穆迪 (MCO) 2009 Q2 法說會逐字稿

Good day, and welcome ladies and gentlemen to the Moody's Corporation second quarter 2009 earnings conference call.

At this time I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode.

At the request of the company we will open the conference up for questions and answers following the presentation.

I will now turn the conference over to Liz Zale, Vice President, Investor Relations.

Please go ahead.

Thank you.

Good morning everyone and thanks for joining us on this teleconference to discuss Moody's results for the second quarter 2009.

I'm Liz Zale, Vice President of Investor Relations.

Moody's released it's results for the second quarter 2009 this morning.

The earnings press release and a presentation to accompany this teleconference are both available on our website, at ir.moodys.com.

Ray McDaniel, Chairman and Chief Executive Officer of Moody's Corporation, will lead this morning's conference call.

Also making prepared remarks on the call this morning is Linda Huber, Chief Financial Officer of Moody's Corporation.

Before we begin I call your attention to the Safe Harbor language which can be found towards the end of the 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 10K for the year ended December 31st, 2008, and in other SEC filings made by the company which are available on our website and on the Securities and Exchange Commission's website.

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

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

I will now turn the call over to Ray McDaniel.

Thanks, Liz, and thank you to everyone for joining today's call.

I will begin our remarks this morning by briefly summarizing Moody's second quarter and year to date 2009 results and update our guidance for the year.

Linda will follow with additional revenue detail and operating highlights, I will then speak to recent developments in the legislative and regulatory area and finish with additional details on Moody's outlook for 2009.

After our prepared remarks we will be happy to responds to questions.

Moody's results for the second quarter reflected some improvement in credit market activity, particularly the broadening of strong corporate bond issuance from investment grade in to high yield.

Total revenue was $451 million, down 8% year-over-year.

Excluding the unfavorable impact to foreign currency translation total revenue was down 4%.

Operating income for the second quarter was $187 million, a decrease of 20% year-over-year, resulting from lower revenue and increased expenses that Linda will discuss later in the call.

There was negligible impact to operating income from foreign currency translation.

Diluted earnings per share for the quarter were $0.46 , 15% below the $0.54 of the prior year period, this included a benefit of $0.03 associated with the favorable settlement of a legacy tax matter and previously announced restructuring activities.

Excluding these items from both periods diluted EPS for the quarter declined by 16% year-over-year to $0.43.

Turning now to year to date performance revenue for the first six months of 2009 was $860 million, a 6% decrease from the first half of 2008, operating income of $336 million was 22% lower than the same period a year ago.

Diluted earnings per share of $0.84 in the first half of 2009 included a charge of $0.01 per share related to the previously announced restructuring activities and benefits associated with the resolution of certain legacy tax matters.

Excluding these items in both periods diluted earnings per share of $0.85 decreased 14% from $0.99 for the first half of 2008.

We are raising our full year 2009 EPS guidance to $1.45 to $1.55 from the prior range of $1.40 to $1.50, based on our first half performance, however, we remain cautious about business conditions for the remainder of the year.

I will now turn the call over to Linda for further commentary on our results and

Thanks, Ray.

I will begin with revenue at the corporate level.

For the quarter total revenue for Moody's Corporation was down 8% year-over-year.

Excluding the unfavorable impact of foreign currency translation revenue declined 4%.

US revenues declined 10% to $237 million, while revenue outside the US decreased by 5% to $214 million, and represented 47% of Moody's total revenue.

Recurring revenue of $278 million, represented 62% of total revenue compared to 57% in the prior year period.

Looking now at each of our businesses, Moody's investor service revenue for the quarter was $310 million, a decrease of 13%, year-over-year, both in the US and outside the US.

Excluding the unfavorable impact of foreign currency translation MIS revenue 9%.

NonUS revenue represented 44% of total ratings revenue.

Global structured finance revenue for the second quarter was $75 million, 35% below prior year period.

In the US revenue decreased 33% year-over-year, due to limited new issuance.

The federal reserve TALF program supported some of the issuance in structured finance markets particularly in asset backed securities sector, where 25 TALF eligible deals were launched in the second second.

