穆迪 (MCO) 2020 Q3 法說會逐字稿

Good day, everyone, and welcome to the Moody's Corporation Third Quarter 2020 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Shivani Kak, Head of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's third quarter 2020 results as well as our outlook for full year 2020. I'm Shivani Kak, Head of Investor Relations.

This morning, Moody's released its results for the third quarter of 2020 as well as our outlook for full year 2020. The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moodys.com. Ray McDaniel, 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. Towards -- today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In accordance with the act, I also direct your attention to the Management's Discussion and Analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2019, our quarterly report form on 10-Q for the quarter ended March 31, 2020, and in other SEC filings made by the company, which are available on our website and on the SEC's website. These, together with the safe harbor statement set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements.

I would also like to point out that members of the media maybe on the call this morning in a listen-only mode.

Before we begin, we would like to comment on the succession plan that was announced last week. Ray McDaniel will retire as President and CEO of Moody's on December 31, up to nearly 34 years with the company, including over 15 years as CEO. We are very pleased that the Board has appointed Rob Fauber, Moody's Chief Operating Officer, as Ray's successor. Ray will remain on the Board upon his retirement and will assume the role of Chairman effective January 1.

I will now turn the call over to Ray.

Thank you, Shivani, and good morning, everyone. Before we discuss the company's performance, I want to take just another minute to reflect on the leadership succession plan. As Shivani mentioned, I'll be retiring from Moody's at the end of the year. And with the unanimous approval of the Board of Directors, Rob Fauber will succeed me as President and CEO. I will continue to serve on the Moody's Board, while I will assume the role of Chairman. Rob has now joined the Board, and we will work closely together as well as with senior leadership and our fellow directors to ensure a smooth and successful transition.

Leaving a job you love and people you respect is not easy, especially at such a great company. I'd like to thank our employees for their unyielding commitment to quality and rigor and trust holding Moody's purpose to bring clarity, knowledge and fairness to an interconnected world. It has been a privilege working with you all. While it's difficult to leave, I'm confident that this is the right time in the company's evolution for this transition to take place. Moody's is stronger now than ever before, and the company is well positioned for the future.

Rob's impressive record of achievement during his 15 years at the company, combined with his deep knowledge of our businesses and the needs of our customers, make him the ideal leader to take Moody's into its next chapter. I think you all know Rob well. Since joining Moody's in 2005, he has shown himself to be an innovative, strategic and results-oriented leader and someone who cares deeply about our people. He has grown with the company and has served in a number of leadership roles, most recently as Chief Operating Officer, where he's overseeing both MIS and MA as well as strategy and marketing for the corporation. I am confident he will continue to maximize our strengths and champion collaboration, innovation and efficiency across the company. Moody's future is in excellent hands.

And with that, let me turn the call over to Rob to say a few words.

Yes. Thanks, Ray. It's been our privilege to work alongside Ray and have benefited from his mentorship over the past 15 years. I'm also proud to be able to call him a friend. Under Ray's leadership, Moody's has experienced the strongest growth in its history. And during his tenure, Ray implemented some very important enhancements to the company's business, including growing and strengthening the ratings and research business, expanding the company's international presence in building the company's data and analytics businesses. He's positioned the company for continued global growth and success. And as we look forward, I believe we have an enormous opportunity.

In this rapidly changing world, understanding and managing risk is more important than ever, and we're focused on offering our customers solutions that leverage integrated data and technology that's grounded in our history of insights and analytical excellence. I thank Ray for his mentorship and support, and I look forward to working with him, the Board and the entire Moody's team to continue providing trusted insights and standards to help decision-makers act with confidence. We've got an exciting journey ahead.

And with that, I'll turn it back over to Ray.

Rob, thanks for the gracious words. And congratulations to you again.

I'll now move on to provide a general update on the business, including Moody's third quarter 2020 financial results. Mark Kaye will then provide further details on our third quarter performance and also comment on our revised outlook for 2020. After our prepared remarks, we'll be happy to respond to your questions.

I want to commend our employees on their hard work during these trying times. Your dedication and focus on delivering best-in-class customer service help Moody's achieve strong third quarter revenue growth of 9% and adjusted diluted earnings per share growth of 25%. Both Moody's Investor Service and Moody's Analytics performed well, despite the difficult environment, exhibiting the resiliency of our organization and the relevance of our products, insights and solutions.

Underlying this performance were highly active credit markets, which continued to benefit from fiscal and monetary stimulus, coupled with issuers looking to opportunistically refinance debt and fortify their cash positions. And we continue to innovate and integrate our award-winning suite of products in response to increasing customer demands for easy-to-use unified solutions.

Finally, given our outperformance year-to-date, we've significantly raised and narrowed our full year 2020 adjusted diluted EPS guidance range to $9.95 to $10.15.

Looking at third quarter 2020 results. Moody's total revenue increased 9%, with 11% growth from MIS and 7% growth from MA. Moody's adjusted operating income of $721 million was up 17% from the prior year period. Solid revenue growth from our 2 businesses outpaced the relatively small increase in operating expenses, driving 370 basis points of adjusted operating margin expansion. Third quarter adjusted diluted EPS of $2.69 was up 25%.

Turning to the credit markets. And as I've talked about on prior calls, this year, we've experienced a dichotomy between the real economy and the credit markets. The real economy remained in flux as resurgent COVID-19 cases within certain parts of the U.S. and Europe caused these areas to begin rolling back reopening measures. While friction between China and the U.S. continue to escalate in the third quarter, the geopolitical environment remained largely as the same, but with increased focus on the upcoming outcome of the U.S. election in November.

Meanwhile, incremental macroeconomic responses were mixed with the implementation of new stimulus measures in certain jurisdictions and uncertainty or lack of actions in others. This is in stark contrast to the credit markets, where fixed rate bond issuance reached new records as issuers bolstered their balance sheets and opportunistically refinanced debt. The M&A pipeline showed positive indicators of recovery among investment-grade issuers. However, activity was still muted in comparison to the prior year. Leverage loans also showed signs of improvement but remained relatively weak in comparison to bonds as demand for floating rate debt was limited.

I'd now like to go into more detail on corporate finance, which was a key contributor to MIS' strong performance. The chart on the left shows the percentage of MIS' total rated issuance by line of business over the last 7 quarters with corporate finance issuance in 2020 increasing to approximately 50%.

As shown on the right-hand side of the slide, activity for this sector grew 10% year-over-year. Favorable mix with more infrequent issuers coming to market resulted in a 23% increase in nonfinancial corporate or CFG transaction revenue. Over the years, we have purposefully oriented ourselves towards more transaction-based pricing agreements. Our data shows that this strategy creates greater value over time, and you can see that positive dynamic in this quarter.

As I noted earlier, refinancing and liquidity issuance were the main drivers this quarter, similar to the trend we observed in the second quarter. As spreads tightened and overall yields declined, refinancing took on a more opportunistic top, while activity related to shareholder payments and M&A continued to lag.

