Good morning, and welcome to S&P Global's second quarter 2017 earnings conference call. I'd like to inform you that this call is being recorded for broadcast. All participants are in listen-only mode. We will open the conference to questions and answers after the presentation, and instructions will follow at that time. To access the webcast and slides, go to investor.spglobal.com. That is investor.spglobal.com and click on the link for the quarterly earnings webcast. If you need any additional technical assistance, please press star zero and I will assist you momentarily. I would now like to introduce Mr. Chip Merritt, Vice President of Investor Relations for S&P Global. Sir, you may begin.
Good morning. Thank you for joining us for S&P Global's earnings call. Presenting on this morning's call are Doug Peterson, President and CEO, and Ewout Steenbergen, Executive Vice President and Chief Financial Officer. This morning, we issued a news release with our second quarter 2017 results. If you need a copy of the release and financial schedules, they can be downloaded at investor.spglobal.com. In today's earnings release and during the conference call, we're providing adjusted financial information. This information is provided to enable investors to make meaningful comparison of the corporation's operating performance between periods and to view the corporation's business from the same perspective as management's. The earnings release contains exhibits that reconcile the difference between the non-GAAP measures and the comparable financial measures calculated in accordance with U.S. GAAP. Before we begin, I need to provide certain cautionary remarks about forward-looking statements.
Except for historical information, the matters discussed in the teleconference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates, and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. In this regard, we direct listeners to the cautionary statements contained in our Forms 10-Ks, 10-Qs, and other periodic reports filed with the U.S. Securities and Exchange Commission. I would also like to draw your attention to a European regulation. Any investor who has or expects to obtain ownership of 5% or more of S&P Global should give me a call to better understand the impact of this legislation on the investor and potentially the company.
This call is intended for investors, and we would ask that questions from the media be directed to Jason Feuchtwanger at 212-438-1247. At this time, I would like to turn the call over to Doug Peterson. Doug?
Good morning. Thank you, Chip. Welcome everyone to the call today. Building on the first quarter of 2017, I'm pleased to report another solid quarter of revenue and earnings growth at S&P Global. Our benchmarks, data analytics, and essential intelligence continue to be critical components of the global financial landscape. Let me begin with the second quarter highlights. We attained strong organic revenue and adjusted operating profit growth in every segment. S&P Dow Jones Indices achieved outstanding revenue growth of 20%. We delivered 330 basis points of adjusted profit margin improvement and adjusted diluted EPS growth of 19%. As a result of our year-to-date performance and our expectations for the remainder of the year, we're increasing our adjusted diluted EPS guidance to a range of $6.15 to $6.30. We returned $251 million through share repurchases and dividends.
We're introducing a more in-depth disclosure of our capital management philosophy, which Ewout will discuss in a moment. We intend to launch a $500 million ASR in the next few days that will be completed by the end of October. We continue to believe that reinvesting in our stock represents a great investment and a good use of our cash. Looking more closely at the financial results, the company reported 2% revenue growth, and on an organic basis, grew 10%, with a $27 million increase in revenue. We were able to increase adjusted operating profit by $63 million. This can be primarily attributed to the Market and Commodities segment, where divestitures drove revenue down by $65 million, yet adjusted operating profit increased $11 million. The company achieved a 330-basis point improvement in adjusted operating profit margin due to the sale of lower-margin businesses, strong organic revenue growth, and productivity initiatives.
Forex had an $8 million unfavorable impact on revenue and a $2 million favorable impact on adjusted operating profit. The strength of our business model continues to be reflected in our results. We were able to turn 10% organic revenue growth into 19% adjusted EPS growth through the inherent scalable nature of our businesses, productivity improvements, and share repurchases. In a moment, Ewout is going to discuss the results of each of our businesses in more detail. What I'd like to do is provide a bit more color on some of the current and future drivers of our businesses. Let me start with bank loan ratings, which have been a growing part of the ratings business over the past few years, particularly in the U.S., but also more recently in Europe. Bank loan ratings are primarily issued on leveraged loans, typically rated BBB+ or lower.
Both the volume of leveraged loans and the percent of leveraged loans rated by S&P have increased over the past few years. During the second quarter, bank loan revenue of approximately $100 million was a key factor in the revenue growth of the ratings segment. As you see from the chart, the longer-term trend for loan ratings has been positive but volatile. This is due to opportunistic loan activity and refinancing driven by attractive spreads for speculative grade credits. I would encourage all of you who track issuance data not to overlook bank loan rating activity. Otherwise, you'll have an incomplete picture of a key revenue component of the ratings business. When tracking issuance data, we always try to point out that where issuance takes place, which type of issuance, and the size of deals makes a difference in the revenue we realize.
Global issuance in the second quarter, excluding sovereign debt, decreased 2%. In the U.S. and Europe, our two most important markets, however, issuance remained flat or grew as a result of sharp increase in structured finance. Geographically, issuance in the U.S. increased 1% in the second quarter, with investment grade decreasing 6%, high yield declining 20%, public finance down 17%, and structured finance increasing 59%, due primarily to the strength in CLOs, RMBS, and CMBS. In Europe, issuance decreased 2% in the second quarter, with investment grade declining 10%, high yield increasing 23%, and structured finance increasing 32%, with strength in RMBS, CLOs, and covered bonds. In Asia, issuance decreased 10%. The vast majority of Asian issuance is made up of local China debt that we don't rate. Ratings recently published its latest issuance forecast. For 2017, we expect an overall decrease in global issuance of 5%.
This compares to the forecast of a 1% decrease that we issued about three months ago. Some of the key changes include industrials and financial services issuance have been reduced primarily due to the expectations for lower Chinese issuance, which is largely unrated. Structured finance issuance has been increased given year-to-date strength. Most importantly, you can see that the categories most impactful to our revenue, namely non-financial, financial services, structured finance, and U.S. public finance, are collectively forecast to increase in 2017. Here's a new chart that we think you'll find very informative. It depicts 20 years of outstanding U.S. debt as a percentage of U.S. GDP. Debt is defined as both bonds and bank loans. The light blue represents non-financial corporations, and the dark blue represents financial corporations. For the past 20 years, total corporate debt has amounted to roughly 40% of GDP.
