穆迪 (MCO) 2017 Q1 法說會逐字稿

Good day, and welcome, ladies and gentlemen, to the Moody's Corporation First Quarter 2017 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 and Communications.

Please go ahead.

Thank you.

Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's first quarter 2017 results as well as our current outlook for full year 2017.

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

This morning, Moody's released its results for the first quarter of 2017 as well as our current outlook for full year 2017.

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 report on Form 10-K for the year ended December 31, 2016, 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 2017 financial results.

Linda Huber will follow with additional financial details and operating highlights.

I will then conclude with remarks on our current outlook for 2017.

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

In the first quarter, Moody's achieved record revenue of $975 million, up 19% from the prior year period, as Moody's Investors Service benefited from very strong issuance levels in the quarter, especially in leveraged finance markets.

Moody's Analytics also continued to exhibit steady growth.

Operating expense for the first quarter was $532 million, up 4% from the first quarter of 2016.

Operating income was $443 million, up 46% from the prior year period.

Adjusted operating income, defined as operating income before depreciation and amortization, of $476 million was up 42% from the prior year period.

The operating margin was 45.5%, up from 37.3% in the first quarter of 2016.

Adjusted operating margin was 48.8%, up from 40.9%.

Moody's EPS for the quarter was $1.78 per share, up 91% from the first quarter of 2016.

Adjusted EPS for the quarter was $1.47, up 58% from GAAP EPS of $0.93 in the first quarter of 2016.

First quarter 2017 adjusted EPS excludes a $60 million or $0.31 per share gain from a strategic realignment and expansion involving Moody's China affiliate CCXI.

Including the $0.31 CCXI gain, we now anticipate full year 2017 EPS in the range of $5.46 to $5.61.

Excluding the gain, we anticipate full year adjusted EPS to be toward the upper end of the range of $5.15 to $5.30, reflecting the likely impact of some debt issuance pull forward during the first quarter, while recognizing ongoing macroeconomic and geopolitical uncertainties.

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 was $975 million, up 19% from the prior year period.

U.S. revenue of $578 million was up 20%.

Non-U.

S. revenue of $397 million was up 18% and represented 41% of Moody's total revenue.

The impact of foreign currency translation on Moody's revenue was negligible.

Recurring revenue of $480 million was up 6% from the prior year period and represented 49% of total revenue.

Looking now at each of our businesses, starting with Moody's Investors Service.

Total MIS revenue for the quarter was a record $668 million, up 27% from the prior year period.

U.S. revenue increased 26% to $423 million.

Non-U.

S. revenue of $246 million was up 30% and represented 37% of total MIS revenue.

The impact of foreign currency translation on MIS revenue was negligible.

Moving to the lines of business for MIS.

First, global corporate finance revenue for the first quarter was $353 million, up 47% from a challenging prior year period.

This year's results reflected robust leveraged finance issuance, especially of U.S. bank loans.

U.S. and non-U.

S. corporate finance revenues were up 41% and 61%, respectively.

Second, structured finance revenue totaled $100 million, up 11% from the prior year period, primarily as a result of increased U.S. CLO and ABS issuance.

U.S. and non-U.

S. structured finance revenues were up 8% and 15%, respectively.

Third, financial institutions revenue of $112 million was up 18% from the prior year period.

This result was driven primarily by an increase in issuance from infrequent issuers.

U.S. and non-U.

S. financial institutions revenue were up 26% and 13%, respectively.

Fourth, public, project and infrastructure finance revenue of $98 million was up 7% from the prior year period, primarily driven by an increase in global infrastructure issuance, partially offset by a decline in U.S. public finance issuance.

U.S. and non-U.

S. public, project and infrastructure finance revenues were up 3% and 15%, respectively.

Finally, MIS Other, which consists of non-ratings revenue from ICRA in India and Korea Investors Service, contributed $5 million to MIS revenue for the first quarter, down 38% from the prior year period.

This decline is attributable to the divestiture of a noncore subsidiary of ICRA in late 2016.

And turning now to Moody's Analytics.

Global revenue for MA of $307 million was up 5% from the first quarter of 2016.

U.S. revenue of $155 million was up 8%.

Non-U.

S. revenue of $152 million was up 3% and represented 49% of total MA revenue.

Foreign currency translation unfavorably impacted MA revenue by 1%.

On a constant currency organic basis, MA revenue grew 4% in the first quarter.

And moving now to the lines of business for MA.

First, global research, data and analytics or RD&A revenue of $175 million was up 6% from the prior year period and represented 57% of total MA revenue.

