穆迪 (MCO) 2011 Q2 法說會逐字稿

Good day and welcome ladies and gentlemen to the Moody's Corporation's second quarter 2011 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 question and answers following the presentation.

I will now turn the conference over to Raya Sokolyanska, Vice President Investor Relations, substituting for Salli Schwartz.

Please go ahead, ma'am.

Thank you.

Good morning everyone and thanks for joining us on this teleconference to discuss Moody's second quarter results for 2011.

I am Raya Sokolyanska, Vice President of Investor Relations, substituting for Salli Schwartz.

Moody's released its results for the second quarter of 2011 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 mornings conference call.

Also making prepared remarks from 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 toward the end of our earnings release.

Today's remarks may contain forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995.

In accordance with the act, I also direct your attention to the management discussion and analysis section and the risk factors discussed in our annual report on Form 10K for the year ended December 31, 2010.

And in other SEC filings made by the Company, which are available on our websites and on the Securities and Exchange Commission's website.

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

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

I will now turn the call over to Ray McDaniel.

Thank you, Raya.

Good morning and thank you to everyone for joining today's call.

I'll begin our remarks by summarizing Moody's second quarter 2011 results.

Linda will follow with addition financial detail and operating highlights.

I will then speak to recent regulatory developments and finish with comments on our outlook for 2011.

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

Second quarter revenue of $605 million increased 27% over the prior year, reflecting gains across the ratings business, particularly for corporate debt and continued strong performance for Moody's analytics.

All reported units within Moody's Investor Service and Moody's Analytics grew in the second quarter of 2011 from the same period in 2010.

Operating income for the second quarter totaled $270 million, 42% of above the prior year period.

Diluted earnings per share for the quarter of $0.82 increased 61% year-over-year and included a benefit of $0.06 resulting from a foreign tax rule.

Based on strong second quarter performance, we are raising our full-year 2011 EPS guidance to a range of $2.38 to $2.48 from the prior range of $2.22 to $2.32.

However, we expect more challenging debt issuance conditions in the US and Europe in the second half of the year as compared to the first half.

Turning to year-to-date performance, revenue for the first 6 months of 2011 was $1.2 billion, a 24% increase from the first half of 2010.

Expenses were $662 million, up 17%, and operating income of $520 million increased 34% from the prior year period.

Revenue at Moody's Investor Service for the first 6 months of 2011 was $851 million, an increase of 28% from a year ago.

Moody's Analytics revenue was $332 million, 14% higher than the prior year period.

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

Thanks, Ray.

I'll begin with revenue at the Company level.

As Ray mentioned, Moody's total revenue for the quarter increased 27% to $605 million.

Excluding the favorable impact of foreign currency translation, revenue grew 23%.

US second quarter revenue increased 20% to $315 million while revenue outside the US grew 34% to $290 million and represented 48% of Moody's total revenue.

Recurring revenue of $309 million represented 51% of the total, compared to 59% in the prior year period.

Looking now at each of our business, Moody's Investor Service revenue for the quarter was $438 million, a 33% increase year-over-year.

Excluding the favorable impact of foreign currency translation, revenue grew 29%.

US revenue was up 26% over the prior year period while outside the US, revenue grew 44% and also represented 44% of total ratings revenue.

Global corporate finance revenue, in the second quarter, increased 56% from a year ago to $200 million.

Revenue grew 43% in the US, while outside the US, revenue increased 85% year-over-year.

Growth was driven by strong issuance in investment grade and speculative grade bonds and bank loans.

Global structure finance revenue for the second quarter was $86 million, 18% above the prior year period.

In the US, revenue increased 8% year-over-year, primarily due to strong issuance growth and commercial mortgage backed and asset backed securities.

Other areas of the US structured finance market, including residential mortgage backed securities, remained weak.

Non-US structured finance revenue rose 28%, reflecting higher issuance volumes than European asset backed and mortgage backed securities, including covered bonds.

Global financial institutions revenue of $79 million increased 25% from the same quarter of 2010.

US financial institutions revenue increased 27%, driven by increased banking and insurance issuance from smaller sized institutions, while non-US revenues increased 24%, spurred by stronger backed banking activity in all regions.

Global revenue for the public, project and infrastructure finance business grew by 13% year-over-year to $73 million.

