MOODYS.COM

18 NOVEMBER 2013

NEWS & ANALYSIS China’s Third Plenum Policy Statements Are Credit Positive 2

» The Sovereign » Local Governments » Strategic State-Owned Enterprises » Large Property Developers » Utility Companies

Corporates 10

» New Cholesterol Guidelines Are Positive for AstraZeneca, Negative for Merck

» Kimberly-Clark Plans to Spin Off Healthcare Business, a Credit Negative

» General Electric Plans to Exit Retail Finance Business Are Credit Negative

» Grifols Acquires Novartis' Diagnostics Business Unit, a Credit Negative

» China SCE Property's Latest Land Purchase Is Credit Negative » BJCL's Stake Acquisition in Juda International Would Be Credit

Positive » AVIC International Subsidiary Equity Placement Is Credit Positive

Infrastructure 18 » Brazil Oil Production Outlook Grows, Benefiting Drillships

Banks 19 » M&T Wells Notice and Justice Department Probe Add to

Compliance Woes » Rise in Large Brazilian Company Bankruptcies Is Credit Negative

for Brazilian Banks » Eurobank's Capital Increase Plans and Staff Reductions Are

Credit Positive » BNP Paribas Acquisition of Minority Stake in BNP Paribas Fortis

Is Credit Positive » Carige's Postponed Capital Increase Is Credit Negative » KBC Group Recognizes Additional Impairment in Irish Mortgage

Portfolio » Sberbank's Five-Year Development Strategy Is Credit Positive » ICBC Designation as a Global Systemically Important Bank Is

Credit Positive » China's Capital-Qualifying Bank Debt Guidance Will Benefit

Senior Creditors

Insurers 33

» US Insurers See Low Enrollment in Affordable Care Act, a Credit Negative

Sub-sovereigns 35 » Mexican Income Tax Reform Will Relieve States' Spending Pressures

US Public Finance 36 » New York Transportation Authority Revises Its Revenue

Projections, a Credit Positive

CREDIT IN DEPTH US Public Finance 38

Jefferson County, Alabama’s debt offering is a non-investment grade risk. We judge the two liens to be in the B or Ba speculative-grade rating categories, subject to substantial-to-high credit risk.

RATINGS & RESEARCH Rating Changes 43

Last week we upgraded Fortescue Metals Group, Shimao Property, Bank of America NA, Citibank NA, and 66 European CLO tranches and downgraded Sophia, Tervita, Morgan Stanley, Goldman Sachs, JPMorgan, Bank of New York Mellon, State Street Bank and Trust, Arrow Reinsurance, CIBC Mellon Trust, and Northern Trust, among other rating actions.

Research Highlights 49

Last week we published on European telecom, China retail, global pharmaceuticals, global base metals, US for-profit hospitals; banks in the US, United Arab Emirates, Eastern Europe, Middle East, Latin America, China, Mexico, Russia and CIS; Mozambique, Netherlands, Portugal, Saudi Arabia, Senegal, South African secondary cities, Rhode Island municipalities, European RMBS and ABS, Australian RMBS, ABS and covered bonds, and Asian structured finance, among other reports.

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Thursday’s Credit Outlook 53 » Go to Last Thursday’s Credit Outlook

NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

China’s Third Plenum Policy Statements Are Credit Positive Last Friday, the leadership of China released Decision on Certain Issues Related to the Comprehensive Deepening of Reform (an unofficial English translation here), a major policy statement that adds detail to the broad policy agenda in last Tuesday’s communiqué from the third plenum of the 18th Congress of the Communist Party of China (CPC). The two documents set specific benchmarks for key social, environmental and economic reforms. The unfolding policy agenda aims to sustain relatively rapid economic growth through institutional reform.

In this report, we explain why we believe the policy statements are credit positive for:

» the sovereign

» local governments

» state-owned enterprises

» property developers

» utilities

China’s Reform Direction Is Credit Positive for the Sovereign Our interpretation of the back-to-back policy statements is that while China’s (Aa3 stable) growth imperative remains strong, and credit positive for the sovereign, the CPC’s new leadership recognizes that the model established two decades ago is producing diminishing economic returns and has raised social tensions. In our view, the leadership recognizes that economic growth alone will not address China’s social challenges this decade.

The two policy statements’ key features intend to add scope for market forces, ease restrictions on foreign investment, scale back government direction of the economy and enhance property rights.

The State Council’s Development Research Center (DRC) reiterated to us the statement in the “Decisions” that the CPC leadership considers the private sector’s role “decisive” in contributing to the economy’s health, which is an evolution from the “foundational” role the third plenum of the 14th Congress designated for it in 1993. By leveling the private sector’s playing field with the state sector, the CPC leadership intends to allow greater competition, deregulation and mixed ownership, but without allowing privatization of strategic state corporate assets.

Friday’s policy document contains 16 sections that set benchmarks for major reform areas, with specific references to strengthening farmers’ property rights and overhauling the urban residency hukou system, measures to address social equity grievances that have led to incidents of social unrest over the past decade of rapid industrialization and urbanization.

Reforms will build on initial steps already proposed or taken. In late October, the DRC released its 383 reform plan, so called because of its three broad principles, eight priority areas (i.e., finance, taxation, land, state assets, social welfare, innovation, foreign investment and governance) and three means to achieve reform. Prior to that announcement, the State Council in February 2013 released wide-ranging guidelines

David Erickson Associate Analyst +65.6398.8334 david.erickson@moodys.com

Tom Byrne Senior Vice President +65.6398.8310 thomas.byrne@moodys.com

NEWS & ANALYSIS Credit implications of current events

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on income distribution measures.1 And in 2012, the State Council initiated a pilot reform of business taxes, mainly benefitting small and medium enterprises.2

As with previous CPC congresses’ third plenum statements, the full scope of the Central Committee’s policy direction will take time to coalesce. This was the case with the transformational third plenum of the 14th CPC congress, which in November 1993 announced the “socialist market economy” principle. Subsequently, China enacted its first Company Law in 1994, and two years later in 1995, its first Central Bank and Commercial Bank Laws. Time will tell whether this third plenum also unleashes “unprecedented” reforms, as Politburo Standing Committee member Yu Zhengsheng asserted it would in his 26 October statement, but the direction for reform has gained greater clarity in the past week.

In conclusion, the policies recognize the state sector’s dissipated ability to propel growth following the 2008 global financial crisis. Yet, sustained, relatively rapid growth would allow the central government to more readily absorb contingent fiscal liabilities embedded in local-government investment vehicles and to meet rising demands to improve people’s livelihood. This would preserve China’s high growth, strong central government finances credit profile. A rebalancing of state and private sector roles will boost productivity and help China achieve the growth targets leadership set out in the run-up to the fifth-generation leadership transition in November 2012 (see exhibit below).

China’s Long-Term Economic Outlook Sustained, relatively rapid growth hinges on the success of the third plenum’s reform agenda

2011-15 2016-20 2021-25 2026-30

Annual GDP Growth 8.6% 7.0% 5.9% 5.0%

Annual Labor Force Growth 0.3% -0.2% -0.2% -0.4%

Annual Labor Productivity Growth 8.3% 7.1% 6.2% 5.5%

Source: World Bank and the Development Research Center of the State Council (2012), China 2030: Building a Modern, Harmonious, and Creative Society.

1 See China’s Income Redistribution Plan, 11 February 2012. 2 See Expansion of Value-Added Tax Trial is Credit Positive for China, 30 July 2012.

NEWS & ANALYSIS Credit implications of current events

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China’s Local Government Finances Will Benefit from Planned Policy Reforms Measures contained in the two policy statements would improve the ability of China’s regional and local governments to finance their service and infrastructure responsibilities. Credit positive measures include the following:

» More transparent budget policies and reporting systems, such as the establishment of comprehensive financial statements on an accrual basis, a critical measure to improve the transparency of local government operations

» An improved central government financial transfer system to local governments. Reforms include less reliance on earmarked special purpose transfers, which sometimes require matching local government contributions, and increased general purpose transfers that provide greater flexibility to local governments

» Tax reform, including the introduction of property and resource taxes, which would potentially provide additional and more stable revenue sources to local governments

» A more effective budgetary framework including better matched revenue-raising authority and spending responsibilities, and clarified central and local government responsibilities, which is likely to improve accountability and fiscal outcomes

» Establishing local government debt management and risk warning mechanisms that would likely constrain indebtedness

» Introducing new financing mechanisms, such as allowing local governments to issue bonds to broaden the financing channels for urban construction, which would make local government borrowing more transparent.

The plenary session’s conclusions will guide the development of implementation plans and regulations of individual ministries, although the timing for these developments is unclear. But the fact that this direction has been approved by senior leadership and is consistent with announcements over the past 12 months demonstrates the central government’s serious commitment to fiscal reform of the country’s local governments. Consequently, we expect the central government to expedite implementation of reforms.

The reforms address shortcomings in local government budgetary frameworks, in particular, the mismatch between their revenue-raising powers and actual responsibilities (i.e., vertical fiscal imbalance3).

Some of the considered solutions, such as the rollout of a national property tax, which has proven to be a secure and stable revenue source for local governments in many countries, along with shifting expenditure responsibilities to different levels of government, if implemented, would likely put local governments on a more solid financial footing by better aligning revenues with spending.

In addition, local governments are responsible for meeting their infrastructure needs, but are not allowed to access capital markets. However, infrastructure needs and costs are increasing massively because of the country’s high rate of urbanization, which the government projects will rise to 60% by 2030 from 50% presently, with each 1 percentage point gain equal to 10 million people. Responsibilities such as those for infrastructure have led to fiscal pressures and indirect, riskier forms of borrowing through local government financing vehicles and other related entities.

3 Local governments collect 51% of revenues, but are responsible for 85% of expenditures in China.

Debra Roane Vice President - Senior Credit Officer +61.2.9270.8145 debra.roane@moodys.com

NEWS & ANALYSIS Credit implications of current events

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A local government bond market would allow for greater transparency in local government finances, and would have the added benefit of making them more accountable for their own investments and borrowing decisions.

We believe central leadership has the necessary political resolve to make the changes, but given the wide-ranging and complex nature of the reforms, the timing for their actual implementation is likely to take several years.

NEWS & ANALYSIS Credit implications of current events

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China’s Strategic State-Owned Enterprises Will Benefit The policy statements outline key reform initiatives that the government will enact by 2020 and affirm the dominant role of the economy’s public sector. We believe these reform initiatives and affirmations are credit positive for strategically important Chinese state-owned enterprises (SOEs).4

The government’s continued focus on the public sector leads us to believe it will continue to direct state-owned capital to strategically important areas, including those that are related to national security, key to the Chinese economy, provide public service, or are developing emerging strategic industries or support SOEs operating in these areas.

Examples of these SOEs include China National Petroleum Corporation (CNPC, Aa3 stable), China Petrochemical Corporation (Sinopec, Aa3 stable), China National Offshore Oil Corporation (Aa3 stable), State Grid Corporation of China (Aa3 stable), China General Nuclear Power Corporation (A3, stable), and China Three Gorges Corporation (A3 stable). Strategically important SOEs are also apt to benefit as the state gradually reduces its investment and involvement in less important sectors, potentially redirecting proceeds and resources to the strategically important SOEs.

The policy agenda includes other reform initiatives that would likely improve SOEs’ standalone credit strength by enhancing management and corporate governance, improving accountability for investment decisions, employing professional managers, optimizing reward and incentive systems, and promoting financial and budget information disclosures.

Moreover, the policy documents stress the decisive role of market mechanisms in resource allocation in the economy, which implies further relaxation of government control on interest rates, capital flow, investments and energy prices. These developments, along with related changes such as pricing mechanism reforms for refined oil and natural gas earlier this year and the removal of the lending rate floor in July,5 will generally benefit Chinese corporates. SOEs will be among the major beneficiaries, for example, those like CNPC and Sinopec, which suffered losses in their refining and natural gas import businesses because of government price controls.6

Some reform initiatives could have negative credit consequences for SOEs. However, we expect those reforms will be gradually implemented to help the government maintain stability while transitioning amid economic growth. For instance, the Decision includes a plan to allocate 30% of the gains of the country's state-owned capital to public fiscal account by 2020, versus the current requirement for SOEs to repatriate only up to 15% of their net income to the state. The potential increase of dividend payout will reduce the SOEs’ free cash flow.7 However, the effect on rated central SOEs will be modest because we expect that the plan will phase in gradually.

Additionally, opening currently monopolized non-strategically important sectors, such as unconventional oil & gas resources, telecom value-added service and medical services, will enable the private sector businesses to establish niche positions in some of these markets. Increasing competition even amid gradual reforms will likely pressure the credit profiles of SOEs in these sectors.

4 See Credit Quality of China’s Central SOEs Will Diverge Further Amid Economic Reforms, 8 August, 2013. 5 See Chinese Central Bank’s Removal of Lending Rate Floor Is Credit Negative for Banks, 22 July 2013. 6 See China’s Oil Price Reform Is Credit Positive for the Country’s Refiners, 28 March 2013. 7 See China’s Plan to Increase State-Owned Enterprise Dividends Is Credit Negative, published on 11 February, 2013.

Kai Hu Vice President - Senior Credit Officer +86.10.6319.6560 kai.hu@moodys.com

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Nevertheless, large SOEs in sectors such as oil and gas, telecommunications and railway have accumulated significant advantages in technology, experience, client relationship and distribution networks, which are difficult for potential competitors to replicate in a short period.

NEWS & ANALYSIS Credit implications of current events

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China’s Large Property Developers Will Benefit from Urbanization and Market Mechanisms The policy statements are credit positive for large property developers because they suggest a central government policy agenda that continues the urbanization process, loosens control of interest rates and relies more on market dynamics to determine resource allocation.

