MOODYS.COM

22 SEPTEMBER 2014

NEWS & ANALYSIS Corporates 2 » Endo's Offer for Auxilium Would Raise Leverage for a Small

Contribution to EBITDA » WhiteWave's Purchase of So Delicious Serves Up a Long-

Term Treat » Airbus Plan to Sell Non-Core Assets Is Credit Positive » An Alere LBO by Former CEO and Co-Founder Would Be

Credit Negative » Sears Borrows $400 Million from Affiliates of CEO to Boost

Near-Term Liquidity, a Credit Negative » National Mentor's Parent Plans to Pay Off Notes with IPO

Proceeds, a Credit Positive » Maestro Peru Gains the Backing of a Larger Entity in Falabella » Grupo Posadas and Playa Resorts Face Heavy Damages after

Hurricane Odile » Ericsson Will Stop Developing Thin Modems, a

Credit Positive » Bayer Plans to Float Its MaterialScience Business, a

Credit Positive » Global Ship Lease's Vessel Acquisition Is Credit Positive » Wuzhou Pens Credit-Positive Strategic Agreement with Ping An

Real Estate and PAG VIII

Infrastructure 15 » China Resources Power Will Cut On-Grid Tariff for Coal-Fired

Plants, a Credit Negative

Banks 16 » European Banks’ Weak Demand for Cheap Central Bank

Funding Is Credit Negative » Nordea Raises Additional Tier 1 Capital, a Credit Positive » China Moves to Reduce Window Dressing of Deposit Balances,

a Credit Positive to Banks

Insurers 22 » Mexican Insurers Face Substantial Claim Losses from Hurricane

Odile, a Credit Negative » IMPSA's Default Highlights Credit Negative Implications of

Argentine Insurer Mandate

Asset Managers 26 » US Federal Reserve's Modifications to Repo Program Are Credit

Positive for Money Market Funds » CalPERS Exit from Hedge Funds Is Credit Positive for It, Credit

Negative for Hedge Funds

Sovereigns 29 » Ireland's Growth Accelerates in the Second Quarter, a

Credit Positive » Namibia and Botswana See Credit-Positive Progress on Walvis

Bay Port Expansion » Sri Lanka's Swap Line with China Will Bolster Its External

Liquidity and Trade, Credit Positives » Fiji Elections Will Normalize Diplomatic Relations, a

Credit Positive

US Public Finance 34 » Chester County, Pennsylvania's Surging Wage Growth Will

Boost Local Government Income Tax Collections

RATINGS & RESEARCH Rating Changes 36

Last week we upgraded Air Canada, Deutsche Post, Integrys Energy Group, ITC Great Plains, Niagara Mohawk Power, Grand River Dam Authority, Jobs Ohio Beverage System, 19 US subprime auto loan ABS and 49 US subprime RMBS; and we downgraded TDC, Instituto Costarricense de Electricidad, Reventazon Finance Trust, Costa Rica, three Costa Rican banks and the Puerto Rico Electric Power Authority, among other rating actions.

Research Highlights 49

Last week we published reports on European paper and forest, US homebuilding, Chinese property developers, European steel, Australian miners, US apparel, Asian miners, Brazilian infrastructure, UK electricity networks, Paraguayan banks, US excess and surplus insurers, Indian banks, Cypriot banks, Chinese banks, Canadian banks, global reinsurance, International Investment Bank, Armenia, Malaysia, the US, Costa Rica, Dominican Republic, African sovereigns, UK sub-sovereigns, California utilities, Ohio, US not-for-profits, US ABS, global CLOs, US RMBS, European RMBS and ABS, Australian RMBS and US tobacco ABS, among other reports.

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Thursday’s Credit Outlook 57 » Go to Last Thursday’s Credit Outlook

NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Corporates

Endo’s Offer for Auxilium Would Raise Leverage for a Small Contribution to EBITDA Last Tuesday, Endo Luxembourg Finance I Company S.à.r.l. (Ba3 review for downgrade), a subsidiary of Endo International Plc (unrated), said that it had offered $2.2 billion to buy its smaller rival, Auxilium Pharmaceuticals Inc. (B3 review for upgrade). Auxilium on Wednesday confirmed that it had received the offer and said that it had adopted a shareholder-rights plan while it evaluates the offer.

If successful, the cash-and-stock offer would be credit negative for Endo, in part owing to the very limited near-term EBITDA contribution from Auxilium, which is facing operating losses. If accepted, the offer would raise Endo’s financial leverage to more than 4x from 3.5x during a period when it is facing several growth challenges and will create more uncertainty about its fast-paced acquisition strategy. Following the offer’s announcement, we placed Endo’s ratings on review for downgrade and Auxilium’s on review for upgrade.

One of Endo’s main challenges is the decline for its pain treatment Lidoderm – a $950 million annual sales product at its peak – because of the launch in September 2013 of a generic version by Actavis, Inc. (Baa3 stable). We expect further declines, owing to the imminent launch of another generic version from Mylan Inc. (Baa3 stable), which is awaiting approval from the US Food and Drug Administration (FDA). The Mylan launch will create a three-player market, which will put pricing pressure on all three participants.

Endo is also facing major cash outflows related to litigation over the safety of its surgical mesh products. The company has already agreed to pay $830 million to settle roughly 20,000 liability claims, which it will pay out over time. But these settlement agreements do not fully resolve all of Endo’s liabilities because not all plaintiffs have elected to participate. New cases could also arise. As of 30 June 2014, upward of 5,000 cases remained outstanding outside the settlement agreements. Although Endo has built up a $1.17 billion reserve for expected future payments, including the $830 million settlement discussed above, its litigation costs could exceed its estimates.

Endo’s bid for Auxilium illustrates the company’s rapid acquisition pace, which could also increase its debt. To date this year, Endo has made five major acquisitions, including Mexican pharmaceutical company Grupo Farmaceutico Somar for $269 million and two US generic pharmaceutical companies, Boca Pharmacal for $233 million and Dava Pharmaceuticals, Inc. for $575 million. Its largest acquisition this year, Paladin Labs for $1.6 billion, allowed Endo to form an Irish holding company through a corporate inversion. We expect that it will use its new international infrastructure to continue making acquisitions.

In targeting Auxilium, Endo is pursuing a company with negative EBITDA and a main product, Testim, sales of which are rapidly shrinking. Publicity surrounding the cardiovascular risks associated with testosterone gels has hurt Testim’s sales, which were $211 million for 2013. Testim has also been hit by the recent market entrance of a similar testosterone gel from Upsher-Smith Laboratories Inc. (unrated) and by competing products such as AbbVie Inc.’s (Baa1 stable) Androgel and Eli Lilly and Company’s (A2 stable) Axiron. Auxilium has now launched its own generic version of Testim, further crowding the market. The market for testosterone gels is likely to take another hit as the FDA is considering adding restrictions to the drug and is likely to act soon.

Most of Auxilium’s upside lies in its ability to reduce expenses and in Xiaflex (see exhibit), which recently became the only drug approved to treat Peyronie’s Disease, a condition involving penile curvature. We are

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

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

optimistic about Xiaflex’s potential in this indication, given Auxilium’s expertise in urology and its strong relationships with urologists. Xiaflex is also growing in other indications, including Dupuytren’s Contracture, a progressive hand condition, and could have upside potential in treating cellulite and frozen shoulder. Before Endo’s offer, Auxilium announced a $75 million cost-reduction program affecting 30% of its workforce. Endo will seek merger synergies on top of the $75 million, but has not yet quantified its synergy target.

Sales of Auxilium’s Drugs Testim and Xiaflex Testim is in decline, while Xiaflex has upside

Source: Auxilium 10Q and 10K reports

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NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

WhiteWave’s Purchase of So Delicious Serves Up a Long-Term Treat Last Wednesday, WhiteWave Foods Co. (Ba2 stable) said it had agreed to buy plant-based food company So Delicious Dairy Free (unrated) for $195 million, a long-term credit positive.

So Delicious, which produces plant-based, non-genetically modified beverages, creamers, cultured products and frozen desserts, had sales of $115 million for the past 12 months through June and has grown sales at a rate of 30% or more for several years.

The deal complements WhiteWave’s core business and helps diversify its product line, adding the top-selling plant-based frozen dessert brand to WhiteWave’s coffee creamers, beverages and organic greens sold under brand names including Silk, International Delight, Alpro and Horizon Organic. The company expects So Delicious to be accretive to earnings within a year after closing, excluding transaction and integration costs.

Denver, Colorado-based WhiteWave expects to close the cash purchase from investors led by Wasserstein & Co. in the next few months. The deal follows WhiteWave’s first-time bond issuance, $500 million of senior unsecured bonds due 2022, which closed the same day as the acquisition announcement. This gives the company sufficient liquidity to pay for So Delicious without material borrowings under its $1 billion revolving credit line. WhiteWave’s sales for the 12 months ended in June were approximately $3 billion.

Although WhiteWave did not disclose the EBITDA multiple, we believe that it is paying a high multiple for Eugene, Oregon-based So Delicious. However, we estimate that the multiple is nearer to 10x after accounting for distribution gains and cost synergies. We expect that WhiteWave’s debt/EBITDA leverage will be more than 4x at closing, but expect the company to reduce this to less than 4x over the next year, which is within our expectations for the rating.

Although the planned acquisition of So Delicious appears to be a good fit with WhiteWave’s existing businesses, it signals a relatively fast acquisition pace given that WhiteWave closed on the acquisition of Earthbound Farms in January and entered a joint venture in China that same month.

Linda J. Montag Senior Vice President +1.212.553.1336 linda.montag@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Airbus Plan to Sell Non-Core Assets Is Credit Positive Last Tuesday, Airbus Group N.V. (A2 stable) announced that it planned to sell certain non-core assets within its Defence and Space division. Non-core asset sales would be credit positive because they would improve the company’s margin and cash flow, although not to the extent that Airbus’ A2 rating and stable outlook would be affected. Although the divestitures will not materially alter Airbus’ financial profile, they are an important step and follow the strategic review that Airbus undertook after its failed merger attempt with BAE Systems plc (Baa2 stable) in 2013.

The divestitures fit well with Airbus’ broader portfolio realignment and optimization efforts. Monetization of these non-core assets will allow for modest incremental organic investment and bolt-on acquisitions, but more importantly they will allow management to focus more closely on the company’s core aeronautics, military and space activities and the ultimate realization of improved operating efficiencies, enhanced competitiveness and stronger financial performance.

With assets broadly falling outside of the space, military aircraft, missiles, and related services core competencies, the segments that Airbus has initially identified as divestiture candidates include Fairchild Controls, Rostock System-Technik, AvDef, ESG and Atlas Elektronik, which is a joint venture with German manufacturer ThyssenKrupp AG (Ba1 negative). Combined, these three segments generated about €2 billion of 2013 estimated revenue (some of which is recognized through joint venture accounting).

We expect the asset sales to occur no sooner than mid-2015, and we expect that net sale proceeds of well less than a 1x multiple of the €2 billion in 2013 annual revenue will further bolster liquidity in support of requisite (and significant) working capital investment next year as program ramp-ups at the company’s commercial aerospace subsidiary accompany increasing capital spending. Alternatively, Airbus could use the proceeds to support organic investments or modest acquisitions that align with the company’s strategic repositioning. We do not expect Airbus to return proceeds to shareholders or use them to pay down debt. To the extent that the company does opt to increase shareholder remuneration using net disposition proceeds or remaining excess cash balances, its otherwise strong liquidity profile would be adversely affected.

A sale of the targeted divestiture segments would not materially affect the company’s scale or its operating profit given these segments relatively limited contribution to Airbus’ €60 billion revenue base. The comparatively weak average margin of the divestiture candidates suggests some modest improvement in overall reported operating margins. And the company’s pro forma business mix will be more exposed to the ongoing improvement in commercial aerospace, and less exposed to the lingering and likely protracted contraction of the defense sector.

