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MOODYS.COM
3 AUGUST 2015
NEWS & ANALYSIS Corporates 2 Honeywells Planned Acquisition
of Melrose Industries Elster
Unit Is Credit Positive A UPS Acquisition of Coyote Logistics
Would Be
Credit Negative Delphis Planned Acquisition of HellermannTyton
Is
Credit Negative A Wabtec Acquisition of Faiveley Transport Would
Be
Credit Positive Brazil Demand for Fine Payment Heightens Threat
to
Votorantim Cimentos Liquidity Solvays Acquisition of Cytec Is
Credit Negative for Both GKNs Acquisition of Fokker Technologies Is
Credit Positive Falling Copper Prices and Zambian Power Reductions
Tarnish
FQMs Credit Metrics Baidus Greater Investment in
Online-to-Offline Business Is
Credit Negative
Infrastructure 14 SSEs Acquisition of Gas Assets Improves
Internal Sources
of Supply ENGIE Clinches Credit-Positive Nuclear Contribution
Reduction
and Reactor Extension
Banks 18 Ally Financial Will Benefit from Ally Banks Ability to
Fund
Riskier Loans Banco PSA and Santander (Brasil) Car Loan
Partnership Is
Credit Positive Guatemalas Weakening Economic Confidence Is
Credit
Negative for Banks
Insurers 24 Sirius Groups Sale to China Minsheng Investment
Corp. Is
Credit Negative Argentinas New Civil and Commercial Code Has
Mixed
Implications for Insurers
Sovereigns 27 Ireland Reports Strong First-Quarter Growth, a
Credit Positive Slovenias Privatisation Strategy Builds Momentum,
a
Credit Positive
US Public Finance 31 Michigan Supreme Court Affirms State
Pension Reforms, Credit
Positive for the State Glendale, Arizona, Renegotiates Smaller
Subsidy to Pro Hockey
Team, a Credit Positive
RATINGS & RESEARCH Rating Changes 35
Last week we downgraded Advanced Micro Devices and Teva
Pharmaceutical Industries, and upgraded Michigan, Southeast Housing
and 26 US subprime RMBS, among other rating actions.
Research Highlights 38
Last week we published on US homebuilders, Asian corporates,
European alcoholic beverage manufacturers, US chemicals, North
American covenant quality, Japanese corporate liquidity, UK retail,
US corporate defaults, Latin American telecommunications, US
nuclear power generators, Bolivian banks, Lebanese banks, Austrian
banks, Gazprombank, The Bank of New York Mellon and State Street
Corp, Vietnamese banks, Eurasian sovereigns, Sri Lanka, Dominican
Republic, Cyprus, Nicaragua, L&Q Group, SANRAL, Prague, Spanish
regions, Michigan public universities, US variable-rate demand
bonds, Japanese ABS and RMBS, UK RMBS and Finnish covered bonds,
among other reports.
RECENTLY IN CREDIT OUTLOOK
Articles in Last Thursdays Credit Outlook 44 Go to Last
Thursdays Credit Outlook
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NEWS & ANALYSIS Credit implications of current events
2 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
Corporates
Honeywells Planned Acquisition of Melrose Industries Elster Unit
Is Credit Positive Last Tuesday, Honeywell International Inc. (A2
stable) said that it had agreed to acquire the Elster Group unit of
Melrose Industries plc (unrated) for $5.1 billion. The planned
acquisition is credit positive because it will enhance Honeywells
environmental and combustion control and process solutions
offerings, which should lead to revenue and margin expansion.
Honeywell expects to close the transaction in the first quarter
of 2016 and will fund the purchase with overseas cash and some new
debt issued by one or more of its US subsidiaries. The 12.6x 2015
EBITDA purchase multiple is on the lower end of the range of
recent, cross-industry M&A transactions.
Elsters leadership in the natural gas sector and its footholds
in electricity and water, together with Honeywells focus on driving
cost efficiencies, leveraging research and development and reducing
time to market for new products, will help the company realize its
expected financial returns. Honeywell estimates that cost synergies
from the deal will total around $150 million, or 8% of Elsters
annual revenue, which will help it achieve a targeted return on
investment of at least 10% by the fifth year after the deals
completion. Honeywell excludes revenue synergies when calculating
financial returns.
Funding the majority of the purchase price with cash will limit
pressure on Honeywells credit metrics. Pro forma for the
acquisition as of 30 June 2015, we estimate that debt/EBITDA will
be 2.0x, versus 1.8x pre-transaction, while EBITA/interest will be
13.0x, versus 14.4x pre-transaction. We also estimate that
Honeywells EBITDA margin will be 18.1%, versus 17.9%
pre-transaction, while free cash flow/debt will be 15.0%, versus
16.9% pre-transaction. Our pro forma estimates assume no cost
synergies and debt funding of 40% of the purchase price.
We expect pro forma metrics to remain well within the indicative
parameters we have articulated for the assigned ratings (i.e.,
debt/EBITDA of less than 2.5x and EBITA/interest of more than 7x).
With offshore cash and short-term investments likely to exceed $9
billion by the end of 2015, Honeywell maintains a significant
amount of dry powder for funding additional acquisitions while
maintaining its credit metrics at levels supportive of its A2
rating.
Jonathan Root, CFA Vice President - Senior Credit Officer
+1.212.553.1672 [email protected]
This publication does not announce a credit rating action. For
any credit ratings referenced in this publication, please see the
ratings tab on the issuer/entity page on www.moodys.com for the
most updated credit rating action information and rating
history.
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NEWS & ANALYSIS Credit implications of current events
3 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
A UPS Acquisition of Coyote Logistics Would Be Credit Negative
Last Friday, United Parcel Service, Inc. (Aa3 negative) said that
it had agreed to acquire Coyote Logistics, LLC (B2 stable) for $1.8
billion, including assumed debt. The planned transaction is credit
negative because UPS is paying a high multiple for the synergies it
expects to realize.
The acquisition of Coyote, which UPS expects to close by the end
of August, is mainly an attempt to reduce costs. Coyote provides
truckload freight brokerage services across the continental US. The
company is an important service provider to UPS, which increasingly
relies on it when package demand surges, such as during the
year-end holiday period. Truckload freight brokerage is a
low-margin business and requires significant scale to produce
meaningful earnings and free cash flow, notwithstanding minimal
capital needs. Bringing Coyote in-house will allow UPS to capture
the profit it currently pays as a customer.
The acquisition will also provide UPS with the opportunity to
reduce empty miles across its line-haul fleet by leveraging Coyotes
technology and database to find loads for return trips that today
do not contribute any revenue. Doing so will increase the
utilization of UPS tractors and trailers, contributing to top-line
growth and operating profit given limited additional expense. UPS
also expects that the combination of Coyotes technology and UPS
logistics infrastructure will contribute incremental growth by
deepening relationships with existing customers.
But 18x trailing EBITDA is a high multiple to pay for these
benefits, some of which the company could have realized without
acquiring Coyote. That said, even though we expect the entire
purchase to be funded with debt, the modest size of the transaction
will not burden UPS credit metrics. Pro forma for the acquisition
as of 31 March 2015, we estimate that debt/EBITDA will be 4.0x,
versus 3.9x pre-transaction, while EBIT/interest will be 7.0x,
versus 7.3x pre-transaction. We also estimate that UPS EBITDA
margin will decline by up to 0.4 percentage points from 12.4%
pre-transaction. These pro forma measures assume no cost or revenue
synergies. If the transaction yields $150 million in cost synergies
(the high end of UPS expectations), these credit metrics would
barely change.
UPS credit metrics are weak relative to other issuers rated Aa3.
Over $14 billion of incremental adjusted debt related to the
companys participation in multi-employer pension plans (MEPPs) is a
large component of its pro forma total adjusted debt of $37
billion. This adjustment increases debt/EBITDA by more than 1.5
turns, which remains somewhat elevated for the Aa3 rating if the
MEPP adjustment is excluded. Our negative outlook on UPS ratings
reflects the potential for us to downgrade the senior unsecured
rating should credit metrics not strengthen to levels that better
support the Aa3 rating following the 2015 holiday season.
Jonathan Root, CFA Vice President - Senior Credit Officer
+1.212.553.1672 [email protected]
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NEWS & ANALYSIS Credit implications of current events
4 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
Delphis Planned Acquisition of HellermannTyton Is Credit
Negative Last Thursday, Delphi Automotive PLC (Baa3 positive), the
parent of Delphi Corporation (Baa3 positive), said that it had made
a binding offer to acquire HellermannTyton Group PLC (Ba2 review
for upgrade) for $1.85 billion, which includes the assumption of
debt. Although strategically sound, the deal is credit negative for
Delphi because it will weaken its leverage and interest coverage
metrics. Following the announcement, we put HellermannTytons
ratings on review for upgrade.
We expect that adjusted debt/EBITDA, pro forma for the
acquisition, will rise to about 2.00x from 1.59x for the
last-12-month period ended 30 June. We also expect pro forma
EBITA/interest to decline to about 8x from about 10x for the
last-12-month period. The company is well-positioned to return
debt/EBITDA to less than 2x thanks to gross business bookings of
$24 billion at year-end 2014, increasing electrical content in
passenger cars and managements expectations of about $50 million in
annual synergies from the HellermannTyton acquisition. In addition,
we expect the company to pursue shareholder return policies
consistent with managements intention of maintaining strong,
investment-grade credit ratings.
