Weekly Credit Outlook - June 25, 2012

25 JUNE 2012
NEWS & ANALYSIS

Corporates 2 P&G Cuts Sales and Earnings View as Economic Slowdown Hits Home Walgreens Stake in Alliance Boots Cuts into its Credit Profile Acquisition of Norit Would Weaken Cabots Credit Profile Hammerson Sells a Majority of its Office Properties to Focus on Retail, a Credit Positive Indian Competition Commission Fines Cement Cartel, a Credit Negative for Holcim and Lafarge Russias New Guarantee Programme Is Credit Positive for ChelPipe and Other Domestic Corporates Chinas New Foreign-Exchange Policy Will Help Chinese Firms with Overseas Investment or Offshore Debt GS E&Cs Resumption of ERC Project in Egypt Is Credit Positive MNC SKY Visions Planned IPO Is Credit Positive Infrastructure BNDESPARs Investment in Renova Energia Is Credit Positive for Light Energia 12
Sovereigns Japans Tri-Partisan Consumption Tax Deal Is Credit Positive Icelands Prepayments on IMF and Nordic Government Loans Are Credit Positive Hidroelectricas Insolvency Filing Is Credit Negative for Romania US Public Finance New York State Denies Deficit Financing to Fiscally Troubled Municipalities Rhode Islands Budget Is Credit Positive for Central Falls and Schools, but Leaves Woonsocket and Pensions Unaddressed Contraction in Municipal Variable Rate Demand Debt Is Credit Positive for Weaker Issuer
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CREDIT IN DEPTH
US Banks, Card Networks, Merchant Acquirers and Retailers New debit rules hurt banks and reshape the payment processor market. 41
RATINGS & RESEARCH

Rating Changes Last week we downgraded Choice Hotels International, Codere, 15 global banks and securities firms, various entities in Lloyds Banking Group, Ceskoslovenska Obchodni Banka (Czech Republic and Slovakia), ING Bank Slaski, ING Bank Eurasia, Bank Gospodarki Zywnosciowej, Natixis Bank (ZAO), and 91 structured finance transactions with exposure to the downgraded 15 global banks and securities firms, and upgraded Flowserve, RBS Global, Turkey, and the Turkish subsovereigns of Istanbul, Ismir, and Toplu Konut Idaresi Baskanligi, among other rating actions. Research Highlights Last week we published on European telecoms, Canadian broadband, leveraged loan covenants, oil and natural gas, EMEA corporate liquidity, US manufacturing, debit card rules, reinsurance, asset managers, Venezuela, Brazil, the Caribbean Development Bank, Pakistan, Russian regions, California, CLOs and US auto ABS, among other reports. Follow us on twitter: twitter.com/MoodysWCO Click here for Weekly Market Outlook 52 44
Banks 13 Changes in Canadian Mortgage Insurance Are Positive, but May Be Too Late JPMorgans Investment in Mexican Subsidiary Is Credit Negative for Other Foreign Wholesale Banks in Mexico Report on Brazils Exchanges Encourages Competition but Is Negative for BM&FBovespa Bank of Englands Decision to Post Collateral in OTC Derivatives Transactions Is Credit Positive for Dealers WestLBs Costly Break-Up Is Credit Positive for Senior Bondholders Russian Central Bank Will Scrutinise Use of Emergency Liquidity Facilities, a Credit Positive Mizuhos Brazilian Acquisition Creates a Credit Positive Beachhead Tighter Lending Rules on Luxury Houses Are Credit Positive for Taiwanese Banks Insurers 25 Tokio Marine to Front-Load Domestic Stock Sales, a Credit Positive Asset Managers 27 Eaton Vances Acquisition of Minority Stake in Hexavest Is Credit Positive Chinas Opening of High-Yield Bond Market Is Credit Positive for International Asset Managers
MOODYS.COM
NEWS & ANALYSIS

Credit implications of recent worldwide news events
Corporates
Janice Hofferber, CFA Senior Vice President +1.212.553.4493 janice.hofferber@moodys.com
P&G Cuts Sales and Earnings View as Economic Slowdown Hits Home
Last Wednesday, The Procter & Gamble Company (Aa3 stable) cut its organic revenue and core earnings per share forecasts for the fourth quarter ending 30 June and introduced modest growth expectations for fiscal 2013. The credit negative development shows that economic weakness in Europe and the US is beginning to pinch, and it suggests that P&Gs focus on emerging-markets expansion has cost it a step in defending existing brands and introducing new ones at home. The company said net sales will decline 1%-2% in the current quarter, including foreign-exchange effects, compared with prior guidance of a 1%-2% increase. It expects core earnings of $0.75-$0.79 per share, down from a prior range of $0.79-$0.85. For fiscal 2013, P&G expects organic sales (excluding foreign exchange and M&A) to increase 2%-4% and core earnings per share to be flat to up in the mid single digits from fiscal 2012 results. These estimates are well below its mid-single-digit revenue growth and high-single-digit earnings growth in recent years. The consumer products giant is feeling the effects of economic weakness, market share losses, higher commodity costs and foreign exchange volatility in Europe and the US. Owing to rising fuel costs and lower disposable incomes, consumers in the advanced economies are becoming more price sensitive despite the highly consumable, low-priced nature of the types of everyday necessities P&G makes. P&G is the first US-based multinational consumer products company to disclose that problems in Europe and a slow recovery in the US are affecting its sales and earnings. But recent market share losses suggest that P&Gs pricing is too high in categories such as diapers and laundry, and that its lack of meaningful innovation and slow productivity improvements are beginning to take a toll. Part of the problem may be that P&G has spent heavily to expand in emerging markets, which has cut into its $2 billion product innovation budget while diverting human resources to achieving its goal of reaching an additional 1 billion consumers over the next few years. This strategy has reduced its capacity to defend its market share and create innovative new products in the developed markets. Consequently, US-focused competitors such as Church & Dwight Co. Inc. (Baa2 stable) and Sun Products Corporation (B2 negative) in the US laundry segment, and Unilever N.V. (A1 stable) in European personal care and home care, have gained ground against P&G brands. These competitors have also gained a cost advantage through their limited foreign exchange exposure to the euro. P&G could falter in emerging markets, too. After a decade-long overseas push, P&G generates 40% of its sales in emerging markets and an even lower percentage of its profits. In contrast, Kimberly-Clark Corporation (A2 stable) gets 45% of its sales in emerging markets, and Colgate-Palmolive Company (Aa3 stable) gets about 55%. Nevertheless, P&G has been booking emerging-markets organic sales growth of about 12% a year. But with concerns of slowing growth in China, where P&G is the largest consumer products purveyor, emerging-markets sales may weaken. To be sure, P&G is not alone in its problems. Danone (A3 stable) last Tuesday scaled back its 2012 operating margin forecast, citing weakness in Spain and elsewhere in the European Union periphery, and others may follow suit. Companies that are more at risk include battery maker Energizer Holdings Inc. (Baa3 stable), with nearly 50% sales exposure to Europe, and skin-care and cosmetics maker Estee Lauder Companies (A2 stable), with over 50% of its sales coming from its large and growing Asian business and substantial European business.
MOODYS WEEKLY CREDIT OUTLOOK
25 JUNE 2012
NEWS & ANALYSIS

Maggie Taylor Vice President - Senior Credit Officer +1.212.553.0424 margaret.taylor@moodys.com
Walgreens Stake in Alliance Boots Cuts into its Credit Profile

Last Monday, Walgreen Co. (A3 review for downgrade) said it had agreed to purchase 45% of the equity of European pharmacy-led health and beauty company Alliance Boots (unrated) for $6.7 billion, a decision that will weaken the US drug-store chains capital structure. Walgreen intends to finance this transaction with a combination of additional debt, equity and cash. Alliance Boots, which is also owned by private-equity firm Kohlberg Kravis Roberts (KKR) and other investors, is highly leveraged, and Walgreen will also significantly increase its debt to finance the investment, leading us to put Walgreens A3 rating on review for downgrade. Walgreen will more than double its current $2.3 billion of debt by adding an additional $3.5 billion to finance the transaction. This debt will increase Walgreens debt-to-EBITDA ratio to 3.8x by 1 September, from 3.3x currently. Moreover, Alliance Bootss debt-to-EBITDA ratio was about 6.2x on 31 March, as a result of the remaining 7.8 billion of debt KKR used to finance its leveraged buyout of the company. We believe there is a risk that the two companies might not deleverage as rapidly as Walgreen expects. To be sure, we expect the combination will drive substantial cost savings for both companies. We believe the combined companies will have sizable purchasing scale for generic drugs and front-end merchandise, which will be a large driver of the potential cost savings. But overall, the increase in leverage makes this deal credit negative. The transaction has other risks. In particular, Alliance Boots derives about 58% of its total annual revenue of 23 billion from continental Europe, where worries about the economy are mounting.
25 JUNE 2012
NEWS & ANALYSIS

William Reed Vice President - Senior Credit Officer +1.212.553.4653 william.reed@moodys.com
Acquisition of Norit Would Weaken Cabots Credit Profile

Last Thursday, Cabot Corporation (Baa1 review for downgrade) said it had entered into an agreement to buy Dutch chemicals company Norit N.V., an indirect parent of Norit Holdings BV (B1 review for upgrade), for $1.1 billion, a move that marks Cabots effort to become a leading higher-margin specialty chemicals company. The planned acquisition is credit negative for Cabot and we placed its ratings on review for downgrade. Cabot has offered an acquisition price nearly 12x Norits 2011 EBITDA, a high multiple, even for Norit, a relatively stable business with strong margins. Cabot plans to finance $900 million of the deal with debt, instantly doubling its debt burden and raising its leverage to about 3x from less than 2x today. Strategically, the deal would give Cabot, a global supplier of commodity and specialty materials, more than 150 types of activated carbon products for removing pollutants and other impurities from water, air, food, drugs, and industrial waste gases. Norit sells these products to a wide range of end users. Yet the weakening of Cabots historic credit profile, along with the incremental debt to fund the Norit purchase price, threatens to dilute the deals strategic benefits to debtholders. For its part, Cabot has shown a seriousness about keeping its leverage under control. The recent sale of its Supermetals business will give Cabot about $275 million as part of an earnout over the next 24 months to help reduce its new debt load of $900 million. The Supermetals sale, including sale of the excess inventory, will total a minimum of $450 million in cash. Cabot received $175 million at the initial closing, and expects to receive an additional $275 million over the next two years. Still, the additional debt from the Norit deal would be a considerable burden for Cabot, which already had $894 million in debt, including $687 million on its balance sheet plus debt adjustments of $93 million for under-funded pension obligations and $114 million for an operating lease. Cabot believes the Supermetals sale and the cash flows of Cabots ongoing businesses will help it lower its debt/EBITDA ratio to about 2.4x by the end of 2013, but we expect its initial leverage to rise to about 3x. Much of the increased demand for Norits products ties directly to the tightening enforcement and enactment of environmental, health and safety regulations and laws, especially those requiring that industrial facilities reduce their emissions of air and water pollutants. Any slowing in the implementation of such rules would reduce the cash flows that Norit anticipates. Moreover, if the Norit deal does signal the start of a Cabot expansion effort, such a debt-funded acquisition spree would compromise Cabots credit profile even further. Whether the companys risk profile has changed, and whether the company can keep its leverage in check, will determine the course of a future rating action. In a 21 June conference call with investors, Patrick Prevost, Cabots chief executive, characterized the deal as a new growth platform for Cabot and the next step to becoming a higher margin, leading specialty chemicals company. Mr. Prevosts comments may not imply that Cabot is ready to embark on an acquisition spree, but any further debt-funded M&A deals would clearly stretch Cabots balance sheet. Mr. Prevost said in his remarks that Cabot has looked at various industry spaces in terms of potential acquisitions for several years now. It is not yet clear whether buying Norit puts an end to Cabots hunt for assets.
25 JUNE 2012
NEWS & ANALYSIS

Lynn Valkenaar Vice President - Senior Analyst +44.20.7772.8650 lynn.valkenaar@moodys.com
Hammerson Sells a Majority of its Office Properties to Focus on Retail, a Credit Positive
Last Tuesday, Hammerson plc (Baa2 stable) said that it had exchanged contracts to sell to Brookfield Office Properties the majority of its office property portfolio for a total cash sum of 518 million, above pro forma book value with an initial yield1 of 5.2%. The sale, which is Hammersons first step toward focusing on developing and acquiring retail properties, is credit positive as it will improve its profitability as operating costs decrease with its new concentration on a single line of business. In addition, the sale, along with the companys proposed expansion of its retail portfolio, will also enhance the companys franchise value, particularly with respect to its tenant relationships. Hammerson is a real estate investment trust (REIT) with a large portfolio of UK and French prime commercial properties valued at 5.72 billion at 31 December 2011. Following this transaction, the portfolio will be 97% retail, versus 89% before the sale, and 3% office, versus 11% before the sale. Although Hammerson will lose some of the benefits of diversification as a result of the disposal of its office properties, the companys income will be more stable. Rental income from Hammersons offices in the City of London has been more volatile than that of its prime retail properties. For example, the office portfolio was 8.9% over-rented2 at year-end 2011, while a more stable rental growth pattern has led to a potential income increase at rent review3 of 3.8% for its shopping centres and 2.3% for its retail parks. In addition, Hammersons business risk will decline. The company has historically taken calculated, but nevertheless speculative, development risk to optimize its returns on office developments. By contrast, Hammersons retail developments have been partially pre-let, at a minimum by anchor tenants, prior to starting construction. Furthermore, many of Hammersons retail developments are lower-risk extensions and/or refurbishments of existing, successful retail properties. Regarding the enhancement to Hammersons franchise value, office property owners find it difficult to cultivate franchise value because office tenants seldom provide opportunities for repeat business in other locations. National and international retailers prefer to rent from property owners specializing in retail so that they know in advance what kind of landlord/tenant relationship into which they will be entering. For example, a landlords positioning of retailers within a well-designed shopping mall can have a large effect on sales. Enhanced franchise value will translate into better demand for Hammersons shopping centres, which translates into being able to ask and get higher rents from tenants and preserve occupancy rates, particularly during cyclical downturns. Hammerson has identified several retail development projects in which to reinvest sale proceeds; these will produce superior returns on investment compared to acquiring comparable completed and let properties. For example, Hammerson is developing a prime regional shopping centre in Marseille, France, that it expects to open in the spring of 2014. The company estimates a return on the 400 million overall cost of development at around 7.4% a year, with more than 64% of rental income already contracted. Hammerson has also identified 320 million of extension and refurbishment works to its UK retail parks and smaller retail properties, and expects these schemes to produce an average return on cost in excess of 7.5%.
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Initial yield is measured by the ratio of rents generated by a property to its purchase price or valuation. Over-rented means that rent paid by the tenant is greater than the open market rent. UK landlords reserve the right to review rents, typically every five years, to raise them to open market rates.
25 JUNE 2012
NEWS & ANALYSIS