Airbus recently announced a plan to sell its 46% stake in Dassault Aviation SA (unrated), a legacy holding of considerably higher value that pre-dates the company’s shift to a more commercially oriented corporate governance structure. As Airbus and other European defense contractors pursue further restructurings in response to persistent budgetary headwinds, we expect that other joint ventures, the formation of many of which were both commercially and politically motivated, may also be unwound.

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

Jack Kuhns Associate Analyst +1.212.553.6946 jack.kuhns@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

An Alere LBO by Former CEO and Co-Founder Would Be Credit Negative Last Monday, Alere Inc.’s (B2 stable) former CEO and co-founder Ron Zwanziger filed plans with the US Securities and Exchange Commission to pursue a takeover of the medical device company for $46 per share or higher. If completed, the transaction, which values Alere at about $3.8 billion, would be credit negative because we expect it to increase Alere’s financial leverage.

According to the Schedule 13D filing, the transaction would be financed with an undisclosed combination of debt and equity. Although Alere’s current Moody’s-adjusted debt/EBITDA was roughly 6x as of 30 June, recent leveraged buyouts and acquisitions within the medical device sector have resulted in Moody’s-adjusted debt/EBITDA of between 6.5x and 7.5x, which would not be supportive of a B2 rating.

Should a buyout occur, existing debtholders are protected by change-of-control provisions that require full repayment at par (in the case of senior secured credit facilities) or provide holders a put at 101 (in the case of bonds). As a result, the company’s existing debts would likely be repaid in full at par, or at a premium.

The filing notes that Mr. Zwanziger has contacted multiple parties, including certain shareholders and former executives and co-founders, to gauge their interest in acquiring the company, and he is attempting to conduct a due diligence process. Alere’s current Chairman of the Board, Gregg Powers, recently rejected Mr. Zwanziger’s diligence request and stated that the board “would consider any bona-fide proposal that would maximize shareholder value.”

The planned LBO would also be credit negative because of the increased risk that the company will return to the aggressive and largely debt-financed acquisition strategy that it followed when Mr. Zwanziger led the company from 2001 through June 2014. Since 2007, Alere paid approximately $4.6 billion for acquisitions and increased its total reported debt by $2.4 billion. In mid-2013, doubts about Zwanziger’s financial and strategic leadership of Alere were voiced by activist shareholder Coppersmith Capital Management, which was advocating for aggressive deleveraging through asset sales and a revised governance structure.

Alere, headquartered in Waltham, Massachusetts, operates in health management and professional and consumer diagnostics. The health management business includes disease management, women’s health, and wellness. Diagnostic products focus on infectious disease, cardiology, oncology, drug abuse and women's health. For the 12 months ended 30 June 2014, the company generated net revenues of approximately $3.0 billion.

Daniel M. Gonçalves Analyst +1.212.553.1335 daniel.goncalves@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Sears Borrows $400 Million from Affiliates of CEO to Boost Near-Term Liquidity, a Credit Negative Last Tuesday, loss-addled Sears Holdings Corp. (Caa1 stable) said that it would borrow $400 million from funds affiliated with Sears Holdings CEO Edward Lampert to boost short-term liquidity. The move is credit negative because the loan is backed by company real estate assets (25 unspecified, owned properties) that have been a key potential source of liquidity as Sears continues to burn cash and which historically have not been pledged. Although we do not expect the company to meaningfully rely on secured financing against its real estate on a sustained basis, should this change in such a way that it constrains the company’s liquidity options, it could lead to negative rating implications.

The loan comes as Sears Holdings faces numerous challenges, not least of which are questions about the viability of its Kmart division, which constituted around 41% of domestic sales for the 2013 fiscal year ended 1 February 2014. Sears Holdings’ operating performance continues to erode, with adjusted EBITDA (as defined by the company) falling to a loss of $534 million for the first half of 2014, versus a year-earlier adjusted EBITDA loss of $104 million. Absent an improvement in performance, Sears Holdings is facing approximately $1.5 billion of cash burn in the current and next fiscal years.

We expect that the company will use the loan to help finance the normal seasonal build-up of inventory ahead of the holiday season. The November-January period is typically when Sears generates positive cash flow as it unwinds the seasonal build of inventory, so we expect Sears Holdings to generate enough cash flow to repay the advance, which is payable in December 2014 and which Sears Holdings can extended to February 2015.

The 25 properties that serve as collateral are part of a bigger real estate portfolio consisting of 712 Sears and Kmart stores, which were owned (rather than leased) as of 1 February 2014. Although we do not have reports that specify the value of these properties, we estimate that the values are most likely higher than those of J.C. Penney Company Inc. (Caa1 negative), whose properties, according to filings as of 14 May 2013, were worth a conservative $2.2 billion.

Scott Tuhy Vice President - Senior Credit Officer +1.212.553.3703 scott.tuhy@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

National Mentor’s Parent Plans to Pay Off Notes with IPO Proceeds, a Credit Positive Last Tuesday, Civitas Solutions Inc. (unrated), the indirect parent of National Mentor Holdings Inc. (B3 review for upgrade), priced its initial public offering at $17 a share and said it plans to use the proceeds to repay debt, a credit positive. Following the announcement, we put National Mentor’s B3 corporate family rating and Caa2 unsecured rating on review for upgrade, and affirmed its secured debt rating at B1.

Although the offering’s price was lower than the $20-$23 a share its underwriters previously estimated, we expect the company to use the majority of the $182.2 million of proceeds (net of estimated underwriting discounts, commissions and offering expenses) to redeem $162 million of National Mentor’s 12.5% senior unsecured notes. This is a credit positive because it will reduce National Mentor’s leverage to below 5.3x debt/EBITDA from its current level of 6.1x. The IPO also diversifies National Mentor’s investor base and provides it access to a different source of capital to fund its aggressive acquisition strategy.

National Mentor, based in Boston, provides in-home care and operates group homes for people with intellectual or developmental disabilities, brain injuries and emotional, behavioral or medically complex needs. Owned by private-equity firm Vestar Capital Partners V L.P., the company is a leader in the otherwise fragmented market for home and community-based care services and reported net revenue of approximately $1.2 billion for the fiscal year ended 30 June 2014.

However, the company is highly leveraged and about 42% of 2013 net revenue comes from a few states, namely Minnesota, California, West Virginia, Florida and Indiana, in which it has the largest presence. There is also risk associated with the company’s heavy reliance on governmental funding, where it gets about 90% of its revenue, because most states face fiscal challenges. It operates in 36 states, with more than 12,500 clients in residential care and 15,700 clients in non-residential settings.

Daniel M. Gonçalves Analyst +1.212.553.1335 daniel.goncalves@moodys.com

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Maestro Peru Gains the Backing of a Larger Entity in Falabella On Wednesday, home-improvement chain Maestro Peru S.A. (Ba3 negative) said that Grupo Falabella’s (unrated) wholly owned subsidiary Sodimac Peru (unrated) had acquired Maestro from private-equity firm Enfoca for about $492 million. The sale is credit positive for Maestro, because the owner of 30 stores throughout Peru will now have the backing of a far larger entity, with 391 department, home-improvement and grocery stores across South America.

Falabella’s acquisition will increase its presence in fast-growing Peru, which now accounts for just 17% of its revenues, and Falabella’s implicit support for Maestro leads us to expect that Maestro will pay off its roughly SOL19.8 million ($7 million) of debt due in 2015.

Maestro is midway through an ambitious growth strategy, including new store openings that will demand significant capital spending. During the 12 months through 30 June 2014, Maestro spent roughly SOL62 million on its expansion, draining its cash reserves to SOL16 million.

The company also has little flexibility in its capital structure, with a debt/EBITDA ratio of 5.7x as of 30 June 2014, versus 5.4x a year earlier. The high leverage is a consequence of less EBITDA growth than Maestro had expected over the past few years to offset the company’s increased debt following its issuance of $200 million of notes in 2012, and the 10% depreciation of the Peruvian currency since 2012. Moreover, although the bond issuance provided the liquidity that Maestro needed to fund the projects it has completed to date, further growth will require a significant amount of additional capital.

Falabella’s ownership offers some relief to Maestro’s deleveraging effort, easing the strain on Maestro before each new store becomes profitable. Now Maestro can rely more loosely on EBITDA growth for its deleveraging effort as its expansion continues. Sales of Maestro’s land will continue, easing the deleveraging effort further. Although it remains uncertain how Falabella plans to address Maestro’s high leverage, Maestro will receive strong support from Falabella, which would also benefit from Maestro’s presence in Peru

Peru’s retail sector is growing by about 6.1% annually, exceeding our economic forecast for the country of about 4.1% GDP growth in 2014 and 5.8% in 2015.1 By contrast, Chile, where Falabella generates about three-quarters of its revenue, will grow 3%-4% next year, according to Chile’s central bank.2

1 See Corporate Credit Quality in Peru: Peru Enjoys Higher Consumer Confidence But Braces for Weak Metal Prices and El Niño,

31 July 2014 and Government of Peru Credit Analysis, 29 August 2014. 2 See Corporate Credit Quality in Chile: Chilean Corporate Credit Quality Will Remain Stable Despite Deceleration and Weaker

Peso, 31 July 2014.

Veronica Amendola Vice President - Senior Analyst +54.11.5129.2610 veronica.amendola@moodys.com

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Grupo Posadas and Playa Resorts Face Heavy Damages after Hurricane Odile On 15 September, Hurricane Odile hit Mexico’s state of Baja California Sur and 125 mile-per-hour winds and torrential rains swept through the tourist destination. The storms are credit negative for Grupo Posadas, S.A.B. de C.V. (B2 negative) and Playa Resorts Holdings B.V. (B3 stable), both lodging companies with significant hotel and resort holdings in Los Cabos, Baja California Sur.

Odile was Baja California Sur’s most severe storm in decades. It caused widespread flooding, cut power, damaged roads and airports and stranded about 30,000 mostly foreign tourists. Both hotel chains face the risk that their insurance claims may not fully cover losses. A significant level of insurance recovery looks likely because both Posadas and Playa own their Los Cabos properties, but payments will depend on the exact conditions of their liability, property and business interruption coverage.

The storms could prove especially damaging to Playa, which owns just 13 hotels and one of them is in Los Cabos compared to the 119 hotels that Posadas owns, manages or leases, with just two in the Los Cabos area. Both companies own all of their properties in the state.

Three of Playa’s 13 hotels were closed prior to Odile for brand reconversion, which leaves the company heavily reliant on all of its properties, including its Hyatt Ziva Los Cabos resort. Playa in February 2014 estimated that Hyatt Ziva Los Cabos would contribute about 13% of its total full-year revenues and 11% of EBITDA.

Despite only two Posadas hotels in the Los Cabos area, accounting for about 3.5% of the company’s total rooms, these rooms make an outsized contribution to Posadas’ revenue and EBITDA because they operate under the high-margin “vacation club” format. Its vacation club format comprises only six hotels, but these account for around 35% of Posadas’ revenues. In addition to the two Los Cabos hotels, the remaining vacation club hotels are located in other major Mexican coastal destinations.

Nonetheless, Playa’s exposure to Los Cabos would leave it vulnerable to larger losses than Posadas. Moreover, Playa is more exposed to liquidity pressures during the period of recovery of the claim. Posadas’ broader geographic diversification gives it more cushion, but does not protect completely against revenue losses and capital costs for repairing damages.

Sandra Beltran Analyst +52.55.1253.5718 sandra.beltran@moodys.com

NEWS & ANALYSIS Credit implications of current events

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Ericsson Will Stop Developing Thin Modems, a Credit Positive On Friday, Telefonaktiebolaget LM Ericsson (Baa1 stable) announced that it will discontinue development of slim modems, which the company had taken over following the breakup of its joint venture with STMicroelectronics N.V. (Baa3 stable) in August 2013.

The discontinuation of thin modem development this quarter will save Ericsson approximately SEK2.6 billion (approximately €280 million or $360 million) annually in research and development (R&D) costs, or around 8% of the company’s total annual R&D costs, according to the company’s own estimates. The company intends to redeploy parts of the R&D savings to its radio networks operations.

