Q3 2019 Earnings Call
Okay, and welcome ladies and gentlemen.
Corporations.
29, <unk> earnings conference call at this time I would love to inform you that piece.
<unk>.
All participants.
The company.
First question.
The presentation.
The confidence oversee shibani.
Investor Relations. Please go ahead.
Thank you good morning, everyone and thanks for joining us on this teleconference to discuss Moody's said quarter Twinge 19 result, as well as our current outlet for full year 2019.
Im should Oneq <unk> head of Investor Relations. This morning, Lady 26 results for the third quarter of 29 team. That's why there's an update to our current helps a couple years twinge 19th the earnings press release in the presentation to accompany this teleconference. I base available on our website at <unk> don't make these dot com.
Ray Mcdaniel, ladies President and Chief Executive Officer will lead this morning's conference calls well, so making prepared remarks on the call. This morning, smoke Kate Wheaties Chief Financial Officer.
Joining this call Weve also be presenting non-GAAP or adjusted figures. Please refer to the tables at the end <unk> earnings press release. All this morning for reconciliation between for the job Mr. measures mentioned during this call and gap.
Before we begin I call your attention to the Safe Harbor language, which can be found toward the end of <unk> earnings release.
Todays remarks may contain forward looking statements within the meaning of the private Securities Litigation Reform Act 1995.
In accordance with the act I will say direct your attention to the management's discussion and analysis section and the risk factors discussed <unk> annual report on Form 10-K for the year ended December 31st 2018, and other SEC filings made by the company, which are available on our website and on the Fccs website. These.
Together with the Safe Harbor statements set forth important factors that could cause actual results to differ materially from those contained in any such forward looking statements.
I would also like to point out that members of the media maybe on the pool. This morning listen only mode.
Can I just wanted to rain Daniel.
Thanks.
Good morning, Thank you everyone for joining todays call.
I'll begin by summarizing Moody's third quarter, 2019th financial results.
About an update on the execution of our strategy.
Okay will then follow what further details on our third quarter results and comment on our revised outlook for 2019.
After our prepared remarks, we'll be happy to respond to your questions.
I'd like to start by providing select highlights for the quarter first what is cheap substantial revenue growth with Moody's Investor service attaining a second highest quarterly revenue result ever as what was continued strength in Moody's analytics, which has now delivered double digit growth in eight of the past nine quarters.
Second the adjusted operating margin of 49.5% was up 190 basis points as compared to the prior year period.
Next in light of stronger than anticipated topline growth and disciplined expense management, we're raising our full year adjusted diluted EPS guidance range to $8.05 to $8 in 20 cents in.
And finally since our last earnings call. We continue to execute on our long term strategy of Tarted targeted investment in regional and product expansion opportunities.
In addition, I'm pleased that Moody's is bolstered its leadership in E.S.G. engagement and disclosure.
Moving onto a third quarter 2019 results robust performance across both business segments resulted in a 15% revenue increase for Moody's overall.
Driven by 16% growth in M.I.S. and 13% growth in M&A.
Moody's adjusted operating income of $614 million was up 19% from the prior year period and the adjusted operating margin of 49.5% was up 190 basis points.
Adjusted diluted EPS grew 27% driven by strong business performance.
We continue to enhance our core ratings and analytics businesses, while pursuing strategic growth opportunities both down the corporate credit pyramid and across into new geographies and adjacent product areas I'd like to take a few minutes to review several key initiatives Moody's has undertaken in the last few months in line with our strategic priorities.
I'll speak Oh first speak to our enhanced regional presence in China and Latin America.
Starting with China, we forecast the domestic ratings market to generate industry wide revenue approximately $270 million in 2019 and far joint venture CCX, all like to have market share in the low fortys percent range up from the high Thirtys during 2018.
With Ccxone, we're well positioned with 30% ownership stake in China's largest domestic rating agency, which has approximately 17 1700 rated customers, including approximately 40, new public ratings year to date in.
In addition earlier this week, we announced that we acquired a minority stake in Tsingtao Green Finance Syntel obtains data for more than 1200 publicly listed companies in China to provide environmental data and analytics Greenbaum verification and Green finance solutions to Chinese banks institutional investors corporate in policy.
Research organizations.
Syntel investment complements our recent acquisitions of majority Stakes in video Iris and for 27 and advances our global commitment to establishing transparent standards for evaluating E.S.G. risks.
Moving to Latin America last month, we launched Moody's local.
Subject to regulatory approvals. This new platform will provide domestic ratings in research for financial institutions corporates local governments [laughter].
[laughter] and other sectors in Peru, Panama and Bolivia from this foundation, we look forward to further expanding our presence in domestic markets across the region.
