Good day, everyone, and welcome to the Moody's Corporation First Quarter 2021 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers following the presentation. I will now turn the conference over to Shivani Kak, Head of Investor Relations. Please go ahead.

Thank you. Good morning, and thank you for joining us to discuss Moody's first quarter 2021 results and our revised outlook for full year 2021. I'm Shivani Kak, Head of Investor Relations. This morning, Moody's released its results for the first quarter of 2021 as well as our outlook for full year 2021. The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moodys.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, 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. Good morning, everybody, and thanks for joining today's call. I'm going to begin by providing a general update on the business, including Moody's first quarter 2021 financial results. And following my commentary, Mark Kaye will provide some further details on our first quarter 2021 performance as well as our revised 2021 outlook. After our prepared remarks, we'll be happy to take any questions. Moody's delivered strong financial results in the first quarter of 2021, revenue growth of 24% and an increase in adjusted diluted EPS of 49%, supported by strong performance from both Moody's Investor Service and Moody's Analytics. Improving economic fundamentals and increased M&A activity drove robust issuance in the first quarter, particularly in the leveraged loan and high-yield bond markets. MIS generated over $1 billion in revenue, and that was up 30% over the prior year period. MA's best-in-class subscription-based products and solutions drove revenue growth of 14% in the quarter. Amidst this growth, we're reinvesting back into our business by introducing new offerings and integrating our recent acquisitions. As a result of our strong performance in the quarter, we've updated our full year 2021 guidance, and we now project Moody's revenue to increase in the high single-digit percent range. Additionally, we've raised and narrowed our adjusted diluted EPS guidance to be in the range of $11 to $11.30. Now turning to first quarter results. This is the first time that MIS' revenue has exceeded $1 billion in a single quarter, while MA has delivered its 53rd consecutive quarter of growth. Moody's adjusted operating income rose 41% to $914 million, and the adjusted operating margin expanded 680 basis points to 57.1%. Adjusted diluted EPS was $4.06, again, up 49%. We could not have accomplished these great results without the hard work and dedication of our employees across the world. So on behalf of the entire management team, I'd like to express our appreciation and say thank you. I would like to acknowledge the continued challenges faced by many of our employees across the globe due to ongoing pandemic conditions and especially our colleagues in India. Now turning back to the first quarter. Issuance volumes reached their highest level in over a decade. While all sectors were active, leveraged finance was really the busiest of all asset classes with leveraged loans and high-yield bond issuance increasing by 94% and 85%, respectively. Typically, it's unusual for both leveraged loans and high-yield bonds to experience this amount of growth in the same quarter. Issuers tend to favor one type of debt over the other, depending on their outlook. But attractive refinancing opportunities, along with improving M&A activity, supported both fixed and floating rate issuance this quarter. Additionally, the CLO market rebounded from a quiet 2020 as issuers refinanced their existing securitizations to take advantage of tighter spreads. The strength in the leveraged finance issuance in the first quarter stemmed primarily from an improving outlook for corporate defaults. In January, the global speculative-grade default rate was expected to end the year at just under 5%. By early April, this outlook had improved to approximately 3% to 4%. That was due to a more positive economic backdrop. These lower default expectations led to tighter credit spreads, keeping the overall cost of borrowing low despite an increase in benchmark rates, creating an attractive environment for opportunistic refinancing and M&A-driven issuance. We often get asked about what informs our longer-term views of issuance. We've shown a version of this graph on the slide before. In fact, I think I showed it in our 2018 Investor Day. The data shows that historically, GDP is one of the best predictive indicators of issuance over the longer term. While this relationship may not hold in any one year, there is a clear correlation that issuance tracks GDP growth over time, and we expect this to remain true going forward. This makes intuitive sense as healthy economies promote business growth and capital investment, providing a positive backdrop for our business over the medium term. Focusing on 2021, we expect