While refinancing was a key issuance driver this quarter, the refunding needs over the next 4 years for North American and European issuers increased 10% year-to-date to approximately $3.8 trillion. Of that total, approximately 20% is forecast to mature in 2021. Furthermore, of the 2021 maturities, only about 1/3 are in the U.S., where we have seen the greatest amount of issuance this year. Our views that a portion of 2020 activity represents what we think of as contingent pull forward where companies issue debt to fortify their cash positions until they become more confident in the future operating environment. The extent to which this may then impact the refinancing of some 2021 maturities through cash on hand remains to be seen and depends heavily on how the economic outlook develops.

The refinancing needs shown on this slide represent a robust base of future issuance, even though the average maturity has lengthened for investment-grade. Specifically, due to lower benchmark rates and steady spread tightening, U.S. investment-grade issuers have been incentivized to lengthen the maturity of their bonds to take advantage of low overall effective yields. This is evidenced by the higher year-to-date average investment-grade maturity of 14.5 years compared to 12.4 years in 2019. This was partially the outcome of a nearly 60% increase year-to-date in 11- to 30-year issuance, as shown in the light green bar on the left-hand chart. This was especially pronounced in the third quarter where 50% of investment-grade issuance was longer than 10 years.

Many have asked us where the longer average bond maturities would have a dampening effect on refinancing needs in the medium term. While this is an important trend to follow, the impact to date has been relatively muted for 2 primary reasons. First, year-to-date, the increase in maturities was limited to investment-grade as speculative grade bond issuance saw a decrease in average maturity to 7.5 years due to the substantial rise in the use of medium-term maturity bonds.

Second and perhaps more importantly, while there has been an uptick in longer-dated investment-grade supply, the absolute rise in issuance volume has resulted in a significant increase in 1- to 10-year bond maturities. Specifically, investment-grade issuance volumes with 1- to 10-year maturities rose by more than $160 billion year-to-date as compared to full year 2019 or more than 43%, supporting healthy future refunding needs.

Turning to Moody's Analytics. The business continued to show resilience, delivering strong sales growth, despite the challenging COVID-19 environment. High demand for our insights and analytics supported solid customer retention across both lines of business and an overall retention rate of 94% reflects the relevance and importance of our solutions during uncertain times. Stable retention rates, together with growth in subscription sales, led to better-than-expected performance in the third quarter. M&A continues to successfully convert the existing sales pipeline as our sales force and customers have adapted to the virtual working environment. The pipeline for 2021 is encouraging especially for high margin, recurring revenue subscription products, partially offset by softness in onetime project sales. We have a busy season in the winter months, and we'll provide our 2021 outlook early next year after we examine the sales mix and performance in the fourth quarter.

Maintaining healthy sales pipeline and strong customer retention rates requires ongoing innovation to ensure that we continue delivering solutions that meet emerging customer needs. By combining new modules with our established products, we provide our customers with the tools they need to make better decisions. This quarter, we launched 2 new integrated solutions that bring our capabilities together and offer more powerful solutions.

Leveraging natural language processing and machine learning, our credit sentiment score provides customers with early credit-relevant warning indicators. We are pairing this tool with our corporate credit scoring products, CreditEdge and RiskCalc. Together, these capabilities deliver a solution that helps customers monitor their portfolios for potential credit deterioration. Similarly, we've incorporated ESG and climate assets within our flagship product CreditView, also known as moodys.com.

Using data from Vigeo Eiris and Four Twenty Seven, customers are now able to see the sustainability risk metrics of their portfolio companies, along with their credit ratings, providing them with the tools and data needed to take a more holistic approach to evaluating credit decisions. In addition to enhancing our current portfolio organically, we are also investing in the business via acquisitions and partnerships.

In the past, we've spoken about our strategic growth priorities of regional expansion and business adjacencies. And we recently made a number of exciting investments in both areas.

Starting with business adjacencies. Our acquisition of Acquire Media and AI-powered curated real time news aggregator expands our growing KYC capabilities. The acquisition bolsters our ability to provide customers with counterparty screening and surveillance as well as early warning signals to help them make better decisions.

We have also made significant progress on our ESG initiatives. The formation of the ESG Solutions group in September combines our internal capabilities with our strategic investments in Vigeo Eiris and Four Twenty Seven. The team will facilitate coordinated efforts across Moody's as well as unify innovation and product creation.

Turning to regional expansion. We recently acquired a minority stake in MARC, a Malaysian rating agency, which strengthens Moody's presence in Southeast Asia and positions us as a leader in Islamic finance. In China, we created the commercial strategies group to help identify and capture growth opportunities for MA. The team will ensure that our new product development and innovation plans align with market opportunities as well as help support the advancement of China's domestic markets and global economy through data, analytics and insights.

Over in Latin America, we continue to build on our Moody's local platform with the recent expansion into Argentina and Uruguay, which combines the strength and expertise of our brand with understanding of the domestic credit markets. As we continue to invest in our capabilities to fulfill customer needs, we are also looking internally at our workplace of the future. We're excited about the level of engagement from our employees in helping to define our new working environment as their input is key to maintaining our strong culture. By leveraging our existing technological capabilities, we are confident we will not only be able to execute on expense-saving opportunities but also uphold the exceptional level of service our customers have come to expect.

I'll now turn the call over to Mark Kaye to provide further details on Moody's third quarter results and our revised outlook for 2020.

Thank you, Ray. As Ray mentioned earlier, MIS continued to demonstrate strong operating leverage in part through disciplined expense management. This quarter's 11% revenue growth outpaced the 4% increase in issuance due to favorable revenue mix in both corporate and financial institutions lines of business. The largest contributor was corporate issuance, which exhibited 18% revenue growth as compared to a 10% increase in global activity, as both investment-grade and speculative-grade issuers bolster their liquidity positions and opportunistically refinance debt ahead of potentially volatile for the quarter.

Similarly, financial institutions revenue benefited from favorable mix as the top line grew 12%, despite a 12% global issuance decline. This was due to a 77% increase in activity from infrequent U.S. bank issuers as the larger, more frequent U.S. banks were more subdued, having issued heavily in prior quarters.

In public, project and infrastructure finance, revenue rose 11% mostly due to a 25% increase in U.S. public finance activity we issued to take advantage of receptive credit market conditions and historically low all-in coupon rates. Meanwhile, structured finance revenue declined 16% compared to a 22% decrease in global issuance, stemming from weakness in CLOs as the lack of new loans supplying wider spreads hindered new CLO creation.

We are pleased to see an uptick in first-time mandates in the third quarter through a combination of increased high-yield bond issuance and early signs of resumption in M&A activity. Overall, approximately 540 mandates have been signed year-to-date, which was ahead of our prior expectations. A significant revenue growth and ongoing expense discipline led to an expansion of adjusted operating margin by 410 basis points.

Moving over to MA. Third quarter revenue grew 7%, or 8% on an organic constant-currency basis. By collaborating with customers to power their decision ecosystems, we help them measure, manage and understand risk. This is even more important in times of uncertainty and underpinned our impressive mid-'90s retention rates. Furthermore, MA's recurring revenue base represents 90% of the total, up 6% year-over-year, providing ballots to Moody's overall revenue mix.

