Good day, and welcome, ladies and gentlemen, to the Moody's Corporation First Quarter 2016 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen only mode. At the request of the company, we will open up the conference for question and answers following the presentation. I will now turn the conference over to Sallie Schwartz, Global Head of Investor Relations. Please go ahead.
Thank you. Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's Q1 results for 2016, as well as our updated outlook for full year 2016. I am Sallie Schwartz, Global Head of Investor Relations and Communications. This morning, Moody's released its results for the Q1 of 2016 as well as our updated outlook for full year 2016. The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moodys.com.
Ray McDaniel, Moody's President and Chief Executive Officer, will lead this morning's conference call. Also making prepared remarks on the call this morning is Linda Huber, Moody's Executive Vice President and Chief Financial Officer. Before we begin, I call your attention to the Safe Harbor language, which can be found toward the end of our earnings release. Today's remarks may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In accordance with the Act, I also direct your attention to the management's Discussion and Analysis section and the risk factors discussed in our annual report on Form 10 ks for the year ended December 31, 2015, and in other SEC filings made by the company, which are available on our website and on the Securities and Exchange Commission's website.
These, together with the Safe Harbor 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'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 Q1 results. Linda will follow with additional financial detail and operating highlights. I will then conclude with comments about our updated outlook for 2016.
After our prepared remarks, we'll be happy to respond to your questions. In the Q1 of 2016, reduced global bond issuance weighed on Moody's financial performance despite Moody's Investor Services, consistent market coverage and additional ratings mandates, as well as strong results at Moody's Analytics, which is not sensitive to debt issuance activity. Overall, revenue for Moody's Corporation of $816,000,000 declined 6%. Operating expense for the Q1 was $512,000,000 up 4% from the Q1 of 2015. Operating income was $304,000,000 an 18% decline from the prior year period.
The impact of foreign currency translation on operating income was negligible. Adjusted operating income defined as operating income before depreciation and amortization was $334,000,000 down 16% from the same period last year. Operating margin for the Q1 of 2016 was 37.3%. The adjusted operating margin was 40.9%. Diluted earnings per share of $0.93 was down 16% from the prior year period.
Given market conditions, we have scaled back our revenue and earnings expectations for full year 2016 and are managing our cost base accordingly. Our 2016 EPS guidance is now $4.55 to 4.65 dollars Before I turn the call over to Linda, I'd like to highlight 2 investments we made in the Q1. In March, Moody's Analytics announced the acquisition of GGY, a leading provider of actuarial software for the life insurance industry. The addition of GGY's products and specialized expertise accelerates MA's extension into financial risk management for life insurers, complementing our already strong position with global banks. As part of the Enterprise Risk Solutions line of business, GGY will contribute to MA's regulatory solvency and capital management solutions.
We also announced a minority investment in Finagraph, a provider of cloud enabled automated financial data collection and business intelligence solutions for private companies. This investment underscores Moody's commitment to innovative financial technologies to better address the needs of our customers. Peningrad's information and analytical solutions represent important advances in banks' risk assessments of small and medium sized businesses, thus improving access to credit for this underserved segment of the market. I'll now turn the call over to Linda to provide further commentary on our financial results and other updates.
Thanks, Ray. I'll begin with revenue at the company level. As Ray mentioned, Moody's total revenue for the Q1 declined 6% to 8 $16,000,000 Foreign currency translation unfavorably impacted revenue by 2%. U. S.
Revenue of $480,000,000 was down 4% from the Q1 of 2015. Non U. S. Revenue of $336,000,000 was 52,000,000 and represented 55 percent of total revenue. Looking now at each of our businesses, starting with Moody's Investor Service.
Total MIS revenue for the quarter was $525,000,000 down 13% from the prior year period. Foreign currency translation unfavorably while non U. S. Revenue of $189,000,000 while non U. S.
Revenue of $189,000,000 declined 18% and represented 36% of total ratings revenue. Recurring revenue of $231,000,000 increased 4% and represented 44% of Ratings revenue. Moving now to the lines of business for MIS. 1st, global corporate finance revenue of $240,000,000 for the quarter was down 20% from the prior year period. This result reflected lower levels of global speculative freight issuance as well as declines in the number of U.
S. Investment grade bond offerings and in the volume of European investment grade issuance. U. S. Corporate Finance revenue decreased 10% while non U.
S. Revenue decreased 36%. 2nd, Global Structured Finance revenue for the Q1 was $91,000,000 down 11% from the prior year period. This represented the lowest revenue quarter for structured finance that we have seen in 10 quarters. U.
S. Securitization activity slowed primarily within the CMBS and CLO markets due to widening spreads, regulatory requirements and reduced availability of bank loan collateral. U. S. Structured finance revenue was down 15%.
Non U. S. Revenue was flat with a modest increase in Europe. 3rd, Global Financial Institutions revenue of $95,000,000 was up 1% from the prior year period. U.
S. Financial institutions revenue was down 3%, while non U. S. Revenue was up 4%. 4th, global public project and infrastructure finance revenue of $92,000,000 was down 9% versus the prior year period as U.
S. Project finance activity and European infrastructure related issuance fell amid choppy market conditions. U. S. Public project and infrastructure finance revenue was down 6%, while non U.
S. Revenue was down 14%. MIS other, which consists of non rating revenue from Moody's majority owned joint venture interest in ICRA and Korea Investor Service contributed $8,000,000 to MIS revenue for the Q1, flat to the prior year period. And turning now to Moody's Analytics, global revenue for MA of $291,000,000 was up 11% from the Q1 of 2015. Excluding revenue from our March 2016 acquisition of GGY, MA revenue grew by 10%.
Foreign currency translation unfavorably impacted MA revenue by 2%. U. S. Revenue of $144,000,000 was up 12% year over year and non U. S.
Revenue of $147,000,000 was up 9% and represented 51% of total MA revenue. Recurring revenue of $222,000,000 increased 9% and represented 76 percent of MA's revenue. Moving now to the lines of business for MA. First, Global Research Data and Analytics or RD and A, revenue of $165,000,000 was up 10% from the prior year period and represented 57% of total MA revenue. Growth was mainly due to strong new sales of research and data as well as record customer retention.
U. S. RD and A revenue was up 14%, while non U. S. Revenue was up 5%.
2nd, Global Enterprise Risk Solutions or ERS revenue of $90,000,000 was up 16% from last year, primarily from accelerated project deliveries. U. S. ERS revenue was up 14%, while non U. S.
Revenue was up 17%. Excluding revenue from GGY, ERS revenue grew 13%. And as we've noted in the past, due to the variable nature of project timing and completion, ERS revenue remains subject to quarterly volatility. Trailing 12 month sales for ERS increased 1%, reflecting a very difficult comparison with the Q1 of 2015. 3rd, Global Professional Services revenue of $37,000,000 was flat to the prior year period.