And more about Moody's local please visit Moody's local dot com.
Shifting to our expansion down the credit pyramid and into business adjacent sees in the third quarter, we added new product capabilities to further enhance our portfolio.
First a bureau van Dyke, we launched compliance catalyst to enhance platform to streamline customer identity analysis, facilitating compliance with no your customer anti money laundering, anti bribery and related rules and regulations [laughter] excuse me second earlier. This month, we acquired a b F suite of software.
Platform used by issuers and trustees to administer and report on asset backed and mortgage backed securities programs.
This acquisition strengthens amazed leading position in securitize markets, serving issuers dealers and investors with data analytics and operational tools.
Third and my answer is public finance rating group use data and analytics firm for 27 to analyze U.S. local government sheet stress exposure in credit risk. This demonstrates our ability to integrate SG data into credit analysis and research.
Finally, our acquisition of risk first which closed in July provides M&A with the award winning Faro platform, a leading solution for asset managers and pension plan sponsors supporting more than 3000 plans in more than 1.4 trillion dollars Nasons risk first offers extensive unique data and advanced analytic.
For management of long dated assets and liabilities.
These new capabilities demonstrate our ability and commitment to enhancing the relevance of movies brand to an ever expanding range of analytical disciplines stimulating the growth prospects of our business.
Issuance activity increased after four consecutive quarters of decline and was a key driver of our third quarter operating performance.
Central Bank actions and falling benchmark rates create an issuer friendly market conditions, overcoming continued geopolitical uncertainty and bearish global growth forecast.
Strong corporate fixed rate bond issuance, driven by opportunistic and M&A related financing aided am I asked in delivering robust growth in the third quarter.
Corporate finance was a significant driver about my guess is year over year performance. So I'd like to spend another minute on U.S. investment grade and high yield bond issuance as well as bank loan issuance in the third quarter.
Issuance of floating rate loans, which have slightly higher year over year financing costs increased by 21% reversing a string of year over year declines in the prior four quarters.
Organic revenue was up 10% from the prior year period.
Our DNA revenue grew 13% GT strong demand will be urban dikes solution that integrates custom identity requirements as well as sales of credit research and ratings data feeds.
On an organic basis, our DNA delivered double digit revenue growth of 10%.
Ers revenue grew 16% for the quarter or 15% organically led by strong demand for new credit displacements in loan origination platform, along with products that enable complaints with new accounting standards for banks and insurers.
Trailing 12 months Ers revenue was up 5%, while sales were up 10%.
As Ray mentioned earlier it may has now delivered double digit growth in eight of the lost nine quarters.
I'd like to highlight the robust performance of Yris, thus far this year.
The increase your its recurring revenue base, which has grown by $160 million since 2015 remains a significant driver EMEA revenue.
Recurring revenue as a share the total erase business was 78% on a trailing 12 month basis through the third quarter.
This demonstrates the continuing shift in the business mix.
On a trailing 12 month basis as of the third quarter subscription sales increased 16%, while sales of onetime products and services declined 6%.
The strategic shifts to expand our subscription business will support ongoing scalability and drive future operating leverage in M&A.
We remain disciplined in managing expenses to drive strong operating performance.
In the third quarter total operating expenses increased 18% with approximately 10 percentage points related to incentive compensation on operating expenses attributable to acquisitions completed within the last year captive insurance company settlement at an impairment charge relates to the plan divestiture of Max.
Year to date total operating expenses increased 11% with approximately nine percentage points related to the restructuring charge operating expenses to retool to acquisitions, hi accrual for incentive compensation in the captive insurance company settlement and the next impairment charge.
Details regarding the captive insurance company litigation matter were previously disclosed in our Form 10-Q filing.
That disclosure will be updated to reflect the settlement.
Coming Form 10-Q that we plan to filing later this week.
I'll now discuss Moody's updated full year 2019 guidance.
Moody's outlook for 2019, you speak submission assumptions about many geopolitical conditions and macroeconomic and capital market factors. These include but are not limited to interest in foreign currency exchange rate.
For profitability in business investment spending mergers and acquisitions and the level of debt capital markets activity.
These assumptions are subject to uncertainties and results for the year could differ materially from our current outlook.
Our guidance assumes foreign currency translation into coach exchange rate, specifically, a full cost for the remainder of 2019 reflects us exchange rates with the British pound of $1.23 cents.
And for the euro of $1.19.
We now anticipate that both Moody's revenue and operating expenses will increase in the high single digit percent range with operating expense guidance, reflecting depreciation and amortization restructuring charges.
Captive insurance company settlement and impairment charge relates to plan divestiture of mix and acquisition related expenses.
