Moody's Corporation (MCO) Earnings Call Transcript & Summary

All right. Good afternoon. We'll get started here. So for our next fireside chat, I'm delighted to have the CEO of Moody's Corporation, Rob Fauber. Many of you know Rob already. He's been on conference a couple of times, at least virtually, but for the first time here in person. So good to see you in person.

Yes, it is.

And welcome to the SDC conference. So I'll ask a couple of questions here. We'll open it up to the audience at the end of it. You can send questions via Pigeonhole. I'm sure you guys know how to do that by now. And then I can go ahead and ask Rob.

So first, Rob, let's address the elephant in the room here. A small competitor of yours pulled their guidance yesterday, talking about the juries and macro backdrop. They noted that if the current conditions persist, FY '22 ratings revenues could be down high teens. You already gave guidance on your earnings call, which was more conservative than their initial guidance. But you still have somewhat better ratings revenue, I think, in your guidance. So along with that, we have seen how confident do you feel about your FY '22 guidance here?

Yes. I knew this was going to be the first question, by the way. So the first thing I would say, Christian, is we're going to provide an update to our full year outlook, like we always do on our earnings call, and that will be -- our second quarter earnings call will be in July. Our current guidance, which we updated on our first quarter earnings call in early May, just to give you a little bit of insight into how we put that together. As you'd imagine, we analyzed a range of different scenarios and really thinking about both from a macroeconomic perspective and also what we're seeing in terms of capital markets activity. And we had expected -- and we communicated this on the earnings call, we had expected at the time that the weakness that we had seen in the first quarter was going to persist into the second quarter, and we talked about that. And we had expected that there would be continued volatility and uncertainty. Certainly, that has impacted bond markets. We have seen that in May. May was a particularly challenging month for issuance. And I would say though, Christian, that issuance has been even softer than we had expected. And just to maybe put it in perspective for you, when we were building that outlook in May, we had expected that there would be something like 4 billion a day of investment-grade issuance in the quarter. We've seen more like 3 billion a day in April and May. So it's run lighter than we had expected. If June continues at that 3 billion pace, we would expect to have a shortfall to what we had built into our second quarter for our full year outlook at the time. One other thing I'd add is the leveraged finance markets have been hit particularly hard. An interesting data point for you, if you look at April and May, there have been something like 40 working days. Roughly half of those, there has been no high-yield issuance, and that's quite extraordinary. We've also seen a real softening in the leveraged loan market, especially in Europe. So that gives you a little bit of insight. But I want to come back to something, Christian, which is we still believe that the medium-term outlook for the business remains solid. The drivers that we talk about in terms of economic growth and disintermediation, we believe that those are intact. We're in the midst of some real cyclical turbulence here. It's happened before to our business. We're going to manage through it.

Just to double-click on that, and you mentioned no high-yield issuance in some days, clearly, that's on sustainable pace. Is there any catalysts that you think could make volumes pick back up sometime this year?

Yes. So we still have a fairly benign default environment. That should keep spreads relatively tight. And so as you see spreads come in, I think what we'll see is that will be a catalyst to help unlock some of the issuance. One interesting data point here, Christian, when we look at first-time mandates, we actually had pretty strong performance of first-time mandates in the first quarter, but a lot of that didn't go to market. So there is a backlog that's waiting to go to market. And I think spreads coming in and having just a period where we see less volatility in the market, and particularly in the equity markets, that may bring some issuance forward and help the market kind of find its footing.

Okay. Let's do some longer-term issues, a longer-term macro concerns. Inflation is a big one. Maybe not the base case that we're in a 1970 scenario, but as a CEO, you plan for all types of scenarios. How do you think the Moody's business performs in a 1970 star world of high interest rates, high inflation?