Growth was mainly driven by credit research and ratings data feeds.

U.S. and non-U.

S. RD&A revenues were up 5% and 8%, respectively.

Second, global enterprise risk solutions or ERS revenue of $96 million was up 7% from last year due to the March 2016 acquisition of GGY.

U.S. and non-U.

S. ERS revenues were up 14% and 3%, respectively.

Trailing 12-month revenue and sales for ERS increased 10% and 16%, respectively, primarily due to the 2016 acquisition of GGY.

As we continue to make progress on shifting the mix of the ERS business to emphasize higher-margin products, product sales were up 25%, while service sales declined 8%, with about half of the growth in product sales attributable to last year's acquisition of GGY.

Third, global professional services revenue of $36 million was down 2% from the prior period.

U.S. professional services revenue was up 9%, while non-U.

S. revenue was down 8%.

Turning now to operating expenses.

Moody's first quarter operating expense was $532 million, up 4% from 2016.

The increase in the operating expense was primarily attributable to higher accruals for incentive compensation and the March 2016 acquisition of GGY.

This increase was partially offset by a favorable foreign currency translation impact of 1% and the impact of ongoing cost management initiatives.

As Ray mentioned, Moody's operating margin was 45.5%, up 820 basis points from 37.3% in the first quarter of 2016.

Adjusted operating margin was 48.8%, up 790 basis points from 40.9%.

Now I'll provide an update on capital allocation.

During the first quarter of 2017, Moody's repurchased approximately 0.5 million shares at a total cost of $55 million or an average cost of $112.24 per share.

Moody's also issued 1.5 million shares as part of its annual employee stock-based compensation plan.

Moody's returned $73 million to its shareholders via dividend payments during the first quarter of 2017.

And on April 25, the Board of Directors declared a regular quarterly dividend of $0.38 per share of Moody's common stock.

This dividend will be payable on June 12, 2017 to stockholders of record at the close of business on May 22, 2017.

Outstanding shares as of March 31, 2017 totaled 191.3 million, down 2% from a year ago.

As of March 31, 2017, Moody's had approximately $700 million of share repurchase authority remaining.

On February 27 of this year, Moody's issued $800 million of notes, consisting of $500 million in 2.75% senior unsecured notes due in 2021, and $300 million in floating rate senior unsecured notes due in 2018.

Also in the first quarter, the company repaid its outstanding $300 million in Series 2007-1 Notes, along with an associated prepayment penalty of approximately $7 million.

At quarter end, Moody's had $4.1 billion of outstanding debt and approximately $800 million of additional borrowing capacity under its commercial paper program, which is backstopped by an undrawn $1 billion revolving credit facility.

Total cash, cash equivalents and short-term investments at quarter end were $2.3 billion with approximately 83% held outside the U.S.

Cash flow from operations for the first 3 months of 2017 was negative $512 million, a decline from a positive $254 million in the first quarter of 2016.

Free cash flow for the first 3 months of 2017 was negative $531 million, a decline from a positive $227 million in the prior year period.

The declines in cash flow from operations and free cash flow was due to $864 million of payment the company made pursuant to its 2016 settlement with the Department of Justice and various states attorneys general.

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

Thanks, Linda.

I'll conclude this morning's prepared remarks by discussing the changes to our full year guidance for 2017.

A complete list of Moody's guidance is included in Table 11 of our first quarter 2017 earnings press release, which can be found on Moody's Investor Relations website at ir.moodys.com.

Moody's outlook for 2017 is based on assumptions about many geopolitical conditions and macroeconomic and capital markets 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 outlook assumes foreign currency translation at end of quarter exchange rates.

Specifically, our forecast reflects exchange rates for the British pound of $1.25 to GBP 1, and for the euro of $1.07 to EUR 1.

As I noted earlier, Moody's now expects full year 2017 EPS to be $5.46 to $5.61, which includes a $0.31 per share CCXI gain.

Excluding the gain, full year 2017 adjusted EPS is expected to be toward the upper end of the range of $5.15 to $5.30.

Both ranges include an estimated $0.15 per share benefit due to the adoption of Accounting Standard Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, $0.10 of which was realized in the first quarter.

Operating expense is still expected to decrease in the 25% to 30% range.

Adjusted operating expense, which excludes the 2016 settlement charge and the restructuring charge associated with cost management initiatives, is now expected to increase in the mid-single-digit percent range.

The effective tax rate is now expected to be approximately 30% due to the impact of the nontaxable CCXI gain.

