Moody`s Corp (MCO) — Q4 2020 Earnings Call Transcript

Thank you. Good morning and thank you for joining us to discuss Moody's fourth quarter 2020 results and our outlook for full year 2021. I'm Shivani Kak, Head of Investor Relations. This morning, Moody's released its results for the fourth quarter of 2020 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.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 is 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 a reconciliation between all adjusted measures referenced during this call and 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. 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, 2019, our quarterly report form on 10-Q for the quarter ended March 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 statement 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 will now turn the call over to Rob Fauber.

Thanks, Shivani, and good morning, and thanks to everybody for joining today's call. I'm going to begin by summarizing Moody's full year 2020 financial results and then I'll provide an update on our strategic direction, and following my commentary, Mark Kaye will provide further details on our fourth quarter 2020 results, as well as our outlook for 2021. After our prepared remarks, we'll be happy to respond to any of your questions. First, on behalf of the entire Moody's management team, I'd like to extend my appreciation to our employees for their steadfast dedication and resilience. Your remarkable adaptability and commitment to providing our customers with world-class service and supporting each other is key to our continued success. And we're really proud of your accomplishments. Our employees helped Moody's achieve record financial results in 2020, with revenue growth of 11% and an increase in adjusted diluted EPS of 22% against the backdrop of heightened credit market activity. Moody's Investors Service generated $3.3 billion in revenue, which was up 15% from the prior year. Moody's Analytics also performed well with revenue totaling $2.1 billion, up 6%, demonstrating the strong value of our products and solutions during these unprecedented times. For 2021, we project Moody's revenue to increase in the mid-single digit percent range. This is driven by our expectation that strong growth from MA and a favorable issuance mix for MIS will offset an expected decline in global debt activity. Moody's 2021 adjusted diluted EPS is forecast to be in the range of $10.30 to $10.70. In 2021 and beyond, we're going to continue to deliver solutions to meet our customers' evolving needs by integrating and leveraging our data and analytic capabilities, and investing in innovation. In addition, recent acquisitions combined with organic investments position us well for the future and reinforce our long-term growth opportunity. Finally, we continue to emphasize our role as responsible stewards of our stockholders' capital. While investing in the business remains our top priority, we'll seek to return approximately $2 billion to our stockholders this year in the form of dividends and share repurchases. During the full year results, Moody's revenue grew an impressive 11%, with record revenues from both MIS and MA that increased 15% and 6% respectively. On an organic constant currency basis, MA revenue increased 8%. Moody's adjusted operating income rose 16% to $2.7 billion and the adjusted operating margin expanded by 230 basis points to 49.7%. Adjusted diluted EPS was $10.15, up 22%. Together we achieved many milestones in 2020; for the first time, revenue at MIS and MA surpassed $3 billion and $2 billion respectively, with MIS having rated more than $5.5 trillion in global issuance. We also made significant progress in delivering for our stakeholders. During 2020, we made an $11 million contribution to the Moody's foundation to support the work to empower people with the financial knowledge, resources, and confidence they need to create a better future and to reach their potential for themselves, their communities, and the environment. The events of the past year have also underscored the importance of a strong commitment to diversity and inclusion, both internally and externally. This past year, we launched a number of initiatives to further support diversity and inclusion across our company, as well as within the communities we operate, including $2 million in commitments to support equal justice and educational opportunities. On the environmental front, we furthered our sustainability leadership by enhancing our disclosures and establishing clear commitments to environmental sustainability. As a result, Moody's was recognized by CDPA with an A score for addressing climate change. In 2020, amidst the pandemic, we continued to invest in our business and position the company for ongoing growth. In addition to a range of product launches, we also acquired or invested in companies that complement and enhance our products and solutions and expand our market reach. In September, we restructured our ESG assets under a single unit. This aligns our efforts across the firm, strengthens our thought leadership in the ESG space, and better positions us to meet the needs of the market. Turning to MIS, credit market activity reached record levels in 2020, especially for non-financial corporate issuance, which grew over 16% from its previous high in 2017 and was 34% above its prior five-year average. Both investment-grade and speculative-grade debt benefited from a favorable environment as issuers fortified their balance sheets and opportunistically refinanced debt. However, leveraged loan volumes remain modest for most of the year despite an uptick in M&A activity in the fourth quarter. Mark is going to provide some details on MIS' 2021 issuance expectations when he discusses our guidance. Now pivoting to MA, we continued to see significant growth in recurring revenue, which now