Moody's Credit Outlook - January 20

20 JANUARY 2014
NEWS & ANALYSIS

Corporates
General Motors New Dividend Is Credit Negative for
US Public Finance 2
New York State Sales Tax Collections Indicate Slowing
31
Economic Growth Outside New York City Area

Federal Budget Removes Threat of a DC Government
Automaker, Credit Neutral for GM Financial

Googles Planned Acquisition of Nest Labs Is Credit Positive Bombardiers CSeries Aircraft Delay Is Credit Negative Grupo Elektra Acquisition of Blockbuster Chain in Mexico Is
Shutdown in Fiscal 2015, a Credit Positive Securitization

J.C. Penney Store Closings Are Credit Negative for Six CMBS
34
Credit Positive
Cosan Logistics Business Combination Talks with Railroad
Transactions
Operator ALL Are Credit Positive

McKessons Failed Bid for Celesio Is Credit Negative for Haniel Liberty Globals Removal of VTR from UPC Credit Pool Is Credit
RATINGS & RESEARCH

Rating Changes Last week we downgraded Orange, Winnipeg Airport Authority and Banco Sabadell, and upgraded Fortescue Metals Group, among other rating actions. Research Highlights Last week we published on the US technology, US retailers, US gaming, global pharmaceuticals, Italian banks, Japanese insurers, Sub-Saharan Africa sovereigns, Abu Dhabi, US ABS, US CMBS, US mortgage servicers, Latin American securitization, Italian RMBS, European RMBS and ABS, European CMBS, and global CLOs, among other reports. 41 36
Negative for UPC

Suntory's Plan to Acquire Beam Inc. Is Credit Negative for
Suntory, Uncertain for Beam

Tencents Investment in China South City Is Credit Positive Greenland Hong Kongs Partnership with CR Land Is Credit
Positive
Indonesian Ban on Mineral Ore Exports Is Credit Positive for
Alcoa of Australia Banks

Basel Committee Eases Its Liquidity Guidance, a Credit
15
Negative
Russian Central Banks Liquidity Methodology Is Credit Positive
RECENTLY IN CREDIT OUTLOOK

Articles in Last Thursdays Credit Outlook Go to Last Thursdays Credit Outlook
for Banks
RCI Banque Accelerates Its Deposit Funding Plans, a Credit
45
Positive
Belarus Sharply Limits Banks Foreign-Currency Lending, a
Credit Positive
Hong Kongs Rules on Personal Lending Are Credit Positive for
Banks
CIMB Groups Capital Raise Is Credit Positive for Its Malaysian
Click here for Weekly Market Outlook, our sister publication containing Moodys Analytics review of market activity, financial predictions, and the dates of upcoming economic releases.
Bank Subsidiaries Insurers

Desjardins Insurance Makes a Credit-Negative Push into
26
Ontarios Competitive Auto Market Sovereigns

Egypts Constitutional Referendum Is a Credit-Positive Step
29
Toward Political Stabilization
MOODYS.COM
NEWS & ANALYSIS

Credit implications of current events
Corporates
Bruce Clark Senior Vice President +1.212.553.4814 bruce.clark@moodys.com Curt Beaudouin, CFA Vice President - Senior Credit Officer +1.212.553.1474 john.beaudouin@moodys.com
General Motors New Dividend Is Credit Negative for Automaker, Credit Neutral for GM Financial
Last Tuesday, General Motors Company (Baa2 stable senior secured/Ba1 stable senior unsecured) said its board had declared a quarterly dividend of 30 cents per share on its common stock. The restoration of the dividend, GMs first since 2008, is credit negative for the company because it will consume about $1.7 billion of cash annually. It is credit neutral for General Motors Financial Company, Inc. (Ba2 stable) because we do not expect the dividends reinstatement to have any effect on the finance subsidiarys capital plans. Despite the annual dividend payout, GMs liquidity will remain strong and should provide ample flexibility to contend with market downturns and other operational challenges. We also believe that the reestablishment of the dividend is consistent with GMs investment-grade credit profile. The size of GMs annual common dividend is similar to that of Ford Motor Companys (Baa3 stable) approximately $2 billion annual dividend. As of 30 September 2013, GM had gross liquidity of about $33.8 billion, consisting of $26.8 billion in cash and access to $7 billion in committed credit facilities (i.e., $11 billion in total facilities less $4 billion allocated to GM Financial). In addition, we calculate that for the 12 months ended 30 September, the company generated approximately $3 billion in free cash flow before the payment of either a preferred or common dividend. GMs principal liquidity requirements during the next 12 months include our estimate of approximately $7 billion needed for intra-period working capital requirements and $300 million in maturing debt. GMs operating performance will continue to benefit from strong fundamentals in both North America and China, which should offset pressures in Europe and other international markets. We expect US light vehicle demand to grow by about 3.8% to 16.2 million units in 2014. GM has a robust and highly competitive new-product program and we expect incentive levels in the US market to remain stable. This should allow the company to strengthen its North American operations margins and earnings. In addition, GM maintains a highly competitive and profitable position in the Chinese market, which we expect will grow by 10% in 2014. As for GM Financial, the finance subsidiary is not paying dividends to GM and we do not expect this to change for the foreseeable future. With the 2013 acquisition of most of Ally Financial Inc.s (Ba3 stable) international operations,1 the planned rollout of a prime retail loan product in North America this year and other business initiatives, GM Financial has significant growth in its business plan and therefore we expect the company to retain capital in the business.
GM contributed $1.3 billion of equity to GM Financial on 1 April 2013 in conjunction with the initial closing of the Ally international acquisition. GM will fund another $700 million of equity upon closing of the Ally international China joint venture, which the companies expect will occur in 2014.
MOODYS CREDIT OUTLOOK
20 JANUARY 2014
NEWS & ANALYSIS

Richard J. Lane Senior Vice President +1.212.553.7863 richard.lane@moodys.com
Googles Planned Acquisition of Nest Labs Is Credit Positive

Last Monday, Google Inc. (Aa2 stable) said it had agreed to buy Nest Labs Inc. (unrated), a maker of Internet-connected thermostats and smoke detectors, for $3.2 billion in cash. The planned acquisition is credit positive because Nest Labs household devices present a significant growth opportunity, as well as a valuable source of customer data. The transaction is subject to US regulatory approvals. Google expects to close the deal in the next few months. Google Ventures, the companys venture capital arm, has been one of Nest Labs primary backers. With cash and marketable securities of $56.5 billion as of 30 September 2013 ($32.2 billion of which resides offshore), Google has ample liquidity to complete the acquisition. We expect Google to generate more than $14 billion of free cash flow over the next year. Nest Labs has quickly become one of the biggest brands in the emerging smart-home market with its Internet-connected digital thermostats and smoke/carbon monoxide detectors, which customers can monitor remotely through mobile applications based on Googles Android and Apple Inc.s (Aa1 stable) iOS operating systems. Over time, the Nest Thermostat and the Nest Protect smoke detector systems adapt to the schedules and behaviors of customers to reduce heating and cooling costs. Nest Labs believes its thermostats have penetrated just 1% of US homes so far, signaling significant growth opportunities ahead. Aside from this potentially long runway, we believe the data that Nest Labs collects regarding energy usage and customer behavior will be valuable to Google. Such data would help advertisers target specific customer groups more effectively, much as they do with Googles search algorithms and Android-based devices. However, Nest Labs vows that it will continue to adhere to its existing privacy policy, which requires a customers consent to share user data with third-party products and services. It remains to be seen whether Google sticks with this policy or turns up the heat on sharing more personal information.
20 JANUARY 2014
NEWS & ANALYSIS

Darren Kirk Vice President - Senior Credit Officer +1.416.214.3845 darren.kirk@moodys.com
Bombardiers CSeries Aircraft Delay Is Credit Negative

Last Thursday, Bombardier Inc. (Ba2 negative) said its CSeries aircraft will enter into service in the second half of 2015, a delay of between three and nine months from our previously expected timeframe. The delay is credit negative because it will increase program costs, complicate efforts to sign additional orders and hinder the companys ability to reduce cash consumption and leverage. Bombardier indicated that it has not identified a need for major design changes. Rather, the delay stems from the need for additional time to complete testing and preparation of the aircraft. We believe that Bombardiers revised CSeries schedule incorporates additional cushion given that the company announced three successive delays to complete the aircrafts first flight, which finally took place in September 2013. Although Bombardiers entry-into-service projection appears realistic, additional delays remain possible owing to the complexity of the program. Although it is difficult to quantify the effect of the latest delay, we expect CSeries development costs to exceed $4 billion, including $1.4 billion funded by governments and suppliers. The delay could also require Bombardier to lower prices to drive new orders and will likely increase working capital requirements, which would pressure the companys liquidity. Just before the announcement of the delay, Bombardier announced it had obtained 16 additional orders for the CSeries, for a total of 198 firm orders to date, plus 247 options. This is a positive development because CSeries orders have been lighter than we expected at this stage of the program and lag behind the companys target of 300 firm orders by the entry-into-service date. The relatively light order flow is likely due in part to aggressive responses from The Boeing Company (A2 stable) and European Aeronautic Defence & Space Co. EADSs (A2 stable) Airbus subsidiary, which are offering re-engined versions of their competing aircraft to reduce their performance gap with the CSeries. The light order flow also likely reflects the need for Bombardier to prove it can deliver the aircraft within the scheduled timeframe and at the promised economics. Data from in-flight testing and progress toward the entry into service will be vital to confirm these advantages and provide customers the confidence they need to move ahead with new orders. Bombardiers cash flows have been soft because of cyclical weakness in its business jet operation, execution challenges in its transportation division and a weaker-than-normal level of cash advances from customers in both segments. These factors, together with the sizable investment required for the development of the CSeries, have contributed to Bombardiers $4 billion of cumulative free cash flow consumption since the end of 2010. The company has tapped the debt markets to fund this shortfall, increasing its adjusted leverage to 7.2x as of 30 September 2013. As we have noted before, we would consider lowering Bombardiers rating if the company is materially cash flow consumptive in 2014 and if it fails to reduce leverage below 6x with the expectation of further improvement. The mid-February release of the companys fourth-quarter 2013 financial statements will help us gauge Bombardiers ability to meet these hurdles despite the latest CSeries delay.
20 JANUARY 2014
NEWS & ANALYSIS

Alonso Sanchez Rosario Assistant Vice President - Analyst +52.55.1253.5706 alonso.sanchezrosario@moodys.com
Grupo Elektra Acquisition of Blockbuster Chain in Mexico Is Credit Positive