So we talk about a stagflation scenario as probably the most challenging environment for issuance. And that would be characterized, I would think, by declining economic growth and high levels of inflation. And currently, we're not there. I'm not ready to draw comparisons to the '70s and '80s quite yet, Christian. It is a challenging time. Obviously, we're coming out of a period of unprecedented monetary and fiscal stimulus over the last 2 years to support the markets. But there are some pretty important differences between now and back then. I mean if you look at levels of inflation were considerably higher than there is a hope and a belief that inflation may, in fact, be peaking, we'll see. Interest rates were considerably higher. Unemployment was considerably higher. So I do think we're in a meaningfully better place. And we've been pretty consistent that we believe that rising interest rates, as long as they're accompanied by economic growth, that's a scenario that can still work for issuance. The other thing I would note is, and I've said this on some of our earnings calls, back to that point of all of the stimulus that's been put into the economy, it's now being withdrawn, and policymakers have an incredibly challenging task on their hands. And part of that task is communicating effectively with the market. The market wants to believe that this will all be gradual and well understood. And so there's certainly the opportunity for surprises or policy missteps, and that's when you end up seeing kind of a risk-off environment. It's hard for us to build that into our outlooks.

Okay. Let's talk about your business mix in the ratings business. I think it's been a decision on the management team side to have more of your ratings revenue come from transactional revenues. I think about 2/3 of your business is that way. The competitor is more like half. Going through this environment, having all these questions been thrown out at you around transactional revenues, any thoughts on changing that strategic decision to make yourself a little bit more recurring?

Yes. So it's not something you can just turn on a dime. And it's interesting, Christian, I get this question all the time when we go through an air pocket and issuance. Wouldn't you like to have more orientation towards recurring revenues, right? At the very moment, yes, sure, I would. But I'm going to come back to our thinking about the medium term, and we gave out medium-term guidance for the business. As long as you think that issuance is going to continue to grow, currently, we're in a cyclical retrenchment. I get that. But we still believe that there will be growth in issuance over the medium term. If you believe that, we think that a slightly heavier orientation towards transaction revenue makes sense, because we get kind of more economic capture, if you will. If that view changes over the medium term, that's when we might think about, do we want to start to change that mix? We're not there yet. And the other thing I would just share for folks is we've got the ratings business. So about 2/3 is transactional, about 1/3 is recurring, but we've also got this business called Moody's Analytics, and that's almost all recurring revenue and a very nice counterweight to the transactional revenue in MIS.

I promise I'll get to MIS at some point because it's an important growth driver, but let's dodge me a little bit more on the ratings side.

Sure.

I'm always surprised about the strength of sort of new customer growth. It seems always to be pretty robust, just short of 1,000 customers. I think you're talking about your target for this year, last year, over 1,000. Can you give us a sense of what's driving the resiliency of new customer growth, how you actually drive customer growth in ratings? I was imagining like you guys just wait and people just come and ask for ratings. But...

Gosh, I wish it was like that, Christian.

I'd be curious how you actually practice and drive customer growth.

Yes. So I ran what we call the commercial group at Moody's. There's really sales and marketing for -- sales and marketing product for the rating agency. I did that for about 3.5 years. In fact, that's where I got to know Shivani, our Head of Investor Relations. And it's interesting when you think about the work that we have to do. In the United States, the value proposition of a rating is very well understood by issuers. There's a very strong investor demand pull. As you get farther away into less mature markets, there's less investor demand pull. And so there's more of an educational role really around the value proposition of ratings and the value proposition of a Moody's rating, in particular. And so that's a lot of the work that we do out there with potential issuers in Asia and Africa and other places. We've been building out that commercial team all around the world. We've also built out a dedicated team focused on intermediaries. So this is at the big banks, the bigger rangers, they've got teams that are working with the issuers and helping them engage with rating agencies. We spend a lot of time with them. They're very important stakeholders and influencers for us. We also have a dedicated team focused on investors. And again, if you think about our -- our business model is about investor demand pull. So we want to make sure that we're always keeping that ecosystem alive. And so we spend a lot of time engaging with investors also around what we're doing in the value of a Moody's rating. One other interesting thing that we've done, to give you a sense of how we kind of drive growth, we have a team spread around the United States that calls on municipal issuers. And they're in local communities all over the United States. And we realized that there's a great opportunity to leverage that team to call on community banks. Many community banks are not public debt issuers, but we have been able to engage with them about the value of a rating for counterparty purposes. And so there's a neat example of using that sales team that we've got and our presence in the markets to actually generate relationships with folks who actually aren't issuing debt. The last thing I'd say, Christian, just about the kind of strength of these first-time mandates, most of the first-time mandates are coming from leveraged finance markets, not surprisingly, right? There aren't many big investment grade -- big -- very large multinational companies that haven't already established themselves in the public debt markets. It happens from time to time, but most of this is coming from the leveraged finance market. And a lot of it is driven by private equity. It's sponsor-backed activity. And so when you see strength in the leveraged finance markets, that's when you see a lot of first-time issuers. Last year was a really strong year for us. As I said, interestingly, this year, very strong so far in the first quarter, but a lot of that hasn't hit the market yet. And the last thing I would say to that, Christian, and one thing that gives us confidence over time is understanding a lot of this is sponsor-driven. Those private equity firms have enormous war chests to deploy. And so we think that, that is going to continue to support the leveraged finance market and first-time issuers into the market over the medium term.

