30 APRIL 2012
NEWS & ANALYSIS
European Sovereign and Bank Crisis
» Spain’s New Fiscal Measures Are Credit Positive for Sovereign and
Sub-Sovereigns
» IMF Support for Bail-Ins Is Credit Negative for Bondholders of
Systemically Important Financial Institutions
» Czech Government Averts Collapse, but Instability Will Hamper
Policy Effectiveness
» Challenges Remain Despite the Netherlands’s Credit Positive Fiscal
Consolidation Agreement
» Bank Failures Illustrate Danish Banking System’s Credit Negative
Exposure to Real Estate and Agriculture
» Liquidity Reserve Availability Is Credit Positive for Ukrainian Banks
2
Corporates
9
Sovereigns
» US Social Security and Disability Insurance Trustees Project Higher
Net Outlays, a Credit Negative
28
» Political Instability in Bangladesh Is Credit Negative
» Sanction Removal, Debt Forgiveness and Reform Progress Are
Credit Positive for Myanmar
» Lorillard Acquisition of Electronic Cigarette Maker Is Credit Positive
» Siemens’s Cost Overruns To Connect Offshore Wind Farms Are
Credit Negative
» Fresenius SE’s Tender Offer for Rhoen-Klinikum Is Credit Negative
Sub-sovereigns
» Delay of Gauteng E-toll Is Credit Negative for South African
National Road Agency
34
US Public Finance
» Illinois Governor Proposes Sweeping Public Pension Reforms, a
Credit Positive
35
RATINGS & RESEARCH
Rating Changes
37
Last week we downgraded Nestle, Pitney Bowes, RadioShack, Shuaa
Capital, Orient Corp., Nova Ljubljanska Banka, Nova Kreditna Banka
Maribor, Abanka Vipa, GATX Corp., four Uzbek banks, the Canadian
province of Ontario, and Berlin Hyp's public sector covered bonds, and
upgraded TransCreditBank, among other rating actions.
» CRH’s Sale of its 49% Stake in Secil to Semapa Is Credit Positive
» India Rejects Reliance’s Natural Gas Survey, a Credit Negative
» VimpelCom’s Sale of Vietnamese Business Is Credit Positive
Infrastructure
» US Regulatory Support for NiSource Pipeline Modernization Is
Credit Positive
» Proposed Rate Freeze Is Credit Negative for Central Hudson Gas
& Electric
» EDENOR Improves Liquidity through Sale of Subsidiary
» Withdrawal of Generation Capacity Is Credit Positive for UK
Power Companies
15
Banks
» Broader Role for Brazil’s Deposit Guarantor in Bank Resolutions Is
Credit Positive
» BTG’s IPO To Boost Group’s Market Position, a Credit Positive
19
Research Highlights
44
Last week we published on the European corporates, North American
capital goods, US apparel, Russian natural gas, Argentina, US cable TV,
financial guaranty insurance, Spanish insurance, money market funds,
China, the Netherlands, Serbian local governments, US healthcare,
credit card ABS, Asia-Pacific RMBS, and UK covered bonds, among
other reports.
twitter.com/MoodysWCO
Click here for Weekly Market Outlook,
our sister publication containing
Moody’s Analytics’ review of market
activity, financial predictions, and the
dates of upcoming economic releases.
» BCP’s Acquisition of Chile’s IM Trust Is Credit Positive
» China Bank Regulator Reports Strong Bank Profits, a Credit Positive
MOODYS.COM
NEWS & ANALYSIS
Credit implications of recent worldwide news events
European Sovereign and Bank Crisis
Kathrin Muehlbronner
Vice President - Senior Analyst
+44.20.7772.1383
kathrin.muehlbronner@moodys.com
Sebastien Hay
Vice President - Senior Credit Officer
+34.91.768.8222
sebastien.hay@moodys.com
Spain’s New Fiscal Measures Are Credit Positive for Sovereign and Sub-Sovereigns
On 20 and 21 April, the Spanish government (A3 negative) announced new savings measures in
healthcare and education that it believes will save around €10 billion annually, provided they are fully
implemented. The savings would accrue predominantly to the regions, as key providers of these public
services. The announced measures are credit positive for both the sovereign and sub-sovereigns as they
would help the regions reduce their deficits this year and demonstrate the central government’s
commitment to correct its large fiscal imbalance and recover fiscal credibility.
The healthcare measures announced on 20 April include increased co-payments for medicine
depending on income, centralized purchasing and other measures that, according to the government,
will bring savings of €7 billion. The educational measures presented on 21 April include an increase in
class sizes and teaching hours in primary and secondary education, as well as an increase in university
tuition fees. The government expects to reap €3 billion in additional revenues and savings.
While some of the measures might yield fiscal savings relatively quickly (e.g., the co-payments for
medicine), others will be more complex to implement. For example, proposed measures such as better
career mobility within the healthcare sector for health personnel and a new system to centralise healthrelated purchases (ranging from drugs to technology) will likely only have an impact from 2013
onward. In addition, the measures in the area of education are proposals that the regions are
responsible for implementing.
We also note that the government’s estimate for total savings of €10 billion, or 7.5% of the regions’
operating expenses, is substantial and relates to a full year. Healthcare savings estimates amount to 9%
of total spending in that area, while those in education amount to 8% of total education spending.
Individual regions’ previous healthcare reforms show that the regions can generate important savings.
For example, in 2011 alone, the use of generic drugs in Galicia (A3 negative) generated annual savings
of approximately €100 million, or 3% of its annual costs in healthcare. As a comparison, we estimate
that the regions collectively need savings of around €16 billion this year, equal to 10% of their budgets,
to achieve their 2012 fiscal target (1.5% of GDP versus last year’s deficit of 2.9% of GDP). That target
suggests the need for significant measures beyond these most recent ones.
In addition to full implementation of the announced measures, restoring full confidence in Spain’s
public finances will require concrete evidence that the government is indeed tightening control over
the regions’ budgetary policies. In theory, the Budgetary Stability Law, which the Spanish Parliament
approved last week, strengthens the central government’s ability to exercise stronger oversight and
control over the regions’ finances than in the past, as it will be able to impose penalties and intervene
in a region deviating from its agreed fiscal path. However, it remains to be seen whether and how these
principles will be put into practice.
2
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Carlos Suarez Duarte
Assistant Vice President - Analyst
+44.20.7772.1061
carlos.suarezduarte@moodys.com
Alain Laurin
Senior Vice President - Group Credit Officer
+33.1.5330.1059
alain.laurin@moodys.com
IMF Support for Bail-Ins Is Credit Negative for Bondholders of Systemically
Important Financial Institutions
Last Tuesday, the International Monetary Fund (IMF) released a research paper advising policymakers
to consider creating bail-in rules to deal with distressed systemically important financial institutions
(SIFIs). The IMF’s support for cross-border bail-ins is credit negative for bondholders of SIFIs1
because, if implemented, a practical bail-in mechanism increases the likelihood that bondholders will
receive a haircut on the debt of banks close to insolvency.
The creation of a bail-in framework will likely receive significant public support since it aims to reduce
the systemic risk caused by a SIFI’s disorderly default and restore its capital without tapping taxpayer
funds. Consequently, government support to an ailing bank may be limited to providing emergency
liquidity to restore market confidence. The IMF’s research paper follows a European Commission (EC)
proposal outlining several options to implement a viable bail-in framework. Currently, most countries
lack a detailed bail-in framework for senior unsecured bondholders, although some, including the UK,
Denmark and Ireland, have legislation in place that allows bailing-in certain liabilities.
Overall, both the IMF and the EC note the importance of restoring confidence in the viability of a
troubled SIFI among short-term creditors (e.g., repo counterparties) in order to prevent contagion and
reduce systemic risk. As a result, regulators would need to differentiate between some types of
unsecured debt, excluding from the bail-in process some short-term debt obligations such as payments,
clearing, and settlements obligations. Such differentiation potentially reduces the need for government
intervention because the troubled SIFI would be able to meet its short-term unsecured obligations as it
would not be included in the bail-in. As a result, the government would not have to support
counterparties, including systemically important financial market infrastructures, that would otherwise
face difficulties owing to unsettled trades. The IMF proposal places the bail-in burden on the longterm senior unsecured bondholders of the distressed SIFI after the elimination or dissolution of
existing equity shares, subordinated and convertible bonds.
However, implementation of a credible bail-in framework for SIFIs faces significant challenges because
they generally operate through a number of legal entities in different jurisdictions. We consider it
unlikely that all regulators would recognise the bail-in powers of foreign peers, especially when it
involves imposing losses on local bank creditors to protect a foreign SIFI.
In addition, insufficient recapitalisation may just delay the resolution of banks with serious asset
quality problems, undermining confidence in a bail-in as an effective mechanism to deal with a SIFI’s
failure in favour of radical alternatives such as liquidation. It will also be difficult to put a bail-in
framework in place over the next few years, given current conditions, because doing so would lead to
significantly increased funding costs for SIFIs. The Financial Stability Board (FSB) has the
responsibility to clarify and outline a credible and consistent global framework that could be applied
across jurisdictions.
We believe that the effectiveness of a bail-in framework will primarily rely on its transparency and
applicability because the market will have to be convinced of the institution’s viability. In addition,
bondholders will have to include the greater probability of haircuts and conversion into equity in the
pricing of SIFI bonds. Therefore, the new rules need to incorporate, as suggested by the IMF, losses
across all senior unsecured bondholders triggered by a combination of factors, rather than expect that
1
3
On 4 November, the Financial Stability Board (FSB) unveiled the provisional list of 29 global systemically important
financial institutions (G-SIFIs). See G-SIFI Capital Surcharge Is Credit Positive for the 29 Banks but Resolution Framework
Could Offset That Benefit, Weekly Credit Outlook, 14 November 2011.
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
creditors would purchase new bond issues with contractual obligations that accept haircuts or debt
conversions under certain conditions.
Furthermore, despite regulators’ detailed explanation of the bail-in triggers, including capital ratios below
minimum regulatory requirements, accounting and regulatory differences across jurisdictions are likely to
make implementation challenging. However, the FSB proposal will likely involve a gradual
implementation process that will give regulators time to include bail-ins within their new resolution plans.
4
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Rebecca Karnovitz
Associate Analyst
+1.212.553.1054
rebecca.karnovitz@moodys.com
Jaime Reusche
Assistant Vice President - Analyst
+1.212.553.0358
jaime.reusche@moodys.com
Czech Government Averts Collapse, but Instability Will Hamper Policy Effectiveness
Last Friday, the Czech Republic’s (A1 stable) center-right government narrowly survived a noconfidence vote after one of the three parties that make up the ruling cabinet left the coalition earlier in
the week. The government garnered the support of 105 of the lower-parliament’s 200 lawmakers,
securing only a slim majority and consequently a weakened mandate. While these events avoid a snap
election for now, the government’s fragility will make it more difficult for to carry out its agenda, a
credit negative outcome that could jeopardize the country achieving its fiscal targets.
Should the government fall before the scheduled June 2014 parliamentary election, reform paralysis is
likely to set in. This development would be a major hit to the structural reform agenda that sought to
increase competitiveness and improve investment conditions in the country. The European
Commission’s excessive deficit procedure2 is likely to be cured by 2013 in any case, barring any fiscal
slippage in 2012, and the government’s strong credit metrics and affordable debt profile will help
preserve the sovereign’s creditworthiness. But a slimmer majority in parliament or a collapse of the
government would be a lost opportunity to enhance the economy’s performance.
Earlier in April, a row over austerity measures led to tensions within the coalition. These later eased
and the coalition remained intact, allowing the government to preserve its comfortable majority in
parliament. This latest crisis in Czech politics was precipitated by the split of Public Affairs (VV), the
junior partner of the governing coalition, from the cabinet after the party’s unofficial leader, Vit Barta,
refused to give up his parliamentary seat despite having been convicted of paying bribes. This event led
to the dissolution of the three-party coalition and brought the government to the brink of collapse.
However, the country avoided early elections when former VV lawmaker and Deputy Prime Minister
Carolina Peake formed a new political platform and pledged her support to the government. Although
Mrs. Peake’s ability to rally enough allies remained in question until the very last minute, she delivered
the votes needed to ensure the government’s survival.
While the center-right government has survived this latest episode of uncertainty and political
brinkmanship, its ever-thinning majority and weakened mandate will make it more difficult for it to
push through its agenda. Moreover, political actors could capitalize on the government’s weakness by
extracting favors in exchange for their support, an unproductive and potentially destabilizing situation.
This latest crisis is also the third no-confidence vote that this government has survived in its two years
in power and given these factors it is still likely that elections will be held ahead of their 2014 schedule.
Recent polls suggest that almost two thirds of Czechs want to see the center-right cabinet fall and that
an early election would likely bring the opposition Czech Social Democratic Party (CSSD) to power.
