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Good day, and welcome, ladies and gentlemen, to the Moody's Corporation First Quarter 2020 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 question-and-answers following the presentation. I will now turn the conference over to Shivani Kak, Head of Investor Relations. Please go ahead, ma'am.
Thank you. Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's first quarter 2020 results, as well as our outlook for full-year 2020. I'm Shivani Kak, Head of Investor Relations. This morning, Moody's released its results for the first quarter 2020, as well as our outlook for full-year 2020. The earnings press release and the 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 Mark Kaye, Moody's Chief Financial Officer.
During this call, we will also be presenting non-GAAP or adjusted figures. Please refer to the tables at the end of our earnings press release filed this morning for a reconciliation between all adjusted measures mentioned during this call and GAAP. 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, 2019 and in other SEC filings made by the company, which are available on our website and on the SEC'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'll now turn the call over to Ray McDaniel.
Thanks, Shivani. Good morning, and thank you, everyone, for joining today's slightly delayed call. We apologize for that delay. I'll begin by providing a general update on the business, including Moody's first quarter 2020 financial results. Mark Kaye will then comment on our outlook for 2020. After our prepared remarks, we'll be happy to respond to your questions. Much of today's call will be focused on the effect that the COVID-19 pandemic has had on the economy and our business, along with Moody's preparedness and response.
I'd like to start by saying how incredibly proud I am of the dedication and hard work of our employees across the globe. They've made it possible for Moody's to continue operating respectively, demonstrating that the resilience of our business lies with our people. This importantly includes our technology staff, who were proactive in upgrading our infrastructure and planning for remote work. Amidst these turbulent times, we remain confident in Moody's long-term growth fundamentals. As our expertise is increasingly relied upon in this environment, our mission has become even more critical, to provide trusted insights and standards that help decision makers act with confidence. We have maintained a healthy balance sheet and ample liquidity, which will help us manage through this period of uncertainty. While we have had a strong first quarter with robust growth in both revenue and earnings, we expect the implications of COVID-19 to be more pronounced throughout the second half of the year.
As a management team, we prepare rigorously for a multitude of contingencies. After careful consideration, we have aligned around the base case scenario with relatively wide-ranging outcomes. This is reflected in our full-year 2020 adjusted diluted EPS guidance, which we have lowered and widened to a range of $7.80 to $8.40 this is a material change from our previously communicated guidance, and we will discuss the changes to our assumptions that drive this updated outlook.
As everyone is aware, the COVID-19 virus has taken a significant toll globally. It has required heroic efforts from the health community to treat millions of patients, and we would like to express our sincere gratitude for these frontline professionals. As the pandemic continues, the health and safety of our more than 11,000 employees remains Moody's top priority. Like other organizations, we have transitioned to remote work. We continue to monitor the situation on a local level, and will align our future working arrangements with guidance from the relevant authorities, such as considerations for adequate testing and contact tracing. Likewise, we are taking steps to ensure we can provide a safe work environment.
In response to the pandemic, we've made our research and insights accessible to the public-at-large by creating a microsite at moodys.com/coronavirus, which contains a wide range of content related to COVID-19 and its impact on the markets. In addition, we are regularly engaging with market participants via virtual meetings and webcasts to share our knowledge and opinions. We are also supporting our local communities, including providing our employees with virtual opportunities to volunteer, and the recently announced $1 million program of charitable donations and other supporting measures addressing both the immediate and long-term impacts of the pandemic. This follows an initial donation in January to aid in medical relief in China. The program includes global and local brands that are a mixture of humanitarian and other aid to address the impact of COVID-19 on small businesses and education systems. I encourage you to learn more about these and other key corporate social responsibility initiatives in our CSR report published earlier this week, and at our microsite, moodys.com/CSR.
Lastly, we are lending our expertise to governments and policy makers to help mitigate the Coronavirus's impact, and plan for recovery. Our information and analysis has been critical, for example, in helping to inform stimulus programs and the allocation of fiscal support. These commitments to our stakeholders exemplify Moody's purpose to bring clarity, knowledge, and fairness to and interconnected world. We continue to proactively engage with our customers in order to provide unique insights specifically relevant to this time of stress. One example, as I mentioned, is our COVID-19 microsite, which aggregates content from across our businesses, and includes over 1,000 published reports that have been visited more than 120,000 times. We have seen a 120% increase in usage on our website, and over 35,000 people participated in Coronavirus related online events that we have organized.
During this crisis, we are investing in our customers and communities by enhancing existing products and developing new offerings. For instance, we've built out our macroeconomic scenarios to reflect the potential implications of the Coronavirus outbreak in January, and these scenarios have helped hundreds of banking customers project the impact of the virus on their businesses. Moody's Analytics also recently announced its Know Your Supplier Portal. This innovative tool aids hospitals and other healthcare providers identify and screen suppliers, as sourcing medical and personal protective equipment for frontline staff remains a critical challenge, and unfortunately, also invites fraud and scams. Finally, MA enhanced its credit decisioning solutions to help lenders underwrite loans on the first day the Paycheck Protection Program was made available to banks and borrowers under the CARES Act.
In addition to our COVID-response. We are also remaining focused on key growth initiatives, ensuring that when we emerge from this situation to a new normal, Moody's will be strongly positioned for continued growth. I'd like to update you on three of those initiatives, where we've been investing in these areas recently, and our strategy is beginning to coalesce into unique and powerful customer solutions. First, Know Your Customer, or KYC, where we recently acquired Regulatory DataCorp, RDC, in order to create a leading global player in this space. We have a compelling and hard-to-replicate suite of solutions, bringing together decades of experience in customer and supplier screening, proprietary databases, and AI capabilities to improve speed and effectiveness in identifying risks. We are well underway in the integration process, and the recently launched Know Your Supplier Portal that I mentioned earlier demonstrates this.