Okay. Sticking with sort of private markets and thinking about private credits, it's a space that's grown pretty significantly. It rivals many more established markets today. Can you just talk about how Moody's benefits from this market? Net, is it a risk or an opportunity to the Moody's business model?

Yes. I mean you could probably look at it as both. And let me start from just maybe a pure credit perspective. And if you're interested in getting more of our insights, we've got some great research about this market on moodys.com. But I mean you're talking about a market in North America that's around $1 trillion. So it's approaching the size of the institutional loan market. This is a big market. And why has this market been growing so quickly? Well, it's an opportunity for companies to get more leverage than they can get at the banks. That's, I think, one primary reason. And it's also around speed of execution. And it's become a very accessible market for middle market companies that are looking to raise capital. I think one of the challenges with this market is it's pretty opaque. And you think about what's going on, this exposure has moved off of bank balance sheets onto somebody else's balance sheet. And who are the underlying investors in these credit funds? It's insurance companies, it's pension funds and others, right? And so I think if we have a downturn in the credit markets and we see defaults start to pick up, you may start to see some cracks in this market. You may see some of the investors wanting to get a better understanding of the credit quality of what they have invested in. That's an opportunity for us that we're trying to think through, but it's also a potential source of disintermediation of the public markets, right? So the banks are concerned about this. And likewise, this is -- represents an opportunity to go into the private market rather than the public market, which could be a risk for us. We do address that market in some ways. We have ratings on business development companies, BDCs. It's not a big part of our business today. And I would say that a number of companies that may now start in the private markets will eventually kind of graduate into the public markets. So it may not be total disintermediation, there may just be a timing difference of when these companies are actually coming in to get a rating.

Okay. Speaking of growth opportunities, you've been fairly active in terms of geographic expansion, affiliates and investments in Asia, Lat Am, and I think we should leave even one in Africa. Maybe just talk about over the next 3 to 5 years, which sort of regions most excite you? What could we see? Which region could really add meaningfully to the Moody's business?

Yes. So first of all, we love to invest in the MIS business. It is a great business. There aren't that many opportunities to do it. One of those opportunities is to build our presence in domestic local currency markets around the world. The biggest of those and, therefore, the ones that would have potentially the most impact on our growth opportunity are in Asia. And I get a lot of questions about how we're addressing the market in China. We have a 30% stake in the leading domestic rating agency in China. But that's not actually flowing through our P&L. But we also have majority ownership in businesses that are in the domestic markets in Korea and India. Those are reasonably sized businesses. So the Asia market is a pretty big market for domestic issuance. And we have a pretty good presence there. We also just made an investment in Malaysia, minority investment in a company there. Then you look at Latin America. That's a place where we have, over the last couple of years, rolled out a platform called Moody's Local, where we have effectively rolled up all of our domestic rating operations in the region into 1 Latin American platform, with local analysts in local language and local products. It's been pretty successful for us. Because rather than trying to address these local markets the same way that we're addressing these cross-border markets, we needed to have some differentiation. And so that platform has allowed us to do that. In fact, we're now -- we've now rolled out that model in all the big economies: Mexico, Brazil, Argentina and so on. We've seen some really nice traction in terms of the coverage -- building the coverage there. The last place, and you touched on it, Christian, and this is a long-term investment for us, but we're quite excited about it, we just acquired majority control of domestic rating business in Africa. We have been seeing some nice growth in our cross-border business coming out of Africa. And now we have a footprint across the entire continent. GCR has over 400 rating relationships across 25 countries. So we really have some unmatched presence and I think first-mover advantage in Africa. This isn't going to move the needle for us in terms of MIS revenue in the next few years, but this is an important investment for us over time. The last thing I would say, Christian, in addition to giving us exposure to the growth of those markets, these investments are also important because a number of these companies that start by issuing in the domestic local currency markets, they eventually also graduate to cross-border. So in some ways, it's an early customer acquisition strategy for us.