Focusing first on RD&A. The growing importance of knowing your customers, suppliers and supply chain helped MA expand its KYC and compliance business this quarter. This, together with robust sales of research and data feed products, have a 22% increase in revenue or 12% on an organic basis. Within ERS, revenue grew 8% or 7% on an organic basis. Strong performance in credit assessment and loan origination solutions such as credit lines drove growth with additional support from our suite of insurance products.

In the third quarter, the MA adjusted operating margin increased 220 basis points. In conjunction with the growth in revenue, incentive compensation accruals increased but were partially offset through expense discipline and lower travel and entertainment costs.

Turning to Moody's full year 2020 guidance. Moody's outlook for 2020 is based on assumptions regarding many geopolitical conditions and 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, foreign currency exchange rates, capital markets liquidity and activity in different sectors of the debt market. The outlook also reflects assumptions regarding general economic conditions and GDP growth in the U.S. and Euro area, the company's own operations and personnel and additional items as detailed in the earnings release. These assumptions are subject to uncertainty, and results for the year could differ materially from our current outlook.

Our guidance assumes foreign currency translation at end of quarter exchange rates. Specifically, our full costs for the remainder of 2020 reflects U.S. exchange rates for the British pound of $1.29 and for the euro, $1.17. The guidance also assumes a previously announced restructuring program around the rationalization and exit of certain real estate leases estimated to result in total pretax charges of $25 million to $35 million. Of this total, $25 million to $30 million is expected to be recorded in the second half of the year, including the $23 million charge incurred in the third quarter. This program is expected to result in estimated annualized savings of $5 million to $6 million.

For full list of our guidance, please refer to Table 12 of our earnings release. We have raised our full year 2020 guidance for most key metrics as compared to the prior forecast and now anticipate that Moody's revenue will increase in the high single-digit percent range. Our upward revision outpaces that of our operating expenses, which we now expect to increase in the low single-digit percent range. The resulting improvement in operating leverage supports our upwardly revised adjusted operating margin guidance in a range of 48% to 49% to approximately 50%.

We are reaffirming both the net interest expense and full year effective tax rate guidance ranges of $180 million to $200 million, and 19.5% to 21.5%, respectively. The diluted EPS full cost has been significantly raised and narrowed to a range of $9.30 to $9.50 and adjusted diluted EPS to a range of $9.95 to $10.15. Free cash flow is now expected to be approximately $1.8 billion.

In prior quarterly earnings calls, we noted uncertainties surrounding the impact of the pandemic. As a result, temporarily paused share repurchases as we monitored the effects of COVID-19 on our business. After careful evaluation, we are pleased to announce that we expect to resume share repurchases in the fourth quarter, and we are providing guidance of approximately $500 million in buybacks for the year.

Our full year 2020 guidance is underpinned by the following macro assumptions. 2020 U.S. and euro area GDP to decline approximately 6% and 9%, respectively. The U.S. unemployment rate to end the year at approximately 8%. Benchmark interest rates to stay low with U.S. high-yield spreads of approximately 500 basis points and the global high-yield default rate to rise to approximately 8% by year-end. We continue to closely monitor both the macroeconomic backdrop and credit market activity as we head into the fourth quarter.

Turning to the operating segments. For MIS, with the surging issuance year-to-date, we now anticipate full year revenue to increase in the low double-digit percent range with rated issuance growing in the high teens. MIS guidance assumes investment-grade activity for the full year increases 60%, up from our prior assumption of 50%. High-yield issuance increases 25%, up from 5%. Bank loan issuance declines 10%, up from a 20% decline. Constructed issuance declined 35%, slightly higher than our prior expectation of a 40% decline.

Additionally, with the increase in first-time mandates in the third quarter, we have raised our full year expectation from approximately $550 million to a range of $600 million to $700 million. As a reminder, first-time mandates are an integral part of MIS' future growth, enabling us to generate incremental revenue not only through issuance but also through future annual monitoring fees.

Given the likely contingent pull-forward activity that we have discussed, we believe that the majority of issuers that we're looking to refinance of (inaudible) liquidity in 2020 have already done so. Furthermore, we anticipate that M&A, although on a positive trend compared to activity earlier in the year, will remain relatively limited during the fourth quarter.

Turning to MIS' adjusted operating margin. We are also raising our guidance by 2 percentage points to approximately 60%. This is driven by both year-to-date revenue growth continuing to outperform and disciplined expense management inclusive of our incentive compensation accruals. With over 50 quarters of consecutive growth in MA, we are pleased to reaffirm full year 2020 revenue growth guidance in the mid-single-digit percent range. Our guidance reflects a net unfavorable impact of approximately 2 percentage points from the divestiture of MAKS and FX, partially offset by growth from targeted acquisitions, including RDC, RiskFirst, ABS Suite and Acquire Media. We expect RD&A revenue growth in the fourth quarter to a gain, driven by KYC and compliance solutions as well as research and data feeds. Similarly, continued strength in ERS from lending software and analytics such as private lendings and IFRS 17 solutions support steady growth in 2020.

MA's reaffirmed adjusted operating margin guidance of approximately 30% is driven by operating leverage created by the ongoing transition to scalable subscription-based product and focused expense management initiatives.

Before turning the call back over to Ray, I would like to highlight a few key takeaways. First, we are pleased to raise guidance metrics for the full year due to better-than-expected performance in the third quarter, driven by the high demand for Moody's award-winning suite of products, insights and solutions. Second, we continued to innovate and reinvest in our business to further enhance our relevance and meet our customers' evolving needs, positioning Moody's for sustainable long-term success. Third, in this increasingly complex environment, we remain committed to all of our stakeholders. Our thoughtful approach to expense management, our future workplace environment and prudent capital allocation is designed to ensure ongoing operational and financial flexibility.

I am also personally excited and energized by Rob Fauber's appointment as the incoming President and CEO of Moody's, given his impressive record of achievement and his deep knowledge of our businesses and the needs of our customers. I also want to sincerely thank Ray for his leadership, guidance and friendship over the past several years. I've thoroughly enjoyed working with and learning from him.

And with that, let me turn the call back over to Ray.

Thank you, Mark. This concludes our prepared remarks. So Rob Fauber, Mark Kay and I would be happy to answer any questions that you might have. So please, operator, if we can open this up for questions.

(Operator Instructions) And we'll first hear from Kevin McVeigh of Crédit Suisse.

Congratulations to you, Ray, Rob as well and really just all around really, really good results. It's good to go on, on top, Ray, and you set a tough bar for Rob, but it's a lot of hard work there. I wanted to start with just the margins in Moody's Analytics, really nice improvement. Just wondering if you could help us frame that out a little bit in terms of what drove it and how sustainable it is going forward?

Thank you for the question. And perhaps before I address the question directly, I thought, for context, it's worth noting that we had over 500 basis points of margin expansion in Moody's Analytics over the past 3 years, a very impressive result on a continued trend. For the third quarter specifically, the reported MA margin expanded by 220 basis points to 31.4% this quarter. And that was primarily driven by over 300 basis points of core expansion. And so I think about RD&A being 200 basis points of that and maybe ERS being around 100 basis points of that. And that was offset in part by incentive compensation trips during the quarter. We have maintained our 2020 MA segment margin guidance of approximately 30%. That represents over 200 basis points of margin expansion on a trailing 12-month basis from 2019. We do expect continued margin expansion over the long term. We may see some pressure in the next 12 to 18 months, depending on the ultimate duration and severity of the ongoing COVID-19 economic impact, but we do feel very positive about this business.

