穆迪 (MCO) 2016 Q1 法說會逐字稿

Good day, and welcome, ladies and gentlemen, to the Moody's Corporation first-quarter 2016 earnings conference call.

At this time, I would like to inform you that this conference is being recorded.

(Operator Instructions)

I will now turn the conference over to Salli Schwartz, Global Head of Investor Relations.

Please go ahead.

Thank you.

Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's first-quarter results for 2016, as well as our updated outlook for full-year 2016.

I am Salli Schwartz, Global Head of Investor Relations and Communications.

This morning, Moody's released its results for the first quarter of 2016, as well as our updated outlook for full-year 2016.

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 Linda Huber, Moody's Executive Vice President and Chief Financial Officer.

Before we begin, I call your attention to the Safe Harbor language, which can be found toward 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 reports on Form 10-K for the year ended December 31, 2015, and in other SEC filings made by the Company, which are available on our website and on the Securities and Exchange Commission's website.

These, together with the Safe Harbor statements, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements.

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

I'll now turn the call over to Ray McDaniel.

Thank you, Salli.

Good morning.

And thank you to everyone for joining today's call.

I'll begin by summarizing Moody's first-quarter results.

Linda will follow with additional financial detail and operating highlights.

I will then conclude with comments about our updated outlook for 2016.

After our prepared remarks, we'll be happy to respond to your questions.

In the first quarter of 2016, reduced global bond issuance weighed on Moody's financial performance, despite Moody's investor services, consistent market coverage, and additional ratings mandates, as well as strong results at Moody's Analytics, which is not sensitive to debt issuance activity.

Overall revenue for Moody's Corporation of $816 million declined 6%.

Operating expense for the first quarter was $512 million, up 4% from first quarter of 2015.

Operating income was $304 million, an 18% decline from the prior-year period.

The impact of foreign currency translation on operating income was negligible.

Adjusted operating income, defined as operating income before depreciation and amortization, was $334 million, down 16% from the same period last year.

Operating margin for the first quarter of 2016 was 37.3%.

The adjusted operating margin was 40.9%.

Diluted earnings per share of $0.93 was down 16% from the prior-year period.

Given market conditions, we have scaled back our revenue and earnings expectations for full-year 2016 and are managing our cost base accordingly.

Our 2016 EPS guidance is now $4.55 to $4.65.

Before I turn the call over to Linda, I would like to highlight two investments we made in the first quarter.

In March, Moody's Analytics announced the acquisition of GGY, a leading provider of actuarial software for the life insurance industry.

The addition of GGY's products and specialized expertise accelerates MA's extension into financial risk management for life insurers, complementing our already strong position with global banks.

As part of the enterprise risk solutions line of business, GGY will contribute to MA's regulatory solvency and capital management solutions.

We also announced a minority investment in Finagraph, a provider of cloud-enabled automated financial data collection and business intelligence solutions for private companies.

This investment underscore's Moody's commitment to innovative financial technologies, to better address the needs of our customers.

Finagraph's information and analytical solutions represent important advances in banks' risk assessments of small and medium-sized businesses, thus improving access to credit for this underserved segment of the market.

I'll now turn the call over to Linda to provide further commentary on our financial results and other updates.

Thanks, Ray.

I'll begin with revenue at the Company level.

As Ray mentioned, Moody's total revenue for the first quarter declined 6% to $816 million.

Foreign currency translation unfavorably impacted revenue by 2%.

US revenue of $480 million was down 4% from the first quarter of 2015.

Non-US revenue of $336 million was down 8% and represented 41% of Moody's total revenue.

Recurring revenue of $452 million increased by 7% and represented 55% of total revenue.

Looking now at each of our businesses, starting with Moody's Investor Service, total MIS revenue for the quarter was $525 million, down 13% from the prior-year period.

Foreign currency translation unfavorably impacted MIS revenue by 1%.

US revenue declined 10% to $336 million, while non-US revenue of $189 million declined 18% and represented 36% of total ratings revenue.

Recurring revenue of $231 million increased 4% and represented 44% of ratings revenue.

Moving now to the lines of business for MIS, first, global corporate finance revenue of $240 million for the quarter was down 20% from the prior-year period.

This result reflected lower levels of global speculative grade issuance, as well as declines in the number of US investment grade bond offerings and in the volume of European investment grade issuance.

US corporate finance revenue decreased 10%, while non-US revenue decreased 36%.

Second, global structure finance revenue for the first quarter was $91 million, down 11% from the prior-year period.

This represented the lowest revenue quarter for structured finance that we have seen in 10 quarters.

US securitization activity slowed, primarily within the CMBS and CLO markets, due to widening spreads, regulatory requirements, and reduced availability of bank loan collateral.

US structured finance revenue was down 15%.

Non-US revenue was flat with a modest increase in Europe.

Third, global financial institutions revenue of $95 million was up 1% from the prior-year period.

US financial institutions revenue was down 3%, while non-US revenue was up 4%.

Fourth, global public project and infrastructure finance revenue of $92 million was down 9% versus the prior-year period, as US project finance activity and European infrastructure-related issuance fell amid choppy market conditions.

US public project and infrastructure finance revenue was down 6%, while non-US revenue was down 14%.

MIS other, which consists of non-rating revenue from Moody's majority-owned joint venture interests in ICRA and Korea Investor Service contributed $8 million to MIS revenue service for the first quarter, flat to the prior-year period.

Turning now to Moody's Analytics, global revenue for MA of $291 million was up 11% from the first quarter of 2015.

Excluding revenue from our March 2016 acquisition of GGY, MA revenue grew by 10%.

Foreign currency translation unfavorably impacted MA revenue by 2%.

US revenue of $144 million was up 12% year over year, and non-US revenue of $147 million was up 9% and represented 51% of total MA revenue.

Recurring revenue of $222 million increased 9% and represented 76% of MA's revenue.

Moving now to the lines of business for MA, first, global research data and analytics, or RD&A, revenue of $165 million was up 10% from the prior-year period and represented 57% of total MA revenue.

Growth was mainly due to strong new sales of research and data, as well as record customer retention.

US RD&A revenue was up 14%, while non-US revenue was up 5%.

Second, global enterprise risk solutions, or ERS revenue of $90 million was up 16% from last year, primarily from accelerated project deliveries.

US ERS revenue was up 14%, while non-US revenue was up 17%.

Excluding revenue from GGY, ERS revenue grew 13%.

And as we've noted in the past, due to the variable nature of project timing and completion, ERS revenue remains subject to quarterly volatility.

Trailing 12-month sales for ERS increased 1%, reflecting a very difficult comparison with the first quarter of 2015.

Third, global professional services revenue of $37 million was flat to the prior-year period.