overall issuance to decline modestly from 2020's pandemic-related surge, but it will still be above the prior 5-year average. Investment-grade issuance, which grew the most in 2020, is expected to face the toughest comparable. However, with GDP expanding, segments of the debt market most sensitive to improvements in the economy, like leveraged loans and structured finance, are expected to show corresponding strength. Mark will provide some further details on our issuance forecast by asset class later in the call. Moving to MA, we're driving robust organic growth across multiple products and solutions. Credit research and data feeds delivered low double-digit growth, driven by continued demand for ratings data feeds, coupled with strong retention rates. KYC and compliance are growing in line with our mid-20% expectations, led by our compliance catalyst and supply chain solutions. We're continuing to grow in insurance and asset management. In addition to our IFRS 17 offerings, we're expanding our footprint with the buy side, benefiting from the enhanced solutions suite obtained as part of our RiskFirst acquisition in 2019. In keeping with the theme of collaborating and modernizing and innovating that I discussed on the fourth quarter earnings call, I want to highlight a few recent examples that speak to how we're meeting our customers' evolving needs. Starting with ESG and climate, we're integrating ESG across all aspects of the business. In the first quarter, we launched a tool that provides climate-adjusted credit scores for approximately 37,000 public companies. Building on our partnership with Euronext, our data powered the launch of their CAC 40 ESG index. In MIS, our analysts are enhancing our ESG analysis with the launch of ESG scores and tools, including our proprietary ESG credit impact score that identifies the impact of ESG factors on a credit rating. Our first batch of scores now cover the entire rated sovereign universe. On prior earnings calls, we've discussed how we're integrating artificial intelligence, machine learning, and natural language processing into our products to make them better and faster. One example is QUIQspread. It's our automated financial spreading tool now used by numerous banks around the globe, helping customers substantially reduce both the time and cost spent spreading financial statements. It's won multiple awards, including best AI Technology Initiative at the 2020 American Financial Technology Awards. Another area where we're using innovative technology is sentiment analysis and scoring capabilities. Our customers tell us they need help with early warning indicators that filter the signal from the noise. We're delivering monitoring tools to analyze news stories to understand sentiment across thousands of media outlets. Interest in this use case is increasing across our customer base. Our acquisition of Acquire Media has enhanced our efforts in this space, which we will touch on more in a moment. In addition to innovating for our customers, we're modernizing our own technology infrastructure to deliver greater operational efficiency and agility. Just last week, we were proud to receive an honorable mention in the Red Hat Innovation Awards for the open source platform and agile process implemented within the rating agency. Now turning to our recent acquisitions, we're making good progress integrating and leveraging the capabilities we acquired to enhance our offerings. We integrated information and screening capabilities into our KYC solutions, specifically within our flagship private company database known as Orbis. We're giving customers curated information on individuals and companies in one place, dramatically improving their ability to make better KYC decisions and saving countless hours in the process. As I mentioned a few moments ago, the Acquire Media acquisition has accelerated our ability to generate scores that interpret the sentiment implied in news stories. Content from Acquire Media has been integrated into multiple products, improving our customers' ability to put facts into context, focus their monitoring efforts, and consider risks more holistically. In commercial real estate, we've combined recent catalysts to create Moody's commercial real estate solutions. We're developing new tools that bring together curated data and world-class analytics to support commercial real estate professionals with more integrated lending and investing solutions, which are on track to launch this summer. Finally, we're pairing Zion Financial's asset and liability management solutions and loan pricing tools with MA's existing CECL capital planning and balance sheet software to help customers understand risks and opportunities across their treasury accounting and financial planning departments. With that, I'll now turn the call over to Mark to provide further details on Moody's first quarter results and an update on our outlook for 2021.

