Good day, and welcome, ladies and gentlemen, to the Moody's Corporation's 2nd Quarter 20 17 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 Sallie 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 Q2 2017 results as well as our current outlook for full year 2017. I am Sallie Schwartz, Global Head of Investor Relations and Communications. This morning, Moody's released its results for the Q2 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 ks 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, Sally. Good morning and thank you to everyone for joining today's call. I'll begin by summarizing Moody's second quarter and first half twenty seventeen financial results. Linda will follow with additional 2nd quarter financial details and operating highlights. I will then conclude with comments on our current outlook for 2017.
And after our prepared remarks, we'll be happy to respond to your questions. Before addressing our financial results, I want to begin by saying that we still anticipate completing our proposed acquisition of Bureau Van Dijk in the Q3. Beginning with our next earnings call, we should be able to discuss our financial results and guidance, including the operations of Buro Van Dijk. For this call, however, we will limit our remarks to what we have disclosed in our earnings release this morning. In the Q2, Moody's achieved a record $1,000,000,000 in quarterly revenue, up 8% from the Q2 of 2016.
Operating expense for the Q2 was $543,000,000 up 5%. Operating income was 458 up operating income as operating income before depreciation, amortization and Bureau Van Dijk acquisition related expenses. The operating margin was 45.7%, up from 44.2% in the Q2 of 2016. The adjusted operating margin was 49.7 percent, up from 47.5%. Moody's diluted EPS for the quarter was 1 point $1 per share, up 24% from the Q2 of 2016.
Adjusted diluted EPS for the quarter was $1.51 up 16%. 2nd quarter 2017 adjusted diluted EPS excludes the $41,000,000 or $0.13 per share unrealized gain from a euro denominated purchase price hedge relating to the pending Bureau Van Dijk acquisition as well as $7,000,000 or $0.03 per share of acquisition related expenses. Turning to the first half performance, Moody's revenue for the first half of twenty seventeen was almost $2,000,000,000 up 13% from the prior year period. U. S.
Revenue was 1 point revenue was $830,000,000 up 15%. The impact of foreign currency translation was negligible. Moody's Investor Service first half revenue of almost $1,400,000,000 was up 18% from the prior year period. U. S.
Revenue was $835,000,000 up 14%, while non U. S. Revenue was $520,000,000 up 25%. Moody's Analytics revenue for the first half of twenty seventeen was $621,000,000 a 4% increase over the prior year. US revenue of $311,000,000 was up 7%, while non US revenue of $310,000,000 was up 2%.
Operating expense for the first half of twenty seventeen was almost $1,100,000,000 up 4% from the prior year period. Foreign currency translation favorably impacted expense by 2%. Operating income was $901,000,000 up 26%. Foreign currency translation favorably impacted operating income by 1%. Adjusted operating income of $973,000,000 was up 25%.
Moody's operating margin was 45.6% and its adjusted operating margin was 49.2%. The effective tax rate for the first half of twenty seventeen was 27.8%, down from 32.1% in the prior year period. The decline was primarily due to a non cash, non taxable gain related to a strategic realignment and expansion involving Moody's Chinese affiliate CCXI as well as a benefit from the adoption of the new accounting standard for equity compensation. Given the strength of the first half and a supportive market environment, we are raising our full year 2017 diluted EPS guidance to a range of $5.69 to $5.84 This range includes the $0.31 per share CCXI gain, the $0.13 per share purchase price hedge gain and $0.10 per share of Bureau Van Dijk acquisition related expenses. Excluding these items, we anticipate full year adjusted diluted EPS to be in the range of $5.35 to $5.50 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 Q2 was a record $1,000,000,000 up 8%. U. S.
Revenue of $568,000,000 was up 4%. Non U. S. Revenue of $433,000,000 was up 13% and represented 43% of Moody's total revenue. The impact of foreign currency translation on Moody's revenue was negligible.
Recurring revenue of $489,000,000 was up 6% and represented 49% of total revenue. Looking now at each of our businesses, starting with Moody's Investor Service. Total MIS revenue for the quarter was $687,000,000 up 10%. U. S.
Revenue increased 3% to $412,000,000 Non U. S. Revenue of $274,000,000 was up 21% and represented 40% of total MIS revenue. The impact of foreign currency translation on MIS revenue was negligible. Moving now to the lines of business for MIS.
1st, corporate finance revenue for the Q2 was $356,000,000 up 17%. This result reflected a favorable mix within each of U. S. Leverage finance and EMEA investment grade issuance as well as strong growth in EMEA bank loan and Asian bond issuance. U.
