Moody's (MCO) CEO Ray McDaniel on Q3 2016 Results - Earnings Call Transcript

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Moody's Corporation (NYSE:MCO)

Q3 2016 Results Earnings Conference Call

October 21, 2016, 11:30 am ET

Executives

Salli Schwartz - Global Head of Investor Relations and Communications

Ray McDaniel - President, Chief Executive Officer, Director

Linda Huber - Chief Financial Officer, Executive Vice President

Rob Fauber - Senior Vice President of Corporate and Commercial Development, President of Moody's Investors Service, Inc

Mark Almeida - President of Moody's Analytics

Analysts

Peter Appert - Piper Jaffray

Tony Kaplan - Morgan Stanley

Tim McHugh - William Blair

Andre Benjamin - Goldman Sachs

Warren Gardiner - Evercore

Manav Patnaik - Barclays Capital

Bill Warmington - Wells Fargo Securities

Vincent Hong - Autonomous

Joseph Foresi - Cantor Fitzgerald

Alex Kramm - UBS

Jeff Silber - BMO Capital Markets

Craig Huber - Huber Research Partners

Ashley Serrao - Credit Suisse

Operator

Good day and welcome, ladies and gentlemen, to the Moody's Corporation third quarter 2016 earnings conference call. At this time, I would like to inform you this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for question-and-answers following the presentation.

I will now like to turn the conference over to Salli Schwartz, Global Head of Investor Relations and Communications. Please go ahead.

Salli Schwartz

Thank you. Good morning everyone and thanks for joining us on this teleconference to discuss Moody's third quarter 2016 results as well as our current outlook for full year 2016. I am Salli Schwartz, Global Head of Investor Relations and Communications.

This morning, Moody's released its results for the third quarter of 2016 as well as our current outlook for full year 2016. The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moodys.com. Ray McDaniel, Moody's President and Chief Executive Officer, will lead this morning's conference call. Also making prepared remarks on the call this morning is Linda Huber, Moody's Executive Vice President and Chief Financial Officer.

Before we begin, I call your attention to the Safe Harbor language, which can be found toward the end of our earnings release. Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In accordance with the Act, I also direct your attention to the Management's Discussion and Analysis section and the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2015 and in other SEC filings made by the company, which are available on our website and on the Securities and Exchange Commission's website.

These, together with the Safe Harbor statements, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. I would also like to point out that members of the media may be on the call this morning in a listen-only mode.

I will now turn the call over to Ray McDaniel.

Ray McDaniel

Thanks Salli. Good morning and thank you to everyone for joining today's call. I will begin by summarizing Moody's third quarter and year-to-date 2016 results. Linda will follow with additional financial detail and operating highlights. I will then conclude with a litigation update and comments on our current outlook for 2016. After our prepared remarks, we will be happy to respond to your questions.

In the third quarter Moody's revenue of $917 million increased 10% primarily as a result of record third quarter revenue from Moody's Investor Service driven by higher leverage finance issuance in U.S. public finance plant activity as well as solid growth for Moody's Analytics. Operating expense for the third quarter was $520 million, up 7% in the third quarter of 2015 and included an $8.4 million restructuring charge associated with cost management initiatives. Operating income was $398 million, a 14% increase from the prior year period. The impact of foreign currency translation on operating income was negligible.

Adjusted operating income, defined as operating income before depreciation, amortization and the aforementioned restructuring charge, was $439 million, up 16% from the same period last year. The reported operating margin for the third quarter of 2016 was 43.3% and the adjusted operating margin was 47.8%.

GAAP EPS of $1.31 was up 15% from the third quarter of 2015. Non-GAAP EPS of a $1.34 was up 21%. Third quarter 2016 non-GAAP EPS excludes $0.03 impact from the restructuring charge. Third quarter 2015 non-GAAP EPS excludes $0.03 benefit from a legacy tax matter.

Turning to year-to-date performance. Moody's revenue for the first nine months of 2016 was $2.7 billion, an increase of 2% from the prior year period. Foreign currency translation unfavorably impacted revenue by 1%. Revenue at Moody's Investors Service was $1.8 billion, a decline of 1% from 2015. Revenue at Moody's Analytics was $899 million, 8% higher than the prior year period. Operating expense in the first nine months of 2016 was $1.6 billion, up 5% from the prior year. Foreign currency translation favorably impacted expense by 2%. Operating income was $1.1 billion, down 2% from the first nine months of 2015. The impact of foreign currency translation was negligible. Adjusted operating income of $1.2 billion was down 1% from the prior year period. Moody's reported operating margin was 41.8% and its adjusted operating margin was 45.7%. The effective tax rate for the first nine months of 2016 was 31.5% down from 31.7% in the same period in 2015.

In light of the strong third quarter performance coupled with continued expense management, we are increasing our full-year 2016 GAAP EPS guidance to a range of $4.76 to $4.86, which includes an anticipated non-cash foreign exchange gain of $0.18 related to a subsidiary reorganization, offset in part by a $0.04 restructuring charge. Excluding the gain on the restructuring charge, the non-GAAP EPS guidance range is now $4.62 to $4.72.

I will turn the call over to Linda to provide further commentary on our financial results and other updates.