comprises over 90% of its total. This has been driven by our strategic focus on building our subscription-based business with mission-critical products and services that are embedded into customer workflows, supporting strong customer retention rates. As a result, MA’s margin has grown 480 basis points over the past three years. This expansion is inclusive of the organic and inorganic investments that we've made in the business. Before I turn it over to Mark, I thought I'd provide some thoughts about the opportunity in front of us. To do that, I think it's helpful to reflect on our journey as a company over the last 15 years, during which we've expanded our capabilities to meet the evolving needs of our customers. Back in 2007, we formed Moody's Analytics, marking the first step in broadening beyond the rating agency with the development of software and analytics businesses. From 2017 to 2020, we built out substantial data and analytics capabilities, starting with the acquisition of Bureau van Dijk, one of the world's largest company databases. We complemented that by adding depth across people, properties, ESG, and climate, just to name a few. This strategy positions us well to serve a wide range of risk assessment markets, where we can integrate data and analytics and deliver insights, all enabled by technology. Looking forward, organizations face a complex interlinked world of risks and stakeholders. COVID has accelerated the digitization of manual processes across the financial sector and highlighted the importance of resilience in scenario planning. Organizations are managing a variety of risks that simply weren't on the radar screen years ago, ranging from ESG to climate, cyber threats, and financial crime. They're seeking a more holistic, 360-degree view of risk – who they're connecting to, and who they're doing business with. To succeed, companies must increasingly incorporate alternative datasets into their core risk processes and are looking for insights amidst the proliferation of data. A variety of stakeholders are urging companies to better identify and manage these risks, including regulators, customers, and employees, and there are significant financial and reputational impacts for not managing these risks effectively. With this backdrop, customers increasingly seek trusted partners who possess the scale, rigor, and capabilities to help them make better decisions regarding a wider range of risks. As CEO, I am focused on three key areas to meet these market needs and realize the full potential we have as an integrated risk assessment business. First, sharpening our understanding of our customers' evolving needs, delivering solutions that can draw on the breadth and depth of our capabilities. Second, investing with intent to grow and scale, deepening and extending our presence and expanding risk assessment markets as we've done successfully with 'Know Your Customer.' And third, collaborating, modernizing, and innovating with a focus on technology interoperability and data access to maximize our data analytic and technology capabilities on behalf of our customers. Of course, this is all underpinned by supporting and developing our people, ensuring we have the skills and engaged workforce needed to drive the business forward. For the last year, we've referred to Moody's as an integrated risk assessment business. Today, we serve a wide range of risk assessment use cases and end markets collectively worth over $35 billion. Our largest risk assessment business is the rating agency, serving fixed income issuers and investors. Moody's has evolved to help customers with everything from customer onboarding, commercial lending, to sustainable investing, among many other areas. What has been a winning formula for us over the years is combining our data, analytics, and insights with deep domain expertise and technology enablement, delivering solutions for customers to identify, measure, and manage risk. We're not just a data company or a software company, but a business with a unique combination of strengths and assets, as well as a deeply trusted brand. We continue to invest in our people, data sets, and analytic capabilities as they become increasingly important across a growing number of risk assessment use cases in markets. That's what we mean by an integrated risk assessment business. Earlier this week, we announced our intention to acquire a company called Cortera. We're excited about the valuable assets they'll add to the Moody's portfolio, including a world-class database on private companies in North America and one of the most comprehensive databases of commercial credit information, featuring data and analytics on over 36 million companies. We plan to integrate Cortera data into our offerings to better serve various markets, including commercial lending, customer onboarding, and supply chain management. By combining Cortera's data with Moody's proprietary analytics, we look forward to helping our shared customer base make better decisions about their business relationships. Cortera builds on several acquisitions we've made over the past few years, beginning with the Bureau van Dijk business in 2017, followed by RDC and Acquire Media this past year. Together, they form a comprehensive suite of reference and entity data and AI technology to serve a range of use cases, including Know Your Customer and compliance. In 2020, Moody's Analytics generated approximately $525 million in annual sales from these solutions, and we expect them to produce high teens growth in 2021. The Know Your Customer and compliance use case, in particular, is generating over $200 million in annual sales and is projected to grow by over 25% in 2021, continuing to be our fastest-growing risk assessment market. I'm now going to turn the call over to Mark to provide further details on Moody's fourth quarter results as well as our outlook for 2021.