Last Tuesday, Grupo Elektra, S.A.B. de C.V. (Ba3 stable) said that it had acquired Blockbuster de Mexico, S.A. de C.V. (unrated) for about $31.1 million in cash. The deal is credit positive because it will expand Elektras retail space and customer base. The small size of the deal limits the effect on Elektras credit quality and will have no effect on the companys ratings or outlook. Its credit metrics and liquidity should remain essentially unchanged. Elektras adjusted debt/EBITDA was 9.6x as of 30 September and adjusted EBITA/interest expense was 3.1x. The Blockbuster video retail chain is nearly defunct in the US, where digital distribution of movies has eclipsed physical disk film rentals. Dish Network Corporation (Ba3 negative), the chains owner, said late last year that it would close its remaining US Blockbuster stores this month. In Mexico, bricks-and-mortar film rental is still a viable business. Elektra will get about 300 Blockbuster retail locations throughout the country, increasing its total points of sale to nearly 6,800 and its retail sales space by about 7%. Elektra operates retail chains focused largely on consumer electronics, appliances, furniture, motorbikes and consumer staples. It also has a large financial services component, through which it offers consumer credit in its stores. Through the Blockbuster acquisition, Elektra will be able to offer financial services to Blockbusters 1.6 million customers in Mexico.
20 JANUARY 2014
NEWS & ANALYSIS

Erick Rodrigues Assistant Vice President - Analyst +55.11.3043.7345 erick.rodrigues@moodys.com Cristiane Spercel Assistant Vice President - Analyst +55.11.3043.7333 cristiane.spercel@moodys.com
Cosan Logistics Business Combination Talks with Railroad Operator ALL Are Credit Positive
Last Tuesday, Brazilian energy company Cosan S.A. Indstria e Comrcio (Ba2 stable) said that its logistics subsidiary, Rumo Logstica Operadora Multimodal S.A. (unrated), had held preliminary talks with railroad operator ALL - Amrica Latina Logstica S.A. (Ba3 stable) regarding a possible business combination. A combination would be credit positive for ALL because it could resolve a legal dispute with Rumo, in which ALL is facing contractual penalties that we estimate total BRL200 million, or 10% of the railroads annual EBITDA. The legal dispute between ALL and Rumo involves a 2009 agreement to increase railway line productivity for the transportation of sugar to the Port of Santos, Latin Americas largest port. The agreement called for Rumo to primarily fund the projects BRL1.2 billion price tag to increase the capacity of the railway line that runs to the port, acquire new locomotives and railcars, and expand the terminals facilities. In return, ALL agreed to transport Cosans sugar to the Port of Santos at competitive tariffs until 2028 and reimburse Rumos investments in rolling stock with the payment of rent on equipment in proportion to the actual volume of the product transported. The railway line at the center of the dispute is a 262-kilometer stretch between Bauru and Santos in the state of Sao Paulo that is part of ALLs Malha Paulista concession. A resolution of the dispute would benefit both companies because the additional capacity from this rail line expansion would increase productivity for the logistics system as a whole. However, the companies have not reached a formal agreement on a business combination, and the ultimate credit implications would depend on the terms and financing structure of that transaction. The agreement has been in dispute since the second half of last year because not all of the improvements have been completed, likely because of the absence of certain environmental permits, among other challenges. This has stalled the companies expectation of a capacity expansion to 9 million tons of sugar per year from the current 2 million tons. The case went to arbitration in October, despite contract amendments that ALL and Rumo agreed to last May. Rumo filed the request against ALL to enforce its contractual rights, and other administrative and legal measures, while ALL requested legal protection to avoid the payment of the contractual penalties and renegotiate the contractual terms. The dispute has drawn the attention of the Brazilian government, which is currently reviewing the concession framework to foster $40 billion of new investment for an 11,000-kilometer expansion of the countrys rail network. Brazils regulatory authority for rail concessions and the countrys antitrust regulator are also reviewing the matter.
20 JANUARY 2014
NEWS & ANALYSIS

Kathrin Heitmann Assistant Vice President - Analyst +49.69.70730.789 kathrin.heitmann@moodys.com
McKessons Failed Bid for Celesio Is Credit Negative for Haniel

Last Monday, German investment holding company Franz Haniel & Cie. GmbH (Ba1 stable) announced that McKesson Corporations (Baa2 review for downgrade) increased offer for drug distributor and retail pharmacy operator Celesio AG (unrated) had failed. This development is credit negative for Haniel, which owns 50.1% of Celesio, because Haniel will not receive estimated proceeds of about 2.0 billion from the transaction. This amount would have exceeded Haniels reported net debt of 1.6 billion in November 2013. McKesson had not received the minimum acceptance of at least 75% of all outstanding shares and convertible bonds by midnight 9 January, thereby scuttling Haniels sale of its stake in Celesio to McKesson. The sale proceeds would have been used to improve Haniels fairly high market-value gearing, as adjusted by us, of around 29% as of the end of November, and would have provided Haniel with the flexibility to improve the diversification of its holdings by investing part of the proceeds in new ventures. The marketvalue gearing is based on the spot stock prices of Haniels investments, which include Metro AG (Baa3 stable), Celesio and Takkt (unrated). If we were to take into account these investments 200-day average prices as of the end of November 2013, the market-value gearing would have been 36%. We expect Haniel to remain committed to further reducing its debt despite the failed sale of its Celesio stake. Haniel has a 472 million bond due in October 2014, which we previously assumed would have been repaid with the proceeds from the Celesio transaction. The company will now need to refinance or repay the bond with its existing liquidity sources. Haniel benefits from a strong liquidity profile and the next major debt maturity after the October bond is in 2017, a key credit supportive factor for its current Ba1 rating. The failed transaction also has no immediate effect on Haniels ratings because we previously assumed that Haniel would reinvest a large portion of the proceeds from the disposal of the Celesio stake in new businesses. Haniels high portfolio concentration, with its investments in Metro, Celesio and Takkt equaling around 85% of Haniels portfolio value, temper its credit quality and Ba1 rating. A successful Celesio transaction would have increased Haniels sensitivity to the performance of Metro. Over time, the freed up capital for new portfolio investments would eventually have led to a more diversified portfolio. Haniel is currently evaluating next possible strategic steps with respect to its Celesio stake.
20 JANUARY 2014
NEWS & ANALYSIS

Paco Debonnaire Associate Analyst +44.20.7772.1948 paco.debonnaire@moodys.com Christian Rauch Senior Vice President +44.20.7772.5337 christian.rauch@moodys.com
Liberty Globals Removal of VTR from UPC Credit Pool Is Credit Negative for UPC
Last Monday, international cable operator Liberty Global plc (Ba3 stable) announced that it would remove its 80%-owned subsidiary VTR GlobalCom, SpA (unrated) from the credit pool for its UPC Holding B.V. (Ba3 stable) subsidiary. In connection with this reorganization, Liberty Global will repay 1.3 billion worth of bank facilities under UPCs credit facility. Liberty Global expects to fund this repayment in part with proceeds from a $1.4 billion (principal amount) offering of senior secured notes by VTRs parent, VTR Finance B.V. (B1 stable). The reorganization is credit negative for UPC because the proposed repayment does not sufficiently compensate for the loss of VTRs EBITDA and will raise UPCs own leverage closer to the 5.5x leverage downgrade trigger set for our Ba3 rating. UPCs debt/EBITDA (as adjusted by us) was just above 5x for the 12 months ended 30 September 2013. The debt repayment of the UPC bank facilities, which totaled 1.26 billion at 30 September 2013, equals leverage of around 3.8x of VTRs reported operating cash flow (OCF) for the 12 months ended 30 September 2013. In addition, UPC will lose a degree of geographic diversification through the reorganization and its scale and scope will shrink. VTR constituted about 16% of UPCs reported OCF for the nine months ended 30 September 2013. VTR currently provides UPCs broadband communications operations in Chile. Its sister company, VTR Wireless SA, is a subsidiary of UPCs corporate parent Liberty Global that offers mobile services in Chile but is outside of UPC. Liberty Global plans to place VTR and VTR Wireless in a standalone credit pool together with VTR Finance, their parent. At this stage, the reorganization is broadly neutral for Liberty Global, which will continue to consolidate VTR Finance. However, we note that Liberty Global is considering a spinoff of VTR Finance and Liberty Globals Puerto Rican asset, Puerto Rican Liberty Cablevision of Puerto Rico LLC.
20 JANUARY 2014
NEWS & ANALYSIS

Mariko Semetko Assistant Vice President - Analyst +81.3.5408.4209 mariko.semetko@moodys.com Linda Montag Senior Vice President +1.212.553.1336 linda.montag@moodys.com
Suntorys Plan to Acquire Beam Inc. Is Credit Negative for Suntory, Uncertain for Beam
Last Tuesday, Japanese beverage company Suntory Holdings Limited (A3 review for downgrade) announced its plan to acquire Beam Inc. (Baa2 review direction uncertain) for $16 billion, or more than 20x Beams EBITDA. The acquisition is credit negative for Suntory. After the announcement, we placed Suntorys ratings on review for downgrade and placed Beams ratings on review direction uncertain. For Suntory, the acquisition will lead to a significant increase in debt and financial leverage, with positive but less significant offsetting earnings, branding and operational benefits. Debt at the operating subsidiary, Beam, could be structurally senior to Suntory holding company debt and a significant amount would pressure Suntorys credit quality. We placed Beams ratings on review direction uncertain because of the lack of information about how its bonds will be treated, uncertainty about whether Beam will continue reporting its financials and pending the outcome of the rating review of the new parent. A rating outcome above Beams current rating could be credit positive for Beam, while an outcome below Beams rating could be credit negative. Suntory is currently rated two notches above Beam. The purchase price includes the assumption of Beams debt, although it is not clear if the debt will be guaranteed or legally assumed, and Suntory will fund the acquisition with cash on hand and committed bank financing. Even if Suntory applies all its reported cash on hand to the purchase, the transaction will increase its debt burden by more than $10 billion. Pro forma for the acquisition, using Suntorys and Beams EBITDA for the 12 months to 30 September 2013 and the likely addition of debt, Suntorys debt/EBITDA could be 6x, although actual leverage will depend on the ultimate capital structure. The exhibit below shows potential scenarios for increased debt levels and leverage, excluding any synergies or EBITDA growth. Potential Scenarios for Suntorys Increased Debt
Gross Debt $ Billions EBITDA (12 months through 30 September 2013) $ Billions Debt/EBITDA
Suntory Beam
Suntory and Beam Combined
$6.8 $2.5
$2.2 $0.8
3.1x 3.2x
The effect on debt/EBITDA if the acquisition adds the following amount of debt (with Beams debt included as a part of the additional debt.)
Additional Debt from the Acquisition $ Billions EBITDA (12 months through 30 September 2013) $ Billions
Gross Debt $ Billions
Debt/EBITDA
$10.0 $12.0 $14.0 $16.0
$16.8 $18.8 $20.8 $22.8
$3.0 $3.0 $3.0 $3.0
5.6x 6.3x 6.9x 7.6x
Note: All metrics incorporate our public analytical adjustments and are as of 30 September 2013. Source: Moodys Financial Metrics and the issuers financial results
20 JANUARY 2014
NEWS & ANALYSIS