US professional services revenue was down 6%, while non-US revenue was up 3%.

Turning now to expense, Moody's first-quarter expense was $512 million, up 4% from 2015.

The increase was primarily due to higher compensation costs in MA, reflecting additional head count required to support business growth, as well as Moody's ongoing technology investments.

Expenses in MIS were down slightly compared to the prior-year period.

Foreign currency translations favorably impacted expense by 2%.

As Ray noted, Moody's reported operating margin and adjusted operating margin were 37.3% and 40.9%, respectively, for the first quarter.

Moody's effective tax rate for the quarter was 32.3% versus 32.9% for the same period last year.

The year-over-year decline was primarily due to a change in New York City tax law relating to income apportionment.

Now I'll provide an update on capital allocation.

During the first quarter of 2016, Moody's returned $334 million to shareholders via share repurchases and dividends.

The Company repurchased 2.9 million shares at a total cost of $262 million, or an average cost of $89.83 per share, and issued 1.6 million shares under its annual employee stock-based compensation plans.

Moody's also paid $72.1 million in dividends during the quarter, and on April 11 announced a quarterly dividend of $0.37 per share of Moody's common stock, payable June 10 to stockholders of record at the close of business on May 20.

Outstanding shares as of March 31, 2016 totaled 194.3 million, down 4% from the prior-year period.

As of March 31, 2016, Moody's had $1.2 billion of share repurchase authority remaining.

At quarter end, Moody's had $3.4 billion of outstanding debt and $1 billion of additional debt capacity available under its revolving credit facility.

Total cash, cash equivalents, and short-term investments at quarter end were $2.1 billion with approximately 73% held outside the US.

Free cash flow for the first three months of 2016 was $211 million, down 13% from the first three months of 2015, primarily due to the year-over-year decline in net income and changes in working capital.

And with that, I'll turn the call back to Ray.

Thanks, Linda.

I'll conclude this morning's prepared comments by discussing the changes to our full-year guidance for 2016.

The full list of Moody's guidance is included in our first-quarter 2016 earnings press release, which can be found on Moody's Investor Relations website at IR.moodys.com.

Moody's updated outlook for 2016 is based on assumptions about many macroeconomic and capital market factors, including interest rates, foreign currency exchange rates, corporate profitability and business investment spending, mergers and acquisitions, consumer borrowing and securitization, and the amount of debt issued.

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 forecast reflects exchange rates for the British pound and the euro at $1.44 to one British pound, and $1.14 to one Euro, respectively.

As I noted earlier, the Company now expects 2016 EPS of $4.55 to $4.65, inclusive of $0.02 dilution from the acquisition of GGY.

Moody's full-year 2016 revenue is now expected to increase in the low single-digit percent range.

In response to this revised revenue outlook, we have lowered our projected base business spending for the year by approximately $50 million through expense management actions and reduced incentive compensation.

These savings allow Moody's to maintain guidance for operating expenses to increase in the mid single-digit percent range, despite the addition of GGY's operating expenses and the negative impact of foreign currency translation.

Moody's now projects an operating margin of approximately 41%, while adjusted operating margin is still expected to be approximately 45%.

Free cash flow is now expected to be approximately $1 billion.

Capital expenditures are now expected to be approximately $125 million.

For MIS, 2016 revenue is now expected to be approximately flat.

US revenue is now expected to decrease in the low single-digit percent range, while non-US revenue is now expected to increase in the low single-digit percent range.

Corporate finance revenue is now expected to decrease in the low single-digit percent range, reflecting weak issuance in the first quarter, as well as expectations for variable issuance activity for the remainder of the year.

Structured finance revenue is now expected to decrease in the mid single-digit percent range as a result of continued challenges to US securitization activity.

Public, project and infrastructure finance revenue is now expected to increase in the mid single-digit percent range, which assumes weakness in the first quarter is not offset in the remainder of the year.

For Moody's Analytics, 2016 revenue is now expected to increase in the high single-digit percent range.

US revenue is now expected to increase in the low double-digit percent range, while non-US revenue is now expected to increase in the mid single-digit percent range.

Research, data and analytics revenue is now expected to increase in the high single-digit percent range as a result of new business and an increased customer retention rate.

Enterprise risk solutions revenue is now expected to increase in the high single-digit percent range, including revenue associated with the March 2016 acquisition of GGY.

Before we move to the Q&A, I would like to highlight the MIS management change that we announced on April 4. Effective June 1, 2016, Michel Madelain will retire as President and Chief Operating Officer of MIS and will assume the role of Vice Chairman for MIS.

He will also remain on the MIS Board of Directors and MIS European boards.

Rob Fauber, who has been with Moody's for 11 years, will succeed Michel Madelain as President of MIS.

I would like to extend my thanks to Michel and congratulate Rob on his new role.

This concludes our prepared comments.

And joining us for the question-and-answer session is Michel Madelain, President and Chief Operating Officer of MIS, and Mark Almeida, President of Moody's Analytics.

We would be pleased to take any questions you may have.

(Operator Instructions)

And we'll take our first question from Alex Kramm with UBS.

Hi, good morning, afternoon.

I wanted to come and talk about the guidance for a second here.

From a bigger picture perspective, what was really the thinking in the EPS reduction?

And I'm talking primarily from a seasonal perspective.

Is this -- hey, the first quarter was really awful, but our outlook, because of refinancing and everything else that we talked about three months ago, has not really changed?

Or is this also a reflection of -- you know what, the second quarter is all right, but there's still a lot of uncertainty here with Brexit in June and things like that, but we're still hoping a lot for the second half?

Hopefully you're getting the drift of my question, but where does the near term and the remainder of the year fit into this?

At a high level, Alex, I would point to two things.

One, as you point out, we feel there is still quite a bit of uncertainty for the remainder of this year at a macro level between Brexit and the potential for interest rate increases, and the fact that we still have some tough comps in the second quarter in particular.

We do expect more momentum in the second half of the year than we've had in the first half.

And we've already seen improvement in late March and April compared to the very weak beginning to the year in January and February.

The other thing I would point you to, though, is structured finance.

The conditions for the structured finance market have been very challenged so far this year, and we think that they are going to continue to be challenged, especially in the US.

There are a number of reasons for this.

Not only is it credit spreads, which can affect the economics of the transaction, but also regulatory requirements that are being implemented and interpreted.

And a lot of the market participants are sorting out the appropriate interpretation for new regulatory requirements around risk retention and disclosure of underlying asset information.

And that, in combination with a challenging interest rate environment or spread environment.

Issues around the appropriate availability of collateral in areas such as CLOs, has really impacted our outlook for structured finance in the United States for not only the first-quarter results, but our outlook for the remaining nine months.

