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Credit Outlook Summary - 15 February 2016

Core Content

This document provides an overview of the credit implications of various current events across different sectors, including Corporates, Infrastructure, Banks, Insurers, and US Public Finance. It includes rating changes, research highlights, and recent analysis from Moody's Credit Outlook.

Main Points by Sector

Corporates

• Mylan's Deal for Meda:

  • Credit Implication: Credit negative
  • Reason: The acquisition increases Mylan's financial leverage to 4.0x debt/EBITDA from under 2.5x.
  • Strategic Benefits: Expands presence in European generics and specialty pharmaceuticals, reduces EpiPen concentration, and increases revenue.
  • Synergies: Expected to generate $350 million in synergies over four years.
  • Liquidity: Mylan has a $1 billion share repurchase program and a stable outlook for EpiPen.

• Manutencoop:

  • Credit Implication: Credit negative
  • Reason: Risk of losing a €68 million Italian government contract and restricted access to future tenders.
  • Impact: Could result in €68 million revenue loss and potential performance bond call.
  • Liquidity: Current net cash is €32 million, with €10 million in committed bank facilities fully drawn.
  • Rating Action: Downgraded to B3 stable from B2 negative due to the fine.

• Cecina (Gecina):

  • Credit Implication: Credit positive
  • Reason: Sale of healthcare real estate portfolio for €1.35 billion, 16% above book value.
  • Leverage Reduction: Debt/asset ratio will decline to the low-30% range from almost 40%.
  • Portfolio Shift: Office portfolio will make up over 75% of the asset base, up from 64%.
  • Occupancy: Office occupancies maintained at over 90%.

• Lippo Karawaci:

  • Credit Implication: Credit positive
  • Reason: Cancellation of note issue reduces financial pressure.
  • Debt/EBITDA: Expected to be around 3.3x in 2016.
  • Interest Coverage: Expected to be around 2.5x.
  • Asset Sales: Announced sales of two assets to real estate investment trusts.

Infrastructure

• US Supreme Court Stay on Clean Power Plan:

  • Credit Implication: Credit positive for some entities.
  • Impact: Delays implementation until at least June 2017, giving coal plants more time to decide on closures or conversions.
  • Affected Entities: Dynegy Inc., FirstEnergy Solutions Corp., NRG Energy, Inc., and others.
  • Market Outlook: Negative for the merchant power sector due to declining capacity prices.

• New England Electricity Capacity Auction:

  • Credit Implication: Credit negative
  • Price Decline: Auction cleared at $7.03 per kilowatt per month, a 25% drop from the previous year.
  • Supply and Demand: New generation and demand-side resources offset the retirement of Pilgrim Nuclear Power Station.
  • Renewables: Wind and solar facilities cleared the auction, but their effective contribution was reduced due to intermittency.
  • Long-Term Outlook: Continued decline in capacity prices expected, with negative rating pressure on senior debt and deposits.

Banks

• European Commission Changes to MREL:

  • Credit Implication: Credit negative
  • Reason: The proposed changes appear to weaken the mandate of the Banking Resolution and Recovery Directive (BRRD).
  • Impact: May reduce the amount of MREL held by banks, exposing senior creditors to higher losses.
  • Uncertainty: Ambiguous language on transitional periods creates uncertainty for investors.
  • Regulatory Divergence: Risks increased inconsistency in MREL implementation across Europe.

• Common Regulatory Approach for Transatlantic Clearinghouses:

  • Credit Implication: Credit positive
  • Reason: Agreement between CFTC and EC avoids market disruption.
  • Impact: Allows US CCPs to serve EU counterparties and vice versa.
  • Key Entities: CME Group Inc., Intercontinental Exchange Inc., LCH.Clearnet Ltd., and Eurex.

• Italian Mutual Banks:

  • Credit Implication: Credit positive
  • Reason: Benefit from a cross-guarantee scheme.

• Nykredit's Stock Offering:

  • Credit Implication: Credit positive
  • Reason: Provides additional capital and liquidity.

• Russia's Subsidized Mortgages:

  • Credit Implication: Credit positive for lenders
  • Reason: Extension of mortgages supports lending activity.

• Hungary's Banks' Impaired Assets:

  • Credit Implication: Credit positive
  • Reason: European Commission approval eases regulatory pressure.

• Poland's Foreign-Currency Mortgage Conversions:

  • Credit Implication: Credit negative
  • Reason: Increases financial risk for banks.

• Vietnamese Banks:

  • Credit Implication: Credit positive
  • Reason: Proposed tightening of liquidity and lending rules may improve financial stability.

Insurers

• Coface:
  • Credit Implication: Credit positive
  • Reason: Set up a contingent equity facility to bolster capital in stress scenarios.

US Public Finance

• Seattle Public Schools Levies:
  • Credit Implication: Credit positive
  • Reason: Voter renewal of levies supports funding for public schools.

Rating Changes

• Downgraded:

  • SKF
  • Aria Energy Operating
  • Homer City Generation, L.P.
  • Azerbaijan
  • Western Australia Treasury Corporation

• Upgraded:

  • NAV Canada
  • Greater Toronto Airports Authority
  • CarMax prime auto ABS
  • Ally Financial auto ABS

Research Highlights

• Reports published on various sectors:
  • UK care home providers
  • Polish food retailers
  • US diversified technology
  • European pharmaceuticals
  • US corporate defaults and recoveries
  • European gaming
  • European and CIS steelmakers
  • US wireless tower operators
  • Sub-Saharan African banks
  • Russian banks
  • Global insurers
  • US public finance ratings
  • California school districts
  • US mobile phone ABS
  • US property markets
  • US RMBS
  • US mortgage warehouse securitizations
  • Global covered bonds
  • US CLOs

Key Information

• Mylan is expected to delever rapidly post-acquisition but may not maintain leverage below 3.5x.
• Manutencoop is heavily reliant on public sector contracts, and losing access to future tenders is a significant risk.
• Cecina (Gecina) benefits from the sale of its healthcare portfolio, reducing leverage and shifting to a more profitable office portfolio.
• Lippo Karawaci cancels a note issue, reducing financial pressure and improving debt/EBITDA and interest coverage ratios.
• The Clean Power Plan stay is credit positive for certain coal plants and project financings, but signals a prolonged downturn in the merchant power sector.
• MREL changes by the European Commission are credit negative due to potential weakening of the BRRD's mandate and increased risk for bondholders.
• The common regulatory approach for transatlantic clearinghouses is credit positive, avoiding market disruption.
• Public finance in the US, particularly Seattle Public Schools, is credit positive due to voter support.

Conclusion

The document highlights both credit positive and negative developments across multiple sectors. Corporate acquisitions, regulatory changes, and market dynamics all play a role in shaping credit risk. The outcomes of these events are expected to influence rating actions and financial strategies in the coming months.