The planned transaction, which Delphi expects to close in the
fourth quarter of 2015, will modestly enhance profit margins and
bolster the ability of its electrical/electronic architecture
segment to increase passenger vehicle content. We estimate that the
companys EBITA margin, including our standard adjustments, will
approach 14% on a pro forma basis, improving from about 13% for the
12 months ended 30 June 2015.
Liquidity will remain strong. As of 30 June 2105, Delphis cash
balances totaled about $1.2 billion, which included proceeds from
the divestment of the thermal business announced in February 2015.
Although cash balances will fall by about half pro forma for the
acquisition, seasonal working capital inflows in the fourth quarter
should support cash balances, with full-year 2015 free cash flow
generation of about $1.1 billion.
HellermannTytons $720 million revenue base is modest compared
with Delphis electrical/electronic architecture segments $8.3
billion in annual revenue. As connectivity, infotainment and other
electronic content in passenger vehicles increase, it will require
additional electrical connections, which will support growth in
this part of Delphis business.
Delphi has continued to improve profitability after its 2012
acquisition of FCI Groups motorized vehicles division. As such, we
believe the integration risks around the acquisition of
HellermannTyton are low. However, any softening in global passenger
vehicle demand would delay the pace of leverage reduction.
Timothy Harrod Vice President - Senior Credit Officer
+1.212.553.4488 [email protected]
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NEWS & ANALYSIS Credit implications of current events
5 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
A Wabtec Acquisition of Faiveley Transport Would Be Credit
Positive Last Monday, Westinghouse Air Brake Technologies Corp.
(Wabtec, Baa3 stable) said that it had agreed to acquire Faiveley
Transport S.A. (unrated) for about $1.8 billion, including assumed
debt. Despite our expectation of an uptick in leverage and a
dilutive effect on margins, the planned acquisition is credit
positive because it will significantly enhance Wabtecs position in
key non-US markets and expand its product and service offerings.
After the announcement of the deal, we affirmed Wabtecs Baa3 rating
and maintained a stable outlook.
Faiveley is the second-largest provider of equipment and
services in the European passenger rail transit market. The
acquisition will strengthen Wabtecs presence in other regions,
notably Asia-Pacific. Although Wabtec derives about 50% of its
revenues from non-US markets, its market share remains relatively
low in most of those regions, despite an acquisitive growth
strategy.
Wabtec plans to fund the acquisition with available cash,
existing credit facilities and potentially other debt financing, as
well as by issuing convertible preferred stock. Pro forma for the
acquisition, we estimate that debt/EBITDA for the 12 months ended
31 March 2015 would be 2.3x, up from only 0.9x on a standalone
basis. Benefiting from at least $400 million in annual free cash
flow, Wabtec should be able to reduce leverage to about 1.5x at the
end of 2016.
The transaction will also have a dilutive effect on margins,
because margins tend to be lower in the transit market versus the
freight rail market. We estimate that Wabtecs EBITA margin, pro
forma for the acquisition, will decline by about 200 basis points
to around 16% for the 12 months ended 31 March 2015. Faiveley
reported an operating margin of 8.6% for the fiscal year ended 31
March 2015, lower than the 11.2% margin in Wabtecs transit segment
in 2014. Under Faiveleys three-year strategic plan for fiscal
2016-18, the company was targeting an increase in its operating
margin to 11%-12%, a margin expansion of 240-340 basis points.
The planned transaction poses integration risks because it would
be Wabtecs largest acquisition to date and most of Faiveleys
operations are outside the US. Still, we believe that Wabtec will
be able to integrate Faiveley successfully, given managements track
record of integrating newly acquired, albeit significantly smaller,
companies.
Rene Lipsch Vice President - Senior Analyst +1.212.553.1908
[email protected]
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NEWS & ANALYSIS Credit implications of current events
6 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
Brazil Demand for Fine Payment Heightens Threat to Votorantim
Cimentos Liquidity Last Wednesday, Brazils Council for Economic
Defence (CADE), the countrys antitrust authority, ruled that the
companies implicated in a cement price-fixing and cartel case have
30 days to pay BRL3.1 billion ($931 million) in fines from 2014,
including BRL1.5 billion from Votorantim Cimentos S.A. (Baa3
stable). The demand is credit negative for Votorantim Cimentos
because it threatens the companys liquidity.
CADEs demand for payment was widely expected and ends the appeal
process at the antitrust authority. CADE also gave the cement
companies involved in the cartel case a year to reduce their
installed concrete and cement capacity through asset sales, which
was part of their punishment. All of the fined companies will
likely see restricted access to public financing and tax benefits
until they divest some assets.
In May 2014, CADE fined Votorantim Cimentos and a number of
other Brazilian cement producers for price-fixing and cartel
formation. Votorantim Cimentos, Brazils only rated cement company
with roughly a 36% share of the domestic market, has long denied
involvement in cartel practices, and will appeal the sanctions. The
legal appeals process will almost certainly delay compliance,
taking years to make its way through three levels of Brazils
federal courts, including the highest. A final decision could
eventually reduce or throw out the penalty, or allow installment
payments. But if upheld in whole or in part, the sanctions would
strain Votorantim Cimentos liquidity and likely damage its
reputation.
CADEs non-monetary penalty demands that the companies named in
its ruling divest their ready-mix concrete assets equal to 20% of
total installed capacity wherever they have more than one plant
within a 50-kilometer radius. The companies may sell these assets
either individually or as a group to any company not named in the
suit. CADE is also requiring that the penalized companies sell
their minority interests in cement and ready-mix concrete companies
in Brazil.
Votorantim Cimentos today could afford the BRL1.5 billion fine
and the loss of capacity equaling less than 5% of its annual
EBITDA, but the full payment would take a considerable chunk out of
its BRL2.4 billion-plus cash balance. In an extreme liquidity
situation, Votorantim Cimentos, the worlds eighth-largest cement
producer, could tap its revolving credit facility, which has more
than BRL2.1 billion available. Votorantim Cimentos has a
comfortable amortization schedule with an average debt maturity of
9.2 years and funding mix mainly concentrated in bonds (50% of
total reported debt) and debentures (29% of total reported debt),
giving the company the means to pay the fines if necessary.
Any payments or divestments would also add to the stress that
capital spending already places on Votorantim Cimentos liquidity.
The company plans to invest around BRL5 billion in 2015-17 to raise
its production capacity in Brazil to 37 million tons by the end of
2017, bringing its total worldwide capacity close to 60 million
tons.
Marcos Schmidt Vice President - Senior Analyst +55.11.3043.7310
[email protected]
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NEWS & ANALYSIS Credit implications of current events
7 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
Solvays Acquisition of Cytec Is Credit Negative for Both Last
Wednesday, Solvay SA (Baa2 negative) announced that it had agreed
to acquire Cytec Industries Inc. (Baa2 review for downgrade) for
$6.4 billion, including a total cash consideration of $5.5 billion.
The acquisition is credit negative for Solvay because it will
significantly increase its debt and put renewed pressure on its
leverage metrics. The deal is also credit negative for Cytec
because there is no indication what Solvay will do with Cytecs
debt. Following the announcement, we changed Solvays outlook to
negative, and put Cytecs ratings on review for downgrade.
Despite the sizable equity component in the permanent financing
structure that Solvay intends to put in place to term out the
initial bridge financing, including a 1.5 billion rights issue and
the issuance of hybrid notes, we estimate that Moodys-adjusted
debt/EBITDA will rise to just under 4x immediately following the
closing of the transaction from 3.5x at the end of June 2015 (see
exhibit).
Solvays Financial Metrics
Note: Forecasts for 2015 are pro forma for the merger taking
effect on 1 January 2015. Sources: Moodys Financial Metrics and
Moodys Investors Service forecasts
Additionally, the integration of this large and fully priced
acquisition entails some significant risk. The transactions price
tag equals 14.7x Cytecs 2015 consensus EBITDA (based on analysts
mean estimate published by FactSet), a valuation clearly above the
average of around 10x EBITDA recorded in the specialty chemical
sector in recent years, notwithstanding that the price reflects
Cytecs above-average growth prospects and robust average EBITDA
margin of around 18% (on a Moodys-adjusted basis) over the past
three years.
Although the rights issue that Solvay has planned has received
the full support of its main 30% shareholder, Solvac (unrated), the
timely implementation of the refinancing of the acquisition bridge
financing in the equity and debt capital markets is subject to
future market conditions.
The deal is also credit negative for Cytec because it creates
uncertainty regarding whether the companys outstanding bonds will
be assumed, guaranteed or refinanced by Solvay. If Solvay decides
not to provide support for Cytecs bonds and Cytec does not continue
to issue separate consolidated financial statements, it would be
detrimental to Cytecs bondholders.
Despite the credit-negative aspects, the deal makes strategic
sense, enhancing Solvays business risk profile and growth
prospects. Cytec will also help Solvay to further diversify its
end-market and geographical exposure: based on 2014 figures, North
America will account for 26% of group sales, versus 23% pre-merger.
Solvay will gain leading positions in fast-growing markets such as
composites materials for aircraft and automobiles, and in
phosphine-based separation chemicals used by the mining industry.
It will have
0%
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8%
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18%
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0.0x
0.5x
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3.5x
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2012 2013 2014 2015 Pro Forma Estimate 2016 F
Debt / EBITDA - left axis Net Debt / EBITDA - left axis EBITDA
Margin - right axisRCF/Debt - right axis RCF/Net Debt - right
axis
Francois Lauras Vice President - Senior Credit Officer
+44.20.7772.5397 [email protected]
Joseph Princiotta Vice President - Senior Analyst
+1.212.553.6823 [email protected]
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NEWS & ANALYSIS Credit implications of current events
8 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
access to Cytecs strong technology platform and long-established
and close relationships with key customers such as The Boeing
Company (A2 stable) and Airbus Group SE (A2 stable).