S. And non U. S. Corporate finance revenues were up 6% 40%, respectively. 2nd, structured finance revenue totaled $119,000,000 up 7%, primarily driven by the continued strength of U.
S. CLO issuance. U. S. Structured finance revenue was up 12%, while non U.
S. Revenue was down 3%. 3rd, financial institutions revenue of $102,000,000 was up 14%. This result was largely driven by an increase in issuance from infrequent issuers in EMEA. U.
S. And non U. S. Financial Institutions revenue were up 8% 20%, respectively. 4th, public project and infrastructure finance revenue of $105,000,000 was down 7%.
This result was primarily driven by a decline in U. S. Issuance and a change in mix of European infrastructure issuance. The revenue decline was partially offset by strong growth in infrastructure issuance in Asia. U.
S. Public project and infrastructure finance revenue was down 12%, while non U. S. Revenue was up 4%. Finally, MIS Other, which consists of non rating revenue from ICRA in India and Korea Investor Service, contributed $5,000,000 to MIS revenue for the 2nd quarter, down 37%.
The decline is attributable to the divestiture of a non core subsidiary of ICRA in late 2016. Turning now to Moody's Analytics. Total revenue for MA of $314,000,000 was up 3.5%. U. S.
Revenue of $155,000,000 was up 6%. Non U. S. Revenue of $158,000,000 was up 1% and represented 50% of total MA revenue. The impact of foreign currency translation on MA revenue was negligible.
And now moving to the lines of business for MA. 1st, research data and analytics or RD and A, revenue of $181,000,000 was up 7% and represented 58% of total MA revenue. Growth was mainly driven by strength in sales of credit research and ratings data feeds. U. S.
And non U. S. RD and A revenues were up 6% 10%, respectively. 2nd, Enterprise Solutions or ERS revenue of $97,000,000 was flat to the prior year period. This result was primarily due to the timing of revenue percent, while non U.
S. Revenue was down 5%. Trailing 12 month revenue and sales for ERS increased 6% 14%, respectively, primarily due to the 2016 acquisition of GGY. We continue to make progress on shifting the mix of the ERS business to emphasize higher margin products with trailing 12 month product sales up 21% and services sales declining by 4%. 3rd, professional services revenue of $36,000,000 was down 5%.
U. S. Professional services revenue was up 6%, while non U. S. Revenue was down 10%.
And turning now to operating expenses, Moody's 2nd quarter operating expense was $543,000,000 up 5%. The increase was primarily attributable to annual salary increases, higher accruals for incentive compensation and expenses related to the pending acquisition of Euro Van Dijk. This increase was partially offset by a decline in non compensation expense and a favorable foreign currency translation impact of 2%. As Ray mentioned, Moody's operating margin was 45.7%, up 150 basis points from 44.2% in the Q2 of 2016. Adjusted operating margin was 49.7 percent, up 2 20 basis points from 47.5 percent a year ago.
Moody's effective tax rate for the quarter was 32.1%, up from 31.9% in the prior year period. Now I'll provide an update on capital allocation. During the Q2 of 2017, Moody's repurchased approximately 700,000 shares at a total cost of $79,500,000 or an average cost of $115.35 per share. Moody's also issued approximately 400,000 shares, part of its employee stock based compensation plans. Moody's returned $73,000,000 to its shareholders via dividend payments during the Q2 of 2017.
And on July 11, 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 September 12, 2017 to stockholders of record at the close of business on August 22, 2017. Over the first half of twenty seventeen, Moody's repurchased 1,200,000 shares at a total cost of $134,500,000 or an average cost of $114.06 per share and issued approximately 1,900,000 shares as part of its employee stock based compensation plans. Moody's also returned $145,000,000 to its shareholders via dividend payments during the first half. Outstanding shares as of June 30, 2017 totaled 191,000,000 down 1% from a year ago.
As of June 30, 2017, Moody's had approximately $600,000,000 of share repurchase authority remaining. As part of Moody's financing of the pending acquisition of Bureau Van Dijk, on June 12, 2017, Moody's closed issuance of $1,000,000,000 of senior unsecured notes consisting of $500,000,000 of 2.625 percent notes due 2023 $500,000,000 of 3.25 percent notes due 2028. Prior to issuing these notes, Moody's had an undrawn bridge loan facility. The incremental financing expenses associated with these items amounted to $0.03 per share in the 2nd quarter. At quarter end, Moody's had $4,900,000,000 of outstanding debt and $1,500,000,000 of additional debt capacity available under its revolving credit facility and undrawn term loans.