We have also continued to add new features to our compliance product, Compliance Catalyst, including the ability for customers to create their own list of entities with whom they do not want to transact, as well as enabling compliance with U.S. OPAC and EU sanctions regulations regarding entities that are majority owned by a sanctioned company or individual. We remain excited about the growth prospects in KYC, as our customers will be searching for new tools and solutions to improve their efficiency in this crucial function.
Another area of focus for us is ESG, which we are embedding across Moody's. Last week, to commemorate Earth Day, we rolled out our new ESG and climate risk hub, moodys.com/ESG. The site showcases our ESG and climate risk capabilities across both lines of business.
The products provided by 427, Vigeo Eiris, and SynTao Green Finance alone re immensely powerful. But when we bring together these companies' world-class data and analytics with MIS and MA's core competencies, we have unrivaled offering for our customers.
Finally, we continue to enhance our CRE platform. The commercial real estate market, like many other areas, is under intense pressure right now, and many of our customers are trying to think through the impact to their investment portfolios. We continue to build on our proprietary REIS database, recently launching a new website with a dedicated COVID-19 topic page. With the REIS network, paired with our tools and expertise in ESG, structured credit, and risk, we can provide a comprehensive solution with a wide range of use cases to help our customers. So we remain focused on creating long-term growth, and are optimistic about our prospects for these markets.
Before reviewing our first quarter results, I thought it would be helpful to provide a recap of how COVID-19 affected the credit markets. The virus has had a starkly negative impact on the global economy, resulting in widespread rising unemployment in recessionary conditions. In response, governments have undertaken unprecedented global monetary easing efforts and fiscal actions. While we've seen market disruption, we've also observed somewhat of the dichotomy between the impact of these macro shocks on the real economy, and the functioning of the credit markets. For instance, investment grade companies have responded to economic uncertainty by bolstering their cash balances and capital positions, with record levels of bond issuance in March and April. On the other hand, we've observed substantial spread widening in speculative grade issuance markets, and leverage finance activity curtailed as the contagion intensified.
The high-yield bond market has begun to reopen, especially at the higher end of the speculative grade rating scale, while the leveraged loan market has been slower to recover. Nevertheless, the banking system has remained stable, allowing for a wave of borrowings under revolving credit facilities by corporates seeking liquidity. We have seen similar trends outside the corporate sector, and that higher rated names, notably financial institutions, have retained access to the credit markets, and use that access to bolster liquidity. We've seen a slowdown in structured finance activity, notably in CLOs, as spreads widen during March, given underlying credit concerns. U.S. public finance was also active early in the first quarter, yet issuance slowed as funding rates escalated.
As credit markets increasingly read through severe economic stresses and focus more on post-virus underlying fundamentals, we expect that this dichotomy with the real economy may continue until companies and financial institutions have completed their balance sheet and liquidity strengthening initiatives. I'd like to further highlight the progression of corporate issuance over the course of the first quarter. As you can see, leverage finance was relatively active early in the quarter, given tight spreads and healthy investor demand. However, issuance tapered as high-yield spreads significantly widened in March to exceed 1,000 basis points, levels not seen since 2009. The simultaneous surge in investment grade activity drew a contrast, as March issuance more than doubled from the prior year period. These diverging trends inform our issuance outlook, which Mark will elaborate on shortly.
Moving to the first quarter 2020 results, Moody's exhibited strong performance, as both business segments contributed to a 13% revenue increase overall from the prior year period, with 19% growth from MIS and 5% growth in MA. MA grew 9% organically, excluding acquisitions and divestitures. Moody's adjusted operating income of $649 million was up 25% from the prior year period/ Aided by ongoing cost discipline, the adjusted operating margin expanded by 490 basis points to 50.3%. Adjusted diluted EPS of $2.73 grew by 32%.
I will now turn the call over to Mark Kaye to provide further details on our revised outlook for 2020.
Thank you, Ray. I will begin by discussing how the rapidly evolving events over the last several weeks have affected Moody's outlook for 2020. Since our investor call on March 11, COVID-19 was declared a pandemic by the World Health Organization, leading to the implementation of shelter-in-place policies across most of the U.S., Europe, and Asia Pacific. With the shutdown at non-essential businesses and reduced staffing needs across many sectors, over 30 million Americans have now filed for unemployment. This economic disruption has materially impacted the normal functioning of markets, and added extreme points so far. [Indiscernible] surged to over 80, oil prices hit multi-decade lows, and high-yield spreads widened to over 1,000 basis points.
On the other hand, as Ray mentioned, governments have implemented unprecedented fiscal support and monetary easing actions, helping to allow credit markets to function a degree better than what's implied by developments in the underlying economy. With the net effect of these indicators, we have selectively revised downward our 2020 base case assumptions to reflect a more adverse operating environment. Specifically, our base case scenario assumes that economic activity will remain relatively weak into the third quarter and possibly fourth quarter. We currently assume 2020 U.S. and European GDP to decline 5.7% and 6.5% respectively, the U.S. full-year unemployment rate to be approximately 10%, benchmark rates to stay low with high-yield spreads remaining in excess of 700 basis points, and high-yield default rates to be between 11% and 16%.