Alex, just to give you some sense of the calendarization of that, we've taken down the MIS revenue outlook by a little bit more than $100 million.

You should consider 40% of that is what we've already seen as weakness in the first quarter.

60% of it comes from the rest of the year forecast.

And in terms of that remaining 60%, about 60% of that is a reduction in structured finance, and the balance, about 40%, is in corporate.

So, that should give you something to work with in terms of what we're seeing.

We've taken it down for the first quarter, but also we have moderated our expectations, the balance of that being structured and the remainder being in corporate for the rest of the year.

That's very great color.

Thank you.

And then, secondly, Linda, while I have you, can you talk about the cost side of the equation in a little bit more detail?

I think in the past you've done a great job talking on an absolute dollar basis how the trajectory looks like.

And it seems like you've really now cut all the flex that you had, so you should probably have a good visibility for the second, third and fourth quarter.

And then if there is any variability to what you're hopefully going to give me now, is it basically if revenues actually end up being a little bit better, some of the negative flex comes back and maybe some of the bonuses come back?

Basically what I'm saying is, in a weaker revenue environment, there's not much that's going to change on the cost side, on an absolute basis.

But if we actually end up doing better, you probably see costs up a little bit again.

Is that fair?

Alex, let me just set out the explanation for this.

We saw the markets were weak in the beginning of February.

We moved aggressively and we moved hard against that situation.

We have taken steps in T&E, and, most importantly, in hiring.

For two of the divisions, this excludes Moody's Analytics, we are back to what I would call essential hiring and we're looking at hiring on a person-by-person basis in terms of backfilling.

So, really clamped down on that front for two of the divisions.

Now, we can't turn the ship that quickly, and that's the issue.

We often talk about $50 million of expense flex.

We have that in train already.

About half of that is from reduced incentive compensation because we've just taken the guidance down.

The other half is from the expense management actions that I spoke about earlier.

Now, if this gets worse, we have another $50 million, which, again, is split about half and half between incentive compensation and other expense saving measures that we could take.

But as we move into that second $50 million, this does get tougher, and we've already taken down our incentive compensation with this first pass by about $20 million.

So we'll see how we go and we'll see what we want to do.

But we have been very clear about this.

We started these actions again in February, but you're going to have to wait for the rest of the year to see this flow through.

And I'll ask if Ray has any further questions on this.

The only thing I would add, as we've said before, we would take different actions if we saw structural changes in the markets that we're operating in versus cyclical ups and downs.

This looks largely to us to be a cyclical condition in the markets.

We'll see in the structured finance area how that market adjusts to different regulatory requirements, but history has said that it does adjust.

But in terms of how quickly that's going to recover, we will have to see.

There's a couple of phases of regulatory requirements.

The market is adjusting currently to the first phase.

There will be more coming.

So we'll just have to keep an eye on that space.

Alex, one more clarification.

The $50 million we've already committed to, that is largely offset by additional expenses from GGY and what we view as potential unfavorable FX situation.

So good effort by taking down expenses by $50 million.

However, we do have the offset, so we're basically back to where we started.

So, the watch word here is to be very careful with hiring and to be very careful with all other expense items up and down the P&L.

And we are absolutely on that.

Great.

And sorry, just quickly, on the expenses, in absolute dollars like you usually give, like, in the next couple of quarters, up $5 million, $5 million, $5 million.

Can you just give us an update?

It seems like not much has changed, but just remind us how the absolute dollar level is changing in your expectation.

Sure.

We're looking at an expense ramp from here that we think is going to be $35 million to $45 million over the course of the year.

Now, the most variable part of that is incentive compensation.

If we are not doing well, incentive compensation gets hit first and hard.

And if we somehow manage to do better, incentive compensation might ramp up toward the end of the year.

So it's just a watch out there, but we expect the ramp from here, $35 million to $45 million.

Excellent.

Thanks for that.

We will now go to Andre Benjamin with Goldman Sachs.

On ERS, I was wondering if you could maybe talk through the increase to guidance in that business line, particularly the high single-digit increase from low single-digit just a few months ago.

I was wondering how much of that is M&A contribution versus new business wins and other factors, because if you're simply pulling business forward, I would think the full-year guidance wouldn't change that much.

Sure.

We'll ask Mark to take that.

I think you've got it right, Andre.

It's really driven by the GGY acquisition ticking up the ERS result at high single.

The business is performing very much in line with what we expected coming into the year.

The timing in the first quarter's been a little different.

I think we've just been executing quite well on project delivery, so we've pulled some things forward.

But the, the base outlook for the business organically is consistent with what we guided to previously.

And then on the debt outlook, I know you talked a bit about the split between how much came out of structured versus other buckets.

In corporate finance, where you did take the view down, I was wondering if you could provide some color on how much of that is continued weakness in the high yield market versus you might be starting to see some cracks in the pipeline for investment grade, as well.

Sure.

Andre, maybe this is a good time for us to talk about what we're hearing from the banks.

And, again, this is issuance views for both financial and nonfinancial US dollar issuance.

And then we'll go over to Europe.

I think you should be able to see a slide that we've put up.

Now, investment grade bonds, a curious situation.

For the first quarter of 2016, $340 billion in issuance, about flat year over year.

That's good.

What was less good is that the deal count, the number of transactions, was down by about 20%.

So dollar volume, dollar value, about the same, but deal count, down, which is not helpful to us.

Moving across the column, month-to-date for April, about $65 billion.

And for the full year, we're looking at $1.2 trillion, which is about flat.

So, right now for investment grade, the pipeline is robust, it's good.

And we expect the market to remain active and the backdrop is stable and companies are coming out of blackouts.

So it looks like there's quite a bit to do right now.

So investment grade, positive.

The issue here has been the deal count.

Going down to high yield, looking at $40 billion of issuance so far, that's down 60% year over year.

Month-to-date April, $25 billion.

Year to date, we're looking at $230 billion, down 15%.

The market tone is better.

There are some deals in the market, there have been deals in the market this week.

There's one in the market today.

As a Friday, that's unusual.

The market tone has improved, but the market is still bifurcated, as you see in the second point between haves and have-nots.

The stronger credits are doing better.

Spread tightening has already happened.

We're in about 160 basis points.

The question is, is that enough, and if spreads continue to tighten we may see some progress.

Conversely, if they widen out again, we may see further backup.

So we're going to have to watch that closely.

Leveraged loans, we see $40 billion in the first quarter, which is down 25% year over year, $15 billion month-to-date, and $260 billion for the year, which is down 10% year over year.

So, stability in the macro backdrop, as you see in the first point, is also aiding the leverage loan market.