Of note, we do not expect a significant ramp up in expenses from the first to the fourth quarter of 2019, as we realize savings from the restructuring program.
The full year 2019, operating adjusted operating margins, a full cost to be approximately 42% and 48% respectively.
We are targeting net interest expense to be approximately $195 million.
Your effective tax rate is now anticipated to be in the range of 21.5% to 22.5%.
Diluted EPS and adjusted diluted EPS, a full cost to increase.
$7.20 to $7 in 35 cents.
And $8.05 to $8.20, respectively share repurchases are anticipated to be approximately $1 billion.
Let's talk about guidance. Please refer to table 12 of our earnings release.
Yes, we have revised full year revenue uplift to be in the mid single digit percent range do you should the supportive market conditions that ray spoke about earlier, we anticipate USIS revenue to increase in the mid single digit percent range.
Non you missed revenue now full cost increase in the low single digit percent range.
Estimates for 2019 debt issuance is approximately flat when compared to 2018, we forecast stronger activity from fixed rate corporate bonds in the public sector as well as continued support from did funded M&A, we expect lower contributions from floating rate bank loans with dealers and assume ongoing load benchmark rates and accommodative.
Monitory policy.
Estimate to achieve approximately 901st time mandates in 2019 remains on track.
Adjusted operating margin expectation is still approximately 58% for 2019.
For any we anticipate total revenue to increase in the low double digit percent range given strong sales growth across all business lines boasted by stable recurring revenue.
We continue to expect the EMEIA adjusted operating margin to expand 150 to 250 basis points to the 28% to 29% range.
And then banking.
Full year 2019 guidance reflects the aggregate impact of announced acquisition as what is the plan divestiture of Max.
Before turning the call back over to rate I would like to emphasize a few key takeaways from the quarter.
Moody's coal business continues to grow.
As noted earlier, we are actively pursuing innovation and extension into business adjacent season regional geographies.
If it's reflects our ability and commitment to enhance the relevance and growth prospects that both M&A and M&A.
Last we are pleased to rate adjusted diluted EPS guidance due to stronger than anticipated revenue growth and disciplined expense management.
I will now turn the call back of the two rate for final remarks.
Thanks Mark.
Before turning the QNX I'd like to take a few minutes to introduce the incoming presence of Moody's analytics and Moody's Investor service.
Effective November Onest, Steve to link I will assume the role of president of Moody's analytics, Steve join Moody's and 1990 and is currently the executive director of Ers pass a role he has held since 2013.
He previously led sales customer service and marketing for M&A.
Prior to the formation of M&A, he held various sales product development and product strategy roles at MIT, yes.
And in that context.
I have.
Those of you who've been on this call in past years I've always acknowledged that there are conflicts of interest inherent with the business model as there are with many many business models in different industries.
So the business model.
And so we we emphasize the managing of the conflict of interest that is that is inherent.
We're not going to be able to find a business model that doesn't have some conflicts.
Very helpful. Thank you.
Our next question comes from and Joe Nicola with William Blair. Please go ahead. Your line is open.
Just curious if you could you talk a little bit more about that and maybe more broadly if you could kind of frame.
Where demand for yes, she is in China relative to where you see it and in Europe and in the us.
Yes, Rob as Rob has been closest to this ongoing invite him to make a couple of remarks.
Yes, so it's a small minority investment and its related the intersection of our efforts in both China and the SG.
China is the second largest green bond market globally. After the you us.
Over $40 billion issuance last year.
And the government there recently announced some new requirements for publicly listed companies to disclose it made disclosures around DSG Russ starting in 2020, so since Tom as a provider of yes, GM Green finance data and analytics.
They're not only based in China, but they are focused on China. They collect currently.
Need on over 1200 listed Chinese companies and that number is growing.
They were in fact, the first Chinese signatory of the year ends.
Principles for responsible investment so.
This investment I think is going to help since how accelerate its coverage and adoption in the Chinese market and its ability to serve Chinese market participants and it's also going to enhance Moody's globally SG offerings, because going to give us access to what we think is going be some pretty valuable and rich.
Chinese content sense around DSG.
We see the Green finance market as an important one in China as I said it's.
Clear policy focus.
The data and analytics market, serving that is in its infancy.
So we're pretty excited about getting into this market and then kind of nascent stages.
With a what we think there's a prominent in Chinese player.
Much like we did with Ccxone years ago, and the rating business.
Great. Thank you Thats helpful color and then just a couple of housekeeping keeping items.
First give an update on when you expect the Max sale to close and then second I was hoping you could size the onetime license delivery any ers in the quarter.
With respect to Max I think we would anticipate closing in the first half of November .
As it relates to the license delivery in that.
Specifically, a breakout that I wouldn't say is material enough.
