Craig Huber: Good morning. Thank you. I’d like to hear more about your outlook for Ratings for the for the debt issuance year, please, if you can just kind of go into investment grade, high yield bank loans. And I particularly like to hear about if you’re overly concerned of what’s going on in the commercial real estate market, not so much what the impact is on the CMBS market. But if things continue to get worse there, do you think there could be some negative domino effects in the whole banking sector, financial sector out there. Thank you.
Douglas Peterson: Okay. Thanks Craig. Let me give you some color just on the issuance market generally and then dig into a couple of questions you asked. Overall, as you know, in the last quarter, the issuance was strong. It was up 8% billed issuance, including bank loans. Our bank loans is actually quite weak during the quarter. But the — we saw, on the other hand, a lot of volatility and a lot of lumpiness in that issuance. There were some characteristics of markets like corporates in the U.S. was up 80%. Overall investment grade globally was up was up 20%. It in the U.S. Overall, it was up 19%, et cetera. And then overall, high yield was up 90% during the quarter. But on the other hand, structured credit CLOs were down 46% in Europe, 42% in the U.S. So, there’s a lot of lumpiness in markets, and that has to do with uncertainty as to ratings, what’s happening with interest rates, what’s happening with inflation, yield, et cetera, spread.
So, there’s a lot of market instability still out there. We saw yesterday the U.S. fed raised interest rates by 25 basis points. This morning, the ECB raised interest rates by 25 basis points. So, the markets are looking for some stability of rates and spreads growth rates, et cetera. Now with that backdrop, let me give you what are a couple of the forecast that we have for the rest of the year. We’ve increased our range for billed issuance for the rest of the year from a range of 4% to 8%. The previous was 3% to 7% at the last quarter, and the quarter before that is actually 2% to 6%. So, we’ve seen it improving throughout the year, what we expect for the rest of the year. And if you look at the — what we’re expecting for the rest of the year, if you look at 4% to 8% and with the guidance range we just gave, it means that we’re going to be growing in kind of the mid double-digit range for the rest of the year in billed issuance.
A couple of the different areas I can share with you. As you know, our Ratings research team produces forecasts and summaries of what they’re going to see going forward. We use that as one of the inputs for billed issuance. It’s a different methodology than the billed issuance, but I want to give you that information anyway. We see the corporates growing at about 13% for the rest of the year with a range between 5% and 20%. Financial services flat for the rest of the year, with a range that could be down as much as 5%, up 4%. Structured finance down about 13% for the year, with a range of down 18% to down 8%. And then U.S. public finance could be down about 5%, with a range down 10% or up 2%. So, these are the factors that we’re using. We are expecting that once we see these factors I mentioned like inflation, interest rates, spreads, et cetera, as that starts to improve, we think we’ll see a better outcome.
One last thing I want to mention is M&A. M&A has been incredibly weak. This last quarter, second quarter, it was one of the weakest levels we’ve seen. It was as low as the second quarter of 2020 when we saw the beginning of the pandemic when everything came to a halt. I’ve been speaking with a lot of banks to understand what their outlook is for M&A, because that’s a big driver of levered loans of the lending market, of the high yield market, et cetera. We’re seeing from the bankers that we’re speaking with that they’re expecting that at the end of this year and into the first quarter of next year, they’re expecting that M&A will pick up again as the market conditions improve. They’ve told me that there’s a pretty large backlog and big pipeline waiting to — for people to start doing deals, but it’s not happening as long as there’s still some uncertainty in the markets.
So, thanks Craig. Thanks for the question.
Operator: Thank you. Our next question comes from Andrew Steinerman with JPMorgan. Your line is open.
Alexander Hess: Yes. Hi. This is Alex Hess on for Andrew Steinerman. Just wanted to ask about the adjusted expense maybe sort of cadence for the year. You guys spoke to incentive comp being elevated year-on-year in 2Q. Maybe what does that look like for the back half of the year? And then also, if you could maybe more qualitatively flesh out what went into core investment growth and overall compensation expense, that would be very helpful. Thanks all.
