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Credit Outlook Summary - 30 May 2016

Core Content

This summary provides an overview of the credit implications of recent corporate, banking, sovereign, and sub-sovereign events as analyzed by Moody's Investors Service. The report highlights both credit positive and credit negative developments across various sectors, including corporate restructuring, acquisitions, and regulatory changes.

Main Points

Corporate Sector

• Hewlett Packard Enterprise (HPE)

  • Credit Negative: HPE's planned spinoff of its services business is credit negative due to reduced diversification and a decline in revenue base.
  • Financial Impact: HPE will transfer $1.9 billion in funded debt and $2.3 billion in gross pension liabilities to CSC.
  • Credit Metrics: Adjusted debt/EBITDA is expected to decline to 1.2x from 1.6x, and free cash flow/adjusted debt to improve to over 25% from 12%.
  • Market Position: HPE remains a market leader in servers, storage, and networking.
  • Outlook: Stable outlook, with potential for growth through acquisitions and consistent execution.

• Computer Sciences Corporation (CSC)

  • Credit Positive: The merger with HPE's services business is credit positive due to increased scale, diversification, and cost synergies.
  • Financial Impact: The merger is expected to reduce CSC's debt/EBITDA to the low 2x range from 2.6x.
  • Synergies: Estimated $1 billion in cost synergies, with $3.6 billion in new debt raised and $3.1 billion distributed to HPE.
  • Outlook: Stable outlook, with potential for further acquisitions in household categories.

• Energizer Holdings, Inc.

  • Credit Positive: The acquisition of HandStands is credit positive, broadening the product portfolio and increasing scale.
  • Financial Impact: Leverage is expected to decrease by 0.1x to 3.7x, EBITDA margins to rise by 60 basis points to 19.8%, and free cash flow to increase by 25% to around $100 million.
  • Integration: The acquisition allows cross-selling and supply chain integration.
  • Outlook: Continued expansion in household categories expected.

• Maisons du Monde (Maison du Monde)

  • Credit Positive: The IPO is credit positive, as it allows debt refinancing, interest cost reduction, and support for international expansion.
  • Financial Impact: Refinancing of €325 million senior secured notes with a €250 million term loan will improve EBIT/interest ratio to 2.2x and reduce leverage to 4.2x.
  • Growth Strategy: Aims to increase overseas sales to 50% of total sales by 2020.
  • Market Position: Strong growth in like-for-like sales and profitability across all countries.

• Embraer S.A.

  • Credit Positive: The $260 million business-jet deal with Mexican firm Across is credit positive, showing competitiveness and potential for future sales.
  • Financial Impact: The order is expected to support internal cash generation and gradually improve leverage from 6.0x to 3.0x-4.0x over two years.
  • Market Position: Leads the world in light business jet deliveries and has a growing portfolio of midsize models.
  • Outlook: Continued growth in small and midsize jets, particularly in the US market.

• Wesfarmers Limited

  • Credit Negative: Impairment charges and profit warning are credit negative, reflecting weak performance in Target and Curragh.
  • Financial Impact: EBITDA forecast reduced by AUD100 million, increasing adjusted debt/EBITDA to 3.2x.
  • Outlook: Stable rating, but dividend and financial ratios are under scrutiny to maintain A3 rating.

Banking Sector

• CFTC's Cross-Border Margin Rule

  • Credit Positive: The new rule is credit positive for US banks with significant derivative books, as it prevents regulatory arbitrage and enhances oversight.
  • Implementation: Applies to all uncleared swaps of a US CSE with a US parent, regardless of location.
  • Compliance: Substituted compliance allows CSEs to meet margin requirements in foreign jurisdictions.
  • Affected Entities: Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, and Bank of America.

• Ares' Acquisition of American Capital

  • Credit Negative: This acquisition is credit negative due to increased leverage and financial risk.

• Banco Popular's Capital Increase

  • Credit Positive: The €2.5 billion capital increase is credit positive, improving financial stability.

• STX Shipbuilding's Receivership

  • Credit Negative: Impairs Korean banks' asset quality due to exposure to STX Shipbuilding.

Sovereign Sector

• Greece

  • Credit Positive: The Eurogroup's €10.3 billion disbursement eases liquidity issues.

• Iceland

  • Credit Positive: Scheduling an auction to buy offshore krónur is credit positive, indicating fiscal discipline.

• Bosnia

  • Credit Positive: The IMF extended fund facility agreement is credit positive, signaling improved financial outlook.

• Israel

  • Credit Positive: The expanded coalition reduces legislative discord, supporting political stability.

Sub-Sovereign Sector

• Rio de Janeiro (Brazil)
  • Credit Negative: Missing a debt payment signals a deteriorating fiscal position for Brazilian states.

US Public Finance

• Ohio's Sales Tax Growth

  • Credit Positive: Sales tax growth is credit positive for most counties, improving cash flow and financial stability.

• Metropolitan Atlanta School Districts

  • Credit Positive: Voters' approval of a sales tax extension is credit positive, supporting budget flexibility.

Green Bonds

• Obvion's GREEN STORM
  • Credit Positive: The first green bond assessment by Moody's is credit positive, indicating environmental and financial responsibility.

Key Information

• Credit Positive Developments:

  • Computer Sciences' merger with HPE's services business
  • Energizer's acquisition of HandStands
  • Arca's entry into the US with Coca-Cola joint venture
  • Maison du Monde's IPO and debt refinancing
  • CFTC's cross-border margin rule for US banks
  • Iceland's auction of offshore krónur
  • Bosnia's IMF agreement
  • Greece's liquidity relief
  • Ohio's sales tax growth

• Credit Negative Developments:

  • HPE's spinoff of services business
  • Ares' acquisition of American Capital
  • Wesfarmers' impairment charges and profit warning
  • STX Shipbuilding's receivership
  • Rio de Janeiro's missed debt payment

Summary

The Credit Outlook for 30 May 2016 outlines a mix of credit positive and negative developments across various sectors. Corporate actions such as mergers and acquisitions have mixed impacts, with some improving financial metrics while others reduce diversification and increase leverage. Regulatory changes, like the CFTC's cross-border margin rule, are viewed positively for US banks. Sovereign and sub-sovereign developments reflect varying degrees of fiscal health, with some nations showing improvement and others facing challenges. The report also highlights the significance of green bonds and public finance improvements, such as in Ohio and Metropolitan Atlanta school districts. Overall, the credit landscape is dynamic, with Moody's closely monitoring the financial health and strategic moves of various entities.