increasing our organic strategic investments in 2021.
Especially in the third and fourth quarter of this year.
And if I just had a round out sort of that attribution.
We're really looking at a 150 to 190 basis points of headwind.
From the recent acquisitions, including <unk> and transaction related costs and around 25 basis points of <unk>.
<unk>.
Between the EMA in the Mis business growth.
In a specific on M&A.
Specifically.
We are guiding to approximately 29% for the full year and.
And that means the implied fourth quarter EMEA margin.
Is approximately 24% and that is down from last year's REIT.
<unk> of 28, 4%, that's driven almost solely by more than 400 basis points of margin compression.
<unk> from the M&A.
Activity and transaction related costs, the underlying fourth quarter margin.
Is it really expected to be approximately flat year over year.
Primarily because we are accelerating our organic investments really again in the third and fourth quarter. This year and just to remind and I know you mentioned, just a minute ago, but I want to reiterate the medium term EMEA adjusted operating margin guidance remains in that mid <unk> percent.
Got it that's helpful.
On the topic of REIT investments Youre, making reinvestments of about $80 million to $100 million from the cost savings that you're realizing can you talk about which parts of the business.
Those investments are going into and what's been done year to date.
Absolutely.
Precise that we're looking to reinvest approximately $110 million.
It back into the business this year and that really is through those cost efficiencies that we've been able to generate and primarily in the areas of.
K y.
CRE ESG and climate and I know we've spoken about those before I also wanted to add it also relates to modernizing some of our internal data and technology infrastructure and thats about enhancing our products and expanding our presence in the emerging markets and then of course, we started a couple of examples earlier in the call around the data hub and that cloud based analytical platform.
So there are several areas that we're using to enhance organic investments, yes. Let me. Let me give you. An example, so for instance in commercial real estate. Obviously, we made an acquisition of the beginning of the year catalyst to build out our coverage. We've also been investing organically.
And thats coming out of that investment fund and really there is there is two products in particular at the end of the third quarter, we launched our credit lines for commercial real estate product that's targeted at CRE lenders those are our core customers and that product delivers.
More digitized and automated and connected approach that's going to reduce underwriting time for our customers and we're building out a sales pipeline and we're excited about that.
We're also scheduled to launch our portfolio construction and monitoring product for CRE investors.
This coming month.
And similarly.
Speaking with prospective customers. There that gives you. An example of the kind of thing that we're doing out of that investment fund.
Okay.
Very helpful. Thank you.
Our next question comes from Andrew Nicholas with William Blair.
Hi, Thanks. This is actually Trevor Romeo on for Andrew I appreciate you taking the questions.
You touched on this a bit in the prepared remarks, but I was just wondering if you could maybe talk a bit more about your investment in and bid site.
Alright.
Your thoughts on kind of a market for cyber security ratings and analytics.
How that investment enables you to take advantage of that opportunity.
Hey, Trevor welcome to the call.
So I, probably don't need to say that cyber attacks are growing in frequency and severity. They are affecting a much broader range of industries and as we I think we all understand is not just data breaches anymore of those is about also about the physical security of infrastructure and we have done some interesting work in RMS we had looked at.
The sectors that we considered to be medium higher high cyber risk, it's 13 sectors.
Total rated debt more than 20 trillion.
So the numbers here are big and I guess, what I'd say is it's a growing problem material implications, but the real issue is it's very opaque there is little ability of financial markets to be able to quantify cyber risk.
This is a critical area of concern with virtually every customer that I meet with it's probably not surprising. So when you think that our investment in bid site as established these standard add scale and cyber security ratings in risk assessment in a way thats.
Frankly seriously needed and Hasnt been done before so think of this as they've got an outside in approach that's essentially what accompany it looks like to the Internet and then they translate to.
Translate that something that looks kind of like a FICO score and then in the transaction.
We combined our joint venture.
That had our inside out approach.