Once fully implemented, the reduction in costs will improve Ericsson’s EBIT margins towards 12% from below 11% in the 12 months to 30 June 2014, before the redeployment of the savings into similar expenses for the core business. Although only slightly, it will also improve leverage, with debt/ EBITDA prospectively down to 1.2x from 1.3x in the last 12 months to 30 June.

Although Ericsson had previously announced that it would evaluate the future of its modems business within 18-24 months of integration, the discontinuation of the modem chip operations is an important strategic change. Ericsson had taken over the modem operations as part of the breakup of its joint venture with STMicroelectronics in August 2013 after a few years of disappointing results. Since then, it had reorganized the modem business and expected it to have significant market potential, although the company refrained from quantifying the potential in terms of sales. Ericsson had even stated its intention to become one of the leaders in this field, in which Qualcomm (unrated) is currently the leader and the dominant player. As recently as August, it had brought the first devices integrating its own modems on the market.

Since the integration of the modem operations into Ericsson in 2013, market conditions have become increasingly challenging, with strong competition, price erosion and an accelerating pace of technology innovation, according to the company. Ericsson’s planned withdrawal from the modem business was probably inevitable, in our view, because the business had lost its previous largest customers when first Sony Ericsson and then Nokia lost market shares and then completely withdrew from the mobile phone market. Given the limited market for slim modems outside iPhones or Galaxy S phones, Ericsson needed to sign either Apple and Samsung, or both, as customers. Facing strong incumbents in the market, Ericsson was evidently unable to find new customers for its multimode thin modems.

Roberto Pozzi Vice President - Senior Credit Officer +49.69.7073.0719 roberto.pozzi@moodys.com

Janko Lukac Associate Analyst +49.69.7073.0713 janko.lukac@moodys.com

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Bayer Plans to Float Its MaterialScience Business, a Credit Positive Last Thursday, Bayer AG (A3 stable) announced that it would float its MaterialScience polymer business on the stock market as a separate company within the next 12-18 months. Such a separation would be credit positive for Bayer, allowing the German company to use IPO proceeds to reduce debt and transfer a material amount of debt to the MaterialScience business, thereby helping protect, if not improve, Bayer’s leverage metrics after the transaction’s close.

A separation of the MaterialScience operation would allow Bayer to focus entirely on its Life Science businesses, and further pursue the growth strategy that has benefited its credit profile in recent years. Although we expect MaterialScience’s future financial performance to benefit from an ongoing drive for efficiency, the separation should have an accretive effect on Bayer’s profit margins and return on capital. The Life Science businesses had a blended EBITDA margin of 27% in the 12 months to June 2014, versus 11% for MaterialScience.

Bayer has yet to disclose details about the two successor groups’ respective capital structures. However, MaterialScience generated EBITDA (before special items) of €1.2 billion on sales of €11.3 billion in the 12 months to June 2014, and thus has significant debt-servicing capacity as a standalone entity. We expect that MaterialScience will take a significant amount of debt and debt-like obligations from Bayer, while still being able to achieve investment-grade credit quality and gain direct access to the capital markets.

Following the separation, Bayer would be free to concentrate on further expanding and strengthening the Life Sciences businesses, which include the HealthCare and CropScience operations and which accounted for about 70% of Bayer’s consolidated sales, or €28.1 billion, and 88% of reported EBITDA before special items, or €7.6 billion, in the 12 months to June 2014. The company intends to raise its research and development spending and continue the commercialisation of recently launched pharmaceutical products.

In the past few years, Bayer has significantly improved its business profile, meeting organic growth targets set for its pharmaceuticals division. Moreover, the pending acquisition of US-based Merck & Co., Inc.’s (A2 stable) over-the-counter (OTC) products business should bolster Bayer’s operational strength and further enhance its position in the consumer care sector.

We expect Bayer’s HealthCare business to record a significant increase in earnings and cash flow generation starting this year, reflecting the successful launch of several new products in 2010-12. Notwithstanding the separation of MaterialScience, we expect Bayer’s financial profile to improve over the next 24-36 months, with solid growth in earnings and operating cash flows that allow the company to lower its debt/EBITDA to less than 2.0x by 2016 from 2.7x at the end of 2014, following Merck’s OTC business acquisition.

Francois Lauras Vice President - Senior Credit Officer +44.20.7772.5397 francois.lauras@moodys.com

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Global Ship Lease’s Vessel Acquisition Is Credit Positive On Thursday, Global Ship Lease, Inc. (GSL, B3 stable) announced the acquisition of an 8,063 twenty-foot equivalent3 containership, with a three-year charter contract attached, for a purchase price of $55 million. This acquisition is credit positive because it will diversify GSL’s customer portfolio and positively affect its profitability and credit metrics.

GSL is a Republic of the Marshall Islands corporation that owns a fleet of containerships. Its business is to charter out its fleet under long-term, fixed-rate charters to container shipping companies. The container vessel that GSL acquired will be chartered back to the container liner company selling it for a period of 36-39 months at a gross rate of $34,500 per day, for total contracted revenue of $37.7-$40.9 million. GSL expects the vessel charter to generate annual EBITDA of approximately $9.4 million.

Additionally, we estimate that the vessel acquisition, which will increase GSL’s annual revenue by around $12.5 million, will improve the company’s EBITDA margin by around 100 basis points. Assuming acquisition funding of the vessel is split 70% cash and 30% debt (via drawing on the company’s $40 million revolving credit facility), we estimate that the company’s 2013 leverage, pro forma the acquisition (i.e., with an annual EBITDA contribution of $9.4 million), would improve by 0.2x to 3.8x from 4.0x (including Moody’s adjustments). Although GSL’s cash balance will decline because a portion of its cash on balance sheet will be used to fund the vessel acquisition, we anticipate that the company’s next 12 months liquidity profile will remain adequate.

GSL did not disclose the vessel’s seller, but said that it is a container shipping company that is not yet part of its customer portfolio. This will therefore diversify GSL’s customer base, which has until recently essentially comprised CMA CGM S.A. (B2 stable), which is also its largest shareholder. Indeed, most of GSL's current vessels (15 out of 17) are chartered out to CMA CGM under long-term charters. The two remaining vessels recently have been chartered out for periods of less than a year to Sea Consortium Pte Limited (unrated).

3 A unit of cargo capacity.

Marie Fischer-Sabatié Senior Vice President +33.1.53.30.10.56 marie.fischer-sabatie@moodys.com

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Wuzhou Pens Credit-Positive Strategic Agreement with Ping An Real Estate and PAG VIII On 14 September, Chinese property developer Wuzhou International Holdings Limited (B2 stable) said it has signed a strategic cooperation agreement with Ping An Real Estate Hong Kong (unrated) and PAG VIII (unrated), which will bring about $344 million to the company. The deal is credit positive because it provides Wuzhou with additional financing for its property-development business and improves its liquidity.

Wuzhou said it will issue $100 million in convertible notes at a 7% coupon rate with a five-year maturity to Ping An Real Estate Hong Kong and PAG VIII. The notes will rank pari passu with Wuzhou’s existing US dollar notes. The $100 million proceeds from the convertible notes will improve Wuzhou’s liquidity position by allowing the company to refinance part of its short-term debt, which amounted to RMB1.5 billion ($244 million) at the end of June 2014.

In addition, Ping An Real Estate plans to make strategic investments of up to RMB1.5 billion in Wuzhou’s specialized wholesale markets and logistics projects. These are likely to be equity investments into Wuzhou’s project-development companies, which will strengthen the projects’ capital bases.

The larger capital bases combined with the backing of a strong partner like Ping An Real Estate (which is owned by the second-largest Chinese insurance company by income from premiums) should allow Wuzhou’s project-development teams to obtain bank loans more quickly and at lower rates than they could before the strategic agreement. We expect this to allow Wuzhou to complete their property-development projects more quickly, with resultant sales and earnings recognition also strengthening Wuzhou’s market position and business scale. Wuzhou’s financial and risk management will also benefit from oversight by Ping An Real Estate and PAG VIII’s appointment of a director to Wuzhou’s board.

Additionally, the RMB1.5 billion investments from Ping An Real Estate will allow Wuzhou to satisfy a large part of its capital commitments, which amounted to RMB2.1 billion for the acquisition of land-use rights and properties under development, as of year-end 2013. Wuzhou’s gross debt doubled over the past 18 months to RMB4.8 billion as of 30 June as the company expanded the scope of its development. For the 12 months that ended June, its EBITDA/interest coverage declined to 2.1x from 3.0x in 2013 and 4.3x in 2012.

However, with substantial saleable resources on hand, we expect Wuzhou will be able to achieve its contracted sales target of RMB6.5 billion in 2014. Wuzhou’s year-over-year contracted sales rose 33.5% to RMB3 billion during the first half of this year. Given this positive trend, we expect the company to maintain its EBITDA/interest coverage at above 2.0x and its debt/book capitalization within 50%-55%.

Wuzhou is a property developer in China and specializes in the development and operation of wholesale markets and multi-functional commercial complexes. Ping An Real Estate Hong Kong is a private company wholly owned by Ping An Real Estate, the real estate investment management arm of Ping An Insurance (Group) Company of China, Ltd. (unrated). PAG VIII is a private company wholly owned by investment funds managed by Pacific Alliance Investment Management Limited, an affiliate of PAG (unrated). PAG is an Asia alternative investment fund management group.

Jiming Zou Assistant Vice President - Analyst +86.21.6101.0381 jiming.zou@moodys.com

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Infrastructure

China Resources Power Will Cut On-Grid Tariff for Coal-Fired Plants, a Credit Negative Last Monday, China Resources Power Holdings Co. Ltd. (CR Power, Baa2 stable) said that the on-grid tariff of its coal-fired power plants will drop by RMB0.004-RMB0.019 per kilowatt hour (kWh), or about 2%-4%. The reduction is credit negative for the independent power producer, 88% of whose power plants are coal fired, because it will reduce the company’s sales and profits.

The tariff cut follows China’s National Development and Reform Commission’s announcement in August that it would lower on-grid tariffs for coal-fired power plants in China effective 1 September.

As a result of the reduction, we estimate that CR Power’s revenue will decline by around RMB1.6 billion in 2015, based on our expectation for the company’s annual net generation volume for that year of 134 million megawatt-hours. This amount equals only 2.3% of CR Power’s total revenue of RMB70 billion in 2013, so the effect on the company’s credit metrics will be minimal.

CR Power’s profitability is more sensitive to coal prices than it is to tariff adjustments. CR Power’s costs for purchasing coal declined 9.2% year on year in the first half of 2014, and we expect the prolonged weakness in coal prices to help offset some of the revenue decline arising from the tariff reduction. Accordingly, we expect CR Power’s adjusted debt/book capitalization and adjusted funds from operations/debt over the next 12 months to remain similar to 2013 levels of 55% and 23%, respectively.

The tariff reductions reflect China’s efforts to implement a pricing mechanism introduced in 2012 that links the sales price of electricity generated by coal-fired power plants to the price of coal. China aims to improve the transparency of its tariff mechanism, although achieving that goal is likely to be gradual.

CR Power invests in, develops, owns and operates power plants in China. China Resources Holdings Co. Ltd (unrated), is a major Chinese conglomerate owned by China’s State Council, controls 63.1% of CR Power. As of 30 June, CR Power had 94 power plants in commercial operation, with a total attributable installed capacity of 29,897 megawatts, of which, 22% are powered by wind, hydro and natural gas, with the remainder coal-fired.

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

Sunny Yang Associate Analyst +852.3758.1513 sunny.yang@moodys.com

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Banks

European Banks’ Weak Demand for Cheap Central Bank Funding Is Credit Negative Last Thursday, the European Central Bank (ECB) made €82.6 billion of four-year 0.15% loans to 255 euro area banks from its first of eight scheduled targeted long-term refinancing operations (TLTROs). The lacklustre demand for funds – a total of €400 billion is available at this operation and December’s TLTRO – is credit negative for euro area economies because it likely reflects a combination of too few profitable lending opportunities for banks and their continued desire to deleverage and de-risk. This first TLTRO will not lead to a significant increase in bank lending to the private sector.

