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Credit Outlook Summary

Core Content Overview

This document provides an analysis of credit implications related to various corporate, infrastructure, sovereign, and public finance developments as of 14 July 2016. It outlines how recent events may impact the creditworthiness of entities in different sectors, including the effects of regulatory changes, business divestitures, infrastructure funding, and political outcomes on financial stability.

Main Points by Section

Corporates

• Thomson Reuters:

  • Sold its Intellectual Property & Science (IP&S) business for $3.55 billion to private-equity funds.
  • The divestiture is credit positive as it allows the company to reduce total debt/EBITDA from 3.0x to 2.8x.
  • IP&S contributed ~8% of revenue and ~9% of EBITDA in 2015.
  • IP&S faced challenges due to lack of scale and declining transaction revenue.
  • The company aims to improve organic revenue growth to mid-single-digit levels.

• China Travel Service (CTS):

  • Benefited from the merger of CNTS and CITS, which strengthens its financial support.
  • CTS has a Baa3 negative rating, but the merger is expected to improve its position.
  • CNTS is a state-owned entity and is strategically important to the travel services industry in China.

Infrastructure

• US Ports:

  • Received $760 million in federal grants under the FASTLANE program.
  • These grants are credit positive as they reduce congestion and improve freight mobility.
  • The grants focus on major ports and freight corridors, including the Port Authority of New York and New Jersey, Massachusetts Port Authority, and Port of Portland.

• Kyushu Electric:

  • Faces credit negative impact due to the election of anti-nuclear candidate in Kagoshima Prefecture.
  • The new governor may suspend operations of Sendai 1 and 2 nuclear reactors, leading to a monthly loss of ~¥10 billion.
  • Kyushu Electric's profits for fiscal 2016 may be affected, with potential for ordinary losses in 2017 if reactors remain shut.
  • The company has a contractual mechanism to absorb losses, which is a credit positive for senior and covered bond investors.

Sovereigns

• Iraq:

  • Approved a $5.34 billion, three-year Stand-By Arrangement with the IMF.
  • The deal is credit positive, as it will improve liquidity amid fiscal and balance-of-payments challenges.
  • The country's fiscal deficit is expected to widen to 15% of GDP in 2016, up from 14% in 2015.
  • Oil exports remain flat despite increased production, due to pipeline sabotage in the north.

• Australia:

  • The government's slim majority in the House of Representatives and a potentially fragmented Senate may hinder fiscal reforms.
  • This is credit negative as it challenges the government's ability to pass measures aimed at reducing the budget deficit.
  • Despite the challenges, robust real GDP growth is expected to support Australia's credit quality.

Key Information

Credit Positive Developments

• Thomson Reuters' divestiture of IP&S business improves its debt/EBITDA ratio.
• US ports benefit from federal grants under the FASTLANE program.
• Nykredit Realkredit's resolution notes increase buffers for senior and covered bond investors.
• Iraq's IMF deal provides liquidity support amid fiscal and balance-of-payments challenges.

Credit Negative Developments

• Argentine court ruling to revoke the tariff increase negatively impacts gas utilities.
• Australia's political fragmentation may hinder fiscal measures.
• Kagoshima Prefecture's anti-nuclear stance could reduce Kyushu Electric's earnings.

Summary of Impact

• Thomson Reuters: Credit positive due to improved debt structure and focus on core segments.
• China Travel Service: Credit positive due to strengthened support from the merged parent company.
• US Ports: Credit positive from federal grants improving freight mobility and reducing congestion.
• Kyushu Electric: Credit negative due to potential shutdown of reactors and reduced earnings.
• Iraq: Credit positive from IMF funding to alleviate liquidity pressures.
• Australia: Credit negative due to political challenges in passing fiscal reforms, but supported by strong GDP growth.

Exhibits Mentioned

• Exhibit 1: Kyushu Electric Ordinary Profits (Losses) from Sendai Shutdown
• Exhibit 2: Iraq's Financial Account Net Flow Components
• Exhibit 3: Iraq's Foreign Exchange Reserves
• Exhibit 4: Australia's House of Representatives Composition Before and After the July Vote

Conclusion

The document highlights a mix of credit positive and negative events affecting different sectors and regions. Corporate restructuring and infrastructure funding are generally seen as credit enhancing, while political and regulatory shifts, such as anti-nuclear policies and fragmented governance, may pose risks. The overall credit outlook is influenced by the interplay of these factors, with some entities benefiting from support and others facing increased financial stress.