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Credit Outlook Summary

Core Content

This document provides an overview of credit implications of various current events affecting different sectors, including Corporates, Infrastructure, Banks, Insurers, Sovereigns, Sub-sovereigns, US Public Finance, and Securitization. It outlines rating changes, research highlights, and analysis from Moody's credit officers on how these events impact financial health and credit profiles.

Main Points by Sector

Corporates

• US Proposal to Loosen Fuel Requirements:

  • The EPA proposed to reduce renewable fuel blending requirements, which is credit positive for US refiners.
  • Companies like Valero Energy and PBF Holding will benefit due to lower compliance costs and reduced need for RINs.
  • RIN prices have declined due to the expected easing of mandates, but uncertainty remains about availability.

• Devon Energy's Acquisition of Eagle Ford Shale Assets:

  • Credit negative due to increased leverage and event risk.
  • The deal will raise debt/production and leverage ratios, impacting financial metrics.
  • Devon aims to reduce debt through asset sales and free cash flow generation, though execution risk exists.

• Visant's Acquisition of American Achievement:

  • Credit positive as it reduces leverage, costs, and improves earnings and cash flow.
  • The deal will lower adjusted debt/EBITDA to 7.2x and increase operating margins to 17%.
  • The transaction is subject to regulatory review due to reduced competition in the school memorabilia market.

• Lightstream's Strategy to Reduce Debt:

  • Credit positive due to plans to operate within cash flow, reduce capital expenditures, and sell non-core assets.
  • Expected to improve leverage metrics and reduce reliance on revolving credit.
  • Execution risk exists with asset sales, particularly in western Canada.

• Oman Oil's Acquisition of Oxea:

  • Credit positive for Oxea as it becomes part of a more strategic owner, Oman Oil.
  • The deal reaffirms support for Oman's Vision 2020 and diversification strategy.
  • Oxea's debt/EBITDA remains stable due to a change-of-control clause.

• Vedanta's Benefit from Cairn India's Share Buyback:

  • Credit positive for Vedanta as it will gain access to CIL's cash flows.
  • The buyback allows SSL to increase its stake in CIL, improving dividend payments and liquidity.
  • Dividend distribution tax and reluctance to leak cash to minority shareholders have limited Vedanta's liquidity.

Infrastructure

• Korea's Electricity Tariff Hike:

  • Credit positive for KEPCO due to increased operating margins and reduced reliance on debt.
  • The 5.4% tariff increase supports KEPCO's financial profile and allows for better capital expenditure funding.
  • Fuel costs have stabilized, and the government's continued support strengthens KEPCO's credit standing.

• CLP Holdings' Acquisitions of CAPCO and PSDC:

  • Credit negative for CLPH and CLPP due to increased financial stress and weakened credit metrics.
  • Acquisitions will raise leverage and reduce FFO to debt ratios, especially if funded by debt.
  • Weak performance in Australia and India contributes to the negative outlook.

Banks

• Lloyds' Sale of Asset Management Business:

  • Credit positive as the sale is expected to generate a post-tax gain and improve financial position.
  • The transaction reduces exposure to non-core businesses and improves balance sheet health.

• Russia's Rising Personal Leverage:

  • Credit negative for consumer finance banks due to increased risk of default and financial strain.

• Hungarian Banks' Retail NPLs:

  • Credit negative due to record-high retail nonperforming loans, indicating deteriorating credit quality.

• Korea's Rising Household Debt:

  • Credit negative for the financial system, as increased debt levels pose risks to stability and solvency.

Insurers

• ACE Limited's Share Repurchase:

  • Credit negative due to the repurchase program, which may indicate financial stress.
  • However, capital remains strong.

• China's Plan:

  • Credit positive for life insurers, but credit negative for property and casualty insurers.
  • The plan likely reflects regulatory or market-driven shifts favoring life insurance.

Sovereigns

• Ukraine's Suspension of EU Agreement:
  • Credit negative as it hinders economic and institutional credit improvements.
  • The suspension affects investor confidence and financial stability.

Sub-sovereigns

• New Brunswick's Pension Reform:

  • Credit positive as it could lead to improved fiscal management and reduced liabilities.

• Russian Regions:

  • Credit negative due to declines in federal subsidies and loans, increasing financial strain.

US Public Finance

• California's Income Tax Surge:

  • Drives large surpluses, improving state finances.

• Atlanta's Pension Reform Lawsuit:

  • Credit negative due to legal and financial risks associated with the lawsuit.

• Desert Hot Springs' Fiscal Emergency:

  • Credit negative as it signals financial distress and potential default risks.

Securitization

• TFOVIS and Mexican Teachers' Payroll:
  • Credit positive due to the centralized payroll, which supports the securitization structure.

Key Information

• Rating Changes:

  • Downgraded: Western Union Financial Services, Principal Financial Group, Principal Financial Services, Principal Life Insurance Company, the Port of Seattle, Westchester County.
  • Upgraded: Home Depot, Quintiles Transnational, TRW Automotive, Discovery Education, Citigroup Pty, DDR, Republic of Tatarstan.

• Research Highlights:

  • Covered Asia credit, China property developers, US mobile phone carriers, oil refiners, German bonds, corporate liquidity, utilities, banks, insurers, and securitization outlooks.

• Event Risk:

  • Highlighted in several transactions, including Devon's acquisition and CLP's overseas investments.

• Leverage and Liquidity:

  • Many companies are affected by changes in leverage and liquidity, especially in the energy and financial sectors.

• Regulatory Impact:

  • Regulatory decisions, such as the EPA proposal and FTC approval, play a significant role in shaping credit outcomes.

Summary

This summary highlights the credit implications of recent corporate, infrastructure, banking, and regulatory developments. Key credit positive events include the EPA proposal for refiners, Visant's acquisition, Lightstream's debt reduction, and the US regulatory approval of Oman Oil's acquisition. Credit negative events involve Devon's debt-heavy acquisition, CLP's overseas investments, and rising leverage in Russia and Hungary. The document also discusses the impact of regulatory changes, tax policies, and market trends on credit profiles across various sectors and entities.