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MOODYS.COM
25 JANUARY 2016
NEWS & ANALYSIS Corporates 2 » Johnson & Johnson Job Cuts Will Create Efficiencies and
Reinvestment Opportunities » Performance Deterioration at Key Subsidiaries Weighs on
Baosteel Group's Credit Quality » Semiconductor Manufacturing Int'l Benefits from Shanghai
Integrated Circuit Investment
Infrastructure 6 » US Federal Appeals Court Ruling Is Credit Negative for Coal-
Dependent Sectors and States » Sabesp Considers Suspending Water Conservation Program
Amid Improved Supply, a Credit Positive » Rising Cost of Nuclear Waste Storage Is Credit Negative for
Electricité de France
Banks 9 » Energy-Driven Capacity Utilization Decline Portends Broader
Downturn in US Banks' Commercial Credit Quality » Leading Brazilian Banks Create Centralized Credit Bureau, a
Credit Positive » UK Enforcement Action against Former Co-Operative Bank
Executives Is Credit Positive for All Banks » National Bank of Greece's Finansbank Sale Will Enhance
Liquidity and Capital » Poland's New Tax Threatens Banks' Profitability, a
Credit Negative » Russia Revises Bank Resolution Framework, a Credit Negative
for Corporate Depositors, but Positive for Individual Depositors » Swedish Banks' Risks Will Decline If Moderate Depreciation of
Swedish Home Prices Is Sustained » A Protracted Period of Low Oil Prices Is Credit Negative for
Nigerian Banks » Bank of Tokyo-Mitsubishi UFJ Buys 20% Stake in Filipino Bank,
a Credit Positive
Insurers 23 » Argentina's About Face on Foreign-Currency Assets and
Infrastructure Investments Is Credit Positive for Insurers » Zurich Insurance Fourth-Quarter Expected Net Loss Is
Credit Negative
Sovereigns 26 » Return of Ebola Challenges Sierra Leone's Economic Recovery » Georgia Will Benefit from Ukrainian Trade Passing Through
the Sovereign
US Public Finance 30 » Atlantic City Moves Closer to Default and Bankruptcy after
Governor Vetoes Aid Package
CREDIT IN DEPTH US Collateralized Loan Obligations 32
The weakening credit quality of oil exploration & production companies and oilfield services companies is credit negative for US CLOs. We placed on review for downgrade the ratings of a large number of these companies, reflecting our expectation that their credit quality will decline with oil prices. Among the US CLOs we rate, seven have exposures of 5% or more to the companies we placed on review for downgrade.
RATINGS & RESEARCH Rating Changes 34
Last week, we downgraded Ecopetrol, McDermott International, Wynn Resorts, VTB Bank (Azerbaijan), OJSC Bank of Baku, UniBank Commercial Bank, MBIA Mexico and Baltinvestbank, and we upgraded ACE Seguros, among other rating actions.
Research Highlights 38
Last week, we published on European food retailers, China’s metro companies, Singapore’s industrial REITs, US fallen angels, US covenant quality, US lodging and cruise, global oil and gas, US speculative grade liquidity, Mexican state-owned development banks, the Kyrgyz Republic, Germany, China’s regional and local governments, US prime auto loan ABS, European CMBS, India and China securitization, US ABS, US CMBS and European RMBS & ABS, among other reports.
RECENTLY IN CREDIT OUTLOOK
» Articles in Last Monday’s Credit Outlook 42 » Go to Last Monday’s Credit Outlook
NEWS & ANALYSIS Credit implications of current events
2 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Corporates
Johnson & Johnson Job Cuts Will Create Efficiencies and Reinvestment Opportunities Last Monday, diversified healthcare company Johnson & Johnson (J&J, Aaa stable) announced plans to eliminate 4%-6% of the global workforce within its Medical Devices segment – or 2.5% of its entire workforce. The company expects that the restructuring will save between $800 million and $1 billion a year pre-tax by 2018.
Although the move highlights the challenges that J&J faces across its Medical Devices segment, it is credit positive because it will improve J&J’s earnings potential and provide opportunities for the company to redeploy the savings into higher-growth product areas. It also averts a credit-negative scenario in which J&J would sell the segment’s business lines and use the proceeds to repurchase shares.
The targeted cost savings of up to $1 billion equals about 4% of J&J’s 2015 EBITDA. Although the savings will help improve J&J’s operating margins, we expect that it will reinvest the majority of the savings into the business. J&J has a long history of product innovation, and will use the savings for both product development and geographic expansion. Pre-tax charges will total $2.0-$2.4 billion, with about 50% being severance and other cash outflows, and the majority of the remainder being asset write-downs. The cash outflows are modest compared with J&J’s existing cash and investments, reported at $37 billion as of 27 September 2015.
Challenges facing the Medical Devices segment include soft demand for some products, pricing pressure and slowing growth in emerging markets. The unit is very large with $25 billion of annual revenue (about 35% of J&J’s total) and spans many diverse areas, including orthopaedics, cardiovascular, surgery, vision and diabetes – the latter two of which are unaffected by the restructuring.
Johnson & Johnson’s Medical Devices Sales for the Nine Months that Ended 27 September 2015 Division Revenues $ Millions Growth Rate versus Prior Period
Orthopaedics $6,839 0.8%
Surgical Care $4,271 1.3%
Specialty Surgery $2,533 3.3%
Vision Care $1,960 -0.2%
Cardiovascular $1,597 5.4%
Diabetes $1,448 -1.6%
Total Medical Devices* $18,710 -2.9%
Notes: * Also includes diagnostics revenues. Growth rate excludes foreign-currency exchange.
Source: Johnson & Johnson
The orthopaedics business, in particular, faces weak growth owing to heavy competition from other implant makers, fewer elective surgical procedures and ongoing pricing pressure. In addition, Medicare reimbursement for orthopaedic procedures in the large US market is transitioning toward a “bundled” approach, which we expect will create pricing pressure. Under bundling, hospitals are responsible for all of the costs and quality of care related to hip or knee procedures. As a result, we expect that hospitals will seek to extract the best value they can from their device vendors.
Michael Levesque, CFA Senior Vice President +1.212.553.4093 [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.
NEWS & ANALYSIS Credit implications of current events
3 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Performance Deterioration at Key Subsidiaries Weighs on Baosteel Group’s Credit Quality Last Wednesday, Baoshan Iron & Steel Co. Ltd. (BISC, A3 stable), a key subsidiary of Baosteel Group Corporation (A3 stable), said that its 2015 profit before tax dropped 78% to RMB1.8 billion, owing to weak pricing, foreign exchange loss and asset impairments. On 16 January, Xinjiang Bayi Iron & Steel (Bayi, unrated), another Baosteel subsidiary, announced that it had incurred a net loss of about RMB2.5 billion in 2015 – its second consecutive year of losses – because of steel market oversupply, severe price declines and asset impairments. Based on its listing rules, the Shanghai Stock Exchange will issue a notice to inform investors about the delisting risk of Bayi.
The subsidiaries’ weak performance will depress Baosteel Group’s earnings and cash flows, and will likely result in it having additional financing needs, a credit negative.
We expect Baosteel Group’s earnings in 2015 to be much lower than the RMB5.9 billion reported for 2014 given the substantial earnings decline at its key subsidiaries. However, Baosteel Group’s earnings are also likely to benefit from the material and increasing profit contribution from its non-steel businesses and investment income.
Similarly, Baosteel Group’s 2015 operating cash flow will weaken substantially from its 2014 level because of lower earnings and the absence of a large working capital release from iron ore procurement. This means increased external borrowings to support its final investments in its new steel project in Zhanjiang, China. We expect Baosteel Group’s gross debt/EBITDA to rise to 5.5x in 2015 from 4.6x in 2014.
As China switches its growth driver to consumption from fixed-asset investments, domestic steel production fell by 2.3% in 2015, its first decline in the past three decades, according to the National Statistics Bureau. Amid persistent oversupply, average steel prices in China eroded by about 30% in 2015 and outpaced iron ore price declines for most of the year, thus depressing steel producers’ earnings. Bayi, which operates in the relatively isolated western part of China, was most adversely affected because of severe local market downturns and its reliance on captive iron ores that are costlier than seaborne iron ores.
BISC, with its competitive technology and value-added products, will likely improve its earnings this year. In particular, its RMB2 billion foreign exchange loss recorded in third-quarter 2015 is unlikely to recur in 2016 because the company substantially reduced its foreign-currency exposure by entering into currency swaps during the third quarter. BISC also initiated a cost-saving program of up to RMB4 billion in 2016.
We expect Baosteel Group to accelerate Bayi’s restructuring, support its liquidity and shore up its dwindling equity base given the subsidiary’s large steel capacity in strategically important western China. Such financial commitments will likely increase Baosteel Group’s borrowings or reduce its financial investments, which serve as a cushion against the volatile steel industry. Additionally, the delisting warning by the Shanghai Stock Exchange highlights the limited likelihood of raising additional equity financing for Bayi in the open market, which leaves the parent to address the Bayi’s business loss and capital calls.
Jiming Zou Vice President - Senior Analyst +86.21.2057.4018 [email protected]
Danny Chan Associate Analyst +86.21.2057.4033 [email protected]
NEWS & ANALYSIS Credit implications of current events
4 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Semiconductor Manufacturing Int’l Benefits from Shanghai Integrated Circuit Investment On 18 January, the Shanghai Integrated Circuit Investment Fund announced that it would invest RBM20 billion in Semiconductor Manufacturing International Corporation (SMIC, Baa3 stable) and two other Shanghai-based semiconductor manufacturing companies. The Shanghai Integrated Circuit Fund has designated RMB30 billion of its RMB50 billion of assets under management to support the semiconductor manufacturing and equipment industries in the Yangtse River Delta region.
The investment is credit positive for SMIC because the foundry industry is capital intensive and SMIC, which is the most advanced Chinese foundry player, requires RMB5-RMB6 billion of capital expenditure annually to grow its business. The Shanghai Integrated Circuit Investment Fund capital injection will strengthen SMIC’s already solid balance sheet.
As shown in Exhibit 1, assuming SMIC receives one third of the RMB20 billion investment, it will significantly increase SMIC’s cash buffer to fund its ongoing 28-nanometer capacity expansion and the construction of new 12-inch wafer fabrication facilities.
EXHIBIT 1
Semiconductor Manufacturing International’s Sources and Uses of Cash
Sources: Moody’s Financial Metrics and Moody’s Investors Service estimates
The investment also demonstrates both central and local government support for leading semiconductor players. Shanghai Integrated Circuit Investment Fund’s move followed the China National Integrated Circuit Fund’s $400 million investment in SMIC in February 2015. We consider the national and local government investment in SMIC evidence of its strategic importance to China’s integrated circuit industry.
According to Gartner, a global technology consulting firm, China is currently the largest market for semiconductor components and accounted for 57% of the global consumption in 2014. The majority of this demand is met by imports because local supply is insufficient to meet demand. China Semiconductor Industry Association estimates the consumption and production gap reached $120 billion in 2014 (Exhibit 2). In view of insufficient local supply, the Chinese government has made the development of a local integrated circuit industry a priority in its agenda.
-2-10123456789
2013 2014 LTM 06/15 2015F 2016F
RMB
Billi
ons
Cash & Cash Equivalents Short-term InvestmentsCash from Operations Estimated Investment from Shanghai IC FundCapex
Lina Choi, CFA Vice President - Senior Credit Officer +852.3758.1369 [email protected]
Dan Wang Associate Analyst +852.3758.1529 [email protected]
NEWS & ANALYSIS Credit implications of current events
5 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
EXHIBIT 2
China’s Integrated Circuit Consumption and Production Gap
Sources: China Center for Information Industry Development Consulting, China Semiconductor Industry Association, and PricewaterhouseCoopers
Integrated circuit design in China will continue to grow at 20.1% CAGR per annum in the next five years, according to IEEE Conference on Wireless Sensor and the China Semiconductor Industry Association. This compares with the global CAGR of 6.6%. SMIC has established customer relationships with home-grown integrated circuit design players and stands to benefit from higher growth rates.