All of these figures and assumptions or materially more negative than what we anticipated in mid-March. We continue to closely monitor both the macroeconomic backdrop and the credit markets, and we'll update our assumptions as we gain increasing insight into the impact of COVID-19. Moody's outlook for 2020 is based on assumptions about many geopolitical conditions and macroeconomic and capital market factors. These include, but are not limited to, the impact of the COVID-19 pandemic, the responses to the pandemic by governments, businesses, and individuals, as well as disruptions in the energy markets, the effect on interest rates, capital market liquidity, and activity in different sectors of the debt markets. Our assumptions also include interest and foreign exchange rates, corporate profitability and business investment spending, mergers and acquisitions, and the level of debt capital markets activity. 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. Our forecast reflects U.S. exchange rates for the British pound of $1.24 and for the euro of $1.10. We anticipate that both Moody's revenue and operating expenses will decline in the mid-single digit percent range. The full-year 2020 adjusted operating margin is forecast to be in the range of 46% to 48%. We're targeting net interest expense to be between $180 million and $200 million. The full-year effective tax rate is anticipated to be in the range of 19.5% to 21.5%. Diluted EPS and adjusted diluted EPS are forecast to be in the range of $7.25 to $7.85, and $7.80 to $8.40 respectively. Free cash flow is expected to be in the range of $1.2 billion to $1.4 billion. For a full list of our guidance, please refer to Table 12 of our earnings release.
For MIS, we anticipate total revenue to decline in the high single-digit percent range, and for issuance to decline in the low double-digit percent range, with an estimated 600 new mandates. MIS's internal forecast calls for investment grade issuance to increase 10% with a 20% decline in high yield and a 40% decline in bank loans. We assume that liquidity driven issuance will continue. However, fewer M&A financings will reduce total rated issuance. Additionally, we expect there to be a lower proportion of infrequent issuer activity, leading to a less favorable mix of issuance. The stable recurring revenue base, along with cost discipline, will provide balance to the margin for these downwardly revised revenue drivers. The MIS adjusted operating margin is forecast to be in the range of 55% to 57%.
We remain confident in MIS's long-term fundamentals, despite COVID-19 related headwinds. As the graphs on the slide show, at the start of the year, MIS rated non-financial corporates had over $4 trillion of refinancing needs in the following four years to five years. This provides a future base for issuance, although the recent surge in investment grade issuance has likely steepened the last few years of these charts and resulted in new maturities begun the time periods we show here. Furthermore, as I previously indicated, speculative grade default rates are likely to increase, and these refinancing amounts may be reduced or the time periods delayed as a result.
Aside from refinancing, we expect that M&A will at some point reemerge as a prominent use of proceeds for debt capital markets activity. For MA, we forecast total revenue to grow in the mid-single digit percent range, due to the business's strong recurring revenue base, robust organic performance, and the contribution from recent acquisitions. This growth reflects the offsetting impact of MAKS's divestiture. For strong expense discipline, we still expect the MA adjusted operating margin to expand over 200 basis points in 2020 to approximately 30%.
As I just noted, MA's ability to continued growth on a reported and organic basis during 2020 is enabled by its high recurring revenue base, with only around 10% of MAs 2020 revenue anticipated to be derived from new sales. However, due to the disruption from COVID-19 related social distancing guidelines, we have curtailed in-person sales meetings, and as a result, have prudently included an impact to renewal yields and new sales development in our forecast. I'd like to highlight here that MA has had a stable history of strong retention rates between 94% and 96% since 2012, and its track record of retaining customers spans multiple products and services. Research, ERS, and BvD all had retention rates of 92% or higher in 2019. As such, we expect that MA will provide overall stability for Moody's in mitigating the revenue impacts associated with COVID-19 in 2020.
During this period, MA's increasing its emphasis on proactive customer support, while focusing on our customers' evolving needs through innovation, new value propositions, and enhanced product features. MA has adapted to the current situation by holding substantially more virtual meetings, which has led to an increase in the total number of sales meetings compared to the prior year period. The effectiveness of these virtual meetings has yet to be fully determined, and as such, we anticipate that the sales cycle may extend beyond the typical average of nine months to 12 months.
I'd like to provide additional color on our plan to reduce expenses in the mid-single digit percent range in 2020. In recent years, we have been actively managing our expense base, and our guidance increased to $60 million benefit related to the restructuring plan we completed in mid-2019. We also assumed $30 million in additional cost savings from increased utilization of lower cost locations, M&A synergies, and improved process efficiencies through technology. As you can see on the bottom chart, the guidance we provided during the Investor Update Call on March 11 was for an increase in expenses in the low single-digit percent range, rather than the decrease in the mid-single digit percent range that we now assume. The incremental savings from our prior guidance is substantially due to lower incentive compensation and reduced expending in marketing, and travel and entertainment costs, along with reprioritization of investment and project spends. I'd also note that we expect to continue investing in key areas, such as ESG, KYC, China, and enabling technologies to support future growth opportunities. We've developed our investment plans on a contingency basis, in case our assumptions on the impact of COVID-19 vary significantly.
I also want to make it clear that supporting our stakeholders through COVID-19 through the heightened relevance of our insights, analytics, and data means that maintaining our employee base remains a high priority. As such, we have not factored in material headcount reductions into our expense guidance. Moody's remains focused on proactively managing expenses and preserving strong liquidity, and at the end of the first quarter, we held $2.2 billion of cash and short-term investments, and maintained an undrawn $1 billion revolving credit facility.
In March, we issued $700 million of five-year notes, which illustrated investor confidence in Moody's and our capacity to access the capital markets, even in turbulent times. our maturity schedule is well balanced, while our weighted average coupon is over a percentage point lower than it would otherwise have been without the benefit of our hedging programs. We continue to be anchored around a BBB plus rating, indicative of the appropriate level of leverage to provide both financial flexibility and capital efficiency. And finally, while we have confidence in the resilience of the business and the strength of our balance sheet. Given the uncertainty around the extent and duration of COVID-19, we have temporarily suspended share repurchases in favor of prioritizing liquidity management.
Before turning the call back over to Ray, I would like to emphasize a few key takeaways. Moody's continues to operate effectively, demonstrating the resilience to impact of COVID-19. We are highly engaged with our key stakeholders, who look to the insights and expertise we provide, especially during times of stress. We are actively adapting to meet the current circumstances, innovating new products and leveraging technologies to stay connected. Last, our strong balance sheet and disciplined expense management position us well for sustainable long-term growth.