Ewout Steenbergen: Thanks Alex. Just generally, I would like to say expenses are under control. They are in line with expectations. And we expect the overall expense growth for the full year to be relatively modest. So, let me give you a little bit more color around this. So, the key driver of the expense growth this quarter was a swing in the incentive compensation that we already discussed. As I mentioned, also expect that to create elevated expenses in the third quarter, and then we will see it significantly coming down in the fourth quarter. We still expect to hit our margin targets for this year. And as I said before, I think it’s also may be good to point that overall we’re looking at expenses in absolute dollars that are on a declining trend.
So, we have now seen two quarters in a row that in absolute dollars, our expense is coming down. And actually, the third quarter, we expect sequentially further that our expenses will be down relative to the second quarter. So, very much in line with expectations. Your question about what is going into the growth bucket? It’s a couple of areas that go in the growth bucket. The first is our strategic investment spend. So that is the $150 million budget that we have for this year to invest in some of our key initiatives to drive future growth. The second is the additional spend with respect to cloud and also the additional usage of GPUs for our gen AI developments that we are buying for our cloud providers. And then the third, that is the BAU growth.
So, these are costs related to BAU growth. Think, for example, about additional data that we have to purchase for product development within our divisions. So, those elements go into the growth bucket. But overall, we don’t see that really as an expense. We see that as an investment in the future and future growth for our businesses.
Operator: Thank you. Our next question comes from Owen Lau with Oppenheimer. Your line is open.
Owen Lau: Hey, good morning. Thank you for taking my question. So, I have a quick follow-up to your AI strategy. One of the competitors has partnered with Microsoft. Could you please talk about the plus and minus of using an in-house AI compared to outsourcing it to a large tech firm? Why in-house AI, such as Kensho or the hybrid approach fits into S&P overall strategy? Thank you.
DouglasPeterson: Yeah. Thank you, Owen. And this is something we thought a lot about. And as I started my last comment a few minutes ago, we’ve been thinking about the AI strategy for over seven years. This isn’t something that we’re just jumping into right now. We’ve had a lot of experience of how we can use AI, not only as a productivity tool, but also as a tool to drive growth and new product ideas. We’ve also been developing our datasets. And as you recall, at the same time when we acquired Kensho, we also came up with the Marketplace. And the Marketplace now has over 225 tiles, which have information and data, which not only can markets use in new ways, we can also use that. So, we’ve been on an approach to cleaning up our data, making it usable.
And we feel that the need for — as I used the word before, stacking different capabilities and solutions as models, is going to be the way that you can deliver the most valuable insights and solutions to our customers. As an example, you might need to take your data and turn it from being raw data into something that can be used by a model to learn or to be used in order to develop a new application. That data might — the application might then need a different application on top of it, so that the customer can use it. So, it has capabilities to be able to use in spreadsheets, to be downloaded, to search on it, et cetera. So, we feel that there’s a need to have multiple applications. And that’s why the hybrid approach is the one that we’re going to be pursuing.
That doesn’t mean that we’re not going to work with some of the providers that you just described. We already have a really strong relationship with AWS in our cloud strategy. They are developing a really compelling AI strategy. We’ve been using over the past, NVIDIA chips. We were one of the first groups that ever were using them in the way they’re being used now for AI. We have a really strong relationship with Microsoft. There’s also open tools that are being used. We also have people developing our own LLM model. So, we think that we can use this. We think that we have a really good network of people across the company that Ewout just described that are using different types of models. So, we believe that we can have governance, we can have controls.
We’ve had controls in place for the last five years since we’ve owned Kensho to manage and track everything we’re doing in AI. We’re going to continue to use that same discipline for everything we’re doing in AI to make sure that we’re also controlling where we’re investing and how we’re moving forward. So, it’s our belief that a hybrid model is the right one for us and something that’s going to create the most value for our shareholders. Thanks Owen.
Operator: Thank you. Our next question comes from Jeff Meuler with Baird. Your line is open.