Thank you, Rob. In the first quarter, MIS achieved noteworthy results. Strong execution, robust credit activity, and favorable issuance mix contributed to revenue growth of 30% compared to a 23% increase in global MIS rated issuance. Corporate Finance was the largest contributor, growing 34%, while issuance grew 37%. This was primarily driven by leveraged finance issuers opportunistically refinancing debt and funding M&A transactions. In contrast, in line with our expectations, investment-grade activity moderated compared to the prior year period. The financial institutions and public project and infrastructure finance lines of business also benefited from strong opportunistic refinancing led by infrequent issuers. Revenues in these sectors grew by approximately 30% year-over-year despite issuance growth in the single-digit percent range. In structured finance, revenue grew 21% as tighter spreads drove elevated CLO refinancing and new CMBS activity. MIS' adjusted operating margin expanded 720 basis points to 67.7%. This enables strong revenue growth coupled with ongoing cost efficiency initiatives and lower bad debt reserves, partially offset by higher incentive compensation accruals. Moving to MA, first quarter revenue grew 14% or 10% on an organic basis. RD&A revenue rose 17% or 12% organically as KYC and compliance solutions delivered mid-20% organic growth. Customer retention rates remain high. ERS revenue growth of 5% or 4% on an organic basis was driven by a 15% increase in recurring revenue, led by insurance products as well as credit assessment and loan origination solutions. Recurring revenue growth offset the expected decline in one-time revenue as we continue our strategic shift toward more subscription-based products. MA's adjusted operating margin expanded 360 basis points to 32.9%. Strong top line growth and execution of our in-flight restructuring program enabled additional operating leverage in the quarter. As Rob mentioned earlier in the call, Moody's adjusted diluted EPS grew by almost 50% to $4.06, primarily driven by our extraordinary performance in the quarter. Growth in operating income contributed approximately $0.94 to adjusted diluted EPS with $0.85 attributed to MIS. Additionally, non-operating activities, including the resolution of uncertain tax positions and the release of associated accrued interest, provided a $0.28 benefit. Turning to Moody's full year 2021 guidance. Moody’s outlook for 2021 is based on assumptions regarding many geopolitical conditions, macroeconomic, and capital market factors. These include, but are not limited to, the impact of the COVID-19 pandemic, responses by governments, regulators, businesses and individuals, as well as the effects on interest rates or currency exchange rates, capital markets liquidity, and activity in different sectors of the debt market. The outlook also reflects assumptions regarding general economic conditions, the company's operations and personnel, and other items detailed in the earnings release. Our full year 2021 guidance is underpinned by the following macro assumptions: 2021 US and Euro area GDP will rise to a range of 6% to 7% and 3.5% to 4.5%, respectively. The US unemployment rate will decline to between 5% and 6% by year-end, and benchmark interest rates will remain low, with US high-yield spreads remaining below approximately 450 basis points. Finally, the global high-yield default rate is predicted to decline to a range of 3% to 4% by year-end. Our guidance considers foreign currency translation at end of quarter exchange rates, specifically our forecast for the remainder of 2021 reflects US exchange rates for the British pound at $1.38 and $1.18 for the euro. These assumptions are subject to uncertainty, and results for the year could differ materially from our current outlook. Following our first quarter performance, we are raising our full year 2021 guidance for most metrics compared to the guidance provided on February 12. We now anticipate that Moody's revenue will increase in the high single-digit percent range. As we strategically manage our expense base, we are maintaining our expectations for cost growth in the mid-single-digit percent range. Given our improved revenue outlook and expense ability, we project Moody's adjusted operating margin to be approximately 50%. Our updated net interest expense guidance is in the range of $160 million to $180 million, and we reaffirm the effective tax rate projection of 20% to 22%. We raised and narrowed our diluted and adjusted diluted EPS guidance ranges to $10.40 to $10.70 and $11 to $11.30, respectively. Our free cash flow forecast is now expected to be between $2.1 billion and $2.2 billion, and we continue to anticipate full year share repurchases of approximately $1.5 billion, subject to available cash, market conditions, and other ongoing capital allocation decisions. For a complete list of our guidance, please refer to Table 12 of our earnings release. Within MIS, we project full year global rated issuance to decline in the low single-digit percent range, up from our previous guidance of a high single-digit percent decline. Our guidance for high-yield bonds and leveraged loans has been raised to approximately flat and up 55%, respectively, as we expect robust issuance in leverage finance to persist into the second quarter, supported by low borrowing costs and sustained M&A activity. However, we anticipate supply to return to more normalized levels in the second half of 2021, as we believe many issuers will fulfill the majority of the funding needs earlier in the year. Full year investment-grade supply is still expected to decrease by approximately 30%, following a very active prior calendar year. We forecast issuance from financial institutions to be approximately flat. We have not factored the proposed U.S. infrastructure bill into our assumptions regarding public project and infrastructure finance issuance, which we anticipate will decline approximately 15%. Depending on the contents of the final legislation, if it were to pass, it could improve our expectations for the balance of the year. The expected increase in leverage loan supply positively impacts new CLO creation. As a result, we predict structured finance issuance will increase 40%. In line with the surge in leverage finance activity in the first quarter, we're increasing our guidance for new mandates in 2021 to be in the range of 800 to 850. We've updated MIS' revenue outlook to reflect stronger-than-anticipated first quarter performance. We now estimate that MIS' revenue will increase in the mid-single-digit percent range, up from our prior guidance of approximately flat. We're also raising MIS' adjusted operating margin guidance to approximately 61%. For MA revenue, we are maintaining our forecast of an increase in the low double-digit percent range. This forecast is due to strong demand for our subscription-based products, stable customer retention rates, favorable foreign exchange rates, and a 2% to 3% percentage point tailwind from recent acquisitions. MA's adjusted operating margin guidance remains at approximately 30%, as we expect underlying margin expansion to be partly tempered by an acceleration in strategic investments in 2021. Since we are maintaining our full year 2021 expense guidance in the mid-single-digit percent range, I would like to provide additional clarity and insight regarding our approach to expense management. In the first quarter, operating expenses rose 7% over the prior year period. Of this reported growth, approximately 4 percentage points were attributed to recent acquisitions and the unfavorable impact of movements in foreign currency exchange rates. Ongoing expense discipline continues to reinforce our operating leverage. As noted on last quarter's earnings call, by generating upwards of $80 million in cost efficiencies this year, we are able to self-fund our strategic priorities and reinvest back into the business. The majority of these strategic investments will occur in the second half of 2021. Before turning the call back over to Rob, I'd like to highlight a few key takeaways. First, we successfully executed our strategic and business objectives against the backdrop of robust issuance, delivering meaningful results this quarter across both operating segments. Second, we are focused on innovation and integrating new features into our products and solutions to meet our customers' evolving needs. Third, we are maintaining expense discipline through ongoing cost efficiency initiatives, which enable us to reinvest in our key strategic priorities and expand our operating margins. Finally, we are pleased to revise upward our full year 2021 outlook as we drive operating leverage and create further opportunities for growth. 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?