To influence and the directional guidance the numbers that we provided.
Perfect. Thank you.
Our next question comes from Farmington with Wells Fargo. Please go ahead your line is.
Okay.
Good afternoon, everyone.
So.
Question for you on bodies local through Panama in Bolivia, just wanted to know if you could share with us how much revenues coming out of Latin America currently and whether the thought here is.
Ability to accelerate revenue growth, there and maybe talk a little bit about what's behind the timing.
Sure go ahead, Rob, Yes, Hi, it's Robin and one one thing I'd distinction I wanted to draw between what we've done with Moody's logo and earlier question with Ccxone branding.
These are wholly owned subsidiaries that we have.
In in Latin America, So we've decided to take up a bit of a new approach in the region.
Around the domestic bond markets.
Yes.
And it's interesting you look at the the overall rating opportunity in Latin America, a meaningful part of that is coming from the domestic bond markets. So we.
We rebranded as Moody's local and the focus is going to be providing.
Themselves.
Local ratings in local language.
To meet specific local needs and we think that is going to help us better capture this domestic rating.
Revenue opportunity across the region.
I would say the Moody's local platform itself in terms of revenues is quite small.
The Latin America, the overall Latin America for Am I asked is actually a.
Im fairly small part of the overall total of our revenues, but to the first step here was the repositioning.
The equilibrium businesses.
I think you're going to see us continue to.
Expand on that platform in the coming 12 to 24 months to best serve that market.
And then on for my follow up on I wanted to check in on Rhys.
Just ask about new products that had been introduced and analysts ask if youre seeing some success going after the U.S. bank market.
Yes.
Reserves is performing.
Very much as we expected but.
Just remind you that we recognize when we were acquired reefs that.
That was a business that did require some some work and some effort, particularly around product strategy. We've done a tremendous amount of work there. We feel like we are moving forward nicely. One other things we're very excited about in Greece is that.
As we are spending more time with more customers in the commercial real estate space.
It's very clear that there is a lot of demand for better data solutions and more advanced analytical tools and that's exactly why we bought race because we thought that.
They provided the data foundation to which we could apply our analytical skills and really upgrade the practice of risk management in commercial real estate. So it's.
Yes.
Moving very much as we expected we remain bullish and excited about the business, we think theres, a big opportunity there, but frankly, there's a lot of work for us yet to do there we've accomplished a lot but.
Still there's a lot on our to do less.
So I just wanted to say two to Steve Robb in my congratulations on the promotions and to Mark Almeida, Congratulations on a great Ron and happy trails.
Thank you. Thank you Sir I appreciate it.
Our next question comes from Christian Bolu, Rick Autonomously. Sir. Please go ahead. Your line is open.
Good morning.
Let me on TSG.
You spoke a lot about efforts around is key.
Help us understand kind of how in aggregate your target all four in compares to your main competitor.
Maybe just speak to kind of how you plan to sort of monetize these outputs over time.
And just sort of sort of color around.
You know how you think the revenue potential evolves over the next two to three years.
Yes, let me start and then I'll see if my colleagues wanted to add anything.
When we're looking at the DSG space.
First of all we're looking at.
Much more fragmented market then.
Some of the core markets that we operate in.
So there are large number of competitors.
There are not a lot of established standards. There is a move towards standards that I think is going to be helpful for the SG sector and in looking at MSG through I think it's very important obviously two separate out the from the asked from the G.
We have made efforts.
Particularly in the environmental area.
Although vizio Iris in particular provides some some broader SG investment rather than than just environmental but scinto and for 27.
Our more in the environmental sector and also support.
Other work that we're doing and other products that were developing whether it's in Moody's analytics or Moody's Investor service. So you can see that for 27 for example, aligns very nicely with some of our commercial real estate efforts both.
In the rating agency and and Moody's analytics.
I would also pointed out just to temper expectations that we are looking at markets that in some ways are just beginning to monetize and what those addressable markets will ultimately become has a fair amount of uncertainty around it nonetheless.
Yes, and one of the reasons why we're bullish about this is that regardless of how each sector in the space might evolve. We think there is our relevance to the the other work we do in our core businesses. So that the investments will not be stranded no matter what.
Yes, exactly maybe just a bit to build on that a little bit that's exactly right right in some ways.
This is a good investment as R&D into the rating agencies, and we've rolled out new tools corporate governance and carbon transition assessment tools that are topic and sector specific and we think that.
Meets the needs of fixed income investors.
And then I think raise right and then we're going to be monetizing this both.
Through the businesses that we've acquired but also through the integration of the data and the analytics in products and.
In services in both M&A and Am I asked maybe just a spotlight a little bit.