I will now turn the call back over to Ray.
Thank you, Mark. This concludes our prepared remarks. Joining Mark and me in a virtual format for the question-and-answer session are Rob Faber, our Chief Operating Officer; and special guests, Steve Tulenko and Mike West, the Presidents of MA and MIS respectively. We'd be pleased to take your questions.
Thank you. [Operator Instructions] We will ask that you please limit your questions and yourself to one question with a brief follow-up. You are then welcome to rejoin the queue for any additional questions you may have. [Operator Instructions] And our first question comes from Alex Cram with UBS. Please go ahead.
Hello, everyone. I think you gave a lot of guidance on the updated forecast already, but just maybe a little bit more color on the MIS side. It seems like high yield and levered loans are the biggest culprits here, so maybe you can just flush this out a little bit more. I mean, high yield, as you noted yourself, spreads have already tightened. The month has started very well. So just wondering where that conservatism comes from. And then on the levered loan side, any reasons why that could be different or any more color you can provide there. Thank you.
A - Mark Kaye
Alex, thanks very much for your question. I think what we'll do here is similar to what we've done in the past where I'll talk a little bit about the issuance drivers that we're hearing from some of the banks, and then I'm going to turn it over to Rob to follow up with our internal viewpoint. Before I begin, it's probably worth noting that, in general, many of the banks we spoke with haven't yet updated their official issuance forecasts, especially for high yield, considering ongoing market volatility. Starting with U.S. investment grade, the banks are seeing a strong liquidity to start the year, with record March issuance volumes. Many of the initial issuance were towards the higher end of the investment grade spectrum. But access to the market was brought more recently as a result of the Fed's actions to improve liquidity, which has also led to narrower spreads. The issue with on balance showed a clear preference for longer-dated bonds, partially due to the temporary disruption at the front end of the curve in mid-March. And the majority of issuance was motivated by issuers looking to create additional liquidity and fortify their balance sheet, considering the uncertain environment. But with spread tightening and still low benchmark rates, there are favorable conditions for more opportunistic issuance later in the year.
M&A driven issuance is expected to be considerably lower than 2019, with some estimating more than 50% decline in M&A driven refinancings. The upcoming U.S. election cycle could also create volatility. So in terms of outlook, what we heard from the banks is that they are calling for U.S. investment grade issuance to be down 5% to up 5%. One note that's important to keep in mind for comparative purposes is the banks' use of investment grade issuance are inclusive of financials. After getting off to a solid start to the year, the banks also noted that U.S. speculative grade issuance came to a halt for most of March, as spreads widened above 1,000 basis points. The strength of the first two months of the year is obviously demonstrated by the year-to-date issuance still being ahead where it was this time last year, both the fixed and floating rate notes. And then more recently, there have been some positive signs with strong fixed rate issuance month-to-date in April. So with the preference for the higher end of the speculative grade market, the leverage loan market is seeing some indications of opening as well, but with a handful of transactions in April.
Turning to Europe, dynamics similar to the U.S. investment grade, though less pronounced with the ECB's corporate sector purchase program, and certainly their announcement this morning. Overall, the banks themselves estimate that year-to-date European denominated investment grade issuance volume is up about 30%, with the last week of March especially busy. Then finally, after getting off to a strong start to the year in January and February, the European high-yield market has seen significant dislocation as a result of the COVID-19, having been effectively shut for the last seven weeks to eight weeks. So, that's it. The banks are optimistic that conditions could improve in the near future, and that the recent ECB measures to improve liquidity in the European investment grade market would then have a correspondingly beneficial impact to the high-yield market, with a solid pipeline waiting for conditions to stabilize. And I suppose I could say more encouragingly, high-yield bond issuance has recently resumed, marking the first issuance since the market was shut down due to the impact of the virus.
And with that, I'll turn it over to Rob to update you on MIS's issuance expectations.
A - Rob Fauber
Great. Thanks, Mark. Alex. Thanks for the question. I know there's a good bit of interest around our overall issuance outlook so I want to give a fulsome answer and continue to build on what Mark talked about. As we said, overall we're looking at a low double-digit decline and global rate issuance. For investment grade, you heard Mark talk about we're looking for something in the range of up to 10% for the reasons that Mark cited, which is really issuers have been really hitting the market bolstering liquidity and balance sheets. We think we're going to see a continuation of that activity and good market access for investment-grade issuers. We should also see some improvement in some of the non-U.S. regions and we've certainly seen that so far in April. Although not completely to the same degree that we've seen in the U.S. Your question specifically Alex, was around leverage finance. I think that you honed in on an area there. The key headwind for corporate issuance really isn't in our mind in the leverage finance sector. Certainly, we're starting to see some signs of improvement after the market was effectively shot for much of March but that said, I think we're going to see a challenging environment for leveraged finance throughout much of the year. There are a few reasons for that. One, some industries like oil and gas, transportation, retail, leisure we were expecting to see an uptick in defaults through the balance of the year, particularly at the lower end of the rating scale. That means we're going to see some attrition in terms of the number of issuers and our forecast have considered the default outlooks for those highest risk factors. Economic uncertainty and rising defaults are going to keep spreads elevated for those sectors, and that's going to weigh on issuance as well as M&A activity, which we think is going to be slow given the economic concerns that Mark talked about. Really leverage loan issuance as you heard Mark talked about being down. We think something in the range of twice what we're going to see high yield. There is a couple of reasons for why we think that leverage loan issuance is going to contract more than high yield. First, the rating distribution of leverage loan issuers is skewed more heavily to the low end of spec grade so that means we should see more defaults, higher spreads and reduced market access for leverage loan issuance. Second, the current stress that we're seeing in the CLO market is going to dampen the investor bid for leveraged loans. Third, the fact that we've got benchmark rates that are expected to remain very, very low, for considerably longer, it is going to again, skew the investor preference towards high-yield bonds rather than floating rate leverage loans. I think we'll continue to see issuance in the high yield bond space certainly from the BA area and really the fallen angels and the more resilient sectors. We're happy to go into some of the other sectors but let me pause there.
