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Credit Outlook Summary - 30 June 2014

Core Content

This document outlines the credit implications of various recent events across different sectors, including corporations, banks, insurers, and sovereigns. It provides an analysis of how these events impact credit ratings and financial health of the involved entities.

Main Points and Key Information

Corporates

• Hanesbrands Purchase of DBApparel: A credit-positive event, as it enhances Hanesbrands' market share and global sales without significantly increasing leverage. The acquisition is expected to boost sales to $6.0 billion and increase global diversification to 25% from 11%. Synergy savings of $50 million are anticipated within 3-4 years.

• Aereo Supreme Court Defeat: Credit-positive for broadcasters and TV station owners. The ruling preserves retransmission fees and strengthens their control over licensed content.

• Ex-Im Bank Political Support: Credit-negative for Boeing and other large manufacturers due to weakening political support for the Export-Import Bank. The lack of renewal could increase reliance on debt capital markets and lessors for international sales.

• Lockheed Martin's $1.9 Billion Contract: Credit-positive for Lockheed Martin as it receives a significant contract to build satellites for the US Air Force. This reflects continued confidence in the company's cost management capabilities.

• VWR IPO Filing: Credit-positive due to the inclusion of a debt repayment plan. The IPO is expected to reduce adjusted debt/EBITDA to 5.7x from 6.8x and improve the cost of capital.

• Eaton's Antitrust Settlement: Credit-negative due to the $500 million payment to ZF Meritor, which reduces liquidity and may affect leverage and coverage metrics. However, the company is on track to reduce debt significantly over the next few years.

• Petrobras Payment to Brazil: Credit-negative as the company must pay an additional $6.8 billion to expand production in offshore fields. This diverts funds from its capital spending program and increases leverage.

• Ooredoo and Gulf/Turkish Corporates: Credit-negative due to the Iraq crisis, which affects their operations and financial stability.

• STMicroelectronics Share Buyback: Credit-negative as it may weaken the company's balance sheet and financial flexibility.

• DIA Sale to Carrefour: Positive for the seller, neutral for the buyer.

• Lend Lease Sale of Bluewater Shopping Centre: Credit-positive for the seller.

• India's Upstream Producers: Credit-negative due to delays in gas price hikes.

• INPEX LNG Project: Credit-positive as the completion of 50% of the project improves financial prospects.

Banks

• Argentina's Debt Dispute: Credit-negative for banks due to the economic instability and reduced state aid to municipalities in Tennessee, which affects local governments.

• Swiss Banks' Self-Regulation: Credit-positive for Swiss banks as it indicates better operational controls.

• Banca Popolare di Milano: Credit-positive due to the removal of risk-weighted assets add-on.

• PKO Bank Polski: Credit-positive as profit retention will strengthen Tier 1 capital.

• Dongbu's Restructuring: Credit-negative for Korean banks due to the stalled restructuring process.

Insurers

• Northwestern Mutual's Sale of Frank Russell: Credit-positive for the company, as it allows for a more focused business strategy.

Sovereigns

• Turkey's Credit Challenges: Increased due to the Iraq crisis, which affects political and economic stability.

• Tennessee Law on State Aid: Credit-negative for local governments as it restricts state aid to municipalities.

Rating Changes

• Upgraded: CityCenter Holding, Schlumberger, Verisk Analytics, Banco Monti dei Paschi di Siena, Adventist Health System/Sunbelt Obligated Group, California, one US CMBS, and 18 US private student loan ABS.

• Downgraded: Monsanto, Praeco, Western Liberty Group Finance, Corporate Commercial Bank, Henry Ford Health System, Puerto Rico's authorities for electric power, aqueduct and sewer, and highway and transportation; three US CMBS and five US private student loan ABS.

Research Highlights

• Published research on various topics including:
  • Chinese corporates
  • J.P. Morgan Asia Credit Index
  • Global airlines
  • US capital goods
  • India's upstream oil producers
  • European mining equipment
  • Canadian broadband communications
  • China's property developers
  • UK tobacco
  • Chinese life and property & casualty insurers
  • Hong Kong banks
  • UK life insurers
  • GCC insurers
  • Mexican asset managers
  • Global reinsurers
  • Spain, Italy, and Ireland
  • Commodity-exporting sovereigns (Brazil, Australia, Romania)
  • Brazil & Mexico infrastructure
  • Japan
  • Council of Europe Development Bank
  • English housing associations
  • UK sub-sovereigns and structured finance

Recent Developments

• Private Rulings on Condensates: Credit-positive for US E&P companies and credit-negative for refiners. The rulings allow processed condensate exports without a license, increasing demand for infrastructure and affecting refining margins.

• Ex-Im Bank Portfolio Growth: The bank's portfolio increased significantly from $68 billion in 2009 to $114 billion in 2013, reflecting its growing role in facilitating US exports.

• Free Cash Flow Projections: Eaton is expected to generate over $1 billion in free cash flow in 2014, with a projected $1.3 billion over the remaining three quarters of the year.

Key Takeaways

• The credit outlook is mixed, with several positive developments for certain companies and negative impacts for others.
• Political and regulatory changes, such as the Ex-Im Bank's potential non-renewal and private rulings on condensate exports, have significant credit implications.
• Financial strategies like debt repayment and share buybacks can improve credit profiles, while settlements and capital spending can strain liquidity and leverage.
• The document emphasizes the importance of monitoring leverage, coverage ratios, and liquidity for maintaining credit stability.