The government projects urbanization will increase to 60% by 2030 from 50% now, with each 1 percentage point gain equal to 10 million people. Two hundred million more city dwellers in the next 17 years in a more market-driven property market would be credit positive for leading mass-market property developers. Those best positioned to capture the demand include China Overseas Land & Investment Limited (Baa1 stable), China Vanke Co. Ltd. (Baa2 stable), Longfor Properties Co. Ltd. (Ba1 stable), Country Garden Holdings Company Limited (Ba2 stable) and Shimao Property Holdings Limited (Ba2 stable). Compared to smaller property developers, these developers benefit from better geographic coverage in China, higher quality properties, better after-sale services, and stronger brands. Their average annual sales are RMB30 billion ($4.9 billion) or more.

The large developers will also have better access to bank financing at lower costs under the government’s intention to relax control of interest rates because banks prefer large market players with solid credit profiles, and demand for their higher quality projects permits them to pledge the projects as collateral for bank borrowings.

The policy statements mention that local governments will be allowed to access capital markets. This would support the country’s urbanization process as the local governments can raise funds to support their infrastructures needs.

The policy statements also mention tax reform, which we interpret as meaning the government wants to expand the three-year old property tax programs in Shanghai and Chongqing to more cities. Households fulfilling certain criteria, such as gross floor area, are required to pay property tax in these cities. The tax aims to boost local governments’ tax revenue rather than cool the property market. Shanghai and Chongqing’s taxes are low and have not had material effect on the property markets, and we do not expect the central government to implement a significant tax that would materially affect rated developers over the next 12-18 months.

We do not expect the government to relax its existing restrictions on property purchases and mortgage financing for second homes. These restrictions are meant to reduce speculative property development and keep house prices from spiking.

Franco Leung Assistant Vice President - Analyst +852.3758.1521 franco.leung@moodys.com

Kaven Tsang Vice President - Senior Analyst +852.3758.1305 kaiyin.tsang@moodys.com

NEWS & ANALYSIS Credit implications of current events

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China’s Utilities Will Benefit from Focus on Markets and Clean Energy The two policy statements set specific benchmarks for key social, environmental and economic reforms that suggest measures that will be credit positive for the country’s utilities companies.

We expect the government to expedite prevailing reform initiatives in China’s utilities and infrastructure sectors, including increasing the transparency and linkage of market-based fuel costs in regulated utility tariffs and related cost pass-through mechanisms; shifting to clean energy sources from fossil fuels; and lowering the barriers to entry for private sector firms to participate in utility and infrastructure projects, thereby promoting competition.

Improving the tariff mechanism to pass fuel-price increases onto customers would be credit positive for power utilities, particularly those with coal-fired generation, such as China Resources Power Holdings Co. Ltd. (Baa1 stable). Gas distribution companies, including China Resources Gas Group Limited (Baa1 stable), ENN Energy Holdings Limited (Baa3 stable), Towngas China Company Limited (Baa2 stable), The Hong Kong and China Gas Co. Ltd. (A1 stable) and Beijing Enterprises Holdings Ltd. (Baa1 stable) will also benefit.

The lack of a clear framework for the timely adjustment of regulated tariffs to reflect fuel-price increases has weakened the profitability of coal-fired power generating companies in recent years, and to a lesser extent, gas distribution companies.

One of the key market-oriented reforms underway in China is expediting the rationalization of resource prices, which improves the transparency and predictability of China’s evolving regulatory framework. We expect the government to step up efforts to lift price controls on coal, natural gas and on-grid tariffs, and increase transparency in tariff mechanisms that allow upstream producers to pass costs to downstream users. The price and tariff mechanism reforms will give the power utilities better control over their sales prices and room to improve cost efficiencies, making the sector more competitive.

The emphasis on clean-energy sources is credit positive for clean-energy generation companies such as China Longyuan Power Group Corporation Limited (Baa3 stable) and gas distribution companies. We expect these companies to continue benefitting from rising market demand, favorable government policies and improving support for infrastructure facilities, such as faster expansion of gas pipelines and electric grid networks that transmit and distribute clean energy to end-users.

The promotion of private investment, another key theme of the policy statements, would increase competition and encourage companies to improve their efficiency. Although an increase of private capital will intensify the competition for new projects, we do not expect most of our rated power utilities and infrastructure companies to be challenged over next three years given their established market positions, exclusive franchise rights and good financial profiles to meet heavy capital investment requirements.

We expect more concrete details on the reforms in coming weeks and an accelerated, though gradual, pace for reform in order to maintain stability and economic growth.

Ivan Chung Vice President - Senior Credit Officer +852.3758.1399 ivan.chung@moodys.com

Ivy Poon Analyst +852.3758.1336 ivy.poon@moodys.com

NEWS & ANALYSIS Credit implications of current events

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Corporates

New Cholesterol Guidelines Are Positive for AstraZeneca, Negative for Merck On Tuesday, two major US heart associations released guidelines for the treatment of cardiovascular disease and recommended the use of cholesterol-lowering statins for patients who fall into four broad risk categories. The associations also said that non-statin therapies do not acceptably reduce the risk of heart attack, stroke and other cardiovascular events.

As a result, we expect statin use to rise, which is credit positive for AstraZeneca PLC (A2 stable) and generic manufacturers of statins, including Teva Pharmaceuticals Industries Ltd. (A3 negative). We also expect the use of non-statin cholesterol drugs to fall, a credit negative for Merck & Co., Inc. (guaranteed obligations A1 stable) and AbbVie Inc. (Baa1 stable).

The guidelines, published by the American College of Cardiology and the American Heart Association, mark a change to previous recommendations, under which patients were treated to specific cholesterol goals. Instead, the new protocols recommend statin therapy for patients who fall into any one of four risk buckets, which encompass patients with a broad range of cholesterol levels. For example, although current guidelines recommend statin treatment primarily to patients with low-density lipoprotein cholesterol, or LDL-C levels, of 130 or higher, the new guidelines recommend treatment for people with much lower levels, depending on their age and other risk factors, such as diabetes.

Although some patients currently taking statins, but not falling in the risk buckets, may stop, we believe the overall use of statins will rise. The increase might take some time to materialize, given that the existing guidelines have been in place for more than a decade and are well entrenched. The guidelines only apply in the US, but over time various cardiovascular groups or regulators in other countries might adopt a similar approach.

As shown in the exhibit below, the largest branded statin is AstraZeneca’s Crestor. The drug accounted for 22% of AstraZeneca’s year-to-date 2013 sales through 30 September. Most other statins have gone generic in the US, so most promotional effort in the statin space is done by AstraZeneca, without competition. Pfizer Inc.’s (A1 stable) Lipitor is also a statin, but most of its sales are outside the US because it already went generic.

Cholesterol Drug Sales for the 12 Months Ended 30 September 2013 Crestor Is the Largest Cholesterol Drug and Will Benefit Most from the New Guidelines

Source: Company press releases and filings

$0

$1

$2

$3

$4

$5

$6

$7

Crestor (AstraZeneca) Zetia (Merck) Lipitor (Pfizer) Vytorin (Merck) Niaspan (AbbVie) Tricor/Trilipix (Abbvie)

$ Bi

llion

s

US Ex-US

Michael Levesque, CFA Senior Vice President +1.212.553.4093 michael.levesque@moodys.com

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Generic statins, such as atorvastatin, simvastatin and pravastatin, are sold by a variety of manufacturers, including Teva, Actavis, Inc. (Baa3 stable) and Mylan Inc. (Baa3 stable). Although these companies will benefit, the upside in their results could be negligible given the diversity of their product portfolios.

The new guidelines also state that non-statin therapies (alone or in combination) do not provide acceptable benefits compared with their potential for adverse effects in the routine prevention of heart attack, stroke or other conditions classified as atherosclerotic cardiovascular disease. Assuming that physicians adopt the new guidelines, they will have the most negative effect on Merck, affecting its large Zetia/Vytorin franchise. Zetia is not a statin, but is approved for the reduction of cholesterol and is taken either alone or in combination with a statin. Merck also manufactures Vytorin, a combination of Zetia with the older, generic drug simvastatin, which Merck sells as Zocor.

Much of the marketing message around Zetia centers on helping patients to reach their cholesterol goals, which the new guidelines specifically de-emphasize. Although not a major growth driver, these products are important to Merck, together totaling close to 10% of its year-to-date sales and not facing generics before December 2016. A sharp decline would increase Merck’s challenges in restoring healthy growth, already affected by generic competition and other competitive pressures.

AbbVie will see a decline in its cholesterol franchises, Trilipix and Niaspan, which constitute 6% of AbbVie’s sales. These products are not statins, but are used to lower LDL-C (Trilipix) and raise high-density lipoprotein cholesterol, or HDL-C (Niaspan). The products have already been facing generic competition and are becoming less relevant to AbbVie as products such as Humira continue to grow.

NEWS & ANALYSIS Credit implications of current events

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Kimberly-Clark Plans to Spin Off Healthcare Business, a Credit Negative On Thursday, Kimberly-Clark Corporation (A2 stable) said it plans to pursue a tax-free spin-off of its healthcare business, one of its four segments, which is credit negative because it will diminish business diversity and cash flow.

The spin-off reduces revenue by around 8% and EBITDA by around 7%. The loss of earnings and the company’s indication that it will not reduce its $0.81-per-share quarterly dividend (approximately $1.2 billion annually) will hurt free cash flow.

Nevertheless, we expect that retained cash flow to net debt (about 25% for the 12 months through 30 September, with all ratios incorporating Moody's standard adjustments) will remain above 22%, and funds from operations to net debt (approximately 39% for the same period) will remain above 31%, levels that would lead to downward rating pressure. We expect that 2014 retained cash flow to net debt will be 24%-25% and funds from operations to net debt about 40%, factoring in the planned spin-off.

The company will continue to maintain good geographic diversity, meaningful scale and strong market positions in its personal care and consumer tissue businesses following the spin-off. We project that pro forma free cash flow will exceed $600 million in 2014. We also believe that the company is committed to maintaining good commercial paper market access. Accordingly, we expect the company will manage its cash flow and balance sheet to sustain credit metrics necessary to maintain its A2 and Prime-1 ratings. For example, Kimberly-Clark indicated it will moderate future dividend increases until the dividend payout ratio is restored to its current level. This mitigates the spin-off’s upward pressure on the dividend payout ratio. Debt-to-EBITDA leverage (2.2x last 12 months as of 30 September) increases to roughly 2.4x pro forma for the transaction, but we project a return to 2.2x in 2014.

Kimberly-Clark has not disclosed certain details regarding the structure of the spin-off, including whether the company plans to extract cash as part of the transaction by issuing debt at the new entity to fund a distribution to Kimberly-Clark. The company also has not disclosed how much cash and pension liability, if any, would be transferred to the new company. Our projected 2014 credit metrics would improve modestly if the company receives cash and/or transfers any pension obligations, which we have not assumed.

We do not expect the spin-off to meaningfully affect Kimberly-Clark 's retained businesses because the company's scale (pro forma revenue base of approximately $19.6 billion) remains significant. Any loss of purchasing or manufacturing synergies is manageable, and we expect Kimberly-Clark to quickly rationalize any stranded overhead costs. Kimberly-Clark's healthcare business, which supplies surgical and infection-prevention products to hospitals and certain medical devices, has a lower margin than the company's overall average. The company expects to complete the spin-off by the end of third-quarter 2014.

John Puchalla Vice President - Senior Credit Officer +1.212.553.4026 john.puchalla@moodys.com

NEWS & ANALYSIS Credit implications of current events

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General Electric Plans to Exit Retail Finance Business Are Credit Negative Last Friday, General Electric Company (Aa3 stable) said it planned to exit the retail finance business through a multi-step transaction that will begin with an initial public offering of up to 20% of the shares of General Electric Capital Corporation’s (A1 stable) North American retail finance unit in 2014. Although these planned measures will lower the funding risk at GE Capital, we view them as credit negative because they will reduce GE Capital’s earnings and shrink the scale of future dividends that GE Capital can upstream to GE.

After the planned IPO, GE expects to distribute in 2015 its remaining interest in GE Capital’s retail finance unit to voting GE shareholders in exchange for shares of GE common stock – the effective equivalent of a share repurchase, albeit by means of an asset exchange rather than cash. This will enable GE to achieve its strategic objective of returning its common stock share base to levels it had before the global financial crisis.

GE will remain exposed to the retail finance business for several years because GE Capital will need to provide the soon-to-be-spun-off unit with transitional funding and administrative services while managing the ownership transition. We expect that the nature and magnitude of this support to be similar to current levels, but it will extend beyond the split-off date. As the transaction progresses, GE will therefore likely cede control of the retail finance assets well before the need for support is fully eliminated.

The transaction is consistent with GE’s strategy of shrinking GE Capital’s balance sheet and reducing its related exposure to wholesale funding risk and cyclical deterioration in asset quality performance for non-core assets. In fact, the planned separation accelerates the parent company’s recent risk-reduction measures and its ongoing transition to a more industrial-oriented business mix.

But although the retail finance unit periodically experiences higher-than-average delinquency and credit-loss rates, it also generates above-average returns relative to GE Capital’s other business units. GE expects that the unit’s 2013 earnings will be in line with 2012 unit profits of $2.2 billion, or about 27% of GE Capital’s earnings (before corporate items and eliminations). The loss of this income stream will reduce the dividends that GE Capital will be able to distribute to GE.

GE Capital’s asset sales over the past few years have enabled it to increase capital distributions to GE, which included the repayment of $15 billion of support it received from its parent during the global financial crisis. However, GE has used much of this money to repurchase shares, rather than benefit creditors.

GE Capital’s retail finance unit is composed of US and Canadian private-label and dual-card8 businesses ($36 billion of receivables as of 30 September), a sales finance unit ($11 billion) and an elective health procedure finance business ($6 billion). The transaction brings ending net investment closer to GE’s $300-$350 billion target and will enable it to meet its goal of reducing GE Capital’s contribution to consolidated parent company earnings to 30%, from pre-crisis levels of 45%-55%.