Total cash, cash equivalents and short term investments at quarter end were almost $3,400,000,000 with approximately 58% held outside the U. S. Cash flow from operations for the first half of twenty seventeen was negative $48,000,000 a decline from a positive $546,000,000 in the first half of twenty sixteen. Free cash flow for the first half of twenty seventeen was negative $91,000,000 a decline from positive $492,000,000 in the prior year period. The declines in cash flow from operations and free cash flow were due to payments the company made in the Q1 of 2017 pursuant to its 2016 settlement with the Department of Justice and various states' attorneys general.
And with that, I'll turn the call back over to Ray.
Okay. Thanks, Linda. I'll conclude this morning's prepared comments 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 Q2 2017 earnings press release, which can be found on the Moody's Investor Relations Web site at ir. Moodys.com.
Moody's outlook for 2017 is based on assumptions about many geopolitical about many geopolitical conditions and macroeconomic and capital market factors, including interest rates, foreign currency exchange rates, corporate profitability and business investment spending, mergers and acquisitions, consumer borrowing and securitization and the amount of debt issued. These assumptions are subject to uncertainty and the 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 $1.30 to 1 pound and for the euro of $1.14 to €1 As I noted previously, this guidance does not include revenue and operating expense estimates related to our pending acquisition of Buro Van Dijk. Moody's now expects full year 2017 diluted EPS to be $5.69 to $5.84 including the CCXI gains, the purchase price hedge gain and acquisition related expenses for Bureau Van Dijk.
Excluding these items, full year 2017 adjusted diluted EPS is now expected to be $5.35 to $5.50 Both ranges include an estimated $0.16 per share tax benefit due to the adoption of the new accounting standard for equity compensation as well as an estimated $0.10 per share impact from financing expenses related to the pending acquisition of Bureau Van Dijk and an estimated $0.04 per share impact related to reduction in share repurchase activity as a consequence of financing the acquisition. The adjusted operating margin is now expected to be approximately 47%. Moody's now expects full year 2017 revenue to increase in the high single digit percent range. For MIS, full year 2017 revenue is now expected to increase in the high single digit percent range also. U.
S. Revenue is still expected to increase in the mid single digit percent range, while non U. S. Revenue is now expected to increase in the low teens percent range. Corporate Finance revenue is now expected to increase in the low teens percent range.
Financial Institutions revenue is expected is now expected to increase in the high single digit percent range. For MA, full year 2017 revenue is now expected to increase in the high single digit percent range. U. S. Revenue is now expected to increase in the mid single digit percent range and non U.
S. Revenue is now expected to increase in the low double digit percent range. RD and A revenue is now expected to increase in the low double digit percent range. Before turning to Q and A, a reminder that we continue to expect our previously announced acquisition of Bureau Van Dijk to close in the Q3 of 2017. As a result, we are not able to provide any updates for you regarding the pending acquisition beyond what we have said in the earnings release.
This concludes our prepared remarks. And so joining Linda and me for the question and answer session are Mark Almeida, President of Moody's Analytics and Rob Falber, President of Moody's Investor Service. We'd be pleased to take any questions you may have.
Thank you. And we'll go first to Toni Kaplan from Morgan Stanley.
Hi, good morning. Within Corporate Finance, you had a very strong first half and you've increased guidance for the year. Could you give some additional color on the drivers? Is it just issuance related or is pricing or share gains also playing a factor there? And also just which regions have been very strong?
It looks like the non U. S. Business is where you're really expecting the benefits.
Yes. I'll turn this over to Rob to provide some color. But you're correct, we had very strong performance in the leveraged loan and spec grade portions of the market and the non U. S. Growth was very strong as well.
So Rob, I don't know if you wanted to provide any color commentary on that.
Yes. First, the first point there in regards to kind of the drivers of revenue growth. There were a few things that played into it for this quarter. First, we had a very favorable mix of issuance. And by this, I mean that we saw very strong issuance from issuers who are typically infrequent issuers rather than issuers on relationship based arrangements with us.
As Ray mentioned, U. S. Bank loans, we saw very healthy activity there. And we benefited from issuance that was a bit more broad based than last year where we had several kind of super jumbo transactions included in the volume. So this broader issuance generally leads to better revenue yield.
We had very strong growth in first time mandates also contributing to that favorable mix. And as Ray mentioned some pockets very strong issuance growth, particularly outside the United States, EMEA Bank Loans, Asian Corporate Finance, Canada to spotlight 3.
Okay, great. And then you raised the MA guidance to high singles from mid, and basically because of the RD and A line. And so could you just give us some color on why your confidence has increased in that business segment? And so what's really driving your higher confidence for that for the rest of the year? Thanks.
