Moody's Corporation (MCO) Q2 2011 Earnings Report, Transcript and Summary

Good day, and welcome, ladies and gentlemen to the Moody’s Corporation’s Second Quarter 2011 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers following the presentation. I will now turn the conference over to Raya Sokolyanska, Vice President Investor Relations substituting for Salli Schwartz. Please go ahead ma’am. Raya Sokolyanska – Vice President, Investor Relations: Thank you. Good morning everyone and thanks for joining us on this teleconference to discuss Moody’s second quarter results for 2011. I am Raya Sokolyanska, Vice President of Investor Relations substituting for Salli Schwartz. Moody’s released its results for the second quarter of 2011 this morning. The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moodys.com. Ray McDaniel, Chairman and Chief Executive Officer of Moody’s Corporation will lead this morning’s conference call. Also making prepared remarks on the call this morning is Linda Huber, Chief Financial Officer of Moody’s Corporation. Before we begin, I call your attention to the Safe Harbor language which can be found toward the end of our earnings release. Today’s remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In accordance with the Act, I also direct your attention to the management’s discussion and analysis section, and the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2010 and in other SEC filings made by the company, which are available on our website and on the Securities and Exchange Commission’s website. These together with the Safe Harbor statement set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. I would also like to point out that members of the media may be on the call this morning in a listen-only mode. I will now turn the call over to Ray McDaniel. Ray McDaniel – Chairman and Chief Executive Officer: Thank you, Raya. Good morning and thank you to everyone for joining today’s call. I’ll begin our remarks by summarizing Moody’s second quarter 2011 results. Linda will follow with additional financial detail and operating highlights. I will then speak to recent regulatory developments and finish with comments on our outlook for 2011. After our prepared remarks, we’ll be happy to respond to your questions. Second quarter revenue of $605 million increased 27% over the prior year, reflecting gains across the ratings business particularly for corporate debt and continued strong performance from Moody’s analytics. For all reported units within Moody’s Investors Service and Moody’s Analytics grew in the second quarter of 2011 from the same period in 2010. Operating income for the second quarter totaled $270 million, 42% above the prior year period. Diluted earnings per share for the quarter of $0.82 increased 61% year-over-year and included a benefit of $0.06 resulting from a foreign tax ruling. Based on second quarter performance, we are raising our full year 2011 EPS guidance to a range of $2.38 to $2.48 from the prior range of $2.22 to $2.32. However, we expect more challenging debt issuance conditions in the U.S. and Europe in the second half of the year as compared to the first half. Turning to year-to-date performance, revenue for the first six months of 2011 was $1.2 billion, a 24% increase from the first half of 2010. Expenses were $662 million, up 17% and operating income of $520 million increased 34% from the prior year period. Revenue of Moody’s Investor Service for the first six months of 2011 was $851 million, an increase of 28% from a year ago. Moody’s Analytics revenue was $332 million, 14% higher than the prior year period. I will now turn the call over to Linda to provide further commentary on our results and other updates. Linda Huber – Chief Financial Officer: Thanks Ray. I will begin with revenue at the company level. As Ray mentioned, Moody’s total revenue for the quarter increased 27% to $605 million. Excluding the favorable impact of foreign currency translation, revenue grew 23%. U.S. second quarter revenue increased 20% to $315 million while revenue outside the U.S. grew 34% to $290 million and represented 48% of Moody’s total revenue. Recurring revenue of $309 million represented 51% of the total compared to 59% in the prior year period. Looking now at each of our businesses, Moody’s Investor Service revenue for the quarter was $438 million, a 33% increase year-over-year. Excluding the favorable impact of foreign currency translations, revenue grew 29%. U.S. revenue was up 26% over the prior year period while outside the U.S. revenue grew 44% and also represented 44% of total ratings revenue. Global corporate finance revenue for the second quarter was $86.3 million, 18% above the prior year period. In the U.S. revenue increased 8% year-over-year, primarily due to strong issuance growth in commercial mortgage-backed and asset-backed securities. Other areas of the U.S. structured finance market including residential mortgage backed securities remained weak. Non-U.S. structured finance revenue rose 28%, reflecting higher issuance volumes in European asset-backed and mortgage-backed securities, including covered bonds. Global financial institutions revenue of $79 million increased 25% from the same quarter of 2011. U.S. financial institutions revenue increased 27%, driven by increased banking and insurance issuance from smaller-sized institutions, while non-U.S. revenues increased 24% supported by stronger banking activity in all regions. Global revenue for the public, project and infrastructure finance business grew by 13% year-over-year to $73 million. Revenue increased 7% in the U.S. reflecting growth in infrastructure finance partially offset by continued weakness in public and project finance issuance. Non-U.S. revenue increased 25%, primarily driven by growth in infrastructure finance. And turning now to Moody’s Analytics, global revenue for Moody's Analytics was $167 million, was up 12% from the second quarter of 2010. The impact of foreign currency translation was negligible. U.S. revenue grew by 4% year-over-year to $70 million. Non-U.S. revenue increased by 18% to $97 million and represented 58% of total Moody's Analytics revenue. Globally revenue from research, data and analytics of $111 million increased 6% from the prior year period, and represented about 66% of total MA revenue as we continue to see good demand for products across our portfolio. Revenue from risk management software of $40 million increased 2% over last year’s strong second quarter performance. Due to the variable nature of project timing and the concentration of revenue in a relatively small number of engagements, risk management software revenue remain subject to quarterly volatility. Professional services revenue more than tripled to $16 million, reflecting the acquisition of CSI Global Education in November 2010 as well as strong results in the base business. Moody's second quarter expenses were $335 million, an increase of 17% compared to second quarter of 