Stanislas Duquesnoy Vice President - Senior Analyst +49.69.70730.781 stanislas.duquesnoy@moodys.com
Indian Competition Commission Fines Cement Cartel, a Credit Negative for Holcim and Lafarge
On 21 June, the Indian Competition Commission concluded its review of alleged collusion in the Indian cement industry and imposed material penalties on the 10 largest Indian cement producers. This long-awaited cartel investigation decision is credit negative for Switzerland-based cement producer Holcim Ltd. (Baa2 negative), and to a lesser extent for France-based Lafarge SA (Ba1 stable). We believe that indirect credit consequences from the competition commissions decision will outweigh the cash effect of the fines on both Holcim and Lafarge. Both issuers currently enjoy aboveaverage operating margins in India compared with the rest of their international operations. But like several other emerging markets, India is exposed to high energy, logistics and salary cost inflation. Holcim and Lafarge have been able to compensate for some of the cost inflation through price increases, but the Competition Commission ruling and increased scrutiny of cement prices are likely to make it much more difficult for these two players to increase prices and maintain their current margins. Holcim is Indias largest cement producer through its two majority stakes in the unrated ACC Ltd. (50.3%) and Ambuja Cements (50.13%). ACC controls 10.4% of the Indian cement market according to the Indian Competition Commission, while Ambuja Cements controls 9.8%. Holcim fully consolidates the two companies into its accounts. Lafarge is a much smaller player, with a 3.2% market share. The two entities controlled by Holcim will have to pay INR23.1 billion (CHF390 million or 324 million) in penalties under the announced ruling, while Lafarge will have to pay INR4.8 billion (67 million). For Holcim, the fines are 2% of adjusted debt and 15% of the groups retained cash flow for the last 12 months ended 31 March, while for Lafarge the fines are 0.4% of its adjusted debt and 5% of retained cash flow. We consider the fines to be exceptional one-off items and exclude them from our retained cash flow calculation for credit metrics. The effect would not be material for either issuer. However, the producers have 90 days from the date of the ruling to pay the fine but 60 days to appeal both the ruling and the size of the penalty. An appeal is likely to delay the payment of the penalty as the case will be brought to the Indian High Court and could also lead to lower cash charges. We do not think that Holcim will need to recapitalize ACC and Ambuja because these two entities have very healthy balance sheets with very little debt, and equity capital covers respectively 6.3x and 6.9x the amount of the penalty.
25 JUNE 2012
NEWS & ANALYSIS

Sergei Grishunin Assistant Vice President - Analyst +7.495.228.6168 sergei.grishunin@moodys.com Artem Frolov Assistant Vice President - Analyst +7.495.228.6110 artem.frolov@moodys.com
Russias New Guarantee Programme Is Credit Positive for ChelPipe and Other Domestic Corporates
Last Wednesday, ChelPipe Group (unrated), Russias second-largest pipe producer, said it soon expected to receive state guarantees of around RUB30 billion ($880 million) from a RUB107 billion ($3.2 billion) state guarantee programme aimed at supporting domestic corporates if the euro area crisis escalates and spreads. Disbursement of the guarantees would be credit positive for domestic corporates, as they are likely to aid their debt restructuring efforts by making it easier to obtain cheaper and longer-term financing under challenging market conditions. If it receives a disbursement, ChelPipe plans to use the state guarantees to refinance at a lower cost part of its RUB100 billion debt obligation, which will mature this year. The company incurred most of this debt in 2008-09 to finance a large capex programme totaling around RUB44 billion to produce large diameter pipes. In May 2012, ZAO OMK (unrated), another Russian large diameter pipes producer, received state guarantees totalling RUB21 billion to finance its RUB50 billion capex. Under the programme, the government will provide loan guarantees to eligible corporates for terms of up to five years for up to 50% of the total loan amount (or up to 70% in the case of corporates in the military defense industry). To be eligible for the programme, corporates must not have filed for bankruptcy or have any overdue liabilities to the state. In addition, corporates must provide additional loan security so that the total security (including the state guarantee) covers 100% of loan principal. Furthermore, corporates must reduce the amount of executive compensation to an amount agreed upon with the government until the guarantee expires. Unlike so-called state comfort letters, which represent an intention, rather than an obligation, by the state to repay the debt of an insolvent company, state guarantees oblige the state to repay creditors within 30 days of an issuers default, provided the borrower has adhered to the conditions of state guarantee. If rated corporates receive state guarantees under the programme, the degree of the credit enhancing effect would depend on several factors. These include the underlying credit profile of the issuer, the strength of its ties if any with the Russian state, the terms and conditions of the guarantees, the validity of the guarantee and its enforceability, and the proportion of debt covered by guarantees. At this stage, the government has yet to finalise the list of strategically important companies eligible under the programme. However, under a similar RUB300 billion programme implemented in Russia during the financial crisis in 2009, large industrial corporates operating in such industries as metals and mining, agriculture, machinery, petrochemical and real estate were the main beneficiaries. This time, we also would expect that similar industries would benefit the most, while oil and gas companies are less likely to apply for state guarantees. We view the proactive stance taken by the government in setting up the guarantee as positive because the government can implement the measures quickly if economic conditions deteriorate, which recent developments suggest could happen. The Russian economy heavily relies on revenues from its oil and gas exports, and oil prices have fallen substantially in the past three months to around $90 per barrel of Brent from $125 in March. In addition, the main domestic stock markets are down more than 20% since reaching highs in March, and the ruble is down by around 13% against the US dollar.
25 JUNE 2012
NEWS & ANALYSIS

Ping Luo Vice President - Senior Analyst +852.3758.1353 ping.luo@moodys.com Kai Hu Vice President - Senior Analyst +86.10.6319.6560 kai.hu@moodys.com
Chinas New Foreign-Exchange Policy Will Help Chinese Firms with Overseas Investment or Offshore Debt
On 15 June, the Chinese State Administration of Foreign Exchange (SAFE) announced a new policy to allow onshore entities of Chinese domestic companies to obtain foreign-currency loans within China for lending to their offshore entities. The new policy, which takes effect on 1 July, also relaxes restrictions on individuals who provide guarantees to their offshore investments. The move by SAFE is credit positive for Chinese corporate issuers with overseas investments or offshore debt, particularly non-property, high-yield issuers, as it provides a new foreign-currency funding channel for these issuers, which often had limited offshore liquidity resources. Texhong Textile Group Limited (Ba3 negative) and Winsway Coking Coal Holding Limited (Ba3 negative), both of which have overseas investments and offshore debt, are among our rated issuers that would benefit from the policy. The permission to use domestic, foreign-currency loans for cross-border, inter-company borrowing provides alternative liquidity to service these companies offshore debt, and we expect it to help them better match the currencies in which they borrow with the funding currencies of their overseas investments. SAFEs allowance of individual guarantees, usually by a firms major shareholders, also facilitates the borrowing companys offshore financing. It is usually difficult for Chinese high-yield issuers to obtain offshore bank loans because of issuers limited overseas assets and lack of extensive, foreign banking relationships. They often have to rely on offshore capital markets, which are volatile and subject to investors risk appetite for Chinese companies. Whenever offshore debt and equity market investors enthusiasm for Chinese companies wanes, as has occurred in recent months, Chinas high-yield issuers, in particular, face challenges securing funds from offshore channels to fund their overseas investments or refinance their offshore debt. Chinese corporations usually have better onshore banking relationships but must cope with various restrictions on transferring capital overseas. Previously, such companies had limited channels to invest abroad owing to Chinas strict controls over the countrys capital account. Common channels include dividend distributions on foreign direct investment, repayment of registered, inter-company loans from offshore entities, borrowing from offshore banks under domestic bank guarantees, and inter-company advances using foreign currency they already own, but limited to 30% of the sending firms registered capital. All these channels require cumbersome approval procedures, and some may even involve high costs, such as withholding taxes for repatriation of dividends. SAFE promulgated the new policy as the Chinese government tries to encourage more domestic, private-sector companies to invest abroad. The policy is yet another sign of Chinas gradual relaxation of its capital-account controls for outbound investments. We note that total foreign currency loans available for lending are still small, with total foreign currency deposits of $378 billion, or 3% of total deposits in China, and loans of $566 billon, or 6% of all loans in China as of May 2012. However, both figures have been increasing. Among our rated Chinese companies, we believe non-property, high yield issuers would most benefit from this new policy. The policy opens up a new funding avenue for them, as long as they have good onshore banking relationships, available domestic credit facilities, or assets for collateral to secure new bank loans. Chinese state-owned enterprises and other investment grade corporates usually have better offshore liquidity resources and therefore less need for such loans. Meanwhile, we expect Chinese property issuers to continue facing a tightening credit market.
25 JUNE 2012
NEWS & ANALYSIS

High-yield issuers such as Texhong and Winsway both have offshore debt outstanding and overseas investments, and their onshore operations have relatively healthy liquidity profiles. The new policy from SAFE provides an additional alternative to the companies funding channels.
25 JUNE 2012
NEWS & ANALYSIS

Chris Park Vice President - Senior Credit Officer +852.3758.1366 chris.park@moodys.com
GS E&Cs Resumption of ERC Project in Egypt Is Credit Positive

Last Monday, Korean construction firm GS Engineering & Construction Co. Ltd. (GS E&C, Baa3 negative) said that it had resumed the engineering-procurement-construction work for the refinery project of Egyptian Refining Co. (ERC, unrated), following the project finally receiving funding. The resumption is credit positive for GS E&C, as its cash flow will benefit from an advance payment of about $300 million. Revenue and earnings will also benefit considerably, as we estimate the progress of this project alone will increase the companys revenue by around 7% annually over the next four years. ERC originally awarded the project, worth $2.1 billion, to GS E&C in August 2007, and at the time it was the largest overseas project won by a Korean engineering and construction firm. However, the financial crisis of 2008-09 and the political turmoil in Egypt triggered funding difficulties that delayed the projects execution. The company aims to complete the project by August 2016. Yet even with the funding in place, the persistent political uncertainty surrounding Egypt remains a challenge, as renewed political unrest could threaten the timely execution and reimbursement from the project. We believe GS E&C will make progress in winning new orders in the Middle East and Asia given the number of large projects it has in the pipeline. Therefore, we expect revenue and earnings growth in the plant division, which accounted for 83% of adjusted operating income in 2011, will accelerate starting in the second half of 2012. We expect consolidated revenue to grow by around 10% annually over the next couple of years, driven mainly by the robust growth in plant revenue. The exhibit below shows GS E&Cs plant divisions performance since 2007. GS E&Cs Plant Business Performance
16 12 Plant Order Backlog Plant Revenue
KRW trillion
8 4 0 2007 2008 2009 2010 2011 1Q12
Note: Figures include the performance of the environmental division, which is relatively small, compared with GS E&Cs plant business. Source: GS E&C
GS E&C has accumulated large-scale orders in its plant business over the past few years, owing to its competitive position in the Middle East, where demand for petrochemical and refinery plants has been robust. As of March, its order backlog for the segment, including orders for its environmental business, stood at KRW15.7 trillion, or about 3.6 years of revenue. New order wins for its plants business were sluggish in first-quarter 2012, down 75% from a year earlier, owing to the postponement of large-scale projects in the Middle East. However, we expect new order wins for 2012 to exceed the KRW5.8 trillion ($5 billion) of orders in 2011 because a number of large projects, which GS E&C is in a strong position to win, are due to be launched during the year. These projects include LG Chems ethylene plant in Kazakhstan ($2 billion), the Petro Rabigh project in Saudi Arabia ($2 billion), and a gas plant in Venezuela ($1 billion).
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25 JUNE 2012
NEWS & ANALYSIS

Annalisa Di Chiara Vice President - Senior Analyst +852.3758.1537 annalisa.dichiara@moodys.com
MNC SKY Visions Planned IPO Is Credit Positive

On 15 June, MNC Sky Vision (P.T.) (B2 stable), one of Indonesias largest pay-TV providers, announced that it would launch an initial public offering (IPO) that could exceed $200 million, based on current pricing estimates by Reuters. The planned IPO is credit positive as the increased liquidity that would follow would provide more permanent funding for MNC Sky Visions capex and growth strategy over the next one to two years. According to Finance Asia, Sky Visions IPO, if successful, will be Indonesias biggest IPO this year. Sky Vision is currently 75%-owned by Global Mediacom Tbk (P.T) (unrated) and 20%-owned by Bhakti Investama Tbk (P.T.) (unrated). Its principal business is providing satellite-based, direct-tohome pay-TV services throughout Indonesia. Through the companys two leading TV brands, Indovision and Top TV, and the OkeVision brand, the company had 1.1 million subscribers in 2011 and a total market share of 69%, according to Media Partners Asia, a leading provider of information services on the media industry in Asia. At 1.6 million total subscribers in 2011, Indonesias pay-TV penetration rate of 4.8% of TV households is among the lowest in Asia Pacific, providing significant scope for organic growth. As a comparison, Indias penetration rate is above 80%, Malaysias is above 50% and the Philippines and Thailand are in the 7%-10% range. However, Indonesia also has 1.4 million illegal subscribers, so piracy remains a key issue and will continue to dampen the rate at which Sky Vision and other pay-TV operators can monetize growing demand. The IPO consists of up to 847 million newly issued shares and up to 565 million secondary shares offered by Bhakti Investama, the selling shareholder. The company will only receive proceeds from the newly issued shares. According to the preliminary prospectus, 70% of these proceeds will be allocated to capex, which includes the purchase of set-top boxes and other supporting broadcast equipment. Sky Vision provides set-top boxes to subscribers free of charge and equipment upgrades are necessary to support more channels and an expansion of high-definition TV. The company will use the remainder to repay around $24 million of debt, including intercompany borrowings, as well as for working capital purposes. Although debt/EBITDA will improve moderately to 2.2x from 2.5x, the real benefit of this transaction is the potential boost in the companys liquidity profile. We expect Sky Vision to generate negative free cash flow through 2013, reflecting the significant capex required to support the expansion of its subscriber base. Proceeds from this IPO will provide permanent funding for these cash shortfalls, which we estimate could average $40-$50 million over the next two years. In addition, competition is increasing, as telecom providers such as Telekomunikasi Indonesia (P.T.) (Baa1 stable) boost their product offerings and presence in the pay-TV market by bundling voice, broadband, TV and mobile to gain customers. We believe these factors will lead to increased pressure on average revenues per user (ARPUs) and lower operating margins over the next two years. As such, stronger liquidity would provide additional flexibility to fund capex as these factors lower internal cash flow generation. The companys credit profile currently relies on Global Mediacom to fully support any and all of Sky Visions financial requirements resulting from the expected negative free cash flow, as the company has no long-term committed bank credit facilities. A successful IPO will likely replace the companys reliance on Global Mediacom.
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25 JUNE 2012
NEWS & ANALYSIS

Infrastructure
Alexandre Leite Vice President - Senior Analyst +55.11.3043.7353 alexandre.leite@moodys.com
BNDESPARs Investment in Renova Energia Is Credit Positive for Light Energia

On 15 June, Light S.A. (Ba1 stable) announced that BNDES Participaes S.A. - BNDESPAR (A3 stable), the equity investment arm of the Brazilian development bank Banco Nac. Desenv. Economico e Social - BNDES (Baa2 stable), would make a BRL314.7 million (approximately $157 million) equity investment in the Brazilian renewable energy company Renova Energia S.A. (unrated). BNDESPARs investment is credit positive for Light Energia S.A. (Ba1 stable), of which Light S.A. owns 100% and is one of Renovas controlling shareholders, as it will strengthen Renovas capital base and provide enough liquidity to develop its large pipeline of renewable energy projects. Those projects include the development of several wind farms with total installed capacity of 774 megawatts (MW) that the company expects will deliver electricity between 2013 and 2016. In addition, Renova has identified a pipeline of wind and small hydropower projects with total installed capacity of up to nine gigawatts in different geographic locations in Brazil. Renova, a renewable energy company that develops and operates wind farms and small hydroelectric power plants, plays a key role in Lights efforts to increase its exposure to the electricity generation business, given that Lights core regulated distribution business will be materially affected by the third periodic tariff review in November 2013. By 2015, we expect that Light will derive about 30% of its consolidated EBITDA from the generation business, which will require annual investments of BRL150 million between 2013 and 2015 that BNDES will primarily finance. In 2009 and 2010, Renova won public auctions organized by the Brazilian government to supply renewable energy. In 2011, the company successfully sold 103.6 average-MW of energy that nine of its wind farms currently under development will generate starting in March 2014. Five other wind farms that the company has scheduled to go on line in July have already received long-term debt financing totaling BRL297.4 million (approximately $149 million) from BNDES. BNDESPARs equity infusion will help Light Energia strengthen its position in the Brazilian electricity generation market. BNDES is wholly owned by the Brazilian government, and is the largest source of long-term debt and equity financing in Brazil. As of December 2011, BNDES reported total assets of BRL624.8 billion, a 13.8% increase over the previous year; disbursements in 2011 reached BRL139.7 billion. BNDES is strategically important to the Brazilian government owing to its mission of promoting social and economic development in the country.
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NEWS & ANALYSIS