This concludes our prepared remarks.

And joining Linda and me for the question-and-answer session are Mark Almeida, President of Moody's Analytics; and Rob Fauber, President of Moody's Investors Service.

We'll be pleased to take any questions you may have.

(Operator Instructions) Our first question comes from Toni Kaplan with Morgan Stanley.

This is actually Jeff Goldstein on for Toni.

Can you just talk a little bit more about your expectations for the rest of the year?

Obviously, it was an extremely strong quarter driven by ratings.

But by increasing your EPS guidance to only the high end of the previous range and hearing some of your comments about pull forward and macro risks, you obviously have some reservations about the remainder of the year.

So really, just overall, can you talk a little bit more about the puts and takes that go into your guidance raise and what do you think needs to happen for you to exceed the range?

Well, you can see from our updated guidance that we did not fully roll through the very strong first quarter into the remainder of the year.

We think it's going to provide a benefit, and that's why we're guiding to the upper end of the range.

But we're also cognizant of the fact that refinancing continues to be a very heavy driver of issuance, and that characterized the first quarter in the corporate sector, in particular.

So looking out for the remainder of the year, we think some activity that we initially had anticipated would go later in the year did get pulled forward into the first quarter.

And if we're looking for upside to our current guidance, I think we'd be looking to more new money borrowing.

And we can certainly make a case for that with a strong economy.

And I hope that's what happens.

But that's what's guiding our outlook at a high level currently.

Got it.

And then just with ratings having such a strong quarter, I'm assuming there was less of an impact to the Moody's Analytics margin from increased overhead.

So can you just talk about if the 80 basis points of expansion that we saw in the quarter at Moody's Analytics is representative of core margin expansion?

And if not, what the core expansion would have looked like there?

I'll let Mark Almeida answer this in a little more detail.

But we do anticipate ongoing expansion of margin at Moody's Analytics, but we do not expect that line to be completely smooth.

Mark, do you want to comment?

Sure.

First, to your question about overhead allocation.

The way we allocate corporate overhead to the business lines, I don't think is as dynamic as what your question suggested.

The share of overhead allocation is fixed.

So it doesn't change from quarter-to-quarter.

So in other words, what you saw in Q1 was indeed core expansion in the Moody's Analytics margin.

And I think, as Ray said, what we're seeing there is exactly what we've been talking about for some time that as the enterprise risk solutions business matures, as the product offering matures and we shift from being engaged in doing a lot of bespoke work for customers to doing more standard product delivery, we would expect to see more margin coming out of that business.

And I think that's what you see going on here.

As Ray said, that's not going to be a straight line, but we do expect continued gradual improvement in the Moody's Analytics margin as a result of that.

And we'll take our next question from Joseph Foresi with Cantor Fitzgerald.

I was wondering if you could talk about what's built into issuance for the second half.

What are your expectations for growth there?

And maybe you can compare your second half assumptions with the first half, just so we can get an idea of cadence.

Well, last year, we had a strong second half after a weak first half.

We don't expect that the second half of this year is going to be weak, but we do anticipate that we're having -- going to have a stronger first half than second.

That being said, the full year outlook in terms of issuance for investment grade, it's flat to down by perhaps 10%.

For high yield, it's flat to up about 5%.

And for leveraged loans, up 5% to 10%.

Those aren't big changes from where we were when we spoke to you in February, but it's a little less optimistic on the investment grade side and more optimistic on the leveraged loan side.

Okay.

And then, could I get your thoughts on some of the political events we have going on here.

Obviously, we talked about the Trump administration and some of the tax changes and -- or potential tax changes.

And then you also have some upcoming elections in Europe.

Maybe you can talk about the impact on your business and what your thoughts are in relation to issuance.

Sure.

I'll take the second part first and then maybe Linda would like to comment on the tax situation here in the U.S. But yes, we have been cautious in our outlook for the second half of the year -- actually, beginning the second quarter in the European context of elections for France, U.K., Germany, Italy.

And so the more those outcomes turn out to be expected outcomes, the more confidence the market is going to have.

And we would probably expect to see more economic momentum and hopefully, more debt activity.

But there is -- there's going to be a level of anxiety around each of these elections throughout the year.

And they are spaced out throughout the year.

So I imagine we're going to be having periods of relative optimism and then periods where market participants pull back awaiting the outcome of these various elections.

Joe, just wanted to be clear that this guidance does not incorporate any of the Trump tax proposals.

Because as you know, such proposals have a long way to go before they're enacted as legislation.

