Question-and-Answer Session
Operator
Thank you. Our first question comes from Peter Appert with Goldman Sachs. Please go ahead.
Peter Appert - Goldman Sachs
Thank you. Terry, you referenced in your remarks the potential for possibly some margin compression in the second half of the year. I assume you're referring primarily to S&P. So, could you quantify potentially with you think the risk to margins might be in the second half?
And then secondly, just confirm that you were referencing S&P, or do you expect to see as well some margin pressure at the education and info services segment?
Terry McGraw
Thanks, Peter. No, as we said coming into this year, we expect margin improvement in all three segments and that will be the case. In the second quarter, for Standard & Poor's, the margin was 48.9%. Obviously, that's quite strong.
We did 43.9% at the end of last year and we said that each year going forward we expect margin improvement at S&P and that guidance continues. I don't think it's fair to say that we're going to be at 48.9% by the end of the year. But, we still expect margin improvement and continued strength that way there.
On the education side, we've been very clear in terms of what our goal is and what our expectations are, and we've worked hard at this and we're off to a very good start in the K-12 space and a good start to the higher education year.
So, we expect improvement here and we expect improvement, again, in each year going forward and the same thing with information media. So, we're off to a very good start to a year. When you have earnings at 31.7% in the second quarter, I don't think we can keep that pace going. So, the second half will be at a little less of a rate on that one, but we expect to finish the year with double-digit earnings.
Peter Appert - Goldman Sachs
Right. Right, I understand that, obviously, you start very strongly and you expect the year to be up on a full-year basis, but I was specifically asking about the second half and let me be more precise then.
For the education business in the context of the revenue momentum you've seen, do you think you can sustain positive margin comps in the second half of the year?
Terry McGraw
Again, I would keep to where we are at, Peter, that we're going to see margin improvement here. Obviously, the third quarter is a big quarter in the education marketplace and we have to see how that comes. But, we like our position right now and we'll see.
But, again, we expect margin improvement there and I think we have to see how this third quarter materializes to make any predictions that way. And for the financial services side, Peter, we expect double-digit top and bottom growth in the second half.
Peter Appert - Goldman Sachs
Okay. Thanks. But, could I just ask one brief follow-up for Vicky, perhaps. There's been some discussion in the market about issuers shopping more aggressively for ratings in the context of some of the criteria changes you've talked about. So, do you see any impact there, Vicky, if terms of the pipeline in your own business on a near-term basis?
Vicky Tillman
Well, actually, as I indicated, we have been changing criteria at some of our assumptions and adjustments around it in a number of the different asset classes. I mentioned specifically residential mortgages, some of the covenant light, as well as commercial-backed, mortgage-backed securities. While that does sometimes have an impact because our subordination levels may increase and the types of protection that we have to have in deals may in fact sway issuers potentially not to come to S&P.
But, we believe in the long run because by the way we're transparent in the market, and I think in the forefront in terms of allowing the market to understand why we do what we do that ultimately we're going to end up the year in a very good position relative to market share.
Peter Appert - Goldman Sachs
Okay, thank you.
Bob Bahash
Peter, let me just add a comment on the education margin for the second half of the year. As you know, Terry had indicated that we have very strong outlooks for performance and science and in math and some of our big areas and we plan on doing very, very well.
Coupled with that, though, is very high marketing costs, as you know, free with order, etc., and they tend to place a little bit more pressure on margins in that initial sale period. So, we're expecting a little bit of pressure on the margins in the third quarter as well as the fourth quarter.
But, we believe that our year is really excellent because of the penetration in terms of the adoption characteristics that we have, but nevertheless, we're going to experience a little bit of margin pressure in the third and fourth quarter. We're trying to see what we can do to offset some of that, but nevertheless, that's about where we are right now.
And that's why Terry had mentioned in his remarks that we expect some compression in margins for all the segments in the second half of the year.
Peter Appert - Goldman Sachs
Okay, thanks. That's helpful.
Operator
Thank you. Our next question comes from Lisa Monaco with Morgan Stanley. Please go ahead.
Lisa Monaco - Morgan Stanley
Good morning. Terry or Vicky could you just give us some color in terms of how much did second quarter at S&P come in better than expected and what are you seeing in the pipeline?
Is the pipeline more robust than you had been seeing, three months ago, or, were some deals pushed into 2Q ahead of some of these headlines about subprime we've seen? And then I have a follow-up.