Outside the US, structured finance revenue was down 38%, driven by declines across all asset classes.

Global corporate finance revenue in the second quarter increased 9% from a ago to $108 millions primarily driven by better activity in the high yield market and strong issuance of investment grade bonds.

Revenue grew 15% in the US and remained about flat outside the US, as the rebound in investment grade issuance in Europe was offset by declines in other regions.

Global financial institutions revenue of $67 million was down 10% from the second quarter of 2008.

US financial institutions revenue decreased 17%, due to issuance declines in the insurance and banking sectors.

Outside the US revenue down 5%, as issuance growth in the insurance sector was more than offset by the client banking sector.

Global revenue for the pubic project and infrastructure finance business declined 8% year-over-year to $61 million.

Revenue decreased 18% in the US due to lower issuance in the municipal sector, nonUS revenue grew 22% primarily as a result of solid project and infrastructure finance issuance in Europe.

Turning now to Moody's analytics, global revenue of $140 million was up 7% from the second quarter of 2008.

Excluding unfavorable impact of foreign currency translation, revenue increased 9% primarily due to impact of acquisitions made in 2008.

In the US, revenue declined 2% to $63 million, as weakness among financial services customers resulted in higher customer attrition, that was partially offset by new subscription contracts, software licenses and professional service engagements.

NonUS revenue grew 14% and represented 55% of total analytics revenue.

Globally subscription revenue stayed about flat at $118 million.

Software revenue grew 83%, year-over-year, largely driven by the Fermat acquisition in the fourth quarter of 2008, and professional services revenue stayed about flat.

Moody's second quarter expenses were $264 million, an increase of 4%, compared to second quarter 2008.

Excluding restructuring items for both periods expenses increased 2%.

The increase was primarily due to the Fermat acquisition, incremental rent expense incurred during the built out of our Canary Wharf location in London and an increase in the allowance of [doubtful] accounts.

Operating margin for the quarter was 41.5%, or 42.2% excluding the restructuring charge.

Our effective tax rate for the quarter was 36.4% compared with 38.5% for the prior year period.

Excluding certain legacy tax matters and restructuring efforts in both quarters, effective tax rit was 38.8% for the second quarter 2009 compared with 39.6% for the prior year period.

Decrease was due primarily to a higher proportion of taxable income generated internationally and lower tax jurisdictions.

I would like to turn now to a update on capital allocations and stock buybacks.

At quarter end we had $1.4 billion of share repurchase authority remaining under the current program.

As mentioned on our first quarter conference call, we are committed to returning capital to shareholders in a manner that is consistent with maintaining sufficient liquidity.

In the near term that means maintaining our current dividend but curtailing share repurchase activities.

During the second quarter 2009 Moody's did not repurchase shares and issued 600,000 shares under employee stock based compensation plans.

Outstanding shares as of June 30, 2009, totaled 236.3 million, a 3% decrease from a year earlier.

At quarter end Moody's had $1.3 billion of outstanding debt, and approximately $400 million of additional debt capacity available under the revolving credit facility.

During the quarter we used a portion of our cash flow to reduce short-term debt by $80 million.

In total we reduced short-term debt by $137 million for the first half of 2009, and expect to continue reducing it through 2009.

The combination of debt repayment and an improved cash position of $393 million has reduced net debt by $284 million, or approximately 23%, since year end 2008.

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

Thanks Linda.

I will start with a brief update on legislative and regulatory developments.

We continue to communicate with oversight authorities at national, regional and global levels.

Beginning in the US, there have been a number of developments since our last call.

Over the past month the Obama administration has published a blueprint for regulatory reform and provided congress with a set of draft bills on financial system regulation.

as part of the legislative proposals draft bills specific to credit rating agencies was published on July 21st.The bill addresses topics such as ways to strengthen the management and disclosure of conflicts of interests, improvements in transparency in disclosure, a differentiated scale for structured finance ratings, disclosure of preliminary ratings, reducing the use of ratings and regulation, and strengthening the authority and supervisory role of Securities and Exchange Commission.

The bill is now subject to congressional input as they address the broader elements of financial regulatory reform.

Certain aspects of the administration's bill and rating agencies have also been the subject of existing and proposed rules by the SEC.