That's great. And then Mark, maybe just within the context of MA as well, almost a 95% retention rate in this environment seems really, really impressive. Maybe some puts and takes around that in terms of what's driving that? And then ultimately, even within the context of with bankruptcies a little bit better, client losses, anything like that, because really just a really, really nice outcome.

Yes. Rob, did you want to address that?

Yes, sure. Yes, the overall retention rate across MA, as you say, has remained very strong. In fact, probably ticked up slightly. That's led by our research products and 96% retention there, very, very strong. I think what you're seeing is in an environment of uncertainty, our customers really, really value the insights and expertise that we're able to offer them. So I think that's supporting the retention. But you also see the retention rates in our ERS and BvD businesses. We have that on the webcast. And I think that goes to the fact that these are embedded into customer workflows and viewed as kind of must-have solutions. So when you think about the ERS suite of solutions, these are being used for loan origination, regulatory capital reporting, accounting, all sorts of things. So that supports those retention rates. And just like with BvD, a lot of that data is being used to support the compliance solutions, which again, really supports those retention rates.

Thank you, Kevin, and thank you for your comments at the beginning also.

Next, we'll hear from Manav Patnaik of Barclays.

And my congratulations to both Ray and Rob as well. The first question I had was just to try to think about some of the moving pieces, particularly around issuance in the fourth quarter. Clearly, there's going to be some election volatility, and that depends on how the markets should act. But what I wanted to ask was the surge in investment-grade and high-yield issuance that we saw that surprised a lot of us after the first set of lockdowns, in your sense, do you think a lot of the IG companies have raised cash in terms of maybe what they anticipate they needed? Or do you think if there's another lockdown, you could see some kind of a repeat of that coming?

Manav, this is Mark and get off today, and I think given the nature of your question, what I'll do share is maybe a little bit different from what we've done in the past. And I'll start really by talking about what we're hearing from the banks and then we'll open it up for any further next follow-on questions from that.

So starting with the U.S. investment-grade. The banks have seen record issuance, which was increasingly driven by opportunistic issuers looking to take advantage of historically low rates and tight spreads in the third quarter. Our fiscal and monetary responses have facilitated markets stability but companies continue to build liquidity reserves in case of uncertainty. As a result, the cash balances have surged over the last 2 quarters. The banks view it as likely that while a portion of this cash will be deployed in 2021 as business fundamentals normalize, the majority may be used to fund near-term debt maturities contingent upon the future operating environment. Specifically, the banks have also seen strong interest in longer 40-year bond durations and a notable increase in ESG and sustainability bond issuance.

For the remainder of the year, the banks believe that activity will slow as many companies have completed their necessary funding for the year. However, some may continue to take advantage of favorable low rates and type spreads. And then to date, M&A activity or M&A-related issuance has been significantly returned. The pipeline looks relatively muted. However, there are indications that M&A volumes may be bottoming. Further uncertainty around the occurrence and timing of fiscal stimulus, rising infection, vaccine trials, election results and tenant rates, of course, are going to continue to weigh on the market. They've given their view for investment-grade issuance to be up 50% to 60% for the full year.

Moving on to U.S. spec grade. Similar to the investment-grade market, active high-yield bond issuance has been driven by record low rates and tightening spreads. The volume of the high-yield bond issuance year-to-date has passed full year 2019 as well as the yearly totals for the last 10 years. Conversely, leverage loan issuance has lagged and that a weak technical backdrop slowing CLO formation and low demand. And for the remainder of the year, high-yield bond and leverage loan issuance is expected to slow in the fourth quarter. Given that most refinancing needs were funded ahead of the uncertainty for next week's election and, obviously, a second wave of potential COVID-19 cases.

Turning to European investment-grade. Despite the recent spike of COVID-19 cases, our Central Bank's support and strong investor demand have continued and spread narrowing, with investment-grade spreads recovering to about 80% of their levels before the pandemic. Our ESG issuance continues to increase with around 10% of corporate bond issuance in 2020 label this ESG bonds. Reverse Yankee issuance remains muted with volumes down more than 20% year-to-date, and that's due to the favorable rates in the U.S.

For the full year, the bank's full cost of European investment-grade issuance to be up 5%. And then finally, for European spec grade, issuance has been similarly supported by proactive monetary and fiscal policies as well as returning investor demand for high-risk investments. This has allowed the leveraged finance market to remain relatively healthy, with the forward pipeline looking more robust than previous months. And so far, October has been a busy month, obviously, also in anticipation of volatility that may be caused by the U.S. election.

And with that, let me pause there to see if there are any further questions.

Okay. I guess, I'll have to digest that more. But maybe just a follow-up with me. Just on the KYC business, could you just help frame what the competitive landscape there looks like and perhaps also if that means there could be many more tuck-ins coming here for U.S.?

Yes. Rob, I think this is for you.

Yes. I'd be happy to take that. And Manav, what I might also do is maybe provide you a little bit of color on kind of what we're seeing in the KYC space. So as you know, we've got a leading position in that market. We're competing against players like Refinitiv, LexisNexis, Dun & Bradstreet and a number of others. But there's some interesting trends going on in the KYC space. So first, COVID's really accelerated a digital transformation in KYC and customer onboarding. And I think lockdowns have made the old-fashioned way of doing all this stuff quite challenging. Companies are looking for more precise filters and ways to focus what and when they look at individuals and entities. And we actually had a very large bank tell us recently that for the first time, their legal and compliance teams are pushing for their KYC teams to use external vendors and solutions that better leverage data and technology than what they're doing in-house.

So automation not only brings efficiency, but also improves reliability and quality control. And you see what happens in the market, some of these headlines when these banks get this stuff wrong, the fines can be in the billions.

The second regulation continues to develop and evolve in this space. And it's requiring companies to know more about their customers than ever before. So you've got new regulations that expand the number and nature of offenses that must be screened for. So things like reputational risk, social risk, tax crime, cybercrime, environmental issues. And to be able to screen and monitor for risks like that, customers need more sophisticated platforms around adverse media like what we've got with RDC in which we further enhanced with our acquisition of Acquired Media. So we're very excited about that.

I think the third thing is that financial crime is getting more and more sophisticated. And that requires more intelligent solutions. So you've got institutions increasingly trying to understand their exposure, not just to their customers but to their customers' customers. And again, that's where we're merging banks' own internal data with our external entity in hierarchy and risk data from BvD and RDC, and we can give a deeper understanding of risk than these institutions can get on their own.

So we're really focused on offering smarter content to existing solutions, providing new insights in some of these new areas and providing the market with really trusted sources of insights and analytics that we think is best-in-class and really positions us well in that competitive landscape.

And I would -- yes, I'll just add real quickly that 4 firms wanting to be able to demonstrate to the risk committees or their Boards of Directors or their regulators that they are taking a robust approach to knowing their customers and others. Using a standard is very valuable in demonstrating that robustness. And we are very much a standard in this area. So just add that in as a positive networking effect to our position.