Credit implications of current events Several factors, and expectations for future deleveraging, mitigate Suntorys immediately increased leverage. Leverage reduction could come from the acquisitions increased earnings and the current cash flow available from Beam and Suntory. Benefits to Suntory include a broader product mix and geographic reach, higher margins and increased cross-selling opportunities. Optimally, the acquisition has the potential to address Suntorys two main credit constraints: its geographic concentration and its low margins compared with global peers. Suntorys operations, particularly on the alcohol side, are currently concentrated in Japan. The acquisition will increase Suntorys overseas presence and its distribution network, and Beam has very high margins. Beams adjusted EBITA margin was 26.3% for the 12 months through 30 September 2013, significantly higher than Suntorys 7.9% for the 12 months ended 30 June 2013. As a result, Suntorys profitability should see a boost once the transaction closes. Gross revenues for Suntory and Beam combined will be about 2.3 trillion ($22 billion). Suntory has been the distributor for Beans products in Japan. Suntory expects the acquisition to close in the second quarter, upon regulatory and shareholder approvals.
10
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NEWS & ANALYSIS

Jiming Zou Assistant Vice President - Analyst +852.3758.1343 jiming.zou@moody.com Lisa Tao Associate Analyst +852.3758.1307 lisa.tao@moodys.com
Tencents Investment in China South City Is Credit Positive

Last Wednesday, China South City Holdings Limited (CSC, B2 positive) announced that Tencent Holdings Limited (Baa1 positive), one of the largest Internet services providers in China, will make a HKD1.5 billion equity investment in exchange for a 9.9% stake in CSC. Following this investment, Tencent will have an option within the next two years to buy additional shares that would raise its stake to about 13%. This investment is credit positive for CSC, a developer and operator of large-scale integrated logistics and trade centers in China, because it will strengthen its equity base and liquidity and support the establishment of an e-commerce platform for the management and operation of CSCs trade and logistics centers. Tencents investment will improve CSCs liquidity position by HKD1.5 billion, raising its cash balance from the HKD7.1 billion it reported in September 2013. Moreover, CSCs pro forma debt/book capital will improve to 42% from 44% as of the end of September 2013. If Tencent exercises the option to subscribe to new shares in the next two years, it would further improve CSCs equity base. With this investment, we expect CSC to have ample liquidity to develop its large-scale trade and logistics centers over the next 12-18 months. CSC has large funding requirements related to its development of about 5 million square meters of gross floor area as of September 2013 in seven provincial capital cities of China. Tencents investment will also expedite the development of CSCs e-commerce platform. CSC will be able to leverage Tencents expertise in Internet services to establish integrated e-commerce services, outlet services for branded goods, online-to-offline retail business, online payment and warehousing and logistics arrangements. Tencents investment in CSC also reflects the companys expectation of long-term commercial value that CSC can generate from its tenants and merchants through the operation of trade and logistics centers. Tencent operates leading social networking services, online portals and online game platforms in China. Integrated online trade services and Internet platforms will provide more value-added services to CSCs tenants and merchants, which we expect will further enhance the competitiveness of CSCs trade centers. This, in turn, should help secure new customers. However, we expect the benefits from Tencents investment will take time to play out. CSC continues to face execution risks arising from its fast expansion into new locations. In addition, CSC has a limited track record of operating trade centers outside of Shenzhen.
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NEWS & ANALYSIS

Franco Leung Assistant Vice President - Analyst +852.3758.1521 franco.leung@moodys.com
Greenland Hong Kongs Partnership with CR Land Is Credit Positive

Last Tuesday, Greenland Hong Kong Holdings Limited (Ba1 stable) announced that it will sell 50% of its equity interests in a plot of land in Shanghais Huangpu District to China Resources Land Limited (Baa1 stable). The two companies will form a partnership to jointly develop the land. The joint venture is credit positive for Greenland Hong Kong because it will alleviate pressure on its liquidity and leverage that resulted from the RMB5.95 billion land acquisition in December 2013. Proceeds from Greenlands 50% sale of the Shanghai land plot will equal about 18% of the companys total assets of about RMB17 billion and 165% of its cash balance as of the end of June 2013. Therefore, it will substantially reduce the companys land payments in the next three to six months. However, Greenland Hong Kong is unlikely to significantly reduce its leverage given its rapid expansion plans. Its leverage, measured by adjusted debt/capitalization, was at about 60% at 30 June 2013. We expect the companys leverage to rise substantially above 60% in the next 12 months. The plot has a planned gross floor area of around 245,550 square meters (sqm), which translates to an average land cost of around RMB24,230 per sqm. The land plot is zoned for residential and commercial use. We believe a substantial portion of the land will be developed into a shopping mall, utilizing China Resources strong execution capabilities in developing retail projects. China Resources, a leading property investment and development company, has a large investment property portfolio totaling a gross floor area of 2.2 million sqm, which includes high-end shopping malls, office buildings and hotels. We expect that the acquisition will help China Resources solidify its presence in Shanghai. However, the effect on China Resources credit quality is small given that the purchase amounts only to about 1.2% of its 30 June 2013 total assets. Greenland Hong Kong accelerated its land acquisitions in 2013, including a 50% stake in a Hangzhou project that it bought from its parent, Greenland Holding Group Company Limited (Baa3 stable) for a total consideration of about RMB895 million. Since Greenland Holding Group acquired Greenland Hong Kong in August 2013, Greenland Hong Kong has had an ambitious growth plan to raise its contracted sales target to RMB10 billion in 2014 from RMB3.5 billion in 2013 and RMB3 billion in 2012.
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NEWS & ANALYSIS

Saranga Ranasinghe Associate Analyst +61.2.9270.8155 saranga.ranasinghe@moodys.com Matthew Moore Vice President - Senior Analyst +61.2.9270.8108 matthew.moore@moodys.com
Indonesian Ban on Mineral Ore Exports Is Credit Positive for Alcoa of Australia
On 12 January, the Indonesian governments ban on the export of unprocessed or unrefined mineral ore took effect, which will limit the supply of copper, nickel, bauxite and gold ore, among other base metals and commodities. A curtailment in the global supply of bauxite, the key feedstock for the manufacture of alumina, is credit positive for Alcoa of Australia Limited (AoA, Baa2 stable) because it will benefit the price of alumina. The ban, the full details of which the government has not yet released, will also benefit other companies that have struggled with steadily declining prices for aluminium, alumina, nickel and other base metals since 2011. Among the beneficiaries are aluminium, bauxite, alumina and nickel producers such as BHP Billiton Limited (A1 stable), Rio Tinto plc (A3 stable) and Alcoa Inc. (Ba1 stable). According to the latest rules, Indonesia will allow base metals such as copper, manganese, lead and zinc to be exported until 2017. AoA, an alumina and aluminium producer, has substantial bauxite reserves and has three of the worlds largest alumina refineries with a combined capacity to produce about 9 million tonnes of alumina per year. The company has been facing margin and earnings pressure because of the challenges affecting the aluminium industry and alumina prices. EBIT margins decreased to 7.9% in the 12 months ended December 2012 from 21.5% a year earlier. Given the high fixed costs of its operations, increases in selling prices will positively affect underlying earnings. Indeed, a $1 increase in the alumina price will add about AUD8-AUD10 million of earnings. However, we do not expect a significant global recovery in aluminium and alumina prices in the next six to 12 months owing to current industry fundamentals. Indonesia accounts for about 11% of the worlds bauxite supply (Exhibit 1). The law aims to promote the development of processing capacity in Indonesia, and we expect the ban to lift the price of alumina, which will benefit alumina producers. Alumina prices averaged around $320/tonne in 2013, an improvement on 2012 levels, but down 12%-14% from 2011 levels. Demand for alumina has been strong owing to continuing growth in aluminium demand. Alumina prices have outperformed aluminium prices because of stronger supply/demand fundamentals (Exhibit 2). Aluminium prices have been affected by challenging global economic conditions, high inventory levels and producers reluctance to curtail high-cost aluminium smelting capacity.
EXHIBIT 1
Sources of World Bauxite Mine Production in 2012

Other 22% Australia 28%
Indonesia 11% Brazil 13% India 8% China 18%
Source: Source: US Geological Survey
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NEWS & ANALYSIS

EXHIBIT 2
Aluminium and Alumina Prices

Aluminium - left axis $2,700 $370 $2,400 $340 $2,100 $1,800 $1,500 $1,200 2011 2012 2013 $310 Alumina - right axis
$/tonne
$280
$250
Source: Australian Bureau of Resources and Energy Economics
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$/tonne
NEWS & ANALYSIS

Banks
Alain Laurin Associate Managing Director +33.1.5330.1059 alain.laurin@moodys.com
Basel Committee Eases Its Liquidity Guidance, a Credit Negative

On 12 January, the Basel Committee on Banking Supervision (BCBS) published several documents on the Basel III framework, which is still a work in progress. It published a consultative document on the net stable funding ratio (NSFR) together with three guidance documents on liquidity coverage ratio disclosure standards, guidance for supervisors on market-based indicators of liquidity and leverage ratio framework and disclosure requirements. Although the committees guidance and proposals indicate progress toward the full completion of the Basel III framework, they ease many proposals, which is credit negative for banks. The BCBS clearly expressed concerns about a trade-off between the goal of achieving financial stability and encouraging bank intermediation. The banking industry has repeatedly argued that imposing too stringent a regulatory framework would deprive ailing economies of much-needed lending, thereby delaying economic recovery. In recognition of this risk, the BCBS watered down earlier proposals to ease the constraints imposed on banks. As a reminder, in January 2013, the BCBS relaxed the liquidity coverage ratio (LCR) minimum requirement and its implementation schedule. The revised guidance confirms that the LCR will be phased in between 2015 and 2019, with a minimum threshold set at 60% (instead of 100% as per previous guidance) on January 2015, rising in equal 10-percentage-point steps per year to 100% in 2019. Under the new guidance on LCR disclosures, the BCBS has defined a template for public reporting that will ensure some consistency across banks and jurisdictions, a boon to bank credit analysis. However, the BCBS also indicated that the disclosure of liquidity positions under certain circumstances, such as a stressed environment, might be challenging. Consequently, banks will be required to merely publish the overall amount of high quality liquid assets (HQLA) they hold without disclosing the breakdown of those assets. The pool of HQLA comprises Level 1 assets (highest quality) and Level 2-A and Level 2-B assets, which are lower quality. Moreover, local supervisors have the flexibility to include assets not listed by the BCBS in Level 2-B category, with a cap set at a 15% maximum of total HQLA. The aim of transparency, comparability and consistency would be compromised if limited information is published on the composition of HQLA. The BCBS stipulates, however, that banks could provide more granular information where relevant, including on the composition of HQLA. The BCBS also indicates that countries that receive financial support may choose a different implementation schedule, less immediate than the 2015-19 schedule, and choose less comprehensive disclosure requirements for their banking systems. The BCBS also defines the available amount of stable resources numerator of the net stable funding ratio, which is to be implemented in 2018, less stringently. In the original 2010 proposal, a 10% haircut was applied to stable deposits, versus 5% in the revised proposal. Items of required stable funding in the denominator of the ratio have also been relaxed. For example, some retail loans that required 85% stable funding under the 2010s proposal will now require 50%.
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Svetlana Pavlova Assistant Vice President - Analyst +7.495.228.6052 svetlana.pavlova@moodys.com
Russian Central Banks Liquidity Methodology Is Credit Positive for Banks