Banks
William Burn Analyst +1.416.214.3632 william.burn@moodys.com Andriy Stepanyants Associate Analyst +1.416.214.3853 andriy.stepanyants@moodys.com
Changes in Canadian Mortgage Insurance Are Positive, but May Be Too Late
Last Thursday, Jim Flaherty, Canadas Minister of Finance, announced rule changes for governmentbacked insured mortgages that seek to reduce consumer mortgage indebtedness and cool the housing market. The changes are the latest in a series that began in 2008, and come against a backdrop of rising consumer leverage in Canada. On 15 June, Statistics Canada released data showing that debt to household income increased to a record 152%. The new rules are credit positive for Canadian banks, but may be too late to avoid a housing correction. By law, Canadian borrowers must buy insurance on all mortgages with loan-to-value (LTV) ratios of more than 80%. The latest rule change marks the fourth revision since 2008 of the government mortgage insurance program, and will apply to new loans when the rule comes into force in July. The changes are:
Further reduction in the maximum amortization period to 25 years from 30 years. It was 35 years before March 2011. Reduction in the maximum refinancing amount to 80% LTV from 85%. It was 90% before March 2011. Limit on the maximum total debt service (all debt obligations and home-related expenses) to 44% of gross household income from 45%. Withdrawal of government-backed insurance for homes with a purchase price greater than CAD1 million.
Shorter loan amortizations will immediately cool home sales by requiring increased monthly payments. For a typical loan of CAD350,000, monthly payments will rise 11% (see Scenario 1 in the exhibit below), which has approximately the same effect as a 1% increase in rates with a 30-year amortization period. Alternatively, in Scenario 2, if monthly payments stay constant, the maximum purchase price achievable by the borrower would fall around 9%. Notably, the government did not increase the minimum 5% down payment requirement for new home purchases as it seeks to strike a balance between a controlled slowdown and an abrupt dislocation. Effect of Mortgage Insurance Rule Changes on a Borrower with CAD18,000 Down Payment
Scenario Loan Amount CAD 000s Loan Term in Years Monthly Payment Rate LTV House Price Monthly Payment CAD 000s Percent Change House Price Percent Change
Base Case 1 2
CAD 350 CAD 350 CAD 317
30 25 25
CAD 1,671 CAD 1,847 CAD 1,671
4% 4% 4%
95% 95% 95%
CAD 368 CAD 368 CAD 335
na 11% na
na na -9%
Scenario Descriptions 1 Amortization shortened to 25 years; loan amount unchanged 2 Amortization shortened to 25 years; loan amount reduced to maintain same payment Source: Moodys calculations
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NEWS & ANALYSIS

The changes announced last week will enhance the stability of Canadian banks, as they will result in Canadian borrowers holding more equity in their homes. By limiting the amount that Canadians can borrow against the value of their homes, these rules will tend to lead to stronger debt service and will also create an equity buffer that banks can access if necessary through the sale of the property. Both of these trends reduce the risk in the uninsured consumer credit portfolios of the Canadian banks. Banks generally have unsecured credit exposure (e.g., credit cards) to borrowers with insured mortgages. The new rules are positive for all Canadian banks, and particularly for Canadian Imperial Bank of Commerce (Aa2 stable; B-/a1 stable)4 and The Toronto-Dominion Bank (Aaa negative; B+/aa2 negative) because of their leading shares in consumer credit cards. However, the governments moves may have come too late, owing to the build-up in consumer debt that has already occurred. Previous rule changes had some effect in countering the stimulus provided by historically low interest rates, but failed to stop Canadian household leverage from increasing. Moreover, slowing growth in household disposable income will be a headwind for consumers trying to deleverage. Canadian consumers reliance on low interest rates to support high debt loads remains a risk. The Bank of Canada estimates that if interest rates rise 325 basis points by mid-2015, the proportion of households with total debt service ratios of 40% or more will increase to approximately 20% from 11.5% in 2011. 5 The tightening of total debt service guidelines announced as part of this package of changes will help to improve the resilience of Canadian consumers.
4 5
The ratings shown are the banks deposit rating, its standalone bank financial strength rating/baseline credit assessment and the corresponding rating outlooks. Bank of Canada Financial System Review, June 2012 (pages 20-21).
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NEWS & ANALYSIS

Felipe Carvallo Assistant Vice President - Analyst +52.55.1253.5738 felipe.carvallo@moodys.com
JPMorgans Investment in Mexican Subsidiary Is Credit Negative for Other Foreign Wholesale Banks in Mexico
Last Monday, JPMorgan Chase & Co. (A2 negative) announced it would make a capital increase of $250 million in its Mexican subsidiary Banco JPMorgan, S.A. (unrated), a sizable 80% boost to current equity of about $310 million. The capital increase is credit positive because it strengthens Banco JPMorgans balance sheet and enables it to lend and finance M&A activity, as well as enhance its capabilities in the debt and equity capital markets at a time of increasing business opportunities in Mexico. At the same time, JPMorgans move adds competition to an already highly competitive market, with negative credit implications for foreign wholesale bank peers operating in Mexico, particularly Bank of America Mxico, S.A. (BAMSA, Baa2 review for downgrade; D+/baa3 review for downgrade), 6 Deutsche Bank Mxico, S.A. (Baa1 review for downgrade; D/ba2 stable), and Banco Credit Suisse Mxico, S.A. (Baa1 stable; D+/baa3 stable). With the new capitalization, Banco JPMorgan will become the second most important foreign wholesale bank in Mexico in terms of capital (see exhibit below), rising from a distant third. All these wholesale banks cater to large domestic corporations, a broad universe of subsidiaries of foreign companies, and a deep institutional investor market. Foreign Wholesale Banks in Mexico
As of 31 March 2012
Capital MXN millions Loans MXN millions Assets MXN millions
Banks
Ratings
ING Bank, S.A. (Mexico) Bank of America Mxico, S.A. Banco JP Morgan, S.A. (Mexico) Bank of Tokyo-Mitsubishi UFJ (Mxico), S.A. Barclays Bank Mxico, S.A. Deutsche Bank Mxico, S.A Banco Credit Suisse Mxico, S.A. The Bank of New York Mellon, S.A. Royal Bank of Scotland Mxico, S.A. UBS Bank Mxico, S.A.
Source: Comisin Nacional Bancaria y de Valores, Moodys
Baa3 review for downgrade; D-/ba3 review for downgrade Baa2 review for downgrade; D+/baa3 review for downgrade Unrated Aa1.mx stable; D/ba2 stable Baa2 review for downgrade; D/ba2 stable Baa1 review for downgrade; D/ba2 stable Baa1 stable; D+/baa3 stable Unrated Unrated Unrated
8,210 4,761 4,271 3,480 2,835 2,502 2,113 719 644 491
3,504 1,072 340 2,292 0 737 115 0 651 184
45,293 92,778 39,661 12,058 25,867 172,091 56,536 780 4,097 7,439
Yet, how JPMorgan seeks to generate returns on the additional capital will be critical to its performance and to the competitive landscape. Banco JPMorgans improved capacity to lend pesos onshore to the subsidiaries of foreign corporations will pit it against market leaders BAMSA and Deutsche Bank Mxico as they leverage their balance sheets for investment banking deals. An increase in Banco JPMorgans ability to finance M&A will directly affect the strong leads that Banco Credit Suisse Mxico and BAMSA have traditionally held in this area. A larger capital base would help Banco
6
The bank ratings shown in this report are the banks deposit rating, its standalone bank financial strength rating/baseline credit assessment and the corresponding rating outlooks.
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NEWS & ANALYSIS

JPMorgan challenge market share dynamics in a much more fragmented debt capital market, where Deutsche Bank Mxico and BAMSA lead today. A stronger balance sheet also comes at an auspicious time when Mexicos onetime most active foreign wholesale bank, ING Bank, S.A. (Mexico) (Baa3 review for downgrade; D-/ba3 review for downgrade) has significantly contracted both its loan book and trading volumes as its parent bank ING Bank N.V. (A2 negative; C-/baa1 negative) focuses on its European subsidiaries. Increased capital for Banco JPMorgans brokerage house 7 will increase its capabilities in Mexicos much smaller equity capital markets. Stock brokerage services, advisory services and bond underwriting are activities that Mexican regulations state can only be performed by brokerage house vehicles, not by banks. JPMorgans investment also closely follows Bank of Tokyo-Mitsubishi UFJ, Ltd.s (Aa3 stable; C/a3 stable) $200 million capital increase in Bank of Tokyo-Mitsubishi UFJ (Mxico), S.A. (Aa1.mx stable; D/ba2 stable) in the first quarter. That investment underscores general interest in Mexico, but does not pose a threat to other foreign wholesale banks in Mexico given Bank of Tokyo-Mitsubishis primary focus on servicing Japanese corporations operating in Mexico.
JPMorgan Casa de Bolsa, S.A. de C.V. (unrated)
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NEWS & ANALYSIS

Alexandre Albuquerque Assistant Vice President - Analyst +55.11.3043.7356 alexandre.albuquerque@moodys.com Ricardo Kovacs Vice President - Senior Analyst +55.11.3043.7308 ricardo.kovacs@moodys.com
Report on Brazils Exchanges Encourages Competition but Is Negative for BM&FBovespa

Last Monday, Brazils securities regulator Comisso de Valores Mobilirios (CVM), unveiled a study it commissioned from UK-based economic consultancy Oxera Consulting Ltd. on the organization and competitive landscape of the equities and derivatives exchanges in Brazil. The reports findings are credit negative for BM&FBovespa S.A. (A1 review for downgrade), 8 Brazils equity and commodities exchange, because it recommends introducing competition to the exchanges monopoly in clearing services. The independent study concluded that increased competition would reduce the costs of trading and post-trading services, benefiting investors and potentially boosting business and trading volumes. The report also advocates sharing clearinghouse services as a preferred means to increase competition by new entrant exchanges, rather than duplicating clearing platforms, an option that would reduce gains for infrastructure providers such as BM&FBovespa. BM&FBovespa holds a near monopoly of equities and derivatives trading in Brazil, and it is improving its capabilities by integrating its clearinghouses for derivatives, equities, foreign exchange rates, and government bonds into a single platform, a move that will strengthen its grip on the domestic market. Under Brazilian securities regulations, trades must be matched in an exchange environment, while settlement and clearing must be done through a central counterparty, and at the beneficial owner level, as currently offered by BM&FBovespa. Potential competitors would therefore be required to provide the same integrated solution as BM&FBovespa, unless they are allowed to use its existing platform. However, to date, the exchange has shown little interest in sharing its clearing infrastructure with competing exchanges: its position and the prohibitively high costs of establishing a new clearinghouse thwarted the planned Brazilian entry of two US-based exchanges, BATS Global Markets (unrated) and Direct Edge (unrated), in 2011. The exchange, however, has reduced trading fees for home brokers and high-frequency traders in a move that indicates it is bracing for competition, which is now certain, leaving only the question of when it will come. Because the high growth potential of equities and derivatives transactions is a strong incentive for international exchanges to enter Brazil, we expect the regulator to discuss the findings of the Oxera report with market participants in the near future, although changes to the current competitive landscape could be years away because of Brazils complex regulatory and infrastructure conditions. In the meantime, in another indication that pressure on BM&FBovespa is growing, CETIP S.A. Mercados Organizados (CETIP, unrated), the Brazilian group engaged in post-trade services, has also requested authorization from the Central Bank of Brazil and CVM to act as central counterparty for trading fixed-income securities and over-the-counter (OTC) derivatives. CETIP is a privately owned company that provides registration, custody and settlement services for fixed income, derivatives, and interbank transactions. CETIPs request to act as a central counterparty will allow it to broaden the scope of its product mix and earnings, and leverage its presence in two markets in which BM&FBovespa has limited presence: fixed-income securities lending, and OTC derivatives trading. CETIP now faces the task of building a robust risk management structure to comply with regulatory requirements, which we expect to be in place by year-end 2013. Despite our expectations that this move will have a limited effect on BM&FBovespas business, it is CETIPs first step in becoming a clearinghouse.
The rating shown is the local currency issuer rating.
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25 JUNE 2012
NEWS & ANALYSIS

Carlos Suarez Duarte Assistant Vice President - Analyst +44.20.7772.1061 carlos.suarezduarte@moodys.com
Bank of Englands Decision to Post Collateral in OTC Derivatives Transactions Is Credit Positive for Dealers
Last Thursday, the Bank of England (BOE) announced that starting next year it would begin providing collateral to its over-the-counter (OTC) derivatives counterparties when the value of the position is in the counterparties favour. This effort will collateralise foreign exchange and interest rate derivatives undertaken by the BOE for its own balance sheet and as an agent for the UK Treasury. The decision is credit positive for large derivatives dealers such as Barclays Bank plc (A2 negative; C/baa2 stable), 9 HSBC Bank plc (Aa3 negative; C/a3 stable) and Royal Bank of Scotland plc (A3 negative; D+/baa3 stable), as it will reduce the costs generated by uncollateralised derivatives transactions. The BOEs action also sets an important precedent for other governments and supranational organisations that currently do not post collateral. The decision will also benefit the BOE because its counterparties will cease to incorporate their expected funding costs into derivatives prices. Derivatives dealers continue to operate through unilateral credit support annexes with most sovereign and supranational counterparties. As a result, dealers do not receive collateral to fund their mark-tomarket gains, but have to post collateral when they experience mark-to-market losses. Hedging these positions with sovereigns involves additional costs as financial counterparties always apply two-way collateral agreements. The BOEs announcement considers that posting collateral would help its counterparties provide better prices driven by lower costs. Until now, just a handful of financially vulnerable countries such as Ireland and Portugal have posted collateral to their derivatives counterparty. Therefore, the BOE will become the first central bank to post collateral for its derivatives operations for economic reasons rather than to reassure counterparties on its credit. The Basel III regulatory framework proposes higher credit valuation adjustment for uncollateralised claims. As a result, derivatives dealers with sizable uncollateralised positions would face additional capital requirements, although the European Union draft legislation makes an exemption for sovereign clients. The BOEs decision is likely to improve derivatives dealers profitability since they will not have to assume any additional capital charges or funding costs. Furthermore, dealers would potentially mitigate their counterparty exposure since the BOE will provide foreign currency securities to counterparties instead of UK government bonds in pounds. We consider it unlikely that financial regulators will require all sovereigns and supranational entities to follow the BOEs example. However, we expect this decision to encourage some central banks to revisit their position regarding collateral posted for derivatives transactions if they want dealers to provide better prices.
The ratings shown are the banks deposit rating, its standalone bank financial strength rating/baseline credit assessment and the corresponding rating outlooks.
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25 JUNE 2012
NEWS & ANALYSIS

Katharina Barten Vice President - Senior Credit Officer +49.69.70730.765 katharina.barten@moodys.com
WestLBs Costly Break-Up Is Credit Positive for Senior Bondholders