-$120-$160
-$120
-$80
-$40
$0
$40
$80
$120
$160
$200
$240
2010 2011 2012 2013 2014 2015F 2016F 2017F
$ Bi
llion
s
Consumption Production Gap
NEWS & ANALYSIS Credit implications of current events
6 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Infrastructure
US Federal Appeals Court Ruling Is Credit Negative for Coal-Dependent Sectors and States Last Thursday, a three-judge panel of the US Court of Appeals for the District of Columbia Circuit denied an application seeking to stay the US Environmental Protection Agency’s (EPA) Clean Power Plan rule while litigation is ongoing. The Clean Power Plan, released in August 2015, establishes statewide carbon dioxide emissions standards for existing fossil fuel-fired electric generating units, with the goal of cutting CO2 emissions 32% by 2030 versus a 2005 baseline.
The denial is credit negative for big coal-fired generators such as NRG Energy, Inc. (Ba3 stable) and Dynegy Inc. (B2 positive) and more than 300 US Midwest cities that financed new coal-fired units with $9 billion of revenue bonds. The ruling is also credit negative for states such as West Virginia (Aa1 negative) and Kentucky (Aa2 stable), which benefit from coal-related severance tax revenue (which applies to the extraction of natural resources such as coal) because the Clean Power Plan will accelerate the transition to cleaner electricity supplies at the expense of coal.
NRG and Dynegy both have substantial coal generation assets that would be negatively affected. The cities’ new coal-fired units, which are highly efficient and meet all current EPA environmental regulations, will be subject to state implementation plans under the Clean Power Plan. To comply, the coal-fired units might have to run less or could be subject to a carbon cap-and-trade program.
The affected states will continue to be negatively affected by the protracted decline in coal consumption, which is hampering severance tax revenue, coal employment and income. West Virginia collects severance taxes equal to 7% of general fund revenues, while Kentucky collects 1.8%. West Virginia estimates net coal severance tax revenues will fall to $198 million in fiscal 2016, a 29% decline from fiscal 2015 net collections of $277 million, although a portion of the decline is due to an increase in the share of revenues distributed to local governments. A coalition of states led by West Virginia and several business groups requested the Appeals Court to grant the stay. Prior to the court’s decision, coal sales were expected to slightly rebound in fiscal 2017. The exhibit below shows the decline in coal sales in West Virginia.
West Virginia Projects a Significant Decline in Fiscal 2016 Coal Sales and Average Price, November 2015 Forecast
Fiscal 2015 Fiscal 2016 Fiscal 2017 Fiscal 2018
Coal Sales in Million Tons $112.8 $85.0 $92.0 $90.9
Average Price per Ton $64.7 $62.0 $60.3 $60.1
Note: Numbers for the fiscal year ended 30 June 2015 are baseline actual figures.
Source: State of West Virginia
Although the rule is in effect for the duration of the litigation period, it is not a final ruling. We expect the Appeals Court to hear oral arguments on 2 June and decide whether the regulation is legal, and expect that the D.C. Circuit Court will have a decision on the larger case before year-end. The judges ordered participants to submit a proposed format for briefing by 27 January, and a proposed schedule that ensures initial briefs are filed by 15 April and finalized by 22 April.
Although regulators telegraphed the standards for more than a year, some coal-heavy states found the rule surprising because their targets were more stringent than under earlier versions of the proposal. As a compromise, the EPA eased the timeline for compliance to 2022 and established an early incentive program for energy efficiency and renewable energy projects.
Genevieve Nolan Vice President - Senior Analyst +1.212.553.3912 [email protected]
Anne Cosgrove Vice President - Senior Analyst +1.212.553.3248 [email protected]
Dan Aschenbach Senior Vice President +1.212.553.0880 [email protected]
Jim Hempstead Associate Managing Director +1.212.553.4318 [email protected]
NEWS & ANALYSIS Credit implications of current events
7 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Sabesp Considers Suspending Water Conservation Program Amid Improved Supply, a Credit Positive Last Monday, Companhia de Saneamento Basico do Estado de Sao Paulo (Sabesp, Ba1 negative) CEO Jerson Kelman announced that an increase in water reservoir levels would allow the company to suspend a subsidized bonus program in place since February 2014 that rewards consumers for reducing their water consumption. If carried out, suspension of the bonus program would contribute to a recovery in the company’s revenues and cash flow generation, a credit positive.
Sabesp’s bonus program hurt revenues by around BRL1 billion (9% of net revenues) in the 12 months to 30 September 2015. In December 2015, Sabesp reduced the scope of its bonus program by raising the threshold (i.e., the minimum amount of consumption reduction) for consumers to receive a bonus. Reacting to the gradual but marked increase of water reservoir levels, Sabesp requested and received approval from Brazil’s water regulator, Agência Nacional de Águas, to increase production out of the Cantareira water system, Sabesp’s largest reservoir, to 19 cubic meters per second (m3/s), from 15.5 m3/s currently.
Rainfall and lower consumption allowed Sabesp’s water reservoirs to recover last year. At the end of 2015, water levels had increased by 402 million cubic meters, the equivalent of half of Cantareira’s water reservoir capacity. In October 2015, water inflows into Sabesp’s reservoirs doubled to 52.7 m3/s from 25.7 m3/s the previous year. In September, the company completed the interconnection between the water reservoirs Rio Pequeno - Rio Grande in the Billings water system and Taiaçupeba in the Alto Tietê system thereby increasing its production capacity by an additional 4 m3/s.
In the nine months that ended 30 September 2015, Sabesp’s water supply and sewage volumes declined 8.4% from a year earlier, while its net revenues rose a modest 1.4%, partly helped by an authorized tariff increase of 15.24% in effect since June 2015. The company’s EBITDA grew by 24.7%, mainly driven by BRL1 billion in extraordinary income in the form of compensation from the state of Sao Paulo in first- quarter 2015.
Despite the prospects of an improvement in operating performance, Sabesp’s prevailing weak liquidity remains a major constraint on its ratings owing to the high exposure of the company’s foreign currency debt to real devaluation. The steep devaluation of the Brazilian real in 2015 led to the company’s debt/EBITDA ratio rising to 3.54x as of 30 September 2015 from 2.76x a year earlier. Although Sabesp’s leverage currently remains below the 3.65x required by its most stringent covenants, it will be challenging for the company to meet this leverage target in first-quarter 2016 given that from first-quarter 2016 onward, the EBITDA factored into the covenant calculation will no longer include the effect of the BRL1 billion of extraordinary income that Sabesp received in first-quarter 2015.
Financial covenants embedded in Sabesp’s debt would allow creditors to accelerate their debt payments if a breach were to occur over two consecutive quarters or in two quarters within a four-quarter period. Debt with the most stringent covenants held by foreign creditors constitutes less than 20% of Sabesp’s outstanding debt. In the current environment of improved water production capacity, we expect Sabesp to obtain waivers from creditors if needed, and to continue benefitting from its access to borrowing from banks and capital markets.
Paco Debonnaire Analyst +55.11.3043.7341 [email protected]
NEWS & ANALYSIS Credit implications of current events
8 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Rising Cost of Nuclear Waste Storage Is Credit Negative for Electricité de France On 15 January, the French government issued an order revising upward the costs associated with Cigéo, the country’s project for the long-term management of radioactive nuclear waste. This upward revision led Electricité de France (EDF, A1 negative), the country’s state-owned utility, to announce that it will need to raise the level of its nuclear provisions by €800 million at the end of 2015, equivalent to a €500 million post-tax effect on the company’s adjusted debt position.
Such an increase is credit negative for EDF because €500 million constitutes nearly 1% of the company’s net adjusted debt of €68.5 billion at 30 June 2015, and will add to existing pressure on the company’s credit quality. We estimate that EDF’s 14.2% ratio of retained cash flow/net debt for the 12 months that ended June 2015 would have been weaker by 10 basis points pro forma for the additional provisions.
Cigéo plans the storage of long-lived medium- and high-level radioactive waste produced by nuclear facilities in France in deep geological formations. The national agency for the management of radioactive waste (ANDRA) expects the storage facility to be commissioned in 2025 with an operating life of more than 100 years.
The 15 January order issued by the Ministry of Ecology, Sustainable Development and Energy sets the cost of Cigéo at €25.0 billion (at 2011 economic conditions) based on studies by ANDRA. The updated cost of Cigéo compares with a previous estimate of €20.8 billion (at 2011 economic conditions) and will be shared between EDF, nuclear services provider AREVA and public body Commissariat à l’Énergie Atomique (CEA).
Although the additional provision will further weigh on EDF’s financial ratios, the credit effect will ultimately depend on any mitigating measures that EDF and/or the French government implement. Notably, following the release of the ministerial order, EDF indicated that it will be up to the board of directors to determine the effect of the additional provision on its final dividend for the year ended 31 December 2015.
More generally, the need to book additional provisions illustrates the exposure of EDF’s credit metrics to the volatility of nuclear and pension liabilities, which accounted for around 30% of the company’s net adjusted debt position at 30 June 2015 (see exhibit below). Such liabilities are highly sensitive to underlying accounting and economic assumptions, including discount rate and estimated future costs.
Electricité de France’s Net Adjusted Debt at 30 June 2015
Liabilities at 30 June 2015 € Millions As a Percent of Total Net Adjusted Debt
Net Financial Debt €41,424 60%
Adjustment for Pension Liabilities €14,118 21%
Adjustment for Nuclear Liabilities €6,778 10%
Capitalised Operating Leases €3,660 5%
Hybrids €5,048 7%
Other (€2,543) (3%)
Net Adjusted Debt €68,485 100%
Sources: Electricité de France and Moody’s Financial Metrics
Paul Marty Vice President - Senior Credit Officer +44.20.7772.1036 [email protected]
NEWS & ANALYSIS Credit implications of current events
9 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Banks
Energy-Driven Capacity Utilization Decline Portends Broader Downturn in US Banks’ Commercial Credit Quality On 15 January, the US Federal Reserve (Fed) reported that US capacity utilization fell to 76.5 percent in December 2015 (3.6 percentage points below its long-run (1972–2014) average and the fourth consecutive month of decline, from a recent high of 79.0% in December 2014). Banks’ commercial credit quality has historically been strongly correlated with the industrial sector’s capacity utilization, making last month’s decline a credit-negative portent for US banks.
The Fed’s measure of capacity utilization covers manufacturing, utilities and mining, and is expressed as a percentage of total industrial capacity. The mining sector includes oil and gas extraction, a particular trouble spot recently given weakening energy commodity prices. In fact, mining capacity utilization has led the 2015 decline, falling much faster than the overall index. In December 2015, mining capacity utilization was 78.4%, down from 91.7% a year earlier. Manufacturing capacity utilization, the index’s largest component, has been relatively stable, dropping just 0.3% to 76.0% in December 2015 from 76.3% in December 2014.
US banks’ fourth-quarter 2015 earnings reports thus far reflect the divergence, showing notable deterioration in energy credit quality, but little deterioration elsewhere in their commercial loan books. Citigroup Inc. (Baa1 stable), Wells Fargo & Company (A2 stable) and Comerica Incorporated (A3 stable) are examples of banks whose results show the divergence.
The relationship between capacity utilization and US bank commercial and industrial (C&I) problem loans, as reported by the Federal Deposit Insurance Corporation (FDIC), is shown in Exhibit 1. Capacity utilization is shown on an inverted scale, which highlights the close correlation.
EXHIBIT 1
Falling Capacity Utilization Rates Portend Strained Corporate Profits and Higher Credit Costs for Banks
Sources: Federal Reserve and Federal Deposit Insurance Corporation
Given ongoing energy commodity price decline, we expect further deterioration in banks’ energy portfolios as 2016 unfolds, which makes banks’ overall asset quality metrics more vulnerable to broader deterioration if total capacity utilization weakens further. In that scenario, US banks’ would come to regret their rapid C&I growth in recent years. Exhibit 2 shows that from 2011 through the first half of 2015, US banks grew their C&I portfolios at a faster pace than their overall loan books.
66%
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C&I Nonperforming Loan Ratio - left axis Capacity Utilization Rate, Inverted Scale - right axis
Allen Tischler Senior Vice President +1.212.553.4541 [email protected]
NEWS & ANALYSIS Credit implications of current events
10 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
EXHIBIT 2
Rated US Banks: C&I and Total Loan Growth Rates, 2011-14 and Quarterly (Annualized) for 2015
Source: Federal Reserve
US banks were attracted to C&I as a means of diversifying away from real estate, which was the primary trouble spot of the last downturn. In addition, banks were attracted to C&I loans, even though they are generally low-yielding assets, because they present an opportunity to cross-sell other products. C&I relationships can also be a good source of deposits.
