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Credit Outlook Summary - 10 March 2016

Core Content

This document provides an analysis of credit implications arising from recent events in various sectors including Corporates, Infrastructure, Banks, and US Public Finance. It outlines how these events may affect the financial health and credit ratings of the involved entities.

Main Points by Sector

Corporates

• Couche-Tard (Baa2 stable): Acquiring 279 Esso sites in Ontario and Quebec will increase its leverage from 2.1x to 2.5x. However, the company has strong cash flow generation capabilities and expects leverage to decline to 2x within 12-18 months.
• Topaz Energy and Marine Limited (B2 review for downgrade): Extended BP contract for 14 vessels is a credit positive, as it boosts revenue and cash flow predictability. Despite this, the company's credit ratings remain under review due to weak industry fundamentals.
• TerraForm Power Operating (TERP, B3 negative): Benefited from Vivint's termination of the merger with SunEdison, which removes future capital obligations and reduces leverage.

Infrastructure

• Exelon and Pepco Holdings (Baa2 stable and Baa3 developing): Filing for a third merger approval is a credit positive for Exelon, as it would add $8 billion in rate base. For PHI, a merger termination would create significant financial stress.
• Transport for London (TfL, Aa2 stable): Loss of UK government operating grants is a credit negative, as it reduces the most stable revenue source and creates a revenue gap. The grant loss is expected to result in a cumulative loss of £2.9 billion by the end of fiscal 2021.

Banks

• Uganda's Banks: High lending rates (24.6%) are credit negative, as they hurt borrowers' repayment capacity and loan demand. The shilling depreciation and high proportion of foreign-currency loans (45%) compound asset risks. Nonperforming loan ratios have increased to 5.3%.
• ANZ (Aa2 stable): Alleged market manipulation by Australian regulators is a credit negative, as it could lead to legal and reputational consequences.

US Public Finance

• New Jersey: Retaining the ability to cut pension contributions is a credit positive, as it provides flexibility in managing public finances.

Key Information

• Couche-Tard is acquiring Esso sites for CAD1.7 billion, increasing leverage to 2.5x, but expects to deleverage quickly due to strong free cash flow.
• Topaz's new BP contract adds $1.4 billion to its revenue backlog and provides predictability, but its credit ratings are under review due to weak oil prices.
• China Railway Construction Corporation Limited (CRCC) is expected to benefit from increased railway spending, with a 45%-50% market share and stable adjusted EBITDA margins.
• Korea's spectrum auctions will increase leverage for SKT and KT, potentially impacting their credit ratings.
• Transport for London faces a significant revenue gap due to the early termination of government grants, increasing financial risk.
• Uganda's banks are negatively affected by high lending rates and shilling depreciation, which impact asset quality and loan growth.
• ANZ is facing legal action over alleged market manipulation, which is a credit negative.

Summary of Credit Impacts

Conclusion

The report highlights a mix of credit positive and negative implications across different sectors. While some companies benefit from strategic acquisitions or government support, others face challenges due to increased leverage, reduced revenue stability, and regulatory issues. The overall credit outlook remains cautious, with particular emphasis on the impact of macroeconomic conditions and industry-specific risks.