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Credit Outlook Summary

Core Content

This document provides an overview of credit implications of current events across various sectors including Corporates, Infrastructure, Banks, and Sovereigns. It highlights key developments that impact the creditworthiness of companies and governments, with a focus on financial performance, strategic moves, and regulatory actions.

Main Points by Sector

Corporates

• Pfizer's Acquisition of Medivation:

  • Pfizer acquired Medivation for $14 billion, which is credit negative due to the significant reduction in domestic cash and potential future debt issuance.
  • The acquisition enhances Pfizer's oncology portfolio, particularly with Xtandi, a successful prostate cancer drug.
  • Despite the credit negative impact, Moody's affirmed Pfizer's A1/Prime-1 ratings and maintained the negative rating outlook.
  • The deal was fully funded with existing cash, reducing total cash and investments from $34 billion to $20 billion.
  • Free cash flow from operations remains solid at over 35%, and debt/EBITDA remains around 2.1x.
  • Medivation's pipeline includes talazoparib (breast cancer) and pidilizumab (B-cell lymphoma), with clinical trials expected to yield results in the coming years.
  • Xtandi's patents expire in 2026 in Europe and 2027 in the US.

• Pentair's Sale to Emerson:

  • Pentair sold its valves and controls business to Emerson for $3.15 billion, which is credit positive for Pentair as it allows debt reduction and balance sheet improvement.
  • The deal is credit negative for Emerson due to increased exposure to the oil and gas sector.
  • Pentair's leverage was high at 4.2x, and the sale is expected to reduce it to the mid-3x range by 2016.
  • The remaining proceeds will be used for strategic acquisitions to strengthen its core businesses.
  • Emerson's purchase price is a high multiple on the depressed profits of the segment, and the new segments are expected to generate more predictable cash flow.
  • The deal is expected to improve EBITA margins to mid to high teens, exceeding current margins in its network power division.

• Rising Gold Prices:

  • Higher gold prices are credit positive for AngloGold Ashanti and Gold Fields.
  • Both companies reported improved free cash flow and reduced debt levels.
  • Gold Fields' free cash flow increased from $9 million to $57 million, while AngloGold Ashanti's increased by 30% to $116 million.
  • Companies are now considering expanding production capacity with surplus cash.
  • Dividend policies remain unchanged, with AngloGold Ashanti planning to restart dividends in 2017 based on cash flow, and Gold Fields maintaining a 25%-35% payout ratio.
  • Moody's revised its gold price forecast to $1,250 per ounce for 2016 and 2017, with a stress case at $1,000 per ounce.

Infrastructure

• Korea's SR Co.:
  • The successful test of a new high-speed railway line is credit positive for SR Co.
  • The line will support SR's revenue and operating cash flow, with a planned opening in December.
  • SR is expected to record adjusted debt/EBITDA of $4.5x–$5.0x and adjusted debt/capitalization of 65%–67% in 2017–18.
  • SR will be the exclusive provider for passengers traveling to and from the southern part of Seoul, ensuring a stable market share.
  • However, SR faces demand risk due to its lack of operating history.

Banks

• Pakistan's Textile Sector Decline:
  • Declining textile exports (down 14% in July 2016) are credit negative for Pakistani banks.
  • The textile sector accounts for 9% of GDP, 50% of exports, and 40% of employment, but is under pressure due to weak global demand, low commodity prices, and a stable rupee.
  • Banks' exposure to the sector ranges from 9% to 12% of total loans, with high nonperforming loan (NPL) ratios.
  • National Bank of Pakistan and others have classified a significant portion of textile sector loans as problematic.
  • The central bank reported that most problematic debt is covered by loan-loss provisions.
  • Relief measures, including zero-rated tax regimes and duty-free imports, aim to boost exports and reduce pressure on banks.

Sovereigns

• Poland's Constitutional Crisis:
  • A constitutional crisis has escalated, with prosecutors investigating the head of the Constitutional Tribunal for abuse of power.
  • This follows the ruling against a new Constitutional Tribunal Act, which failed to address EC concerns over the rule of law.
  • The crisis threatens to impair investment, increase tensions with the EU, and reduce economic growth.
  • Real investment contracted by 2.2% in Q1 2016, and the PMI Manufacturing Index indicates subdued investment activity.
  • Moody's assigned a negative outlook to Poland's A2 rating in May 2016 due to the crisis and its impact on external investment.

Key Information

• Credit Implications:

  • Acquisitions, divestitures, and regulatory actions have varied credit impacts on companies and banks.
  • High leverage, weak cash flows, and exposure to volatile sectors (e.g., oil and gas, textile) are credit negative factors.
  • Improved cash flows, debt reduction, and strategic realignments are credit positive.

• Market Outlook:

  • The container shipping industry remains under pressure due to weak global trade growth and overcapacity.
  • Gold prices are expected to remain volatile between $1,100 and $1,300 per ounce over the next three years.
  • The EU's concerns over the rule of law in Poland are likely to worsen the investment climate and affect economic growth.

• Regulatory Actions:

  • Mega International's New York branch faced a $180 million penalty for anti-money-laundering deficiencies.
  • The incident highlights differences in regulatory enforcement between Taiwan and the US.
  • The bank has committed to hiring external consultants and monitors to improve compliance.

Summary of Ratings and Outlook

• Pfizer: A1/Prime-1 ratings affirmed, with a negative outlook.
• Pentair: Credit positive with improved leverage expected by 2016.
• AngloGold Ashanti and Gold Fields: Credit positive due to improved cash flows and reduced debt.
• SR Co.: Credit positive with potential for improved metrics post-operation.
• Mega International: Credit negative due to regulatory penalty and compliance issues.
• Poland: Negative outlook on A2 rating due to constitutional crisis and investment climate concerns.