Theres also the growth of what I think I'll call them labeled bond market started as the green bond market, but it really has has gone beyond that into more broadly into sustainability.
And that market is has been growing quite rapidly. So label bond volumes are going to are going to hit something like $280 billion issuance. This year.
Yes.
Something like 220 230 billion of that isn't.
Green bonds and another 40 to 50 billion is in social and sustainability. So that's an emerging.
Area, and then you've got sustainability in Greenland to loans, and that's probably something like another 70 billion.
So you can see your way to about 350 billion on this labeled bond issuance.
And there are few drivers for that you've got investor demand for.
Yes, GE compliance securities you've got.
The market focus on climate RIS and you've got issuers also wanting to demonstrate their own sustainability credentials. So we think we're really well placed in this market with.
The Vizio Rs acquisition was that's given US a leadership position in the in the label bonds phase that we're going to continue to build on just to give you a sense through the first three quarters of this year, we signed a little over 100.
Second party opinion mandates.
Is your ours did 53 all of last year.
This past quarter, we actually does your ours actually issued a second party opinion on the first gender bond in Latin America, and asking finance.
And let smbs and Panama. So in general we're pretty excited about the opportunity in front of us.
So leverage all of this I think we should see some growth and as Ray said.
Fragmented and we're going to have to see.
How the market evolves over the next.
123 years.
Great. Thanks for the very comprehensive answers and then.
Just a quick follow up on.
Question to China.
I believe there's a recent articles and Bloomberg suggested Moody's is having an issue with Chinese government in terms of recent.
Stake in that CCX I, so not sure how accurate that is but.
We'll be glad to get sort of comment around.
In order to ship the Chinese government.
Yes, we'll see cxi it any any updated thoughts around.
Going.
Moving on the JV versus going that Standalone like your peers.
Well the.
The relationship with.
Chinese authorities for us is really with regulatory authorities more so than.
The policy makers.
In other areas of the government and that that relationship with the regulatory authorities has always been constructive and continues to be I think we're.
Able to have good dialogue.
At both the staff level and at the leadership level at the at major regulatory institutions.
And are able to be pretty candid in sharing our thoughts and views and hearing their thoughts and views.
That being said.
I think it's difficult to completely separate.
The relationship with.
With the authorities from what's going on at a geopolitical level.
And so where we are.
Behaving.
Conservatively in terms of how we're thinking about the pace of and the nature of the opportunity in China.
We remain committed to see Cxi.
We remain committed to the providing ratings and research services and Moody's analytics products in the in the cross border markets into the large financial institutions in China.
And we'll continue to do so.
And we're very satisfied with the with our stake in Ccxone. It's it's a good business and were.
To be there.
Okay. Thank you very much.
Our next question comes from Joseph far size with Cantor Fitzgerald. Please go ahead. Your line is open.
Hi, My first question is just on margins how do you think about the margin profile heading into 2020 can you remind us of some of the drivers and I know in the past we've talked about.
The analytics business is potentially continuing to move their margins up.
We can get an update there.
I'll start.
But to 44 enthusiasm and off test Markel made it to talk about it may specifically as we sort of think about margin both for the third quarter in year to date, there's really two items that are worth keeping in mind.
First is margin expansion in the third quarter would it be 260 basis points.
On an organic basis, and the inorganic acquisitions and ongoing investments that we've made and your today's and obviously in the third quarter.
The impact the margin negatively by around 70, Bips and second thing I'd keep in mind, you sort of FX movements and across time periods, they tend to swing margins.
In different directions, depending on the rights and the underlying movements can sell as they try to think forward and margins are principally driven by underlying growth in the business to sell and Thats really being the primary driver of the performance this quarter and certainly is our expectation to be the primary driver outperformance in that in future periods and then loss.
Actually we do have the opportunity not necessarily through margins through ongoing capital management activities to use and the tools that we have to drive that EPS.
Growth in accretion, we certainly CMS seen us take some of those steps at the management LLC and interest rate portfolio.
In the first three quarters of 2019.
Yes, so in in EMEA I would just make a couple of notes.
We continue to deliver consistent and gradual margin expansion in may.
With this.
This latest quarter.
We've now delivered nine consecutive quarters of margin expansion both on a trailing 12 months ended on a year on year basis and over that period of nine quarters. We've taken the margin up by more than 500 basis points. So we're we're very happy with what we've done there we're doing it a number of different ways. We are.
Certainly as that May grows we're seeing operating leverage.
Through.
Also we are realizing the positive margin impact from ongoing adjustments were making it our product portfolio and third.
We continue to execute on operational improvements across the business. We think we're disciplined business people and we would expect to continue to apply rigor to our oversight of the operation.