Chairman Mary Shapiro declared her support for the administrations bill in a house financial services committee hearing on July 22.

It is also stated that the commission staff is exploring the possibility of proposing additional rules regarding credit rating agencies.

We remain focused on playing constructive role in the discussions of these issues with Congress and regulatory authorities in the coming months.

In Europe following the European parliamentary vote in favor of new rating agency regulation, we continue to consult with national authorities, the Committee of European Securities Regulators, or CESR, and other authorities such as the International Organization of Securities Commissioners, or IOSCO, on the specifics of implementations.

The EU regulation is expected to be fully implemented by the second half of 2010.

As we've discussed earlier, compliance efforts in the Europe, the US and elsewhere, will entail investment and additional costs.

The amount and timing of these compliance costs remains uncertainly, but they're likely to grow in 2010 and beyond as we respond to multiple legislative and regulatory initiatives.

Finally as regulatory reviews take place in other jurisdictions we will continue to advocate for globally consistent approaches that along with the IOSCO framework and the G20 statements.

I would like to conclude this morning's prepared remarks by discussing our full year guidance.

Moody's outlook for 2009 is based on assumptions about many macroeconomic and capital market factors, corporate and consumer borrowing, securitization, and the nature and impact of government sponsored economic stabilization and stimulus initiatives.

There is an important degree of uncertainty surrounding these assumptions and if actual conditions differ Moody's results may differ materially from our current outlook.

As I mentioned earlier we are revising our EPS guidance upward for the full year 2009 to $1.45 to $1.55 due to better than expected first half performance, but reflecting caution about business conditions for the rest of the year.

This outlook assumes foreign currency translation in 2009 at current exchange rates.

While our expectations for total revenue have modestly improved the company still expects full year 2009 revenue to decline in the mid single digit percent range.

Revenue expectations for certain areas changed based on conditions specific to those sectors and geographies.

We expect recurring revenue to remain stable and issuance based revenue to reflect lower overall issuance in the second half of 2009 compared to the first half.

We now expect full year 2009 expenses to increase in mid single digit percent range.

Full year 2009 operating margin is still projected in the mid to high 30%s range.

For the global Moody's investor service business we continue to expect full year revenue to decline in the high single digit percent range.

In the US revenue is still expected to decline in the high single digit percent range, while nonUS revenue is now projected decrease in the mid single digit percent range.

We now expect structured finance revenue for full year 2009 to decrease in the mid 20%s range due to continuation of weak issuance trends.

Corporate finance revenue for full year 2009 is now expected to increase in high single digit percent range from full year 2008 reflecting strength in first half activity in both investment grade and high yield issuance.

Revenue from financial institution ratings is still expected to decline in the mid single digit percent range, and we still expect public project and infrastructure finance revenue for full year 2009 to be about flat with full year 2008.

For Moody's analytics, we now anticipate full year 2009 revenue growth to be in the low single digit percent range.

We continue to expect strong growth in software revenue primarily associated with our acquisition of Fermat, to offset declines in subscription revenue in the low single digit percent range and in professional services in the high single digit percent range.

Within the US, we still project Moody's analytics revenue to decline in the low single digit percent range, and outside the US, we now expect Moody's analytics revenue to increase in the high single digit percent range.

That concludes our prepared remarks.

Joining us for the question-and-answer session are Michel Madelain, the Chief Operating Officer of Moody's investor service, and Mark Almeida, President of Moody's Analytics.

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

Thank you.

(Operator Instructions) We'll go first to Peter Appert at Piper Jaffray.

Thanks.

Ray, just more on the guidance, the numbers you are offering seems surprisingly cautious in the context of the margin leverage you are enjoying currently and the momentum we seen in the market in the first half.

Are you seeing something in July specifically or something in terms of pipeline that causes you to be cautious?

The -- I think the -- probably the most important determinant for our outlook in the second half compared to the first half has to do with corporate finance activity.

And the reason for our caution and I hope it proves to be cautious, is that we think that a lot of the first half activity was not only refinancing of debt that was delayed from the fourth quarter of last year, and -- or needed to be refinanced in the first half of this year, but also prefinancing, that was pulling forward debt that had not matured when windows of opportunity were available.