This is great. I'll have a quick follow-up and a little bit more I guess medium term. I think initially the view heading into this crisis was okay, there's going to be a recession and you will see massive deleveraging coming out of this, as we've probably seen in other recessions for short periods of time. But I think there is also a narrative here whereof the people say like, well, wait a minute. There is all stimulus. There's a lot of debt from governments but eventually, some of that debt is already today finding itself on corporate balance sheets or corporate debt. At the same time municipals are going to be struggling and will have to raise more and more debt. Is there actually a narrative here that when all said is done, there is going to be more debt in the world and more business for you to do and rates and more refinancing happening down the line versus maybe the easy to jump conclusion that the world is going to be leveraging and there's going to be less to do in the next few years? Any comments.
Yes. Hi, Alex. It's Ray. There are obviously many narratives given the uncertainty that we have but I think there is a higher probability to the narrative that you just explained and is generally being assigned to that storyline in the market today. I think coming out of this with the banks going into the situation in much better shape than they were in during the financial crisis. The ability to supply liquidity, to allow M&A activity to move forward there will probably be distressed M&A coming out of this. The demands on the municipal sector to raise capital and a range of reasons for having debt in the market both opportunistically and out of need, I think is closer to a central case scenario as I said than I think people are generally giving credit for today.
Okay, very helpful. Thank you.
Our next question comes from Michael Cho with JPMorgan. Please go ahead.
Thanks, good afternoon. I'm going to switch gears a little bit and focus on Moody's Analytics for a second. I was just hoping to get a little bit more color on the changes of the MA revenue guidance and maybe you can talk through the various nuances when we think about pressure on renewal yield and then maybe comment on how pricing plays into that dynamic.
Sure. Hi, this is Rob and I'm going to ask Steve to give a little bit of color on the renewals in a second. As you see now we expect growth for the full year to be in that mid-single-digit range and that implies a bit of a reduction which includes about 1% from unfavorable FX movements. There is a little bit greater impact to the ERS business due to some of the one-time nature of sales than we expect to see in the research data and analytics segment. But we do think that revenue growth is going to be impacted by our ability to close on sales from our existing pipeline as well as the ability just to generate new sales opportunities in the upcoming quarters. Mark touched on that. I'd say we're also actively mitigating those factors in a couple of ways. First, the impact of social distancing, we're really ramping up these virtual sales meetings so we're keeping our sales teams very engaged with our customers. Second, the issue around customer purchasing behaviors, we're adapting our sales campaigns to launch new product features and address very immediate customer needs. Within call it six weeks of experience that we've had under these conditions, we've updated our sales outlook to incorporate the impact of all of this on our sales generation for the remainder of 2020. Like I said, we think we have a little bit lower growth in RD&A and ERS in general. Steve, do you want to add to that just in terms of the renewals?
Yes, thanks very much. I would say that at least in my experience in renewing our accounts over the years, maybe the leading indicator, the most powerful indicator of a renewal problem is a lack of usage. I would say we have exactly the opposite going on here. Our usage levels are as high as they've ever been. In fact, we're showing 20% and 30% more usage this year than we saw at the same time last year. So quarter-on-quarter Q1 usage of our products and I mean across the board credit view The BvD products, the ERS products usage is up 20% and 30% across the board. Demand for what we do is very strong and I would say we're confident we'll renew most everybody according to schedule. There are some big macroeconomic factors that could affect the renewal yield and that's what we've tried to acknowledge in some of the slides that we presented earlier. A few of our accounts may face troubles and we wanted to acknowledge that. We see a little bit of an impact on renewal yield but that's probably measured in a point or two but not much more than that and the macroeconomy would be the biggest driver, not a lack of usage.
Great, thank you. Then just on the cost side more broadly, for all Moody's. Is there a bucket costs or efficiencies that we can think about as more permanent in nature given the actions that you're taking with the economic environment? I saw you made a call-out around projects and investments. Can you give a little bit more color on what type of projects and investments are getting reprioritized or pushed out? Thanks.
Mike, it's Mark here, and thanks so much for the question and good morning. Maybe I'll talk a little bit more broadly and then I will narrow in on your questions. I think there are two pieces here. The first is as a result of obviously COVID-19. We've taken a number of actions to put in place additional cost savings asides from those that arose from our 2018-2019 restructuring program or the previously stated $30 million in the 2020 cost efficiencies. We mentioned a couple of those in this part of the prepared remarks, either due to reducing certain expenses from the implementation of social distancing. For example, moving meeting formats to be more virtual rather than in person. That obviously saves travel costs. Secondly, we have evaluated a number of our spending plans and really gone through a reprioritization process with some of the initiatives that are more infrastructural back end being delayed slightly but really making sure that we focus on the business and our customers as a priority during this time. We've also revised down with some of the operating metrics in the environment. For example, our incentive comp has come down but equally importantly, the $30 million inefficiencies that we started the year with, we continue to invest in KYC, in RDC and ESG and in China. That's really important because we want to make sure during this period we take advantage of the opportunity to continue that investment cycle. There may be one of the last quick comment I'd add. During the March 11 Investor Day we did give a margin waterfall and we spoke about a number of the attributes there. It's important just to point out that we will continue that organic investment, which does contribute to a 50 basis point reduction in our margin guidance this year so we are continuing to invest.
Our next question comes from Bill Warmington with Wells Fargo. Please go ahead.
