20160125-穆迪服务-Credit_Outlook_44页_1mb

Credit Outlook Summary

Core Content Overview

This document provides a comprehensive analysis of credit implications arising from various current events across different sectors and regions. It includes updates on corporate, infrastructure, bank, and insurer credit risks, as well as sovereign and public finance developments. The document is structured into sections for clarity, with key insights and rating changes highlighted.

Main Sectors and Key Points

Corporates

• Johnson & Johnson:

  • Announced job cuts in the Medical Devices segment, aiming to save $800 million to $1 billion annually by 2018.
  • The restructuring is credit positive as it improves earnings potential and allows reinvestment in higher-growth areas.
  • The move averts a credit-negative scenario of selling business lines for share repurchases.
  • Pre-tax charges will total $2.0–$2.4 billion, with about 50% being severance and other cash outflows.
  • The orthopaedics division faces weak growth due to competition, fewer surgeries, and pricing pressure.
  • The company's Medical Devices segment had a total revenue of $18.7 billion for the nine months ended 27 September 2015, with a -2.9% growth rate.

• Baosteel Group:

  • Subsidiaries BISC and Bayi reported significant profit declines in 2015, impacting Baosteel's credit quality.
  • BISC's 2015 profit before tax dropped 78% to RMB1.8 billion due to weak pricing, FX losses, and asset impairments.
  • Bayi incurred a net loss of RMB2.5 billion, its second consecutive year of losses, due to market oversupply and price declines.
  • The Shanghai Stock Exchange issued a delisting warning for Bayi.
  • Baosteel Group's gross debt/EBITDA ratio is expected to rise to 5.5x in 2015 from 4.6x in 2014.
  • The company is likely to increase borrowings or reduce financial investments to support Bayi's restructuring.

• Semiconductor Manufacturing Int'l (SMIC):

  • Benefited from a RMB20 billion investment by the Shanghai Integrated Circuit Investment Fund.
  • The investment is credit positive, as it strengthens SMIC's balance sheet and supports growth.
  • SMIC's cash buffer is expected to increase significantly with the investment, aiding in 28-nanometer expansion and new 12-inch wafer fabrication.
  • The Chinese government is prioritizing the development of a local semiconductor industry due to the consumption-production gap of $120 billion in 2014.
  • Integrated circuit design in China is expected to grow at 20.1% CAGR over the next five years, outpacing the global average of 6.6%.

Infrastructure

• US Federal Appeals Court Ruling:

  • The denial of a stay for the Clean Power Plan is credit negative for coal-dependent sectors and states.
  • Coal-fired generators like NRG Energy and Dynegy will face compliance challenges, potentially leading to reduced operations or participation in carbon cap-and-trade programs.
  • States like West Virginia and Kentucky, reliant on coal severance taxes, will see declining tax revenues.
  • Coal sales in West Virginia are projected to decline from 112.8 million tons in fiscal 2015 to 85.0 million tons in fiscal 2016, with a corresponding drop in average price.

• Sabesp:

  • Considered suspending a water conservation bonus program due to improved water supply, which is credit positive.
  • The bonus program reduced revenues by BRL1 billion in the 12 months to 30 September 2015.
  • Sabesp's debt/EBITDA ratio rose to 3.54x in September 2015 due to the real's steep devaluation.
  • Despite this, the company is expected to obtain waivers from creditors and maintain access to capital markets.

• Electricité de France (EDF):

  • The rising cost of nuclear waste storage (Cigéo) is credit negative, with an additional €800 million provision required.
  • This provision will increase EDF's net adjusted debt and negatively affect its financial ratios.
  • Nuclear and pension liabilities account for about 30% of EDF's net adjusted debt as of 30 June 2015.

Banks

• US Banks:

  • A decline in energy-driven capacity utilization (to 76.5% in December 2015) is a credit negative signal for US banks' commercial credit quality.
  • The mining sector, particularly oil and gas, has seen a sharp decline in utilization, leading to credit risks for banks.
  • US banks have historically linked commercial credit quality to industrial capacity utilization.
  • C&I loan growth outpaced overall loan growth from 2011 through 2015, increasing exposure to credit deterioration.