Linda Huber

Thanks Ray. I will begin with revenue at the company level. As Ray mentioned, Moody's total revenue for the third quarter was $917 million, up 10% from the prior year period. U.S. revenue of $546 million was up 13% from the third quarter of 2015. Non-U.S. revenue of $371 million was up 5% and represented 40% of Moody's total revenue. The impact of foreign currency translation unfavorably impacted Moody's revenue by 1%. Recurring revenue of $460 million was up 3% and represented 50% of total revenue.

Looking now at each of our businesses, starting with Moody's Investor Service. Total MIS revenue for the quarter $612 million, up 12% from the prior year period. U.S. revenue increased 11% to $391 million. Non-U.S. revenue of $221 million was up 13% to the prior year period and represented 36% of total ratings revenue. The impact of foreign currency translation on MIS revenue was negligible.

Moving to the lines of business for MIS. First, global corporate finance revenue for the third quarter of $300 million was up 21% from the prior year period. This result primarily reflected higher levels of bank loan and speculative grade bond issuance. A strong investor demand and tighter credit spreads drove debt refinancing activities. U.S. and non-U.S. corporate finance revenues were up 16% and 32% respectively.

Second, global structured finance revenue for the third quarter was $104 million, down 7% from the prior year period as reduced U.S. CMBS and CLO activity was only partially offset by increased U.S. RMBS and REIT activity. U.S. and non-U.S. structured finance revenues were down 9% and 4% respectively

Third, global financial institutions' revenue of $96 million was up 7% from the prior year period as a result of increased Asian bank issuance. U.S. and non-U.S. financial institutions' revenues were up 2% and 11% respectively.

Fourth, global public project and infrastructure finance revenues of $105 million was up 16% versus the prior year period, primarily driven by strong U.S. public finance issuance. U.S. public, project and infrastructure finance revenue was up 29% while non-U.S. revenue was down 8%.

MIS other, which consists of non-trading revenue from ICRA in India and Korea Investor Service, contributed to $8 million to MIS revenue for the third quarter, up 4% from the prior year period.

And turning now to Moody's Analytics, global revenue for MA of $305 million was up 6% from the third quarter of 2015. U.S. revenue of $154 million was up 19% year-over-year. Non-U.S. revenue of $150 million was down 4% and represented 49% of total MA revenue. Foreign currency translation unfavorably impacted MA revenue by 3%. Excluding revenue from our March 2016 acquisition of GGY, MA revenue grew 3%.

Moving now to the lines of business for MA. First, global research data and analytics. Our RD&A revenue of $168 million was up 6% from the prior year period and represented 55% of total MA revenue. Growth was mainly driven by strong sales of credit research and ratings data feeds. U.S. RD&A revenue was up 14% while non-U.S. revenue was down 4%. Foreign currency translation unfavorably impacted RD&A revenue by 3%.

Second, global enterprise risk solutions or ERS, revenue of $100 million was up 10% from last year. The growth was driven primarily by the March 2016 acquisition of GGY as well as growth in the credit assessment and stress testing product lines. The US ERS revenue was up 39% while non-U.S. revenue was down 3%. Foreign currency translation unfavorably impacted ERS revenue by 4%. Trailing 12-month revenue and sales for ERS increased 10% and 5% respectively. As we have noted in the past, due to the variable nature of project timing and completion, ERS revenue and sales remains subject to quarterly volatility.

Third, global professional services revenue of $36 million was down 3% from the prior year period. U.S. professional services revenue was up 6% while non-U.S. revenue was down 7%.

Turning now to expenses. Moody's third quarter expense was $520 million, up 7% from 2015. The increase was primarily attributable to additional headcount in MA to support business growth and from March acquisition of GGY, the restructuring charge and increased incentive compensation across the company. Foreign currency translation favorably impacted expense by 2%.

Moody's reported operating margin increased 140 basis points to 43.3% in the third quarter and adjusted operating margin increased by 250 basis points to 47.8%. Moody's effective tax rate for the quarter was 30.5%, down from 32% in the third quarter of 2015.

Now, I will provide an update on capital allocation. During the third quarter of 2016, Moody's repurchased 1.9 million shares at a total cost of $193 million or an average cost of $103 per share and issued 798,000 shares as part of its employee stock based compensation plans. Moody's also paid $71 million in dividends during the quarter. On October 18, Moody's announced a quarterly dividend of $0.37 per share of Moody's common stock payable December 12 to stockholders of record at the close of business on November 21.

Over the first nine months of 2016, Moody's repurchased 7.1 million shares at a total cost of $679 million or an average cost of $95.51 per share and issued 2.7 million shares as part of its employee stock based compensation plan. Additionally, Moody's returned $215 million to its shareholders via dividend payments during the first nine months of 2016.

Outstanding shares as of September 30, 2016 totals 191.2 million, down 3% from September 30, 2015. As of September 30, 2016, Moody's had $787 million of share repurchase authority remaining.

At quarter-end, Moody's had $3.4 billion of outstanding debt and $1 billion of additional borrowing capacity under its commercial paper program which is backstopped by an undrawn $1 billion revolving credit facility. Total cash, cash equivalents and short-term investments at quarter-end were $2.1 billion with approximately 80% held outside the U.S. Free cash flow in the first nine months of 2016 was $772 million, down 7% from the first nine months of 2015, primarily due to lower net income.