So unless we see additional prefinancing activity from debt that would be maturing in 2010 or 2011, or new money issuance for capital expenditure and investment, I think that we are being cautious because of the amount of refinancing that we believe was pulled into the first half in investment grade in the second quarter particularly in the high yield sector.

So you're not buying the thesis that structural changes if the banking industry are driving issuers to the debt market as opposed to the banking market.

I certainly think that is part of the story and there are certainly arguments and I think they are rational arguments that can be made for upside to our outlook, but I also think there are very good reasons to be cautious.

And we have seen activity this year go through periods of sluggishness, and then very aggressive issuance.

I expect we are going to continue to see that in the second half as well, as I said hopefully this proves to be cautious but that is the reason for our uncertainty.

Okay.

And then Linda, is there anything on the cost side from a phasing or timing that would have implications for margins that might also be a function of these more cautious expectations for a second half?

Yes.

Sure, Peter.

Couple of points to keep in mind.

We have a modest increase in our second half expenses over the first half and said that consistently.

We do have some seasonal effects in the second half we have marketing spend conference related travel, in the second half we have slight merit based increases which take effect, we are watching FX very cautiously.

The dollar obviously has been bouncing around that's making that pretty difficult to predict, but we are remaining cautious and that could move against us.

And we do have a bit of ramp up of IT spend in the back half of the year, some of that is compliance driven, some is in line with major technology projects that we are working on.

But just modestly higher spend in the second half of the year all of which is predicted and baked in.

And then last thing and I will get off, Ray you mentioned a sense that the SEC is working on additional rules.

Any further color on that in terms of what direction they might be going in?

The proposed rules that they have out in the market now are associated with additional information disclosure, particularly performance disclosure, rating history disclosure.

And I think that we would expect to see if anything, more attention to the comparative performance between rating agencies, and to information disclosure more broadly for the asset backed securities market, and that might not relate directly to rating agencies, but would certainly will be a part of the market where we are an information user and I would expect that would be on the horizon.

Nothing specific in terms of them addressing the issue of legal liability or pricing model though?

To the extent that Chairman Shapiro expressed support for the draft bill presented by the Obama administration, that bill, as you I think are probably aware, did not call for changes in liability or in business model and pricing.

Great.

Thanks, Ray.

Thanks Linda.

Thank you.

We will go next to Craig Huber at Barclays Capital.

Yes, good morning.

A few questions if I could.

Can you break down like I always ask, your nontransaction versus transaction revenue breakdown across your four categories in the quarter?

Sure, Craig.

It's Linda.

I will give you second quarter of 2009, and if you are looking at the sequential change from the first quarter 2009, I think the headline would have to be that our transaction revenue percentage here has actually picked up.

In the first quarter of 2009 we were at 46% transaction revenue for the rating agency.

And then for the second quarter of 2009 that moved up to 52% and 48% recurring.

So let me give you each of the segments and I will do transaction first and relationship second.

So for structured, transaction is 41%, reoccurring or relationship is 59%.

For CFG corporate finance it's 67% transaction, as we saw an increase in investment grade and high yield issuance, and 33% relationship.

Financial institutions is 33% transaction and 67% relationship.

And public project and infrastructure is 59% transaction and 41% relationship, which for the rating agency is I said, 52% transaction, and 48% relationship, which is a move towards the transaction side.

Analytics remains pretty constant at 9% transaction and 91% relationship.

So for the corporation as a whole, we are at 38% transaction, and 62% relationship, a bit of a move towards the transaction side with a good second quarter.

Great.

And then separately can you speak if you would about interest expense line/other collectively, it came in at $8 million higher than I was expecting once you adjust for the $6.5 million one time item.

Can you just explain why that was up significantly from the fourth quarter to the first?

Sure.

As we said in the script, Craig, we had resolution of a tax matter.

And probably best that we look at this once the Q is out in a little bit more detail.

But the net effect of that resolution not a lot of money and not material but it does provides for movement both in our tax liability line and our related interest line.

So the difference there, the main part of the difference there is really accounted for by that resolution of a tax matter.