Sure. This is Mark. We're getting some benefit from the stronger pound and euro, but on a constant dollar basis, growth is pushing up from high single digits to double digits. And we're seeing good underlying performance in the business with better than expected yield from price, new sales production and net upgrades somewhat offset by higher attrition. So overall, the business is firm across all of the different product areas And it's just pushing us up slightly from high single to the lower end of double digits.
Thank you. And we'll go next to Alex Kramm from UBS.
Yes. Hey, everyone. Just maybe stepping back and asking more broadly about the guidance here. Obviously, great first half of the year. If I look at typical seasonality, I think the guidance suggests a slowdown that's usually a little bit bigger than what we would expect typically.
So maybe just some commentary around what is conservatism or are there actually any particular areas that make you think that some of the current run rates are not sustainable and some of this was more one time than usual?
Well, we certainly think that there has been pull forward into the first half, including the second quarter. How much opportunistic financing is still going to occur in the second half pulling forward from 20 18, we'll just have to see. But borrowing conditions do remain good. Rates are low, spreads are narrow. So that's all positive.
Also, I would say in terms of the second half, we're cognizant of the fact that we are going to be compared against a strong second half in twenty sixteen. And so while we think there's going to be healthy activity, the comparables are more challenging in the second half.
All right. Makes sense. And then maybe just shifting gears away from earnings for 2nd here. I wanted to ask you about BVD. When you had the call and you were pointing out the strong growth that these guys had, I think like 9% CAGR or so plus, I think there was a sense that a lot of that was true growth and very little pricing, and I think there's an expectation that you can do more there.
Don't align. When we do our own channel checks, it actually sounds like pricing has been a fairly healthy component. In some cases, maybe there was even a goal to like you renew and you want to have maybe close to like 10% increases from time to time. Again, these might be one off conversations. But the point is, can you just compare and contrast what we may have heard and kind of like the sense that you left post the call, now that you maybe have spent a little bit more time?
Yes. I mean, to answer generally, I think the answer is the same as how we think about pricing for the rest of Moody's Corporation. We are going to be very focused on what kind of additional value can be provided, the synergies that we've talked about and that any pricing that we would seek to increase would be associated with growth in value of the product and data that we're making available.
Thank you. And we'll take our next question from Manav Patnaik with Barclays.
Yes, thank you. The first question is just around guidance. I was wondering if you could flush out the benefit you had from FX both on the top line and EPS?
Sure, Manav. Hang on just one second.
It was not material in the Q2. It was negligible on revenue and I think it was 1% on expense.
And Manav, to anticipate if you're wondering about the full 2017 outlook, we're expecting a 2% favorable impact on revenue growth. And as Ray had said, a minimal, slightly unfavorable impact on expense growth. Does that help you out?
That's for the full year. Yes, correct. That's what I
was looking for. Okay. And then just broadly, I guess, maybe tying into the typical expense ramp that you usually give us, Linda, It sounds like you're generally a little bit more constructive in the second half understanding there's tough comps and so forth. But what is the, I guess, the cost control focus look like now at the company?
Sure, Manav. In answering the ramp question, looking at the Q1 expense run rate to the Q4, now we're looking at a ramp of $40,000,000 to $50,000,000 and previously we had said $30,000,000 to 40 dollars Some of that is because our projects are stretching out a little bit further into the year and we do expect some hiring in some of the businesses. However, we're keeping very close, very tight handle on hiring around here and we do continue very much to focus expense controls, focus on T and E, but particularly using caution in hiring, particularly in the higher cost areas and looking to substitute where possible in other locations. So we continue that focus throughout the year.
Thank you. And we'll go next to Tim McHugh from William Blair.
Yes, thanks. Maybe just to ask on Europe, I think in the past you've had somewhat of a mixed view of the opportunity there given GDP growth versus the secular trend? Obviously, trends are very strong lately. I guess, following up from one of the earlier questions, is your view of the importance or the pace of growth that we could expect to see during the next few years internationally changed at all or improved at all?
No, I think for both Europe and the U. S, we expect growth to be modest, GDP growth and then debt growth to be modest. But the mix of debt that is in the banking system versus the capital markets, we certainly expect to continue to see the disintermediation trend continue. And that is a European story. It's actually a global story, but it's definitely a European story as well.
And given the caution in Europe about the pace at which they might engage in any tapering, I think we're going to continue to see a good market environment, good market tone going forward. And that is a little more optimistic than I had been at certain points in the past.
Tim, it's Linda. Let me just interject here the issuance views we're hearing from a number of the investment banks that we talked to. And then Rob Sauber may have some more granular color for you. But looking at the European markets and again this is not a Moody's view, but rather what we're hearing from the bank, they're saying they're expecting the second half of twenty seventeen volumes to be in line with first half activity as issuance volumes pick back up after the post summer slowdown. As Ray had noted, spreads and rates remain very attractive and we'll see what happens with the tapering.