And with that, I will turn the call back over to Ray.

Ray McDaniel

Okay. Thanks Linda. As we disclosed in today's earnings release, on September 29 we received a letter from the Department of Justice indicating that it is preparing a civil complaint against Moody's alleging violations of the Financial Institutions Reform, Recovery and Enforcement Act in connection with ratings MIS assigned to RMBS and CDOs leading up to the 2008 financial crisis.

As we have previously disclosed, following the global credit crisis of 2008, Moody's periodically received subpoenas and inquiries from various governmental authorities, including the DOJ and state's attorneys generals. The DOJ has advised us that their investigation remains ongoing and may expand to include additional periods. A number of state's attorneys generals have also indicated they expect to pursue similar claims under state law. Moody's is continuing to respond to the DOJ and states subpoenas and inquiries. As I hope you will appreciate, I am not going to be able to add anything beyond what I have just said and what we disclosed in our earnings release.

I will conclude this morning's prepared remarks by discussing the changes to our full year guidance for 2016. The full list of Moody's guidance is included in our third quarter 2016 earnings press release, which can be found on the Investor Relations website at ir.moodys.com.

Moody's current outlook for 2016 is based on assumptions about many geopolitical conditions and macroeconomic and capital market factors including interest rates, foreign currency exchange rates, corporate profitability and business investment spending, mergers and acquisitions, consumer borrowing and securitization and the amount of debt issued. These assumptions are subject to uncertainty and results for the year could differ materially from our current outlook. Our guidance assumes foreign currency translation at end of quarter exchange rates. Specifically, our forecast reflects exchange rates for the British pound of $1.30 to UKP 1 and for the Euro of $1.12 to EUR 1.

Moody's third quarter movements in foreign exchange rates have had no meaningful impact on the full year 2016 outlook. As I noted earlier, Moody's is increasing its full year 2016 GAAP EPS guidance range to $4.76 to $4.86. Excluding the foreign exchange gain and restructuring charge I mentioned earlier, the non-GAAP EPS guidance range is now $4.62 to $4.72.

The company now expects share repurchases to be approximately $750 million subject to available cash, market conditions and other ongoing capital allocation decisions. Capital expenditures are now expected to be approximately $120 million.

For MIS, Moody's now expects 2016 revenue to be approximately flat reflecting increased guidance for non-U.S. MIS revenue which we also now expect to be approximately flat. U.S. revenue is still expected to be approximately flat. Corporate finance revenue is now expected to be approximately flat and structured finance revenue is now expected to decrease in the mid single-digit percent range. Financial institutions' revenue is now expected to increase in the low single-digit percent range. For Moody's Analytics, we are not anticipating any changes to the outlook items we provided on September 28, 2016.

This concludes our prepared remarks and joining Lind and me for the question-and-answer session are Mark Almeida, President of Moody's Analytics and Rob Fauber, President of Moody's Investor Service. We will be pleased to take any questions you might have.

Question-and-Answer Session

Operator

[Operator Instructions]. We will take our first question from Peter Appert from Piper Jaffray.

Peter Appert

Good morning. So Linda, perhaps could you talk about what we should think about in terms of incremental legal costs, potentially on a near-term basis? And also how you think about the pace of buyback activity given the potential call on your cash?

Linda Huber

Sure, Peter. Good morning. We are not going to comment on incremental legal costs because as Ray said we have just received this piece of correspondence. Also, calls on our cash, we have said that we are going to repurchase $750 million of shares this year and so we will go from there. As you see on page 13 of the earnings release, we do have $2 billion of cash on hand and we do have our borrowing lines and CPA program.

Peter Appert

Sure. Got it. And then one other question, the guidance for 4Q would imply a bit slower operating environment. Can you just talk for a second about what influences you are thinking in that regard?

Linda Huber

Sure. Maybe we will turn that over to Rob.

Ray McDaniel

Yes. Peter, it's Ray. And I will let Rob comment on this in more detail, but I think the punch line is, we do think that some of the strength in the third quarter was pulled forward from the fourth quarter, We had a very strong close in late September and some of that issuance appears to have been opportunistically pulled into a very attractive issuance environment.

Rob, I don't know if you have any more detail you can add to that.

Rob Fauber

That's right. And I think I would characterize, there is continued good market access here in the U.S. and we expect that will continue through the election and even potentially beyond. Selective access, I would say, in Europe and healthy issuance in Asia. And we have a healthy new mandate pipeline as well. But as Ray said, we have incorporated some potential volatility and fewer, what we call, [indiscernible] days in the fourth quarter into our thinking.

Peter Appert

Very good. Thank you.

Operator

We will take our next question from Tony Kaplan from Morgan Stanley. Please go ahead.

Tony Kaplan

Hi. Thanks so much for taking my question. Just wanted to ask about, just given the strong performance in corporate finance, any way to frame the pull forward that just discussed? How much was from fourth quarter? How much, maybe, from 2017? Or maybe just how much larger it was than you were expecting in third quarter?