Thank you, Rob. In the fourth quarter, Moody's total revenue increased 5%, with MA and MIS contributing 8% and 2% of growth, respectively. Moody's adjusted operating income of $531 million was down 5% from the prior year period. Solid revenue growth in the quarter was outpaced by increased operating expenses, including non-recurring items such as severance and incentive compensation. This resulted in a 410 basis point decline in the adjusted operating margin. Fourth quarter adjusted diluted EPS was $1.91, down 5%. For MIS, fourth quarter 2020 revenue benefited from a favorable issuance mix across all lines of business, increasing by 2% against a 3% aggregate decline in global MIS rated issuance. Financial institutions were the largest contributor in the fourth quarter, growing 12%, double the 6% increase in issuance. This was driven by infrequent U.S. Bank issuers taking advantage of the low rate environment. Corporate finance revenue grew 2% despite a 9% decline in issuance. This was primarily the result of strong contributions from both U.S. leveraged loans and speculative-grade bonds as issuers continue to opportunistically refinance debt and support M&A deals. Revenue from public project and infrastructure finance declined 3% against a 12% increase in U.S. public finance activity, as many issuers addressed refunding needs earlier in the year to avoid potential election-related volatility. In structured finance, revenue decreased by 11% compared to a 31% decrease in issuance. This is primarily due to lower CMBS activity, despite signs of improvement in CLO. In the fourth quarter, first-time mandates grew 32%. For the full year, we received approximately 700 new mandates. MIS expense growth included non-recurring costs such as severance related to business efficiency initiatives and incentive compensation accruals associated with strong full year performance. Consequently, expense growth outweighed revenue expansion for the quarter, resulting in an adjusted operating margin of 48.3%. On a full year basis, MIS's adjusted operating margin expenses rose by 170 basis points to 59.7%. Moving to MA, fourth quarter revenue grew 8% or 5% on an organic basis, with continued robust demand for KYC and compliance solutions driving a 21% increase in RD&A revenue, 11% on a non-organic basis. This is further supported by sustained customer retention rates in the mid-90% range and strong sales of research subscriptions and data feeds. In ERS, low double-digit recurring revenue growth driven by strong demand for insurance products was offset by an expected decline in comparable year-over-year one-time software licensing fees and implementation services, resulting in an overall growth rate of 1%. Further, ERS's subscription products, the acquisition of RDC, as well as the divestiture of MAKS in 2019 contributed to a five percentage point increase in MA's returning revenue, now comprising 91% of its total, up from 86% in the prior period. In the fourth quarter, MA's adjusted operating margin increased 280 basis points, benefiting from lower year-over-year incentive compensation accruals. For the full year, MA's adjusted operating margin increased 160 basis points, supported by growth in recurring revenue as well as expense efficiency initiatives. Turning now to Moody's full year 2021 guidance. Moody's outlook for 2021 is based on assumptions regarding various geopolitical conditions, macroeconomic, and capital market factors. These include but are not limited to the impact of the COVID-19 pandemic, responses by governments, regulators, businesses, and individuals, as well as the effects of interest rates, foreign currency exchange rates, capital markets liquidity, and activity in different sectors of the market. The outlook reflects assumptions about general economic conditions, the company's own operations and personnel, and additional items as detailed in the earnings release. Our full year 2021 guidance is underpinned by the following macro assumptions. 2021 U.S. GDP will rise approximately 4% to 5%, and Euro area GDP will increase in the range of approximately 3.5% to 4.5%. The U.S. unemployment rate will gradually decline to between 5% and 6% by year-end, and benchmark interest rates will remain low, with high-yield spreads falling below approximately 450 basis points. Finally, the global high-yield default rate is expected to decline below 5% by year-end. Our guidance assumes foreign currency translation at end of quarter exchange rates. Specifically, our forecast for 2021 reflects U.S. exchange rates for the British pound of $1.37 and $1.22 for the euro. These assumptions are subject to uncertainty and results for the year could differ materially from our current outlook. In 2021, we project that Moody's revenue will increase in the mid-single digit percent range, given our approximately flat revenue outlook for MIS and the expectation of low double-digit growth in MA. Operating expenses are projected to increase in the mid-single digit percent range, and savings generated from our cost efficiency programs will be reinvested in key strategic initiatives. After expanding Moody's adjusted operating margin in 2020 by 230 basis points to 49.7%, we are projecting 2021 margins to remain in the range of 49% to 50%. We estimate net interest expense to be in the range of $190 million to $210 million. The full year 2021 effective tax rate is anticipated to be between 20% and 22%. Diluted EPS and adjusted diluted EPS are forecasted in the range of $9.70 to $10.10 and $10.30 to $10.70 respectively. Free cash flow is expected to be in the range of $1.9 billion to $2.1 billion, and we plan to return approximately $1.5 billion through share repurchases, subject to available cash, market conditions, and other ongoing capital allocation. Additionally, today we announced an 11% increase in our quarterly dividend, bringing the total expected capital return to stockholders in 2021 to approximately $2 billion. For a full list of our guidance, please refer to Table 12 of our earnings release. For MIS, we estimate that revenue will be approximately flat year-over-year, with global rated issuance projected to decline in the high single-digit percent range. We forecast that full year investment-grade and high-yield activity will decline by approximately 30% and 5%, respectively. In contrast, we anticipate that leveraged loan issuance will grow by approximately 10%, supported by increased M&A activity. Structured finance issuance is expected to grow in the 15% to 20% range due to increased asset formation and loan volumes contributing to larger pipelines for new CLO creation. In 2021, we expect 700 to 750 first-time mandates with the strongest contribution from leveraged finance activity. First-time mandates contribute both to the current year's transaction revenue base and to recurring monitoring fees. MIS's adjusted operating margins will remain stable at approximately 60%. Disciplined cost management is enabling ongoing investment back into the rating agency, enhancing our offerings and delivering greater value to our customers. For MA, we project 2021 revenue to increase in the low double-digit percent range, supported by high single-digit constant dollar organic growth, as well as recent M&A activity and favorable movements in foreign exchange rates. Robust customer demand for KYC and compliance solutions, including contributions from the recent Cortera, RDC, and Acquire Media acquisitions, support future RD&A revenue growth. These expansions are further reinforced by strong retention rates for our research and data feed products. While ERS is anticipated to continue growing at a double-digit rate, we expect that transaction-based revenue will decline by 20% to 30% year-over-year. MA's adjusted operating margin is projected to be approximately 30% in 2021. Our outlook assumes continued positive margin expansion of approximately 50 to 100 basis points, inclusive of ongoing organic and inorganic investments in the business. Last quarter, we highlighted $80 million to $100 million of cost savings from our expense management initiatives that we would be reinvesting back into the business in 2021. In addition to the KYC and compliance opportunity, our focus is on investing to meet our customers' evolving needs in ESG and commercial real estate. We are also strengthening our presence in emerging markets, including China and Latin America. Furthermore, we continue to invest in our IT infrastructure and product development. Over the long-term these investments will reduce costs, promote interoperability, and accelerate decision-making. Before turning the call back over to Rob, I would like to highlight a few key takeaways. Following a record year that validated our strategic direction, we're pleased to provide a robust outlook for 2021. This is driven by high demand for our data analytics and insights and reaffirms our long-term growth opportunities. Our capital allocation priorities remain unchanged, and we prioritize attractive opportunities to invest in our business before returning capital to our stockholders in the form of dividends and share repurchases. Finally, we believe that Moody's long-term sustainability is best served by meeting the needs of all of our stakeholders. By actively supporting our employees, customers, and communities, we are able to demonstrate our commitment to sustainable stewardship and create enduring value for our stockholders. And with that, let me turn the call back over to Rob.

