SPGI
#The CMBS pipeline has actually been quite weak.
CMBS issuance was down over 60% in the second quarter.
There were 10 transactions that were completed.
We were on one of them and we continue to claw our way back into that market.
The pipeline now right now is actually quite weak.
It is a trend that started off in the first quarter ---+ first and second quarter, continued in CMBS.
We have hired a great team.
We have retooled our approach to be business over the last couple of years.
It is our hope that we get included on more and more deals on the CMBS market over time.
We do continue to rate many of the single borrower transactions but those also have been quite weak during the quarter.
I would point to two things.
One, compared to Q1, Q1 was an abnormally terrific growth quarter for our Global Trading Services.
It was up quite considerably in the first.
We still had very nice growth in that area.
It's only 10% of that mix.
But we still had very nice growth in the second quarter, but it just wasn't quite as fast as what we saw in Q1, so it wasn't as accretive as we saw previously.
It is still a challenging market out there in terms of the profit pressures on the commodities space, so we are still seeing growth, but it may be costing us a growth point or two.
Thanks, <UNK>.
I assume the way you are asking the question was you are looking at more on a sequential basis from first to second quarter.
Some of the expense difference between the first and the second in that general range that you mentioned had to do with the drop-off ---+ what <UNK> mentioned in terms of some of the outside professional fees that we were paying either to lawyers or more significantly in some of the work that was underway in the risk and compliance area to ensure tight complaints with some of the Dodd-Frank requirements, which we had to do last year.
So that money has been spent.
We do have that risk and compliance investment now in the run rate, so that benefited some of the expense quarter-to-quarter.
On a go-forward basis, it's not like we expect minimal revenue.
We have to ---+ to <UNK>'s point, we are trying to be more commercially oriented going forward, but we are going to be influenced by what is going on with issuance trends.
I just would say that our forward outlook is not assuming this robust activity that we saw clearly here in the second quarter.
Let me just give you a little bit about ---+ nobody has asked this question, but since I'm prepared for it, I will tell you a couple of factors that (laughter) you haven't asked yet.
Related to the overall issuance market going forward, as you know from what we just gave you, we do see that there is going to be a reduction in the overall issuance for 2016.
But if you look forward further, and you look at the 2016, look out forward to 2020 or so, there's two factors we're looking.
One of them is total debt markets, including bank loans, which we don't necessarily rate.
The market is large.
We think it is going to grow by trillions of dollars.
In fact, it could span over the next five years to a $73 trillion market, including a large increase in China.
We do think that there is an increase in the combination of refinancing, as well as new financing going into that.
We are targeting, through all of our businesses, in market intelligence, a couple of businesses there, and then also in ratings, more and more penetration of loan markets and models and things like that.
So we look at the size of the markets and how they are growing longer-term than just the next quarter.
Over the rest of the year, though, we do think that there is a large amount of debt maturing between now and 2021.
The issuance ---+ the maturations over the rest of the year are actually not that strong.
That's why we see the full-year down about 3.8%.
We are concerned about the Brexit, what kind of impact that might have on issuance.
US interest rates and global interest rate outlooks have been quite volatile and they're changing all the time.
So in the short run, we usually expect possible volatility.
As you've have seen, as you track this business, quarterly issuance can go up and down.
But with a very long-run five-year view, we see some very large numbers of $73 trillion overall corporate debt market, which includes bank loans, and then through 2021, $10.3 trillion in debt maturing that is actually publicly issue debt.
We do see that there is a lot of activity.
We are trying to build our business around this and trying to expand it beyond just being a single ratings approach to the market, looking at bank loan rating, RES, different types of loan evaluation services, et cetera, so this is a big area for us to focus our strategy going forward.
The leading indicators should be higher oil prices.
That is probably ---+ I am giving you an unscientific answer, but if I were going to what's one of the most important correlations to overall volume, as well as activity, it has to do with the price of oil.
As you know, as we dropped into a very low oil price early this year, even though it's recovered somewhat, there a lot of people that exited the industry.
You had a large increase in defaults and bankruptcies in the US, in particular, in different types of oil businesses.
So probably getting a higher price of oil would be the largest factor that could bump up growth to the double-digit range, if that was still possible.
We have still been growing quite steadily in the mid-, single, mid- to high single-digit range, despite this because there is still such a demand for information and for our prices to be embedded in different kinds of contracts.