Next, we'll hear from Toni Kaplan of Morgan Stanley.

Rob, congrats on the new role. And Ray, congrats on your retirement. And on the 2020 issuance and all the color earlier in the call, and I know you don't like to give the forward year at this point but -- and there's a lot of moving pieces in the next few weeks, potentially with stimulus and the election. But just help us out preliminary -- on your preliminary thoughts on 2021 issuance scenarios. I think your closest competitors forecasting issuance at about down 3. So just hoping to understand if you'll take the over or under on that one.

Toni, hey, I'll take that, and appreciate the well wishes. 2021, I think, remains uncertain, just like the balance of 2020. So we're going to give -- as you noted, we're going to give our guidance on the fourth quarter earnings call like we normally do. I think in particular, this year, it's going to be very important to see how 2020 ends in terms of issuance. Because that's going to be a material factor in pulling together our 2021 outlook. We see a real drop-off in issuance after the elections, then we may have some pent-up demand starting off in 2021. I guess, I would say, in general, from where we sit right now, I think the headwinds probably outweigh the tailwinds. And very importantly, because we've had 2, and I'm including this year, too, very strong issuance years. And that obviously creates some very tough comps for issuance, and in particular, for corporate issuance and investment-grade issuance.

In terms of kind of thinking about the supporting factors going into next year, I'd maybe highlight a few things. One, obviously, the potential for improving economic growth and an increase in M&A activity. We've certainly seen an uptick in M&A activity this past quarter. And I think we could see more sponsor-driven and distressed activity next year. Sustained Central Bank's support, along with potentially another round of stimulus. And obviously, I think a continued low rate environment that's going to be supportive of refinancing those maturity walls that we showed in the webcast deck. And that means that we may see growth in some areas like our rating assessment service that works with companies around M&A activity. I think we could see an improvement in bank loans off of a very low base this year. Various parts of structured finance. We could see ongoing U.S. public finance and infrastructure issuance taking advantage of very low rates. Then we weigh that against the potential headwinds. And starting with, like I said, a very elevated issuance that we've seen this year, particularly in investment-grade, which, as we said, we expect to be up around 60% versus 2019. That's a hard act to follow. And we've talked about the elevated liquidity at a lot of issuers. You heard that from Mark in terms of what the banks are thinking. That raises the potential for cash-rich companies either to defer issuance or pay down debt, depending on how next year unfolds.

And then I think in addition, the virus is obviously a wildcard. That's likely going to impact the trajectory of any economic recovery in both consumer sentiment and corporate investment and balance sheet management. So hopefully, that gives you some insight into our thinking today, but I can assure you we'll provide a firm view next quarter.

Very helpful. And then on MIS margins, there's an incredibly strong quarter-over-quarter acceleration. And I would have expected costs returning following the 2Q lockdowns, et cetera. And so just maybe a continued increase in incentive comp, given issuance has been so strong. So just maybe talk a little bit more about the strength in MIS margins and maybe parse out some of the more permanent versus temporary savings, could some of the COVID-related reductions eventually return?

Toni, good afternoon. You're absolutely correct. MIS margins this quarter were very strong. The 64.2% result was up around 410 basis points compared to the same period last year. And there were 2 very strong underlying drivers to that. The first was very strong revenue performance, obviously, in the quarter. And the second was very strong cost discipline that we showed throughout the quarter. As I think through what the potential temporary and the permanent related items could be in the quarter, we looked at a variety of factors. And that includes activities the management team is taking around restructuring, increased automation within MIS, the utilization of lower cost locations or procurement efficiencies, and then obviously, a real estate optimization. Then there's a good portion of that, that we believe will carry through into future quarters.

On the other hand, we do want to make sure that we are sufficient and adequately stopped with the right expertise. And so there are definitely elements of the leverage that we created this quarter, we're going to use to reinvest back into the business. So that puts us up for stable views in 2021.

Next, we'll hear from Alex Kramm with UBS.

I appreciate that you -- when I look at 2021, you had provided a lot of color. One thing I would ask, though, about 2021, Rob, you just mentioned the loan business having some very easy comps next year, and I guess, that makes a little bit more bullish on that business next year. But what other factors should we be thinking about in the loan business in particular? Is it just about the rate picture, near-term rates? Or are there other reasons where -- why that business could actually make a nice comeback next year?

Yes. With respect to loans, in particular, I think we have to acknowledge that generally, the borrowers are at the lower end of the credit continuum, and as such, are more susceptible to the pace and strength of recovery, whether we have a second wave that forces closings of parts of the economy that have been able to open. So again, this whole -- there's really a set of interdependencies between what's happening politically, what's happening with the disease and what's happening in the economy more broadly, and they play off of each other. And I would say the loan market is particularly sensitive to both positive or negative developments around that set of interdependencies. So hopefully, that's helpful to getting to your question.

Yes. No, that's fair. And then just a quick one here. Also, again, sorry that I'm thinking about '21, but to me, 2020 is already over, I think. But when I think -- well, I think everybody hopes it will to be over, right? So if you think about the recurring side of the MIS business, I think year-to-date, you've grown that 5% and you cited the strong issuance over the last couple of years. Is it fair to assume that given the strong issues that we had this year that the recurring revenues, the monitoring fees and -- continue to appreciate at that pace?

Yes. Rob, do you want to take that? I'm sorry.

Yes. Yes. Alex, I think so. I mean, obviously, we've had a little bit of slowdown from the rate of recurring revenue growth that we saw in the second quarter. I think it was something like 5%. And that's -- typically, what's contributed to that is ongoing pricing initiatives. I think that remains intact. As you know, we had a little bit lower first-time mandates while we're in the height of kind of the pandemic that has, obviously, picked back up. So I think that improvement in mandates will continue to support a growth rate that looks something like what we're seeing now.

Okay. Very good. And also -- go ahead.

Alex, just real quickly, I just wanted to add, do keep in mind that the growth in this year related to first-time mandates -- for the first-time mandates we brought on board last year. Those will be somewhat higher than the number of first-time mandates we get this year. So there's a bit of a headwind, even though we will continue to have growth. I just want to make sure you're able to model that correctly.

Absolutely. And then again, also congrats to all the new roles and enjoy, I guess, semiretirement from here. Take care.

Thank you.

Judah Sokel of JPMorgan.

I'll also just echo those congratulatory messages to both you, Ray and Rob. Looking forward to continuing the great work with you guys. Just wanted to ask a couple of questions about free cash flow. You touched on the cost expense management that will help free cash flow. It seems like while things have been strong and obviously, guidance has taken up, generally, it seems like that maybe there was a little bit of a slippage, a little bit of a disconnect in that conversion from EPS to free cash flow and EPS, taking up a little bit more. So maybe you can just touch on what's going on there? And then also just touch on the rationale for restarting the share repurchase program. How you guys thought about the timing and the amount for getting back into that?

