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Summary of Credit Outlook Document (13 October 2016)

Core Content

This document outlines the credit implications of recent events in the corporate, infrastructure, and banking sectors, with a focus on how these developments affect the financial health and credit ratings of various entities. It includes analysis from Moody's Analytics, highlighting both credit positive and negative outcomes based on market activity, regulatory changes, and business decisions.

Main Points and Key Information

Corporate Sector

• Boeing's Order from Qatar Airways:

  • Boeing received a significant order for 40 widebody aircraft and a letter of intent for up to 60 narrowbodies, valued at $18 billion if exercised.
  • This is a credit positive for Boeing as it helps fill production gaps and potentially secures a major Middle Eastern customer.
  • However, the large deal size and tight pricing environment suggest Boeing may offer aggressive price discounts, which could reduce economic returns.
  • The letter of intent is seen as a warning about the increasing use of options in aerospace contracts, influenced by political and economic pressures.

• Misys' IPO and Refinancing:

  • Misys (B2 review for upgrade) plans to raise at least £500 million through an IPO and $1.3 billion in term loans to repay existing debt.
  • The transaction is credit positive as it reduces financial leverage and improves cash flow.
  • If successful, Moody's-adjusted gross debt to EBITDA will decrease from ~5x to ~3.6x, and free cash flow (FCF) generation will improve significantly.
  • The IPO will likely result in a reduction of the interest bill by ~€100 million and improve the interest coverage ratio to ~5.0x.
  • Vista Equity Partners is expected to retain a majority stake in the company until at least 2017.

Infrastructure Sector

• Duke Energy's Sales of Latin American Businesses:
  • Duke Energy (Baa1 negative) sold its Latin American operations for a total of ~$2.4 billion.
  • The sale is credit positive as it reduces debt and eliminates exposure to volatile international markets.
  • The proceeds will be used to repay part of the debt incurred from the acquisition of Piedmont Natural Gas.
  • After the sale, the percentage of parent company debt in Duke's capital structure is expected to drop from 35% to 32%.

Banking Sector

• ING's Strategic Plan:

  • ING (Baa1 stable) announced a new strategic plan to cut costs by €900 million by 2021, focusing on digitalization and branch closures.
  • The plan is credit positive as it aims to improve profitability and reduce the cost-to-income ratio.
  • ING's common equity Tier 1 capital ratio improved to 13.1% in June 2016 from 10% in 2013, and its return on equity is within the target range.
  • Despite progress, the cost-to-income ratio has increased above the target, and net interest margins are under pressure due to low interest rates.

• Banco BPI's Reduction in Exposure to Angola:

  • BPI (Ba3) agreed to sell 2% of its stake in Banco de Fomento de Angola to Unitel, reducing its exposure to Angola.
  • This is a credit positive as it helps BPI comply with European regulatory limits and avoid potential ECB fines.
  • The sale is part of a broader effort to restructure its African operations, following a failed plan to spin off these units before the regulatory deadline.

• Attica Bank's Increased Emergency Liquidity Assistance (ELA):

  • Attica Bank (Caa3 stable) increased its ELA by issuing €380 million of state-guaranteed bonds, which is a credit negative.
  • The increased reliance on ELA signals financial stress and reduced loss-absorbing capacity.
  • The bank's customer deposits have declined significantly, and it faces capital shortfalls due to regulatory findings from a recent audit.

• Norway's Proposed Financial Services Tax:

  • Norway introduced a 5% payroll tax and a 1% higher corporate tax rate for banks.
  • This is a credit negative for all 19 Moody's-rated Norwegian banks, expected to reduce net income by 3%-4% in 2017.
  • The tax will increase the cost of labor and reduce profitability, especially for less profitable banks.
  • The tax may also reduce international competitiveness and favor foreign banks in Norway.

• Korean Banks' Loan Delinquencies:

  • Korean banks' won-denominated loan delinquency rate rose to 0.87% in August 2016, the highest since December 2014.
  • This is a credit negative due to increased delinquencies in the shipbuilding and shipping sectors, which are undergoing restructuring.
  • Asset deterioration is expected to continue, negatively impacting profitability and capital buffers.
  • SME and household loan delinquencies also showed mixed trends, with SMEs slightly increasing and households decreasing.

Key Trends and Implications

• Aerospace Sector: Political and economic pressures are increasing the importance of offset requirements in contracts, with Qatar Airways leveraging its economic influence to secure favorable terms with Boeing.
• Steel Industry: EU tariffs on Chinese steel are credit positive for European producers like ArcelorMittal and thyssenkrupp, helping to stabilize prices and profitability.
• Banking Sector: Regulatory compliance and cost-cutting measures are critical for banks to maintain creditworthiness, especially in the face of low interest rates and increasing tax burdens.
• Corporate Debt Restructuring: Companies like Misys are using IPOs and refinancing to reduce leverage and improve financial performance, signaling a shift towards more stable capital structures.
• Geopolitical Influence: Countries like Qatar and India are using their economic clout to secure favorable trade and defense contracts, impacting the credit profiles of both local and international firms.