Down 6%, while non U. S. Revenue was up 3%. Turning now to expense, Moody's Q1 expense was $512,000,000 up 4% from 2015. The increase was primarily due to higher compensation costs in MA, reflecting additional headcount required to support business growth, as well as Moody's ongoing technology investments.
Expenses in MIS were down slightly compared to prior year period. Foreign currency translation favorably impacted expense by 2%. As Ray noted, Moody's reported operating margin and adjusted operating margin were 37.3 percent and 40.9 percent respectively for the Q1. Moody's effective tax rate for the quarter was 32.3 percent versus 32.9 percent for the same period last year. The year over year decline was primarily due to a change in New York City tax law relating to income apportionment.
Now I'll provide an update on capital allocation. During the Q1 of 2016, Moody's returned $334,000,000 to shareholders via share repurchases and dividends. The company repurchased 2,900,000 shares at a total cost of $262,000,000 or an average cost of $89.83 per share and issued 1,600,000 shares under its annual employee stock based compensation plans. Moody's also paid $72,100,000 in dividends during the quarter and on April 11 announced a quarterly dividend of $0.37 per share of Moody's common stock payable June 10 to stockholders of record at the close of business on May 20. Outstanding shares as of March 31, 2016 totaled 194,300,000 down 4% from the prior year period.
As of March 31, 20 16, Moody's had $1,200,000,000 of share repurchase authority remaining. At quarter end, Moody's had $3,400,000,000 of outstanding debt and $1,000,000,000 of additional debt capacity available under its revolving credit facility. Total cash, cash equivalents and short term investments at quarter end were $2,100,000,000 with approximately 73% held outside the 1st 3 months of 2016 was $211,000,000 down 13% from the 1st 3 months of 2015, primarily due to the year over year decline in net income and changes in working capital. And with that, I'll turn the call back to Ray.
Thanks, Linda. I'll conclude this morning's prepared comments by discussing the changes to our full year guidance for 2016. A full list of Moody's guidance is included in our Q1 2016 earnings press release, which can be found on the Moody's Investor Relations website at ir. Moody's.com. Moody's updated outlook for 2016 is based on assumptions about many macroeconomic and capital market factors, including interest rates, foreign currency exchange rates, corporate profitability and business investment spending, mergers and acquisitions, consumer borrowing and securitization and the amount of debt issued.
These assumptions are subject to uncertainty and results for the year could differ materially from our current outlook. Our guidance assumes foreign currency translation at end of quarter exchange rates. Specifically, our forecast reflects exchange rates for the British pound and the euro at $1.44 to 1 British pound and $1.14 to 1 euro respectively. As I noted earlier, the company now expects 2016 EPS of $4.55 to $4.65 inclusive of $0.02 dilution from the acquisition of GGY. Moody's full year 2016 revenue is now expected to increase in the low single digit percent range.
In response to this revised revenue outlook, we have lowered our projected base business spending for the year by approximately $50,000,000 through expense management actions and reduced incentive compensation. These savings allow Moody's to maintain guidance for operating expenses to increase in the mid single digit percent range despite the addition of GGY's operating expenses and the negative impact of foreign currency translation. Moody's now projects an operating margin of approximately 41%, while adjusted operating margin is still expected to be approximately 45%. Free cash flow is now expected to be approximately $1,000,000,000 Capital expenditures are now expected to be approximately $125,000,000 For MIS, 2016 revenue is now expected to be approximately flat. U.
S. Revenue is now expected to decrease in the low single digit percent range, while non U. S. Revenue is now expected to increase in the low single digit percent range. Corporate Finance revenue is now expected to decrease in the low single digit percent range, reflecting weak issuance in the Q1, as well as expectations for variable issuance activity for the remainder of the year.
Structured finance revenue is now expected to decrease in the mid single digit percent range as a result of continued challenges to U. S. Securitization activity. Public project and infrastructure finance revenue is now expected to increase in the mid single digit percent range, which assumes weakness in the Q1 is not offset in the remainder of the year. For Moody's Analytics, 2016 revenue is now expected to increase in the high single digit percent range.
U. S. Revenue is now expected to increase in the low double digit percent range, while non U. S. Revenue is now expected to increase in the mid single digit percent percent range.
Research data and analytics revenue is now expected to increase in the high single digit percent range as a result of new business and an increased customer retention rate. Enterprise Risk Solutions revenue is now expected to increase in the high single digit percent range, including revenue associated with the March 2016 acquisition of GGY. Before we move to the Q and A, I'd like to highlight MIS management change that we announced on April 4. Effective June 1, 2016, Michel Madeline will retire as President and Chief Operating Officer of MIS and will assume the role of Vice Chairman for MIS. He will also remain on the MIS Board of Directors and MIS European Boards.
Rob Faubur, who has been with Moody's for 11 years, will succeed Michel Madeline as President of MIS. I'd like to extend my thanks to Michelle and congratulate Rob on his new role. This concludes our prepared remarks and joining us for the question and answer session is Michelle Madeline, President and Chief Operating Officer of MIS and Mark Almeida, President of Moody's Analytics. We'd be pleased to take any questions you may have.
And we'll take our first question from Alex Kramm with UBS.
Hey, good morning. I guess afternoon already almost. I wanted to come and talk about the guidance for a second here. I guess from a bigger picture perspective, what was really the thinking in the EPS reduction? And I'm talking primarily from a seasonal perspective.
Is this, hey, the Q1 was really awful, but our outlook because of refinancing and everything else that we talked about 3 months ago has not really changed or is this also a reflection of what the Q2 is all right, but there's still a lot of uncertainty here with Brexit in June and things like that, but we're still hoping a lot for the second half. So hopefully you're getting the drift of my question, but where's the near term and the remainder of the year kind of fit into this?
Yes. At a high level, Alex, I would point to 2 things. One is, as you point out, we feel there is still quite a bit of uncertainty for the remainder of this year at a macro level between Brexit and the potential for interest rate increases and the fact that we still have some tough comps in the second quarter in particular. We do expect more momentum in the second half of the year than we've had in the first half, and we've already seen improvement in late March April compared to the very weak beginning to the year in January, February. The other thing I'd point you to though is structured finance and the conditions for the structured finance market have been very challenged so far this year, and we think that they're going to continue to be challenged, especially in the U.
S. There are a number of reasons for this, but it's not only is it credit spreads, which can affect the economics of the transaction, but also regulatory requirements that are being implemented and interpreted. And a lot of the market participants are sorting out the appropriate interpretation for new regulatory requirements around risk retention and disclosure of underlying asset information. And that in combination with a challenging interest rate environment or spread environment and issues around the appropriate availability of collateral in areas such as CLOs has really impacted our outlook for structured finance in the United States for not only the Q1 results, but our outlook for the remaining 9 months.