However, the attractiveness of C&I led to heightened competition among banks in recent years, with some lenders loosening their underwriting standards in an effort to grow and win business. If the economy sours, which would show itself in much weaker capacity utilization, marginal C&I credits will deteriorate and lead to rising loan loss provisions beyond banks’ energy portfolios.
0%
2%
4%
6%
8%
10%
12%
14%
16%
2011 2012 2013 2014 Q1 2015 Q2 2015 Q3 2015
C&I Loans Total Loans
NEWS & ANALYSIS Credit implications of current events
11 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Leading Brazilian Banks Create Centralized Credit Bureau, a Credit Positive Last Thursday, Brazil’s five largest banks announced a plan to create a credit intelligence bureau that will pool and centralize credit information on both corporate and personal borrowers. The creation of the bureau is credit positive because it will allow banks to make more informed lending decisions, improve credit quality and ultimately lead to lower problem loan ratios.
The banks involved are Banco do Brasil S.A. (Baa3/Baa3 review for downgrade, ba11), Banco Bradesco S.A. (Baa3/Baa3 review for downgrade, baa3 review for downgrade), Banco Santander (Brasil) S.A. (Baa3/Baa2 review for downgrade, baa3 review for downgrade), Caixa Econômica Federal (Baa3/Baa3 review for downgrade, ba3) and Itaú Unibanco S.A. (Baa3/Baa3 review for downgrade, baa3 review for downgrade). Together they constituted 68.8% of the Brazilian banking system’s loans as of September 2015, according to Brazil’s central bank.
By gaining access to each other’s broad databases of consumer and corporate borrowers, they will be able to analyze new credits more quickly, thereby boosting efficiency, and will benefit from enhanced ability to assess credit risk over the term of a loan.
The bureau will give banks an added tool to help navigate Brazil’s current economic recession. We estimate that Brazil’s GDP fell by 3.5% in 2015, and will contract another 3.0% in 2016, which will continue to put negative pressure on problem loan ratios. The ability to cross check the credit histories of varying types of borrowers over different time lines will improve loan performance monitoring, helping banks to reduce problem loans, which, according to Brazil’s central bank, were 3.3% of all loans system-wide as of November 2015, the highest level since May 2013.
Additionally, as the bureau gathers more information on a larger pool of market participants, banks will be able to more easily identify new potential long-term borrowers with higher credit quality. This will help foster more medium to long-term lending in Brazil, which is a key goal of the credit bureau, particularly for corporate borrowers.
The bureau will be set up as a corporation, with each partner bank holding a 20% equity stake. Its management and board of directors will be formed by members appointed by its shareholders, and will be entirely focused on the bureau’s operations. LexisNexis Risk Solutions FL Inc. (unrated) will act as the technical partner of the project through a service rendering agreement. Later, the bureau may also develop a suite of products that it can sell to third parties, which would provide an additional fee income stream to its shareholder banks.
The new bureau, which will be the only bank-owned agency of its kind in Brazil, is subject to final legal documentation and will require regulatory approval. Information on borrowers will only be held subject to their approval and in accordance with respective laws.
1 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating (where available) and baseline
credit assessment.
Farooq Khan Associate Analyst +55.11.3043.6087 [email protected]
NEWS & ANALYSIS Credit implications of current events
12 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
UK Enforcement Action against Former Co-Operative Bank Executives Is Credit Positive for All Banks On 15 January, the UK Prudential Regulation Authority (PRA) banned two former senior executives of Co-operative Bank plc (Caa2/Caa2 positive, caa22) from holding any senior positions at any regulated entity. Although there were no findings of dishonesty or lack of integrity, the regulator determined that former CEO Barry Tootell and Keith Alderson, the former managing director of the corporate and business banking division, did not exercise due skill, care and diligence in carrying out some aspects of their roles.
The PRA’s increasing focus on evaluating the performance of banks’ senior management is credit positive because it will strengthen bank executives’ commitment to implement robust independent risk and governance processes. In addition to its findings, the PRA ordered Mr. Tootell to pay £173,802 and Mr. Alderson to pay £88,890. Both penalties include a 30% discount for early settlement.
The PRA’s actions come ahead the introduction of the new senior management regime (SMR) in March, and illustrate UK regulators’ commitment to raise the level of accountability for senior bank managers. According to PRA Deputy Governor Andrew Bailey, Messrs. Tootell and Alderson each fell short of PRA’s expectations and their actions posed an unacceptable threat to the safety and soundness of the bank.
Despite multiple bank failures during the financial crisis, this marks the first time that UK regulators have banned a onetime bank CEO at a banking institution that nearly failed or had to be bailed out by taxpayers. This action results from the heightened political and regulatory focus on holding senior banking executives accountable for their actions, following the June 2013 findings and recommendations of the Parliamentary Commission for Banking Standards.
The 2013 Banking Reform Act incorporated the commission’s recommendations and has now provided the PRA and the Financial Conduct Authority with tools to strengthen accountability, including the SMR. The SMR introduces additional rules for persons performing management functions and will allow the regulator to take disciplinary action against senior bank managers if their actions adversely affect the safety and soundness of a regulated entity.
The increased vigilance of senior management activities will be also accompanied by the implementation of some reforms regarding remuneration aimed at aligning the risk and reward rules for bank decision-makers. If regulators can demonstrate that these initiatives are enforceable, these regulations will encourage senior bank executives to behave responsibly, a credit positive for banks. Additionally, since one of the main regulatory objectives is to prevent threats to the UK’s financial stability, the increased focus on the management of large institutions will benefit all institutions because it will reduce the likelihood of systemic crises.
2 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating and baseline credit assessment.
Carlos Suarez Duarte Vice President - Senior Analyst +44.20.7772.1061 [email protected]
NEWS & ANALYSIS Credit implications of current events
13 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
National Bank of Greece’s Finansbank Sale Will Enhance Liquidity and Capital Last Monday, National Bank of Greece S.A. (NBG, Caa3 negative, ca3) shareholders approved the sale of Turkish subsidiary Finansbank AS (Ba2/Ba2 negative, b1) to Qatar National Bank (QNB, Aa3 stable, baa1) for €2.75 billion. Although NBG is selling Finansbank at a loss of €780 million (of which €402 million in goodwill write-off) and the sale will significantly limit the geographic diversity of NBG’s assets and earnings, the transaction is credit positive because it will considerably enhance NBG’s liquidity and capital.
The deal, which was signed on 21 December, involves selling NBG’s 99.8% stake in Finansbank to QNB, plus the repayment by QNB of a $910 million subordinated loan NBG extended to Finansbank. This will enhance NBG’s liquidity by around €3.5 billion, which will allow the bank to repay its €2 billion high-cost contingent convertible capital instruments (CoCos)4 subscribed by the state-owned Hellenic Financial Stability Fund (HFSF) as part of the bank’s €4.6 recapitalisation last December. The bank expects to receive the funds from QNB in the first half of 2016, after receiving the required regulatory approvals.
In addition, NBG will be in a position to reduce the emergency liquidity assistance (ELA) received from the Bank of Greece (BoG). That assistance, which totalled a high €15.6 billion at the end of November 2015, is provided against collateral that the bank posts at the central bank, including €8.7 billion of government-guaranteed bonds. These bonds have a higher cost to NBG, owing to the guarantee fee NBG pays the government. Any decrease of the ELA will reduce the bank’s cost of funding this year, supporting its net interest margins and profitability amid lower revenues because of the Finansbank sale.
The quality and level of the bank’s capital will also benefit from the Finansbank sale because its pro forma common equity Tier 1 (CET1) ratio is likely to increase by more than 600 basis points to around 19.6%, excluding any CoCos. This would be the highest CET1 ratio among all Greek banks, providing an additional loss-absorption buffer to NBG’s creditors. Still, more than 60% of NBG’s capital will be in the form of deferred tax assets (DTAs) that totalled €4.9 billion as of September 2015 and are eligible to be converted into deferred tax credits (DTCs). We consider such DTCs as non-tangible equity owing to Greece’s (Caa3 stable) weak credit standing. Accordingly, as shown in the exhibit below, we estimate NBG’s pro forma tangible CET1 ratio (excluding any DTCs) to be around 7.5%, from a low 1.5% as of September 2015 before its recapitalisation and the sale of Finansbank.
National Bank of Greece’s CET1 Capital Ratio Evolution
Source: National Bank of Greece
3 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating (where available) and baseline
credit assessment. 4 These CoCos have a coupon of 8% per annum, while they mandatorily convert into equity if the bank’s common equity Tier 1
regulatory ratio drops below 7%.
9.6%
7.0%
8.0%-5.1%
-12.1%
7.5%
0%
5%
10%
15%
20%
25%
Reported CET1 - Sep2015
CET1 PostRecapitalisation
Effect of FinansbankSale
CoCos Repayment DTCs Removal Pro-forma TangibleCET1
CET1 = 19.6%
Nondas Nicolaides Vice President - Senior Credit Officer +357.25.586.586 [email protected]
NEWS & ANALYSIS Credit implications of current events
14 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Disposing of Finansbank will significantly limit the geographic diversity of NBG’s assets and earnings, increasing proportionally the bank’s exposure to Greece. Although NBG’s Turkish operations accounted for around 34% of its risk-weighted assets, they comprised a high 42% of its core revenues and have contributed significantly to its earnings during the past 10 years as part of NBG. As a result, NBG’s credit standing will now be highly dependent on its performance in Greece, where nonperforming loans comprised 33.8% of gross loans in September 2015 and challenges and downside risks are considerable.
NEWS & ANALYSIS Credit implications of current events
15 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Poland’s New Tax Threatens Banks’ Profitability, a Credit Negative On 15 January, Polish President Andrzej Duda signed a law introducing a new bank tax that obliges Polish lenders to make total annual payments equal to 44 basis points of their adjusted assets5 starting 1 February 2016. The law is credit negative for banks because we estimate that the tax will cost the sector about PLN4.4 billion (€1 billion) this year, equal to around 32% of banks’ annualised earnings for the first 10 months of 2015.6
The bank tax risks reducing by one third banks’ return on assets of 0.9% generated in the first 10 months of 2015 (on an annualized basis) and their return on equity of 8.5% for the same period. Such a decline in net income would reduce banks’ ability to absorb shocks.
The tax comes at a time when the current government is also considering imposing a conversion of foreign currency mortgages (which totalled 16% of total loans as of November 2015) into the local currency. If the conversion were to be enforced on unfavourable terms for banks, burdening them with substantial financial costs, it would threaten the stability of the banking sector. The tax also threatens to hurt credit growth because it reduces banks’ capital creation, which risks adversely affecting Poland’s economy and resulting in slower GDP growth. The bank tax introduction is one of the measures designed by the Law and Justice political party to finance the social spending expansion under the revised government budget for 2016.
Based on the latest available financials, we project that the cost for the vast majority of rated Polish banks, absent one-off items, will range between 16% of net profit for Bank Zachodni WBK S.A. (A3 stable, baa37) to 64% for Getin Noble Bank S.A. (Ba2 stable, b1) based on the annualisation of three quarters of 2015 earnings (see Exhibit 1). Of the remaining rated banks, Bank BGZ BNP Paribas S.A. (Baa2 stable, ba2) may report a loss in 2016 as a result of the tax, although this would largely depend on its ability to realise timely synergies from its merger with BNP Paribas Polska (unrated). Bank BPH S.A. (Ba2 stable, ba3) will be exempt from paying the bank tax because it is under a remedy program until the end of 20178 owing to very weak profitability.
5 Assets minus own funds, with the first PLN4 billion tax-free. It excludes Treasury securities and the bills issued by the Polish
National Bank, which are pledged under refinancing operations with the same institution. 6 We exclude the cost arising from the one-off obligatory contribution to the Bank Guarantee Fund in fourth-quarter 2015. See
Extraordinary Payment to Poland’s Bank Guarantee Fund Is Credit Negative for Banks, 30 November 2015. 7 The bank ratings shown in this report are the bank’s deposit rating and baseline credit assessments. 8 Institutions under a remedy program referred to in Article 142 of the Banking Law are exempt from the bank tax. The program,
which requires agreement with the regulator, is initiated upon the event of a balance-sheet loss or the endangerment of a bank’s solvency or liquidity.