Just as a way to think about what potentially could happen, of course, a lowering of the corporate tax rate would be helpful for Moody's.

You can take a look at that by thinking about 1 percentage point drop in our estimated tax rate would give us $0.07 to $0.08 on the EPS line.

We did note that the latest proposal did not mention interest deductibility limitation, nor did it mention a border tax adjustment.

And we would not expect that the deemed repatriation tax would have a meaningful impact on issuance because offshore cash is held very closely by a small number of companies.

So generally, the majority of scenarios that have been discussed would be net positive for Moody's.

Of course, the details would matter quite a bit.

And that's the basis of what we know at this time.

But again, none of these proposals are baked in to anything we're saying today.

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

Just wanted to come back to the early retirement of debt or the pull forward comments, Ray, you made earlier.

Just wondering if you can flesh it out a little bit more.

I guess, what are you hearing when you're talking to corporates or to banks?

I mean, is this just the typical, we think rates are moving higher, let's go now.

Is this, hey, let's get ahead of tax policy changes because some banks are telling us it's the wise thing to do now.

And how does it impact the longer-term outlook for refinancing?

Just what are you hearing, I guess, is my question at the end of the day?

I think it's each of the items you identified.

And there are -- right now, spreads -- rates and spreads are very attractive.

So it is a good opportunity for issuers to be in the market, whether it's refinancing or new money or upping their outstanding debt.

These are attractive conditions.

And looking ahead to potential interest rate increases going forward, and again, some of the uncertainty that comes with the geopolitical situation and the elections in Europe, yes, we do think issuers are taking advantage.

And we're not -- we're certainly not anticipating a weak second half of the year, as I said earlier.

But the kind of growth we've seen early in this year, we just don't think is going to be sustained.

Yes, Alex, this is Linda.

I think we should also point out that, again, for us last year, we had the reverse pattern where the second half of the year was much stronger so the comps become more difficult for us.

Just to kind of go through the views we're hearing from various investment banks, and again, these are not Moody's views.

The first quarter was a record issuance for investment grade.

And that reflects the low market volatility, attractive rates and tight spreads, as Ray said.

$450 billion of issuance through the end of April.

And once we get through the blackout, we expect issuance to pick up in May.

Last week was $40 billion in issuance, which is pretty strong.

This week is calling for $30 billion to $35 billion.

And with the 10-year at 2.36%, that remains a pretty attractive set of issuance conditions for investors.

We do expect, as is being noted this morning, about 94% probability that the Fed will raise -- do a rate hike in June.

Thus far, that has seemed to mostly flatten the yield curve.

For high-yield bonds, it's been a bit of a mixed condition, $100 billion so far this year.

The pipeline is light-ish due to the factors that Ray had commented on as contrasted with leveraged loan, which has been $300 billion of issuance to date this year.

The activity is moving to the leveraged loan market.

We saw a record start to 2017, but this is important, Alex, 75% of that volume is from refinancing and repricing.

CLO issuance has also been robust, $25 billion year-to-date.

And the pipeline is strong in these areas, and we look to that for increased activity.

In Europe, things are quite positive.

The euro and sterling markets are resilient, conditions are constructive, spreads at all-time lows, rates historically low, but the busy political calendar offsets that potentially and we will see some choppiness.

On spec grade in Europe, strong leveraged financing activity.

Leveraged loan activity reached a post financial crisis high in Q1.

High yield bond spreads in Europe at a 10-year low.

And of course, as we mentioned, the macro conditions, again, may cause choppiness in the speculative grade market as well.

But generally, pretty good conditions, and we'll have to see what happens.

But if you want to finance, the market remains quite attractive.

Very true.

And then just secondly, maybe a little bit more longer term.

But a couple of months ago at a conference, you changed one of the slides in your typical presentation deck a little bit.

I think you had this long-term slide that you used a lot in terms of the algorithm of the long-term growth.

And you changed that, I think, to some degree, kind of took away with some of the boxes that you have to have and you also reduced the longer term growth rate.

You may have addressed this already at the conferences, but can you just kind of like talk about what this change was all about?

Like how your thinking about the long-term algorithm for the company may have changed or this is more of a next few years are different?

So just flesh out why the long-term change there for us.

Sure.

First of all, I think it's important to underline that there's no change in our outlook for the revenue areas that we have under our control.

This is pricing Moody's Analytics in the sense that it's a non-capital markets component of our business.

Coverage, new mandates, all of that remains consistent with the views that we've had in recent years.

