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Credit Outlook Summary

Core Content Overview

This document provides a detailed analysis of credit implications related to various corporate, bank, insurer, and sovereign events. It outlines the credit impact of recent developments, including antitrust lawsuits, business divestitures, acquisitions, regulatory changes, and financial decisions, across multiple sectors.

Main Points and Key Information

Corporates

• General Electric (GE):

  • The US Department of Justice (DOJ) filed an antitrust lawsuit to block GE's $3.3 billion sale of its appliances business to Electrolux, which is a credit negative.
  • The sale was expected to help GE reduce its finance subsidiary's size and improve liquidity, but the failure to complete it would strain its industrial cash flow.
  • GE had previously downgraded its senior unsecured debt rating to A1 due to its plan to sell $200 billion of GE Capital assets and provide a full guarantee of existing debt.
  • The planned acquisition of Alstom's power and grid businesses is under regulatory scrutiny and may also impact GE's liquidity.
  • Despite the challenges, GE's credit rating was previously downgraded due to the cumulative effect of multiple credit-negative developments.

• Emerson Electric:

  • The spinoff of its network power business is a credit positive.
  • The network power segment accounts for 25% of assets and 20% of revenues, with low returns and growth.
  • Post-spinoff, Emerson's segment margin could increase by over 3 percentage points, and return on capital could rise by over 13 percentage points.
  • The company's credit profile remains strong, supported by its history of managing debt-funded acquisitions and share repurchases.

• Amadeus:

  • The acquisition of Navitaire for $830 million is a credit positive.
  • Navitaire is a US-based provider of passenger service systems (PSS), particularly strong in low-cost and hybrid carriers.
  • The acquisition will reduce exposure to the distribution segment and allow expansion into airline IT services.
  • Amadeus expects its net leverage to rise to 1.50x in 2015, but its high EBITDA margins (high 30s) should support free cash flows and recovery to pre-acquisition leverage levels.

• LBC Tank Terminals:

  • The formation of Seabrook Logistics joint venture with Magellan Midstream is a credit positive.
  • The project will increase LBC's storage capacity by 10% and is supported by a long-term agreement with a major refiner.
  • The facility is expected to generate at least $5 million in annual free cash flow.
  • The project aligns with LBC's long-term expansion strategy, particularly in the US, and is backed by strong shareholder support.

• Eskom:

  • The rejection of a 25.3% electricity price increase is a credit negative for Eskom, but a credit positive for mining companies.
  • The 12.69% increase is insufficient to fund Eskom's costs, likely leading to further debt increases.
  • Mining companies benefit as electricity costs account for 16%-30% of their costs in South Africa.
  • The weaker rand and stronger USD reduce the cost burden for miners.

• Japan's Big Pharma Companies:

  • The government's plan to increase generic drug usage to 80% by 2020 is a credit negative.
  • This will reduce revenue and earnings for big pharma companies due to the shift from branded to generic drugs.
  • Government-imposed biennial price cuts will also impact domestic sales.
  • Despite this, Japanese pharma companies are expected to benefit from overseas growth and new product launches, especially in the US.

• Chorus:

  • The New Zealand ruling on revenue backdating is a credit negative.
  • The NZD62 million reduction in revenue is nearly 10% of forecast EBITDA for the fiscal year ending 30 June 2016.
  • The final pricing principle (FPP) is slightly higher than the initial one, but the proposed reductions still pose a risk to Chorus's financial position.

Banks

• PEFCO:

  • The failure to reauthorize the Ex-Im Bank is a credit negative.
  • PEFCO relies on Ex-Im Bank guarantees for its loans, and without reauthorization, it may have to wind down its portfolio or enter more risky activities.
  • If the Ex-Im Bank is not reauthorized, PEFCO's business will be limited, and it may enter run-off.
  • The run-off is expected to be manageable due to strong liquidity and limited credit risk.

• SMBC:

  • The acquisition of GE's European loan portfolio is a credit negative.
  • The transaction is fully debt-financed and increases leverage, which may negatively affect credit metrics.

• Aozora:

  • Repaying government bailout funds is a credit negative.
  • This action may signal financial strain and reduce liquidity.

• China's Margin Requirements:

  • Easier margin requirements are a credit negative.
  • This may lead to increased leverage and risk exposure for financial institutions.

Insurers

• ACE and Chubb:

  • The combination is a credit positive.
  • The merger is expected to enhance market position and operational efficiency.

• Willis and Towers Watson:

  • The merger is a credit positive.
  • The combined entity is likely to benefit from increased scale and diversification.

• Puerto Rico Electric:

  • The default avoidance is a credit positive for Assured Guaranty and MBIAs.
  • This indicates improved financial stability and reduced risk for these insurers.

Sovereigns and Sub-sovereigns

• Panama:

  • The end of the governance pact is a credit negative.
  • It complicates reform efforts and may lead to increased political and economic instability.

• Vancouver, British Columbia:

  • The rejection of a sales tax increase is a credit negative for the local transit authority.
  • This may reduce funding for public transportation projects.

• New Jersey:

  • Increased education spending is a credit positive for school districts and public universities.
  • This supports long-term financial stability and growth in the education sector.

Rating Changes

• Upgraded:

  • Air Canada, PVH, Landsvirkjun, Caser, Novikombank, Iceland, $1.4 billion of Citigroup subprime RMBS, $2.0 billion of Fifth Third Bank auto loan ABS, and $2.9 billion of Hyundai auto loan ABS.

• Downgraded:

  • Laureate Education, Companhia de Eletricidade do Estado da Bahia, and Greece.

• Other Rating Actions:

  • Eight members of the Austrian Raiffeisen Banking Group, Banque Federative du Credit Mutuel, Credit Industriel et Commercial, and Credit Mutuel Arkea were rated under the revised bank rating methodology.

Research Highlights

• Reports were published on:
  • North American manufacturing
  • Italian corporates
  • US apparel and home products
  • US medical products
  • US and European chemicals
  • Global pension liabilities
  • North American railroads
  • Heathrow Finance
  • Electricity markets in Britain, Ireland, Iberia, Germany, Nordic countries, Poland, France, Italy, and Australia
  • Norway, Belarus, East African Development Bank, the Czech Republic, Macao, English housing associations, US housing finance agencies, Florida, and US CLOs

Recently in Credit Outlook

• Articles from the previous Thursday's edition are referenced, but no new content is summarized here.