2010 or 13% increase including the negative impact of foreign exchange translation. Expense growth was primarily driven by increased headcount including from the acquisition of CSI Global Education and higher accruals for incentive compensation and Moody's profit sharing plan, reflecting the stronger full year outlook. Moody's reported operating margin for the quarter was 44.6%, compared with 39.9% in the second quarter of 2010. Our effective tax rate for the quarter was 27.8% compared with 31.1% for the prior year period. The decrease was driven by lower taxes on foreign and state income and a recent favorable tax ruling, partially offset by a smaller benefit in 2011 for legacy tax matters. Now, I will provide an update on capital allocation and stock buybacks. During the second quarter of 2011, Moody's did not repurchase any shares and issued 0.9 million shares under employee stock-based compensation plans. Outstanding shares as of June 30, 2011 totaled 228.7 million, representing a 2% decline from a year earlier. As of quarter end, Moody's had 1.1 billion of share repurchase authority remaining under its current program. As of June 30th, Moody's had $1.2 billion of outstanding debt with $1 billion of additional debt capacity available under our revolving credit facility. Cash and cash equivalents were $939 million, an increase of $453 million from the prior year period, approximately 70% of our cash holdings are maintained outside the U.S. We remain committed to using our strong cash flow to create value for shareholders, while maintaining sufficient liquidity. We expect to resume share repurchases in the second half of 2011 subject to available cash flow, market condition and other ongoing capital allocations decisions. And with that I will turn the call back over to Ray. Ray McDaniel – Chairman and Chief Executive Officer: Thanks, Linda. I'll continue with an update on legislative and regulatory developments. First, in the U.S., as discussed last quarter, the principal regulatory activities in 2011 will be SEC rulemaking under the Dodd-Frank Act. The majority of rule proposals regarding regulation of NRSRO were published in May with the common dead line of August 8th. These rule proposals include requirements on reporting of internal controls, analysts training and transparency of ratings related information. The SEC has also published request for comment regarding the feasibility of establishing system before a signing in NRSRO to determine one of the credit ratings for structured finance products. This is generally known as the Franken amendment. That comment deadline is September 13. And yesterday, during an open hearing, the SEC adopted rules that we move references to credit ratings and certain rules, forms, and communications made by issuers under the securities laws. This action is consistent with Moody’s long-standing recommendations. While new rules entail various changes in our rating agency processes and operations and require us to adapt our business, we will not alter our fundamental business objective to provide the highest quality credit opinions, research and analysis. Turning to Europe, the transfer of oversight of registered credit rating agencies from national regulators to the newly established European Securities and Markets Authority or ESMA is effective as of this month. We have submitted an application for the registration of our EU-based entities and for authorization to endorse our non-European credit ratings, so that they qualify for regulatory use by EU regulated entities. We expect the review of Moody’s registration application to be concluded before year end. The European Commission is expected to propose new rules for the rating agency industry in the coming months regarding matters that include the use of ratings in regulation, business models, sovereign ratings, liability, and competition. Finally on July 20, the European Commission published its preliminary proposal on bank capital, which seeks to implement Basel III. The proposal focus is on three new elements, provision of sanctions, effective corporate governance, and provisions preventing the over-reliance on external credit ratings. As regulatory reviews and activity occur in other jurisdictions, we will continue to advocate for globally consistent approaches that align with the G-20 statements and directives. I will conclude this morning’s prepared remarks by discussing our full year guidance. Moody’s outlook for 2011 is based on assumptions about many macroeconomic and capital market factors, including interest rates, corporate profitability, and business investment spending, mergers and acquisition activity, and consumer borrowing and securitization. There is an important degree of uncertainty surrounding these assumptions and if actual conditions differ, Moody’s results for the year may differ materially from our current forecast. As mentioned earlier, we are revising our EPS guidance upward for the full year 2011 to a range of $2.38 to $2.48 reflecting stronger than expected second quarter performance partially offset by expectations from more challenging debt issuance conditions in the U.S and Europe in the second half of 2011 as compared to the first half of the year. For Moody’s Corporation, we now expect full year 2011 revenue to grow in the low-teens percent range. Full year expenses including the impact of higher accruals for incentive compensation and Moody’s profit-sharing plan are now projected to increase in the low double-digit percent range. The full year 2011 operating margin is still projected between 38% and 40%. Our effective tax rate is now expected to be approximately 33% for the year. Our revenue expectations for certain areas have changed based on conditions specific to those businesses and geographies. My comments will primarily highlight those components that have been revised and we refer you to our earnings release for a full review of our 2011 guidance. Our full year outlook assumes foreign currency translation at end of quarter exchange rates. At Moody’s Investor Service, we now expect revenue to increase in the low teens percent range globally with high single-digit percent growth in the U.S. and growth internationally in the low 20s percent range. Revenue now projected to increase in the mid 20s percent range in corporate finance and in the high single-digit percent range in structured finance. Public project and infrastructure finance revenue is now expected to remain about flat to last year. Global revenue of Moody’s Analytics is now expected to grow in the low double-digit percent range with that growth reflected both in the U.S. and internationally. That concludes our prepared remarks. And joining us for the question-and-answer session is Michel Madelain, President and Chief Operating Officer of Moody’s Investor Service. Mark Almeida, the President of Moody’s Analytics is traveling today and will not be on the call. We’d be pleased to take any questions that you may have.