Last Tuesday, following months of difficult negotiations, the owners of WestLB AG (A3 review for downgrade; E/caa1 stable)10 announced that major obstacles to the planned orderly breakup of WestLB have been cleared. The plan is credit positive for WestLBs senior bondholders (senior unsecured A3 review for upgrade) because they can expect to have their exposure safeguarded by an entity with a stronger credit profile. Disposition of WestLBs assets and liabilities will most likely proceed in line with an agreement that the bank, its owners and the German government reached in June 2011. Most of WestLBs assets and liabilities will be transferred either to Landesbank Hessen-Thueringen (Helaba, A2 stable; D+/baa3 stable) or to Erste Abwicklungsanstalt (Aa1 stable), the wind-down vehicle of WestLB, which offers the highest degree of safety given that it enjoys full public-sector backing. Other assets and liabilities will remain in WestLBs successor entity, a non-bank service provider that will be renamed Portigon AG. According to the plan, all debt will be transferred out of WestLB, except for subordinated instruments. Whether deposits will be transferred depends on the depositor. We expect all covered bonds and the portion of senior unsecured debt and deposits that represents funds provided by savings banks and their clients, in total 40 billion, to be transferred to Helaba, which has emerged as one of the strongest of the Landesbanks. All other senior debt of WestLB will be transferred to Erste Abwicklungsanstalt. Liabilities other than senior unsecured debt and covered bonds of WestLB, particularly subordinated debt (unrated) and hybrid instruments (Ca (hyb)), will probably be excluded from the beneficial transfers. If these instruments remain in Portigon, they are at risk for losses that may occur during its start-up phase. Whether 4 billion of capital in addition to WestLBs subordinated instruments will be sufficient to shield any remaining deposits in Portigon from losses remains to be seen. In addition to the immediate effects for investors in WestLB, the banks rescue, break up and unwinding have several significant aspects. The WestLB case has shown that Germanys Landesbanks are considered systemically important, demanding full support for senior bondholders even if the costs are great and the banks future (and jobs) are forfeited under pressure from anti-trust authorities in Brussels. The case also shows that there are limits to the support that the mutually supportive SparkassenFinanzgruppe (Aa2 stable) is prepared to provide. The total costs of WestLBs unwinding, which the NRW Ministry of Finance estimated at 18 billion, 11 were not shared pro rata by the banks owners because respective costs exceeded the financial capacity of the stake-holding regional savings banks. Instead of the Sparkassen-Finanzgruppe, which principally offers support to all of its members, the central government stepped in and contributed 3 billion to the package. This is significant for taxpayers and bondholders, since future support actions of a large scale may once again go beyond the sectors capacity and control, leaving it to the central government to decide on burden-sharing.
10 11
The bank ratings shown in this report are the banks deposit rating, its standalone bank financial strength rating/baseline credit assessment and the corresponding rating outlooks. Including all support rendered since 2005 and contingent liabilities relating to assets and liabilities that need to be unwound.
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25 JUNE 2012
NEWS & ANALYSIS

Maxim Bogdashkin Assistant Vice President - Analyst +7.495.228.6052 maxim.bogdashkin@moodys.com Anna Avdeeva Associate Analyst +7.495.228.6059 anna.avdeeva@moodys.com
Russian Central Bank Will Scrutinise Use of Emergency Liquidity Facilities, a Credit Positive
On 17 June, Mikhail Sukhov, deputy chairman of the Central Bank of Russia (CBR), stated that banks whose reliance on CBR funding exceeds 10% of liabilities will be subject to increased monitoring by the regulator. We view this development as credit positive for Russian banks as it signifies CBRs efforts to address at an early stage potential liquidity problems. The CBRs emergency liquidity facilities were among the most important tools of systemic support in Russia during the 2008-09 financial crisis. Banks borrowed from CBR during the entire crisis, with their dependence on CBR funding peaking at 14% of liabilities in January 2009 (see Exhibit 1).
EXHIBIT 1
Russian Banks Reliance on Central Bank of Russia Funding Is Growing Again

CBR Funding as Percent of Total Banking Liabilities
16% 14% 12% 10% 8% 6% 4% 2% 0% 4.5% 13.8%
Source: Central Bank of Russia
Currently, most Russian banks do not rely on CBR borrowings, which accounted for only 4.5% of total liabilities at the end of May 2012. However, a limited number of banks (Exhibit 2) increased their CBR funding, mainly to finance opportunistic strategies in foreign exchange or securities markets, or loan growth. In some cases, excessive reliance on CBR funding may also signal bankspecific liquidity problems. Mr. Sukhov said as much, noting that excessive demand for CBR funding by certain banks may signal potential problems that their regulatory reporting does not show. Therefore, these banks will be required to explain the need for CBR funding, and we expect that they will have to revisit their funding strategies.
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NEWS & ANALYSIS

List of Rated Banks That Borrowed Above 10% of Liabilities from the CBR as of May 2012
Bank CBR Funding % Total Liabilities Borrowings from CBR ($ millions) Bank ratings*
EXHIBIT 2
CentroCredit Bank StarBank Derzhava Bank Solidarnost Rosdorbank ING Bank Eurasia Stroykredit Bank SME Bank Nota bank SMP Bank Natixis (ZAO) Sovcombank MTS Bank Locko-bank Tatfondbank Rusfinance Bank
57% 27% 27% 21% 20% 14% 17% 14% 13% 13% 11% 11% 10% 10% 10% 10%
$921 $88 $82 $114 $72 $1,000 $162 $320 $208 $413 $57 $201 $403 $155 $223 $216
B3 stable; E+/b3 stable Ba2.ru ** B3 stable; E+/b3 stable B3 negative; E+/b3 negative B3 stable; E+/b3 stable Baa2 negative; D/ba2 stable Caa1 stable; E/caa1 stable Baa2 stable; E+/b1 stable B3 positive; E+/b3 stable B3 stable; E+/b3 stable Ba3 stable; E+/b1 stable B2 stable; E+/b2 stable B1 negative; E+/b2 stable B2 stable; E+/b2 stable B3 stable; E/caa1 stable Baa3 review for downgrade; E+/b1 stable
*The ratings shown are the banks deposit rating, its standalone bank financial strength rating/baseline credit assessment and the corresponding rating outlooks. ** National Scale Rating. National Scale Ratings are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. Source: Central Bank of Russia, Moodys calculations
Although we expect banks to resort to CBR liquidity facilities only in extraordinary cases, some players opt to fund their conventional banking operations with accessible and still cheap CBR sources. The cost of CBR three-month repo financing, currently the most popular CBR instrument, could be up to 300 basis points cheaper than a three-month unsecured interbank loan. While this choice is rational from a cost perspective, the utilisation of the CBRs limits and tying up liquid assets in repo deals decreases the maneuvering room that these banks will have in the event of a liquidity squeeze. As a result, we expect the CBRs increased monitoring will discourage banks from using overly aggressive liquidity management and improve banks liquidity.
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NEWS & ANALYSIS

Tetsuya Yamamoto Vice President - Senior Analyst +81.3.5408.4053 tetsuya.yamamoto@moodys.com
Mizuhos Brazilian Acquisition Creates a Credit Positive Beachhead

Last Wednesday, Mizuho Corporate Bank, Ltd. (A1 stable; C-/baa1 stable) 12 announced that it had reached an agreement with German bank WestLB AG (A3 review for downgrade; E/caa1 stable) to acquire WestLBs Brazilian corporate banking subsidiary, Banco WestLB do Brasil S.A. (unrated) for an undisclosed sum. The acquisition is credit positive for Mizuho, as it gives the Japanese bank a base of operations in Brazil, where many of its large corporate customers are increasing their investment. Banco WestLB do Brasil, based in Sao Paulo, is a medium-size bank established in 1911 with total assets of approximately $1.5 billion as of the end of December 2011, and focuses mainly on wholesale banking. We see the acquisition as a good strategic move for Mizuho to support its clients. Mizuho has business relationships with approximately 70% of listed companies in Japan, many of which are attracted to Brazils strong domestic demand and rich natural resources. For the past 40 years, Mizuhos only presence in Brazil has been a representative office in Sao Paulo, which placed Mizuho at a disadvantage vis--vis Mitsubishi UFJ Financial Group, Inc. (MUFG, unrated) and Sumitomo Mitsui Financial Group, Inc. (SMFG, unrated), 13 which already have domestic Brazilian banking subsidiaries. Following the acquisition, Mizuho will be better placed to support the global financial needs of its large corporate customers for which Brazil is an increasingly important market. With its acquisition of this local banking platform, Mizuho strengthens its ability to support the entrance and expansion of both Japanese and non-Japanese customers in Brazil, and will be able to offer its clients full banking services including loans and deposits, which it cannot do now. Although the parties in the deal have not disclosed the price for Banco WestLB do Brasil, we expect the cost to be minimal compared with Mizuho Financial Group, Inc.s (MHFG) 14 total assets of 165 trillion ($2.1 trillion) as of the end of March. This transaction gives Mizuho geographic diversification in its core commercial banking businesses, with low financial risk at a time when Japans own growth prospects are poor. Mizuhos past forays into overseas markets in US were ill-timed and resulted in relatively high credit costs. The small scale of this expansion reflects Mizuhos improved discipline regarding overseas acquisitions. Mizuho Corporate Bank, Ltd. is one of main operating banks of MHFG, one of three Japanese mega bank groups. Completion of the transaction is subject to regulatory approvals.
12 13
14
The bank ratings shown in this article are the banks deposit rating, its standalone bank financial strength rating/baseline credit assessment and the corresponding rating outlooks. The domestic subsidiary banks are the Bank of Tokyo-Mitsubishi UFJ, Ltd. (Aa3 stable; C/a3 stable) and Mitsubishi UFJ Trust and Banking Corporation (Aa3 stable; C/a3 stable) for MUFG; and Sumitomo Mitsui Banking Corporation (Aa3 stable; C/a3 stable) for SMFG. The domestic subsidiary banks are Mizuho Bank, Ltd. (A1 stable; C-/baa1 stable), Mizuho Corporate Bank, Ltd. (A1 stable; C-/baa1 stable), and Mizuho Trust & Banking Co., Ltd. (A1 stable; C-/baa1 stable).
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NEWS & ANALYSIS

Ginger Kao Associate Analyst +852.3758.1317 ginger.kao@moodys.com
Tighter Lending Rules on Luxury Houses Are Credit Positive for Taiwanese Banks
Last Thursday, Taiwans central bank announced tighter lending rules on all luxury housing units, including a 60% cap on loan-to-value ratios (LTV) and a ban on interest-only mortgages. The tightening, which marks the first time that Taiwans regulator has imposed explicit lending rules on luxury houses, is credit positive for Taiwanese banks because the proposed rules will help dampen real estate speculation. The central bank defines luxury houses as units with a price higher than TWD80 million ($2.7 million) in the metropolitan Taipei area, and higher than TWD50 million ($1.7 million) in other areas. A stable property market is important to Taiwanese banks as housing loans 15 accounted for around 29% of total loans as of the end of 2011. The exposure was even higher among some of our rated banks, including Land Bank of Taiwan (Aa3 stable; D/ba2 stable), 16 Hua Nan Commercial Bank Ltd. (A3 stable; D+/ba1 stable), Cathay United Bank Co., Ltd. (A2 stable; C-/baa2 stable), Taipei Fubon Bank Co. Ltd. (A2 stable; C-/baa2 stable), and E. Sun Commercial Bank Ltd. (Baa1 stable; D+/baa3 stable). These banks had mortgage books exceeding 32% of their total loans at the end of 2011. We expect the LTV cap will provide an extra buffer for Taiwanese banks in the event of a major price correction. The central bank has observed that, compared with normal mortgages, banks usually make luxury housing loans at higher LTVs and lower lending rates. The maximum LTV on luxury housing loans can reach as high as 80%-97%, while the average LTV on a normal mortgage is 71%. 17 We note that Taiwans new LTV limit is lower than that of Hong Kong, where the Hong Kong Monetary Authority, the de facto central bank, last year lowered the LTV cap for housing units with prices higher than HKD10 million ($1.3 million) to 50%. Previously, the LTV cap for housing units with prices between HKD8 million ($1.0 million) and HKD12 million ($1.5 million) was 60%, while the LTV cap for housing units with prices higher than HKD12 million was 50%. Although the tightening in lending will slow banks mortgage growth, the central banks moves emphasize the importance of a healthier and more rational real estate market, a positive for banks asset quality. Property prices in Taiwan have risen significantly since 2009 (see Exhibit 1). Since mid-2010, Taiwans government bodies, including the central bank, Financial Supervisory Commission, and Ministry of Finance, have implemented several measures aimed at cooling the overheated property market, especially in the metropolitan Taipei area. These measures have helped stabilize housing prices in Taiwan since third-quarter 2011 and slowed the growth of new mortgage origination between August 2011 and January 2012.
15 16 17
Including home improvement loans for renovation or maintenance. The ratings shown are the banks deposit rating, its standalone bank financial strength rating/baseline credit assessment and the corresponding rating outlooks. This ratio is taken from the central banks press release, which provides only the maximum LTV on luxury housing loans and average LTV on normal mortgage.
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NEWS & ANALYSIS

EXHIBIT 1
Shinyi Housing Price Index (First-Quarter 1991 =100)

Taipei City 300 250 200 150 100 50 New Taipei City Taichung City Kaohsiung City Taiwan
Q12007
Q12010
Q22008
Q22004
Q22011
Q22006
Q22009
Q32011
Q32008
Q32004
Q32006
Q22005
Q42008
Q42004
Q42006
Q32009
Q32005
Q42009
Q42005
Q22007
Q22010
Q32007
Q32010
Q42007
Q12004
Source: Sinyi Real Estate Co.
However, weve observed a rebound in new mortgages underwritten by the five major banks 18 since February 2012 and believe that these latest measures reflect the governments determination to maintain a stable property market. Statistics published by the central bank (Exhibit 2) show that new mortgage origination as a percentage of total new loans for the five major banks increased to 7.9% in April from a low of 4.5% in January, while the new mortgage growth rose 1% in April, compared with a 46% contraction in January.
EXHIBIT 2
New Mortgage Originations and Ratio of New Mortgages to Total New Loans for The Five Major Banks
New Mortgages - right axis 12% 10% 8% 6% 4% 2% 0% New Mortgages / Total New Loans - left axis 70 60 50 40 30 20 10 0
Q42010
Q12008
Q12006
Q12009
Q12005
Q42011
2011/07
2011/10
2010/04
2010/08
2010/06
2010/09
2010/03
2010/05
2010/02
Note: Data are for Bank of Taiwan, Taiwan Cooperative Bank, First Commercial Bank, Hua Nan Commercial Bank and Land Bank of Taiwan. Source: Central Bank of Republic of China (Taiwan)
18
These five banks are Bank of Taiwan (Aa3 stable; D+/baa3 stable), Taiwan Cooperative Bank (unrated), First Commercial Bank (A3 stable; D+/ba1 stable), Hua Nan Commercial Bank, and Land Bank of Taiwan.
24
25 JUNE 2012
2012/04
2011/12
2012/03
2011/01
2010/11
2010/07
2012/02
2010/10
2011/08
2011/04
2011/11
2011/06
2010/01
2011/09
2011/03
2011/05
2012/01
2011/02
2010/12
TWD billions
Q12012
Q12011
NEWS & ANALYSIS

Insurers
Natsuko Ishida Analyst +81.3.5408.4059 natsuko.ishida@moodys.com
Tokio Marine to Front-Load Domestic Stock Sales, a Credit Positive