Simone Zampa Vice President - Senior Credit Officer +44.20.7772.1425 [email protected]
Aleksandar Hristov Associate Analyst +44.20.7772.1071 [email protected]
NEWS & ANALYSIS Credit implications of current events
16 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
EXHIBIT 1
Potential Effect of Poland’s New Tax on Rated Banks versus Annualised 2015 Profits
Note: Calculations for annualised 2015 profit assume that in fourth-quarter 2015 banks will maintain profits at level similar to the first nine months of the year (or based on latest interim available financials), and are also normalised to exclude material one-off items. The tax for 2016 is applied only for 11 months. Source: Moody’s Investors Service
The forthcoming sale of Visa Europe Ltd. (unrated), in which some Polish banks have a stake, to Visa Inc. (A1 stable) will help those Polish banks offset part of the tax cost this year. In addition, we expect that banks will pass part of the cost related to the tax to their clients by increasing margins, although the highly competitive nature of the bank sector will limit their ability to do so.
Furthermore, the Polish banking system operates in a growing economy that we expect will report GDP growth of 3.4% this year, and is currently well capitalised, with a common equity Tier 1 (CET1) ratio of 14.3% as of September 2015, and a leverage ratio (tangible common equity to total assets) of 10.1% as of the same date (see Exhibit 2). These levels will help relieve any immediate negative pressure arising as a result of the tax.
EXHIBIT 2
Polish Banks’ Common Equity Tier 1 and Leverage Ratios as of Third-Quarter 2015
Sources: The banks, Polish Financial Supervision Authority and Moody’s Investors Service
-120%
-100%
-80%
-60%
-40%
-20%
0%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
PowszechnaKasa
OszczednosciBank Polski
Bank PolskaKasa Opieki
BankZachodniWBK S.A.
ING BankSlaski
mBank S.A. Getin NobleBank S.A.
BankMillennium
S.A.
Bank BGZBNP Paribas
S.A.
BankHandlowy wWarszawie
CreditAgricole Bank
Polska
PLN
Bill
ions
Annualised 2015 Profit - left axis Estimated Tax Cost for 2016 - left axis Projected Decline in 2016 Profit Owing to Bank Tax - right axis
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
PowszechnaKasa
OszczednosciBank Polski
Bank PolskaKasa Opieki
BankZachodniWBK S.A.
ING BankSlaski
mBank S.A. Getin NobleBank S.A.
BankMillennium
S.A.
Bank BGZBNP Paribas
S.A.
BankHandlowy wWarszawie
Bank BPH S.A. CreditAgricole Bank
Polska
Common Equity Tier 1 Ratio Tangible Common Equity / Total Assets Average CET1 Ratio for the Bank System
NEWS & ANALYSIS Credit implications of current events
17 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Russia Revises Bank Resolution Framework, a Credit Negative for Corporate Depositors, but Positive for Individual Depositors Last Tuesday, Russian Deputy Minister of Finance Alexey Moiseev announced that regulators intend to extend the bail-in bank resolution regime to corporate depositors, adding that individual depositors would likely be excluded from bail-in. The announcement sheds light on the new resolution and recovery concept currently under development by the Central Bank of Russia (CBR) and the Ministry of Finance, although further details have not yet been released. If adopted as announced, the new framework would be credit negative for corporate depositors because they would have to share losses in bank resolution. Currently, Russian legislation only provides for bail-in of subordinated creditors.
As of 1 December 2015, corporate depositors accounted for 42% of the sector’s total liabilities and composed the largest source of non-equity funding for Russian banks (see exhibit). We also expect that, in line with globally applied practices, the bail-in regime will be imposed on bondholders, although this source of funding is not substantial.9 The exclusion of individual depositors (32% of banks’ total non-equity funding) from the bail-in will benefit this category of depositors because they will have a substantial layer of other groups of creditors (subordinated creditors, senior bondholders and corporate depositors) that under the revised bank resolution framework will likely absorb most of the losses.
Russian Banks’ Non-Equity Funding Structure as of 1 December 2015
Source: Central Bank of Russia
As a G-20 member country, Russia is obliged to follow the Financial Stability Board (FSB) recommendations for bank resolution framework. In December 2014, Russian banking legislation was updated to allow bail-in of subordinated creditors through write-off or conversion of their debt to share capital. This approach was used in 2015 to resolve Bank Uralsib (Caa2 positive, ca10) and Svyaznoy Bank (unrated), whereby the regulator wrote off Bank Uralsib’s subordinated obligations totalling RUB21 billion (approximately $300 million) and Svyaznoy Bank’s subordinated obligations totalling €11 million after the banks had breached the write-off trigger of a common equity Tier 1 ratio of 2%.
Although no legal framework for bail-in of senior creditors currently exists in Russia, the regulator in 2015 began to selectively implement this concept through a conversion of large corporate deposits into long-term subordinated debt, where it deemed that the preservation of a failed but operating bank would reduce the cost of these failures for creditors. This approach was used in resolution of Fundservicebank (unrated) and Bank Tavrichesky (unrated). 9 The CBR reports separately only domestic ruble-denominated bonds, which at 1 December 2015 accounted for 2% of the sector
total non-equity funding. Banks’ foreign-currency-denominated bonds are reported as part of corporate deposits, and we estimate their share was around 5% of the sector total non-equity funding at 1 December 2015.
10 The bank ratings shown in this report are the bank’s local currency deposit rating and baseline credit assessment.
Corporate Deposits42%
Retail Deposits33%
Due to the CBR7%
Due to Banks11%
Local Bonds2%
Other Funding Sources5%
Olga Ulyanova Vice President - Senior Analyst +7.495.228.6078 [email protected]
NEWS & ANALYSIS Credit implications of current events
18 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Swedish Banks’ Risks Will Decline If Moderate Depreciation of Swedish Home Prices Is Sustained On 15 January, Svensk Mäklarstatistik, Sweden’s statistics agency for the real estate sector, published data that showed a moderate decline in house prices during fourth-quarter 2015 in areas that had previously recorded significant price inflation. For the entire country, prices of condominiums and houses rose a modest 1% in fourth-quarter 2015. Still, the data show that for 2015, condominium prices rose 16% and house prices rose 12%.
If the fourth-quarter’s moderate price decline is sustained, it would reduce the risk of a more dramatic house price correction, a credit positive for banks with large mortgage exposures (see Exhibit 1) because the collateral value backing existing exposures would remain sufficient. At the same time, banks would have less incentive to lend more aggressively.
EXHIBIT 1
Large Swedish Banks’ Direct Exposure to the Swedish Housing Market, SEK Billions
Swedbank Svenska
Handelsbanken SEB Nordea* SBAB Lansforsa-
kringar Bank Skandia-
Banken
Retail Mortgages in Sweden 668 639 450 392 204** 142 44
Total Lending in Sweden 1,184 1,166 1,010 866 284 196 46
Total Global Lending 1,370 1,855 1,357 2,858 284 196 46
Retail Mortgages in Sweden as Percent of Total Lending in Sweden
56.4% 54.8% 44.5% 45.2% 71.7% 72.3% 97.0%
Retail Mortgages in Sweden as Percent of Total Global Lending
48.7% 34.4% 33.2% 13.7% 71.7% 72.3% 97.0%
Notes: Mortgage retail lending data are as of 30 September 2015. * SEK values for Nordea are based on exchange rate of 9.3538 SEK/EUR as of 30 September 2015. ** Values for SBAB exclude lending to tenant-owner associations of approximately SEK52 billion.
Sources: The banks and Moody’s Investors Service
House prices in Sweden have more than tripled over the past 20 years, vastly exceeding the country’s GDP growth of 62% over the same period. The latest house price data, however, suggest slowing price appreciation. Prices in the central areas of Stockholm, Gothenburg and Malmö, all of which recorded Sweden’s largest increases, have begun to decline (see Exhibit 2).
EXHIBIT 2
House Price Trends in Major Swedish Cities, Indexed to 100 at January 2015
Note: Condominium prices as measured by Swedish krona per square meter on a three-month rolling basis. Source: Svensk Mäklarstatistik
100
102
104
106
108
110
112
114
Jan 2015 Feb 2015 Mar 2015 Apr 2015 May 2015 Jun 2015 Jul 2015 Aug 2015 Sep 2015 Oct 2015 Nov 2015 Dec 2015
Central Stockholm Central Gothenburg Central Malmö
Giovanni Fontana Vice President - Senior Analyst +44.20.7772.1475 [email protected]
Mathias Kuelpmann, CFA Senior Vice President +49.69.7073.0928 [email protected]
Alexander Zeidler Vice President - Senior Credit Officer +44.20.7772.8713 [email protected]
NEWS & ANALYSIS Credit implications of current events
19 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
One driver of the recent slowdown in price increases is likely regulation. In November 2014, Finansinspektionen, the Swedish financial regulator, proposed a new regulation on mandatory amortisation, including a requirement to repay 2% of the loan annually for mortgages with a loan-to-value ratio (LTV) of more than 70% and 1% for LTV ratios between 50% and 70%. We expect this regulatory tightening of loan standards to take effect in June 2016. Anecdotal evidence suggests that many banks are already phasing in these tighter standards before the regulator forces them to do so, also including a debt-to-personal- income cap.
At the same time, interest rates set by the Swedish central bank remain negative and housing construction has not yet caught up with population growth. Hence, absent any additional regulatory measures the risk remains that house prices will pick up again in 2016.
Many Swedish banks remain exposed to the housing market through their covered bond funding secured by residential properties, which on average constituted a large 56% share of banks’ total bonds issued at the end of November 2015. Therefore, any substantial property price decline that leads to diminished investor confidence in Sweden’s housing market would risk negatively affecting covered bonds were it not for banks maintaining the high quality of the mortgage pools backing the covered bonds. Indeed, there is a legal requirement that only the portion of a loan up to 75% of the property’s market value can be used to back covered bonds. If there is a significant decline in property values, the portion of the loan in the cover pool should be adjusted downward, thereby maintaining the collateral’s asset quality. Maintaining the quality of their covered bonds will help banks maintain their access to market funding and their ability to lend to consumers. We also note the Swedish covered bond programmes we rate have loan-to-value ratios well below 75%.
NEWS & ANALYSIS Credit implications of current events
20 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
A Protracted Period of Low Oil Prices Is Credit Negative for Nigerian Banks On 15 January, oil prices fell by more than 5% to close below $30 per barrel for the first time in more than a decade. Oil prices remained below $30 per barrel until Friday, when they rallied to above $32 per barrel. Still, the consensus is that oil prices will remain lower for longer than analysts previously expected. A protracted period of low oil prices is credit negative for Nigerian banks because it will negatively affect dollar liquidity and elevate asset risks.
Nigerian banks’ balance sheets are partially dollarized, with foreign-currency-denominated loans constituting around 40% of total loans as of the end of September 2015. On the liabilities side, foreign currency funding contributes about 22% of total funding and generally banks maintain a matched balance sheet exposure to foreign currency. As of November 2015, foreign currency deposits in dollar terms declined by 20% from a year earlier, but we still believe balance sheets are fairly well matched. Low oil prices – which have translated into lower foreign currency earnings for Nigeria – and ongoing negative pressures on the local currency, the naira, have been the main contributors to this decline.
Additionally, low oil prices and subsequent negative pressure on the naira diminishes investor confidence, making it harder for banks to raise non-deposit funding. Exhibit 1 shows Nigeria’s credit default swap spread, which has increased by nearly 500 basis points since June 2014 as oil prices continue to fall. Domestically, banks perceived as relatively weak will struggle to access dollars from other banks via the interbank market.
EXHIBIT 1
Brent Crude Oil Price and Nigeria Five-Year Credit Default Swap Spread
Sources: Bloomberg
The tight liquidity hurts banks’ asset-liability management and the cost of foreign currency funding reduces their profitability. However, banks such as Access Bank Plc (Ba3 stable, b211), Guaranty Trust Bank Plc (unrated) and Zenith Bank Plc (unrated) should benefit from their strong corporate client relationships and withstand the tight dollar liquidity better than their peers.
