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Credit Outlook Summary

Core Content

This document provides a comprehensive analysis of credit implications of various current events affecting different sectors, including Corporates, Banks, Insurers, Asset Managers, Sovereigns, and US Public Finance. Each section highlights specific developments and their credit impacts, with a focus on whether the event is credit positive or negative and the rationale behind the assessment.

Main Points

Corporates

• Devon Energy Corporation:

  • Sold $1 billion in non-core upstream assets, including those in east Texas and the Anadarko Basin.
  • The sale is credit positive as it helps reduce debt.
  • The company has already sold $1.3 billion in assets in 2016, well on track to meet its $2–$3 billion goal.
  • The asset price is a strong 13x multiple of annualized first-quarter 2016 cash flow.
  • Proceeds will be used to pay down debt, with a total of $9.3 billion in standalone debt as of March 2016.
  • Despite the strong cash flow, the company's debt is still high relative to funds from operations, which were negative in Q1 2016.

• CDK Global:

  • Accelerated its $1 billion share buyback program to year-end 2016.
  • The move is credit negative due to increased leverage.
  • Debt/EBITDA is expected to reach 3.0x, above its target of 2.5x.
  • The company has not yet realized significant cost savings from its business transformation plan.
  • The accelerated buyback could reduce its capacity to pursue strategic growth opportunities.
  • Revenues are expected to reach $2.2 billion in 2016.

• Dover Corporation:

  • Agreed to acquire Wayne Fueling Systems for $780 million in cash.
  • The acquisition is credit negative due to increased leverage.
  • Debt/EBITDA will rise to 3.1x, up from 2.7x.
  • Expected cost synergies of $30 million over three years.
  • The acquisition expands Dover's presence in the retail fueling market and reduces exposure to oil and gas.
  • Dover's total revenue for 2016 is expected to be around $6.7 billion.

• Keurig Green Mountain:

  • Discontinued the Kold system to focus on its core hot beverage business.
  • The move is credit positive as it eliminates operating losses and reduces capital expenditures.
  • The company expects to save $125 million in fiscal 2016 and significantly reduce its debt leverage.
  • The Kold system had high development costs and weak consumer demand.
  • The discontinuation is expected to allow faster deleveraging than previously anticipated.

• China Jinmao Holdings Group Limited:

  • Made large land acquisitions in Hangzhou and Shenzhen, totaling RMB10–15 billion.
  • The acquisitions are credit negative due to weakened liquidity and increased leverage.
  • The company's debt/capitalization is expected to rise to around 50% over the next 1–2 years.
  • High land costs and regulatory constraints in Shenzhen could impact profit margins.
  • However, the company's brand and product positioning in high-tier cities may help mitigate these risks.

Banks

• First BanCorp (FirstBank Puerto Rico):

  • Received regulatory approval to pay interest on deferred TRUPs.
  • The approval is credit positive as it prevents default and signals improved capital and liquidity conditions.
  • The bank has $1 billion in cash liquidity, which can cover deferred interest and upcoming payments.
  • Despite this, the bank still faces challenges such as high problem loan ratios and ongoing regulatory constraints.

• ECB's Pillar 2 Capital Add-Ons:

  • The ECB is changing its approach to Pillar 2 capital requirements, which is credit positive for AT1 bondholders.
  • The new approach separates Pillar 2 into a formal requirement and a supervisory guidance component.
  • This reduces the risk of AT1 coupon suspension due to breaches, easing pressure on capital guidance.
  • The change aligns the ECB's approach with that of the UK and European Commission.

• Georgia's Currency Appreciation:

  • The appreciation of the Georgian lari against the US dollar is credit positive for banks.
  • This improves the value of dollar-denominated assets and reduces foreign exchange risk.

• South Africa's Mining and Agriculture Contraction:

  • The contraction in these sectors is credit negative for development banks.
  • It may lead to reduced credit demand and increased non-performing loans.

• Korean Government's Policy Bank Recapitalization:

  • The recapitalization plan is credit positive for banks.
  • It aims to strengthen the financial stability of policy banks and improve their capital positions.

Insurers

• Argentine Workers' Compensation Resolution:
  • The resolution is credit positive for insurers.
  • It provides clarity and stability in the regulatory environment, reducing uncertainty and potential credit risks.

Asset Managers

• AMG's Equity-Financed Acquisitions:
  • AMG's acquisitions of alternative managers are credit positive.
  • The equity-financed approach reduces leverage and financial risk.

Sovereigns

• Saudi Arabia's National Transformation Program:

  • The approval of the program is credit positive.
  • It signals a commitment to economic reform and diversification, which could improve long-term creditworthiness.

• Rwanda's IMF Standby Credit Facility:

  • The facility is credit positive for Rwanda.
  • It will help bolster liquidity and improve fiscal and economic conditions.

• Madagascar's IMF Program:

  • The program is expected to improve liquidity and fiscal conditions.
  • It is credit positive for the country.

US Public Finance

• New Jersey Court Eliminates Pension Risk:

  • The court action is credit positive for the state.
  • It removes a source of pension-related financial risk, improving fiscal stability.

• Oklahoma Budget:

  • The budget is credit positive for K-12 schools but credit negative for public universities.
  • It reflects a shift in funding priorities and may lead to improved financial conditions for schools.

Key Information

• The document outlines the credit implications of various corporate, bank, insurer, asset manager, sovereign, and public finance activities.
• Credit positive events typically involve actions that reduce leverage, improve liquidity, or eliminate financial risks.
• Credit negative events usually involve increased leverage, weakened liquidity, or heightened financial risks.
• The analysis includes detailed financial metrics such as debt/EBITDA, EBIT/interest coverage, and capital structure changes.
• Several companies and entities are mentioned, including Devon Energy, CDK Global, Dover, Keurig, China Jinmao, PTTEP, Air New Zealand, and FirstBank Puerto Rico.
• The ECB's new approach to Pillar 2 capital add-ons is expected to improve the credit profile of AT1 bondholders in European banks.