Given Cytecs financial track record, the acquisition should be
accretive to Solvays EBITDA margin and boost its future cash flow.
In addition, management targets annual synergies of more than 100
million within the three next years, which we view as achievable
given the potential cost savings and cross-selling opportunities
between Cytec and Solvays existing specialty polymers and advanced
formulations businesses.
In addition, Solvay is likely to accelerate the transformation
of its portfolio post-acquisition, and sell some of its more mature
businesses, such as Acetow or Polyamide. This would further support
Solvays deleveraging effort and the recovery in its financial
metrics, including returning debt/EBITDA toward 3x by 2017.
The transaction has been unanimously recommended by Cytecs board
of directors, and although the transaction is subject to customary
regulatory and shareholder approvals, the companies expect to
complete it by fourth-quarter 2015.
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NEWS & ANALYSIS Credit implications of current events
9 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
GKNs Acquisition of Fokker Technologies Is Credit Positive Last
Tuesday, UK-based GKN Holdings plc (Baa3 stable) announced that it
would acquire Netherland-based aerostructures specialist Fokker
Technologies (unrated) for 636 million (451 million), including the
refinancing of approximately 135 million of external net debt as of
year-end 2014. The Fokker acquisition is credit positive for GKN
because it will enhance its product offering and allow it to
strengthen its competitive position.
Around 45% of the deals funding will be raised from equity, with
debt composing the rest. As a result, GKNs credit metrics will only
slightly weaken when the transaction closes, with Moodys-adjusted
debt/EBITDA rising to 3.3x from 3.1x as of year-end 2014. When we
factor in Fokkers approximately 50 million of debt-like obligations
(including a $21 million settlement of US sanction violations) that
GKN will assume, the transaction values Fokker at 501 million, or
9.3x Fokkers 2014 EBITDA.
Fokker generated 758 million (544 million) of revenues and 76
million (55 million) of EBITDA in 2014. The company specializes in
empennage, fuselage and movable wing parts. It benefits from
leading advanced composite and electrical technologies and holds
strong positions in electrical wiring design and manufacturing
systems.
The transaction, which the companies expect to close in October,
would mark GKNs first major acquisition since 2012, when it
acquired Volvo Aero, the aerospace division of Sweden-based AB
Volvo (Baa2 stable) for 633 million. GKNs cautious approach toward
external growth and its commitment to an investment-grade rating
explains why management decided to fund both transactions with a
mix of debt and equity.
Acquiring Fokker will strengthen GKNs aerospace division by
giving GKN access to Fokkers complementary technology, broadening
its product offering and increasing its order book. Pro forma for
the transaction, the companys auto-related activities will generate
55% of group sales post-Fokker, versus 59% pre-Fokker, while
aerospace will constitute 35%, versus 30% pre-Fokker.
We expect the transaction to be moderately margin dilutive given
Fokkers slightly lower profitability in EBITA margin terms
(approximately 0.3 percentage points down from the 8.5% reported in
2014 after integration cost). We expect a strengthening of GKNs key
credit metrics starting in 2016 as the company applies free cash
flow to debt reduction, supported by some initial synergies from
the combination with Fokker, which company management estimates
will be around 23 million.
GKN acts as a finance, investment and holding company of GKN
plc, an international engineering group with operations in 33
countries. In 2014, GKN reported revenues of 7.0 billion, or 7.5
billion including GKNs pro rata share in joint ventures.
Oliver Giani Vice President - Senior Analyst +49.69.70730.722
[email protected]
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NEWS & ANALYSIS Credit implications of current events
10 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
Falling Copper Prices and Zambian Power Reductions Tarnish FQMs
Credit Metrics On Friday, copper closed at $2.36 per pound, $0.98
lower than its 52-week high of $3.24 per pound on 8 August 2014,
driven by decreasing demand from China, the worlds largest copper
consumer. Falling copper prices are credit negative for First
Quantum Minerals Ltd. (FQM, B1 negative) because they lower
revenues at a time when FQM faces mounting financial pressure as
its Zambian mines suffer power reductions and the companys Cobre
Panama project consumes cash.
To date, FQM has had no challenges in selling product despite
global supply-demand trends weighing on the prices it receives.
International Copper Study Group estimates that Chinas consumption,
which constitutes approximately 40% of global demand, fell 5% in
the four months ended April 2015 versus a year earlier. We expect
this trend to continue owing to Chinas falling GDP growth and a
deterioration in consumer sentiment as demand for end products
using copper decreases. At the same time, there has been a
sustained increase in copper inventories since the beginning of the
year as a result of global mine production increasing by around 3%
(see exhibit). This has added further pressure on copper
prices.
London Metals Exchange Copper Warehouse Inventories
Source: London Metals Exchange
Compounding FQMs challenges is that Zambian power utility Zesco
Ltd. (unrated) has implemented power cuts following reduced
generation capacity at its hydroelectric plant. Zambia is enduring
one of its worst droughts on record and although the country is
adding power generation capacity early next year, the country faces
a power shortage over the next eight months. Such a shortage would
reduce production rates at FQMs two Zambian copper mines, Kansanshi
and Sentinal, a project that had been ramping up production, and
reduce flow rates at Kansanshis new smelter facility. These mines
together generate nearly half of FQMs total cash flow, which will
be negatively affected by lower production available for sale.
The path for FQM to restore credit metrics back to rating
guidance levels looks less clear. Lower copper prices, the $600
million that the company will spend this year on its $6.4 billion
Cobre Panama copper project and production reductions at the
Zambian mines will weaken credit metrics. This will be driven by
lower EBITDA generation, continued negative free cash flow and
rising debt levels. Metrics for the 12 months ended 30 June 2015
will likely breach our indicative parameters for a B1 rating:
debt/EBITDA below 4.5x and EBIT/interest above 2.0x. Currently,
FQMs debt/EBITDA is 4.4x and EBIT/interest is 1.8x.
FQMs liquidity remains strong following a recent renegotiation
of bank loan covenants, which still offer sufficient headroom
against reported metrics and a lower copper price. Further
supporting FQMs liquidity is a $1.1 billion equity capital raise in
May that the company used to reduce its draw-down on its bank
facilities. However, any uplift to credit metrics from these
factors is temporary: any availability on the bank facilities is
likely to be used up by the remaining portion of the $1 billion of
capex for this year, driving debt
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Douglas Rowlings Analyst +971.4.237.9543
[email protected]
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NEWS & ANALYSIS Credit implications of current events
11 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
higher. We recognise that FQM can defer some of its capex spend
into next year, but it will eventually be spent. The effect from
delaying capex is unlikely to change the effect of declining free
cash flow and rising debt because we see little relief in sight for
copper prices. Forecast refined copper production will exceed usage
next year, keeping prices low.
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NEWS & ANALYSIS Credit implications of current events
12 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
Baidus Greater Investment in Online-to-Offline Business Is
Credit Negative Last Tuesday, Baidu Inc. (A3 positive) CFO Jennifer
Li said during the companys second-quarter earnings call that the
Chinese search engines selling, general and administration
(SG&A) expenses in the second half of 2015 will increase by
80%-90% from the first half, mainly to support growth in Baidus
online-to-offline (O2O) service. This significant increase in
expenses is credit negative because it will reduce the companys
EBITDA and weaken its debt/EBITDA ratio.
The increase will come on top of a 65% increase in SG&A in
the first half of this year to RMB6.8 billion, versus the
year-earlier level of RMB4.2 billion (see exhibit).
Baidus SG&A and SG&A as a Percentage of Sales Baidu to
increase SG&A to promote its online-to-offline services.
Sources: Baidu quarterly financial statements and Moodys
Investors Service estimates
In particular, Baidu plans to spend RMB20 billion over the next
three years to attract consumers to Baidu Nuomi, its O2O local
e-commerce platform. O2O refers to Internet companies driving
consumers who access their online platforms to brick-and-mortar
merchants and service providers with which Internet companies have
partnered.
Baidu reported RMB40.5 billion of gross merchandise value for
its O2O services in second-quarter 2015, which includes Chinese
group buying site Baidu Nuomi, online travel agency Qunar and Baidu
Takeout Delivery. Gross merchandise value grew 109% in
second-quarter 2015 from a year earlier.
Notwithstanding this growth, Baidu Nuomi and Baidu Takeout
Delivery are in the early stages of growth and do not yet
contribute materially to revenue. Baidu offers subsidies and
promotions to its users to facilitate transactions to seed the
market and educate users about O2O services, but it will take time
for these initiatives to produce meaningful earnings.
Baidus heavy investment to develop a user base for O2O has
weakened its credit profile. Based on Baidus current investment
plan, we expect the companys debt/EBITDA to increase to 2.4x at
year-end 2015 from 1.6x at year-end 2014, and for its EBITDA margin
to decline to 25% for full-year 2015 from 39% over 2014.
Baidus net cash position remains strong. Cash and short-term
investments totaled RMB75 billion as of 30 June. This amount,
together with its strong and stable cash flows from its core search
business, should be sufficient to cover its investment needs and
its recently announced $1 billion share repurchase program.
