Moody's Corporation (MCO) Q4 2022 Earnings Call

Moody's Corporation (NYSE:MCO) Q4 2022 Earnings Conference Call January 31, 2023 12:30 PM ET

Company Participants

Shivani Kak - Head, IR

Rob Fauber - President and CEO

Mark Kaye - CFO

Conference Call Participants

Manav Patnaik - Barclays

Owen Lau - Oppenheimer

Kevin McVeigh - Credit Suisse

Alex Kramm - UBS

Toni Kaplan - Morgan Stanley

Ashish Sabadra - RBC Capital Markets

Jeff Silber - BMO Capital Markets

George Tong - Goldman Sachs

Jeff Meuler - Robert W. Baird

Andrew Steinerman - JPMorgan

Faiza Alwy - Deutsche Bank

Shlomo Rosenbaum - Stifel

Russell Quelch - Redburn

Craig Huber - Huber Research Partners

Operator

Good day, everyone, and welcome to the Moody's Corporation Fourth Quarter and Full Year 2022 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 would now turn the call over to Shivani Kak, Head of Investor Relations. Please go ahead.

Shivani Kak

Thank you, and good afternoon, and thank you for joining us today. I'm Shivani Kak, Head of Investor Relations. This morning, Moody's released its results for the fourth quarter and full year of 2022, our outlook for full year 2023 and an update on our medium-term targets. The earnings press release and the presentation to accompany this teleconference are both available on our website at ir.moodys.com.

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 U.S. GAAP. I call your attention to the Safe Harbor language which can be found towards the end of our earnings release. Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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, 2021, 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.

Rob Fauber, Moody's President and Chief Executive Officer, will provide an overview of our results, key business highlights and outlook; after which, he'll be joined by Mark Kaye, Moody's Chief Financial Officer, to answer your questions.

I'll now turn the call over to Rob.

Rob Fauber

Thanks, Shivani. Good afternoon, and thanks to everybody for joining today's call. I'm going to start with some key takeaways from our 2022 results, and then I'll look ahead to what we're expecting for 2023 before we take your questions. Our fourth quarter and full year 2022 financial results demonstrate the positive momentum and resilience of MA; while at the same time, reflecting the impact of challenging market conditions on MIS. And MA had a very strong finish to the year. It delivered its 60th consecutive quarter of growth and 10% ARR growth. Revenue grew 15% for the year; and for the first time, MA's full year adjusted operating margin exceeded 30%, and those are results that achieve the Rule of 40 distinction.

MIS generated $2.7 billion in revenue as it weathered a challenging year for issuance, and we continue to advance our ratings franchise to ensure that we're well positioned to capture future issuance growth. And during the fourth quarter, we executed on the expanded expense management program that we announced in October and that's expected to deliver over $200 million in annualized savings in 2023. And it really significantly strengthens our financial position and flexibility for the coming year.

Now for the full year 2023, we expect Moody's revenue to grow in the mid- to high single-digit percent range. And in addition, we're maintaining our previously communicated medium-term growth targets with a reset of the base year to 2022. And in what is clearly a fast-paced and ever-evolving landscape, we're investing with intent to grow and scale and to expand our capabilities to deliver on our mission, and that is providing best-in-class integrated perspectives on risk.

So turning to our full year financials. Moody's total revenue was $5.5 billion. MA contributed approximately half of our total revenue for the first time in our history. And as I mentioned, MA revenue grew by 15%. And excluding the negative impact of foreign exchange, growth would have been 20%. Organic constant dollar growth for both MA revenue and ARR was 10%. And overall, Moody's achieved a 42.6% adjusted operating margin with an adjusted diluted EPS of $8.57.

Now moving on. We remain laser focused on the four strategic priorities that I outlined in February of 2021. In order to realize the potential of our global integrated risk assessment strategy, and the success of this strategy has been made possible by our incredibly talented and committed employees. They've helped us launch new products, expand into new markets and improve the experience for our customers. And it's really wonderful to see our collective work achieve a number of important industry awards.

For the first time, Moody's earned the top ranking in the Chartis RiskTech100. And we placed ahead of hundreds of companies in the risk and compliance technology space that ranges from household names in our sector to earlier-stage innovators. And it's really a testament to the momentum of our risk assessment strategy and the quality of our portfolio of solutions. And in addition, for the 11th consecutive year, MIS was voted the Best Credit Rating Agency by Institutional Investor and really demonstrates that we remain the clear agency of choice with investors.

In MIS, in 2022, we made several important investments to enhance our ratings presence in emerging markets. And that includes the acquisition of our majority stake in the largest domestic rating agency in Africa and the further expansion of Moody's Local in Latin America. We also met the need for greater transparency in ESG risks, specifically as they relate to credit by rolling out more than 10,000 new ESG credit impact scores across MIS.

Now across MA, we enhanced a number of our workflow offerings through the integration of data and analytics, and we created new products to meet evolving customer needs. In fact, newly developed organic products contributed a significant portion of MA sales growth in 2022. I'm going to touch on several of these in a few minutes.

Turning to the outlook for MIS. As I mentioned last quarter, we expect that the factors that impacted issuance in 2022 to persist really through the first half of 2023. The inflationary environment, the pace of interest rate increases are still causing volatility in equity and debt markets, and the trajectory of economic growth in major economies remains uncertain. So it's going to take some time for these issues to resolve and for debt market activity to fully resume but refunding needs and pent-up issuance demand and baseline economic growth, they all point to a recovery in issuance, which we expect to pick up in the second half of the year.

And in this environment, we are proactively balancing our commitment to serve issuers and investors with the highest quality ratings and research and insights; while at the same time, prudently managing cost. And we expect that the swift and decisive expense management actions that we took in the fourth quarter will enable MIS' adjusted operating margin to return to the mid-50s percent range in 2023.

