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Credit Outlook Summary - 17 October 2016

Core Content

This document provides an analysis of credit implications stemming from various current events across different sectors, including Corporates, Infrastructure, Banks, Sovereigns, and US Public Finance. The focus is on how these events affect financial leverage, cash flow, and overall creditworthiness of the entities involved.

Corporates

Key Events and Credit Implications

• Coke's Africa Purchase: The purchase of Anheuser-Busch InBev's stake in Coca-Cola Beverages Africa (CCBA) will temporarily increase Coke's net leverage to 2.1x-2.2x net debt/EBITDA. However, if Coke sells CCBA to an independent third party, leverage may remain unchanged. This is a credit negative event.
• Phillips 66 Partners' Debt Funding: Phillips 66 Partners (PSXP) is funding its asset drop-down with $1.1 billion in debt, which is effectively debt-funding share buybacks at its parent company Phillips 66 (P66). This is credit negative for P66**, as it will increase leverage and reduce free cash flow.
• Newell's Tools Sale: Newell Brands (Baa3 stable) plans to sell its tools business to Stanley Black & Decker for $2 billion, using proceeds to pay down debt. This is credit positive as it reduces leverage and improves cash flow.
• Ericsson's Weak Results: Ericsson's third-quarter results were significantly below expectations, leading to a credit negative rating change from Baa1 to Baa2, with further downgrade risk.
• Verallia's PIK Postponement: Verallia's decision to cancel the PIK issuance is credit positive, as it avoids annual cash interest costs of €39 million and improves liquidity.
• Samsung Galaxy Note 7 Production Halt: The halt in production is credit negative due to potential losses and operational disruption.

Key Viewpoints

• Consolidation in the African bottling system is expected to improve efficiency, which is credit positive.
• P66's debt funding for share buybacks and dividends will increase its leverage and reduce cash flow.
• Ericsson's declining sales and margins indicate credit negative trends.
• Newell's strategy to reduce leverage through asset sales is credit positive.
• Verallia's liquidity is improved by postponing the PIK issuance.
• The Galaxy Note 7 production halt has negative implications for Samsung.

Infrastructure

Key Events and Credit Implications

• Duke Paranapanema Acquisition: The acquisition by China Three Gorges is credit positive for the infrastructure project.
• Korea Railroad Corp Tax Refund: A court ruling increases the likelihood of a tax refund, which is credit positive for the company.

Key Viewpoints

• The acquisition of Duke Paranapanema by China Three Gorges is expected to enhance the project's financial position.
• The tax refund for Korea Railroad Corp is a positive development for its credit profile.

Banks

Key Events and Credit Implications

• Wells Fargo's Board Appointments: Positive but may not be sufficient to address underlying issues, so it's credit neutral.
• JPMorgan and Wells Fargo Results: Positive for banks with oil and gas exposure.
• HSBC Mexico's Capital Injection: Credit positive as it improves capital adequacy.
• Citi's Retail Business Sale in Brazil and Argentina: Credit positive due to reduced exposure and improved liquidity.
• Julius Baer's Additional Tier 1 Securities: Credit positive as it strengthens capital position.
• Romania's Mortgage Conversion: Credit negative for banks due to potential financial strain.
• Taiwan's Charges Against CTBC's Shareholder: Credit negative for CTBC due to legal and financial uncertainty.

Key Viewpoints

• Capital injections and asset sales are generally credit positive for banks.
• Legal and regulatory actions, such as Romania's mortgage conversion and Taiwan's charges, are credit negative.
• Wells Fargo's changes are positive but may not resolve deeper issues.

Sovereigns

Key Events and Credit Implications

• Côte d'Ivoire's IMF Financing: The country will receive $647 million in IMF support, which is credit positive for its financial stability.
• Mozambique's Audit: An audit of state-owned enterprises could allow the resumption of international aid, which is credit positive.

Key Viewpoints

• IMF financing and the resumption of international aid are credit positive for the respective countries.
• These events signal improved financial conditions and support for sovereign debt.

US Public Finance

Key Events and Credit Implications

• Illinois' Debt Buy and Hold: Banks agreeing to buy and hold Illinois' variable-rate debt is credit positive for the state's financial position.

Key Viewpoints

• The agreement improves Illinois' ability to manage debt and enhances its credit profile.

Recently in Credit Outlook

• The document references recent articles and links to the Weekly Market Outlook for more detailed financial analysis and economic forecasts.

Key Takeaways

• Credit Positive Events: Newell's debt reduction, Verallia's PIK postponement, HSBC Mexico's capital injection, Citi's asset sale, Julius Baer's securities placement, and the resumption of international aid for Mozambique.
• Credit Negative Events: Coke's temporary leverage increase, Phillips 66 Partners' debt-funded buybacks, Ericsson's weak results, India telcos' spectrum acquisitions, Romania's mortgage conversion, and the Galaxy Note 7 production halt.
• Neutral or Mixed Impacts: Wells Fargo's board appointments, JPMorgan's results, and the potential impact of the Turk Stream pipeline on Gazprom.