(Operator Instructions) I will go first to Peter Appert with Piper Jaffray. Peter Appert – Piper Jaffray: Thanks. So, Linda, I’m wondering in the context of how robust the margins were in the current quarter, if you are rethinking your expectations in terms of where you think a reasonable level of margin might be over the next couple of years?

Peter thanks. Over the next couple of years, I think you said we’d hope to over time return to the low 40s, but for the second half of this year, most immediately we are expecting to see a little bit of margin compression in the back half of the year. Looking at our guidance, you probably inferred that we are expecting some revenue growth slowdown from the first half of the year to the second half of the year and as we had mentioned on the first quarter call, we will continue to ramp expenses. So, we may find that the margin will suffer a bit of contraction before we hopefully return to expansion mode. Peter Appert – Piper Jaffray: When you say compression, are you meaning versus first half or you meaning on a year-to-year basis?

I mean versus first half. The first half I think we are running at 44.3 for the year for margin. Let me give you the actual numbers so that I'm sure that everybody understands where we are here. We do expect revenue slowdown in the second half of the year compared to the first half. You will recall we have tougher comparables as well in the third and fourth quarter, when revenues strengthened last year. So, the first half of the year we have done a $1.182 billion in revenue and we are expecting that we will probably see some more between $50 million and $75 million less in revenue for the second half. That will still be up in the mid single digits over last year's second half, but again the pace of growth is moderating. Then on the expense side, if you go back to the first quarter call you will remember that I said that the first quarter expenses were in fact $327 million for the first quarter and we are expecting that ramp to increase by $40 million to $50 million for the expense number, when we get to Q4. So, the two trends taken together, earnings growth a little bit slower and ramping expense growth will probably cause margin contraction for the back half of the year. Peter Appert – Piper Jaffray: Got it and then, Linda, just as a housekeeping issue, the $0.06 tax benefit from the foreign tax ruling are you including that benefit in the revised guidance?