What about the foreign currency translation in the balance sheet items, did that impact the quarter, it tends to bounce around?

It did.

And if you look at the other part of the line looking sequentially the first quarter of 2009, we had a reduction in that line of $4.7 million from FX or FX loss if you want to call it that of $4.7 million.

And that number widened out to a loss of $6.4 million in the second quarter.

So yes, you are correct.

Okay.

On the cost if you could, can you break out for us how much collectively your incentive and stock based accruals were in the second quarter?

And what was the same number in the first quarter?

Yes.

Just a second here while we find that for you.

Incentive compensation in the first quarter of 2009 was 6% of total compensation.

And that number's moved up to 8%, for the second quarter of 2009, and Craig that reflects that the accrued compensation as we go based on performance, and as you can see we had a good pick up in the operating income line and some of our other lines in the second quarter.

So we increased the percentage there for incentive compensation, and the difference comes to about $5.1 million of increase for the second quarter over the first.

And we will see how that accrual rate goes for the back half of the year.

We'd also like to flag for all the analysts on the call this year we are paying out bonuses or we would expect to pay out bonuses, it's something that's approximates 50% of our normal sort of targets.

As performance of the company improves and particularly as we're planning for 2010, we would expect that that bonus number is going to have to pick up in the range of $40 million to $45 million.

So we just want to make sure everyone in modeling 2010 is taking that number to account and thinking about that roll forward for next year, if we are fortunate enough to deliver good results to the shareholders and to be able to do better for our employees.

Yes, so just to underscore Linda's comment, this is a on a target to target basis, there would be a $40 million to $45 million increase looking at 2010.

Okay.

Then can you also, like Peter was asking, about your guidance, it certainly seems conservative, given you earned what $0.40, clean number in the fourth quarter when the world seemed to almost stop, $0.41 in the first quarter.

Can you talk about the bullish case of why that wouldn't actually be exceeded in the second half of the year?

Talk about the negative side, but the positive case here.

Sure.

I guess the positive case is fairly easy to make by just describing the absence of negative cases.

We -- so far this year, we have only really seen strength in issuance activity coming out of the corporate finance sector and some parts of infrastructure finance.

So the drivers of growth have been limited even though especially in corporate it has been powerful.

If we were to widen out issuance activity and see stronger issuance coming out of the financial institution sector, the structured finance sector and public finance, that would be certainly a boost to revenue, and we are looking more to the Moody's investor service side rather than Moody's analytics where I think the possibility for significant surprises is less.

Our current outlook does not assume any significant pick up in activity in any of those lines.

And as I was describing to Peter, is assuming that first half issuance activity in corporate finance is going to be larger than second half issuance activity because of the refinancing and prefinancing combination that we believe was pulled into the first half.

So it would be on the rating agency side and it would be an uptick in activity across anyone of a number of lines which have been soft in the first half of this year.

Okay.

Craig, it's Linda, if you wanted to usually you ask me more detail on the corporate finance line.

Let me further pick up on what Ray was saying.

If you look at it sequentially from the first quarter 2009, we did $84 million on the corporate finance line and as we said in the second quarter we've done $107.5 million in fact, of that the percentages investment grade is 30% of that, but high yield is 24% of that, up from 7% in the first quarter.

Bank loans 6% and other is 40%.

So we would love to see the high yield pace continue, but high yield as you know tends to be quite choppy and very much affected by market conditions.

So if things break our way and we do continue to see increased high yield issuances that would be helpful, but again we would rather not count on those sorts of things.

Do you think it's reasonable to expect corporate finance to be comparable to the first quarter as opposed to the very strong second quarter, each of those two quarters?

Well the investment grade corporate finance was very strong in the first quarter.

And remember that in investment grade we have more frequent issuer pricing agreements, and there is going to be more capping of fees over the course of the year.

So frankly we would benefit more by continued strength in high yield activity rather than investment grade activity.

And even in high yield just to offer a little bit of caution, there is some cannibalization in high yield from the rated bank loan market into the high yield bond market.

Still it's very much a positive if we continue to see issuance in the third and fourth quarter in high yield like we saw in the second quarter.