Good afternoon, everyone. The first question on the MIS side, any takeaways from the Chinese market in terms of an early lean on potential recovery for the U.S. markets?
Obviously, at a macro level, there has been a substantial slowing of GDP growth in China similar to the decline that we're seeing now coming up in the U.S. numbers. Orders of magnitude have been similar in terms of the percent change and percent change for I think what we might consider the consensus outlook. So in that respect, we might see that the expectations for recovery we would follow fairly closely behind China having gone into this later. But again, I think at a macro level, there are expectations for a decent rebound in GDP in 2021, possibly in late 2020. I think that would impact both economies. That being said, there are elements of how the Chinese have handled the pandemic and how they are thinking about returning to a normal economy from a working standpoint than in the U.S. We're just going to have to see how some of the different approaches end up impacting the two economies because we have not taken identical approaches either to the shutdowns, handling the shutdowns or the reopening at this point. So TBD I think is the fair stance for both.
My follow-up question, I wanted to ask about BvD. It has been showing some very nice low double-digit, low teens type growth. Previously, some people would think of that business as having some countercyclical characteristics as well. I wanted to know how that was doing and whether you were seeing that kind of cyclicality.
Hi, Bill. I would say counter-cyclical or maybe acyclical are words that we've used over the years. The BvD growth this year has been good, very much in line with expectations that we set forth at the beginning of the year. Usage is very strong and I would say our lead flagship product ORBIS and many of the know-your-customer activities have grown in accordance with what we had expected and so going very well despite that simple problem that it's hard to go see customers right now. I'd add one more comment there, which is internally, we've found a lot of the projects we're doing with customers, the availability of the BvD Orbis product and availability of data has been very helpful because a lot of the questions people are asking right now in terms of size and scale of opportunity, size and scale of risk the BvD database has been very useful.
Our next question comes from Andrew Nicholas with William Blair. Please go ahead.
Okay. Hi, good morning. Thanks for taking my questions. The first one just on relationship-based revenue in MIS obviously is strong again this quarter and the strength appeared to be pretty broad-based. I was hoping you could speak to the different puts and takes to that revenue in the current environment and whether there is any reason to expect moderation in that line going forward.
It's Rob. We had very good recurring revenue growth in MIS. That's been supported by a couple of things. One, our standard pricing initiatives and second, ongoing monitored credit growth from first-time mandates very minimal impact from FX. Also, includes a little bit of revenue contribution now from our ESG and climate businesses. I wouldn't expect any significant change in that line. Obviously, if we see a meaningful increase in defaults we could have some attrition from rated issuers but I don't think there will be a material difference.
Great, thank you. Then just one other quick one. In terms of the renewal process and M&A is there anything you could say about the typical timing of those renewals? At least how those timings are spread across the year and whether or not renewals in the back half of the year would potentially be better than in the second quarter for some of the social distancing reasons and rationale that you outlined?
Sure, it's Steve. I would say, personally, we don't see any obvious indications of real troubles in the second quarter and then I'll say we do have a little bit of seasonality in terms of the renewal base. There is a big proportion or a larger proportion of renewals due. They come due in December and January. Those are our two biggest months. We're relatively well spread throughout the year but December and January are definitely the two biggest proportionately and therefore if COVID were to have diminishing effects later on in the year would be good news for us.
Our next question comes from Toni Kaplan with Morgan Stanley. Please go ahead.
Thank you. I was hoping you could talk about your expectation for structured for the remainder of the year. I know you talked about CLOs but any color on the other products and any potential offset from the Fed actions so far.
Toni, it's Rob. Thanks for the question. Yes, we think securitization broadly is going to be negatively impacted. It's probably in the range of 20% to 25% across most asset classes. I imagine their CLOs, we think is going to be more impacted-- more in line with what we're going to see for leveraged loans. That's really due to both the leveraged loan decline and leveraged loan supply as well as the spreads, the much wider spreads in the CLO space. The commercial real estate space is another area that we think is going to be adversely impacted so we can see CMBS will be down in the neighborhood of something like 25%. And then, the other consumer sectors I think, in general, we just anticipate a relatively slow recovery and that's going to curtail the creation of new mortgages and auto loans and in turn going to dampen the outlook for RMBS and ABS. But let me ask if Mike West wants to add to that answer.
Yes. Thanks, Rob. I think there's two key variables here. First is the asset creation side and that’s particular to corporate-backed securitization and that has to materialize and obviously we're seeing some stress in the system there. And then the second one is that the overall spreads on the instruments have to narrow to make those economics work. So those are two major things that we're looking at and obviously the underlying assets that are in there that we look out through the fundamental. So hopefully that gives a little bit more color.
That's great. And for my follow-up, Mark, I was hoping you could help us understand about repurchases and resuming those, I guess. How many quarters of stabilization do we need to see or I guess what -- what goes into becoming comfortable again with resuming the repurchase program? Thanks.
Thanks, Toni. I'll start with maybe by reiterating that we have not changed our long-term strategic approach to our capital allocation. And we proactively took a number of steps in the first quarter to meet what we think of as 2020 working capital needs under a stress environment. Just a quick summary of those, we drew down approximately $500 million in incremental one- to three-month CP in March, and we did cancel [indiscernible] first quarter 10b5, share repurchase program. We did issue $700 million in new 5-year senior unsecured notes. The decision to pause share repurchases was really done out of an abundance of caution given the uncertainty around the extent and duration of the virus and its impact on the global economy, and we prioritize liquidity for the time being consistent with the actions as many other companies at this point.
Longer term, our plan remains to optimize our balance sheet with the first use of excess cash [indiscernible], after which we will look to return capital to our shareholders by growing the dividend and repurchasing shares. And then, I am just going to add, we don't have any plans to reduce or scale back our dividends at this point in time. Thanks, Toni.