Last Monday, the Central Bank of Russia published the methodology that Russian banks must use to calculate their liquidity coverage ratios (LCRs) as they prepare to implement Basel III liquidity requirements. By specifying the calculation methodology, the regulator is demonstrating its commitment to Basel III implementation, which is credit positive for Russian banks. Based on earlier disclosures and announcements by the central bank, we expect most Russian banks to meet the initial and the gradually increasing LCR requirements. The central banks enforcement of the liquidity requirement is credit positive for those banks that will have to improve their liquidity to meet the requirements. The Central Bank of Russias implementation of the Basel requirements for capital adequacy has been somewhat selective: as part of Basel II, the central bank introduced market risk and operational risk into risk-weighted asset (RWA) calculation, but has not yet provided the banks with an opportunity to apply internal risk-based approaches to calculate RWA. As for Basel III, the central bank has introduced new regulatory capital minimums, but has not yet given banks a timeline for the introduction of capital buffers. When it comes to liquidity requirements, the central bank so far has demonstrated its commitment to implement them in full, and the publication of the LCR methodology is an important step in that direction. Basel guidelines define LCR as the ratio of so-called high-quality liquid assets (HQLA) to net cash outflow over a 30-day period in a stress scenario.2 The central bank disclosed in December that Russias average bank LCR was 47.8% at June 2013. The LCR would be 84% if the HQLA calculation included potential refinancing with the central bank. There were $170 billion of securities and other assets on bank balance sheets eligible as collateral for repo at 1 September 2013, as shown in Exhibit 1.
EXHIBIT 1
Russian Banks High-Quality Liquid Assets at June 2013

Assets Available for Central Bank Refinancing 34% Cash 21%
Accounts with the Central Bank 19% Level 2 Securities 5% Level 1 Securities 21%
Source: Central Bank of Russia - Financial Stability Report, December 2013
The CBR stated in the latest financial stability report that it is considering including refinancing facilities into HQLA calculation. The central bank could justify such an approach with the rationale that the supply
According to the Basel guidelines, the minimum LCR requirement should be initially set at 60% on 1 January 2015 and increased by 10 percentage points per annum to reach 100% by 1 January 2019.
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Credit implications of current events of Level 1 and Level 2 HQLA, as defined by the Basel committee, is inadequate for Russian banks in meeting the systems liquidity requirements without central-bank refinancing. The Basel III regulation will provide an incentive for banks to at least maintain, if not improve, their liquidity. The Basel III liquidity requirements are stricter than the existing regulation in Russia. The ratio currently in use by the central bank most similar to the LCR is the N3, the ratio of liquid assets to the expected cash outflow over a 30-day period. The minimum requirement for N3 is 50%, and the average ratio was 87.2% as of 30 June 2013. As Exhibit 2 shows, Russian banks liquidity as measured by N3 is, on average, well in excess of the minimum requirement. If Basel III rules are introduced without including central bank refinancing into HQLA, the banking sector will immediately face a shortfall of liquid assets and have to accumulate additional liquidity to meet the minimum LCR requirement. If HQLA includes central bank refinancing, which we think is more likely, banks will initially have liquidity in excess of the minimum requirement, but they will need to gradually strengthen their liquidity buffers as the minimum LCR requirement increases.
EXHIBIT 2
Scenarios for Russian Banks Transition from Existing Liquidity Requirements to Basel III
Minimum Requirement Existing Regulation Sector Average First-Half 2013 Excess/Shortfall versus Minimum Requirement
N3 LCR 2015 2016 2017 2018 2019 LCR 2015 2016 2017 2018 2019
Source: Central Bank of Russia and Moodys Investors Service
50%
87.2%
37.2%
Basel III Implementation (Central Bank Refinancing Excluded from High-Quality Liquid Assets)
60% 70% 80% 90% 100%
47.8% 47.8% 47.8% 47.8% 47.8%
-12.2% -22.2% -32.2% -42.2% -52.2%
Basel III Implementation (Central Bank Refinancing Included in High-Quality Liquid Assets)
60% 70% 80% 90% 100%
84.0% 84.0% 84.0% 84.0% 84.0%
24.0% 14.0% 4.0% -6.0% -16.0%
Using the regulatory N3 ratio as a proxy for the largest banks relative liquidity ahead of Basel III implementation (see Exhibit 3), Bank VTB JSC (Baa2 stable, D-/ba3 stable3) and its subsidiaries VTB24 (Baa2 stable, D-/ba3 stable) and Bank of Moscow (Ba1 stable, E+/b2 stable) have the most room to improve their liquidity positions. On the other hand, Home Credit and Finance Bank (Ba3 negative, D3
The bank ratings shown in this report are the banks deposit ratings, their standalone bank financial strength ratings/baseline credit assessments and the corresponding rating outlooks.
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Credit implications of current events /ba3 negative) and Credit Bank of Moscow (B1 stable, E+/b1 stable) have the strongest liquidity profiles and are least likely to need additional liquidity to meet the new Basel III requirements.
EXHIBIT 3
160% 140% 120% 100% 80% 60% 40% 20% 0% min: 50%
Top 20 Russian Banks N3 Ratio at 1 December 2013
Source: Central Bank of Russia
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Guillaume Lucien-Baugas Assistant Vice President - Analyst +33.1.5330.3350 guillaume.lucien-baugas@moodys.com Christophe Larpin Vice President - Senior Analyst +44.20.7772.8760 christophe.larpin@moodys.com Ariel Weil Vice President - Senior Analyst +33.1.5330.1048 ariel.weil@moodys.com
RCI Banque Accelerates Its Deposit Funding Plans, a Credit Positive

Last Wednesday, RCI Banque (Baa3 stable, D+/baa3 stable4), the captive bank of automaker Renault S.A. (Ba1 stable), announced that it had revised upwards its deposit collection objectives and now targets having online saving accounts constitute 20%-25% of funding in 2015, a year earlier than it originally forecast. This development is credit positive because it reduces RCIs reliance on market funding. Wednesdays announcement marks the second time that RCI has revised its target since it began taking deposits in the retail market in February 2012. At the end of June 2013, deposits totaled 2.6 billion, or 10% of outstanding loans, with 1.2 billion coming from France since February 2012 and 1.4 billion from Germany since February 2013. In June, the bank said it aimed for deposits to constitute 20%-25% of its funding by 2016. Six months later, deposits totaled 4.3 billion (1.3 billion in France and 3 billion in Germany), or 17% of outstanding loans. The funds collected in 2013 (3.4 billion) were a significant 52% of RCIs funding plan for the year. In light of that progress, RCI moved up by one year its timetable for reaching its target. Although the retail savings activity in Germany has exceeded RCIs expectations, with 3 billion raised in its first year of business, results in France have been more modest, growing 8% in the second half of 2013, compared with 119% in Germany. Two factors behind the smaller increase in France are competition from French tax-free savings products and withdrawals because of income tax payments in September. Nonetheless, we expect RCI to reach its goal of funding through retail deposits because Germany continues to exceed RCIs expectations. The launch of a new savings business in Austria this year should also help. RCIs decision to begin collecting deposits is part of its effort to reduce its dependence on market funding following the European sovereign debt crisis, and follows a path taken by other captive banks facing funding difficulty amid depressed European car sales. Banque PSA Finance (Ba1 negative, D/ba2 negative) launched a deposit-gathering plan in 2013 and Volkswagen Bank GmbH (A3 positive, C-/baa2 stable), which has long had direct banking operations, reported customer deposits of 24.3 billion, or 72% of outstanding loans, at the end of June 2013. Although online retail deposits are a relatively expensive funding source, they are less confidence-sensitive than market funding. RCIs strong deposit growth is also largely credit positive for its auto securitization business because of the multiple roles that the captive bank plays in these transactions. RCIs auto securitizations are organically linked to RCIs financial health insofar as the captive bank acts as originator, servicer, vehicle realization agent or maintenance provider in the securitization transactions. The performance of all RCI securitizations hinges on RCIs ability to adequately perform these key roles, and will thus benefit from the improved funding diversification. Although deposit growth gives rise to set-off risk for securitizations, that risk is limited. Set-off risk arises to the extent that borrowers may net their deposits against their outstanding loans, should the bank become insolvent. This risk is limited by the low number of customers who are concurrently borrowers and depositors, eligibility criteria ensuring loans granted to depositors are not securitized and legal language in deposit accounts forbidding this compensation. Set-off risk is further mitigated in France because auto loans are provided by Diac (Baa3 stable) and deposits are taken by RCI Banque, two different legal entities.
The ratings shown in this article are the banks foreign deposit rating, its standalone bank financial strength rating/baseline credit assessment and the corresponding rating outlooks.
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Semyon Isakov Assistant Vice President - Analyst +7.495.228.6061 semyon.isakov@moodys.com
Belarus Sharply Limits Banks Foreign-Currency Lending, a Credit Positive