So we see a number of things contributing to margin expansion and we're going to continue to be working at all.
Okay and then my second follow up is just on China.
What's your liability.
In that region to the to the I guess the joint ventures in subsidiaries.
Are they separate entities and then my second.
Part of that question is how do you view your risk from a ratings perspective.
Versus the rest of the world. Thanks.
Yes, I mean CCX eye is a separate.
Company, we are a 30% investor.
So obviously, a minority shareholder and see Cxi.
We don't have management control.
We are not.
Directing.
The ratings that is being done on the ground by employees at at CCX side.
We're not Moody's employees. So in that respect you should think of us as the financial investor in the entity.
No. We're obviously happy to provide assistance, where it's appropriate to do so but.
But thats not in the form of controlling ratings or research for the entity.
They have done well in the domestic market in terms of.
Of their performance.
As we all know the ratings of the domestic market.
Rating agencies in China are generally higher than what you would see from.
The international rating agencies, providing ratings on a global scale.
But in that context, what I would emphasizes the importance of correctly force ranking.
The the credits that are receiving ratings.
The lower end of the ratings spectrum has the higher default risk entities in the upper end has the lower default risk entities.
Almost regardless of the absolute level that those ratings are assigned so I think thats, what we look for at least in the.
Early stages of of the development of that domestic market to see that domestic rating industry is doing a good job, but that forced ranking.
Thank you.
Our next question comes from Craig Huber Huber Research Partners. Please go ahead your line is.
Thank you it too quick housekeeping questions first Mark what was the incentive comp in the quarter what was it a year ago and then also did I hear you correctly. So you thought that costs for the fourth quarter.
I would likely be similar to the first quarter level I've a follow up.
Thanks, Craig did compensation for the third quarter 2019 with $65 million.
Comparable number for the third quarter 2018 was $43 million.
From an expense ramp perspective from the first to the fourth quarter 2019 were expecting less than $10 million.
And we do expect that obviously in fourth quarter expenses to be below both the second and third quarter at level as the risk as we start to realize savings from the restructuring program and other cost control initiatives.
Okay then.
Ray wanted to ask you your updated thoughts on the debt issuance environment right now when you sort of think about the credit spreads in the US in Europe , you think about your outlook for default rates the economic outlook, how you sort of what's your sense now on the debt issuance environment.
Rob offered.
I think some very good thoughts on this earlier in the call.
But.
Yeah.
What we're seeing obviously is an accommodative environment for for debt issuance.
There are limits.
To the positive attributes of low interest rate.
Especially as we look outside the United States were negative interest rates are.
Increasingly important feature of the debt markets.
And I would observe that.
But the reason for negative interest rates is I would actually characterize negative interest rates as a headwind as opposed to a tailwind.
Because it's a policy.
And market response.
Two expectations for very low or negative growth.
And so while while low interest rates are a positive.
This trend.
Two ultra low rates and negative rates I think we would have to count I would at least counted as a headwind.
That being said.
The default rate is low mid continues.
Our forecast as it will continue to be below historical average.
Even though it's going to uptick in our view in 2020.
Still going to be.
If our forecast is correct.
Conducive of good market activity.
What will be very interesting to see in 2020 is whether this favorable mix in debt issuance that we've seen in 2019 continues.
Obviously.
The in frequent issuers acting opportunistically.
Had been.
Characteristic of the 2019.
Debt market profile.
And we will be very interested.
Observers as to whether that that mix that we've seen this year continues in 2020 or shifts to.
More more frequent issuers less opportunistic refinancing et cetera.
And then my last question Ray if I could ask.
Your guidance for the year, you updated guidance adjusted EPS details from five cents $8.20. I mean, historically you guys are typically conservative with your outlook seems to me like that might be case here again.
Remain part of this year I'm, just wondering what you're sensing what your what's in your budget here to make the top of the range will eat dollars in 20 cents because I mean, just look at the math, if you've done $6.29 of adjusted EPS to nine months from $1.90 dollars 91 of EPS in the fourth quarter.
Recently below what you had each of the first three quarters are you.
Basic forecasting.
Transaction revenues for example in your ratings area to be down versus what you had in let's say the to middle quarters fairly meaningful.
Yes, there I mean, there a number of puts and takes to vis as you would expect and mark.
Okay offered some commentary earlier about.
The impact of FX.
The divestiture Max.
And.
I would I would add to that that.
We're hopeful.
And expect that we're going to have a solid quarter for the fourth quarter.
The early numbers on October are encouraging.
And as Mark said that those early numbers, although they are preliminary.
Our leaning us more to the upper end of that Aito five to 820 range.
Yes.
If we're looking for what could go along as opposed to walk right.