It's weaker than the high yield bond market, though, because the fund outflows and the slowdown in CLO formation.

That goes back to the risk retention requirements, which we can talk a bit more about if you want.

And some increased default activity serves as a bit of a headwind.

Now, if we move over to Europe, looking at the next slide, again, these are the views of the banks.

Investment grade in Europe, the pipeline is robust and can pick up further because of the ECB's corporate bond purchasing program.

Brexit, though, in the second point, is an uncertainty, and that could sideline issuers and be harmful to the summer season, which is traditionally weaker, depending on what happens with that vote.

And US corporates continued to see that there's good value in accessing the Euro market, what we would call reverse Yankees.

And we expect that to be a heavy component of supply as it has been and will be, we think, going forward.

Spec grade in Europe, the market was muted.

Supply was down 70%, a very volatile first quarter.

Again, the ECB's move has sparked a renewed risk appetite and is leading to pickup in high yield activity in Europe, and tighter spreads, again, may encourage further issuance.

So, overall in Europe, the ECB's move makes us more optimistic, but it has been a very slow first quarter in Europe.

I think the overall view on the more speculative asset classes across the world would be keep an eye on spreads.

If they continue to tighten, we may see the outlook improve and, conversely, if they widen, particularly as we go into the Brexit vote, that will be detrimental.

So hope that's helpful to you, Andre.

Yes, thank you.

We'll now go to Manav Patnaik with Barclays.

Yes, thank you.

Good afternoon.

A lot of the big picture constraints on the issuance market don't sound much different than what it was when you gave guidance in February.

So maybe some more color on what the degree of change is.

I think in the $100 million you helped break out where you are assuming what, and I think you just walked through the corporate side of things.

So, maybe it's structured finance where maybe you can help us understand the different issuance categories and what changed versus February.

Yes, I'll start, Manav, and then invite Linda or Michel to weigh in.

Our change in outlook for structured finance is really centered on the US, and within the US it's focused on primarily the CMBS market and the CLO market.

As you know from our prior comments, in the commercial mortgage-backed securities area there is a lot of refinancing that needs to occur.

Some of that refinancing is occurring outside of securitization.

And we are also expecting to see the volume and activity pick up in the third and fourth quarters of this year because there was very little conduit lending early in this year, and the conduits have increased their financing, but it will take some months for that to feed into CMBS.

In the CLO area, it's the market dealing with both the risk retention requirements and the interpretations for other regulatory requirements having to do with transparency around underlying assets, and the suitability of the collateral itself.

So, assuming that we see the market sort out how it is going to meet new regulatory requirements and the suitability of collateral, again, we could see a pickup in CLOs later in the year.

Pipelines are not bad.

As a matter of fact, in Europe, pipeline is up quite substantially.

So some of the issues that we're seeing in the US are being partially offset by the international business, but it's still not enough to allow us to come anywhere close to holding our original guidance.

Manav, just a little bit of color and then I'll ask Michel if he wants to comment further.

I think your thesis was what's changed and shouldn't we have been able to see this when we gave our initial guidance.

As I had said previously, high yield bond issuance down 60% in the first quarter is a pretty heavy hit.

Leverage loans down 25% also is a pretty heavy hit.

So you have the risk off mode happening, you had oil prices collapsing, concerns about China, and growth concerns.

So, we went through a pretty heavy risk-off phase there, which is now starting to right itself.

Generally around here we're okay if we have one segment off, but having corporates hit hard, as well as having structure having had the worst quarter it's had in 10 quarters, we frankly didn't see that.

Now, as Ray said, that is what we would view as a cyclical issue in structured until the participants in that market figure out how to deal with some of these different conditions and rules.

We do think that situation will ease as we go into the end of the year.

But I don't think we expected the total risk-off environment in the first quarter.

We were thoughtful, but it was worse than we thought.

And as we said, there are a number of factors that make the rest of the year a little bit tricky to predict.

With that, I'll turn it over to Michel to have him perhaps give some more thoughts about how we're viewing the balance of the year.

Thank you, Linda.

I think what I was going to say is really in terms of the numbers we are seeing, this is really the result of market volumes.

And that I think, as Ray alluded earlier, our coverage has remained very consistent, which we've seen in the past.

As market improve, we should see a pickup in our own volumes.

That's what I was going to add.

Got it.

And then just thinking a little bit beyond the second half of the year, to your comments on structural versus cyclical, it sounds like a lot of this, at least from your comments, is more cyclical.

But how do you guys think about the puts and takes?

I know you talked about the maturity backlog, so maybe you could just give us a few updated comments on that.

And then maybe some comments on -- M&A is slowing down a bit.

That's been a big driver of your issuance and your backlog and it sounds like rating evaluation services might be a little slow because of that.

Any puts and takes there we need to call out?

Yes, you're correct, we have seen slower activity in our rating assessment service, coincident with reduced activity in issuance.

As far as the cyclicality of the conditions, clearly in the corporate sector this is cyclical.

There are significant refinancing walls that begin to build in 2017 and really build for several years after that.

So, we're going to see a large amount of activity associated with refinancing.

M&A, there have been some bumps in the road with M&A, but it has been strong for a while.

And to the extent that we're in a low growth environment, that has and probably will continue to encourage M&A.

Where we see the erosion in M&A-driven debt is, at least at the margins, around some of the tax-driven deals and things of that sort.

So, really, I view the corporate story as being very much a cyclical story with a significant refinancing wall coming upon us beginning next year.

On the structured finance side, again, I think it's largely cyclical, but we have to watch and see how the market deals with new requirements and what economically the market determines makes sense.

So that's an area to keep our collective eye on in terms of how much of it is cyclical and whether there are some structural changes to that market.

I just wanted to note that investment grade issuance conditions are really good right now.

The US 10-year is at 1.85.

If you want to look at reverse Yankee issuance, Unilever did a particularly attractive bond issuance recently, and they paid very little for that issuance, which was really quite remarkable.

We have seen M&A stop as we dealt with the changes in the inversion rules.

And then this week, healthcare M&A came back strong, three deals this week.

I think we saw three deals in the TMT space this week.

So there still is appetite and there's still transactions that need to be funded.

So we'll see how that goes.

This is really a week-by-week situation with the backdrop of the Brexit vote coming up on June 23.

So it provides an unusual degree of uncertainty, particularly in Europe.

Absent the Brexit concern, I think we would feel pretty good about the Company's financing opportunities, particularly for reverse Yankees.

But we're going to have to watch this closely.

All right.

Thanks a lot for that color.

I would just like to congratulate Michel and Rob on their new roles.

We'll now go to Warren Gardiner with Evercore.

Great.

Thank you.