Alex, just to give you some sense of the calendarization of that, we've taken down the MIS revenue outlook by a little bit more than $100,000,000 You should consider 40% of that is what we've already seen as weakness in the Q1. 60% of it comes from the rest of the year forecast. And in terms of that remaining 60%, about 60% of that is a reduction in structured finance and the balance about 40% is in corporate. So that should give you something to work with in terms of what we're seeing. So we've taken it down for the Q1, but also we've moderated our expectations, the balance of that being structured and the remainder being in corporate for the rest of the year.
Well, that's very great color. Thank you. And then secondly, Linda, while I have you, I guess, can you talk about the cost side of the equation a little bit in more detail? I think in the past, you've done a great job kind of talking on an absolute dollar basis how the trajectory looks like and it seems like you've really now cut all the flex that you had. So you should probably have a pretty good visibility for the second, third and fourth quarter.
And then if there's any variability to what you hopefully going to give me now, is it basically if revenues actually end up being a little bit better, some of the negative flex comes back and maybe some of the bonuses come back. And so basically what I'm saying is in a weaker revenue environment, there's not much that's going to change on the cost side on an absolute basis. But if we actually end up doing better, you probably see costs up a little bit again. Is that fair?
Alex, let me just set out the explanation for this. So we saw the markets were weak in the beginning of February. We moved aggressively and we moved hard against that situation. We have taken steps in T and E and most importantly in hiring. For 2 of the divisions, this excludes Moody's Analytics, we are back to what I would call essential hiring and we're looking at hiring on a person by person basis in terms of backfilling.
So really clamped down on that front for 2 of the divisions. Now we can't turn the ship that quickly and that's the issue. So we often talk about $50,000,000 of expense flex. So we have that in train already. And about half of that is from reduced incentive compensation because we've just taken the guidance down.
The other half is from the expense management actions that I spoke about earlier. Now if this gets worse, we have another $50,000,000 which again is split about half and half between incentive compensation and other expense saving measures that we could take. But as we move into that second $50,000,000 this does get tougher and we've already taken down our incentive compensation with this first pass by about $20,000,000 So we'll see how we go and we'll see what we want to do. But we have been very clear about this and we started these actions again in February, but you're going to have to wait for the rest of the year to see this flow through. And I'll ask if Ray has any further thoughts on that.
Yes. The only thing I would add is, as we've said before, we would take different actions if we saw structural changes in the markets that we're operating in versus cyclical ups and downs. This looks largely to us to be cyclical condition in the markets. We'll see in the structured finance area how that market adjusts to different regulatory requirements. But history has said that it does adjust.
But in terms of how quickly that's going to recover, we will have to see. There's a couple of phases of regulatory requirements. The market is adjusting currently to the first phase. There will be more coming. So we just have to keep an eye on that space.
Just one more clarification, the $50,000,000 we've already committed to, that is largely offset by additional expenses from GGY and what we view as potential unfavorable FX situation. So good effort by taking down expenses by $50,000,000 However, we do have the offset. We're basically back to where we started. So the watchword here is to be very, very careful with hiring and to be very careful with all other expense items up and down the P and L. And we are absolutely on that.
Great. And sorry, just to quickly, on the expenses, in absolute dollars, like you usually give like, hey, in the next couple of quarters, see it up $5,000,000 $5,000,000 $5,000,000 Like can you just give us an update? It seems like not much has changed, but just remind us how the absolute dollar level is changing in your expectations?
Sure. We're looking at an expense ramp from here that we think is going to be $35,000,000 to $45,000,000 over the course of the year. Now the most variable part of that is incentive compensation. If we are not doing well, incentive compensation gets hit first and hard. And if we somehow manage to do better, incentive compensation might ramp up toward the end of the year.
So just to watch out there, but we expect the ramp from here $35,000,000 to $45,000,000 Excellent.
Thanks for that.
We will now go to Andre Benjamin with Goldman Sachs.
Hi, Andre.
Hi, how are you? So on ERS, I was wondering if you can maybe talk through the increase to guidance in that business line, particularly the high single digit increase from low single digit just a few months ago. I was wondering how much of that is M and A contribution versus new business wins and other factors, because if you're simply pulling business forward, I would think the full year guidance wouldn't change that much?
Sure. We'll ask Mark to take that. Yes. I think you've got it right, Andre. It's really driven by the GGY acquisition kicking up the ERS result to high single.
Okay. And then I guess The
business is performing very much in line with what we expected coming into the year. The timing in the Q1 has been a little different. I think we've just been executing quite well on project delivery. So we pulled some things forward. But the base outlook for the business organically is consistent with what we guided to previously.
And then on the debt outlook, I know you talked a bit about the split between how much came out structure versus other buckets in Corporate Finance where you did take the view down. I was wondering if you could provide some color on how much of that is our continued weakness in the high yield market versus you might be starting to see some cracks in the pipeline for investment grade as well?
Sure. Andre, maybe this is a good time for us to talk about what we're hearing from the banks. And again, this is issuance views for both financial and non financial U. S. Dollar issuance.
And then we'll go over to Europe. So I think you should be able to see a slide that we've put up. Now investment grade bonds, curious situation. For the Q1 of 2016, $340,000,000,000 in issuance about flat year over year. That's good.
What was less good is that the deal count, the number of transactions was down by about 20%. So dollar volume, dollar value about the same, but deal count down, which is not helpful to us. Moving across the columns, month to date for April, about $65,000,000,000 and for the full year, we're looking at 1 $2,000,000,000,000 which is about flat. So right now for investment grade, the pipeline is robust. It's good.
And we expect the market to remain active and the backdrop is stable and companies are coming out of blackouts. So it looks like there's quite a bit to do right now. So investment grade positive, the issue here has been the deal count. Going down to high yield, looking at $40,000,000,000 of issuance so far, that's down 60% year over year. Month to date April, dollars 25,000,000,000 year to date, we're looking at $230,000,000,000 down 15%.
The market tone is better. There are some deals in the market this there have been deals in the market this week. There's one in the market today as a Friday that's unusual. The market tone has improved, but the market is still bifurcated as you see in the second point between haves and haves and have nots. The stronger credits are doing better.
Spread tightening has already happened. We're in about 160 basis points. The question is, is that enough? And if spreads continue to tighten, we may see some progress. Conversely, if they widen out again, we may see further backup.
