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Credit Outlook Summary - 26 MAY 2014

Core Content

The document provides an overview of credit implications of various current events across different sectors and regions, including corporations, banks, insurers, sovereigns, and sub-sovereigns. It includes news analysis and rating changes from Moody's Analytics, highlighting both credit positive and negative developments.

Main Points by Sector

Corporates

• Sanchez Energy

  • Acquired 106,000 acres in the Eagle Ford shale play from Royal Dutch Shell for $639 million.
  • The acquisition is credit positive, as it boosts production and reserves, improves leverage metrics, and provides substantial investment opportunities at low capital costs.
  • Expected to increase production to 42,800 boe/day (up 128%), proved reserves to 119 million boe (up 102%), and leasehold position to 226,000 net acres (up 88%).
  • The company will rely more on revolving credit facility in 2015 due to its ambitious capital budget.
  • Moody's changed its rating outlook to positive from stable.

• Nokia

  • Redeemed €800 million in senior notes, resulting in annual cash interest savings of €55 million.
  • This is credit positive, as it improves the company's interest cover and reduces senior debt to around €2.5 billion.
  • The debt/EBITDA ratio is expected to improve to 1.7x-2.2x by the end of 2014 from 3.7x in Q1 2014.

• Sunac

  • Acquired a 24.3% stake in Greentown for RMB4.9 billion, which is credit negative.
  • This reduces its EBITDA interest coverage to 1.8x from 2.1x and increases its debt leverage to 66% from 63.6%.
  • The acquisition highlights Sunac's high-risk appetite and may increase its exposure to Greentown's credit quality.

Banks

• Tatra banka

  • Proposed €135.1 million dividend payout is credit negative, as it reduces capital cushion and restricts growth in the Slovakian market.
  • The payout would equal 139% of 2013 consolidated net profit and weaken Tier 1 capital ratio by 70 basis points.
  • Tatra has high credit-risk concentrations, particularly in sovereign debt and large SMEs.

• Thailand's Coup

  • Credit negative for banks due to weakened investor and consumer confidence, stalling loan growth, and increasing nonperforming loans (NPLs).
  • Loan growth for 2014 is expected to be 7%-8% vs. 13% average for 2011-13.
  • NPL formation increased in Q1 2014, particularly in retail and SME segments.
  • Banks have a system-wide Tier 1 ratio of 11.8% and loan-loss reserves ratio of 135%, but risks remain high.

• Sri Lanka's Pawning Loan Guarantee

  • Credit positive for banks as it supports the weak quality of pawning loans, which are backed by gold.
  • The guarantee scheme is expected to cap interest rates at 16% and allow LTV ratios to rise to 80%.
  • Banks with large pawning loan exposures, such as People's Bank and Bank of Ceylon, will benefit most.

Insurers

• RSA Insurance Group
  • Sold its Canadian broking business Noraxis for CAD500 million, which is credit positive.
  • The sale is expected to generate a net cash consideration of £238 million and a gain of £140 million.
  • This improves RSA's capital position and net tangible asset value by around £225 million.
  • The company is exiting low-return, non-strategic portfolios to focus on core markets.

Sovereigns

• Thailand's Coup
  • Credit negative for the sovereign, as it does not restore investor confidence and exacerbates economic pressures.
  • Real GDP shrank 2.1% in Q1 2014, marking the first contraction since late 2011.
  • Political uncertainty is expected to continue, with risks of further economic decline.
  • The Office of the National Economic and Social Development Board revised its GDP growth forecast to 1.5%-2.5% for 2014.

Sub-sovereigns

• Russian Government Plan
  • Credit positive, as it aims to ease refinancing pressure on regions.
• Development of China's Local Bond Market
  • Credit positive, indicating improved financial infrastructure and market depth.

Key Information

• Rating Changes

  • Downgraded: Scientific Games, Weatherford International, Bermuda, Clark County Nevada Airport Enterprise.
  • Upgraded: Chesapeake Energy Corporation, Georgia-Pacific, Hanesbrands, Repsol, Board Gais Eireann, DirectRoute (Limerick) Finance, Electricity Supply Board, AXA Insurance, Banco Mercantil del Norte (Cayman I), China Merchants Bank, MBIA Inc., National Public Finance Guarantee, Philippine National Bank, Portuguese banks' government-guaranteed debt, Charleston County South Carolina School District, and structured securities guaranteed by MBIA Insurance Corporation and MBIA UK Insurance Limited.

• Research Highlights

  • Reports on US defense and aerospace, AT&T's DirecTV acquisition, Chinese property developers, Indonesian property developers, North America building materials, Chinese corporates, US speculative-grade liquidity, US retailers, Chinese natural gas, global pharmaceuticals, North America solid waste, US gas and electric utilities, Austrian banks, Ukrainian banks, US banks, US reinsurance, US life insurers, Canadian life insurers, the Commonwealth of Independent States, the UK, sovereign defaults, China, Buenos Aires, English housing associations, UK universities, California, US not-for-profit hospitals, US state debt, Spanish covered bonds, US ABS, Belgian RMBS, and US RMBS.

• Recent Publications

  • Articles from the previous Thursday's Credit Outlook are available.
  • Weekly Market Outlook is a sister publication offering Moody's Analytics' financial predictions and economic releases.

Summary of Credit Impacts

Conclusion

The document outlines a range of credit implications from corporate acquisitions, bank operations, insurance strategies, and sovereign events. Positive developments include improved liquidity, reduced debt, and strategic asset disposals, while negative impacts arise from political instability, high-risk investments, and reduced capital cushions. These factors influence credit ratings, leverage ratios, and overall financial health across various entities.