That means for every dollar of GDP, corporations raise about $0.40 of debt. This ratio is remarkably consistent. The ratio of financial corporate debt to GDP increased rapidly to a peak of about 70% in 2008. Since that time, financial corporations have reined in their debt levels, and for the past five years, the ratio of debt to GDP has been approximately 40%. We think this chart supports our long-time contention that GDP growth is the fundamental factor correlated with debt levels and thus issuance. Turning to S&P Dow Jones Indices. At the end of June, we released the annual survey of assets. This chart depicts the highlights of that survey. Most importantly, there are $11.7 trillion in assets globally that track indices managed by S&P Dow Jones Indices.
This includes $7.5 trillion in active money that is benchmarked against our indices, and $4.2 trillion in passive money that is invested in products indexed to our indices. Numerous indices support the $4.2 trillion. I'd like to highlight three important categories that should be of interest. Clearly, S&P 500 is the largest of all products, with $3 trillion in assets. These assets increased 38% in the past calendar year. Smart Beta, which had $184 billion in assets, is up 26%, and fixed income, with $41 billion in assets, is up 34%. Next, I'd like to share with you several new products. The first is the launch of the Ivy ProShares S&P 500 Bond Index Fund. This fund is designed to track the index of corporate bonds issued by S&P 500 companies. Ivy ProShares S&P 500 Dividend Aristocrats Index Fund was also launched.
This fund invests in S&P 500 companies with at least 25 years of consecutive dividend growth. We also published the S&P Dow Jones Indices Carbon Scorecard. This scorecard assesses the carbon efficiency and energy mix alignment of a 2% centigrade climate scenario for major SPDJI equity benchmarks around the world. The scorecard comes at a turning point in the integration of climate risk and investment opportunities. As countries limit the rise in global temperatures, market participants are looking for benchmarks most suited to the future economy. Last, we launched the Dow Jones BM&F Commodity Index. It's the first index designed to be a broad measure of the Brazilian commodity futures market. This launch, in conjunction with B3, is part of our development strategy for the commodity derivatives market in Brazil. As you can see, we're actively pursuing our indices growth objectives in fixed income, ESG, and global products.
This quarter, Platts celebrated the 10th anniversary of eWindow. eWindow is an online data entry and communications tool that brings greater speed, transparency, and efficiency to Platts' price assessments. eWindow was constructed by combining Platts' market-on-close methodology with exchange technology licensed from the Intercontinental Exchange. Today, eWindow operates in more than 100 markets across oil, refined products, petrochemicals, and agriculture, involving more than 2,000 traders. Last quarter, we highlighted our efforts in Black Sea wheat. Adding to our growing presence in wheat, today I want to share with you the launch earlier this week of Australian wheat futures by CME. These contracts will be cash-settled without physical delivery and priced in relation to Platts' daily assessment of Australian premium white wheat. Market Intelligence is also expanding its capabilities. In May, we formed a strategic data agreement to provide transcripts to users of Thomson Reuters' desktop platforms.
The transcript service includes earnings calls, guidance calls, investor days, and annual shareholder meetings. This extends our industry-leading transcript coverage and allows us to better scale this product. In addition, we launched Portfolio Analytics, a new tool for the small to mid-sized investment management market. This product integrates S&P Global Market Intelligence's point-in-time data with clients' own proprietary content. Clients can design custom reports that measure how their selection decisions impact performance compared to benchmarks. Clients can quickly assess and compare their performance relative to peer funds, exchange-traded funds, and indices. We expanded risk and credit analytics on RatingsDirect to enhance portfolio monitoring and added non-rated entity credit analytics and scores to Xpressfeed. With that color, let me turn the call over to Ewout, who'll provide specifics on our business results during the quarter.
Thank you, Doug. Good morning to everyone on the call. This morning, I would like to discuss the second quarter results, introduce our updated capital management philosophy, then provide specifics on our increased 2017 guidance. Doug already discussed the changes in revenue, organic revenue, and adjusted operating margin for the company. I would like to point out that the tax rate of 28.9% is below the anticipated full-year run rate of 30%-31%, due primarily to the resolution of tax audits and the discrete tax benefit from stock option exercises. In addition, our ongoing share repurchase program led to a 6.8 million decrease or 3% decline in average diluted shares outstanding. Net of hedges, foreign exchange rates had a modest negative impact on the company's revenue and adjusted operating profit in the second quarter.
The bulk of the impact was in the Ratings segment, with a $6 million unfavorable impact on revenue. There was hardly any impact to adjusted operating profit from weakness year-over-year in the British pound and euro. Now, let me turn to adjustments to earnings to help you better assess the underlying performance of the business. Pre-tax adjustments to earnings totaled to a loss of $13 million in the quarter and included $8 million from write-offs of a PIRA office lease and certain Platts software that was discontinued and replaced using Market Intelligence technology. $5 million of employee severance costs in Market and Commodities Intelligence related to synergy realization. Together, these actions will result in annual savings of approximately $9 million for the next two years, and then $7 million per year thereafter. In addition, we excluded $25 million in deal-related amortization expense.
There is another item that I would like to discuss that is not likely to have an impact on our financial statements, but in the spirit of transparency, we would like to bring to your attention now, and it will also be included in our 10-Q. As you would expect, we are continuously subject to tax examinations in various jurisdictions. In May 2017, the IRS issued a 30-day letter proposing to increase the company's federal income tax for the 2015 tax year by approximately $242 million. The proposed increase relates primarily to the IRS's proposed disallowance of claimed tax deductions for certain amounts paid in 2015 to settle lawsuits by 19 states and the District of Columbia. We vigorously disagree with the proposed adjustment and have filed a formal protest with the IRS to contest the matter before the IRS Appeals Office.
This development does not materially change our initial assessment of the deductibility of our settlement payments. Since we believe that the likelihood is remote that we will have to make this adjustment, we have not recorded a tax accrual for the state settlements as a result of this letter. In the second quarter, every business segment contributed to gains in organic revenue. However, the gains in Indices were outstanding. The reported revenue decline in Market and Commodities Intelligence was due to several divestitures. Each business segment reported gains in adjusted operating profit growth. I find it very impressive that despite the loss of earnings associated with asset divestitures, Market and Commodities Intelligence reported a 5% gain in adjusted operating profit as organic growth and synergies more than made up for the lost profitability associated with the divestitures.