Okay.

Thank you.

We will go next to Michael Meltz with JPMorgan.

Thanks.

I think I have three questions for you.

Ray, you spoke a lot about corporate and financial institutions, I actually think complicit in your guidance structures is the one category you expect to pick up as the year goes by.

Can you talk about what you are seeing on an absolute revenue basis, what you are seeing there?

And I think back on your investor day, Andy had made some comments about market share, are you feeling better about market share?

And then I have two followups.

Okay.

With structured finance, we really don't anticipate material pickup.

We may see a little bit as there is both use of the TALF program and potentially some additional issuance in the asset backed sector on a nonTALF basis.

But the bottom line is we do not expect any significant ramp up in activity in structured finance.

We do have pretty good visibility into structured finance as far as the monitoring and surveillance fees are concerned.

So an uptick in transaction activity there would be beneficial to us and would contribute to a favorable surprise.

With respect to market share, market share in some areas is down, and that is related to the use of government programs, one, which don't distinguish between rating agencies the way private sector investors might, and secondly institutions doing balance sheet transactions where they are not trying to sell those transactions out to an investor base, and so they are perhaps less concerned with what whether they are holding a Moody's rating or a rating simply from another firm that can offer the rating level they are seeking.

So for this period when we have a somewhat if not artificial unusual investor story for structured finance, I think we are going to continue to see some market share challenges.

Okay.

Sorry, Mike, I was going to follow up with the breakouts if you wanted them by categories would that be helpful to you?

I don't really cares.

Someone else might.

I didn't mean that too negatively.

I can get it offline.

My question for you -- your point about bonuses or incentives, for incentives to double what type of revenue growth target would that imply?

I think we would like to see the company get back to the type of revenue growth that we had seen in previous years, but I will let Ray comment.

Michael, we have to distinguish between what would cause a bonus or an incentive payout that would be twice target versus our return to target in the bonus plan and accruals that we make.

We discounted our target bonuses this year.

And we -- in a recovering market in 2010 and beyond, we would intend to return to our full bonus targets.

I don't know what that means, Ray.

You use to say in a normal year you'd be accruing at 15%.

Yes.

That's approximately right.

And right now we are at 8%.

Okay.

Linda, your -- the nonoperating line, I don't think anyone really understands that.

Can you give us as you sit here today in the back half of the year what's a good run rate of expected interest and nonoperating expense, please?

Sure, Michael, that's the hardest line to project forward because we've got obviously a lot of ins and outs there, FX piece bounces around.

We have the expense on borrowing line would probably be one of the more consistent ones and that runs slightly over $10 million, closer to $13 million per quarter.

So you can pretty much look at that one unless we make some big change in our capital structure which we don't anticipate that one is pretty -- you're able to count on that one.

Legacy tax and FIN 48, as you know we are working on resolving some of our tax matters so we had a little bit of movement in those between the first and second quarter.

I think the best way to describe this is that the total of that line was hit by $2.8 million between the first and second quarter.

And then going on we do have other pieces on this, for the second quarter, FX was $6.4 million loss, generally as the dollar strengthens that will move against us, so you've got to gauge that accordingly to what is happening.

We have income from joint ventures which is a little over $1 million, and sometimes we have some other costs.

So the $12.6 million that we are looking at for the second quarter is up from the $7.3 million from -- is more, is an increase in expense over the $7.3 million from the first quarter, so you can take a range somewhere in there.

Again that's going to be difficult to pinpoint exactly.

Okay.

My last question for you, I promise, the -- yesterday I think McGraw had mentioned their legal situation, they said they have over 30 lawsuits outstanding.

Can you give us an update, Ray, however you want to address it, where do you stand on some of the legal issues, please?

Well the details on what we think are relevant litigation will be included in our 10Q.

I don't think you will see dramatic changes from what we have described previously.

But, yes, we do have litigation, some of it is has been publicized more than others of it.

And I would be surprised if ratings related litigation between ourselves and competitors looks dramatically different.

So that's as much as I can give you for now until the Q comes out.

Thanks for your time.

We'll go next to John Neff at William Blair.

Hi, thanks.

Linda, a question for you.

