Moody's Corporation (NYSE:MCO) Q2 2020 Earnings Conference Call - Final Transcript
Jul 30, 2020 • 11:30 am ET
Thank you. [Operator Instructions] Our first question comes from Judah Sokel with JPMorgan.
Hi, good morning. Thank you for taking my questions. Wanted to start off by asking just about your outlook for MIS and embedded inside of that, your issuance outlook. You gave helpful color certainly on the changes to that guidance. I was hoping that maybe you could pull back the covers a little bit more just in terms of what you're expecting in so far as that tapering down of issuance. To what extent is this just a function of tougher year-over-year comps, how much pull forward you perhaps think that there was into the first half? And then thinking longer term perhaps, maybe that there's some sustainability in those higher liquidity-driven fortress balance sheet increases.
This is Mark. What we'll do here is similar to what we've done in the past where I'll talk a little bit about issuance drivers that we're hearing from some of the banks, and then I'll turn it over to Rob to follow up with our internal viewpoint. Starting with the U.S. investment grade, the banks have seen record activity in the first half of the year with year-to-date issuance volumes already above full year 2019 levels. Early in the quarter, many issuers that came to market were towards the higher end of the investment-grade spectrum, but access broadened considerably when spreads tightened as a result of the Fed's liquidity programs. The main issuance drivers were liquidity and refinancing, as you mentioned. The latter of which was opportunistic in nature, in some instances, as issuers capitalized on low effective yields. For the remainder of the year, what we're hearing from the banks is that while market conditions remain favorable, many investment-grade borrowers have already issued at least once in the first half, and the M&A pipeline remains relatively light. Furthermore, I'd say the pandemic, the pace of economic recovery, the upcoming U.S. election and relationships between the U.S. and China continue to be prominent concerns as the banks have expressed. Looking forward, the banks are expecting a much lighter second half of the year. Nevertheless, for full year 2020, they expect U.S. investment-grade issuance to be up 40% to 50%.
And then just from my side, one item just to keep in mind is that for comparative purposes, the banks seeing investment-grade issuance are inclusive of financials. Moving on to U.S. speculative grade. Once activity resumed following the slowdown in March due to COVID-19, issuance recovered with a record second quarter. The Fed's expansion in scope of its asset purchases to include high-yield corporate debt was supportive of the market, and that helped spreads narrow considerably from the peak in late Q1. This, in turn, broadened market access and enabled a greater number of corporates at the lower end of the speculative grade to complete transactions. On the other hand, leveraged loans remain weak overall despite some positive bursts of issuance in the second quarter, and this was due to a significantly