While Market and Commodities Intelligence delivered remarkable adjusted operating margin improvement, we recorded declines in Ratings and Indices. Declines in operating margin are not something that we take lightly. The primary reason for the decline is the timing of incentive compensation accruals. Due to our outsized financial performance in the first half of the year, our incentive accruals were much higher than in the second quarter of 2017 than in the second quarter of 2016. In 2016, incentive accruals were weighted more towards the back half of the year. Excluding this difference in the second quarter accruals, the adjusted operating margin of both Ratings and Indices would have increased. Let me now turn to the individual segments performance, and start with S&P Dow Jones Indices. Revenue increased 20%, mostly as ETF assets under management continued to surge. Adjusted operating profit increased 18% as a result of increased revenue.
Adjusted operating margin decreased 90 basis points to 65.1% as revenue gains were partially offset by increased headcount in commercial and operations to support future growth and the timing of incentive accruals I just discussed. Asset- linked fees, which are principally derived from ETFs, mutual funds, and certain OTC derivatives, experienced the greatest growth in the second quarter, rising 24%, driven by a 34% increase in average ETF AUM. Subscription revenue increased 16% due to growth in data subscriptions, custom indices, and the addition of Trucost. Exchange-traded derivative revenue rose 12%, with gains in S&P 500 index options and fixed futures and options activity and mix. The trend of assets moving into passive investments was again very strong in the second quarter, with the exchange-traded products industry reaching net inflows of $148 billion.
Year to date, these industry net inflows are almost triple the net inflows in the first half of 2016. The quarter-ending ETF AUM tied to our indices totaled $1.156 trillion, up 35% versus the second quarter of 2016. As the chart shows, this was the result of $175 billion of net inflows and $126 billion of market gains over the last 12 months. The $1.156 trillion was a new record, surpassing the previous quarterly record of $1.116 trillion, set on March 31st, 2017. The second quarter average AUM associated with our indices increased 34% year-over-year. This is a better proxy for revenue changes than the quarter-end figures. Transaction revenue from exchange-traded derivatives improved 12%, with increased S&P 500 index options and fixed futures and options activity, and favorable mix more than offsetting declines in activity at the CME equity complex.
Let me now turn to Market and Commodities Intelligence. This segment includes S&P Global Market Intelligence and S&P Global Platts. In the second quarter, reported revenue declined 10% due to recent divestitures. Excluding these divestitures, organic revenue increased 8%. Despite the loss of earnings associated with divestitures, adjusted operating profit improved 5% due to organic growth and synergies realization. Adjusted operating margin improved 530 basis points, primarily due to the sale of lower-margin businesses, strong organic revenue growth, and SNL integration synergies. Turning to Market Intelligence. Recent divestitures cloud solid organic revenue growth of 9%. This growth was due in part to an 11% increase in the number of SNL, S&P Capital IQ, and RatingsDirect desktop users. As evidenced by continued adjusted margin improvement, we are on track to achieve more than $75 million in run rate synergies by year-end.
In addition to strong financial results, we made great progress on product enhancements as well. Some examples include advanced towards a beta release of the new Market Intelligence desktop to the investment banking sector this fall. Added SNL asset-level data to Xpressfeed to complement SNL fundamental data. Added private company data for 77,000 Japanese and 2,000 Chinese companies. Looking more deeply at Market Intelligence revenue, all three components delivered strong revenue growth. Desktop products grew 11% as the growth of the former SNL and S&P Capital IQ desktop products continues to roll out as one commercial offering. Enterprise solutions revenue increased 9% as demand for data feeds continues to be robust. Risk services grew 7%, thanks to low teens growth of RatingsXpress and high single-digit growth of RatingsDirect.
And finally, note that there was $37 million of revenue in the second quarter of 2016 from businesses that were divested. Platts delivered reasonable organic revenue growth despite difficult commodity markets. Second quarter revenue increased 10%. However, excluding revenue from recent acquisitions, organic revenue increased 4% due to modest growth in subscriptions, bolstered by strong growth in global trading services. The core subscription business delivered low single-digit revenue growth with gains in petroleum. Global trading services mid-teens revenue increase was primarily due to the timing of revenue and strong trading volumes in petroleum, partially offset by weakness in metals. If you look at Platts revenue by its four primary markets, you can see that petroleum and power and gas make up the majority of the business. Platts growth this quarter came from petroleum, which benefited from strong global trading activity.
In addition, petrochemicals contributed 6% growth, while both power and gas and metals and agriculture declined 1%. However, gains in agriculture revenue were offset by declines in metals. Please note that there was $11 million of revenue in the second quarter of 2017 from recent acquisitions. Turning to Ratings, revenue increased 10% against the toughest quarterly comparison in 2016, including a 1% unfavorable impact from Forex. Adjusted operating profit increased 8%, while the adjusted operating margin declined 80 basis points to 53.3% due to increased headcount, incentive compensation, and investments in productivity. As we have said in the past, we manage the Ratings business on a rolling four-quarters basis, and you can see on that basis the adjusted operating margin increased 320 basis points. Strong transaction revenue led Ratings' second quarter revenue growth.
Non-transaction revenue increased 4% from growth in surveillance fees, entity fees, intersegment royalties from Market Intelligence, and CRISIL. Transaction revenue increased 15%, primarily from gains in corporate bonds, robust bank loan ratings activity, and structured products. If you look at Ratings revenue by its various markets, you can see the greatest gains were in corporate and structured finance. Bank loan ratings are part of corporates and boosted results in this market. The only market that declined was government, due to the 17% decline in U.S. public issuance that Doug mentioned. Now, turning to our capital position. There was little change from the end of the fourth quarter. We continue to have $2.4 billion of cash and $3.6 billion of long-term debt. $1.6 billion of this cash was held outside the United States at the end of the second quarter.