8 Dual-card combines a private label or branded affinity program (e.g., Macy's, Sears, GAP) with one of the major payment networks

(e.g., VISA, Mastercard, or AMEX).

Russell Solomon Senior Vice President +1.212.553.4301 russell.solomon@moodys.com

NEWS & ANALYSIS Credit implications of current events

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Grifols Acquires Novartis’ Diagnostics Business Unit, a Credit Negative Last Monday, Spain-based global healthcare company Grifols S.A. (Ba2 negative) announced its acquisition of Novartis AG’s (Aa3 stable) Diagnostics Business Unit for a total consideration of $1.67 million. The purchase is credit negative for Grifols because it is largely debt funded and will increase Grifols’ leverage. After the announcement, we changed Grifols’ rating outlook to negative. The sale is credit positive for Novartis.

Grifol’s acquisition is another rather aggressive step to grow its business following the 2011 Talecris acquisition, which also was entirely debt financed. Grifols expects to close the Novartis diagnostic unit acquisition in the first half of 2014, subject to regulatory approvals.

Grifols’ pro forma leverage will increase by around 0.7x to 3.9x assuming profitability of the target is comparable to Grifols’ profitability. We expect the pace of deleveraging will be relatively slow partly because there are no immediate cost synergies. Additionally, the pro forma leverage calculation could understate the leverage effect if the diagnostic business unit grows at a rate lower than Grifols’ and its EBITDA declines because of expiring intellectual property royalties over the next few years.

However, the initial negative effect on leverage is partly offset by an improvement in Grifols’ business profile. Grifols currently operates through four divisions: Bioscience, Diagnostics, Hospital as well as Raw Materials and Others (mainly engineering). Bioscience, which accounts for approximately 90% of current revenues, focuses on the development, manufacturing, marketing and distribution of a broad range of blood plasma-derived products. These products are used for the treatment of chronic and acute conditions, such as immune system deficiencies, neurological diseases, bleeding diseases, burns and major surgery.

The acquisition of Novartis diagnostics business unit will improve Grifols’ diversification and reduce its dependence on the Bioscience business, which will decline post-acquisition toward 70% of total sales. The diagnostics business will help broaden Grifols’ portfolio considerably with a complementary product line, and its expansion in blood screening further improves its vertical integration.

Although the acquisition is partly funded from existing cash balances of €488 million as per end of September 2013, Grifols’ liquidity profile remains good. In addition, we expect continued sizeable positive free cash flow generation on the back of the target’s high cash flow generation and ongoing favorable market dynamics in Grifols’ core blood plasma business. Grfiols’ recent results have been strong, supported by organic growth, declining integration costs and moderate margin expansion. Hence, we would expect Grifols to apply its positive free cash generation to debt reduction over the next 12-18 months to reduce leverage to below 3.5x (from the pro forma 3.9x we estimate) a level more commensurate with its current rating.

Grifols reported revenues were €2.71 billion for the last 12 months as of September 2013. Grifols is the third-largest company by revenue in the global plasma derivatives market, which has approximately $14 billion in annual sales, ranking behind Baxter International Inc. (A3 stable) and CSL (unrated)

Alex Verbov Vice President - Senior Analyst +49.69.70730.720 alex.verbov@moodys.com

Benedikt Schwarz Associate Analyst +49.69.70730.942 benedikt.schwarz@moodys.com

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

China SCE Property’s Latest Land Purchase Is Credit Negative Last Monday, China SCE Property Holdings Limited (B1 stable) announced that it won a bid for land in Shanghai’s Hongqiao District for a consideration of RMB3.6 billion. The acquisition is credit negative because the company’s lack of experience in Shanghai increases the project’s liquidity and execution risks.

China SCE is making the purchase with two partners and is responsible for about half of the purchase price. It will fund the purchase with operating cash flow and cash on hand and therefore won’t increase its gross debt leverage. The company’s contracted sales totaled RMB9.2 billion for the first 10 months of the year, well ahead of our expectations and the company’s original full-year target of RMB7.5 billion.

Although the purchase is in line with the company’s goal of reducing its exposure to lower-tier cities where property supply is increasing, China SCE lacks the financial capacity to operate only in first-tier cities, where land and construction costs are higher than in smaller cities. Out of China SCE’s 29 projects as of end-June, only three were in first-tier cities (two in Beijing and one in Shenzhen).

Operating primarily in the Bohai Rim and West Taiwan Strait economic zones, China SCE’s total land bank at end-June was approximately 10 million square meters. Of this land bank, 68% was in the West Taiwan Strait economic zone (Longyan, Nanchang, Quanzhou, Xiamen, Zhangzhou); 28% in the Bohai Rim economic zone (Anshan, Beijing, Langfang, Linfen, Tangshan); and the rest in Shenzhen. The existing land bank had an average cost of RMB1,127 per square meter, compared with RMB12,827 per square meter for the Shanghai Hongqiao site.

The Shanghai project offers the potential for higher profit margins than China SCE can earn in lower-tier cities; however, given that this is the company’s first project in Shanghai and it is not established there, its ability to complete pre-sales to tenants will likely be tested.

Because Shanghai has more stringent requirements on pre-sales that lengthen the time it takes to start selling properties before their completion compared with lower-tier cities, managing cash flow will likely be challenging. For example, pre-sales in Shanghai can begin only when the shell of a building is complete; pre-sales in lower-tier cities can begin as soon as the foundations of the building is finished. As a result, China SCE’s Shanghai Hongqiao project will require more upfront investment, and cash flow will take longer to materialize than it does in lower-tier cities.

Chris Wong Associate Analyst +852.3758.1531 chris.wong@moodys.com

Lina Choi Vice President - Senior Analyst +852.3758.1369 lina.choi@moodys.com

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

BJCL Stake Acquisition in Juda International Would Be Credit Positive Chinese property developer Beijing Capital Land Limited (BJCL, Ba2 stable) said on Tuesday that it will acquire a 56.1% equity interest in Juda International Holdings Limited (unrated) for HKD298.5 million. Juda produces chemical products for industrial uses and has production facilities in Xiamen, Fujian Province, and is listed on the Hong Kong Stock Exchange. BJCL intends to maintain Juda's bourse listing, which will give BJCL indirect access to the offshore equity market, a credit positive because it will broaden BJCL’s funding access.

Juda can access the offshore equity market and use the funds raised to invest in property projects in China. Because it will be part of the BJCL group and consolidated on BJCL’s financial statements, its investments will be reflected in BJCL’s financials and will support the group’s expansion in China.

BJCL's investment in Juda will increase to a maximum of HKD479.3 million if all the minority shareholders, excluding Beijing Capital Group Co., Ltd. (Capital Group, unrated), accept its unconditional cash offer. In addition, the Capital Group, BJCL’s largest shareholder with a 47% stake, will acquire a 9.9% interest in Juda.

The scale of the investment is small, at less than 1% of BJCL's total assets of RMB47.1 billion (HKD58 billion) as of June 2013. With cash holdings of RMB7.9 billion (HKD9.8 billion) as of June, BJCL has sufficient resources to fund the investment.

Because BJCL is incorporated in China, it needs the China Securities Regulatory Commission's approval to issue new equity. Its access to equity funding has been restrained since 2010 when the government tightened controls on the property sector. Juda is incorporated and listed outside of China, so it is not subject to this regulatory constraint. It can raise funds from Hong Kong’s equity market and use that money to invest in property projects in China.

BJCL will use Juda mainly for equity fundraising in the offshore market. But given Juda’s small scale, the amount it can raise initially will be small relative to BJCL’s operations. As Juda raises funds and makes investments, its scale will gradually increase.

However, the role of International Financial Center Property Ltd (IFC, Ba3 stable) as BJCL's primary investment holding company offshore will remain unchanged. IFC will continue to hold approximately 50% of BJCL's assets and operate as its debt-funding arm in the offshore market.

BJCL was incorporated in China in 2002 and is the property arm of the Capital Group. BJCL was listed on the Hong Kong Stock Exchange in 2003. It is a medium-sized residential developer in China. As of end-June 2013, BJCL had a total land bank of 10.79 million square meters (attributable saleable land bank: 7.1 million square meters) in gross floor area, covering 15 cities in China. This land bank will support the company's development over the next four to five years.

Incorporated in the British Virgin Islands in 2000, IFC is a 100% owned subsidiary of BJCL. It is an overseas investment holding company that owns property development projects in China. As of end-June 2013, IFC had total assets of RMB21.3 billion and a total land bank of approximately 4.68 million square meters in saleable gross floor area.

Kaven Tsang Vice President - Senior Analyst +852.3758.1304 kaiyin.tsang@moodys.com

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

AVIC International Subsidiary Equity Placement Is Credit Positive Last Monday, Tian Ma Micro-Electronics Company Limited (unrated), a listed subsidiary of AVIC International Holding Corporation (Baa3 stable), announced its plan to acquire additional equity interests in five electronic companies from AVIC International and local-government-owned partners for a total consideration of RMB5.4 billion. Tian Ma will fund the acquisitions by issuing new shares to the sellers. Upon completion of the transaction, Tian Ma also intends to place a maximum RMB1.8 billion of new shares to no more than 10 independent third parties. The proceeds of equity placement will be used to supplement its own working capital requirements.

The equity placement, as proposed, is credit positive for AVIC International because it will increase the group’s consolidated equity base by around 6% and lower its leverage. Its debt/capital would be reduced by approximately 1.2 percentage points to 71.7%, from 72.9% as of year-end 2012, absent other changes. It will also support AVIC’s growing liquid crystal display (LCD) businesses, which are heavily funded by debt.

The injection of assets into the publicly listed subsidiary will improve the information transparency of AVIC International. AVIC International is not a listed company. With more businesses included in listed subsidiaries, investors are likely to have more comprehensive and timely knowledge of AVIC International’s operations.

The purchase plan will not materially change the AVIC International’s business profile because it already partially owns and manages the five target companies. Tian Ma will remain a consolidated subsidiary of AVIC International after the transaction.

Tian Ma is purchasing its stakes in the companies from these sellers:

» a 70% equity interest in Shanghai Tian Ma from AVIC International Holdings Limited, Shanghai Zhangjiang Company, Shanghai State Assets Company and Shanghai Optical Communications Corporation

» a 40% equity interest in Chengdu Tian Ma from Chengdu Industrial Group and Chengdu Gaoxin Investment

» a 90% equity interest in Wuhan Tianma from Hubei Technology Investment

» a 100% equity interest in Shanghai Optoelectronics from AVIC International Holding Corporation and AVIC Shenzhen

» a 100% equity interest in Shenzhen Opto-electronics from AVIC International Holding Corporation and AVIC Shenzhen

In view of its fast-growing market of smart phones and other handset devices, Tian Ma has seen improving profitability, which is also credit positive for AVIC International. According to the results forecast Tian Ma announced 28 October, net profit attributable to shareholders for 2013 is expected to increase by 90%-130% year on year.

Kai Hu Vice President - Senior Credit Officer +86.10.6319.6560 kai.hu@moodys.com

Cindy Yang Associate Analyst +86.10.6319.6570 liu.yang@moodys.com

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Infrastructure

Brazil Oil Production Outlook Grows, Benefiting Drillships Last Tuesday, the independent International Energy Agency (IEA) published its 2013 World Energy Outlook, in which it forecast that Brazil (Baa2 stable) will account for one third of the net growth in global oil production until 2035. IEA estimates that the recently discovered pre-salt oil fields will triple Brazil’s oil production capacity to 6 million barrels of oil/day by 2035.

We expect the exploration of Brazil’s new oil fields will keep demand high for ultra deepwater drilling vessels and partially offset increased competition from greater equipment supply, a credit-positive development for all Brazilian rated drillships and floating production storage and offloading projects.

At IEA’s forecast production levels, Petroleo Brasileiro SA – Petrobras (Baa1 negative) would become the global leader in offshore deepwater production. Petrobras has outsourced the exploration of oil in Brazil’s ultra deepwater fields via charter and operation agreements, driven primarily by the company’s capital constraints owing to its substantial capital program, which is set to reach $236.7 billion over the 2013-17 period.9

We expect Brazil’s increased oil production to be positive for projects that have recontracting risk, such as Odebrecht Offshore Drilling Finance Limited (Baa3 stable). The project consists of a portfolio of three state-of-the-art vessels -- two drillships, ODN I and ODN II; and a submersible, Norbe VI. Norbe VI’s contract with Petrobras expires four years prior to Odebrecht’s Baa3 senior secured $1.69 billion notes maturity. In the event of a successful exploration of the pre-salt oil fields, the likelihood increases that Norbe VI will renew its contract with Petrobras, resulting in more stable and predictable cash flow for the entire transaction.

Other drilling vessel operators that we expect will be positively affected are Schahin II Finance Company (SPV) Limited (Baa3 stable), Odebrecht Drilling Norbe VII/IX Ltd. (Baa3 stable), and Lancer Finance Company (SPV) Limited (Baa3 stable).

Petrobras has contracted for an additional 42 drilling rigs for 2014-20, anticipating that future demand will be limited to specific situations and needs, such as rig-construction delays. As contracts with foreign-built vessels expire by 2016, the company expects to replace them with Brazilian-built drilling equipment, but delivery delays from Brazil’s nascent ship building industry are likely. When production in the massive deepwater fields fuels demand for ultra deepwater drilling vessels, as well as for foreign-built vessels, those projects that can deliver equipment will have additional bargaining power to negotiate better daily rates and other contract terms.