Thanks, Mark. This concludes our prepared remarks and Mark and I would be pleased to take your questions. Operator?

The first question I wanted to ask was about margins, and specifically the margin outlook for 2021, thinking about balancing operating leverage from the top-line between investments. I appreciate the color that you guys gave in the extra investment that you're making in emerging markets and taking some of the cost savings. Generally, you guys have done great with margin expansion over time. And yet here we have a year coming up where margins are going to be a little bit more constrained. So how do you think about that balance, driving margin expansion using top-line growth that you will have in 2021, especially in MA, coupled with the need to continue to reinvest?

Thank you very much for the question. This is Mark here. We are constantly pushing to increase margin while ensuring, to your point, that we are balancing that against the need to invest in the business to maintain and accelerate top-line growth. As we noted in the prepared remarks, there are a number of exciting investment opportunities that we've identified for 2021. We're going to take advantage of those while preserving the margin at approximately 49% to 50% for the year after expanding the margin by 230 basis points in 2020. I gave a little bit more color in terms of how that's broken down, that might also be helpful. If we think about creation of margin in 2021 through operating leverage, that's probably 50 to 100 basis points, and that's going to come from things like scalable revenue growth and a little bit of a benefit from the reset of an incentive compensation accrual. If I think about even creation of additional margin from savings and efficiency, that could be between 140 and 180 basis points to the positive, and that's going to come from things like our restructuring program, which we can speak about later in the call, increased automation, utilization of lower-cost locations, procurement efficiencies, and real estate efficiencies, et cetera. Those positive margin creations are going to be offset by organic investments that we're going to be making back into the business. We spoke last quarter about that $80 million to $100 million that we're going to be reinvesting into key strategic areas, which we can talk about further on the call if you'd like. And then there's around 50 to 100 basis points from some of the recent M&A acquisitions that we've done. And then of course, there's that math element in terms of business mix, where MA is forecast to grow faster than MIS in 2021, and that's probably a headwind of around 25 basis points. So if you put that all together, you get a sense of how we're managing the portfolio of businesses to ensure continued margin expansion while we invest in growth in the future.

Anyways, maybe you're starting off on MIS, and sorry if I missed the last question, but can you perhaps attack the delta between your issuance forecasts and then also how you get to the flat revenue forecasts, particularly interested in the recurring revenue given the solid issuance that we had last year, and then also, obviously, pricing and mix any comments that will be helpful as well. Thank you.