Perfect. Okay. Enough on ratings. Let's switch over to the analytics business. Your recent Investor Day, you actually put out some fairly punchy targets on top line. I think you're expecting sort of low to mid-teens top line growth for that business. It's a sizable business, about $3 billion in revenues run rate, so not a small one. I think my first question is, what gives you confidence in there is a sustainable level of growth over the medium term?

Yes. In terms of growth, and you're right, we have some ambitious targets over the medium term that we talked about at our Investor Day, I was using this analogy earlier. I kind of think of us a little bit like a teenager in some wins, right? We've added these capabilities over the last several years, some really important capabilities. When you think about what's going on with our customers, they're coming to us and saying, "Hey, we need help assessing a wider range of risks than ever before." And I'll give you 1 example. I was talking to someone in a very large European bank and they said, "Look, at the time that we're starting customer relationship, making a loan, I got to figure out, is this company going to pay me back? Can I do business with this company? Do I want to do business with this company?" We've been helping that bank with the first of those and doing a great job and the banks coming to us and saying, "I need help with all 3, and I need it at the same time that I'm making that credit decision." So we've got a real opportunity and the customers in some ways have been inviting us in, but we needed to build out the capabilities. And so you saw us do that with the investments in kind of know-your-customer space. You saw us do that around RMS and climate. And so now for us, Christian, I think it's allowed us to, one, expand into some new markets and get some new logos. But building out these capabilities is also allowing us to deepen and broaden existing customer relationships. Both of those then are going to contribute to, we believe, accelerating growth in MA.

On the flip side, that business is very recurring, mostly a recurring business. But there are concerns around recessionary risk and things like that. And we saw it through '09, and it was fairly resilient. But as you look at that business today and you kind of think about a much slow economic backdrop, how resilient do you think that sort of level of growth can be if the macro really turns down?

Yes. And it's interesting, Christian. Today, just doing the meetings, I've gotten all sorts of flavors of questions about pricing. Are you able to pass through pricing in difficult times? Are you able to pass through more pricing in difficult times? Are you able to pass through more pricing in higher inflation environment? So as I think about MA, if you think about the core offerings, they're, I would argue, more important than ever in times of stress and uncertainty. And you see that, for instance, with our credit research. We get more hits and more usage in the pandemic and Ukraine than any other time. And so that's when the value proposition, I would argue, is at its greatest. Then you think about some of the other offerings in the MA portfolio. Think about the Know Your Customer. You're a bank and you have to comply with know-your-customer guidelines. That's not something that, in a downturn, you're going to be cutting back on and say, "Hey, I'm going to skimp on my regulatory compliance around Know Your Customer and accidentally do business with a sanctioned Russian entity." Same with our banking software products. If you think about what some of these are, we've got CECL, an impairment studio, in times of stress. That's when these products are arguably, again, most valuable. So I don't want to sound complacent about it. I ran the sales team. I'm never complacent about price increases with our customers, but we think that we can continue to enhance the value proposition of our products and especially in times of stress and uncertainty and support that pricing opportunity.

Of course, I'm going to ask you one more in pricing. Maybe a different flavor. How -- is pricing mostly discretionary sort of like undertaking on your part? Or are there like inflationary pickers that sort of help you automatically gain increasing pricing over time?

And we're talking MA?

In MA.