And Thats working with management and doing a more in depth analysis similar to what you might think of with a credit rating. So together <unk> got the most comprehensive cyber risk assessment capability in the market and we think it is going to be uniquely well positioned to help quantify the financial exposure to cyber risk and.
There are a few things that really attracted us to bid site they've got first mover advantage in this space. They were the first to do this they have a scalable high growth model.
<unk> got over 2000 customers that use their insights for a wide range of use cases. So this will give you a sense I mean, it's it's everything from insurance companies or underwriting cyber insurance and want better visibility into the risk of what their underwriting.
Corporates, who have got and are managing supply chain and vendors.
So we're doing one security assessment and benchmarking M&A.
M&A due diligence national cyber security.
The list goes on and what we're seeing Trevor is increasing demand for our customers to help them be able to get their arms around this and to integrate that into a variety of workflows. So think about <unk>.
It was interesting I was just talking to my team. The other day that came back from a big compliance conference and one of the big themes was.
Ransomware and cyber is now financial crime.
So I think we're going to see an increasing interest and a convergence around us where you've got companies who are going to want to be able back to this idea of know your know your counterparty know your partner and.
They're going to want to have more visibility into the cyber risk of of who theyre doing business with.
So.
There are a range of things that we have identified where we're going to work with them to integrate their datasets and insights into a range of.
Risk assessment workflows. So we're excited about it.
Okay, great. Thank you that was super helpful.
Just a quick follow up for Mark I apologize if I missed this but what was the incentive comp number in the third quarter and your expectation for Q4.
Good afternoon.
Incentive compensation result for the third quarter was approximately.
$107 million.
And we're now expecting incentive compensation to be between 325 and $330 million for the full year.
And that's an increase of around $60 million from our second quarter forecast really GTD improved full year revenue and margin outlook.
A low teens percentage growth and approximately 51%.
Adjusted operating margin respectively.
Okay perfect. Thank you both very much.
Okay.
Our next question comes from Craig Huber with Huber Research partners.
Great. Thank you my first question, Rob if you can just back on the RMS acquisition, you've talked an awful lot about climate risk models here the data there.
Applicable to the insurance industry, but can you touch on the other industries out there seems like a huge opportunity long term.
Sell those capabilities into other areas outside of insurance, that's why first of all thanks.
Yes, that's exactly right Craig So you think about RMS for 30 years has been supporting the insurance industry and underwriting whether rescue call. It climate risk whether risk REIT among other kinds of risks as well they've obviously developed models beyond extreme weather.
Events, but I think what we're all realizing is that weather risk and the physical risks related to climate change are no longer just the insurance industry's problem in fact the.
The insurance industry.
Is going to be very thoughtful about what they insurer on an ongoing basis right. So you can imagine eurobank you've underwritten.
A 10 year loan and during the life of that loan and insurance company decides they are no longer going to going to <unk>.
Sure the collateral because they're concerned about the climate risk and all of a sudden the bank then inherits the climate risk you've got I think a broad understanding now of the impact of <unk>.
Whether there is a whole range of knock on impacts or give you an interesting data point Craig over the last 30 years, there have been something like $400 billion of insured losses related to weather events events, but there have been something like one three trillion $1 three trillion of uninsured right. So this is flowing.
Through organizations P&l's.
Business interruption supply chain disruptions changes to consumer all of those kinds of things.
That that companies have been.
Secondly, retaining that risk and I think organizations around the world are waking up to realize they want to get much smarter about that risk, especially given concerns about climate change and the other thing I would say Craig is.
And we can touch on that.
We can touch on what's going on with the infrastructure and build back better bills. There is going to be a lot of investment in climate resilience right. So this is trying to understand.
Let's say you're a municipality you want to understand what is the impact of climate change on your munis municipality and what kinds of investments should you be making in risk mitigation adaptation and building climate resilience and there are going to be trillions of dollars over the next.
Several decades going into it.
Thinking about not just carbon transition, but also.
Address a building climate resilience and that is where we think the RMS models combined with our expertise from $4 27 and other things.