0%
5%
10%
15%
20%
25%
30%
35%
0
2
4
6
8
10
12
14
1H 2014 2H 2014 1H 2015 2H 2015 Estimate
RMB
Billi
on
SG&A Amount - left axis SG&A Percent of Sales - right
axis
Anthony Lee, CFA Associate Analyst +852.3758.1305
[email protected]
Lina Choi, CFA Vice President - Senior Analyst +852.3758.1369
[email protected]
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NEWS & ANALYSIS Credit implications of current events
13 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
In addition, Baidu has indicated that it has invited financial
and strategic investors to co-invest in its takeout delivery
business to help fund growth. Reducing its investment outlay by
attracting more investors would be credit positive and could
increase the companys rating upgrade potential.
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NEWS & ANALYSIS Credit implications of current events
14 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
Infrastructure
SSEs Acquisition of Gas Assets Improves Internal Sources of
Supply On Wednesday, SSE plc (A3 negative) announced that it will
acquire a 20% non-operating stake in Totals Laggan-Tomore and
Eradour-Glenlivet fields, off the Shetland Islands, for 565 million
(around $880 million). SSE also plans to invest 350 million through
2018 (including 170 million in the current year) to complete the
development. The acquisition is a significant increase in both the
volume and quality of SSEs internal sources of supply, a credit
positive.
The acquisition increases SSEs gas reserves to more than 6
billion therms (100 million barrels of oil equivalent or mmboe).
The company reported reserves of 2.2 billion therms at 31 March
2015, implying that the Total assets have added around 3.8 billion
therms (65 mmboe).
When the new fields reach peak production in 2016, SSE expects
that its share of output will be 1 million therms per day. This is
a near doubling of the 1.1 million therms/day average production in
the fiscal year ended March 2015, and will account for a
significant portion of gas and electricity (which in the UK market
is closely linked to gas) it supplies to customers. In fiscal 2015,
SSE supplied 1.542 billion therms of gas to residential and
business customers in Great Britain. It also supplied 39.9
terawatt-hours of electricity, which we estimate equals a further
700 million therms of demand.
The Total assets significantly increase SSEs internal sources of
supply. They also increase the quality of SSEs hedge on gas prices.
SSE has historically had little gas production of its own. Instead,
it has relied on coal-fired generation, where profits are
positively correlated with gas prices because revenues are set by
Great Britains gas-driven electricity market, an approximate hedge
on its gas exposure. However, coal output declined significantly in
fiscal 2015 and is unlikely to recover. SSEs renewable output
provides a better proxy for gas, but remains small. The addition of
the Total gas assets provides a significant and direct source of
supply, as shown in the exhibit below.
SSEs Internal Supplies as a Percent of Sales to Customers in
Great Britain
Note: Both supply and production assume gas is converted to
electricity at 52% efficiency. Sources: SSE, Ofgem Consolidated
Segmental Statements and Moodys Investors Service estimates
Owning gas assets or fixed-cost electricity generation is
important if prices paid by customers do not immediately reflect
changes in Great Britains gas prices, which could lead to
volatility in energy suppliers cash flows. In recent years, retail
prices have adjusted more quickly than in the past, which may
reduce the
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
2012 2013 2014 2015 2015 Pro Forma
Gas Production Renewables Coal
Graham W. Taylor Vice President - Senior Analyst
+44.20.7772.5206 [email protected]
Neil Griffiths-Lambeth Associate Managing Director
+44.20.7772.5543 [email protected]
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NEWS & ANALYSIS Credit implications of current events
15 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
need for this internal supply. However, SSE is less hedged than
its peers and this acquisition increases its alignment with the
market average, a credit positive.
The upfront costs of the 565 million purchase will increase SSEs
net debt from 8.3 billion (on a Moodys-adjusted basis) at 31 March
2015, and the effect on credit metrics in the year to March 2016 is
likely to be modestly negative. In subsequent years we expect the
acquisition to have a neutral or positive effect on credit metrics,
given capital allowances. In SSEs first-quarter results on 23 July,
management reiterated its intention to spend 5.5 billion on capex
and acquisitions (net of disposals) between now and 2018. The 350
million of planned development expenditure falls within this plan,
although it suggests a significant change in the balance of the
spending: the 170 million to be invested in the new fields this
year compares with just 21 million of gas production capex in the
year to March 2015.
-
NEWS & ANALYSIS Credit implications of current events
16 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
ENGIE Clinches Credit-Positive Nuclear Contribution Reduction
and Reactor Extension Last Wednesday, global energy utility ENGIE
SA (formerly GDF SUEZ, A1 negative) negotiated a reduction in the
nuclear contribution (levy) it pays to the Belgian government as
part of a wider deal that also prolongs by 10 years the lifespan of
two of its Belgian nuclear reactors. The agreement, which requires
Belgian parliamentary approval, is credit positive for ENGIE
because it reduces the financial burden of Belgiums nuclear
contribution and extends the earnings stream generated by ENGIEs
Doel 1 and Doel 2 reactors.
Under the agreement, ENGIE will pay the Belgian government 200
million in 2015 and 130 million in 2016 (which excludes ENGIEs
contribution for the Tihange 1 nuclear reactor) and a royalty of 20
million per year starting in 2016. This compares with a total
contribution of 397 million in 2014. Doel 1 and Doel 2 each had
been due to reach the end of their operational lives in 2015. ENGIE
intends to invest 700 million in the two plants as a result of the
extension.
ENGIEs annual nuclear contribution for Doel 3, Doel 4, Tihange 2
and Tihange 3 will total 200 million in 2015 and 130 million in
2016. Starting in 2017, ENGIEs contribution will be set at 40% of
the profit that the four nuclear power plants generate, taking into
account variations in costs, production volumes and electricity
prices. In addition, ENGIE will pay starting in 2016 a 20 million
annual royalty linked to the extension of the Doel 1 and Doel 2
plants into Belgiums energy transition fund. The fund was created
in June 2015 to finance research into new energy production and
storage technologies as part of the countrys preparation for the
phase-out of nuclear power. ENGIE also has agreed to pay the
Belgian state 100 million in 2015 and 20 million in 2016 to settle
a longstanding legal dispute.
An existing agreement for the life extension of the Tihange 1
reactor, which also comprises a profit-sharing mechanism with the
Belgian government, remains unchanged. Tihange 1 is jointly owned
by ENGIE and Electricite de France (A1 negative).
We estimate that if the reduced payments agreed to for 2016 had
been in effect last year, ENGIEs ratio of funds from operations
(FFO) to net debt would have been 50 basis points higher at 21.4%.
We calculate that the closure of both Doel 1 and 2 would have
reduced ENGIEs monthly EBITDA by more than 20 million, excluding
the effect of drawing rights.
The agreement suggests that the Belgian government, which
intends to phase out nuclear power by 2025, sees a continued role
for nuclear generation in providing Belgiums energy supply between
now and then. Belgium relies on nuclear power for around half of
its energy needs, and ENGIE is the countrys biggest clean power
generator with 4.1 gigawatts of net nuclear capacity, (net of
third-party capacity and drawing rights) spread across seven
reactors (see exhibit below).
Paul Marty Vice President - Senior Credit Officer
+44.20.7772.1036 [email protected]
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NEWS & ANALYSIS Credit implications of current events
17 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
ENGIEs Nuclear Net Capacity in Belgium
Note: Data is net of third-party capacity and gross of drawing
rights. Source: ENGIE
ENGIE faces separate challenges related to its nuclear fleet in
Belgium. Its Doel 3 and Tihange 2 reactors are both currently
closed subject to technical inspection by the Belgian regulator. In
February 2015, the company estimated that when running, the two
plants generated a monthly EBITDA of 40 million. The company
expects the reactors to resume operations on 1 November, subject to
the Belgian regulators authorization.
Doel 1 (433 MW)9%
Doel 2 (433 MW)9%
Doel 3 (905 MW)18%
Doel 4 (935 MW)18%
Tihange 1 (481 MW)9%
Tihange 2 (907 MW)18%
Tihange 3 (941 MW)19%
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NEWS & ANALYSIS Credit implications of current events
18 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
Banks
Ally Financial Will Benefit from Ally Banks Ability to Fund
Riskier Loans Last Tuesday, Ally Financial Inc. (B1 positive)
announced that it had received regulatory approval from the Federal
Deposit Insurance Corporation to fund loans with FICO scores of
620-659 within Ally Bank, lifting a restriction that had been in
place since its inception. The lifting of this restriction is
credit positive for Ally Financial because it provides another
funding option with a significantly lower cost of funds than
long-term unsecured debt as the company expands its presence in
riskier nonprime auto lending.
Using idle deposits to fund higher-yielding 620-659 FICO loans
will improve Ally Financials net interest margins. Ally Financials
annualized cost of funds for the second quarter of 2015 for
long-term senior unsecured debt was 4.98%, while Ally Banks cost of
deposits was 1.16%, a significant difference. Capital Auto
Receivables Asset Trust 2015-2, a recent Ally Financial
securitization with a 633 weighted average FICO score, had an
initial weighted average coupon of 1.50%-1.75%, depending on actual
prepayments, which shows that deposit funding cost is lower even
than the cost of secured debt.
Adding deposits from Ally Bank as a funding source for these
loans provides Ally Financial with another funding option. If the
securitization markets become unreliable in a stressed environment,
nonprime loans would more likely become even more illiquid compared
with prime loans. Having bank deposits available to fund nonprime
loans puts Ally Financial in a better position to manage its
funding availability across various economic and capital market
scenarios.