Thanks for the question. Let me start with the first question on free cash flow. So this morning, we raised both our full year adjusted EPS and free cash flow guidance by approximately 12%. And based on those midpoints, we are expecting our full year adjusted EPS to grow approximately 21%. And our free cash flow to grow approximately 12% for the year. And that's really the numerical disconnect that you're highlighting. And the primary driver behind that is really simply due to working capital headwinds that we mentioned earlier this year. So specifically, the Q1 retirement pension plan funding, the higher 2019 incentive comp payments that were paid earlier this year and then CapEx.

And if we adjust for those items, our growth in free cash flow this year is very much in line with our adjusted EPS growth for the year. And then I'd simply add to close this out that our forecast free cash flow conversion of net income is expected to be around 100% this year.

On your second question around share repurchases, we have not changed -- I think it's important for me to state upfront that we've not changed our long-term strategic approach to capital allocation. We did take several steps earlier this year to ensure that we were very robust working capital available to us under any sort of stress environment. And we pull share repurchases just out of an abundance of caution. I'm obviously very pleased to announce this quarter that we are recommencing our share repurchase program, and we are guiding to a full year 2020 amount of approximately $500 million, subject to available cash, market conditions and obviously, other ongoing capital-allocation decisions.

Longer term, our plan remain to optimize our balance sheet. We're going to obviously use our first use of excess cash to invest for growth. After which, we'll continue to look to return capital to shareholders by growing the dividend and continuing to repurchase shares. And in terms of your question around why now? And we feel very comfortable with our very strong financial performance year-to-date. And we are very successful in opportunistically early refinancing our 2021 debt in August, and that really means that we've got a clear pathway for 2021.

Craig Huber of Huber Research Partners.

Rob, congratulations as well. Ray, I just want to say as well, I think you've done a fabulous job here in the last 15 years. I think if there was a hall of fame out there for CEOs, you'd be in it, my friend.

Thank you, Craig, I appreciate that.

That's true. It's a high bar you've put in place for Rob and the team there. I guess, as we think about the election here, a lot of people obviously think there's a potential for a blue wave here, Democrats sweeping everything here. What do you and Rob, I think, Ray, that the implications of potentially higher taxes on the consumer as well as corporations, more regulations out there, et cetera, what that could mean for debt issuance that you think of in the coming years after that may be put in place?

So Craig, I'll start, and maybe Rob might want to add on. But as a starting point, we recognize that there are not going to be identical policies and priorities, depending on whether there's a blue wave or whether the Republicans win, hold the Senate, win the presidency, there's a number of combinations, none of which will produce exactly the same set of priorities and policy elements that we'll have to address just as other business as well. That being said, we've done very well in both Republican and Democratic administrations as well as in unified and divided government.

So in a lot of ways, what we think about is accommodating what the policy priorities are in terms of managing our own business, and I think we'll be able to do that usefully. I think we are -- our view, particularly during this pandemic period as having been a very constructive force in the markets with data analytics information. And so I'm pretty optimistic, whichever way this goes that we will have a successful business. Now what that means in terms of debt issuance, the devil is going to be in the details there. And I'll pass this over to Rob for a couple of his thoughts on this.

Yes, Craig, it's interesting because this is really the converse to the questions that we were getting just a few years ago with the lowering of corporate tax rates. And recall.

(technical difficulty)

Sorry, we lost Rob. And so yes, let me just step in because I think Rob was going to discuss the fact that when we were looking at lower rates a few years ago, there was a lot of speculation and questioning about what it means for what happens with not just lower rates, but interest deductibility, tax shields, the prefunding of municipal debt, a host of details that really ended up, in some cases, being pretty immaterial compared to what had been anticipated in terms of debt issuance. But in other cases, caused that issuance to either be accelerated in the case of parts of the municipal sector or did have some effect at the margin. And so again, it sounds like a cliché, but the devil will be in the details in terms of the drivers on debt issuance for 2021 and probably beyond.

My other question, Ray. Your outlook, given the importance of M&A out there historically for debt issuance, it's obviously very weak this year that M&A. Why can that part of debt issuance not pick up significantly here over, say, the next 12, 18 months, assuming this virus gets under control, the economies keep picking up in Europe and U.S., what's your thoughts on M&A here, given the interest rate environment, et cetera, over the next 12-plus months?

Yes. We've seen an uptick in M&A pipelines just recently. And so that flunk we had back in the second quarter is showing signs of getting up off the Kansas. So I'm actually reasonably optimistic about M&A-driven debt issuance over the next 12 to 18 months. And it could take a couple of different flavors. This could be a fairly rapid and strong recovery -- economic recovery, in which case you'll have businesses pivoting to thinking about how to grow and secure beachheads in attractive adjacencies, et cetera, through inorganic activity.

Even if that doesn't happen, the recovery is slow, there are going to be firms that are increasingly distressed, and stronger firms are going to be looking to a distressed M&A market, and I think are going to be more inclined to pull the trigger. So I can see a couple of pathways to a more promising M&A environment in 2021 than we have this year. But I'm not sure which path is going to eventuate.

If I could also just ask, Mark, the incentive comp number for the quarter, if you would please on how it's done year-to-date.

Sure. The incentive compensation for the third quarter was at $77 million. We are now expecting incentive compensation to be approximately $225 million to $235 million for the full year, and that will compare against the initial guidance at the beginning of the year of around $50 million per quarter or $200 million for the full year.

Next question from Jeff Silber of BMO Capital Markets.

And Ray, let me add my best wishes to you and Rob, congratulations. And Ray, I just want to thank you again for all your help over the years. I know you had a previous question that thought that 2020 was over, but we do have a couple of months left, so I just want to ask about your 2020 guidance. If I look at the implied 4Q guidance for MIS, I think, it's implying a low single-digit revenue decline, but pretty adverse decremental margin impact. Is there some spending going on in the quarter that we should know about? Or is my math off?

Your math is correct. Specifically, for the fourth quarter, our guidance would imply sort of a low double-digit decline in MIS revenue. And on the expense side would imply sort of a high single-digit low -- high -- low single digits or the low end of mid-single-digit increase in expenses. Specifically, if I think about the expense ramp really from the first to the fourth quarter, that's really now expected to be around $50 million, and that's really related to costs associated with incentive comp, other charitable contributions. And then specifically, ongoing investments in technology to support our infrastructure to enable better automation, innovation, efficiency as well as business growth. So I hope that gave you a little bit of color on your question.

Yes, that's actually very helpful, Mark. I appreciate it. And just shifting gears over to what your company is doing or planning on doing an ESG. We're getting a lot of questions from investors, a lot of companies that have different strategies. Can you just give us a little bit more color on what your strategy is there?

Sure. Rob, do you want to kick it off?

Yes, I'd be happy to take that. I think you might want to think about it. We've got 3 ways that we're thinking about ESG. One is integrating ESG considerations into our ratings and research. And that's really, really important to the ratings business to ensure the ongoing relevance and thought leadership. I think you'll also see that eventually be commercialized with our research business in MA.

Speaking of MA, we've got a broad customer base of financial institutions, banks, insurance companies, corporates, who have an increasing demand and need for ESG and climate content to be integrated into the various risk-management offerings that we have today. So if you think about whether it's loan origination, now there are climate stress testing. You can imagine our commercial real estate platform, where we've started to put our physical risk scores related to climate from Four Twenty Seven. So I think you'll see a good bit of integration and commercialization of our ESG and climate content through our existing and new MA products and services.