Terry McGraw
Okay, thanks, Lisa. Well, the fact that we have Vicky, here, I'm going to take advantage of that on that one, but let me begin by just saying that economic conditions worldwide are quite strong and are quite good.
The corporate activity that we're seeing is impressive. We're looking at very, very large merger and acquisition activity and the whole corporate and government sector is benefiting from that.
In terms of other asset categories we're also seeing enormous growth, not only here in the states, but in Europe and in Asia, as well. And we're benefiting from that, both in the asset-backed mark, the commercial mortgage-backed market, the CDO market, and so forth.
Certainly, the housing recession in the United States is costing the United States at least 1 percentage point of growth. We'll probably finish up the year at GDP growth of that 2%, 2.5%, but it would be 3%, 3.5% if not for the housing recession and it's, the housing recession is winding down.
And by the end of '08, we should be in a very different position. So the subprime market has been a smaller piece of the overall equation and yes, that's had an affect. But, the growth in the second quarter is an affect because of the growth worldwide and the push for structured instruments and the M&A activity.
And, Vicky, would you like to respond to that?
Vicky Tillman
Well, you pretty much covered what, and I would reiterate what you said. The fact that in the second quarter, I think the fact that, what was record issuance for corporates, I think Terry mentioned that it was a 34.5% increase, so a lot of the corporate issuance that we have seen probably over expectations.
Again, the other element of the experience that we're having is in our nontraditional products and in terms of the bank loan ratings that we're seeing tremendous push, not only in the U.S., but we are very much beginning to penetrate at a much more substantial rate, European bank loan market as well.
So in that regard, I think some of the experience we saw was actually at record breaking and that was unexpected, but it was good news and we see the fundamentals are continuing through the second half.
Lisa Monaco - Morgan Stanley
I guess, just to clarify on that, in terms of your second half outlook for S&P, is it about where you expected two three months ago or was some of that pulled into 2Q?
Terry McGraw
Well, again you're dealing with market conditions and it was a little bit more robust in the first half than we expected. Our guidance for the rest of the year is double-digit top and bottom line for S&P. But obviously at a lower rate than the very, very hot first half.
Lisa Monaco - Morgan Stanley
So, sorry to beat a dead horse, but there's been all these headlines about deals being sidelined in terms of debt deals, is that impacting your business or are strength in other areas offsetting that?
Terry McGraw
Yes, I would expect that, that, again especially in the subprime and Alt-A area, there's going to be more caution going forward and I think that there will be some pressure on that, but again that is a smaller percentage of the overall ratings activity and we'll just have to see how that materializes in the third quarter, but I think it's fair to say that there'll be some softness in that.
Vicky Tillman
Well, we saw some pullback, but I think a lot of that, as Terry indicated before was a re-pricing in the deals. But we do see a strong pipeline coming in and as it relates to some of the loan market, what you're seeing is that they, especially with regards to CLOs they're coming in with a more selective and tighter covenants, as opposed to some of the light covenants that you've seen in the past. So there was some of that, but the pipeline is looking good.
Lisa Monaco - Morgan Stanley
And then just on the margin front for financial in the second half, are there any unusual expenses we should think about or is there any ramp-up investment spending that we should think about, just when we model out the margins?
Terry McGraw
Well, again, as you know, we're investing very heavily on the financial information side and we're very, very pleased with the customer penetration with Capital IQ and the progress we're making there, and the acquisition in the second quarter of ClariFi. And we will continue to make those investments, but nothing out of the ordinary from that.
Lisa Monaco - Morgan Stanley
Okay. Great. Thank you.
Terry McGraw
You bet.
Operator
Thank you. Our next question comes from Craig Huber with Lehman Brothers. Please go ahead.
Craig Huber - Lehman Brothers
Yes. Good morning, just a couple things. Just to clarify this paragraph in your press release about the outlook. It just says low double-digit growth for financial services in the second half. Just to be clear, are you talking about the top line there operating profit, or both?
Terry McGraw
Both.
Craig Huber - Lehman Brothers
Okay. And then also I think Bob, you mentioned just briefly you were expecting margin compression across all three segments in the second half is that correct?
Bob Bahash
That's correct, yes.
Craig Huber - Lehman Brothers
Okay. And then lastly, just to clarify this your subprime exposure on your ratings business, is it roughly about 5% of your revenues for that segment?
Bob Bahash
Well, we don't break that out as such, but if you take a look at just the mortgage loan volume outstanding, subprime is only about 13% of that total market. So you're correct in the assumption that it is a smaller piece of that configuration.
