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Credit Outlook Summary

Core Content

This document provides an overview of credit implications from various current events across different sectors, including Corporates, Infrastructure, Banks, Securitization, and Accounting. It highlights both credit positive and credit negative impacts of these events on the financial health of companies and entities.

Main Points

Corporates

• Analog Devices' Acquisition of Linear Technology is credit negative due to increased debt and leverage, which will raise its adjusted financial leverage to over 4x. Despite this, Analog's strong free cash flow generation and debt reduction commitment support its credit profile.
• Oracle's Acquisition of NetSuite is credit negative as the all-cash deal limits share buybacks and acquisition activity. The acquisition cost is high, with a 11x revenue multiple, and may require further debt issuance if Oracle continues aggressive buybacks or acquisitions.
• McDermott's Strong Order Intake is credit positive. The company reported $1.2 billion in orders, increasing its backlog to $4.4 billion. This backlog provides a solid revenue base, though credit metrics are expected to weaken in the second half of 2016.
• Avnet's Acquisition of Premier Farnell is credit negative as it will increase Avnet's leverage to 3.3x. The acquisition is seen as a strategic move, but the integration risks and financial strain are significant.
• Vale and BHP Billiton's Support of Samarco is credit negative for the two mining companies due to the financial burden of the dam collapse remediation and compensation. However, this support is credit positive for Samarco, helping it meet short-term obligations.
• Gategroup's Acquisition by HNA is credit positive as it provides strategic and operational benefits. The acquisition enhances Gategroup's presence in the Asian market and offers growth opportunities.
• Metalloinvest's Early Debt Repayment is credit positive as it reduces leverage and improves liquidity. The company has no meaningful debt maturities until 2018, and its liquidity remains solid.
• Reckitt Benckiser's £300 Million Provision is credit negative as it reduces cash flow, but the impact on debt and free cash flow is expected to be minimal. The company remains highly generative of free cash flow.
• Geely's Disposal of Loss-Making Joint Ventures is credit positive as it aims to improve profitability and reduce leverage. The disposal of stakes in Kandi Electric Vehicles Group and another joint venture is expected to enhance financial performance.

Infrastructure

• NextEra's Acquisition of Oncor is credit positive for both companies, enhancing their market positions and financial stability.
• Big Rivers Electric's 10-Year Supply Contract is credit positive, providing long-term revenue stability and growth potential.
• Energisa's BRL1.37 Billion Capital Increase is credit positive, strengthening its financial position and supporting future operations.

Banks

• Russian Central Bank's Tightened Foreign Assets Controls is credit positive as it improves financial stability and reduces risks.
• Norwegian Banks' Rising Corporate Lending Margins mitigate downward pressure on profitability, which is credit positive.
• Slovakia's New Countercyclical Capital Buffer is credit positive, as it enhances the financial resilience of the banking sector.

Securitization

• Spain's SME ABS will benefit from a funding option with crowdfunding platforms, which is credit positive.

Accounting

• FASB's Income Tax Disclosure Proposal benefits credit analysis by improving transparency and enabling more accurate financial assessments.

Key Information

• Analog Devices' acquisition of Linear Technology will increase its debt/EBITDA ratio to over 4x, but its strong cash flow generation and debt reduction plan may support its credit profile.
• Oracle plans to fund the NetSuite acquisition with domestic cash and may issue more debt, which could affect its credit rating if it continues aggressive buybacks.
• McDermott has a strong backlog and revenue base, but its credit metrics are expected to weaken in the second half of 2016 due to reduced project activity.
• Avnet faces increased leverage and integration risks with the Premier Farnell acquisition, which is seen as a strategic move.
• Vale and BHP Billiton are under financial strain due to Samarco's liabilities, but their liquidity remains adequate.
• Gategroup benefits from HNA's acquisition, which provides strategic growth opportunities and long-term investment.
• Metalloinvest has reduced its debt and improved its liquidity, with no significant debt maturities until 2018.
• Reckitt Benckiser faces a cash flow reduction due to the provision, but its free cash flow generation remains strong.
• Geely aims to improve its financial health by disposing of loss-making joint ventures, which is credit positive.
• Spain's SME ABS will gain access to new funding sources through crowdfunding platforms.
• FASB's proposal enhances transparency in tax disclosures, aiding credit analysis.

Credit In Depth

• European Banks generally performed well in the 2016 stress tests, with credit metrics exceeding the quantitative guidance for an upgrade. However, the stress test results are not yet finalized and will influence future capital requirements.
• McDermott is a full-service engineering and construction company focused on the upstream oil and gas sector. Its credit quality is impacted by its reliance on Saudi Aramco and the volatility of the oil and gas market.
• Samarco is a joint venture between Vale and BHP Billiton, which is facing significant financial challenges due to the dam collapse. The support from its parent companies is credit positive for Samarco but credit negative for Vale and BHP Billiton.

Recently in Credit Outlook

• Articles from the previous week's Credit Outlook are referenced, suggesting ongoing analysis and updates.
• A link to the previous week's Credit Outlook is provided for further reading.

Summary

The document outlines the credit implications of several corporate transactions and market developments, emphasizing the impact on leverage, liquidity, and profitability. While some acquisitions and events are seen as credit negative due to increased financial burden, others are credit positive as they offer strategic advantages and financial stability. The analysis is structured to provide clear insights into the creditworthiness of each entity involved, considering both short-term and long-term financial implications.