Ally Financial is in the midst of a shift in originations as
General Motors Financial Company, Inc. (Ba1 stable) has taken most
of the General Motors subvented loan and lease originations and a
small portion of wholesale financing. Against that backdrop, Ally
Financial has focused on increasing originations with new dealer
relationships beyond its historical General Motors and Chrysler
ties (see Exhibits 1 and 2). Lending spans across the credit
spectrum, including 620-659 FICO loans and lower. Although we do
not expect it, Ally Financials ability to fund the 620-659 FICO
loans with deposits gives the company greater flexibility to grow
the proportion of these riskier loans in its portfolio. If Ally
Financial were to accelerate nonprime originations, it would be a
credit negative development.
EXHIBIT 1
Ally Financials Auto Loan Originations by Dealer
Source: Ally Financial
66% 63%63%
60% 52% 45%
15%17%
16%
18% 20% 24%
19%
20%20%
22% 28%32%
$9.2
$10.9 $11.8
$9.0 $9.8
$10.8
$0
$2
$4
$6
$8
$10
$12
$14
1Q 14 2Q 14 3Q 14 4Q 14 1Q 15 2Q 15
$ Bi
llion
s
GM Chrysler Other Dealers
Jason Grohotolski Vice President - Senior Analyst
+1.212.553.1067 [email protected]
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NEWS & ANALYSIS Credit implications of current events
19 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
EXHIBIT 2
Ally Financials Auto Loan Originations by Dealer
Second-Quarter 2015 $ Billions
Second-Quarter 2014 $ Billions
Year-over Year Change
Other Dealers $ 3.4 $ 2.2 58%
Chrysler 2.5 1.9 37%
GM Non Subvented 4.1 3.3 22%
GM Subvented (Loan and Lease) 0.8 3.6 -78%
Total $ 10.8 $ 10.9 -1%
Source: Ally Financial
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NEWS & ANALYSIS Credit implications of current events
20 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
Banco PSA and Santander (Brasil) Car Loan Partnership Is Credit
Positive Last Friday, Banco Psa Finance Brasil S.A. (Banco PSA, Ba2
stable, ba31) and Banco Santander (Brasil) S.A. (Baa2 negative,
baa2) announced that they would form a partnership to offer car
loans to individuals and inventory financing to authorized car
dealers under the PSA brand, pending regulatory approval. The
agreement is credit positive for both banks because it will
strengthen Banco PSAs funding profile and help Santander (Brasil)
gain market share and strengthen its asset quality.
Banco PSAs current funding structure is highly concentrated:
deposits from other financial institutions comprised almost three
quarters of its funding base in 2014, and the 10 largest investors
held more than 90% of deposits. Under the new partnership,
Santander (Brasil) will provide Banco PSA with more stable funding
at longer tenors, helping to reduce Banco PSAs overall funding
costs and strengthening its liquidity.
Santander (Brasil) will benefit from the transaction because it
will gain exposure to Banco PSAs portfolio of relatively low-risk
auto loans. Banco PSAs focus on new car financing has allowed it to
maintain superior asset quality, with a nonperforming loan ratio of
2.58% in 2014, which will likely improve the quality of Santander
(Brasil)s mixed portfolio of new and used car financing.
The agreement will also allow Santander (Brasil) to increase its
presence in the countrys vehicle finance market. The banks combined
auto finance operation will be 40% larger than the existing
portfolio at Santander (Brasil). In December 2014, Santander
(Brasil) had 3% of the market, while Banco PSA had 1.2%. In
addition, the partnership will enable Santander (Brasil) to offer
financial services, such as auto insurance, to customers through
Banco PSAs distribution network of authorized dealers.
The agreement calls for Santander (Brasil) to acquire 50% of
Banco PSAs equity through a wholly owned financial subsidiary, with
the final acquisition price depending on Banco PSAs book value on
the date the deal closes. As of 31 December 2014, Banco PSAs
reported equity was BRL454 million ($171 million), while Santander
(Brasil)s net worth was BRL57.3 billion ($21.6 billion). Last year,
the parent companies of Santander (Brasil) and Banco PSA pursued
similar agreements in 10 European countries, which shows their
commitment to building strong car finance franchises in all of
their core markets.
Gaining access to additional low-cost funding will alleviate
pressure on Banco PSAs performance from Brazils tightening monetary
policy and weakening auto sector (see exhibit). The slump in car
production and sales in Brazil that began in 2013 persists this
year, with the first six months of 2015 showing a year-over-year
decline of 18% in car production and a 21% decline in sales.
Brazils association of car manufacturers, Associao Nacional dos
Fabricantes de Veculos Automotores, projects that sales will fall
17.8% for the entire year, while production will decline 20.6%. In
2014, captive vehicle lenders managed to maintain the pace of loan
origination based on their close ties with car manufactures, which
allowed them to make special offers that included interest
subvention, offering 0% interest rate deals, and grace periods on
first loan payments. These competitive advantages, combined with
the infusion of additional resources, will help the banks
partnership to perform well despite continued weakness in Brazils
car market.
1 The bank ratings shown in this report are the banks deposit
ratings and baseline credit assessments.
Alexandre Albuquerque Assistant Vice President - Analyst
+55.11.3043.7356 [email protected]
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NEWS & ANALYSIS Credit implications of current events
21 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
Brazil Vehicle Sales Auto sales have been declining since 2013,
reducing Banco PSAs loan book by 13% last year.
Source: Associao Nacional dos Fabricantes de Veculos
Automotores
Under the agreement, Santander (Brasil) will also acquire 100%
of Banco PSAs leasing subsidiary PSA Finance Arrendamento Mercantil
S.A. (unrated) and 50% of its insurance brokerage company PSA
Corretora de Seguros e Servios Ltda (unrated). Both would be
acquired through Santander (Brasil) subsidiaries. The banks did not
disclose how Santander (Brasil) will finance the transaction.
2.9
3.2
3.6 3.63.8 3.8
3.5
3.2
1.5
2.0
2.5
3.0
3.5
4.0
2008 2009 2010 2011 2012 2013 2014 Jun-15
Mill
ions
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NEWS & ANALYSIS Credit implications of current events
22 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
Guatemalas Weakening Economic Confidence Is Credit Negative for
Banks Last Tuesday, Guatemalas central bank reported that the
countrys Economic Activity Confidence Index2 in July 2015 fell to
its lowest level since 2009 (see exhibit below), capping a sharp
decline over the past three months amid increased political
turmoil. This decline in confidence is credit negative for
Guatemalan banks because it raises the risk that economic growth
will weaken amid a more uncertain investment climate and lead to a
slowdown in household and corporate income growth.
Guatemalas Economic Activity Confidence Index
Source: Guatemala central bank
The index fell to 28.68 from 57.82 at the end of the first
quarter, triggered by a series of corruption scandals that have
come to light since April and which have entangled several
high-level politicians, including Roxana Baldetti, the countrys
former vice president, and Julio Surez, the governor of the central
bank.
A decline in the creditworthiness of individuals and corporates
triggered by the decline in confidence would lead to higher
nonperforming loans (NPLs), which were a very low 1.45% as of June
2015. Guatemalas tense political climate will continue to weigh on
the economy through the end of the year, owing to presidential
elections scheduled to take place in September, and a new president
not taking office until January.
These economic and political headwinds come at a time when banks
have been expanding their loan books at a rapid pace, which
compounds asset quality risks. Loan growth has averaged 14% over
the past three years, or a high 1.8x nominal GDP growth.
Additionally, credit expansion has targeted the riskier consumer
segment, which constituted a relatively large 28% of total loans as
of June 2015, and has accounted for about one third of total
nominal growth since year-end 2012.
This means that banks with larger consumer loan exposures would
initially see the greatest effect from a downturn in job creation
and real wage gains. These banks include Banco de los Trabajadores
(Ba3 stable, b13), Banco de Desarrollo Rural (unrated), Banco de
America Central (its Panama-based parent BAC International Bank,
Inc. is rated Baa3 stable, baa3) and, to a lesser extent, Banco
Agromercantil de Guatemala (unrated). If a prolonged economic
slowdown driven by lower investment materializes, the asset quality
of banks that focus on commercial loans would also be affected
because reduced cash flow would lead to a deterioration in
companies financial positions.
2 The index gauges a survey of analysts related to business
confidence, investment climate and expectations for economic
growth. 3 The bank ratings shown in this report are the banks
deposit ratings, senior unsecured debt ratings (where available)
and baseline
credit assessments.
05
10152025303540455055606570758085
Oct
-09
Jan-
10
Apr-
10
Jul-
10
Oct
-10
Jan-
11
Apr-
11
Jul-
11
Oct
-11
Jan-
12
Apr-
12
Jul-
12
Oct
-12
Jan-
13
Apr-
13
Jul-
13
Oct
-13
Jan-
14
Apr-
14
Jul-
14
Oct
-14
Jan-
15
Apr-
15
Jul-
15
Georges Hatcherian Analyst +52.55.1555.5301
[email protected]
Vicente Gomez Associate Analyst +52.55.1555.5304
[email protected]
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NEWS & ANALYSIS Credit implications of current events
23 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
A rapid deterioration in asset quality would increase loan-loss
provisions, reducing Guatemalan banks return on average assets,
which averaged a strong 2% over the past three years, according to
the Central American Monetary Council. Should this cause a decline
in banks capitalization, it may put strain on their already low
capital metrics. The banking systems ratio of core capital to total
average assets was 6.8% as of November 2014, well below the 7.7%
average for Central America.