I realize it was a pretty tough quarter for direct transaction fees, but it looks like, at least in structured products and corporate finance, relationship fees these jumped pretty nicely from the fourth quarter.

Maybe some of that's pricing, but anything to call out there in terms of the growth?

Some of it is pricing, but it's also the monitoring and annual fees associated with the new rating mandates that have come in over the trailing 12 months are a significant contributor to that.

So as the stock of outstanding ratings grows, the monitoring fees, annual fees grow along with that.

Okay.

And then a while back I think you guys provided some nice color around those monitoring fees across some different regions.

I recall that fees in the US were pretty high relative to Europe and Asia.

That's on the monitoring fee side or relation fee side.

So my question is, does that relationship also hold, for the most part, on the transaction fee side, as well?

Unfortunately, it's not as simple an answer as would probably be convenient, because we have a different mix of frequent issuer pricing agreements versus transactional-based pricing agreements by geography.

The US market, for example, which is heavily represented by speculative grade issuers has more transaction pricing.

Those are less frequent issuers.

And the European market, which is more investment grade driven has more frequent issuer agreements.

So, the pricing is a bit difficult to match up, but broadly speaking, our pricing is consistent around the world for global ratings.

It's not exactly the same everywhere but it's broadly consistent.

Okay.

Great.

Thank you.

We will now go to Joseph Foresi with Cantor Fitzgerald.

Hi.

I wanted to ask about some of your assumptions, because it sounded like you're touching on them in some of your earlier points.

Is it fair to think you're building in a steady environment in Europe in your non-US assumptions?

Then I've got a couple other ones.

We do think that Europe is going to be relatively stronger in the second half of the year once we get through the Brexit vote and with the corporate sector purchase program through the ECB.

So, assuming that Brexit is resolved in a reasonable way in terms of how the market interprets it, and with that June purchase program kicking off, we think it's going to be a very attractive spread environment for corporates.

And that's supporting what should be good year-on-year growth for our European corporates.

Okay.

And then the assumption in global corporate finance, it sounded like you've seen some people come back to the market on the M&A side.

Are you expecting a rebound in the next two to three quarters in M&A?

Again, I'm just trying to get at the assumptions behind some of the guidance that's out there.

I would not anticipate M&A to be running for the remainder of the year at the pace it ran last year.

But there's still going to be a reasonable amount of activity.

So, sorry, I don't have a number on that for you, but that would be my narrative around it.

Keep in mind there's also the announced M&A pipeline that still needs to be funded.

We had cited that at $200 billion at the beginning of the year and only some of that financing has moved through the pipeline.

We've got some very big deals.

We're thinking about the [Teva] deal and also the Dell deal alone, that's $60 billion that we could see that has to move, for example.

We would still see that there is some opportunity there, but we think that companies are going to choose their spots pretty carefully, again, given the macro environment.

Okay.

That's very helpful.

And then just on the cost-cutting side, have you seen any change in attrition rates among employees?

And then it sounded like the compensation was perhaps flexible in the sense that if we had a better second half of the year we could see that compensation number go up.

How do we think about that given the current environment?

Sure.

I think we're seeing a little bit of reduced voluntary turnover.

But it's only moved a few tenths of a percentage point off of our high single-digit view of things.

If one is looking for a job in the financial sector right now, particularly if one is looking for a job in the banking sector, that's a pretty challenging place to look at this point in time.

So, that would probably be the reason why we're seeing a slight reduction in voluntary turnover.

Now, for incentive compensation, let's talk about that.

We had started the year with 100% of our bonus targets being set at the $4.80 we had previously seen for guidance.

We've pulled that down to $4.60.

And as a result of that, we have taken down our incentive compensation.

For example, for the first quarter last year, incentive compensation was $38 million, and this year in the first quarter it's come down to $32 million.

So, we pulled down incentive compensation pretty hard to deal with this new lower forecast.

And if we're not going to hit our numbers, the employees are not paid as well.

That's just the way it goes.

In terms of the $32 million number, we would see that it will ramp a bit as we go into the fourth quarter if things go right.

But if we do considerably better than the $4.60 we're predicting now, Joe, you would expect that we would take incentive compensation back up.

So $4.80 was 100% and $4.60 is below that, so we've cut incentive comp accordingly.

And this does react formulaically.

So, improved performance will cause higher accruals, and reduced performance will reduce the incentive comp line formulaically.

Got it.

Thank you.

We will now go to Vincent Hung with Autonomous.

Good afternoon.

On the frequent issuer programs, are you happy with the proportion of MIS by frequent issuer, or longer term would you prefer that to be higher?

There is some volatility that we are accepting in order to have more transactional pricing as opposed to frequent issuer pricing.

But, outside of cyclical conditions, it really is driven by our view of whether global debt is likely to continue to grow.

And we would like to capture the upside of that through higher transactional pricing, which you might think of as retail pricing as opposed to wholesale pricing.

That being said, if we see a change in the growth opportunity in global debt markets we would consider whether a different pricing model makes more sense and we would adjust.

Okay.

Just last one for me, can you talk about the management change in MIS?

Is it going to be business as usual or should we expect maybe a different approach?

We're very pleased with all the work that Michel Madelain has done since he's been the President of MIS.

So, in that respect, you should think of it as business as usual.

That being said, Rob and Michel are not the same person.

We're looking for good ideas.

We're looking from good ideas from Michel going forward in his new role and from Rob in his new role.

So, anticipate business as usual, but maybe not all exactly the same business.

Great, thank you.

We'll now go with Denny Galindo with Morgan Stanley.

Hi, there.

Thanks for taking my questions.

First one on the expenses, the incremental margins were very high in MIS.

And I was wondering how much of that was due to losing some of these things like rush fees and new issuer fees that might be a higher margin profile than some of the pure transaction-based fees that you guys charge?

No, I really think the focus should be on transaction volumes in terms of the change.

Those other businesses, rating assessment service and that sort of thing, is really not a very large part of the revenue profile for MIS.

So, even though we appreciate when that area is more active, it's not a big contributor to changes in revenue or margin.

It's really based off of volumes.

Denny, a little bit more color.

In this first quarter of 2016, in fact, expenses increased 4% over 2015.

And you might want to ask why that was.

The majority of that growth was to continue to support the growth in Moody's Analytics, which you can see is performing beautifully.

MA expenses grew 9%, which supported revenue growth, which was even greater.

MIS expenses, though, were slightly down and, of course, we're trying to match the expense support for the revenue growth in the business.

And we can't do that instantaneously.

Most of the $50 million that we have already put in process on expense management will come from shared services.

That's the support part of the business, which I run for the most part, and then also to MIS.

