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Credit Outlook Summary - 26 February 2018

Core Content Overview

This document provides a summary of credit implications from recent corporate and financial developments, focusing on how these events affect the credit profiles of various entities. The analysis is divided into sections for Corporates, Infrastructure, Banks, and Sub-sovereigns, with each section highlighting credit positive or negative outcomes.

Corporates

General Mills

• Event: Acquired Blue Buffalo Pet Products for $8 billion in cash.
• Credit Impact: Credit negative due to increased leverage (debt/EBITDA to 4.6x at closing).
• Financing Plan: Funded through cash on hand, new unsecured debt, and $1 billion in new equity.
• Synergies: Expected to reduce debt/EBITDA to below 4.0x within 24 months.
• Deleveraging Strategy: General Mills plans to prioritize deleveraging until net debt/EBITDA reaches below 3.0x.
• Segment Contribution: Blue Buffalo's sales contribution is relatively small (7%), but it adds a high-margin super premium pet food segment.

Albertsons

• Event: Merged with Rite Aid.
• Credit Impact: Credit positive, but with significant risks.
• Synergies: Expected to total $325–$375 million over three years.
• Debt/EBITDA: Pro forma combined debt/EBITDA at 6.5x, with a negative rating outlook.
• Challenges: High leverage, competitive pressures, and integration risks.

BAE Systems

• Event: Published 2017 results showing strong cash flow and reduced pension deficit.
• Credit Impact: Credit positive, with improved credit metrics.
• Debt/EBITDA: Fell to 4.0x in 2017, down from 5.8x in 2016.
• Deleveraging: Confirmed repayment of $1 billion bond due in 2019, supporting leverage reduction.
• Risks: Execution risks from order backlog and potential R&D costs.

DIA (Spanish Food Retailer)

• Event: 2017 results weakened due to intense competition.
• Credit Impact: Credit negative, with a 16% decline in full-year recurring EBIT.
• Reasons: Price cuts to restore competitiveness, store closures, and reduced market share.
• Outlook: EBITDA expected to decline in H1 2018 but recover in H2 due to store refurbishments and expansion.
• Debt/EBITDA: Projected to rise to 3.6x in 2018 from 3.4x in 2017.

Blue Buffalo

• Corporate Family Rating: Under review for upgrade.
• Segment Impact: Adds a high-growth, high-margin pet food segment to General Mills.

ALROSA

• Event: Sold gas assets to Novatek for RUB30.3 billion.
• Credit Impact: Credit positive, assuming proceeds are used for capital investment and debt reduction.
• Liquidity Boost: Enhanced liquidity with strong cash reserves and credit facilities.

Infrastructure

FirstEnergy

• Event: Will deactivate the Pleasant power plant in West Virginia.
• Credit Impact: Credit positive.
• Reason: Reduces operating costs and improves financial flexibility.

Banks

US Treasury Report

• Event: Released report on Orderly Liquidation Authority.
• Credit Impact: Credit positive.

Société Générale

• Event: Implemented biometric face recognition for account opening.
• Credit Impact: Credit positive.

Germany's Building and Loan Associations

• Event: Declining contract volume.
• Credit Impact: Credit negative.

ING DiBa

• Event: Planned acquisition of online lender Lendico.
• Credit Impact: Credit positive.

CreVal

• Event: Share issue underwriting agreement.
• Credit Impact: Credit positive.

BGL BNP Paribas

• Event: Expanded asset management activities in Luxembourg.
• Credit Impact: Credit positive.

Russian Central Bank

• Event: Introduced additional capital requirement for cyber risks.
• Credit Impact: Credit positive.

VTB

• Event: Acquired Magnit stake.
• Credit Impact: Credit negative due to immobilizing capital.

Ukraine's Liquidity Coverage Ratio

• Event: Proposed liquidity coverage ratio.
• Credit Impact: Credit positive for banks.

Latvia's Banking System

• Event: High-profile conduct incidents.
• Credit Impact: Credit negative.

Thailand's Mobile & Internet Banking

• Event: Increasing payments transactions.
• Credit Impact: Credit positive for banks.

Sub-sovereigns

Russian Regions

• Event: Debt burden declined in 2017 due to increased revenue.
• Credit Impact: Credit positive.

Recently in Credit Outlook

• Articles from Last Monday's Credit Outlook: Referenced in this report.
• Weekly Market Outlook: Available as a sister publication, containing Moody's Analytics' financial predictions and economic releases.

Key Takeaways

• Credit Positive Events:

  • General Mills' debt reduction plan.
  • Albertsons' merger with Rite Aid.
  • BAE's improved free cash flow and pension management.
  • Coke's use of repatriated cash to reduce debt.
  • FirstEnergy's power plant deactivation.
  • US Treasury report on Orderly Liquidation Authority.
  • Société Générale's biometric face recognition.
  • ING DiBa's planned acquisition of Lendico.
  • CreVal's share issue underwriting.
  • BGL BNP Paribas' expansion in Luxembourg.
  • Russian central bank's cyber risk capital requirements.
  • Ukraine's liquidity coverage ratio proposal.
  • Thailand's growth in mobile and internet banking.
  • Russian regions' reduced debt burden.

• Credit Negative Events:

  • General Mills' leverage increase from the Blue Buffalo acquisition.
  • DIA's weakened 2017 results due to competition.
  • VTB's Magnit stake acquisition.
  • Latvia's banking conduct incidents.
  • High promotional pricing environment for Albertsons.

• Neutral or Mixed Impact:

  • EQT's spinoff of EQM midstream unit.
  • BAE's potential Qatar Typhoon contract support.
  • DIA's store closures and refurbishments.

Summary of Key Metrics

Summary of Outlook

• General Mills: Will remain credit negative in the short term but is expected to improve leverage over time.
• Albertsons: Credit positive with significant integration risks.
• BAE Systems: Credit positive with improved cash flow and pension management.
• DIA: Credit negative due to competition and store closures, but with potential for recovery.
• ALROSA: Credit positive due to enhanced liquidity from asset sale.