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Credit Outlook Summary

Core Content

This document provides an analysis of the credit implications of recent corporate, bank, and sovereign events. It outlines the potential impact of various transactions and regulatory changes on the credit profiles of companies and countries, with a focus on leverage, profitability, and capital structure.

Corporates

Key Events and Credit Implications

• ** McCormick's Acquisition of Reckitt Benckiser's Food Division (Credit Negative)**

  • McCormick plans to acquire Reckitt Benckiser's food division for $4.2 billion, with $3.7 billion in debt financing.
  • The acquisition will significantly increase McCormick's leverage, raising its pro forma debt/EBITDA to 5.4x (from 2.5x), which is a credit negative.
  • If the transaction closes, McCormick's senior unsecured rating is expected to be downgraded by three notches to Baa2 and its short-term rating to Prime-2.
  • The acquisition is expected to improve earnings and profit margins due to the addition of high-growth, profitable brands like Frank's RedHot and French's Mustard.
  • EBIT margin is projected to increase to 18.2% by 2020 from 15.3% pre-acquisition.

• Wyndham's Acquisition of AmericInn (Credit Positive)

  • Wyndham plans to acquire AmericInn and its management company for $170 million, which will diversify its hotel portfolio.
  • The acquisition is unlikely to significantly affect Wyndham's leverage, as the company has substantial liquidity and will offset part of the purchase price with asset sales.
  • Wyndham's credit metrics remain strong, with debt/EBITDA at 4.2x and EBITA/interest expense at 5.4x as of 31 March 2017.

• XPO Logistics' Equity Offering (Credit Negative)

  • XPO priced an equity offering of $665.5 million, signaling a return to acquisition activity.
  • This increases the likelihood of leveraging transactions, which is a credit negative.
  • The equity offering is a precursor to potential large acquisitions that may increase leverage and reduce credit quality.

• Reckitt Benckiser's Sale of Food Business (Credit Positive)

  • RB will use proceeds from the sale to pay down debt from its Mead Johnson acquisition, accelerating its deleveraging.
  • This is expected to improve RB's credit metrics, positioning it strongly within the A3 rating category.
  • The sale has limited impact on RB's overall business profile, as the food division contributes less than 4% to adjusted operating profit.

• Guangzhou R&F's Acquisition of Dalian Wanda's Hotel Assets (Credit Negative)

  • Guangzhou R&F is acquiring 76 hotels and a 70% stake in another for RMB19.9 billion, which will delay its deleveraging efforts.
  • The transaction is expected to increase its debt leverage to 50%-60% by 2018, from 42% at the end of 2016.
  • The company has sufficient liquidity to support the acquisition, but the increased leverage is a credit negative.

Banks

Key Events and Credit Implications

• US Banks' Capital Payouts (Credit Negative)

  • Most US banks plan to return more than 100% of their earnings to shareholders through dividends and share buybacks.
  • This is a credit negative as it reduces capital and cash available for debt repayment and strategic investments.
  • The median payout ratio is 107% based on trailing 12-month net income, with a lower dividend payout ratio (33%) and higher share buybacks.

• E*TRADE's Share Repurchase and Lower Tier 1 Requirement (Credit Negative)

  • E*TRADE announced a $1 billion share repurchase program and a 50-basis-point reduction in its Tier 1 leverage requirement.
  • This reduces capital and cash availability, which is a credit negative.
  • The program does not affect its Baa3 rating or stable outlook.

• Kuwait Finance House and Ahli United Bank Merger (Credit Positive)

  • KFH is studying a merger with AUB, which would strengthen its business and credit quality.
  • The merger would create the sixth-largest bank in the GCC and offer economies of scale and increased lending opportunities.
  • Integration challenges are expected, but the merger is credit positive due to its potential to enhance profitability and credit strength.

• Australian Banks' Stricter Capital Requirements (Credit Positive)

  • APRA raised the minimum CET1 ratio for Australian banks by 150 basis points to 9.5% (effective 2021), with an expectation of exceeding this by 10.5% by 2020.
  • The increase is credit positive as it enhances the resilience of the banking system.
  • The four largest Australian banks are expected to meet the new requirements through internal capital generation and reduced risk-weighted assets.

Sovereigns

Key Events and Credit Implications

• NAFTA Renegotiation (Credit Positive for Mexico)

  • The renegotiation is unlikely to significantly alter the trade deal, with limited changes expected.
  • This is a credit positive for Mexico, as it does not materially disrupt trade flows or negatively impact the economy.

• El Salvador Pays July Pension Obligations (Credit Positive)

  • El Salvador successfully met its July pension obligations, which is a credit positive signal.
  • This demonstrates the country's ability to meet its financial commitments and supports its credit profile.

Recently in Credit Outlook

• The document references recent articles and provides links to the previous week's Credit Outlook.
• It also includes a link to the Weekly Market Outlook, which contains Moody's Analytics' market analysis and financial predictions.

Key Takeaways

• Credit Negative Events:

  • McCormick's acquisition of Reckitt Benckiser's food division.
  • XPO's equity offering indicating renewed acquisition activity.
  • E*TRADE's share repurchase and lower Tier 1 leverage requirement.
  • Guangzhou R&F's acquisition of Dalian Wanda's hotel assets delaying deleveraging.

• Credit Positive Events:

  • Wyndham's acquisition of AmericInn.
  • Reckitt Benckiser's sale of its food business to accelerate deleveraging.
  • Kuwait Finance House's potential merger with Ahli United Bank.
  • Australian banks' stricter capital requirements enhancing resilience.

• Other Notes:

  • The document highlights the importance of liquidity, leverage, and profitability in assessing credit quality.
  • It also discusses the impact of regulatory changes on capital structure and financial stability.