Your next question comes from George Tong with Goldman Sachs. Please go ahead.
Hi thanks good morning. You expect global debt issuance volumes to be down low-double digits this year. Can you clarify if this refers to total issuance volumes or issuance built specifically by Moody's? And if it refers to build issuance, can you discuss what accounts for the difference between your outlook and your competitors’ forecast of down mid-single digits and build issuance?
I'll just introduce the answer by, it's Ray, by saying -- we're talking about global issuance, not -- this is not an anticipation of a change in Moody's coverage of that issuance, but rather the total issuance that we anticipate seeing in the market. And that being said, it is of course rated issuance. There are parts of the debt markets that are not typically rated. So let me -- let me pass this over to Rob, I know -- I know he might have some more color on this.
Yes, that's exactly right. The only other thing I would add is we typically don't look at issuance in domestic markets, as well.
Yes. Got it. So, as my follow-up in the ratings business, you expect MIS margins to be 55% to 57% this year compared to around 61% last year. Is there room for margin upside in MIS given your cost actions? And how would you expect your cost savings to split between MIS and MA.
Sure. So good morning -- good morning, George. This is Mark here. So certainly on a trailing 12-month basis, we have seen the MIS margins increase this quarter by around 180 basis points to 59.3%. We think that's a better measure to use than sort of a single quarter-on-quarter basis. We do expect issuance to generally recover later this year in the third and fourth quarter, but we don't necessarily anticipate being able to re-reach sort of the record Q1 revenue levels again this year.
The MIS, the cost initiatives are similar to those that we're deploying in MA. So it's sort of a one Moody's approach. And we anticipate that it will contribute similarly to that mid-single digit expense reduction from 2019 actuals to offset our lower revenue outlook and to ensure that we are protecting our margin.
Got it. Thank you.
And our next question comes from Jeff Silber with BMO Capital Markets. Please go ahead.
Thanks so much. Mark, in your prepared remarks, you mentioned a less favorable issuance mix. I know we’ve had a lot of data points that you've given out throughout the call, but, specifically what were you referring to there? What would be the impact on margins from that being less favorable? Thanks.
Jeff, Good morning. As part of that definitely our attribution on a core key basis, we typically look at the mix of the frequent versus the infrequent issuance and what we've observed certainly over the last month or month and a half is that mix is slightly different from what we would have assumed going into the year, primarily because the motivations of companies coming into the market to raise liquidity and capital. It's different than necessarily those of prior periods who would have come into the market to raise cash for investment or reinvestment purposes.
And so I think it was worthwhile to point out that may be a subtle mix change as we go through 2020 and that's part of our incorporated guidance outlook.
Again, I'm sorry, the margin impacts from that mix shift, what would that be?
You can see it captured in the margin outlook that we have currently. When normally infrequent issuers are issuing, they are doing so generally on a transactional basis and pay transaction-based fees. The frequent issuers who actually have been the bulk of the issuers issuing very recently are more likely to be on recurring revenue plans and so we don't capture the upside or the downside to the same extent in that sector with the relationship fees or recurring revenue fees. And if any of my colleagues want to add on to that. Please do.
Yes. The other thing I'd add Ray, in addition to kind of frequency and the nature of the commercial construct. When we see issuance from existing rated issuers that tends to be more margin friendly than when we see issuance from first-time issuers. Obviously first time issuers are important because they are building the portfolio of rated credits. But the ratings, when we see issuance from those existing issuers, that tends to be again a bit more margin friendly.
Okay, great. That's what I thought. I just wanted to clarify that. Thank you so much.
And our next question comes from Craig Huber with Huber Research Partners. Please go ahead.
Great, thank you. I want to first focus on cost if I could, please. Curious what the incentive comp was in the quarter? What your outlook is for the year? But more importantly, can you just update us please on your growth outlook for cost for the remaining part of the year, fourth quarter versus the first quarter? I’ll have a follow-up question as well. Thank you.
Sure. Good morning -- Good morning Craig. This is Mark here. The incentive comp accrual for the first quarter was approximately $31 million. We now expect the incentive comp accrual to be approximately $25 million to $35 million per quarter as a remainder of the year compared to the $50 million per quarter guidance that we had given previously. On the expense ramp, previously we indicated a first quarter to fourth quarter expense ramp of a $20 million to $30 million increase. We are now expecting expense ramp of a $10 million to $20 million decrease for the year.
That's fourth quarter versus the first quarter you’re saying?
That is correct.
Okay. And then also wanted to ask Ray, if you would like to answer this, and you think long-term about your business and when we get through this COVID-19 environment here and say it doesn't last any longer than 12 to 18 months, we get a vaccine, sooner the better of course. When you look at the long-term strategic consequences of your business, both in the Moody's Analytics side, but more importantly on the ratings side, what are the sort of positive the negatives here on the back end of this whole thing, like helpful or actually punitive to your business, Ray.
Well, I mean people have talked about the downside quite a bit in terms of companies that are defaulting, companies that may be cutting back, but the opportunities are really pretty powerful as well when we think out past this cyclical although catastrophic event of COVID. The kinds of data that we collect, the analytics that we put on that data is really essential to managing a range of financial and financially related risks. Some of it -- that risk management is imposed by regulation and policies. Some of it by good business practice, but all of it is considered essential and so whether it's accurate credit ratings, whether it's, know your customer or know your supplier products, the underlying data that goes with all of that for use in new and innovative ways. I think there's going to be a broader and deeper set of products and services being offered that are considered essential coming for Moody's coming out of the COVID pandemic than there were going in.
