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Credit Outlook Summary - 12 October 2017

Core Content Overview

This document provides a summary of credit implications related to corporate, infrastructure, insurance, and sovereign developments as of 12 October 2017. It includes key financial updates, restructuring efforts, and strategic moves that affect credit risk and rating outlooks.

Corporates

Honeywell's Planned Spinoffs Are Credit Negative

• Overview: Honeywell International Inc. (A2 stable) announced plans to spin off its transportation systems unit and some home products businesses.
• Credit Impact: The spinoffs are credit negative due to the loss of earnings and reduced revenue, which will make it harder for the company to meet its leverage target.
• Financial Details:
  • The spun-off businesses accounted for about $7.5 billion or 20% of Honeywell's revenue during the 12 months ending 30 June 2017.
  • Debt/EBITDA was about 2.5x as of 30 June 2017, which is relatively high for A2-rated companies.
  • The company has $10 billion in cash and short-term investments and is expected to generate over $2.5 billion in annual free cash flow through 2018.
• Strategic Outlook:
  • Honeywell expects to pursue acquisitions to replace lost earnings and supplement organic growth.
  • The company is likely to prioritize acquisitions over debt repayment.
  • We expect modest revenue growth and margin expansion through 2018.

Infrastructure

TerraForm Power Shareholders Approve Credit-Positive Acquisition by Brookfield

• Overview: TerraForm Power, Inc. (public parent of TPO, B3 review for upgrade) approved a merger with Brookfield Asset Management Inc. (Baa2 stable).
• Credit Impact: The transaction is credit positive, aligning TPO with a financially stable sponsor and eliminating the risk from SunEdison's (SUNE, unrated) bankruptcy.
• Transaction Details:
  • The deal is expected to close on 16 October 2017.
  • Brookfield will hold an indirect majority stake of approximately 51% and appoint key management.
  • TPO is valued at an implied total equity of $1.7 billion and total enterprise value of $6.6 billion.
• Financial Impact:
  • Brookfield will provide a $500 million subordinated line of credit to fund acquisitions.
  • TPO has a 3,500-megawatt right-of-first-offer pipeline, including 1,200 megawatts of operating wind plants and 2,300 megawatts of development-stage projects.
  • TPO's adjusted EBITDA for 2017 is projected to be $440–$460 million, resulting in a consolidated debt/EBITDA ratio of 7x–8x.
• Management Strategy:
  • The new management is expected to make more prudent financing decisions compared to previous aggressive growth plans.
  • TPO has accumulated significant cash since SUNE's bankruptcy and the sale of UK assets.

Insurers

SwissRe Will Sell 5% Stake in ReAssure to MS&AD, a Credit Positive for Both

• Overview: Swiss Re Ltd. (unrated) and MS&AD Insurance Group Holdings (unrated) announced the sale of a 5% stake in ReAssure for £175 million.
• Credit Impact: The transaction is credit positive for both entities, enhancing their ability to access the UK closed book market and diversifying their portfolios.
• Strategic Benefits:
  • MS&AD will have the ability to invest up to £800 million in ReAssure over three years.
  • The full transaction implies a £5.3 billion valuation for ReAssure.
• Financial Impact:
  • The deal allows Swiss Re to access more cash-generative, closed book business without increasing credit risk beyond its appetite.
  • ReAssure provides meaningful diversification for Swiss Re and acts as a buffer against cyclicality in the P&C reinsurance business.
• ROE and Profitability:
  • Swiss Re's Life Capital division has generated strong cash returns on equity (ROE) of approximately 12% since 2013.
  • The division has contributed about $3.6 billion in dividends since 2012.
  • Swiss Re targets a medium-term ROE of 6%–8% for Life Capital, while ReAssure is expected to be more profitable on a standalone basis.
  • MS&AD expects the transaction to help it achieve a 10% ROE and increase international profitability to 50% of group core profit.

Sovereigns

Moldova's New Banking Law Will Strengthen the Banking Sector, a Credit Positive for the Sovereign

• Overview: Moldova's Parliament passed a new banking law aimed at improving the regulatory framework and strengthening the National Bank of Moldova's supervisory powers.
• Credit Impact: The law is credit positive as it reduces the risk of another banking crisis and lowers the likelihood of new contingent liabilities on the government's balance sheet.
• Regulatory Context:
  • The law aligns national legislation with European standards and transposes Basel III rules into national law.
  • It will enter into force in early 2018, with banks having two years to comply.
• Sector Outlook:
  • The banking sector remains vulnerable, with a high NPL ratio of 17.7% as of August 2017.
  • The three largest banks (Agroindbank, Moldindconbank, Victoriabank) account for 65% of total banking assets and have the highest NPL ratios.
  • The law enhances transparency and expands the central bank's legal powers, including the ability to apply sanctions.

Key Takeaways

• Credit Negative Developments:
  • Honeywell's spinoffs reduce revenue and earnings, making it harder to meet leverage targets.
  • Agrokor's accounting restatements reveal significant irregularities and deteriorated performance, leading to a credit negative rating.
• Credit Positive Developments:
  • TMF's planned IPO will reduce its net leverage and improve cash flow to debt ratios.
  • Brookfield's acquisition of TerraForm Power improves credit quality and liquidity.
  • The sale of a 5% stake in ReAssure by SwissRe to MS&AD is credit positive for both.
  • Moldova's new banking law is credit positive for the sovereign, reducing banking crisis risks.

Additional Notes

• The document also references recently published articles in the Credit Outlook, covering various corporate, infrastructure, insurance, and sovereign credit implications.
• It includes disclaimers regarding the use of credit ratings and information, emphasizing that they are not investment advice and are subject to legal and regulatory constraints.