Last Wednesday, the National Bank of Belarus published a resolution prohibiting banks from issuing foreign-currency loans except for the purpose of settling transactions with non-residents. The prohibition, which took effect immediately, is credit positive for Belarus banks because it limits systemic risks posed by foreign-currency loans, which accounted for 50% of Belarus banks gross loans as of the end of November 2013. Since the Belarus ruble devaluation in 2011, the National Bank of Belarus has repeatedly stated its determination to limit the amount of foreign-currency loans. Nevertheless, the share of foreign-currency loans has increased 10 percentage points since January 2012. Foreign-currency loans remain popular because their interest rates are lower than loans denominated in rubles, averaging around 9% as of November 2013, compared with 40% for local currency loans. Because the interest rate differential has been larger than the recent pace of currency depreciation since the 2011devaluation, foreign-currency loans are effectively cheaper for borrowers. To protect individual borrowers against the risk of faster-than-expected currency depreciation, the central bank in 2009 banned retail loans denominated in foreign currencies. However, corporate borrowers have continued to borrow mostly in foreign currency, even to finance business inside the country. The new rules now allow foreigncurrency loans only for the purpose of settling transactions with non-residents. As the Belarusian ruble depreciates (see exhibit), borrowers without export revenues find it more difficult to service foreign-currency loans. For banks, this implies a deterioration in asset quality. Banks capital adequacy ratios are pressured as the value of their foreign-currency assets increase relative to their rubledenominated capital. Belarusian Ruble-US Dollar Official Exchange Rate in 2010-14
12,000 10,000 8,000 6,000 4,000 2,000 0
Source: The National Bank of Belarus
In 2011, when the Belarusian ruble suffered a 65% onetime devaluation against the US dollar, the government injected BYR14.5 trillion into the two largest banks, Belarusbank (Caa1 negative, E+/b3 negative5) and Belagroprombank JSC (Caa1 negative, E/caa1 stable), to prevent their capital ratios from falling below the regulatory minimum. At the end of September 2013, BPS-Sberbank (Caa1 negative,
5
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Credit implications of current events E+/b3 negative) had 69% of loans denominated in foreign currencies and will be the biggest beneficiary of the new rule among the largest banks.
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Sherry Zhang Associate Analyst +852.3758.1392 sherry.zhang@moodys.com
Hong Kongs Rules on Personal Lending Are Credit Positive for Banks
Last Tuesday, the Hong Kong Monetary Authority (HKMA) published a circular detailing new supervisory requirements on personal loans that aims to reduce the credit risks associated with rising personal loan balances and household leverage ahead of an increase in interest rates from their currently low levels. The regulators move to temper growth in personal loans (excluding auto-finance loans and mortgage loans) is credit positive for banks because they are likely to exercise more prudence in loan underwriting, which should translate into better asset quality. The credit benefits will accrue particularly to those banks with comparatively high shares of other loans to individuals, which we classify as being in excess of 10% of their total local loan book. Such banks include Public Bank (Hong Kong) Limited (A3 stable, C-/baa2 stable6) at 16%, Dah Sing Bank, Limited (A3 negative, C/a3 negative) at 16% and Standard Chartered Bank (Hong Kong) Ltd. (Aa3 stable, B-/a1 negative) at 14%. The exhibit below details Hong Kongs new underwriting requirements.
EXHIBIT 1
Hong Kongs New Requirements on Underwriting Personal Loans

Debt Servicing Ratio (DSR)
DSR limits should be binding for personal loans DSR limits should be granular (longer tenor loans are subject to lower corresponding DSR limits) The calculation of DSR should include repayment of all kinds of loans, including both secured and unsecured
Loan Tenor
Tenors should reflect the purpose of the respective loans Personal loans with long tenors are subject to approvals
Portfolio-Based Limit Structure
Banks should establish an overall internal portfolio limit Banks should establish sub-limits for higher risk exposures
Internal Stress Testing
Banks should conduct stress tests on personal loan portfolios, assuming a 300-basis-point increase in interest rates
Source: Hong Kong Monetary Authority
These requirements should help Hong Kong banks prepare for an eventual rise in US and Hong Kong dollar interest rates. Hong Kong banks margins have been depressed by low prevailing interest rates in recent years. To improve profitability, banks have competed aggressively in lending to consumers and small and midsize enterprises, which has weighed on the margins of these traditionally higher-yielding businesses. The requirements will force banks to apply more prudent underwriting standards despite competitive pressure. The new regulation also aims to resolve shortcomings in previous countercyclical measures on residential and commercial mortgages7 by addressing increased credit risks from non-mortgage personal lending. Other
6 7
The bank ratings in this report are the banks deposits ratings, their standalone bank financial strength/baseline credit assessment and the corresponding rating outlooks. See Hong Kong Banks Will Benefit from New Measures to Curb Speculative Real Estate Demand, Credit Outlook, 28 February 2013, and New Prudential Measures in Hong Kong Are Credit Positive for Banks, Credit Outlook, 20 September 2012.
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Credit implications of current events loans to individuals, which accounted for about 9% of the systems local loans, are particularly vulnerable to economic cycles. Although mortgage loan growth has moderated after six rounds of macro-prudential measures, other loans to individuals continue to grow strongly and increased by more than 60% between the end of 2009 and September 2013. By comparison, residential mortgage loan growth was 36% in the same period (Exhibit 2). A slowdown in personal loan growth with stricter credit underwriting should benefit banks asset quality.
EXHIBIT 2
Hong Kong Household Debt Levels Since the End of 2009

Mortgages 1,000 900 800 700 Other Loans to Individuals
HKD Billions
600 500 400 300 200 100 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13
Source: Hong Kong Monetary Authority
As noted in the HKMAs circular, household debts reached a record high of 61.2% of GDP in September 2013, surpassing the level at the onset of the 1997 Asia financial crisis. The current annualized credit card receivables charge-off ratio was a low 2.09% in third-quarter 2013, versus a peak of 14.55% in secondquarter 2002, when Hong Kongs unemployment rate was 7.5%. However, these latest data must be seen in the context of current extremely low interest rates, which will eventually rise and subject borrowers to higher payments. The new regulations should help temper the rise in household leverage and strengthen household finance against adverse shocks.
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Simon Chen, CFA Assistant Vice President - Analyst +65.6398.8305 simon.chen@moodys.com
CIMB Groups Capital Raise Is Credit Positive for Its Malaysian Bank Subsidiaries
Last Monday, CIMB Group Holdings Berhad (CIMBGH, unrated), the holding company of CIMB Group (unrated), announced that it would raise MYR3.55 billion ($1.09 billion) of new equity through a private placement to support future growth. CIMB Group expects to issue the new shares by the end of this month. The additional capital is credit positive for the holding company because it will reduce leverage. It is also credit positive for CIMB Groups Malaysian subsidiaries, CIMB Bank Berhad (A3 stable, C-/baa1 stable8) and CIMB Islamic Bank Berhad (A3 stable, D+/ba1 stable), which need capital to support growth. On a consolidated basis, the new shares will raise CIMB Groups common equity Tier 1 (CET1) ratio to 9.7% from 8.2% in September 2013. We expect the company to invest a substantial portion of the new capital in CIMB Bank and CIMB Islamic to align their capital levels with industry peers and increase their loss-absorption capacity. As the exhibit below shows, CIMB Bank and CIMB Islamic in September 2013 had the lowest capital levels among CIMB Groups banking subsidiaries, and were below the Malaysian banking average of 12.2% for the period. To bring the ratios of both banks to a level closer to the industry average, perhaps to 10%, we estimate that the group would need to dedicate more than 85% (approximately MYR3.1 billion) of the equity placement proceeds to the two banks. CIMB Groups Banking Subsidiaries
Total Assets MYR Billions Percentage of CIMB Group Assets CET1 Ratio
CIMB Bank Berhad (consolidated) PT Bank CIMB Niaga Tbk CIMB Islamic Bank Berhad CIMB Thai Bank Public Company Limited CIMB Investment Bank
Note: All figures are as of September 2013 Source: Company data and Moodys Investors Service
299.3 61.1 52.8 25.0 3.4
80.8% 16.5% 14.3% 6.8% 0.9%
8.2% 13.3% 9.0% 10.4% 21.4%
The higher capital levels would increase the banks capital buffer, a credit positive considering the increasing asset-quality challenges that commercial banks in Malaysia face as a result of high household debt levels and a likely increase in interest rates over the next 12-18 months. Like its closest peers in Malaysia, Malayan Banking Berhad (A3 stable, C/a3 stable) and Public Bank Berhad (A3 stable, C/a3 stable), CIMB Bank has significant exposure to the household sector, which constituted over half of the banks total loans at the end of September 2013. In Malaysia, household debt as a percentage of GDP rose to a high of 85.3% at the end of September 2013 from 80.5% at the end of 2012. The groups Indonesian subsidiary, PT Bank CIMB Niaga Tbk (Baa3 stable, D/ba2 stable), is not likely to receive capital from this issuance because its present capital levels are sufficient to support business growth over the next 12-18 months, particularly given its plan to maintain slower loan growth than the industry.
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Credit implications of current events Slower loan growth and strong profitability helped CIMB Niagas Tier 1 capital ratio improve to 13.2% at the end of September 2013 from 12.3% at the end of 2012 and 10.2% at the end of 2011. CIMBGHs gearing ratio measured by total debt as a percentage of equity will fall to 35% from 45% in September 2013 as a result of the new capital. The holding company can use some of the proceeds to repay some of the holding company debt liabilities, which will improve its liquidity profile. A healthy liquidity profile will support the holding companys ability to pay dividends, which we view as critical to its continued ability to tap the capital markets for future capital to support the groups subsidiaries.
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Insurers
Enrico Leo Vice President - Senior Analyst +1.212.553.7433 enrico.leo@moodys.com Fadi Massih Associate Analyst +1.416.214.3834 fadi.massih@moodys.com
Desjardins Insurance Makes a Credit-Negative Push into Ontarios Competitive Auto Market
Last Wednesday, Desjardins Group (unrated) announced that it had agreed to acquire State Farm Canadas (unrated) businesses, including its property and casualty and life insurance operations. The transaction is credit negative for Desjardins General Insurance (unrated) because it will expand its property and casualty insurance business in the competitive Ontario personal auto market, where profitability has been volatile. Desjardins Group, a Qubec, Canada-based cooperative with 5.6 million members and which is integral to Caisse central Desjardins (Aa2 stable, C/a3 stable9), offers a number of products, including deposits, residential mortgages, consumer loans and commercial loans. Although the State Farm Canada acquisition will effectively double the size of Desjardins General Insurance, it is not material in the context of the whole group. Desjardins Tier 1 capital ratio will remain above its stated target of 15% after the deal closes, which the company expects in January 2015, subject to regulatory approvals and compliance with customary closing conditions. Such a Tier 1 ratio is strong relative to peers. One challenge that Desjardins General Insurance will face post acquisition is restoring State Farm Canadas property and casualty insurance profitability, which has struggled in recent years with underwriting combined ratios10 exceeding 100% and running higher than the overall industry (see Exhibit 1). Conversely, underwriting combined ratios for Desjardins General Insurance have been profitable over this period, with combined ratios running below 100% and better than the industry. Further, a majority of State Farm Canadas business is concentrated in Ontario personal automobile insurance (65% of direct written premium), a competitive and higher-risk market. Post acquisition, Ontario personal auto will increase to 48% of Desjardins General Insurance direct written premium from 32%, reducing the diversification of the entire group.
9 10
The ratings shown are Caisse central Desjardins deposit rating, its standalone bank financial strength rating/baseline credit assessment and the corresponding rating outlooks. The sum of claim losses incurred and expenses, expressed as a percentage of premiums. A low ratio indicates higher profitability.
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EXHIBIT 1
Underwriting Combined Ratios for Desjardins, State Farm Canada and Canadian Property and Casualty Insurers
Canadian Property and Casualty Insurers 200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% 2008 2009 2010 2011 2012 State Farm Canada Desjardins
Note: Underwriting combined ratio is the sum of claim losses incurred and expenses, expressed as a percentage of premiums. A low ratio indicates higher profitability. Sources: KPMG analysis of regulatory filings for the Insurance Bureau of Canada (Ontario Automobile), MSA Research Inc. analysis of State Farm Mutual Automobile Insurance Company and Desjardins Annual Reports
Personal auto insurance in Ontario is higher risk because of litigation trends and regulatory intervention in setting rates that make achieving profitability challenging. Although the profitability of Ontario auto business improved following the implementation of claim benefit cuts in 2010, it remains hindered by above-average levels of fraud and the Ontario Ministry of Finances targeted 15% auto insurance premium reduction. We expect the effect of the rate cuts, which are being phased in through August 2015, to be offset in part by budgeted anti-fraud and other claim cost-saving initiatives. Somewhat mitigating these challenges are the deals structural features that provide Desjardins with meaningful downside protection as it re-underwrites the acquired portfolio. The continued use of the State Farm brand in Canada for an agreed licensing period, as well as State Farms CAD450 million investment in non-voting preferred shares into Desjardins General Insurance, align the interests of both parties and allow for a smooth transition. The acquisition of State Farm Canada will boost Desjardins General Insurance Groups presence in a consolidating Canadian market where size and scale are increasingly important. As seen in Exhibit 2, Desjardins General Insurance will become the second-largest private property and casualty insurer (excluding government insurer Insurance Corporation of British Columbia), with approximately CAD3.8 billion in pro forma direct written premiums.
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Canadian Property and Casualty Market Share