It depends. We have a number of customers on annual contracts that gives us an opportunity to have discussions with them each year. Other customers, we have on multiyear. And we may have, in some of those cases, escalators built into the contract. I would say, in general, we try to take a view in -- a long-term view on customers. We try to be prudent around how we think about pricing. And I'm going to come back to what I talked about, it's this idea that we want to price behind value, right? So when there's a significant enhancement, I'm going to give you an example. A few years ago, we made a significant upgrade to our CreditView research platform. Well, that gave us a great opportunity to go to our customers and talk about why the price was going to increase. I view things like ESG and climate as ways to enhance -- further enhance that value proposition of the research and give us an opportunity then to have some pricing opportunities. So that's generally how we try to approach this across the business.

Okay. I'll go into ESG in a minute, but you have invested quite a bit in ESG and some other capabilities. Does that give you an opportunity for pricing conversations now? Or are there similar things like the CreditView upgrade that was done a couple of years ago that should be more of a catalyst for a pricing increase in the near term?

Is this specifically about ESG?

MA. So I'm more thinking about sort of your concern around, okay, we add product to the platform, and that's the catalyst to go get price, right?

Yes.

You've done a lot around ESG, right? Or at least you're doing a lot around ESG. Is there the opportunity then to start to take price on that near term?

Yes. I think there's 2 ways that we're going to monetize. So one would be the incorporation of ESG and climate content into our products that enhances that value proposition and does allow us to price for that additional value. And then we've got stand-alone offerings that we're able to create and sell as well. So you're going to see us monetize ESG and climate in both of those ways.

Okay. Let's talk more broadly about ESG. You gave a recent data trying to size the size of the business. It's fairly small, but under $200 million of revenues, and you're guiding to something like a low double digits revenue growth over time. That said, I would -- at least from the flavor, it sounds like your ambitions are much bigger in ESG. Your capabilities are much bigger. So maybe just talk about what is -- like give us a sense of the Moody's capabilities around ESG and how you think about the longer-term opportunity.

Yes. And so let me come back, first of all, Christian, to that $170 million that you just cited. And we talked about that in the first quarter earnings call. That for us is ESG and climate. And a good portion of that climate revenue is coming from RMS. And again, back to why did we buy RMS, one, because we saw an opportunity to better serve the global insurance industry. But two, because they have some really, really valuable at-scale climate analytics, among other things, that we think we're going to be able to monetize across a much broader customer base than RMS has. As you think about our ESG and climate business together, and by the way, you mentioned -- I think you said it was relatively small. I think that $170 million, when we kind of look out among our other competitors, probably reasonably sized, right? The ESG part of that is smaller, growing faster. The climate bit is larger, growing slower, because that's really -- at this point, really, the RMS business. And again, we would expect to accelerate that part. But there's, I'd say, 3 kind of core components to how we think about our ESG and climate business. The first is just ESG data and scores. And we just rolled out something called ESG360, which we may get a chance to talk about, Christian. But we've got coverage on, call it, 10,000 public companies all the way through 300 million private companies. We've got extensive data sets and we've got scores. And that gets used and integrated into a variety of different risk and investment in decision-making workflows. Second is around climate. And there are 2 core components, I think, to the climate opportunity for us in our climate business. One is around understanding physical risk relating to climate and physical risk relating to climate change. And that, I would say, is a very big part of the RMS business today. They have a world-class offering in that. The second part is around transition risk. And it's interesting. Something like 80% of the world's GDP companies and countries have something that looks like a -- have a net 0 target, right? But there was an Oxford University study that said only 20% of those are believed to be robust. So you've got all these organizations putting out these net 0 targets. And then you've got investors scratching their heads and saying, "Okay, what does that mean? What does that imply? If you're going to get to net 0 by 2040 or 2050, what does a decarbonization pathway look like for the airline industry, for the oil and gas industry? And what are you going to have to do?" I would assume companies are going to have to start making changes to business mix, maybe business model. They're going to have to make acquisitions, divestitures, investments, R&D. So you've got the market asking, what are the implications of these net 0 targets? What are the financial implications? And so I think that's a significant opportunity for us to be able to help the market understand that. The last piece, which is around sustainable finance, and you've got issuers of debt, issuers of equity as well, but issuers of debt who have sustainable finance programs, right? So they're issuing green bonds or label bonds. And we have an offering there around second-party opinions and some other things to support the sustainable finance programs of our issuers.