Revenue increased 7% in the US, reflecting growth in the infrastructure finance, partially offset by continued weakness in public and project finance issuance.

Non-US revenue increased 25%, primarily driven by growth in infrastructure finance.

And turning now to Moody's Analytics, global revenue for Moody's Analytics of $167 million was up 12% from the second quarter of 2010.

The impact of foreign currency translation was negligible.

US revenue grew by 4% year-over-year to $70 million.

Non-US revenue increased by 18% to $97 million and represented 58% of total Moody's Analytics revenue.

Globally, revenue from research, data and analytics of $111 million increased 6% from the prior year period and represented about 66% of the total MA revenue as we continued to see good demand for products across our portfolio.

Revenue from risk management software of $40 million increased 2% over last year's strong second quarter performance.

Due to the variable nature of project timing and the concentration of revenue in a relatively small number of engagements, risk management software revenue remains subject to quarterly volatility.

Professional services revenue more than tripled to $16 million, reflecting the acquisition of CSI Global Education in November 2010 as well as strong results in the base business.

Moody's second quarter expenses were $335 million, an increase of 17% compared to second quarter 2010, or a 13% increase including the negative impact of foreign exchange translation.

Expense growth was primarily driven by increased head count, including from the acquisition of CSI Global Education, and higher accruals for incentive compensation and Moody's profit sharing plan reflecting the full -- stronger full year outlook.

Moody's reported operating margin for the quarter was 44.6% compared with 39.9% in the second quarter of 2010.

Our effective tax rate for the quarter was 27.8%, compared with 31.1% for the prior year period.

Decrease was driven by lower taxes on foreign and state income and a recent favorable tax ruling partially offset by a smaller benefit in 2011 for legacy tax matters.

Now, I'll provide an update on capital allocation and stock by-backs.

During the second quarter of 2011, Moody's did not repurchase any shares and issued 0.9 million shares under employee stock-based compensation plans.

Outstanding shares as of June 30, 2011 totaled 228.7 million, representing a 2.4% decline from a year earlier.

As of quarter end, Moody's had $1.1 billion of share repurchase authority remaining under its current program.

As of June 30, Moody's had $1.2 billion of outstanding debt with $1 billion of additional debt capacity available under our revolving credit facility.

Cash and cash equivalents were $939 million, an increase of $453 million from the prior year period.

Approximately 70% of our cash holdings are maintained outside the US.

We remain committed to using our strong cash flow to create value for shareholders while maintaining sufficient liquidity.

We expect to resume share repurchases in the second half of 2011 subject to available cash flow, market conditions and other ongoing capital allocation decisions.

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

Thanks, Linda.

I'll continue with an update on legislative and regulatory developments.

First in the US, as discussed last quarter, the principal regulatory activities in 2011 will be SEC rule making under the Dodd-Frank Act.

The majority of rule proposals regarding regulation of NRSROs were published in May with a comment deadline of August 8.

These rule proposals include requirements on reporting of internal controls, analyst training and transparency of ratings related information.

The SEC has also published a request for comment regarding the feasibility of establishing a system for assigning an NRSRO to determine one of the credit ratings for structured finance products.

This is generally know as the Franken Amendment.

That comment deadline is September 13.

And yesterday during an open hearing, the SEC adopted rules that remove references to credit ratings in certain rules, forms and communications made by issuers under the securities laws.

This action is consistent with Moody's long-standing recommendations.

While new rules entail various changes in our rating agency processes and operations and require us to adapt our business, we will not alter our fundamental business objectives to provide the highest quality credit opinions, research and analysis.

Turning to Europe, the transfer of oversight of registered credit rating agencies from national regulators to the newly established European Security and Markets Authority, or ESMA, is effective as of this month.

We have submitted an application for the registration of our EU based entities and for authorization to endorse our non-European credit ratings so that they qualify for regulatory use by EU regulated entities.

We expect the review of Moody's registration application to be concluded before year end.

The European commission is expected to propose new rules for the rating agency industry in the coming months regarding matters that include the use of ratings and regulation, business models, sovereign ratings, liability and competition.

Finally, on July 20, European Commission published its preliminary proposal on bank capital which seeks to implement Basel 3.

The proposal focuses on 3 new elements -- provision of sanctions, effective corporate governance and provisions preventing the over reliance on external credit ratings.