Our debt coverage, as measured by adjusted gross leverage to adjusted EBITDA, was 2.0 times versus 2.1 times at the end of 2016. This is a new metric that I will discuss in a moment. Year to date, free cash flow was $564 million. However, to get a better sense of our underlying cash generation from operations, it is important to exclude activity associated with divestitures and the after-tax impact of legal settlements. On that basis, year to date, free cash flow was $635 million. As for return of capital, the company returned $251 million to shareholders in the second quarter, $145 million through repurchasing 1.1 million shares, and $106 million in dividends. At this time, I would like to outline our new capital management philosophy. Let me start with a few broad points.
We are continuously analyzing a wide range of internal investments and acquisitions, allocating capital to the highest returning projects, and holding our management team accountable. We'll continue to return excess capital to shareholders in the form of share buybacks and dividends while maintaining a strong balance sheet. Internally, we need to focus on the following key points: ensure that we are responsible stewards of shareholder capital, maintain a rigorous capital allocation framework, demand business line accountability, perpetuate a culture where businesses compete for capital to optimize our portfolio, and continue maximizing organic growth prospects, maintain a capital-light cash flow generative business model, and utilize our experience to continue to be disciplined acquirers. As we think about our capital allocation framework more specifically, we routinely explore and analyze internal and inorganic growth opportunities in order to deliver upon our strategic goals and enhance our competitive positioning.
Management conducts an in-depth review of each potential opportunity within a consistent framework. Strategic fit is paramount to all decisions. This framework includes the following key financial metrics: NPV, cash ROIC, IRR, and earnings contribution. Afterwards, each project is followed up with a rigorous post-acquisition review process. We expect our normal course business capital expenditures to be approximately $125 million annually. For long-term capital return guidance, we expect total payout to shareholders in the form of share repurchases and dividends to be at least 75% of annual free cash flow, excluding certain items. We intend to continue our 44-year track record of steady annual dividend growth and repurchase shares in a disciplined manner. It is important to us that we maintain a prudent financial profile. To that end, I want to share three key points. We are committed to remain investment-grade rated.
We target an average minimum U.S. cash balance of $200 million. Within our current business mix, we target an adjusted gross leverage to adjusted EBITDA ratio of 1.75 to 2.25. Adjusted growth leverage includes debt, the unfunded portion of pension liabilities, the SPDJI put option, and the expected NPV of operating leases. We are moving to this new metric to be consistent with the way that our primary rating agency evaluates our leverage. Finally, I want to review our acquisition philosophy. From a strategic priorities perspective, we'll continue to pursue both skill-driven and tuck-in acquisitions. We're interested in opportunities that augment our benchmark, proprietary data, and tools and analytics capabilities, provide geographic diversification, bolster recurring revenues, and/or provide synergies. Potential areas of strategic interest by division include, in Ratings, non-U.S. opportunities. In Market Intelligence, expand risk services and new technologies. In Platts, supply-demand analytics, and additional commodity capabilities.
In Index, fixed income, ESG, and international indices. Our specific financial criteria includes cash ROIC in excess of hurdle rate upon full synergy realization, desire to become EPS accretive within a reasonable time frame, and in the event that adjusted leverage exceeds 2.25 times, we would expect to return to our stated range within 18 to 24 months. Now, I will review our updated 2017 guidance. Based upon a strong first half and our expectations for the remainder of 2017, we have made several changes to our 2017 guidance. This slide depicts our GAAP guidance and the changes that we have made. Please keep in mind that our guidance reflects current spot market Forex rates. This slide shows our updated adjusted guidance. The changes are highlighted on this slide. I'm going to discuss the changes to our adjusted guidance, which were as follows.
We have increased our organic revenue growth from mid to high single-digit growth to high single-digit growth, with contributions by every business segment. We have lowered our unallocated expense from a range of $130 million-$140 million, down to a range of $130 million-$135 million, driven by continued cost discipline and our ability to tighten the range as the year has progressed. We have increased our operating profit margin guidance from a range of 44.5%-45.5% to a range of 45%-46%. We have lowered interest expense by $5 million to $150 million. We have increased diluted EPS, which excludes deal-related amortization from a prior range of $6-$6.20 to a new range of $6.15-$6.30. Overall, this guidance reflects our expectation that 2017 will be another strong year for the company.
With that, let me turn the call back over to Chip for your questions.
Thanks, Ewout. Just a couple instructions for our phone participants. Please press star one to indicate that you wish to enter the queue to ask a question. To cancel or withdraw your question, simply press star two. I would kindly ask that you limit yourself to two questions. That is two questions in order to allow time for other callers during today's Q&A session. If you have been listening through a speakerphone but would like to now ask a question, we ask that you lift your handset prior to pressing star one and remain on the handset until your question has been answered. This will ensure better sound quality. Operator, we will now take our first question.
Thank you. This question comes from Manav Patnaik. Sir, you may now ask your question.
Thank you. Good morning, gentlemen. The first question is just around the ratings margins again. You mentioned three points, incentive comp, increased headcount, and productivity. I was just wondering on the incentive comp, was this an odd quarter compared to prior years? I don't think you've ever called that out as an impact. On the headcount side of things, where are you increasing the headcount? It sounds like your competitors are reducing them. Maybe just some color there would be helpful.
Good morning, Manav. This is Ewout. Let me give you a little bit more perspective on that development. If you look at the incentive compensation accrual in the first half of 2016, the accrual was much lower at a level compared to the first half of this year, and that was directly correlated with the business and the profitability levels, in 2016, which was at a lower level, as you will recall, compared to 2017. The majority of the difference in expenses, and therefore the impact on margins for ratings year-over-year, is driven by that increased level of incentive compensation accrual year-over-year. We expect that to normalize in the second half of this year. This should correct itself in the second half of 2017, but we see this more as really a timing effect than that it is an effect of absolute expense increase.
With respect to headcount, I would consider that more a smaller part of the increase that has more to do with growth of the business, investments in efficiency technology. You know that we are investing in Project Simplify, which should help the workflow and efficiency of the ratings business going forward. Overall, that's a smaller part of the overall expense increase and has a smaller impact on the margin this quarter.
Okay, got it. That's helpful. By the way, thank you very much for the capital allocation details and so forth. I guess maybe we were expecting it later in the year than now, but maybe for you and Doug, you obviously have the $500 million ASR you put out in the press release. Does that mean your pipeline maybe for the larger deals is not as active, or should I be reading anything into that other than maybe just timing?