And, again, when you start moving up the credit curve and get into CDOs, you're seeing very, very strong growth and as I said in the second quarter, they were up 58%.
Craig Huber - Lehman Brothers
So it sounds like you don't feel you're seeing fall off another round of subprime is going to slightly different classes?
Bob Bahash
Again, everybody's watching the same picture and the question is, is there a spillover effect in the economy of subprime, and I think both, we've heard from Secretary Paulison and also Fed Chairman, Bernanke, saying that there is not a spillover and we're not seeing that.
And so, again, I think we're coming towards the end of the housing recession. We're looking at new starts bottoming out probably by the end of the year, and a little bit more to go in prices by spring of next year, probably about another 6% price decline to go.
And then we'll see some loss exposure and foreclosures probably through the end of next year. But, again, it's a smaller portion of the housing recession and from our standpoint, the strength in other areas are obviously doing quite well.
Craig Huber - Lehman Brothers
And then lastly, if I could you mentioned total new issued dollar volume up 15.3% in the second quarter. According to Thompson, it looks like that data slowed significantly in the month of June. Can you verify that? And then it sounds like from your comments you believe it's going to rebound in July and August, but what's your thoughts? Thank you.
Terry McGraw
Yes, well, there's two parts to that. One, we don't break out monthly data. But as Vicky said, the pipeline is quite strong and we don't see that letting up. But new issuance was just a little bit over 15% in the United States. The big one, though, Craig is that in Europe new issuance is over 33%. And we see that across the board in all asset categories.
So that's going to be a stronger project. And remember now almost 40% of S&P's activity is outside the United States now growing at a faster rate than domestically. And we're going to continue to see that, that trend materialize.
Craig Huber - Lehman Brothers
Great, thank you.
Terry McGraw
Thanks, Craig.
Operator
Thank you. Our next question comes from Karl Choi with Merrill Lynch. Please go ahead.
Karl Choi - Merrill Lynch
Hi. A couple of questions here, first, Terry, your comment about the fourth quarter for S&P being a little bit more challenging in terms of comps, it's a little bit early. But comps will remain difficult for all of '08.
Then, given what's going on in the sub-prime market? And if some maybe liquidity growing out of the credit market here. Does this change your confidence about S&P's ability to deliver double-digit topline growth next year?
Terry McGraw
Well, it's a little early to get into 2008, I want to get through this year on this one. I feel very good about our guidance on double-digit growth, top and bottom line for S&P for the remainder of the year; albeit, it's going to be at a lower rate and we have to see what the affect in some of the sub-prime there.
But, again, it's going to be a smaller impact because of the strength overall, globally as well as in the corporate market, but on, our planning process that is underway now for 2008. I think 2008 for Standard & Poor's is going to be a very good year, but it's too early to quantify that.
And so, we'll give guidance come December on what we expect on that one, but I have every reason to believe that it's going to be a very good year.
Karl Choi - Merrill Lynch
Okay. Second question is on management incentive compensation, based on what I can see from proxy, from your proxy, it looks like in the past management's incentive compensation maxes out when EPS growth is at 15% or so, has that changed for 2007?
Terry McGraw
No.
Karl Choi - Merrill Lynch
Lastly, I guess the question may be for Bob...
Terry McGraw
And by the way, again, in terms of executive compensation. For it to kick in -- to begin, it has to be double-digit growth. We feel very strongly on that given our markets and the growth drivers associated with those markets that our drive and desire is double-digit earnings growth. And therefore, we've aligned our set of process to kick in only with double-digit growth.
Karl Choi - Merrill Lynch
And lastly, a question on the deferred revenues, over what period of time do you expect to amortize the deferred revenues into your income statement?
Bob Bahash
Generally, that's over an annual basis.
Karl Choi - Merrill Lynch
Great. Thank you.
Bob Bahash
Thanks, Karl.
Operator
Thank you. Our next question comes from Michael Meltz with Bear, Stearns. Please go ahead.
Michael Meltz - Bear, Stearns & Co.
Hi, it's Meltz over here, two questions for you. Bob, I know the margin question's been asked a few time here. But you're saying margin's down year-over-year down in the second half, I'm not quite sure why the S&P margins would be down, I understand why the other two segments.
I would like you to maybe clarify that a little bit. And then in that context, do you think with your comments about margins, your comments about interest expense. Do you think consensus -- full-year consensus of 305 is achievable? And I have one follow-up.