9 See Brazil: The Hotspot for Drillships and FPSOs, 25 September 2013.

Alexandre de Almeida Leite Vice President - Senior Analyst +55.11.3043.7353 alexandre.dealmeidaleite@moodys.com

Jose Avila Associate Analyst +55.11.3043.7307 jose.avila@moodys.com

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Banks

M&T Wells Notice and Justice Department Probe Add to Compliance Woes Last Tuesday, M&T Bank Corporation (A3 stable) disclosed in its third-quarter Form 10-Q that the US Securities and Exchange Commission (SEC) had issued its subsidiary, Wilmington Trust Corporation (A3 stable), a Wells notice in connection with an investigation into Wilmington Trust’s financial reporting and securities filings before M&T acquired it. The company also disclosed that the US Department of Justice is conducting an investigation into Wilmington Trust for similar issues and certain commercial real estate lending relationships at the operating bank level, also before its acquisition by M&T.

These regulatory actions are credit negative because they come as M&T is involved in firm-wide remediation of deficiencies in its compliance with the Bank Secrecy Act and anti-money laundering laws and its pending acquisition of Hudson City Bancorp, Inc. (unrated). Also, because the Wilmington investigations could result in civil or criminal penalties, they have the potential to divert management and company resources during a critical period.

The receipt of a Wells notice is a significant escalation by the SEC, signaling that the regulator may bring a civil action against a company and its management. Upon receiving a Wells notice, a recipient can explain to the SEC why it should not bring an action. In its latest 10-Q, M&T disclosed that the SEC issued a Wells notice to Wilmington Trust on 5 August 2013, to which Wilmington Trust responded on 20 September. In Wilmington Trust’s 2010 10-K, the last one filed before M&T acquired it in May 2011, its only disclosures were about an open comment letter regarding credit review, substandard and nonperforming loans, impaired loans, collateral values, goodwill and the deferred tax asset valuation allowance, which led to the subsequent investigations.

M&T disclosed that the investigations are ongoing and the company’s lawyers have met with the SEC and Justice Department. M&T estimated possible losses of up to $70 million above existing reserves from all pending legal proceedings.

Although this amount is not large, equaling 4% of M&T’s trailing 12-month pre-tax income, an escalation in either investigation and the discovery of additional control issues could increase litigation costs and divert senior management’s time from operational and strategic issues. For example, M&T’s merger with Hudson City, which M&T already postponed to 31 January 2014 from 27 August 2013 because of the Bank Secrecy Act and anti-money laundering deficiencies, could be derailed and frustrate M&T’s efforts to build up its currently small presence in New Jersey.

Mark Vassilakis Vice President - Senior Analyst +1.212.553.2997 mark.vassilakis@moodys.com

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Rise in Large Company Bankruptcies Is Credit Negative for Brazilian Banks Last Monday, Serasa Experian published a report on corporate bankruptcies in Brazil that showed a 34% year-over-year increase in bankruptcy protection filings in the third quarter. The uptick in bankruptcies is credit negative for Brazilian banks, which increased their lending to corporations in recent years.

Bankrupt companies’ efforts to restructure debt will likely lead to losses for those banks that have expanded their corporate loan books. The largest year-over-year increase in bankruptcies, at 53%, was among large Brazilian companies with more than BRL50 million in annual revenues, a segment that both large and small banks targeted in recent years for increased lending.

As shown in the exhibit below, the reported increase is in line with the slowdown in Brazil’s economy, with the country’s GDP slowing to 0.9% in 2012 from 7.5% in 2010. The resulting decline in bank asset quality will affect large banks, which have traditionally had significant exposure to large companies, and lenders to small and midsize enterprises (SME banks) that have recently begun lending to large companies.

Large Brazilian Company Bankruptcy Filings, Rolling 12-Month

Note: Large Companies are defined as those with more than BRL50 million in annual revenue Source: Serasa Experian

In response to a rise in delinquencies among small and midsize enterprises starting in 2010, Brazil’s smaller banks began shifting their lending towards larger companies, which they perceived as being less risky. However, smaller credit spreads on loans to larger corporate clients have pressured SME banks’ profitability, which has already been affected by Brazil’s weakening economy. In addition, higher concentrations of loans to large Brazilian companies among SME banks have made them more susceptible to defaults arising from increased bankruptcies in that market segment.

The effect of the bankruptcy trends is already revealing itself in SME banks’ third-quarter results. Among all publicly traded banks in Brazil, only Banco ABC Brasil S.A. (Baa3 stable, D+/baa3 stable)10 reported a rise in profitability. Banco Daycoval S.A. (Baa3 stable, D+/baa3 stable) reported a rise in overall delinquencies to 2.8% in the third quarter from 1.6% a year earlier, largely because of a 200-basis-point rise in corporate delinquencies to 4.4%. Similarly, Banco Industrial do Brasil S.A. (Ba2 stable, D/ba2 stable) reported

10 The bank ratings shown in this report are the banks’ deposit rating, their standalone bank financial strength ratings/baseline credit

assessment and the corresponding rating outlooks.

0

20

40

60

80

100

120

140

Farooq Khan Associate Analyst +55.11.3043.7087 farooq.khan@moodys.com

NEWS & ANALYSIS Credit implications of current events

21 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

worsening delinquencies owing to large problem single-loan exposures, which resulted in its nonperforming loan ratio rising to 3.31% in the first half of 2013 from 0.6% a year earlier.

Although Brazilian banks remain generally well capitalized, the rise in bankruptcy filings adds another challenge to the more difficult operating environment we expect in 2014. Inflation remains high and interest rates have been rising, which adds pressure to funding costs and profitability. Any deterioration in corporate loan asset quality may offset some of the improvements that Brazilian banks have made elsewhere on their balance sheets, especially in consumer lending, where delinquencies fell to 7.0% in September 2013 from 8.2% a year earlier.

NEWS & ANALYSIS Credit implications of current events

22 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Eurobank’s Capital Increase Plans and Staff Reductions Are Credit Positive On Friday, Eurobank Ergasias S.A. (Caa2 negative, E/caa3 stable)11 announced that it will initiate a share capital increase process to raise approximately €2 billion. The announcement followed media reports on Wednesday that Eurobank and the state-owned Hellenic Financial Stability Fund (HFSF), which owns 95.2% of the bank, had agreed with the European Commission, European Central Bank and International Monetary Fund (collectively known as the Troika) to privatise the bank by the end of January 2014, with various foreign investors expressing interest. In addition, the bank’s voluntary worker layoff scheme launched earlier this month will exceed its goal of reducing its headcount by 700.

These developments are credit positive for the bank because they will enhance its relatively weak capital base, with ownership of the bank gradually reverting back to private investors, and lower its cost base.

A privatisation through the issuance of new shares by the end of January 2014, which would follow the HFSF’s €5.8 billion recapitalisation of Eurobank in June 2013 that took place without private investor involvement, would meet the first-quarter 2014 target envisaged by the local recapitalisation law. The privatisation would also enhance the bank’s relatively weak core Tier 1 (CT1) ratio, which was 8.1% at the end of June and below the 9% minimum required by the Bank of Greece.

We estimate that Eurobank will need to raise at least €2 billion of new capital from its privatisation in order to raise its CT1 ratio to more than 13%. Such a level is necessary for Eurobank to absorb any future loan losses considering its high level of nonperforming loans (25.3% of gross loans as of June 2013) and modest provisioning coverage of 50%. Moreover, its CT1 ratio would be comparable to peers Alpha Bank AE (Caa2 negative, E/caa3 stable), whose CT1 ratio was 13.9% at the end of June, and Piraeus Bank S.A. (Caa2 negative, E/caa3 stable), whose CT1 ratio was 13.8%. Additional capital would also help Eurobank meet the capital needs that are likely to emerge when BlackRock conducts its second assessment of credit losses for Greek banks, which the Bank of Greece commissioned and is due to be completed by the end of this month.

According to media reports, there are currently three foreign investment funds that have expressed interest in investing in Eurobank, which suggests that privatisation is feasible. However, we note that the HFSF is likely to have veto power over important strategic decisions given that it will likely retain a significant stake in the bank for some time.

Eurobank’s success in reducing its headcount is also credit positive because it provides additional relief to its cost base. Although top- and bottom-line profitability will remain under pressure from Greece’s persistently adverse operating environment, we estimate that the staff cuts will reduce staff expenses by around 5%, thereby helping the bank to improve its pre-provision income (PPI) following the takeover in July of two smaller bridge banks, New Hellenic Post Bank (unrated) and New Proton Bank (unrated).

As of June 2013, the bank’s six-month PPI was a low €190.3 million after operating expenses of €496.5 million, and the bank estimates annual pre-tax synergies of around €200 million by 2015 from its recent bank acquisitions.

11 The bank ratings shown in this report are the bank’s deposit rating, its standalone bank financial strength rating/baseline credit

assessment and the corresponding rating outlooks.

Nondas Nicolaides Vice President - Senior Analyst +357.25.586.586 nondas.nicolaides@moodys.com

NEWS & ANALYSIS Credit implications of current events

23 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

BNP Paribas Acquisition of Minority Stake in BNP Paribas Fortis Is Credit Positive Last Wednesday, BNP Paribas (BNPP, A2 stable, C-/baa2 stable)12 announced that it had agreed to buy the Belgian government’s 25% stake in BNP Paribas Fortis SA/NV (BNPP Fortis; A2 stable, C-/baa1 stable) for €3.25 billion. The transaction, which gives BNPP full control over BNPP Fortis, is credit positive for BNPP because it allows BNPP to fully exploit cost synergies at the subsidiary. The deal will also increase BNPP’s retail and commercial business earnings relative to its capital markets business and allow it to retain a strong capital position after the deal’s completion.

The deal is moderately credit positive for BNPP Fortis because it will improve BNPP Fortis’ governance structure and raises the potential for BNPP Fortis’ efficiency to improve from a fuller exploitation of intra-group synergies. In addition, a deeper integration of BNPP Fortis underscores the very high likelihood of parental support, if necessary. The exit of the Belgian government as a key shareholder will not affect our very high systemic support assumptions, given BNPP Fortis’ importance as Belgium’s largest banking institution.

Full control over BNPP Fortis will allow BNPP to continue with the integration of the Belgian bank into its group operations and more effectively exploit the potential for cost synergies at the group level. We estimate that BNPP could achieve around €300 million operating cost savings, or around 3% of its 2012 income before tax, by lowering BNPP Fortis’ cost-to-income ratio to 70% from 76% in 2012.

With full control of BNPP Fortis, we expect BNPP to increase its retail and commercial banking net income contribution by around €150 million, or approximately 2% of its 2012 group net income.

The transaction will have a moderately negative effect on BNPP’s regulatory capital position, because the deal would lower BNPP’s third-quarter 2013, fully loaded Basel III common equity Tier 1 (CET1) ratio by around 50 basis points to 10.3%. Despite the decline, BNPP’s capital position is well above most European peers (see exhibit). Moreover, BNPP should be able to neutralise the effect on its capital from the acquisition in less than two quarters, as we calculate it generates around 40 basis points of Basel III CET1 every quarter.

BNP Paribas’ Regulatory Capital Position Will Remain Above Its Peers Post-Acquisition

Notes: Data as of September 2013. Barclays CET1 ratio of 9.3% includes the £5.8 billion rights issue it completed in October. BAC = Bank of America Corporation; BCS = Barclays Plc; BNPP = BNP Paribas; Citi = Citigroup; CS = Credit Suisse; DB = Deutsche Bank; GS = The Goldman Sachs Group Inc. HSBC = HSBC Holdings plc; JPM = JPMorgan Chase & Co.; RBS = Royal Bank of Scotland plc; SG = Société Générale, UBS = UBS AG. Source: Company data

12 The bank ratings shown in this report are the bank’s deposit rating, its standalone bank financial strength rating/baseline credit

assessment and the corresponding rating outlooks.

0%

2%

4%

6%

8%

10%

12%

14%

UBS BNPP HSBC Citi CS BAC SG GS DB BCS JPM RBS

Basel III Fully Loaded CET1 Basel III Fully Loaded CET1 Post Acquisition of Minority Stake in BNP Paribas Fortis

Alessandro Roccati Senior Vice President +44.20.7772.1603 alessandro.roccati@moodys.com

Lucie Villa Assistant Vice President - Analyst +44.20.7772.5326 lucie.villa@moodys.com

NEWS & ANALYSIS Credit implications of current events

24 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

The sale of the 25% stake in BNPP Fortis is also credit positive for the Belgian government (Aa3 negative) because the sale proceeds will enable the government to achieve its debt objective of 100% of GDP this year. This sale, and the associated €900 million capital gain, end the government’s bail-out. The Belgian government acquired its 25% stake in BNPP Fortis in 2008-09, following the collapse of Fortis Bank Belgium (now BNPP Fortis) and its rescue by the Belgian state and by BNPP, which resulted in the government owning a 25% stake and BNPP owing the rest.

NEWS & ANALYSIS Credit implications of current events

25 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Carige’s Postponed Capital Increase Is Credit Negative Last Monday, Banca Carige S.p.A. (B2 review for downgrade, E+/b3 review for downgrade)13 announced that it was postponing obtaining the approval of a new business plan that was to include a substantial capital increase. The postponement of the capital increase is credit negative for Carige’s bondholders.

The postponement stems from uncertainties related to the European Central Bank’s (ECB) comprehensive assessment of the most systemically important banks in the euro area beginning in 2014. Many details of the assessment are still unknown, creating significant uncertainty for many European banks about the sufficiency of their capital.

Following a request by the Bank of Italy, Carige was planning to strengthen its capital by €800 million by the first quarter of 2014 mainly via asset disposals, with any remainder coming from a capital increase. However, most of Carige’s asset disposal efforts failed, with the largest asset, a life insurance company, not receiving sufficient market interest owing to its large holding of Italian government bonds. This failure has left Carige needing to rely significantly on a capital injection to both meet its target and respond to the outcome of the ECB’s comprehensive assessment.

Carige planned to announce the details of its capital increase by mid-November, once the outcome of its asset disposal was more definitive. Carige’s management announced that the Bank of Italy has pushed back the original deadline to raise capital to take into account the additional challenges posed by the ECB, but it is unclear whether the regulator has finalised a new timetable for Carige’s capital strengthening.