So we're going to have to watch that closely. Leveraged loans, we see $40,000,000,000 in the Q1, which is down 25% year over year, dollars 15,000,000,000 month to date and $260,000,000,000 for the year, which is down 10% year over year. So stability in the macro backdrop, as you see in the first point, is also aiding the leveraged loan market. It's weaker than the high yield bond market though because of fund outflows and a slowdown in CLO formation that goes back to the risk retention requirements, which we can talk a bit more about if you want. And some increased default activity, serves as a bit of a headwind.
Now if we move over to Europe, looking at the next slide, again, these are the views of the banks. Investment grade in Europe pipeline is robust and can pick up further because of the ECB's corporate bond purchasing program. Brexit though, in the second point, is an uncertainty and that could sideline issuers and be harmful to the summer season, which is traditionally weaker depending on what happens with that boat. And U. S.
Corporates continue to see that there's good value in accessing the euro market, what we would call reverse Yankees, and we expect that to be a heavy component of supply as it has been and will be we think going forward. Spec grade in Europe, the market was muted. Supply was down 70%, a very volatile first quarter. Again, the ECB's move has sparked a renewed risk appetite and is leading to pickup in high yield activity in Europe and tighter spreads again may encourage further issuance. So overall in Europe, the ECB's move makes us more optimistic, but it has been a very slow Q1 in Europe.
I think the overall view on the more speculative asset classes across the world would be keep an eye on spreads. If they continue to tighten, we may see the outlook improve. And conversely, if they widen, particularly as we go into the Brexit vote, that will be detrimental. So hope that's helpful to you, Andrey.
Got it. Thank you.
We'll now go to Manav Patnaik with Barclays.
Yes. Thank you. Good afternoon. So a lot of the big picture, I guess, constraints on the issuance market don't sound much different than what it was when you gave guidance in February. And I was so I guess is it fair that I guess maybe some more color on what the degree of changes?
I think Linda in that $100,000,000 you helped break out the where you're assuming what and I think you just walked through the corporate side of things. So maybe it's structured finance where maybe you can help us understand the different issuance categories and what changed versus February?
Yes, I'll start Manav and then invite Linda or Michelle to weigh It's really centered on our change in outlook for structured finance is really centered on the U. S. And within the U. S, it's focused on primarily the CMBS market and the CLO market. As you know from our prior comments in the commercial mortgage backed securities area, there is a lot of refinancing that needs to occur.
Some of that refinancing is occurring outside of securitization. And we are also expecting to see the volume and activity pickup in the 3rd and 4th quarters of this year, because there was very little conduit lending early in this year and the conduits have increased their financing, but it will take some months for that to feed into CMBS. In the CLO area, it's the market dealing with both the risk retention requirements and the interpretations for other regulatory requirements that having to do with transparency around underlying assets and the suitability of the collateral itself. So assuming that we see the market sort out how it is going to meet the new regulatory requirements and the suitability of collateral, again, we could see a pickup in CLOs later in the year. Pipelines are not bad.
As a matter of fact, in Europe, pipeline is up quite substantially. And so some of the issues that we're seeing in the U. S. Are being partially offset by the international business, but it's still not enough to allow us to come anywhere close to holding our original guidance.
Manav, just a little bit of color and then I'll ask Michelle if he wants to comment further. I think your thesis was what's changed and shouldn't we have been able to see this when we gave our initial guidance. As I had said previously, high yield bond issuance down 60% in the Q1 is a pretty heavy hit. Leveraged loans down 25 percent also is a pretty heavy hit. So you have the risk off mode happening.
You had oil prices collapsing, concerns about China and growth concerns. So we went through a pretty heavy risk off phase there, which is now starting to write itself. So generally around here, we're okay if we have one segment off, but having corporates hit hard as well as having structured having had the worst quarter it's had in 10 quarters, we frankly didn't see that. Now as Ray said, that is what we would view as a cyclical issue in structured until the participants in that market figure out how to deal with some of these different conditions and rules. We do think that that situation will ease as we go into the end of the year.
But I don't think we expected the total risk off environment in the Q1. We were thoughtful, but it was worse than we thought. And as we said, there are a number of factors that make the rest of the year a little bit tricky to predict. With that, I'll turn it over to Michel to have him perhaps give some more thoughts about how we're viewing the balance of the year.
Thank you, Linda. I think no, what I was going to say is that really in terms of the numbers we're seeing, this is really the result of volumes market volumes. And that I think as Ray alluded earlier, our coverage has remained very consistent, which we've seen in the past. So as market improve, we should see a pickup in our own volumes, obviously. That's what I was going to add.
Got it. And then just thinking a little bit beyond the second half of the year to your comments on structural versus cyclical, I mean, it sounds like a lot of this, at least from your comments, is a little bit more cyclical. But how do you guys think about the puts and takes?
I know you've talked about the, I guess, the maturity backlog. So maybe you could just give us a few updated comments on that. And then maybe some comments
on, I guess, M and A is slowing down a bit. That's been a big driver of your issuance in your backlog. And it sounds like Ratings and Evaluation Services might be a little slow because of that. So any puts and takes there we need to call out?
Yes. It's you're correct. We have seen slower activity in our rating assessment service, coincident with reduced activity in issuance. As far as the cyclicality of the conditions, clearly in the corporate sector, this is cyclical. There are significant refinancing walls that begin to build in 2017 and really build for several years after that.
So we're going to see a large amount of activity associated with refinancing. M and A, there had been some bumps in the road with M and A, but it has been strong for a while. And to the extent that we're in a low growth environment, that has and probably will continue to encourage M and A. Where we see the erosion in M and A driven debt is at least at the margins around some of the tax driven deals and things of that sort. So really, I view the corporate story as being very much a cyclical story with a significant refinancing wall coming upon us beginning next year.
On the structured finance side, again, I think it's largely cyclical, but we have to watch and see how the market deals with new requirements and what economically the market determines makes sense. So that's an area to keep our collective eye on in terms of how much of it is cyclical and whether there are some structural changes to that market.
None of it Okay, that's great.
Yes, go ahead.
I'm sorry. I just wanted to note that investment grade issuance conditions are really good right now. The U. S. Tenure is at 1.85.
If you want to look at reverse Yankee issuance, Unilever did a particularly attractive bond issuance recently and they paid very, very little for that issuance, which was really quite remarkable. We've seen M and A kind of stop as we dealt with the changes in the inversion rules. And then this week, healthcare M and A came back strong, 3 deals this week. I think we saw 3 deals in the TMT space this week. So there still is appetite and there's still transactions that need to be funded.
So we'll see how that goes. So this is really a week by week situation with the backdrop of the Brexit vote coming up on June 23. So it provides an unusual degree of uncertainty, particularly in Europe. Absent the Brexit concern, I think we would feel pretty good about company's financing opportunities, particularly for reverse Yankees. But we're going to have to watch this closely.
All right. Thanks a lot for that color. And I'd just like to congratulate Michelle and Rob on the new roles.