Although a CSSD-led government could bring more political stability, the party has rejected the
current government’s budget-cutting measures. Once in power, it could introduce a different policy
mix that emphasizes revenue measures over cost-cutting ones. That said, the party is unlikely to
undertake a complete policy reversal that would jeopardize consolidation efforts.
Last Monday’s announcement that the 2011 general government deficit came to 3.1% of GDP puts
the 2013 target of 2.9% within reach. Even though the combination of an unstable political scene and
unsupportive growth environment could lead to an increase in the 2012 fiscal deficit, its overperformance last year means that the consolidation effort needed to meet the 2.9% target in 2013 is
easier to achieve.
2
5
The Excessive Deficit Procedure mandates that sovereigns comply with Maastricht guidelines that suggest governments
maintain their fiscal deficits below the 3% of GDP mark, otherwise they risk economic sanctions.
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Sarah Carlson
Vice President - Senior Analyst
+44.20.7772.5348
sarah.carlson@moodys.com
Challenges Remain Despite the Netherlands’s Credit Positive Fiscal
Consolidation Agreement
Last Thursday, the outgoing Dutch coalition was able to reach agreement with three opposition parties
on additional fiscal consolidation measures, an issue that prompted the government to resign earlier in
the week. The policy agreement is positive and shows the political consensus in favour of the fiscal
discipline that has long existed in the Netherlands (Aaa stable). Nevertheless, the government’s
resignation will necessitate early elections on 12 September, creating policy uncertainty for the Dutch
sovereign until a new government is formed.
We expect that Dutch politics will remain volatile for the remainder of 2012. This is not new to the
Netherlands and we have incorporated it into the rating; only six Dutch governments since World War
II have served out their four-year terms, and the last six failed to do so. Yet the resulting political and
policy uncertainty comes at a critical time. It is highly likely that it will take some time after the
election for a coalition agreement to be reached.
In the meantime, should the European Union determine that the newly agreed package is insufficient in
meeting the country’s commitments under the Excessive Deficit Procedure, reaching political consensus
on additional fiscal measures could be challenging. Moreover, the package of measures that was agreed
upon last Thursday is more skewed toward tax increases than toward spending cuts, which implies a
greater degree of uncertainty about the amount of deficit reduction that will actually be achieved.
However, the Netherlands is entering this testing period from a position of relative strength. The
country has a very robust institutional framework and a significant track record of fiscal discipline.
Although Dutch debt/GDP is higher than the 45% level achieved right before the financial crisis, at
65.2% in 2011, it is still below the 87.2% euro area average, and will peak at a level that is 10
percentage points below current levels in France (Aaa negative) and the UK (Aaa negative).
We expect the Dutch economy to contract by 0.6% in 2012; indeed, this contraction lies at the heart
of the government’s budgetary shortfall. Household and government deleveraging and the euro area’s
wider economic challenges will dampen growth for some years, but we still expect it to rebound to
1.2% in 2013 with a gradual strengthening thereafter. Nevertheless, the economy’s openness,
competitiveness, and diversification are important strengths. Moreover, the Netherlands has already
undertaken many structural reforms, such as labour market reform, that many euro area countries have
yet to implement to boost their competitiveness.
Although Dutch households have significant mortgage debt, the country’s banks are well capitalised,
and there is no indication that credit losses on their mortgage books, which have been modest thus far,
are likely to create a need for the sovereign to use its balance sheet to support them. However, if the
banks’ credit losses rise dramatically and require the state to recapitalise the sector, it would also put
downward pressure on the sovereign’s rating.
At the same time, if we were to see a weakening in the Dutch institutional framework, most notably a
weaker commitment to fiscal discipline, or a repeated abrogation of the country’s self-imposed fiscal
rules, then it would also put downward pressure on the country’s sovereign rating. The strength of
Dutch institutions has importance beyond the sovereign itself. As one of the euro area’s main
proponents of rules-based fiscal discipline and monitoring, a Dutch failure to abide by these rules
could weaken proposed euro area rules at their birth.
6
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Oscar Heemskerk
Vice President - Senior Credit Officer
+44.20.7772.5532
oscar.heemskerk@moodys.com
Bank Failures Illustrate Danish Banking System’s Credit Negative Exposure to Real
Estate and Agriculture
Last Monday, Danish bank regulators used the Bank Package IV resolution regime to resolve two failed
Danish banks, Sparekassen Ostjylland (unrated) and Spar Salling Sparekasse (unrated). Regulators
transferred the banks’ bad loans to Financial Stability, the government-backed vehicle mandated to take
over, sell and wind down struggling Danish banks. The resolution of the two banks highlight Danish
banks’ continued credit challenges, specifically their exposures to the poorly performing agriculture and
property sectors, which amount to 11% and 22% of overall banking system exposures, respectively.
The regulators’ action followed the Danish Financial Services Authority’s decision on 20 April to
increase the individual solvency requirements of the two ailing banks to 18.6% of risk weighted assets
from 11.9% at the end of June 2011 for Ostjylland, and to 15.5% from 11.2% for Spar Salling,
exceeding current capitalisation levels of 12.6% and 14.1%, respectively.
The extent of the two banks’ exposures to agriculture and property was behind the regulators’ decision.
In the case of Ostjylland, its agriculture loans are 12% of its loans and advances, while property loans
are 17%; Spar Salling’s levels are 26% and 3%, respectively. The failed banks and the banks that took
over their activities, Sparekassen Kronjylland (unrated) for Ostjylland and Den Jyske Sparekasse
(unrated) for Spar Salling, are smaller savings banks, each with total assets below €2 billion, and with
an aggregate market share of less than 1% of system assets.
We believe that the asset quality problems, specifically in agriculture and property, faced by these
banks highlight possibly wider concerns for these asset types in the Danish banking sector. More
positively, the use of Bank Package IV for the resolution mitigates concerns on the wider use of the
alternate resolution regime, Bank Package III, under which losses would have been allocated at the
senior debt and deposit levels. It is, however, not evident that Bank Package IV solutions can be found
for future bank failures, which we expect to occur more often.
7
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Elena Redko
Assistant Vice President - Analyst
+7.495.228.6074
elena.redko@moodys.com
Liquidity Reserve Availability Is Credit Positive for Ukrainian Banks
On 18 April, the National Bank of Ukraine (NBU), the country’s central bank, declared its intention to
allow banks to unblock up to 100% of non-interest bearing mandatory reserves (up from 40%) for use in
intraday liquidity management. Despite easing a prudential measure, we consider this action as credit
positive for Ukrainian banks. While the NBU will still maintain daily supervision of unblocked reserves,
the measure will increase the banks’ intraday liquidity positions by $1.8 billion (1.4% of system assets)
and improve profitability, as a portion of these funds are reallocated to interest-yielding assets.
This NBU initiative does not change the amount of mandatory reserves the banks are required to keep
with the central bank, but merely enables them to re-allocate the funds from blocked non-interestbearing accounts with the NBU to other types of liquid assets, including those that bear interest, such
as T-bills, government bonds and interbank loans.
The NBU calculates mandatory reserves as a percentage of demand and term customer accounts, and
the reserve requirements depend on the currency and maturity of the deposits. At year-end 2011,
mandatory reserves of around $3 billion covered close to 4.5% of customer funding in Ukrainian
banks. As shown in the exhibit below, we estimate that the NBU initiative is likely to increase the level
of liquid assets in the system by around $1.8 billion, or 7%, by year-end 2012, thus improving the
banks’ liquidity.
Evolution of Mandatory Reserves Availability and the Impact on Liquidity and Profitability of
Ukrainian Banks
Available Percent of
Mandatory Reserves
Unblocked Mandatory
Reserves of Liquid Assets*
Unblocked Mandatory
Reserves of InterestBearing Assets*
Before March 2012
30%
3.2%
0.7%
March 2012
40%
4.2%
0.9%
100%
10.6%
2.3%
Expected by year-end 2012
*Moody’s estimate based on year-end 2011 data
Source: National Bank of Ukraine
As a next step, it is likely that some banks that consider their newly available liquidity position as
sufficiently strong may decide to reallocate “excessive” non-reserve-related liquidity and channel it into
higher-margin products, such as corporate bonds or short-term corporate loans. This would enable
them to earn extra revenue, supporting their currently weak profitability, albeit at the cost of credit
risks associated with these riskier investments.
The NBU began easing its liquidity requirements in November 2011 to support Ukrainian banks’
liquidity amid shaky depositor confidence. As the first step, it allowed the banks to use up to 30%
(from zero previously) of their mandatory reserves in intraday transactions. Then, as the liquidity
environment improved, the central bank in March increased the limit to 40%.
As the country’s largest deposit-takers, the following banks will be the main beneficiaries of the NBU
initiative: Privatbank (Ba3 review for downgrade; D-/ba3 review for downgrade),3 Ukreximbank (Ba3
review for downgrade; D-/ba3 review for downgrade), Savings Bank of Ukraine (B2 negative; E+/b2
stable), Raiffeisen Bank Aval (Ba1 review for downgrade; D-/ba3 review for downgrade), and
Ukrsibbank (unrated).
3
8
The ratings shown are the banks’ local deposit rating, its standalone bank financial strength rating/baseline credit assessment
and the corresponding rating outlooks.
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Corporates
Janice Hofferber, CFA
Senior Vice President
+1.212.553.4493
janice.hofferber@moodys.com
Lorillard Acquisition of Electronic Cigarette Maker Is Credit Positive
Lorillard Tobacco Co. (Baa2 stable) said last Wednesday it would acquire blu ecigs, a Charlotte, North
Carolina, manufacturer of electronic cigarettes, for $135 million. The acquisition is credit positive
because it will help Lorillard diversify away from the traditional cigarette business, which is in longterm decline.
Lorillard remains dependent on Newport, its largest cigarette brand, for more than 88% of its revenues
and operating profits. With the acquisition, Lorillard will gain a foothold in the nascent electronic
cigarette industry and join rivals in efforts to diversify away from traditional cigarettes. Marlboro
maker Altria Group Inc. (Baa1 stable) already has a significant smokeless tobacco business, and it said
in January that it had entered into an agreement with Okono A/S, an affiliate of Denmark’s Fertin
Pharma A/S (unrated), to develop non-combustible nicotine-containing products. Reynolds American
Inc. (Baa3 positive) is another key player in smokeless tobacco and it has a subsidiary, Niconovum AB
(unrated), that provides nicotine replacement therapy.
Prior to this acquisition, Lorillard had been less aggressive than its peers in entering adjacent categories
like cigars, smokeless tobacco, and new forms of nicotine replacement products. These are key
initiatives for an industry whose products must now be deemed safe by the US Food and Drug
Administration. Further, cigarette sales volumes have been declining about 3%-4% a year, driving the
need to find new revenue streams.
The blu ecigs deal is relatively small for Lorillard and will have no immediate effect on its credit
ratings. It will have about $800 million of cash following a $1.1 billion payment this month under the
longstanding Master Settlement Agreement with state attorneys general, and it generates about $1
billion in annual free cash flow before dividends.
While the acquisition will help Lorillard in the long run, it remains saddled with weak product
diversification, highlighted by its lack of smokeless offerings and large reliance on the Newport
menthol brand. An FDA review of the public health effects of menthol cigarettes adds a bit of
uncertainty, but we do not expect any recommendation from the agency to have a significant adverse
impact on the menthol category.
9
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Wolfgang Draack
Senior Vice President
+49.69.70730.719
wolfgang.draack@moodys.com
Siemens’s Cost Overruns To Connect Offshore Wind Farms Are Credit Negative
Last Wednesday, Siemens AG (A1 positive) announced that it would take a second €200 million-plus
charge to cover cost overruns related to connecting offshore wind projects in the North Sea to Germany’s
power grid. Siemens apparently underestimated the deep sea projects’ engineering challenges and the
complexities of gaining regulatory approvals, and now requires additional personnel and equipment to
complete the projects, some of which now face delays of a year or more. The project mismanagement is
credit negative because it will not only cost Siemens money, it may also hurt its image as the leading
European connector of offshore wind farms at a time when its rivals are making inroads.
The main problems that Siemens has encountered relate to the complexity of the engineering work, a
shortage of specialized engineers, weather conditions that only allow installation work during a short
timeframe, and the time needed to obtain regulatory approvals. From October 2011 to March 2012,
Siemens took cumulative charges of about €480 million, a high share of the €2.5 billion contract value
for four wind farms under construction that likely exceeds the calculated margin, even if the company
can recover some of that amount from sub-suppliers.
For Siemens’s credit profile the amount involved is moderate, but it contributed to a more than 10%
reduction in the company’s income from continuing operations target to €5.2-€5.4 billion.