Yes, we introduced a 33% tax rate of rolling forward we had in two beneficial items one with the resolution of the legacy tax matter for $0.03 and then that foreign tax ruling that you exactly mentioned Peter, which was $0.06. Peter Appert – Piper Jaffray: Or $0.09 in the revised guidance.

That’s correct. Peter Appert – Piper Jaffray: Okay got it. And then lastly, Ray, can you give us an update on the litigation front. You had some pretty good success, I understand recently?

There are a couple of things from the quarter that I think are probably worth highlighting. First of all because the case is visible, I'd just point out that on the CalPERS matter, the hearing that was originally scheduled for August 23 has been postponed to September 8 and 9. We don't know that there will be any ruling consistent with the timing of that hearing, but that is when the hearing is going to be held on CalPERS. In May, we had a Court of Appeals decision affirming the dismissal of three separate cases that we've referred to in previous calls as a 33 Act cases that would seek to hold rating agencies liable as underwriters under the 33 Act. The Court of Appeals, the Second Circuit Court of Appeals affirmed the dismissal of the three separate cases that it was reviewing, so that was very good news. Then just recently in July, we had the Second Circuit again saying that plaintiffs in a shareholder action that they were seeking to establish class action status for could not appeal the decision disallowing them to represent other shareholders as a class. So those would be the three cases that are worth noting from the most recent quarter.

We will go next to William Bird with Lazard. William Bird – Lazard: Good morning. I was wondering if you could just talk a little bit about the implied guidance for the second half. Is it based on what you are seeing now and also how if you risk the numbers relative to a potential U.S. downgrade?

Sure, Bird. I think it's appropriate to characterize the pipelines now as reasonable. They are not as – certainly in the corporate area are not as robust as they were earlier in the year, but they're still pretty good, especially for investment grade issuance, and I will offer some broader comments in just a moment, but I would also characterize the public finance pipeline as reasonable, although it has been soft for most of this year, so there has been a pick up, but it was off of a low base earlier in the year and then in structured finance again the pipeline looks pretty good, but it has some areas of strength and some areas where there is continuing weakness. So I would say that's the area where our outlook for the second half of the year is probably the most uncertain and may embed the most upside potential as against our current expectations, but beyond the pipelines, which again I am characterizing as being pretty good are questions about whether there are going to be temporary market dislocations associated with some of the sovereign debt issues either in Europe or here in the U.S. We’re looking at situations that we think are somewhat analogous to when we saw market slowdown a year ago when the initial problems with Greece surfaced and there were temporary slowdowns in debt issuance. We wouldn't be surprised to see that again in the second half this year, although we do believe that those would be temporary. Then whether there would be a slowdown in issuance associated with any rating action on the U.S. Government, I think while there is not a direct linkage between most of the corporate and private sector ratings that we do assign, there are some areas where there are linkages whether it's with government sponsored enterprises or municipality states and we would assume that there would be in the event of a rating action on the U.S. Government, again some market dislocation and we would have to see how quickly any resolution about the debt ceiling problems in the U.S. were resolved, how quickly those actions were taken and what the longer term plan around the sovereign debt situation in the U.S. would be in order to better forecast what the impact would be on the financial markets more broadly. William Bird – Lazard: Great, thank you. I was just wondering if you could touch on refinancing, you know, clearly there was quite a lot of that activity in Q2. I was wondering if you have any sense of how much of the future activity got pulled forward?

Yes, we certainly believe that Q2, really the first half of this year has been characterized by pull forward of debt financing early in the year from later this year and then more recently from 2012. So a lot of debt that would have been maturing in 2012 has been refinanced, but there is still a large amount of debt that is scheduled to mature in 2013 through 2015 that is going to have to be refinanced and we would expect to see pull-forward of that as we move later into this year and then into 2012 before potentially interest rates or spreads widen and financing costs rise. So, there is a substantial amount of debt to be refinanced. In terms of where we would see upside in the corporate area, it's really not the refinancing at this point though, I think we would want to see a resumption of business spending, business confidence, and merger and acquisition activity to continue as it has in the first half of 2011 and that would provide some upside potential to the corporate sector. William Bird – Lazard: Great. And just final question, Linda, I was wondering if you could give us the incentive comp accrual. Thank you.