Last Tuesday, Tokio Marine Holdings Inc. (unrated) 19 announced that its disposal of domestic stocks this fiscal year will likely exceed its earlier 50 billion target. A faster-than-expected pace of equity sales is credit positive because it reduces the companys exposure to a relatively risky asset compared with its other investments, while the proceeds from the disposal would improve the companys capital efficiency and provide a means to diversify into non-Japanese businesses. This decision aligns with managements strategy to increasingly focus on reducing the companys equity investments by 300 billion during fiscal 2012-14 against a backdrop of tightening regulations on higher-risk assets and rising internal demand for new risk capital to fuel its business growth. In particular, by developing an internal economic risk model that applies a confidence interval of 99.95% value at risk (VaR) to its calculation of solvency margins, Tokio Marine has improved its capital controls independently of Japans new solvency margin regulations, which took effect in March and raised the required confidence interval to 95% VaR from 90%. Tokio Marine seeks to approach Europes more stringent European Solvency II standard. Tokio Marine & Nichido Fire Insurance Co., Ltd. (financial strength Aa3 stable), Tokio Marines operating non-life subsidiary, recorded a strong 629.7% solvency margin at the end of March under the new Japanese regulatory standard, well above the minimum requirement of 200%. However, its internal model measured the group economic solvency ratio at 115%. Although that ratio still suggests that capital is more than sufficient to cover risk, the narrow 15% buffer pressures the group to reduce its equity investment to achieve a higher, and more stable, economic solvency ratio. We think that Tokio Marine has been the most aggressive and successful among its domestic peers at reducing domestic stock exposures, a strategy common to all Japanese property and casualty insurers (See Exhibits 1 and 2). Tokio Marines Steady Disposal of Domestic Equity by Fiscal Year ( billions)
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total
EXHIBIT 1
260
130
170
120
45
60
50
95
187
206
1,323
Source: Company disclosures and Moodys
19
Tokio Marines operating non-life subsidiaries are Tokio Marine Nichido & Fire Insurance Co., Ltd. (financial strength Aa3 stable) and Nisshin Fire & Marine Insurance Co., Ltd. (unrated).
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NEWS & ANALYSIS

Tokio Marines Domestic Stock Sale Profits Exceed Peers Profits

Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
EXHIBIT 2
Net Gain on Sales of Domestic Stocks - billions [A] Tokio Marine (Aa3 stable) Mitsui Sumitomo (A1 stable) Aioi Nissay Dowa (A1 negative) Sompo Japan (A1 stable) Nipponkoa (unrated) Market Value of Stocks on Balance Sheet - billions [B] Tokio Marine Mitsui Sumitomo Aioi Nissay Dowa Sompo Japan Nipponkoa Percentage Gain to Balance Sheet Amount [A]/[B] Tokio Marine Mitsui Sumitomo Aioi Nissay Dowa Sompo Japan Nipponkoa 1% 1% 1% 1% 4% 1% 1% 3% 1% 3% 3% 5% 10% 1% 4% 2% 1% 4% 2% 2% 5% 2% 3% 1% 2% 6% 2% 1% 3% 3% 4,714 3,010 1,169 2,100 1,158 3,487 2,245 846 1,523 858 2,199 1,380 613 1,019 601 2,737 1,724 718 1,239 680 2,204 1,510 663 1,163 602 1,924 1,418 602 984 541 61 24 17 19 43 45 24 25 22 23 68 66 58 14 24 60 10 31 28 12 116 35 23 16 11 122 24 6 32 18
Note: Combined figures of Aioi and Nissay Dowa are used up to March 2011 Source: Company disclosures (non-consolidated) and Moodys
26
25 JUNE 2012
NEWS & ANALYSIS

Asset Managers
Rory Callagy Vice President - Senior Analyst +1.212.553.4374 robert.callagy@moodys.com
Eaton Vances Acquisition of Minority Stake in Hexavest Is Credit Positive

Last Monday, Eaton Vance Corp. (A3 stable) announced that it planned to acquire 49% of the stock of Hexavest (unrated), a Montreal-based global and international equity manager with approximately $9.9 billion in assets under management (AUM). The $185 million purchase price will be funded from cash on hand. The transaction is credit positive for Eaton Vance because Hexavests global and international equity investment capabilities fill an important gap in its suite of product offerings. Eaton Vances position in traditional global and international equities represents a very small portion of its $197.5 billion in AUM as of 30 April. Hexavest provides Eaton Vance with a franchise that has a proven track record with institutional investors and strong growth momentum in an asset class experiencing strong organic growth. Through the end of May, global and international equity mutual funds had accumulated aggregate net inflows of approximately $28 billion, compared with more than $7 billion of net outflows from domestic equity funds, according to mutual fund research company Strategic Insight. The combination of Hexavests strong performance track record and Eaton Vances strong distribution and product development positions Hexavest to capitalize on growth opportunities within US retail and institutional distribution channels. As part of the agreement, Eaton Vance assumes the role of primary distributor of Hexavests products outside of Canada. Along with the M&A announcement, Eaton Vance announced that it would launch a series of new retail mutual funds in the US and offshore markets that Hexavest would subadvise. Eaton Vance will earn distribution revenues on all Hexavest products sold outside Canada, less distribution-related expenses, in addition to its right to 49% of Hexavests profits. Hexavest, founded in 2004, is a privately held, employee-owned asset manager. Generational transfer risk associated with this transaction is limited as the oldest members of Hexavests management team are in their 40s and the employee-owners will retain control and direct operations of the company, which we expect will reinforce continuity in its day-to-day operations. Eaton Vances $185 million purchase price implies a total valuation for Hexavest of $380 million, or 4% of AUM. While Eaton Vance is paying a premium for its 49% stake when compared with historical M&A multiples of 2%-4% of AUM, the benefits from adding strong global equity investment capabilities to its product suite will help compensate for the higher upfront cost. However, the acquisition will not have a material effect on Eaton Vances balance sheet liquidity. Eaton Vances liquidity is strong, with $515 million in cash and cash equivalents on its balance sheet as of 30 April. The companys liquidity profile is also supported by strong operating cash flow, no near-term debt maturities and limited capital expenditure requirements. Consistent with its minority investment, Eaton Vance will account for its investment in Hexavest using the equity method. Eaton Vance will have an option to acquire an additional 26% interest in Hexavest within six months after the fifth anniversary of the transaction closing. The companies expect to close the transaction in Eaton Vances fiscal fourth quarter ending 30 October.
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NEWS & ANALYSIS

Soo Shin-Kobberstad Vice President - Senior Analyst +44.20.7772.5214 soo.kobberstad@moodys.com
Chinas Opening of High-Yield Bond Market Is Credit Positive for International Asset Managers
Last Wednesday, the China Securities Regulatory Commission (CSRC) approved rules that would allow the countrys RMB2 trillion ($315 billion) mutual fund industry to invest in Chinas newly created high-yield corporate bond market. The approval is credit positive for international asset managers that have local presence in China, expertise in high-yield corporate bonds, and strong distribution capabilities. Potential beneficiaries, to name a few, include international asset managers such as Invesco Holding Company Limited (A3 stable) and Franklin Resources, Inc. (A1 stable), which have joint ventures with local asset managers. In addition to providing a new investment opportunity, fees for high-yield bonds are typically higher than those for highly liquid traditional asset classes. Accordingly, the opening of Chinas high-yield bond market to mutual funds will allow asset managers that are already well positioned within China to diversify their product line into a higher-margin segment, which we expect will improve their profit margins and revenue diversification. The opening of the high-yield corporate bond market to mutual funds is the latest development in a series of regulatory changes by Chinese authorities to liberalise and develop the countrys domestic capital markets. Chinas renminbi-denominated bond market, of which high-yield bonds are a subset, has grown quickly to become the biggest bond market in Asia (see Exhibit 1).
EXHIBIT 1
Chinese Domestic Bonds Outstanding

Government Bonds 25 20 Corporate Bonds
RMB trillions
15 10 5 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Industrial and Commercial Bank of China, Asia Online, Moodys
As Chinas bond market develops, there will be better price transparency and risk-return assessments for investors, which, in turn, encourages additional foreign investment. With the introduction of the high-yield bond market, experienced asset managers with a presence in China now have an enhanced pool of local investments to match the global capital seeking to invest in China. Global investors appetite for fixed-income investments in China has already been growing as evidenced by the wellsubscribed issuances of dim sum bonds (renminbi-denominated bonds issued outside mainland China), which have reached $5.4 billion this year. In the Chinese bond market, institutional investors are dominated by state-owned financial enterprises. High-yield bonds will also significantly enhance the opportunity for domestic investors to take stakes in small and medium-sized enterprises (SMEs) that make up the vast majority of the Chinese economy. Mutual funds such as Franklin Templetons Surging Income Bond Fund, Invescos Great Wall
28
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NEWS & ANALYSIS

Sustaining Income Bond Fund, and Deutsche Banks Harvest Bond Open-Ended Fund and Harvest Credit Bond Fund are ready to take advantage of the opening of the high-yield bond market. We expect international asset management companies that have built a local market presence over the years through joint ventures and affiliates to benefit from the increasing liberalisation of the fund industry and the growing availability of capital markets instruments. Exhibit 2 is a list of international asset managers that are authorized by the CSRC to manage mutual funds within China and have holding companies that we rate. Authorised Fund Management Companies in China with International Affiliation
Company Name International Stakeholder Moody's Rated Entity / Parent of Stakeholder
EXHIBIT 2
Guotai Asset Management Co., Ltd. Bosera Asset Management Co., Ltd. Changsheng Fund Management Co., Ltd. Harvest Fund Management Co., Ltd. Great Wall Fund Management Co., Ltd. UBS SDIC Fund Management Co., Ltd. China Merchants Fund Management Co., Ltd. Fortune SGAM Fund Management Co., Ltd. Morgan Stanley Huaxin Fund Management Co. Guotai Junan Allianz Fund Management Co., Ltd. Fortis Haitong Investment Management Co., Ltd. Invesco Great Wall Fund Management Co., Ltd. AEGON-Industrial Fund Management Co., Ltd. SWS MU Fund Management Co., Ltd. China International Fund Management Co., Ltd. Bank of China Investment Management Co., Ltd. Franklin Templeton Sealand Fund Management Co., Ltd. Huatai-PineBridge Fund Management Co., Ltd. ICBC Credit Suisse Asset Management Co., Ltd. Bank of Communications Schroder Fund Management Co., Ltd. CITIC-Prudential Fund Management Company Ltd. HSBC Jintrust Fund Management Company Limited First State Cinda Fund Management Co., Ltd. Lombarda China Fund Management Co., Ltd. KBC-Goldstate Fund Management Co., Ltd. AXA-SPDB Investment Managers Co., Ltd. ABC-CA Fund Management Co., Ltd. Minsheng Royal Fund Management Co., Ltd. BNY Mellon Western Fund Management Co., Ltd.
Allianz SE ING Investment Management DBS Group Deutsche Asset Management Invesco Asia UBS Asset Management ING Investment Management Societe Generale Asset Management Morgan Stanley Asset Management Allianz Asset Management Fortis Investment Management Invesco Asia AEGON Asset Management Mitsubishi UFJ Asset Management JPMorgan Asset Management BlackRock Franklin Templeton PineBridge Investments Credit Suisse Asset Management Schroder Investment Management Ltd Prudential Asset Management HSBC Asset Management Lombarda China Fund Management Co. Goldstate Securities / KBC AXA Investment Managers Amundi RBC Asset Management BNY Mellon Asset Management
Allianz SE, Aa3 ING Group N.V., A3 DBS Bank Ltd, Aa1 Deutsche Bank AG, A2 Invesco Holding Company Limited , A3 UBS AG, A2 ING Group N.V., A3 Societe Generale , A2 Morgan Stanley, Baa1 Allianz SE, Aa3 Fortis Bank, A2 Invesco Holding Company Limited , A3 AEGON N.V., A3 Mitsubishi UFJ Trust and Banking Corporation, Aa3 JPMorgan Chase & Co, A2 BlackRock Inc., A1 Franklin Resources, Inc., A1 Prudential Public Limited Company, A2 Credit Suisse Group AG, A1 Schroders, not rated Prudential Public Limited Company, A2 HSBC Holdings plc, Aa3 Banca Lombarda e Piemontese S.p.A., Baa2 KBC Group NV, Baa1 AXA, A2 Groupe Crdit Agricole, A2 Royal Bank of Canada, Aa3 BNY Mellon Corporation, Aa3
Colonial First State Global Asset Management Commonwealth Bank of Australia, Aa2
Source: China Securities Regulatory Commission, Authorised Asset Management Companies as of February 2012.
29
25 JUNE 2012
NEWS & ANALYSIS

Sovereigns
Thomas Byrne Senior Vice President - Regional Credit Officer +65.6398.8310 thomas.byrne@moodys.com David Erickson Associate Analyst +65.6398.8334 david.erickson@moodys.com
Japans Tri-Partisan Consumption Tax Deal Is Credit Positive

On 15 June, Japans ruling Democratic Party (DPJ) and the two largest opposition parties reached an agreement to double the countrys consumption tax to 10% from 5% by October 2015, with an intermediate step to 8% in April 2014. After facing strong opposition from members of his own party, Prime Minister Yoshihiko Noda made the deal with the opposition Liberal Democratic Party (LDP) and the New Komeito Party. The agreement to raise the tax is credit positive for Japan (Aa3 stable), as it is one of the first serious efforts in many years to attempt to tackle Japans high levels of government debt and deficit. Increasing the consumption tax is essential for a number of reasons. First, it signals policy decisiveness after years of drift. Second, the tax increase seeks to help make social welfare spending sustainable, without which the government would need to cut social welfare benefits against the backdrop of a rapidly aging population. Third, the revenue increase is an essential component of Japans fiscal consolidation goal, achievement of which we consider to be necessary to maintain market confidence in Japanese government bonds (JGB). However, the agreement stipulates that implementation of the tax hike is conditional on the Japanese economy achieving faster growth and the absence of deflation: it requires 3% growth in nominal GDP and 2% growth in real terms, adjusted for CPI inflation. The last time such conditions prevailed was in 1991, when the asset bubble burst, suggesting satisfying these conditions will be as challenging as the political compromise achieved last Friday. The government last raised the consumption tax in 1997 to 5% from 3%. Since then, general government revenue has remained steady at approximately 30% of GDP, even as government expenditures, driven by rising social welfare payments, have risen. According to the International Monetary Fund, general government debt as a share of GDP ballooned to 229.8% in 2011 from 105.6% in 1997, leaving Japan with by far the highest government debt level among advanced economies. Failing to achieve necessary fiscal consolidation or rejuvenate economic growth would undermine government credibility, threatening a sharp rise in JGB yields. Therefore, raising the consumption tax is an important step to maintain market confidence and ensure that borrowing costs do not rise rapidly. Market confidence in JGBs has remained strong thus far, despite the reversal in Japans fiscal consolidation efforts in the wake of the global financial crisis (see exhibit). The yield on the 10-year bond has tightened to a mere 0.825% as of last Friday, much lower than comparable yields on US Treasuries or German Bunds. At the onset of the global financial crisis in September 2008, the 10-year JGB yield was 1.540%.
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NEWS & ANALYSIS

Japans Conundrum: Tightening Japanese Government Bond Yields against Deteriorating Government Finances
10 Year JGB Yield - left axis 2.5% 2.0% 1.5% General Government Budget Deficit - right axis 12% 10%
6% 1.0% 0.5% 0.0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 4% 2% 0%
Source: International Monetary Fund, Bloomberg
However, raising tax rates can also thwart growth, and policymakers fear a bring-forward and subsequent slowdown in private consumption and GDP growth similar to what accompanied the increase in the consumption tax in 1997. As such, supply side measures that increase productivity and investment in the domestic economy are crucial for long-term fiscal sustainability. A succession of LDP and DPJ governments following the Koizumi administration (2001-06) has been unable to pass measures that would lead to substantive fiscal consolidation. Mr. Noda has been constrained by a large faction within his own party that has been against raising the consumption tax. By staking his political career on passage of the consumption tax bill and deferring DPJ- supported social welfare issues, a guaranteed minimum pension and health care reform for the elderly, to consideration by a proposed council, Mr. Noda gained the backing of the two opposition parties and most likely the passage of the tax bill. Mr. Noda reportedly intends to bring the bill to a vote in the lower house on 26 June. Even with the agreement to raise the consumption tax, the government will not achieve its ultimate goal of eliminating the primary deficit by 2020 without implementing further reforms. Therefore, resolute political leadership is essential to advance a reform agenda and overcome policy inertia and gridlock that have characterized Japans politics since the Koizumi administration succeeded in reining in the fiscal deficit before the onset of the global financial crisis. Without such progress, Japan risks reaching a tipping point where the market demands a risk premium on JGBs, making deficit financing and debt refinancing very costly.
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Percent of GDP
8%
Yield
NEWS & ANALYSIS

