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Credit Outlook Summary - 17 December 2015

Core Content

The document provides an analysis of credit implications stemming from recent events across various sectors, including Corporates, Infrastructure, Banks, and Sub-sovereigns. It outlines both credit positive and negative developments, focusing on how these events may impact the financial health and creditworthiness of the involved entities.

Key Developments

Corporates

• Fed's Rate Hike: The first rate hike in nearly 10 years by the US Federal Reserve will reduce pension underfunding by $450 billion, which is a credit positive. However, the immediate impact on pension funding is expected to remain flat at 78% in 2015.
• Newell's Jarden Deal: Newell Rubbermaid's acquisition of Jarden Corporation is a credit negative due to the significant increase in debt, which raises its adjusted financial leverage to 5.5x debt/EBITDA from 3.2x. Despite this, the deal is strategically sound and may improve its credit profile by 2017.
• Sanofi's Asset Swap: Sanofi's proposed swap with Boehringer Ingelheim is a credit positive. It would exchange its animal health business for a consumer healthcare business, along with a €4.7 billion cash payment, enhancing its market position and improving cash flow from operations to debt.
• STC's Tender Offer: STC's voluntary tender offer to increase its stake in VIVA Kuwait is a credit positive. It will allow STC to gain majority control of VIVA, leading to greater dividend flows and strategic influence in the Kuwaiti mobile sector.

Infrastructure

• SoCalGas Gas Storage Leak: The leak at SoCalGas Aliso Canyon facility is a credit negative. It has led to public health and environmental concerns, legal challenges, and potential reputational damage. However, the impact on customers is relatively limited, and SoCalGas has the financial capacity to absorb the costs.

Banks

• UK Court Decision: The UK court's ruling in favor of Lloyds Banking Group is a credit positive. It allows the bank to redeem enhanced capital notes, potentially saving £190 million annually. This improves its net interest margin and capital structure.
• Banco Santander Totta's Capital Increase: The €300 million capital increase is a credit positive, as it will improve the bank's regulatory capital ratios and Moody's-adjusted tangible common equity (TCE) ratio, enhancing its capital position.
• Sparebanken Hedmark's Acquisition: The acquisition of the remaining stake in Bank 1 Oslo Akershus is a credit positive. It will consolidate the bank's ownership, expand its franchise, and improve its capital ratios.

Sub-sovereigns

• Querétaro, Mexico Pension Reform: The pension reform in Querétaro is a credit positive, as it aims to improve the financial sustainability of the region's pension system.

Main Points and Key Information

• Interest Rates and Pension Underfunding: The Fed's rate hike is expected to reduce pension underfunding by $450 billion over time, improving corporate leverage metrics.
• Market Expectations vs. Projections: While the market projects a slower rate increase, Moody's expects a more gradual rise, which could still lead to fully funded pension plans by 2019.
• Strategic Acquisitions: Newell's acquisition of Jarden is seen as a strategic move despite the credit negative impact due to increased debt. Sanofi's asset swap is a credit positive, enhancing its market position and cash flow.
• Regulatory and Legal Developments: The UK court ruling and Banco Santander Totta's capital increase are credit positives that improve capital structure and regulatory compliance.
• Public Health and Environmental Concerns: The SoCalGas gas storage leak is a credit negative due to legal and reputational risks, though the impact on customers is minimal.
• Market Dynamics and Integration Risks: Newell faces integration risks due to ongoing acquisitions, which could affect its credit profile.
• Currency and Tax Reforms: Argentina's elimination of agricultural export taxes is a credit positive for agricultural and protein producers, while the potential depreciation of the peso could benefit exporters but pose challenges for companies with foreign-denominated debt.

Exhibits and Data

• Exhibit 1: Shows the projected pension funding levels for US corporate rated issuers, highlighting the growth in PBOs and the underfunding trend.
• Exhibit 2: Depicts the trajectory of Moody's Aa US Corporate Rate from 2008 to 2019, indicating the expected increase in discount rates.
• Exhibit 3: Illustrates the projected pension funding levels, assuming a 200-basis-point increase in discount rates and a 7.75% return on plan assets.

Summary of Credit Implications

• Credit Positive Events: Fed's rate hike, Argentina's tax reform, Sanofi's asset swap, STC's tender offer, UK court decision, Banco Santander Totta's capital increase, and Sparebanken Hedmark's acquisition.
• Credit Negative Events: Newell's Jarden deal due to increased debt, SoCalGas gas storage leak due to legal and reputational risks.

This summary captures the essence of the credit outlook, emphasizing the balance between positive and negative developments across different sectors and regions.