So maybe let me talk to you a little bit about the 2021 issuance outlook. As I said back in October, we still think issuance is going to be down modestly year-over-year, and we're guiding down in the high single-digit percent range. While we expect some very robust issuance activity to continue, we've got some favorable market conditions. The challenges for year-over-year growth are the tough comparables after two very strong issuance years between last year and the year before. Our outlook assumes that these constructive market conditions continue largely for 2021, widespread distribution of a vaccine, and improving economic growth. We're seeing continued recovery in M&A activity, with a lot of sponsor-driven activity and sustained central bank support, along with potentially another round of stimulus. All that, I think, will be underpinned by a continued low-rate environment that's going to support refinancing. This means that we expect growth in areas like our rating assessment service that supports M&A activity, leveraged finance, and various parts of structured finance and so on. So Alex, maybe let me break it down by sector, and then you can get a sense and do your own comparisons. For investment-grade, we're looking at something like a 30% decline moderating after what we all know was an extraordinary issuance year last year. In particular, U.S. corporate investment-grade issuance was up almost 80% in 2020. Just very tough comparables. That said, our outlook for 2021 investment-grade would still be one of the strongest years on record. We think issuers will continue to come to market, driven by refinancing amidst all the ongoing low rates, tight spreads, and M&A activity. For leveraged finance, we estimate that high yield bonds will remain elevated relative to recent years, estimating a very modest decline of 5%. I think high-yield activity outside the U.S. should improve after a slower year in comparison to the U.S. I think we'll see investor demand remain quite strong in the ongoing search for yield. For leveraged loans, we believe we're going to see some growth driven by M&A and LBO activity, supporting issuance. For structured finance, we see that improving somewhere in the range of 15% to 20%. It's a mixed bag as you think about the different components of structured finance. ABS growth will be supported by asset classes like auto loans, where we're seeing good activity, a little more muted in places like credit cards and student loans. We'll see some growth in RMBS as well as modest growth in CMBS, with the market for hold asset securitizations experiencing some distress. For CLOs, depending on what's happening in the leveraged loan market, we expect some growth there from stronger supply and tightening spreads. Lastly, in public finance, we expect to see a very strong year consistent with last year.

And you care to talk about recurring versus transaction and pricing?

From a recurring revenue standpoint, I think we'll be looking at probably something in the low to mid-single digits. We've received questions about how we characterize recurring revenue. If we included our rating assessment service and access issuance fees, we’d be looking at something in the mid-single digits. I think, in general, when you look at it on a full-year basis, there is a pretty comparable outlook for recurring revenue.

Okay. And then secondarily, if that's okay, quick one, just on CCXI, definitely some headlines in December on China, which is obviously an important topic for a lot of people. Can you just flesh out how you are feeling around that JV considering that, essentially, you're out of the market for a few months, highlighting that maybe the market is ready for a different rating agency arrangement over there?

Yes, Alex, so maybe just to touch on that. Obviously, CCXI had a license suspension, a three-month suspension coming at the end of December, and they're taking a number of actions to address that. As I think about China's strategy more broadly, we have MIS cross-border rating business; we have the MA business in China, with really no impact to that. In terms of the domestic rating market, it's unfortunate that CCXI had this issue, but they do remain the leading domestic credit rating agency in China. Early signs from the Biden administration don't lead us to think that U.S. policy towards China is likely to soften meaningfully. So for us, looking at this, the environment for U.S. firms in important sectors like credit ratings will remain challenging to be truly successful in the long term. We're continuing to collaborate with CCXI on commercial engagement. Additionally, given some of the challenges we've seen in the domestic credit rating industry, we are also thinking about how we can capitalize on demands for green finance and insights into small businesses and Know Your Customer solutions. Thinking beyond CCXI, back in October, we set up a new dedicated Product Development Group based in Shenzhen to develop data and analytics and other offerings for China's domestic risk markets. In November, we acquired a minority stake in a company called NEO Tech, which is a cutting-edge provider of alternative data and insights serving the ESG and KYC markets in Greater China. Lastly, we made an investment in a company called SynTao Green Finance, which we’re excited about to support the growth of that market.

Rob, maybe you could help us understand your thoughts around M&A? Would you say you're more open to large deals, or would you continue to stick to small or medium tuck-ins? And what would be sort of the most attractive for you in an M&A target? And what return thresholds do you look for?

I'd say our M&A criteria remain very consistent, and we've talked about that over the years. We are looking for things that will advance our strategy. Cortera is an interesting example because it allows us to acquire data that is very valuable across multiple customer segments and risk assessment use cases. So that's very attractive. Another good example would be what we did with climate, acquiring 427 a couple of years ago, but that climate data has been integrated into a wide range of risk offerings across MA, in addition to the standalone 427 offerings. Those kinds of opportunities are very interesting to us because we can acquire data and analytic capabilities relevant across a range of risk assessment use cases. When there's strong industrial logic, it helps us meet the criteria we’ve maintained over the years.

