Moody's Corp (MCO)

• Moody's is expected to benefit from the significant growth in private credit markets, which are projected to reach up to $3 trillion by 2028. Moody's is well-positioned to provide independent third-party credit assessments for this expanding sector. -
• Favorable issuance conditions are anticipated for 2025, driven by tight spreads, expectations of lower interest rates, and large refunding walls of nearly $5 trillion over the next 4 years, particularly in speculative-grade debt which is up 19%. These factors should support future growth in Moody's ratings business. -
• Moody's Analytics has a strong new business pipeline, especially in areas like KYC where they've launched new products and are leveraging AI for screening agents. This positions MA for future growth, with maintained expectations of high single-digit revenue growth and ARR in the high single to low double digits. -

• Moody's adjusted diluted EPS guidance for Q4 implies growth will be relatively flat to slightly down compared to the prior year, and down approximately 30% sequentially from Q3, indicating a potential slowdown in earnings momentum. -
• MIS revenue and margins are expected to be lower in Q4 due to anticipated lower revenues, which could negatively impact overall profitability. -
• The company recorded an increase in incentive compensation accruals by 54% in Q3 2024 compared to the prior year, with total incentive compensation expected to be approximately $490 million for the full year, potentially pressuring margins. -

1. Issuance Outlook for 2025
   Q: Can issuance tailwinds offset tougher comps and pull-forward in 2025?
   A: Moody's expects issuance tailwinds to outweigh headwinds in 2025, citing declining speculative-grade default rates, tight spreads near all-time lows, and anticipated lower interest rates creating a favorable environment for new issuance and refinancing. Significant "refunding walls" of nearly $5 trillion over the next four years, growth in speculative-grade maturities, and a modest pickup in M&A activity also support a positive outlook. However, macroeconomic factors, the upcoming election, and geopolitical events pose potential risks. -

2. Pull-Forward Impact on Future Issuance
   Q: Has pull-forward lowered expectations for 2025 issuance growth?
   A: Despite heavier pull-forward in speculative-grade issuance this year, overall pull-forward is in line with historical averages, and forward maturities one year out are 15% higher than last year. Moody's believes this represents a tailwind for near-term issuance rather than a headwind for 2025 growth. -

3. Private Credit Growth Opportunities
   Q: How is Moody's capitalizing on private credit market growth?
   A: Moody's sees significant opportunities in the expanding private credit market. Major players like Apollo and Blackstone consider credit rating agencies essential for independent assessments. Moody's is experiencing rapid growth in rating BDCs and fund finance instruments, contributing to their Financial Institutions Group (FIG) revenue. They are also seeing increased demand for ratings in asset-backed finance and project finance, as investors seek third-party risk assessments. Partnerships, such as with MSCI, aim to further leverage these opportunities - ,. -

4. AI Product Adoption and Impact
   Q: What is the progress and adoption rate of Moody's AI products?
   A: Moody's has launched several AI-enabled products, including Research Assistant, Navigators, an AI Early Warning System focused on commercial real estate, and automated solutions for banking workflows. Adoption is strong among smaller firms, but larger institutions face longer sales cycles due to regulatory and risk compliance frameworks. While this delays adoption, customer interest remains high, and Moody's expects uptake to increase over time - ,. -

5. Margin Expansion in Moody's Analytics
   Q: What are the expectations for MA margin expansion in Q4 and beyond?
   A: Moody's expects the adjusted operating margin in Moody's Analytics (MA) to increase in the fourth quarter, slightly exceeding the guided range due to seasonal revenue strength. For the full year, they are maintaining a margin target of 30% to 31%. Having completed most investments in areas like GenAI capabilities and platform development, the focus will shift to expanding margins by migrating customers from legacy platforms and disciplined management of discretionary spending, reaffirming commitment to medium-term margin targets. -

6. ARR Growth in Research & Insights
   Q: Why didn't Research & Insights ARR growth accelerate as expected?
   A: Research & Insights ARR grew 6% in Q3, lower than the prior 9% due to pressures in the banking sector and longer sales cycles for GenAI products among large financial institutions. While adoption is slower than anticipated, customer satisfaction remains high with new AI-enabled products, and a strong pipeline is expected to drive modest acceleration, though likely at the lower end of high single-digit growth. -

7. Debt Velocity Below Historical Averages
   Q: Where does debt velocity stand, and what does it imply for future issuance?
   A: Debt velocity remains below historical averages—approximately 12% compared to the typical 14%—due to the total stock of debt growing faster than issuance volume. This suggests room for increased issuance in the future, acting as a potential tailwind for Moody's business. -

8. Favorable Revenue Mix in Ratings
   Q: What drove stronger transaction revenue relative to issuance growth?
   A: A favorable revenue mix resulted from opportunistic issuance by infrequent investment-grade issuers, strong growth in leveraged finance—which is typically revenue mix friendly—and an uptick in first-time mandates that carry higher fees. Consistent pricing initiatives also contributed to stronger revenue relative to issuance volume. -

9. Impact of AI Adoption Delays
   Q: Is AI product adoption pacing differently than expected?
   A: Yes, adoption among larger financial institutions is slower due to their need to establish regulatory-compliant risk and control frameworks before deploying AI-enabled solutions. While this extends sales cycles, Moody's remains encouraged by elevated customer engagement and anticipates adoption will grow over time. -

10. Moody's Analytics Medium-Term Targets
    Q: Any updates on MA's medium-term targets amid deceleration?
    A: Moody's plans to update medium-term targets in the next earnings call. Growth strategies focus on expanding customer relationships in financial services through cross-selling and upselling, and targeting corporates with their extensive company databases for new use cases like trade credit and supplier risk. These initiatives aim to drive growth and achieve medium-term objectives despite current deceleration. -

Annual guidance for FY 2024:

• MIS Revenue Growth: High 20s percentage range - (raised from high-teens percentage range - )
• MIS Adjusted Operating Margin: 59% to 60% - (raised from 58% to 59% - )
• Overall Revenue Growth: High teens percentage range - (raised from low teens percent range - )
• Expenses: Increase by approximately 10% - (raised from high single-digit range - )
• Adjusted Operating Margin: 47% to 48% - (raised from 46% to 47% - )
• Free Cash Flow: Approximately $2.3 billion - (raised from $2 billion to $2.2 billion - )
• Adjusted Diluted EPS: $11.90 to $12.10 - (raised from $11 to $11.40 - )
• ARR for MA: High single to low double digits - (no change from prior guidance - )
• MA Adjusted Operating Margin: 30% to 31% - (no change from prior guidance - )