Ray McDaniel

I think broadly speaking, we think the strength in the third quarter was pulled forward of near term issuance that would have been occurring probably in the fourth quarter and early in 2017 otherwise. Looking out into 2017, we think that issuing conditions are probably going to be attractive and that may encourage pull forward from 2018 and beyond. Part of the reason why we are optimistic about the current outlook for issuance conditions is driven by the fact that we think the default rate in the speculative grade arena is probably peaking right about now over the next month or so and it's going to moderate and come down, which should help spread. So even if official rates are moving up somewhat, we think there is an opportunity for spread tightening and an attractive issuance environment.

Tony Kaplan

Got it. And then on the margin side, MIS margins were strong. It seemed like that was mainly revenue flow through. Anything else to call out there? And then in MA, you have, I guess, margin contraction year-over-year for the last two quarters, partially because of the corporate allocation and things like that, but should we be expecting, I guess, similar contraction in MA margins in the fourth quarter? Thanks.

Linda Huber

Tony, thanks. This is Linda. You are right. MIS flow-through was helpful to us. You will note that we also called out continued expense control. And as you saw, we put $0.03 through in a restructuring charge. We are seeing good results from the cost controls that we have mentioned before. Those are particularly in effect for MIS and for shared services. And we feel that that's, as I said, starting to have an impact on our numbers, which is great.

For Mark, who will comment in a minute, the unfortunate result of Mark's success is that he does get to carry more of the overhead burden and he will talk a little bit more about the margin outlook for his business.

Mark Almeida

Yes, Tony. Right, the MA margin was held down by the increased share of overhead allocation that we are getting this year. And also remember we have the GGY acquisition which is hitting us this year. So I can tell you that when we adjust for those things, the work that we do in looking at this on a pro forma basis and adjusting for the acquisition and assuming that we add the constant share of overhead expense, we see modest margin expansion so far this year.

Tony Kaplan

Terrific. Thanks guys.

Operator

We will take our next question from Tim McHugh from William Blair. Please go ahead.

Tim McHugh

Yes. Thanks. Ray, I just want to follow-up to the comments as you looked into 2017 and I guess also the comment about pull forward. You have talked before about the refinancing potential in 2017. Is that part of what you felt got pulled forward? Or was it really just timing within the quarters? I guess I am trying to think about that going into next year.

Ray McDaniel

Yes. As I mentioned, our belief is that it was more fourth quarter and maybe early 2017 issuance getting pulled into the third quarter. So I do not anticipate that we are going to see a large amount of 2017 refinancing, having already gone through in the third quarter of 2016. And again, if issuance conditions are as we are speculating, that is probably going to encourage pull forward out of 2018 and into 2017.

Tim McHugh

Okay. Thanks. And on ERS, the trailing 12-month sales numbers have kind of been in the mid single-digits for two quarters. I know there is the rolling 12-month number. So the different things to drop in and come out of that number. But I guess recent bookings, I would be curios for any more color there. Is it still supportive of thinking about that business as a double-digit organic kind of growth business as we go into next year? Or is new sales activity, is that more representative of what we should think about for ERS?

Ray McDaniel

No. Tim, I think it is. We do continue to think of this as a double-digit growth business particularly and recall what Steve talked about at Investor Day, particularly focusing on those areas of the business that we are really trying to drive, particularly around software licenses, software subscriptions and software maintenance. As we told you, we are de-emphasizing the implementation services business that low margin business that frankly we don't particularly want and don't particularly need given our market position now. So when we focus on the core aspects of the ERS business, we are seeing good strong bookings there, certainly in the double-digits and getting up towards the mid-teens.

Tim McHugh

When you say double-digits to mid-teens, is that for the total ERS? Or are you just saying the software piece is growing at that pace, but total practice revenue might be lower because you are not doing as much of the implementation?

Ray McDaniel

Correct. Yes. It would be the latter. Ignoring the sort of the flatness that we are seeing in the implementation services business and just looking at those parts of the business that we are emphasizing, that's where we are seeing the double-digit or mid teens type growth.

Tim McHugh

Okay. Thank you.

Ray McDaniel

Yes.

Operator

We will take our next question from Andre Benjamin from Goldman Sachs. Please go ahead.

Andre Benjamin

Thanks. Good morning. Just on the issuance side, as you talk to your capital markets, that counterparts to form the view about the pipeline on the potential forecasts. So maybe talk a little bit about the level of confidence or lack thereof that you are hearing from them around those ranges as they talk to their customers? And this is really more a question around talent, are they really confident in the baseline that comes from refi. M&A and those products, et cetera? Or do you sense a greater uncertainty relative to, say, a month or two ago, whatever timeframe you want to use as a reference?

Linda Huber

Sure. Andre, it's Linda. I will take a shot at this and I will talk about the views that we get from the various investment banks. The view, first will cover the U.S. and then outside the U.S., this will span financial and non-financial U.S. dollar issuance.

Before I start that, though, I think the market is cheered by some larger M&A deal talk that has happened today and recently. So I think that tends to improve confidence. But let's go through these categories. Investment grade third quarter 2016 issuance was up 20%. Issuers are taking advantage of historically low rates and strong investor demand.