Okay. Well, we can talk about ESG360, which you recently launched. I think S&P has a similar platform, Sustainable1. It's increasingly difficult to really understand the differentiation between these platforms. [indiscernible] your own words or your view, what is Moody's differentiation in terms of its ESG platform?

Yes. So one of the places where we're really starting to focus in on is around the data quality. And we hear that all the time from the market. First of all, it's hard to get the data, right? There's not a lot of mandatory disclosure around the kinds of things that investors are looking for. So when we built this ESG360 product, that was one of the -- the real focus areas for us was getting high-quality traceable data. Investors also want to understand the methodologies that are producing the scores, right? And that's an area where I think given our lineage as a credit rating agency and having robust and transparent methodologies, we have an opportunity to bring that analytical rigor to the ESG market. So what we did was we developed a platform. While we had ESG scores and we had climate on-demand scores, we never really had it all in 1 place in a modern user interface that was able to support the needs of investors around portfolio analytics, around the ESG profile of their portfolio, around looking at the climate profile of their portfolio. So we built this product, ESG360, put all that content together in one place. And we have launched something called a comprehensive coverage campaign. And back to the point I made earlier, we've got coverage of, call it, 10,000 public companies, but a place where we've got a real -- we believe, a real competitive advantage is leveraging. We have one of the world's largest databases on companies, and we now have scores, modeled scores, ESG scores and climate analytics on something like 300 million companies. That's hard for anyone to match, and it's very important if you're thinking about sustainable supply chain and other kinds of things. So once we launched this campaign, we launched the product in the last month, we're continuing to make enhancements, we've gotten pretty good interest in it. We've gotten 120,000 visits to our ESG hub, which for us is a big number. We've gotten a couple of hundred sales leads. So we're encouraged by it.

Good stuff. Are there any regulatory tailwinds for ESG data uptake? I know the ECB launched some sort of climate stress test for banks. I think the U.S. banks might be in for something similar. So can you just talk about any sort of regulatory tailwinds that you see upcoming that could boost demand?

Yes. So some significant regulation, either being considered or has been implemented, Europe has, I'd say, been in the forefront of this. In Europe, you have something called SFDR, and that has required, among other things, investors to make certain kinds of disclosures that allowed us to build an offering to help investors with those disclosures. There's also something called an EU taxonomy that requires companies to make disclosures about their sustainability objectives and their business activities as they relate to sustainability. Again, an opportunity for us to build an offering to help companies comply with that regulation. If you think about here in the U.S., the SEC has a draft climate disclosure rule. It's something like 500 pages. It is very extensive. It is building off of the disclosure in TCFD and going beyond that. And so it's interesting. We're -- as a company, we're also a TCFD filer. And so this year, when we were doing our own TCFD report, we were integrating all sorts of our own analytics, including that from RMS. And we think that, that allowed us to have a really cutting-edge TCFD report. It also gives us insight into what our customers are -- if big parts of this draft go into effect, what our customers are going to have to do? And also, what's the opportunity for us to help them? So I think you're going to find that many, many companies are going to have to make some significant investments in order to comply with that. And you touched on bank stress testing, that's yet another area where we're able to help our customers comply with regulatory mandates. So a number of a number of tailwinds that I think are probably not going away anytime soon.

Okay. As a reminder, if you have a question, feel free to use Pigeonhole to send it through, and I'll ask Rob. ESG sentiment, Rob, seems to be evolving, shall we say. [indiscernible] for folks like Elon Musk and obviously, the current energy crisis in Europe, in particular, seems to be shifting sort of like the debate around ESG and energy transition. Are you hearing that sentiment shift at all from your customer base? And longer term, how do you think that impacts the demand for data, demand for analytics around ESG?