Thank you. Thanks.
We'll pass that along.
We'll now go to Warren Gardner with Evercore.
Great. Thank you. So I realize it was a pretty tough quarter for fees, but it kind of looks like at least in structured products and corporate finance relationship fees jumped pretty nicely from the 4th quarter and maybe some of that's pricing, but anything to kind of call out there in terms of the growth?
Yes. I mean, some of it is pricing, but it's also the monitoring and annual fees associated with the new rating mandates that come in over the trailing 12 months are a significant contributor to that. So as the stock of outstanding ratings grows, the monitoring fees, annual fees grow along with that. Okay.
And then a while back, I think you guys provided some nice color around those monitoring fees across some different regions. I recall that fees in the U. S. Were pretty high relative to Europe and Asia, And that's kind of on the monitoring fee side or relation fee side. So I guess my question is, does that relationship kind of also hold for the most part on the transaction fee side as
well? Unfortunately, it's not as simple as an answer as would probably be convenient because we have a different mix of frequent issuer pricing agreements versus transaction based pricing agreements by geography. So, the U. S. Market, for example, which is heavily represented by speculative grade issuers, has more transaction pricing.
Those are less frequent issuers. And the European market, which is more investment grade driven, has more frequent issuer pricing agreements. So, the pricing is a bit difficult to match up. But broadly speaking, our pricing is consistent around the world for global ratings. It's not exactly the same everywhere, but it's broadly consistent.
Okay, great. Thank you.
We will now go to Joseph Foresi with Cantor Fitzgerald.
Hi. I wanted to ask about some of your assumptions because it sounded like you're touching on them in some of your earlier points. But is it fair to think you're building in a steady environment in Europe in your non U. S. Assumptions?
And then I've got a couple other ones.
We do think that Europe is going to be relatively stronger in the second half of the year once we get through the Brexit vote and with the corporate sector purchase program through the ECB. So assuming that Brexit is resolved in a reasonable way in terms how the market interprets it. And with that June purchase program kicking off, we think that's going to be a very attractive spread environment for corporates and that's supporting what should be good year on year growth for our European corporates.
Okay. And then the assumption, I guess, Global Corporate Finance, it sounded like you've seen some people come back to the market on the M and A side. Are you expecting a rebound in the next, I guess, 2 to 3 quarters in M and A? Again, I'm just trying to get at the assumptions behind some of the guidance that's out there.
No, I wouldn't say I would not anticipate M and A to be running for the remainder of the year at the pace it ran last year. But there's still going to be a reasonable amount of activity. So sorry, I don't have a number for you on that, but that would be my narrative around it.
So keep in mind, there's also the announced M and A pipeline that still needs to be funded. We had cited that at 200 $1,000,000,000 at the beginning of the year and only some of that financing has moved through the pipeline. So we've got some very, very big deals. We're thinking about the Teva deal and also the Dell deal alone that $60,000,000,000 that we could see that has to move, for example. So we would still see that there is some opportunity there.
But we think that companies are going to choose their spots pretty carefully again given the macro environment.
Okay. That's very helpful. And then just on the cost cutting side, have you seen any change in attrition rates among employees? And then it sounded like the compensation was perhaps flexible in the sense that if we had a better second half of the year, we could see that compensation number go up. How do we think about that kind of given the current environment?
Sure. I think we're seeing a little bit of reduced voluntary turnover, but it's only moved a few tenths of a percentage point off of our high single digit view of things. If one is looking for a job in the financial sector right now, particularly if one is looking for a job in the banking sector, that's a pretty challenging place to look at this point in time. So that would probably be the reason why we're seeing a slight reduction in voluntary turnover. Now for incentive $0.80 we had previously seen for guidance.
We pulled that down to $4.60 and as a result of that, we've taken down our incentive compensation. For example, for the Q1 last year, incentive compensation was $38,000,000 and this year in the Q1, it's come down to $32,000,000 So we pulled down incentive compensation pretty hard to deal with this new lower forecast. And if we're not going to hit our numbers, the employees are not paid as well. That's just the way it goes. In terms of the $32,000,000 number, we would see that it will ramp a bit as we go into the 4th quarter if things go right.
But if we do considerably better than the 460 we're predicting now, Joe, you would expect that we would take incentive compensation back up. So $480,000,000 was 100% and $460,000,000 is below that. So we've cut incentive comp accordingly.
Yes. And this does react formulaically. So improved performance will cause higher accruals and reduced performance will reduce the incentive comp line formulaically.
Got it. Thank you.
We will now go to Vincent Hung with Autonomous.
Hi. How's it going? Good afternoon. Good afternoon. On the frequent issuer programs, are you happy with the proportion of MIS that is frequent issuer or longer term would you prefer that to be higher?
There is some volatility that we are accepting in order to have more transactional pricing as opposed to frequent issuer pricing. But that really outside of cyclical conditions, it really is driven by our view of whether global debt is likely to continue to grow and we would like to capture the upside of that through higher transactional pricing, which you might think of as retail pricing as opposed to wholesale pricing. That being said, if we see a change in the growth opportunity in global debt markets, we would consider whether a different pricing model makes more sense and we would adjust.
Okay. And just last one for me. So can you talk a
bit about the management change in MIS? Is it going to be business as usual or should we expect maybe a different approach?
Well, we're very pleased with all the work that Michel Madeline has done since he's been the President of MIS. So in that respect, you should think of it as business as usual. That being said, Rob and Michelle are not the same person. So we're looking for good ideas. We're looking for good ideas from Michelle going forward in his new role and from Rob in his new role.
So, anticipate business as usual, but maybe not all exactly the same business.
Great. Thank you.
We'll now go with Denny Galindo with Morgan Stanley.
Hi there. Thanks for taking my questions. First one on the expenses, the incremental margins were very high in MIS. And I was wondering how much of that was due to kind of losing some of these things like rush fees and new issuer fees that might be kind of a higher margin profile than some of the pure kind of transaction based fees that you guys charge?
No, I really think the focus should be on transaction volumes in terms of the change. Those other businesses, rating assessment service and that sort of thing, is really not a very large part of the revenue profile for MIS. And so even though we appreciate when that area is more active, it's not a big contributor to changes in revenue or margin. It's really based off of volumes.
Jenny, a little bit more color. In the Q1 of 'sixteen, in fact, expenses increased 4% over 15%. And you might want to ask why that was. The majority of that growth was to continue the growth, support the growth in Moody's Analytics, which as you can see is performing beautifully. So MA expenses grew 9%, which supported revenue growth, which was even greater.
MIS expenses though were slightly down. And of course, we're trying to match the expense support for the revenue growth in the business and we can't do that instantaneously. Most of the $50,000,000 that we have already put in process on expense management will come from shared services. That's the support part of the business, which I run for the most part, and then also to MIS. Moody's Analytics is performing well and we will continue to invest in it.