That's great. And then, you've mentioned in the past year ESG revenue was about $15 million to $20 million. Can you just update us on where that stands now and how fast it's growing? What particular areas of focus within ESG are you looking at in '21 relative to initiatives and where do you see the most opportunity there?

In 2020, our ESG revenue was approximately $17 million. We're looking to grow that by around 25% in 2021 through discrete sales to external clients. The interesting piece about ESG revenue for 2021 is, in addition to that, we're looking at another $5 million to $10 million in revenue from either MIS using their data and analytics to inform ESG data, or integrating ESG into our MA products, including distributing ESG through CreditView and CreditEdge. There are many exciting developments we have going into 2021 in terms of how we're thinking about our ESG products. This includes integrating our climate and ESG content into CreditView, updating our physical risk scores for over 5000 companies leveraging Bureau van Dijk's data and methodology, and increasing our coverage around transition risks. We're also incorporating ESG within credit, having ESG issuer profile scores as part of our credit impact frameworks. There's a lot of opportunity for us in this area.

Rob, thanks for providing the color on the integrated risk assessment market, focusing on KYC and compliance, obviously very high growth areas. I was just wondering as you think about your group going forward, are there other use cases or geographies which you think are attractive from a growth perspective?

A couple of things I would say. First, I'm going to talk about the broad portfolio of RD&A in MA where we currently have that business. The KYC and financial crime solutions is one area where we see strong growth rates. There's also a lot of demand for data and analytics on private companies that support integrating that data into lending and transfer pricing decisions. In the broader portfolio within RD&A, we have a lot of credit research, data tools that are increasingly incorporating content such as ESG, climate, and cyber. We're also building out our commercial real estate content, which we have seen increased demand from customers for analytics and workflow tools for lenders and investors. Additionally, we are seeing good demand for economics content as well, featuring support for scenario analysis, market planning, and stress testing.

That's very helpful color, Rob. Maybe a quick question on the organic growth for the MA business, the high single-digit growth. If you could help parse the growth from RD&A, the recurring growth in ERS, and then obviously, Mark, you talked about some of the headwinds from the shift to the subscription model. Any incremental color would be helpful.

Absolutely. I think forward to 2021, specifically, the majority of growth is likely to be driven through the RD&A segments. Rob spoke earlier, we discussed ERS and its ongoing transition to a more recurring revenue basis. That will offset some of the declining one-time sales in the ERS space. If you're thinking about achieving some of that low double-digit guidance, most will come through RD&A in 2021. We will see small growth, but still growth within ERS throughout the year.

I hope you can provide a bit more detail on the different strategic investments outlined on Slide 23. Maybe some examples of investments you're making that you are particularly excited about. Is there any single initiative that's outsized relative to the others in terms of both investment standard and total opportunity?

We feel very positive about some of the areas we're investing the $80 million to $100 million of cost efficiencies into. For instance, we can start with the commercial real estate side, both growth through our recent business, and then the integration of some of the data sets that we produce. Additionally, through KYC and compliance, it involves further integration of the Acquire Media, RDC, Bureau van Dijk, Cortera data sets that can create synergistic opportunities. Furthermore, on the ESG side, we are beginning to build through this. We spoke a moment ago to one of Toni's question about the creation of new products and opportunities with an integrated approach.

Adding to that, Mark, when we focus on KYC and compliance alongside our company and reference data, we continue to make investments to enhance our products in these areas. We’re three years out from the Bureau van Dijk acquisition, which has been a core piece of our growth. Collectively, our company and reference data business are growing sales by something in the high teens. We are investing in complementing our Orbis data and in assessing growth, with recent investments in RDC for people data and Acquire Media for adverse media. Additionally, the Cortera acquisition will give us more data on private companies and commercial credit, helping continue to build what we think is the most useful and usable database on companies. Just a recent organic investment includes integrating the Orbis database with the RDC data in one interface, a powerful screening tool that creates efficiency for customers. We’ve already seen customer traction with this initiative.

Great. That's helpful. Then maybe a follow-up to that KYC discussion—obviously, it’s among the faster-growing opportunities at Moody's from a margin perspective. As that becomes a bigger part of M&A, is it accretive to the long-term margins for that business or pretty consistent with the segment as a whole?

Absolutely. As we think about longer-term, KYC opportunity continues to be attractive from both a revenue and margin perspective. We're not necessarily as focused on margins in the near-term with respect to bolstering the integrated business. We are very focused on ensuring that margin processes approach something like the Bureau van Dijk margin profile over the medium term. That's how we are balancing revenue growth versus margin profile over the next 12 to 18 months.