Furthermore, it exemplifies the complex challenges of such projects and may curb the scale of future
offshore wind projects in Germany.
Siemens is the general contractor for the grid connection of four large wind farm projects with a total
order volume of around €2.5 billion. Unlike in the UK, the location of most of Europe’s 3.8 gigawatts
(GW) of offshore wind capacity that is up and running, German offshore projects are generally farther
away from the coastline (about 100 kilometers versus 10 kilometers in the UK), deeper (up to 70
meters deep), and face shorter periods of favorable weather (May to September). The need for
additional AC/DC transformer stations adds complexity, and the grid connection is provided by
TenneT, instead of by the wind platform operator itself.
Aside from the logistics involved in providing such connections, such an arrangement exposes Siemens
to financially constrained and regionally focused grid companies with high funding needs and to public
outcries against expanding high voltage long distance grids. In addition, securing the approvals of
multiple regulatory authorities for new technologies and grid connections takes time. Amid all these
challenges, Siemens has agreed to act as a general contractor for turnkey delivery.
Wind energy is the fastest growing electricity generation technology. Annual installed capacity has
grown an average 23% for the past five years,4 making up about 10%5 of European installed power
generation capacity and equivalent to 6.3% of power consumption in 2011. The lion’s share of wind
energy so far is generated onshore. Installations offshore started in a material way only in 2009 and
currently account for less than 1% of wind capacity in Europe.
However, the growth and revenue potential for the vendors in this segment is huge. In 2011,
investment in EU wind farms was €12.6 billion, of which 19% (€2.4 billion) was for offshore
installations.6 Siemens expects the market segment to double in size to about €6 billion in the next five
years, offering growth and revenue potential for the vendors in this segment. However, the technical
and regulatory challenges are significant.
4
5
6
10
BTM Consult, March 2012.
The European Wind Energy Association, February 2012.
The European Wind Energy Association, February 2012.
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Alex Verbov
Vice President - Senior Analyst
+49.69.70730.720
alex.verbov@moodys.com
Fresenius SE’s Tender Offer for Rhoen-Klinikum Is Credit Negative
Fresenius SE & Co. KGa (FSE, Ba1 review for downgrade) said last Thursday it planned a public tender
to acquire one of its competitors, Rhoen-Klinikum AG (RK, Baa2 review for downgrade), in a largely
debt-funded transaction valued around €3.9 billion. Although the acquisition makes strategic sense, it is
credit negative for FSE because it follows recent debt-funded acquisitions plus FSE’s €180 million share
buyback of Fresenius Medical Care AG & Co. KGaA (FMC, Ba1 stable), of which it owns 30%. We put
both FSE and RK on review for downgrade following the announcement of the bid.
FSE’ recent acquisition and buyback activities before the RK deal totaled around €2.4 billion, and have
already increased reported net leverage to 2.8x for 2011-12. With the RK purchase, we expect the
headline reported net leverage of FSE Group to increase by around 0.5x. In our view, the leverage of
FSE excluding full FMC consolidation but including FMC dividends (FSE-ex) is more relevant in
assessing FSE’s credit because of FMC’s limited cash dividend contribution. We expect FSE-ex’s net
debt/EBITDA ratio to grow on a pro forma basis to 4.2x as reported (our adjusted gross debt is likely
to be some 0.5x-0.7x higher) from an estimated 3.0x for 2012.
We further expect that the increasing contribution of hospital operations arising from the RK
acquisition will lead to an overall dilution of FSE’s operating and cash flow margins because
corresponding metrics for private hospitals (both RK’s and FSE’s own private hospital subsidiary
Helios) are below those of FSE-ex (the result of exceptionally high margins for Kabi, FSE’s infusion
therapy and clinical nutrition subsidiary). Furthermore, cash flow from both RK and Helios for the
next couple years will be burdened by non-discretionary capital expenditure commitments related to
past acquisitions at both companies.
The acquisition accelerates market consolidation, bringing together two of the largest players (Helios’s
2011 sales were €2.67 billion, while RK’s were €2.63 billion). The transaction also removes a sizable rival
that competed with FSE to buy state-owned hospitals, thereby helping to improve FSE’s bidding power.
FSE expects the combined company will achieve annual synergies of €100 million, which helps explain
why it agreed to pay a more than 50% premium to the latest share price. However, in the past,
selective operational and financial metrics (e.g., EBITDA margins, patients per bed, labour costs, and
percentage of sales) have been broadly comparable between RK and Helios, and both have similar track
records of turning around unprofitable operations. Consequently, achieving extra synergies from the
combination of two profitable operators may be more challenging.
Although the merger’s attendant synergies and cost cuts would help improve profitability, so would an
end to further acquisitions, as they dilute EBITDA margins on average by 2%-3%. However, we think
it’s unlikely that FSE will stop making acquisitions as the market continues to consolidate and we
expect Helios to remain an active player. Although FSE has a track record of quickly deleveraging after
acquisitions, the absolute size of RK poses new risks.
11
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Stanislas Duquesnoy
Vice President - Senior Analyst
+49.69.70730.781
stanislas.duquesnoy@moodys.com
CRH’s Sale of Its 49% Stake in Secil to Semapa Is Credit Positive
Last Tuesday, Sociedade de Investimento e Gestao (Semapa, unrated) said it would acquire the 49%
stake held by Irish building materials company CRH plc (Baa2 stable) in Portuguese cement producer
Secil (unrated). The transaction is credit positive for CRH as it will receive €574 million in cash
proceeds from the sale, will deconsolidate approximately €70 million of debt, and will be able to exit
the difficult Portuguese market. In addition, the deal would end a legal dispute between CRH and
Semapa that has been pending since late 2009.7
CRH purchased its stake in Secil in 2004 for an equity consideration of €329 million plus a €100
million share of net debt. Last week’s transaction values Secil at a 74% premium to what CRH paid in
2004. The sale price also values CRH’s stake in Secil at more than 12x 2011 EBITDA (10x 2010
EBITDA), which we consider to be a high valuation for the sector.
Receipt of the cash proceeds will reinforce CRH’s position within the Baa2 rating category on account
of our expectation of an improvement in its retained cash flow (RCF) to net debt ratio in 2012.
Specifically, we expect cash proceeds to lift RCF/net debt to around 20%-21% pro-forma of the sale’s
completion, compared with 18.8% at the end of fiscal 2011. Foreign exchange rate movements and
differences between profits and losses and cash flow taxes distorted the 2011 RCF/net debt calculation
by lowering our RCF calculation by about two percentage points.
CRH will be able to exit the difficult Portuguese market as well as the politically sensitive Tunisian and
Lebanese markets. In 2011, Secil reported a 5.4% decline in revenues and a 20.7% drop in EBITDA,
leading to a 390-basis-point decrease in its EBITDA margin. Declining volumes in Portugal and
Tunisia mainly drove the drop in revenues, while volumes in Lebanon and Angola were resilient.
Euroconstruct, a European research firm for the building materials industry, expects cement
consumption in Portugal to fall by 15.1% in 2012 and 5.7% in 2013, according to its latest study
published in November 2011. Rising electricity and thermal fuel costs exacerbated the drop in
EBITDA because Secil could not pass on these higher costs to customers through price increases.
7
12
See Semapa Purchase of CRH’s 49% Stake in Secil Is Credit Positive for CRH, 15 August 2011.
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Nino Siu
Associate Analyst
+852.3758.1513
nino.siu@moodys.com
India Rejects Reliance’s Natural Gas Survey, a Credit Negative
Last Monday, India’s Petroleum and Natural Gas Ministry rejected a proposal by Reliance Industries
Limited (Baa2 positive) and its partner BP plc (A2 stable) to survey all of the fields in its jointly owned
KG-D6 block. Instead, the ministry restricted pre-development expenses, or cost recovery, to fields that
have already proved commercially viable. These survey limits are credit negative for Reliance because it
will lead to higher long-term costs if the surveys are conducted individually on different fields.
For Reliance, which owns 70% of KG-D6 and operates the field, a comprehensive survey of the entire
block would bring cost advantages from leveraging existing infrastructure. Reliance and BP, which owns
the remaining 30% stake in KG-D6, are working on an integrated development plan for the entire block.
Reliance said the comprehensive plan would save $1 billion owing to integration and optimization and
another $3.1 billion in overall Phase II development costs of $8.8 billion. Reliance’s plan to explore and
develop the untapped resources in the block, in our view, could also be a way to address the declining gas
production at KG-D6, which accounted for approximately 80% of the company’s total gas production in
fiscal 2011-12. The block is now producing 27.64 million metric standard cubic meters of gas per day
(mmscmd), a sharp drop from its peak of 54 mmscmd in March 2010.
Under the government’s cost recovery mechanism, all pre-development expenses are deducted from gas
sales revenue before a profit split between the government and the operator. There have been 18 gas
discoveries and one oil discovery made in the KG-D6 block so far, of which two gas fields and one oil
field are in production, and only five of the remaining fields have been approved as commercially
viable. By restricting exploration activities to the approved fields, the pre-development expenses will be
reduced and a higher share of profits would go to the government. However, this approach also
discourages future exploration and production (E&P), which are currently constrained by low gas
prices. The government’s intention to reduce cost recovery reduces the incentive to invest in E&P.
However, we expect that Reliance’s downstream investment plans will counterbalance the drag in E&P. It
plans to spend $12 billion on downstream investment, including $8 billion to expand its refining and
petrochemical capacity and $4 billion to build a petcoke gasification project that can convert petroleum
coke into synthetic gas. The petcoke project will provide a power source for its refining and petrochemical
plants that, at around $14-15 per million Btu, is 3x cheaper than imported LNG.
13
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Artem Frolov
Assistant Vice President - Analyst
+7.495.228.6110
artem.frolov@moodys.com
VimpelCom’s Sale of Vietnamese Business Is Credit Positive
Last Monday, VimpelCom Ltd. (Ba3 stable) said that it had signed an agreement to sell its indirect
49% stake in its Vietnamese joint venture, GTEL Mobile, for a cash consideration of $45 million.
Notwithstanding the transaction’s relatively small size, this divestment is credit positive since it is
evidence of management’s new strategic focus on profitability and operating efficiencies.
VimpelCom acquired a 40% stake in GTEL Mobile in 2008 for a consideration of $267 million and
increased it to 49% in 2011 for an additional $196 million. The company’s operations in Southeast
Asia (Vietnam, Laos and Cambodia) have consistently generated negative EBITDA. And although the
cash proceeds from the disposal of this stake will be lower than its investment, its exit from GTEL
Mobile confirms the company’s more cautious approach to pursuing investments in developing
countries since 2011, when it acquired Wind Telecom and a new management team was appointed.
We anticipate that VimpelCom will continue to review its portfolio of assets, particularly in Southeast
Asia, where its businesses in Laos and Cambodia demonstrated poor subscriber growth in 2011.
On its own, the disposal of non-profitable assets in Southeast Asia will have no effect on VimpelCom’s
rating given that they account for less than 2% of the group’s consolidated revenue. Nevertheless, it
will allow the group to cut losses and optimise future capital investments, directing them to more
value-accretive businesses.
VimpelCom’s Ba3 rating is primarily based on our assessment of the business and financial profile of
its Russian and Ukrainian operations, consolidated under VimpelCom Holdings B.V. (Ba3 stable).
These entities continue to determine the credit quality of the group.
14
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Infrastructure
Mihoko Manabe, CFA
Vice President - Senior Credit Officer
+1.212.553.1942
mihoko.manabe@moodys.com
US Regulatory Support for NiSource Pipeline Modernization Is Credit Positive
On 20 April, NiSource Inc. (Baa3 stable) said that US Department of Transportation (DOT)
Secretary Ray LaHood had pledged to expedite the regulatory and approval process for the company’s
$4 billion, 15-year program to upgrade its natural gas pipeline system in the northeastern US. This
development is credit positive for NiSource.
The DOT’s commitment to NiSource smoothes the path for an extensive pipeline upgrade program
that proposes replacing some of the country’s oldest, still-operating pipes, and improving the system’s
access to the promising gas-producing Marcellus and Utica shale regions in Pennsylvania and Ohio.
NiSource’s pipeline upgrade program will reduce the likelihood of an accident with its potentially large
financial and reputational costs, and drive future earnings growth through a renewed capital
investment in its network.
At this stage, explicit support from the DOT, which oversees US pipeline safety, gives a high-profile
boost to NiSource as it embarks on approval processes with numerous constituents at federal, state, and
local levels, including environmental agencies.
NiSource’s pipeline upgrade program is particularly noteworthy on two fronts. First, it is the first
multi-billion dollar program to be announced outside California since 2010, when Pacific Gas &
Electric Company’s (A3 stable) pipeline exploded in San Bruno, California. Second, it proposes an
infrastructure tracker surcharge to recover upgrade-related costs from its customers, a first for interstate
gas pipelines.