And its compensation view will be slightly different perhaps than the rest of the corporation. If it performs according to its targets, which through the Q1 it has and even better, its incentive compensation would be at target or perhaps even higher. So we're being very cautious to match what we're doing here with where we're seeing growth. And the further reason for the growth in that incentive compensation for the Q1 year over year was because of some of the additions that we made in headcount last year and that some of the things we had already started at the very beginning of 2016. We have a very good handle on that right now.
And of course, we did see the acquisition of GGY, which added some expense and we continue to make prudent technology investments. But this is very carefully planned expense management where we need it to support the growth areas and we're throttling back on those areas, particularly the support areas where we can do that. So very careful, very active management of our expense base.
Okay. That's helpful. And then that's a good segue into Moody's Analytics. That was a little strong. Most of the guidance increase seems to be from the acquisition.
But we've also seen some stories coming out about IFRS 9 and the equivalent GAAP rules, which seem like it might give you guys a pretty nice runway in ERS over the next, say, 2 to 3 years. Have you been able to kind of size that opportunity in any better way since we last spoke on IFRS 9 and these changes to the GAAP provisioning rules?
Denny, well, we've talked about this. IFRS 9, we think is going to be a very nice growth driver for the business. We actually think that the prospect for IFRS 9 is probably richer for us than what we've gotten from stress testing, because it's applicable to many, many more institutions all over the world. So, we're very optimistic about IFRS 9. It's still early days, frankly, for that initiative.
We've had some success thus far. We have a good pipeline and we have very good expectations for what we can do there. But you're absolutely right, we had good strength across MA in the Q1, really very broad based strength for Moody's Analytics. On a constant dollar basis, every region was up double digits organically. So, we feel that the business is just performing very well and demand for the things that we're doing continues to be very strong.
So, we've taken up guidance in ERS because of the GGY acquisition, but we've also taken up guidance in our DNA, just reflecting strong underlying growth in the business.
Okay. And then just one last one. On the capital allocation guidance, you had this kind of 1,000,000,000 dollars number out there. And typically, the way you formulate, we do this, you end up buying more shares whenever or spending more whenever the stock price is down. So I was a little surprised that only roughly 25% of that annual buyback rate occurred in the Q1.
I mean, is there was there something kind of stopping you from or did the formula not come out with more aggressive buybacks in that quarter? And is this something that maybe we could increase that number if there's an attractive opportunity with the price in the Q2 or Q3? Maybe just kind of thoughts around on how that buyback number will progress?
Danny, it's Linda. Menefray wants to chime in. I'm sure he will do so. So we're working with the guidance of approximately $1,000,000,000 in buybacks and we have to set our plan as we finished the previous quarter's earnings call. So in the absence of better information when we did this close to 90 days ago now, we decided to keep our allocation pro rata So we started out spreading around Brexit, around the U.
S. Election and so on. So we started out spreading our money pro rata across the year. Now we had some heavy tiering in place and when the stock price fell to $0.78 we were able to buy back more shares quite cheaply and in fact we were at $89 and change for average repurchase price in the Q1. Until yesterday, the stock was in the high 90s $100 So we felt pretty good about that.
So I have to see where we want to go with that allocation over the rest of the year. But again, we have to do this in advance for the coming quarter and we can't change that allocation until we move into another window period. So that's the technical explanation of what's going on. I hope that's helpful to you and maybe Ray has some further thoughts.
No, I think that's it.
Was very helpful. That's it for me.
We'll now go to Peter Appert with Piper Jaffray.
Thanks. So, the MIS revenue performance in the Q1 lagged just a little bit against your primary competitor. Anything to read into that in terms of changes in the market share dynamic?
No. Our coverage was very strong. And so I don't think that's part of the story. I think the story probably does revolve around the fact that we have more transactional based pricing than our competitor. And so in a low volume quarter, I think that's where you see the difference show up.
Yes, makes sense. Ray, on the Brexit issue, let's say, God forbid, they make the wrong decision and decide to go. Do you interpret that as a fundamental structural change in the market that might just reduce the issuance opportunity coming out of the EU?
It's certainly for I would think for some period of time that is going to be a disruptive influence in the European market. And not only because of an exit by the UK, but whether that causes any other nations to rethink their position in the EU or in the Eurozone. So it's quite speculative to try and anticipate what the overall consequence of this would be. That being said, it's also hard for me to imagine that in the short run, it wouldn't have a chilling effect on issuance just because of the confusion about what the longer term consequences would be.
Right, understood. And then lastly for Mark, I'm wondering if it's possible for you to give us any color around a backlog metric for the ERS business to help us better understand the sustainability of growth. I'm asking this in the context of you've cited accelerated deliveries as a driver of revenue. I wonder if that brings down your backlog number that therefore makes the revenue growth number going forward look, maybe less compelling?
Peter, the way I'd answer that is we've got frankly and we talked about this last time, for ERS, we've got a pretty modest revenue growth outlook this year, partly because of the pull forward that we saw at the end of 2015. We had pulled a pretty sizable chunk of revenue into late 2015 from 2016. So that was impacting our 2016 growth rate. But we still the business is still performing well. I mean, trailing 12 month sales are now down to, I think, 1% over prior year.
I think that's really a question of difficult comps in this past quarter and in the Q2 of last year. We expect double digit sales growth for the rest of this year. So I think we're going to be in good shape as we move into 2017. I don't see this impairing growth in the business going forward.
So net new sales are running at a double digit rate currently, is that the message? Net
news well, again, to be very precise, trailing 12 month sales are up only 1% over where they were this time last year. That said, we had very, very strong growth in the Q2 of last year and in the 1st and second quarters of last year. So, we've got difficult comparables in this period. Moving ahead into quarter 2, 3 and 4 of 2016, we are projecting double digit sales growth in ERS.
I'm sorry, when you say double digit sales growth, are you talking about new billings or are you talking about recognized revenue?
No, no, I'm sorry. I'm talking about sales as opposed to revenue recognized on the P and L. So billings would be the right metric.
Got it. Very good. Thank you.
We'll now go to Craig Huber with Huber Research Partners.
Yes. Hi. Thanks for taking my questions.
First, Ray or Linda, can
you just talk a little further about the high yield market out there in the U. S, maybe in the context, where are the default rates right now for the energy commodity companies, if you separate that as default rates there versus the rest of the market for high yield?
Well, our forecast for the energy sector for the 1 year forecast is for a 10% default rate and about 12.5% in metals and mining. So that obviously is elevated compared to the global 2016 forecast of about 4.5%. So with the recent relative strength in energy prices, that might help these numbers tick down. But we'll have to see. The energy sector has been quite volatile through the Q1 and was a source of money both leaving the high yield sector, but then also money coming back in later in the quarter.