So I would say there continues to be a lot of demand and interest from our customers and investors around how to think about ESG and climate considerations and integrating that into their decision-making. I will say that there's also a number of questions being asked about what do these ESG scores actually measure, right? And it's a hard question to answer, actually. And it's pretty easy for me to answer what a credit ratings measure, right? It's a probability of default and expected loss, and they've proved to be pretty predictive over time. And that's why they're so valuable. The ESG market, if you think about it, actually is still pretty nascent in that regard. The other thing I would say is that you're also seeing and you're reading the same articles as I am. I mean people ask questions about, well, what's important to me? And on one hand, I may not want to be invested in fossil fuel companies. On the other hand, energy independence is a hot topic, and there's a renewed appreciation for the importance of that, right? And so I think what you're seeing is there are different preferences for different asset owners. What's important to one asset owner may be more or less important to another asset owner. And what that means is that then, in some cases, that ESG score may not be serving the need of these asset owners because they have different preferences. And what they really want is the data. And coming back to my point, right? They want to be able to get ESG and the subcomponents of that and then wait what is, in fact, most important to them. And so that, again, Christian, is why we really have tried to focus in on the importance of data. So I would say that's around ESG, but climate is a place where I feel like there's probably more consensus around what are we trying to measure? Well, we're trying to understand the physical risk and how that translates to the potential for financial loss relating to climate events.

Let's do a couple from the audience. So the first one from the audience is, what areas of the credit markets do you see particular stress right now?

Yes. So in some ways, all at the moment. But I would say, in particular, it's been in leveraged finance. And I touched on this, and it's interesting. Last year was a very, very strong year for leveraged finance. And you look at -- take leveraged loans, for instance, I think leveraged loan volumes were up something around 100%. I'm looking at Shivani. I think I have that right. It's a huge number, now obviously, coming off of that pandemic year. But we've seen real stress in the leveraged finance markets. And again, back to why is that? Well, one reason is just the market volatility. It just makes it very difficult for these issuers to get into the market. And we frequently see when there's a lot of equity market volatility, that translates typically to a lull in leveraged finance activity, and we've seen that. So what would we look for to maybe see a resumption of leveraged finance activity? You want to see spreads start to come in. And I think there -- it's too early to say where we are on that, but we're going to look at the default rate outlook, how that translates into spreads and look at what's going on in the equity markets in terms of volatility, and that will give us a sense of maybe when the leverage finance market can start to find its footing.

The other question is about MA. How unique are your data sets in MA? Is there a white space in terms of adding data sets to your portfolio?

Yes. So let me start with maybe our biggest data set and the one that's driving probably the highest growth across the MA portfolio, and that's a database called Orbis. And we acquired Orbis when we bought Bureau van Dijk back in 2017. Orbis is a database on roughly 400 million companies. So it's one of the most comprehensive databases in the world. But what's really valuable about what's in Orbis is it has what's called ultimate beneficial ownership. And so you can get -- you can use Orbis to understand the chain of ownership for any given company. And guess what? It turns out that, that is absolutely essential to complying with Know Your Customer. And by the way, Know Your Customer is going from banks having to do Know Your Customer to now organizations having to comply with sanctions, to organizations perhaps wanting to self sanction and determine who they don't want to do business with, to organizations trying to be able to understand supply chain. So that whole KYC, that use case for the Orbis data is expanding, right? But that ultimate beneficial ownership, I'll give you an example, Christian, there's a little company in the United States that produces -- that manufacture school buses. It looks like a very nice company. When you look 11 layers up in their ownership chain, you get to Roman Abramovitch. But it takes some work to be able to figure that out. And when you think about what you have to do around KYC, so that database we have is essential, but another part of the work that you've got to do is you've got to map the people to the companies. So now I've got politically exposed persons. I got to understand who's on the Board and what all these relationships are. Several years ago, we bought a company called RDC. That company was founded after 9/11 by the banks to combat tariffs financing. And that grew into a, I would call it, a database on potentially risky individuals. And now we have married that up, the Orbis database with the RDC data and AI-curated media platform so that now I can constantly search for news on companies and people. You put all that together, that's pretty unique. And that's one reason that we have a strong position in that market. Because it brings all of that together for the customers in ways that they find very valuable. So that's maybe the most valuable data set that I might speak to.