Our first question comes from Toni Kaplan with Morgan Stanley.

Thanks so much. First quarter came in much higher than what I was expecting, driven by MIS. But when I look at the guide for the full year, I guess the raise is a little bit lower than what I would have expected, just given the quarter. I know we're going to comp the strongest quarter in 2Q. Are you just waiting for that to be behind you, or are your expectations for the rest of the year lower now than they were, or are you just being conservative because I know we have a lot of positive indicators ahead of us with strong GDP, et cetera? Thanks.

Toni, we have increased our outlook for the full year 2021 adjusted EPS to approximately $11.15 at the midpoint of the guidance range, which is around 6% higher than the guidance we gave on EPS back in February. The primary driver of that increase is really a reflection of the actual and expected strong operating performance of MIS, calling it around 6 percentage points. We all see small tailwinds of around 1% from some of the non-operating factors like the settlement of the outstanding tax matter, which is a little more favorable than expected, offset in part by FX. We're certainly happy to go into the issuance outlook and our views there separately.

Okay. Great. And just as my follow-up, MIS margins were the highest ever, I believe, and not by an insignificant amount. You're guiding to 61% in the segment for the year, but I'm having a hard time getting down to that level after the 68% in Q1. Maybe help us drill down into the drivers of the lower margin for the rest of the year. Thanks.

We are guiding, to your point, to approximately 61% for the MIS margin for the full year. That means, if you put the 67.7% into context, you would expect a year-to-go average margin for MIS to be somewhere between 57% and 58%. This is primarily driven by our year-to-go expectation for issuance activity, which would be down in the low double digits, given our full year guide of low single-digits issuance. If I look at the underlying drivers, it could be driven by tough comparables compared to last year and a pull forward that we saw in the first quarter.

We will take our next question from Kevin McVeigh with Credit Suisse.

Great, thanks so much and congratulations. I wonder if you could give us just a little context on the insurance and commercial real estate opportunities, specifically within M&A. Obviously, there's been some reinvestment back into the business, balancing reinvestment versus the base margin change and obviously, the opportunity that insurance and commercial bring to the entire enterprise.

Yes. Kevin, this is Rob. Thanks a bunch. Good to have you on the call. Let me talk about each in turn here. Starting with commercial real estate, it's a major asset class for our financial institution and investor customers. Our customers are looking for the integration of a wide range of data and analytics to give them better insights and make better decisions, especially given the turbulence in the market. We acquired REIS a few years back to give us some market and property-level data to integrate into our offerings. We are pleased with how Catalyst is helping us build out those data capabilities in new markets even faster than we anticipated. By combining that with our commercial mortgage metrics product, we build our CRE solutions offering. In this suite, we're developing lending and portfolio construction and management tools to address our customers' pain points. Now let me turn to insurance. Our insurance business is seeing very nice growth. The core driver is insurers seeking our solutions to help them with IFRS 17 compliance. Our acquisition of GGY enhanced our capabilities in this area, providing actuarial software solutions widely used by insurers for pricing, reserving, asset liability management, financial modeling, hedging, and more. Over the years, we've built out a suite for insurance companies, including ALM, regulatory reporting, and business analytics. Our risk assessment capabilities in areas like credit, commercial real estate, ESG, and climate offer future growth opportunities for us to deliver greater value to our insurance customers. So, we feel good about both of those opportunities.