So it has contributed to the volatility and availability of funding based on the overall flows in and out of that sector.
And then where you've seen the default rates for the non energy companies and high yield in the U. S. Right now?
For our high yield U. S, we are forecasting at year end 6% in the U. S. And about 2% in Europe. So the global number would be about 4%, 3 high 3% is 4%.
I'm sorry, is that for the non energy related companies or for the overall?
Yes, that's looking at overall spec grade.
I guess you're inferring then that the non energy companies, the default rates, the health of those high yield companies are much better shape, of course.
Exactly, exactly.
So does that give you a reason for optimism for high yield as you kind of think out here over the next 12 months for high yield debt issuance for the overall?
Yes, I mean, the spreads have certainly come in from where they peaked in early February. They've come in significantly. It's I think they I think it would be beneficial for them to continue to come in because there is not a lot of refinancing that has to happen this year. It is more opportunistic. So if we were moving out 12 months or 18 months, I would say, this kind of spread environment is certainly supportive of refinancing for maturing debt.
But right now, we're in a more opportunistic environment. So more firms can wait and see if spreads continue to tighten or not.
I have 2 other questions, please. 1, is there any update, Linda or Ray, on the DOJ front if they potentially come out of your company like they did a few years ago with S and P?
No. There's we've been disclosing in our Qs and K that we continue to have investigations, inquiries being made of us from the DOJ and State's Attorneys General, that disclosure has remained very consistent. So there's really no new news to offer there.
And then lastly, Linda, if
you could just give us an update for the Q1, the breakdown of the revenues in your 4 ratings areas, how those revenues broke down, your high yield bank loans, investment grade, etcetera, please?
Sure, Craig. I'll start with the corporate sector and we'll start with investment grade and we're looking at Q1 a of revenue from investment grade. That was 28% of the total for CFG, which is $240,000,000 Last year, we had $87,000,000 in investment grade and $298,000,000 in corporate. So the percentage stayed about same at 28%. That grade is where the story is.
For the Q1 this year, we had $30,300,000 That is less than half of last year's $62,700,000 And this year, we're looking at spec rate being 13 percent of the total. Bank loans down a bit, dollars 41,300,000 versus $44,500,000 last year and 17% of the total and other, about flat 102.6% 43% of the total for CFG. Going to structured, again quarter over quarter 2016 versus 2015. ABS, asset backed securities, pretty close, about $20,000,000 for the Q1 this year versus 21% last year. Percentage is about flat at 22%.
RMBS, also not that much movement. In fact, this was up in the Q1 of 2016 to almost $21,000,000 versus about 18% last year. Percentage was up to 23%. Commercial Real Estate, here again was where we saw a more dramatic difference, about $28,000,000 in the Q1 of this year versus 33 last year. Percentage is about 31% this year.
Structured credit also a more dramatic change, dollars 22,000,000 this versus almost $29,000,000 last year and 24% of the total. So that's the story in structured. FIG, not too much difference in FIG, a total of $95,000,000 for the Q1 of 'sixteen, about flat to last year, it's about $94,000,000 FIG does not move around as much as the other lines. So for banks, we're about $59,000,000 last year it was about $63,000,000 percentage is about 62%. Insurance did perform better.
We're close to $30,000,000 in insurance versus $25,000,000 last year. That's 31% of the big total. Managed investments, about $4,000,000 flat to last year in dollar and percent. Other also flat in dollar and percent at about $2,500,000 3 percent. And PPIF, again, this was another less than pleasant surprise.
Last year in the Q1, PPIF in 2015 did $100,000,000 This year we have a little bit less than $92,000,000 So PFG at Sovereigns is about $55,000,000 about flat to last year's $56,000,000 Projects and Infrastructure is where we saw some weakness, about 36.5% versus last year's 44.5%. So that's about 40% of the PPIF line and about an 18% decline, which was obviously not helpful. Then the other line is negligible for PPIF. So again, PPIF in total down 9% year over year. So we had 3 out of 4 of the businesses having some challenges with corporates down the most in dollar and percent terms, structured, which is our 2nd biggest business though off and then PPIF off 9% as well with banking about the same.
So again, if we have 1 or one of these engines have a bit of a challenge, we can usually figure it out and make it up somewhere else. But 3 out of 4 of the MIS engines down, that's a little bit tricky. And so you see the results in the quarter numbers.
Great. Thanks for going through all that.
We will now go to Doug Arthur with Huber Partners.
Yes, thanks. Two questions. I mean, Wade, there's been a bunch of sort of indirect questions on this on the call, but I'm just trying to get a better sense of the trend in mandates globally right now. And then I've got a follow-up.
Obviously, we're continuing to see a significant number of new mandates. The Q1, they were down a little bit compared to the Q1 of last year. And that would be typically associated with reduced debt market activity. So we're convinced, I'm convinced that it remains a very important fundamental long term driver of the business. But it does follow the cycles of debt issuance activity.
And so it was off slightly in the Q1 compared to last year.
Okay, great. And then Linda, just a technical question per se. Interest expense on an absolute basis was up quite a bit sequentially from the Q4. I'm trying to understand within your tranches of debt, did anything materially change there Q4 or Q1 over Q4?
Let me take a look at that, Craig. Q1 over Q4, I think the answer to that is that we did reopen our 30 year notes in November of 2015. Now not to call anybody out, but a number of the analysts have completely missed that we took on $300,000,000 worth of debt in the Q4 in November. We've talked about it a lot, but despite that, some folks have completely missed it. So adding another $300,000,000 of debt in November, we only had obviously a partial inclusion of that debt in the 4th quarter and we had a full quarter of that interest expense in the Q1.
So let me see, the 4th quarter we had interest expense of $31,800,000 and that bumped up to 34.6 dollars in the Q1 of 2016. So that's what that's all about. And again, sorry if we didn't signal this strongly enough. We thought we did, but everybody should note that we added $300,000,000 to those 2,000 and 44s in November.
That clarifies it. Thank you.
Sure. We will now go to Bill Warmington with Wells Fargo.
Good afternoon, everyone.
Hi, Bill.
So a question for you on the improved outlook for Moody's Analytics. Part of it's coming from the inclusion of GGY, but then RD and A came in better than expected in Q1. What was actually going on within RD and A? That's normally pretty steady predictable business and it's coming in on the upside. So I was going to ask for some color on what's driving that?
Yes. Bill, I think the short answer is we had very strong sales at the end of last year and at the beginning of this year. It's a subscription business. And so having sales come in a bit stronger than we expected, that's going to result in more revenue that gets recognized for the full year in 2016. And it was a combination of a number of things.