A tracker surcharge would enable NiSource to recover its ongoing costs quickly, rather than going
through a costly, drawn-out rate case. Pipeline revenues are underpinned by privately negotiated
contracts with customers, so they would have to agree to a new surcharge.
We believe other pipelines will initiate safety-related programs that will cost billions of dollars for the
industry as rules tighten over the next few years. Most pipelines in the US are more than 40 years old
and will need to be replaced, or have new facilities added to allow for more testing to ensure their
safety under the recently passed federal pipeline safety law.8
Over the next several years, these pipelines will need to negotiate reasonable plans with regulators and
customers, enabling their compliance with the new pipeline safety mandates, while recovering those
costs quickly enough so that their credit metrics do not deteriorate. We believe NiSource is in a good
position to negotiate an accelerated cost-recovery mechanism, as numerous customers would want
reliable access to the Marcellus and Utica shales. If the company is successful, it will set a precedent
that other issuers are likely to follow, which would be credit positive for the industry at large.
8
15
See Pipeline Safety Costs Rising As Alternative Rate Designs Sought, 25 April 2012.
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Ryan Wobbrock
Analyst
+1.212.553.7104
ryan.wobbrock@moodys.com
Proposed Rate Freeze Is Credit Negative for Central Hudson Gas & Electric
On 20 April, Central Hudson Gas & Electric Corp. (CHG&E, A3 stable) filed a petition with its
regulator, the New York State Public Service Commission (NYPSC), in connection with Fortis Inc.’s
(unrated) proposed acquisition of CHG&E’s parent, CH Energy Group (unrated). The petition, filed
by a number of Fortis and CH Energy entities, includes a rate freeze for CHG&E’s customers through
July 2014, plus additional customer benefits worth $20 million. The proposed rate freeze is credit
negative for CHG&E because it eliminates the company’s ability to recover costs in a timely fashion
amid a period of unprecedented capital investment for the utility.
CHG&E is currently in the middle of a three-year rate plan that went into effect in June 2010 and
provides annual rate increases through June 2013. The petition’s proposal will freeze rates at the thirdyear level, while deferring additional electric and gas revenue increases until 1 July 2014 at the earliest.
Additional concessions include $10 million in one-time public benefit adjustments, which the
company can use to reduce a future rate increase; a guaranteed $2 million in annual operating cost
savings (i.e., cost synergies) for the first five years of Fortis’s ownership; and a lower over-earnings
threshold (which dictates when the utility begins to share profits with customers) to a return on equity
of 10.0% from 10.5%.
The rate freeze outlined in the petition will restrict the company’s internal cash flow generation during
a period of high capital investment aimed at replacing aging infrastructure and maintaining reliability
in the transmission and electric and gas distribution systems. As a result, we see CHG&E’s leverage
rising and its cash flow to debt credit metrics falling. For example, it generated nearly $150 million in
adjusted cash from operations (CFO) in 2011, compared with about $610 million in adjusted debt
(i.e., 25% CFO/debt). We had already expected projected CFO to decline post-2011 owing to the
absence of beneficial tax items such as 100% bonus depreciation, but now this fall will be exacerbated
by revenue stagnation in an environment of rising costs. We further see its cash flow to debt metric
trending toward 20% during the rate freeze, as it funds over $100 million in annual capex with a
balanced mix of debt and internally generated funds.
In February, Fortis announced it would acquire CH Energy for $1.5 billion, including the assumption
of $500 million of debt. Both companies filed the joint petition as part of New York’s required
regulatory-approval process. The companies aim to complete the merger by February 2013. In New
York, utility mergers require evidence of a “net positive benefit” to the public interest in order to attain
regulatory approval. CHG&E’s joint petition outlines proposed concessions that will benefit
customers, in an attempt to satisfy the net positive criteria and earn NYPSC support.
16
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Daniela Cuan
Vice President - Senior Analyst
+53.11.3752.2017
daniela.cuan@moodys.com
EDENOR Improves Liquidity through Sale of Subsidiary
Last Monday, Empresa Distribuidora y Comercializadora Norte S.A. (EDENOR, B3 negative),
Argentina’s largest electric transmission and distribution utility, announced it would sell its
subsidiary, Empresa Distribuidora de Electricidad de Salta S.A. (EDESA, B2 stable), to Salta
Inversiones Eléctricas S.A. (SIESA, unrated) for approximately ARS230 million. EDENOR, which
serves the metropolitan Buenos Aires area and has more than 2.6 million customers, plans to keep the
cash on its balance sheet, which will help it meet its 2012 cash needs and improve its liquidity, a credit
positive. The companies expect to close the transaction in May.
We noted the importance of EDENOR improving its liquidity a month ago, when we downgraded
EDENOR to B3 from B2 owing to its weakening cash flow and declining liquidity. In addition, high
inflation in Argentina and delays in tariff increases to recover rising costs are taking a toll on EDENOR’s
cash flow from operations, which has fallen to ARS36 million from ARS146 million in 2010.
As a part of the transaction, EDENOR will receive approximately ARS100 million from SIESA, and
another ARS131.3 million in repayment of an intercompany loan it granted to EDESA. ENENOR
acquired EDESA, the electric distribution utility operating in the northern province of Salta, in March
2011 from AEI (unrated).
EDENOR can collect certain funds from the Program for the Rational Use of Electric Power
(PUREE), a mechanism that compensates the company for the amounts it is owed under requested
and pending, but not yet approved, tariff increases. But Argentina’s rising inflation is outpacing the
utility’s ability to recover its costs in a timely manner. The decision to sell EDESA illustrates the
urgency of projected cash flow deterioration, and provides a boost to the company’s cash cushion.
The ARS231.3 million in proceeds are approximately half of EDENOR’s 2012 capital expenditure
plan, which we estimate at approximately ARS400 million. Alternatively, the proceeds are an amount
equal to almost two years of interest payments on the company’s outstanding $300 million notes.
17
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Scott Phillips
Assistant Vice President - Analyst
+44.20.7772.5206
scott.phillips@moodys.com
Helen Francis
Vice President - Senior Credit Officer
+44.20.7772.5422
helen.francis@moodys.com
Withdrawal of Generation Capacity Is Credit Positive for UK Power Companies
Last Monday, the UK company National Grid published data showing that npower (unrated), one of
the big six UK utilities, will withdraw a 1.6 gigawatt (GW) coal-fired power plant in April 2013. The
withdrawal of the plant will decrease supply in the electricity system and likely lead to higher power
prices and spreads, a credit positive for the owners of remaining generation capacity in the UK. Among
the biggest companies are SSE plc (A3 stable), which owns around 11 GW of capacity; Centrica plc
(A3 stable), which owns around 7 GW; and Electricite de France (EDF, Aa3 stable), which owns
around 14 GW. Higher power prices will translate into higher revenues and cash flows.
Npower’s move is the latest in a growing trend of utilities removing capacity from the system in
response to the current oversupply and weak generation spreads. We estimate that UK forward spark
spreads, the gross profit a gas-fired power plant makes from generating electricity from gas, are
currently around £3 per megawatt-hour (MWh) for an average efficient gas plant, up from less than
£0/MWh earlier in the year. While the increase is credit positive, we believe the level required to cover
operating and maintenance costs is in the range of £5-£8/MWh. Furthermore, spark spreads are still
significantly below new-entrant levels of approximately £12-£15/MWh, the point at which it becomes
economic to invest in a new plant.
What’s more, generators are currently receiving their allowances to emit carbon dioxide for free,
allowing plants to continue running despite the weak market spreads. However, starting in January
2013, European utilities will have to pay for all of their carbon dioxide output, forcing the operators of
less efficient plants to either withdraw capacity or operate at a loss. The UK government has also said it
will enforce a minimum carbon price, which will further accelerate this process and increase the overall
system cost of producing electricity, thereby forcing power prices and spreads upward. This
development would be of particular benefit to utilities operating relatively clean generation portfolios,
such as EDF and Centrica.
18
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Banks
Ricardo Kovacs
Vice President - Senior Analyst
+55.11.3043.7308
ricardo.kovacs@moodys.com
Alexandre Albuquerque
Assistant Vice President - Analyst
+55.11.3043.7304
alexandre.albuquerque@moodys.com
Broader Role for Brazil’s Deposit Guarantor in Bank Resolutions Is Credit Positive
Last Thursday, Brazil’s deposit insurance fund, Fundo Garantidor de Crédito (FGC, unrated),
announced that its member banks were amending its bylaws to allow it to assist in bank resolutions.
The amendment follows the role the fund has played over the past two years as a lender of last resort to
small banks needing assistance. The change is credit positive for Brazil’s banks because it establishes a
legal framework for bank resolution beyond the scope of the central bank prudential regulation for
assisting troubled banks.
The fund’s revised mandate is in addition to its role as guarantor of bank deposits in the system and, as
a result, it is now subject to the approval of Brazil’s monetary council, Conselho Monetario Nacional
(CMN), the country’s highest regulatory authority. Under the new bylaws, the FGC will be formally
authorized to contribute to the stability of the financial system and to help support the prevention of a
banking system crisis, based on guidance from bank regulators. In practical terms, the regulators will
have to decide the special status of a financial institution before the FGC can provide assistance.
The bylaw changes also enhance the transparency of the remedial process, as it defines the limits that
the fund can provide to banks in case of extraordinary financial assistance. The FGC now has two
main assistance programs: one for boosting banks’ liquidity via asset purchases, and another for
supporting ownership restructurings, including reorganizations and changes of control. When the fund
is only using one program at a time, its assistance to more than one bank can involve no more than
50% of the fund’s assets. Assistance to a single bank can exceed no more than 25% of the fund’s assets.
If the FGC is using the two programs simultaneously, each individual program is limited to a
maximum of 35% of the fund’s assets. As of March 2012, the FGC had total assets of BRL 32.2 billion
(approximately $17.7 billion).
Decisions regarding when to provide support and resolution to a bank will shift to a board of
independent members and away from the member banks to avoid potential conflicts of interest.
Brazil’s current regulatory framework for bank resolutions calls for recapitalization by a bank’s
shareholders, or for a change in ownership control if current shareholders are unable to inject capital
into a troubled bank. If no new capital is forthcoming, the regulatory authorities intervene to liquidate
the institution. Over the past few years, the FGC has taken on a broader role in bank recapitalizations
and ownership restructurings, doing so in the cases of Banco PanAmericano S.A. (Ba2 stable;
E+/b1 stable),9 Banco Matone (unrated) and Banco Schahin (unrated).
The exhibit below details the various forms of support provided by the FGC for these banks, which
included a mix of financing and loan guarantees to the acquiring shareholders, and loan purchases to
provide liquidity, as was the case of Banco Cruzeiro do Sul S.A. (B2 negative; E+/b2 negative).
9
19
The bank ratings shown in this article are the banks’ foreign-currency deposit ratings, its standalone bank financial strength
rating/baseline credit assessment and the corresponding rating outlooks.
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Recent Operations by Brazil's Fundo Garantidor de Crédito
Bank
Amount
Date
Use of funds
BRL 4.3 billion
Nov-10/Jan-11
Acquisition financing to BTG Pactual
Banco Schahin
BRL 1.5 billion
Aug-11/Sep-11
Acquisition financing to Banco BMG
Banco Matone
BRL 850 million
Jul-11
Acquisition financing to Banco Original
Banco Cruzeiro do Sul
BRL 3.6 billion*
Oct-11
Liquidity (acquisition of assets)
Banco PanAmericano
Total
BRL 10.25 billion
* Funds Disbursed in tranches in 2011, 2012 and 2013.
Source: Valor Econômico, Agência Estado, Fundo Garantidor de Crédito, and Moody’s
Although these arrangements allowed for prompt resolutions, they raised concerns about the FGC’s
role as a lender of last resort and its decision-making process because they went beyond its original
mandate. The proposed new bylaws are particularly positive for midsize financial institutions whose
business and funding models are structurally exposed to potential market and liquidity disruptions, and
that could be subject to change in ownership.
20
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Ceres Lisboa
Vice President - Senior Credit Officer
+55.11.3043.7317
ceres.lisboa@moodys.com
BTG’s IPO to Boost Group’s Market Position, a Credit Positive
Last Thursday, Banco BTG Pactual S.A. (BTG, Baa3 stable; D+/baa3 stable)10 raised BRL3.6 billion
($2 billion) in an initial public offering (IPO) of about 13% of its equity. The deal attracted primarily
foreign investors, who paid a premium of 2.4x the book value per share at 31 December 2011. In
addition, BTG registered its Bahamas-based sister company and proprietary hedge fund BTG
Participations Ltd. (unrated) to list global depositary receipts (GDRs) on the Euronext Amsterdam to
target foreign institutional investors.