Low oil prices will also reduce Nigerian banks’ asset quality. The banks’ exposure to the oil and gas industry is substantial at around 24% of total loans, of which about one third is to the upstream segment. If oil prices remain at current levels for the next two quarters, we expect Nigerian banks’ problem-loan ratio to rise beyond our initial expectation of around 10% because banks estimate the average breakeven price for most borrowers in the upstream sector at around $40 per barrel. Negative pressures in the upstream segment will also filter through the economy, compounding asset risks. Additionally, single-borrower
11 The bank ratings shown in this report are the bank’s local deposit rating and baseline credit assessment.
0
100
200
300
400
500
600
700
800
$0
$20
$40
$60
$80
$100
$120
Basi
s Po
ints
$ pe
r Bar
rel
Generic Brent Crude - left axis Nigeria 5 Year CDS Spread - right axis
Peter Mushangwe, CFA Associate Analyst +44.20.7772.5224 [email protected]
Akin Majekodunmi, CFA Vice President - Senior Analyst +44.20.7772.8614 [email protected]
NEWS & ANALYSIS Credit implications of current events
21 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
exposure remains high, even within the oil and gas sector. At the end of June 2015, banks’ problems loans ratio increased to 4.7% from 2.9% in December 2014. Exhibit 2 shows oil and gas loans as a percent of total loans for the Nigerian banks we monitor.
EXHIBIT 2
Select Nigerian Banks’ Oil and Gas Loans as a Percent of Total Loans as of 29 September 2015
Note: GTB = Guaranty Trust Bank Plc and UBA = United Bank for Africa Plc GTB’s data are as of the end of June 2015. Source: The banks
We estimate that up to 20% of oil and gas loans have been restructured already and we expect further loan restructuring this year. Restructuring has mainly been by increasing loan tenors, allowing struggling clients to pay based on their cash flow capacity and converting some amortizing loans into bullet loans. Despite the restructuring, we expect increased provisions to negatively affect banks’ profitability in 2016. Additionally, the tight dollar liquidity will cause the naira to depreciate, creating another asset quality pressure point given the high exposure of foreign-currency-denominated loans.
Although we do not expect a significant effect on solvency, outstanding oil and gas loan balances are greater than banks’ tangible common equity, on average. At the end of 2014, the tangible common equity of FBN Holdings (unrated), Sterling Bank Plc (B2 stable, b3) and Guaranty Trust was noticeably less than their oil and gas loan balances, while Zenith, Fidelity Bank Plc (unrated), Union Bank Plc (unrated) and United Bank for Africa Plc (unrated) had tangible common equity that fully covered their oil and gas exposures.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
FBN Holdings Sterling GTB Diamond Fidelity Access Zenith UBA
Oil and Gas Exposure as Percent of Total Loans System Average
NEWS & ANALYSIS Credit implications of current events
22 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Bank of Tokyo-Mitsubishi UFJ Buys 20% Stake in Filipino Bank, a Credit Positive On 14 January, The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU, A1/A1 stable, a312) announced that it will acquire a 20% stake in Philippines-based Security Bank Corporation (unrated) for about ¥90 billion.
The investment is credit positive because it will help BTMU further deepen and diversify its operations in Asia outside of Japan, which is a strategic focus for the bank. BTMU’s previous investment in Thailand, for example, has continued to perform well and now is the largest contributor to earnings from its Asian operations. Additionally, the stake will provide BTMU with an opportunity to further grow earnings and should not negatively affect BTMU’s asset quality or liquidity. The Philippines has a stable banking system, strong GDP growth, loan growth opportunities, a low level of nonperforming loans and strong funding and liquidity.
BTMU’s investment in Security Bank marks the first time that a Japanese bank has made a major investment in a Philippine financial institution and to date is the largest equity investment by a foreign bank into a Philippine bank. BTMU will treat this investment as an equity method affiliate, becoming Security Bank’s second-largest shareholder. BTMU will get two seats on the board to allow it to contribute to the strategic direction of the bank.
This investment follows BTMU’s 2013 purchase of a majority stake in Thailand-based Bank of Ayudhya (Baa1 stable, ba1), which has since been accretive to earnings, and the purchase of a 20% stake in Vietnam Bank for Industry and Trade (B2 stable, b3) the same year.
Security Bank was established more than 60 years ago and has grown to become the Philippines’ sixth largest private domestic universal bank by assets as of September 2015. Its business is diverse, focusing on corporate and investment banking, commercial middle-market banking, retail banking and financial markets.
During 2007-12 and again in 2014, the bank ranked first in return on shareholders’ equity and return on assets, and had the lowest cost-to-income and nonperforming loan ratio among private domestic universal banks. It also had strong capital, with a total capital adequacy ratio of 15.9% and Tier 1 capital adequacy ratio of 12.7% as of 30 September 2015.
12 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating (where available) and baseline
credit assessment.
Raymond Spencer Senior Vice President +81.3.5408.4051 [email protected]
NEWS & ANALYSIS Credit implications of current events
23 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Insurers
Argentina’s About Face on Foreign-Currency Assets and Infrastructure Investments Is Credit Positive for Insurers Last Tuesday, Argentina’s Superintendencia de Seguros de la Nación (SSN), the country’s insurance regulator, lifted restrictions put in place last October that required insurers to drastically reduce their holdings of foreign-currency-denominated securities. Additionally, SSN revoked rules requiring insurers to allocate a portion of their investments to securities that support infrastructure development and small and midsize enterprises (SMEs).
The rule changes are credit positive because they will allow insurers to continue using foreign-currency-denominated securities to hedge against the country’s high inflation rate and preserve the value of their portfolios against an expected further devaluation of Argentine peso. Also, because insurers will no longer be forced to invest in risky projects to meet asset-allocation quotas, their risk-adjusted returns and capital adequacy will improve.
The regulatory changes fit within a broader shift in policies that aim to improve the economy that newly elected President Mauricio Macri’s administration has implemented since taking office last month.
Nonetheless, the peso will likely continue to weaken this year because the currency had become overvalued under previous controls. This weakness will create additional strains for insurers’ real economic profitability and capitalization. The peso fell 53% against the dollar in 2015, and has already dropped another 3% since the start of this year, following Mr. Macri’s decision in December to lift capital controls and allow the currency to float freely. The devaluation has been particularly challenging for property and casualty (P&C) insurers, which are sensitive to the exchange rate, especially in their automobile coverage lines. A weakening peso drives up the cost of imported replacement parts for cars, which erodes P&C insurers’ underwriting performance.
Until last October, firms regularly invested in dollar-denominated government securities to help manage these risks. However, in an attempt to stanch the decline in the peso, the previous administration implemented a rule barring insurers from holding foreign-currency assets in excess of their foreign-currency liabilities. In practice, this would have required companies to sell nearly all of their dollar-denominated securities because they had very low levels of foreign-currency debt.
Since the ban was put in place, few insurers had started selling their dollar-denominated assets, because most had filed appeals. Under the new changes, firms will be able to continue using foreign-currency holdings as part of their risk management strategies.
Additionally, revoking rules in place since 2012 that required insurers to allocate a certain portion of their investment portfolios to SME- and infrastructure-related assets will improve their investment performance. This is because risk-adjusted returns on these securities were typically lower than other available investment options, in part because the regulatory requirements artificially inflated the price of these assets.
We expect Argentine asset managers that created SME- and infrastructure-focused funds in recent years to experience negative side effects over the next two years because of the revocation of the allocation rules. These asset managers created these funds in large measure to meet demand from insurance companies facing the new asset allocation requirement, and now we expect that these funds will experience outflows as insurers select new allocations. However, in an attempt to avoid creating market disruption, the SSN has set a two-year schedule for insurers to shift out of their SME and infrastructure holdings, which will limit liquidity pressures for asset managers. In addition, the change will allow asset management firms to focus more on products that meet real market demand, which will support their credit quality.
Diego Nemirovsky Vice President - Senior Credit Officer +54.11.5129.2627 [email protected]
Jose Montano Vice President - Senior Analyst +52.55.1253.5722 [email protected]
NEWS & ANALYSIS Credit implications of current events
24 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Zurich Insurance Fourth-Quarter Expected Net Loss Is Credit Negative On Wednesday, the Swiss insurer Zurich Insurance Company Ltd. (ZIC, financial strength Aa3 stable) announced that its fourth-quarter 2015 earnings will show approximately $100 million of operating losses in its general insurance business, around $475 million of restructuring costs and a $230 million goodwill write-off. Consequently, we expect the group to report a fourth-quarter net loss, negatively affecting the group’s earnings coverage and also the group’s capital and financial leverage.
The expected operating loss in the general insurance segment follows a $183 million operating loss in the third quarter. Both quarters were affected by material catastrophes including a $275 million loss related to the explosion in the port of Tianjin in the third quarter and $275 million loss related to a series of UK and Ireland floods in the fourth quarter. Nonetheless, the exhibit below shows that even after adjusting for these losses and other exceptional events, the general insurance segment profitability has been weakening for several quarters. This deterioration mostly results from large claims, notably in its Global Corporate segment.
Zurich Insurance Company’s General Insurance Business Pre-Tax Operating Profit
Notes: *The fourth-quarter 2015 figures are preliminary estimates. ** Selected exceptional losses include a $300 million reserve strengthening and $275 million loss related to the explosion in the port of Tianjin in the third quarter and $275 million of losses related to UK and Ireland floods in the fourth quarter of 2015. Sources: Zurich Insurance Company financial supplement third quarter 2015, Zurich Insurance Company press release and Moody’s Investors Service
ZIC had already identified underperforming portfolios, representing around 15% of its general insurance premiums, and had already started pruning these portfolios in the second half of 2015, exiting loss-making segments or regions and increasing prices in order to improve profitability. However, premiums will likely decrease in 2016 and underwriting actions take time to fully bear fruit because it will take up to one year to replace or end existing underperforming businesses. We therefore expect underwriting results to remain under pressure this year. ZIC is also reducing expenses, but the benefits to net income will be offset by restructuring costs. Zurich Insurance Company announced that it will account for $475 million of restructuring charges in the fourth quarter of 2015 because it accelerated its efficiency program, but we expect additional restructuring charges in 2016. These headwinds will come in addition to the low interest rates, which push investment income downwards and led ZIC to write-off around $230 million goodwill related to its German life business.
Overall, we expect ZIC to report a net loss for the fourth quarter and overall net income of around $2.0 billion for the full year 2015. This would translate into a return on capital of around 4% or lower in 2015, down from 7.0% in 2014. The lower return will also push earnings coverage to around 6x in 2015, from 9.4x in 2014. These two metrics in 2015 are significantly below our expectations for Aa-rated insurance companies.
$807
$562
$755 $736$880
$801 $786
$511
$706
$460
-$183~-$100
$392
~$175
-$200
-$100
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15
$ M
illio
ns
As Reported* Adjusted for Selected Exceptional Losses**
Benjamin Serra Vice President - Senior Credit Officer +33.1.5330.1073 [email protected]
NEWS & ANALYSIS Credit implications of current events
25 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Because we expect 2015 profits to be lower than the dividends the group paid in 2015 ($2.7 billion), the decline will also have a negative effect on the group’s capitalisation, and therefore financial leverage. Nonetheless, the effect will be moderate and we consider ZIC’s solvency was strong at year-end 2015. However, the company announced in May 2015 that it plans to redeploy $3 billion of capital through acquisitions (including the $675 million allocated to the planned acquisition of Rural Community Insurance Services) and/or distributions to shareholders, and that it could increase the group’s leverage. In the absence of rapid improvements in profitability, such actions would negatively pressure the group’s credit and ratings.
NEWS & ANALYSIS Credit implications of current events
26 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Sovereigns
Return of Ebola Challenges Sierra Leone’s Economic Recovery On 16 January, just one day after the World Health Organization (WHO) proclaimed West Africa to be Ebola-free, Sierra Leone (unrated) officials announced a new Ebola death, and four days later, announced a second death. The WHO has warned that it expects an outbreak. Compared with the 4,000 lives that Sierra Leone lost between May 2014 and November 2015 as a result of the Ebola epidemic, these two Ebola-related deaths may seem minor, but it means that Sierra Leone will not be perceived as Ebola-free.
Such a perception is credit negative for the sovereign because it will prolong reduced investment in the country, negatively affecting trade and growth. It also risks curtailing the potential for policy measures such as investment into the health system and infrastructure that Sierra Leone needs to tackle the lingering effects of the epidemic and the sharp drop in commodity prices.
Additionally, the fresh Ebola death threatens to prolong the population’s mistrust in government institutions. According to the World Bank, a lack of trust in government impedes cooperation and typically results in those who are infected avoiding public institutions and dismissing official guidance, which triggers further spread of the disease. The lack of government effectiveness is a key factor in our assessment of the sovereign’s credit quality. Economic activity will be hampered further by a diversion of funds from development projects to Ebola containment.