Rank Company Insurance Financial Strength Rating* 2012 Direct Premiums Written CAD Millions 2012 Market Share
EXHIBIT 2
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 29
Intact Insurance Corporation of British Columbia Desjardins + State Farm (pro-forma) Aviva RSA TD Assurance Co-operators General Insurance Wawanesa Mutual Desjardins General Insurance State Farm Economical Insurance Lloyd's Underwriters Travelers + Dominion of Canada (pro-forma) Dominion of Canada Northbridge Allstate Chartis Travelers
A1 stable unrated A1 stable A2 review for downgrade unrated unrated unrated unrated unrated unrated unrated unrated A3 stable Aa3 stable A1 stable Aa2 stable
7,138 3,919 3,828 3,551 2,944 2,707 2,184 2,161 1,980 1,848 1,810 1,704 1,581 1,270 1,162 1,055 954 311
14.4% 7.9% 7.7% 7.2% 6.0% 5.5% 4.4% 4.4% 4.0% 3.7% 3.7% 3.4% 3.2% 2.6% 2.4% 2.1% 1.9% 0.6%
Note: * Insurance financial strength rating for lead insurance company. Source: MSA Research Inc. and Moodys Investors Service
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Sovereigns
Mathias Angonin Associate Analyst +971.4.237.9548 mathias.angonin@moodys.com Steffen Dyck Assistant Vice President - Analyst +65.6398.8324 steffen.dyck@moodys.com Tom Byrne Senior Vice President +65.6398.8310 thomas.byrne@moodys.com
Egypts Constitutional Referendum Is a Credit-Positive Step Toward Political Stabilization

Last Tuesday and Wednesday, Egypt (Caa1 negative) held a referendum on the countrys second postrevolution constitution that, according to the High Election Commission, received support from more than 98% of voters despite a low turnout of about 39%. That is only slightly higher than the 33% turnout for the first post-revolution constitutional referendum in December 2012, during the Mohamed Morsi presidency. Nonetheless, the referendums result is credit positive because it restarts a democratic political process. It was the dearth of political voice and government accountability that motivated Egypts January 2011 revolution, which overthrew nearly three decades of one-man rule. The adoption of Egypts second post-revolution constitution will likely define a more durable institutional order after three years of political disorder, although Egyptian politics remains fraught with uncertainty. Six polls have been held since the revolution, including two constitutional referendums, one presidential election, one election to the House of Representatives (the lower house of parliament) and one to the Shura Council (the upper house of parliament). The next steps in the unfolding political process will determine whether political conditions stabilize further, and whether the emerging political order can contain the violence unleashed by the clash between secular and Islamist forces in the Egyptian polity. The next steps are that presidential and legislative elections will be held within six months of the constitution coming into force, with presidential elections likely held before legislative elections. The constitution secures the militarys oversight of some executive decisions, with the military designating the defence minister, for instance, and the Supreme Judicial Council selecting the prosecutor general. The new constitution keeps Islamic shariah as the foundation of law, but in a more inclusive and secular form. For example, the new constitution underscores the states commitment to achieving equality between women and men and forbids the formation of parties based on religion, race, gender or geography. Despite the unsettled political conditions, financial and economic conditions have stabilised since the 3 July military intervention last year. Data from the Egyptian Ministry of Finance show that government borrowing costs have receded, with auction result yields on one-year Egyptian-pound Treasury bills easing to 10.8% on 16 January from 15.4% on 2 July, as shown in the exhibit below. Also, the yields on the dollar-denominated government bond due in 2020 were 6% on 17 January, sharply lower than the 10.4% on 3 July. Part of the stabilization in borrowing costs is due to the $12 billion support package set up by the governments of Kuwait (Aa2 stable), Saudi Arabia (Aa3 stable) and the United Arab Emirates (Aa2 stable) shortly after the 3 July ouster of the Morsi government, whose party is now illegal. The support package also bolstered the Central Bank of Egypts holding of official international reserves, as shown in the exhibit.
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Credit implications of current events Egypts Foreign Exchange Reserves and One-Year Treasury Bill Yields Have Fallen Since Mid-2013
Foreign Exchange Reserves - left axis 40 35 30 One-Year T-bill Yield - right axis 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
$ Billions
25 20 15 10 5 0
Sources: Egyptian Ministry of Finance and the Central Bank of Egypt
Although external support from governments in the Cooperation Council for the Arab States of the Gulf is helpful, it cannot solve Egypts domestic political problems. The constitutional referendum marks an important step towards political stabilization, which, in turn, may suggest an improved outlook for Egypts economic prospects.
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US Public Finance
Valentina Gomez Analyst +1.212.553.4861 valentina.gomez@moodys.com
New York State Sales Tax Collections Indicate Slowing Economic Growth Outside New York City Area
On Tuesday, New York State (Aa2 positive) released county sales tax results for the fourth quarter, which indicated slowing retail activity outside the New York City metro area. The weak sales tax receipts are credit negative for these upstate New York counties because most depend on sales tax revenue for a large portion of operating revenue. Total fourth-quarter county sales tax growth, excluding New York City, was just 1.4% from a year earlier. Of New Yorks 57 counties, 36 had less than 1% growth. Nearly half saw falling fourth-quarter 2013 sales tax revenues (see Exhibit 1). Broome Countys (A2 negative) collections fell by the largest margin, 8.7%. However, key bright spots include Washington (Aa3), Essex (Aa3) and Hamilton (unrated) counties. Outside of the New York City metro area counties,11 sales tax growth declined 0.31%.
EXHIBIT 1
Most New York Counties See Little Growth or Declines in Sales Tax Revenues in Fourth-Quarter 2013 Compared to Prior Year
Growth of 2% or More 32% Negative Growth 47%
Postive Growth Less than 2% 21%
Source: New York State Department of Taxation and Finance
As Exhibit 2 shows, of the 14 counties with full-year declines, 10 counties saw greater declines in the fourth quarter, indicating ongoing and increasing weakness in sales tax revenues. Sales tax is a major source of New York counties revenue, generally accounting for 25% or more of the general fund budget. Without sales tax growth, local governments will be increasingly stressed to meet increasing obligations, such as growing pension and health care costs. In addition, property taxes, which account for the other primary source of revenues, are subject to a property tax cap.
11
New York City metro area counties include New York Citys five counties (New York, Kings, Queens, Bronx and Richmond), Westchester, Nassau, Suffolk and Rockland.
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20 JANUARY 2014
NEWS & ANALYSIS

EXHIBIT 2
New York Counties Experiencing Declines in Full-Year 2013 Sales Tax Receipts and the Change in Fourth-Quarter 2013 Receipts
For 10 counties, fourth-quarter declines were greater than full-year declines
9% 8% Broome Schenectady Clinton Wyoming Oswego Sullivan Orleans Chautauqua Schuyler 0% 1% 2% 3% 4% Jefferson Bad but getting better: 4th quarter decline less than full year decline Schoharie* 5% Decline in Full Year 2013 Steuben Bad and getting worse: 4th quarter decline greater than full year decline Chemung
Decline in 4th Quarter 2013
7% 6% 5% 4% 3% 2% 1% 0%
Tioga
* Schoharie had a fourth-quarter increase of 0.8%. Source: New York State Department of Taxation and Finance
New York City and metro area counties recorded a 5.4% increase in fourth-quarter sales tax collections, but the growth was not distributed evenly. For example, Nassau County (A2 stable) had virtually no change from fourth-quarter 2012, although full-year growth was 6.8%. Superstorm Sandy rebuilding efforts, which tapered off at the end of 2013, helped boost the full-year growth. Westchester, Suffolk and Rockland counties each recorded growth of more than 5%, with Westchester experiencing the largest proportional increase of 6.2%. Receipts in New York City itself grew a similar 6.1%. Exhibit 3 compares the fourthquarter and full-year growth in 2013 of the New York City metro area counties with counties in the rest of the state.
EXHIBIT 3
Sales Tax Receipts in the New York City Metro Area and the Rest of New York State
Fourth-Quarter 2013 Full-Year 2013
NYC Metro Counties All Other Counties
5.4% -0.3%
6.8% 1.6%
Note: NYC Metro Counties includes New York City, Nassau, Rockland, Suffolk and Westchester counties. Source: New York State Department of Taxation and Finance
The results indicate a stalling economic recovery in upstate New York, where full-year 2013 sales tax revenues rose 1.64%, down from full-year growth of 3.46% in 2012. Fourteen counties reported negative annual growth in 2013, compared with just four in 2012. The magnitude of the declines was also larger: in 2013, four counties Schoharie (unrated), Broome, Tioga (A1) and Chemung (A1) fell more than 4%, nearly double the largest decline of 2012. In 2012, Chemung County slowed by 1.84%.
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20 JANUARY 2014
NEWS & ANALYSIS