The IPO is credit positive as it enhances the bank’s capital at a time when management intends to
expand both in Latin America and globally and raise its profile in wholesale and investment banking.
The IPO also supports BTG’s accelerated business expansion in Brazil, where it competes against a
host of domestic and global wholesale banks.
Exhibit 1 shows BTG’s performance in key business segments. It ranks first in mergers and
acquisitions, second in IPO equity issuance, fourth in fixed-income issuance, and seventh in assets
under management. It also highlights the strong position of Brazil’s three largest retail banks, Banco
Bradesco S.A. (Baa2 positive; B-/a1 review for downgrade), Banco Itaú BBA (Itaú BBA, Baa2 positive;
B-/a1 review for downgrade) and Banco do Brasil S.A. (Baa2 positive; C+/a2 review for downgrade),
which dominate the fixed-income and asset management league tables. These banks’ much larger
balance sheets and origination capabilities give them a competitive edge over BTG and others. A larger
capital base enhances BTG’s business opportunities, although it will not fully offset the domestic
banks’ competitive advantages.
10
21
The bank ratings shown in this article are the banks’ foreign-currency deposit rating, its standalone bank financial strength
rating/baseline credit assessment and the corresponding rating outlooks.
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
EXHIBIT 1
Top 10 Players: Competitive Landscape in Investment Banking Activities in Brazil
Assets Under Management
March 2012
BRL
billion
Mergers & Acquisition in
2011 (Closing Amount)
BRL
million
1
Banco do Brasil
432
20.8%
1
BTG Pactual
2
Itau Unibanco
299
14.4%
2
Morgan Stanley
16,507
17.5%
3
Bradesco
233
11.2%
3
Santander (Brasil)
16,382
17.4%
4
Caixa Economica Federal
138
6.6%
4
JP Morgan
14,231
15.1%
5
Santander (Brasil)
125
6.0%
5
Banco Espirito Santo
13,424
14.3%
6
BEM
124
6.0%
6
HSBC Bank Brasil
11,087
11.8%
7
BTG Pactual
108
5.2%
7
Caixa Geral
10,656
11.3%
8
BNY Mellon
107
5.2%
8
BofA Merrill Lynch
10,020
10.6%
9
HSBC Bank Brasil
97
4.7%
9
Bradesco
10,013
10.6%
10
Citibank
65
3.1%
10
Citibank
7,776
8.3%
Industry Total
2,079
Industry Total
Consolidated 12-Month
Fixed Income Origination
Volume through March 2012
BRL
million
12-Month IPO/Equity
Origination Volume
through March 2012
34,070
36.2%
94,094
BRL
million
1
Bradesco
20,549
23.1%
1
Itau BBA
(Itau Unbanco Group)
3,379
31.6%
2
Itaú BBA
(Itau Unibanco Group)
17,418
19.5%
2
BTG Pactual
2,529
23.6%
3
Banco do Brasil
14,560
16.3%
3
Bradesco
1,345
12.6%
4
BTG Pactual
9,957
11.2%
4
Credit Suisse
910
8.5%
5
Santander (Brasil)
6,826
7.7%
5
Goldman Sachs
555
5.2%
6
HSBC Bank Brasil
5,886
6.6%
6
Santander (Brasil)
527
4.9%
7
Caixa Economica Federal
4,232
4.7%
7
Morgan Stanley
480
4.5%
8
Banco Votorantim
3,002
3.4%
8
Bofa Merrill Lynch
319
3.0%
9
Banco Nordeste do Brasil
1,110
1.2%
9
Banco Espirito Santo
203
1.9%
10
Citibank
1,086
1.2%
10
Banco do Brasil
177
1.7%
Industry Total
10,707
Industry Total
89,100
Source: Association of Investment Banks and Capital Markets (ANBIMA)
BTG’s growth plans add to earnings diversification, but consume capital and carry execution risks
related to consolidating operations in different, very competitive business segments with significant
global volatility. Following rapid expansion in Brazil in areas such as real estate and energy to consumer
finance, BTG is now targeting other Latin American markets, aiming to capture the strong capital
inflows coming to the region and to leverage the expertise of local firms for deal-making. Plans also
include partnerships in Asian markets to complement its global reach, a move that focuses on boosting
the bank’s recurrent fee-income generation.
Last March, BTG combined operations with the Chilean brokerage firm Celfin (unrated), which it
acquired in August 2011 for $600 million. The merger created the largest asset and wealth management
group in Latin America, with over $60 billion and $21 billion in assets, respectively, and beefed up
BTG’s wholesale and investment banking capabilities in the region with presences in promising markets
such as Peru and Colombia. In January 2012, through its retail banking arm Banco PanAmericano S.A.
22
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
(Ba2 stable; E+/b1 stable), the bank announced the acquisition of real estate group Brazilian Finance &
Real Estate (unrated) for BRL1.2 billion. This transaction awaits regulatory approval.
As shown in Exhibit 2, BTG derived 58% of its 2011 earnings from volatile trading activities
predominantly focused on Brazil. For investors who have been attracted to the bank’s consistent track
record of high returns, averaging above 20% over the past three years, the next phase of expansion may
be critical, as it moves beyond its home base.
EXHIBIT 2
BTG Pactual’s Evolution of Earnings by Business Line
2009
2010
2011
1,200
BRL million
1,000
800
600
400
200
Investment Banking
Corporate Lending
Sales & Trading
Services
Fee-Income from
Asset Management
(WUM & AUM)
Proprietary
Trading/Investment
Activities (Principal
Investments)
Interest on Own
Capital
Source : BT G Pactual Preli mi nar y Pros pe ctus file d at CVM
23
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Jeanne Del Casino
Vice President - Senior Credit Officer
+1.212.553.4078
jeanne.delcasino@moodys.com
Georges Hatcherian
Associate Analyst
+1.212.553.2862
georges.hatcherian@moodys.com
BCP’s Acquisition of Chile’s IM Trust Is Credit Positive
Last Tuesday, Peru’s Credicorp (unrated) announced that its banking subsidiary, Banco de Credito del
Peru (BCP, Baa3 stable; D+/baa3 stable),11 Peru’s largest bank, had reached an agreement to acquire a
60.6% controlling stake in Chilean investment bank IM Trust, subject to regulatory approval. The
acquisition is credit positive for BCP as it is a critical step towards creating a regional investment bank
and establishing a footprint in Chile’s deep and growing capital market. This transaction follows BCP’s
acquisition of 51% of Colombian brokerage Correval in December 2011, which the companies expect
to complete this month.12
The IM Trust acquisition is a cornerstone of BCP’s regional investment banking push, given the depth
and breadth of the Chilean market and IM Trust’s strong local brand. As of February 2012, the
Santiago Stock Exchange’s market capitalization was $316.8 billion, while the stock exchanges of
Bogota and Lima were $255 billion and $134 billion, respectively (Exhibit 1). Total trades so far in
2012 for all three countries were $16.7 billion.
EXHIBIT 1
Market Capitalization and Traded Volume of MILA ($ Billions)
Market Capitalization
Colombia
$255
Traded Volume
Chile
$3.5
Chile
$317
Colombia
$4.7
Peru
$134
Peru
$0.4
Note: MILA = Mercado Integrado Latinoamericano (Latin American Integrated Stock Exchange)
Source: MILA
IM Trust is among the top Chilean domestic investment banks in fixed income, where it holds a
leading 30.3% market share, and in mergers and acquisitions. It is also an active participant in the
equities market (Exhibit 2).
11
12
24
The bank ratings shown in this article are the bank’s foreign currency deposit rating, its bank financial strength
rating/baseline credit assessment and the corresponding rating outlooks.
See BCP’s Diversification into Colombian Brokerage is Credit Positive, Weekly Credit Outlook, 5 December 2011.
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
EXHIBIT 2
Chilean Investment Banking Market Shares
Fixed Income
IM Trust
Equities
30%
Celfin Capital
21%
Larrain Vial
17%
Larrain Vial
20%
Celfin Capital
16%
Santander
8%
Consorcio
11%
Security
8%
Others
26%
Banchile
6%
IM Trust
<6%
Others
33%
Source: Celfin Capital
IM Trust’s diverse product line, which also includes asset and wealth management, will complement
and add heft to BCP’s regional investment banking strategy, with transaction volumes topping $10
billion. The Chilean firm’s assets under management (AUM) will further boost Credicorp’s AUM by
about 15% to $12.5 billion (Exhibit 3). IM Trust will also help to extend Credicorp’s regional
coverage through its regional network of relationships, and the M&A and equity transactions it has
completed in Ecuador, Argentina, the Dominican Republic, and Honduras.
EXHIBIT 3
Regional Investment Banks Capital, Earnings and Assets Under Management ($ Millions)
Total Capital
Total Earnings
Assets Under Management
Credicorp
Banco BTG Pactual
Grupo Sura
$3,462
$3,513
$9,710
$724
$885
$171
$10,800
$85,500*
$120,000
(*) Includes Wealth Management
IM Trust
Correval
Celfin Capital
Larrain Vial
Total Capital
$32
$49
$190
$167
Total Earnings
$6
$3
$50
$38
$1,700
$2,306
$5,500
$3,000
Assets Under Management
Source: Moody’s
While the size of the IM Trust transaction is modest relative to BCP’s capital base (the implied purchase
price of $122 million when combined with the $77 million investment in Correval equals about 8% of
BCP’s total equity), it offers an opportunity for the bank to enhance its investment banking team and
diversify its earnings in a broad range of fee-based and low capital intensive activities. As the market leader
in Peru with an over 40% share in the structuring and placement of debt and equity issuances, BCP is in
a position to leverage IM Trust to serve its large base of Peruvian and regional clients.
BCP faces regional powerhouses such as Brazil’s Banco BTG Pactual S.A. (Baa3 stable; D+/baa3
stable), which recently acquired Chile’s Celfin and completed a $3.6 billion initial public offering, and
Grupo de Inversiones Suramericana S.A. (Grupo Sura, unrated), which acquired ING’s regional
pension, insurance, and investment fund operations for $3.6 billion. Although on a smaller scale, the
selection of IM Trust and Correval in Credicorp’s target markets positions the group well to take
advantage of the region’s growth opportunities.
25
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Bin Hu
Vice President - Senior Analyst
+852.3758.1503
bin.hu@moodys.com
China Bank Regulator Reports Strong Bank Profits, a Credit Positive
Last Tuesday, the China Banking Regulatory Commission (CBRC), China’s banking regulator,
released its 2011 annual report showing that after-tax profits for Chinese banks increased 39.3%
systemwide in 2011 to RMB1.25 trillion ($198.68 billion). The banks reported strong earnings
growth across the board, ranging from the so-called “Big Four” to much smaller rural commercial
institutions (see Exhibit 1). This robust and broad-based earnings growth is credit positive for the
banking system.
EXHIBIT 1
Profit Distribution by Main Types of Chinese Banks (RMB Billions and Contribution to Total
Profit in Percentages)
2010
Large Banks
2011
RMB515.1
57.3%
RMB664.7
53.1%
135.8
15.1%
200.5
16.0%
City Commercial Banks
77.0
8.6%
108.1
8.6%
Rural Commercial Banks
Joint-Stock Commercial Banks
28.0
3.1%
51.2
4.1%
Foreign Banks
7.8
0.9%
16.7
1.3%
Policy Banks
41.5
4.6%
53.7
4.3%
Source: CBRC annual reports
Despite increased profitability, China’s banks are at the beginning of a rising non-performing loan
(NPL) cycle.13 Several banks first-quarter earnings have already shown rising NPLs, including Bank of
China Ltd. ( BOC, A1 stable; D/ba2 stable),14 Shenzhen Development Bank Co. Ltd. (SZDB, Ba2
positive; D-/ba3 positive) and China Minsheng Banking Corp., Ltd.(unrated). However, CBRC’s
annual report indicates that banks have also built up strong buffers to absorb increased credit costs. In
particular, the report notes the following:
» Improved earnings quality. The 39% rate for systemwide profit growth is double the 19% rate for
systemwide asset growth, leading to a 20-basis-point (bp) gain in return on assets to 1.2%, and a
2.3-percentage-point improvement in return on equity to 19.2%. In addition, all bank types were
profitable. The main profit drivers were higher net interest income and fee/commission income.
However, the proportion of investment income declined, suggesting less dependence on marketsensitive revenue sources (see Exhibit 2).
13
14
26
See Moody’s Banking System Outlook: China, 12 April 2012.
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.