Overall, KYC and compliance represent a big-scale business with an attractive margin profile.

I just wanted to focus on Cortera. I was hoping you could give us a little more on how big that asset is and what is already encompassed in it. Just guide us through that. Also, see how much of a gap, let's say, for income of the U.S. call it BvD is intact.

The acquisition of Cortera is not a big acquisition; however, it's an important step in enhancing our data business. They've already been an important data contributor to our Orbis database. We've known Cortera for years and collaborated with them on the Know Your Supplier portal rolled out last year during COVID. Their data is contained within Orbis but by owning Cortera, we unlock access to their entire suite of reference and trade credit data, featuring 36 million companies and a trillion and a half data points—an enormous amount of data we expect will have real relevance across Moody’s franchise. This data enables insights into company spending and commercial credit. Regarding growth, Cortera has really focused on building out this data asset instead of chasing growth; they have a very small sales force. Therefore, while we will enhance their offerings with our well-established proprietary credit and company data, our significant sales force will better serve the Cortera core market.

Got it. And then I guess a little data puzzle that you're assembling all across Moody's Analytics. That sounded exciting. I was wondering how you can visualize ERS within Moody's Analytics.

Yes. I would think of ERS as an enormous content engine. As you're getting a sense, this company and reference data we're talking about form a significant part of it. We also have substantial content engines in the rating agency. We’ve commercialized the offerings in commercial real estate and have a breadth of credit research data tools that increasingly incorporate content like ESG and climate. We’re leveraging data to build software as a service, allowing for extensive content distribution. ERS is effectively a software used and embedded into customer workflows at financial institutions. It’s very sticky once installed.

I want to dive deeper into your operating margin expectations by segment. Holistically, you're expecting margins to be relatively flat this year. Assuming MA margins continue to increase, how are you thinking about MIS margins and their sustainability as issuance levels begin to normalize?

Let me step back for a minute to talk about the fourth quarter and expectations for 2021. We are aware of the pressures on margins due to increased expenses but it appears to be primarily driven by the pandemic. If I look at MCO in total, the primary driver of the expense growth was a 16% uptick. Of that, 11% we can likely attribute to the one-off costs not recurring faster. The underlying core expense base remains consistent and disciplined. In 2021, we feel comfortable maintaining our operating expense base to be supportive of revenue. This led to our guidance towards approximately a 60% MIS margin outlook for 2021.

Got it. That's helpful. Switching gears, if we look at your issuance expectations, you're looking for high yield issuance to be round about mid-single-digit off of difficult comps. You also cited some factors that can be very conducive to high yield issuance, like low default rates, low spreads, improving equity environment, M&A activity, etc. How would you handicap the potential upside or downside versus your base case expectations for high yield?

I might broaden the lens and talk about issuance overall before focusing on leveraged finance. In terms of upside, a faster than expected health recovery can lead to quicker economic recovery supporting increased issuance, especially from the Biden administration regarding potential infrastructure. M&A is also a wildcard and can surpass levels seen in kind of 2018, 2019. Leveraged loans, M&A activity, and sponsor activity would positively affect that market. The headwinds arise from companies with ample liquidity deciding whether to pay down debt, invest, or pursue acquisitions. If the economic recovery through health takes longer, that could yield a downside. Interestingly, if COVID worsens, we don't expect a liquidity surge like in Q2 last year since companies currently have healthy cash flow.

I just want to quickly go back to the expense guidance up mid-single digit, can you talk about your assumptions in terms of T&E and marketing? Do you also include, for example, additional severance and an incentive or any charges related to real estate or reorganization? What are the key drivers of expense growth?

Regarding the attribution of 2020 actual expenses to 2021, there are really four primary categories. The first category is savings and efficiency. The $80 million to $100 million we anticipate creating is probably around 3% to 3.5% of that expense base. The goal of these savings and efficiencies is to self-fund many of the opportunities we see in 2021, as well as enhancing technology infrastructure for efficiency. This investment base will probably consume another 3% to 3.5%. You can expect around 2% to 2.5% of expenses related to incremental M&A activity driving towards that mid-single-digit growth guidance. We also consider FX in terms of headwinds, where the dollar is expected to depreciate relative to 2020. Additionally, we don't expect the same degree of restructuring and impairment charges compared to 2020. With respect to T&E expenses, we've modeled an increase as we move through the year. We are largely returning to more normalized levels by Q3 or Q4, although still lower than pre-pandemic levels.

So my follow-up is, thank you for the color on Slide 15; I think it's very helpful. Could you please talk about maybe the pace of the integration in terms of these offerings? How do you expect to realize the synergy of these four great assets and drive additional growth rather than just some of its parts?