Bill, as we had said, obviously, we’ve increased our guidance and that really results in two things; first, our incentive comp accrual goes up and also we've instituted profit sharing because EPS growth has at this point exceeded 10% for the year. The profit sharing number which is right now a little under $2 million you can see in the salary and benefits line, the incentive comp number for the second quarter 2011 was $35 million, and for this quarter last year, it was $18.3 million, reflecting, obviously we've had a very strong second quarter this year and last year's second quarter, as Ray had described, was characterized by the air pocket, as we call it, around Greece. So, we had a much lower incentive compensation number last year.

We’ll go to Michael Meltz with JPMorgan. Michael Meltz – JPMorgan: Thank you. Linda, can you clarify the Peter's question about the guidance? The EPS you're basing it on to get to that $2.38 to $2.48, that's the $1.46 you did non-GAAP in the first half or the $1.49?

It’s 1.49 GAAP. We do our guidance by GAAP Michael. Michael Meltz – JPMorgan: Okay. And then, just to understand a little bit more on what you're saying about the near term expectation, is Q3 looking just, Ray, I guess you said reasonable then you said pretty good pipeline. And you're looking at a pipeline of what could get done based on what issuers have, your discussions, how are you thinking about it? Because I guess we're sitting here thinking the world's ending and it's an ugly place out there, but it sounds like you still expect a good amount of issuance. You expect revenues to grow in the second half. Can you just talk little more about what you see?

We do expect year-on-year revenue growth in the second half. We do not expect it to be the kind of growth that we saw in the first half. But, we are not expecting a significant downturn in our business at all. In fact as I said, we’re expecting it to continue to grow in the second half of the year. We do think there are higher than normal likelihood of short term disruptions. We’ve been seeing that over the last 12 to 18 months and doesn’t look like any reason to say we think those periods of disruptions are passed us. There continues to be stress in Europe and European public sector and obviously we have the issues here in the US that have been in the headlines. So, there is a, I would say, a higher than usual degree of uncertainty about exactly what the timing is for returning to greater market stability and what the conditions will be that have led to that greater market stability based on policy actions in the US and developed Europe, both. Michael Meltz – JPMorgan: Okay. Linda, a question for you on capital allocation, why was there no repurchase in the quarter as the stock pulled back and now you're sitting here, the stock's gotten tagged a bit, I mean, how should we be thinking about the extent of share repurchase activity going forward?

Certainly Michael, it was a much simpler explanation. When we have material information that the market doesn’t have, we’re precluded from being in the share repurchase market and that was the situation for most of the second quarter. As I said, we are expecting to resume share repurchase for the back of the year and we have plenty of capacity and we have plenty of cash.

We’ll go next to Craig Huber with Access 342. Craig Huber – Access 342: Yes, good morning. Thanks. As I typically like to ask, Linda, can you just give us the transaction versus non-transaction percentages for structured finance, corporate, financial institutions and PPIF? And I have some follow-ups. Thanks.

I will give you the percentages, as you said, Craig for transaction and then relationship. We’ll start with structured. For the second quarter of 2011 transaction is 51, relationship 49, corporates on the back of the very strong issuance 76, transactions 24%, relationship, financial institution 38%, transaction 62% relationship, PPIF 59 and 41, total for the rating agency for the second quarter 61% transaction and 39% relationship, MA, as you know Craig kind of runs the other way 16% transaction, 84% relationship and as we said in the script the total for the company was 49 and 51. Craig Huber – Access 342: Then also, Linda, if you would, another way you break down the revenues within structured finance and the other categories via ABS, RMBS, CREF and derivatives, and if you could breakdown corporate financial and PPIF as well that way by percentages?