Using Basel II core Tier 1 ratio (CT1) as a proxy, Carige’s 7.7% pro forma capital as of September 2013 is just €70 million below the 8% minimum common equity Tier 1 (CET1) ratio that the ECB prescribes. However, this does not take into account the stress test that Carige will undergo, whose results will likely be compared against a lower ratio, and the difference in the calculation between the two ratios.

Carige’s larger-than-anticipated capital increase will launch in a challenging operating environment, where appetite for Italian assets may be limited. Moreover, executing the capital increase a few months later than originally planned will result in Carige having to compete with many euro area banks that are also looking to raise capital to comply with the ECB’s comprehensive assessment. A number of Italian banks are approaching the comprehensive assessment with weak capitalisation, and Carige is among the weakest (see exhibit below).

13 The bank ratings shown in this report are the bank’s deposit rating, its standalone bank financial strength rating/baseline credit

assessment and the corresponding rating outlooks.

London +44.20.7772.5454

NEWS & ANALYSIS Credit implications of current events

26 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Italian Banks’ Latest Core Tier 1 Ratio versus the ECB Minimum Core Equity Tier 1 Ratio Requirement

Note: Data for Veneto Banca, BP Vicenza, and Iccrea are as of 30 June 2013, while for the others, the data are as of September 2013. The exhibit also shows Carige’s pro forma core Tier 1 (CT1) ratio, including the effect derived from the sale of the bank’s asset management unit and a tax benefit, which will both be included in the next quarterly reports. For Banca Popolare di Milano, the exhibit shows the pro forma CT1, including a planned capital increase by July 2014 that has already been supported by a pre-underwriting agreement by a syndicate of banks. For Veneto Banca, the ratio shown is its Tier 1 ratio because its CT1 ratio is not publicly available. Source: The banks

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

NEWS & ANALYSIS Credit implications of current events

27 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

KBC Group Recognizes Additional Impairment in Irish Mortgage Portfolio On Thursday, Belgium’s KBC Group (KBC, Baa1 stable) announced that a reassessment of its €12 billion portfolio of Irish mortgage loans, which are booked at its subsidiary KBC Bank Ireland PLC (Ba1 negative; D-/ba3 negative14), will result in the classification of an additional €2 billion mortgages in the impaired loan category. Consequently, the company will take a €510 million impairment charge on the mortgage portfolio in fourth-quarter 2013, a credit negative.

KBC indicated that the reassessment was driven by the upcoming European Central Bank’s comprehensive Asset Quality Review (AQR) and recent guidance from the European Banking Authority (EBA) on the prudential treatment of problem loans and forbearance.15 The EBA has emphasized the need for greater transparency across Europe given that banks have been proactively managing on- and off-balance-sheet assets in recent years and often avoided classifying loans as impaired or defaulted.

At KBC, the overall impairment charge on the loan portfolio amounts to €775 million. The charge includes an additional €161 million of impairments from the Irish corporate portfolio, whose review was based on a more prudent outlook on future cash flows and collateral values, and €104 million on other items after reviews. The overall €775 million impairment is approximately 41% of the group’s nine-month pre-tax profit at end-September this year. However, we do not expect these reclassifications to materially damage the group’s financial strength, given its 13.4% core Tier 1 ratio at end September, and its earning capacity in its home markets.

Furthermore, Johan Thijs, KBC’s CEO, specified that the upcoming AQR will lead to minimal adjustments on the rest of its portfolio, mainly comprising exposures to the Belgian, Czech, Hungarian and Slovakian economies. Necessary adjustments will be confirmed after the ECB’s final report, which is scheduled for October 2014.

KBC’s decision indicates that the bank needed to more conservatively assess its Irish mortgage portfolio because of the pervasive stress that households face given Ireland’s real estate market turmoil. Reclassifying 16.5% of the Irish mortgage portfolio in the impaired loan category reveals quite aggressive forbearance practices at the subsidiary over the past few years. For the sake of comparison, Spanish banks’ overall restructured loans accounted for 12% of their loan portfolios.

Although KBC is the first group to openly recognize that the assessment of its bank loan portfolio is a direct response to the pending AQR, we expect that other banks will proceed similarly and initiate a more conservative reappraisal of their loan books rather than risk being singled out by the ECB’s comprehensive assessment in 2014.

14 The ratings shown are KBC Bank’s deposit rating, its standalone bank financial strength rating/baseline credit assessment and the

corresponding rating outlooks. 15 See Europe’s Disclosure Requirements for Nonperforming and Forborne Loans Improve Bank Asset Transparency, 24 October

2013.

Yasuko Nakamura Vice President - Senior Analyst +33.1.5330.1030 yasuko.nakamura@moodys.com

Alain Laurin Associate Managing Director +33.1.5330.1059 alain.laurin@moodys.com

NEWS & ANALYSIS Credit implications of current events

28 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Sberbank’s Five-Year Development Strategy Is Credit Positive Last Tuesday, Sberbank (Baa1 stable, D+/ba1 stable),16 Russia’s largest lender, published its new five-year development strategy, including a target of 14%-16% average annual asset growth over 2014-18, a material slowdown from the 24% annual growth posted in 2009-13 (see exhibit). The strategy is credit positive for Sberbank because a focus on slower growth will support its asset quality during a period of weak economic growth in Russia. Moreover, Sberbank aims to achieve greater cost efficiency, which will positively affect its bottom-line results.

Sberbank’s Slower Asset Growth Will Support Its Asset Quality

Note: June 2013 data is year-on-year asset growth Source: Moody’s Financial Metrics and Sberbank

In line with most other banks in Russia, we expect that Sberbank’s asset quality will deteriorate in 2014 owing to Russia’s weakening economy. However, Sberbank’s more cautious growth will lead to slower buildup of problem loans in 2015 and beyond. Sberbank’s growth target is not very high in the context of Russia’s high inflation rate, which will exceed 6% for 2013.

Asset growth in the next five years will be mostly organic. This is positive for Sberbank because it has yet to fully integrate two large acquisitions it made in 2012, controlling stakes in Denizbank A.S. (Turkey) and Sberbank Europe (formerly Volksbank International) in the Central and Eastern Europe region. Although Sberbank does not rule out new acquisitions to strengthen its franchise in markets where it already has a presence, such transactions will be small in size owing to Sberbank’s moderate Tier 1 ratio of 10.5% at 30 June 2013.

Sberbank’s assets outside of Russia will account for 12% of total assets by the end of this year, according to its own estimate, and will be mainly composed of subsidiaries in Turkey (Denizbank A.S., Baa3 stable, D+/ba1 stable), Ukraine (JSC Sberbank of Russia, unrated), Kazakhstan (SB Sberbank JSC, Ba2 stable, E+/b2 stable), Belarus (BPS-Sberbank, Caa1 negative, E+/b3 negative) and Central and Eastern Europe (Sberbank Europe, unrated). Operations in Ukraine and Belarus expose the group to particularly high credit and operational risks because these countries are experiencing severe economic problems.

16 The bank ratings shown in this report are the banks’ deposit rating, their standalone bank financial strength ratings/baseline credit

assessment and the corresponding rating outlooks.

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Eugene Tarzimanov Vice President - Senior Credit Officer +7.495.228.6051 eugene.tarzimanov@moodys.com

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29 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Within Russia, Sberbank plans to increase the share of retail loans in its loan portfolio to around 30% by 2018 from 27% in June 2013 through somewhat faster growth in retail loans (18% per year) than corporate loans (15% per year). We generally favour retail exposures over concentrated corporate loans because of the former’s granularity.

Sberbank’s strategic focus on greater operational efficiency will support its bottom-line results. The bank targets a cost-to-income ratio of 40%-43% by year-end 2018, versus 49% in 2012, through cost-cutting initiatives such as a 10% reduction in staffing and a 10%-20% decrease in the number of branches. Sberbank’s previous five-year strategy (2009-13) failed to achieve this goal, partly because of inefficient cost management and new acquisitions. Sberbank will now be better able to improve its efficiency because it already made substantial IT investments and has no appetite for acquisitions over the next few years.

We expect that Sberbank’s main domestic competitors Bank VTB, JSC (Baa2 stable, D-/ba3 stable) and Gazprombank (Baa3 stable, D-/ba3 stable) will pursue similar strategies to cope with the weak performance of the Russian economy.

NEWS & ANALYSIS Credit implications of current events

30 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

ICBC Designation as a Global Systemically Important Bank Is Credit Positive On 11 November, the G-20’s Financial Stability Board (FSB) designated the Industrial and Commercial Bank of China Ltd (ICBC, A1 stable; D+/ba1 stable17) as one of 29 global systemically important banks (G-SIB), a credit positive for ICBC. The G-SIB designation will compel higher capital standards for ICBC, and will lead to greater regulatory oversight and more proactive efforts on risk identification and risk management.

ICBC is the largest bank globally by assets. It reported total assets of RMB18.7 trillion ($3.0 trillion) at end-September 2013, and has domestic market shares of 14% in deposits and 13% in loans.

In general, G-SIBs are required to hold an additional 1.0-2.5 percentage points in core capital above the capital requirement for non-G-SIBs under Basel III rules.

ICBC will not face immediate pressure fulfilling its G-SIB capital requirements because it reported a 10.59% core Tier 1 ratio and a 13.17% capital adequacy ratio at end-September 2013. Both ratios are above the respective thresholds of 8% and 11.5% mandated for its G-SIB designation, which are 1% higher than the required ratios for non-G-SIB international banks.

A more pressing task than the capital requirement facing ICBC is meeting higher expectations for its risk management, particularly in light of its fast growing international business.

According to the FSB, ICBC must meet the higher expectations for data aggregation capabilities and risk reporting within three years of the designation. G-SIBs are required to meet higher supervisory expectations for risk management functions, data aggregation capabilities, risk governance and internal controls.

In total assets, ICBC is larger than Bank of China Limited (BOC, A1 stable; D/ba2 stable), which was designated a G-SIB in 2012. However, ICBC is a relative newcomer in terms of establishing an international network, and thus faces a pressing task of bringing its controls in line with its recent growth. The bank’s overseas expansion has been quite rapid in the past few years. Its overseas assets accounted for 7.6% of its total assets at end-June this year, compared with 2.8% at year-end 2008. Its rapid growth has elevated its systemic importance by expanding its cross-jurisdictional activities and interconnectedness with other global financial institutions.

Although the G-SIB designation constrains return on capital and operational flexibility, and entails an additional cost because of intensified regulations, the credit benefits outweigh these factors because a tighter capital and supervisory regime make G-SIBs less likely to take actions that would adversely affect their credit quality.

17 The bank ratings shown in this report are the banks’ deposit ratings, their standalone bank financial strength ratings/baseline credit

assessments and the corresponding rating outlooks.

Bin Hu Vice President - Senior Analyst +852.3758.1503 bin.hu@moodys.com

NEWS & ANALYSIS Credit implications of current events

31 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

China’s Capital-Qualifying Bank Debt Guidance Will Benefit Senior Creditors Last Friday, China’s Banking Regulatory Commission and Securities Regulatory Commission jointly announced new guidelines that clarify the type of capital-qualifying debt banks can issue, the criteria for qualifying issuers and related supervisory arrangements. The new guidelines, which took effect 6 November, allow specific banks to issue subordinated debt with write-down provisions that will qualify as Tier 2 capital. The new guidelines are credit positive for bank depositors and senior creditors because the new Tier 2 capital securities will enhance the banks’ loss-absorption capacity, thereby increasing credit protection for depositors and senior unsecured debtholders.

With this clarification, we expect that banks will be more active in replenishing their maturing legacy Tier 2 capital with new Tier 2 capital securities. Until now, few Chinese banks have been able to issue these instruments, which we attribute to the absence of guidance on implementation, despite the fact that Basel III-equivalent capital rules introduced in January permit the use of subordinated debt with write-down provisions.

In addition, the new guidelines require that banks disclose to investors that capital-qualifying debt must be written down when the bank is no longer viable. Such a requirement increases the likelihood that Chinese regulators will invoke the bail-in features in these securities if necessary, and in our view makes it more likely that the new Tier 2 capital instruments will provide true credit protection for senior creditors.

We expect China’s 18 publicly traded banks and banks that have initial public offering applications under regulatory review will immediately benefit from this guidance because currently they are the only ones that can issue publicly traded subordinated debt with write-down provisions. Among the publicly traded banks we rate, Industrial & Commercial Bank of China Ltd. (ICBC, A1 stable, D+/ba1 stable),18 Bank of China Limited (BOC, A1 stable, D/ba2 stable), Agricultural Bank of China (ABC, A1 stable, D/ba2 stable), China Construction Bank Corporation (CCB, A1 stable, D+/ba1 stable) and Bank of Communications (BoCom, A3 stable, D+/ba1 stable) will benefit most owing to the size of their legacy Basel II-compliant subordinated debt that is due or callable in 2014 and 2015 (see exhibit).

Rated Chinese Banks’ Subordinated Debt Maturing or Callable in 2014-15

Note: ABC = Agricultural Bank of China; BOC = Bank of China Limited; BoCom = Bank of Communications; CCB = China Construction Bank Corporation; CEB = China Everbright Bank; CITICB = China CITIC Bank; CMB = China Merchants Bank; ICBC = Industrial & Commercial Bank of China Ltd.; PAB = Ping An Bank; SPDB = Shanghai Pudong Development Bank Source: Company annual reports. Data are as of the end of 2012.

18 The bank ratings shown in this report are the banks’ deposit rating, their standalone bank financial strength ratings/baseline credit

assessment and the corresponding rating outlooks.