In spec rate in Europe, the leverage loan market remains robust, but some softness crept into high yield, given where we are in the calendar year as is typical with summer issuance weakening a bit. Most of the refinancing expected in 2017 may have already occurred, but fundamentals are improving, economic growth looks reasonable and there's the overhang of uncertainty from Brexit. Maybe Rob might want to speak a little bit more specifically about what he's seeing in MIS.
And the only other thing I would add to that, echo Ray and Linda's comments, we've seen very strong issuance growth there. That continued through the French and U. K. Elections. Lots of investor interest, lots of cash to invest there.
And we've also seen a pickup in first time mandate activity in EMEA, recent activity about 2x what we have been seeing over the last year or 2. So a very good indicator about first time issuers coming into the market and as Ray said that disremediation trend.
Okay, great. And can I follow-up on RD and A? Mark, I understand that kind of the metrics you gave in terms of new sales and pricing. But I guess one part is, can you comment on where you've seen higher attrition? And secondarily, the improved sales that's leading to the higher revenue growth, given there's a bunch of different solutions you provide within RD and A, can you elaborate on what parts, I guess, of that segment are seeing stronger demand or strong growth?
Yes. On the attrition point, I would characterize the higher attrition as very idiosyncratic, a couple of selective cases of attrition, but not anything systematic either by product or customer type or geography. On the positive side, the strength in the business, as I said earlier, is really across the board. We're seeing good sales production and pricing power and customer upgrades and new sales production in really all of our product areas. So I really can't pinpoint it to any one thing, but it's just better than expected performance along a number of dimensions and across a number of businesses.
And just to be clear, we're seeing good solid performance. I wouldn't characterize what we're seeing as a dramatic improvement in the business. We expected the business to do well. It's doing a bit better than we expected. And as I said, that's pushing us into double digit growth.
But and again, it's no one geography or product area that I can really point to.
Thank you. And we'll go next to Jeff Silber from BMO Capital Markets.
Thanks so much. Now that it looks like down in D. C, we're moving away from health care reform back to tax reform. I'm just wondering if you're hearing any updates about the potential change in the deductibility of corporate interest expense and what the impact might be on your business?
I have not heard anything that isn't in the public discourse about the tax reform expectations. And really there are just a large number of variables and until we see how the different trade offs are made and interact with each other, it's going to be difficult to predict.
Tim, it's Linda. I just also wanted to reiterate, we've said this before, but I just want to make sure you have it handy. If it does happen that corporate tax rates move downward, a 1% change in our estimated tax rate is equal to $0.07 to $0.08 of EPS. So if you want to play around with potential scenarios, you can do it with that guideline.
Okay. That's helpful. And then actually a couple of number questions for numbers questions for you, Linda. What share count is embedded in your guidance for the year? And can you give us an update on what your expected interest expense is for the year as well?
Thanks so much.
Sure. I'm not going to give you a share count for the year. You can take a look at the share count that we have. We have said that given that we are committed to delevering, given the acquisition expense of Euro Van Dijk, we are reducing the guidance on our share repurchases to approximately $200,000,000 for both 2017 and 2018. And job 1 for Moody's right now is to reduce is to delever from the financing costs for Bureau Van Dijk.
So you can do some math there, Jeff, and I think you probably could come up with something that looks reasonable. And I'm sorry, your second question was?
Was that interest expense?
Sure. So in thinking about interest expense, we have been running at a rate that we had viewed as pretty normal of a $35,000,000 a year rate in 2016. Now this year that rate has kicked up because we did do some issuance of $800,000,000 in the Q1 of the year. And then it's pretty important that everyone understands how we've handled the financing of Bureau Van Dijk. So we announced the deal, you'll recall, on May 15, and at that point, we had a bridge loan in place.
We replaced that bridge loan on June 12, and we turned back that bridge loan with public bonds, along 5 year bond and along 10 year bond. The blended interest rate on those financing is 2.94%. So we are going to pay with sort of onethree, onethree, onethree in cash, those bond proceeds and also we have commercial paper and a term loan facility if we want to use that. So again, you'll see that the financing impact of all of that for the year is about $29,000,000 or $0.10 So hopefully that will help you out in terms of thinking about what the additional financing costs will be for the year.
Thank you. And we'll go next to Joseph Foresi from Cantor Fitzgerald.
Hi. I was wondering if you could give us some idea of how conservative you are on the second half performance of issuance. It sounded like the environment is good, things are picking up. Outside of comps, is there anything else that we should that you're concerned about and anything kind of holding you back?