Yes, sure. Let me do corporates first, Craig. Investment grade for the second quarter was 19% of the total corporate revenue; spec grade, high yield was 23%, bank loans 22% and other was 37% and in fact corporates represented 46% of the rating agency revenue. If we look at structured, the asset-backed line was 32% of the structured total. Residential mortgage-backed securities, and this includes covered bonds on a global basis, was 26% of the revenues. Commercial real estate was 20%, derivatives was 21% and structured represented 20% of the total rating agency revenue. Financial institutions; banking represented 68%, insurance 24% and managed investments 8% and FIG was a total of 18% of the MIS revenue and PPIF, the public finance and sovereigns 47%, annuities 7%, project and infrastructure 46% and PPIF was a total of 17% of the rating agency revenue. Do you want analytics as well Craig? Craig Huber – Access 342: We have that in the press release. I’m just curious you did hit on this, but is there anything else you can tell us more specifically why you didn't buy back any stock in the quarter? Whatever you're alluding to here is it in the marketplace now, so you're allowed to buy back stock in the third quarter or are you still on hold?

Yes. As of today, it's in the marketplace now. We had choppy issuance conditions and frankly it was unclear where we were going to go with our guidance, so we weren't in the market. That's the story Craig Huber – Access 342: Lastly on the costs, if I heard you right are you trying to say that your total cost by the fourth quarter will be up $40 million to $50 million versus say where you're at in the first quarter that we kind of say?

Right, total expenses were $327 million in the first quarter and we're going to ramp throughout the year and so we're looking at another $40 million or $50 million on top of that $327 million by the time we get to Q4. So, call it $367 million, $377 million something like that.

We will go next to Doug Arthur with Evercore. Doug Arthur – Evercore: Linda, just on the cost side again, SG&A has been ramping at a 15% to 20% rate for four, five quarters in a row. This specific quarter was only up 4%; anything changing there?

Not particularly. We have added to our efforts, obviously to drive the Moody's Analytics business, but nothing particular there, a little bit of pop-up in T&E expense, but nothing of great note there Doug. Doug Arthur – Evercore: Yes, I mean it just seemed like all of a sudden you're kind of leveled off. I know you've spent a lot of time on second half expenses, but just kind of a strange trend. Then Ray, can you specifically address the bank loan ratings market within corporate, I mean that was huge and it's really been huge now year-over-year for six or seven quarters in a row and it appears to have been another big boomer in the second quarter. What's going on there and what is your outlook there for the second half?

Sure. What has been going on there is two things. One, the rated bank loan sector is an area where we are gaining share as compared to the unrated sector, so the number of bank loans that are being rated as a percent of the total stock of bank loans is growing. There has also been a significant amount of bank loan activity, so the stock itself has been growing and in particular, I would point to Europe and what is a longer term secular disintermediation trend and a move to having bank loans rated and available for a wider investment population than historically would have been the case. We did have very significant amount of bank loan activity in the first half of the year. We don't think it's going to again maintain that pace although it's going to continue to be a strong area for us in the second half of the year, although with the U.S. being stronger than Europe is our current expectation. Doug Arthur – Evercore: Am I right to look at it this way that if the public markets, which are clearly softened here near term remain that way at least through some resolution of the debt ceiling that the bank loan market could continue to operate at a fairly strong level separate from that?

Yes. I would agree with that on a longer term basis. Whether we will have, you know, the kind of bank loan activity in the second half of this year compared to the first half, I would have to say, no. We don't think we will. But, again it's a secular story I think more than a cyclical story. So, we believe that the amount of ratable debt is growing and the request for ratings on that debt is increasing. Doug Arthur – Evercore: Okay, great. Thank you.

We will go next to Sloan Bohlen with Goldman Sachs Sloan Bohlen – Goldman Sachs: Hi, good afternoon. Ray, just to stick on the topic for few seconds, that secular change you see in the bank loan market, do you think that’s more tied to capital requirements at banks versus what we are seeing here with regard to the debt ceiling whether it be whatever is going on with sovereign debt? Maybe explain what we could see in terms of the magnitude how broad that ratable debt market could grow?

I think it is attached more to disintermediation and is being driven probably by both sides of the lending equation. In that banks in certain jurisdictions are making loans less available, but also the borrowers themselves are looking to have access to multiple sources of capital and so whether it's from the bank lines or whether it's from the bond markets, we are seeing growth in the speculative grade market through bonds and then because of the interest in expanding the investor base in the loan sector. I do think that is driven by capital requirements. I think it's also driven by again the borrowers interest in diversifying its access to capital. Sloan Bohlen – Goldman Sachs: Okay and would you tribute that to the strength that we saw in the corporate market in Europe, this past quarter?

