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Credit Outlook Summary

Core Content

This document provides an analysis of credit implications from various current events across different sectors, including Corporates, Infrastructure, Banks, and Sovereigns. It evaluates how these events affect the financial health and creditworthiness of companies and entities, offering insights into potential credit positives and negatives.

Main Points and Key Information

Corporates

• Boeing's Recent Aircraft Orders Are Credit Positive

  • Boeing received an order for 50 737 MAX aircraft from China Aircraft Leasing Group (CAL), which helps reduce its order gap with Airbus.
  • A separate order from Qatar for 36 F-15QA fighter aircraft is also credit positive, as it increases defense backlog and supports the T-X trainer program.
  • The estimated value of the MAX order is $2.3–$2.5 billion, with potential for price escalation due to inflation.
  • The Qatar deal is valued at $12 billion and includes associated weapons, training, and support services.

• Amazon.com's Planned Acquisition of Whole Foods Is Credit Positive

  • Amazon agreed to acquire Whole Foods for $13.7 billion, accelerating its entry into the food retail sector.
  • The acquisition is expected to provide Amazon with last-mile delivery capabilities and enhance its product profile.
  • Whole Foods is a relatively small player in the $800 billion food retail market with $16 billion in annual revenues.
  • The move is seen as a strategic advantage for Amazon, which could help it compete more effectively with Walmart and other retailers.

• FDA Asks Endo to Stop Selling an Opioid Painkiller, a Credit Negative

  • The FDA requested Endo to voluntarily withdraw Opana ER due to abuse risks.
  • The withdrawal is expected to cause a significant earnings decline, delaying Endo's deleveraging plans.
  • Opana ER contributed about 5% of Endo's revenue but was a high-margin product.
  • Endo's debt/EBITDA is expected to remain elevated beyond 2018, reaching close to 6x.
  • Despite the challenges, Endo has sufficient liquidity to withstand the earnings loss.

• Kirby's Planned Acquisition of Stewart & Stevenson Is Credit Positive

  • Kirby agreed to acquire Stewart & Stevenson (S&S) for $710 million.
  • The acquisition is credit positive due to strategic benefits and Kirby's history of quick deleveraging.
  • The deal will be funded with 50% equity and 50% debt, with the possibility of upsizing the revolving credit facility.
  • S&S's operations will expand Kirby's presence in the southern US and internationally.
  • Pro forma debt/EBITDA is expected to approach the mid-2x range.

• Mattel's Dividend Cut Is Credit Positive, but Will Have Little Effect on Deleveraging Efforts

  • Mattel cut its dividend by 60%, freeing up cash for strategic investments.
  • The reduction is expected to have minimal impact on its deleveraging efforts due to the absorption by new investments.
  • Mattel's debt/EBITDA is projected to remain above 5x through 2018, with a return to historical levels closer to 2x expected by 2020.
  • The company is expected to return to revenue growth in 2017, driven by core brands and entertainment tie-ins.
  • Mattel's Baa2 rating reflects its strong brand portfolio and geographic diversification, despite credit metric weakening.

Infrastructure

• Kyushu Electric Moves Closer to Restarting Two Nuclear Reactors Following Favorable Court Ruling
  • A regional court in Japan dismissed a case against Kyushu Electric's planned restart of Genkai 3 and 4 reactors.
  • The restart is expected between October 2017 and March 2018, after additional assessments.
  • Restarting the reactors is a credit positive milestone as it improves cost competitiveness and reduces reliance on thermal generators.
  • The two reactors in operation (Sendai 1 and 2) contributed an average of ¥5 billion and ¥4.5 billion per month to profitability.
  • Kyushu Electric has five reactors, with four of them expected to be in operation soon.

Banks

• Chile's Proposed Banking Law Is Credit Positive for Banks' Depositors and Senior Bondholders

  • The proposed law introduces Basel III capitalization requirements and new buffers.
  • It allows regulators to set minimum capital requirements and introduces new risk charges.
  • The law also transfers regulatory powers to the Comisión para el Mercado Financiero, improving independence and integration.
  • The reform is expected to lead to a more stable capital base and reduce funding costs for banks.
  • The minimum CET1 ratio is expected to increase to around 17%, improving tangible common equity and loss-absorbing capacity.
  • The reduction in ELA borrowing will improve profitability and margins.

• National Bank of Greece's Sale of Its Bulgarian Operations Is Credit Positive

  • NBG completed the sale of its Bulgarian operations, improving its capital ratio and liquidity.
  • The sale is expected to increase the CET1 ratio by around 100 basis points and boost liquidity by €900 million.
  • The proceeds will be used to reduce expensive ELA borrowing, which currently costs 1.5%.
  • The sale follows a series of deleveraging actions and is part of a restructuring plan to improve funding profile and capital strength.

Sovereigns

• US Revision of Cuba Policy Is Credit Negative for Island
  • The US policy revision is seen as a credit negative for Cuba due to potential economic impacts.
• Steep Decline in South Africa's Business Confidence Is a Setback to Growth Recovery
  • The decline in business confidence is a credit negative for South Africa, signaling a potential slowdown in growth.
• Zambia's Suspension of 48 Opposition Members of Parliament Is Credit Negative
  • The political action is a credit negative for Zambia due to its potential impact on economic stability and governance.

Summary of Credit Impacts