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
EXHIBIT 2
Income Composition of China’s Banks
Net Interest Income
Fee and Commission Income
Investment Income
Others
2010
2011
70%
60%
50%
40%
30%
20%
10%
0%
2007
2008
2009
Source : CB RC annual repor ts
» Increased loss-absorption buffer. To put this in perspective, the system’s 2011 profit of RMB1.25
trillion exceeded reported NPLs of RMB1.05 trillion ($166.64 billion) at year-end 2011. The banks
were also profitable after significant additions to their loan-loss reserves (commercial banks’ loan-loss
reserves increased 21% in 2011, raising the coverage ratio by 60 percentage points to 278% at the
end of 2011). Therefore, strong profit growth did not come at the expense of slack provisioning.
» A forthcoming boost in retained earnings. The report also supports our view that higher retained
earnings will strengthen more banks’ capital bases. The government has accepted lower dividend
payout ratios for Industrial and Commercial Bank of China Ltd. (ICBC, A1 stable; D+/ba1 stable),
Bank of China and China Construction Bank Corp. (CCB, A1 stable; D+/ba1 stable),15 and many
smaller banks had lower dividend payout ratios than the bigger banks in 2011. We expect other
banks will increase retained earnings.
Among individual banks, ICBC continued to top the 2011 profit league table with a net profit of
RMB208.4 billion ($33.07 billion), while SZDB recorded the strongest profit growth of 66.79% on
the back of a 60% increase in net interest income. BOC reported relatively modest profit growth of
18.8% in the year, which slowed further to 9.8% in first-quarter 2012. We see BOC’s first-quarter
result as a precursor to slowing profitability for the industry as a result of a slowing economy, but the
improvements in the system’s fundamentals serve as strong mitigating factors to its credit outlook.
15
27
See Huijin’s Agreement to Lower Dividends Is Credit Positive for China’s Big Three Banks, 9 February 2012.
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Sovereigns
Steven Hess
Vice President - Senior Credit Officer
+1.212.553.4741
steven.hess@moodys.com
US Social Security and Disability Insurance Trustees Project Higher Net Outlays, a
Credit Negative
Last Monday, the trustees of the Social Security and Disability Insurance trust funds released their
annual report,16 which advanced by three years the projected year when the combined funds would be
exhausted to 2033 from 2036. The revised timetable implies that without reform of these programs,
the government would have to cut benefits by 25% to the level of contributions in that year. Social
Security accounts for about one fifth of total federal spending, and the increasing net cost of the
program, while overshadowed by rises in Medicare and Medicaid costs, is a significant source of
pressure on the long-term fiscal and debt position of the government.
From the point of view of US government (Aaa negative) finances, the more important information in
the report is the already rising net outlays resulting from these programs. The projected $927 billion net
cost of the programs over the next decade (tax receipts, including income tax on benefits, minus benefit
payments and administrative expenses) rises $435 billion from the $492 billion estimated in the trustees’
2011 report (see exhibit). The projected cost increase is credit negative for the federal government.
Cumulative Net Cost of Social Security & Disability Insurance, 2012-21
Net Cost Per 2011 Report
Net Cost Per 2012 Report
$1,000
$900
$800
$ billions
$700
$600
$500
$400
$300
$200
$100
$0
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Source : Moody’s cal cula tio ns fro m 2012 Annual Repo rt of the Boar d of T rus tees da ta
Although Social Security and Disability Insurance are for different purposes (pensions and disability),
the trustees often consolidate their reporting. Social Security is by far the larger of the two programs,
but it is also on somewhat sounder footing. The trustees estimate the smaller Disability Insurance trust
fund by itself will be exhausted in 2016.
In calendar year 2010, payroll contributions and income tax on benefits fell below total benefit payments
from the two programs for the first time since the government reformed them in the 1980s and have
remained so in 2011 and 2012, mainly because of a temporary reduction in the individual payroll tax to
4.2% from 6.2% during in those years. However, even after the payroll tax reduction expires at the end of
2012, benefit payments will exceed income during the coming decade and beyond.
16
28
See The 2012 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability
Insurance Trust Funds.
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
The trust funds of the two programs have no assets other than nonmarketable Treasury obligations.
From the point of view of consolidated federal finances, therefore, it is only the income that comes
from outside the government (tax revenues) and the payments to beneficiaries that affect the overall
balance sheet of the government. While technically the trust funds will continue to accumulate assets
until roughly 2021 because of interest paid on their Treasury holdings, these assets are intragovernmental claims, and ultimately the benefits are obligations of the government.
Changes in economic assumptions, including an assumption of higher inflation than in the previous
report, are the main drivers behind the significant increase in the projected Social Security deficit over
the coming decade. Social Security payments are indexed to inflation. The trustees’ report assumes
inflation somewhat higher than those behind the Obama administration’s or the Congressional Budget
Office’s (CBO) budget assumptions. A “low-cost” alternative projection in the Social Security trustees’
report, which has much lower inflation assumptions, results in considerably smaller deficits in the
coming decade.
In its baseline scenario, the CBO projects federal debt to rise by $4.7 trillion between 2011 and 2021,
the same period covered by the 10-year projections discussed above. The $435 billion rise in the Social
Security deficit included in the new trustee report could increase this figure even further, although the
CBO itself does not now share the same assumptions.
29
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Cynthia Mar
Associate Analyst
+65.6398.8323
cynthia.mar@moodys.com
Thomas Byrne
Senior Vice President - Regional Credit Officer
+65.6398.8310
thomas.byrne@moodys.com
Political Instability in Bangladesh Is Credit Negative
Last Tuesday, the opposition Bangladesh Nationalist Party (BNP) called a nationwide strike for a third
day in a row to protest the disappearance of Elias Ali, one of the party’s leading figures. At least five
people have been killed in riots and shops were closed mid-week in the capital Dhaka. This political
instability is detrimental to investor confidence, and is credit negative.
Any erosion of investor confidence comes at an inopportune time for Bangladesh (Ba3 stable). Earlier
this month, the authorities signed an extended credit facility with the International Monetary Fund
(IMF) for $987 million that includes broad fiscal, monetary, financial sector and trade reforms over
three years. The program aims to restore macroeconomic stability, strengthen the country’s external
position and promote sustainable growth. Should political instability deter needed foreign investment,
or lead to a worsening of the external payments position or in the government fiscal balance, then the
IMF program may not be sufficient to buoy investor confidence.
Bangladesh had been experiencing a rare period of relative political stability since 2009 when a
landslide electoral victory brought the current Awami League government to power. Prior to this, the
country’s short history as an independent nation had been punctuated by military coups and political
vendettas that turned into street violence.
Although politically tumultuous, economic growth in the young South Asian nation has been
remarkably steady, averaging 5.4% over the past 20 years. GDP per capita in purchasing power parity
terms rose to $1,700 in 2011 from $500 in 1990, according to the IMF. The country has enjoyed
balance of payment surpluses since 2001, powered by textile exports and buoyed by remittances.
However, surging fuel consumption in the past 18 months, in addition to rising global oil prices, have
strained government finances because of rising subsidy costs. The balance of payments slid into deficit
for the first time in 10 years at the end of fiscal 2011.17 Capital outflows now and the resulting
downward pressure on the currency would add to external pressures.
Rising inflation, coupled with daily power outages, has also diminished the government’s popularity
and is feeding undercurrents of social unrest. To alleviate the burden on state energy corporations and
promote budget consolidation, the government raised energy and fuel prices four times in 2011.
Headline inflation climbed into the low double digits in March 2011 from a year earlier and has not
dipped below since, averaging 10.7% last year, the highest level in a decade (as shown in the exhibit).
In March 2012, the CPI was 10.1% higher than a year earlier.
17
30
30 June 2011.
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Inflation Is Rising and Feeding Social Unrest
Inflation
Real GDP Growth
12%
Year-Over-Year Change
10%
8%
6%
4%
2%
0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source : IM F, Worl d E cono mi c Outlook
31
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Tom Byrne
Senior Vice President - Regional Credit Officer
+65.6398.8310
thomas.byrne@moodys.com
Matt Robinson
Director of Sovereign Research
+44.20.7772.5635
matt.robinson@moodys.com
Sanction Removal, Debt Forgiveness and Reform Progress Are Credit Positive
for Myanmar
Last Monday, European Union (EU) finance ministers agreed to suspend most sanctions on Myanmar
(unrated) in response to recent progress on economic and democratic reform. The EU decision came
two days after Japan agreed to write off $3.7 billion of Myanmar’s debt and resume full financial aid to
the country for the first time since 1987. Thawing international relations, removal of sanctions, debt
forgiveness and continued reform are credit positive for Myanmar, enhancing growth opportunities
and strengthening regional economic, financial and diplomatic ties.
The EU’s one-year suspension of sanctions removes trading and investment restrictions on around 800
companies either controlled by or associated with the Myanmar government, and unfreezes assets and lifts
travel bans on 491 people in, or tied to, the government. The EU will also restore Myanmar to the
Generalized System of Preferences, which allows low-income nations better access to EU markets, and
open a trade office in the country. The EU announcement follows the US and Australia earlier easing of
selected financial and travel restrictions, and moves by neighbouring countries to normalise trade ties.
Lifting sanctions allows international investors and multilateral development banks to re-engage with
Myanmar, offering the prospect of improving annual GDP growth from its current sub-3% decade
average. The International Monetary Fund (IMF) sees real GDP growth improving to 6% this year
and over the next five years.18 However, Myanmar’s catch-up growth phase will not be sustainable
without additional economic opening and liberalization. Its economy remains very poor (annual GDP
per capita was a meagre $832 in 2011, according to the IMF, ranking Myanmar in the bottom 10th
percentile globally), and it is burdened with deep, structural distortions inherited from decades of near
isolation from international trade and commerce.
Myanmar’s credit challenges include productivity constraints related to inadequate infrastructure; a
fragile banking sector, which limits private sector access to credit; a weak rule of law; and a history of
high inflation that discourages investment. Government revenue generation is impaired by pervasive
corruption and a sizable black market, particularly in cross-border trade with neighbouring Thailand
and India.19 Attracting foreign investment and generating growth opportunities will be essential to
bolstering economic resilience and establishing sovereign creditworthiness.
The EU’s suspension of sanctions recognises recent progress in wide-ranging economic and democratic
reform. The military junta that held power since 1962 was dissolved in 2011 following a general
election and the installation of a civilian government in 2010 (albeit the military still retains a strong
influence over politics and the economy). The legalisation of Myanmar’s main opposition party has
since seen pro-democracy leader and 1991 Nobel Peace Prize winner Aung San Suu Kyi and a number
of her supporters elected to the national parliament earlier this month.20 The government has also
eased restrictions on the media.
The authorities took a large step along the path of macroeconomic reform when they allowed the
Burmese currency to float on 1 April. This will help support the government’s aim to gradually
eliminate restrictions on international payments and transfers abroad, a key measure that will foster
18
19
20
32
See IMF World Economic Outlook, April 2012
The World Bank’s Governance Indicators score Myanmar in the bottom decile globally (2010).
Aung San Suu Kyi was elected to the lower house of the Myanmar parliament on 1 April and her National League for
Democracy party won 43 of the 45 vacant seat in the lower house. In a 1990 general election, Ms. Suu Kyi’s party won 59%
of the national votes and 81% of the seats in parliament, but she was under house arrest and the military junta nullified the
election results. She remained under house arrest in Burma for almost 15 of the 21 years between 1989 and her release on
13 November 2010.
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
trade and investment and underpin the development of Myanmar’s fragile and underdeveloped
financial system.
Meanwhile, Japan’s forgiveness of more than half of the ¥502 billion ($6.2 billion) debt incurred
between 1962 and 1988 under the country’s then-socialist government removes a significant debt
hurdle that had made access to new funding difficult. Earlier this year, in a rare example of nascent
transparency from the hitherto secretive government, Myanmar’s finance minister revealed that Japan
accounted for around $8 billion of the country’s total $11 billion external debt outstanding21 prior to
the debt forgiveness. Concessional terms for the remaining debt owed to Japan and further economic
reforms to attract foreign capital would allow for a significant increase in growth-enhancing
infrastructure investments, such as electricity, high-speed rail, and port and water supply projects that
harness Myanmar’s energy resources and largely untapped work force.
21
33
China, the World Bank, the Asian Development Bank and Germany are among Myanmar’s other foreign creditors.
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Sub-sovereigns
Francesco Soldi
Vice President - Senior Analyst
+39.02.9148.1149
francesco.soldi@moodys.com
Kenneth Morare
Analyst
+27.11.217.5478
kenneth.morare@moodys.com
Delay of Gauteng E-toll Is Credit Negative for South African National Road Agency
Last Thursday, the South African government decided to postpone implementation of electronic
tolling on the country’s largest toll road, the Gauteng Freeway Improvement Scheme (GFIP). The
government’s decision, which it made in anticipation of the courts on Saturday blocking the tolling’s
implementation, is credit negative for the South African National Road Agency Ltd. (SANRAL, Baa1
negative), which relies on e-toll revenues to service its debt of ZAR20 billion ($2.6 billion), which it
incurred to finance GFIP’s construction and absorb concomitant operating costs. Furthermore, the
postponement adds uncertainty and establishes a precedent for a final court decision on GFIP e-tolls,
which we expect by the end of May or June.