I would have to say that if we saw.
Pull forward into the September October period from what would have come in November and December we may not see as much strengths as as people are anticipating for closing out the year. So.
The the amount of of opportunistic financing that goes on in these last couple of months is obviously.
An important factor so well.
I'll leave it at that and less Marquai wants to add anymore, I think what about the positive case that though.
But the negative intensity, but what the positive cases that were things to come in better than this tapia range here.
Yes no.
It certainly could we could we can continue to have.
We continue to have.
Strength.
In the form of opportunistic refinancing, especially by infrequent issuers that would be.
Very beneficial for the business.
The timing of some of the.
Product sales on the Moody's analytics side can be influential and.
Could help the fourth quarter.
Maybe Rob will install for a couple of comments on what the pipeline looks like that might be helpful. Sure right. So in the us.
I'd say the investment grade market, we're still seeing pretty strong investor appetite, we saw earlier this week.
Good sized acquisition finance you will get done that was heavily oversubscribed, so thats good to see.
Hi, My sense is we're going to have active weeks heading into Thanksgiving here in the United States I'd say the same for investment grade in Europe .
Pretty pretty strong pipeline.
We've got US issuers also looking to tap the euro market given where.
Rates are there for leveraged finance.
Really both in the us in Europe , we've we've seen some.
Bifurcation of market sentiment, so you've got very strong demand for the larger more well known.
Spec grade issuers in that category and you can see that with the BA.
Index at record lows.
In terms of yield we saw recent print in Europe for BA to name as low as coupon ever in the high yield space. So in general I would expect issuance to continue in November and in early December .
Randy talked about the pull forward. There's also the potential I guess that some deals in the pipeline should could slot in Q1.
Just given the expectation for accommodative conditions to continue well into next year.
So the other thing I would mention.
Is that in the U.S public finance market, which is we saw very good issuance. This quarter that continues to be active and we're seeing this trend of taxable refunding.
Because you've got during the funding costs and that means the economics are favoring the refunding of tax exempt with taxable debt. So.
If we see that keep up that that can provide maybe some upside to our outlook.
Great. Thank you.
Our next question comes from George Tong with Goldman Sachs. Please go ahead. Your line is open.
Hi, Thanks, good morning.
Global issuance volumes are on track to be flat. This year and you mentioned that volumes next year could be flat to possibly up mid single digits can you comment on how the pricing environment in ratings should change depending on issuance growth and if you've seen improving pricing power, especially among in frequent issuers.
No I think that I think that the the impact of pricing.
First of all when we talk about.
Three points.
Contribution from price, that's assuming a static.
Debt market profile, both in terms of the issuance volumes and the mix.
Of frequent an infrequent issuers so when we see growth for example in frequent issuers, we get we get more benefit.
Because there they are they're being priced on a transactional basis as opposed to on a long term basis.
And Thats why the pricing, even though we can talk about.
Pricing.
Relatively in a relatively simple way.
Yes, it's impacted.
Potentially materially up or down by both issuance and by mix.
Because some some of the pricing does relate to bonds actually being issued and so if they're not the theres no price impact.
So.
I don't see any change in course around that in 2020 and.
We'll have to we'll have to watch carefully to see what the issuance levels and mix or and the impact on price from the.
The other thing I'd add just to clarify I think are kind of.
Initial thinking where we sit now is more around flattish for next year and when I. When I commented on mid single digit. It was what would what would you have to believe to be able to get there.
Got it that's helpful.
On margins, you've previously indicated that long term EBITDA margins should be in the high Fortys. Your margins are already in that range. Currently so do you have a view that margins can go above 50% longer term or are there are factors that could prevent that.
I think the biggest factor that would.
Prevent that would be the relatively higher growth rate.
Year on year coming out of Moody's analytics.
And Moody's analytics, while obviously, it's been consistently expanding margins over the last few years.
It's still a lower margin business than the credit rating agency. So it's accelerated growth should act to to keep margins from expanding to aggressively.
Got it thank you.
Our next question comes from Handy can be Oh. Please go ahead your line is.
Hey, Thanks, good morning.
I wanted to ask a follow up on on the opportunity related to China. I know there is the investment in TCX I was curious to hear any updated thoughts on on the outlet for the onshore bond market and whether that I guess looking to be a sizeable as an opportunity as somebody say thanks.
Yes, I mean, we have a very.
Robust.
Business in the in the cross border bond market coming out of China.
Not surprisingly this is with.
And as largest corporate and financial institutions for the most part.
Including.
Both private and state owned enterprises.
We continue to get new rating mandates coming from China that has been a steady stream.
And just to just to try and balance that commentary a little.