So moving to MA. I want to highlight the impact of the significant investments that we've made in product development and sales and acquisitions. And over the last three years, these investments have helped us deliver $1 billion in additional recurring revenue. And on an organic constant currency basis, recurring revenue growth has been steadily improving each year from 9.2% in 2020 to 9.7% in 2021 and 11.1% in 2022. And we're well positioned for future growth as three of our businesses with revenue of more than $100 million each delivered ARR growth in excess of 10%. In fact, our KYC and compliance business, which is our fastest-growing business, had ARR growth greater than 20%. And even some of our more established products such as Orbis and CreditView, delivered high single-digit ARR growth last year.

So let me give you a little bit of insight into how several of our newly-launched products are contributing to this growth. And I'm going to start with our KYC Lifecycle solution, which offers customers a user-friendly configurable portal and risk engine. And it enables fast and accurate checks that leverage our vast company, people and news data sets. And this solution integrates the capabilities that we've built and acquired over the past several years, so it's opening the door to new markets and customer segments with a powerful new workflow tool for financial crime compliance and third-party due diligence. And it is resonating with our customers. In the fourth quarter, we completed one of our largest-ever sales to a nonfinancial corporate customer in MA with a combined offering supporting both customer and supplier vetting and screening capabilities.

We also recently launched an enhanced version of our Climate on Demand product, which integrates our very rich climate analytics from RMS and MA and broadens the scope of our capabilities in the banking and insurance sectors and beyond. And Climate on Demand is part of our growing suite of physical and transition risk offerings, which are gaining traction with our customers. For example, we were awarded an important sales mandate late last year as a major U.S. financial regulator selected us to help them better understand and measure the impact of climate on risks facing financial institutions in the broader economy.

And we were selected because of our ability to bring together some unique capabilities from across Moody's, and that includes our ability to quantify the financial impact of climate risk, physical risk assessment of bank operations and exposures as well as finance emissions. And in banking, we extended our CreditLens origination solution into commercial real estate, and that's one of the largest asset classes on bank's balance sheets. And this product integrates our proprietary property data, market forecast and credit analytics to meet the specific needs of commercial real estate lenders. And we're excited to partner on this product with one of the largest real estate lenders in the United States, and we're encouraged by the positive customer feedback and sales progress to date. So together, these examples, I think, demonstrate how we are integrating capabilities, we're driving product innovation and leveraging our very strong sales distribution to build a robust pipeline as a foundation for continued growth.

So let me turn to the outlook for 2023, and I want to highlight just a few of our guidance metrics. We project that Moody's revenue will grow in the mid- to high single-digit percent range and adjusted operating margin to be in the range of 44% to 45%. Adjusted diluted EPS is forecast to be in the range of $9 to $9.50. And for the medium term, we're maintaining our previously communicated growth targets with a reset of the base year to 2022.

And in summary, we made strong progress in the fourth quarter to position the business for success, closing out what we'd characterize as both a challenging and a productive year. And indeed, against the backdrop of macroeconomic headwinds, we've continued to unlock the growing potential of MA and reinforced the foundation for MIS to capture the immense opportunity we see once issuance levels recover. So we've entered 2023 in a position of strength, and I have tremendous confidence in the growth potential of the business as we continue to execute and invest in building Moody's as the leading provider of integrated perspectives on risk.

And with that, Mark and I would be pleased to take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Manav Patnaik from Barclays.

Manav Patnaik

Rob, I just wanted to touch on that -- the medium-term guidance for the ratings business, which you’ve maintained at low to mid-single digits even though the base, I guess, has come down a lot. I just wanted to try and flush through a little bit more in your assumptions. And I always thought it was a GDP plus 3 to 4 type pricing business, and your competitor obviously had a more optimistic outlook there, too. So just trying to understand how you guys are thinking through that.

Rob Fauber

Yes. Manav, we've gotten some questions around how quickly things are effectively going to snap back to 2020 and '21. And just to kind of put that in perspective, 2021 total issuance was more than 35% higher than the average from '09 to 2022 if you exclude the 2020 and '21 years. So those two pandemic years were, in fact, extraordinary and unusual years. And so obviously, we are re-baselining off of what we believe are, in fact, kind of more normalized levels of issuance. In fact, if you look at 2022 total issuance, it was down something like 5% from that average that I was talking about, historical average.

But another way to kind of look at this, Manav, and you're kind of, I think, getting at, is there also some upside to the way we're thinking about the medium term? So while overall issuance in 2022 was about 5% below that historical average ex those two extraordinary years. If you look at corporate issuance, it was down something like 15%. And if you look at the mix of corporate issuance as a percent of total issuance, we're actually down a good bit in 2022 and as we kind of look forward.

So I think in a way, there's been a mix shift against us here. And so if you think that there's more opportunity for corporate issuance as a percent of the total, there might be some upside to the way we think about the medium term.

Mark Kaye

Yes. And add on to just Rob's remarks, that we do recognize that some investors may now see this guidance as being slightly conservative in nature. We do remain open to the possibility of revisiting and looking at this specific target once we have better insight into the macroeconomic and the issuance environment as the year unfolds.

Manav Patnaik

Okay, got it. Makes sense. And then Mark, just perhaps maybe even an open-ended question to talk about the expense ramp and stuff that you typically do. But what I was looking for is the expense savings that you've talked about, like how does that split between the two segments?