Bank lending to the private sector has been declining for some time. In August, the stock of outstanding loans to non-financial corporations was 2.8% lower than a year earlier, and 11.7% below its peak in January 2009. The additional funding provided by the 18 September TLTRO is too small to reverse this downward trend. As we noted when the operational details of the TLTROs were first announced, the programme will likely have a limited effect on bank lending to the private sector.

Demand at last Thursday’s auction was much lower than for the December 2011 LTRO (€530 billion) or the February 2012 LTRO (€489 billion). It was also below the typical regular seven-day monetary refinancing operations over the past two years, which have averaged €110 billion (see Exhibit).

European Central Bank’s First TLTRO Demand Was Very Low Amounts Borrowed at European Central Bank Open-Market Operations

Source: European Central Bank

Low take-up at Thursday’s TLTRO may be accounted for by banks preferring to wait for the December operation, when they will be better able to assess their funding needs after the ECB and European Banking Authority have published the results of the Asset Quality Review and stress tests. Banks may also be waiting for the details on the ABS and covered bond purchase programmes that the ECB announced on 4 September. ECB President Mario Draghi presented the TLTROs and ABS and covered bond purchase programmes as two parts of a package of measures aimed at increasing the size of the ECB’s balance sheet by around €1 trillion. Once the details of the ABS and covered bond purchase programmes are announced, banks will be better able to decide which of the two parts of the package is most attractive to them. Moreover, unlike in 2011-12, borrowing from the ECB to invest in government bonds is relatively unattractive because of the low yield environment. For instance, yields on two-year Italian and Spanish

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TLTRO Sep 2014 3-year LTRO Feb 2012 3-year LTRO Dec 2011 7-day MRO Average Since Jan 2013

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Marie Diron Senior Vice President +44.20.7772.1059 marie.diron@moodys.com

TLRO Sep 2014

3-year LTRO Feb 2012

3-year LTRO Dec 2011

7-day MRO Average Since Jan 2013

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

government notes have fallen to around 40 and 30 basis points respectively from around 3.8% and 5% at the time of the December 2011 LTRO.

However, the low take-up at this first TLTRO also suggests that banks do not need additional funding, even at very low interest rates. This is despite €352 billion of ECB funding outstanding after repayments scheduled on 24 September from the original two LTROs, which mature in late 2014 and early 2015. Banks were likely reluctant to participate in the TLTRO since, without prospects of being able to use these funds to increase lending to the private sector, depositing the TLTRO funds at the ECB incurs a 0.2% charge. The small amount borrowed from the ECB is consistent with euro area banks generally not seeing many profitable lending opportunities. It also reflects a continued desire to prioritise deleveraging and de-risking of the balance sheet over expanding credit.

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Nordea Raises Additional Tier 1 Capital, a Credit Positive Last Wednesday, Nordea Bank AB (Aa3 negative, C/a3 stable4) announced that it had issued $1.5 billion additional Tier 1 (AT1) capital securities, becoming the first Swedish bank to access the market for Basel III-compliant Tier 1 capital securities. The transaction is credit positive because it raised the banking group’s Tier 1 capital buffer to absorb losses by 75 basis points to 17% of risk-weighted assets.

The AT1 issue increases Nordea’s total pro forma capitalisation at the end of June to 19.75%, widening the buffer over its estimate 19% total capital requirement (see exhibit). Nordea’s capital ratios are high relative to other European banks, because the bank has reduced its risk-weights under Basel II and Basel III reporting. When we take into account the transitional floor that limits the benefit of such risk-weight reductions, Nordea’s total capital ratio at the end of June was 13.3%.

Nordea Bank’s Required and Pro-forma Capital Ratio

Note: We estimate the Pillar II requirement at 2%. Source: Finansinspektionen and Nordea Bank

4 The ratings shown are the deposit rating, standalone bank financial strength rating/baseline credit assessment and the

corresponding rating outlooks.

4.5%

3.5%

2%

0.5%0.5%0.4%

2%

3%

2.5%

15.2%

1%

0.8%

2.7%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Capital Requirements Pro-forma Capital End-June 2014

Tier 2 net of deductions for insurance investments

New AT1 issue ($1.5 bln)

Tier 1 hybrids

CET1 capital

Capital conservation buffer

Countercyclical capital buffer

Systemic risk buffer

Systemic risks Pillar II

25% risk weight floor on Norwegian mortgages

15-25% risk weight floor on Swedish mortgages

Current risk weight floor on Swedish mortgages

Pillar II requirement excluding risk weight floor on Swedish mortgages and systemic risk

Minimum AT1 (2.0% can be Tier 2)

Minimum CET1

Oscar Heemskerk Vice President - Senior Credit Officer +44.20.7772.5532 oscar.heemskerk@moodys.com

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

The Basel III regulatory process has led to the introduction of a number of regulatory capital buffers. If Nordea were to breach such buffers, its regulator, Finansinspektionen, can take increasingly severe remedial actions. For Nordea, regulatory requirements include a minimum common equity Tier 1 (CET1) ratio of 4.5% of risk-weighted assets; a minimum amount of 3.5% of Tier 2 instruments and AT1 securities; a Pillar II requirement we estimate at 2%; a systemic risk buffer of 5%, of which two percentage points is a Sweden-specific Pillar II requirement; a countercyclical buffer of 0.19%;5 and a capital conservation buffer of 2.5%.

Recent increases in risk-weight floors for residential mortgages in Sweden and Norway create an additional 1.4% buffer requirement. Not all these buffers are fully phased in now, with the systemic risk buffer to take effect in January and the countercyclical buffer to be in place in September 2015. According to Nordea, the increased capital requirements will not reduce dividend payout ratios in 2014 and 2015. In 2013, the payout ratio was 56%.

5 The 0.19% requirement reflects only Swedish credit exposures and does not take into account exposures in other countries.

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

China Moves to Reduce Window Dressing of Deposit Balances, a Credit Positive to Banks On 12 September, the China Banking Regulatory Commission (CBRC) and China’s Ministry of Finance jointly announced measures to limit window dressing of deposit balances by commercial banks. The new measures specifically target bank practices aiming to inflate deposit balances prior to month end by subjecting banks reporting deviations in their deposits above a 3% threshold to disciplinary actions.

The measures are credit positive for Chinese banks because they will reduce volatility in banks’ demand for funds and benefit their liquidity management. By preventing individual banks from taking overly aggressive steps to manage their deposit balances, the measures will help reduce volatility in the overall funding environment, which will in turn make it easier for banks to manage their liquidity. Exhibit 1 details the new measures.

EXHIBIT 1

Chinese Regulatory Deposit Balance Measures Measures Details

A cap on spikes in deposits toward the end of a month

CBRC will subject banks with large deviations in deposit flows, defined as the change in their month-end deposits over daily average deposits during the month, to various disciplinary actions, including the following:

» For a bank with a deviation exceeding 3%, a three-month ban on business approvals

» For a bank that exceeds the 3% limit twice, reduction in its annual rating assigned by CBRC

» For a bank with a deviation exceeding 4%, CBRC will order a partial business suspension for three months and impose a cap on the growth of its asset with a tenor longer than 90 days

» For those banks already showing such a deviation prior to the announcement, CBRC and PBOC will require their senior management to submit and execute an improvement plan

» Depending on CBRC’s related disciplinary actions, the MoF could also lower its performance score on the banks breaching the proscribed limits

A ban on practices aiming to inflate deposit balance

» Banned practices include offering deposit rates higher than the allowed rates by paying depositors through other accounts or means, attracting deposits via third parties, delaying payments, requiring borrowers to keep part of the finance obtained as customer deposits or margin deposits, making a bulk of wealth- management products mature near period ends and converting them to deposits and booking interbank bank deposits as customer deposits

» The CBRC also requires banks to rid their performance evaluation system of benchmarks linked to employees’ ability to attract large deposits prior to period-ends

Source: China Banking Regulatory Commission

As seen in Exhibit 2, China’s deposit flows have shown increased volatility since 2011 as deposits have had to compete with other higher-yielding investment products. Fluctuations are more significant near quarter end (as shown by the red bars in the exhibit), when some banks, notably large banks and most joint-stock banks, disclose their financial metrics. Banks must comply with a 75% regulatory cap on loan-to-deposit ratios and are incentivized to manage their deposits prior to month end to meet monitoring requirements. The significant volatility in deposit flows has also in a few instances, such as the money crunch in late June 2013, spilled over to the interbank market.

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

NEWS & ANALYSIS Credit implications of current events

21 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

EXHIBIT 2

China Monthly New Deposits China’s deposit flows show increased volatility since 2011

Note: Since 2011, deposit inflows generally exhibit a sharp increase in the third month (in pink color) of each quarter, followed by a reversal in the

subsequent month (in red color). Source: People's Bank of China

The new rules will pose adjustment challenges to those banks that are currently reliant on window dressing to manage their liquidity, which we believe to be those with high loan-to-deposit ratios. Among the banks with public disclosure, we think Bank of Communications Co., Ltd. (A2 stable, D+/baa3 stable6) and China Merchants Bank (Baa1 stable, D+/baa3 stable) are two examples because of their higher average loan-to-deposit ratios at over 80% as of the end of June 2014 (see Exhibit 3).

EXHIBIT 3

Chinese Bank Average Loan-to-Deposit Ratios at the First Half of 2014

Source: Bank financial statements

6 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.

(2)

(1)

0

1

2

3

4

5

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08

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08

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8

Oct

-08

Jan-

09

Apr-

09

Jul-0

9

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NEWS & ANALYSIS Credit implications of current events

22 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Insurers

Mexican Insurers Face Substantial Claim Losses from Hurricane Odile, a Credit Negative On 14-15 September, Hurricane Odile hit the Mexican west and northwest coastlines, with the storm and its ensuing flooding inflicting significant damage across several states and affecting more than 300,000 residents, most of whom live in the state of Baja California Sur. Among the most affected was the tourist resort of Los Cabos, where strong winds damaged hotels, public buildings, roads and private homes. The damage caused by this Category 3 hurricane is credit negative for Mexican insurers because it exposes them to potentially substantial claim losses related to property damage, business interruption, hotel and entertainment operations, and travel interruption and cancellation.

We expect that the top 10 Mexican general insurers with exposure to earthquakes and other catastrophic risk will be most affected, even though claim losses are likely to emerge in other lines of business and at international reinsurers. As of December 2013, as the exhibit below illustrates, these include AXA Seguros (unrated), Aseguradora Interacciones (unrated), Seguros Inbursa (unrated) and Seguros Banorte Generali (unrated).

Mexico’s Top 10 Property and Casualty Insurers by Earthquake and Other Catastrophic Gross Premiums Written in 2013 (MXN Millions)

Company

Earthquake and Other

Catastrophic Gross Written

Premiums (GPW)

Market Share (Cat-Exposed

GPW) Catastrophe

Reserves Shareholders'

Equity

Cat-Exposed GPW as % of Cat-

Reserves + Shareholders'

Equity

AXA Seguros 1,766 12% 2,806 8,557 16%

Aseguradora Interacciones 1,620 11% 243 460 230%

Seguros Inbursa 1,386 10% 8,202 9,424 8%

Seguros Banorte Generali 1,323 9% 616 3,828 30%

Agroasemex 1,193 8% 877 1,550 49%

Mapfre Tepeyac 1,102 8% 2,134 2,164 26%

Grupo Mexicano de Seguros 859 6% 264 611 98%

Grupo Nacional Provincial 594 4% 403 6,210 9%

Zurich, Cia de Seguros 558 4% 27 1,025 53%

Seguros Atlas 474 3% 1,505 3,209 10%

Source: Mexico’s Comisión Nacional de Seguros y Fianzas

Southern Baja California Sur is one of Mexico’s most developed tourist areas, and Los Cabos, in particular, has a significant concentration of hotels and tourism-related developments with marine, golf courses and retirement communities. According to the Comisión Nacional de Seguros y Fianzas, Mexico’s insurance regulator, 1.8% of the industry’s total gross catastrophe-based premiums included in “earthquake and other catastrophic lines” premiums relate to risks located in Baja California Sur.