Again, as I had mentioned, the pull forward that we saw into the first half of the year creates some uncertainty for the second half. There is still a sizable amount of debt that can be pulled forward and conditions remain good. But whether that will happen or not, I think a lot of the debt that was maturing late in 2017 has already been refinanced. So we'd be looking into the out years to see what might get pulled forward. Rob, did you want to add to that?
The only thing I would add, so kind of touching on that, is just kind of the sustainability of this bank loan refinancing cycle that we're in. That's a question mark. Another question mark just an unforeseen event market volatility and I think some potential upside if we see a pickup in public finance U. S. Public finance refunding activity.
Yes. Let me maybe jump in here and for the completeness of the record, I'll give the indications that we're hearing from the issuing banks for the year. On investment grade, year to date, it's been about $720,000,000,000 of investment grade issuance. And for the year now, the call is for investment grade issuance to be down 5% to 10%. Rates have moved a bit higher, but spreads are stable.
Overall, condition is very constructive. The first half of twenty seventeen was on pace with record 2016 levels, but generally there may be a slowdown in the second half as Rob had just talked about. The M and A pipeline is a bit lighter than in the previous 2 years, so that would be another factor that weighs on our thinking about the back half of the year. In high yield, dollars 150,000,000,000 issuance to date calling for flat to up 5% in high yields. The markets are resilient despite concerns about distressed retailers and a bit of weakness in the energy sector.
Underlying demand has continued to be strong. But again, the same comment that the pipeline has been lighter given the lack of M and A and many of the refinancings that were scheduled have already been completed. Lastly, leverage loans in the U. S. Dollars 400,000,000,000 to date that is up 30%.
And as Rob had said, we have to think about whether that will continue. Spreads have been tighter, very strong loan refinancing and repricing activity. Also note, dollars 55,000,000,000 of CLO formation and very strong investor demand. So you might want to take all of that into consideration and thinking about your own views for the back half of the year.
Right. Thanks. And then just on analytics, can you update us on how much of the growth this quarter was maybe related to timing or some pent demand or regulatory change? It sounded like you think that the business is just pushing forward maybe to a higher growth rate. But I just want to see if any of that took place just given all the political changes here in the U.
S? Thanks.
No, I don't think we saw that happening in the first half of the year. You're right to observe that some of the regulatory pressure on financial institutions around the world is lightening up. But so demand for what we do is being driven by other interests and other requirements on the part of the banks. But I don't think we saw any pull forward in activity related to regulation in any way.
Thank you. And we'll go next to Peter Appert from Piper Jaffray.
Thanks. Good morning. So Linda or Mark, I was hoping you could give us a little bit of commentary on margin trends in the analytics business, not to be greedy, but I'm wondering why the margin performance isn't a bit better given the strength you're seeing in your higher profit businesses and also the shift in ERS, why that isn't theoretically showing up in margin performance yet?
Peter, I think it's because we've always said that in any given quarter, the margin isn't going to be that isn't going to tell you all that much about the business. And I think this quarter is a very good example of that because we had light revenue in ERS due to the project timing issue. So, we were light on the top line. The expenses were what the expenses were. And we did have some additional expense coming through related to the Bureau Van Dijk transaction.
So, again, I don't think you can glean an awful lot of information from either the operating margin or the adjusted operating margin in the quarter. I think more generally, we're continuing to make good progress on the work we're doing in ERS to drive higher profitability. We've talked about shifting from a business that has grown a lot through these delivering these low margin implementation services. We're deemphasizing that work and putting a lot more emphasis on product sales. That is going well and we'll continue on that path.
So we feel like we're on a good trajectory with that and think we'll continue to see progress over time. But again, any 1 quarter might not be consistent with the longer term trend.
And Peter, I probably should help Mark out here a bit. Mark has been pretty successful. And as we've talked about before, as his business is more successful, it does draw a bit more in terms of corporate allocations. So that's part of the issue as well.
Got it. And then Linda, for you, the I'm wondering what your thought is on this concept of potentially moving to an adjusted EPS metric in conjunction with the Bureau Van Dijk transaction. Where are you on that?
Peter, we're contemplating that. We can't get the cart in front of the horse here because we don't own Bureau Van Dijk yet. So we have to wait until that closing occurs, which as Ray said, we expect to be on schedule in the Q3. All of that is appears to be going fine. At that point, we'll think about that and it's something we're discussing right now.
But we'll have more to say about all that on the Q3 call.
Thank you.
Thank you. We'll go next to Craig Huber from Huber Research Partners.