As regulatory reviews and activity occur in other jurisdictions, we will continue to advocate for globally consistent approaches that align with the G20 statements and directives.

I'll conclude this morning's prepared remarks by discussing our full year guidance.

Moody's outlook for 2011 is based on assumptions about many macroeconomic and capital market factors, including interest rates, corporate profitability and business investment spending, mergers and acquisition activity, and consumer borrowing and securitization.

There is an important degree of uncertainly surrounding these assumptions and if actual conditions differ, Moody's results for the year may differ materially from our current forecast.

As mentioned earlier, we are revising the EPS guidance upward for the full-year 2011 to a range of $2.38 to $2.48, reflecting stronger than expected second quarter performance, partially offset by expectations from more challenging debt issuance conditions in the US and Europe in the second half of 2011, as compared to the first half of the year.

For Moody's corporation, we now expect full-year 2011 revenue to grow in the low teens percent range.

Full year expenses, including the impact of higher accruals for incentive compensation in Moody's profit sharing plan, are now projected to increase in the low double digit percent range.

The full-year 2011 operating margin is still projected between 38% and 40%.

Our effective tax rate is now expected to be approximately 33% for the year.

Our revenue expectations for certain areas of change based on conditions specific to those businesses and geographies.

My comments will primarily highlight those components that have been revised and we refer you to our earnings release for a full review of our 2011 guidance.

Our full-year outlook assumes foreign currency translation at end-of-quarter exchange rates.

At Moody's Investor Service we now expect revenue to increase in the low teens percent range globally with high single digit percent growth in the US and growth internationally in the low twenties percent range.

Revenue is now projected to increase in the mid twenties percent range in corporate finance and in the high single digit percent range in structured finance.

Public project and infrastructure finance revenue is now expected to remain about flat to last year.

Global revenue of Moody's Analytics is now expected to grow in the low double digit percent range with that growth reflected both in the US and internationally.

That concludes our prepared remarks.

And joining us for the question and answer session is Michel Madelain, President and Chief Operating Office of Moody's Investor Service.

Mark Almeida, the President of Moody's Analytics, is traveling today and will not be on the call.

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

(Operator Instructions)

And we'll go first to Peter Appert with Piper Jaffray.

Thanks.

So, Linda, I'm wondering in the context of how robust the margins were in the current quarter, if you are rethinking your expectations in terms of where you think a reasonable level of margin might be over the next couple of years?

Peter, thanks.

Over the next couple of years, I think we said we'd hope to, over time, return to the low 40s.

But for the second half of this year, most immediately, we're expecting to see a little bit of margin compression in the back half of the year.

Looking at our guidance, you've probably inferred that we're expecting some revenue growth slow down from the first half of the year to the second half of the year.

And as we mentioned on the first quarter call, we will continue to ramp expenses.

So, we may find that the margin will suffer a bit of contraction before we hopefully return to expansion mode.

And when you say compression, are you meaning versus first half or are you meaning on a year-to-year basis?

Mean versus first half.

The first half I think we're running at 44.3 for the year for margin.

And let me give you the actual numbers here so that I'm sure that everybody understands where we are here.

We do expect a revenue slow down in the second half of the year as compared to the first half.

And you'll recall we have tougher comparables as well in the third and fourth quarter when revenues strengthened last year.

So for the first half of the year, we've done $1.182 billion in revenue.

And we're expecting that we'll probably see somewhere between $50 million to $75 million less in revenue for the second half.

That will be up in the mid-single digits over last year's second half, but again, the pace of growth is moderating.

Then on the expense side, if you go back to the first quarter call, you'll remember that I said that the first quarter expenses were in fact $327 million for the first quarter and we're expecting that ramp to increase by $40 million to $50 million for the expense number when we get to Q4.

So, the 2 trends taken together, earnings a little bit -- earnings growth a little slower and ramping expense growth will probably cause margin contraction for the back half of the year.

Got it.

And then, Linda, just as a housekeeping issue, the $0.06 tax benefit from the foreign tax ruling -- are you including that benefit in the revised guidance?

Yes.

You should use a 33% tax rate rolling forward.

We had 2 beneficial items, 1 was a resolution of the legacy tax matter for $0.03 and then that foreign tax ruling that you correctly mentioned, Peter, which was $0.06.