Super helpful, Rob. Just within the context of that, could you talk about the M&A opportunity? I know there have been acquisitions in the sector and a ton of capital. How are you thinking about consolidation in the space and any thoughts on activities in that regard?

Sure. While I can’t comment on potential acquisitions or divestitures, I can give you some insight into how we're thinking about M&A. We're looking for assets that are on strategy and will advance our capabilities in risk assessment. Customer needs are evolving around a wider range of risks, so we're focused on high-value data and analytics critical to customer workflows. Historically, we've concentrated on credit, but our customers are asking us for more. Our priorities include KYC, private company data, commercial real estate data analytics, and ESG and climate. Regarding distribution, we think of our ERS business as a chassis for delivering our risk content to financial institutions. With our customer base of banks and insurance companies using our SaaS solutions, we have significant opportunities to expand our relationships and effectively meet their growing needs, both organically and inorganically.

We will take our next question from Judah Sokel with JPMorgan.

Hi. Thank you for taking my questions. For my first question, I was hoping to take another stab at Toni's question. As you look at the rest of the year following the first quarter, how does your outlook for quarters two to four compare to how you were thinking about quarters two to four when you gave guidance in February?

Yes, Judah, it's Rob. I'll start with issuance, which is foundational here. We raised our issuance outlook due to the strength in the first quarter with global issuance up 23%. Let me break it down for the rest of the year. Q2 2020 saw a huge surge of investment-grade infrastructure and issuance by almost 90%. So with Q1 issuance up 23%, Q2 will inevitably be down due to this tough comp, while Q1 was strong. Mark mentioned a sawtooth pattern, indicating a slightly slower summer. We expect a modest decline in Q3, accounting for the record issuance from last year and growth in Q4. Thus, the issuance for the second half will show a modest decline from the second half of last year.

If I were to translate the issuance outlook that Rob spoke to, at a high level from an MIS revenue perspective, you could think about Q2 and Q3 being down in the mid-single-digit decline range and then Q4 being approximately flat year-over-year for revenue.

That was really helpful. Thank you for that cadence visibility. As a follow-up, any ability to do something similar or just give us perspective in terms of pace through the year as far as margins go and for MA? That would be appreciated. Thank you.

Judah, thank you. I’ll start with MCO and then work my way to MA. MCO's adjusted operating margin for the quarter was 57.1%. Over the trailing 12 months, that would equate to 51.6%. If I think about the projection around that 50% guidance for the year, we expect several factors to impact margins. First, positive creation of margin from operating leverage amounts around 100 basis points, along with some benefits from incentive compensation resets, slightly lower bad debt expenses. However, we expect higher travel and entertainment expenses while investments in strategic areas will offset this by around 160 at the MCO level. For MA, the Q1 margin expansion was led by strong 14% reported revenue growth, with lower expenses primarily due to our announced restructuring at the end of 2020. MA expects to accelerate its investments in key strategic priorities, including CRE and KYC. As those investments ramp up, we anticipate that our margins will remain in line with the 30% full year guidance. On a full year basis, you could think about underlying margin expansion at MA of around 390 basis points, offset by strategic investments of around 240 basis points and acquisitions of around 130 basis points.

We will take our next question from Simon Clinch with Atlantic Equities.

Hi, I appreciate you taking my question. I was wondering if we could dig into the breakdown of MA's organic growth this quarter. Could you break down what we saw from the acquisition of Bureau van Dijk and the KYC complex, as well as other key growth drivers?

Absolutely, Simon. MA is seeing steady and good growth with several drivers behind it. First is credit research and data feeds, where there's demand for ratings data and very high retention rates. As for KYC and compliance, there's demand for greater precision and customer vetting automation. We're seeing heightened interest in supply chain resiliency tools as well. A recent major US corporate subscribed to our Orbis data to assess regulatory and reputational risks across both customers and suppliers. ERS SaaS products also show growth, evidenced by strong recurring revenue growth in insurance, risk, and finance. There's an active pipeline for product development moving forward.

Okay, thanks. Did I hear that the KYC portion of your business is growing at that mid-20% pace right now? Is that correct?