The Ebola re-emergence is a setback to the economy, which in 2015 posted Sub-Saharan Africa’s lowest real GDP growth of negative 24%. The disruption of economic activity caused by Ebola was compounded by an abrupt drop in iron ore prices that led to the closure of the country’s main iron ore mines. The World Bank estimates that Sierra Leone, Guinea and Liberia in 2015 lost a combined at least $2.2 billion in forgone growth owing to the epidemic; implying losses to Sierra Leone of about $809 million. According to the International Monetary Fund’s (IMF) growth estimates, actual real GDP in 2015 amounted to only two thirds of the real GDP projected before the Ebola outbreak in early 2014 (see Exhibit 1).
EXHIBIT 1
Sierra Leone’s Real GDP Indexes Before and After the Ebola Outbreak 2012 = 100.
Notes: (e) = estimates; (p) = projections. Sources: International Monetary Fund World Economic Outlook and Moody’s Investor Service
0
20
40
60
80
100
120
140
160
180
200
2012 2013 2014 2015 (e) 2016 (p) 2017 (p) 2018 (p) 2019 (p)
October 2015 Forecast April 2014 Forecast Before Ebola Outbreak
Zuzana Brixiova Vice President - Senior Analyst +44.20.7772.1628 [email protected]
Patrick Cooper Associate Analyst +1.212.553.3811 [email protected]
NEWS & ANALYSIS Credit implications of current events
27 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
The announcement of the new case, together with resultant restrictions on the movements of more than 100 people, has already generated unrest (e.g., homes of those perceived as high risk were attacked). If the disease or the unrest were to become more widespread, and the population’s trust in public institutions declined and damaged the credibility of government policies, it would prolong the recession and temper the country’s impressive growth comeback that the IMF projected last year for 2017-19 (see Exhibit 2).
EXHIBIT 2
Sierra Leone’s Real GDP Growth Before and After the Ebola Outbreak
Note: (e) = estimates; (p) = projections. Sources: International Monetary Fund World Economic Outlook
Beyond the growth and employment effect, reduced economic activity stemming also from low commodity prices has increased risks to the financial sector’s stability. Specifically, the ratio of nonperforming loans to total loans reached about 40% in June 2015, up from 19% in 2012, according to the IMF. The lingering effects of the epidemic, together with lower-for-longer outlook for commodity prices, will make Sierra Leone’s return to a high and sustained longer-term growth substantially more challenging.
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
2012 2013 2014 2015 (e) 2016 (p) 2017 (p) 2018 (p) 2019 (p)
October 2015 Forecast April 2014 Forecast Before Ebola Outbreak
NEWS & ANALYSIS Credit implications of current events
28 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Georgia Will Benefit from Ukrainian Trade Passing Through the Sovereign On 15 January, Georgia (Ba3 positive), Ukraine (Caa3 stable), Azerbaijan (Baa3 stable) and Kazakhstan (Baa2 stable) finalized an agreement for preferential rates along the Trans-Caspian international transport route, which links Europe to China through rail, road and shipping infrastructure, after Russia (Ba1 stable) closed its borders to trade from Ukraine. Consequently, and absent a rapprochement between Ukraine and Russian, most of the Russian pass-through trade (which Ukrainian authorities estimate totals $1.8 billion annually) will be redirected through Georgia, bolstering the country’s position as a transit hub between Europe and Asia.
The expansion of the Trans-Caspian transport route is credit positive for Georgia because the increase in trade will support growth this year and help strengthen Georgia’s long-term economic potential through infrastructure development and improvements in customs and other trade-related institutions. It will also support a key component of Georgia’s development strategy: to establish itself as a transportation and logistical hub for trade with Europe, Asia, and the Middle East.
The immediate impetus for the agreement among Georgia, Ukraine, Azerbaijan, and Kazakhstan was the escalating trade conflict between Ukraine and Russia. At the beginning of 2016, Russia closed its borders to Ukrainian trade, citing Ukraine’s trade pact with the European Union (EU) and Ukraine’s joining of economic sanctions against Russia. Russia’s new regulations will permit Ukrainian pass-through trade only via Belarus (Caa1 negative) and require active monitoring of goods while in Russia, which has made the pass-through trade to Central Asia essentially impossible (Russia may grant some exceptions to a select number of Kazakhstani importers).
The closing of the northern trade routes through Russia serves as a potential boon for Georgia. In 2014, the five Central Asian countries of Kazakhstan, Kyrgyz Republic (B2 stable), Tajikistan (unrated), Turkmenistan (unrated) and Uzbekistan (unrated) received more than $2 billion in imports from Ukraine, while an additional $3.4 billion in Ukrainian exports went to China (trade flows may be lower this year owing to the economic slowdowns in Central Asia and China). According to Ukraine’s Ministry of Economic Development and Trade, $1.8 billion of the country’s exports were shipped through Russia.
Much of this trade will now be diverted through Georgia. With Georgian trade turnover reaching $11.4 billion in 2014, the pass-through trade from Ukraine constitutes a 16% expansion in trade through Georgian territory and a 165% increase over Georgia’s trade with China and Central Asia, which totaled $1.1 billion in 2014. This is on top of recent increases in trade, with value added in the transport sector expanding to nearly GEL2 billion in 2014 (see exhibit).
Value Added in the Georgian Transport Sector
Sources: National Statistics Office of Georgia, Haver Analytics and Moody’s Investors Service
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
GEL
Bill
ions
Joshua Grundleger Associate Analyst +1.212.553.1791 [email protected]
Ernest Sergenti Assistant Vice President - Analyst +1.212.553.4196 [email protected]
NEWS & ANALYSIS Credit implications of current events
29 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Foreign direct investment (FDI) in Georgia has also recently increased, after having declined in 2012. By 2014, FDI had risen to $1.8 billion, versus $815 million in 2010, driven largely by growth in investment from China, which in 2014 became the third-largest source of FDI after the Netherlands and Azerbaijan. Moreover, nearly one quarter of FDI went to the transportation and communications sectors.
The increase in pass-through trade also will help Georgia develop its transport infrastructure and increase its competitiveness as a transit corridor. To that end, Georgia has been working closely with the EU to implement the Deep and Comprehensive Free Trade Area (DCFTA) agreement signed in September 2014 as part of the EU-Georgia Association Agreement, and recently began discussions with China regarding a free-trade deal as part of the latter’s Silk Road initiative.
NEWS & ANALYSIS Credit implications of current events
30 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
US Public Finance
Atlantic City Moves Closer to Default and Bankruptcy after Governor Vetoes Aid Package Last Tuesday, New Jersey (A2 negative) Governor Chris Christie vetoed a property tax stabilization bill that would have provided critical near-term financial relief to Atlantic City, New Jersey (Caa1 negative). Without another liquidity infusion from the state, the city is likely to default on debt service payments as early as April. The Atlantic City council plans to review the option of a Chapter 9 bankruptcy filing this week, but New Jersey law requires state approval for a municipal bankruptcy. An ongoing tax appeal battle between the Borgata casino and Atlantic City could force both the city and state to consider bankruptcy more seriously.
The governor’s veto killed three Atlantic City rescue bills that would have provided nearly $47 million in additional revenues in 2016, according to the city’s Emergency Manager, and a predictive stream of payment in lieu of taxes (PILOTs) from casinos. The bills could be resurrected, but time is running out and the city’s cash position is dangerously low (see Exhibit 1). Given that the state, which approves New Jersey local government budgets, allowed Atlantic City to budget $33.5 million of “casino redirected anticipated payments” that did not seem to be definitely linked to the legislation, the state may come through in the 11th hour with a loan, as it did in 2014, although that remains uncertain. The state could also allow the city to defer another estimated $40 million of 2016 pension and health benefits that are due in April, or the state could allow the city to release restricted cash. All of these quick and short-term fixes would just prolong Atlantic City’s crisis.
EXHIBIT 1
Atlantic City’s Unrestricted Cash Balance in 2016 Liquidity projections are deeply negative.
Note: Excludes restricted cash and $23 million of state aid paid throughout the year. Sources: Atlantic City Emergency Manager Reports 19 January 2016 and 23 March 2015; Moody’s Investors Service
The city’s cash continues to decline, and stalemated negotiations between the state and city on several fronts may prevent the timely adoption of viable solutions that were proposed in 2014. The city will consider filing for Chapter 9 protection this week; however, the state Local Finance Board must approve the filing and it seems unlikely to do so given recent public statements by state legislators. Ongoing tax appeals totaling more than $190 million (particularly with the Borgata) add a variable that could force all parties to agree to bankruptcy protection. Even if the city receives the additional revenue proposed in resurrected Atlantic City fiscal recovery legislation and the property tax revenues from casinos remain stable, the city still projects a budget deficit of $31 million in 2016 without additional budget measures (see Exhibit 2). The
-$60
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-$40
-$30
-$20
-$10
$0
$10
$20
1-Jan 1-Feb 1-Mar 1-Apr 1-May 1-Jun 1-Jul 1-Aug 1-Sep 1-Oct 1-Nov 1-Dec
$ M
illio
ns
Josellyn Yousef Vice President - Senior Analyst +1.212.553.4854 [email protected]
NEWS & ANALYSIS Credit implications of current events
31 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
deficit grows to $67 million if the budget improvements are not realized, and increases to $86 million if the city has to issue bonds for tax appeal refunds.
EXHIBIT 2
Atlantic City’s Projected Budget Deficit under Different Scenarios
Sources: Atlantic City Emergency Manager Reports 19 January 2016 and 23 March 2015
Closure of any of the city’s eight remaining casinos would be another problem for the city, especially without a PILOT agreement that ensures a total casino PILOT payment. Four casinos shut their doors permanently in 2014. Trump Taj Mahal, Caesars and Bally’s (all in Chapter 11) continue to struggle despite less competition because of the recent casino closures. A closure of any one of the remaining eight casinos could result in between $8 million and $15 million in lost revenue to the city.
-$30.5 -$31.9 -$32.4 -$31.8-$26.2
-$67.2-$61.6
-$55.7 -$58.6 -$60.1
-$86.4-$80.0
-$73.4 -$75.5 -$76.2
-$100
-$90
-$80
-$70
-$60
-$50
-$40
-$30
-$20
-$10
$0
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
Including Vetoed Budget ImprovementsExluding Budget ImprovementsExluding Budget Improvements and Including Unbonded Debt Servive
CREDIT IN DEPTH Detailed analysis of an important topic
32 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Weakening Credit Quality of E&P and Oilfield Services Companies Is Credit Negative for US CLOs On 21 and 22 January, we placed on review for downgrade the ratings of a large number of exploration and production (E&P) and oilfield services (OFS) companies,13 reflecting our expectation that their credit quality will continue to decline along with oil prices, which recently dipped below $30 per barrel, the lowest level in over a decade, before rising on Friday to above $32 per barrel. Even assuming oil prices recover modestly from current levels, E&P companies and the OFS companies that support them will experience rising financial stress with much lower cash flows, which is credit negative for the collateralized loan obligations (CLOs) that hold their debt.
Many of the speculative-grade E&P and OFS companies we placed on review are common holdings in post-crisis US CLOs (CLO 2.0s), and together, they appear in 447 deals we rate with an average exposure of 1.55%. Exhibit 1 shows issuers that are the most widely held in CLO 2.0s, many of which also have depressed loan prices, and only adequate or weak liquidity.
