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Credit Outlook Summary - 3 November 2016

Core Content

This document provides an analysis of credit implications stemming from various corporate and market events. It covers key developments in the corporate, infrastructure, and banking sectors, assessing their impact on credit ratings and financial health.

Main Points

Corporates

• CenturyLink's Acquisition of Level 3:

  • Credit negative for both companies due to increased leverage.
  • CenturyLink's Moody's-adjusted debt/EBITDA will rise to 4.4x, with a potential decline to 4.2x by 2019.
  • The transaction is expected to improve the supply-demand balance in the hyper-competitive fixed-line telecommunications sector.
  • Smaller telecom operators may benefit from increased growth opportunities and customer cannibalization.

• General Electric's Merger with Baker Hughes:

  • Credit negative for GE due to increased leverage and the financial burden of the merger.
  • The new company will be better positioned to benefit from energy market recovery, but cash flow improvements are expected to take a couple of years.
  • GE's capital constraints and high dividend payout may limit its financial flexibility.

• Baker Hughes' Merger with GE Oil & Gas:

  • Credit positive for Baker Hughes due to improved market position and stable leverage.
  • The merged entity will compete with Halliburton for the No. 2 position in the oilfield services (OFS) sector.
  • Expected to maintain a low debt/EBITDA ratio of around 2x.

• Suncor's Sale of Lubricants Unit to HollyFrontier:

  • Credit positive for Suncor as it removes a non-core business and improves liquidity.
  • Credit negative for HollyFrontier due to increased leverage and integration risks.
  • The transaction will increase HFC's EBITDA and reduce its capital spending, but the impact on leverage and coverage is limited.

Infrastructure

• Korea Gas and Korea District Heating:
  • Credit positive due to tariff hikes reflecting improved cost pass-through mechanisms.
  • The 6.1% increase in city gas tariffs and 4.7% in district heating tariffs will offset rising LNG import costs.
  • Kogas' FFO/debt ratio is expected to improve to 6.0%–8.0%, while KDHC's is projected to remain at 10%–12%.

Banks

• Panama's Anti-Tax Evasion Convention:

  • Credit positive for Panamanian banks as it improves transparency and supports correspondent banking relationships.
  • The convention helps banks comply with international standards and reduces external refinancing risks.

• Banca Carige's ECB-Imposed Problem Loan Reduction:

  • Credit implications depend on the bank's ability to reduce problem loans without significant capital impact.
  • The ECB's targets may require additional capital or result in losses for subordinated creditors.
  • Carige's CET1 ratio is currently above the regulatory minimum, but the plan's execution will be critical.

• Bank Hapoalim's Early Retirement Scheme:

  • Credit positive due to cost savings, improved efficiency, and better capital position.
  • The scheme is expected to reduce the workforce by 15% and improve the cost-to-income ratio by three percentage points.
  • The bank will benefit from regulatory capital incentives and maintain its CET1 ratio above the minimum.

Key Information

• CenturyLink:

  • Acquires Level 3 for $24 billion.
  • Debt/EBITDA increases to 4.4x.
  • Synergies expected to be $975 million over 36 months.
  • Dividend increase may negatively impact creditor cash flow.

• General Electric:

  • Merges GE Oil & Gas with Baker Hughes.
  • Expected to take a couple of years to become accretive to cash flow.
  • Capital constraints and high dividend payout may limit flexibility.

• Baker Hughes:

  • New ownership structure with GE owning 62.5%.
  • Maintains low leverage and strong liquidity.
  • Expected to benefit from improved market position and synergies.

• Suncor:

  • Sells PCLI for CAD1.125 billion.
  • Improves liquidity and reduces capital spending.
  • HFC's leverage is expected to increase slightly to 2.0x–2.5x.

• Swire Properties:

  • Sells an investment property for HKD6.5 billion.
  • Credit positive as it funds capital commitments and reduces borrowing needs.
  • Full effect on credit quality will be seen in 2018.

• Korea Gas and KDHC:

  • Benefit from tariff hikes to offset rising LNG costs.
  • Improved cost pass-through mechanisms signal better financial management.

• Panama's Banking Sector:

  • Improved transparency through the anti-tax convention.
  • Supports correspondent banking and reduces external risks.

• Banca Carige:

  • Required to reduce problem loans over three years.
  • CET1 ratio is currently above regulatory minimum, but execution of the plan is crucial.

• Bank Hapoalim:

  • Introduces early retirement scheme with significant cost savings.
  • Expected to improve efficiency and maintain capital adequacy.
  • Regulatory support and capital incentives help mitigate the financial impact.

Summary

The document outlines credit implications of various corporate and market events, highlighting both credit positive and credit negative outcomes. Key areas of focus include mergers and acquisitions in the telecommunications and oilfield services sectors, asset sales, and regulatory changes in the banking and infrastructure industries. Each analysis provides an assessment of leverage, liquidity, and financial performance, offering insights into the creditworthiness of the involved entities.