A preliminary assessment by Asociacion Mexicana de Instituciones de Seguros (AMIS), the Mexican insurance trade group, puts the damage associated with the hurricane at more than MXN12 billion ($950 million). However, the final Odile-related costs will take months to tally, particularly given the latency of

José Montaño Vice President - Senior Analyst +52.55.1253.5722 joseangel.montano@moodys.com

NEWS & ANALYSIS Credit implications of current events

23 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

estimating and reporting contingent business interruption claims. Odile stranded more than 30,000 tourists and damaged more than 8,000 houses.

As required by local regulation, Mexican insurers carry pre-funded catastrophe reserves and insurers further limit their catastrophic losses through international reinsurance protection. However, insurers are likely to cover a significant part of the damage from the storm.

In Mexico, as in most parts of Latin America, the most severe consequences of natural disasters frequently fall on low-income populations that usually do not have any kind of insurance protection. Based on statistics published by AMIS, less than 5% of homes in Mexico are insured. Historically, low insurance penetration in the country and relatively prudent risk management by insurer have helped to mitigate insured losses.

NEWS & ANALYSIS Credit implications of current events

24 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

IMPSA’s Default Highlights Credit Negative Implications of Argentine Insurer Mandate Last Thursday, Argentine industrial conglomerate Industrias Metalúrgicas Pescarmona S.A. (IMPSA, unrated) failed to pay interest due on the company’s debt. This is a credit-negative development for Argentine insurers, both because of their direct investments in IMPSA and because it calls into question the credit quality and liquidity of other infrastructure and small and midsize enterprises (SMEs) into which, by regulation, insurers must invest a portion of their capital.

Since October 2012, Argentine insurers have been required to invest a minimum of 5%-12% of their invested assets in infrastructure projects and SMEs. IMPSA’s 18 September default puts a spotlight on the credit quality and liquidity of these investments because such events erode insurers’ asset quality and capital adequacy. The threat has grown since February 2014, when Argentina’s insurance regulator raised the minimum investment allocation to 7%-14%, effective June 2014, and raised the minimum again, to 8%-18%, effective September 2014.

We expect insurers’ investments in infrastructure projects and SMEs this year to move toward the levels shown in the third row of Exhibit 1, based on specific percentages stipulated for each sector, and to reach the required allocation by 30 September.

EXHIBIT 1

Comparison of Argentine Insurers’ Current and Future Exposure to Infrastructure Projects and SMEs

Workers’

Compensation Property and

Casualty Life Annuities Total

Total Investments as of June 2014 ARS29 billion ARS49 billion ARS11 billion ARS33 billion ARS122 billion

Required Investment in Infrastructure and SME Projects, New (Current)

8% (7%) 18% (14%) 18% (14%) 14% (13%) 15% (12%)

Our Estimate of Investments in Infrastructure and SME Projects as a Percent of Capital, Pro forma June 2014 (Actual June 2014)

44% (38%) 40% (31%) 76% (59%) 121% (112%) 53% (44%)

Source: Moody’s Investors Service, based on information published by Superintendencia de Seguros de la Nación

Insurer funds invested in these mandated categories are capped at 20% of total invested assets for workers’ compensation insurers, and at 30% for property and casualty, life and annuity insurers. Nonetheless, we expect infrastructure and SME investments as a percentage of industry-wide capital to increase to a significant 53% of capital on a pro forma basis as of the fiscal year ended 30 June 2014, from 44%, adding strain to insurers’ overall liquidity and risk-adjusted capitalization.

As the bottom row of Exhibit 1 shows, we project on a pro forma basis as of June 2014 that the annuity sector will have the most exposure at 121% of capital, followed by the life sector at 76%, which reflects these sectors’ asset-intensive businesses and higher investment leverage. The property and casualty sector’s exposure at 40% of capital and the workers’ compensation sector’s exposure at 44%, although lower than the annuity and life sectors, are also significant concentrations.

Exhibit 2 lists the top 20 Argentine insurers exposed to infrastructure and SME projects (all are unrated), based on each insurer’s level of investment leverage (invested assets relative to capital).

Diego Nemirovsky Vice President - Senior Credit Officer +54.11.5129.2627 diego.nemirovsky@moodys.com

NEWS & ANALYSIS Credit implications of current events

25 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

EXHIBIT 2

The 20 Most Exposed Argentine Insurers to Infrastructure and SMEs Projects

Company Sector

Total Investments as

of June 2014 ARS Million

Minimum Required

Investment

Estimated Required

Investment as Percent of

Capital at 30 June 2014

Zurich International Life Limited Sucursal Argentina Life 5,417 18% 302%

La Segunda Seguros de Retiro Annuity 408 14% 283%

Orígenes Seguros de Retiro Annuity 9,332 14% 257%

Nación Seguros de Retiro Annuity 3,075 14% 212%

La Estrella Compañía de Seguros de Retiro Annuity 5,816 14% 188%

Instituto Autarquico Provincial del Seguro de Entre Rios Seguro de Retiro

Annuity 96 14% 134%

Prudential Seguros Life 1,490 18% 128%

Instituto Autarquico Provincial del Seguro de Entre Rios Diversified 746 18% 110%

Federacion Patronal Seguros P&C 8,314 18% 107%

Binaria Seguros de Retiro Annuity 946 14% 101%

San Cristóbal Seguro de Retiro Annuity 1,482 14% 99%

Proyeccion Seguros de Retiro Annuity 168 14% 89%

Galicia Retiro Compañia de Seguros Annuity 102 14% 88%

Nivel Seguros P&C 49 18% 86%

SMG Life Compañia de Seguros de Retiro Annuity 1,428 14% 86%

Argos Compañía Argentina de Seguros Generales P&C 171 18% 83%

Aseguradora Total Motovehicular P&C 144 18% 82%

Compañia de Seguros La Mercantil Andina P&C 883 18% 82%

La Holando Sudamericana Compañia de Seguros P&C 330 18% 80%

Noble Aseguradora de Responsabilidad Profesional P&C 73 18% 76%

Source: Moody’s Investors Service, based on information published by Superintendencia de Seguros de la Nación

NEWS & ANALYSIS Credit implications of current events

26 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Asset Managers

US Federal Reserve's Modifications to Repo Program Are Credit Positive for Money Market Funds Last Wednesday, the Federal Reserve Bank of New York announced changes in its overnight reverse repurchase agreement program (RRP), supporting both market liquidity and counterparty diversity. Effective 22 September, each counterparty will be permitted to submit one bid of up to $30 billion in each operation, a significant increase from the prior $10 billion limit. The Fed will also impose a limit to the total amount awarded in any operation of $300 billion.

For US domestic money market funds (MMFs) and their sponsors, the increased bid limit to $30 billion is a credit positive development that alleviates a shortage in the supply of very short-term securities that MMFs need to meet regulatory liquidity requirements. The market has faced a shortage of repo supply because large banks are lately using the repo market less to fund their balance sheets. Tight supplies have in turn caused repo yields to decline, which has weighed against the returns earned in MMFs, causing fund sponsors to waive fees. The Fed’s RRP has become an important alternative supply. Ninety-four of the largest 2a-7 money market funds are eligible to use the Federal Reserve’s RRP.

The RRP’s popularity has grown rapidly because the Fed, a highly desirable counterparty, will pay lenders up to five basis points on these loans, a competitive rate in the overnight money markets. As shown in Exhibit 1, in 2014 daily RRP balances have steadily climbed to $150 billion from approximately $85 billion at the beginning of the year. Overnight reverse repo agreements are lending arrangements in which liquid investors, such as money market funds, purchase assets from a borrower with an agreement to sell them back the next day. The Fed’s RRP uses treasury securities held in the Fed’s System Open Market Account as collateral.

EXHIBIT 1

US Fed’s Daily Overnight Repo Balances through 18 September 2014

Source: New York Federal Reserve Bank

Since the end of 2013, the share of money market fund repo investments has risen fairly dramatically and now exceeds 20% in a typical month. Money market funds’ increasing use of RRP is illustrated in Exhibit 2, which shows the rising share arranged with the NY Fed as counterparty.

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Neal M. Epstein, CFA Vice President - Senior Credit Officer +1.212.553.3799 neal.epstein@moodys.com

NEWS & ANALYSIS Credit implications of current events

27 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

EXHIBIT 2

US Fed Share of Moody’s-Rated Money Market Fund Repo Positions

Source: Moody’s Investors Service

This new $300 billion program limit is indirectly positive for MMFs and their sponsors because it supports market liquidity and counterparty diversity. The Fed seeks to prevent excessive use of the program, which could have adverse supply and demand phenomena. Quite apparent in Exhibits 1 and 2 are spikes in RRP usage occurring at the end of each calendar quarter. MMFs (and other users) appear motivated to increase their exposure to the RRP at quarter end, to reduce the appearance of balance sheet risk on quarter-end reporting dates. Beginning 22 September, RRP bids must include an interest rate that will be used to calculate a “stop out” rate. In the event that total bids exceed the program limit, this rate would be offered, reducing demand for RRP repo. In addition, the Fed seeks to avoid “crowding” out other suppliers of repos, who would have been forced to compete against the Fed to attract funds and who may need liquidity at quarter end.

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NEWS & ANALYSIS Credit implications of current events

28 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

CalPERS Exit from Hedge Funds Is Credit Positive for It, Credit Negative for Hedge Funds Last Tuesday, California Public Employees Retirement System (CalPERS, Aa2 stable), the largest US public pension fund, announced its decision to completely eliminate its hedge fund investments. The exit will include redeeming from 24 large hedge funds and six funds of hedge funds investments totaling $4 billion out of a total portfolio of roughly $300 billion.

This move is credit positive for CalPERS because it will reduce portfolio complexity and risk, investment management costs, and depending on how proceeds are reinvested, may also improve portfolio liquidity. These benefits together with recent increases in member agent contribution rates will improve the pension fund’s financial health.

Conversely, CalPERS’ action is credit negative for alternative asset managers because its prominent position in the market may cause other institutional investors to re-examine their participation in alternatives. Following CalPERS’ announcement, Texas Teachers Retirement Fund, the sixth-largest US public plan, announced an 11% reduction in the portion of its portfolio allocated to hedge funds.

» Large institutional investors have been the primary drivers of flows into alternatives such as hedge funds and CalPERS was at the forefront of this movement. CalPERS’ action is significant for the industry’s growth outlook given the fact that the flow of funds into alternatives has been dominated by large institutional investors. This is in contrast to the early days of the alternatives industry when high-net-worth individuals accounted for the majority of investments. CalPERS started its hedge fund investment program in April 2002. Since 2008, the primary source of funds going into alternatives has been from institutional investors, namely public and private pension plans, endowments and foundations, and sovereign wealth funds (i.e., large, institutional fiduciaries).

» Re-examination of the role of alternatives in institutional investors’ portfolios. It is likely that more alternatives programs will come under scrutiny since hedge funds as a group have underperformed traditional benchmarks. Alternatives have the highest fees and greatest liquidity costs – attributes that are at odds with secular trends toward transparency, liquidity and lower-cost investing. Furthermore, the signaling effect of CalPERS’ decision to exit completely is entirely different from one of reducing hedge fund exposure. The question of whether to scale-up or completely exit a hedge fund program is likely to face other plans with similar exposures as CalPERS.