You're including -- all $0.09 is in the revised guidance.

Correct.

That's correct.

Okay.

Got it.

And then lastly, Ray, can you just give us an update on the litigation front.

You've had some pretty good success, I understand, recently?

Yes.

There are a couple of things from the quarter that I think are probably worth highlighting.

First of all, because the case is visible, I'd just point out that on the CalPERS matter, the hearing that was originally scheduled for August 23 has been postponed to September 8 and 9.

We don't know that there will be any ruling consistent with the timing of that hearing but that is when the hearing is going to be heard on CalPERS.

In May we had a court of appeals decision affirming the dismissal of 3 separate cases that we've referred to in previous calls as the 33 Act cases that would seek to hold rating agencies liable as underwriters under the 33 Act.

The court of appeals -- the second circuit court of appeals affirmed the dismissal of the 3 separate cases that it was reviewing.

So that was very good news.

And then just recently in July, we had the second circuit, again, saying that plaintiffs in a shareholder action that they were seeking to establish class action status for could not appeal the decision disallowing them to represent other shareholders as a class.

So those would be the -- I think, the 3 cases that are worth noting from the most recent quarter.

Thanks, Ray.

We'll go next to William Bird with Lazard.

Good morning.

I was wondering if could just you talk a little bit about the implied guidance for the second half.

Is it based on what you're seeing now?

And, also, how if you risk the numbers relative to a potential US downgrade?

Thank you.

Sure, Bill.

The -- I think it's appropriate to characterize the pipelines now as reasonable.

They are not as -- certainly in the corporate area, are not as robust as they were earlier in the year but they're still pretty good, especially for investment grade issuance.

And I'll offer some broader comments in just a moment.

But I would also characterize the public finance pipeline as reasonable, although it has been soft for most of this year.

So, there has been a pickup but it was off of a low base earlier in the year.

And, then, in structured finance, again, the pipeline looks pretty good but it has some areas of strength and some areas where there is continuing weakness.

So, I would say that's the area where our outlook for the second half of the year is probably the most uncertain and may imbed the most upside potential as against our current expectations.

But beyond the pipe lines, which, again, I'm characterizing as being pretty good, are questions about whether there are going to be temporary market dislocations associated with some of the sovereign debt issues, either in Europe or here in the US.

And we're looking at situations that we think are somewhat analogous to when we saw market slow down a year ago when the initial problems with Greece surfaced and there were temporary slow downs and debt issuance.

We wouldn't be surprised to see that again in the second half this year, although we do believe that those would be temporary.

And then whether there would be a slow down in issuance associated with any rating action on the US government, I think while there is not a direct linkage between most of the corporate and private sector ratings that we do assign, there are some areas where there are linkages, whether it's with government-sponsored enterprises or municipality states.

And we would assume that there would be, in the event of a rating action on the US government, again, some market dislocation and we would have to see how quickly any resolution about the debt ceiling problems in the US were resolved, how quickly those actions were taken and what the longer term plan around these sovereign debt situations in the US would be in order to better forecast what the impact would be on the financial markets more broadly.

Great, thank you.

And I was just wondering if you could touch on refinancing?

Clearly there was quite a lot of activity in Q2.

I was wondering if you have any sense of just how much of the future activity got pulled forward?

Yes, we certainly believe that Q2, really the first half of this year, has been characterized by pull forward of debt financing.

Earlier in the year, from later this year, and then more recently from 2012.

So, a lot of the debt that would have been maturing in 2012 has been refinanced.

But there is still a large amount of debt that is scheduled to mature in 2013 through 2015 that is going to have to be refinanced and we would expect to see pull forward of that as we move later into this year and then into 2012 before potentially interest rates or spreads widen and financing costs rise.

So, there is a substantial amount of debt to be refinanced.

In terms of where we would see up side in the corporate area, it's really not the refinancing at this point though.

I think we would want to see a resumption of business spending, business confidence and merger and acquisition activity to continue as it has in the first half of 2011.

And that would provide some up side potential to the corporate sector.

Great.

And just final question, Linda, I was wondering if you could give us the incentive comp accrual.

Thank you.

Sure.

Bill, as we had said, obviously we've increased our guidance and that really results in 2 things.