We do expect, though, lighter periods of issuance expected in the fourth quarter because of the following three factors, earnings blackouts will continue through October, U.S. elections obviously are November 8 and the Federal Open Market Committee meetings are December 13 and 14. For full year 2016, we expect issuance in the year up 10%. you will recall that originally these projections had been for issuance to be sort of flat to down 10%. So this is better than had been anticipated at the beginning of the year.

Yield third-quarter 2016 issuance was up 35% which is a very big number. There again, strong investor demand, good pricing and opportunistic issuance coming through, very favorable factors. Issuance volumes have moderated over the last two to three weeks as spec rate market activity has shifted in favor of loans, in other words shifting toward leverage loans versus bonds. And for the full year, we are expecting that the year will be down 5% on high yield, which is less bad than some of those initial indications had been back in January.

Leverage loans third quarter 2016 issuance up 50%, a very large number. Leverage loan market continues to exhibit strength on the back of an opportunistic wave of refinancing activity and growing CLO issuance. Our CLO pipeline is very strong right now and full year 2016 issuance expected to end the year up 10%. Again, that's far more favorable than what was predicted at the beginning of the year.

In Europe, investment grade ECB's purchasing program continues to underpin the market. DOE's purchase program also has officially begun and so you see a lot of U.S. corporates doing reverse Yankee issues over in Europe as a heavy component of the supply there in Europe.

The high yield market is also accommodative for issuers and a large portion of deal flow is coming from refinancing activity. September of 2016, on the high yield front in Europe was second highest month on record. And we do have some caution driven by concerns around potentially ECB tapering and the timing and extent of any U.S. rate rises, some renewed speculation on the hard Brexit and its rhetoric and regional European referendums and elections coming up.

So, I think, generally much better than we had expected. I think Rob might want to comment a little bit that we continue to see growing strength through the middle and the end of September which was perhaps a bit better than we had expected even at Investor Day.

So Rob?

Rob Fauber

Yes. The only thing I might add to that, Linda, is that in the investment grade space, we have seen continued interest from foreign investors who were looking for yield. And it's interesting, when you look at the funds flow both in high yield while last week we saw a small outflow, the prior two weeks were almost $4 billion in inflows and over $11 billion in inflows year-to-date. Similarly on the bank loan side, that asset class has seen its 11th straight week of inflows and that's the longest streak since 2014 and almost $3 billion over the last 11 weeks. So I think that really supports the market technicals.

Linda Huber

Thanks. Andre, anything else we can do for you on that front

Andre Benjamin

No. That was it.

Operator

And we will take our next question from Warren Gardiner from Evercore. Please go ahead.

Warren Gardiner

Yes. Thank you. I was a little surprised to see the recurring revenues and ratings were down, I think, a couple of percentage points sequentially, just given the strong debt issuance you guys had this last quarter and of course this quarter as well. So just kind of wondering how to think about that into 4Q, especially given some of that strong issuance we had towards the end of the quarter?

Ray McDaniel

Yes. It was really a combination of a few factors. We had a couple of one-off items this quarter that negatively impacted 3Q recurring revenues. We also saw a little bit of softness in CP outstandings and that's due, I think, in part to some of the money market regulations and that in turn dampened the activity fees that show up as recurring revenue for us and we had a little bit of FX drag. So all that kind of contributed. If you exclude those items, that recurring revenue would have between 3%, 3.5%, which I think is fairly comparable to last quarter.

Warren Gardiner

Okay. Thanks. And then could you just remind me what your leverage cap is and where you guys stand today with respect to keeping your current rating and maybe where you could go and still maintain investment grade?

Linda Huber

Sure. Warren, it's Linda. I think we are pretty happy with our current leverage levels, given our ratings by other companies. We have some room but we are pretty comfortable with where we are right now. We do have, several people have noted a piece of debt coming due in 2017, we continue to take a look at that. That does have a call feature on it. And so we would have to look at the break-evens there. So we continue to watch that one. And we are, as you know, now able to issue CPs. We are paying some attention to that. That allows us to turn the dials a little bit more finely than a large public debt issuance, a term issuance might provide. So we will see, but we are pretty happy with where we are and we like our rating where it is. So really no change.

Warren Gardiner

Okay. Thank you.

Operator

We will take our next question from Manav Patnaik. Please go ahead.

Manav Patnaik

Yes. Good afternoon guys. Just on the insurance front, can you just touch on the structured outlook that you increased a bit? I think you talked obviously positively at the Investor Day. Was there anything incremental to that? Like was it Sprint spectrum bonds or whatever that's been coming to the market, just curious there?

Ray McDaniel

Yes. I mean probably the biggest contributor to the improved outlook is CLO activity. The pipeline for CLOs is quite strong right now. Rob, I don't know if there any other factors that you would point to?

Rob Fauber

Yes. That's right, Ray. We have seen a mix of some of these reset deals. The leverage lending market has obviously picked up and that supported greater supply in the market. And we have seen a good gradation bid for some of the CLO assets that supported that activity.

Manav Patnaik

Okay. And then, Mark, just in terms of the non-U.S. RD&A business that declined, just curious what's going on there?