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NEWS & ANALYSIS Credit implications of current events
24 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
Insurers
Sirius Groups Sale to China Minsheng Investment Corp. Is Credit
Negative Last Monday, White Mountains Insurance Group Ltd. (WTM,
unrated), the ultimate parent of Sirius International Group, Ltd.
(Baa3 stable), announced that it had signed a definitive agreement
to sell 100% of its ownership stake in Sirius and its immediate
parent to CM International Holding PTE Ltd., the Singapore-based
investment arm of China Minsheng Investment Corp., Ltd. (CMI,
unrated). The planned sale to CMI is credit negative because it
exposes Sirius to new risks and uncertainties given CMIs limited
operating history and lack of meaningful expertise in the
reinsurance industry. Additionally, the lack of visibility into
CMIs influence over Sirius strategy, including the risk of it
adopting a more aggressive investment and underwriting approach, is
credit negative. WTMs credit quality is unaffected by the sale.
Sirius is a long-established, medium-scale reinsurer, with
approximately $2 billion of capital, and 2014 gross written
premiums of approximately $1.1 billion. An important part of its
franchise is its longstanding, local relationships with a large
number of cedents across multiple countries.
Although Sirius granular portfolio and strong client
relationships allow it to defend its position in a challenging
reinsurance market, it lacks the resources and scale to compete
effectively against larger reinsurers. Ownership by CMI, a
Shanghai-domiciled investment company focused on investing in
financial services and industrial businesses, could help Sirius
increase its presence in Asia, a market with attractive
potential.
Sirius has indicated that CMI intends to maintain Sirius current
investment and underwriting approach and risk tolerance levels, but
it is not clear whether Sirius will maintain this position over
time, given the different path that some of its peers have
followed. For example, Fosun International Limited (Ba3 stable),
another Chinese investment holding company, has purchased a number
of insurance companies over the past three years and has adopted an
insurance plus investment strategy that involves taking more
investment risk onto the insurers balance sheet to generate higher
returns.
In Sirius case, such a strategy would increase its overall risk
given its exposure to catastrophes that could require the
liquidation of substantial assets to pay claims. Large exposures to
higher risk, illiquid or concentrated assets would increase the
possibility of having to sell them at a substantial discount.
Sirius reported a net after-tax loss for a 1-in-250-year modeled
event for its largest catastrophe zone (Southeast US) of about 19%
of consolidated GAAP equity. Among reinsurers that report such data
publicly, the industry median for similar losses is 15% of
consolidated GAAP equity.
With the sale, Sirius loses its affiliation with WTM, an
established, insurance-focused holding company with deep industry
expertise, and joins a newly formed group with limited insurance
expertise and a limited track record, notwithstanding CMIs
substantial undeployed financial resources. Our expectation that
Sirius management team will remain in place mitigates this
risk.
The transaction is credit neutral for WTM and its remaining
subsidiaries, taking into consideration WTMs potential uses of
proceeds, which we believe include a combination of returning
capital to shareholders, new acquisitions, retaining capital at the
holding company and capital contributions to OneBeacon U.S.
Holdings, Inc. (Baa3 stable) or other subsidiaries. Pro forma for
the sale of Sirius, we estimate that WTMs financial leverage will
decline to approximately 7% from 18% currently. Conversely,
depending on the ultimate use of the proceeds, selling Sirius could
reduce ongoing sources of cash flow to WTM, leaving OneBeacon as
its principal dividend-paying subsidiary.
Brandan Holmes Vice President - Senior Analyst +1.212.553.6897
[email protected]
Alan Murray Senior Vice President +1.212.553.7787
[email protected]
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NEWS & ANALYSIS Credit implications of current events
25 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
Argentinas New Civil and Commercial Code Has Mixed Implications
for Insurers Effective 1 August, Argentinas new Civil and
Commercial Code took effect, triggering changes that affect
insurers. Although some aspects of the code are credit positive for
all insurers, other aspects are credit negative for non-contractual
liability and life and annuity insurers, while still others are
credit positive for public transportation insurers and contractual
liability insurers.
The new code ends the application to insurers of a three-year
statute of limitation for consumers, which is credit positive for
all insurance companies. The three-year limitation was outlined in
Argentinas previous consumer protection law, which superseded laws
specific to certain sectors such as insurance to the favor of the
consumer. The current code makes clear that the three-year statute
of limitation clause is not applicable to insurers, reinforcing the
one-year statute of limitation period specified in Argentinas
insurance law. The reduction of the limitation period to one year
will reduce claims against insurers, a credit positive given that
the narrower time frame to file a claim will likely result in fewer
losses for insurers.
Heretofore, policyholders deductibles, mostly in public
transportation coverages, have occasionally been contested by
injured third parties, at times resulting in insurers being
obligated to fund the policy deductible, even in the absence of a
contractual obligation to do so and contrary to international best
practices. However, under the new law, a third party cannot pursue
claims against an insurer beyond the terms and conditions of the
policy, thereby reducing claims. Exhibit 1 shows Argentine public
transportation insurers that benefit from the change.
EXHIBIT 1
Market Share of Public Transportation Insurers Company Market
Share
Proteccin Mutual de Seguros 36%
Mutual Rivadavia de Seguros 25%
Escudo Seguros 19%
Metropol Sociedad de Seguros Mutuos 9%
Argos Mutual de Seguros 9%
Garanta Mutual de Seguros 2%
Source: Moodys Investors Service, based on information published
by Argentinas Superintendencia de Seguros de la Nacin
The new code establishes a unified expiration period of three
years for non-contractual and contractual liability, versus the
previous legal framework of two years for non-contractual liability
and 10 years for contractual liability. This change is credit
negative for insurers offering non-contractual liability coverage,
such as third-party liability for corporations or construction
firms, because it extends by one year the expiration period,
increasing the time claims can be made. On the other hand, the
change will benefit contractual liability insurers, such as
professional liability insurers, because it shortens the expiration
period by seven years, decreasing the time claims can be made.
Exhibit 2 shows the top five Argentine professional liability
insurers that will benefit from this change.
Diego Nemirovsky Vice President - Senior Credit Officer
+54.11.5129.2627 [email protected]
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NEWS & ANALYSIS Credit implications of current events
26 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
EXHIBIT 2
Market Share of Professional Liability Insurers Company Market
Share
SMG Compaia Argentina de Seguros 25%
Noble Aseguradora de Responsabilidad Profesional 15%
Seguros Mdicos 14%
Federacion Patronal 13%
TPC Compaia de Seguros 9%
Source: Moodys Investors Service, based on information published
by Argentinas Superintendencia de Seguros de la Nacin
The new law allows any debtor to cancel any contract denominated
in a foreign currency at the equivalent amount in local currency
(bank deposits are excluded). This is credit negative for life and
annuity insurers because they could honor a foreign currency
obligation in local currency at the official exchange rate, which
often overvalues the Argentine peso, thereby discouraging the
demand for these products. Exhibit 3 shows the top five Argentine
individual life and annuity insurers.
EXHIBIT 3
Market Shares of Argentinas Individual Life and Individual
Annuity Insurers Individual Life Insurers Individual Annuity
Insurers
Company Market Share
Company Market Share
Prudential Seguros 17%
San Cristbal Seguro de Retiro 34%
Zurich International Life 14%
La Segunda Seguros de Retiro 25%
HSBC Seguros de Vida 13%
Binaria Seguros de Retiro 17%
Liderar Ca. de Seguros 8%
Orgenes Seguros de Retiro 8%
Metlife Seguros 6%
HSBC Seguros de Retiro 6%
Source: Moodys Investors Service, based on information published
by Argentinas Superintendencia de Seguros de la Nacin
The new code also establishes additional obligations for
different parties to buy certain insurance policies, such as
comprehensive insurance coverage for commercial property owners and
landlords condominiums, or liability coverage for educational
institutions against any damage suffered or caused by underage
students. These business segments which have historically been
under-developed owing to a lack of demand will benefit from
increased demand.
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NEWS & ANALYSIS Credit implications of current events
27 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
Sovereigns
Ireland Reports Strong First-Quarter Growth, a Credit Positive
Last Thursday, Ireland (Baa1 stable) published its national
accounts data for first-quarter 2015, which showed that real GDP
had risen by 1.7% from fourth-quarter 2014 levels and by 6.5% from
first-quarter 2014. The growth, which exceeded the rest of the euro
area, is credit positive because it means a more rapid reduction of
the governments still-elevated debt ratio than we had expected and
significantly shrinks Irelands budget deficit. The first-quarter
results have prompted us to revise upward our real GDP growth
forecast to 4.2% for 2015, versus our earlier forecast of 3.8%, and
reduce our public debt ratio forecast, which we now expect will
decline to below 100% of GDP next year.
Irelands real GDP growth continues to surprise on the upside,
with the recovery driven predominantly by a 4.5% contribution from
domestic demand and 2% from net exports (see Exhibit 1). Exports of
goods and services grew by 14.3% versus a year earlier, following
an already strong increase of 12% in 2014.4 Private consumption
expanded by 3.8% from a year earlier, after growing just 2% in all
of 2014. Capital investment was also strong, growing by 4% in the
quarter, after already strong growth of 14.3% in 2014.5 In addition
to the strong first-quarter numbers, Irelands Central Statistics
Office revised upward its GDP data for 2014, now estimating growth
was 5.2% last year, versus an earlier estimate of 4.8%.