Yes. Hi, a couple of questions. Your guidance for structured finance for the rest of the year, I'd be curious just to hear what your underlying thoughts are in some of the categories RMBS, CMBS, the other asset backed categories, how you see that maybe playing out here in the second half of the year?
Yes. For structured finance, we expect there to be year over year growth in the second half. The areas that have been strong, certainly, I would point you to the CLO business. And there is still a substantial stock of potential assets to go into CLOs as the loan market has been so robust recently. So that would continue to be a promising area.
I'll see if Rob wants to add anything further.
Yes, sure, Ray. So ABS, we've experienced the market a little bit of a slowdown after a very active kind of February through May. But I think issuance will be supported in particular by some of these esoteric sectors like solar and handset. In CMBS, kind of a stronger June, I'd say an active rate of inquiries. The pipe is I'd say slightly stronger than it is this time last year.
I'd note that there is some competition from alternative funding sources in the CMBS market. So banks, Lifeco's etcetera. So it remained to be seen how many of these mortgages actually get put into the securitization market. I do think there's some optimism around the CMBS market there that the second half of twenty seventeen will be a bit stronger as I think the view is that the market generally worked through some of the risk retention kinks. CLO as Ray said in addition to the refi activity a healthy pipeline I think we're starting to see some of the SME type deals also come into that pipeline.
RMBS modestly stronger I'd say than this time last year with again a bit of a mix of different type of assets there. In Europe, it looks like a very healthy pipeline there and I think both in CLO, ABS and RMBS.
And then my other main question, you have a comment in your press release when you talk about financial institutions being driven in the quarter by increased issuance from frequent issuer infrequent issuers in Europe and Middle East and Africa. Can you just talk about that? What do you think it augurs for the rest of the year when these banks seemingly assuming banks are not taking on a lot more debt here instead of it sit on its balance sheet? What do you think? So what does it mean you think?
Yes. I'll take a crack at that. So you're right. We typically have a more relationship based construct with the banks that tends to lead to very steady revenue growth. We saw this quarter some very robust issuances as you say from what are typically infrequent issuers.
The growth in all regions, a few different drivers I think at play. In the U. S, we actually saw an increase in bank loan financing activity in the managed investment sector. So that was a bit new with some infrequent issuer activity in Banking and Insurance. In Europe, a continuation of the trend that we saw in the Q1 into the Q2, which I think we may continue to see throughout the rest of the year where banks are building their bail inable capital, bail inable debt to meet those TLAC requirements.
We also saw some opportunistic issuance in places like Sweden and the Middle East. So I think we're going to continue to see financing activity coming out of those Middle Eastern Financial Institutions. And then lastly in Asia, despite the fact that we had lower FIG issuance against the prior year quarter, that revenue growth again supported by infrequent bank and also non bank financial issuers in China. And again, I think we will continue to see some of that issuance activity.
And Craig, it's Linda. For completeness, Rob might want to talk a little bit more about what he's seeing in new mandates as well. So if you want to go ahead with that Rob.
Sure. A good story with first time mandates, healthy leverage finance markets are very conducive to 1st time issuers tapping the market. In the Q2 of 2017, we saw over 300 first time mandates. That's up almost 50% from the Q1 and up I think about 70% over 2Q 2016. That growth was in all very strong in all geographies reflecting again the same comments we had about the leveraged finance markets positive investor sentiment tight spreads.
In Asia, I would also note a record reached a record for first time mandates in the 2nd quarter. And I'd noted that the EMEA activity was significantly elevated over what we've seen in the last couple of years. The only caveat to the Asian first time mandates, a number of those Chinese first time issuers have to get regulatory approval before they can actually issue. So there are some of that issuance still sitting on the sidelines. But overall, we expect to see I think we could see over 800 first time mandates in 2017 and that's up a bit from the levels we've seen in the last couple of years, is kind of mid to higher 700s.
If I
could just squeeze one in Linda, is your 30% corporate tax rate guidance for the year, is that adjusted for the various one time items we've seen in the first half?
It is tracking below that so far.
Yes. The year isn't over yet and we have to take into account the various things that are going to happen over the course of the year. Also, we did have the CCHI situation, which was favorable from a perspective. So give us a little bit of time as we get through the rest of the year on the tax rate, but for right now, we're comfortable there.
Thank you. We'll go next to Anjaneya Singh from Credit Suisse.
Hi. Thanks for taking my questions. I think you guys have touched on this stuff in other answers, but just wanted to get your thoughts on margins. Clearly, a strong quarter in first half, and there's many things contributing to that. But what are your thoughts on the sustainability of these high-40s margins in your guidance as we look ahead.
How much of this is just the MIS mix and revenue flow through that you've talked about versus the discipline and efficiency measures that you're also focused on? Just any thoughts there?