Any final pronouncement against GFIP e-tolls will have severe credit negative repercussions for the
road agency and will exert further negative pressure on the finances of the South Africa national
government (A3 negative), SANRAL’s unique shareholder and guarantor of a large proportion of the
agency’s debt. Indeed, the national government will be required to step in and service or redeem debt
incurred by SANRAL to finance the GFIP project.
The forthcoming court pronouncement will determine SANRAL’s future. A decision to halt GFIP tolls
would be an event of default for the ZAR10 billion ($1.2 billion) in government-guaranteed notes,
(equal to 50% of the GFIP debt) and could trigger immediate debt acceleration by bondholders.
Moreover, the national government would be required to bail out SANRAL and pay the remaining
ZAR10 billion in unsecured GFIP debt. SANRAL relied extensively on borrowed funds to finance its
operations and capex, benefiting from the implicit guarantee of the government of South Africa. In the
past five years, the agency raised over ZAR33.5 billion ($4.5 billion) from local investors and is
currently one of the largest borrowers in the country.
In fact, SANRAL cannot sustain a further increase in gearing, and will also be unable to debt-finance
the operating deficits resulting from its loss of e-toll revenue. Furthermore, fundraising exercises are
complicated because the national government has ruled out alternative sources of funding for the GFIP
project, such as a fuel levy. Concerns about its financial position and business model would likely
restrict SANRAL’s access to borrowing, at least at an affordable cost.
The e-toll on GFIP generated extensive debate in the country.22 Public protests led the national
government to postpone the implementation of e-toll collections to 30 April 2012 from June 2011.
More recently, the government decided on a significant reduction in e-tolls. Thus far, delayed
implementation and lower-than-anticipated tolls have resulted in a revenue loss of about ZAR2.7
billion ($347 million) for SANRAL (a sizable 40% of its estimated 2012 annual budget), which will
grow to ZAR3 billion ($385 million) by the end of May as a result of the recent postponement.
Although partially compensated for by an extraordinary budget allocation of ZAR5.8 billion ($745
million) from the National Treasury, lower toll revenue negatively pressures SANRAL finances and
raises concerns about the government’s policy strategy. These concerns were factored into our February
downgrade of SANRAL’s rating to Baa1 from A3.
22
34
See Review of Gauteng Toll Road Tariffs Is Credit Negative for South African National Roads Agency, 18 July 2011.
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
US Public Finance
Ted Hampton
Vice President - Senior Analyst
+1.212.553.2741
ted.hampton@moodys.com
Illinois Governor Proposes Sweeping Public Pension Reforms, a Credit Positive
On 20 April, Illinois Governor Pat Quinn proposed a plan that would overhaul public pension
funding and increase minimum retirement ages and required pension contributions by workers and
participating local governments and public universities. The administration’s recognition of the need
to substantively reform the pension system is credit positive for the State of Illinois (A2 stable), which
has struggled to address its pension challenges for decades.
A state senate bill that would have required pension participants to pay more to remain in their existing
plan failed to win approval from the governor or the state’s house last year. Pension reforms must be
approved by the state’s General Assembly, a process that could result in substantial revisions to the
governor’s proposals. The governor’s plan allows for negotiation on contentious points: for example, it
proposes that local governments and public universities be required to start covering the normal costs
associated with their employees’ pensions over a period of “several years,” removing that responsibility
from the state. Normal costs are the value of future retirement benefits that covered employees accrue
in a given year.
Savings from specific elements in the proposal are also unspecified, although the state projects that
measures affecting individual plan participants would cut statutorily required contributions by $65
billion to $85 billion in total through 2045. This would reduce the state’s pension contributions by
19%-24%, based on current projections from the state legislature’s Commission on Government
Forecasting and Accountability. Other changes affecting employees include limits on cost of living
adjustments (COLAs). If the state also manages to shift responsibility for paying the normal costs of
the employees of school districts and public universities to the schools and universities themselves, then
its annual pension funding burden would fall even more.
If enacted, the changes also may spur litigation from public employee unions, which will invoke
Illinois’ constitutional protections of pension benefits. The governor’s plan aims to avoid litigation by
asking individual employees to accept new terms (such as a minimum retirement age of 67) in
exchange for continued retirement health insurance and for having future pay increases factored into
pension benefit calculations. This approach underscores the political and legal difficulty of decreasing
current employees’ benefits. Litigation in a handful of states challenges changes to current-employee
benefits. However, a significant number of states recently enacted legislation to reduce current
employees’ benefits after earlier legislation changed benefits for new or incoming employees.
Downgraded to A2 from A1 in January, Illinois became the lowest-rated US state largely because of its
weak pension funding.23 How much any enacted pension reform bolsters the state’s credit standing
depends largely on the degree to which the reform reduces the actuarial accrued liability (AAL) of its
five major plans. As of 30 June 2011, the plans’ reported AAL had risen to $146.5 billion from $113
billion in 2007. Plan assets declined 10% in the same period to $63.6 billion, resulting in a 43%
reported funded ratio (see exhibit). Illinois in 2010 enacted a package of reforms affecting new
employees (as of January 2011), but which had no impact on the AAL.
23
35
See Key Drivers of Illinois’ Downgrade to A2 From A1, 20 January 2012.
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
NEWS & ANALYSIS
Credit implications of recent worldwide news events
Illinois Pensions’ Aggregate Funded Status
Liabilities - left axis
Assets - left axis
Funded Ratio - right axis
$160
70%
$140
60%
$ billions
$120
50%
$100
40%
$80
30%
$60
20%
$40
10%
$20
$-
0%
2007
2008
2009
2010
2011
Source : Sta te of Illinois Gene ral Obli ga tion Ref undi ng Bonds Series of Ma y 2012 , prel imina ry official s tate me nt.
36
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
RATING CHANGES
Significant rating actions taken the week ending 27 April 2012
Corporates
Nestle S.A.
Downgrade
28 Sep ‘11
25 Apr ‘12
Long-Term Issuer Rating
Aa1
Aa2
Outlook
Stable
Stable
The downgrade of the rating reflects the already weak positioning of Nestle's credit metrics and our
expectation that these metrics will be adversely affected by the group's acquisition of Pfizer Nutrition.
Pitney Bowes Inc.
Long-Term Issuer Rating
Downgrade
15 Mar ‘12
23 Apr ‘12
A2
Baa1
Short-Term Issuer Rating
P-1
P-2
Outlook
Review for Downgrade
Stable
The downgrades reflect our expectation that Pitney Bowes' business and credit profile will be
challenged over the intermediate term due to the ongoing secular decline in traditional mail delivery, as
well as our expectation for worsening mail volume trends and increasing competition from alternative
web-based providers.
Beam Inc.
Outlook Change
4 Oct ‘11
23 Apr ‘12
Senior Unsecured Rating
Baa2
Baa2
Short-Term Issuer Rating
P-2
P-2
Outlook
Positive
Stable
The affirmation and the change in outlook follows the announcement that Beam will acquire the
Pinnacle vodka and Calico Jack rum brands from White Rock Distilleries Inc. for about US$605
million in cash. The affirmation of the ratings reflects our view that the acquisition makes strategic
sense and the addition of the new brands will offer Beam better growth opportunities in the fast
growing vodka and rum categories.
37
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
RATING CHANGES
Significant rating actions taken the week ending 27 April 2012
RadioShack Corporation
Downgrade
19 Jan ‘12
24 Apr ‘12
Corporate Family Rating
Ba2
B1
Outlook
Negative
Negative
The downgrade reflects the negative trend in RadioShack's margins due to its top line being
increasingly skewed towards low margin and highly competitive mobility business. In addition, the
proliferation of low-margin smart phones cannibalizing sales from its consumer electronics product line
continues to cause deterioration in its credit metrics.
Companhia Siderurgica Nacional S.A. - CSN
Outlook Change
25 Feb ‘10
25 Apr ‘12
Corporate Family Rating
Ba1
Ba1
Outlook
Stable
Positive
The change in outlook reflects the company's competitive position in the Brazilian steel industry,
supported by its vertically integrated operations and significant self-sufficiency in key inputs. The
positive outlook reflects our expectation that CSN will continue to report solid operating performance
and improving financial metrics over the next 12-18 months.
38
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
RATING CHANGES
Significant rating actions taken the week ending 27 April 2012
Financial Institutions
Abu Dhabi Commercial Bank
Outlook to Stable
29 Dec ‘09
24 Apr ‘12
Long- & Short-Term Debt & Deposits
A1 / Prime-1
A1 / Prime-1
Standalone Bank Financial Strength /Baseline Credit Assessment
D+ / ba1
D+ / ba1
Outlook
Negative
Stable
The outlook change reflects the continued improvement in the bank’s financial fundamentals since
2009 and its improved and more institutionalized risk-management framework. It also reflects its
strengthened funding profile, with a strong emphasis on liquidity.
Shuaa Capital PSC
Downgrade
28 Dec ‘11
24 Apr ‘12
Long-Term Foreign & Domestic Currency Issuer Ratings
Ba3
B1
Outlook
Review for Downgrade
Negative
The downgrade reflects the investment bank’s consistently negative profitability, as well as
uncertainties surrounding the execution of its new business strategy in a difficult operating
environment. Shuaa has reported losses for four consecutive years, and we expect profitability to
remain negative, or at best weak, in the near term.
Orient Corporation
Downgrade
24 Aug ‘11
25 Apr ‘12
Long-Term Issuer Rating
Baa2
Baa3
Outlook
Review for Downgrade
Stable
The downgrade results from the implementation of our revised global rating methodology for finance
companies, and concludes the review initiated on 7 April 2011. Orico's Baa3 rating reflects the
company's standalone credit profile, equivalent to a Ba2 rating, as well as the uplift from our strong
support expectations from Mizuho Financial Group and Mizuho Bank, Ltd., given Orico's strategic
importance to MHFG.
39
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
RATING CHANGES
Significant rating actions taken the week ending 27 April 2012
Promsvyazbank
Outlook to Negative
11 Nov ‘10
25 Apr ‘12
Long-Term Global Local & Foreign Currency Deposits
Ba2
Ba2
Standalone Bank Financial Strength / Baseline Credit Assessment
D / ba2
D / ba2
Outlook
Stable
Negative
The outlook change reflects our view of the continued insufficiency of the bank’s capitalization, which
has remained one of the lowest amongst similarly rated Russia-based peers. Despite a fresh capital
injection in late 2011, Promsvyazbank's Basel I Tier 1 ratio and total capital adequacy ratio stood at just
10.0% and 13.9%, respectively, at year-end 2011, which would provide only a limited cushion against
any unforeseen losses that may crystallize in the currently volatile Russian operating environment.
Nova Ljubljanska Banka
Downgrade
23 Dec ‘11
25 Apr ‘12
Long-Term Deposits
Ba1
Ba2
Standalone Bank Financial Strength /Baseline Credit Assessment
E+ / b1
E+ / b2
Long-Term Deposits
Ba1
Ba2
Standalone Bank Financial Strength /Baseline Credit Assessment
D / ba3
E+ / b1
Long-Term Deposits
Ba2
Ba3
Standalone Bank Financial Strength /Baseline Credit Assessment
E+ / b1
E+ / b2
Outlook
Negative (m)
Review for Downgrade
Nova Kreditna Banka Maribor
Abanka Vipa d.d.
The downgrades reflect the sharp deterioration in all three banks’ asset quality, which has led to large
losses that undermine their future loss-absorption capacity. Due to the ongoing difficulties in the
Slovenian operating environment, the aggregate level of non-performing loans in the banks’ portfolios
has risen sharply, while the un-provisioned portion of non-performers has also increased, exerting
pressure on capital levels. In addition, losses announced by all three banks at year-end 2011 reduced
their Tier 1 capital base by 24%.
40
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
RATING CHANGES
Significant rating actions taken the week ending 27 April 2012
GATX Corporation
Downgrade
19 Mar ‘12
26 Apr ‘12
Senior Secured
A3
Baa1
Senior Unsecured
Baa1
Baa2
Outlook
Review for Downgrade
Stable
The downgrade results from the implementation of our revised global rating methodology for finance
companies, and reflects our view that market-funded financial businesses, including GATX, have
higher risk profiles than their ratings previously reflected. GATX finances its investment in rail and
marine lease assets with wholesale funding sources, exposing it to investor confidence-sensitivity when
funding conditions are volatile.