Moody's Analytics is performing well and we will continue to invest in it.

Its compensation view will be slightly different perhaps than the rest of the Corporation.

If it performs according to its targets, which through the first quarter it has and even better, its incentive compensation would be at target or perhaps even higher.

We're being very cautious to match what we're doing here with where we're seeing growth.

The further reason for the growth in that incentive compensation for the first quarter year over year was because of some of the additions we made in head count last year, and that some of the things we had already started at the very beginning of 2016 we have a very good handle on that right now.

And, of course, we did see the acquisition of GGY, which added some expense.

And we continue to make prudent technology investments.

But this is very carefully planned expense management where we need it to support the growth areas.

And we're throttling back on those areas, particularly the support areas where we can do that.

So very careful, very active management of our expenses.

Okay.

That's helpful.

And then that's a good segue into Moody's Analytics.

That was a little strong.

Most of the guidance increase seems to be from the acquisition.

But we've also seen some stories coming out about IFRS 9 and the equivalent GAAP rules, which seem like it might give you guys a pretty nice runway in ERS over the next, say, two to three years.

Have you been able to size that opportunity in any better way since we last spoke on IFRS 9 and these changes to the GAAP provisioning rules?

Denny, we've talked about this.

IFRS 9 we think is going to be a very nice growth driver for the business.

We actually think that the prospect for IFRS 9 is probably richer for us than what we've gotten from stress testing, because it's applicable to many more institutions all over the world.

So, we are very optimistic about IFRS 9. It's still early days, frankly, for that initiative.

We've had some success thus far.

We have a good pipeline and we have very good expectations for what we can do there.

But you're absolutely right.

We had good strength across MA in the first quarter, really very broad-based strength for Moody's Analytics.

On a constant dollar basis, every region was up double digits organically.

So, we feel that the business is just performing very well.

And demand for the things we're doing continues to be very strong.

We've taken up guidance in ERS because of the GGY acquisition, but we've also taken up guidance in RD&A just, reflecting strong underlying growth in the business.

Okay.

And then just one last one, on the capital allocation guidance, you had this $1 billion number out there.

And typically the way you formulaically do this, you end up buying more shares, or spending more whenever the stock price is down.

So, I was a little surprised that only roughly 25% of the annual buyback rate occurred in the first quarter.

Was there something stopping you from, or did the formula not come out with more aggressive buybacks in that quarter?

And is this something that maybe we could increase that number if there's an attractive opportunity with the price in the second quarter or third quarter?

Maybe just thoughts around on how that buyback number will progress.

Denny, it's Linda.

Then if Ray wants to chime in, I'm sure he will do so.

We're working with the guidance of approximately $1 billion in buybacks, and we have to set our plan as we finished the previous quarter's earnings call.

In the absence of better information when we did this close to 90 days ago now, we decided to keep our allocation pro rata across this year, because you could see a couple of points that might be concerning around Brexit, around the US election, and so on.

So we started out spreading our money pro rata across the year.

Now, we had some heavy tiering in place and when the stock price fell to $78, we were able to buy back more shares quite cheaply.

And in fact, we were at $89-and-change for average repurchase price in the first quarter.

Until yesterday, the stock was in the high $90s and $100.

So, we felt pretty good about that.

So we'll have to see where we want to go with that allocation over the rest of the year.

But, again, we have to do this in advance for the coming quarter and we can't change that allocation until we move into another window period.

So, that's the technical explanation of what's going on.

I hope that's helpful to you.

And maybe Ray has some further thoughts.

No, I think that's it.

That was very helpful.

That's it for me.

We'll now go to Peter Appert with Piper Jaffray.

Thanks.

The MIS revenue performance in the first quarter lagged just a little bit against your primary competitor.

Anything to read into that in terms of changes in the market share dynamic?

No, our coverage was very strong.

So I don't think that's part of the story.

I think the story probably does revolve around the fact that we have more transactional-based pricing than our competitor.

So, in a low volume quarter, I think that's where you see the difference show up.

Makes sense.

Ray, on the Brexit issue, let's say, God forbid, they make the wrong decision and decide to go.

Do you interpret that as a fundamental structural change in the market that might just reduce the issuance opportunity coming out of the EU?

Certainly, I would think, for some period of time that is going to be a disruptive influence in the European market.

And not only because of an exit by the UK, but whether that causes any other nations to rethink their position in the EU or in the euro zone.

It's quite speculative to try and anticipate what the overall consequence of this would be.

That being said, it's also hard for me to imagine that in the short run it wouldn't have a chilling effect on issuance, just because of the confusion about what the longer-term consequences would be.

Right.

Understood.

And then, lastly, for Mark, I'm wondering if it's possible for you to give us any color around a backlog metric for the ERS business to help us better understand the sustainability of growth.

I'm asking this in the context of you've cited accelerated deliveries as a driver of revenue.

I wonder if that brings down your backlog number, that therefore makes the revenue growth number going forward look maybe less compelling.

Peter, the way I'd answer that is, we've got, frankly -- and we talked about this last time -- for ERS we've got a pretty modest revenue growth outlook this year, partly because of the pull-forward that we saw at the end of 2015.

We had pulled a pretty sizable chunk of revenue into late 2015 from 2016, so that was impacting our 2016 growth rate.

The business is still performing well.

Trailing 12-month sales are now down to, I think, 1% over prior year.

I think that's really a question of difficult comps in this past quarter and in the second quarter of last year.

We expect double-digit sales growth for the rest of this year.

So I think we're going to be in good shape as we move into 2017.

I don't see this impairing growth in the business going forward.

So, net new sales are running at a double-digit rate currently, is that the message?

Again, to be very precise, trailing 12-month sales are up only 1% over where they were this time last year.

That said, we had very strong growth in the second quarter of last year and in the first and second quarters of last year.

So, we've got difficult comparables in this period.

Moving ahead into quarter two, three and four of 2016, we are projecting double-digit sales growth in ERS.

I'm sorry, when you say double-digit sales growth, are you talking about new billings, or are you talking about recognized revenue?

No, I'm sorry.

I'm talking about sales as opposed to revenue recognized on the P&L.

So, billings would be the right metric.

Okay.

Got it.

Very good.

Thank you.

We will now go to Craig Huber with Huber Research Partners.

Yes, hi.

Thanks for taking my questions.

First, Ray or Linda, can you just talk a little further about the high yield market out there in the US, maybe in the context, what are the default rates right now for the energy commodity companies, if you separate those default rates there versus the rest of the market for high yield?

Our forecast for the energy sector for the one-year forecast is for a 10% default rate, and about 12.5% in metals and mining.

That obviously is elevated compared to the global 2016 forecast of about 4.5%.