We have the raw material because of the investments we've made over the last three, four years, we've been developing the products, we can see the products are in high demand as Steve was talking about earlier with usage levels growing at pretty dramatic rates. And we're really just tapping the surface with things like know your supplier and the uptake that that's getting is terrific. So looking at longer-term, I -- frankly, I think there's more opportunity than risk, but we've got to get through this thing. Rob, do you want to add anything to that?
Ray, I agree. And we talked about it a bit at the Investor Day call that we had a couple of months ago, I think what we're seeing is that companies and enterprises are going to want and need an even better understanding of the risk of who they're doing business with. I mean, you certainly see that now with credit, with supply chain and it's things like cyber, it's things like ESG. So that I think is very consistent with the direction that we talked about back in March about, really, global integrated risk assessment. And we're seeing -- we expect to see more demand for that than ever coming out of this crisis.
And our next question comes from Manav Patnaik with Barclays. Please, go ahead.
Thank you. Good afternoon, everybody. My first question is just, on the MIS outlook, the bridge between the low-double digit issuance decline and then the high-single digit revenue decline, is there anything more in there other than maybe just pricing as has been historically? And I was wondering if you could just comment on your exposure to the structured market, if that's in the outliers [indiscernible].
Mark, hey. It's Rob. I might have to ask you to ask the second part of that question again. But in terms of the build from issuance to revenues, no, I don't think there's anything unusual there than kind of a standard algorithm. But if you could just repeat the second part of that question.
Sure. Yes, I think it was more around your exposure on the mix to the structure. Is that different than the other players in the market, if there's anything to call out there? And also while I'm at it, I'll just throw my second question which is, around the 600 first-time mandates that you resumed, what is the -- And typically being around clustered housing, what are those 400 -- the profile of those 400 or so that you lose in this environment?
Yes, okay. So in terms of our exposure versus perhaps others in terms of Structured Finance, look, the CLO market we expect to remain very soft over the balance of the year. That has become a more competitive rating market. So -- but I don't think broadly in terms of structured finance, we have any greater exposure by sector. Second, in terms of first-time mandates, a good number of first-time mandates historically come from leverage loan issuers. And so as we see that sector contracting the most, we expect that to have an impact on first-time mandates. I mean, I'm not sure it's really different by region. We expect first-time mandates to be down by region, but it's really, I would say, going to be coming out of that leveraged loan space.
All right. Thank you, guys.
And our next question comes from Craig Huber with Huber Research Partners. Please, go ahead.
Yes, hi. I do have a couple of follow-ups, if I could, please. Pricing in this environment on Moody's Analytics side, but also the ratings, you're sort of pretty confident that you can get your normal 3% to 4% increase?
Well, to some extent, Craig, that is going to be determined by what issuance activity looks like. As you know, at least on the MIS side, some of our pricing relates to things like monitoring fees and some of the pricing relates to debt issuance. So there is some relationship between pricing and issuance activities. Rob may want to comment further on that.
Yes, that's right. I guess what I would say is what you're hearing from us on this call is about the ongoing demand for our products and services for our expertise, for our analysts for our research. And we think all of that is supporting the value proposition, both on the MIS and the MA side, so I don't think we expect there to be any kind of meaningful difference in terms of our approach. And we're going to continue to invest in reinforcing that value proposition, certainly, on the MIS side. That's why we continue to invest in very, very experienced analysts. You've heard us talk about that in the past, but it's at times like this when investors and issuers really value the experience of our analytical staff, of our economic teams, and so we're going to continue to invest in that and support the value proposition to our customers.
And my last follow-up question here is, on the high yield side, can you just talk a little bit further about default rates where you think it might be at the end of this year, how that number of compared to 2008, 2009 peak levels, and also maybe how you sort of think about recovery rates at this stage? Thank you.
Yes, let's, let's ask Mike if he would comment on this, please.
Yes, thanks. Thanks for the questions. We've got out there in our forecast a range of 11% to 16%. The low end of that doesn't differ materially from '08, '09 period, however, what's important here is that we have a large book of business here with regard to the overall impact on profile and the lower-rated credits that we have been warning about before. So overall, that's where we are. Not much different at the low end. Obviously, we've got our pessimistic scenario at 16%.
I should probably -- did want to ask -- I'm sorry -- this -- the oil-related companies out there, was that, Ray, about 15% of your high yield work?
Yes, it's probably a bit lower than that. Mike, do you happen to have the numbers or Rob?
Yes, I'll talk about the debt outstanding and then maybe Rob can add. But it's in the range of 10% to 15%.
Yes, from a revenue standpoint, the transactional revenue that we've gotten from that sector's historically kind of somewhere in the $75 million to $85 million range over the last couple of years. And that's historically been split between investment grade and spec grade.
Great. Thank you very much.
And our next question comes from Patrick O'Shaughnessy with Raymond James. Please, go ahead.
Hey, good afternoon. Just a quick one from me, can you provide some more detail on the bad debt reserves that you noted in your earnings press release?
Sure. Mark?
Patrick?
Yes, please.
Patrick, this is Mark. We recognized $24 million this quarter in bad debt allowance, which mainly resulted from our COVID-19 exposures and impact to certain sectors geographies issuance of lower credit quality. Actually, absent the incremental bad debts accrual which was worth around three percentage points of the Q1 operating expenses, expense growth for the quarter itself would have been flat. And we proactively chose not to adjust out this item in our results.
Thank you.
As there are no further questions at this time, I will now turn the call over to Ray McDaniel for closing remarks.
Okay. Just want to thank everyone for joining the call as always. We look forward to speaking to you again in the summer. And in the meantime, please, everyone stay well. Thank you.
This concludes Moody's first quarter 2020 earnings call. As a reminder, immediately following this call, the company will post the MIS revenue breakdown under the first quarter 2020 earnings section of the Moody's IR homepage. Additionally, a replay of this call will be available after 3:30 PM Eastern Time on Moody's IR website. Thank you.