We think they are going to be very relevant in helping governments corporations financial institutions be able to start to much better.
Zero in on those kinds of risks and think about how it will inform investments.
That's great my other follow up Rob.
Bank loan issuance the outlook there.
These private equity firms out there as you alluded to earlier very flush with.
Capital cash on the balance sheets of stuff and it looks to us like 50% to 60% in recent years of a bank loan issuance as sponsor related to this stuff I mean can you just talk a little bit further about the outlook here, particularly given how low credit spreads are on absolute rates as well just with bank loan outlook. Thanks.
Yes, I'd say, Craig you know near term the bank loan outlook looks good for the reasons that you cited you've got lots of dry powder from the sponsors you've got low default rates and low forecasted default rates at very tight spreads low.
Benchmark rates.
Lots of M&A activity going on so the outlook for leveraged loans looks good I think the only question on our mind is really.
When the dust settles on the year like we said volumes are going to be up something like 100% and the question is.
And will there be a period of digestion like we saw with investment grade this past year or are we going to see some of this.
Some of these underlying drivers.
Turning to allow the loan market to grow off of these record levels.
Don't have an answer for that yet, but we will give you a view on the next call.
Yeah.
Great. Thanks, Rob.
Our next question comes from Jeff Silber with BMO capital markets.
Thanks, so much.
We're hearing a lot these days about the labor shortage and wait for wage inflation I guess I was wondering if you could talk a little bit about your own labor.
Or what Youre seeing is it any different than it had been over the past few months.
Yes, I would say.
Two things.
Like probably almost every company in the United States, we're seeing the same same pressures.
That's led to a little bit of an uptick in our turnover on a historical basis, but we are also.
Picked up our pace of hiring.
So.
I guess, what I would say is that.
Yes, we all hear about some of the.
Some of the compensation issues, but we're also really trying to focus in on the other things that really attract and retain people at our company and I think that has really evolved over the last.
Even just since the pandemic I mean, we see young young people, but I think all of our people. They want to work at a company that has a purpose and where they feel connected to the mission and I can assure you that our people are our very purpose and mission driven at Moody's we're doing some exciting things around combating.
<unk> crime and addressing helping the world address climate change and all of the things that we're doing in the rating agency that play such an important role, but then you've also got workplace flexibility and that is going to be a very important factor in terms of retaining talent is not just about what am I getting paid but where am I going to work and.
All I can say that we've adopted a pretty flexible approach I think most of our employees will be in a hybrid mode. We've given lots of flexibility and frankly, our employees have earned it.
They've done a super job over the last two years of working remotely and.
I think we're really excited to empower our employees to to take advantage of that kind of flexibility when we see that as an opportunity to really a possible competitive advantage in terms of attracting talent going forward.
Alright, Thats, great and then just if I can ask a quick numbers question to Marc Marc can you just let us know what the annualized intangible asset amortization is now that you've completed the Rms deal.
Specifically, let me start with RMS and then I'll move on to the border. So we are still reviewing the intangible asset valuation.
Full RMS we do expect the allocation of the purchase price to be very much in line with historical norms.
Going to be around 40% of those are tangible and yet <unk>.
Amortize the intangible asset what that translates to is around $17 million really for 2021 pretax.
And around $59 million pre.
Pre tax really looking forward from 2022.
Combine that holistically across the portfolio for the full year 2021, we're looking at combined depreciation.
Depreciation and amortization of around 260 ish million.
All of which I would say around 158, maybe 160 Israeli purchase price amortization for this year.
And the remainder would be other regular depreciation and amortization.
Okay. That's really helpful. Thanks, so much mark.
Our next question comes from Andrew <unk> with JP Morgan.
Hi, Mark it's Andrew I want to look back to slide number 19, and could you just tell us what the fourth quarter issuance year over year as implied when you state high single digit growth for the full year 'twenty, one and then I want you to compare that on the same slide because mis revenues.
When you say low teens revenue growth for <unk> revenues for the full year, I think that implies 8% or about 8% mis.