EXHIBIT 1
Contribution of Domestic and External Demand to Irelands Real
GDP Growth
Sources: Irelands Central Statistics Office and Moodys Investors
Service
We expect that Irelands strong growth will continue, although
perhaps not at levels comparable to the first quarter. Private
consumption growth will continue to benefit from strong employment
growth, real wage increases and very high consumer confidence.
Additionally, households will likely benefit from tax cuts in 2016.
Exports will continue to benefit from economic recoveries in the UK
and US, and the competitive exchange rate against these two key
trading partners. Sound export prospects and domestic demand will
support the investment recovery and construction investment will
benefit from strong foreign interest in commercial real estate and
strengthening residential investment. 4 Imports also are increasing
rapidly, given the strength of domestic demand and the relatively
high import content of Irelands
exports, so the net trade contribution to growth is small. 5 The
data on capital investment and imports have to be treated with
caution owing to the first-time inclusion of the large aircraft
leasing industry in national accounts and balance-of-payments
data. However, higher investment and imports effectively cancel
each other out in the overall GDP data.
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
2010Q1
2010Q2
2010Q3
2010Q4
2011Q1
2011Q2
2011Q3
2011Q4
2012Q1
2012Q2
2012Q3
2012Q4
2013Q1
2013Q2
2013Q3
2013Q4
2014Q1
2014Q2
2014Q3
2014Q4
2015Q1
Domestic Demand External Demand Real GDP Growth
Kathrin Muehlbronner Senior Vice President +44.20.7772.1383
[email protected]
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NEWS & ANALYSIS Credit implications of current events
28 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
The strong growth will translate into a very rapid reduction in
Irelands budget deficit. The data on budget execution up to June
show significantly stronger tax revenues than the government
budgeted (see Exhibit 2), while expenditures have remained below
budget. We expect that the government will exceed its target of
reducing the general government budget deficit to 2.7% of GDP from
4% in 2014 and more than 8% in 2012. We currently expect a deficit
of 2.3%, although it could be even lower.
EXHIBIT 2
Irelands Cumulative Tax Revenue Outperformance Against
Budget
Sources: Ireland Ministry of Finance, Haver Analytics and Moodys
Investors Service
These strong GDP growth numbers also facilitate a faster
reduction in Irelands high public debt ratio than we had previously
expected. We forecast the debt/GDP ratio to decline to 102.5% of
GDP by the end of this year, and to drop below the 100% mark next
year, lower than our expectations of just a few months ago (see
Exhibit 3) and down sharply from Irelands debt ratio peak of around
120% of GDP in 2012.
EXHIBIT 3
Irelands General Government Debt to GDP Ratio
Note: Our debt forecasts do not include any privatisation
receipts from the state holdings in Allied Irish Banks and Bank of
Ireland, whose value the government estimates at around 10% of GDP.
Sources: Ireland Central Statistics Office, Haver Analytics and
Moodys Investors Service
0 100 200 300 400 500 600 700 800 900
1,000 1,100 1,200 1,300
January February March April May June July August September
October November December
M
illio
ns
2014 2015
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
2010 2011 2012 2013 2014 2015F 2016F 2017F
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NEWS & ANALYSIS Credit implications of current events
29 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
Slovenias Privatisation Strategy Builds Momentum, a Credit
Positive Last Wednesday, the supervisory board of Slovenian
Sovereign Holding (SSH), Slovenias (Baa3 stable) asset management
and privatisation agency, approved the privatisation of Elan, a
sporting goods manufacturer. The approval is credit positive for
the sovereign because the government will use proceeds from the
sale for debt reduction and it indicates that the governments
privatisation strategy has built momentum over the past few months.
In addition to reducing government debt, the privatisations are an
important step in Slovenia addressing governance problems in some
of the countrys state-owned companies.
Elans privatisation is Slovenias sixth of 15 companies on the
governments initial list for state asset sales (see exhibit). The
government first put this list together in 2013, but until only
recently these sales had been hindered by a lack of political
consensus about the privatisation programme in general. Since then,
the Slovenian parliament has revised its strategy for managing 91
state-owned enterprises, adopting a plan in mid-July 2015 under
which the government classified 46 of the 91 companies as portfolio
investments and thus eligible for sale. Complementing the
governments divestment programme is the sale of distressed assets
through the Bank Asset Management Corporation, whose mandate the
government recently extended by five years to 2022 to avoid selling
off assets at fire-sale prices.
The First 15 Slovenian Companies Slated for Privatisation
Company Business Status
Aerodrom Ljubljana Airport operator Complete
Fotona Laser products Complete
Helios Industrial coatings producer Complete
ito Slovenias biggest food producer Sale and purchase agreement
signed in April 2015
NKBM Financial services Sale and purchase agreement signed in
June 2015
Elan Sports equipment SSH supervisory board granted conditional
consent for sale
Cinkarna Celje Chemicals Advanced
Adria Airways Airline Invitations for expressions of
interest
Telekom Slovenije Telecoms Sale stalled because of changes to
buyers offer
Aero Celje Chemicals In bankruptcy
Terme Olimia Spa operator Not started
Gospodarsko razstavie Ljubljana fair and event manager Not
started
Paloma Paper and tissue producer Not started
Unior Tooling and tourism Not started
Adria Airways Tehnika Aircraft maintenance Not started
Sources: Slovenian Sovereign Holding and Slovenia Ministry of
Finance
Elan is being sold to Merrill Lynch International and Wiltan
Enterprises Limited. The sale is subject to some non-financial
commitments by the buyers, including the preservation of Slovenian
as the language of communication with employees and the honouring
of existing collective bargaining agreements and other social deals
struck with the employees or the workers council.
According to the European Commission, the Slovenian government
is the countrys largest employer, asset manager and corporate
debtor, employing one fifth of all workers in non-financial
corporates, and holds about one third of the countrys corporate
assets. In its latest Macroeconomic Imbalances report, the European
Commission cited high state involvement in the economy as being a
drag on the economy.
Sarah Carlson Senior Vice President +44.20.7772.5348
[email protected]
Stefan Triendl Associate Analyst +44.20.7772.5560
[email protected]
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NEWS & ANALYSIS Credit implications of current events
30 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
The government will use the funds raised through the
privatisation programme to reduce the debt stock, complementing the
governments fiscal consolidation efforts. The debt stock was 80.9%
of GDP at the end of 2014 and we expect it to peak at around 82% of
GDP this year and slowly decline thereafter. We do not include
asset sales in our forecasts, but any privatisation proceeds will
prompt us to revise debt forecasts downward.
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NEWS & ANALYSIS Credit implications of current events
31 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
US Public Finance
Michigan Supreme Court Affirms State Pension Reforms, Credit
Positive for the State Last Wednesday, the Michigan Supreme Court
ruled in favor of the State of Michigans (Aa1 stable) pension
reforms, which took effect in April 2012. The courts ruling is
credit positive for Michigan because it preserves a requirement
that employees participating in the State Employees Retirement
System (SERS) defined-benefit plan contribute toward their pensions
along with the state. The ruling also prevents the states pension
fund from having to draw down assets to refund accumulated employee
contributions.
The state passed Public Act 264 in 2011, which took effect in
April 2012 and gave current employees a choice between contributing
4% of their salaries going forward, and enrolling in a defined
contribution plan for future years of service. Before April 2012,
state employees were not required to contribute toward their
pensions, meaning the only contributions into the plan came from
the state.
A coalition of employee labor groups filed a lawsuit claiming
the states reforms violated the state constitution. Michigans
constitution provides the Civil Service Commission with the
authority to oversee public employee rates of compensation and
conditions of employment. The labor groups claimed that the state
legislature usurped the commissions authority when it required
state employees to begin contributing to their pensions. A lower
court and a state appellate court both sided with the labor groups,
and declared the states reforms unconstitutional. However, the
Michigan Supreme Court disagreed, finding that the commission does
not have the authority to repeal or revise legislation, and that
pension benefits do not fall under the commissions constitutional
purview.
Had the state not prevailed, the pension fund would have had to
refund accumulated employee contributions, which the state
estimates now total $134 million. The state would have to make up
this loss over time as it amortized the plans unfunded
liability.
An adverse ruling also would have removed a key source of annual
pension funding that the state would have to assume going forward,
an amount we estimate totaled more than $40 million in both 2013
and 2014. Although these employee contributions are relatively
small compared with the states annual operating budget of more than
$25 billion, they have recently helped bolster annual plan funding
relative to the annual required contribution (ARC) determined by
plan actuaries (see exhibit).
Tom Aaron Assistant Vice President - Analyst +1.312.706.9967
[email protected]
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NEWS & ANALYSIS Credit implications of current events
32 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
State and Employee Contributions to Michigans SERS Pension Plan
Versus the Annual Required Contribution
Note: We estimate the employee contributions associated with 4%
of payroll requirement based on covered payroll for each year and
the effective date of the reforms. The exhibit excludes employee
contributions for purchased service credit. Annual required
contribution includes employee requirement 2012-14. Sources:
Michigan State Employees Retirement System Comprehensive Annual
Financial Report and Moodys Investors Service
Michigans state employee pensions are somewhat unique compared
with other states and local governments because the state
eliminated defined benefit pensions for new state employees long
ago. Rather than participating in SERS, employees hired after March
1997 receive retirement benefits through a defined contribution
plan. Thus, the states 2012 reforms requiring employee
contributions affected only employees who were already working for
the state and participating in SERS by March 1997.