Mark Kaye

Manav, thank you. So maybe let me start firstly with the expense ramp. So we anticipate operating growth, inclusive of the annual merit increases, the reset of our incentive compensation and then our incremental organic investments to contribute to an expense ramp of between $10 million and $30 million between the fourth quarter of 2022 and the first quarter of 2023 that exclude any restructuring-related items. And then from the first quarter of 2023 to the fourth quarter of 2023, we expect expenses to remain relatively stable and only ramp between $10 million and $20 million. And that's primarily as we realize the benefits of both our 2022, 2023 geolocation restructuring program and any additional cost efficiency actions.

On your second sub-question, restructuring. So through year-end 2023, we still expect to incur up to $170 million in aggregate charges, and that will be split into $70 million to $90 million for MIS and $65 million to $80 million for MA, and that's related to both the real estate rationalization and the reduction of personnel as we selectively downsize and utilize alternative lower-cost locations. For the full year 2022, we were able to accelerate some of our actions. And so we accrued $114 million in total restructuring charges for the year, and that is indeed up from the $85 million we guided to back in October. And that splits into approximately $49 million for MA and $65 million for MIS. And then finally, looking forward, we estimate we'll incur up to $15 million in incremental pre-tax personnel-related charges and $20 million to $40 million in real estate charges in 2023.

Operator

Your next question comes from the line of Owen Lau from Oppenheimer.

Owen Lau

I have a question related to the previous one but it's related to seasonality. Could you please give a sense of maybe the seasonality in terms of the revenue and also margin expectation on a quarterly basis in 2023?

Mark Kaye

Owen, good afternoon. So our central case assumption is for the cyclical market disruption that we experienced during the majority of 2022 to really persist through the first half of 2023. And as a result, for MIS, we expect the transaction revenue to be significantly weaker in the first half vis-à-vis the second half of the year when prior period comparables, the capital market conditions and spreads become more constructive. So specifically, the midpoint of our full year 2023 MIS revenue guidance implies first half revenue to decline in the low teens percent range and second half revenue to grow in the mid-20s percent range. And that also underscores our expectation then for higher MIS margins in the second half of the year versus the first half of the year.

If I look at MA, we forecasted full year 2023 total revenue will increase by approximately 10%, and that's underpinned by broad-based strength across all lines of business. And given that MA revenue is highly recurring, we expect absolute dollar MA revenue to progressively increase over the course of 2023. And as such, we expect MA's first quarter adjusted operating margin to be similar to our actual fourth quarter 2022 margin before improving through the remainder of the year, obviously, as revenue increases and as we realize the benefits of our cost savings.

In addition, as we expand our product capability suite, as we continue to grow the size of our sales force to meet customer demand, we anticipate ARR to also steadily increase throughout the year. And it's going to be similar to what we saw in 2022, ultimately achieving low double-digit percent growth by the end of 2023. On Moody's total operating expenses, our guidance here is for an increase in the low single-digit percent range. And while we don't typically provide expense growth forecast by segment, given we anticipate the majority of our 2023 strategic investments to support MA revenue growth opportunities, the full year segment operating expense guidance would be along the lines of low to mid-single-digit percent decline in MIS and a high single-digit percent growth in MA.

And then finally, for EPS modeling purposes, I'd just like to remind you our first quarter effective tax rate tends to be lower compared to the full year results, and that's simply due to the excess tax benefits around employee stock-based compensation.

Operator

Your next question comes from the line of Kevin McVeigh from Credit Suisse.

Kevin McVeigh

Thanks so much and really nice results. If we went back, you were able to reaffirm the medium-term targets. Obviously, you reset the base here but a pretty dramatic shift in '22 relative to initial expectations. I don't know if this would be for who, but just any thoughts on puts and takes? Is it that analytics has been overperforming a little bit relative to the downturn in MIS? Just any puts and takes as you think about kind of what the initial targets were.

Mark Kaye

Kevin, it's Mark. So maybe I'll talk just thematically, I'll start with our base case assumptions because our medium-term guidance, as you know, refers to a time period within five years, with 2022 as the base year. And that incorporates various assumptions as of the end of January. And those include, for example, U.S. and euro area GDP to stagnate in the near term, followed by recovery, U.S. 10-year treasury yield to stabilize, fluctuating modestly around current levels, issuers continuing to refinance maturing debt.

And then on the MA side, customer retention rates to remain in line with historic levels, and of course, pricing initiatives to align with prior practices and our enhancements to customer value. If I maybe pick, to your question, two specific examples, maybe two tailwinds to headwinds. On the tailwinds side, issuance activity tends to track GDP growth over the medium to long term. And our central case models GDP expansion at a level consistent with what prevailed prior to the COVID-19 pandemic. And we've used our GDP and interest rate predictions from Moody's Analytics forecast, which shows that the 2014 to 2019 average annual real GDP growth was between 2% and 3%, and that's sort of what we expect going forward.

The second tailwind is something we spoke about extensively on prior calls, that's based on our maturity wall studies. U.S. corporates have $1.9 trillion in maturing debt. The majority, we expect to be refinanced. Similarly, European corporates have refunding needs around $2.1 trillion. And then on the headwinds side, the first one maybe is worth noting is we do project interest rate increases -- sorry, we do project interest rates are going to remain elevated and that may potentially impact opportunistic financing. For example, in the U.S., we model a near-term increase in the 10-year treasury yield. And then we expect that to remain roughly stable at that 4% through 2027. And then finally, in resetting our medium-term target base to 2022, we have assumed constant currency foreign exchange rates over the five-year period, specifically the euro at 1.07 and the pound at 1.20. And that shows dollar appreciation versus the original rates we gave in February last year, which were 1.14 and 1.35.

Operator

Your next question comes from the line of Alex Kramm from UBS.

Alex Kramm

Can you just shift gears to capital allocation for a second? Maybe I missed it, but the $250 million in share repurchases seems fairly low relative to what you've been doing in the past and obviously also the free cash flow guidance. So is there a shift of thinking on what are the uses of cash? And then obviously, does that also suggest that maybe on the M&A side, you've taken a harder look, again, maybe in a different environment from a buyer and seller perspective?