With the recent relative strength in energy prices, that might help these numbers tick down.

But we'll have to see.

The energy sector has been quite volatile through the first quarter and was a source of money both leaving the high yield sector, but then also money coming back in later in the quarter.

So, it has contributed to the volatility and availability of funding based on the overall flows in and out of that sector.

And where are you seeing the default rates for non energy companies and high yield in the US right now?

For our high yield US, we're forecasting at year end 6% in the US and about 2% in Europe.

The global number would be about 4% -- high 3%s, 4%.

That's the non energy-related companies or the overall?

That's looking at overall spec grade.

I guess you're inferring, then, that non energy companies, the default rates, the health of those high yield companies are in much better shape, of course.

Exactly.

Does that give you a reason for optimism for high yield as you think out here over the next 12 months for high yield debt issuance overall?

Yes, the spreads have certainly come in from where they peaked in early February.

They have come in significantly.

I think it would be beneficial for them to continue to come in because there's not a lot of refinancing that has to happen this year.

It is more opportunistic.

So if we were moving out 12 months or 18 months, I would say this spread environment is certainly supportive of refinancing for maturing debt.

But right now we're in a more opportunistic environment, so more firms can wait and see if spreads continue to tighten or not.

Two other questions, please.

One, is there any update, Linda or Ray, on the DOJ front?

Could they potentially come after your Company like they did a few years ago with S&P?

No.

We've been disclosing in our Qs and K that we continue to have investigations, inquiries being made of us from the DOJ and states attorneys general.

That disclosure has remained very consistent.

So, there's really no new news to offer there.

And then lastly, Linda, if you would just give us an update for the first quarter, the breakdown of the revenues in your four ratings areas, how those revenues broke down, high yield, bank loans, investment grade, et cetera, please.

Sure, Craig.

I'll start with the corporate sector and investment grade.

We're looking at Q1 2016 compared to 2015.

For investment grade in 2016, we had $66 million of revenue from investment grade.

That was 28% of the total for CFG, which is $240 million.

Last year we had $87 million in investment grade and $298 million in corporate, so the percentage stayed about the same at 28%.

Spec grade is where the story is.

For the first quarter this year, we had $30.3 million.

That is less than half of last year's $62.7 million.

And this year we're looking at spec grade being 13% of the total.

Bank loans, down a bit, $41.3 million versus $44.5 million last year and 17% of the total.

And other, about flat, $102.6 million and 43% of the total for CFG.

Going to structured, again, quarter over quarter, 2016 versus 2015, ABS, asset backed securities, pretty close, about $20 million for the first quarter this year versus $21 million last year.

Percentage is about flat at 22%.

RMBF, also not that much movement.

In fact, this was up in the first quarter of 2016 to almost $21 million versus about $18 million last year.

Percentage was up to 23%.

Commercial real estate, here again was where we saw a more dramatic difference, about $28 million in the first quarter of this year versus $33 million last year.

Percentage is about 31% this year.

Structured credit, also a more dramatic change, $22 million this year versus almost $29 million last year, and 24% of the total.

So that's the story in structured.

FIG -- not too much difference in FIG.

Total of $95 million for the first quarter of 2016.

About flat to last year, about $94 million.

FIG does not move around as much as the other lines.

For banks, we're about $59 million.

Last year, it was about $63 million.

Percentage is about 62%.

Insurance did perform better, we're close to $30 million in insurance versus $25 million last year.

That's 31% of the FIG total.

Managed investments, about $4 million flat to last year in dollar and percent.

Other, also flat in dollar and percent at about $2.5 million and 3%.

And PPIF, again, this was another less than pleasant surprise.

Last year in the first quarter, PPIF in 2015 did $100 million.

This year we have a little bit less than $92 million.

PFG sovereigns is about $55 million, about flat to last year's $56 million.

Project and infrastructure is where we saw some weakness, about $36.5 million versus last year's $44.5 million.

So that's about 40% of the PPIF line and about an 18% decline, which was obviously not helpful.

Then the other line is negligible for PPIF.

Again, PPIF in total, down 9% year over year.

We had three out of four of the businesses having some challenges, with corporate down the most in dollar and percent terms.

Structured, which is our second biggest business, off.

And then PPIF off 9%, as well, with banking about the same.

Again, if we have one of these engines has a bit of a challenge, we can usually figure it out and make it up somewhere else, but three out of four of the MIS engines down, that's a little bit tricky, so you see the results in the quarter numbers.

Great.

Thanks for going through all of that.

We will now go to Doug Arthur with Huber Research Partners.

Thanks.

Two questions.

Ray, there's been a bunch of indirect questions on this on the call, but just trying to get a better sense of the trend in mandates globally right now.

Then I've got a followup.

Obviously we're continuing to see a significant number of new mandates.

The first quarter, they were down a little bit compared to the first quarter of last year.

That would be typically associated with the reduced debt market activity.

So we are convinced, I'm convinced, that it remains a very important fundamental long-term driver of the business.

But it does follow the cycles of debt issuance activity, so it was off slightly in the first quarter compared to last year.

Okay, great.

And then, Linda, just a technical question per se.

Interest expense on an absolute basis was up quite a bit sequentially from the fourth quarter.

I'm trying to understand within your tranches of debt, did anything materially change there Q1 over Q4?

Let me take a look at that.

Q1 over Q4, I think the answer to that is that we did reopen our 30-year notes in November of 2015.

Now, not to call anybody out, but a number of the analysts have completely missed that we took on $300 million worth of debt in the fourth quarter in November.

We've talked about it a lot, but despite that some folks have completely missed.

So, adding another $300 million of debt in November, we only add obviously a partial inclusion of that debt in the fourth quarter and we had a full quarter of that interest expense in the first quarter.

The fourth quarter we had interest expense of $31.8 million and that bumped up to $34.6 million in the first quarter of 2016.

So, that's what that's all about.

And, again, sorry if we didn't signal this strongly enough.

We thought we did, but everybody should note that we added $300 million to those 2044s in November.

That clarifies it.

Thank you.

We will now go to Bill Warmington with Wells Fargo.

Good afternoon, everyone.

A question for you on the improved outlook for Moody's Analytics.

Part of it's coming from the inclusion of GGY, but then RD&A also came in better than expected in Q1.

What was actually going on within RD&A?

That's normally a pretty steady, predictable business and it's coming in on the upside.

So I was going to ask for some color on what's driving that.

Bill, I think the short answer is we had, we had very strong sales at the end of last year and at the beginning of this year.

It's a subscription business.

So, having sales come in a bit stronger than we expected, that's going to result in more revenue that gets recognized for the full year in 2016.

And it was a combination of a number of things.