Mark Almeida

Yes. One, we got crushed by FX. The pound took a beating and you are seeing that in the numbers. We also had kind of an odd ball one-ff last year in the third quarter, we had a strong third quarter last year, reflecting some one-off business that we had done, some large one off business that we have done in some of the smaller segments of RD&A and those didn't recur in the third quarter this year. So that's really what you are seeing there. But the underlying business continues to be quite strong .We feel very comfortable with where we are there.

Manav Patnaik

Do those one-offs continue? Or was that just this quarter's performance?

Mark Almeida

No. They were one-offs in the third quarter that were recognized in the third quarter of 2015. So we had kind of the lapping phenomenon.

Manav Patnaik

Okay. And then just broadly, I just want to understand how you guys define material information or materiality? Just trying to understand, because I presume after this request there is going be a lot of back and forth and I guess is that why you toned down the buyback program because I guess you are not allowed to do that while that's going on? Just curious on how we should think of that?

Mark Almeida

We currently have a programmatic repurchase plan in place that continues. When we come to renew that, we will look at all the appropriate conditions and information that we normally do in terms of renewal. So that's the story on the buyback.

Linda Huber

Yes. Manav, to extend a little further on that, we are operating our share repurchase program under a pre-existing 10b5-1 plan, as you know and we are in the market today and we will take a look. We said we think we will spend about $750 million this year and we are pretty happy with that. So I think that's about it.

Manav Patnaik

So the reduction in the buyback then, is that fair to assume it's from, I guess, the discretionary aspect of the buyback that you had to that 10b5-1?

Linda Huber

Yes. I think saying that we are going to do $750 million for this year is probably about what everybody needs to know in order to model that and we are pretty comfortable with where we are. We have reduced the share count from by 3% from last year of September, as we said in the script.

Manav Patnaik

Okay. All right. Thank you guys.

Operator

We will take our next question from Bill Warmington from Wells Fargo Securities. Please go ahead.

Bill Warmington

Good afternoon everyone.

Ray McDaniel

Hi Bill.

Bill Warmington

And shout out to John Goggins, just when I thought I was out they pull me back in. The first question for you is on the strong Asian issuance. I just wanted to ask you if in terms of what you are seeing there, how much is going towards refinancing of the debt and whether you are seeing some portion of that go to fund some investment that could actually spur some growth?

Ray McDaniel

Yes. I mean a lot of the activity was coming from Chinese banks, asset management firms and of course there refinancing included in that, but I do think we are seeing new money issuance coming out of Asia. And yes, I would say all things being equal, that's a good sign for potential growth.

Rob, I don't know if there is anything else to add to that?

Rob Fauber

Well, a little bit of a mix shift from on-shore borrowings to offshore in this quarter. Cross border issuance from the Chinese property sector, which had been going into the domestic markets a bit in the second quarter. We saw some of the big oil and gas corporates across APAC and some increased issuance from Australia and some healthy first mandate activity.

Bill Warmington

Yes. So the second question for you on margins. You talked at the Investor Day about a five-year target getting to the mid-40s for the operating margin. You had very strong flow through this past quarter. Potentially you have some higher legal expenses coming. I just wanted to bring that up as a question in terms of, does it change the trajectory of that margin target?

Linda Huber

Bill, it's Linda. We don't expect that it will change the trajectory. I think if we noted at Investor Day, we are being prudent about what we think for 2017 and 2018 margin expansion. I think we had noted, we expected that to be perhaps backend loaded over the next few years. And you are right, we do expect to get back to the mid-40s on the simple margin.

I want to state very clearly that we have been very careful on our cost controls. An interesting thing for you to think about Bill, just looking at headcount growth year-over-year at the end of September, the rating agencies head count has grown only 1% and shared services headcount has grown only 1% from this time last year.

We have invested in growth for Moody's Analytics, because that business is moving along really nicely, but we are being very cautious about what we are doing in terms of headcount growth because that's the major component of our expense increases, as you know. So we are being very cautious and legal expenses will fall as they do, but nothing that exciting to comment on there, other than that we are all being very careful about the pace of expenses.

Bill Warmington

Okay. Well, thank you very much for the insight.

Operator

We will take our next question from Vincent Hong from Autonomous. Please go ahead.

Vincent Hong

Hi. Sorry, the answer to this one is probably no, but any sense on timing on this DOJ stuff? Would you expect it to be as prolonged as what S&P experienced?

Ray McDaniel

We don't really have any information I can give you on that at this time.

Vincent Hong

Okay. Last one, how many new mandates did you get this quarter?

Ray McDaniel

About 225 to 227 new mandates. It was up from the second quarter and up from prior year.

Vincent Hong

Great. Thanks.

Operator

We will take our next question from Joseph Foresi from Cantor Fitzgerald. Please go ahead.

Joseph Foresi

Hi. As you work through the planning for next year, what are some key areas of investment you are looking at? And is there any difference between what you are expecting in 2017 for investments versus 2016?

Linda Huber

Sure. Joe, it's Linda. It looks pretty much the same. We are looking to invest in technology to support what MIS is doing to ensure that our rating analysts are as efficient as they can be and that we are handling our regulatory requirements as efficiently as we can for those analysts. So that continues.

We are pleased that perhaps that rate of technology spending might be largely having peaked in 2016. So we will have to see how that goes, but we don't have the forecast for 2017 baked yet fully.

