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Credit Outlook Summary (18 August 2016)

Core Content

This document outlines the credit implications of various corporate and market developments as analyzed by Moody's. It covers updates on restaurant chains, construction companies, property developers, utilities, and banking institutions, providing insights into how these events may affect their credit profiles.

Main Points

Corporates

• Ruby Tuesday

  • Credit Positive: The company plans to close 95 underperforming restaurants to improve profitability and EBITDA by $12–14 million annually.
  • Leverage: Pro forma debt/EBITDA is expected to decrease to 4.5x from 4.8x.
  • Risks: The success of the turnaround depends on improved traffic and SRS; failure could lead to continued negative trends.
  • Free Cash Flow: The company has $30–40 million in free cash flow to support changes.
  • Rating: B3, reflecting weak operating performance and high leverage.

• Cintas' Acquisition of G&K Services

  • Credit Negative: The acquisition will more than double financial leverage, increasing pro forma debt/EBITDA to over 3.5x.
  • Synergies: Expected to generate $130–140 million in annual savings, but may take up to four years to realize.
  • Funding: Likely to be financed with debt, and the company may need to divest some operations for regulatory approval.
  • Rating: A2 review for downgrade.

• Xylem's Acquisition of Sensus

  • Credit Negative: The acquisition will increase leverage, with pro forma debt/EBITDA rising to 3.7x.
  • Synergies: Expected to be realized over time, but near-term free cash flow will be used to repay short-term debt.
  • Rating: Baa2 review for downgrade.

Infrastructure

• Deutsche Wohnen's Acquisition of Nursing Facilities
  • Credit Negative: The acquisition will increase leverage, but not significantly affect investment needs.
  • Portfolio Diversification: Will improve geographic and business diversification, reducing reliance on Berlin.
  • Occupancy: Average occupancy is 87%, with Pro Seniore and Korian as major lessees.
  • Rating: A3 stable.

Korean Builders

• Decline in Overseas Orders
  • Credit Negative: Overseas orders dropped 45% year-on-year to $17 billion, the lowest since 2009.
  • Impact: Reduced revenue, earnings, and cash flow for construction firms.
  • Middle East and Asia: Both regions saw significant declines in new orders.
  • Domestic Expansion: Builders are expanding domestic projects, but may lead to increased unsold inventory.
  • Order Backlog: Most companies have sufficient backlog to cover 2–3 years of overseas revenue.

Chinese Property Developers

• Measures to Cool Property Prices
  • Credit Negative: Policies in Nanjing and Suzhou will suppress sales and increase funding needs.
  • Down Payment Requirements: Increased for second homes, reducing eligible buyers.
  • Land Purchases: Developers must now pay higher down payments for land at auction.
  • Exposure: Golden Wheel has the highest exposure in Nanjing, with 65% of sales and 65% of land bank in the city.
  • Rating Impact: Effects on credit quality are expected to be manageable due to financial buffers.

Key Information

US Public Finance

• Paterson, New Jersey: Passed a levy to prevent a cash shortage, a credit positive.
• State Highway Revenue Bonds: Benefit from record gasoline consumption, enhancing cash flow.

Sovereigns

• Guatemala's Tax Reform: Expected to improve fiscal discipline, a credit positive.
• Botswana's Energy Regulatory Bill: Supports increased electricity supply, a credit positive.

Infrastructure: KEPCO

• Temporary Tariff Cut: A credit negative due to reduced operating profit and profit predictability.
• Impact: Estimated to reduce KEPCO's operating profit by KRW420 billion.
• Capital Position: CET1 capital ratio remains strong at 18.9% as of December 2015, with stress tests showing resilience.
• Fuel Costs: Expected to remain low, with nuclear and coal plants expected to increase generation.
• Rating: Aa2 stable.

Bulgarian Banks

• Asset Quality Review and Stress Test Results: Credit Positive due to strong capital position and resilience to shocks.
• CET1 Capital Ratio: AQR-adjusted CET1 ratio of 18.9% (above 4.5% regulatory minimum).
• Stress Test Scenarios:
  • Baseline: CET1 improves to 22.2% by 2018.
  • Adverse: CET1 falls to 14.4%, still high.
• Follow-up Plans: Banks are advised to maintain or increase capital buffers.
• Rating: No downgrade expected in the short term.

Summary of Credit Implications

Conclusion

The document highlights a mix of credit positive and negative developments across various sectors. While some companies are taking steps to improve performance and diversify, others are facing significant challenges due to increased leverage, reduced sales, and policy changes. The credit outlook for each entity is influenced by their ability to adapt to these changes and maintain financial stability.