Yes. The corporate market, both the loan market and the bond market in Europe were strong in the last quarter. Sloan Bohlen – Goldman Sachs: Okay and then Linda just one question on capital allocation. With regard to thinking about buckets or available liquidity, when we think about buybacks, is there a metric we should think about how much capital you would like to keep in cash as dry powder for acquisitions versus how much you would like on a leverage basis. I know in the past we talked about your levels relative to your commercial paper borrowing, but how should we think about that going forward.

I think you probably just wanted to be aware that of the $939 million of cash we have as we have said about 70% of that is offshore. So working with about $300 million here in the U.S. we would like to keep around the sufficient amount obviously to ensure appropriate liquidity and the rest we can use. We don’t have any specific bogie for acquisition and of course if the acquisition targets are oversees as with the case with CSI and from that we can use the offshore cash to purchase those acquisitions. So, we have plenty of cash and plenty of capability, but the main thing to think about really is to ensure that we have sufficient liquidity here in the U.S. and we are prudent about how we think about the rest. Really doesn’t have too much to do with the commercial paper situation. In fact we have no commercial paper outstanding right now. Sloan Bohlen – Goldman Sachs: Okay. And just to frame that $300 million, is that in terms of more than what you need that, two times more than what you need to trying to frame what the potential availability for share buy backs could be out of that $300 million.

It's a couple of times more than what we need, but given the world today, we try to run this place pretty prudently. So, we are not going to spend down to our last dime. Sloan Bohlen – Goldman Sachs: Okay. Fair enough. Thank you.

We will go next to Edward Atorino with Benchmark Company. Edward Atorino – Benchmark Company: Hi, on the depreciation question guy. Depreciation jumped up in the quarter. Is that the new runway or is there stuff in there that goes away?

Good observation, good observation, Ed. What that really is we are looking at the amortization there of the intangible for the CSI acquisition in Canada that we bought last year. So, that’s really the first piece of that. Then we have soft fair systems that we brought online and a couple more of those. So, that line has picked up a little bit. But, I think in terms of a run rate that sort of for the first half we are running about 40 machined, that is a good number for the back half of the year. Edward Atorino – The Benchmark Company: Same question on interest expense up $5 million quarter-to-quarter. A lot of stuff in there, I know.

Yes, a lot of that line also brings into effect FX. But our expense on borrowing has moved up. You can see it on one of the schedules attached to our statement. The expense on borrowing is 16.3 million versus 10.6 last year because we did put in place that $500 million bond deal that we did last year. So, that is the majority of that. Edward Atorino – The Benchmark Company: So, you had some positives offsetting that.

Yes. So, $15 million, $17 million number here is okay, but this number bounces around a lot, Ed, depending on how FX is going. Edward Atorino – The Benchmark Company: I think it was Peter's questions on the base for the guidance, if one looked at the first half, it's about a $1.60 something that is the base for the year's guidance?

Yes. Edward Atorino – The Benchmark Company: Before the $0.03.

$1.49, Ed. Edward Atorino – The Benchmark Company: Without a computer I can't add.

That is with the $0.03.

Our next question comes from Bill Clark with KBW. Bill Clark – KBW: I just wanted to go back to the expenses for another minute. Linda, you mentioned the $327 million as kind of the baseline and $40 million by year-end. I'm wondering if there is any way to pinpoint how much may have been incrementally added in the second quarter or if we should look at it as a third, third, third for that $40 million.

We don't like to go quarter by quarter particularly. The expense number for the first quarter was $327 million then we went to $335 million. I told you the number you are trying to get to which is $40 million to $50 million above the $327 million where we started. The reason for this is generally the additions in head count and compensation as we talked about in the script. We did not have particularly heavy additions in head count for the second quarter, but we are expecting that those will ramp up in the third and fourth quarter. So, this is a traditional pattern for us that the expenses ramp over the course of the year. But, you should probably make your own decisions as to how you want to run that ramp up, but I think we have described it pretty fully.

There are no further questions at this time. Ray McDaniel – Chairman and Chief Executive Officer: Okay, thank you everyone for joining the call today and we look forward to speaking to you again in October.

This concludes Moody’s second quarter earnings call. As a reminder, a replay of this call will be available after 4 p.m. Eastern Time on Moody’s website. Thank you.