Kathrin Muehlbronner Vice President - Senior Analyst +44.20.7772.1383 kathrin.muehlbronner@moodys.com
Icelands Prepayments on IMF and Nordic Government Loans Are Credit Positive
Last Monday, the Central Bank of Iceland announced that Iceland (Baa3 negative) would prepay ISK171 billion on its outstanding loans from the International Monetary Fund (IMF) and the Nordic governments, the second time this year that the country has made an early repayment on its substantial loans extended by official creditors. 20 The prepayment is credit positive as it improves Icelands external debt maturity profile and will help limit the risk of excessive exchange rate volatility as the country gradually loosens its strict capital controls. The original total loan from the IMF and the Nordic governments was 3.5 billion, or approximately ISK558 billion at current exchange rates. Including the first repayment, Iceland has now repaid 55.5% of the combined loans from the IMF and Nordic governments. 21 The early repayment to the IMF and the Nordic governments has only a limited impact on Icelands overall public debt levels because the government has repaid official creditors with the proceeds of a recent Eurobond issue. 22 The transaction reduces Icelands gross external debt by 2.6% of GDP to approximately 173% of GDP. The early repayments cover principal that is due to the IMF in 2013 and 2014, and repayments that are due to the Nordic governments in 2016-18. The exhibit below shows the repayment profile for Icelands Treasury and Central Bank combined, before the March and June pre-payments, and the new repayment profile. As the exhibit shows, the most substantial repayment on Icelands public-sector external debt occurs in 2016, when the countrys first post-crisis Eurobond matures. Until then, repayments on external debt by the government and central bank are comparatively moderate at ISK895 billion, including the second prepayment, and fully covered by foreign-exchange reserves, which were ISK1,063 billion as of May. Icelands Combined Treasury and Central Bank Foreign Debt Payment Schedule (ISK Billions)
Before Prepayments kr.250 kr.200 kr.150 kr.100 kr.50 kr.0 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E After Prepayments
Note: Includes projected interest due Before Prepayments: As of the end of March 2012 Source: International Monetary Fund, Icelandic Government Debt Management, Bloomberg
20
21 22
32
ISK billions
The first repayment in March 2012 was equal to 705 million, or nearly 21% of the total loans outstanding, and covered maturities of 2013 to the IMF and 2014-16 payments due to the Nordic governments. See Iceland: Early Part-Repayment of IMF and Nordic Loans is Positive, 22 March 2012. The pari passu clause requires the Icelandic authorities to make proportional pre-payments to the IMF and the Nordic governments. According to Icelandic authorities, the transaction leads to an increase in government gross debt by 2.6% of GDP. This is due to the fact that the IMF and Norway extended their loans directly to the Central Bank of Iceland. As a result, these liabilities do not appear under government debt. However, we include these loans in our calculations of general government debt.
25 JUNE 2012
NEWS & ANALYSIS

The early repayments are positive because they will help reduce the risk of excessive exchange rate volatility as Icelands authorities ease the countrys strict controls on capital outflows, which we expect to start in earnest in 2013-14. 23 Hence, it is positive that the authorities attempt to reduce capital outflows linked to their own debt maturities that would otherwise exert additional pressure on the exchange rate. Still, even taking into account the reduced foreign-currency outflows linked to official payments, the size of potential capital outflows in the coming years remains substantial and properly sequencing the liberalization of capital outflows to maintain exchange rate and financial stability will be the major challenge for Icelandic policy-makers. Foreign investors have been unable to withdraw approximately ISK425 billion (24% of 2012 GDP) of krna-denominated assets since the government imposed strict capital controls in late 2008. Most of those investors will want to exit the country as soon as the government lifts the restrictions on capital outflows. Depreciation pressure on the krna will also likely arise from the settlement of the estates of the banks in the winding-down process as well as foreign-currency debt payments by domestic companies. The Icelandic authorities estimate that foreign creditors of the failed banks are due to receive around ISK190 billion (11% of GDP) in foreign currencies out of the settlement of the failed banks estates. In addition, they estimate foreign-currency debt payments that are due by Icelandic companies total up to ISK80 billion per year in 2012 and 2013, rising to more than ISK100 billion per year after that, assuming no change in income. 24
23
24
The Central Bank has been conducting foreign-exchange auctions since February this year to allow the most impatient foreign investors to exit the country. While this is the first step in the capital account liberalization strategy of the Icelandic authorities, the amounts of capital outflows so far have been moderate. See Central Bank of Iceland: Financial Stability Report, June 2012.
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NEWS & ANALYSIS

Atsi Sheth Vice President - Senior Analyst +1.212.553.4873 atsi.sheth@moodys.com Richard Miratsky Vice President - Senior Analyst +420.22.166.6350 richard.miratsky@moodys.com Andrew Schneider Associate Analyst +1.212.553.4749 andrew.schneider@moodys.com
Hidroelectricas Insolvency Filing Is Credit Negative for Romania

Last Wednesday, the Bucharest Tribunal declared Romanias (Baa3 stable) government-owned electricity company Hidroelectrica SA (B2 review for downgrade) insolvent. The company had filed for insolvency on 15 June. The development is credit negative for the sovereign because it increases the likelihood that the government will have to pay some portion of Hidroelectricas debt and also delays the companys planned privatization. The insolvency of a state-owned enterprise additionally sets a precedent that creates uncertainty among creditors of Romanias other government-owned enterprises. Lastly, the companys stated reason for declaring insolvency was reorganization, rather than bankruptcy, which suggests that less extreme measures to reorganize were either not considered or not possible, pointing to institutional weaknesses either within the company or in the countrys operating environment, or both. Over the past year, Hidroelectricas credit profile deteriorated as drought hampered hydroelectricity output and operating costs rose. In addition, the company was under pressure from the governments multilateral creditors (the International Monetary Fund (IMF) and the European Commission) to renegotiate several long-term electricity sales contracts that, by offering buyers lower-than-market prices, contributed to declining profitability. The company, however, was unable to renegotiate or nullify these contracts. In fact, many of these contracts are currently under investigation by the European Commission as well as Romanian authorities to ascertain whether they had been negotiated in violation of European Union rules (Romania has been a European Union member since 2007). It is unclear how the declaration of insolvency will affect these contracts, or the companys debt repayments, which are owed mostly to multilateral development banks and some private commercial banks. A company statement said that it will respect its contracts during the insolvency and restructuring process, which it expects to last for about a year and a half. However, until the company or the government stipulates exactly how creditors will be paid both state guaranteed and unguaranteed debt (which they had not specified prior to publication), the process of insolvency raises default risk and is credit negative for the company. Moreover, this sudden filing for insolvency by a government-owned entity reflects negatively on the sovereigns credit profile with precedent-setting uncertainty for creditors and other commercial partners of other Romanian state-owned entities, which number in the hundreds. Even if creditors are ultimately made whole, the insolvency increases the chances that the government will have to pay the roughly $70 million portion of the companys debt that we estimate the government guaranteed. The amount is not very large relative to the governments own debt of $58 billion, but Hidroelectricas total debt, which we estimate at approximately $725 million, is a significant contingent liability for the government if the government decides to extend credit support to the company during the period of insolvency. The insolvency filing will also delay the governments plans to sell a 10% stake in Hidroelectrica this year as agreed upon under a 2011 5 billion precautionary stand-by agreement with the IMF and European Union. Romanias privatization efforts have been futile over the past year because of market conditions. This delay exemplifies Romanias operating environment uncertainty, which is a key reason why privatization is unsuccessful there. It could further diminish the markets reception of future asset sales, which are not only integral to Romanias agreements with multilateral creditors, but also to the governments effort to improve operating efficiency in state-owned enterprises via private-sector participation.
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NEWS & ANALYSIS

US Public Finance
Robert Weber Assistant Vice President - Analyst +1.212.553.7280 robert.weber@moodys.com
New York State Denies Deficit Financing to Fiscally Troubled Municipalities

Last Thursday, the New York State (Aa2 stable) legislature adjourned without passing bills that would have enabled the city of Long Beach (Baa3 negative), Rockland County (Baa3 negative), and other local governments to issue long-term deficit-reduction bonds, which is credit negative for these municipalities. The deficit-reduction bonds would have extended the timeframe that these issuers have to repay cashflow-related debt; benefited the municipalities with helpful state oversight that accompanies the issuance of deficit reduction bonds; and supported Long Beachs 2013 budget, which was planned with the assumption that the city would be permitted to issue deficit-financing bonds. 25 Local governments in New York facing liquidity and financial strains can request home-rule legislation from the state allowing them to issue bonds for operating rather than capital purposes. These deficitreduction bonds have a fixed coupon, are typically retired within 10 years and provide local governments a long-term financing as an alternative to annual cash flow borrowing to cover deficits. Such legislation also brings a greater level of state oversight, which we regard as positive for troubled municipalities, including a requirement to present annual budgets to the state comptroller prior to formal adoption. The comptrollers office can then make recommendations to improve the budget. In addition, the municipality must submit quarterly financial reports to the comptrollers office. 26 Long Beach has been running operating deficits since 2008, and has faced severe liquidity issues over the past six months requiring the issuance of various cash flow notes. The city had budgeted issuance of deficit reduction bonds in January 2013 to help bring the budget into balance and eliminate the need for short-term notes. Now that the state legislature has not approved the bonds, city officials expect to significantly increase the property tax rate to tackle the deficit. Absent the additional property tax increase, the city will likely be faced with continued liquidity strains, and continued reliance on the unpredictable short-term market for liquidity. Like Long Beach, Rockland County anticipated deficit-reduction bonds to plug its deficit, minimize tax hikes, and receive beneficial state oversight. However, unlike Long Beach, Rockland did not budget for the issuance of deficit reduction bonds and therefore has more leeway, partly because it has until 7 December to finalize its budget, whereas Long Beach has an end of May budget deadline. Deficit-reduction bonds are hardly a panacea to a municipalitys financial problems. Unless accompanied by a return to structural balance, these bonds reimburse the government for past deficits while new gaps continue to accumulate. Past uses of deficit-reduction bonds in New York have had varying degrees of success and failure. The village of Hempstead (A2 stable) issued deficit-reduction bonds in 2006 and has been able to maintain structurally balanced budgets since, which has allowed the village to avoid annual issuance of cash flow notes. In contrast, the city of Glen Cove (Baa3 negative) issued deficit bonds in 2007 but continues to run annual operating deficits, despite the states recommendations to improve its budget practices.
25 26
All local government data are from the government itself or its audited financial statements Source: New York State Comptroller
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NEWS & ANALYSIS

Vito Galluccio Analyst +1.212.553.2738 vito.galluccio@moodys.com Geordie Thompson Vice President - Senior Credit Officer +1.212.553.0321 geordie.thompson@moodys.com
Rhode Islands Budget Is Credit Positive for Central Falls and Schools, but Leaves Woonsocket and Pensions Unaddressed
On 15 June, Rhode Island (Aa2 negative) Governor Lincoln Chafee signed the states fiscal 2013 budget. The $8.1 billion budget includes a material increase in funding for schools, which is credit positive both for school districts and for cities and towns. The budget also appropriates $2.6 million for Central Falls (Caa1 negative) retirees, paid out over five years, allowing the city to continue its bankruptcy exit plan. 27 However, the legislature adjourned without approving any additional financial assistance for cash-strapped Woonsocket (B2 review for downgrade) 28 or provisions to alleviate mounting pension-related challenges for local governments in the state. In the budget, the state increased school aid funding by $34 million, or 3.9%, marking the third consecutive annual increase in school funding (Exhibit 1). State funding for education now stands at over $900 million, well above the pre-recession peak.
EXHIBIT 1
Rhode Island State Aid to Education

Education Aid $1,000 $900 $800 Teacher Retirement Construction Aid Other
$ millions
$700 $600 $500 $400 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Rhode Island House Fiscal Advisory Staff, November 2011 report and 2013 Budget
In addition, recent changes in the states distribution formula for school aid more heavily incorporate changes in population and socioeconomic factors, which result in greater increases in education funding for local governments that have experienced greater population growth and declines in personal income. Exhibit 2 shows the districts with the 10 biggest increases and decreases in education aid in the 2013 budget. For example, while total state education aid was up 3.9% in 2013 compared with fiscal 2012, Barrington (Aa1) will receive a 42% increase and Chariho Regional Schools (Aa3) will receive a 14% cut.
27 28
See Central Falls, Rhode Island, Receives Credit Positive Bankruptcy Ruling, 16 January 2012. See Rhode Island Says No to Woonsockets Supplemental Tax Levy, a Credit Negative, 4 June 2012.
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NEWS & ANALYSIS

EXHIBIT 2
Percent Change in General Aid for Education 2012-13

BARRINGTON EAST GREENWICH LINCOLN CRANSTON NEW SHOREHAM NARRAGANSETT SCITUATE NORTH SMITHFIELD NORTH PROVIDENCE WESTERLY RICHMOND FOSTER GLOCESTER EXETER-W. GREEN JAMESTOWN CENTRAL FALLS SOUTH KINGSTOWN BRISTOL WARREN PORTSMOUTH CHARIHO -20% -10% 0% 10% 20% 30% 40% 50%
Source: Rhode Island Department of Education
Although direct non-education aid for cities and towns is flat versus 2012 (Exhibit 3), the additional school funding will benefit most Rhode Island cities and towns because these municipalities bear responsibility for school financial operations and, on average, allocate more than half of their operating budgets to school funding.
EXHIBIT 3
Rhode Island Non-Education State Aid to Cities and Towns

General Revenue Sharing $300 $250 $200 MV Excise Tax Reimburse Distressed Community Relief PILOT
$ million
$150 $100 $50 $0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Rhode Island Department of Revenue
Additionally, the Rhode Island budget appropriates $2.6 million for Central Falls retirees to mitigate significant cuts to their pensions as a consequence of the citys Chapter 9 bankruptcy plan. The funds are the result of negotiations between the state-appointed receiver for Central Falls and the retirees, and the appropriation allows the city to continue with its plan to emerge from bankruptcy later this year. The legislature adjourned without approving any additional financial assistance for the city of Woonsocket, which is currently under the control of a state budget commission. The city is struggling with a $10 million accumulated deficit and an imminent cash shortage stemming from overspending in school operations. The legislatures refusal to pass a supplemental tax levy prompted the school board to vote last week for a takeover of the schools by the Rhode Island Department of Education, which the department is currently reviewing.
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NEWS & ANALYSIS

The state also failed to enact pension reform measures for local governments. Legislation passed last November made significant changes to the states pension system, including changes to employee benefits, but neglected to address the states 36 locally administered plans. Members of the legislature have publicly stated that they intend to take up local pension reform, but the delay into the next legislative year highlights the significant political hurdles theyll have to surmount.
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NEWS & ANALYSIS

