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Summary of Credit Outlook Document (11 June 2018)

Core Content

The document provides a summary of credit implications from recent corporate, infrastructure, bank, and other financial developments. It outlines the credit impacts of various transactions and regulatory changes on the entities involved, using Moody's ratings and financial metrics as a basis for analysis.

Main Points by Section

Corporates

• Chewy's release as guarantor of PetSmart debt is credit negative for PetSmart debtholders. This reduces the collateral pool for secured creditors and could lead to a distressed exchange if proceeds from the sale are used to purchase PetSmart debt at a deep discount.
• Conduent's credit agreement amendment and non-core asset sales are credit positive. The amendment allows for more flexible use of asset sale proceeds, which can be applied to all existing indebtedness, not just senior secured debt. Asset sales are expected to reduce debt leverage from 3.3x to below 3x.
• Ryerson's purchase of Central Steel & Wire is credit negative. The acquisition will increase leverage and reduce liquidity, as CSTW is not profitable and will likely remain unprofitable in the short term.
• Fortive's $2.7 billion offer to buy Johnson & Johnson's Advanced Sterilization Products unit is credit negative due to increased leverage. The transaction could push adjusted debt/EBITDA to 3.34x, though it is expected to fall to a more manageable level in 2019.
• Profesional Telekomunikasi Indonesia's acquisition of PT Komet Infra Nusantara is credit positive. It strengthens Protelindo's market position and business profile, with minimal impact on leverage due to the EBITDA-accretive nature of the tower business.

Infrastructure

• Entergy Corporation's $1 billion equity issuance is credit positive. It helps mitigate the negative impact of federal tax reform on cash flow-to-debt ratios and defers future debt issuance.
• Greenko Energy Holdings' equity raise and acquisition are credit positive. The acquisition of Orange Renewables adds significant operational capacity and is fully funded by equity, which supports GEH's credit profile.

Banks

• Italy's proposal to ring-fence banks' investment banking operations is expected to have limited effects. Only a few large banks have significant capital market operations, and the impact on retail depositors is minimal.
• MUFG and Mizuho's recovery of ¥200 billion from Sharp is credit positive, as it provides additional liquidity and reduces debt exposure.

Accounting

• FASB moves toward finalizing improved accounting for long-duration insurance contracts. This is a regulatory development that could affect financial reporting and credit analysis for insurance companies.

Asset Managers

• Fortress's re pricing and pay down of term loan is credit positive. This action reduces leverage and improves creditworthiness.
• Invesco's acquisition of Intelliflo is credit positive, as it enhances the company's financial profile through strategic expansion.

Sovereigns

• Mexico's tariffs on US goods have a marginal macroeconomic impact but signal ongoing strained bilateral relations.
• Argentina's preliminary agreement with IMF is expected to support funding, fiscal consolidation, and independent monetary policy.
• Ukraine's anti-corruption court legislation improves prospects for IMF funding, which is credit positive.

US Public Finance

• Illinois' pension buyout plan is credit positive, but reliance on savings poses modest budget risk.
• Illinois Schools' increased state aid is credit positive, indicating improved financial support for public education.

Structured Finance

• Slovakian bank's conversion of old covered bonds is credit positive, suggesting improved capital structure and liquidity.

Key Financial Metrics and Projections

• PetSmart's leverage is expected to rise from 5.4x to over 8.0x due to the Chewy acquisition, though it may see some improvement through cost reductions and synergies.
• Conduent's adjusted debt/EBITDA is projected to fall below 3x in 2018 due to asset sales and debt reduction.
• Fortive's adjusted debt/EBITDA is expected to rise to 3.34x in 2018, but fall to a more acceptable level in 2019.
• Protelindo's adjusted debt/EBITDA remains at 2.0x-2.2x in 2018 and 2019 despite the acquisition.
• Entergy's CFO-to-debt ratio is expected to be 12% in 2018 and 13% in 2019, with a projected 15% ratio after 2019.
• GEH's EBITDA is expected to increase by $130 million in the first full year after the acquisition, with operational capacity rising to about four gigawatts.

Overall Credit Outlook

The credit outlook highlights a mix of positive and negative developments across various sectors. While some companies are benefiting from asset sales, debt restructuring, and strategic acquisitions, others are facing challenges due to increased leverage, reduced collateral, and integration risks. The document emphasizes the importance of liquidity, leverage ratios, and EBITDA generation in assessing creditworthiness.