Customer retention continues to improve. So we got a little bit of a bump from that. New sales production has been very strong. So that contributed. Pricing has been good.
So, I guess, on the RD and A side, one way to say it is we're firing on all cylinders. We're just we're doing quite well there. And as I mentioned earlier, we're doing well all over the world. So, the business is just quite strong and it added to the expectation for the year and prompted us to just move the guidance up.
And then a balance sheet question for you. You've got about $2,100,000,000 in cash. And could you remind us how much of that is offshore? And how do you feel about taking on some additional leverage at this point to support stock repurchases? And then I might as well ask about the private placements coming due in 2017, just to ask if it's too early to ask what you're thinking about doing with that?
Bill, we have 73% of our cash offshore to be exact. And the total amount that we have is $2,066,000,000 so $1,500,000,000 is offshore and a little bit more than $500,000,000 is onshore. We do have some room within our leverage, but given that we did the $300,000,000 addition in the Q4 of last year, I think our view would be we're fine for right now. We'll wait and see what the end of the year looks like. But yes, we could potentially put on a little bit more debt.
We're watching the markets very closely. Your point is very good that we have a private placement with a particularly high coupon coming due in 2017 and we're running the breakevens on that right now. And we'll take a look at that. If we do decide to move toward the end of the year, that may or may not be included depending on what the breakeven looks like. But we're watching the markets carefully.
But since we did $300,000,000 more in the Q4 of November, as I just said, I think if we do anything, it might be more weighted toward the back half of the year. Our cash position is fine to continue with our share repurchase and we'll continue to run our plans as we've guided.
Okay. Thank you for the insight.
Sure. We will now go with Jeff Silber with BMO Capital Markets.
Hey, good afternoon. It's Henry Chiang calling in for Jeff. I just had a question, a follow-up question on MIS. Looking at the non transaction revenues, how should we think about that for the rest of the year given the amount of mandates you already have and especially if the environment sort of remains as it is right now? Any color you can provide that would be appreciated.
For the monitoring fees, their growth will not change dramatically for quarters 2, 3 and 4. We got the biggest bump in the Q1 as we moved into the New Year. And then we'll see we'll continue to see growth, but it will be more modest through the remainder of the year.
Got it. Okay, that's helpful. And in terms of your guidance, the raised guidance for MA, are you also assuming some margin expansion or additional margin expansion for the segment as well for 2016?
Well, we don't provide guidance on the margin outlook. But we continue as we've discussed, we're continuing to work and execute on all the plans we have in place to drive margin expansion in MA over the next several years. So that plan remains intact. Obviously, the acquisition we did will have some impact on the margin in the near term. But nevertheless, the work that we're doing to drive margin expansion given the maturity of the business and the scale that we're achieving, those continue to be a work in progress.
Got it. Okay. Thanks so much.
Henry, it's Linda. To be clear about this, we report our margins fully loaded with overhead costs. I would ask you to look at that very carefully compared to others who are in the same business. Mark's business has been particularly successful of late and perhaps the less than happy outcome for him is that he's now allowed to carry more of the overhead allocation, which makes this life a little bit harder on the margin line. So in the no good deed goes unpunished category, just something you might want to think about a little bit because we do most of that work after we look at what's clearly trackable and traceable for overhead allocation that's based on the revenue view.
So Mark's progress is garnering him a little bit more overhead.
Okay, got it. Okay, all right. Thank you so much.
We'll now go to Tim McHugh with William Blair.
Yes, thanks. Most of my questions have been asked, but just one quick one maybe would be, if you have to make the additional $50,000,000 of cuts, if things got worse than I guess you've anticipated? I know the incentive comp is kind of formulaic, but that next tranche of cuts, I guess how deeply would that require you cutting at that point? Is it at this point, it sounds like you've kind of gone to essential hiring, but what would be required to make that next layer? And I guess, just trying to get a sense of how painful, I guess, that would have to be if that's where you had to go?
Let me just make one thing clear. We received the question why did we deal with our guidance right now on the Q1 call that's a little bit early for us. Part of the reason why we did that is the change in guidance triggers the reduction in incentive compensation for us. So in other words, we've just taken out about close to $20,000,000 in incentive compensation for the Q1 and the rest of the year. That is the result of our pulling down the guidance.
So we will look at now how we perform according to where we are with the midpoint being $4.60
So the next thing
that would happen on $50,000,000 is we'd be about evenly split between another $25,000,000 in incentive compensation if our performance is weaker than we expect now and some other cost cuts that we could make. We probably need to keep with some essential hiring, less so in shared services, but certainly in MIS. We'd like Mark to continue with his hiring plans in MA because they're doing really well as he's outlined. And we've got to be thoughtful about what we're doing with our technology spend. Projects that we could postpone or dial back, I think we've largely done that.
We're taking another path through that. But again, there are certain things that we need to do around here and it gets harder with the second path. Again, we've had tough conditions in the Q1. We view that as cyclical. We have better coverage proportionately in structured finance, which has been hit hard in the Q1 and we're waiting to see what happens for the rest of the year.
So we think we're being prudent and incentive compensation is what we're going to do in order to keep the margin from being hit. Now we've moved the margin guidance down from about 42 to about 41. So we are holding the margin for the most part down 100 bps perhaps in the guidance. But the first hit goes to incentive compensation. And we would like the shareholders to note that it is our intention to hold the margin at about 41%, which is still pretty healthy.
I hope that helps in terms of your questions, Tim. If I missed anything, let me know.
No, that's helpful. Thank you.
And we will go to Patrick O'Shaughnessy with Raymond James.
Hey. So, question is to the extent that some of these market headwinds are impacting your customers and particularly to sell side debt Capital Markets Group, Does that potentially pose some sort of threat to your RD and A revenues or are those mostly on the buy side and pretty sticky?
Yes. I'll let Mark talk to that, Patrick. Yes. Patrick, we have not historically seen very much correlation between headcount cutbacks on the sell side and the RD and A revenue. And in fact, arguably, as they cut back on headcount, be it on the sell side or on the buy side, those organizations become more dependent on people like us as providers of information and analytical support.
Where we saw a real impact on the business is when you're in a very, very, very bad environment, like what we saw in 2,009. But in this kind of an environment, we have not historically seen that as a headwind for RD and A and maybe even a benefit to RD and A.
Great. That's helpful. Thank you.
And it appears that there
are no other questions at this time. I will turn the call back over to Mr. McDaniel for any additional or closing remarks.
Okay. I just want to thank everyone for joining the call today and we look forward to speaking with you again in July. Thank you.
This concludes Moody's 1st quarter earnings call. As a reminder, a replay of this call will be available after 3:30 pm Eastern Time on Moody's website. Thank you.