First our incentive comp accrual goes up and, also, we've instituted profit sharing because EPS growth has, at this point, exceeded 10% for the year.

The profit sharing number which is for right now a little under $2 million, you can see in the salary and benefits line.

The incentive comp number for the second quarter 2011 was $35 million and for this quarter last year it was $18.3 million, reflecting, obviously, we've had a very strong second quarter this year.

And last year's second quarter, as Ray had described, was characterized by the air pocket, as we call it, around Greece so we had a much lower incentive compensation number last year.

Thank you very much.

We'll go next to Michael Meltz with JPMorgan.

Thank you.

Linda, can you clarify the -- Peter's question about the guidance?

The EPS you're basing it on to get to that $2.38 to $2.48 -- that's the $1.46 you did non-GAAP in the first half or the $1.49?

It's the $1.49 GAAP.

We do our guidance by GAAP, Michael.

Okay.

And then, just to understand a little bit more on what you're saying about the near term expectation, is there -- is Q3 looking -- just, Ray, I guess you said reasonable then you said pretty good pipeline.

And you're looking at a pipeline of what could get done based on what issuers have -- your discussions or how are you thinking about it?

Because I guess we're sitting here thinking the world's ending and it's an ugly place out there but it sounds like you still expect a good amount of issuance.

You expect revenues to grow in the second half.

Can you just talk little more about what you see?

We do expect year-on-year revenue growth in the second half.

We do not expect it to be the kind of growth that we saw in the first half.

But it's -- we're not expecting a significant downturn in our business at all.

In fact, as I said, we're expecting it to continue to grow in the second half of the year.

We do think there are higher than normal likelihood of short-term disruptions.

We've been seeing that over the last 12 months to 18 months and it doesn't look like any reason to say we think those periods of disruption are past us.

There continues to be stress in Europe and the European public sector and obviously we have the issues here in the US that have been in the headlines.

So, there is a -- I would say a higher than usual degree of uncertainty about exactly what the timing is for returning to greater market stability and what the conditions will be that have lead to that greater market stability, based on policy actions in the US and developed Europe, both.

Okay.

Linda, a question for you on capital allocation.

Why was there no repurchase in the quarter as the stock pulled back?

And now you're sitting here, the stock's gotten tagged a bit -- I mean, how should we be thinking about the extent of share repurchase activity going forward?

Sure, Michael.

It was a much simpler explanation.

When we have material information that the market doesn't have, we're precluded from being in the share repurchase market.

And that was the situation for most of the second quarter.

As I said, we're expecting to resume share repurchase for the back half of the year and we have plenty of approved capacity and we have plenty of cash.

Okay.

Thank you.

We'll go next to Craig Huber with Access 342.

Yes, good morning.

Thanks.

As I typically like to ask, Linda, can you just give us the transaction versus nontransaction percentages for structured finance, corporate, financial institutions and PPIF?

And I have some follow-ups.

Thanks.

Sure.

I'll give you the percentages, as you said, Craig, for transaction and then relationship.

We'll start with structured.

For the second quarter of 2011, transaction was 51%, relationship 49%.

Corporates on the back of the very strong issuance 76% transactions, 24% relationship.

Financial institutions 38% transactions, 62% relationship.

PPIF, 59% and 41%.

Total for the rating agency for the second quarter, 61% transaction and 39% relationship.

MA, if you know, Craig, kind of runs the other way, 16% transaction, 84% relationship.

And as we said in the script, the total for the Company was 49% and 51%.

Then also, Linda, if you would, another way you break down the revenues within structured finance and the other categories via ABS, RMBS [craft] and derivatives and if you could break down the corporate finance -- financial and peak MIF as well -- that way, by percentages?

Yes, sure.

Let me do corporates first, Craig.

Investment grade for the second quarter was 19% of the total corporate revenue.

Spec-grade high yield was 23%.

Bank loans 22% and other was 37%.

And in fact, corporates represented 46% of the rating agency revenue.

If we look at structured, the asset back line was 32% of the structured total.

Residential mortgage backed securities, and this includes covered bonds on a global basis, was 26% of the revenues.

Commercial real estate was 20%, derivatives was 21% and structured represented 20% of the total rating agency revenue.

Financial institutions, banking, represented 68%.