No, you shouldn't be reading anything other into that. As we gave you in the outline of the capital allocation framework, we have a set of criteria that we look at for our businesses to continue to grow and invest. We're making excellent progress on our performance objectives that we have of growth and excellence across all of the businesses, as you can see playing out from our product innovation and business innovation as well as financial results. You shouldn't read anything into that. We're always taking a look at what would be ways that we could enhance our growth, whether it's organic or acquisitions. What you should really read into it is that when Ewout came on board, we had a goal to refine our capital allocation philosophy. It was something that was taken into account by our management.
Ewout's done a great job getting that done, as well as with our board of directors to ensure that we're all aligned on how we want to invest for growth in the future.
Okay, got it. Thanks a lot, guys.
Thank you.
Thanks a lot.
Thank you, Manav. The next question comes from Peter Appert of Piper Jaffray. Sir, you may ask your question.
Thank you. Good morning. Doug, I'm just wondering in the context of margins being down slightly in the ratings and indices business, does that suggest that perhaps we're getting to the point where margins have been optimized? I'm really asking in terms of just trying to understand if there's much more upside to come.
Let me answer it from the point of view that we felt that over time, the best driver of our margin improvement has been growth of our top line. We're still looking towards growth across all of the businesses. We obviously have views about what will happen in the markets related to the European situation, global economic factors. We're looking at what we think will be the impact of the Federal Reserve and ECB changes to interest rate policy. Top-line growth is always going to be one of the most important drivers of that. Let me assure you that we remain committed to looking at how we can run the business more efficiently. There are ways that we can still drive improvement in productivity in our businesses directly.
As Ewout mentioned, we're doing a lot more at the unallocated expense in the corporate center to see how we can also deliver a more effective approach to managing the companies in how we allocate central expenses. Let me reassure you that we're committed to continued productivity across all of the businesses.
Thanks, Doug. Then relevant to what part of your comments there, your assessment, please, of the ratings outlook for the second half.
Yeah. Ratings outlook for the second half. Well, first of all, in the first half, it was actually a very choppy quarter. It was one where despite looking at the smooth averages across the board in the U.S., industrials, financial services, public finance were all down. In Europe, the only sector that was up were corporates. Financial services were down. Asia was down. What really came through was structured finance. Structured finance was very strong in the quarter, in particular, loans and CMBS, and there was also resurgence of activity in Europe of CMBS and ABS. You saw a real offset on the corporate side, which was weak, offset by structured finance. Then part of what you saw, one of the first slides I presented was the loan slide, because loans were a really important story of the first half of the year.
The second half of the year, we've seen a pretty decent start to the second quarter, especially in loans. Again, loans could be slowing down, then across the board, we've been seeing activity. You know that July and August are always slow months, talking to the investment banks, looking at what the issuance could be coming, we still look at the second half, based on the guidance that we gave today, we built in our outlook for the second half on what we think would be a moderately active second half of the year.
Great. Thanks, Doug.
Thanks, Peter.
Thank you, Peter. The next question comes from Toni Kaplan of Morgan Stanley. Ma'am, your line is now open.
Questions. The 2Q margin within Market & Commodities Intelligence was similar to the margin last quarter at about 37.5%. How should we be thinking about the progression from here to your stated target of mid to high 30s in that segment? Is it mainly from SNL synergies? Will there be core expansion as well? Then, I guess based on that, is there upside to your current target?
Let me give you a couple of perspectives what we see happening in the segment. First of all, indeed, we expect to continue with realizing the SNL synergies. We are on track to achieve $75 million of run rate synergies by the end of this year. As you know, we have a total commitment of $100 million of synergies, another $25 million of synergies to be achieved in post-2017. We're very well on track, and we think those will help to continue to deliver the margins. Secondly, if you look at Market Intelligence, the business is seeing very favorable growth. I particularly like the 11% growth in desktop users. That's a very impressive number. It's very clear that there is a high demand for our desktop products. It's an attractive product, priced in an attractive level, it's doing very well in the market.
A combination of the top-line growth plus efficiency and synergies, we believe overall, that should help this particular segment. If you look at the margin improvement of 530 basis points year-over-year, we think that's overall a very impressive result.
Okay. Just on the index business, I want to know, relative to the average fee rate you're charging across S&P link funds, if you're starting to see any pressure there, and maybe if you could ballpark a magnitude. Just how do you think about the potential offset between increasing flows, but it's potentially declining fee rates?
As we've said in the past, that there's always downward pressure in this marketplace. Because of the elasticity involved and the massive surge of flows that takes place, you really don't see it apparent in our numbers. We think that will continue.
Thank you.
Thank you.
Thank you. The next question comes from Hamzah Mazari of Macquarie Research. You may now ask your question.
Good morning. The first question is just if you could remind us how much of the overall business currently is subscription. Is that still 60%? As you look long term, should that number get bigger towards like a 75% range? Just help us think about the portfolio evolving to more of a subscription model as the businesses that are not ratings start to grow.
This is Ewout. Let me give you some numbers, give you some perspective on this. You know that in ratings, we have not really a distinction between subscription and non-subscription. We more look at a distinction between transaction and non-transaction. Transaction was a little bit more than 50% this quarter. That was due to the high issuance levels and the bank loans. If you look at transaction, it was $394 million of revenue versus $353 million for non-transaction. If you look at Market Intelligence, there, as you know, the majority of our revenue is subscription-based, so it's almost 90% is subscription-based versus non-subscription-based. The same applies for Platts. It's almost 90% subscription versus 10% is non-subscription. Moving to the S&P Dow Jones Indices, there, the subscription is approximately 20% of the overall revenue base. In other words, it depends a bit segment by segment.
Let me add, though, that in S&P Dow Jones Indices, that about 60% of our revenue is AUM based. We don't think of that necessarily as subscription revenue, and clearly it is subject to volumes and could be subject to changes in market levels as well as flows into and out of ETFs and funds. AUM based is different than transaction-based revenue. Once you've locked in a contract, those contracts could go on for a long time. Even though it might be categorized as transaction revenue, we think of it as of its own category, AUM-based revenue.