• Brazilian Banks:

  • Five largest banks formed a centralized credit bureau, which is credit positive.
  • This will improve credit risk assessment and lending decisions, potentially reducing problem loan ratios.
  • The bureau will help banks navigate Brazil's economic recession, with GDP expected to fall 3.5% in 2015 and 3.0% in 2016.

• Other Regional Banks:

  • National Bank of Greece: Sale of Finansbank is expected to enhance liquidity and capital, a credit positive.
  • Poland's New Tax: Threatens banks' profitability, a credit negative.
  • Russia's Bank Resolution Framework: Credit negative for corporate depositors but credit positive for individual depositors.
  • Swedish Banks: Credit positive if moderate home price depreciation continues.
  • Nigerian Banks: Credit negative due to prolonged low oil prices.
  • Bank of Tokyo-Mitsubishi UFJ: Credit positive for acquiring a 20% stake in a Filipino bank.

Insurers

• Argentina:
  • Positive shift in foreign-currency asset and infrastructure investment policies is credit positive for insurers.
• Zurich Insurance:
  • Expected fourth-quarter net loss is credit negative.

Sovereigns

• Sierra Leone:
  • The return of Ebola poses challenges to its economic recovery.
• Georgia:
  • Will benefit from Ukrainian trade passing through the country, a positive development.

US Public Finance

• Atlantic City:
  • Moves closer to default and bankruptcy after the governor vetoed an aid package.

Credit in Depth

• US Collateralized Loan Obligations (CLOs):
  • Weakening credit quality of oil exploration and production companies is credit negative for CLOs.
  • Seven US CLOs have exposures of 5% or more to these companies.
  • Moody's has placed these companies on review for downgrade due to expected credit quality decline with oil prices.

Rating Changes

• Downgraded: Ecopetrol, McDermott International, Wynn Resorts, VTB Bank (Azerbaijan), OJSC Bank of Baku, UniBank Commercial Bank, MBIA Mexico, and Baltinvestbank.
• Upgraded: ACE Seguros.

Research Highlights

• Published reports on:
  • European food retailers
  • China's metro companies
  • Singapore's industrial REITs
  • US fallen angels
  • US covenant quality
  • US lodging and cruise
  • Global oil and gas
  • US speculative grade liquidity
  • Mexican state-owned development banks
  • The Kyrgyz Republic
  • Germany
  • China's regional and local governments
  • US prime auto loan ABS
  • European CMBS
  • India and China securitization
  • US ABS
  • US CMBS
  • European RMBS & ABS

Summary of Credit Implications

• Positive:

  • Job cuts at Johnson & Johnson improve efficiency and reinvestment.
  • SMIC benefits from government investment in semiconductors.
  • Sabesp may suspend a water conservation program, boosting revenues.
  • Centralized credit bureau in Brazil improves lending decisions.
  • Bank of Tokyo-Mitsubishi UFJ's investment in a Filipino bank is credit positive.
  • National Bank of Greece's sale of Finansbank enhances liquidity.

• Negative:

  • Baosteel Group's subsidiaries suffer from poor performance, affecting credit quality.
  • US coal-dependent sectors and states face credit risks due to the Clean Power Plan.
  • EDF's nuclear waste storage costs are credit negative.
  • US banks face credit risks from declining energy sector capacity utilization.
  • Poland's new tax and Russia's bank resolution framework are credit negatives.
  • Zurich Insurance's expected net loss is credit negative.
  • Protracted low oil prices in Nigeria are credit negative.

Key Financial Metrics

• Johnson & Johnson: Targeted cost savings of up to $1 billion, pre-tax charges of $2.0–$2.4 billion.
• Baosteel Group: Gross debt/EBITDA expected to rise to 5.5x in 2015.
• Sabesp: Debt/EBITDA ratio at 3.54x as of September 2015, with a 15.24% tariff increase in 2015.
• EDF: Additional nuclear provision of €800 million, increasing net adjusted debt by €500 million post-tax.

Outlook

• The document emphasizes the importance of monitoring credit risks in response to economic, regulatory, and industry-specific developments.
• Continued low energy prices, regulatory changes, and macroeconomic conditions are key factors affecting credit quality.
• Strategic government investments and improved operational efficiencies can provide credit positives.