Sure. I'll take a start on this and then perhaps Ray might want to add some additional color. Margin is always a happier story for us when we have a strong revenue quarter, because we are pretty thoughtful about our expenses. So if we have a good top line, a lot of that comes down to operating income and helps us on the margin front. For the year, we've guided to approximately 43%.
And of course, if the revenue line turns out to move more strongly than we think for the back half of the year, there is the potential that we could do better. But given everything that we've set out for the back half of the year, we like this 43% guidance for the rest of the year and we thought about that pretty considerably. I don't know if you have anything else you'd like to add.
No, just I mean, I think everyone's aware of this, but obviously if the second half of the year slows in a way that is not expected, our incentive comp accruals would flex in response to that. And so we do have some ability to course correct depending on what's happening with the top line.
Understood. That's helpful. First second question on analytics, could you just touch on ERS? The product sales growth continues to be strong. Any updated views on what's sustainable or what the outlook there could be?
How long do you think these double digit rates can continue? And if you could just remind us what's driving the disparity between the U. S. And non U. S.
Growth rates in that segment?
Yes. To take the first question, the second question first, the distinction between the U. S. And non U. S.
Is really a timing phenomenon. The business is from a sales perspective, the business is doing well globally. So it's just what we're seeing on the revenue line, what projects are getting completed and what revenue is getting recognized is variable by geography. It's not really indicative of anything fundamental about the business itself. So that really again, I would just emphasize that the business is performing well inside and outside the U.
S. With respect to the strong growth in product sales, that is a function of a couple of things. 1, just generally the business is doing well. But also included in that very strong product sales growth on a trailing 12 months basis is the acquired sales from GGY. So you see them coming in and they're additive.
So that's having a positive impact on sales growth. But going forward, we would expect product sales to continue to grow at a double digit rate. I mean that's how we've built the business. That's how we've constructed our product strategy. We see demand to support that.
And that's how we expect to continue to drive growth in ERS is through strong sales of product. Again, as we deemphasize the low margin implementation services business, That's been a big growth driver on the top line in years past, but hasn't done much for us on the margin.
Okay, got it. Thanks so much.
Thank you. And we'll go next to Bill Warmington from Wells Fargo.
Good afternoon, everyone. So you had highlighted strength in the Asian high yield issuance and I was hoping you could give us some color on the opportunity for you to rate Chinese domestic bonds, how that's progressing?
Yes, sure. Rob probably will want to add to my comments. But we did complete the realignment of our CCXI business in domestic China, so that that business is now eligible to rate both parts of the Chinese bond market, the inter what's called the interbank market and the exchange market. In addition, the Chinese have announced an opening to international rating agencies of the interbank part of the domestic Chinese market. So we are looking at opportunities with CCXI and we're also looking at how we may be able to provide research and ratings either from onshore or from offshore from Moody's Investor Service, really aimed at the foreign investment community, as opposed to the domestic Chinese community, which I think really will continue to be served by CCXI.
Okay. And then one housekeeping item, wasn't clear to me. So BVD is on track to close in Q3. Are you planning to update the 2017 guidance when you close the deal or with Q3 earnings?
I think we'll get the deal closed. We don't know when that will happen yet. We expect it to be in the Q3, but we don't know specifically when that will happen. And then we're going to have to get organized around what our outlook is once we're able to really get in and work with the Bureau Van Dijk team. So I would expect it to be the 3rd quarter earnings call.
Got it. All right. Thank you very much.
Thank you. We'll go next to Vincent Hund from Autonomous.
Hi. Just one question. So can
you talk about the mix of frequent issuers in Europe versus U. S? How many more U. S. Frequent issuers are there versus Europe?
The Europe has a higher percentage of issuers on frequent issuer programs. And that's really, I would say, less a matter of preference in Europe versus the U. S. And more a matter of the relatively larger size of the U. S.
Speculative grade market, which is characterized by infrequent issuers who don't find frequent issuer arrangements as attractive. So I think that's really the story there.
Okay. Thanks.
And at this time, I'd like to turn the call back over to Ray McDaniel.
Okay. Thank you. Before we end the call, I want to remind everyone that Moody's will be hosting our next Investor Day in late February of 2018 here in New York City. We'll get more information on the Investor Relations website as we get closer to the event. So thank you everyone for joining today's call and we look forward to speaking with you in the fall.
And this concludes Moody's Q2 2017 earnings call. As a reminder, immediately following this call, the company will post MIS revenue breakdown under the Q2 2017 earnings section of the Moody's IR homepage. Additionally, a replay of this call will be available after 3:30 pm Eastern Time on Moody's IR website. Thank you.