That's right, in line with our expectations discussed on the prior call.

Okay. Just following up: would you be able to update us on your strategy in China, particularly the status of the current market and what CCXI is permitted to do?

Yes. The license suspension at CCXI is over. CCXI continues to be the leading domestic rating agency in China. We address the domestic market through CCXI and the cross-border market opportunity through MIS. Looking ahead, we see emerging opportunities in China, particularly around ESG and sustainable finance. We invested in a company called Shentel, similar to our strategy with CCXI, and we're also collaborating with MioTech to capture unstructured data on ESG and KYC.

Your next question comes from Alex Kramm with UBS.

Yes. Hello, everyone. Apologies for coming back to the same topics that were asked a couple of times on MIS outlook, but I don't think you directly answered some questions. Thinking about the outlook change on the MIS top line, I know you don't give a quarterly forecast, but it appears that from a seasonal perspective, you've become a little more conservative. If true, why considering the improving economic backdrop?

Alex, you're keeping us honest. I think it's true we factored in the potential for some pull-forward from the second half of the year into the first quarter. Recently, we saw a benchmark rate tick-up and a surge in issuance. I’d like to anticipate a question about the upside and downside to this; there are probably more upsides due to strengths in Q2 leveraged finance markets. If the strength continues through Q2, it could contribute additional revenue. However, there are risks with potential volatility due to the markets.

Very fair. Thank you for that. Just a quick one for Mark: on the expense side, you mentioned incentives higher, but I think there was a very easy comp last year. What was the incentive comp for the year, and how do you think about it for the remainder of the year, given the strong first quarter?

The incentive comp accrual process we follow is roughly 25% of the full year expected payout. We accrued $61 million in incentive comp for Q1. Looking for the next three quarters, we expect around $60 million per quarter, slightly higher than the $50 million to $60 million range provided in February. We are incurring appropriately in Q1.

We will take our next question from George Tong with Goldman Sachs.

Hi, thanks. Good morning. I wanted to follow up on earlier questions about pull-forward activity in debt issuance. Can you discuss how much of the upside surprise versus the guide reflected refinancing pull forward compared to improvements in macro or balance sheet prefunding, and what this might imply for issuance across the various categories for the remainder of the year?

George, let me share what we're hearing from the banks regarding their issuance outlook. For US investment-grade, year-to-date activity was below the prior year period. However, banks noted robust issuance in the first quarter due to M&A, tight spreads, and favorable conditions, possibly pulling forward funding plans to take advantage of favorable rates and the interim uptick in rates. Overall, banks expect US investment-grade issuance to decline around 30% this year, aligning with our forecast. Regarding US speculative-grade, tight spreads and low default rates drove impressive starts to high-yield bond and leverage loan issuance; both categories significantly surpassed last year's volumes. However, banks expect the speculative-grade market to slow as many issuers have completed their refinancing needs already this quarter.

Very helpful. Thank you. On the macro perspective, you mentioned the impact of rising interest rates. Could you discuss more puts and takes around how these factors will influence and drive issuance activity?

Our view is that economic growth provides the strongest driver for our business over the medium and long term. It is about business investment and M&A activity. Rates matter, but the key is the pace of rate increases and whether they coincide with economic growth. This relationship is manageable if the Fed is transparent about rates while we see strong economic growth.

Great. Thank you. Just one thought on your cost outlook. Did you raise your expense outlook for the year toward the higher end of mid-single-digit expectations, and can you comment on employee stability aside from acquisitions?

We are pleased our disciplined expense management continues creating operational leverage and allowing investment capability. We're actively managing our expenses down by 3% to 3.5%, or over $80 million, in alignment with our key initiatives in 2021. Year-over-year, we’ve remained relatively stable on an organic basis at around 11,400 employees. We don't anticipate significant movement here, focusing instead on skills and support for our employees. Just to highlight, we expect strategic investments to ramp from 1.5% in Q1 to around 3% to 3.5% for the full year. So we will see accelerated investments over the next couple of quarters.

Hi, thank you for taking my questions. Can you provide more details on the accelerated investments you're planning this year? Is there an ability to increase investments to drive more top-line growth in either business unit in the event of a blowout quarter?

Our primary areas of investment focus on product development across ESG and climate, KYC, commercial real estate, and modernizing technology for efficiency and innovation. We established an internal growth board to hone our investment strategy, and we're looking at ways to accelerate investments when opportunities arise.