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Christine Kuo Vice President - Senior Credit Officer +852.3758.1418 christine.kuo@moodys.com

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32 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Other banks that will benefit include Industrial Bank, China Minsheng Banking Corporation, Huaxia Bank, Bank of Beijing, Bank of Nanjing, Bank of Ningbo, Bank of Chongqing and Huishang Bank (all of which are unrated).

Banks with IPO applications under review that will benefit include Bank of Shanghai Co., Ltd. (Baa3 stable, D/ba2 stable) and China Guangfa Bank (Ba2 stable, D-/ba3 stable).

NEWS & ANALYSIS Credit implications of current events

33 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Insurers

US Insurers See Low Enrollment in Affordable Care Act, a Credit Negative On Thursday, President Barack Obama announced that insurance companies will be allowed to renew existing policies to individuals, even though they do not provide the full extent of benefits required under the Affordable Care Act (ACA). These ‘grandfathered’ policies allow individuals to maintain policies without incurring a penalty, which would reduce the number of potential buyers on the exchanges and adversely impact the insurance risk pool. The President’s administrative fix compounds the risk of insufficient enrollments in the ACA’s health insurance plans to provide insurers with sufficient premiums to cover their costs.

Additionally, according to the Department of Health and Human Services (HHS) enrollment on the exchanges thus far is much lower than government projections, a credit negative for participating health insurers. The insurers’ premiums and product designs are based on achieving substantial enrollment during the six-month open enrollment period. During the first month of the open enrollment in health insurance plans through the Affordable Care Act (ACA) federal and state run exchanges, just over 106,000 individuals completed applications and selected plans.

For insurance companies that have invested heavily in the insurance exchanges in the hopes of obtaining increased individual enrollment, such as WellPoint, Inc. (Baa2 stable) and Health Net, Inc. (Ba3, positive), these results are a serious disappointment. Besides the low return in membership from their administrative expense investment, the exposure to adverse selection is likely to negatively affect earnings in 2014.

Since the open enrollment period does not end until 31 March 2014, the enrollment figures could improve. However, given the technical problems on the health exchanges’ websites, the President’s administrative fix that allows insurers to reinstate recently cancelled policies,19 as well as the possibility of further legislative or administrative action to either delay the individual mandate or extend the open enrollment period, the prospect for meeting the Congressional Budget Office’s projected enrollment figure of 7 million by the end of March is unlikely.

For health insurers to sustain premiums designed for the program, they need not only strong enrollment, but also a diverse demographic mix of business, including a solid number of young healthy individuals. While HHS did not provide demographic data, anecdotal reports from insurance companies indicate that enrollments reflect an older, less healthy population, whose medical costs are likely to exceed their premiums.

Approximately 4 million individuals whose coverage is scheduled to be cancelled by year end because their plans do not meet ACA-required standards complicate the enrollment issue. These individuals would be required to purchase qualified plans to avoid the individual mandate penalty. This group, which has shown an inclination to purchase insurance, would provide relief for the exchanges, boosting enrollment numbers and improving the overall demographics of the insurance pool. As insurance companies, state insurance commissioners, and consumers analyze the feasibility of the President’s announcement, decisions by this affected group of individuals will be delayed, suppressing enrollment numbers.

19 Because of the complexity of reinstating these policies before the start of 2014, it remains to be seen how many insurers will be

willing to reinstate policies, or whether regulators will allow reinstatement.

Steve Zaharuk Senior Vice President +1.212.553.1634 stephen.zaharuk@moodys.com

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34 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Additionally, the problematic enrollment website has sparked proposals to provide relief for individuals through a waiver or delay of the individual mandate and its penalties, or an extension of the open enrollment period – solutions that would likely exacerbate the problem for insurers.20 We believe that the dialogue in Washington and the uncertainty about Presidential or Congressional relief further postpones enrollment decisions, especially among the more healthy.

20 The American Academy of Actuaries, in a letter to Congress dated 5 November, urged Congress “to consider the potential adverse

consequences” of these proposals, pointing out that either action would likely result in higher medical costs and higher premiums as lower-cost individuals will likely delay coverage.

NEWS & ANALYSIS Credit implications of current events

35 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Sub-sovereigns

Mexican Income Tax Reform Will Relieve States’ Spending Pressures Last Thursday, Mexico’s Congress passed a 2014 budget that included a provision that will allow states to retain income tax that they currently collect from their employees and remit to the federal government. This provision is credit positive for Mexican states because it will provide them with additional funds.

Currently, Mexican states transfer all the income tax they collect from their employees to the federal government, 20% of which is returned to the states in the form of federal non-earmarked transfers (known as participaciones). The federal government keeps the remaining 80% of income tax that the states collect. Now states will retain all of their employees’ federal income tax.

The exhibit below shows the increase in employee income tax the states will gain relative to states’ total expenditures in 2012. States that stand to gain the most are those that spend more on salaries relative to their total expenditures, including Distrito Federal (Baa1 stable), Durango (Ba1 stable), Tabasco (Ba1 stable) and Veracruz (Ba3 stable).

Gain to Rated Mexican States from Income Tax Retention to Total State Expenditures in 2012

Note exhibit assumes 17% average federal income tax rate for state employees. Source: Moody’s

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Rafael Rodriguez Associate Analyst +52.55.1253.5743 rafael.rodriguez@moodys.com

NEWS & ANALYSIS Credit implications of current events

36 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

US Public Finance

New York Transportation Authority Revises Its Revenue Projections, a Credit Positive Last Wednesday, New York’s Metropolitan Transportation Authority (MTA, transportation revenue bonds A2 stable) released its November 2013 financial plan, which showed higher ending balances through 2017 than the previous financial plan. The improved forecast, reflecting upward revenue revisions and lower cost estimates, is credit positive.

The MTA publishes a financial plan three times each year. The MTA’s forecasts typically show out-year budget gaps and this was still the case with the November forecast. However, the MTA’s $191 million projected deficit for 2017 is a manageable 1.5% of the MTA’s estimated $12.6 billion consolidated operating expenses for that year.

The MTA’s improved forecast reflects several factors. Increases in passenger fares, toll revenues and real estate transaction fees reflect a stronger regional economy, while projected health, pension and other benefit costs are lower than the MTA forecast in earlier plans. In addition, debt service expenses have declined because interest rates are below budget, and the MTA has realized higher-than-expected paratransit savings for services to disabled riders. These factors more than offset negative revisions including higher overtime estimates, lower petroleum business tax receipts (a tax on the import and sale of petroleum products) and higher operation and maintenance needs.

The MTA’s July 2013 plan was in balance through 2014, with modest cumulative deficits totaling $240 million at the end of 2017. In addition, the July plan incorporated biennial fare and toll increases of 7.5% in 2015 and 2017, which the MTA has now reduced to increases of 4% in each year. Those lower increases shave revenue growth by $905 million through 2017. As an offset, the MTA plans to implement an additional cumulative $500 million of cost-cutting measures through 2017. Based on its success in reducing operating costs in recent years, the MTA was able to restrict budget growth to less than 2% in 2014. Continuing to control expenditures going forward will be key to reducing future fare and toll hikes.

A significant risk in the financial plan is the assumption that labor settlements will include three years of “net-zero” wage growth, including for 2012 and 2013. Non-represented groups have not received a salary increase since 2008. Collective bargaining continues with the Transit Workers Union, the MTA’s largest bargaining unit, which represents about 31,970 transit and bus workers, or about 70% of total transit and bus employees and nearly 50% of all MTA employees. Their contract expired 15 January 2012. Net-zero growth can incorporate offsets through savings from work-rule changes or increased contributions to employee healthcare. Failure to reach a net zero labor settlement would increase the MTA’s annual operating budget by about 2.5%, or $300 million, on top of retroactive payments that might be required (see exhibit below).

Nicole Johnson Senior Vice President +1.212.553.4573 nicole.johnson@moodys.com

NEWS & ANALYSIS Credit implications of current events

37 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

The New York Metropolitan Transit Authority’s Improved Out-Year Balances Assume Successful Cost Cutting

Source: New York Metropolitan Transit Authority financial plans

Another risk to the plan is that the state legislature will not alter the MTA’s subsidies or dedicated revenues, particularly the payroll mobility tax implemented in 2009 to help stabilize the MTA’s financial position. Although the MTA has been successful in several lawsuits that sought to repeal the tax, the loss of that revenue stream outside New York City could result in another $300 million annual revenue gap, which the MTA would likely compensate for by raising fares.

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CREDIT IN DEPTH Detailed analysis of an important topic

38 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Jefferson County, Alabama’s Debt Offering Is a Non-Investment Grade Risk Jefferson County, Alabama has announced its intent to issue $1.738 billion of new sewer revenue debt to retire its $3.1 billion of outstanding defaulted sewer warrants (Ca negative) as part of its bankruptcy exit strategy. The new debt will include $500 million of senior lien warrants and $1.23 billion of subordinate lien warrants. The senior lien warrants have stronger credit quality than the subordinate lien warrants due to their superior projected debt service coverage and stronger legal protections, Still, we judge both liens to be non-investment grade investments in the B or Ba speculative-grade rating categories, subject to substantial-to-high credit risk.21

Key credit factors of the new sewer debt include:

» New, higher sewer rates, which are critical to debt repayment, face financial and governance risks

» With a high debt load and deferral of principal repayment, financial metrics are weak

» Debt service coverage will decline as principal payments increase in later years

» Significant looming capital needs will require further rate increases

» Service area, anchored by a large university healthcare complex, has average wealth levels

» New debt structure provides satisfactory legal security

We rate the county’s outstanding sewer warrants Ca negative, consistent with recovery prospects in the 35%-65% range upon issuance of the new debt and confirmation of the bankruptcy plan. We also rate the county’s defaulted General Obligation Limited Tax (GOLT) debt Caa3 negative, with an expected recovery in the 65%-80% range upon conclusion of the bankruptcy, based on our approach for calculating recovery. (See the Appendix for a chart of all our outstanding ratings on the county.)

Higher Sewer Rates – Critical to Debt Repayment – Face Financial and Governance Risks

FINANCIAL RISK Jefferson County faces a challenge adhering to its plan, which has the county raising sewer rates each year for 40 consecutive years in order to pay debt service, while leaving capital funding needs unaddressed. The approved rate plan increases user charges by 7.89% each year from 2014 through 2018 and by 3.49% each year from 2018 through maturity in 2053. The county intends the rate increases to cover repayment of the new warrants and 10 years worth of projected capital and operating expenses.

However, such long-term financial projections are inherently tenuous. The county’s 10-year projected rate increases may be insufficient if actual revenues, operating expenses or capital expenditures are less favorable than assumed, prompting a need for even higher user rates. Additional rate increases will also be necessary to cover capital expenditures beginning in 2024. The county commission’s willingness to impose additional increases, given its past reticence to do so, is a significant risk.

21 Our opinion is based on the underlying credit quality of the debt, without regard to credit enhancement provided by bond

insurance. The credit opinions in this article are based on information from Jefferson County’s Preliminary Official Statement dated Nov. 4, 2013, and on Moody’s data.

Christopher Coviello Vice President - Senior Analyst +1.212.553.0575 christopher.coviello@moodys.com

Naomi Richman Managing Director +1.212.553.0014 naomi.richman@moodys.com

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39 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

GOVERNANCE RISK In Jefferson County, the responsibility for rate-setting rests with its five commissioners, who face election every four years. This governance structure differs from most publicly run US sewer systems, which set their rates through approvals from appointed, quasi-independent bodies to reduce the unpredictable influences of electoral politics. Jefferson County’s 40-year schedule of rate increases passed by a narrow 3-2 vote and can be revisited by future boards. Additionally, current or future commissioners could vote to roll back or rescind the rate increases or could even re-enter bankruptcy, in which case the county would restart the bankruptcy process.

The affordability of the rate increases for the system’s residential users, whose current rates are among the nation’s highest, remains a contentious political topic. And, the ratepayers may yet challenge whether the approved rates meet the state constitutional standard of “reasonable and nondiscriminatory rules and regulations fixing rates and charges.”

The new rates will be incorporated into the county’s final bankruptcy resolution plan, and approval of the plan by the bankruptcy court is a closing condition for the warrants. But following issuance of the new warrants, current or future commissioners could vote to roll back or rescind the rate increases. While the bond trustee could then ask the court to compel the county to enforce its bankruptcy plan, we are not aware of a precedent for a federal court to compel public utility rates of this nature, given the federalism issues involved in this bankruptcy.

Jefferson County is one of only two rated US local government water and sewer issuers to default on water and sewer revenue bonds since 1970. It is the only one to impose material losses on creditors. Our forward-looking opinions about credit quality do not impose an automatic “penalty box” on past defaulters, but willingness to pay is a key element of our analysis, and past performance is often an important indicator of future actions.

The county’s past debt issuance was motivated in part by criminal acts on the part of multiple individuals, and that the previous risky debt structure included variable rate modes and many layers of derivative contracts. However, this structure was motivated in part by a desire to minimize debt service payments in order to keep sewer rates low. Additionally, the county has not raised sewer rates since 2008, despite insufficient net revenues to cover debt service.

This history separates Jefferson County from the overwhelming majority of sewer revenue bond issuers that routinely demonstrate willingness to pay debts by implementing single-digit, annual rate increases to cover their operating and capital expenses. The current commissioners have demonstrated a change from past governance practices, including not only implementing 40 years of rate increases, but also they appointed a professional, experienced management team. But they have been in place only two years and did not raise rates until recently.

With a High Debt Load and Deferral of Principal Repayment, Comparative Financial Metrics Are Weak

HIGH DEBT LOAD Although we expect large haircuts for existing bondholders, Jefferson County’s sewer system will remain highly leveraged for the foreseeable future. The system will be far more leveraged and offer significantly weaker coverage of future maximum annual debt service (MADS) than is typical of investment grade sewer systems. Despite the significant reduction in debt as a result of the bankruptcy process, the system will continue to bear a heavy debt load.