Robert Azrin Vice President - Senior Analyst +1.212.553.7436 robert.azrin@moodys.com
Contraction in Municipal Variable Rate Demand Debt Is Credit Positive for Weaker Issuers
On 15 June, the Securities Industry and Financial Markets Association (SIFMA) released data showing that the amount of variable-rate demand obligations (VRDOs) outstanding as of the end of the first quarter declined 19% to $290 billion from a year earlier (see exhibit). The sharp decline indicates that a broad range of issuers have successfully reduced their exposure to bank supported variable rate demand debt and the associated risks. This is credit positive for financially weak issuers. Unwinding these exposures has increased in importance owing to the credit pressure on many banks that provide credit and liquidity for VRDOs, and the reduced number of highly rated banks willing to provide replacement letters of credit and liquidity facilities for weaker borrowers. Contraction of Municipal Variable Rate Market Continues in 2012
$430 $410 $390 $370
$ billions
$350 $330 $310 $290 $270 $250
Jan-10
Jun-10
Jun-11
Jul-10
Oct-10
Dec-10
Mar-10
Aug-10
Feb-11
Apr-11
Sep-11
Nov-11
Jan-12
Jan-11
Jul-11
Sep-09
Nov-09
May-11
Nov-10
Oct-09
Dec-09
Source: SIFMA
The decline in the outstanding amount of VRDOs reflects multiple factors, including issuers gravitating towards simpler debt structures and a low interest rate environment that makes fixed rate refinancing attractive. Although some of the contraction reflects issuers proactive effort to reduce the risks associated with VRDOs, some of the decline is likely the result of a lack of other options by weaker issuers looking to extend or substitute their bank facilities. About one quarter of VRDOs with support facilities that expired last year from issuers rated A or below were redeemed, refunded with fixed rate debt or a direct purchase from a bank, or converted to a structure that does not require bank support. Although issuers have been successful in finding solutions to the historically high volume of expiring credit facilities over the last past two years, we expect it will be more challenging going forward. In 2008, there was a spike in issuance of VRDOs after the auction rate market unraveled. Since most of these facilities expired in three to five years, many are now up for renewal. With fewer banks providing these facilities and a challenging landscape for those banks that remain, weaker issuers may find it difficult to extend the expiration date of the existing facility or to secure a substitute bank facility. The decline in availability and affordability will likely force many issuers to seek alternative financing. Variable-rate demand debt exposes issuers not only to the credit of the bank providing credit or liquidity support, but also to general market risk. A market disruption or a credit event related to the specific bank facility provider could cause investors to put bonds back to the issuer. In the event of a failed remarketing, the bank would be required to purchase the bonds. These bank-owned bonds (also known as bank bonds) are usually subject to an accelerated amortization schedule and higher interest
39
May-10
Aug-09
25 JUNE 2012
Mar-12
Feb-10
Apr-10
Jul-09
Oct-11
Sep-10
Dec-11
Mar-11
Aug-11
Feb-12
NEWS & ANALYSIS

rates, which may add stress to an issuers cash flows. Upon expiration of the facility, issuers are also subject to renewal risk as bank facilities typically have one to three-year terms. With continued challenges in the banking sector and a shrinking pool of banks providing credit and liquidity facilities, it is likely the multi-year trend of decline in the VRDO market will persist. For those weaker issuers rotating out of the VRDO structure, the associated risk reduction is credit positive.
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25 JUNE 2012
CREDIT IN DEPTH
Detailed analysis of an important topic
Stephen Sohn Vice President - Senior Credit Officer +1.212.553.2965 stephen.sohn@moodys.com Curt Beaudouin, CFA Vice President - Senior Analyst +1.212.553.1474 john.beaudouin@moodys.com Maggie Taylor Vice President - Senior Credit Officer +1.212.553.0424 margaret.taylor@moodys.com
New Debit Rules Hurt Banks and Reshape the Payment Processor Market
Merchant Acquirers Reap Some Momentary Gains from Durbin Amendment; Retailers Benefit This is an extract from a larger report found here. The Durbin Amendments reform of debit interchange fees and routing practices hits banks the hardest and makes payment processing more competitive. Merchant acquirers 29 and retailers benefit from lower swipe fees, but banks are losing revenue. We expect banks to attempt to offset lost revenue by raising fees for other products and cutting expenses, although this process will be difficult and the timing is unclear. Visa will retain its market leadership position in the signature debit-processing space. With the loss of its exclusive payment network arrangements, Visa will face greater competition in the personal identification number (PIN) debit space, but will take steps to preserve its leadership position in the more profitable signature debit market. (With PIN debit, the customer enters a PIN on a keypad at the point of sale, while with signature debit the customer signs a receipt at the point of sale.) Shifts in PIN debit market share will not materially affect the credit profiles of rated payment processors. The small fees generated by PIN debit (albeit at high profit margins) and the number of processors competing to take share from Visa will likely render any share gains immaterial to these payment processing companies. Merchant acquirers, notably the smaller ones, will be short-term beneficiaries of lower interchange fees. Small acquirers typically have more bundled pricing agreements than the larger players, which mainly have interchange-plus agreements. 30 We expect these acquirers to keep a portion of the interchange savings until competition forces greater pricing transparency. Retailers will use the savings from lower debit fees to offset escalating operating costs. We dont expect lower debit fees to result in a material improvement in retailers earnings, which are pressured by other rising costs. Nor do we expect the benefit of lower debit fees to flow through to lower prices for consumers, though this may have been one of the original intentions of the Durbin Amendment. What is the Durbin Amendment? The Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act authorizes the Federal Reserve to regulate debit interchange fees and network routing of debit transactions. The legislation specifically addresses debit-card transaction fees from payments processed through networks operated by Visa Inc. (A1 stable) and MasterCard Inc. (A3 stable). Because Durbin relates only to debit card transaction fees and does not address credit card fees directly, it does not apply to networks operated by American Express Company (A3 stable) and Discover Financial Services (Ba1 stable). The two key provisions of the Durbin Amendment are as follows:
Debit interchange fees. Effective 1 October 2011, the debit interchange fees (fees that merchants pay to banks to process debit card payments from consumers) were significantly curtailed. Banks (other than those with less than $10 billion in assets, which are exempt from the ruling) can only charge debit interchange fees of up to 21 cents plus 5 basis points of the transactions value, not including a 1 cent allowance for meeting certain fraud prevention standards.
29 30
A merchant acquirer is a payment processor responsible for handling the merchants sales transactions. Interchange plus means the interchange fee (a pass-through fee from the merchant to the card issuing bank) plus a processing fee; the two elements are broken out separately in a pricing agreement.
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CREDIT IN DEPTH
This represents a decrease of about a half of the historical average debit-card interchange fee of 44 cents per transaction from retailers on an average debit purchase of about $39 (equal to 1.15% of the purchased amount). However, as the purchase amount becomes larger, the percentage reduction in debit fees becomes greater given the fixed nature of the mandated pricing model (i.e., the variable component has been cut sharply to five basis points).
Network exclusivity. Effective 1 April, debit-card issuers were required to provide merchants with a choice of at least two unaffiliated networks through which to route their transactions, which seeks to lower processing costs. This routing provision will break up the exclusive payment network arrangements that Visa had with many banks.
Unlocking Visas exclusive contracts (i.e., deals with banks whereby a debit card processes only Visa Signature and Visa Intralink (PIN debit) transactions) will likely dilute its market share in the PIN debit space, the less profitable of the two types of debit networks (the other being signature debit). We expect the increased competition to benefit other PIN debit network operators such as MasterCard (Maestro), First Data Corporation (B3 stable) (STAR), Discover Financial Services (PULSE), Fidelity National Information Services Inc. (Ba1 stable) (NYCE), and Fiserv Inc. (Baa2 stable) (ACCEL/Exchange). Who are the winners and losers of the new debit card rules? As shown in the exhibit below, a range of participants in the debit card payment cycle have been affected by the new Durbin rules. Retailers (upper right) are clearly the winners because they have the greatest ability to adapt to the new rules and deal with or even benefit from its financial consequences. Navigating the Durbin Amendment
Source: Moodys Investors Service
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CREDIT IN DEPTH
Although one of the original intentions of the Dodd-Frank reforms may have been to protect the consumer, we believe that none of the cost savings to retailers will flow through to the consumer in the form of lower prices. We expect retailers will keep the majority of the savings to help defray their rising operating costs. Conversely, banks (lower left) are clearly the losers, as they struggle to adapt to the new rules and replace lost revenues. The rest of this report discusses the effects of the Durbin Amendment on banks, the card networks, merchant acquirers, and retailers. It may be found here.
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RATING CHANGES
Significant rating actions taken the week ending 22 June 2012
Corporates
Choice Hotels International, Inc.
20 Jun 12
Downgrade
22 Jun 12
Corporate Family Rating Outlook
Baa2 Review for Downgrade
Baa3 Negative
Choice recently decided to materially increase its financial leverage, most likely to fund a potential $600 million shareholder dividend. Choices actions will lead to a significant deterioration in debt and cash flow metrics for an extended period and reveal a financial policy that is considerably more aggressive than we had anticipated, leading to the downgrade. Codere S.A.
26 Jan 12
Downgrade
21 Jun 12
B1 Negative
B2 Review for Downgrade
The downgrade reflects the increased business risk affecting its operations in Argentina and Spain. We also have concerns about Codere's liquidity profile over the medium term if the group is unable to access the cash flows generated by its Argentinean operations on a sustained basis. The business environment in Argentinawhere Codere generated 57% of EBITDA in 2011is becoming more challenging and unpredictable as the Argentinean government continues to tighten foreign-exchange controls and limits company dividends as it fights a flight of capital from the country. CHS/Community Health Systems, Inc.
15 Jun 11
Outlook Change
20 Jun 12
B1 Negative
B1 Stable
The outlook change reflects our expectation that Community Health will maintain strong margins while integrating recently acquired facilities and investing in capital projects. While ongoing investigations remain a risk, we do not expect them to detrimentally affect Community Health's very good liquidity position in the near term. We expect Community Health to maintain margins through its focus on cost management and improvements at recently acquired facilities, among other efforts.
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RATING CHANGES
Flowserve Corporation
1 Jun 12
Upgrade
22 Jun 12
Ba1 Review for Upgrade
Baa3 Stable
Recent reductions in working capital inefficiencies and an increase in the clarity of its capital structure strategy led to the upgrade. We expect Flowserve to achieve modest earnings growth and over $300 million of free cash flow over the next year, supported by Flowserves strong market position within the fragmented flow control industry. We also expect Flowserve to maintain good liquidity as it implements its recently announced $1 billion stock repurchase program. RBS Global, Inc.
21 Apr 10
Upgrade
19 Jun 12
B3 Stable
B2 Stable
The upgrade primarily reflects RBS Globals improved financial leverage as a result of an initial public offering by RBS Globals parent company, Rexnord Corporation. Proceeds from the IPO will be used to redeem $300 million of subordinated debt co-issued by RBS and Rexnord LLC. Although company leverage is still high, ratings are supported by high cash balances and availability of revolving credit. Walgreen Co.
5 Apr 12
Review for Downgrade

19 Jun 12
Senior Unsecured Rating Short-Term Issuer Rating Outlook
A3 P-2 Stable
A3 P-2 Review for Downgrade
The review for downgrade is prompted by Walgreen's announcement that it had entered into an agreement to purchase 45% of the equity of Alliance Boots. Walgreen intends to finance this transaction with a combination of additional debt, equity, and excess cash. In addition, the review reflects the sizable amount of debt already held by Alliance Boots, and the economic climate in Europe, where Alliance Boots has a sizable amount of business.
45
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RATING CHANGES
Financial Institutions
Banks and Securities Firms
Downgrades
21 June 12
We downgraded the ratings of 15 banks and securities firms with global capital markets operations because of our reassessment of the volatility and risks faced by creditors of firms with global capital markets operations.. We downgraded the long-term senior debt ratings of four firms by one notch, 10 firms by two notches and of one firm by three notches. In addition, we downgraded the short-term ratings of four firms operating companies to Prime-2 and the short-term ratings of their holding companies to Prime-2. We downgraded the short-term ratings of the holding companies of a further two firms to Prime-2. These rating actions conclude the review initiated on 15 February 2012. All of the banks affected by these actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities. However, they also engage in other, often market-leading business activities that are central to our assessment of their credit profiles. These activities can provide important shock absorbers that mitigate the potential volatility of capital markets operations, but which also present their own risks and challenges. In the past these risks have led many such institutions to fail or to require external support to avoid failure, including several firms affected by these rating actions. In addition to the credit implications of capital markets operations, these actions reflect the size and stability of earnings from non-capital markets activities at each firm, as well as each firms capitalization and liquidity buffers and other considerations were applicable, such as exposure to the European operating environment, any record of risk management problems and risks from exposure to US residential mortgages, commercial real estate or legacy portfolios. For more information, please see our special comment Key Drivers of Rating Actions on Firms with Global Capital Markets Operations and the Global Investment Bank Ratings List excel file.
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RATING CHANGES
Lloyds Banking Group
Downgrades
21 June 12
We downgraded Lloyds TSB Bank plc's senior debt and deposit ratings by one notch, to A2 from A1. We also lowered the banks baseline credit assessment to baa2 from baa1, within the C- standalone bank financial strength rating range. The outlook on the C-/baa2 standalone bank financial strength rating/baseline credit assessment is stable and that on the A2 debt and deposit ratings is negative, reflecting our view that government support for large UK banks will be reduced over the medium term. The Prime-1 short-term rating was confirmed. The drivers of the downgrade and lower standalone credit profile were the bank's sensitivity to the increasingly challenging operating environment in the UK and in Europe more widely and Lloyds' still-high use of wholesale funding, which implies that it would be vulnerable to changes in investor sentiment toward European banks. The A2 senior debt rating of the holding company was downgraded to A3, in line with our views on the structural subordination of holding companies. The senior debt ratings of Bank of Scotland plc were downgraded to A2 from A1, and the senior debt ratings of HBOS plc were downgraded to A3 from A2. The insurance financial strength ratings of Scottish Widows plc and Clerical Medical Investment Group Ltd. were downgraded by one notch, to A2 from A1, and the subordinated debt ratings of both insurers were downgraded to Baa2 (hyb) from Baa1 (hyb). The outlook on all these ratings is stable. Citigroup Subsidiaries
Downgrades
22 June 12
Following our downgrade of its parents, Citigroup Inc. (Citibank) and Citibank N.A., on 21 June 2012 we downgraded the ratings of Citibanks three subsidiaries in Japan. We downgraded Japan Ltd.s long-term deposit rating to Baa1 from A2, its baseline credit assessment to baa3 from baa1, and its short-term deposit rating to Prime-2 from Prime-1. The ratings outlook is stable. We also downgraded the long-term ratings of Citigroup Japan Holdings Inc. (CJH) and Citigroup Global Markets Japan Ltd (CGMJ), to Baa3 from Baa1. The short-term rating of CGMJ was downgraded to Prime-3 from Prime-2. The rating outlook for CJH and CGMJ is negative. Outside of Japan, we also downgraded the long- and short-term senior unsecured ratings of Citigroup Pty Ltd, to Baa1/Prime-2 from A2/Prime-1, and lowered its standalone bank financial strength rating/baseline credit assessment to C-/baa1 from C+. At the same time, we affirmed the long- and short-term deposit ratings of Citibank Korea at A2/Prime-1. All these ratings carry a stable outlook. The rating action on Citigroup P/L concludes the review initiated on 21 February 2012. The ratings on Citibank Korea were not on review.
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RATING CHANGES
Ceskoslovenska Obchodni Banka (Czech Republic)

21 Feb 12
Downgrades
20 June 12
Long-Term Local & Foreign Currency Deposits Short-Term Local & Foreign Currency Deposits Standalone Bank Financial Strength/Baseline Credit Assessment
A1 Review for Downgrade Prime-1 C/a3 Review for Downgrade
A2 Negative Prime-1 C- /baa1 Stable
Ceskoslovenska Obchodna Banka (Slovakia)

Long-Term Local & Foreign Currency Deposits Short-Term Local & Foreign Currency Deposits Standalone Bank Financial Strength/Baseline Credit Assessment Baa2 Review for Downgrade Prime-2 D/ba2 Stable Baa3 Stable Prime-3 D/ba2 Stable
These downgrades were prompted by the weakened financial capacity of the Belgian parent group, KBC Bank, which we downgraded on 15 June 2012. The one-notch downgrade of CSOB Czech Republic's long-term deposit ratings and standalone bank financial strength rating/baseline credit assessment also reflects the more difficult operating environment in the Czech Republic, which we believe will likely dampen earnings generation and pressure asset quality. ING Bank Slaski S.A.
21 Feb 12
Downgrades
18 June 12
Long-Term Deposits Short-Term Local & Foreign Currency Deposits Standalone Bank Financial Strength/Baseline Credit Assessment
A2 Review for Downgrade Prime-1 D+/baa3 Stable
Baa1 Negative Prime-2 D+/baa3 Stable
ING Bank Eurasia

Long-Term Deposits Local Currency Debt Short-Term Local & Foreign Currency Deposits Standalone Bank Financial Strength/Baseline Credit Assessment Baa1 Review for Downgrade Baa2 Negative Baa1 Review for Downgrade Baa2 Negative Prime-2 D/ba2 Stable Prime-2 D/ba2 Stable
The downgrades of the ratings of these subsidiaries of ING Bank N.V. follow our downgrade of the parent bank on 15 June. We maintain very high parental support assumptions for ING Bank Slaski, the subsidiary in Poland, reflecting its 75% strategic ownership by ING Bank N.V., the close brand association between the two entities, and our view that the Polish market remains strategic for the Dutch group and provides an opportunity for diversification. We also maintain a very high probability of parental support for ING Bank Eurasia, the Russian subsidiary, reflecting the parent's 100% ownership
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25 JUNE 2012
RATING CHANGES
Bank Gospodarki Zywnosciowej S.A.