Mark Kaye

Alex, best place for me to start is to reaffirm that our capital planning and allocation strategy is unchanged. We remain committed to anchoring our financial leverage around a BBB+ rating, which provides, in our view, the appropriate balance between ensuring ongoing financial flexibility and lowering the cost of capital. Given, however, that our gross leverage as of year-end was above 2.5x, and that, as we know, is driven by the cyclical market conditions we just experienced. And as we head into 2023, we want to retain the financial flexibility to marginally deliver our balance sheet and improve our gross outstanding debt position if needed.

And that's similar to the actions that we took in the fourth quarter through our tender offer. And what that means for 2023 is our plan is to return approximately $800 million of our global free cash flow, it's about 53% at the midpoint, to our stockholders, subject, of course, to available cash, market conditions, M&A opportunities, et cetera. And that includes, to your question, the share repurchase guidance of $250 million and approximately $560 million in dividends through a quarterly dividend of $0.77 per share, which is 10% up from our prior quarterly dividend. And it's all about creating that flexibility to evaluate opportunities as the year goes on.

Operator

Your next question comes from the line of Toni Kaplan from Morgan Stanley.

Toni Kaplan

Wanted to ask about the free cash flow guide. Part of the reason why it was maybe a little bit lower than what I thought was the CapEx sort of staying at the $300 million range, roughly, let's call it like 5% of revenue. Should we expect that level to continue? Are you at sort of a different CapEx just percentage-wise because of the change in model? Or I guess, what's driving it? Is 5% the right number to be thinking about for future years as well?

Mark Kaye

Toni, thank you for your question. Let me maybe start by saying the midpoint of our cash flow guidance range implies growth of approximately 25% off of our reported 2022 free cash flow result. And that's well above the projected midpoint, which is low double-digits for our U.S. GAAP net income. And in addition, what that really means is at the midpoint, the free cash flow to U.S. GAAP net income conversion ratio is approximately 100%. And that's effectively equal to the average free cash flow conversion ratio that we've had over the last four years, meaning specifically from 2019 to 2022. So we feel pretty comfortable with that as a result.

In terms of CapEx, 2022 actual result was $283 million. We're guiding to approximately $300 million, i.e., a similar level. And there are a number of factors underpinning that guidance, specifically, for example, continued M&A integration activity, for example, related to PassFort or kompany or RMS. There's ongoing enhancements to IT platform and our real estate infrastructure associated with the workplace of the future program. But one of the big drivers that will carry forward into 2023 is effectively the higher amount of capitalizable work under GAAP related to our SaaS-based solutions for our customers. And that ties in directly with the underlying business strategic shift to provide more SaaS-based, more recurring revenue solutions within MA. And so I think it's a step-up in 2023. I don't think we'll see a separate step-up in future years, but that's really what's driving the underlying numbers.

Toni Kaplan

Terrific. And just as a really quick follow-up. I know last quarter, you were sort of saying that you thought third quarter and fourth quarter would be the trough for the issuance declines, and that it should improve throughout 2023, in particular, second half. I feel like there's some consistency in the messaging that second half is going to be better than the first half. But like, I guess, have you delayed your expectation for issuance recovery? Or is it still similar to where you were thinking it was going to be last quarter?

Rob Fauber

Not really. Toni, it's Rob. Not really a change. It's pretty consistent with how we thought about it last quarter. I think one thing you're hearing from us is just the first quarter of 2022 has a relatively robust issuance here. So there is the matter of comps, but I don't think there's any fundamental change from how we were thinking about the kind of troughing and recovery in issuance.

Operator

Your next question comes from the line of Ashish Sabadra from RBC Capital Markets.

Ashish Sabadra

I wanted to focus on the Moody's Analytics business. We saw some pretty good robust strength there and the guidance also implies further acceleration. Mark, in your -- in response to a prior question, you talked about the seasonality but also talked about like a similar growth profile across all three units within MA. But it seems like based on that bubble chart on Slide 9 that you may have some faster growth businesses within Decision Solutions. So I just wanted to better understand how should we think about some of the growth businesses within all the three segments within MA?

Rob Fauber

Yes. Ashish, it's Rob. Let me -- maybe let me start since the question is really about MA growth. Maybe let me just start with kind of the ARR, and then I can zero in a little bit on kind of what's contributing to that. But we talked about on the last call that we've got RMS now in the MA ARR figure. And I think we've also talked about the fact that RMS is not quite yet growing at the same rate as MA overall. We're still executing on the synergy opportunities in order to accelerate that growth. We believe we're on track but there's still work to do.

So the reported figure of 10% had about a 1.5% drag from RMS. So excluding that, we would have been -- had ARR at about 11.4%. And you might remember that back in the third quarter, we were talking about 10%. So we're seeing some very nice acceleration of ARR on a like-for-like basis. And I think that goes to the expanded capabilities that we've got now to attract both new customers and to better serve and expand our relationships with existing customers. Frankly, we had some great execution by our sales teams in the fourth quarter. And that was a real area of investment for us as you've heard us talk about.

But it's not a one-trick pony either. I think that's the other interesting thing. We're trying to get that message across with that bubble chart. We frequently talk about KYC as kind of our high flyer, and it is. It continues to have very strong momentum. But you can also see our life insurance business. You can see our banking business. And you also see, I think, interestingly, we wanted to show two of our what I think of as kind of more mature product lines, which are the CreditView Research and our Orbis offering.