Customer retention continues to improve, so we got a little bit of a bump from that.

New sales production has been very strong, so that contributed.

Pricing has been good.

On the RD&A side, one way to say it is we're firing on all cylinders.

We're doing quite well there.

And as I mentioned earlier, we're doing well all over the world.

The business is just quite strong and it added to the expectation for the year and prompted us to just move the guidance up.

And then a balance sheet question for you.

You've got about $2.1 billion in cash.

Could you remind us how much of that is offshore?

And how do you feel about taking on some additional leverage at this point to support stock repurchases?

And then I might as well ask about the private placements coming due in 2017, just to ask if it's too early to ask what you're thinking about doing with that.

Bill, we have 73% of our cash offshore, to be exact.

And the total amount that we have is $2,000,000,066.

So, $1.5 billion is offshore and a little bit more than $0.5 billion is onshore.

We do have some room within our leverage, but given that we did the $300 million addition in the fourth quarter of last year, I think our view would be we're fine for right now.

We'll wait and see what the end of the year looks like.

But yes, we could potentially put on a little bit more debt.

We're watching the markets very closely.

Your point is very good, that we have a private placement with a particularly high coupon coming due in 2017.

We're running the breakevens on that right now, and we'll take a look at that.

If we do decide to move toward the end of the year, that may or may not be included, depending on what the breakeven looks like.

But we're watching the markets carefully.

But since we did $300 million more in the fourth quarter in November, as I just said, I think if we do anything, it might be more weighted toward the back half of the year.

Our cash position is fine to continue with our share repurchase and we'll continue to run our plans as we have guided.

Okay.

Thank you for the insight.

We will now go with Jeff Silber with BMO Capital Markets.

Hi, good afternoon.

It's Henry Chien calling in for Jeff.

I just had a follow-up question on MIS.

Looking at the non-transaction revenues, how should we think about that for the rest of the year, given the amount of mandates you already have, and especially if the environment remains as it is right now?

Any color you can provide, that would be appreciated.

For the monitoring fees, their growth will not change dramatically for quarters two, three and four.

We got the biggest bump in the first quarter as we moved into the new year.

And then we'll continue to see growth but it will be more modest through the remainder of the year.

Got it.

Okay.

That's helpful.

And in terms of your guidance, the raised guidance for MA, are you also assuming some margin expansion or additional margin expansion for the segment, as well, for 2016?

We don't provide guidance on the margin outlook.

But, as we've discussed, we're continuing to work and execute on all the plans we have in place to drive margin expansion in MA over the next several years.

That plan remains intact.

Obviously the acquisition we did will have some impact on the margin in the near term.

But nevertheless, the work we're doing to drive margin expansion, given the maturity of the business and the scale that we're achieving, those continue to be a work in progress.

Got it.

Okay.

Thanks so much.

Henry, it's Linda.

To be clear about this, we report our margins fully loaded with overhead costs.

I would ask you to look at that very carefully compared to others who are in the same business.

Mark's business has been particularly successful of late.

And perhaps the less than happy outcome for him is that he's now allowed to carry more of the overhead allocation, which makes his life a little bit harder on the margin line.

So, in the no good deed goes unpunished category, that's something you might want to think about a little bit, because we do most of that work after we look at what's clearly trackable and traceable for overhead allocation, that's based on the revenue view.

So, Mark's progress is garnering him a little bit more overhead.

Okay, got it.

All right.

Thank you so much.

We'll now go to Tim McHugh with William Blair.

Yes, thanks.

Most of my questions have been asked, but just one quick one.

If you have to make the additional $50 million of cuts, if things got worse than you've anticipated, I know the incentive comp is formulaic, but that next tranche of cuts, how deeply would that require you cutting at that point?

At this point it sounds like you've gone to essential hiring, but what would be required to make that next layer.

I'm just trying to get a sense of how painful that would have to be if that's where you had to go.

Tim, let me just make one thing clear.

We received the question why do we deal with our guidance right now on the first quarter call.

That's a little bit early for us.

Part of the reason why we did that is a change in guidance triggers the reduction in incentive compensation for us.

So, in other words, we've just taken out about close to $20 million in incentive compensation for the first quarter and the rest of the year.

That is the result of our pulling down the guidance.

We will look at now how we perform according to where we are, with the mid point being $4.60.

The next thing that would happen on $50 million is we would be about evenly split between another $25 million in incentive compensation if our performance is weaker than we expect now, and some other cost cuts that we could make.

We probably need to keep with some essential hiring, less so insured services, but certainly in MIS.

We would like Mark to continue with his hiring plans in MA because they are doing really well, as he's outlined.

And we've got to be thoughtful about what we're doing with our technology spend.

Projects that we could postpone or dial back, I think we've largely done that.

We're taking another pass through that.

But again, there are certain things we need to do around here and it gets harder with the second pass.

Again, we've had tough conditions in the first quarter.

We view that as cyclical.

We have better coverage proportionately in structured finance, which has been hit hard in the first quarter, and we're waiting to see what happens for the rest of the year.

So, we think we're being prudent.

And incentive compensation is what we're going to do in order to keep the margin from being hit.

We've moved the margin guidance down from about 42% to about 41%, so we are holding the margin, for the most part, down 100 bps, perhaps, in the guidance.

But the first hit goes to incentive compensation.

We would like the shareholders to note that it is our intention to hold the margin at about 41%, which is still pretty healthy.

So, I hope that helps in terms of your questions, Tim.

If I missed anything, let me know.

No, that's helpful.

Thank you.

And we will go to Patrick O'Shaughnessy with Raymond James.

Hi.

The question is, to the extent that some of these market headwinds are impacting your customers, and particularly the sell side capital markets groups, does that potentially pose some threat to your RD&A revenues, or are those mostly on the buy side and pretty sticky?

I'll let Mark talk to that, Patrick.

Patrick, we have not historically seen very much correlation between head count cutbacks on the sell side and the RD&A revenue.

And, in fact, arguably, as they cut back on head count, be it on the sell side or on the buy side, those organizations become more dependent on people like us as providers of information and analytical support.

Where we saw a real impact on the business is when you're in a very bad environment, like what we saw in 2009.

But in this kind of an environment, we have not historically seen that as a headwind for RD&A and maybe even a benefit to RD&A.

Great.

That's helpful.

Thank you.

And it appears that there are no other questions at this time.

I will turn the call back over to Mr. McDaniel for any additional or closing remarks.

Okay.

I just want to thank everyone for joining the call today and we look forward to speaking with you again in July.

Thank you.

This concludes Moody's first-quarter earnings call.

As a reminder, a replay of this call will be available after 3.30 pm Eastern time on Moody's website.

Thank you.