» Repudiation of pension fund consultant assumptions. The high fees of alternatives, poor relative returns and lack of ability to scale and generate “alpha” on a large pool of assets are widely mentioned as reasons for reducing alternatives exposure. However, CalPERS’ decision may also be due to a realization of the lack of portfolio benefits by investing in large hedge funds, which were expected to provide a source of high, uncorrelated returns. CalPERS’ assessment of the reward it received from hedge fund investments did not compensate for the cost, complexity and additional risk that they took on by investing in hedge funds. CalPERS’ decision to abandon this “asset class” is a repudiation of the statistical projections of pension fund consultants as to the risk, return and correlation properties of alternatives. These projections have helped to justify a significant exposure to alternatives within pension portfolios as a magic bullet solution to their underfunding problems.

Stephen Tu Vice President - Senior Analyst +1.212.553.4935 stephen.tu@moodys.com

NEWS & ANALYSIS Credit implications of current events

29 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Sovereigns

Ireland’s Growth Accelerates in the Second Quarter, a Credit Positive Last Thursday, Ireland’s (Baa1 stable) Central Statistical Office published its initial estimate of second-quarter national accounts, which showed that the economy grew 7.7% from the same period a year ago, roughly double the 3.8% registered in the first quarter. Merchandise export growth contributed four percentage points of the second quarter rise, signaling the end of negative effects in exports from the expiry of key pharmaceutical patents in 2012 and 2013. In addition to a better-than-expected fiscal outcome and lower financing costs, faster growth will improve the Irish general government’s debt/GDP ratio, which peaked at 123.3% at the end of last year, a credit positive.

Ireland has some of the weakest government debt metrics among rated sovereigns. During the global financial crisis, the government injected €64 billion into the banking system and the International Monetary Fund, European Union and European Central Bank (the Troika) conducted a large bail-out program, which ended in December last year. The banking system is likely to need very little if any new financial support from the government after the results of the European Asset Quality Review are revealed at the end of October 2014.

Ireland has regained access to the international capital markets and is paying the lowest interest rates in its history. Moreover, the better-than-expected pace of debt consolidation this year is now likely to reduce the deficit to below 4% of GDP versus the 5% of GDP in the April 2014 Stability Program and the 4.8% of GDP deficit forecast in the 2014 budget. In addition, the government’s past support to the banks, including the National Asset Management Agency (NAMA), is now starting to return revenue to the government, reducing the government’s formerly large contingent financial liabilities.

Ireland’s European partners last week unanimously agreed (pending national parliamentary approvals) that Ireland can repay the IMF bail-out funds ahead of EU institutions. Repaying the IMF will further reduce Ireland’s financing costs, given the difference between the 5% average interest rate on IMF funds and the less than 2% coupon Ireland pays on its new Eurobonds, exerting additional positive effects on its debt dynamics.

The reemergence of Ireland’s intrinsically strong growth potential is a key factor behind its stronger creditworthiness in the past year and our cumulative three-notch rating upgrade in January and May. Indeed, Ireland’s growth rates contrast with overall European growth, which flatlined in the second quarter, and with the growth of core European countries, some of which contracted modestly. Ireland’s growth benefits from large inflows of foreign direct investment and vibrant exports from both its ‘modern’ (high tech and pharmaceuticals) and its traditional sectors (agricultural products and machinery), which is extremely important for the small, very open economy, in which exports of goods and services is equivalent to just over 100% of GDP.

Kristin Lindow Senior Vice President +1.212.553.3896 kristin.lindow@moodys.com

NEWS & ANALYSIS Credit implications of current events

30 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

With growth accelerating, Ireland will meaningfully improve its debt dynamics. The government’s primary budget will move into a surplus this year that will expand further next year as the general government deficit narrows to under 3% of GDP. We expect Ireland’s general government debt-to-GDP ratio to decline about 13-percentage points to 110% of GDP this year, slightly more than half of which is explained by reduced liabilities related to the Irish Bank Resolution Corporation (IBRC7), and another 5 percentage points in 2015.

7 Ireland’s national accounts were revised earlier this year on the basis of the updated ESA-2010 statistical standards. As part of this

revision, IBRC was reclassified into the general government accounts and its liabilities added to general government debt, increasing general government debt by 7.2% of GDP in 2013. Because IBRC’s loan book is currently in liquidation, we expect this increase to be reversed by the end of the year.

NEWS & ANALYSIS Credit implications of current events

31 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Namibia and Botswana See Credit-Positive Progress on Walvis Bay Port Expansion Last Wednesday, the Namibian Port Authority announced that the first phase of construction on a new port north of Walvis Bay would start in 2015, one year earlier than originally planned. The project’s earlier start is credit positive for the Government of Namibia (Baa3 stable) because it supports trade and regional integration, creating jobs and generating additional fiscal revenue for the government. It will also support the Government of Botswana’s (A2 stable) creditworthiness by providing new outlets for its coal production and diversifying the country’s exports.

The Walvis Bay Port expansion project is one of the key infrastructure objectives in Namibia’s Fourth National Development Plan. The existing port is one of the largest on the Southern African Development Community’s (SADC) west coast. Port traffic has increased owing to the rapid growth in neighboring countries, resulting in higher mineral exports and rising demand for imported intermediary and consumer goods. The construction of a new port facility north of Walvis Bay Port – dubbed the SADC Gateway – will be able to take advantage of the increasing congestion in South Africa’s ports, which are now the major gateway for the SADC region. The SADC Gateway development includes the construction of a tanker jetty north from the existing port in phase 1 (originally scheduled in 2016), new petroleum pipelines and an oil storage facility. A dry bulk terminal is planned in phase 2 (after 2020) as well as a ship-repair facility and a coal terminal linked to Botswana by the Trans-Kalahari railway line in phase 3 (also after 2020).

The Walvis Bay Port expansion project aims to make Namibia a hub for trans-shipments in landlocked neighboring countries and a gateway between the Southern African region and international markets. Plans also call for expansions of rail and road connections to the port throughout the projects.

It will also create thousands of temporary jobs and hundreds of permanent jobs during the construction and operation phases and encourage the emergence of small and medium enterprises in the region, especially in the trade and logistics industries. Increasing the country’s port capacity, developing a ground transport network and completing a port terminal to handle Namibia’s offshore gas reserves will reduce Namibia’s and Botswana’s dependence on South Africa’s already-strained electricity supply.

Furthermore, Botswana just opened a new dry dock at Walvis Bay and plans to build another there andplus a five5-berth coal terminal at the SADC Gateway Port. These will cater to the development of the Mmamabula coalfields, promoting credit-positive diversification of the country’s exports. Two weeks ago, the governments of Namibia and Botswana launched a tender for the construction of the Trans-Kalahari railway corridor, with the target date for a feasibility study to be concluded by the end of the year. The coal deposits in Mmamabula are estimated by the Ministry of Minerals, Energy and Water Resources estimates coal deposits in Mmamabula at 200 billion metric tons, with target markets in India and China. Currently, diamond sales comprise more than three fourths of Botswana’s total exports, subjecting leaving the current account subject to the volatility of diamond prices. While the balance of payments is sufficiently bolstered by current transfers and foreign direct investment, a diversification of export contents, distribution channels and destination markets would further strengthen Botswana’s external position.

The Namibian government will finance the first phase of the expansion, while seeking private financing for the following phases of development. The African Development Bank and the World Bank (both Aaa stable) areis also financing part of the project. If the government takes on additional debt to finance this and other ambitious infrastructure projects, its debt metrics will deteriorate despite faster economic growth. Nevertheless, the government’s debt burden is relatively low, at 27% of GDP, well below the median of Namibia’s Baa peers.

Kristin Lindow Senior Vice President +1.212.553.3896 kristin.lindow@moodys.com

Marine Bourdery Associate Analyst +44.20.7772.1086 marine.bourdery@moodys.com

Cynthia Mar Associate Analyst +44.20.7772.1666 cynthia.mar@moodys.com

NEWS & ANALYSIS Credit implications of current events

32 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Sri Lanka’s Swap Line with China Will Bolster Its External Liquidity and Trade, Credit Positives On Tuesday, the Government of Sri Lanka (B1 stable) and Government of China (Aa3 stable) announced they had inked a CNY10 billion ($1.6 billion) swap-line agreement. The agreement is credit positive for Sri Lanka because it will bolster its external liquidity position and enhance trade flows between the two countries. We also expect the broader package of trade and investment initiatives Chinese President Xi Jinping launched during his Tuesday-Wednesday visit to the island nation to support Sri Lanka’s growth prospects.

The swap line will provide a helpful liquidity backstop for Sri Lanka, whose foreign reserves climbed to $8.1 billion as of June from $6.5 billion at the end of last year, aided by a contraction in imports owing to weak domestic demand. Nonetheless, official foreign-exchange reserves are just about sufficient to cover debt maturing over the coming year in the event of a sudden halt in external funding. Our External Vulnerability Indicator8 for Sri Lanka in 2015 is 97.2% – just below the 100% prudency threshold – illustrating the borderline nature of reserve adequacy. The swap line will also support Sri Lanka’s external liquidity position by facilitating trade with China and ensuring the continuity of foreign inflows. Bilateral trade has trebled over the past five years, reaching $3.1 billion in 2013.

President Xi’s announcement of financing support for large infrastructure projects, such as a $1.5 billion port city complex in the capital of Colombo, and the recent completion of a coal-fired power plant also highlight the potential for stronger ties with China to bolster Sri Lanka’s economic potential. Last year, China accounted for about a quarter of Sri Lanka’s total foreign direct investment (FDI), making it the largest overseas investor in the country. China has also provided development loans for several key infrastructure projects, particularly in ports, roads, telecommunications and tourism.

The start of negotiations between China and Sri Lanka on a Free Trade Agreement and Sri Lanka’s commitment to join the Maritime Silk Road, which will link China with Africa and the Middle East via South Asia, are likely to support further trade and investment inflows. Overall FDI into Sri Lanka has risen 55% this year versus last year to $850 million during the first half of 2014, following a 19.7% increase during the same period of 2013.

This pickup in FDI momentum underscores Sri Lanka’s diminishing reliance on debt to finance its current-account deficit, a feature that has weighed on the sovereign credit profile. It will also mitigate any further ratcheting up in external debt, which at 59% of GDP is the highest in Asia Pacific after Mongolia (B2 negative) and Papua New Guinea (B1 stable), and above the 43.2% average for B-rated peers.

8 (Short-Term External Debt + Currently Maturing Long-Term External Debt)/Official Foreign Exchange Reserves.

Anushka Shah Analyst +65.6398.3710 anushka.shah@moodys.com

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

NEWS & ANALYSIS Credit implications of current events

33 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Fiji Elections Will Normalize Diplomatic Relations, a Credit Positive Last Wednesday, the Government of Fiji (B1 stable) held parliamentary elections for the first time since the military coup in 2006. The return to electoral democracy is credit positive for Fiji because it will help normalize diplomatic relations, facilitating access to concessional funding and potentially strengthening trade ties.

The restoration of a democratic system in the South Pacific island state should allow for easier access to both bilateral and multilateral funding. As of 2013, only 15.8% of Fiji’s government debt was concessional, putting it well below its rated peers in the region. By contrast, Papua New Guinea (B1 stable) sourced 22.8% of its debt from concessional sources, Bangladesh (Ba3 stable) 42.5%, Vietnam (B1 stable) 47.3%, and Cambodia (B2 stable) 98.5%. These countries have correspondingly lower debt servicing burdens, as measured by interest payments as a share of GDP.

In the lead up to the elections, both Australia and New Zealand progressively increased development assistance – a turnaround from the sanctions they imposed on Fiji’s military government after the 2006 coup. Fiji is currently reliant on more expensive domestic market funding, resulting in a relatively high debt servicing requirement. In 2013, the government’s interest payments amounted to 3.5% of GDP, compared to less than 2.0% for each of the regional peers mentioned above.

Fiji has no funding from the World Bank, and the only new loan from the Asian Development Bank over the past eight years was for emergency humanitarian assistance. Fiji’s suspension in 2008 from the Pacific Islands Forum (PIF), the body that promotes regional economic and political cooperation, also precluded its participation in the Trade in Services negotiations as part of the region’s free trade agreement. Pending successful elections, the PIF Ministerial Contact Group recommended that Fiji be invited to participate in the PIF free trade negotiations with Australia and New Zealand for closer economic relations.