For Moody's Analytics, markets running a very nicely growing business and we will continue to invest in that business. And for the commercial operation for Moody's Investor Service, we want to be thoughtful about the ability to do business with us in a constructive way. So we might continue to invest there.

But the investment outlook, I suspect we will look pretty much like it has. But again very cautious eye on expense control and we will talk more about potential for margin expansion for 2017 when we give guidance for 2017. But we would like to be able to show some margin expansion, but we are going to have to see. And I don't know if Ray or others of my colleagues want to comment any further on that.

Ray McDaniel

No. The only thing I would say is probably a notable variable would be, as we look at some of the international markets and market opening in some key emerging markets like China, if that occurs more quickly that might invite investment sooner. If it continues to be at the pace it has been at, we probably would accommodate that with the spending that that you have seen already.

Joseph Foresi

Got it. And as you run through economic variables for 2017, I know you talked about it potentially being a positive issuance environment, can you give us any early thoughts on what your expectations are for some of those variables like interest rates or others that could impact issuance in 2017?

Ray McDaniel

Yes. I mean at a macro level, just looking at GDP, the GDP growth is, I think we are anticipating it's going to stabilize, albeit at fairly low levels in the developed markets. So somewhere around 2% in the U.S. Less than that in Europe. And then for the G20 emerging markets, more in the 5% range. So, it's good in that there is growth in the key markets that we operate in, but it is not going to be fast-paced growth in our estimation.

We would also expect to see a gradual normalization of monetary policy in the U.S., but I think that will be gradual. And we are going to continue to see accommodative monetary policy outside the U.S. So I think that's going to feature in continuation of low rates in a number of markets.

Joseph Foresi

Got it. And then just a last one from me. Can we get any updates on your outlook for Brexit in Europe? Thanks.

Ray McDaniel

Yes. It's going to be a continuing uncertainty, I think. There's a certain amount of rhetoric that is contributing to the uncertainty. I think the rhetoric may be a bit stronger than the reality when we finally see what kind of negotiations go into the divorce and re-marriage in Europe with the U.K.

But the reason I say I think we are in for some prolonged uncertainty is really driven by just the political timing with elections in key countries throughout next year and I think that's going to impact the pace at which negotiations can be conducted. Those countries include the Netherlands, France, Germany. So we will probably see more progress late next year then we will early in the year.

Joseph Foresi

Okay. Thank you.

Operator

We will take our next question from Alex Kramm from UBS. Please go ahead.

Alex Kramm

Yes. Hi, good morning. I heard your comments on DOJ obviously, but I will ask my question anyway just hopefully broad enough that you can answer it. Two questions, actually. So one, when I read your disclosure this morning you mentioned FIRREA, you mentioned RMBS and you mentioned CDOs which sound fairly consistent with what S&P has settled on. So you have studied, I am sure, their case very details. So any anything in the latter that you saw that suggest that it's a different scope or beyond the scope or less of a scope? And then secondly, maybe just can you just remind us, you have been very strong on not settling cases in the past. You have settled a few. So maybe just a general view and how that has evolved the last few years as you have seen some of these cases? Thank you.

Ray McDaniel

No. I don't think it would be appropriate for me to comment on this at this point. The disclosure we made was based on the letter we received and that's about as much as I can say. And I do understand the curiosity and I realize it's probably frustrating for me to keep referring you back to our disclosures. But I think that's the most appropriate course.

Alex Kramm

Fair enough. I get it. Secondly, somebody brought up the Sprint deal that just went off this week. Rob, maybe this is for you. Any more detail you can give us in terms of, do you think this is something new? And do you think another the pipeline of deals like this could go off? And by the way, is this captured in IG or is this a structure deal? How does it work from a financial perspective?

Rob Fauber

Yes. I am not sure I would say this is a trend. This was one particular transaction. This wasn't in the structured area. We have seen some esoteric types of transactions. We have seen your handset transactions and so on. So there's some of that kind of activity going on. But I am not sure that what spread that would be a trend.

Alex Kramm

All right. And then just lastly, real quick for Linda. You mentioned the expenses a few times. I think every quarter you have updated us on the ramp you expect. Can you just give us, I know there is only one quarter left but can you just give us your latest and greatest in terms of absolute dollars and how that's changed over the course of the year? Thank you.

Linda Huber

Sure, Alex. We had said the expense ramp from the first quarter to the fourth quarter will be $25 million to $35 million and we expect that that will hold maybe towards the higher end of the range.

Alex Kramm

All right. Fantastic. Thank you very much.

Operator

We will take our next question from Jeff Silber from BMO Capital Markets. Please go ahead.

Jeff Silber

Thanks so much. In the release you talked a little bit about increasing incentive compensation across the company. Can you just give us a little bit more color? Is that something we should expect to continue going forward?

Linda Huber

Sure, Jeff. Incentive compensation for the third quarter, we did have to take up a bit. In fact that incentive compensation was about $43 million and that ran ahead of the second quarter of $35.6 million and also ahead of last year's $32.9 million. So given the strong performance particularly at MIS, we have had to accrue about $10 million of additional incentive compensation which did offset some of the other cost savings that we had. Going forward for the fourth quarter, this is a bit of a wild card. I would model about $40 million is probably a reasonable number, but we could break a few million dollars either below that or above that.