The new slide and the discussion we've had around that reflects our view that we're looking at protracted lower GDP growth, especially in developed economies.

For 2017, the MIS GDP forecast for the G20 are about 3%.

But importantly, the U.S. is at 2.4% and the euro area at 1.3%.

And between the U.S. and the euro area, we're looking at 85% of our revenue.

So we're taking that into account in terms of the pace at which debt markets are going to be expanding given this low-ish for some period of time outlook on GDP.

In that kind of environment, we're going to continue a strong focus on managing costs and our capital allocation.

Our next question comes from Tim McHugh with William Blair & Company.

Just wanted to ask about the gain in China and the adjustment to the investment there.

Can you elaborate what that was and what that means kind of going forward?

Yes, sure, Tim.

What we did was our joint venture, CCXI, issued additional shares in order to merge with another rating agency in China.

And that merger reduced our holding in the combined company from 49% to 30%.

We didn't sell any or we didn't sell down.

But we have a smaller piece of a larger company.

Strategically, the reason we did this was by combining these 2 rating agencies, we now own licenses through our joint venture to compete in all areas of the domestic Chinese market, both what's called the interbank market, which is large and somewhat slower growing, and the exchange-traded market, which is smaller, but faster growing.

So the fact that we are now able to provide rating and research services through our joint venture in all areas of the Chinese capital market, we think is strategically very important.

And we had the revaluation of our original 2006 investment in the joint venture as a part of this process, and that's what led to the gain.

Yes, Tim, it's Linda.

Let me just also explain the tax effect of this because we got a lot of questions about this.

Our tax rate guidance has come down.

The effective tax rate for 2017, the guidance is now approximately 30%, and that was reduced from the prior guidance of 31% to 32%.

And that's due to the impact of the nontaxable CCXI gain.

That change is a GAAP guidance item.

But again, because that was not taxable, the overall ETR for the year comes down.

If you wanted to strip that out, the tax guidance would be back to the 31%, 32% where it was, but this is a permanent change downward for this year.

Okay.

And just to follow-up.

Is this, I guess, change in China, is it (inaudible) -- there's also been some news, I guess, about perhaps opening up the market there.

I guess, has your -- is this a sign at all about your view of the interest in taking a bigger role or a bigger stake there?

Or is it more just an opportunity, I guess, locally that was a decision for the joint venture to take?

Yes.

Well, there is the opening of the Chinese market and then there are the activities that we are either currently carrying out or will be in a position to carry out between the joint venture and MIS.

I already described the joint venture side of this.

And so I'll ask Rob, if you wouldn't mind commenting on MIS and where we stand in the Chinese market cross-border and then potentially looking into the future.

Yes, right, Ray.

As Ray said, we have a growing presence with our cross-border business in MIS in China, offices in Beijing and Shanghai.

And I think what you're referring to, in January, the State Council of China announced that the foreign investment restriction in domestic CRA industry would be lifted.

So I think that change may allow us more freedom both in how we can invest in the CCXI, the expanded CCXI enterprise as well as how we can potentially better address the domestic market through MIS.

Yes, and I would just add that we continue to see very good growth in new rating mandates from Chinese institutions active in the cross-border market.

So that has been a good news story and it continues to be.

And we'll take our next question with Craig Huber with Huber Research Partners.

Linda, I guess, just a point of clarification.

Your tax rate comment there, just so I'm clear on this, would be 31% to 32% if you exclude the gain for the full year?

Yes, but it is a GAAP change.

It is -- this event for CCXI is nontaxable per GAAP.

So it is a GAAP adjustment to take the tax rate down to 30% going forward.

So that change is good.

And that's our guidance for the full year.

But again, taking out that gain, it would be 31% to 32% you're saying?

Correct.

Okay.

And then my real first question, I'm sorry about this, is you guys talked about some pull forward into the first quarter here.

In the corporate finance area, I guess the transaction revenue is up 72% or so.

How much of that would you ballpark came from pull forward?

Was it roughly half?

And what would you sort of ballpark?

It's difficult to be precise with that, Craig, just because there's quite a bit of noise in the mentions for why capital is being raised.

We can look at mentions from issuers around capital expenditure versus share repurchase versus refinancing and we can see that the large majority of references are for refinancing.

But how that money actually gets used and what portion of it is put to work in other ways is difficult for us to see with a lot of certainty.

Then if I could just quickly ask, the roughly $1.75 billion of cash you have overseas, Linda.

If you do get a chance to take that home from repatriation, how much of that could you actually take home?

I know you have to leave some portion in each country that you operate in, I believe.

