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Credit Outlook Summary

Core Content

This document provides a detailed analysis of credit implications from various current events across corporate, infrastructure, banks, and sovereign sectors. The assessments are based on Moody's credit ratings and outlooks, evaluating the financial and operational impact of these events on the involved entities.

Main Points and Key Information

Corporates

• Broadcom's Acquisition of Brocade

  • Credit Impact: Credit negative
  • Reason: Increased leverage due to the $5.5 billion acquisition.
  • Pro forma Debt/EBITDA: Rises to 3.0x from 2.6x.
  • Outlook: Moody's expects adjusted debt/EBITDA to decline to 2.5x by mid-2018.
  • Strategic Rationale: Brocade's fiber channel switching hardware and software will complement Broadcom's existing product line. However, the company plans to divest its IP networking business.
  • Company Profile: Broadcom maintains leading market positions in several areas and has a stable revenue and free cash flow due to its fab-lite model and broad product portfolio.

• American Axle's Acquisition of Metaldyne

  • Credit Impact: Credit negative
  • Reason: Increased leverage and potential loss of customer concentration with General Motors.
  • Pro forma Debt/EBITDA: Increases to 3.9x from 2.6x.
  • Strategic Benefits: Increased scale, geographic and industry diversity.
  • Outlook: A one-notch downgrade is expected, but the impact is limited due to cost synergies of $100–120 million by 2018.

• Colonial Pipeline's Pipeline Explosion

  • Credit Impact: Credit negative
  • Reason: Potential remediation costs, litigation risk, and lost revenue.
  • Estimated Loss: $10 million in lost profits.
  • Liquidity: Strong with over $200 million in cash and a $500 million credit facility.
  • Insurance: Expected to cover costs, but no business interruption insurance exists.
  • Safety Concerns: The incident raises questions about safety practices and may lead to investigations.

• China Railway Construction's Zambia Railway Contract

  • Credit Impact: Credit positive
  • Reason: Strengthens CRCC's market position in Zambia.
  • Contract Value: $2.3 billion (RMB15.1 billion).
  • Project Details: 388.8 km single-track railway to be completed over four years.
  • Outlook: Overseas revenue is expected to grow to 7–8% of total revenue over the next three years.
  • Debt/EBITDA: Expected to remain stable at 4.5x–5.0x over the next 12–18 months.

• Shanghai Electric Power's Acquisition of K-Electric

  • Credit Impact: Credit negative
  • Reason: High geopolitical, regulatory, and execution risks in Pakistan.
  • Acquisition Value: $1.77 billion for a 66.4% stake.
  • Impact on SEP: KE will constitute 28% of SEP's assets, 40% of its revenue, and 27% of its EBITDA.
  • Currency Risk: Exposure to the depreciating Pakistani rupee.
  • Strategic Importance: SEP is an overseas investment vehicle of SPIC, aligned with China's "Going Out" strategy.

Infrastructure

• TransCanada's Asset Sale and Equity Offering

  • Credit Impact: Credit positive
  • Reason: Reduces leverage and improves financial metrics.
  • Actions: Sold US Northeast power business, raised $3.2 billion in equity, retained Mexican natural gas pipeline.
  • Debt/EBITDA: Expected to decline to 5.0x–5.5x in 2017 and below 5.0x in 2018.
  • Mexican Assets: Low risk due to long-term contracts with Comision Federal de Electricidad.
  • Simplified Structure: Maintaining sole ownership of Mexican assets simplifies the corporate structure.

• Hazelwood Power Station Closure in Australia

  • Credit Impact: Credit positive for remaining power generators
  • Reason: Reduces supply surplus and supports upward pressure on wholesale power prices.
  • Impact on NEM: Prices are expected to rise due to the removal of a major baseload generator.
  • Fossil-Fuel Generators: Face challenges due to increasing renewable energy and carbon reduction goals.
  • Government Commitment: Australia is committed to reducing carbon emissions by 26–28% below 2005 levels by 2030.

Banks

• PKO BP's Acquisition of Polish Leasing Company
  • Credit Impact: Credit positive
  • Reason: Enhances market share and profitability in the leasing sector.
  • Market Share: Increases from 7.1% to 13%.
  • Leasing Volume: PKO BP's net lending to SMEs will nearly double.
  • Profitability: RLPL's net profits in 2015 were PLN71 million, contributing 2.7% to PKO BP's annual profits.
  • Sector Growth: Leasing market in Poland grew 16.6% in 2015, with a return on average assets of 1.0%.

Sovereigns

• Spain's New Minority Government

  • Credit Impact: Credit negative
  • Reason: Struggles to implement reforms.

• Georgia's Parliamentary Elections

  • Credit Impact: Credit positive
  • Reason: Demonstrates institutional strength and supports policy continuity.

• Egypt's Exchange-Rate Liberalization

  • Credit Impact: Credit positive
  • Reason: Supports banks through improved foreign-exchange management.

• South Africa's Platinum Miners' Wage Deal

  • Credit Impact: Credit positive
  • Reason: Supports the sovereign and mining companies.

• Japanese Aid to Myanmar

  • Credit Impact: Credit positive
  • Reason: Boosts economic development in Myanmar.

US Public Finance

• Southeastern Pennsylvania Transportation Authority Strike
  • Credit Impact: Minimal risk to bondholders
  • Reason: The strike poses no significant financial risk to the authority due to its strong liquidity and operational flexibility.

Recent Articles

• The document references articles from the previous Thursday's Credit Outlook, though the content is not fully included in the provided text.
• It also directs readers to Last Thursday's Credit Outlook for more detailed analysis.

Key Analysts and Contact Information

• Terrence Dennehy – Vice President - Senior Analyst, Broadcom
• Gretchen French – Vice President - Senior Credit Officer, EDF
• Ada Li & Osbert Tang – Vice Presidents - Senior Analysts, Shanghai Electric Power
• Spencer Ng – Vice President - Senior Analyst, Hazelwood Closure
• Arif Bekiroglu & Aleksandar Hristov – Assistant Vice President - Analyst, PKO BP

Summary of Credit Outlook

The credit outlook is a mix of credit positive and credit negative implications based on the events analyzed. The credit negative events are primarily driven by increased leverage, safety concerns, and geopolitical/operational risks, while credit positive events are attributed to deleveraging, market expansion, and improved financial metrics. The document emphasizes the importance of operational flexibility, debt management, and regulatory and geopolitical stability in assessing credit risk.