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Credit Outlook Summary - 10 October 2016

Core Content

The document provides an analysis of credit implications of various corporate and financial developments across multiple sectors, including Corporates, Infrastructure, Banks, Insurers, Asset Managers, Sovereigns, and US Public Finance. It highlights both credit positive and credit negative events, offering insights into how these developments may affect the financial leverage, liquidity, and overall creditworthiness of the involved entities.

Main Points by Sector

Corporates

• ConvaTec's Planned IPO and Revamped Capital Structure Are Credit Positive

  • ConvaTec plans to raise $1.8 billion through an IPO and additional debt to reduce leverage.
  • Pro forma debt/EBITDA will drop from 8.2x to 4.3x, with further reduction expected to 3.5x by 2017.
  • The IPO will improve interest coverage and generate around $200 million in free cash flow annually.
  • The move reflects a shift to a more conservative financial policy.

• TransDigm's Special Dividend Will Increase Leverage

  • A $1.1–1.5 billion special dividend will increase leverage by ~0.5x.
  • Pro forma debt/EBITDA will rise to 7.6x from 7.1x.
  • The company expects to reduce leverage to mid-6x to low-7x through earnings growth and operational synergies.

• Cardtronics' Planned Acquisition of DirectCash Payments Will Increase Leverage

  • The $500 million acquisition is credit negative, increasing leverage by 1x.
  • Pro forma debt/EBITDA will rise to 3x from 2x.
  • The acquisition expands international presence and offers potential synergies, but the loss of 7-Eleven may impact leverage.

• Constellation Takes a Shot at Another Premium Brand, a Credit Positive

  • Acquiring High West Distillery for $160 million is credit positive.
  • The deal does not significantly increase leverage, as pro forma debt/EBITDA remains at 3.5x.
  • The acquisition strengthens the company's position in the high-growth craft whiskey segment.

• Telecom Argentina Gets Capital Boost from World Bank's IFC

  • A $400 million credit facility from IFC is credit positive.
  • The loan will support expansion of 4G LTE networks and help fund the $2.6 billion infrastructure plan.
  • The leverage ratio will increase slightly to 1.0x from 0.6x, but remains manageable.

• OHL's Sale of Additional Abertis Stake Is Credit Positive

  • OHL sold 4.425% stake in Abertis for €598 million, reducing gross recourse leverage by 2.7x.
  • Proceeds will be used to repay margin loans and reduce debt, improving liquidity and credit metrics.
  • The company is expected to de-lever more quickly than anticipated, though this requires recovery in construction activities.

• AstraZeneca's Failed Drug Trial Is Credit Negative, but Pipeline Remains Strong

  • Brilinta's failed trial reduces growth prospects, making the $3.5 billion sales target by 2023 unlikely.
  • The company faces competition on Crestor, its top-selling drug.
  • Despite the setback, the strong late-stage pipeline offers potential for future growth.

• TOTAL's Sale of Its Specialty Chemicals Affiliate Is Credit Positive

  • TOTAL sold Atotech B.V. for $3.2 billion, improving retained cash flow/net adjusted debt to 29% from 25%.
  • The sale is part of a $10 billion divestment program to reduce leverage.
  • The company's gearing ratio is expected to improve to 27% following the sale and hybrid note issuance.

• Sime Darby's Share Placement Is Credit Positive

  • The MYR2.4 billion private placement will reduce debt/EBITDA to 3.5x from 3.8x.
  • The company will use half of the proceeds to repay bank borrowings, lowering refinancing risk.
  • Further debt reduction is needed to reach a debt/EBITDA of 3.0x and stabilize the rating outlook.

Infrastructure

• Kansai Electric Will Benefit from Japanese Regulator's Preliminary Okay to Extend Older Reactor's Life
  • The regulator approved extending the life of Mihama 3 nuclear reactor by 20 years.
  • This approval is credit positive, as it supports increased earnings and signals regulatory support for nuclear restarts.

Banks

• US Regulator's Final Rule on Prepaid Cards Is Credit Negative for Consumer Finance Companies

  • The rule is expected to negatively impact consumer finance companies' credit profiles.

• Canada's Proposed Policy of Mortgage Lender Risk Sharing Is Credit Negative for Banks

  • The policy may increase risk exposure for banks, leading to credit negative implications.

• Citibanamex's Investment Plan Is Credit Positive

  • The investment plan is expected to enhance the company's financial position.

• Poland's Additional Capital Requirements for Systemically Important Banks Are Credit Positive

  • The new requirements are seen as credit positive, as they may lead to stronger capital positions.

• Uganda's Falling Loan Volumes and Rising Problem Loans Will Damage Banks' Profitability

  • This trend is credit negative, as it threatens bank profitability.

Insurers

• Hurricane Matthew Threatens to Cause Significant Losses for P&C Insurers and Reinsurers

  • The hurricane poses a risk to the credit profiles of property and casualty insurers and reinsurers.

• Sompo Japan Nipponkoa's Proposed Acquisition of Endurance Is Negative for Buyer, Positive for Target

  • The acquisition is credit negative for Sompo Japan Nipponkoa but credit positive for Endurance.

Asset Managers

• Janus-Henderson Merger Is Credit Positive and a Response to Active Management's Loss of Assets

  • The merger is seen as a strategic move to retain assets and is credit positive.

• Canada Pension Plan Enhancements Are Credit Positive for CPPIB Capital

  • The enhancements are expected to strengthen the credit profile of CPPIB Capital.

Sovereigns

• Canada's Measures to Reduce Housing Market Risks Are Credit Positive for the Sovereign

  • The measures are aimed at improving housing market stability and are credit positive.

• Chile's Fiscal Deficits Push Debt to Its Highest Level in Two Decades

  • Chile's debt levels have reached a two-decade high, which is a credit negative development.

US Public Finance

• New Jersey's Tax Plan Has Negative Implications for State's General Fund

  • The tax plan is expected to negatively impact the state's general fund.

• US Federal Court Upholds Detroit's Pension Cuts, a Credit Positive

  • The pension cuts are seen as a positive for Detroit's credit profile.

Key Information

• Credit Positive Events: ConvaTec's IPO, Constellation's acquisition, Telecom Argentina's IFC loan, OHL's Abertis stake sale, TOTAL's divestment, Sime Darby's share placement, and Canada's housing market measures.
• Credit Negative Events: TransDigm's special dividend, Cardtronics' acquisition, AstraZeneca's failed trial, US and Canada's prepaid card and mortgage policies, Uganda's loan trends, and Chile's rising debt.
• Overall Outlook: The document highlights a mix of events that either improve or worsen the credit profiles of companies and sovereigns, with a focus on leverage, liquidity, and operational performance.