Insurance 24%, and managed investments 8%, and [FIG] with a total of 18% of the MIS revenue.

And PPIF, the public finance and sovereign, 47%.

Muni 7%, project and infrastructure 46% and PPIF with a total of 17% of the rating agency revenue.

Do you want analytics as well, Craig?

I think we have that from the press release.

Yes, okay.

Okay.

Appreciate that.

I'm just curious as well.

You did hit on this but is there anything else you can tell us more specifically why you didn't buy back any stock in the quarter?

I mean, whatever you're alluding to here, is it in the marketplace now so you're allowed to buy back stock in the third quarter or are you still on hold?

Yes.

As of today, it's in the marketplace now.

Okay.

We had choppy issuance conditions and, frankly, it was unclear where we were going to go with our guidance.

So, we weren't in the market.

That's the story.

And then, lastly, on the cost, if I heard you right, are you trying to say that your total cost by the fourth quarter will be up $40 million to $50 million versus, say, what you were at in the first quarter?

Is that what you're trying to say?

Right.

Total expenses for $327 million in the first quarter and we're going to ramp throughout the year.

And so we're looking at another $40 million or $50 million on top of that $327 million by the time we get do Q4.

Call it $367 million, $377 million, something like that.

Great, thank you.

We'll go next to Doug Arthur with Evercore.

Yes, Linda, just on the cost side again, SG&A has been ramping at a 15% to 20% rate for 4 or 5 quarters in a row.

This specific quarter was only up 4%.

Anything changing there?

Not particularly.

We have added to our efforts, obviously, to drive the Moody's Analytics business but nothing particular there.

A little bit of pop up in T&E expense but nothing of great note there, Doug.

Yes, I mean it just seemed like all of a sudden it kind of leveled off.

I know we've spent a lot of time on second half expenses but it's just kind of a strange trend.

And then, Ray, can you specifically address the bank loan ratings market within corporate?

I mean, that was huge and it's really been huge now year-over-year or 6 or 7 quarters in a row and appears to have been another big boomer in the second quarter.

What's going on there and what is your outlook there for the second half?

Sure.

The -- what has been going on there is, I think, 2 things.

One, I think the rated bank loan sector is an area where we are gaining share as compared to the unrated sector.

So, the number of bank loans that are being rated as a percent of the total stock of bank loans is growing.

There has also been significant amount of bank loan activity so the stock itself has been growing.

And in particular, I would point to Europe and what I think is a longer term secular disintermediation trend and a move to having bank loans rated and available for a wider investment population than historically would have been the case.

We did have very significant amount of bank loan activity in the first half of the year.

We don't think it's going to, again, maintain that pace although it's going to continue to be a strong area for us in the second half of the year with the US being stronger than Europe is our current expectation.

Well am I right to look at it this way, that if the public markets, which are clearly softened here near term, remain that way at least through some resolution of the debt ceiling that the bank loan market is -- could continue to operate at a fairly strong level separate from that?

Yes.

I would agree with that on a longer term basis.

Whether we will have the kind of bank loan activity in the second half of this year compared to the first half, I would have to say, no.

We don't think we will.

But, again, it's a secular story, I think, more than a cyclical story.

And so we are -- we believe that the amount of rateable debt is growing and the request for ratings on that debt is increasing.

Okay, great.

Thank you.

We'll go next to Sloan Bohlen with Goldman Sachs.

Good afternoon.

Ray, just to stick on the topic for 2 seconds, that secular change that you see in the bank loan market, do you think that's more tied to capital requirements at banks versus what we're seeing here with regard to the debt ceiling or whether it be whatever's going on with sovereign debt?

Maybe explain what we could see in terms of the magnitude of how broad that rateable debt market could grow?

Yes, I think it is attached more to disintermediation and is being driven probably by both sides of the lending equation, in that banks in certain jurisdictions are making loans less available, but also the borrowers themselves are looking to have access to multiple sources of capital.

And so whether it's from the bank lines or whether it's from the bond markets, we're seeing growth in the speculative grade market through bonds and then because of the interest in expanding the investor base in the loan sector.

I do think that is driven by capital requirements.

I think it's also driven by, again, the borrower's interest in diversifying its access to capital.

Okay.

And would you a tribute that to the strength that we saw in the corporate market in Europe this past quarter?