Bob Bahash
First off, I'm not going to comment on consensus. But let me talk to the margin issues. First off, S&P was off to, as you know a very strong start, first half, second half. And we had posted some very, very attractive margins there. What we're simply suggesting is that the growth rate, albeit double-digit, will be significantly slower than in the first half of the year.
And as a result, the margins will come in closer to the margins that we had achieved last year in the third and fourth quarters. So, this is not a collapse of margins, this is simply margins coming back to being more inline with what we had achieved last year versus the much higher margins that we achieved because of the very, very strong growth that we achieved in the first and second quarters of this year.
So hopefully that clarifies the issue with regard to margins for financial services.
Michael Meltz - Bear, Stearns & Co.
You're saying closer not necessarily down?
Bob Bahash
It's -- I'm saying right in that zone. It's very difficult to predict precisely, because our estimates are looking relatively close. And I'm saying relatively close to our performance of last year in the third quarter and in the fourth quarter. So, yes, I'm saying, but down in relation to where they were.
Michael Meltz - Bear, Stearns & Co.
I understand.
Bob Bahash
But in relation to last year, relatively close to where our performance was last year.
Michael Meltz - Bear, Stearns & Co.
Okay. Okay. One question. Vicky, you commented about the market share and I just want to make sure I understand. In RMBS or in CLOs, are you actually not getting deals at this point, similar or akin to Moody's comment last year? Or are you just mentioning this is something that could happen?
Vicky Tillman
I'm mentioning that we're going to adjust our criteria as we see fit. And if that requires higher subordination levels and higher support levels it's then up to an issuer to make that choice, in terms of whether they're going to go with S&P or not. To-date we have made moves in adjusting our criteria.
And again, and in some regards, especially in a collateralized mortgage-backed securities area as you probably have read, we saw the changes in the real estate market a while ago, saw that the leveraging and the structuring of the deals and the underwriting was beginning to really begin to deteriorate somewhat.
And even further in the first quarter of '07, at which point; again, we called it like it was and just you know raised our requirements in terms of ratings. This can in fact have an adverse impact on whether they come to Standard & Poor's or not. But that's not what we're concerned about, we're concerned about calling it as it is.
Michael Meltz - Bear, Stearns & Co.
And I understand. But, my question is, do you think you have lost deals because of tightened standards in the past month and a half?
Vicky Tillman
Not that I know of.
Michael Meltz - Bear, Stearns & Co.
Okay.
Terry McGraw
It's more that it will be what it is as we go into the third quarter. But no, at this point, we don't see any.
Michael Meltz - Bear, Stearns & Co.
Okay. And last question. What were the shares out at the end of the quarter, please, diluted?
Bob Bahash
Just a minute. We'll get that for you.
Terry McGraw
Shares were what, 350.3 million?
Michael Meltz - Bear, Stearns & Co.
That was the weighted for the quarter, what was it at the end?
Bob Bahash
Yes, for the quarter -- roughly 350.3 million.
Michael Meltz - Bear, Stearns & Co
Weighted for the quarter and end of quarter? I'm asking for the end of quarter?
Bob Bahash
That's weighted for the quarter.
Michael Meltz - Bear, Stearns & Co.
No, I know. But I'm asking what it was at the end after all the repurchase?
Bob Bahash
Okay. We'll get you that.
Michael Meltz - Bear, Stearns & Co.
Okay.
Bob Bahash
We'll pick it up somewhere during the call here.
Michael Meltz - Bear, Stearns & Co.
All right. Thank you.
Terry McGraw
Okay, Michael.
Operator
Thank you. Our next question comes from Edward Atorino with Benchmark. Please go ahead.
Edward Atorino - The Benchmark Co.
Yes. I had a question on shares, which you'll answer. On interest expense, if you did not finish your purchase, would we -- would you set $12 million interest expense for the rest of the year per quarter?
Or to put it another way, what would interest expense be for the rest of the year if you did not complete the share buyback?
Bob Bahash
If we did not, we will be, I think I had said something in the $42 million to $44 million range, If we complete it, the whole thing, probably somewhere around $30 million or so.
Edward Atorino - The Benchmark Co.
Okay. Thanks much.
Terry McGraw
Thanks, Ed.
Operator
Thank you. Our next question comes from Alex Farman with Edgewood Management. Please go ahead with your question.
Alex Farman - Edgewood Management
Congratulations on a good quarter. Are there any other suits like the June 5th suit that we should know about and where do they stand?