That's very helpful. Then second question, just on capital allocation philosophy, which you gave a lot of detail on. Is it fair to say that you do not mind not being investment grade to do a larger deal and then bring leverage down 18-24 months? Do you have to be investment grade even when doing a larger deal? Thank you.
Hamzah, the answer on your question is no. We would like to stay investment grade, as we have stated in the prepared remarks. We are today rated BBB+. We have given a specific range in terms of the adjusted leverage ratio of 1.75-2.25. We think where we are today is an efficient place to play within the overall leverage curve. No, there is no intention with respect to going to below investment grade as a company. On the contrary, we have made an explicit commitment in this capital philosophy to say we would like to remain investment grade.
What we have said is that it could be for a larger acquisition where we will use our balance sheets, that we could increase our leverage to be higher than the 2.25 level for a certain period of time, but that we then would be committed to bring ourselves back into the range in a period of 18 to 24 months. That is usually an approach that is acceptable by the rating agencies, so you don't get penalized for that as long as you have that explicit commitment to bring yourself back into your range in the period of 18 to 24 months. That particular situation should not create a situation that we would be downgraded to below investment grade as a company.
Understood. Very helpful. Thanks so much.
Thank you.
Thank you. The next question comes from Alex Kramm of UBS. You may ask your question.
Good morning, everyone. Just wanted to continue on the capital allocation here for a second. I guess two-part question. One, if you look at the ASR that you just announced and you look at the cash on hand and the minimums that you want in the U.S., it seems like maybe you're raising a little bit of debt for that, and you might be pushing up to the high end of the, I guess, leverage range. Maybe just talk about that. Related to that, if you think about the 75% of, I guess, free cash flow that you want to return in dividends and share repurchases, is that a hard number? Meaning, if you do a big deal, will you still be basically doing those buybacks? Or could you actually get rid of buybacks for a year or so for a big deal?
Will you always return that cash in buybacks?
Good morning, Alex. Two excellent questions. The first question with respect to the ASR. Indeed, if you look at the available cash at the end of the second quarter, we said there's $500 million of cash in the U.S. and $1.9 billion outside of the U.S. We're announcing an ASR of $500 million, but we don't need to add any leverage to do so. The reason is, as you have seen, our free cash flow generation in the first half of this year was just over $600 million. We have a total free cash flow generation guidance for this year of $1.6 billion or more than $1.6 billion. We expect to generate over a billion of free cash flow in the second half of this year.
Just the normal cash flow generation over the next period will be sufficient to keep us above the minimum U.S. cash balance. In other words, there's not a need to add some leverage in order to fund this ASR of $500 million. With respect to your second question, we would say a normal course of business where we do tuck-in acquisitions, smaller inorganic deals. We believe that we should be able to do that with the 25% of free cash flow that has so far not been earmarked as returned to shareholders. Plus, we have some room between where we are today with respect to our leverage and the 2.25. We have sufficient room to maneuver with respect to tuck-in or smaller deals.
If we speak about larger transformational deals, as we have said, then we are willing to exceed the 2.25 range and bring ourselves back into that range over a period of 18-24 months. In that case, it could be that we need to move away from that 75% free cash flow return target, but then for a period of 18-24 months, to bring ourselves back in line with our leverage range. I would say normal course of business, at least 75% of free cash flow commitment to return to shareholders should be absolutely a commitment that we should be able to achieve only at very large kind of deals where we exceed our leverage range. In that case, there could be a possibility that for 18-24 months, we have to move away from this particular objective.
Great. That's helpful. Thank you. Then second topic real quick on the Market Intelligence side. Now that you break out the components a little bit more, the risk services is something that I continue to look at.
I would say one thing, when you look at your primary competitor, that business continues to be much smaller than what they disclose, and there might be differences, of course. Their growth rate also continues to outpace yours. Just wondering what you're doing there, if that's a big focus, if you could do anything better there, because it seems like that should be an area of upside.
It is an area of upside. Thank you for the question. We're putting a major focus on that area. We think that it fits well with what is the global landscape of a changing regulatory environment, the kind of risk environment that's out there, as well as the intensity coming from regulators, from shareholders, et cetera, on looking at better tools for managing risk. Our business is substantially different. We have a very different business. Our largest component of that business is the redistribution of ratings intellectual property, and we also have businesses that we're developing models and risk metrics, as well as some credit estimates, et cetera. We look at this as an area of growth. From the point of view of a comparison to one of the competitors I assume you're talking about, it's a very different business mix.
All right. Fair enough. Thank you.
Thank you.
Thank you. The next question comes from Joseph Foresi of Cantor Fitzgerald. You may now ask your question.
Hi, guys. This is Mike Reid on for Joe. Appreciate you taking the question. Do you believe there's any pull forward into the period in ratings, or there could be any more pull forward from 2018 possible into 2017?
Thanks, Mike. Thanks for the question. There is always potentially some pull forward, but at the same time, once an issue has been issued, their debt is out there, becomes outstanding debt. The closest proxy I could give you to a pull forward is discussed in our global refinancing study that was just issued. We looked at the total amount of debt which is outstanding, that's going to be maturing in the next five and a half years, between now and the end of 2022. The total amount has actually increased. It's gone up by about 3% since a year ago when we issued this study. The amount of debt which is maturing in 2018 has gone down a little bit, about 3%.
That's about as close as I could get to of what you could maybe categorize as pull through or pull forward, which is maybe there's a decrease a little bit in 2018 debt. Beyond that, we always see debt maturing depending on different schedules that come in place. We see people making refinancing decisions or new financing decisions based on what's happening in the markets. I don't want to go on too long, but let me just mention that our contention has always been that the two most important drivers to issuance are GDP growth and then also obviously issuance is driven by spreads. Spreads have been very attractive. The high yield spreads were at 431 at the end of the second quarter. Investment grade is at 162.
Both of those came down substantially from a year and a half ago when in high yield, they were even as high as 836 basis points as the spread. We look at this very carefully. We think that even if there was a pull forward, it remains in the system. It's debt that could always be refinanced again at some point. The only indicator I've got, and I would recommend that you speak with Chip if you want to look at that study on the global refinancing study. There's a slight decrease in maturities in 2018. That's about as close as I could get to a statistic that could see if there's any pull forward.