And then lastly, we've got a stand-alone ESG and climate businesses with Vigeo Eiris and Four Twenty Seven. We recently put all that together into an ESG solutions group. And so there, we are -- we've got scores on thousands and thousands of companies around the world. We're selling those to investors and financial institutions and others. But I think you'll also see us start to develop and we are developing the sustainable finance offerings for issuers. And there, we've got a sustainability rating through Vigeo Eiris as an issuer-paid rating, and we've done close to 40 of those year-to-date. And we have a second-party opinion on labeled bond issuance. So this started in the green bond market. It has moved. Now there's all sorts of labeled issuance, transition bonds, green bonds, blue bonds, social bonds and so on. And so we're providing second-party opinions on that issuance through Vigeo Eiris.

I'd also note that our affiliates are starting to do the same thing. So CCXI has a green bond assessment offering and our affiliate in Korea has just gotten its first mandate. So I think you'll see us monetize this a variety of ways.

And maybe one last point on indexes because we get this question a lot, how are you going to be able to monetize ESG through indices. We obviously don't have a scaled index business. And so what we're doing is working to partner with other index providers to provide them the data to power their indices. And so a good example of that Euronext, Sole Active are 2 index providers that we partner with. We just recently launched a very interesting index with Euronext around energy transition. So I think you'll see us monetize that index opportunity in a different way.

Jake Williams, Wells Fargo Securities.

I wanted to pass along our congratulations to both Ray and Robert as well. My question is related to the RDC. And I was wondering if you could provide an update on how those synergies are trending? And maybe kind of any discussion around absolute margin level in the RDC business.

Yes, I'd be happy to. I'll take that. We're changing...

Sorry, Rob. Jake, just wanted to welcome you to the call. I know or I believe this is your first time on. So I just want to say hello and welcome. I'll turn the substance over to Rob now.

I appreciate that. Look, we feel good about RDC in the combination with BvD. It's a great business, a super group of people and really a good fit with the MA portfolio. And I was talking earlier about these trends that we're seeing in the KYC market. So I think this was a timely acquisition.

So far this year, we've really focused on a joint sales program between BvD and RDC. And that, I think, has been successful. We've seen, I think, some tangible sales wins that neither BvD nor RDC would have closed without this combination. We've got an initial phase of our integrated compliance offering that's going to be released next month. So that's a key milestone in the integrations of our product offerings. And then we've got the acquisition of Acquire Media, and that further strengthens our capabilities, specifically with RDC.

So Acquire Media is a very important supplier to RDC and the Moody's overall. And that's going to be an opportunity to leverage their sophisticated AI-driven news aggregation engine to build new early warning signal offerings that are going to further enhance our KYC business as well as actually have some benefits to our credit and ESG offerings.

In regards to maybe how it's performing, slightly better than expectations from a revenue standpoint due to the momentum that we had coming into the year with subscription growth. Our current sales may be a little bit behind expectations. But that's really just the same overall challenges we've had caused by social distancing. So I think that's very much a temporary issue.

Shlomo Rosenbaum of Stifel.

Rob, I'm going to congratulate you also, but I do want to tell Ray that he does seem a little young to be put out to pasture.

I don't feel young.

Well, you seem energetic on these calls. There are questions that I want to ask you, just some of the strength in RD&A. Are you -- is the strength of going to like 12% organic growth, how much of that is new sales versus the strong retention. Are you seeing a pickup in sales over there as well? Or is it really just west calling out of the funnel or just a little bit more color there.

Yes. So yes, we're not -- Ray is not being put out to pasture by any means. But thanks for the well wishes. So maybe 3 primary drivers of that RD&A organic constant dollar growth that we're seeing, and it's really research data feeds and these compliance solutions, the KYC solutions in the BvD, RDC business. In research, I touched on there's really strong retention rates. That 96% in research is actually slightly up over the last 12 months. That's a remarkably good figure. And the yield on this existing base from upgrades and price-related to our enhanced credit view platform is, I think, what's driving that growth. In data feeds, it's interesting. We did some things around sales deployment to get both new logos, but also to sell more product into existing customers to serve a little bit broader range of use cases at these customers. And we've seen really nice growth in organic growth and data feeds.

And then, of course, BvD, RDC, I think I've talked about that a good bit. To give you a sense, the BvD revenue was low teens this quarter. And as you've heard from us, we think there's good ongoing demand in the KYC space.

Okay. And then maybe this one is for Mark. If we encounter a situation in 2021, where you're dealing with the confluence of -- we drove much weaker year-over-year issuance just because of what we saw the strength in this year, together with the fact that we will hopefully have more of an opening up of the economy in general in terms of people traveling and more expenses creeping in. What are the main levers that you have to go ahead and kind of manage the margins? And just like philosophically, when you manage the business, is that something that you focus on in the heightened way in the near term? Or is that something that, like, hey, the margins can just go down year-over-year, and that's just the nature of the business? Or how should investors be thinking about that?

Yes, Shlomo, it's a very interesting question, and it's certainly one that the management team and I think about on a fairly regular basis. Maybe the way I'll address it is by talking through some of the expense actions that we've taken this year are implementing now. And with the idea that you could infer that those will carry through to 2021 to create the financial flexibility that we need as a firm.

For this quarter itself, you did see that the adjusted operating expense growth was 1% for MCO, and that's against that 9% revenue growth for the quarter. And then maybe just an early signal, demonstrating how strongly we're managing against our expenses.

If I carry that forward to the full year, you can see here that our guidance again is for low single-digit percentage growth against a high single-digit MCO revenue number. So that same sort of theme carries forward to the full year. And that's despite absorbing expenses this year related, for example, to COVID-19, bad debt reserves, higher incentive comp, M&A activity, et cetera.

And then if I carry that forward a little bit further into 2021, we are targeting to manage our core expenses down with the idea of self-funding between $80 million and $100 million of reinvestment back into the business to support underlying business growth, promotion activities, some strategic investments like KYC, ESG, et cetera. And that's going to be achieved through some of the cultural expense discipline around, again, managing those core expenses down to self-fund, and that we're going to achieve those savings from procurement activities, IT efficiency, travel and entertainment, real estate, et cetera. So I think it gives you a little bit of color around how we're thinking of managing our expense base to create that financial flexibility in 2021.

Next, we'll hear from George Tong of Goldman Sachs.

Ray, you will be missed. Congrats on a great run. And Rob, congrats on the new role.

Thank you.

So you noted that you're continuing to increase your mix of transaction-based pricing within MIS. Can you talk about where you are in this process? And which of your debt categories you expect to be more focused on with this change?

Yes. So I'll just start, George. But Rob may have additional thoughts. I would really say it's not so much that we have a target ratio or percentage between the recurring and the transaction. But we are noting that a lot of the growth we're seeing is coming from speculative grade issuers, and those tend to be less frequent issuers and more inclined to pay on a transaction basis. If we believe and I do that, that trend will be continuing, that is going to be pushing in a transactional direction over time in terms of the mix. And Rob, Mark, please weigh in.

Yes, I think that's exactly right, Ray. Nothing really to add to that.

