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Credit Outlook Summary

Core Content

This document provides an overview of the credit implications of recent corporate, infrastructure, bank, sub-sovereign, and securitization events. It includes analysis from Moody's analysts on how these developments affect the credit profiles of the involved entities, with a focus on financial stability, leverage, risk management, and regulatory changes.

Main Points by Sector

Corporates

• Darden's Acquisition of Cheddar's Restaurant Is Credit Positive

  • Darden (Baa3 positive) is acquiring Cheddar's (unrated) for $780 million.
  • The deal is expected to be funded with debt and cash, with a leverage increase from 2.5x to 2.9x–3.1x over 12–18 months.
  • The acquisition enhances Darden's product variety and brand presence, particularly in fine dining and other concepts.
  • The outlook change to positive reflects improved performance at Olive Garden and LongHorn, with Olive Garden contributing 58% of Darden's earnings and LongHorn contributing 21%.

• ABB's Acquisition of Bernecker + Rainer Industrie-Elektronik Is Credit Positive

  • ABB (A2 stable) acquires B&R (unrated) for an estimated $1.5–2.0 billion.
  • The acquisition strengthens ABB's position in industrial automation and complements its existing offerings.
  • B&R's high R&D content and skilled workforce are valuable additions.
  • The deal is expected to improve ABB's financial metrics through cash flow and debt reduction.

• Schneider Electric's Distribution of DTN Sale Proceeds to Shareholders Is Credit Negative

  • Schneider Electric (A3 negative) sells Telvent DTN (unrated) for €840 million and uses the proceeds for a €1.0 billion share buyback.
  • This increases leverage slightly and exposes the company to additional legal and credit risks.
  • The buyback program is expected to reduce cash flow from operations pre-working capital changes from 12% to mid-teens.

• Japan Petroleum Exploration Will Benefit from Power Project's Financing Deal

  • JAPEX (Baa1 negative) benefits from a ¥140 billion project financing deal for a natural-gas-fired power project in Fukushima.
  • The integration of upstream and downstream operations provides earnings stability and diversification.
  • The project is expected to be operational in 2020 and will significantly benefit JAPEX's Soma LNG terminal.

Infrastructure

• Spire's Equity Issuance Is Credit Positive
  • Spire (Baa2 stable) issues equity to reduce its debt balance.
  • The proceeds from the equity issuance are expected to improve its cash flow from operations ratio.
  • The company's financial results are largely driven by its natural gas utilities, which serve 1.7 million customers.

Banks

• Santander Consumer USA's Settlements over Subprime Auto Loans Are Credit Negative

  • SC (unrated) settles $26 million in allegations of predatory lending in Massachusetts and Delaware.
  • The settlements increase credit costs and expose the company to further legal liabilities.
  • A significant portion of subprime auto loans originated by high-risk dealers have defaulted, increasing loan losses for securitizations.

• Argentina's Central Bank Approves Santander Rio's Purchase of Citibank's Local Retail Business, a Credit Positive

  • Santander Rio (Caa1 positive/Ba3 stable) acquires Citibank's retail business in Argentina.
  • The acquisition adds 500,000 new customers and 70 offices, enhancing its retail lending position.
  • The Tier 1 ratio drops by 120 basis points, but the bank has a strong capital cushion.

• HSH Nordbank's Significant De-risking Progress Is Credit Positive

  • HSH Nordbank (Baa3/Baa3 developing) reduces non-core assets and improves risk provisions.
  • The bank's common equity Tier 1 ratio increases to 14.1%, indicating improved capitalization.
  • The bank is expected to sell more nonperforming loans and is working to attract potential buyers through its de-risking strategy.

• Azerbaijan's Bank Resolution Framework Would Be Negative for Related-Party Depositors

  • Azerbaijan's proposed bank resolution framework increases exposure of related-party depositors to bank failures.
  • The framework includes mandatory conversion of related-party deposits into equity in case of capital shortages.
  • This could lead to higher risks for shareholders and senior management if banks fail.

• Australia's Limits on Interest-Only Mortgages Will Curb Riskier Lending

  • APRA and ASIC introduce new regulations to limit interest-only mortgages, especially those with high LTV ratios.
  • These measures are credit positive for Australian banks, RMBS, and covered bonds by reducing riskier lending.
  • Interest-only mortgages accounted for 38% of housing loan approvals in December 2016.

Sub-sovereigns

• Ontario Will Benefit from Canadian Government's Infrastructure Investment

  • The Canadian government's infrastructure investment is expected to benefit Ontario's credit profile.

• Mexico's Pre-Budget Statement Is Credit Positive for States and Municipalities

  • The pre-budget statement is viewed as credit positive for sub-sovereign entities in Mexico.

• Mexico's Implementation of Debt Limit System Is Credit Negative for Sub-sovereigns

  • The implementation of a debt limit system is seen as a credit negative for sub-sovereigns in Mexico.

• Spanish Regions Reduced Deficits in 2016

  • Spanish regions achieved a reduction in deficits, which is a positive credit development.

Securitization

• UK Proposes New Rules for Persistent Debtors, a Credit Positive for Credit Card ABS
  • The UK's proposed rules for persistent debtors are expected to improve the performance of credit card ABS, making them more credit positive.

Key Information

• The document highlights both credit positive and negative developments across multiple sectors.
• Acquisitions and divestitures are major factors influencing credit profiles.
• Regulatory changes, such as those in Australia and the UK, are seen as credit positive.
• Legal settlements and compliance measures can have negative credit implications, particularly for banks and subprime lenders.
• Debt management, leverage ratios, and capital cushion are critical factors in credit assessments.
• The proposed bank resolution framework in Azerbaijan is a risk for related-party depositors.
• The integration of businesses, such as JAPEX's power and E&P operations, is expected to provide long-term benefits.