If China is going to have some relative sluggishness in its economic growth and I emphasize relative because it's pretty good by global standards.
Mostly.
That may slow at least six quickly some of the cross border activity coming out of China.
Both for new rating mandates and or four entities that are already rated and thinking about whether they want to raise additional debt. So we'll just have to watch side and see obviously, having the trade negotiations completed and in some kind of a positive way.
Would be helpful to the global economy and would also be helpful to the Chinese economy, and as a result, I think helpful to walk cross border business.
Got it okay. Thank you so much.
And we'll take one last question from Shlomo Rosenbaum Saifun. Please go ahead. Your line is open.
Hi, Thank you for squeezing me in just a couple of housekeeping items I want to.
Ask Mark just to kind of star I say guidance for re Repurposes tweak down a little bit just from the range from 1.321 to one 2.3 toned down to one.
Is there any.
Reason you could 0.2 for that is that just defer more deployed on on acquisitions or anything.
In terms of why that would come down the cash flow is really good from the company and the numbers are better than expected.
Thanks for the question our capital allocation priorities haven't changed I think this is a reflection.
Consistency in the way that we manage our cash repatriation.
And if it's as well as an evaluation of our global caching and make the point that we do expect the 300 million differential.
Incremental for 2020, and we'll finalize the exact amounts later the ceiling that give that guidance.
Okay and just also also from Mark just wanted to talk about these negative interest rates what are the opportunities for Moody's as a company to tap into those negative interest rates and get paid total someone else's money.
Sure I definitely think negative interest rates from a individual treasurer perspective provide an interesting opportunity to manage.
Once again portfolio and we have seen a lot of reverse Yankee issuance, taking place certainly earlier this year CDC treasures actively engaged in that market.
And then of course being able to bring it back to the us to deploy potentially higher yielding opportunities. It is something we look at maybe to pivot again back to the way that we think about capital management here really first and foremost that investing in growth opportunities as Ray mentioned early rebasing the acquisitions and then to extend that we don't have additional opportunities.
Right.
And it Doesnt meet our strategic objectives, or which don't meet all financial hurdles to return that capital back to shareholders through dividends will to share repurchases. It's not just a matter of raising capital, it's making sure that we could use for that capital.
Okay. If you monetize squeeze in one more for Ray just for for perspective rate. If there was no incremental gross.
In.
In some of the China initiatives, you're talking about or in any of the east you initiatives that you're talking about theres no incremental growth from today over the next three years would there be.
Any material change and outlook for this company in terms of performance.
I mean, you mean, you mean financial growth.
Yes, I mean, just if you guys did not have few if everything stayed the same in those two things realistically is this company's growth rate going to change very much in the next several several years.
With respect to to the SG space.
Hey, I don't think it is going to be large enough over a three year period that that in of itself, it's going to to turn the dial for the organization I think it's going to to enhance the relevance of number of our products and our credit ratings and research and analysis.
But even if there is good robust growth in these sectors that have not yet really monetized themselves.
I think thats going to be a longer term process in terms of actually.
Turning the dial for Moody's Corporation as a whole.
Okay, and that's the same thing for China and any of the initiatives there.
China, I guess would be.
A little more of a wildcard.
Certainly the domestic bond market in China is large.
And the demand for.
Analytical products and solutions that come out of Moody's analytics.
That come out of increasingly come out of Moody's Investor service is there.
So it's really a question of how we're participating.
And and keeping in mind that fully participating in that market is participating in the domestic market.
For domestic investors the domestic market for international investors looking to put capital to work in China.
And the true cross border market and we're focused on all three the domestic market through CCX side and the other markets on our own.
Great. Thanks.
It appears that had no further questions at this time I would now like to turn the confidence back to Mr. heavy mcdaniel for any additional on closing remarks.
Okay first of all I want to thank everyone for joining and secondly, I want to.
Thank Mark Almeida.
For.
Many decades of very skillful.
Service on behalf of Moody's.
Thanks, Mark for myself personally for the leadership team really for the organization as a whole.
He has been a tremendous executive for US has has kept and the growth.
Of Moody's analytics for the last.
12 plus years.
<unk> has been a vital part of Moody's Investor service before that and.
Has just consistently provided.
Outstanding work as an executive and.
And he has been a great friend. So thank you very much Mark and we appreciate your help with his transition and the best you going forward. Thank you Rick.
Okay. Thanks, everyone for joining we'll talk to you get into new year.
This concludes Moody's third quarter 2019 earnings costs as a reminder, immediately following this call the company. The post the end if revenue breakdown on the third quarter 2019, earning section of the movies IR homepage.
Any of the Scott will be available after June 30 PM Eastern time onboard. These IR website. Thank you.