So there is data that's in the KYC. So this result you see there for Orbis is kind of everything excluding KYC use cases for the data. And both of those are growing at a high single-digit ARR growth rate. So we feel very good about kind of the portfolio. And again, if you think about the strategy, it's been about identifying risk assessment use cases and then threading through these kinds of capabilities to help our customers with a range of kind of risk and decision-making. So some very good momentum in the portfolio.

Operator

Your next question comes from the line of Jeff Silber from BMO Capital Markets.

Jeff Silber

In your prepared remarks, you talked a little bit about some of the indicators you're seeing to give you confidence about a global debt issuance rebound in the second half of the year. Can we get some examples of what you're looking for, what we should be looking for?

Rob Fauber

Yes. It's Rob. So maybe let me talk about both what I think could provide some upside as well as also what could provide some headwind to our outlook. So I'll start with the upside. We talked a lot about, on the last call, just the market's need to get more certainty around the trajectory of inflation and getting certainty that inflation was starting to peak because that then informs the Federal Reserve actions and the market wanting to understand whether we're near the end of the tightening cycle. And you can see, as we then went through the fourth quarter end of the year and into January, the market getting some confidence and you see the issuance that started.

We also talked about where you're going to see that. And so I think that's interesting to understand. You're first going to see, as the markets open up, opportunistic investment-grade issuance. There's the folks with the best access to the market. Then you're going to see, and we have started to see, the higher-rated spec grid names coming to the market so the B, A names. And then eventually, you start to see the single B names coming to the market, and we have seen a few of those. In fact, we've seen our first couple of dividend recaps in months. And it's that kind of activity that starts to give you confidence that the market is opening up.

Now I would say it's -- I'm going to use the word kind of a fragile recovery because there's still plenty of headline and event risk. But we are starting to see that. You saw a very robust month in January for investment grade. You saw high yield start to pick up in leverage loans, started quite slowly, but we're starting to see some leverage loan activity as well. M&A, we have a fairly muted forecast for M&A, kind of a flattish assumption built into our outlook. That could provide some upside if we see M&A activity pick up. And I would look to the sponsor-backed M&A and LBO activity as a place where the sponsors have a lot of dry powder to put to work. And so that would be something to look for.

Just quickly in terms of what could the derailers or the headwinds be -- yes, sure.

Jeff Silber

Sorry. No. You broke up there. Sorry about that.

Rob Fauber

No, sorry. Just in terms of -- just very quickly, Jeff, what could provide a few headwinds? There is, as I said, a headline risk, both in terms of inflation prints and what that means for what the Fed is going to do. But -- and just in general, any unanticipated policy actions by central banks. And that's something I'd talked about even last year. The central banks have a pretty tough assignment on their hands to both deal with inflation and engineer a soft landing. So I think we're going to be keeping a close eye on all that.

Operator

Your next question comes from the line of George Tong from Goldman Sachs.

George Tong

You expect 2023 MIS revenue to increase low to mid-single digits, and that's based on an assumption of low single-digit growth in global debt issuance volumes. If you assume pricing growth of perhaps 4% to 5% given higher inflation, the guide implies to the degree of negative mix from issuance. That said, it looks like you're expecting high yield and structured issuance to be the fastest-growing categories in 2023. And these are generally favorable from a pricing mix perspective. So can you help bridge your assumptions for MIS revenue growth and global debt issuance volume growth in 2023?

Rob Fauber

George, I think you've got it about right. I mean, that's why we've got a range that we've included there for our outlook. And maybe let me just -- it might be helpful, George, just to touch on, for a moment, how we're thinking about 2023 issuance outlook. And there are a wide range I think, of views, probably a wider range than I can remember in recent memory around what's going to happen with outlook. And as you start to zero-in on what's accounting for the difference, it really, I think, is largely around folks' expectation around leverage finance issuance.

And I'll start with investment-grade. I mean, we expect that to grow modestly something like 5% for the year. Leveraged finance, when we look at high yield, we're expecting growth of 25%. Last year is one of the slowest years on record. And I would acknowledge that we've got a little bit more cautious view than some folks in the market. I've seen some much more bullish forecasts for high-yield issuance. But in general, I think what is informing kind of our view is we've got an environment with higher funding costs. We've got the potential for a recession, and we've got a flattish M&A outlook. And so that's what's contributing to our view.

I would acknowledge, George, that we've got a pretty healthy backlog of first-time mandates that did not go to market last year. Almost all of those are in the leveraged finance space, so there's some definite pent-up demand. And then leveraged loans, we think it's going to be flattish. And again, back to kind of Mark's commentary, kind of a tale of two halves. Loans had a very strong start to 2023 but -- so we expect that, that will pick up in the back half of the year -- for 2022, excuse me.

Operator

Your next question comes from the line of Jeff Meuler from Baird.

Jeff Meuler

Rob, you hit on some of this when talking about M&A -- or MA more broadly, but I want to focus on Decision Solutions in Q4 specifically. It pretty significantly accelerated. And correct me if I'm wrong, but I thought RMS was in there, and you noted that's currently growing more slowly organically than, I guess, your heritage solutions. So just anything further you can say on what drove the organic acceleration in Decision Solutions in Q4 specifically? And is it underlying or is there anything unusual like one-timers like rev rec true-ups for full year usage or anything like that?

Rob Fauber

Yes. Great question. Decision Solutions was a good story for the quarter, indeed. 15% growth on an organic constant dollar basis in the quarter. You will remember actually, last quarter, we kind of talked about Decision Solutions, a little bit lower reported growth rate print, so we're talking about the importance of kind of looking through that to ARR. That's still the case. And so if you look at kind of full year, we had about 11% growth in Decision Solutions ARR.