And if you did bring it home, what would you use it for, share buyback?

Craig, we don't disclose that.

But you are directionally correct that a certain amount of that needs to remain in the statutory entities that we have in Europe.

So we couldn't return it dollar for dollar.

I think it'd be fair to say that the strong majority we could bring back.

We obviously would be able to respond very quickly if such a change does become law, but right now, it's not.

And if we did make a decision like that, the use of those -- that return of cash would be subject to the usual decision-making process that we do regarding our capital allocation.

So at this point, we haven't taken the plan that far.

We do know what we would do if there is a change.

But to this point, such change is still going to be some amount of time away if it does materialize at all.

Our next question comes from Manav Patnaik with Barclays.

Linda, if I can just ask you to first give us the updated expense ramp that you typically do?

Sure, Manav.

As of now, the new first quarter to the fourth quarter expense ramp is $30 million to $40 million.

Previously, we had said $20 million to $25 million.

But we've had an uptick because of better, actually, higher incentive compensation in the first quarter and a little bit later spending on some of our IT projects.

So again, $30 million to $40 million from the first quarter to the fourth quarter.

Okay.

And then sort of bigger-picture question, after lowering, I guess, forget about the long-term guidance necessarily, but I guess the focus on most of the conversation is still on the ratings business more than you guys would like to probably.

But just in the context of the opportunities, there are some interesting assets in the financial umbrella that might be out there up for sale and so forth.

Just your thoughts on diversification or are you happy with the portfolio where it is?

Or how we should think of that longer term?

Well, first of all, we do like to talk about the rating agency.

So that's okay.

But with respect to our satisfaction with the portfolio, yes, we are very satisfied.

We've made what we think are some very nice strategic acquisitions that have been performing well in Moody's Analytics.

We would continue to look for other opportunities similar to what we've done in the past.

But we remain disciplined about how we think about bringing assets on board and about M&A generally.

And we'll take our next question from Jeff Silber with BMO Capital Markets.

Looking at the margin expansion in the MIS business, is some of the reason for that the large increase in transaction-related revenue relative to subscription-based?

Jeff, it's Linda.

We've always talked about one of the great features about Moody's as an investment is, if we get some progress on the top line, we have a lot of operating leverage.

And we were able to really demonstrate that this quarter with some pretty impressive increases in the margin for the quarter.

Now the best outcome for us, as Rob Fauber will talk about in a minute, is probably if we see that revenue increase come through the corporates line where we have teams obviously covering all of these issuers.

And that allows for a very effective bring down in terms of margin expansion.

But I'll turn it over to Rob for a little bit more color.

And I think that's right, Linda.

I think we probably have the most operating leverage in the U.S. corporate finance space.

Over time, as we see significant increases in issuance volume, we will have to add staff to be able to keep up with the demand and monitor the new relationships, but I think in general that's right.

Okay.

Great.

And I'm sorry to go back and ask a tax question.

But I know you're not giving guidance for 2018.

But for modeling purposes, should we go back to that 31%, 32% rate for next year?

Jeff, we probably will deal with that in February of next year.

Given all the exciting tax proposals on the table right now, we think we're going to take the better part of valor here and not comment on what the rate should be for next year because there are a lot of proposals floating around and none of them have made their way to law yet.

So go ahead and model whatever you'd like, but it's hard to know right now.

But assuming we kind of stay ceteris paribus, 31% to 32% would make sense?

I'm not going to confirm that.

Let's take a look next year.

It depends on a whole lot of things, including one-off audits that we have to look at and various other things.

The mix of our business between the U.S. and offshore is a very heavy driver of that tax rate.

And there's some indications that the headline tax rate in the U.K. comes down, but yet they're limiting interest deductibility.

So there's a lot that goes into that number.

And it could change if any one of those situations change.

So on this one, we're just going to let you do whatever you'd like there.

And we'll take our next question from Peter Appert with Piper Jaffray.

So Linda, the preliminary question is, can you quantify, please, the bonus accruals for the first quarter?

And then a follow-up related to how you answer that.

Yes, sure, Peter.

So the incentive comp accrual in the first quarter went up pretty considerably from last year.

Last year, in incentive comp, we did $32.2 million.

This year, we did $52 million.

Now that includes 2 components, and it's important to understand that.

And of that change, which is about $20 million, $15 million of it is the overperformance that we put up in the first quarter.

The other $5 million relates to normal increases that we do with target bonuses year-over-year.

So the outperformance is really the $15 million piece of that, Peter.