We get to see a meaningful uptick in your DA expense, can you give us an update on where you stand with Canary Wharf and CapEx year to date versus your full year expectation.

Sure.

We are -- let me see if I can find this.

Canary Wharf is approaching its end.

And through the end of the year we will continue to run a double rent expense, John, which runs about $2 million per quarter, it's about $.75 million per month, so that runs off at the end of the year.

We are getting ready to start to move about 800 people over to the new location, we are starting those moves after Labor Day, we're going through mid October.

And the team will be occupying five floors over at Canary Wharf on the terms of a good deal that we were able to negotiate with them.

So we have said that the cost for that was about $40 million to $50 million in total.

And we are looking at a more normalized CapEx run rate of $60 million to $70 million going forward.

We are trending upward because we are building out some system improvements that we've talked about.

Some of those are good business sense to do them.

Others have some interaction with our compliance activities, so as we build out the systems we capitalize those obviously and the DA number will move up a bit.

But the bulk this year, you're correct, has been Canary Wharf, we are almost ready to move.

Okay.

We are seeing that expense in the DA associated with Canary Wharf at this point, so there is no reason to suspect there is going to be a step function up.

I think that you may see a bit as we bring all of it on line.

But stay tuned as we get to our Q and we will talk to you more about that, John, if that's okay.

Okay.

Ray you mentioned market share and I was going to ask you specifically about RMBS, where it looks like there has been some dramatic changes there, granted on very low transaction volume, but DBRS and Fitch seemingly large increases there.

I was wondering if you could speak to the dynamics you are seeing in that market in particular.

Well, the first comment would not be we are not seeing much of a market there.

So I'm not terribly concerned about the transaction or couple of transactions that have come to market.

But we have changed our methodologies and approaches to rating RMBS, I think we are well positioned with that when the market returns to a state of better health in terms of being able to persuade investors that our analysis is rigorous, robust.

And so we are going to wait.

And when that happens I think we are if I think going to be able to make the case affectively that the rating Is we are stride on those securities are going to be the best ratings available.

So stay tuned.

Great.

Another one kind of related to the asset backed market but two recent CNBS deals in the UK, curious were those rated by Moody's and how hopeful a sign is that for the CNBS market?

To tell you the truth I don't know if they were rated by Moody's.

I don't know if Michel Madelain who is on the phone is aware.

We rated one of the two.

The way we look at those deals out there, they were very simple structure, single asset and we see that as the way CNBS would return at least in Europe in four months we expect to see.

Again I don't think we are not anticipating any real strength in CNBS issuance activity in the second half of the year.

And then could you just remind us as far as incentive comps and bonuses are concerned, what are the key financial metrics that the bonuses are tied to?

Well, for management the bonuses are tied to the operating income of Moody's Corporation, that's for the Moody's Corporation management and then operating income for Moody's investor service or Moody's analytics are the financial measures.

We also have a number of qualitative measures for -- that help to guide performance paths.

There is also an EPS measure for a small number of the senior executives of the firm.

Great.

And then last question here.

Just for the record, will Moody's lose any revenue as a result of the prohibitions that are coming out and the regulatory reform against rating agencies advising on or structuring bond?

Thank you.

Yes, I looked at that in the draft bill and I guess there are a couple of reasons why I don't think so.

But let me start with just the comment that our consulting or professional services line in Moody's analytics would be the only thing that is potentially effected.

And a good bit of that line is in fact nonconsulting activities, having to do with things like credit training, that we do out of that line.

So it's the smallest line at Moody's analytics and a good portion of that is in fact unrelated to consulting.

So I'm not too concerned even if the decision is made that we cannot do that, but I don't think that that is going to be the conclusion, I think there is going to be much of a focus on not conducting consulting activities out of the rating agency and not conducting consulting related to ratings out of any part of the firm.

And I think we are on very safe ground on both of those points.

We'll go next to Edward Atorino at Benchmark.

Actually my questions were answered it had to do with that other line which I always ask.

I let someone else ask it.

Thanks.

Bye.

And we'll go to Craig Huber at Barclays Capital.

Yes, Linda, I will take you up on the offer just to hear the breakdown of the structured finance revenues on the quarter.