EXHIBIT 1
Fourteen E&P and OFS Companies on Review for Downgrade are Common Holdings in US CLO 2.0s*
Issuer Par Amount
$ Millions Number of CLOs
Corporate Family Rating SGL Rating**
First Lien Loan Price (%) Sector
Seadrill Partners LLC $838 241 B2 NA 35.32 OFS
MEG Energy Corp. $372 123 B1 SGL-1 75.60 E&P
Fieldwood Energy LLC $372 261 B2 SGL-3 66.10 E&P
HGIM CORP. $352 139 B3 SGL-4 52.36 OFS
Templar Energy, LLC $225 148 B2 NA N/A E&P
Breitburn Energy Partners L.P. $167 113 B2 SGL-3 92.05 E&P
CJ Holding Co. $162 121 B3 SGL-3 53.70 OFS
Petroleum Geo-Services ASA $124 80 B1 NA 60.25 OFS
UTEX Industries, Inc. $123 54 B3 NA 58.50 OFS
Osum Production Corp. $111 43 B3 SGL-2 45.00 E&P
Jonah Energy LLC $108 65 B1 SGL-3 58.00 E&P
KCA Deutag Alpha Ltd $101 32 B3 NA 68.00 OFS
Prowler Acquisition Corp $106 43 B3 SGL-3 80.00 OFS
Cactus Wellhead LLC $58 29 B3 SGL-3 69.00 OFS
Notes: * Captures all broadly syndicated CLO 2.0s we rated as of 30 June 2015 and based on latest available trustee-reported data. Loan prices are based on Markit data as of 20 January 2016. The exhibit excludes seven other companies which together account for roughly $32 million of CLO exposure. ** Issuers rated SGL-3 possess adequate liquidity, whereas those rated SGL-4 possess weak liquidity. Sources: Moody’s Investors Service, trustee reports and Markit data
The weakening industry fundamentals and operating environment for E&P and OFS companies will worsen CLOs’ weighted average rating factor (WARF), increase potential par losses and erode CLO notes’ over-collateralization (OC) ratios. CLO portfolio WARFs will deteriorate as trustee reports capture the change in rating review status. (CLOs typically incorporate a two-notch adjustment in their WARF calculations for corporate ratings on review for downgrade, and a one-notch adjustment for those with negative outlooks.) If E&P and OFS issuers default, or CLO managers sell their loans at discounted prices, CLO par will erode
13 See Moody's Reviews US Energy Companies for Downgrade and Moody's Reviews Canadian Energy Companies for Downgrade
and Moody's Reviews EMEA Energy Companies for Downgrade, 21 January 2016.
Min Xu Senior Vice President +1.212.553.7228 [email protected]
Ramon O. Torres Senior Vice President +1.212.553.3738 [email protected]
Aileen Wang Associate Analyst +1.212.553.4954 [email protected]
Anthony Tufano Associate Analyst +1.212.553.1097 [email protected]
CREDIT IN DEPTH Detailed analysis of an important topic
33 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
and OC ratios will decline, potentially shutting off interest payments to junior CLO notes and equity if OC triggers are breached. Lastly, rating downgrades of E&P or OFS issuers to Caa1 or lower would likely also pressure CLOs’ excess limits on Caa holdings and hurt their OC ratios, especially if combined with depressed loan prices. (Typically, CLOs will start to haircut the OC numerator once their Caa-rated assets exceed 7.5% of par. The excess is carried at market value instead of par, with the cheapest assets accounting for the excess first.) Among the US CLO 2.0s we rate, the seven shown in Exhibit 2 have exposures of 5% or more to the E&P and OFS companies we placed on review for downgrade.
EXHIBIT 2
Seven US CLO 2.0s* Have Exposures of 5% or More to E&P and OFS Companies on Review for Downgrade
Deal Name Closing Date
Percent Exposure WARF
Percent Caa or Below Manager
Silvermore CLO Ltd. May 2014 7.09% 2775 6.29 Silvermine Capital Management LLC
ECP CLO 2012-4, Ltd. June 2012 5.98% 2670 9.50 Silvermine Capital Management LLC
Silver Spring CLO Ltd. Sep 2014 5.84% 2676 6.30 Silvermine Capital Management LLC
Crown Point CLO II, Ltd. Nov 2013 5.74% 2762 3.87 Valcour Capital Management LLC
Mountain View CLO 2014-1 Ltd. Sep 2014 5.57% 2986 6.20 Seix Investment Advisors LLC
Telos CLO 2014-5 Ltd. May 2014 5.53% 2961 2.50 Telos Asset Management LLC
Telos CLO 2014-6, Ltd. Dec 2014 5.52% 2914 1.70 Telos Asset Management LLC
Notes: * Captures all broadly syndicated CLO 2.0s we rated as of 30 June 2015 and based on latest available trustee-reported data. Source: Moody’s Investors Service and trustee reports
Oil’s continuing oversupply globally and tepid growth in demand drove prices to their recent sub-$30 per barrel level, a 12-year low, prompting us to sharply reduce our oil price assumptions on 21 January. Most E&P companies cannot internally fund sustaining levels of capital spending at current market prices, and would likely have trouble accessing capital markets. We also expect the OFS sector’s EBITDA to drop by 25%-30% in 2016, owing to projected capital expenditure reductions by E&P and integrated oil companies. Liquidity pressure for the overall oil and gas sector is rising, increasing default risk. Our oil and gas Liquidity-Stress Index worsened to 21.4% in mid-January from 19.6% in December, and is approaching its record high of 24.5% in March 2009.
In contrast to US CLOs, European CLO 2.0s have largely avoided buying credits in commodity-dependent sectors, with only one deal having a small exposure, of about 0.3%, to an oil driller.
RATING CHANGES Significant rating actions taken the week ending 22 January 2016
34 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Corporates
Ecopetrol S.A. Downgrade
23 Jun ‘15 18 Jan ‘16
Long-Term Issuer Rating Baa2 Baa3
Outlook Stable Review for Downgrade
The downgrade reflects persisting stressed oil prices, which will continue to negatively affect the company's cash flow generation and credit metrics, increasing its credit risk. Weaker cash generation and higher leverage, coupled with limited funding availability overall for the oil industry, will hurt the company's ability to continue with its capital spending program to sustain reserves and production.
McDermott International, Inc. Downgrade
2 Apr ‘14 21 Jan ‘16
Corporate Family Rating Ba3 B1
Outlook Negative Stable
The downgrade reflects the increased risks of project cancellations and delays, as well as reduced capital spending in the upstream oil and gas sector due to the recent plunge in oil prices. This has increased the possibility of McDermott's operating results, liquidity and credit metrics deteriorating in the medium term.
Progressive Waste Solutions Ltd Review for Upgrade
1 Oct ‘12 19 Jan ‘16
Corporate Family Rating Ba1 Ba1
Outlook Stable Review for Upgrade
The review for upgrade follows the company's announced all-stock merger with Waste Connections Inc. (unrated), a provider of integrated solid waste services in the US. Progressive will be the surviving entity. The review reflects the likelihood that Progressive's credit profile will improve once it merges with Waste Connections, particularly its scale and diversity.
Wynn Resorts, Limited Downgrade
20 Oct ‘15 20 Jan ‘16
Corporate Family Rating Ba1 Ba2
Outlook Review for Downgrade Negative
The downgrade reflects our view that gaming demand challenges in the Macau, China gaming market – which accounts for a majority of Wynn's consolidated revenue and EBITDA – will continue and will make it difficult for the company to reduce its consolidated leverage to the level needed to maintain a Ba1 corporate family rating.
RATING CHANGES Significant rating actions taken the week ending 22 January 2016
35 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Financial Institutions
ACE Seguros Upgrade
30 Nov ’15 20 Jan ‘16
Insurance Financial Strength Rating B2 B1
Outlook Review for Upgrade Stable
The upgrade follows the completion of the ACE and Chubb combination as announced on 14 January 2016 by Switzerland-based Chubb Limited. It reflects our view that the combined business and financial profile of the two Argentina subsidiaries has resulted in a stronger credit profile for the newly combined Chubb in Argentina, as well as the increased benefit of parental support for ACE Seguros, in line with Chubb Argentina's current ratings.
Actions Taken on Six Azerbaijani Banks Downgrade
21 Jan ‘16
We downgraded the baseline credit assessments and downgraded the long-term deposit ratings of VTB Bank (Azerbaijan), OJSC Bank of Baku and UniBank Commercial Bank with a negative outlook. We also changed the outlook to negative from stable on the long-term deposit ratings of OJSC XALQ BANK, Joint Stock Commercal Bank Respublika and Kapital Bank OJSC, while the banks' ratings were affirmed. The rating actions reflect the negative impact of the depreciation of the Azerbaijani manat on the banks' asset quality, profitability and funding after the introduction in December 2015 of a free-floating exchange rate regime, as well as heightened dollarization of the banks' funding profiles.
Jefferies Group LLC Outlook Change
21 Jan ‘16
We have affirmed the Baa3 senior debt ratings of Jefferies Group LLC and the Baa2 issuer ratings of its principal regulated broker-dealer subsidiaries, Jefferies LLC and Jefferies International Limited. We also revised the outlook on all of the ratings to stable from negative. The outlook change reflects our view that Jefferies did not substantially loosen underwriting standards or increase its risk appetite during 2015. Despite suffering a sharp drop in profitability in 2015, Jefferies maintained its long-standing risk and liquidity controls.
MBIA Mexico Downgrade
4 Mar’ 15 22 Jan‘ 16
Insurance Financial Strength B2 B3
Outlook Negative Review for Downgrade
The downgrade follows the recent downgrade and review for downgrade of MBIA Insurance Corporation. MBIA Mexico is fully owned by MBIA Insurance Corporation, a subsidiary of MBIA Inc., the group's ultimate holding company. MBIA Mexico's ratings are based primarily on the explicit and implicit support provided by MBIA Corp.
RATING CHANGES Significant rating actions taken the week ending 22 January 2016
36 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Baltinvestbank Downgrade
10 Nov’ 15 20 Jan‘ 16
Counterparty Risk Assessment Caa1(cr) Caa2(cr)
Long-Term Bank Deposit Ratings Caa2 Caa3
Baseline Credit Assessment caa2 ca
Adjusted Baseline Credit Assessment caa2 ca
Outlook Review for Downgrade Positive
The downgrade follows the Central Bank of Russia's announcement that the state Deposit Insurance Agency had taken Baltinvestbank into temporary administration with a subsequent financial rehabilitation procedure. Baltinvestbank's baseline credit assessment and adjusted baseline credit assessment of ca reflects the bank's very weak standalone credit profile.
Sub-Sovereign
ATB Financial Outlook Change
6 Apr ‘04 18 Jan ‘16
Long-Term Issuer Rating (Domestic) Aaa Aaa
Outlook Stable Negative
The outlook change reflects the increased risk that ATB may require further capitalization from the Province of Alberta. ATB's gross impaired loans increased 1.3 times over 2014 levels, and we expect that loans will continue to show signs of deterioration as the economic downturn of the province continues in 2016.
Alberta Capital Finance Authority Outlook Change
26 Jan ‘01 18 Jan ‘16
Backed Senior Unsecured (Domestic) Aaa Aaa
Outlook Stable Negative
The outlook change reflects the strong credit links between Alberta Capital Finance Authority and the Province of Alberta, whose fiscal position we expect to deteriorate further than previously expected in an environment of protracted low oil prices and deterioration of economic activity.
RATING CHANGES Significant rating actions taken the week ending 22 January 2016
37 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Catalunya, Generalitat de
Outlook Change 23 Oct ‘15 15 Jan ‘16
Senior Unsecured MTN (Domestic) (P)Ba2 (P)Ba2
Senior Unsecured (Domestic) Ba2 Ba2
Senior Unsecured (Foreign) Ba2 Ba2
Long-Term Issuer Rating (Foreign) Ba2 Ba2
Commercial Paper (Domestic) NP NP
Other Short Term (Domestic) (P)NP (P)NP
Outlook Stable Negative
The outlook change reflects (1) our view that the risk of the region's fiscal consolidation efforts coming to a halt has increased; (2) increasing political tensions between Catalunya and the central government that could negatively affect the investment climate in the region; and (3) a slight risk that, should political tensions escalate further, the government's liquidity support to the region could be affected.
Structured Finance $1.2 billion of ABS Sponsored by Navient Placed on Review for Downgrade
On 19 January 2016, we placed on review for downgrade the ratings on 17 classes of notes in six SLM Private Credit Student Loan Trusts. The securitizations are backed by private student loans. The placement on review reflects the correction of an error in the calculation of net losses on the outstanding collateral pools that were used to run Aaa and other rating levels cash flow scenarios.
RESEARCH HIGHLIGHTS Notable research published the week ending 22 January 2016
38 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Corporates
Food Retail - Europe: More Transparency Would Help but Uneven Disclosure of Supplier Income is Set to Continue After Tesco's announcement in September 2014 that it had identified an overstatement of profit caused by inappropriate accounting for supplier income, the UK's financial reporting regulator issued a call for more clarity in the reporting of complex supplier arrangements. After highlighting that fees, contributions, discounts, multiple offers and volume rebates provided by suppliers could have a significant impact on the financial results, the FRC reminded companies that investors need to receive enough clear and relevant information to be able to evaluate the company's performance and financial position where these amounts are, or could become, material.