$0
$100
$200
$300
$400
$500
$600
$700
$800
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
$ M
illio
ns
State Employee Annual Required Contributions
-
NEWS & ANALYSIS Credit implications of current events
33 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
Glendale, Arizona, Renegotiates Smaller Subsidy to Pro Hockey
Team, a Credit Positive Last Friday, the Glendale, Arizona (A3
positive), city council voted to amend its arena management
agreement with the owners of the National Hockey Leagues Arizona
Coyotes. The amended agreement is credit positive because it
reduces the citys costs related to professional sports
enterprises.
The term of the arena agreement was shortened significantly to
30 June 2017 from 2028 and the annual management fee payable by
Glendale was reduced to $6.5 million from $15 million. Net
short-term savings to the city will be approximately $3.6 million
annually through the fiscal year ending 30 June 2017 because the
Coyotes ownership will now collect approximately $5 million
annually from ticket surcharges and parking fees from arena events
that were previously paid to the city.
The city councils actions also rescinded the full cancellation
of the arena management agreement that was approved on 10 June
2015, but was halted by a restraining order from the Maricopa
County Superior Court. The amended agreement removes litigation
risk to the city because the owners of the Coyotes, IceArizona
Manager Co. LLC, a subsidiary of Renaissance Sports and
Entertainment, will no longer pursue a civil suit for $200 million
of damages that stemmed from the citys attempt to cancel the arena
agreement.
The city was obligated to pay the teams owners $225 million
under the 2013 original agreement, or $15 million annually for 15
years, to manage the city-owned and financed Gila River Arena.
Amending the agreement reduces the citys net costs of the Coyotes
to 2.9% of budgeted operating revenues for fiscal 2016 from 4.4%
under the original agreement (see exhibit).
Glendales Costs and Revenues under Arena Agreement
Source: Glendale, Arizona
Glendale currently does not have an arena management contract
after fiscal 2017 and will have to hire for arena management
services, either with the Coyotes or another third party, but the
expected cost of those services will be less onerous than the prior
$15 million annual fee and will align with the reported competitive
market rate of $6.5 million. The Coyotes may opt to relocate after
the arena agreement ends following the 2016-17 season, although the
teams owners and the city publicly indicated that they want the
team to remain in Glendale.
The citys long-term costs related to the Coyotes include debt
service on approximately $133 million of long-term debt outstanding
until 2033. The debt-financed construction of the arena is secured
by the citys general excise taxes, a key operating resource.
Glendale expects to appropriate annual transfers from its general
fund or seek other measures to offset more than $39 million of
internal transfers that the city
($8.40)
($4.80)
-$16-$14-$12-$10-$8-$6-$4-$2$0$2$4$6$8
Original Agreement Amended Agreement
$ M
illio
ns
Fiscal Year 2016
Arena Management Fee & Capital Contribution Shared Arena
Revenues with Coyotes Net Costs to Glendale
Pat Liberatore Analyst +1.415.274.1709
[email protected]
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NEWS & ANALYSIS Credit implications of current events
34 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
previously made to its general fund from its environmental
enterprises; these transfers supported subsidies of $25 million
annually that the city owed the National Hockey League in fiscal
2011 and 2012, when the league temporarily managed the arena and
the Coyotes before the team secured a long-term owner.
-
RATING CHANGES Significant rating actions taken the week ending
31 July 2015
35 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
Corporates
Advanced Micro Devices, Inc. Downgrade 21 Apr 15 28 Jul 15
Corporate Family Rating B3 Caa1
Outlook Negative Negative
The downgrade reflects our expectation that the company will
face ongoing operating losses over the next year and negative free
cash flow. It also reflects ongoing revenue declines and operating
losses in its PC-related business (microprocessors and graphics
chips) that will more than offset the expected profitability in the
companys embedded and semi-custom chip business.
Gardner Denver, Inc. Outlook Change 9 Jul 13 29 Jul 15
Corporate Family Rating B2 B2
Outlook Stable Negative
The outlook change reflects our concerns about Gardner Denvers
significant exposure to upstream energy (estimated at about 25% of
sales) and our expectations that lower volumes and pricing pressure
in these markets will lead to a material weakening of credit
metrics over the next 12 to 18 months.
Italcementi S.p.A. Review for Upgrade 31 Jul 14 29 Jul 15
Corporate Family Rating Ba3 Ba3
Outlook Positive Review for Upgrade
The review for upgrade follows the announcement that
HeidelbergCement will acquire the 45% interest in Italcementi owned
by Italimobiliari and will make a tender offer to acquire the
companys remaining public shares. The review will consider the
potential for the companys credit profile to be strengthened as
part of the larger and less financially leveraged HeidelbergCement
Group.
Peugeot S.A. Outlook Change 19 Feb 15 30 Jul 15
Corporate Family Rating Ba3 Ba3
Outlook Stable Positive
The outlook change reflects the companys successful progress on
its turnaround strategy, which, together with favorable market
conditions, has supported better margins in the first six months of
2015.
-
RATING CHANGES Significant rating actions taken the week ending
31 July 2015
36 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
Teva Pharmaceutical Industries Ltd Downgrade 21 Apr 15 27 Jul
15
Long-Term Issuer Rating A3 Baa1
Outlook Negative Review for Downgrade
The downgrade reflects Tevas demonstration of more aggressive
financial policies and its willingness to tolerate a level of
leverage that no longer supports the A3 rating. We expect that pro
forma debt to EBITDA (before synergies) will rise to approximately
4.6x from 2.0x currently.
Financial Institutions
Actions Taken on StanCorp Group Review for Upgrade 27 Jul 15
We placed on review for upgrade the senior debt ratings of
StanCorp Financial Group, Inc. at Baa2. The placement on review
follows Meiji Yasuda Life Insurance Companys announcement of its
proposed acquisition of all outstanding stock of StanCorp for about
$5 billion in cash in a transaction expected to close by end of the
first quarter of 2016. We note that the acquirer is a higher rated
company and expect that Meiji Yasuda will provide support to
StanCorps creditors to protect the $5 billion investment.
OJSC Bank of Baku Outlook Change 12 Dec 13 30 Jul 15
Long-Term Bank Deposits B1 B1
Outlook Stable Negative
The outlook change reflects increased pressure on OJSC Bank of
Bakus asset quality and profitability, driven by the weakening of
its borrowers creditworthiness on the back of unhedged foreign
currency risk, accelerated inflation and elevated cost of
funds.
-
RATING CHANGES Significant rating actions taken the week ending
31 July 2015
37 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
US Public Finance
Michigan (State Of) Upgrade 25 Mar 14 24 Jul 15
GO Bonds Aa2 Aa1
Revenue Bonds Aa3 Aa2
Outlook Positive Stable
The upgrade reflects improvement in the states financial
position, particularly growth in the states rainy day fund,
bolstered by a strong tax revenue trend and a robust growth rate in
the economy that has featured an improvement in the auto
sector.
Southeast Housing, LLC Upgrade 1 Aug 14 27 Jul 15
Revenue Bonds Ba3 Ba2
Outlook Stable Stable
The upgrade reflects improved financial performance following
debt restructuring and mitigation of litigation risk over property
taxes. It also reflects our projections for solid financial
performance, full occupancy, including a substantial number of
units rented to non-active military service members, and an
increase in the basic allowance for housing for 2015.
Structured Finance
26 Tranches from Eight Subprime RMBS Transactions Upgraded We
upgraded the ratings of 26 tranches from eight subprime RMBS
transactions backed by subprime mortgage loans, affecting $1.05
billion. The upgrades reflect the recent performance of the
underlying pools and our updated loss expectations on the pools.
The upgrades also account for the build-up in credit enhancement
owing to the sequential pay structure, non-amortizing subordinate
bonds and availability of excess spread.
-
RESEARCH HIGHLIGHTS Notable research published the week ending
31 July 2015
38 MOODYS CREDIT OUTLOOK 3 AUGUST 2015
Corporates
US Homebuilders Outlook Is Positive on Improving Job Market,
Limited Supply of Homes Our outlook on the US homebuilding industry
remains positive. Employment in the US continues to grow, with
about three million jobs created in the last year alone. This
improvement, alongside pent-up demand and low housing supply,
should support solid growth for US homebuilders through 2015 and
2016. Asian Corporates Can Expect Ongoing Negative Credit Trends
The credit trend for Asia Pacific (including Japan and Australia)
corporates remained negative in Q2 2015. Although there were more
positive rating actions than negative ones, 21 of the 29 positive
actions were driven by sovereign rating actions or other changes
unrelated to the issuers standalone credit profiles. Excluding such
actions, the number of positive rating actions as a result of
changes in the standalone credit profiles of the corporate entities
totaled just eight, only about half that of negative rating
actions. European Alcoholic Beverage Manufacturers: Regulation Will
Curb Profitability Growth in India Despite Growing Economy and
Increased Consumption Indias alcoholic beverage market has strong
long-term potential for European producers, supported by strong
economic growth prospects, rising disposable incomes and an
increasing social acceptance of alcohol consumption. We expect beer
volume growth of 8.8% a year in 2015-18, albeit from a low base,
and spirits segment volume growth to moderate to around 3.7% a
year, more in line with the global average. US Chemicals:
Refinancing Risk is Rising for Select High-Yield Chemical Companies
About one fifth of our B-rated chemicals portfolio has about $5
billion of debt maturing in 2017 and 2018. Most were initially
rated in the last few