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CreditOutlook Summary

Core Content

This document provides an overview of credit implications from various current events across Corporates, Infrastructure, Banks, and Sovereigns sectors. It outlines both credit positive and credit negative impacts on different entities, including mergers, acquisitions, debt repayments, and regulatory changes.

Main Points

Corporates

• Baker Hughes:

  • The collapse of the merger with Halliburton is credit positive for Baker Hughes, as it receives a $3.5 billion termination fee.
  • The fee will be used to reduce debt and buy back shares, improving liquidity and financial flexibility.
  • However, the OFS industry is still under severe strain due to the oil-price downturn, which continues to affect both companies' fundamentals.

• Halliburton:

  • The termination fee is a credit negative due to the immediate cash outflow, which will increase its net debt/EBITDA ratio to 3.3x.
  • Halliburton has strong liquidity with $7.5 billion in debt offering and a $3.0 billion revolving credit facility.

• International Paper:

  • The acquisition of Weyerhaeuser's pulp assets is credit positive for both.
  • It strengthens International Paper's position as the largest global fluff pulp producer and creates cost synergies.
  • Weyerhaeuser will use the proceeds to reduce leverage, with an expected reduction to 3.5x in 12-18 months.

• CommScope:

  • The early repayment of $300 million of PIK notes is credit positive.
  • It results in $20 million in annual interest savings and improves interest coverage.
  • The company is expected to reduce leverage to 4.5x over the next 18 months.

• The Navigator Company:

  • The early repayment of €150 million of senior notes is credit positive.
  • The company has significantly reduced its interest expenses and is expected to save €16 million over four years.
  • It has a strong liquidity position with €1 billion in cash and €750 million in free cash flow.

• Evergrande:

  • The increased stake in Shengjing Bank is credit negative.
  • The investment raises financial and investment risk, undermining efforts to limit debt growth.
  • The stake is seen as financial rather than strategic, and it is unlikely to provide synergies.

• SK Telecom and KT Corporation:

  • Winning spectrum at auction is credit positive for both.
  • The spectrum acquisitions are at reasonable prices, and the companies can accommodate the slight increase in leverage.
  • SKT's leverage is expected to rise to 2.1x in 2016, but decline to 2.0x in 2017.
  • KT's adjusted leverage will increase to 2.1x, but remain within its rating and outlook.

Infrastructure

• Energy Future Holdings:

  • The new reorganization plan is credit positive for Texas Competitive Electric.
  • The plan aims to separate unregulated businesses from regulated operations, providing more corporate freedom and certainty.
  • The confirmation hearing is scheduled for 1 August, with a potential emergence from bankruptcy by the end of the year.

• Energias do Brasil:

  • The BRL1.5 billion capital raise is credit positive for the company and its subsidiaries.
  • It improves the capital structure and reduces financial expenses, with potential savings of BRL120 million annually.
  • The company's subsidiaries, Bandeirante Energia and ESCELSA, may face weaker cash flows due to lower tariffs and volume sales in Brazil.

Banks

• Italy's Nonperforming Loan Foreclosures:

  • The new framework is credit positive for banks and SME securitisations.
  • It aims to improve the efficiency of loan recovery and support financial stability.

• European Commission's State Aid Approval for HSH Nordbank:

  • The approval is credit negative for the bank.
  • It may lead to challenges in maintaining financial flexibility and managing debt.

Sovereigns

• US Cruise Ships to Cuba:

  • This event is credit positive for the US sovereign.
  • It signals improved diplomatic and economic relations with Cuba.

• IMF Program for Sri Lanka:

  • The program is credit positive for Sri Lanka's liquidity.
  • However, it does not address fiscal challenges, which remain a concern.

Recently in Credit Outlook

• The document includes references to articles from the previous week's Credit Outlook.
• It also links to Weekly Market Outlook, a sister publication with financial predictions and economic releases.

Key Takeaways

• Credit Positive events include:

  • Baker Hughes receiving a $3.5 billion termination fee.
  • International Paper's acquisition of Weyerhaeuser's pulp assets.
  • CommScope's early repayment of PIK notes.
  • The Navigator Company's refinancing.
  • SK Telecom and KT winning spectrum at auction.
  • Energy Future Holdings' reorganization plan.
  • Energias do Brasil's capital raise.

• Credit Negative events include:

  • Halliburton's payment of the $3.5 billion termination fee.
  • Evergrande's increased stake in Shengjing Bank.
  • Australian airports facing airline capacity cuts that will pressure revenue.

• Liquidity and Leverage:

  • Many companies have strong liquidity positions, but leverage remains a concern.
  • Debt reduction and cost-cutting are key strategies for improving credit profiles.

• Regulatory and Market Conditions:

  • Regulatory changes, such as in Italy and Brazil, are influencing credit outcomes.
  • Market dynamics, including oil prices and airline capacity, are also affecting corporate creditworthiness.