Provisional election results Thursday indicated that military strongman and incumbent Prime Minister Frank Bainimarama’s Fiji First party had won over 60% of the vote. Opposition parties alleged fraud. But the Multinational Observer Group that monitored the election released an initial statement saying it was “conducted in an atmosphere of calm with an absence of electoral misconduct or evident intimidation.”

The normalization of Fiji’s diplomatic relations could also enhance trade and regional economic integration. A more representative government is likely to address workers’ rights, thus improving Fiji’s prospects for retaining its preferential access to the US. This was jeopardized in 2012 by the military government’s deteriorating relations with trade unions. Fiji’s suspension from the PIF may be lifted and the country could enhance its role as a regional hub by acceding to the Trade in Services protocol under the region’s FTA.

Additionally, multilateral funding is usually accompanied by technical assistance, which would help improve the effectiveness of governance in the country, a rating constraint. The World Bank’s evaluation of the quality of governance declined precipitously after the latest coup: Fiji’s ranking for “government effectiveness” fell to the lowest 6% of countries that we rated in 2012, from the bottom 40% in 2006.

Christian de Guzman Vice President - Senior Analyst +65.6398.8327 christian.deguzman@moodys.com

NEWS & ANALYSIS Credit implications of current events

34 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

US Public Finance

Chester County, Pennsylvania’s Surging Wage Growth Will Boost Local Government Income Tax Collections Last Thursday, the US Bureau of Labor Statistics reported that Chester County, Pennsylvania (Aaa stable) had the strongest first-quarter wage growth among the 339 largest counties in the US, with average weekly wages up 13.9% from the first quarter of 2013. The income gains are credit positive for the suburban Philadelphia county and its 72 municipalities and 12 school districts, which are already recording growing income tax receipts.

Localities in Chester County rely on income taxes more heavily than most US local governments. According to the Pennsylvania Department of Community & Economic Development, income taxes comprise approximately 14% of municipal9 revenue in Pennsylvania; for Chester County municipalities, that figure is 21%.

The acceleration in wage growth in Chester County will continue to push income tax receipts for municipalities and school districts higher, mitigating potential underperformance of other revenue sources and likely strengthening financial reserves.

Pennsylvania authorizes municipalities to levy an earned income tax of up to 1%, which is often split equally with a municipality’s corresponding school district. Municipalities in Chester County, the wealthiest county in Pennsylvania and the 24th-wealthiest in the nation, according to the American Community Survey, generate a relatively larger percentage of their revenues from income tax because of higher wages (see exhibit). Chester County’s per capita income of $42,020 is equal to almost 150% of state and national per capita income.

Ten Wealthiest Pennsylvania Counties by Per Capita Income Chester County is wealthier and more income tax-driven than its peers

Note: Exhibit shows aggregate income tax receipts for municipalities in each county, not county revenues. Municipalities in Delaware County (Aa1)

generally collect less income tax revenue than others owing to the large proportion of commuters who work in Philadelphia, a city whose wage tax supersedes local earned income taxes.

Source: American Community Survey and the Pennsylvania Department of Community & Economic Development

9 We use “municipal” to mean cities, townships and boroughs. This figure does not include school districts or the county itself.

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Dan Seymour, CFA Analyst +1.212.553.4871 dan.seymour@moodys.com

NEWS & ANALYSIS Credit implications of current events

35 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

A half dozen municipalities in the county, including the Township of West Bradford (Aa2), do not levy a property tax (although they have the authorization to do so) because the income tax generates sufficient revenue to cover operating expenses. School districts are relatively less reliant on income taxes. For instance, the West Chester Area School District (Aaa stable), Downingtown Area School District (Aaa stable) and Phoenixville Area School District (Aa2) each generate 7%-9% of their total revenues from income taxes. Chester County does not levy an income tax, although the strengthening of its socioeconomic profile remains a key positive.

We think the wage growth is likely broad-based, because the county’s employment base spans numerous industries including technology, finance and pharmaceuticals, with employers including Vanguard Group (unrated), QVC Inc. (Ba2 stable) and Siemens Medical Solutions (unrated). Chester County’s June 2014 unemployment rate of 4.5% was the lowest in the Philadelphia metropolitan area, which spans four states, and county unemployment has been significantly below the state and national unemployment rates for years. The county’s poverty rate is just 6.5%, versus a national rate of 14.9%.

The county’s robust economy and strong employment base, and the direct effect both factors have on income tax revenues, are key factors behind the county’s very high ratings. The county itself is one of only two Aaa-rated Pennsylvania counties, along with nearby Bucks County (Aaa negative). The median rating for Chester County cities is Aa2, higher than the sector median of Aa3. We rate five school districts in Pennsylvania Aaa and four of them are in Chester County.

RATING CHANGES Significant rating actions taken the week ending 19 September 2014

36 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Corporates

Air Canada Upgrade 7 Apr ‘14 17 Sep ‘14

Corporate Family Rating B3 B2

Outlook Positive Stable

The upgrade reflects our increased confidence in Air Canada’s ability to execute its significant expansion plans and cost reduction initiatives in a manner that enables its adjusted EBITDA to expand modestly and allows its adjusted financial leverage to remain under 5.5x.

Deutsche Post AG Upgrade 25 Sep ‘12 15 Sep ‘14

Long-Term Issuer Rating Baa1 A3

Short-Term Issuer Rating P-2 P-2

Outlook Positive Stable

The upgrade reflects Deutsche Post's improvement in profitability, decreased leverage and increased interest coverage during the last several years as a result of the company's improved focus on execution and cost containment.

Endo Luxembourg Finance I Company S.à.r.l. Review for Downgrade 24 Jun ‘14 17 Sep ‘14

Corporate Family Rating Ba3 Ba3

Outlook Negative Review for Downgrade

The review for downgrade follows the announcement that Endo has offered to buy Auxilium Pharmaceuticals, Inc. for approximately $2.2 billion in cash and stock. It also reflects our concerns that Endo's financial leverage will increase with limited near-term EBITDA benefit, given pressures facing Auxilium's business profile, notwithstanding recent cost-cutting initiatives. The review will focus on the strategic benefits of the merger offset by higher financial leverage. The review will also consider Endo's rapid acquisition strategy, the impact of declining Lidoderm sales, and the ongoing cash outflows associated with mesh litigation.

RATING CHANGES Significant rating actions taken the week ending 19 September 2014

37 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

TDC A/S Downgrade 20 Jan ‘11 16 Sep ‘14

Long-Term Issuer Rating Baa2 Baa3

Outlook Stable Stable

The downgrade reflects (1) TDC's announcement that it will acquire GET AS for an amount equivalent to €1.67 billion; (2) our expectation that financial metrics will deteriorate with the acquisition, with leverage measured by the ratio of adjusted gross debt to EBITDA increasing to around 3x in 2015; and (3) increasing pressure on the company's domestic operations as a result of intensifying competition in the Danish mobile market.

TRW Automotive Inc. Review for Downgrade 18 Nov ‘13 15 Sep ‘14

Corporate Family Rating Ba1 Ba1

Outlook Positive Review for Downgrade

The review for downgrade follows the announcement that TRW Automotive Holdings Corp. (the parent company of TRW Auomative Inc.) has entered into a definitive agreement with ZF Friedrichshafen AG under which ZF will acquire all outstanding shares of TRW Auomative Inc. The transaction will be financed through a combination of ZF cash on hand, as well as committed debt financing, and TRW will be operated as a separate business division within ZF. We estimate that the potential amount of acquisition-related debt would pressure the current ratings if supported by TRW's operations on a standalone basis.

Range Resources Corporation Outlook Change

29 Aug ‘13 19 Sep ‘14

Corporate Family Rating Ba1 Ba1

Outlook Stable Positive

The positive outlook reflects Range's improving leverage position and growing commitment to an investment-grade rating. The company's scale and operating efficiency support a higher rating, but its operating concentration in the Marcellus region creates a high degree of exposure to the successful build-out of midstream infrastructure by third parties.

RATING CHANGES Significant rating actions taken the week ending 19 September 2014

38 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Infrastructure

Dayton Power & Light Company Review for Downgrade 9 Sep ‘13 15 Sep ‘14

Senior Secured Long-Term Debt Rating Baa1 Baa1

Outlook Stable Review for Downgrade

The review for downgrade reflects the possibility that the Public Utility Commission of Ohio could authorize the generation asset separation plan as requested by Dayton Power & Light Company. This plan includes transferring the generation assets no later than 1 January 2017 to an affiliate, which would lead to a significant decrease in the amount of collateral that currently supports the utility's outstanding secured debt.

Integrys Energy Group, Inc. Upgrade 23 Jun ‘14 18 Sep ‘14

Senior Unsecured Rating Baa1 A3

Outlook Positive Stable

The upgrade reflects our expectation that the upcoming sale of Integrys’s retail energy services business will markedly improve the company's business risk profile and result in more reliable and stable operating cash flows.

ITC Great Plains

Upgrade 5 May ‘14 18 Sep ‘14

Senior Unsecured Rating Baa1 A3

Outlook Positive Stable

The upgrade reflects the fact that the Kansas V-Plan project is largely completed and our expectation that it will be in operation by year-end, which will eliminate any lingering construction-execution risk. We expect (1) a continued supportive Federal Energy Regulatory Commission regulatory framework, (2) decreased construction risk, and (3) a material improvement in ITC Great Plains’ financial profile upon completion of the Kansas V-Plan.

RATING CHANGES Significant rating actions taken the week ending 19 September 2014

39 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Niagara Mohawk Power Corporation

Upgrade 14 Nov ‘07 18 Sep ‘14

Senior Unsecured Rating Senior Unsecured Rating Senior Unsecured Rating

Outlook Outlook Outlook

The upgrade reflects additional information regarding the regulatory ring-fencing provisions that the company is subject to. In particular, we note that the limitation on dividend payments if leverage (as measured by debt to capitalization) exceeds 55% provides a material credit benefit. The upgrade also reflects our more favorable view of the credit supportiveness of the US regulatory environment.

Instituto Costarricense de Electricidad (ICE) Downgrade 24 Sep ‘13 17 Sep ‘14

Senior Unsecured Rating Baa3 Ba1

Outlook Negative Stable

Given that the Costa Rican government fully owns ICE, the rating action follows the downgrade of the Government of Costa Rica’s bond rating to Ba1 from Baa3 on 16 September 2014.

Reventazon Finance Trust

Downgrade 28 Jan ‘11 17 Sep ‘14

Senior Secured Rating Baa3 Ba1

Outlook Negative Stable

The downgrade follows the downgrade of Instituto Costarricense de Electricidad’s (ICE) rating as the project is very highly dependent on ICE's financial performance given the obligations that ICE has assumed under the contractual arrangements as the sponsor, EPC contractor, lessee and operator.

RATING CHANGES Significant rating actions taken the week ending 19 September 2014

40 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Financial Institutions

Costa Rican Banks Downgraded 16 Sep ‘14

The downgrades follows our downgrade of the Costa Rican government’s bond rating to Ba1 from Baa3. Given the banks' close financial and business dependence on the government, including holding large amounts of government securities, and the government’s guarantee on their obligations, the banks’ baseline credit assessments align substantially with the government's risk, which limits both their standalone and supported ratings.

Highmark Inc. Outlook Change 2 May ‘13 18 Sep ‘14

Long Term Rating Baa2 Baa2

Outlook Negative Stable

The outlook change follows the Pennsylvania Insurance Department's announcement of Highmark's final transition plan in connection with the termination of its contract with University of Pittsburgh Medical Center. The change to a stable outlook reflects the continued provider access provided under the terms of the transition plan, an improvement in the financial condition of West Penn Allegheny Health System (the largest hospital facility in the Allegheny Health Network), and Highmark's affiliated integrated health delivery network and the further expansion of the network, including partnerships with Johns Hopkins and Carnegie Mellon University.