Nick Samuels Vice President - Senior Credit Officer +1.212.553.7121 nicholas.samuels@moodys.com
Federal Budget Removes Threat of a DC Government Shutdown in Fiscal 2015, a Credit Positive
On Thursday, the US Congress passed legislation permitting the District of Columbia (DC, Aa2 stable) to implement a budget and spend local tax revenues in the next fiscal year, even with another federal government shutdown. The measure is credit positive for DC, which tapped $149 million of reserve funds to finance operations for 16 days in October 2013 because Congress had not enacted a federal budget. Before DC can spend local tax revenues, Congress must approve its budget because it has oversight of the DC government and the DC budget is usually included in the federal spending bill. DC sent an approved spending plan to Congress and to President Barack Obama in July 2013, but with no federal budget in place by 1 October 2013, the start of the federal fiscal year, which DC follows, DC was prohibited from implementing the $6.8 billion fiscal 2014 general fund budget that reflects most of its spending for police, fire, schools and other governmental functions. Although DC continued to collect local property, sales and income taxes, it was legally restricted from spending that revenue, except to pay debt service. DC does not need appropriations to pay debt service on any of its outstanding debt except for $219 million of outstanding certificates of participation (COPs). A prolonged federal budget impasse could have affected DCs ability to pay a 1 January 2014 debt service payment on time. Starting 1 October, most of the federal government shut down. However, instead of closing its government, DC decided to use standing authority to access its contingency reserve fund to keep all operations running rather than determining that some functions, such as public safety, were essential and required employees to work without pay and reimburse them later. During the 16-day federal shutdown, DC used $149 million of that $224 million reserve fund (its other cash reserve funds totaled $555 million). Since the shutdown ended, DC has fully replenished the contingency reserve fund. The 2014 Consolidated Appropriations Act passed last Thursday means that DC will not face similar circumstances for the fiscal year that starts 1 October 2014, even if Congress is late again passing a federal spending bill. The measure allows DC to spend local funds based on the budget the mayor and council will approve this spring, eliminating the policy scramble DC had to deal with last October, and ensures timely COP debt service payment.
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20 JANUARY 2014
NEWS & ANALYSIS

Securitization
Peter Simon Associate Analyst +1.212.553.1354 peter.simon@moodys.com Wesley Flamer-Binion Analyst +1.212.553.7896 wesley.flamer-binion@moodys.com
J.C. Penney Store Closings Are Credit Negative for Six CMBS Transactions
Last Wednesday, J.C. Penney Company, Inc. (JCP, Caa1 negative) announced plans to close 33 underperforming stores. The store closings are credit negative for six commercial mortgage-backed securities (CMBS) deals that we rate and are collateralized in part by retail malls whose anchor tenants include a JCP store that will close (see Exhibit 1). JCPs store closings are credit negative for the affected CMBS deals because the loss of an anchor tenant is a warning sign that a mall has low sales productivity and is at risk for future loan default.
EXHIBIT 1
J.C. Penney Store Closings in Moodys-Rated CMBS Transactions

Mall Location CMBS Deal Loan Balance $ Millions Percent of Deal
Military Circle Mall The Centre at Salisbury Laurel Mall Wausau Mall Bristol Mall Natchez Mall
Norfolk, VA Salisbury, MD Hazleton, PA Wausau, WI Bristol, VA Natchez, MS
GMACC 2004-C2 JPMCC 2006-LDP7 BSCMS 2007-PW15 WFRBS 2011-C4 BACM 2006-5 CGCMT 2006-C4
$52.8 $115.0 $36.8 $18.8 $17.3 $7.9
11.58% 3.67% 1.74% 1.31% 0.92% 0.48%
Source: Moodys Investors Service, Trepp LLC and J.C. Penney Company Inc.
Mall anchors are important drivers of shopper traffic, and malls with a shuttered JCP store face reduced foot traffic until a replacement anchor is in place. If remaining tenants avail themselves of co-tenancy clauses, which can allow for reduced or free rent, or even early lease terminations without penalty as a direct result of an anchor tenants departure, it will compound the affect of JCPs exit. We have addressed the risk factors facing retail malls in two recent publications.12 Defaulted mall loans have among the highest loss severities in CMBS, with an average loss of approximately 90% through the first three quarters of 2013 (see Exhibit 2).
12
See Troubled Mall Loans Weigh on US Conduit and Fusion Transaction Credit Quality, 17 December 2013, and US CMBS: Growing Gap Between Strong and Weak Malls, 7 June 2012.
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20 JANUARY 2014
NEWS & ANALYSIS

EXHIBIT 2
Weighted Average Loss Severities by CMBS Property Type

2012 100% 90% 80% 70% 60% 50% 40% 30% Retail: Malls Retail: Non-Malls Hotel Industrial Multifamily Office First Nine Months of 2013
Source: Moodys Investors Service and Trepp, LLC
JCP is an anchor in more than 400 mall loans that are collateral in more than 200 CMBS transactions. JCP in its announcement left open the possibility of future store closings, saying that the company will continue to reevaluate its stores financial performance and will adjust its national footprint accordingly. Other anchor tenants are closing stores as well. Earlier in January, Macys, Inc. (Baa3 positive) announced five store closings and Sears Holdings Corp. (Caa1 stable) announced it will continue to reduce unprofitable stores as leases expire and in some cases accelerate closings when circumstances dictate.
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20 JANUARY 2014
RATING CHANGES
Significant rating actions taken the week ending 17 January 2014
Corporates
Beam Inc.
3 Jun 13
Review Uncertain
13 Jan 14
Senior Unsecured Rating Short-Term Issuer Rating Outlook
Baa2 P-2 Positive
Baa2 P-2 Review Uncertain
The rating action follows the announcement that Suntory Holdings Limited will acquire Beam for $16 billion. The review will focus on how Beam's bonds are structured after the acquisition and whether financial information will be made available to monitor Beam's creditworthiness. It will also focus on the speed at which Beam will deleverage, potential synergies, integration risks and the capital structure after the acquisition. Charter Communications Inc.
28 Feb 13
Review for Downgrade

14 Jan 14
Corporate Family Rating Outlook
Ba3 Stable
Ba3 Review for Downgrade
The review for downgrade follows Charters offer to merge with Time Warner Cable. We believe the combined entity could increase Charters debt level without a commensurate increase in cash flow. The review will monitor developments regarding the deal, including a potentially new capital mix. Fortescue Metals Group Ltd
13 Nov 13
Upgrade
15 Jan 14
Corporate Family Rating Outlook
Ba2 Positive
Ba1 Stable
The upgrade reflects our belief that Fortescue's credit profile will continue to strengthen due to the company's improved debt-reduction strategy. It also reflects Fortescue's new expansion activities, which will lead to further improvements in production and cash-flow generation.
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20 JANUARY 2014
RATING CHANGES
Imperial Tobacco Group PLC

9 Nov 12
Outlook Change
15 Jan 14
Long-Term Issuer Rating Outlook
Baa3 Positive
Baa3 (affirmed) Stable
The outlook change reflects Imperial's weaker-than-expected operating performance in fiscal year 2013, as well as our belief that the group will struggle to follow the guidance we set for a possible upgrade within the next year. However, given Imperials recently stable business and financial profiles, the outlook change also reflects our view of the groups ratings as solidly positioned in their current rating category. Orange
2 Aug 12
Downgrade
14 Jan 14
Long-Term Issuer Rating Short-Term Issuer Rating Outlook
A3 P-2 Negative
Baa1 P-2 (affirmed) Stable
The downgrade reflects the negative business and financial risk implications for Orange of the persistent price war in the French mobile market. It also reflects our expectation that Orange will see further revenue declines this year, which will negatively affect its cash flow and financial risk. Time Warner Cable, Inc.
4 Apr 07

14 Jan 14
Senior Unsecured Rating Short-Term Issuer Rating Outlook
Baa2 P-2 Stable
Baa2 P-2 Review for Downgrade
The review for downgrade follows Charter Communications' proposed merger with Time Warner Cable. The deal could leave the combined entity with a debt burden above $60 billion and a debt-to-EBITDA of greater than 5.0x, compared with Time Warners outstanding debt of $26.7 billion and debt-to-EBITDA of 3.3x as of 30 September 2013. The review will focus on whether a deal is reached, and, if so, the acquisition terms, financing plans, execution risks and capital structure. It will also focus on the closing of the announced transaction and, should it not close, Time Warners business and financial strategies going forward.
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20 JANUARY 2014
RATING CHANGES
Infrastructure
Winnipeg Airport Authority Inc.
5 April 13
Downgrade
13 Jan 14
Senior Secured Rating Outlook
A1 Negative
A2 Stable
The downgrade reflects the continued lack of passenger growth at Winnipeg International Airport, which is operated by Winnipeg Airport Authority. The weak traffic growth (1.9% decline in the first nine months of 2013) is resulting in persistently weak credit metrics and increased debt. The outlook change reflects our expectation that credit metrics will stabilize and slowly improve as amortization on two thirds of the debt begins to result in debt reduction. Further, we expect modest traffic growth to resume soon.
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20 JANUARY 2014
RATING CHANGES
Financial Institutions
Banco BPI S.A.
28 Mar 12
Outlook Change
17 Jan 14
Outlook Long-term Rating
Negative Ba3
Stable Ba3
The change in outlook reflects the stable outlook on the banks standalone rating and on Portugal's Ba3 government rating, and reflects our view that the downside risks to the bank's standalone rating have substantially decreased. Although the bank's credit fundamentals are likely to remain under pressure during 2014, we take comfort from its high capital levels, the benefit of its international revenue sources and its favorable asset quality track record. Banco Sabadell S.A.
4 Jul 13
Downgrade
14 Jan 14
Debt and Deposit Ratings Standalone Financial Strength/ Baseline Credit Assessment
Ba1/Not Prime D/ba2
Ba2/Not Prime D-/ba3
The rating action concludes the review for downgrade initiated on 4 July 2013. The downgrade takes into account Banco Sabadell's weakened financial profile and significant challenges ahead, as well as moderate signs that the Spanish economy is improving, which should reduce pressure on the bank's asset quality over the medium to long term. BMI Bank B.S.C.
26 Jun 13
Extends Review for Downgrade

16 Jan 14
Deposit Rating
Ba1
Ba1
The extended review reflects our intention to reassess the current three-notch support uplift embedded in BMI's ratings as soon as its merger with Al Salam Bank (unrated) is completed. Although shareholder approvals have been obtained, we will wait for the final sale purchase agreement to be signed by both parties before we conclude the review. As part of the review process, we will examine to what extent a lower probability of parental support from Bank Muscat may be countered by a higher likelihood of government support, given the combined entitys higher systemic importance in Bahrain.
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20 JANUARY 2014
RATING CHANGES
Cetera Financial Group, Inc.

