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Credit Outlook Summary - 5 September 2016

Core Content

Moody's Credit Outlook for 5 September 2016 highlights the credit implications of various corporate, banking, and sovereign events. The report discusses both credit positive and credit negative impacts across different sectors and regions, focusing on financial health, leverage, and risk management.

Corporates

Credit Positive Developments

• Multiemployer Pension Benefit Cut Filings: The New York State Teamsters Conference Pension and Retirement Fund (NY Conference) submitted an application to cut benefits by 28%, which could save sponsors $1.6 billion. This is the eighth such filing since October 2015, indicating ongoing stress in multiemployer pension plans (MEPPs). If the US government infuses $101 billion into the Pension Benefits Guarantee Corporation (PBGC), it would be credit positive for plan sponsors.

• R.R. Donnelley's Spin Transaction: R.R. Donnelley & Sons Company (RRD) announced a conditional tender offer for $1 billion of its debt, which will help reduce leverage and improve financial metrics. The spin-off of LSC Communications and Donnelley Financial Solutions is expected to result in a slightly improved adjusted debt/EBITDA ratio of 3.8x by 2017-18 if the company continues to reduce debt with free cash flow.

• Ista's Voluntary Prepayments: Ista International GmbH (B1 stable) made a voluntary €80 million prepayment on its term loan, reducing its leverage ratio to 6.2x. This is credit positive, as it accelerates deleveraging and improves interest coverage and free cash flow.

• Hutchison 3G-Wind Merger: The merger between H3G and Wind Telecomunicazioni S.p.A. is credit positive due to the combined entity's increased scale and potential for synergies and deleveraging. The merger is expected to be completed by the end of the year, with a pro-forma debt/EBITDA ratio of 4.5x.

• China Railway Construction's Light Rail Project in Nigeria: Winning the RMB12.0 billion Light Rail Project in Kano is credit positive for China Railway Construction Corp Ltd (CRCC), as it strengthens its position in Nigeria and supports its overseas revenue growth.

Credit Negative Developments

• European Satellite Operators: The SpaceX rocket explosion destroyed the Amos-6 satellite, leading to lost revenue for Eutelsat Communications SA (Ba1 stable) and delays in satellite launches for SES S.A. (Baa2 stable) and Inmarsat plc (Ba1 negative). The incident could lead to revenue losses of €5 million in fiscal 2017, €15 million in fiscal 2018, and €25-€30 million in fiscal 2019.

• US Response to Insurer Withdrawals from Affordable Care Act Exchanges: The US government's response is a credit negative threat for insurers due to potential financial strain from reduced participation in exchanges.

Banks

Credit Positive Developments

• US Banks' Expense Efficiency: Improved expense efficiency at US banks is credit positive, driven by cost-cutting measures and lower litigation costs. The efficiency ratio for banks with assets over $1 billion improved to 56.8% in Q2 2016, a 150 basis point improvement from the year-ago level.

• Swaps Margin Rule: The implementation of the swaps margin rule by the CFTC and five US federal regulators is credit positive for systemically important financial institutions such as JPMorgan Chase & Co. (A3 stable), Bank of America Corporation (Baa1 stable), and Citigroup Inc. (Baa1 stable).

• Banco Comafi's Purchase of Deutsche Bank's Argentine Subsidiary: This transaction is credit positive for Banco Comafi, as it reduces exposure to foreign risks and enhances financial stability.

• Sparebanken Vest's Additional Tier 1 Bond Issue: This bond issue is credit positive for Sparebanken Vest, as it strengthens its capital base.

• Hatton National Bank's Capital Increase: The capital increase is credit positive, improving the bank's financial resilience.

Credit Negative Developments

• Nordic Banks' Oil Woes: Norway's oil sector issues, highlighted by Farstad's second-quarter results, pose credit risks for Nordic banks.

Insurers

• US Response to Insurer Withdrawals: The US government's response to insurer withdrawals from Affordable Care Act exchanges is a credit negative threat, as it may lead to increased financial pressure on insurers.

Sovereigns

Credit Positive Developments

• Egypt's VAT Approval: The long-awaited approval of value-added tax in Egypt is credit positive, as it provides a more stable revenue stream.

• Uganda's Oil Production Licences: Granting long-delayed oil production licences is credit positive, indicating progress in energy sector development.

• Ethiopia's Hydropower Export Deal with Tanzania: The deal is credit positive, as it enhances Ethiopia's export capabilities and economic stability.

• Sierra Leone's Graft Arrests: These are credit positive, suggesting improved governance and reduced corruption risks.

Credit Negative Developments

• Zimbabwe's Foreign Donor Support: Weakening foreign donor support after police suppression of protests is a credit negative for Zimbabwe, indicating potential fiscal and economic instability.

• India's Deficit in April-July: The deficit points to large investment spending cuts later, which is a credit negative for India.

Recent Updates

• Articles in Last Monday's Credit Outlook: The latest issue of Moody's Credit Outlook is available, and the next one is scheduled for 12 September.

Key Information

• Multiemployer Pension Plans: The PBGC is facing severe financial challenges, with liabilities of $54 billion and assets of only $2 billion as of 30 September 2015. The CBO estimates that a $101 billion federal infusion would be credit positive for plan sponsors.

• CRCC's Financial Outlook: CRCC's adjusted debt/EBITDA is expected to remain at 4.5x–5.0x over the next 12–18 months, with its overseas revenue expected to grow to 7%–8% of total revenue.

• US Banks' Efficiency: The efficiency ratio for large US banks improved to 56.8% in Q2 2016, driven by cost-cutting and reduced litigation expenses.

• SpaceX Incident Impact: The SpaceX rocket explosion is expected to delay satellite launches for European operators, affecting their financial plans and revenue projections.

Conclusion

The Credit Outlook for 5 September 2016 provides a comprehensive analysis of the credit implications of various events across corporate, banking, and sovereign sectors. It emphasizes the importance of financial management, regulatory compliance, and strategic decisions in maintaining credit stability. While some developments are credit positive, others pose risks, particularly in the context of ongoing economic and regulatory challenges.