Got it. Just a quick one on the margins. In the ratings business, without the incentive accrual, you said it would be up. Did you estimate how many basis points there, what kind of expansion it would have been without the incentive accrual?
We are not quantifying that, but we can reconfirm that indeed, excluding the change of incentive compensation, margins would have gone up in Ratings year-over-year.
As well as in the Indices business. Same thing applies. If we eliminate that year-over-year increase in incentive comp, the margins would have been up in Indices year-over-year as well in the quarter.
Okay. Thanks, guys.
Thanks, Mike.
Thank you. The next question comes from Craig Huber of Huber Research. Sir, you may ask your question.
Yes. Hi, my first question. For roughly the last year and a half, you've been moving away from subscription or non-transaction revenues within your ratings business more to transaction oriented and had some success with that. I'm just kind of wondering how much more is left on that endeavor.
Thanks, Craig. We have been moving towards that, but the flip side is that we see a very critical part of our business model are those longer run, long-term relationships. It's valuable for us to have an approach where some of our fees and transactions are coming in through more stable, long-term relationship approach. We feel that we've built excellent relationships with our customer base. We're showing how we can deliver long-term value to them. That overall, we think that the mix and the change of how we're going, we think that we could be achieving at some point a stability in the mix. When it comes to what we deliver, it's critical that we show our customers the kind of value that we're creating and the kind of value that we're delivering.
Also, could you talk a little bit further about your outlook in the second half for both corporate finance as well as structured finance ratings or outlook there for the second half of the year? Anything materially different we should be aware of in your mind?
Yes. As you saw in the first half of the year, there was some really big shifts in the mix. We do see pretty active pipelines for structured finance products. Given the rates, given the spreads, there's a lot of liquidity. You still have quantitative easing in Europe that is sucking up a lot of assets. We see a strong pipeline for structured finance. Auto loans have slowed down a little bit. There have been some slowness there, but credit cards are picking up as well as CMBS activity. On the structured side, on the traditional ABS side, we see strong pipelines. CMBS as well. RMBS, as you know, it had a big uptick in the quarter, but from such a tiny base that any uptick was going to look like a large percentage.
We don't see in the long run a lot of activity in RMBS until there is a stronger approach to GSE reform. On the corporate and financial institution side. Corporates, we've seen less activity in the first and second quarter than we had seen last year. There is some interest in the U.S. in a couple of sectors. Oil and gas, we've seen some pickup there. Financial institutions are going to depend very importantly globally on capital rules and the shift to TLAC. The long-term, the banks are going to have to continue to increase their capital buffers. There is a slight shift in the financial institutions market in the U.S. towards capital return. As we see the large financial institutions here move towards capital return, that might tamper somewhat issuance of the financial institution sector.
Finally, on public finance, our outlook for public finance is pretty muted for the second half of the year. There's no major maturities that are coming up, we don't see any of the major jurisdictions running out and doing issuance.
Just sorry, high yield and investment grade. Talk a little bit further about that, if you would, in the second half, your outlook there.
Yeah. What we saw in the first half of the year in terms of investment grade. Investment grade was down in the U.S., it was down in Europe, it was down in Asia, and high yield was also down in the U.S., but it was up pretty dramatically in Europe over 20%. We're expecting that high yield. I don't necessarily have a good pipeline call on high yield, but if I look at the rates are still very attractive. The base rate is attractive. Base rate is, even though it's up over a year ago at around 230 in 10-year yield, the spread is down over 150, 200 basis points, which means that the all-in cost on high yield is very attractive.
If I look at the rate scenario, I look at kind of the growth that's taking place in the economy, high yield could be an attractive area this year. I mean, the last second half of the year. So far this year, with the exception of Europe, high yield has not really been that strong.
Thanks, Craig.
Thank you.
Thank you, Craig. We will now take our final question from Bill Warmington of Wells Fargo Securities. Sir, you may ask your question.
Good morning, everyone. My question for you is on SNL and Capital IQ. What kind of reception are you getting from clients on the bundled enterprise pricing strategy, and are you seeing any competitive response from the other industry players?
First of all, let me mention that one of the things that we find has become very compelling about the business model and the combination of SNL and Capital IQ is that it allows us to approach a very diverse set of users. We're able to provide value and bring very interesting analytics and data to financial institutions, to insurance companies, to regulators, to corporates. We have a very wide group, buy side, sell side, et cetera. We also have a very different type of value proposition for different users. We have risk managers, portfolio managers, bankers, salespeople, et cetera. That kind of diversification across different types of users from a pure user point of view as well as different types of industries has given us the kind of growth that you've seen. The reception to our new approach has been very positive.
There are organizations which see a lot of value being delivered through our enterprise-wide pricing. We're still going through an approach to rolling that out. Very importantly, as we mentioned, we have a new market intelligence platform, which during this quarter was previewed with our own internal users. During the third quarter into the fourth quarter, we're going to be getting a beta version out to be delivering it early next year. We think that that will also allow us to see the full value of the integration of SNL and Capital IQ. Given the diversification of our client base, diversification of users, the value proposition that we're delivering, we're very pleased with the progress.
Okay. For my second question, just wanted to ask about index M&A opportunities. It seems you've got a nice mega trend there with the move to passive, really strong margins. It seems like if you could find something, the cost synergies would be significant. Are there opportunities out there in the index field?
Let me take that. There are a few here and there. Obviously, you should assume that if there's something out there, we're looking at it. We gave you some of the themes that we would be interested in looking at or adding to our value, whether it's fixed income, it's ESG, it has to do with global expansion. Those are the types of themes that we'd be interested in adding to our portfolio.
Got it. Well, thank you very much.
Thanks, Bill.
Thank you. We have three more questions on queue. The next question comes from Tim McHugh of William Blair. Sir, you may ask your question.
Hi, it's Stephen Sheldon on for Tim McHugh this morning. Thanks for taking our questions. First, for Platts, you talked about low single-digit growth in the subscription portion. Can you provide some color on what trends you're seeing recently within subscriptions and the impact that prior contract renewals may be having?