15 Aug 13
Outlook Change
17 Jan 14
Outlook Long-term Rating
Positive B3
Developing B3
The outlook change follows Ceteras announcement that it will be acquired by RCS Capital Corporation (unrated) from Lightyear Capital LLC, and reflects the possibility that Cetera's ratings could come under downward pressure if the transaction's financing increases the firm's debt load and cash flow leverage, and upward pressure if profitability improves and debt reduction results in substantial cash flow deleveraging or increases its business diversification without increasing its risk profile. FGA Capital
18 Jan 13

15 Jan 14
Long-Term Deposit Rating Corporate Family Rating Probability of Default Rating
Baa3 Ba3 Ba3-PD
Baa3 Ba3 Ba3-PD
The review follows the 7 January 2014 rating action on Fiat S.p.A., and will focus on the outcome of the review on Fiat and its possible impact on FGAC, as well as the extent to which support from Credit Agricole S.A. underpins the current rating. SBAB Bank AB
2 Nov 11

14 Jan 14
Long-Term Issuer and Senior Unsecured Ratings Short-Term Rating Subordinate Rating Junior Subordinate Rating Preferred Stock Rating
A2 P-1 A3 (P)Baa2 Ba1(hyb)
A2 P-1 A3 (P)Baa2 Ba1(hyb)
The review reflects our view that the banks standalone credit strength continues to face challenges, the success of recently offered new products and a capital position sensitive to relatively small changes in asset quality. The review will focus on SBABs likely future profitability and the potential for the banks new products to succeed in the Swedish banking market. It will also look at the likelihood of systemic support for SBAB's subordinated debt.
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20 JANUARY 2014
RESEARCH HIGHLIGHTS
Notable research published the week ending 17 January 2014
Corporates
US Technology: Cash-Rich Tech Companies to Face Greater Pressure to Increase Shareholder Returns
As of mid-2013, technology companies accounted for 56% of the cash held by the 50 most cash-rich US companies outside of the financial sector. But their payout ratios average a low 20%. As a result, technology issuers have faced calls for more aggressive capital returns. Based on our outlook for modest global economic growth, we expect a slight improvement in aggregate revenue growth and cash-flow generation in 2014.
US Retail: Tepid Sales Growth in Fourth Quarter Will Continue into Early 2014
In November and December 2013, unadjusted retail and food service sales grew year-over-year by 3.3%, compared with 3.8% in the third quarter of 2013. We are concerned that retailers may have been more promotional than we anticipated, hurting gross margins and earnings. However, we continue to expect retail sales to grow by 4%-5% in 2014, as we believe a lower consumer debt burden, combined with a rise in disposable income, will lead to increased consumer spending.
US Gaming: Online Gaming Gets Off to a Slow Start in New Jersey

Online gaming revenues in New Jersey totaled $7.4 million in December 2013, the states first month of legal Internet gaming. This amounts to only about 3.6% of brick-and-mortar casinos aggregate revenue in the same month. We believe future promotional and marketing spending will need to be significant, especially as 46.6% of New Jersey residents are unfamiliar with the states launch of online gaming.
Global Pharmaceuticals: Divestitures of Non-Core Businesses Can Raise Cash but Weaken Credit Quality
We expect pharmaceutical companies to increasingly divest assets they no longer deem core to their strategies. Although the rationale for companies to unlock value and refocus operations is compelling, these divestitures can be credit negative. For example, Bristol-Myers Squibbs credit profile has deteriorated as it has shed assets over the past few years, with revenues dropping to $16 million from more than $20 billion in 2003.
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20 JANUARY 2014
RESEARCH HIGHLIGHTS
Financial Institutions
Italian Banks: Easing of Taxation on Hybrid Bonds' Conversion Is Credit Positive
An amendment to Italys recent budget law will eliminate banks tax liability when converting hybrid instruments into common equity. The possible rise of hybrid-note issuance would allow Italian banks to enhance their levels of Tier 1 capital and to strengthen their balance sheets. We also expect the amendment to maximize the impact of hybrid instruments on banks solvency.
Japan Life Insurance & Japan Property and Casualty Insurance: Industry Looks to Abenomics to Provide a Stable Backdrop
The profitability of Japans insurance market is rising, due to stronger product pricing and reduced negative spread. We expect that insurers will see higher returns on their assets, including stronger unrealized gains from their equities holdings. Moreover, Abenomics and Bank of Japans new phase of monetary easing provide stability to the industry, supporting our forecast for real GDP growth of 1%-2% in 2014.
Sovereigns
Focus on New Sovereign Ratings in Sub-Saharan Africa
In 2013, we assigned first-time ratings to the Democratic Republic of the Congo, the Republic of the Congo, Mozambique and Uganda, as well as to the East African Development Bank. Common challenges are low levels of income, weak institutional strength, lack of infrastructure and political instability. Creditworthiness is supported by strong growth, increasing foreign direct investment, abundant natural resources and domestic demand.
Abu Dhabi Analysis

Abu Dhabis Aa2 rating is supported by the prudent management of proceeds from its vast hydrocarbon reserves, which have led to large fiscal and external surpluses, low direct government debt and a sizable accumulation of sovereign wealth fund assets. Credit constraints include the emirates dependence on hydrocarbon revenue and the governments potentially large contingent liabilities residing in the debt of its government-related issuers.
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20 JANUARY 2014
RESEARCH HIGHLIGHTS
Structured Finance
US ABS Spotlight
In this months issue we discuss the deteriorating trends in the US subprime auto sector and what the inevitable rise in rates will mean for excess spread for credit card ABS. We also lay the groundwork for analyzing commercial PACE loans, a potential new ABS asset class in the esoteric sector. And theres much more.
Large Properties in US Major Markets Lead Recovery in Office Properties

According to Moody's/RCA Commercial Property Price Indices report, the performance of central business district office properties in major markets has improved by 97% since the January 2010 trough. Major market prices have recovered nearly all of their peak-to-trough losses.
US Mortgage Servicer Dashboard: Third Quarter 2013

In this edition we focus on the servicing stability of Ocwen, Nationstar and Walter, which have significantly expanded their servicing portfolios over the past two years. We examine their foray into originations and how they are integrating the servicing portfolios and platforms they have acquired, how they are using excess cash flow and how the improvement in the housing market and economy is affecting their performance.
2014 Outlook Latin America Securitization

Despite the credit strength of new Latin American deals, delinquencies in Argentinean and Brazilian ABS will rise, and fiscal reforms in Mexico will hinder the performance of some existing transactions. In Argentina, consumer loan delinquencies will slow in 2014, but the performance of 2012 consumer loan vintages will be weak. In Brazil, the changing macroeconomic environment will hurt the credit performance of existing ABS deals. In Mexico, higher GDP rates, stable employment levels and low inflation will not mitigate the challenges of higher loan losses, higher recovery costs and declines in real-estate-owned sales prices.
Despite Macroeconomic Headwinds Italian RMBS Delinquencies Will Remain Stable Due to Low Household Leverage and Low LTVs
Delinquencies in Italian RMBS transactions will be stable given low Italian household leverage levels and consistently low loan-to-value (LTV) ratios. Low household leverage is protecting mortgage loan performance against defaults, as borrowers are less likely to go into arrears, even under weak macroeconomic conditions. Low LTVs also ensure that borrowers rarely fall into negative equity, even when the housing market is subdued.
Credit Insight: European RMBS & ABS

Feature articles include Spanish Loan Renegotiation Proposal Will Have Limited Credit Impact on RMBS Transactions; Household Deleveraging in Euro Area Is Credit Positive for European Securitisations; Uncertainties Surrounding Spanish Government Plan to Tame the Electricity Tariff Deficit Are Credit Negative for Related ABS Deals; Increased Use of Master Structures for French Auto ABS Transactions Introduces Both Investor Protections and Performance Uncertainty; Amendments to Italian Law Are Credit Positive for Securitisations and Covered Bonds; and Despite Macroeconomic Headwinds Italian RMBS Delinquencies Will Remain Stable Due to Low Household Leverage and Low LTVs.
43
20 JANUARY 2014
RESEARCH HIGHLIGHTS
European CMBS Loan Maturities Quarterly Update

Only 22% of the 31 CMBS loans (2.3 billion) scheduled to mature in fourth-quarter 2013 repaid at maturity or prepaid, compared to the four-quarter rolling average of 37%. The low repayment rate reflects the high leverage of the loans and the secondary quality of the underlying assets. In addition, the defaulted or repaid-with-loss loans were the highest of any quarter in the last two years. In first-quarter 2014, 25 loans with a securitized balance of 2.5 billion are scheduled to mature, but we expect only a third to repay at maturity because of the high proportion of loans with high LTV ratios and low Moodys debt yield, and the secondary quality and locations of the underlying assets.
CLO Interest
In this issue we discuss recovery rates for second-lien loans, which due to their position in corporate capital structures will fall further than first-lien loans. We also discuss the rise in optional redemptions of CLO 1.0 deals, particularly for 2005-07 vintages, as increased funding costs reduce equity returns.
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20 JANUARY 2014
RECENTLY IN CREDIT OUTLOOK

Select any article below to go to last Thursdays Credit Outlook on moodys.com
NEWS & ANALYSIS

Corporates
Elliott Managements Proposal to Boost Shareholder Returns
Asset Managers and Money Market Funds 2

Systemically Important Designation for Asset Managers and
16
Funds Is Credit Positive
Is Credit Negative for Juniper Networks

Sears Holiday Woes Accelerate Its Cash Burn, a Credit
Sovereigns
US Federal Budget Deficit Shrinks at Faster Pace, a Credit
19
Negative
Positive US Public Finance

Californias Proposed Budget Would Significantly Improve
Road Kings China Toll Road Acquisition Is Credit Negative Antam Will Suffer from the Indonesian Export Ban of Mineral
21
Ores Banks
Chiles New Bankruptcy Law Is Credit Positive for Banks Capital Relief for German Mutualist Banking Groups on Intra-
School and Community College Districts Liquidity Plant Repairs Is Positive for the County
FEMA Contribution to Nassau County, New York, Sewage
Group Stakes and Lending Is Credit Positive
Belarus Capital Injections into Banks Are Credit Positive Vietnam Relaxes Bank Foreign Ownership Rules, a Credit
Positive for Domestic Lenders Insurers

Preliminary US Healthcare Exchange Demographics Are
14
Credit Negative for Health Insurers
45
20 JANUARY 2014
EDITORS
News & Analysis: Jay Sherman, Elisa Herr and Sharon Adams Ratings & Research: Bronwyn Collie Final Production: Barry Hing
PRODUCTION ASSOCIATE
David Dombrovskis
2014 Moodys Corporation, Moodys Investors Service, Inc., Moodys Analytics, Inc. and/or their licensors and affiliates (collectively, MOODYS). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. (MIS) AND ITS AFFILIATES ARE MOODYS CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODYS (MOODYS PUBLICATIONS) MAY INCLUDE MOODYS CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODYS DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODYS OPINIONS INCLUDED IN MOODYS PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODYS PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODYS ANALYTICS, INC. CREDIT RATINGS AND MOODYS PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODYS PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODYS PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODYS ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODYS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. 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Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided AS IS without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODYS is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moodys Publications. To the extent permitted by law, MOODYS and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODYS or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODYS. 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20 JANUARY 2014

NEWS & ANALYSIS

Economic Growth Outside New York City Area

Automaker, Credit Neutral for GM Financial

Shutdown in Fiscal 2015, a Credit Positive Securitization

Operator ALL Are Credit Positive

RATINGS & RESEARCH

Negative for UPC

Suntory, Uncertain for Beam

Indonesian Ban on Mineral Ore Exports Is Credit Positive for

Alcoa of Australia Banks

RECENTLY IN CREDIT OUTLOOK

Bank Subsidiaries Insurers

Ontarios Competitive Auto Market Sovereigns

Toward Political Stabilization

NEWS & ANALYSIS