Okay. Perfect. A couple more from the audience. On leveraged finance, many firms are ramping private credit allocations -- sorry. So on leveraged finance, many firms that are ramping private credit allocations, are you seeing -- look through high-quality credit data demand rising rather than simple stickier ratings?

Let me make sure I understand that.

Yes, it's a confusing question [ over with that ]. So I think the question is on leveraged finance -- you know what, I don't understand the question. I think let's just skip it. So sorry, whoever that is. Next one, how do you think about MIS margins in a softer revenue environment?

How do I think about in a softer revenue environment? Obviously, it's more challenging, a softer revenue environment. So maybe let me talk about just how we think about the expense base in MIS. Most of the expense base is people. And we've got a huge portfolio of monitored credits that whether these companies are issuing debt or not, we've got to continue to monitor. So I'd say a big part of that is relatively fixed, right? Because I can't just stop monitoring credits because issuance is down. I -- the way we think about resource in MIS is we think about portfolio loads, right? So what's the appropriate load for an analyst? How many credits can an analyst cover? We have some flexibility within those -- there's a range of -- so you can imagine in more difficult times, we can slow down hiring. We can possibly raise the portfolio loads. We've got incentive comp levers that we can pull. But one of the things that we're really focused on at MIS is technology enabling our analysts. And this is really, really important because one of the challenges about managing the staffing at the rating agency is when you go through a boom period in issuance, then you say, "All right. Well, now I got to go out and hire a bunch of folks to handle all this issuance." I go out in the market, I recruit, then they come in, then they have to get trained and they have to get licensed. And just about the time that we assign them a portfolio, the issuance has gone somewhere else, right? So you really don't want to be in an environment where because issuance is up, I just got to go out and hire more people, right? So you want to technology-enable our analysts. And that's around making their workflows more efficient. And so we've been doing a lot of things to try to invest in making our analysts more efficient. And that will allow them then over time to cover more credits and to move those portfolio loads up. So what we'd like to think is that in a time like this, we're going to continue to be able to deliver efficiency. We do have a few levers, and that's how we think about kind of managing the margin. And I -- the last thing I'd say is, while this is a challenging period, this isn't the first time that we've gone through an air pocket and issuance. And so we do have a team that's pretty experienced in managing through these times.

Okay. Speaking of workplace, maybe the last question, Rob. You guys launched a workplace of the future initiatives, which I'm very curious about. What have you learned so far on this initiative? And more importantly, how does that affect how you think about longer-term operating margins for the company?

Yes. So we've really leaned into flexibility. We've got -- I would characterize ours as a hybrid model. I'm going to do an ad. If your company is telling you, you have to come back 5 days a week into the office and you don't want to, give us a call.

Is that Tesla?

But it's important, Christian, because we -- we're all in a war for talent. And we do believe that this is an important way that we can retain talent and attract talent. And you think about -- we've got a big ratings business, but we've got a big growing MA business that is looking more and more like a SaaS business, like a fintech, right? And so we've got to make sure that we've got a value proposition that's competitive with those kinds of firms so that we can attract and retain the kind of talent we need. And in particular, there's a real race to get software engineers and development talent. And so I was down in our Charlotte office the other day, which is where we've opened up a technology hub right now for our MIS technology team, super modern, cool environment, lots of young, diverse technology talent there and people are in and out of the office. And it's working really well. There's a great energy there. So there's really something I think we can learn from that. I suspect, Christian, that over time, where this is going to head with a hybrid model, and I don't think this -- I'm not giving you any wild insights here, but I think we're probably going to need less real estate, but we're asking ourselves some real questions about, well, the real estate we do have, what's it for? What's the purpose of coming into the office? It's not just coming in because we said you have to be in on Wednesdays and then people come in and sit in their office all day. I'm not sure that makes a lot of sense, actually. If it's to come in because we need to collaborate, because we're going to have training sessions, because we're going to have things that will renew our culture, that makes a lot of sense. And so I think you're going to see that we'll probably need less real estate, but the real estate that we do have is probably going to have to get reconfigured to accommodate that why.

Okay. Perfect. It's a perfect way to end this. Thank you so much. That was very good. Thank you.

All right. Thanks for having me. Appreciate it.