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CreditOutlook Summary

Core Content Overview

This document provides a comprehensive analysis of credit implications stemming from various current events across multiple sectors, including Corporates, Infrastructure, Banks, and US Public Finance. It highlights both positive and negative credit impacts on different companies and entities, based on Moody's Analytics' assessments. The document also includes rating changes and research highlights, offering insights into market trends and financial health indicators.

Main Points and Key Information

Corporates

• Emirates Order Cancellation:

  • Emirates Airline cancelled a $16 billion order for 70 Airbus A350 XWB aircraft, valued at around $22 billion now.
  • This is a credit negative for Airbus and a credit positive for Boeing.
  • The cancellation reduces Airbus' A350 XWB order book by ~10% (from 812 to 742 units), but the impact on financials is expected to be limited due to the delayed delivery timeline (2019 onwards).
  • Key suppliers: Rolls-Royce, United Technologies, Thales, Rockwell Collins, and Spirit Aerosystems may face some financial pressure if Airbus shifts product strategy.

• Stronger PC Demand:

  • Intel raised its Q2 and full-year revenue guidance due to stronger-than-expected business PC demand.
  • This is a credit positive for Intel and indirectly for Hewlett-Packard (HP), which derives 30% of its revenue and 10% of operating profit from PCs.
  • HP's PC revenue increased 8% YoY in Q2, with operating profit up 21%.
  • The positive PC demand trend suggests that the death of the PC has been greatly exaggerated, as per Mark Twain.

• B/E Aerospace Spinoff:

  • B/E Aerospace plans to split into two entities, one focused on aircraft cabin interiors and the other on consumables.
  • If all debt remains with the cabin interiors business, this would lead to a credit negative impact.
  • The company's outlook was changed to negative from stable.
  • The spinoff is expected to be completed in Q1 2015, and the company is likely to fund the acquisitions with debt, increasing its debt/EBITDA ratio.

• Nexeo's Composites Sale:

  • Nexeo sold its composites business for $61.5 million to Composites One, which is a credit positive.
  • The sale proceeds and expected earnings from recent acquisitions are expected to reduce Nexeo's leverage.
  • Nexeo's debt/EBITDA ratio improved to ~6.4x, though it remains stressed.
  • The company is shifting toward high-margin specialty chemicals.

• Mexico's Auto-Parts Manufacturers:

  • Mexico's auto production increased by 12.5% in May, reaching 287,000 units, which is a credit positive for Tenedora Nemak and Sanluis Rassini.
  • Mexico's vehicle production is projected to reach 3.7 million units by 2016, up 28% from 2013.
  • Both companies are expected to see improved free cash flow and leverage ratios by 2016.

• Japan Tobacco's E-Cigarette Acquisition:

  • Japan Tobacco acquired Zandera Ltd., a UK-based e-cigarette maker, which is a credit positive.
  • The acquisition diversifies JT's product lines and offers potential growth in a less regulated market.
  • E-cigarettes are currently less taxed than traditional cigarettes, and the market is expected to grow by at least 50% annually in the US.
  • The purchase price is expected to be a modest outlay, with limited impact on JT's credit profile.

• True Corp's Recapitalization:

  • True Corp plans to raise THB65 billion (about $2 billion) through a rights offering and private placement to China Mobile.
  • This is a credit positive for True Corp and a credit negative for China Mobile.
  • The deal will significantly reduce True Corp's leverage and restore its equity base.
  • China Mobile's increased risk appetite and potential future acquisition strategy are a concern.

Infrastructure

• Covanta's Dividend Increase:
  • Covanta announced a 40% increase in its quarterly dividend, which is a credit negative.
  • The dividend increase is expected to raise annual cash flow requirements by $37 million.
  • The company's dividend ratio is projected to rise to ~40% of operating cash flows from ~30%.
  • While cost savings are expected, the higher dividend will weaken retained cash flow/debt ratio.

Banks

• US Federal Reserve Stress Test Modifications:

  • The Fed proposed changes to bank stress tests that would result in more conservative capital planning.
  • These changes are credit positive for banks as they enhance capital management practices.
  • The Fed pointed out that some banks previously exploited timing differences in the stress testing process.

• Liquidnet's SEC Settlement:

  • Liquidnet's settlement of an SEC investigation is a credit positive.

• ICE Launch of Euronext IPO:

  • The launch of Euronext IPO by ICE is a credit positive.

• Monte dei Paschi Non-Performing Loan Sale:

  • Monte dei Paschi sold non-performing loans to Fortress, which is a credit positive.

• Privatization of Philippines' United Coconut Planters Bank:

  • The privatization is a credit positive.

• Reserve Bank of India's Liquidity Coverage Guidance:

  • The guidance is a credit positive for banks.

US Public Finance

• Massachusetts Municipal Health Insurance Reform:

  • The reform is a credit positive for local governments.

• California Public Schools Teacher Employment Ruling:

  • The ruling is expected to benefit public schools.

Securitization

• Santander Consumer USA Auto ABS Deal:

  • The company corrected a payment error and increased enhancement in its Auto ABS deal, which is a credit positive.

• Argentine Interest Rate Caps:

  • The caps are a credit negative for securitizations.

Rating Changes

• Downgrades:

  • Johnson Controls, Avanza Spain, PPL Energy Supply, Centras Insurance, and Providence Health & Services were downgraded.

• Upgrades:

  • 38 tranches from 2005-06 US subprime RMBS transactions were upgraded.

Research Highlights

• Moody's published reports on a wide range of sectors including:
  • North American and EMEA chemical
  • South and Southeast Asian high-yield
  • European telecom
  • Chinese retail
  • US dental service
  • North American railroads
  • US engineering and construction
  • European high-yield
  • US electric utilities
  • UK infrastructure guarantees
  • Georgia Power and South Carolina Electric
  • Australian airports
  • US P&C insurers
  • Italian banks
  • Balkan banks
  • Econometric modeling of banks' creditworthiness
  • European money market funds
  • Terrorism risk insurance
  • Africa, Kazakhstan, multilateral development banks
  • Spanish regions
  • US housing finance agencies
  • French covered bonds
  • Canadian ABCP
  • European RMBS and ABS
  • US jumbo reverse mortgages
  • European securitization

Recently in Credit Outlook

• The document references recent articles in the previous week's edition of Credit Outlook, and invites readers to access the full edition for more details.
• It also provides a link to the Weekly Market Outlook, a sister publication with Moody's Analytics' financial predictions and economic release dates.

Conclusion

The summary highlights that while certain events, such as the Emirates order cancellation, have credit negative implications for some entities, others, like increased PC demand and the sale of non-core assets, have credit positive effects. The document also emphasizes the importance of capital planning, regulatory changes, and market trends in shaping credit profiles. Overall, the analysis provides a balanced view of the credit landscape across various industries and regions.