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Credit Outlook Summary - 24 October 2016

Core Content

This document provides an analysis of credit implications of various corporate, bank, sovereign, and sub-sovereign events as of 24 October 2016. It highlights credit positives and negatives for different entities, focusing on leverage, profitability, and financial stability.

Main Points

Corporates

• SUPERCALU's Sale of Save-A-Lot Business: Credit positive as the sale will reduce leverage, improve capital structure, and fund growth initiatives. The sale is expected to lower pro forma post-sale debt/EBITDA to 4.25x from 4.7x, and the company's remaining businesses are expected to have lower revenue growth and operating margins.
• Abbott's Vascular Products Sale: Credit negative due to the company's revised financing plan, which reduces the amount of equity it can use for acquisitions. The sale is expected to result in pro forma initial debt/EBITDA of 4.5x, and the company's ratings are likely to be downgraded to Baa3 with a stable outlook.
• VeriSign's .Com Registry Agreement Extension: Credit positive as it removes uncertainty around the .com registry and allows management to focus on growth. The extension is expected to keep the .com gTLDs at 38% of total gTLDs, and the company's debt/EBITDA is expected to remain at 3.5x-4.0x.
• Glencore's Disposal of Australian Rail Asset: Credit positive as the sale adds cash and supports debt reduction without significantly affecting earnings. The company aims to reduce net funding to below $30 billion by 2017, and its gross adjusted leverage is expected to improve to 3.2x.
• SGL Carbon's Sale of Graphite Electrode Business: Credit positive due to the sale of a loss-making segment, which will reduce net debt and improve net debt/EBITDA to 6.2x from 7.6x. The company's remaining divisions are strategic for its major shareholders.
• UPC's Acquisition of Multimedia Polska: Credit positive as the acquisition strengthens market position in Poland, generates annual synergies of $30 million, and slightly improves leverage. The transaction is expected to reduce UPC's debt/EBITDA to less than 5.25x.
• COFCO Meat's IPO: Credit positive for COFCO HK as the IPO will reduce its debt and improve transparency. The IPO is expected to raise up to HKD2.6 billion, with proceeds used for expansion and repayment of loans.

Banks

• Brazil's Rate Cut: Credit positive for banks as it reduces funding costs, improves asset quality, and supports loan growth. Large retail banks with long-term fixed-rate loans will benefit most.
• Lebanese Banks' Decline in Foreign Assets: Credit negative due to a significant reduction in foreign assets, increasing net foreign liabilities. This is attributed to the central bank's financial operations, which have increased exposure to the sovereign and reduced foreign assets.

Sovereigns

• Croatian Parliament's Support for New Government: Credit positive as it suggests stability and support for the new government.
• Namibia's Increase in Teachers' Salaries: Credit negative as it may challenge fiscal consolidation.
• Zambia's Fiscal Deterioration: Credit negative due to a sizable fiscal deterioration.

Sub-sovereigns

• German Laender: Benefit from changes to the financial equalisation system.
• Italian Regions: Will benefit from higher healthcare funding in 2017.

Key Information

• SUPERCALU: Sale of Save-A-Lot business will reduce leverage and improve capital structure. Remaining businesses have lower growth and margins.
• Abbott: Vascular products sale is part of regulatory compliance. The company's ratings are expected to be downgraded to Baa3 with a stable outlook.
• VeriSign: Extension of .com registry agreement is credit positive, with a solid track record of meeting performance requirements.
• Glencore: Continued debt reduction through divestments and bond buybacks, aiming for net funding below $30 billion.
• SGL Carbon: Sale of loss-making graphite electrode business is credit positive, focusing on strategic divisions.
• UPC: Acquisition of Multimedia Polska strengthens market position and improves leverage.
• COFCO HK: Credit positive due to COFCO Meat's IPO, which reduces debt and improves transparency.
• Brazil's Banks: Rate cut is expected to improve profitability and reduce problem loans.
• Lebanese Banks: Decline in foreign assets is credit negative, increasing exposure to the sovereign.

Conclusion

The credit outlook highlights a mix of positive and negative developments across various sectors and regions. Corporate actions such as divestments and acquisitions are seen as credit positives if they reduce leverage and improve financial stability. Conversely, reductions in foreign assets and fiscal deterioration are credit negatives. The overall sentiment is cautiously optimistic, with a focus on debt reduction, profitability, and regulatory compliance.