Yes. Okay.

Okay. Got it. That's helpful. And then looking forward to the remainder of the year, how would you expect the mix of issuance between investment-grade and high-yield to change, especially given the strong rate of high-yield issuance we saw in the third quarter?

Yes. Rob?

Yes, I'd be happy to kind of take that. Maybe let me just talk to you about kind of what we're seeing right now. We -- given how strong investment-grade has been year-to-date, we are seeing some, I'd call it, headlines impacting the investment-grade market, similar to the equity markets. It's elections, earnings and section stimulus. I would note that funds flows into investment-grade continue to be strong. We've had something like 28 consecutive weeks of inflows, and the fed continues to be a small buyer in the secondary market, and that provides some support.

Meanwhile, the conditions in the leveraged finance markets are very conducive to issuance. And that's interesting because usually that doesn't happen when we see this kind of equity market volatility. But up until very, very recently, we've seen some relatively aggressive deals, dividend recaps, LBOs, and that's even corresponded with an uptick in leverage loan activity. So we may see the balance of issuance a little bit weighted to leverage finance. But I think some of the strength that we're seeing in the activity has just been issuers trying to get ahead of the election-related volatility. And as we talked about, and I think we're going to see that activity slow to the end of the year. The last thing I would say is with the upcoming holidays, there are just -- there are fewer and fewer windows for issuance for the remainder of the year.

Next, we'll hear from Owen Lau of Oppenheimer.

So first of all, Ray, congratulations on your successful career duties. And also Rob, congratulations on the well-deserved promotion. So for my question, I want to go back to buybacks. If I'm doing my math correctly, dividend and share repurchases in total is above 50% of free cash flow this year. Is there any room to be more aggressive, given that you had targeted 80% in the past and where the share is trading?

Owen, thank you for the question. We target to really manage our capital that is with an anchoring. Maybe that's the best way to phrase it, with an anchoring really around a BBB+ rating. We don't propose and we don't set targets based on percentage of free cash flow return.

With that said, over the past several years, specifically 2015 to 2019, our free cash flow conversion of net income has actually been 115% when adjusting for the DOJ settlement. This year, we expect, as I mentioned earlier on the call, the number to be slightly over 100% or approximately 100%.

In terms of the year-to-date, the expectation for dividends has been around $315 million year-to-date and then share repurchases has been around $253 million. If we hypothetically carry forward the dividend rate through to year-end, that would put dividends at roughly $420 million and share repurchase guidance of approximately the $500 million we spoke about earlier, which would be about 50% of our approximately $1.8 billion free cash flow guidance. You are absolutely correct there.

Okay. Got it. And then finally, for ERS, I think ERS had a pretty strong quarter. And you mentioned the credit assessment, loan origination solutions and IFRS 17. Maybe could you please provide more color on the reason of that strength? And in particular, why it happened in the third quarter and also the sustainability of these projects going forward?

Rob?

Yes. I'll touch on this. Overall, ERS growth has been supported by, obviously, RiskFirst. And as we said, strong sales of credit wins and IFRS solutions and insurance solutions. So we've seen, as we sunset one of our origination products, we've seen a very good kind of renewal cycle around that. And in fact, subscription growth for our credit origination -- credit assessment origination has been something like north of 30% year-over-year. And that's, again, driven by that -- those year-to-date sales of the CreditLens software. But IFRS 17 continues to contribute to that as well.

Simon Clinch of Atlantic Equities.

I wanted to just follow-up with just on the KYC business opportunity that you have. And I was just wondering in terms of the data sets you have and the assets you've acquired, are there any natural ancillary kind of opportunities for the use of that data beyond the sort of KYC market that you're currently targeting?

Yes. Good question. So I think what we're likely to see is the broadening of KYC to go beyond simply serving regulatory requirements at financial institutions. And you heard me talk a little bit earlier about, in addition to increasing regulation, you've got institutions who also just want to have a better understanding of who they're doing business with. And going beyond, for instance, financial crime into things like reputational risk, data security, social issues around modern slavery and things like that. So I think what that means is, in addition for drivers for KYC, I think we may start to see -- customers start to look at this kind of data to understand their supply chain risks to -- we've talked about on calls before, kind of a know-your-supplier use case. So I think you're going to see this broaden over time.

Okay. Interesting. And just in terms of other areas within sort of regulatory tech or compliance tech, are there any opportunities there as well?

So going beyond, for instance, our KYC offering? Is that...

Yes, within the space of regulatory tech beyond KYC. This one (inaudible) market.

It is. I think more broadly, we've shown before that the broader regulatory and accounting drivers for our MA business. So there's a whole host of different kinds of regulation, not just KYC but things around stress testing, regulatory capital calculations, Basel, solvency, a whole range of things that I think are driving demand for both the existing MA products as well as opportunities for us to fill product gaps to meet more and more of these regulatory requirements as they evolve.

Okay. That's interesting. Great. And maybe if I could just follow-up on the ESG comments you had before. Just in terms of -- across all those different opportunities you have, how you think monetization of those will develop over time? And I'm thinking because over the next decade, I would imagine that a lot of the ESG data that were -- that companies and investors and companies using would ultimately become just part of the existing process that we have today. So I was just kind of curious as to how you view that opportunity to monetize that beyond what you have today?

Yes, great question. I think that's right. It's what you're getting at is eventually the data, which right now is hard to get, right? So there's real value in good, high-quality data. But over time, as there are standards around disclosure requirements, as there is automation on -- through XBRL, the data itself, I think, will become more commoditized. And what will really be valuable is the insights. So I think you're going to see part of the industry evolve. I talked about the sustainability ratings and second-party opinions. I think that is going to grow over the medium to long term. We're already seeing a pickup in demand there. And then I think you're going to see, like I talked about earlier, the integration of this content into risk-management offerings, right? So every financial institution, bank insurance company in the world is going to have to be really thinking about these nonfinancial risks, ESG, climate, and they're going to have to be integrating them into their origination platforms, they're monitoring up their portfolios. I talked about stress testing. We're seeing Bank of England with a climate stress test and banks are going to have to comply with that. So I think you're going to see the monetization of that ESG content through the risk-management segment. And back to my point around indexes, we don't have a big scaled index business, but we do have a big scale risk-assessment business serving financial institutions.

And that concludes our question-and-answer session for today. At this time, I'd like to turn the call back over to Ray McDaniel for additional closing comments.

Okay. Thank you. And by the way, Simon, I forgot to welcome you to the call as well.

So before ending the call, I would like to reiterate my gratitude to our employees. Your resilience, dedication, support really amaze me. I'd also like to thank all of you who have joined on these earnings calls over the years. I think this will be my 63rd and for those of you who've been along for some or all of the journey, I very much appreciate the interactions we've had. So thank you, everybody, and I'll enjoy the last 2 months.

This concludes Moody's Third Quarter 2020 Earnings Conference Call. As a reminder, immediately following this call, the company will post the MIS revenue breakdown under the third quarter 2020 earnings section of the Moody's IR homepage. Additionally, a replay of this call will be available after 3:30 p.m. Eastern time on Moody's IR website. Thank you. You may now disconnect.