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40 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Jefferson County’s debt ratios are outliers compared to rated sewer revenue bonds. The sewer system’s ratio of total debt to current year (2013) operating revenues will be roughly 11x. This is far above the median of about 3x for all rated sewer systems and 4x for the largest systems with more than $100 million of operating revenues. Among rated sewer systems, the median MADS coverage by current year revenues is 1.62x for all systems, and 1.58x for the largest systems. In contrast, Jefferson County’s revenues provide MADS coverage of only 0.4x.22

SLOW PRINCIPAL REPAYMENT Principal amortization is heavily deferred in the county’s debt structure, repaying less than 2% of principal over the next 10 years because for the first 10 years, the finance plan funds capital expenditures out of operating revenues. Even 10 years from now, using the projections provided in the Preliminary Official Statement dated 4 November 2013, the system will remain highly leveraged. Although in 2023, operating revenues will be more than 55% higher than they are today, the ratio of debt to operating revenues will be about 7x, and MADS coverage will still be only 0.67x.

The payment of total debt service, including principal and interest, is also extremely slow. We calculate that the system pays only 11.5% of debt service in the first 10 years, and just 36.2% in the first 20 years of the 40-year life of the warrants. A typical investment grade sewer credit would pay two-thirds or more of its debt service in the next 20 years.

Debt Service Coverage Will Decline Precipitously When Principal Payments Spike After 10 Years We expect the county to face increasing risk that it will fail to achieve adequate debt service coverage in the later years of these warrants. The enacted rate increases would boost net revenues to amply cover debt service in the early years, but the back-loaded debt structure will lead to tighter coverage in the future. The county’s Preliminary Official Statement only offers financial projections through 2023, or one quarter of the total life of the new debt. The lowest projected debt service coverage through 2023 is a robust 5.2x for senior warrants and a solid 1.6x for junior warrants for the next 10 years. However, debt service jumps sharply – by 67% – between 2023 and 2024. At that point, debt service coverage will tighten dramatically. We calculate that projected 2023 net revenues inflated at 3% would cover debt service by only 1.2x in 2024.

Significant Future Capital Needs Loom; Will Require Further Rate Increases One of the material risks that the new warrants face is that the back-loaded debt structure and corresponding rate increases may not leave capacity for future capital investment. Beyond regular system renewal and replacement, significant investments could be necessary to meet stricter environmental standards.

Jefferson County’s extensive capital plan addresses various environmental issues related to its 1996 Consent Decree, as well as system efficiency upgrades that will meet both specific utility needs and provide operational reliability going forward. However, the feasibility study states that the strict phosphorus limit requirements that the county’s sewer system will be accountable for in the future “are approaching the limits of currently available phosphorus treatment technology.”23 The necessary upgrades would require sizeable future capital expenses. If these standards are not relaxed, or if other environmental standards

22 The MADS calculation incorporates unaudited fiscal 2013 net revenues of $106 million and $254 million MADS in 2053. 23 POS Appendix E, Municipal Advisors Feasibility Study, Series 2013 Sewer Warrants, p. 4-6.

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41 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

tighten in the coming years, it is likely that significant debt issuance would be needed in fiscal 2024 and beyond, requiring even greater rate increases than those already approved.

Service Area, Anchored by a Large University Healthcare Complex, Has Average Wealth Levels The sewer system serves most of Jefferson County and small portions of adjacent counties. Jefferson County benefits from a substantial property tax base of $43.7 billion. It has a sizeable healthcare, educational and financial presence located predominantly in the City of Birmingham (GOLT rated Aa2 stable). The University of Alabama at Birmingham (UAB) (Aa2 stable) is the sewer system’s largest single customer, accounting for 2% of 2012 charges billed. It operates a substantial hospital and research program and generates nearly $3 billion in annual revenue. UAB is not only the largest employer in Jefferson County, but also one of the top employers in the entire state.

Wealth levels within the county remain somewhat below national averages, with per capita income at 96.5% of the US and median family income at 90.5% of the US.24 Unemployment levels, however, continue to trend below both state and national averages at 6% as of July 2013, compared to state unemployment of 6.6% and national unemployment of 7.7%.

The county encompasses 1,124 square miles and as a result, the sewer system is extremely large. The need for sewer lines to traverse the area’s hilly terrain contributes to the system’s heavy capital needs. The system originally consisted of 21 individually operated collection facilities that eventually connected to the county’s treatment system. Today, with $2.68 billion book value of net fixed assets, the system consists of nine treatment plants that treat an average of 104 million gallons per day (mgd), 177 pump/lift stations and 3,145 miles of sewer lines.

New Debt Structure Provides Satisfactory Legal Security Both the senior lien and subordinate lien structures will include current interest warrants, capital appreciation warrants and convertible capital appreciation warrants (see exhibit below).

Jefferson County’s Proposed New Debt Issuance New Warrant Sale Par

Senior Lien Current Interest Warrants $375,000,000

Senior Lien Capital Appreciation Warrants $55,693,095

Senior Lien Convertible Capital Appreciation Warrants $69,308,272

Total Senior Lien Par $500,001,367

Sub Lien Current Interest Warrants $750,155,000

Sub Lien Capital Appreciation Warrants $71,935,073

Sub Lien Convertible Capital Appreciation Warrants $416,317,273

Total Subordinate Lien Par $1,238,407,346

Total Senior and Subordinate Par $1,738,408,713

Source: Jefferson County Preliminary Official Statement dated 4 November 2013

24 2006-2010 American Community Survey 5-Year Estimates

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42 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Security for the new warrants will include a senior lien rate covenant of 125% of annual debt service and a subordinate lien rate covenant not less than 110% of annual debt service. The warrants will also have debt service reserve funds, which are funded with letters of credit from JP Morgan. Senior lien warrants will have an additional bonds test of 1.25x senior lien debt service coverage. The additional bonds test is 1.10x for subordinate lien. All of the senior and subordinate warrants are fixed rate. If there were a second bankruptcy filing, while priority of payment may be respected, there is still a great deal of uncertainty about ultimate recovery of senior and subordinate lien debt, given that municipal bankruptcies are so rare.

Appendix: Jefferson County Related Ratings

Security Rating Outlook

Jefferson County Sewer revenue* Ca Negative

Jefferson County GOLT Caa3 Negative

Jefferson County Lease Ca Negative

Jefferson County Limited Obligation School B3 Negative

City of Birmingham GOLT Aa2 Stable

Birmingham Water Works Board Senior Lien Aa2 Stable

Birmingham Water Works Board Subordinate Lien Aa3 Stable

*These are the current warrants in default, not the planned new issuance.

RATING CHANGES Significant rating actions taken the week ending 15 November 2013

43 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Corporates

Fortescue Metals Group Ltd Upgrade

22 Aug ’13 13 Nov ‘13

Corporate Family Rating Ba3 Ba2

Outlook Positive Positive

The one-notch upgrade reflects the strengthening in Fortescue's credit profile following announced progress on its debt reduction strategy. The upgrade also reflects Fortescue's ongoing success in its expansion activities.

Grifols S.A. Outlook Change

15 Jul ’13 13 Nov ‘13

Corporate Family Rating Ba2 Ba2

Outlook Stable Negative

The outlook change follows Grifols’ announcement that it would acquire Novartis’ diagnostic business unit for $1.675 billion, and reflects the moderate re-leveraging of Grifols’ pro forma for the planned purchase in a largely debt-funded transaction.

Shimao Property Holdings Limited Upgrade

18 Jul ’13 15 Nov ‘13

Corporate Family Rating Ba3 Ba2

Outlook Positive Stable

The upgrade reflects our expectation that Shimao's good sales execution will be maintained. Shimao has demonstrated a good track record of sales execution since it fine-tuned its business strategy in 2011. Its strong sales are the result of its increased focus on small- to medium-sized products for the mass market that target first-time home buyers and up-graders.

Smurfit Kappa Group plc Outlook Change

8 Mar ’12 12 Nov ‘13

Corporate Family Rating Ba2 Ba2

Outlook Stable Positive

Our outlook change mirrors the company's continued track record in reducing its financial leverage through a mix of debt repayments and improvements in operating profitability, with adjusted gross leverage expected to decline to around 4 times by year-end. We also recognize the group's resilient operating performance over the past quarters despite the challenging macroeconomic environment in its European stronghold.

RATING CHANGES Significant rating actions taken the week ending 15 November 2013

44 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Sophia, L.P. Downgrade

13 Dec ’11 14 Nov ‘13

Corporate Family Rating B2 B3

Outlook Stable Stable

The downgrade reflects the surge in debt-to-EBITDA at Sofia to about 8.5 times pro-forma for the new PIK notes that Sophia is issuing, from 7.0 times. The very high leverage is somewhat balanced by Sophia's growing scale and leading position as a niche provider of software and services for the administrative and academic functionality at higher education institutions.

Telesat Canada Outlook Change

13 Mar ’12 12 Nov ‘13

Corporate Family Rating B1 B1

Outlook Stable Positive

The outlook is positive based on expectations of continued de-leveraging and free cash flow expansion through 2014-15. The company's strong business profile, featuring a stable contract-based revenue stream with a nearly six-year equivalent revenue backlog of $5 billion that is booked with well-regarded customers, provides a solid positive consideration.

Tervita Corporation Downgrade

24 Jan ’13 12 Nov ‘13

Corporate Family Rating B3 Caa1

Outlook Negative Stable

The downgrade is primarily driven by Tervita’s very high leverage, generally weak execution (especially of its growth spending) over the past couple of years, and exposure to the cyclical land drilling business with a concentration in western Canada. We are concerned that, unless earnings grow in the next few years, the company's capital structure may be untenable.

RATING CHANGES Significant rating actions taken the week ending 15 November 2013

45 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Financial Institutions

Review of Eight Large US banks Concluded On 14 November, we concluded our review of eight large US banking groups, lowering by one notch the senior holding company ratings of Morgan Stanley, Goldman Sachs, JPMorgan, and Bank of New York Mellon. We also confirmed the senior holding company ratings of Bank of America, Citigroup, State Street, and Wells Fargo. The credit ratings of these banking groups each benefit from our assumption of government support. The rating actions reflect strengthened US bank resolution tools, prompted by the Dodd-Frank Act, which affect these assumptions. We also considered the changing credit profiles of certain banks.

Specifically we lowered the standalone baseline credit assessments (BCA) of Bank of New York Mellon and State Street Bank and Trust, both to a1 from aa3 to reflect the long-term profitability challenges facing these highly-rated custodian banks. We also raised the standalone BCAs of both Bank of America N.A. and Citibank N.A. to baa2 from baa3 to reflect positive changes in the banks' credit profiles including declining legacy exposures and strengthening capital.

Arrow Reinsurance Company Limited Downgrade

23 Aug ‘13 14 Nov ‘13

Insurance Financial Strength Rating A3 Baa1

The rating action follows on our downgrade of the rating of Arrow Re's ultimate parent, Goldman Sachs, to Baa1 from A3, with stable outlook. The insurance financial strength rating on Arrow Re reflects the benefit of implicit and explicit support provided by Goldman Sachs. Without parental support, Arrow Re's standalone credit profile is lower than Baa1.

CIBC Mellon Trust Company Downgrade

2 Jul ‘13 15 Nov ‘13

Standalone Financial Strength/ Baseline Credit Assessment

B-/a1 C+/a2

Issuer and Long-Term Deposit Ratings Aa3 A1

The downgrade reflects structural profitability pressures that CMT faces along with its affiliate, CIBC Mellon Global Security Services Company (GSS), which are managed on a combined basis and are both 50:50 joint ventures between The Bank of New York Mellon and Canadian Imperial Bank of Commerce. Although CIBC Mellon's position in the Canadian custody market remains very strong, it faces similar profitability pressures as other custodian banks in the current low interest rate environment. Given CMT's extensive use of services provided by its owners, it may prove harder to achieve further efficiency savings to offset revenue headwinds than would be the case if all these costs were controlled directly.

RATING CHANGES Significant rating actions taken the week ending 15 November 2013

46 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Cigna Corporation Outlook Change

5 Feb ‘13 12 Nov ‘13

Insurance Financial Strength Rating A2 A2

Outlook Stable Positive

We changed the outlook because Cigna's financial profile has improved as a result of consistent financial results for the last few years. In addition, strategic developments have improved the company's risk profile. In particular, Cigna's financial leverage (adjusted debt to total capital), which has historically been high relative to the company's rating at around 45%, is expected to be managed to below 40% over next 12 months.

Landesbank Saar Outlook Change

16 Nov ‘11 13 Nov ‘13

Standalone Financial Strength/ Baseline Credit Assessment

D/ba2 D/ba2

Outlook Stable Negative

The outlook change reflects our view that SaarLB is vulnerable to adverse events given significant sector concentrations in the areas of commercial real estate and project finance. The progressive replacement of non-core assets with corporate loans coupled with the bank's expansion strategy into project finance with focus on renewable energy, which is still an immature and untested industry, results in a relatively unseasoned loan book, thus inducing new tail risks.

Northern Trust Corporation Downgrade

2 Jul ‘13 14 Nov ‘13

Senior Debt Rating A1 A2

Standalone Financial Strength/ Baseline Credit Assessment

B/aa3 B-/a1

Long-Term Deposit Rating Aa3 A1

The downgrade reflects profitability pressures. Specifically, in the current challenging operating environment, including a protracted period of low interest rates, Northern Trust's net interest margin has compressed and its noninterest income from sources tied to interest rates has been reduced. Moreover, the bank's revenue in some ancillary businesses is hindered by changed market dynamics, including lower foreign exchange fees and reduced securities lending demand following client losses during the financial crisis.

RATING CHANGES Significant rating actions taken the week ending 15 November 2013

47 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Sub-sovereigns

Bromford Housing Group (UK) New

11 Nov 2013

Issuer rating Aa3

Outlook Stable

The rating reflects financial ratios that are among the strongest among its rated peers, robust governance, strong management practices and moderate debt-to-revenue ratio, which is not expected to grow given a moderate capex programme. The rating also factors in a significant portion of income coming from a volatile revenue source.