Okay.

Let me find it again.

My feeling were a little bit hurt that Michael rejected the information.

But we will try to get over that and move on.

For second quarter structure remained pretty flat sequentially, Craig, which I know you like to look at.

Total FFG was $74.6 million as compared to $72.4 million in the first quarter.

And the percentage breakouts go like this: asset backed for the second quarter was 34% of that total as compared to 31% in the first quarter.

So as we said we seen a little bit of improvement in the asset backed line and not a lot, but that's the positive there.

RNBS is 19% for the second quarter as opposed to 18% in the first quarter.

Basically flat.

Commercial real estate is 13%, versus 15% in the first quarter.

And derivatives is 34% opposed to 36% in the first quarter.

And again [74.6] as compared to [72.4].

So it's pretty flat.

And yes, obviously it would be helpful to have some uptick in the structured finance line, but we've planned that we will continue to see very modest revenue from the structured finance line for the rest of the year.

Before I ask you about finance institutions, in the past, Ray, you said basically in your structured finance you thought permanently going with $200 million to $250 million of your revenues, then you said 10% to 12% of ratings revenues in 2007 for the whole company.

Can you give us update on that, that number seems low to me nowadays, $200 million to $250 million.

What do you think?

I have not done a formal update of my original analysis, Craig.

But I would agree with you, I think that is light at this point.

My range I guess would probably if we go back and look at 2007, total revenue for the firm of $2.26 billion.

I'd say probably we're looking at more like 15% to 20%.

Maybe a $400 million kinds of number for the reduction in structured finance, once it gets back to a recovery condition and looks more normal.

Okay, then Linda can you give us breakout of financial institutions?

Sure.

Yes.

Financial institution revenue for the second quarter of 2009 was $67.3 million, sequentially that's up from $56.3 million in the first quarter.

As we had talked about we seen sort of a hesitation or a postponement in revenues.

For banking in the second quarter we are looking at 65% of that total line versus 68% in the first quarter, so that's off a bit.

Insurance is up a bit, 31% versus 27% in the first quarter.

And managed investments is 4% versus 5% in the first quarter.

So a little bit of movement there and a little bit of improvement but again modest .

And then while I have you how about breaking down the project public line, please?

Okay.

Then I'll let you go.

Okay.

Craig.

That's up a bit sequentially, we're at $60.8 million versus $57 million for in the first quarter.

And your favorite line here Craig, PFG sovereign represented 49% of that total in the second quarter versus 52% in the first quarter, so that;s down a bit.

Municipals was 9% in the second quarter versus 11% in the first.

So again a little bit of a modest decrease, and project and infrastructure moved up nicely to 43% from 37% of that revenue line in second quarter over first quarter.

Great.

Thank you.

And we'll go next to Peter Appert at Piper Jaffray.

Ray, on the issue of competitive dynamic, have you seen more push back from clients in the context of either playing the competitors against each other or just more sensitivity to pricing in the context of a difficult macroenvironment?

I don't think it's sensitivity to pricing as it is the operating conditions that have been offered to the market under those government programs, whether it's the TALF program which requires AAA ratings or whether it's the European Central Bank program, which also requires AAA ratings.

It simply causes firms to have to look for a AAA, and that's frankly understandable because that's how they can have eligible securities.

And in addition once they've made that determination I think naturally they are going to look for the easiest to achieve AAA.

Again I don't think that's surprising.

It's not about pricing it's about who can give me the rating.

It's who can give me the rating and what are my all-in costs including the overcollaterallization or collateral posting that has to go along with it.

You haven't seen the basis point fees vary dramatically this year versus a year ago?

No.

That's -- the direct ratings cost are a very small part of these transactions costs, so that's not where the pressure is coming.

It's on the ratings themselves and on collateral to support those ratings.

Thanks, Ray.

And that does conclude today's question-and-answer session.

At this time I would like to turn the conference back over to Mr.

McDaniel for any closing remarks.

Just want to thank everyone for joining us today, and say that we look forward to speaking with you again in October.

Thank you, everybody.

And that does conclude today's conference, again, thank you for your participation.