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Credit Outlook Summary - 21 August 2017

Core Content

The document outlines the credit implications of various corporate, infrastructure, and banking events, analyzing their impact on financial leverage, cash flow, and credit ratings. It provides detailed insights into specific transactions and their effects on the credit profiles of the involved entities.

Main Points

Corporates

• VF Corporation's Acquisition of Williamson-Dickie:

  • The $820 million cash acquisition is strategically sound but credit negative due to increased leverage from short-term debt.
  • Commercial paper borrowing is expected to rise to $2 billion at closing, with a focus on debt repayment and share repurchase suspension.
  • The acquisition is expected to be immediately accretive to earnings and cash flow, and will enhance VF's workwear portfolio and brand appeal.
  • VF's financial leverage is projected to decrease to below 2.0x by 2018, supported by strong free cash flow.
  • The company continues to pursue acquisitions and divestitures to reshape its portfolio.

• Mylan's EpiPen Settlement:

  • A $465 million settlement with the DOJ is credit negative as it reduces available cash for debt repayment.
  • The settlement reclassifies EpiPen as a brand-name drug, affecting pricing and profitability.
  • Delays in generic drug launches and pricing pressure from the FDA will slow Mylan's deleveraging.
  • Mylan's leverage is expected to improve to 3.5x by 2018, but at a slower pace than previously anticipated.

• Air Berlin's Insolvency:

  • Air Berlin's insolvency is credit negative for Flughafen Berlin Brandenburg (FBB), as it is the main airline at Tegel.
  • However, FBB's traffic levels are expected to remain stable due to the potential replacement by low-cost airlines.
  • FBB is not due any receivables from Air Berlin, and the insolvency process may allow for a restructuring or sale of the airline.

• PTTGC's Petrochemical Expansion:

  • The THB32 billion ($887.4 million) investment in polyurethane plants is credit negative due to increased leverage and reduced cash.
  • The project will diversify production but not generate earnings until 2020.
  • PTTGC's leverage is expected to weaken slightly but remain within the Baa2 rating threshold.
  • The company has a high capital expenditure plan for 2017-21, increasing its risk exposure.

Infrastructure

• Santee Cooper's Rate Action Deferral:
  • The deferral of rate increases is credit negative due to rising debt service and lack of permanent cost reductions.
  • The utility relies on a $976 million parental guarantee from Toshiba, which is a vulnerable source of funding.
  • Santee Cooper has a strong historical financial position and liquidity, but failure to reduce costs or secure new revenue could lead to negative credit pressure.
  • The company is considering a potential asset sale, which would require the approval of the South Carolina legislature.

Banks

• Wells Fargo's Board Changes:

  • The changes are credit positive, reflecting a strategic overhaul to improve governance and rebuild stakeholder trust.
  • The new board structure includes more independent directors and enhanced oversight.
  • The bank is shifting focus to long-term value and restructuring its operations, including centralizing risk management.

• LPL Financial's Acquisition of National Planning:

  • The $325 million acquisition is credit positive, as it enhances LPL's market leadership and assets under administration.
  • The transaction is expected to slightly increase LPL's leverage ratio to 4.6x, but with EBITDA benefits.
  • LPL may issue $200 million in incremental debt to fund the acquisition.
  • There is a risk of employee retention due to the reduction in NPH's financial advisors, but LPL is mitigating this with forgivable loans.

Key Information

• Credit Ratings:

  • The document emphasizes that credit ratings are not announced in this report and directs readers to Moody's website for the most updated information.

• Financial Leverage and Cash Flow:

  • Several companies, including VF, Mylan, and PTTGC, are facing increased leverage due to acquisitions and investments.
  • Free cash flow and debt repayment strategies are critical in mitigating credit risk.

• Regulatory and Market Factors:

  • Regulatory actions, such as the DOJ settlement for Mylan and the FDA's approval pace, significantly impact financial performance and credit outlook.
  • Industry conditions, like low utilization and depressed day-rates in offshore drilling, affect companies such as Transocean.

• Strategic Moves and Risks:

  • Acquisitions and divestitures are strategic tools used by companies to reshape portfolios, but they carry credit implications.
  • Increased capital expenditures and expansion projects raise execution and financial risks for PTTGC and others.

Conclusion

The credit outlook highlights both positive and negative implications of corporate actions, regulatory changes, and market dynamics. While some acquisitions and strategic moves are viewed as credit positive due to enhanced market position and operational efficiencies, others are credit negative due to increased leverage, cash flow constraints, and heightened business risks. The document underscores the importance of financial discipline, regulatory compliance, and effective integration in managing credit risk.