And if you want to look at the modeling for the rest of the year, you might want to look at a $40 million to $45 million number for each of the remaining quarters.

But the one thing I can promise you is that we'll get that wrong because it depends on the performance quarter-by-quarter.

But we did have very good performance in the first quarter, so we put up the heftier number based on the percentage of completion of our budget for the year.

Got it.

Okay.

So the follow-up then is that x that increase, your costs are basically flat year-to-year in the quarter, which is pretty extraordinary.

So I guess, this is cheating, but there are 2 sub-questions to this: number one, why not even a bigger accrual for the bonus in the first quarter given just the extraordinary strength in issuance; and two, how, why are costs flat for the first quarter?

Sure.

I'll tackle the second one first.

And yes, thank you very much for noting.

We've been working very hard on keeping our expense growth limited.

Now some of you may have noticed we went from low single digits to mid-single digits, and that's just because we were at the very cusp of this line.

We bumped just slightly from the highest end of low single digits to the lowest end of mid-single digits, if you can follow that, it really doesn't amount to very much.

The expense growth that we had, Peter, you're right, comes primarily from this higher incentive comp and the cost from the GGY acquisition, which we're about to lap.

So we've been pretty happy with that, we've worked very hard to keep tight control on hiring.

If you looked at the headcount for the corporation year-over-year, we're actually down 1% first quarter this year versus last year.

A lot of that is that we've reduced headcount slightly in shared services.

Rob's kept a very good handle on the rating agency's headcount.

And Mark's business, where we've had very good growth, has had a little increase, but we're also very careful where we put the people.

And we're looking at lower cost jurisdictions where a number of them have gone with shared services.

So pretty happy with all of that.

We continue to maintain our discipline, even though we've had this very strong first quarter.

And the incentive comp accrual is based on where we think we're going to be for the year in that percentage of completion.

So it's sort of a formulaic thing.

If we had taken up our guidance, Peter, that would have been a different case, and we would have had to move more aggressively on incentive comp in the first quarter.

As you know, we've moved to the upper end of our guidance range so we went with the $15 million.

So hope that gets you everything you need.

And we'll take our next question from Warren Gardiner from Evercore.

Just a question on the slide on the investment bank issuance views.

Do those reflect or I guess do your internal forecast differ significantly from any of those?

And then, I guess I'm trying to understand why the downward or sort of slight downward adjustment for high yield and investment grade just for the full year versus what was spoken about last quarter.

Because I guess I just kind of struggle whether it's been pulled forward and conditions remain pretty favorable, why sort of soften those for the full year?

Sure.

Warren, these views that Ray and I quoted from are a summation of a number of banks.

Sometimes they match up with our internal view and sometimes they don't.

I think there are a couple of things going on.

There is some pull forward as you had mentioned.

But also, in a period where rates may move up, the focus tends to move toward the leveraged loan market, which is more of a floating rate market.

So I think that's the main reason why high yield may have softened a bit because you're seeing a substitution effect over into the leveraged lending side.

I will stop here and see if Rob has anything else he wants to add about what's going on there.

The only thing I would add to that, Linda, is the fund flows in high yield have been a bit choppy for the year.

Year-to-date, down about $6 billion in outflows.

We have seen some stronger inflows in mid-April, but we're still down as opposed to what Linda was talking about.

Year-to-date inflows in leveraged loans, about $12.5 billion of inflows through mid-April, and that's double what we saw in full year 2016.

Okay.

Got it.

And then, I guess, any thoughts on the structured product pipeline from here?

I'm sorry if I missed any comment on that earlier.

Yes, sure.

Rob?

Yes.

I'll touch on maybe a couple of the asset classes.

I'm going to focus mostly in the U.S. as they're obviously our largest market.

In ABS, the issuance momentum picked up throughout quarter, and that was after a slowdown that we had seen in the back half of the fourth quarter.

And that's been led by an uptick in autos and cards primarily.

Spreads there have flattened and are at multiyear lows.

So conditions, issuance condition is good there.

We expect the activity to moderate a little bit from a very strong March.

And we are continuing to see some interest in the esoteric space, renewable energy, those kinds of things.

CMBS, spreads are still at very favorable levels.

We are nearing the apex of the CMBS refinancing on maturity of loans that originated just precrisis in '06 and '07.

I think everybody is familiar that the activity in CMBS suffered at the beginning of this year as we saw a pull forward into the fourth quarter as folks were trying to get ahead of the risk retention implementation deadlines.

We have seen that strengthen a bit in March.

