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Credit Outlook Summary

Core Content Overview

This document provides an analysis of credit implications stemming from recent corporate, infrastructure, bank, sovereign, and sub-sovereign events. It highlights the credit impacts of acquisitions, divestitures, regulatory changes, and market developments on various entities.

Main Points by Sector

Corporates

• Pfizer's Acquisition of Anacor:

  • Credit Impact: Credit negative.
  • Reason: High price paid (55% premium over Anacor's share price), with Anacor's key drug not yet FDA approved.
  • Debt Impact: No change in debt/EBITDA due to cash funding. Future acquisitions may involve debt, which could push leverage above the 1.5x–2.0x guidance for its A1 rating.
  • Strategic Value: Anacor's drug (crisaborole) has blockbuster potential, but the deal reduces Pfizer's cash reserves and may affect its ability to pursue other opportunities.

• Midea's Buyout Offer for KUKA:

  • Credit Impact: Credit positive for KUKA.
  • Reason: Midea's increased ownership (from 10.2% to full ownership) will support KUKA's strategic diversification and provide access to Midea's financial strength.
  • Strategic Value: Midea's acquisition aligns with its goal to enhance manufacturing automation and provides KUKA with a stronger financial backing.

• Gerdau's Sale of Spanish Subsidiary:

  • Credit Impact: Credit positive.
  • Reason: Proceeds from the sale will help reduce debt, improving its adjusted debt/EBITDA ratio from 6.2x to 6.0x.
  • Strategic Value: The sale is part of Gerdau's strategy to focus on core operations and reduce leverage, though it still faces challenges in Brazil's steel industry.

Infrastructure

• Public Service of New Mexico's Rate Case Delay:

  • Credit Impact: Credit negative.
  • Reason: The 30-day delay postpones rate implementation, delaying cost recovery and reducing the company's ability to earn its authorized return on equity.
  • Financial Impact: CFO pre-W/C to debt ratio is expected to remain in the mid-teens for 2016, with recovery to the high teens in 2017.

• GenOn Energy's Asset Sale:

  • Credit Impact: Credit positive.
  • Reason: Proceeds from the sale of Aurora Power Station will reduce a projected funding shortfall.
  • Strategic Value: The sale is part of GenOn's strategy to reduce debt and improve liquidity, though remaining assets are unattractive and may limit future cash generation.

Banks

• Re-Proposed Pay Rules for US Banks:

  • Credit Impact: Credit positive.
  • Reason: The rules align compensation with sound risk-taking, improving governance and risk management practices.
  • Implementation:
    • Level 1 banks (assets ≥ $250B): 60% deferral of senior executives' incentive compensation for 4 years.
    • Level 2 banks (assets $50B–$250B): 50% deferral for 3 years.
    • Level 3 banks (assets $1B–$50B): 50% deferral for 3 years.
  • Clawback Policies: Apply to 100% of incentive-based compensation for up to 7 years in cases of misconduct, which is more stringent than current practices.
  • Regulatory Context: The rules are consistent with current practice but may be too short for long-term risks, unlike in the UK and Switzerland.

• Raymond James Fined for AML Failures:

  • Credit Impact: Not explicitly stated, but likely negative.
  • Reason: The fine indicates regulatory scrutiny and potential financial consequences.

• TMX's Auto Title Loan Focus:

  • Credit Impact: Credit negative.
  • Reason: Regulatory focus on single-payment auto title loans could increase credit risk for TMX.

• Russian Banks' Related-Party Lending Limits:

  • Credit Impact: Credit negative.
  • Reason: Weaker lending limits may increase risk exposure and reduce credit quality.

• Vnesheconombank's Loan Conversion:

  • Credit Impact: Credit positive.
  • Reason: Conversion of central bank loans to subordinated debt improves credit quality.

Sovereigns

• Iraq's Stand-By Arrangement with the IMF:

  • Credit Impact: Credit positive.
  • Reason: The arrangement will help with liquidity and stabilize the country's financial position.

• Nigeria's Oil Pipeline Sabotage:

  • Credit Impact: Credit negative.
  • Reason: Sabotage disrupts oil production and revenue, affecting the country's fiscal health.

Sub-sovereigns

• Austrian Pact with HETA Creditors:
  • Credit Impact: Credit positive for the State of Carinthia.
  • Reason: The pact provides financial relief and supports the region's credit profile.

US Public Finance

• New York State Property Tax Cap:

  • Credit Impact: Not explicitly stated, but likely negative.
  • Reason: Tax cap reduces school budgets, affecting public finance stability.

• Arizona's Prop 123:

  • Credit Impact: Credit positive.
  • Reason: Increased state education funding over 10 years benefits school districts and local governments.

Covered Bonds

• Hypothekenbank's Cover Pool Merger:
  • Credit Impact: Credit positive for Pfandbrief holders.
  • Reason: The merger strengthens the cover pool, improving the security of covered bonds.

Key Information

• Pfizer:

  • Acquired Anacor for $5.2 billion, a 55% premium.
  • No change in debt/EBITDA due to cash funding.
  • Future acquisitions may involve debt, increasing leverage.

• Midea:

  • Offers to buy out KUKA shareholders at €115 per share, a 36% premium.
  • Strategic alignment with KUKA's diversification goals.

• Gerdau:

  • Sold Spanish subsidiary for €155 million, reducing adjusted debt/EBITDA to 6.0x.
  • Faces ongoing challenges in Brazil's steel industry.

• GenOn Energy:

  • Sold Aurora Power Station for $365 million, reducing projected funding shortfall.
  • Remaining assets are unattractive, limiting future cash generation.

• Emera:

  • Sold 50.1 million shares of Algonquin Power & Utilities for CAD544 million.
  • Proceeds will be used to reduce debt for the TECO acquisition.

• US Banks:

  • New pay rules are credit positive, but deferral and clawback periods may be too short.
  • Regulatory changes align with sound risk-taking and governance, but implementation may be challenging for smaller banks.

• Regulatory Changes:

  • Include stricter pay rules, AML fines, and changes to related-party lending limits.
  • These changes affect credit profiles and financial risk management practices.

• Sovereign and Sub-sovereign Credit:

  • Iraq's IMF agreement is credit positive.
  • Nigeria's pipeline sabotage is credit negative.
  • Austrian pact with HETA creditors is credit positive for Carinthia.

Summary

The document outlines credit implications across various sectors, emphasizing how corporate actions, regulatory changes, and market events influence financial risk and credit quality. While some deals and policies are credit positive, such as Midea's acquisition of KUKA and Gerdau's sale of its Spanish subsidiary, others like Pfizer's acquisition of Anacor and the delays in New Mexico's rate case are credit negative. The re-proposed pay rules for US banks are generally credit positive, though their effectiveness may depend on the duration of deferral and clawback periods. Sovereign and sub-sovereign credit assessments are also affected by external factors like the IMF arrangement and pipeline sabotage.