Terry McGraw
Alex, could you say that again?
Alex Farman - Edgewood Management
Are there any other suits like the suit that you just mentioned, the June 5th ruling, and where do we stand on those things?
Terry McGraw
No, there are no other suits and I don't anticipate them. Again, we are dogged in terms of the compliance function to our process and procedures and that's what we monitor very carefully. And, of course, we worked with all government agencies in terms of doing that, but there are no suits outstanding.
Alex Farman - Edgewood Management
And, the international growth, what percentage of it...
Terry McGraw
Yeah. Alex, you're breaking up there, and we can't hear you very well. But if the question was on international growth, and it's about for S&P, it's about 19%. And it's growing at a very good rate and will continue at that rate for some time.
Alex Farman - Edgewood Management
Thank you.
Terry McGraw
Thanks, Alex.
Operator
Thank you, our final question comes from Fred Searby with J.P. Morgan; please go ahead.
Terry McGraw
Fred?
Operator
Fred your line is open. Please check your mute button, we're not able to hear you.
Terry McGraw
We're not hearing anything, operator.
Operator
Yes. I'm not exactly sure what is wrong with his line.
Fred Searby - J.P. Morgan
Hello.
Terry McGraw
Yeah. There we go, Fred?
Operator
We can hear you now. Fred, please go ahead with your question.
Fred Searby - J.P. Morgan
Sorry about that Terry, a couple questions. First CDOs, I just, it looks actually like you made a pretty accurate prediction for the second quarter. Just came in slightly below I think you'd said 65% originally.
Terry McGraw
Right.
Fred Searby - J.P. Morgan
What would you think in terms of the third quarter, and then secondly, a follow-on on Michael Meltz' question. But I would have thought that what I've gleaned that you would have actually gained market share because of Moody's tighter, more stringent rating criteria in CMBS. So, I would have thought you would have some benefit, or is Fitch really, I guess Fitch would have been the principal beneficiary.
Could you just elaborate somewhat on that, and then finally just ABS I was surprised. It was a little better than we thought it would, can you give us some components or thoughts of why given some of the factors what drove some of the upside there, at least from our perspective.
Terry McGraw
Okay, well, first of all Fred on the CDL market. As we all know it is a very, very strong market and the pipeline going forward is also very, very strong; these are instruments of choice of institutional investors because they have so much flexibility. Obviously in getting the risk reward attributes that they want.
And we will continue to see strong growth that way. But the only way I can really answer that is to say that the pipeline is full and is very strong, on the asset-backed securities. We were a little surprised as well, because we've been looking at the traditional areas of auto loans, student loans, credit card receivables and the like. And even though there's some softness on the automobile side, we're seeing strength elsewhere.
And so, it was good to see the asset back strong and, again across the board when you break down all the categories. We're seeing considerable strength and I think that pretends well for the economic conditions here, and outside the United States overall; Bob do you have a number on Michael Meltz's question?
Bob Bahash
I don't have that right now. But if we get it to really close or -- but otherwise we'll post it on the site.
Terry McGraw
You'll post it on the site, okay great. Okay, Fred.
Fred Searby - J.P. Morgan
No. I appreciate it but on the market share question, CMBS, I'm just...
Vicky Tillman
Maybe I can respond to that I said earlier that, we saw some of the changes occurring and implemented and adjusted, our assumptions around the criteria for CMBS. We believe earlier in the year, than what Moody's did, so that had to be taken into affect. My understanding is as well, is that Moody's did in fact change their criteria in April. But did not have, was not effective until July.
So, basically speaking how they managed that is up to them. But we saw it our criteria was in effect we saw it. We let the market know about it. And we, once we understood the conditions that were weakening, and that's in some of the structuring of the deals and the underwriting and the high leverage; once we saw that we put it into affect immediately, and that may explain the market share difference.
Fred Searby - J.P. Morgan
And was the principal beneficiary then Fitch.
Vicky Tillman
I don't know the answer to that.
Fred Searby - J.P. Morgan
Okay, thank you.
Terry McGraw
Thanks, Fred. Fred while we've got you. I think we have the Michael Meltz question here.
Bob Bahash
Yeah, for the month of June, the weighted average shares outstanding on a diluted basis was 349.5 million shares.
Fred Searby - J.P. Morgan
Okay.
Operator
Thank you. That does conclude this morning's call, on behalf of the McGraw-Hill Companies; we thank you for participating. And wish you a good day.
Terry McGraw
Thank you.
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