<unk> growth for the fourth quarter could you just confirm that and then share with us the drivers between issuance change year over year and mis revenue growth for the fourth quarter.
Andrew.
Good afternoon, and thank you for your question. So we are guiding to.
Yes.
Revenue outlook of sort of low teens growth for the full year I argue maybe thats towards the higher end of low teens and that does imply to your point year to go.
Mis revenue.
Probably the high single digits, and maybe I'll add a higher end of high single digit for mist.
Issuance side, and we are guiding towards high single digits for the year.
And that would imply.
Mid teens issuance growth in the fourth quarter.
And you are seeing a little bit of.
Negative mix in the fourth quarter as a result of that guidance and Thats, primarily driven by structured.
Finance, specifically the CLO.
Asset class within structured finance, we see greater than sort of a 100% year over year guidance.
The issuance itself.
And it doesn't necessarily translate as well visiting some of the other asset classes into per dollar of revenue so that should explain sort of that.
Those impacted your.
Perfect. Thank you.
And our next question comes from Owen Lau with Oppenheimer.
Thank you for taking my questions I have two quick questions first one more.
Mark would you please give us an update on the ESG revenue. This quarter and then have you change any expectation of yours ESG revenue contribution going forward. Thank you.
Although we are still continuing to guide to a full year at ESG revenue of approximately $21 million on a standalone basis, and then an additional $5 million to $10 million of ESG revenue through integration of our ESG analytics into the mis and MA products and solutions.
For the third quarter itself year to date to ESG revenues very much in line with expectations growing well over 20%. So we feel comfortable about meeting the targets for this year.
Got it that's very helpful and then another one.
About the tax rate I think there are lots of noise and conversation about our corporate tax rate next year.
How does Moody's.
Or do you think about the tax rate.
Going forward and as Andy would you.
Incremental cash.
Tax payment and something like that thank you.
Thanks for the question here, So let me step back just for a minute and.
Addressed your question Holistically, given given tech is a very fluid area at the moment.
And so it may be somewhat premature to speculate about potential impacts so with that said there are really three primary areas on our tax watch list that we are actively monitoring.
First and this one is probably a little bit obvious is the biden administrations tax proposals and the implied impact to Moody's go forward effective tax rates from potential revisions to the corporate debt.
Guilty or the ft II rates.
However, based on the releases that we've seen this morning of the <unk> Theater Legislative framework.
Those items are maybe looking less likely and instead, we're more likely to see potentially a 15% minimum corporate tax on logic operations as well as possibly a 1% surcharge on corporate stock buybacks. So things are evolving quite quickly here, it's a rough order of magnitude depending on where we actually.
And up a 1% change in the effective tax rate that would correspond to around a 14th St.
Impact to the 2021 adjusted EPS.
The second one that we're looking at is clearly the OECD, sorry, OCD net pillars number one and two around a global minimum and digital services tax and then obviously that impact on transfer pricing and then third and finally relates to changes to tax transparency and texts governance and Thats really part of the integral element of corporate <unk>.
For example, the recently issued as standard on this by the Global reporting Institute.
Guiding to full year effective tax rate between $19 and 25% for full year 2021.
So that is just north of well north of 15% proposed minimum corporate tax and so we feel comfortable with where we are.
Thank you very much.
And we have no further questions at this time I'd like to turn the conference back to Rob Fauber for any additional or closing remarks.
Okay. So before we wrap it up just a an advertisement that Moody's will be hosting our next investor day on March 10th 2022 in New York City.
It's going to be a great opportunity to learn more about our business and we hope to have many of you attend that in one way or another.
So with that thank you for joining today's call.
Look forward to speaking with you again in the new year take care.
This concludes Moody's third quarter 2021 earnings call as a reminder, immediately following this call. The company will post the MIF revenue breakdown under the Investor resources section of the Moody's IR homepage. Additionally, a replay of this call will be available after four P. M.
Stern time on Moody's IR website. Thank you.
Okay.
[music].
Sure.