Jeff Silber

Okay. Great. That's helpful. And I am sorry to go back to the DOJ issue, but can you tell us what the reserve policy has been? What you have reserved against cases similar to this? And also, historically what insurance would reimburse you for typically for these, if there are any settlements? Thanks.

Linda Huber

Sure. Just quickly and then Ray will comment. U.S. GAAP, we can't reserve for anything that is not probable or estimable and since we don't have any information on that front, we can't have any reserves on this matter. Also we do have insurance coverage, but we are not going to comment on that either.

And I will see if Ray has anything further to add.

Ray McDaniel

No, I don't on those items.

Jeff Silber

Okay. Thank you.

Operator

We will take our next question from Craig Huber from Huber Research Partners. Please go ahead.

Craig Huber

Yes. Thank you. Linda, the restructuring charge you guys took in the quarter, it's been quite some time since last time you did that. Can you just give us a little more detail what part of the company that's pertaining to please?

Linda Huber

Sure. The restructuring charge was modest, $8 million and change. We don't do that too often. As we have said before, we are watching expenses particularly carefully. And I think I commented earlier on what we are doing with headcount management, both in MIS and shared services. So I think, Craig, it's fair to say that most of that restructuring charge accrued to shared services and to MIS.

Ray McDaniel

And it was in multiple areas, modest actions in multiple areas.

Craig Huber

Okay. And then Ray, towards the outlook for structured finance, just as we think out over the next six-plus months, maybe RMBS, CMBS, what are some of your sort of outlook there and the underlying factors that might drive it materially better or worse than we have seen in recent quarters?

Ray McDaniel

Yes. Rob may want to comment on this, but what I would look for really is how some of the work being done to structure transactions in light of the risk retention rules and efforts being made to try and create structures that are still economically attractive and comply with those rules is going to be the big variable going into 2017. We have begun to see some ideas and actions around how to address the risk retention rules. But again, we just have to watch and see what the range is what the banks ultimately land on.

Rob Fauber

The only thing I might add to that, Ray, is so we have a healthy CMBS pipeline. You asked about CMBS, right now as issuers are looking to get in front of the risk retention deadline. So while January could be a bit light, I think we will see debt issuance in the first half of 2017 in CMBS supported by this upcoming maturity wall that we can see.

Craig Huber

I was also going to ask about maturity wall on the corporate finance side here data you showed increased this over the next four years. Ray, just remind us, in the transaction revenues for the corporate loan historically, what's the general range of how much that business historically comes from refinancing?

Ray McDaniel

Rob, do you have the --

Rob Fauber

I think we said at Investor Day for U.S. and European fundamental, which is what we shared, I think it was in the 35% of transaction revenue.

Ray McDaniel

30% to 40%.

Rob Fauber

In that ramp.

Ray McDaniel

Yes.

Craig Huber

Okay. Great. Whatever your litigation costs are in the fourth quarter, I assume that's obviously embedded in your outlook here for your costs for the full year, right?

Ray McDaniel

Yes. Our legal costs are included in our outlook, yes.

Craig Huber

Okay. Great. Thank you.

Operator

We will take our next question from Ashley Serrao from Credit Suisse. Please go ahead.

Ashley Serrao

Good afternoon. I just want to first clarify the messaging on expenses here. In face of elevated litigation costs, is the message that there isn't a lot you can do on the incentive front in the near term or accelerating some of the future expense talked about at the Analyst Day? Or given this letter, are you reevaluating some additional levers you can pull?

Ray McDaniel

Just to adjust the premise of the question, we have not said that we have increased litigation costs. We have not commented on that.

Linda Huber

Yes. Ashley, it's Linda. We will continue with our expense plans. The guidance for the remainder of the year includes everything that we can see right now. Again, we are being very cautious, particularly on headcount. We are being very thoughtful on the businesses and the support services that have had perhaps more challenging conditions earlier this year. But we are continuing on doing what we are doing. The conditions in the business, both of the businesses are very good. The third quarter was quite strong, as you can see, record MIS revenue in the third quarter. So we are going to keep doing what we are doing and in early February, we will give guidance for 2017.

Ashley Serrao

Okay. And I don't know if you can answer this, but I am going to try. So how should we think about the maximum settlement you can fund today given your U.S. liquidity sources without having to repatriate foreign cash?

Ray McDaniel

No. As we said, we have commented to the extent that we feel is appropriate in our disclosures already.

Ashley Serrao

Okay. And then just final question, what's you view and current appetite to do M&A as long as these investigations continue?

Ray McDaniel

Well, we have been engaged in M&A activity on a regular basis. I think we would continue to look for attractive assets to acquire. So I don't see any change in our thinking or behavior going forward than what you have seen in recent years.

Ashley Serrao

Okay. Thank you for taking my questions.

Operator

I would like to turn the conference back over to Ray for additional remarks.

Ray McDaniel

Okay. I just want to thank everybody for joining us and we look forward to speaking with you again in the New Year. Thanks.

Operator

This concludes Moody's third quarter 2016 earnings call. As a reminder, a replay for this call will be available after 3:30 PM Eastern on Moody's IR website. Thank you very much.

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