QBE Insurance Group Ltd.
Outlook to Negative
10 Feb ‘11
27 Apr ‘12
Issuer Rating
A3
A3
Senior Debt
A3
A3
Outlook
Stable
Negative
The outlook change reflects a financial leverage profile that is more aggressive than our expectations at
the current rating level and the group's increased and significant goodwill intangibles as a result of a
continued aggressive pace of acquisitions. The outlook change also reflects the group's high catastrophe
exposures and incremental pressures related primarily to a weakened outlook for the Australian
mortgage insurance sector.
TransCreditBank
Upgrade
31 Aug ‘11
27 Apr ‘12
Long-Term Local & Foreign Currency Debt & Deposits
Ba1
Baa3
Long -Term National Scale Rating
Aa1.ru
Aaa.ru
Standalone Bank Financial Strength/ Baseline Credit Assessment
D- / ba3
D- / ba3
Outlook
Stable
Stable
The upgrade reflects TransCreditBank’s closer integration into VTB group, and greater evidence of
VTB's increased commitment to support its new subsidiary. We note that TransCreditBank now
operates under VTB group's standards, including in terms of risk management.
41
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
RATING CHANGES
Significant rating actions taken the week ending 27 April 2012
Uzbek Banks
Downgrades
27 Apr ‘12
On 27 April 2012 we downgraded the local-currency deposit ratings of four Uzbek banks, and
confirmed the rating of a fifth bank following our reassessment of systemic support. The ratings of the
following banks were downgraded: National Bank of Uzbekistan to B1 from Ba3; Asaka Bank to B1
from Ba3; Ipoteka Bank to B2 from B1; and Qishloq Qurilish Bank to B2 from B1. We confirmed the
B1 long-term local currency deposit rating of Alokabank, with a stable outlook.
These rating actions followed the review of the affected banks' ratings initiated on 1 February 2012,
which was prompted by a need to re-assess the level of government support provided to systemically
important banks in Uzbekistan.
Sovereigns
Egypt, Government of
Review Extended
21 Dec ‘11
26 April ‘12
Issuer Rating
B2
B2
Outlook
Review for Downgrade
Review for Downgrade
The extension of the review of Egypt's B2 government bond ratings for possible downgrade was taken
in order to incorporate the credit implications of the country's upcoming presidential elections and its
ongoing negotiations with the IMF. The rating review will focus on political developments and the
availability of external financial support.
Sub-sovereigns
Province of Ontario (Canada)
Downgrade
15 Dec ‘11
26 April ‘12
Issuer Rating
Aa1
Aa2
Senior Unsecured
Aa1
Aa2
Commercial Paper
P-1
P-2
Outlook
Negative
Stable
The downgrade of Ontario's rating reflects its growing debt burden and the risks surrounding the
province achieving its medium-term fiscal plan, given the subdued growth outlook, extended
timeframe back to balance and ambitious expenditure targets.
42
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
RATING CHANGES
Significant rating actions taken the week ending 27 April 2012
Structured Finance
Moody's Downgrades Berlin Hyp's Public-Sector Pfandbriefe to Aa1
The downgrade follows Berlin Hyp's public announcement on 19 April 2012 that the level of overcollateralization in their public-sector Pfandbrief programme is expected to be close to the 2%
statutory minimum in the future. Under our expected loss analysis, the rating consistent with this level
of over-collateralization is Aa1, whereas the level of over-collateralization necessary to support the Aaa
rating is 7%.
43
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
RESEARCH HIGHLIGHTS
Notable research published the week ending 27 April 2012
Corporates
Weak European Sentiments Offset Modest Hints of US Recovery
Persistent economic trends left industry outlooks largely intact at the start of 2012. Among the 58
non-financial corporate sectors worldwide that we analyze, only three outlooks shifted direction during
the first three months of the year. About 67% of the sectors had stable outlooks at the end of the first
quarter, indicating that few industries foresaw significant shifts in fundamental business conditions
over the next 12-18 months. The number of negative outlooks climbed slightly during the first
quarter, reaching 12 by the end of the first quarter of 2011, up from 10 at the end of 2011; this
represents a continuation of the upward trend in negative outlooks that began in late 2011.
North American Capital Goods Industry: Profits to Rise as Capital Investment
Outpaces Economic Growth
We changed our outlook for the North American capital goods industry to positive from stable on 23
April 2012. The positive outlook primarily reflects our expectation that makers of trucks, tractors,
cranes and factory equipment will see demand for their products increase over the next 12 to 18
months, along with their profits. In addition, sales of commercial vehicles and agricultural and mining
equipment will continue to outpace North American economic growth over the next 18 months.
US Apparel: Lower Cotton Costs Point to Higher Operating Profit in 2012-13
The year-long reversal in cotton prices is the main driver for our positive outlook. Cotton prices have
fallen more than 60% from their peak in March 2011, easing the cost pressures on the industry. We
believe that operating-income growth will accelerate in 2012, driven by lower cotton costs, with the
strongest growth in the second half of the year. A second driver for the positive outlook is that growth
in the US economy will support demand for apparel.
Lower Natural Gas Tariffs in Russia Are Credit Negative for Russian Gas Sector
On 13 April, Russia’s Ministry of Economic Development released its macroeconomic scenarios for
2013-30, which envisage a dramatic slowdown in the transition to market-based prices for domestic
natural gas from artificially low regulated prices. The news is credit negative for Russia’s gas sector,
whose major players include state-controlled gas giant OJSC Gazprom (Baa1 stable) as well as
independent gas producers, such as OAO Novatek (Baa3 stable), OAO Lukoil (Baa2 stable), OJSC Oil
Company Rosneft (Baa1 stable) and TNK-BP International Ltd. (Baa2 stable).
44
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
RESEARCH HIGHLIGHTS
Notable research published the week ending 27 April 2012
YPF's Nationalisation Is Credit Negative for Spanish Corporates with a Presence
in Argentina
Last Monday, the government of Argentina (B3 stable) passed a law changing majority control in
Repsol YPF S.A.YPF S.A. (B3 review for downgrade). As a result, 51% of YPF’s Class D shares, which
Spanish oil and gas company Repsol YPF S.A. (Baa2 review for downgrade) owns, are subject to
expropriation by the Argentine government. The nationalisation of YPF is credit negative for other
rated Spanish corporates with a significant presence in Argentina, because it will result in more
uncertainty regarding the legal environment and the application of the rule of law.
If the government imposes further restrictions on transferring funds outside Argentina, or if it pursues
other nationalisations, the negative effect will be greater on those corporates that rely heavily on
repatriating cash from Argentina to service their debt at the holding company level.
Frequently Asked Questions: Argentina Expropriates Majority Stake in YPF
This Special Comment seeks to answer some of the main credit questions arising from the executive
office of the Government of Argentina’s decision that it would ask its legislature to approve the
nationalization of a 51% stake in YPF S.A.
US Cable Industry: Triple-Play-Equivalent Rate Is at a Plateau
Triple-Play-Equivalent growth has slowed to a trickle, an indication that EBITDA growth will
continue to decelerate. The TPE rate matters because it captures how well a cable company is managed
compared with peers and competitors. Cable companies with a low TPE rate might have a greater
potential for subscriber and EBITDA growth, but their market positions are also more tenable.
Financial Institutions
Financial Guaranty Insurance: Negative Outlook
The financial guaranty industry has not recovered from the financial crisis. Business opportunities have
shrunk and insured penetration of the municipal market remains at a fraction of historical levels, while
the value of financial guaranty insurance has declined. Furthermore, continued uncertain performance
of insured portfolios and risk concentrations hinder a recovery, increasing the likelihood that
alternatives will take hold.
Spanish Insurance: Banking Consolidation Will Further Advantage the
Strongest Insurers
The ongoing restructuring of the Spanish banking system will affect Spain’s insurance industry due to
banks’ major role in the distribution of life products. Although the consolidation between savings
banks, or cajas, has not yet triggered a similar consolidation among insurance companies, we believe it
will lead to a significant shift in insurers’ market shares over time.
45
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
RESEARCH HIGHLIGHTS
Notable research published the week ending 27 April 2012
Money Market Funds: Sterling Prime Funds Reduced Sensitivity to Market Risk in 2011
This special comment provides an overview of trends affecting the 23 rated prime money market funds
denominated in Sterling that we rate. It reviews the evolution of the key metrics underlying our rating
methodology, including funds’ credit profiles, liquidity profiles and sensitivity to market risk, while the
data covers 23 Europe-domiciled funds, two of which are VNAV funds.
Sovereigns
China Credit Analysis
China’s Aa3 foreign and local-currency bond ratings are primarily supported by the country’s relatively
high economic strength and very high government financial strength. The positive rating outlook is
supported by favorable medium term economic growth prospects as well as by strong government debt
dynamics. However, tight control over local government finances and a new wave of reform, especially
in the financial system, are necessary for China to sustain rapid and stable economic growth
throughout the rest of this decade.
Netherlands: Collapse of Coalition Government Challenges Fiscal
Consolidation Efforts
The collapse of the Dutch centre-right governing coalition and the failure to agree a package of
austerity measures are credit-negative for the Netherlands. Despite the country’s very robust
institutional framework and significant track record of fiscal discipline, this development generates
uncertainty about the country’s future policies.
Sub-sovereigns
Serbian Local Governments: Recent Reform Strengthens Municipal Finances
In October 2011, the Serbian government amended the Law on Local Government Finance (LLGF),
taking two significant steps to improve the financial positions of the local governments in Serbia.
First, the share of proceeds from personal income tax (PIT) was doubled to 80% in favor of local
governments. Second, the amount of transfers received from the central government was increased
by 13.3% to RSD33.2 billion in 2012 from RSD29.3 billion in 2011, according to a new
distribution formula.
Although we recognize these measures as credit positive, we do not anticipate upward rating
adjustments in 2012 as a result of the changes in the law. The Serbian institutional framework,
established in 2007, is still immature and therefore subject to further fine-tuning.
46
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
RESEARCH HIGHLIGHTS
Notable research published the week ending 27 April 2012
US Public Finance
Supreme Decision: Prohibition of Individual Mandate Would Remove Healthcare
Reform's Best Feature for Hospitals
If the US Supreme Court rules that the individual mandate to purchase health insurance is
unconstitutional, it would heighten credit risk for not-for-profit hospitals, which are the vast majority
of community hospitals in the US. This uncertainty continues to drive our negative outlook on the
sector. Our report focuses on the survival or fall of the mandate, including the extent to which its
elimination – even if some of the law’s other positive features are allowed to stand – would be a clear
credit negative for the not-for-profit healthcare sector. In its entirety, we consider the healthcare reform
law a long-term credit negative; however, removing the mandate would make the negative features of
reform loom much larger compared with the remaining positive elements.
Structured Finance
Credit Card Statement Newsletter
Overall, the performance of credit card ABS was strong in March. In this issue, we also note that our
outlook for the US credit card industry is stable, primarily reflecting card issuers’ stronger asset quality
and profitability in an improved macroeconomic environment.
Structured Thinking: Asia Pacific Newsletter
Home price appreciation in Australia over the past decade, together with other forms of credit support,
such as lenders mortgage insurance, should help ensure that Australian RMBS losses remain low by
international standards. In addition, we explain how the credit quality of all Korean covered bonds we
rate has improved since their closing dates because of (i) cash collateralization; (ii) the improved credit
quality of the issuer; and (iii) the benefits of aging or seasoning
We placed 25 Asia ex-Japan repackaged security transactions and two Taiwan collateralized bond
obligations on review for downgrade following similar actions on 131 banks and securities firms
globally. We also note that Mitsui Fudosan's plan for rapid expansion overseas over the next six fiscal
years is credit negative because the company is less familiar with markets overseas than local markets.
We believe that overseas expansion will introduce an element of foreign-exchange risk.
UK Covered Bonds: Strong Q1 2012 Issuance Levels Are Credit Positive
Sterling covered bond issuance has had an exceptional start to the year, with issuance of GBP11 billion
in Q1 2012, almost double the total for 2011. The development of a sterling covered bond market is
credit positive for UK covered bonds, as investors’ and issuers’ confidence will build as the market
develops in terms of liquidity, depth and tighter pricing. Banks and financial authorities will, in turn,
have greater incentives to support and protect the market. Importantly, a robust domestic investor base
should improve the funding capabilities of covered bonds during times of market stress.
47
MOODY’S WEEKLY CREDIT OUTLOOK
30 APRIL 2012
EDITORS
PRODUCTION ASSOCIATE
News & Analysis: Jay Sherman, Elisa Herr and
Barry Hing
Rating Changes & Research Highlights: Greg Davies
Final Production: Barry Hing
David Dombrovskis
© 2012 Moody’s Investors Service, Inc. and/or its licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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