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Credit Outlook Summary - 16 June 2016

Core Content Overview

This document outlines the credit implications of various current events across different sectors, including Corporates, Infrastructure, Banks, and Insurers. It highlights both credit positive and credit negative developments, providing analysis on how these events may affect the credit profiles of the involved entities.

Main Points and Key Information

Corporates

• Microsoft's Acquisition of LinkedIn

  • Credit Impact: Credit negative
  • Reason: The $26.2 billion acquisition is fully debt-funded, which will increase Microsoft's gross debt/EBITDA to ~2x from ~1.6x.
  • Ratings Action: Moody's placed Microsoft's senior unsecured rating on review for downgrade.
  • Synergies: The acquisition could enhance Microsoft's cloud-based ecosystem with LinkedIn's data, but the high price and debt burden are concerns.
  • Capital Returns: Microsoft has a $10 billion share buyback program remaining, but its international cash generation limits its ability to fund returns without additional debt.

• Symantec's Acquisition of Blue Coat

  • Credit Impact: Credit negative
  • Reason: Symantec will take on $4.1 billion in new debt to fund the $4.65 billion acquisition and $1.3 billion in shareholder returns.
  • Leverage: The deal will increase leverage, but cost savings and debt repayment are expected to reduce it over time.
  • Strategic Benefits: The acquisition reduces Symantec's consumer security concentration and diversifies its portfolio.

• Orbotech's Public Offering

  • Credit Impact: Credit positive
  • Reason: The $102 million equity issuance and $150 million in debt repayments will reduce leverage from ~2.1x to ~1.2x.
  • Financial Policy: Orbotech has been deleveraging since 2014 and aims to maintain this trend.
  • Growth Potential: The company may pursue debt-financed acquisitions, but its market position is constrained by competition and cyclical demand.

• China's Infant Formula Regulation

  • Credit Impact: Credit positive
  • Reason: The regulation will reduce the number of infant formula products available, lowering competition and increasing market share for Biostime.
  • Leverage: Biostime's leverage is expected to improve from 3.0x to 2.9x if its revenue increases by 10% in 2017.
  • Market Changes: The regulation affects all producers, both domestic and foreign, and may lead to a limited impact on Biostime's product line due to the smaller contribution of its ADiMIL brand.

Infrastructure

• Sweden's Energy Policy
  • Credit Impact: Credit positive
  • Reason: Tax cuts on nuclear and hydro power generation will reduce production costs for Vattenfall and Fortum.
  • Cost Savings: Vattenfall could save SEK18-19 billion over four years, while Fortum may save ~€600 million.
  • Decarbonisation Goals: Sweden aims to achieve 100% renewable energy by 2040, with support for nuclear as part of the strategy.
  • Investments: Vattenfall will invest in its three Forsmark reactors, with potential investments in Ringhals 3 and 4.

Banks

• Cari Cesena's Rescue

  • Credit Impact: Credit negative for contributing banks
  • Reason: The €280 million capital increase funded by the Interbank Deposit Protection Fund is costly for participating banks.
  • Contagion Risk: Rescue operations may set a precedent for future support, potentially draining capital from sound institutions.
  • Previous Rescues: Similar actions were taken for Banca Tercas, Banca Popolare di Bari, and others.

• Russia's Interest Rate Cut

  • Credit Impact: Credit positive
  • Reason: The 50 basis point cut to 10.5% signals improved economic conditions and reduced inflation.
  • Funding Cost: The rate cut will reduce banks' funding costs, especially for customer deposits.
  • Loan Demand: The cut is expected to increase loan demand, improving banks' net interest income and capital positions.

• Qatar National Bank's Capital Raise

  • Credit Impact: Credit positive
  • Reason: The issuance of QAR10 billion in AT1 securities strengthens QNB's Tier 1 capital ahead of its acquisition of Finansbank.
  • Regulatory Compliance: The capital will ensure QNB meets Qatar Central Bank's requirements, including a 9.75% common equity Tier 1 ratio.
  • Growth Prospects: The acquisition will increase QNB's pro forma balance sheet to over $180 billion, enhancing its franchise.

• Pakistan's Corporate Restructuring Bill

  • Credit Impact: Credit positive
  • Reason: The bill allows the creation of corporate restructuring companies, which will help banks clean up nonperforming loans (NPLs).
  • NPLs: As of March 2016, NPLs were ~11.7% of gross loans, with ~84% classified as loss.
  • Impact on Banks: The bill will improve loan quality and enable more lending to the private sector.
  • Economic Growth: Expected to be supported by the China Pakistan Economic Corridor and improved judicial frameworks.

Insurers

• US Life Insurers' Reserving Policy
  • Credit Impact: Credit negative
  • Reason: The shift to principles-based reserving will reduce reserves, potentially increasing risk exposure and financial strain.

Recent Credit Outlook Highlights

• The document includes links to the previous week's credit outlook and a market outlook publication from Moody's Analytics.
• Exhibits are referenced to provide visual support for the analysis, including power prices, capital ratios, and NPL trends.

Summary of Credit Impacts