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Credit Outlook Summary - 25 February 2016

Core Content Overview

This document outlines the credit implications of recent events across different sectors, including corporations, banks, and sovereigns. It provides insights into how these events affect the credit profiles of the involved entities, with a focus on risk assessment and rating actions.

Corporates

Key Points

• Sysco's Brakes Acquisition:
  • Sysco plans to acquire Brakes Group for $3.1 billion, including $2.3 billion in debt.
  • The acquisition is credit negative due to the high 11x EBITDA multiple, which will significantly increase Sysco's debt/EBITDA ratio.
  • Pro forma for both the Brakes acquisition and additional share repurchases, Sysco's debt/EBITDA is expected to rise to around 4.0x from 2.7x.
  • This may result in a downgrade of Sysco's long-term rating by at least one notch and its commercial paper rating to Prime-2.
  • The acquisition is strategic, providing Sysco with a stronger foothold in Europe, but is unlikely to generate significant synergies.

Strategic Context

• The acquisition follows the collapse of a previous attempt to acquire US Foods due to regulatory issues.
• Brakes operates in multiple European countries and will function as a standalone entity within Sysco.

Banks

Key Points

• Panama's Removal from FATF Grey List:

  • Panama was removed from the FATF grey list, which is credit positive for its banks.
  • This reduces the risk of losing correspondent banking relationships and improves access to cross-border liquidity.
  • Large and midsize banks are expected to benefit the most due to their established franchises.

• BTG Pactual Sells BSI:

  • BTG sold BSI for CHF1.5 billion, boosting liquidity and capitalization.
  • The sale is a credit positive, as it helps BTG recover from the CEO's arrest and improves its CET1 ratio by about 200 basis points.
  • BTG has also sold other illiquid assets and secured a credit line to increase liquidity.

• Indonesia Cuts Reserve Requirement:

  • Bank Indonesia reduced the reserve requirement by one percentage point, freeing up IDR34 trillion in liquidity.
  • This is credit positive for Indonesian banks, reducing funding costs and easing deposit competition.
  • Banks with a high proportion of time deposits in their funding mix are expected to benefit the most.

• Singapore Banks' 2015 Results:

  • Singapore banks, including DBS, OCBC, and UOB, reported increased nonperforming loans due to low oil prices.
  • Exposures to oil and gas services firms are significant (13%–25% of CET1 capital) and pose a credit risk.
  • Despite this, banks are expected to maintain robust profitability due to strong pre-provision income.

Sovereigns

Key Points

• Portugal's Revised 2016 Budget:
  • The revised budget targets a deficit of 2.2% of GDP, improving fiscal credibility.
  • This is a credit positive move, as it shows the government's willingness to adjust and align with the EC's fiscal framework.
  • The budget also removes the risk of early elections, which could have destabilized the country.

Strategic Context

• The revised budget includes new fiscal measures estimated at 0.45% of GDP and aligns growth assumptions with the EC and external forecasters.
• The EC still considers Portugal's budget to be at risk of non-compliance and may require additional measures.

Sub-sovereigns

• Brazilian States' Debt Restructuring Plan:
  • The plan is expected to improve liquidity and enforce fiscal discipline.
  • This is a credit positive for Brazilian states, as it helps manage financial obligations and stabilize their credit profiles.

US Public Finance

• Devon Energy Layoffs:
  • Layoffs in Oklahoma City due to low oil prices are credit negative.
  • These job cuts are part of a broader trend affecting the energy sector and may impact local economic conditions and public finances.

Recently in Credit Outlook

• The document references recent articles and provides links to the previous week's Credit Outlook.
• It also directs readers to the Weekly Market Outlook for financial predictions and economic releases.

Key Information

• Credit Implications:

  • Acquisitions and strategic moves can have significant credit impacts, either positive or negative, depending on the terms and financial implications.
  • Regulatory changes and market dynamics can influence credit profiles and rating actions.
  • Liquidity management is crucial for banks, especially in the wake of major transactions or economic downturns.

• Rating Actions:

  • Several entities are under review for downgrade, including Sysco, Ingram Micro, and BTG Pactual.
  • Positive rating actions are associated with improved regulatory compliance and liquidity management.

• Market Trends:

  • Increased competition in the set-top box market is a credit negative for cable companies.
  • The IT distribution industry is in a state of continuous realignment due to changing customer demands and product lifecycles.

• Geographic and Sectoral Risks:

  • Exposure to specific sectors, such as oil and gas, can significantly affect credit quality.
  • Increased business risk in certain regions or markets may outweigh diversification benefits.

Summary of Key Ratings

• Sysco: Debt/EBITDA ratio is expected to rise to 4.0x, potentially leading to a rating downgrade.
• Ingram Micro: Uncertain parental support and potential debt refinancing due to the acquisition are credit negative.
• Link REIT: The proposed acquisition is credit negative due to increased leverage and limited income generation.
• Panama's Banks: Credit positive due to removal from the FATF grey list.
• BTG Pactual: Credit positive due to improved liquidity and capitalization from asset sales.
• Indonesian Banks: Credit positive from reduced reserve requirements and lower funding costs.
• Singapore Banks: Credit negative due to rising nonperforming loans from oil and gas sector exposure.
• Portugal: Credit positive due to revised budget and improved fiscal credibility.

Conclusion

The document highlights the diverse credit implications of recent corporate and sovereign actions. While some developments, such as regulatory improvements and strategic asset sales, are credit positive, others, like high-cost acquisitions and sector-specific downturns, are credit negative. These insights are essential for understanding the financial risks and opportunities in various markets.