Yes. I would assess our integration progress with Bureau van Dijk as having exceeded our synergy targets set during the acquisition; we're pleased with that outcome. Another significant asset, RDC, has also performed according to our expectations. The earlier example provided on integrating RDC data into Orbis and creating a unified offering showcases our success in achieving our integration goals. With the recent acquisition of Acquire Media in October, we created an integration management office to expedite business value, and ensure corporate integrations proceed swiftly to help realize the full potential of what we are acquiring.

You might have answered this earlier. I just wanted to get a bit of clarification. I think Toni had asked about your M&A strategy. Do you expect the majority of acquisitions to be in the MA area, rather than MIS? Is there anything in MIS that might look attractive to you?

Yes. Historically, that has been the case; there just aren't that many scaled opportunities to build out the rating business. You did see us make investments last year in a Malaysian rating agency, which is significant because it's one of the largest Islamic finance markets in the world. But, as you look around the globe, sizable domestic markets seem limited, but we are active in them, such as India and China. By focusing on MA, you can see the expansive opportunity in terms of the scalable addressable markets, growth rates, and customer demands.

Okay, that's helpful. And then just a quick question for Mark. Looking at your MIS revenue guidance, can you scope out the impact of acquisitions in 2021?

In terms of MIS for 2021, we are looking at organic growth consistent with our overall outlook of flat for the year. Organic acquisitions would be relatively immaterial to overall MIS. On the other hand, MA tends to expect around 2% to 3% growth from the inorganic acquisitions completed over the last four months.

I just want to get a little more clarity on the fourth-quarter costs. What was incentive compensation there? And for the full year, can you quantify how much of the costs in the fourth quarter are non-recurring? You called out the $30 million restructuring charge in your presentation packet and press release but what else is in there that we could quantify that might be considered non-recurring?

In 2020, the full-year incentive compensation was approximately $246 million, consistent with 2019 numbers. For 2021, the incentive compensation is expected to be between $50 million to $60 million per quarter, higher than 2020 due to aligning incentive compensation plans of recent acquisitions into our business. In terms of the fourth-quarter specifics, the restructuring severance is around $36 million, and incentive compensation has exceeded our normal run rate by approximately $23 million. Those are the two keys to consider regarding one-time expenses.

Rob, with the new Biden administration here, what seems to be the outlook for higher corporate tax rates, potentially increased regulations, what could that mean for debt issuance? Also regarding the potential changes and impact on ESG, how favorable could that be?

Regarding a potential increase in corporate taxes, I don't think that’s a priority for the Biden administration. The COVID recovery and economic recovery are near-term focuses. We may see discussions in the latter part of this year for potential changes in 2022. However, I would suggest that while the tax shield may be positively affected, other factors affecting issuance remain more impactful, such as the pandemic recovery, low rates, geopolitical factors, and customer behavior around cash flow management. Regarding ESG matters, it certainly appears the Biden administration is highly focused on climate change. We've observed a push for rejoining the Paris Agreement and increasing ESG disclosures. We believe this movement will provide a more structured and comparative landscape benefiting our capabilities in delivering ESG data and analytics.

Is the restructuring you’ve implemented going to improve the ESG business as well? Also, could this have an impact on accretion overall?

In late December, we approved a new restructuring program that we estimate will result in annualized savings of approximately $25 million to $30 million. This program specifically relates to the strategic reorganization within the MA reportable segment. There was another restructuring program initiated in July primarily in response to COVID-19 impacts. Combined, total restructuring charges in 2020 were around $50 million, and those actions are expected to generate significant run-rate savings, enhancing our future growth prospects.

I was wondering if you could cycle back to what you're building within RD&A and how competitive the environment is for acquiring these data assets that you hope to continue doing. Given the current market, how do you think about that competitiveness and what differentiates Moody's as a buyer?

It's a very competitive market; valuations are high. We've maintained a disciplined approach to M&A, placing a premium on the industrial logic of acquisitions. It’s key for us to be the natural owner of these assets, which allows us to enhance and monetize our acquisitions effectively. When we considered Cortera, we recognized the value of the data. We believed we were the right fit for their assets, maximizing utility across product offerings. Similarly, we've had success with RDC, which aimed to address client pain points around understanding onboarding and risk. The M&A space for KYC, financial crime, and associated data remains competitive, making our disciplined and logical approach vital. I’d like to add that in regards to ERS, although we are de-emphasizing one-off sales, we still anticipate sales solutions based on our insurance analytics suite, credit loss reporting requirements, and commercial lending applications. That is what drives our recurring revenue growth in the ERS segment. Similar to RD&A and overall, we continue building revenue streams through diverse product offerings targeting client needs. This concludes our prepared remarks and Mark and I would be pleased to take your questions. Operator?