I think we'd expect to see that pick up again in the second half of this year.

And I would just note that there are a lot of single-borrower deals where there's competition to fund by banks and insurance companies.

So we'll see how that plays out.

In CLOs, similarly to the strength in the leveraged loan market, spreads there have continued to tighten, again, at multiyear lows.

We've seen very heavy refinancing activity.

That continued all the way into April.

I would think that will slow down a bit, probably pick back up again sometime in the third quarter.

And we are seeing some new CLO issuance in the pipeline.

So it's not just going to be weighted towards all of that refi activity.

And we'll take our next question from Bill Warmington from Wells Fargo Securities.

This is Jake on for Bill.

Just wanted to ask how the new issuer mandates are trending in 2017 versus previous years?

Yes.

Rob?

Yes.

With strength in the leveraged finance markets, we typically see strength in first-time issuers.

That's where a lot of the first-time issuer mandates come from.

Those were up very nicely in the first quarter versus the fourth quarter of 2016, over 200 new mandates, and up very strongly from the first quarter of '16 when as you remember, we had very weak leveraged finance issuance.

I would think that may moderate a little bit, but you've heard our comments and outlook for high yield and bank loan, but we think we'll still be in line with our first-time mandate count for the last several years.

And we'll take our next question from Patrick O'Shaughnessy from Raymond James.

So in enterprise risk solutions, you saw a really nice acceleration of your trailing 12-month sales growth from 4% in the December quarter to 16% in the March quarter.

I think part of it may be that you had some easier comps.

But can you talk a little bit more about what was driving that increased sales growth?

Yes, it's Mark here.

What we had -- what you're seeing there, a lot of that is coming out of the GGY acquisition.

They have a very large amount of their renewable business.

That is -- that closes in January.

And this was the first January that we owned that business.

So that got rolled into the trailing 12 months sales figure for ERS.

So that's a big driver there.

But even if you take the GGY piece out, we still had pretty solid growth in trailing 12-month sales in ERS.

So we feel good about what's going on there.

All right.

Great.

And then quick follow-up.

With CCXI, do you guys have an option to take your ownership back up to 49% at some point?

No, we do not have an option to take it up to 49%.

But we are in a joint venture with individuals who -- and institutions who may seek to sell some of their interest in the future.

And to the extent that we are satisfied with the performance as we have been over the last decade, we're a potential buyer.

And we'll take our next question from Vincent Hung with Autonomous.

Can you talk about how your share of leveraged loan ratings has trended because S&P said they're rating a higher share of loans this quarter.

Yes, we have a pretty comprehensive coverage in the bank loan market, but I would say that it further improved in Europe in the first quarter.

Okay.

And my follow-up is, can you talk about any of the work that you're doing on technology in the rating agency to drive any sort of improvements in ratings analyst's productivity?

Because I guess one of the pain points for a lot of ratings analysts is the maintenance work.

Yes, I'll let Rob comment on this.

But as we talked about before, we've been in the process of a really pretty comprehensive transformation of how we do business in MIS and our processes.

And really, there's an important technology component, but there's also just some process reengineering that is nontechnology-related.

And this really comes from the fact that a lot of the responsibilities and obligations on analysts have changed post-financial crisis and with regulation, and we have to align our business in a way that responds to those both effectively and efficiently.

And that's what this process is about.

So Rob, I don't know if you wanted to add anything to that.

Yes, just maybe a little bit more color.

We're modernizing both our analytic and data platforms.

We're putting in place a workflow platform for the analysts that will, I think, automate much of kind of what you're touching on in terms of all that credit administration and rating workflow.

We're going to get some benefits out of that.

We'll get some efficiency.

We'll get the right tasks done in the right place.

And we're -- we believe that will also allow our lead analyst to spend more time focused on the credit portfolio and in engaging with the market and with issuers and investors.

It appears there are no further questions at this time.

Mr. Ray McDaniel, I'd like to turn the conference back to you for any additional or closing remarks.

Okay.

Thank you very much.

And just before we end the call, I wanted to mention that Moody's will be hosting its next Investor Day in late February or early March 2018 here in New York City.

I know this is an early announcement and we don't have a specific date yet, but I wanted to give everyone a sense of what we're aiming for there.

More information will be available on the Investor Relations website as we get closer to the date.

So thank you all for joining the call today, and we look forward to speaking with you again in the summer.

This concludes Moody's First Quarter 2017 Earnings Call.

As a reminder, immediately following this call, the company will post the MIS revenue breakdown under the First Quarter 2017 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.