And we've really got strength in a number of areas. And I think I used that phrase, it's not a one-trick pony. And that's true. In KYC, we're up in that kind of mid -- low to mid-20s range. But we've also got a very nice life insurance business and a very nice banking business. The KYC business, we just got lots of demand not only for the data, but now we've got this life cycle product that I mentioned, which allows us to package the data with a workflow solution, gives us the opportunity to have even bigger engagements with our customers. So that's very, very helpful. And we launched that in the second half of last year.

But maybe just to focus in just a little bit more on the other two businesses. People are probably less familiar with it. We have a nice business. Obviously, RMS serves the property and casualty and reinsurance market. But we have had, for years, a business serving life insurance -- life insurers. And we've got a really powerful actuarial modeling platform and we've been able that is used by many of the world's largest insurers. And we've just been able to do what we've done with banking, frankly, which is to build a suite of solutions around risk and portfolio management and balance sheet management and capital planning and reporting.

And one of the areas where we've had some really nice growth is around our risk integrity IFRS 17 solution. As you may be familiar, insurers are having to implement IFRS 17. So there's been a lot of demand to help our customers there. And then the other is banking. We've just seen some very nice growth with the kind of suite of solutions in banking across origination, risk and portfolio management and capital planning.

Operator

Your next question comes from the line of Andrew Steinerman from JPMorgan.

Andrew Steinerman

I just wanted to jump into that MA organic revenue growth guide of about 10%. When I look at MA's ARR in the fourth quarter coming in at 10% and then the guide really is for it to accelerate to low double digit in '23, I just felt with that accelerating backlog, the bias for MA organic revenue growth would be above 10%. Are there any kind of headwinds, maybe non-subscription revenues to note to kind of just kind of keep it about 10%?

Rob Fauber

Yes. One headwind, as you know, Andrew, we've transitioned most of the portfolio to recurring revenue. I think it's something like 94%. But in the banking business is where we do have some -- still some kind of onetime. And you've heard us talk about moving away. We've moved almost entirely away from onetime license revenue. We also have some services work, and we've been deemphasizing that and really focusing where you might see a small delta between kind of ARR and then translating to overall revenue.

Mark Kaye

Yes. And Andrew, just to add on to that, if you think about decomposing our guide of 10% organic constant currency growth for MA, you could think about recurring as growing in that low double-digit range when you think about transactional onetime declining in that high teens percent range.

Operator

Your next question comes from the line of Faiza Alwy from Deutsche Bank.

Faiza Alwy

I have two questions on the MIS midterm targets. First, I appreciate the conservatism on the top line. I'm curious that you left your margin target as is despite a lower sort of implied top line. So just wanted some more perspective on that. Is it related to the recent restructuring actions?

And then second related question is, you mentioned a private credit market as one of the factors as you think about issuance. We've obviously seen significant expansion in that market in '22. So curious what your thoughts are around private product both for '23 and as you thought about your medium-term targets.

Mark Kaye

On your question around the MIS adjusted operating margin, we are maintaining our expectation for MIS' medium-term margin to be in the low 60s percent range. And I certainly acknowledge that, that's a meaningful step-up compared to our new base year 2022 results and full year 2023 guidance. While this target is reflective of performance within 5 years, the key, and I think this is the point that you were flushing out, the key to achieving it will naturally be influenced by the issuance recovery pattern we experienced in 2023 and beyond.

That said, MIS' medium- to long-term business fundamentals remain firmly intact. And we continue to believe that the disruption in the debt capital markets that we experienced in '22 was really cyclical. It wasn't structural in nature. And that view is informed by several data points and observations. For example, the stock of debt has steadily grown over the last several decades. The price to value is compelling for our customers. There are strong refinancing needs that can help buttress the future transactional revenue base, credit spreads remain around that historical average.

And overall, I'd say that the interest burden is still relatively low for corporates. And these factors, in addition to the proactive and decisive expense management actions like we took last quarter, should help to stabilize the '23 margin in that mid-50s percent range, and that will help us obviously set a good base before expanding to that low 60s over the medium term.

Rob Fauber

Yes. One other thing I want to emphasize just around why we're talking about MIS margin expenses. And I've gotten these questions from folks over the last few months is just around making sure we've got the right resources. And I want to assure you that we approached the restructuring exercise very, very thoughtfully. We monitor over $70 trillion in rated debt and it is absolutely critical to us that we make sure that we've got the expertise and resources to not only monitor that stock of debt but also to be able to service the flow of new issuance.

And so we just -- we approached that very thoughtfully, things like a typical span and layer exercise and thinking about initiatives that could be deprioritized and ways to get more efficient. And we're committed to getting more efficient in that business, and that's what you see with the medium-term target.

Let me touch just briefly on the private credit space. We talked about that on the last call. The private credit market has experienced some strong growth over the last few years. And I guess the way we've stepped back and tried to really think about it is, what is the opportunity for us to address that market and the needs of that market? Because we do think that we have a role to play in helping both asset managers and investors and borrowers.

And we've got some very large relationships with many of the largest private credit lenders in the world. And you think about our relationships with the asset managers. We've got ratings on the asset managers themselves as well as their portfolio companies and CLOs and BDCs. And we also support them with a range of products across MAs. And we've been in some very active discussions with a range of players in this space. And we think that we've got more that we can do to serve them around some important use cases. That includes providing independent credit assessments to help investors to understand the credit quality of these portfolios that they're invested in but also to help the asset managers themselves around credit scoring, company data, benchmarking portfolio management, ESG is another area. So we think there's an opportunity here for us to do more. And we've got a number of things in the works across the company to be able to support the use cases around us.

Operator

Your next question comes from the line of Shlomo Rosenbaum from Stifel.