First Nations Finance Authority Inc. (Canada) New

13 Nov 2013

Issuer rating A3

Outlook Stable

The rating reflects the strong institutional framework and governance and management structure of the First Nations Finance Authority. The rating also reflects extensive membership and borrowing criteria, balanced by the presently small pool size of small borrowers, limited diversity and limited track record. Also factored into the rating are the oversight of borrowing members by the First Nations Financial Management Board and strong support from the federal government.

Aut. Regions of Madeira and Azores, City of Sintra (Portugal) Outlook change

12 Nov 2013

Madeira (issuer rating) B3 (15 Feb 2013) B3

Azores (issuer rating) B1 (18 Nov 2011) B1

Sintra (Issuer rating) Ba3 (15 Feb 2012) Ba3

Outlook Negative Stable

The change in outlook follows our action on the Government of Portugal on 8 November, raising the outlook on Portugal’s Ba3 rating to stable. The transfers Sintra receives from the central government imply that the city’s creditworthiness is constrained at the Government of Portugal's rating. As a result, given the city's good financial performance, the change in the outlook on the sovereign rating triggered a similar outlook change on Sintra's rating.

RATING CHANGES Significant rating actions taken the week ending 15 November 2013

48 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Structured Finance

Updated Approach to Swap Counterparty Linkages Leads to Rating Actions On 12 November we updated our approach for assessing swap counterparty linkage in structured finance transactions. The updated approach determines the rating impact on notes exposed to swap counterparties based on factors including 1) the rating of the counterparty, 2) the rating trigger provisions in the swaps, 3) the type and tenor of the swap, 4) the amount of credit enhancement supporting the notes, 5) the size of the relevant note, and 6) the rating of the notes before linkage.

» In Europe, we placed on review for downgrade the ratings of 150 notes in 48 residential mortgage-backed securities (RMBS) and 17 notes in 14 asset-backed securities (ABS).

» In the US, we placed on review for downgrade the ratings of 21 notes in eight US student loan-backed transactions, affecting approximately $6.5 billion.

» In Australia, we placed on review for downgrade the ratings of 56 notes in 22 residential mortgage-backed securities (RMBS) and one note in a commercial mortgaged-backed security (CMBS).

Amortising European CLOs Upgraded due to Significant Loan Prepayments On 14 November we upgraded the ratings on 66 tranches in 29 European collateralised loan obligations (CLOs), totaling approximately €1.9 billion of outstanding rated balance. The magnitude of these upgrades ranged generally between one and three notches. The ratings of all tranches upgraded, except for those already upgraded to Aaa (sf), remain on review for upgrade. We also placed on review for upgrade the ratings of an additional 27 tranches in 20 CLOs, totaling approximately €852.1 million of outstanding rated balance. These actions are primarily a result of the substantial deleveraging of senior notes and increases in overcollateralisation (OC) levels, which improved the credit enhancement levels of outstanding tranches in these transactions. The deleveraging and OC improvements primarily resulted from high prepayment rates of leveraged loans in CLO portfolios. In particular, we observed a significantly high rate of prepayment during the summer of 2013.

RESEARCH HIGHLIGHTS Notable research published the week ending 15 November 2013

49 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Corporates

EMEA Telecommunications Service Providers: Revenues to Stabilize in 2014, But Slow and Uncertain Recovery Keeps Outlook Negative

Our outlook for the EMEA telecommunications service industry is negative. While we expect revenues to stabilize or marginally decline (0% to -0.5%) in 2014, it is not clear to us how sustainable any recovery will be.

Chinese Department Stores' Credit Quality Is Diverging as Rents Rise and Competition Increases

The credit quality of Chinese department stores will diverge further in the next two to three years as rents rise and competition from Internet retailers and shopping malls increases. Retailers that own a large percentage of their stores are better positioned to maintain their profitability, market share and funding access than those that lease their spaces.

Global Pharmaceuticals: New US Cholesterol Guidelines Are Negative for Merck's Vytorin/Zetia Franchise

New US treatment guidelines for the reduction of cardiovascular disease will lead to changes in the use of cholesterol-related pharmaceutical products. The guidelines eliminate the concept of treating with cholesterol “goals”, and instead recommend statin therapy based on categories of risk factors. Although some patients currently taking statins may stop, we believe that the overall use of statins is likely to rise. The new treatment guidelines, however, specifically state that non-statin therapies do not provide acceptable risk reduction, so Zetia sales will fall.

Outlook Update: Global Base Metals: Prices to Stay Largely Range-Bound in 2014 as World Economy Faces Slow Recovery

We changed our outlook for the Global Metal Base industry to stable from negative, as the price decline has bottomed. Prices are expected to remain within current trading levels given the slow global economic recovery.

US For-Profit Hospitals: Despite Slow Enrollment, Exchanges Remain Positive for For-Profit Hospitals

We continue to believe that the expansion of insurance coverage under healthcare reform will be credit positive for the for-profit hospital operators. The figures show quicker-than-anticipated growth in individuals eligible for Medicaid, a positive for the for-profit hospitals.

RESEARCH HIGHLIGHTS Notable research published the week ending 15 November 2013

50 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Financial Institutions

Moody's Concludes Review of Systemically Important US Banks – Frequently Asked Questions

Our report focuses on the changes to our systemic support assumptions, which were a major driver of our 14 November rating action. The changes in support assumptions are directly related to the ongoing progress of US bank regulators in developing an effective resolution framework for large, complex banks.

United Arab Emirates Banking System Outlook

We have changed our outlook for the UAE banking system to stable from negative to reflect continued improvements in the operating environment, particularly in core economic sectors, such as trade, transport and tourism, as well as the ongoing recovery of the local real-estate market, most notably in the residential and prime commercial segments. As a result of the improvements we expect that problem loan levels will decline and profitability will increase.

Leading Indicators of Asset-Quality for Banks in Eastern Europe and the Middle East

We present the leading indicators for asset quality that we track across banking systems in Eastern Europe and the Middle East. We track these indicators as part of our surveillance of banks’ asset quality as they help to inform our outlook on loan book performance and ensure both the timely detection of vulnerabilities and shifts in problem loan trends.

Leading Indicators of Asset-Quality for Banks in Latin America

We present the leading indicators for asset quality we track across banking systems in Latin America. We track these indicators as part of our surveillance of banks’ asset quality as they help to inform our outlook on loan book performance and ensure both the timely detection of vulnerabilities and shifts in problem loan trends.

FAQ on Key Credit Issues Regarding Contractual Non-viability Subordinated Debt Issued by Chinese Banks and Their Hong Kong Subsidiaries

Investors face higher risks of losses on contractual non-viability subordinated debt than traditional “plain vanilla” securities because the former gives regulators explicit discretion and flexibility to impose losses on investors. Starting in 2013, all new issuances of non-common equity capital instruments in both Mainland China and Hong Kong must contain contractual non-viability language.

Mexico’s Financial and Fiscal Reforms Are Credit Positive for Banks – Frequently Asked Questions

Mexico’s financial and fiscal reforms will improve growth prospects in the financial sector. Increased focus on lending to SMEs will boost profit margins, increased formality in the economy will result in new bank clients, and better collateral enforcement and credit reporting will encourage banks to move into new markets. Our report answers key questions about the financial reform and the impact it will have on credit quality for Mexican lenders.

2013 Survey of Russian and CIS Banks’ Single-Client and Related-Party Concentrations Our survey of Russian and other Commonwealth of Independent States (CIS) bank concentrations shows that exposures to single clients and related parties continue to be among the highest globally. These concentrations expose banks to heightened credit risk, as problems at just a few large borrowers or intragroup companies or both can significantly affect CIS banks’ credit standing.

RESEARCH HIGHLIGHTS Notable research published the week ending 15 November 2013

51 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

Sovereigns

Mozambique Credit Analysis Mozambique’s B1 rating is constrained by the country’s low income levels and the economy’s lack of diversification, given its dependence on the extractive sector and subsistence agriculture. Moreover, its development policy’s focus on natural resource exploitation will further widen fiscal and current account deficits given the need to upgrade the country’s infrastructure network.

Netherlands Credit Analysis The Netherlands’ Aaa rating with negative outlook is supported by the country’s highly competitive, diversified and export-oriented economy and the fact that it is one of the richest countries in the world on a purchasing power parity basis. The Dutch banking sector, however, constitutes a key weakness for the sovereign given its large size and the substantially leveraged household sector.

Key Drivers for Moody's Decision to Change Outlook on Portugal's Ba3 Rating to Stable On 8 November, we changed the outlook on Portugal’s Ba3 government bond rating to stable from negative. We discuss the key drivers of this action: the improving trend in Portugal’s fiscal position and the government’s commitment to fiscal consolidation, the slowly improving economic outlook, and the reduced risk of a debt restructuring.

Saudi Arabia Credit Analysis Saudi Arabia’s considerable economic and government financial strengths support its Aa3 government bond rating, with a stable outlook. In recent years windfall oil revenues have generated large fiscal surpluses, allowing the government to build a sizeable asset cushion and sharply reduce its debt ratios. Constraints on the rating are mainly institutional.

Senegal Credit Analysis Senegal’s B1 rating remains constrained by the economy’s vulnerability to internal and external shocks, both of which are responsible for below-potential growth over the last decade. Factors supportive of Senegal’s creditworthiness include the country’s political stability relative to its regional peers, which has led to policy continuity and social stability domestically.

Sub-sovereigns

South African Secondary Cities: Sound Credit Profiles Support Likely Growth in Debt The South African National Treasury recently highlighted 19 secondary cities that it believed had sufficient budgetary capacity and financial sophistication to expand their capital expenditure commitments in order to support the country’s socio-economic growth. Overall, we believe the majority of South African secondary cities have the capacity to take on new borrowing without affecting their credit profiles.

RESEARCH HIGHLIGHTS Notable research published the week ending 15 November 2013

52 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

US Public Finance

Rhode Island Municipalities Look to ACA Exchanges and Other Strategies to Reduce Growing Healthcare Expenses Rhode Island local governments’ employee and retiree healthcare costs are increasing faster than the rate of inflation because of the state’s aging workforce, increasing life expectancy of retirees, and growth in per capita use of healthcare services. To combat these high costs, the state of Rhode Island, among other strategies, is seeking to harness the new Affordable Care Act healthcare benefit exchange to reduce local governments’ retiree healthcare costs.

Structured Finance

Credit Insight The November edition discusses the credit positive implications for Russian consumer ABS transactions following the country's first consumer ABS issuance since 2006, the structure of which eliminates currency risk and reduces interest rate risks. We also discuss the vulnerability of Spanish and Italian SME ABS transactions to tightness in the credit supply, which comes on the back of high refinancing needs over the next five years, and credit positive implications for Irish RMBS and covered bonds of the apparent bottoming out of the Irish housing recession after seven years of falling house prices.

Australian RMBS, ABS and Covered Bonds Outlook for 2014 Australia’s RMBS, ABS and covered bond markets will continue to perform well in 2014 and issuance will remain similar to 2013 levels. In RMBS, delinquencies will rise modestly, but losses will remain low because most loans are seasoned and benefit from house price appreciation, and the overall mortgage market benefits from the ongoing deleveraging among borrowers. The credit quality of new ABS will slip as a result of a reduction in novated leases and an increase in non-auto assets in portfolios. Australian and New Zealand covered bonds will retain their high credit quality because of the strong credit quality of their issuers and sovereigns, and the stable quality of the residential mortgage collateral.

Asia (Ex-Japan) Covered Bonds, RMBS, ABS, CMBS and CLO Outlook for 2014 The performance of Asia (ex-Japan) covered bond, RMBS, ABS, CMBS and CLO markets will remain good and stable in 2014. In Korea, government measures to control the growth of household debt, stronger GDP growth and the low interest rate environment support the stable outlook for transactions. In Singapore, CMBS transactions benefit from favorable loan-to-value ratios and high debt service coverage ratios. In Asia (ex-Japan) CLOs, although overall credit quality remains good, it is deteriorating in some regions because of the increasing costs of borrowing for corporations in India and China and the depreciation of the Indian rupee.

RECENTLY IN CREDIT OUTLOOK Select any article below to go to last Thursday’s Credit Outlook on moodys.com

53 MOODY’S CREDIT OUTLOOK 18 NOVEMBER 2013

NEWS & ANALYSIS Corporates 2 » US Airways and AMR Antitrust Settlement with US Justice

Department Is Credit Positive » Mitel's Aastra Acquisition Will Reduce Leverage and Expand

Market Share » Housing Controls Are Credit Negative for Shanghai Developers

Infrastructure 5 » AMR-US Airways Merger Settlement Is Credit Negative for

Smaller US Airports » Transurban’s Acquisition of Cross City Tunnel Debt Is Credit

Negative

Insurers 8 » RSA Insurance's Irish Woes Are Credit Negative

Sovereigns 9 » Typhoon Haiyan Is Unlikely to Derail Philippine Credit

Improvement

CREDIT IN DEPTH US Public Finance 11

On 11 October, the City of Detroit Emergency Manager Kevyn Orr approved a debtor-in-possession (DIP) financing proposal. DIP financings are commonly used in the corporate sector to inject liquidity into a bankrupt entity, with the objective of paving the way for eventual recovery. In the municipal sector, however, DIP financings are unprecedented. Detroit is likely the first local government to propose this type of post-petition financing structure as it continues to navigate Chapter 9 bankruptcy, while balancing the competing interests of operating an insolvent city and negotiating with a variety of creditors.

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EDITORS PRODUCTION ASSOCIATE News & Analysis: Elisa Herr, Jay Sherman and Wendy Arthur

David Dombrovskis

Ratings & Research: Robert Cox Final Production: Barry Hing