Chinese Metro Sector: Continuing Strong Government Support Underpins Credit Profiles China has ambitious targets for investment in metro systems, a key policy driver of economic development, urbanization and air quality improvement. Despite financial support from city government budgets, we expect Chinese city metro companies will still rely on credit markets to finance expansion. Key to city metro companies gaining access to credit markets at low cost is investor perception that they will continue to enjoy implicit and explicit government support. As such, city governments have strong economic incentives to uphold investor confidence.
Industrial Real Estate Investment Trusts – Singapore: Industrial REITs Will be Acquisitive in 2016 We expect Singapore REITs (S-REITs) in the industrial space will maintain an appetite for overseas acquisitions in 2016 as they pursue asset growth, yield accretion and portfolio diversification amid challenging domestic business conditions. We expect industrial REITs to exercise discipline in financing acquisitions with a prudent mix of debt and equity to maintain their credit profiles.
The Crossover Zone: 2016 Promises More Fallen Angels from Cyclical and Sovereign Pressure The number of potential ‘fallen angels,’ or global non-financial companies rated Baa3 with a negative outlook or on review for downgrade, thus just above speculative grade, rose sharply in the fourth quarter of 2015 due to pressures on commodity-linked industries and sovereign ratings. As of the end of 2015, the ratio of potential fallen angels to potential rising stars was the largest since June 2009.
Moody's Quarterly Covenant Quality Sector Report: Protection Weakens in Seven Sectors, Reflecting Overall Quality Decline The covenant quality of high-yield bonds in seven out of 11 North American non-financial corporate sectors weakened during the past year. Covenants deteriorated the most in the paper, packaging and forest products sector, driven by the rise in issuance of high-yield lite bonds and a decline in the overall CQ score for full-package bonds, which reflects the absence of low-rated credits from this sector in 2015.
RESEARCH HIGHLIGHTS Notable research published the week ending 22 January 2016
39 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
US Lodging and Cruise: Fourth Quarter RevPAR Growth Slows, a Trend That Will Continue in 2016 According to data released by Smith Travel Research on 19 January 2016, growth in US RevPAR slowed to 4.8% in the fourth quarter of 2015, marking the fourth consecutive slowdown in quarterly growth. We had anticipated RevPAR growth would slow in last year's second half, but fourth quarter’s RevPAR growth was weaker than our expectations and signals that fourth quarter lodging company earnings growth will be weak. It also may indicate that our current forecast of 5.5%-6.5% RevPAR growth in 2016 is optimistic.
Global Oil and Natural Gas Industry: Increased Supply and Concerns About Demand Growth Drive Prices Yet Lower We have reduced our price estimates for Brent crude and West Texas Intermediate crude amid continued oversupply in the oil markets and the risk of Iran boosting its oil output. OPEC countries continue high levels of production in the battle for market share, contributing to the current oil glut despite moderate consumption growth by key consumers such as China, India and the US.
SGL Monitor: LSI Gains Point to Rising Default Risks as 2016 Gets Underway Moody’s Liquidity-Stress Index moved higher to 7.2% in mid-January from 6.8% in December, fueled by earnings pressure in the energy sector. Liquidity stress has also been spreading slowly to some low-rated companies in other sectors, but speculative-grade liquidity outside of energy and commodity-related companies remains healthy.
India Credit: Heard From the Market: India Not Immune to External Risks Market participants that we surveyed are increasingly concerned about the potential spillover of external risks, such as interest rate tightening in the US and China’s ongoing slowdown, on India’s growth story. However, this is more likely a reflection of the broad-based spike in global risk aversion rather than India’s relative vulnerabilities. Investors still regard the country as much better placed than most of its similarly rated emerging market peers.
Financial Institutions
Banobras, Nafin and Bancomext: Peer Comparison - Mexican Development Banks to Depend on Government Support to Meet New Growth Targets Mexico’s largest development banks will need capital injections in order to meet the growth targets outlined by the government. The government’s growth targets aim for the largest banks and other government agencies to provide a combined MXN1 trillion ($53.7 billion) of new financing to the private sector between 2014 and 2018. In order to meet the targets, all four banks will have to maintain a relatively rapid pace of loan growth in the coming years, which could fuel increased asset quality risks.
RESEARCH HIGHLIGHTS Notable research published the week ending 22 January 2016
40 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Sovereigns
Government of Kyrgyz Republic – B2 Stable: Annual Credit Analysis The Government of Kyrgyz Republic’s heavy reliance on gold and remittances and its relatively high debt burden are the major constraints on its B2 rating, especially considering the impact of the slowdown in Russia and the recent depreciation of the Kyrgyz som. Furthermore, the country's political arena has been troubled in recent years. While the most recent transition of power and elections was relatively smooth, internal strife could re-emerge over time.
Government of Germany: Civil Servants' Pensions Pose Fiscal Challenges, Partly Addressed By Reforms
Fiscal challenges arising from civil servant pensions are greatest for Germany's regions, as most civil servants work at the regional level. The challenge facing the regions is exacerbated by the prohibition on them issuing new debt, which will be introduced in 2020 according to the national debt brake rule, as this will limit their budget flexibility. The regions in former West Germany will experience the sharpest increase in civil servant pension payments, as the large number of teachers employed in the 1970s to deal with the 1960s baby boom generation retire in the period up to 2025.
Sub-sovereigns
Chinese Sub-Sovereign Monitor Last year was a memorable one for Chinese regional and local governments, characterized by far-reaching regulatory change aimed at improving their financial transparency, including the launch of a municipal bond market at $570 billion that is already one of the largest globally. During 2015, RLGs also faced mounting fiscal pressure as China’s economy slowed, and this more challenging environment is reflected in our negative outlook for the sector in 2016.
RESEARCH HIGHLIGHTS Notable research published the week ending 22 January 2016
41 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
Structured Finance
Gauging the Impact of LTV on Losses in US Prime Auto Loan Pools Pools of prime auto loans with high loan-to-value (LTV) ratios perform more than three times worse on a cumulative net loss basis than pools of loans with low LTVs, based on an analysis of loan performance for five issuers of prime auto loan ABS. High LTVs are not the only factor driving the higher losses of high-LTV loans; these loans often have other risky attributes, such as longer loan terms.
European CMBS Loan Maturities Update: High repayment trend continues into 2016 A total of 34 loans with a securitized balance of €4.72 billion have their original scheduled maturity dates in 2016, and we expect two thirds of them to repay. This is higher than the average repayment rate of 38% recorded since the first quarter of 2012. Our expectation is based on the high number of prepayments in combination with the number of loans for which we project low to medium default probability, based on low to moderate Moody’s loan-to-value ratios.
Securitization - India and China: Securitization Funds NBFCs' Lending to Promote Spread of Financial Inclusion India and China have the common goal of building inclusive financial systems that will bring affordable credit to the underprivileged. In both countries, non-bank finance companies (NBFCs) are key providers of credit to individuals and small businesses that would otherwise have limited access to bank loans or would incur high interest costs for such loans. While there are various funding avenues open to NBFCs, securitization has proven to be reliable and competitively priced, and is therefore an important source of the funds they use for lending.
Moody's ABS Spotlight - January 2016 In this edition, we summarize our 2016 credit outlooks for the different sectors of asset-backed securities (ABS). We also analyze the relationship between loan-to-value ratios and the credit performance of prime auto loan pools, and comment on the continuing trend of auto loan auto ABS issuers securitizing loans with longer payment terms. In addition, we discuss how recent changes in energy rates in Nevada set a credit-negative precedent for the nascent solar ABS asset class.
US CMBS Q4 Review: Conduit Credit Continues to Slip, But at a Slower Pace The credit quality of US conduit/fusion commercial mortgage-backed securities continued to weaken in the final quarter of 2015, with conduit loan leverage as measured by Moody’s loan-to-value ratio rising to 118.9%. But while it likely will continue to increase over the next few quarters, thereafter rising interest rates and risk retention could help establish a floor for credit quality decline floor for this cycle.
Credit Insight: European RMBS & ABS - January 2016 This edition of Credit Insight examines the credit positive impact of a gradually improving macro environment for European RMBS and ABS. Most structured finance markets’ collateral performance will be stable owing to the improving economic conditions in most countries. The positive turnaround in macro conditions will also give lenders the opportunity to securitize legacy portfolios.
RECENTLY IN CREDIT OUTLOOK Select any article below to go to last Monday’s Credit Outlook on moodys.com
42 MOODY’S CREDIT OUTLOOK 25 JANUARY 2016
NEWS & ANALYSIS Corporates 2 » Qualcomm's Joint Venture with TDK Is Credit Positive » Brown-Forman's Southern Comfort Sale Is Credit Negative » Intrawest's Buyback Plan Is Credit Negative » Kindred's Settlement with the US Department of Justice Is
Credit Negative » AT&T Bundling DIRECTV with Unlimited Mobile Data Is
Credit Negative for Cable Companies » Benefits from Shaw Media Sale Outweigh Burden of Ongoing
Dividend Payments » China's Fuel-Price Floor Is Credit Positive for Chinese National
Oil Companies
Banks 11 » Goldman Sachs' Settlement of US Probe over RMBS Hurts
Earnings but Cuts Tail Risk » Bank Membership Rule Is Credit Positive for Federal Home
Loan Banks » Ruling Barring Captive Insurers from Federal Home Loan
Bank Membership Is Negative for Mortgage REITs » Federal Reserve's Bank Acquisition Review Process Is Quicker
for Well-Regarded Acquirers, a Credit Positive » BOK Financial's Energy Loan Provision Is Credit Negative and
Suggests Other Banks Will Follow » Colombia Raises $2 Billion to Finance Infrastructure, a Credit
Positive for Its State Development Bank » Finalized Basel Market Risk Capital Rule Improves Bank
Capital Comparability » Pillar 2 Regulatory Scrutiny Is Credit Positive for Germany’s
Small and Midsized Banks » Changes to Bonus Buy-Outs Would Be Credit Positive for
UK Banks » RCI Achieves 30% Deposit Funding Target, a Credit Positive » Egypt's New Lending Regulations Are Credit Positive
for Banks » Egypt's Higher SME Lending Quota Supports Economy but
Jeopardizes Banks' Asset Quality » Kuwaiti Banks' Risks Grow amid Slowdown in Real Estate » BNK Financial's Equity Raise Is Credit Positive for Busan Bank
and Kyongnam Bank
Insurers 35 » US Health Insurers Would Benefit from President Obama's
Proposal to Extend Medicaid Funding » MetLife’s Plan to Separate US Retail Business Is
Credit Negative » UK Flood Losses Are Credit Negative for Property and
Casualty Insurers
Sovereigns 40 » Costa Rica's Loss of Chinese Funding Means Higher Domestic
Interest Rates, a Credit Negative » Israel’s Finances Improve Beyond Expectations » Iran Sanctions Relief Will Boost Liquidity and Economic
Growth
Sub-sovereigns 45 » Czech Regions Will Get State Transfer for Road
Reconstruction Again in 2016, a Credit Positive
US Public Finance 46 » Oklahoma's 3% Mid-Year Cuts Are Credit Negative for
School Districts » Burgeoning Budget Imbalance Greets Louisiana's
New Governor
Securitization 49 » Home Partners of America's Unique Business Strategy
Strengthens Its First Single Family Rental Securitization
RATINGS & RESEARCH Rating Changes 52
Last week, we downgraded Evergrande Real Estate Group, Navios Maritime Holdings, Duke Energy, Duke Energy Progress, Progress Energy and Credit Suisse and affiliates and upgraded Belfius Bank and subsidiaries, UBS and affiliates, GFI Group and three Hyundai US auto ABS, among other rating actions.
Research Highlights 58
Last week, we published on global airlines, US cable, US building materials, US retail, Asian high-yield bond covenants, PSA Corp., UK water, aircraft lessors, Sue Vodokanal, German municipalities, Mexican states, US states, US state housing finance agencies, US CLOs, European SMEs, Brazilian FIDC securitizations, US solar ABS, Italian covered bonds and RMBS, US reverse-mortgage RMBS and ResiLandscape, among other reports.
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EDITORS PRODUCTION ASSOCIATE News & Analysis: Elisa Herr and Jay Sherman Sol Vivero Ratings & Research: Mina Kang