Yes.

The corporate market -- both the loan market and the bond market in Europe were strong in the last quarter.

Okay.

And then, Linda, just one question on capital allocation.

With regard to thinking about buckets or available liquidity when we think about buy backs, is there a metric we should think about how much capital you'd like to keep in cash as dry powder for acquisitions versus how much you'd like on a leverage basis?

I know in the past we've talked about your levels relative to your commercial paper borrowing but how should we think about that going forward.

I think, Sloan, you probably just want to be aware that of the $939 million in cash we have, as we said, about 70% of that is offshore.

So, we're working with about $300 million here in the US.

We like to keep around a sufficient amount, obviously, to ensure appropriate liquidity and the rest we can use.

We don't have any specific bogey for acquisitions and, of course, if the acquisition targets are overseas, as was the case with CSI and Fermat, we can use the offshore cash to purchase those acquisitions.

So, we have plenty of cash and plenty of capability.

But the main thing to think about really is to ensure that we have sufficient liquidity here in the US and we're prudent about how we think about the rest.

It really doesn't have too much to do with the commercial paper situation.

In fact, we have no commercial paper outstanding right now.

Okay.

And just to frame that $300 million, is that in terms of more than what you need?

Is that 2 times more than what you need?

Just trying to frame what the potential availability for share buy backs could be out of that $300 million.

It's a couple times more than what we need but given the world today, we try to run this place pretty prudently.

So we're not going to spend down to our last dime.

Okay.

Fair enough.

Thank you.

We'll go next Edward Atorino with Benchmark.

Hi, I'm the depreciation question guy.

Depreciation jumped up in the quarter.

Is that the new run rate or is there some stuff in there that goes away?

$21.8 million versus $15 million?

Sure.

Good question.

Good observation, Ed.

What that really is is we're looking at the amortization there of the intangibles for the CSI acquisition in Canada that we bought last year.

So that's really the first piece of that.

And then we also have software systems that we've brought on line and a couple more of those.

So, that line has picked up a little bit.

I think in terms of a run rate, that sort of for the first half we're running about $40 million.

That's probably a good number for the back half --.

So 20 and a quarter?

Same question on interest expense, up $5 million quarter-to-quarter.

A lot of stuff in there, I know.

Yes.

A lot of that line also brings into effect FX.

But our expense on borrowing has moved up.

You can see it on one of the schedules attached to our statement.

The expense on borrowing the $16.3 million versus $10.6 million last year because we did put in place that $500 million bond deal that we did last year.

So, that's the majority of that.

So you had some positives offsetting that?

Yes.

So, $15 million, $17 million number here is okay but this number bounces around a lot, Ed, depending on how FX is going.

I think it was Peter's questions on the base for the guidance, if one looked at the first half, it's, what, a dollar sixty-something?

That's the base for the year's guidance?

Yes.

Before the $0.03.

$1.49, Ed.

I can't add.

Without a computer I'm hopeless.

And that is with the $0.03.

That's what I meant.

Thank you very much.

(Operator Instructions)

Our next question comes from Bill Clark with KBW.

Hi.

I just wanted to go back to the expenses for another minute.

Linda, you mentioned the $327 million as kind of the baseline and $40 million by year-end.

I'm wondering if there's any way to pinpoint how much may have been incrementally added in the second quarter or if we should just look at it as a third, a third, a third for that $40 million?

Well we don't like to go quarter-by-quarter here particularly.

The expense number the first quarter was $327 million and then we went to $335 million.

I told you the number you're trying to get to, which is $40 million to $50 million above the $327 million where we started.

The reason for this is generally that the additions in head count and compensation as we had talked about in the script.

We did not have particularly heavy additions in head count for the second quarter but we're expecting that those will ramp up in the third and fourth quarter.

So, this is a traditional pattern for us that the expenses ramp over the course of the year.

But you should probably make your own decisions as to how you want to run that ramp up but I think we've described it pretty fully.

Okay.

Alright.

Thank you.

(Operator Instructions)

And there are no further questions at this time.

Okay.

Thank you, everyone, for joining the call today and we look forward to speaking to you again in October.

This concludes Moody's second quarter earnings call.

As a reminder, a replay of this call will be available after 4.00 pm eastern time on Moody's website.

Thank you.