Shlomo Rosenbaum

I want to ask a little bit about the MIS guidance just for 2023. When you look at the composite and the pieces of that you put in that support your outlook, how much of your guidance is dependent or focuses on kind of the refi walls that are sort of inherent support? And how much is it in terms of just assuming that market conditions tend to come -- get better over the course of the year and particularly in the second half of the year or just more dependent on things improving versus things that you can actually see? And maybe you can talk a little bit about that on vis-à-vis what you normally do this year. Is there any change?

Rob Fauber

Hi, Shlomo. It's Rob. Maybe what I'll do, I mean, refi -- let me just kind of talk to you a little bit about the several different things that kind of go into how we think about issuance drivers and also kind of what our visibility and confidence level is around those. Refi is one of them. And the first thing I would say is just around mix, and we've talked about that a little bit, that there's obviously a wide range of what's going to happen with leveraged finance. And I think we've got a little bit less certainty around that. Again, just the fact that there's a wide range of views across Wall Street means we have a little less confidence about what's going to happen, and that also contributes to why we have a range in our overall guide.

When you think about the issuance in the -- coming from the financial institution space, there, we've got much more confidence as it translates to revenue, right, because of the kind of commercial relationships that we have with banks. Around refi, obviously, we've got great visibility in the refi walls themselves. There is a question about the extent of pull forward. That's always a question.

And I would say, look, we've looked at this before. It's a really, really rough number, but we kind of tend to think about kind of a little over 1/3 of kind of transaction revenue being supported in any given year by kind of those refi walls. And then you have to look at kind of what do we think is going to happen with market conditions, and that gets into rates and spreads. Spreads are very well correlated to default rates. We have great visibility around default rates. But obviously, there's volatility in the market that can make spreads move around at any given time.

I talked about some of the headline risk that exists in 2023. And that's not something that we're able to capture in a forecast. Those kinds of events are binary. They either happen or they don't. And a great example is the -- kind of the debt ceiling issue. That creates some event risk for the market. So can't predict the future, but there are some things that we feel fairly comfortable about that give us insight into -- that help us kind of build to that outlook. So hopefully, that gives you a feel for it.

Shlomo Rosenbaum

Okay. And if I could sneak in one just housekeeping. The AR DSO was up a little bit sequentially. Were there any deals that closed particularly towards the very end of the quarter that kind of pushed it up?

Mark Kaye

Shlomo, this is Mark here. This might be a record for a question on an earnings call around DSOs. I anticipate you're looking at our externally reported accounts receivable over, I think, three months revenue annualized. And I'm guessing you're seeing a number of around 115 in the fourth quarter around, let’s call, at 110 for full year. Internally, we're able to do a little bit more of a precise calculation because we can use sales.

And so if I think about ending sort of ending accounts receivable off of the -- divided by three-month sales annualized, we get a much lower number of around 71 for the full year. That 71 days is a little bit up from what I saw in the last year. And the driver here is just around the integration of acquisitions into our corporate processes as we bring sort of that same discipline and rigor to the DSO processes of the companies we've acquired.

Operator

Your next question comes from the line of Russell Quelch from Redburn.

Russell Quelch

Just want to go back to this point around the MIS guidance, if I may, to start. If I pose it this way, we've got data that we've been presented with historically that shows there to be perhaps a 5% refi wall in '23 over '22. If I haircut that by a couple of percent for defaults which I think would be conservative, the starting point, therefore, is 3% growth. And as George pointed out, historical pricing is 4% to 5% with the potential for a positive pricing mix, which would get me to sort of 8% to 10% as a baseline growth for next year. And that's without assuming anything for sort of new issuance recovery, and you said new issuance recovery is sort of low single digits. So I'm just trying to square that with this sort of low mid-single-digit guidance because it does seem like there's a big gap there between the way I built it and what your guidance suggests.

Mark Kaye

This is Mark here. Russell, nice to have you on the call. One other element to add to your model is the reporting of MIS other revenues for 2023 vis-à-vis 2022. Those are down in the range of $10 million to $15 million primarily to reflect the incorporation of some of our ESG products and capabilities into our MA revenue set. That's really what's driving the difference between sort of the issuance outlook and the revenue outlook we provided this morning.

Russell Quelch

Okay. I might follow up with you on that one. And then Mark, just another question, maybe flipping over to Decision Solutions. I appreciate there's been a few on this now. But wondered how much of the growth in Q4 was related to pricing. And how much might be related to you increasing cross-sells between the products where you've been investing in that growth? And if you would argue, there was upside risk to the guidance if corporate M&A activity recovers -- I'm sorry, that's a 10% guidance for MA.

Rob Fauber

What was that last bit of the question? I'm sorry, Russell.

Russell Quelch

Yes, apologies. Wondering whether there is upside risk to the 10% MA growth guidance if we see a recovery in corporate M&A activity next year -- or sorry, this year?

Rob Fauber

To the MA guidance?

Russell Quelch

Yes, 10% MA guidance.

Rob Fauber

Let me just start with the question about Decision Solutions and pricing. And with the biggest growth engine in Decision Solutions is our KYC business. And just to give you a sense, new sales almost doubled in 2022. And we had a greater than 50% increase in the number of new customers, and we had a meaningful increase in the average sale price. That's not just pricing.

What that really does is the bundling of products and capabilities that's allowing us to have a larger ticket size. So I think what you're really seeing certainly in KYC is a lot of new customers coming into the market. We're obviously doing a very nice job of bringing those into the Moody's family when you look at our growth rates relative to the overall market but also continuing to be able to provide additional capabilities to folks who are already then using the products and services.

So I'd say that's actually probably a similar story to kind of a lesser extent for what we're doing around banking. We've just got a suite of cloud-based solutions that we continue to build out that allows us to bundle those solutions together and to increase the ticket sizes and the size of the relationship that we've got with our customers. So it's not just about price increases there. Of course, there's an element of that as we continue to enhance the value proposition of all of our products. But I think it's really more around cross-sell, and in the case of KYC, especially just new customer acquisition.

