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Credit Outlook Summary

Core Content

The Credit Outlook document dated 29 September 2016 provides an analysis of the credit implications of various current events across different sectors, including Corporates, Banks, Insurers, and Exchanges. It highlights both credit positive and negative developments, focusing on how they affect financial stability, liquidity, and profitability of the involved entities.

Main Points

Corporates

• Office Depot:

  • Sold its European business to Aurelius Group for an undisclosed amount.
  • The sale is credit positive as it removes a problematic segment and allows focus on North American operations.
  • Office Depot continues to lag behind Staples in performance and faces competition from Amazon.
  • The company is likely to increase shareholder returns in 2017 due to its cash reserves and the removal of the European business.

• Travelex:

  • Sold its US insurance business to Cover-More Group for $105 million.
  • The disposal is credit positive as it improves liquidity and reduces reliance on a non-core business.
  • Travelex's core businesses are underperforming, and it has faced negative free cash flow and liquidity pressures.
  • The company has already sold another non-core asset, Dynamic Currency Conversion, earlier in the year.

• Saipem:

  • Secured $430 million in new onshore drilling contracts, primarily in Saudi Arabia.
  • The contracts are credit positive due to the addition to its backlog and strong customer relationships.
  • Despite a stressed oilfield services industry, Saipem's contracts in Saudi Arabia are at current market rates.
  • The company's onshore drilling segment is its second most profitable, with a 28.6% EBITDA margin.

• Maersk:

  • Announced a planned split to focus on transport and logistics, exiting its energy-related businesses.
  • The split is credit negative as it reduces business diversification and exposes the company to greater volatility in the container shipping sector.
  • Energy businesses contributed 52% of Maersk's EBITDA in 2015, and their performance is expected to decline in the coming years.
  • The proceeds from the split are uncertain, and the negative impact of reduced diversification is expected to persist.

Banks

• Saudi Banks:
  • Benefited from liquidity support by the Saudi Arabia Monetary Authority (SAMA).
  • SAMA injected SAR20 billion in time deposits and introduced seven-day and 28-day repurchase agreements.
  • These measures are credit positive as they reduce funding costs and improve regulatory loan-to-deposit ratios.
  • Banks are facing liquidity pressures due to deposit outflows and low oil prices, which have impacted non-oil GDP growth.

Insurers

• Canadian Mortgage Insurers:
  • Draft capital requirements published by OSFI are credit positive as they increase capital for the mortgage insurance industry.
  • The changes are more risk-sensitive and incorporate factors like creditworthiness and loan-to-value ratios.
  • CMHC, the Crown corporation, is also affected positively as it is a key player in the mortgage insurance market.
  • The government guarantees up to CAD900 billion in mortgage insurance, which backstops exposures for Canadian banks.

Exchanges

• CBOE's Acquisition of Bats:
  • CBOE agreed to acquire Bats Global Markets for $3.2 billion.
  • The acquisition is credit positive for Bats, as it improves revenue diversification and reduces reliance on transaction-based revenues.
  • CBOE plans to suspend its share repurchase program and focus on de-leveraging.
  • The deal increases CBOE's market share in the US options market to 37%, from 27%, and is expected to consolidate the industry.

Key Information

• Credit Positive Events:

  • Office Depot's sale of its European business.
  • Travelex's disposal of its US insurance business.
  • Saipem's new onshore drilling contracts.
  • CBOE's acquisition of Bats.
  • Draft capital requirements for Canadian mortgage insurers.

• Credit Negative Events:

  • Maersk's planned split from its energy businesses.
  • Lebanon's weak fiscal performance.
  • Atlantic City's technical default.
  • Kentucky's court ruling on university funds.

• Trends and Outlooks:

  • The oilfield services industry is under stress, with expected EBITDA declines of 30%–40% in 2016.
  • Canadian housing prices are rising, increasing household debt and posing risks to the banking system.
  • The US options market is consolidating, with CBOE and Nasdaq leading the way.

Summary

The Credit Outlook for 29 September 2016 evaluates the credit implications of recent developments in the corporate, banking, insurance, and exchange sectors. It identifies several credit positive actions, such as Office Depot’s divestiture of its European operations, Travelex’s disposal of its insurance business, Saipem’s new drilling contracts, and CBOE’s acquisition of Bats, which enhance liquidity, reduce risk exposure, and improve revenue diversification. Conversely, it highlights credit negative implications, including Maersk’s exit from energy, Lebanon’s fiscal underperformance, and Atlantic City’s technical default, which raise concerns about financial stability and business diversification. The report also notes ongoing challenges in the oilfield services industry and the potential risks posed by rising Canadian housing prices to the banking sector.