For example, we expect for 2021 to generate around $25 million in stand-alone activities from ESG, with an additional $5 million to $10 million through ESG integration into MIS and MA products. The strategic investments of around 3% to 3.5% of expenses are projected to ramp up over the year. The acceleration in expenses, particularly in the fourth quarter, is now expected to be between $60 million and $80 million, up from the previous $45 million to $55 million guidance. This change relates to achieved savings in Q1 and a change in timing of strategic initiatives, mainly in the second half of the year.

Good afternoon. Regarding incentive compensation and investments, I'm wondering about flexibility in the accrual process. If you accrue less in Q1, would this put pressure on later quarters?

Owen, we typically follow a time-based percentage for our incentive compensation accrual. If our outlook holds, you wouldn't see significant variation in incentives as we progress through the year. The year could turn out differently, though, leading to adjustments to previous quarters and causing some volatility.

We have data scientists and engineers driving innovation across the business. We leverage AI, machine learning, and natural language processing across products. QUIQspread is an example stemming from employee ideas, significantly reducing time and costs for banks in financial statement processing. We see ongoing initiatives in natural language generation in our reporting processes as well.

We will take our next question from Manav Patnaik with Barclays.

Thank you. Rob, I wanted to follow-up on your comments about M&A. With your new position as CEO, will there be a change in the cadence of tuck-in acquisitions or larger acquisitions given the recent competitive actions in the industry?

We're focused on our journey here. I believe we can build significant scale in existing markets at an organic pace. We aim to enhance our existing assets, make tuck-in acquisitions as needed, and build relationships in those high-growth areas. We're not fixated on size; we need to ensure acquisitions are strategic and aligned with our goals around customer outcomes.

Rob, tying back into your position, are you or the company itching to pursue a large acquisition at all? Are you open to that idea?

Not specifically itching for a large acquisition. We're running our race and serving high growth markets where we are expanding our positions. We've highlighted successful integrations in past acquisitions, and we're constantly evaluating how best to enhance and invest in the existing businesses.

We will take our next question from Shlomo Rosenbaum with Stifel.

Hi, thank you for taking my questions. Can you break down the contributions from the Cortera acquisition and non-operating income?

If I think about M&A, the total spend for several significant acquisitions was around $350 million, which we expect to generate approximately $44 million in revenue for 2021. This impacts MA negatively by approximately 130 basis points to adjusted EPS of around -$0.04. The breakdown of non-operating income includes gains from tax-related interest accruals resolution and small FX losses this quarter, balanced with investment assessments across various affiliates.

We will take our next question from Andrew Nicholas with William Blair.

Hi, thank you for taking my question. Could you speak to your balance sheet? With cash building and leverage below limits, what's keeping you from being aggressive on share repurchase?

Our capital allocation framework remains unchanged. We prioritize opportunities to invest in the business organically and inorganically before returning cash to shareholders. We ceased buybacks during the uncertainty in early 2020. Currently, we project $2 billion in returns to stockholders this year through dividends and buybacks. Expect an acceleration in share repurchases in the second quarter.

Great. Thank you. Regarding free cash flow, it seems to be growing at a slower pace than net income this year. Could you provide context for that dissonance?

The subtle difference between the forecasted growth suggests expected working capital headwinds and timing of non-cash items. Free cash flow grew faster than net income in both 2019 and 2020. We are a capital-light business, and significant changes would be required to alter this dynamic, which we don't anticipate.

We will take our next question from Jeff Silber with BMO Capital Markets.

Thanks. I know it's late; I'll keep it brief. You mentioned the potential positive upside from proposed infrastructure bills. Would it primarily affect the public finance aspect of your issuers, or could it impact other segments as well?

While proposed infrastructure investments will impact public project sectors, there’s potential for corporate finance sectors as well. Historically, those sectors maintain similar economic profiles, but too soon to determine the effects, as it depends on the final legislation.

Got it. Are there any notable differences in the profitability you can achieve depending on the issuer?

Not particularly, we don’t see significant differences across the issuer types regarding margin.

There are no further questions at this time. I would like to turn the conference back over to Rob Fauber with any additional or closing remarks.

Thank you, everyone, for joining today's call. We look forward to speaking again in the summer.

This concludes Moody's First Quarter 2021 Earnings Call. A replay of this call will be available after 3:30 PM Eastern Time on Moody's IR website. Thank you.