Russell Quelch

Okay. And then the second point, I'll rephrase it better in terms of the MA revenue growth guidance of 10%. Is there upside risk to that if we see a recovery in corporate M&A activity?

Rob Fauber

I don't really see those two things tied tightly together. There'll be upside to the MIS guidance, obviously, but I don't necessarily think so from an MA standpoint.

Operator

Your next question comes from the line of Craig Huber from Huber Research Partners.

Craig Huber

I guess, Rob, you've talked about this, let's go a little deeper here. Your medium-term outlook, you said that's five years here, you're talking about low to mid-single-digit MIS revenue growth long term, which is the same range that you're giving for this year. We all know 2022 was obviously a very rough macro year M&A for the marketplace for most of the bloody year was quite low. Debt taken on for share buybacks was quite low last year. Refinancings last year seemed like that was low versus what it should be the next few years, that you agree on that and stuff.

And when you think about pricing, historically, you've done 3% to 4% price, maybe it's a little bit higher than that, but at least 3% to 4%. How do you square all that with only up 2% to, say, 5% on average for the next five years with the base year seemingly being so low? Is it just being overly conservative here? I'm just trying to get a better sense of this. I get a lot of questions on this.

Rob Fauber

Yes. I understand that some will view us as conservative. And obviously, time will tell, and I hope that's correct, Craig. I guess it just comes back to kind of what I talked about earlier when we look at kind of a longer-term average in terms of overall issuance and where we ended up 2022 and what we see, at least in front for us for 2023, we think implies as we, I think, in line with our medium-term targets. So I think that's what it comes back to.

But as I said, the one thing that maybe to think about in terms of are we being conservative, I touched on this a little bit earlier in the call is, while on one hand, we're at relatively similar levels of issuance from pre pandemic, I mean, a little bit lower but not significantly lower, the mix is different. So last year, we had much more issuance coming from financial institutions as a percent of the total than corporates. And so as that -- if that mix shift changes back to what we've seen over the last, call it, six, seven years pre-pandemic, then yes, I think in that case, we'd see faster corporate growth that might provide some upside to the way we think about the medium-term targets.

Craig Huber

Then also just on the pricing, can you guys tell us what you're expecting pricing for MIS this year to be a similar question for MA?

Rob Fauber

Yes. So Craig, we always kind of target across the company kind of a 3% to 4% kind of annual price increase. And I think we talked about a little bit on the last call, but what we do in MIS, every year, we do a very detailed review of pricing across sectors and regions. And based on that, we come out with our list prices for the following year. And I think you can expect our list prices for 2023 are going to be a little bit higher than the rate of increase, a little bit higher than maybe it has been historically. But the realization of that will depend on mix, right, where the issuance actually comes from.

Craig Huber

And the MA side, what's the pricing there, you think, on average for this year?

Rob Fauber

I'd say it's within that range.

Operator

And we have a follow-up question from the line of Kevin McVeigh from Credit Suisse.

Kevin McVeigh

Hey, Rob, you've done a really nice job remixing the business and MA has kind of crossed the 50% threshold. If you look out three to five years, how should we think about what the business looks like? And I don't know if there's a way to maybe frame that organically versus inorganic? I mean, start to kind of parse deals and things, but maybe give us an organic view of kind of where the business sits three to five years from now?

Rob Fauber

Yes. Kevin, that's an interesting question. And I guess I might start by saying when we think about integrated risk assessment, it's not just MA. It's all of Moody's. The rating agency is a really important contributor to, but also beneficiary of, this integrated risk assessment strategy that we have.

But maybe a few things, Kevin. First, I think you're seeing us develop scale in a few areas beyond our ratings business. And we obviously have a world-class fixed income research business in Digital Insights that serves investors. We've got, in Decision Solutions, I mean, you've heard me talk about a little bit meaningful businesses that are supporting both banking and insurance different really critical risk workflows, origination, underwriting, portfolio and risk management and capital planning and reporting.

And then, of course, we've got a rapidly growing KYC business that we think has some really industry-leading capabilities. We're really well positioned there. I think that's where you're going to see us continue to invest and really drive growth because those are very important delivery platforms for a range of content across all of Moody's. And you heard me talk about kind of what's driving ARR. And so all this fits together.

When I think about that content, I mean, think about it, $70 trillion of debt rated by MIS. It's data ownership and credit scores from 425 million companies. It's massive economic data sets and ESG and physical risk scores on hundreds of millions of companies and locations. And we think of that as kind of our risk operating system, and we are increasingly threading that content through those scaled platforms. And you've heard us talk about it but our commercial real estate lending module for banking. That takes a lot of that property and economic and climate content, and we've got KYC integrations that are on the way into our banking solutions. You've got ESG and climate integration into ratings, banking, insurance and research and so on.

So I think ultimately, complementing our ratings business, we're going to have scaled platforms with a suite of cloud-based solutions that serve key customer sets. And they're differentiated by being able to draw on all this proprietary data and analytics that we've got, where and when customers need it, so that they can better identify, measure and manage risk. That's where I think we're going to be three to five years from now.

Operator

And there are no further questions at this time. Mr. Rob Fauber, I'd turn the call back over to you for some closing remarks.

Rob Fauber

Okay. Thanks, everybody, for joining. Appreciate the questions, and we look forward to speaking with you on the next call. Have a good day.

Operator

This concludes Moody's Fourth Quarter and Full Year 2022 Earnings Call. As a reminder, immediately following this call, the company will post the MIS revenue breakdown under the Investor Resources section of the Moody's IR homepage. Additionally, a replay will be made available immediately after the call on the Moody's IR website. Thank you.