21 Feb 12
Downgrade
18 June 12
Long-Term Deposits Short-Term Local & Foreign Currency Deposits Standalone Bank Financial Strength/Baseline Credit Assessment
Baa1 Review for Downgrade Prime-2 D/ba2 Stable
Baa2 Stable Prime-2 D/ba2 Stable
The one-notch downgrade was prompted by our downgrade of Rabobanks standalone ratings, from which we impute rating uplifts for the Polish subsidiary. Nonetheless, we believe that the probability of parental support for Rabobank remains very high, given Rabobanks role as a long-term strategic shareholder in BGZ, its record of providing foreign-currency funding and capital resources to BGZ and its long-term interest in the Polish agribusiness sector. Natixis Bank (ZAO)
21 Feb 12
Downgrade
18 June 12
Long-Term Deposits Short-Term Rating National Scale Rating Standalone Bank Financial Strength/Baseline Credit Assessment
Ba2 Review for Downgrade Not-Prime Aa2.ru E+/b1 Stable
Ba3 Stable Not-Prime Aa3.ru E+/b1 Stable
The downgrade of Natixis Bank (ZAO), the Russian subsidiary of Natixis, follows our 15 June downgrade of the French parent, The long-term ratings of ZAO nonetheless continue to incorporate one notch of uplift because of our parental support assumptions.
Sovereigns
Turkey, Government of
5 October 10
Upgrade
20 June 12
Senior Secured Debt Rating Outlook
Ba2 Positive
Ba1 Positive
The key drivers for the rating action were, first, the significant improvement in Turkey's public finances and increased shock-absorption capacity of the government's balance sheet and, second, policy actions that have the potential to address external imbalances, such as the large current account deficit, which is the largest credit risk facing the country. The government's financial strength has been improving steadily over the past decade. Key supports to the government's ratings include its effectiveness, transparency and rule of law.
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25 JUNE 2012
RATING CHANGES
Sub-sovereigns
Istanbul, Metropolitan Municipality of (Turkey)
5 Oct 10
Upgrade
21 June 12
Issuer Rating Outlook
Ba2 Positive
Ba1 Positive
Izmir, Metropolitan Municipality of (Turkey)

8 Nov 10
Upgrade
21 June 12
Issuer Rating NSR Outlook
Ba2 A3.tr Stable
Ba1 A1.tr Positive
Toplu Konut Idaresi Baskanligi (Turkey)

5 Oct 10
Upgrade
21 June 12
Issuer Rating NSR Outlook
Ba2 A3.tr Positive
Ba1 A1.tr Positive
The action on these Turkish sub-sovereigns follows our upgrade of Turkey's government bond rating to Ba1 from Ba2, with positive outlook. The action on Turkey's sovereign rating has direct implications for sub-sovereign ratings given their close operating and financial linkages with the Turkish government.
US Public Finance
New York State Thruway Authority (NY)
16 June 11
Outlook Change
18 June 12
Revenue Bond Rating Outlook
A1 Stable
A1 Negative
The negative outlook speaks to an as yet uncertain finance plan for a new Tappan Zee Bridge across the Hudson River north of New York City, and the risks associated with the execution and management of a design-build contract and the environmental permitting. The authority expects to debt finance most of the cost of the Tappan Zee Bridge replacement. An essential crossing that connects Rockland and Westchester Counties, the bridge is a key part of New Yorks thruway system and provides nearly 19.5% of the authoritys toll revenues.
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25 JUNE 2012
RATING CHANGES
Structured Finance
Downgrades of Global Banks and Securities Firms June Drive Negative Rating Actions on over 100 Structured Finance Securities We downgraded securities that have a direct linkage to the downgraded global banks and securities firms, which act as key counterparties in the affected transactions. We placed on review for downgrade those securities that have strong indirect linkage to the downgraded banks unless issuers and their agents have communicated plans to implement protection mechanisms that will reduce the credit linkage to these banks. We did not take immediate rating actions on securities with indirect exposure to downgraded banks if we concluded those exposures have a small effect on the securities' credit quality, or that the likelihood of the timely implementation of effective structural protection mechanisms was high. For more information, please see the press releases Moody's downgrades 28 European structured finance transactions directly exposed to firms with global capital markets operations,Moody's downgrades 26 US structured finance transactions directly exposed to firms with global capital markets operations and Moody's downgrades 37 structured finance transactions directly exposed to firms with global capital markets operations.
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25 JUNE 2012
RESEARCH HIGHLIGHTS
Notable research published the week ending 22 June 2012
Corporates
European Telecommunications Service Providers: Moody's Credit Metrics Preview Higher Leverage as Accounting Continues to Evolve
We look at Europes five-largest telecom service providers in the first of four reports explaining some of our significant adjustments to the financial statements of major European companies This additional reports will cover automobile manufacturing, pharmaceuticals and retail.
Canadian Broadband Communications Quarterly: Ratings Steady as Increased Competition Continues to Impact Operational Results
We find no rating changes in the industry over the last quarter despite the credit negative of increased competition, thanks to a reasonable amount of financial flexibility. Although the rated Canadian broadband communications should maintain their ratings, weaker subscriber growth trends for both wireless and fixed-line operations as well as somewhat lower EBITDA per subscriber measures will be the norm.
A Year's Worth of Loan Agreements Shows Where Benefits Tilt Toward Borrowers
We reviewed 45 leveraged loans from the past year totaling more than $100 billion and found that certain loan covenant provisions provide greater flexibility to corporate borrowers and private-equity sponsors, although they also contain lender-friendly elements. This review marks the first anniversary of our loan service, which highlights key gaps that lenders confront in loan covenant provisions.
Global Integrated Oil Industry: High Oil Prices and Depressed Natural Gas Keep Pressure on Integrated Oil Companies
Our stable outlook for the industry is based on our expectation of essentially flat to slightly higher operational cash flow in 2012. We expect oil prices to remain volatile as Middle East political tensions persist; Europes debt crisis remains unresolved and general pressures on global economic growth continue. In addition, we expect natural gas prices to remain depressed as the unconventional shale drilling boom continues.
National Oil and Gas Companies: Government Goals Are a Key Credit Driver for National Oil Companies
In our report, we place each of our rated state-owned national oil company (NOCs) that we rate into one of four categories depending on the sponsoring governments goals. Goals such as maximizing the governments revenue and the countrys employment tend to hurt credit quality. As governmentrelated issuers, the NOCs have ratings that are closely tied to the ratings of the sovereign government.
Liquidity of EMEA Corporates Remains Solid But Has Begun to Deteriorate

The robust liquidity position of EMEA corporates has begun to deteriorate as market conditions have become more challenging. While a surge in defaults in the near term is unlikely, weaker liquidity profiles could result in downgrades for low-rated companies.
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25 JUNE 2012
RESEARCH HIGHLIGHTS
US Manufacturing Industry - Cash Pile Declines as Spending on Shareholder Returns and Acquisitions Surges
US manufacturers cash holdings declined 23% in 2011, with outlays for acquisitions and returns to shareholders growing faster than capital expenditures. Despite these cash outflows, liquidity remains strong and operating cash flow-to-debt metrics are healthy. Share repurchases by manufacturers tripled in value in 2011, while dividend payments jumped 20%.
Financial Institutions
New Debit Rules Hurt Banks and Reshape the Payment Processor Market
The Durbin Amendments reform of debit interchange and routing practices hits banks the hardest and makes payment processing more competitive, while merchant acquirers and retailers are benefiting from the changes. We expect that banks will attempt to make up for lost revenue by raising fees for other products and cutting expenses, though this process will be difficult.
Moody's Reinsurance Monitor Newsletter - June 2012

This edition of Reinsurance Monitor includes articles on the 2012 hurricane season, the recent upswing in pricing in property catastrophe lines, Citizens Property Insurance Corps purchase of a significant amount of private external risk transfer in advance of the hurricane season, and Citizens Property Insurance Corps sponsorship of a $750 million cat bond, Everglades Re, the largest single tranche ever issued in that market.
1Q 2012 Quarterly Update - Asset Managers

Aggregate assets under management increased 5.5% in the first quarter of 2012 for the managers we reviewed, driven by improved equity market valuations. US domestic index growth exceeded 12%, while international indices also rose at double-digit rates. The cumulative performance of equities over the past two quarters ranged between 16% and 30%, contributing to a recovery of asset managers account values and operating performance.
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25 JUNE 2012
RESEARCH HIGHLIGHTS
Sovereigns
Venezuela Credit Analysis
Venezuelas B1 domestic currency and B2 foreign currency government bond ratings reflect, among other factors, very weak institutions marked by an absence of checks and balances on executive authority and a highly pro-cyclical fiscal policy, with a rapid increase in spending and corresponding growth in debt at a time of historically high oil revenues. Credit strengths include a large if volatile current account surplus, significant assets in the public sector, and the governments control of some of the worlds largest oil reserves.
Caribbean Development Bank Credit Analysis

The Aa1 rating continues to reflect a number of significant credit strengths, including strong financial support from both borrowing and non-borrowing members, a preferred creditor status that has ensured a good repayment performance even from borrowing members that have gone through debt restructurings, and strong capital adequacy and liquidity. We had downgraded the bank from Aaa in May largely because of shortcomings in the banks risk management and financial planning capacity.
Brazil Credit Analysis

Brazils Baa2 government bond rating with positive outlook incorporates the countrys high economic strength, which is underpinned by (1) the size of an economy, which is the sixth largest in the world, (2) its high degree of diversification, and (3) a large and growing domestic market that mitigates the impact of adverse external shocks.
Pakistans Credit Pressured by Deteriorating External Payments Position

Pakistans (B3 Stable) external payments position is under strain from a rising trade deficit and decline in capital inflows. Large repayment obligations falling due in 2012 and 2013 will also add to pressure. Weak government finances, structural inflationary pressures and domestic political uncertainties add to Pakistans external vulnerabilities, compounding the downward pressures on the credit quality of the sovereign.
Sub-sovereigns
Russian Regions: Stable Outlook, but Credit Risks May Grow in Medium Term
We have a stable outlook on the Russian regional sector because we expect economic growth in Russia to continue, although it will decelerate. We also expect contained funding deficits and manageable debt affordability. At the same time, we caution that future challenges may lead to further differentiation in the credit quality of the rated regions.
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25 JUNE 2012
RESEARCH HIGHLIGHTS
US Public Finance
Cash Flow Risks Drive Downgrades of California Tax Allocation Bonds
Heightened risks of missed or untimely debt service payments on California Tax Allocation Bonds (TABs) have led us to downgrade all TABs that had been rated Baa3 or higher to Ba1. These risks arose from the challenges in implementing a state law that mandated the dissolution of all redevelopment agencies,. In this report, we detail the risks associated with the dissolution law and the recent events that revealed them.
Structured Finance
CLO Interest Newsletter
Because a managers CLO loan portfolios have substantially similar obligors, consolidation among managers. will make diversifying CLO tranche holdings more difficult in the future. Also discussed: bank downgrades will limit CLOs from purchasing additional participations, changing covenants to extend a CLOs life typically has negative credit impact, but no rating impact, among other topics.
Auto Navigator Newsletter

Weakening in the labor market and uncertainty about the durability of the recovery has led Moodys Analytics to revise its near-term outlook for US auto sales downward to 14.8 million units for the year. Also discussed: prime auto loan ABS performance continued to improve in April, new Canadian auto loans that feature lease-like residual value risk, our upgrade of Ford to investment grade ends a successful FUEL program.
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25 JUNE 2012
EDITORS
News & Analysis: Jay Sherman, Elisa Herr and Andre Varella Rating Changes & Research Highlights: Robert Cox Final Production: Barry Hing
PRODUCTION ASSOCIATE
David Dombrovskis
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Weekly Credit Outlook - June 25, 2012

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Weekly Credit Outlook - June 25, 2012

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25 JUNE 2012

NEWS & ANALYSIS

RATINGS & RESEARCH

NEWS & ANALYSIS

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

Maggie Taylor Vice President - Senior Credit Officer +1.212.553.0424 margaret.taylor@moodys.com

Walgreens Stake in Alliance Boots Cuts into its Credit Profile

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

William Reed Vice President - Senior Credit Officer +1.212.553.4653 william.reed@moodys.com

Acquisition of Norit Would Weaken Cabots Credit Profile

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

Lynn Valkenaar Vice President - Senior Analyst +44.20.7772.8650 lynn.valkenaar@moodys.com

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

Stanislas Duquesnoy Vice President - Senior Analyst +49.69.70730.781 stanislas.duquesnoy@moodys.com

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

Chris Park Vice President - Senior Credit Officer +852.3758.1366 chris.park@moodys.com

GS E&Cs Resumption of ERC Project in Egypt Is Credit Positive

8 4 0 2007 2008 2009 2010 2011 1Q12

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

Annalisa Di Chiara Vice President - Senior Analyst +852.3758.1537 annalisa.dichiara@moodys.com

MNC SKY Visions Planned IPO Is Credit Positive

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

BNDESPARs Investment in Renova Energia Is Credit Positive for Light Energia

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

CAD 350 CAD 350 CAD 317

CAD 1,671 CAD 1,847 CAD 1,671

95% 95% 95%

CAD 368 CAD 368 CAD 335

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

Felipe Carvallo Assistant Vice President - Analyst +52.55.1253.5738 felipe.carvallo@moodys.com

3,504 1,072 340 2,292 0 737 115 0 651 184

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

JPMorgan Casa de Bolsa, S.A. de C.V. (unrated)

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

Report on Brazils Exchanges Encourages Competition but Is Negative for BM&FBovespa

The rating shown is the local currency issuer rating.

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

Carlos Suarez Duarte Assistant Vice President - Analyst +44.20.7772.1061 carlos.suarezduarte@moodys.com

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

Katharina Barten Vice President - Senior Credit Officer +49.69.70730.765 katharina.barten@moodys.com

WestLBs Costly Break-Up Is Credit Positive for Senior Bondholders

MOODYS WEEKLY CREDIT OUTLOOK