Yeah, Stephen, this is Doug Peterson. On Platts, we feel like our 4% growth has actually been good compared to the underlying market dynamics. As you know, the price of oil has been generally low, a lot lower than what people had originally forecast a few years ago, settling right now around $50 a barrel for Brent. We think that compared to what we've seen in some of our competitors in other parts of the information market, 4% growth has been good. It's a combination of new penetration as well as what you've seen with renewals. We do obviously always understand that when we go into renewal discussions, that our customers are going through sometimes tough times, and they need to look at how they're going to manage their costs effectively. We have a value proposition that we deliver.
We work with our customers very carefully to ensure that they understand that value proposition, provide potentially new products, new services, new approach to pricing. Those discussions and negotiations have been going quite well, and that's also reflected in the growth rates that we showed today.
Okay, that's helpful. I guess second, within Indices, the expense base has been a little volatile over the last few quarters, and you talked some about the impact of incentive accruals this quarter, but can you talk about how we should think about that expense base as we look into the second half of the year? Thanks.
If you look at the expense base of Indices compared to a year ago, there are a couple of elements that drive the difference. First of all, this year we have the inclusion of Trucost. You know that we did that acquisition of Trucost last year, so that is an addition that you have to take into account. Secondly, there is that difference in incentive compensation, which we believe is a timing matter and should self-correct in the second half of this year. Thirdly, as you will recall, in the second half of last year, we added a third data center. That is a step-up cost that is not in the comparable period in 2016.
Also, again, in the second half of this year, there should not be a difference anymore because that is a one-time step-up cost, and that will be in the same period on a comparable basis. Those are the main differences year-over-year. If you look at the business-as-usual expenses, those are going up at a relatively low %. That is what you should normally expect going forward, again, from the Indices expense base.
Great. Thank you.
Thank you. The next question comes from Jeff Silber of BMO Capital Markets. Sir, you may ask your question.
Good morning. Thanks for squeezing us in. It's Henry Chien calling for Jeff. Just a question on the Market Intelligence, the really strong growth in enterprise and desktop. I was wondering if you could share just some color on what's driving that, whether it's any improvement in your end markets or clients or anything internally that you're doing or new sales or any sort of color to understand the trend there. Thanks.
Good morning, Henry. It's a combination of factors. I touched on a couple of them before. It's the diversification of our user base. It's also the ongoing shift to a pricing model, which provides an enterprise-wide view. The enterprise-wide view allows us to have a much wider user base as opposed to a per-seat type of a pricing model. Through that, we can determine and show the kind of value that we're delivering, and the organizations understand the kind of value we're delivering. We feel that it's a combination of all of those factors, and we're pleased with the progress and look forward to reporting more as we go through the rest of the year.
Got it. Okay. That's helpful. Really appreciate the capital allocation framework. Just wanted to touch a little bit on the transformative or larger acquisitions. I was wondering if you could share any thoughts on what kind of situation that would likely be or any thoughts of what kind of criteria would lead to a transformative or a very large acquisition. Thanks.
Henry, good morning. This is Ewout. Obviously, I cannot speculate on a scenario like that. What you should see in terms of essence of our capital philosophy is the following. On the one hand, a very significant commitment to return capital to our shareholders from our ongoing free cash flow generation, at least 75%. It could be more if we don't need the remaining 25% for certain growth opportunities. To have a prudent balance sheet and a balance sheet that has flexibility in case of a large transformation kind of M&A situation. Of course, we are not predicting that. That is just a prudent balance sheet we think is the right approach for the company.
We have tried to strike a balance in our capital management philosophy, and I think that's the key takeaway you should see from what we have presented to you today.
Okay. Thanks so much.
Thanks, Henry.
Thank you. We will now take our final question from Vincent Hung of Autonomous. Sir, you may ask your question.
Hi. Just on leverage again. If you were to do an acquisition, how far could you go beyond 2.25 times?
Well, I'm not going to provide you a specific number on that, Vincent, as you understand. I think you can understand, if we speak about 18 to 24 months of cash generation, the commitment of dividends that we will, of course, not back away from, how much of that cash is available to bring ourselves back into that leverage range, and how much that would mean. I think you have all the components to calculate that particular number.
Okay. Just lastly, you've called out data feeds as a strong driver of growth in recent quarters. Could you just give us some color here on the drivers of demand, the new customers, and how much of that is kind of pricing?
Sorry, can you repeat the question? In which particular area?
Data feeds in Market Intelligence. He's asking why data feeds in Market Intelligence have been strong. Is it quants and that sort of thing you mentioned?
I don't have the numbers to give you. I'd ask you to go back to Chip later to see if we can get you any further details on it. I can tell you from the point of view of what's attractive about the data feeds, it's that there's definitely a move across our broader customer base towards more automated tools, towards ways to build systems that take advantage of direct data feeds into systems. Think about it's machine-to-machine delivery where we can provide data feeds that go right into other systems. It's an area that is growing. We think that it's an area that the kind of added value that we bring, it's beyond just, I think the better word is it's highly value-added data that we're feeding. It's not raw data, it's not commoditized data.
The kinds of things that we're providing bring a lot of value. They get embedded in the workflow. Data feeds are actually a really, really critical part of our business model, because the more things get embedded, the more sticky they become.
One other thing I'd like to add is that SNL, with all the fabulous capabilities they had, they didn't have a data feed business. We mentioned earlier in the call in the prepared remarks, we're just now beginning to launch some of SNL's capabilities through our data feeds business within Market Intelligence, which is kind of exciting for our customers.
Thanks.
Well, thank you very much. Let me just close with a couple of comments. First of all, thank you everyone for joining the call and for all of your questions. We're very pleased with our strong start to the year. Clearly, there's more to do. We look forward to delivering on our growth and innovation and growth and excellence commitments. We obviously want to continue to drive forwards on productivity and continuous improvement initiatives. I'm very pleased that Ewout's been able to put in place a capital allocation framework, and we will see during the year, how we're going to be talking to you more about that capital allocation framework when it's live. We look forward to seeing you next quarter.
That concludes this morning's call. A PDF version of the presented slides is available now for downloading from investor.spglobal.com. A replay of this call, including the Q&A session, will be available in about two hours. The replay will be maintained on S&P Global's website for 12 months from today and for one month from today by telephone. On behalf of S&P Global, we thank you for participating and wish you good day.