But double-digit range would require more than just ---+ would require a lot of work from us, but in particular, for the price of oil to be a lot higher.
The only thing I'd add to that is just keep in mind, we are trying to grow off an ever-increasing base, so double-digits off $700 million is a little bit different than double-digits off $0.5 billion.
So the reality is the business is working hard to expand its product line.
We have been investing to expand out the product line beyond oil.
That now represents one-third of the business.
We're also looking to do more than just price assessments, and we're investing to do more in the area of supply/demand analytics, so we also, from a longer-term point of view, need to build out the product line and increase our offering.
Andre.
Are you muted.
Okay, operator.
He is not there.
The primary driver would be, first is the level of overall debt issuance because that is probably the first and the second most important driver.
There could be a little bit of impact from what goes on with fund flow relative to US equity markets that could impact our indices business, but now, we have pretty good revenue visibility outside of debt issuance because so much of our business today is recurring revenue subscription-based.
The only thing I'd add to that is that, as you know in our industries business, we do have certainly ---+ as you know, we've change the way we characterize our revenue.
If AUMs continue on a very steady increase, that would also be a benefit.
That revenue tends to drop almost all straight to the bottom line.
That could be another factor that would put us up towards the higher end of the range.
And that's for the flow issue and an overall stock market level.
Flow and market level.
Right, so two things there.
We have a resource model that takes everything that you just mentioned into account in terms of our forecasting.
We are able to manage the staffing level through attrition, if we needed to.
We're also able to manage it through our bonus pool, our bonus accruals, if that was something we needed to look at to ensure that we are accruing according to the level of staffing we have, as well as the level of activity.
Those are two of the most important levers.
But we have built a way that we've got some flexibility, as well, by having analysts that are spread around the globe; they are not all concentrated in London and New York.
Despite the Brexit being a concern for us, we do have significant staffing in other European cities, including Frankfurt and Paris and Madrid.
We also get support from our partner, CRISIL, in India.
They are part of the overall flow as well, and some of the aspects to work flow processes of crunching numbers, et cetera.
So we have various variables we use to manage that.
That's part of what John Berisford is doing a great job at.
Thank you.
This is an iterative process that could take a while.
There was no low hanging a fruit.
This is something that's not ---+ it's very important for us to approach this from a relationship point of view and we hope that there is a continuous steady penetration of more products, more services our customers, as I mentioned.
There is no league table for loan ratings, and this is another area that we're trying to do more and more of as we think also around the globe, is most markets are more bank markets as opposed to loan markets.
We're trying to penetrate with more services in that area, as well, so this is something that we hope we can see continuous improvement and growth in the top line from many, many different factors.
It's not just the contract terms.
We have good relationships with our customers, and as you can imagine, any time when you to renegotiate contract terms, it's not always easy.
That's an area that we've been spending a lot of time on, structurally, as well as strategically.
The industry itself is going through a massive amount of change with Barclays having changed hands, with ICE having bought IDC, with what's happening in Europe with the exchange transaction going on there in the interest of fixed income investments around the world.
As well as all of the main asset managers, large goal of asset managers, looking at so much change and volatility in the shape of the fixed income markets, especially with pricing liquidity concerns creeping in.
We think it's an area that it will continue to develop.
We think there will be more and ETF products and target date products, retirement products, et cetera, that are developed over the years.
We would like to play in that.
We are off to a good start with our dialogue with the asset managers and with ultimate distributors about these types of products and services.
We have a core set of indices around the S&P 500, as well as some other fixed income indices.
We have about $40 billion right now in AUMs in the fixed income index space.
We are looking at all different ways to grow the business, whether it would be continuing to grow and penetrate with what we already have and what we are developing, as well as looking at the different properties that pop up for sale and whether or not they could be valuable to be added to our portfolio, if the price is attractive, as well if the capabilities they bring are attractive.
So continues to be an important potential growth area for us and we do have dedicated resources to seeing how we can grow in this area.
Okay.
Thank you very much, everyone.
With that, let me conclude the call.
I am pleased that we had another strong quarter.
The financial performance was excellent, ending up with an EPS growth of 17% and year-to-date cash flow of $513 million, et cetera, is all something that we are very pleased that we have been able to achieve.
But let me end the call again by thanking <UNK> <UNK>.
He has been a great partner and he is heading off to Yale University and they are going to get the benefit of his experience and expertise.
Thank you, <UNK>.
We wish you all the best.
Thanks, everyone.