Banco Mizuho do Brasil S.A. Outlook Change 26 Feb ‘14 15 Sep ‘14

Long-Term Foreign Currency Bank Deposit Rating

Baa2 Baa2

Long-Term Foreign Currency Bank Deposit Rating Outlook

Stable Negative

The rating affirmation and change in outlook to negative from stable follow the change in outlook for Brazil's Baa2 sovereign rating. The bank's rating is at the same level as the sovereign rating and, therefore, a change in outlook for the government’s Baa2 bond rating directly affects the outlook for Mizuho Brazil's foreign currency deposit rating.

RATING CHANGES Significant rating actions taken the week ending 19 September 2014

41 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Banco Bradesco Europa S.A. Outlook Change 9 Oct ‘13 15 Sep ‘14

Long-Term Domestic Currency Bank Deposit Rating

Baa2 Baa2

Long-Term Domestic Currency Bank Deposit Rating Outlook

Stable Negative

The affirmation of BBE’s deposit ratings and negative outlook change reflect the alignment of ratings between BBE and its Brazilian parent Banco Bradesco S.A., in light of the high level of integration. BBE's deposit rating is constrained by the parent’s Baa2 foreign currency deposit rating, whose outlook we changed to negative from stable following a similar outlook change for Brazil's government debt rating. Bradesco's foreign currency deposit rating is itself constrained by Brazil's Baa2 foreign-currency deposit ceiling, reflecting currency transfer risk.

RATING CHANGES Significant rating actions taken the week ending 19 September 2014

42 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Sovereigns

Costa Rica

Downgrade

23 Sep ‘13 16 Sep ‘14

Gov Currency Rating Baa3 Ba1

Foreign Currency Deposit Ceiling Baa3/P-3 Ba2/NP

Foreign Currency Bond Ceiling Baa2/P-3 Baa2/P-3

Local Currency Deposit Ceiling A3 A3

Local Currency Bond Ceiling A3 A3

Outlook Negative Stable

The downgrades reflect our view that material fiscal improvements for Costa Rica are unlikely in the next one to two years. For the past few administrations, the government's weak position in Congress has delayed approval of legislation because of the need to forge ad-hoc alliances, impeding efforts to approve significant fiscal reforms.

France Affirmation

24 Jan ‘14 19 Sep ‘14

Gov Bond Rating Aa1 Aa1

Foreign Currency Deposit Ceiling Aaa/P-1 Aaa/P-1

Foreign Currency Bond Ceiling Aaa/P-1 Aaa/P-1

Local Currency Deposit Ceiling Aaa Aaa

Local Currency Bond Ceiling Aaa Aaa

Outlook Negative Negative

Despite some negative credit pressures, France retains significant credit strengths, including the size and wealth of the economy, as well as its affordable debt burden despite a continuous, gradual erosion of its economic and fiscal strength. The affirmation is also supported by renewed government commitment to accelerating the pace of structural reform, introducing a more consistent approach to economic policy, and proceeding with its savings plans.

RATING CHANGES Significant rating actions taken the week ending 19 September 2014

43 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

United Kingdom

Affirmation

22 Feb ‘13 19 Sep ‘14

Gov Bond Rating Aa1 Aa1

Foreign Currency Deposit Ceiling Aaa/P-1 Aaa/P-1

Foreign Currency Bond Ceiling Aaa/P-1 Aaa/P-1

Local Currency Deposit Ceiling Aaa Aaa

Local Currency Bond Ceiling Aaa Aaa

Outlook Stable Stable

Our decision to affirm the UK's rating follows the outcome of the referendum on Scottish independence, which maintains the 307-year-old union, thereby preserving the country's current institutional and fiscal framework. While the political process going forward will likely lead to further devolution of powers to Scotland and some changes in the fiscal transfers, we do not anticipate that these will have a material impact on the quality of the UK's institutions, or its financial strength. Indeed, as we indicated in May, the strength of the UK's credit profile would not have changed materially in the event of Scottish independence and therefore such an event would have likely been rating neutral.

RATING CHANGES Significant rating actions taken the week ending 19 September 2014

44 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Sub-sovereigns

Belo Horizonte, City of

Outlook Change

4 Oct ‘13 16 Sep ‘14

LT Issuer Rating (Foreign) Baa3 Baa3

LT Issuer Rating (Domestic) Baa3 Baa3

NSR LT Issuer Rating (Domestic) Aa1.br Aa1.br

Outlook Stable Negative

Maranhao, State of

Outlook Change

4 Oct ‘13 16 Sep ‘14

LT Issuer Rating (Foreign) Ba1 Ba1

LT Issuer Rating (Domestic) Ba1 Ba1

NSR LT Issuer Rating (Domestic) Aa2.br Aa2.br

Outlook Stable Negative

Mato Grosso, State of

Outlook Change

4 Oct ‘13 16 Sep ‘14

LT Issuer Rating (Foreign) Baa3 Baa3

LT Issuer Rating (Domestic) Baa3 Baa3

NSR LT Issuer Rating (Domestic) Aa1.br Aa1.br

Outlook Stable Negative

Minas Gerais, State of

Outlook Change

4 Oct ‘13 16 Sep ‘14

LT Issuer Rating (Foreign) Baa3 Baa3

LT Issuer Rating (Domestic) Baa3 Baa3

Outlook Stable Negative

RATING CHANGES Significant rating actions taken the week ending 19 September 2014

45 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Parana, State of

Outlook Change

4 Oct ‘13 16 Sep ‘14

LT Issuer Rating (Foreign) Baa3 Baa3

LT Issuer Rating (Domestic) Baa3 Baa3

NSR LT Issuer Rating (Domestic) Aa1.br Aa1.br

NSR LT Issuer Rating (Foreign) Aa1.br Aa1.br

Outlook Stable Negative

Rio de Janeiro, City of

Outlook Change

4 Oct ‘13 16 Sep ‘14

LT Issuer Rating (Foreign) Baa2 Baa2

LT Issuer Rating (Domestic) Baa2 Baa2

NSR LT Issuer Rating (Domestic) Aaa.br Aaa.br

Outlook Stable Negative

Sao Paulo, State of

Outlook Change

4 Oct ‘13 16 Sep ‘14

LT Issuer Rating (Foreign) Baa2 Baa2

LT Issuer Rating (Domestic) Baa2 Baa2

Outlook Stable Negative

The change in the outlooks on the ratings of these Brazilian states and municipalities follows our recent assignment of a negative outlook to the Government of Brazil's Baa2 rating, which was due to the reduction of economic growth perspectives in Brazil and the ongoing deterioration of the sovereign's fiscal position. Macroeconomic and institutional factors closely link the credit quality of state and municipal governments in Brazil to that of the federal government.

RATING CHANGES Significant rating actions taken the week ending 19 September 2014

46 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

US Public Finance

Grand River Dam Authority, Oklahoma Upgrade 11 Mar ‘13 16 Sep ‘14

Electric System Revenue Bonds A2 A1

Outlook Positive Stable

The upgrade reflects our expectation that the authority’s key financial metrics will improve over the near term as a result of (1) economic growth in the greater Tulsa region; and (2) a decrease in scheduled debt amortization requirements, owing to substantial amortization during 2011-13.

Jobs Ohio Beverage System, Ohio Upgrade 7 Jan ‘13 18 Sep ‘14

Statewide Senior Lien Liquor Profits Revenue Bonds

A2 Aa3

Outlook Developing Stable

The upgrade reflects the Ohio Supreme Court's final decision to dismiss litigation challenging the creation of JOBS, which was a key driver in the initial A2 rating and developing outlook.

Ocean County, New Jersey Outlook Change 8 Nov ‘13 15 Sep ‘14

General Obligation Bonds Aaa Aaa

Outlook Negative Stable

The outlook change reflects our expectation of continued financial stability following improvements to the county’s ongoing financial operations and cash reserves.

Puerto Rico Electric Power Authority Downgrade 1 Jul ‘14 17 Sep ‘14

Power Revenue Bonds Caa2 Caa3

Outlook Ratings Under Review Negative

The downgrade considers the uncertainty that persists regarding the details of the expected restructuring plan by PREPA, the implementation risk that continues regarding PREPA's ability to execute on its multi-year fuel conversion plan as well our belief that any such debt restructuring will involve some degree of impairment for bondholders. The downgrade to Caa3 further incorporates a belief that the expected recovery rate could approximate 65% to 80% in the event of a default, which we believe is highly likely.

RATING CHANGES Significant rating actions taken the week ending 19 September 2014

47 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Puerto Rico Highway & Transportation Authority, Puerto Rico Convention Center District Authority, Puerto Rico Aqueduct & Sewer Authority

Confirmation 1 Jul ‘14 17 Sep ‘14

PRHTA Transportation Revenue Bonds

Caa1 Caa1

PRHTA Subordinate Lien Transportation Revenue Bonds

Caa2 Caa2

CCDA Hotel Occupancy Tax Revenue Bonds

Caa1 Caa1

PRASA Revenue Bonds Caa1 Caa1

Outlook Ratings Under Review Negative

These three authorities have adequate coverage of maturing debt for the near term, and no unmanageable maturing short-term obligations that could trigger a default, leading the confirmation of their ratings. The passage of a debt restructuring law applicable to these public corporations indicates that a default trigger could emerge, and it underscores that the central government of the Puerto Rico (B2 negative) will no longer be able to provide operating support to these entities as it struggles with an onerous debt burden and long-running economic stagnation.

RATING CHANGES Significant rating actions taken the week ending 19 September 2014

48 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Structured Finance

Action Taken on 2011-13 Santander Subprime Auto Loan ABS On 15 September we upgraded 19 tranches and affirmed an additional 44 tranches of vintage securitizations that Santander Consumer USA Inc. (SCUSA) issued from 2011 through 2013. The upgrades, which affect approximately $5.8 billion of asset-backed securities, reflect the build-up of credit enhancement owing to the sequential pay structure and non-declining reserve account. We also expect the cumulative net loss for the 2012 and 2013 transactions to improve slightly.

Subprime RMBS from Various Issuers Upgraded The 17 September action affects approximately $2 billion of subprime residential mortgage-backed securities (RMBS). We upgraded the ratings of 49 tranches from 26 subprime RMBS transactions issued from 2005 to 2006. The upgrades reflect improving performance of the related pools or faster pay-down of the bonds as a result of high prepayments or faster liquidations.

RESEARCH HIGHLIGHTS Notable research published the week ending 19 September 2014

49 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Corporates

European Paper and Forest Products Companies: First Half Results Indicate That Benefits of Business Transformation Are Starting To Be Felt Despite falling European paper demand, the overall profitability of most rated European paper companies improved in H1 2014 compared with the same period a year ago. Players that have repositioned or broadened their business profiles should maintain or even improve profitability in 2015. Less diversified players, such as Lecta S.A. and Norske Skogindustrier ASA, continue to face shrinking demand for paper and price declines, factors that could erode their profitability more permanently.

US Homebuilding: Conflicting Signs Mean It's Like Constantly Calling Audibles from the Line of Scrimmage The US homebuilding industry is shaping up as a tale of two markets. While the macroeconomic statistics are giving contradictory signals, and the expected strength is clearly ebbing, the publicly rated homebuilders are doing much better than the macro results would seem to indicate. Nevertheless, industry challenges remain the same, with less-than-robust consumer confidence, tepid job growth and tight mortgage availability.

China Property Industry: Developers' Financial Results Weakened in First Half but Should Improve in Second Half Revenue recognition and EBITDA weakened, cash collection from contracted sales slowed, profit margins contracted and debt levels increased for rated Chinese property developers during the first six months of 2014. However, revenue recognition and EBITDA should rise during the second half of the year as the rated developers deliver an increased number of housing projects, and liquidity should increase along with higher contracted sales.

European Steel Producers: Improved Capacity Utilisation and Profitability Seen For European Steelmakers, But Not Enough To Change Stable Outlook Our outlook for the European steel producers is stable. We believe steel consumption in the EU will be driven by an increase in demand and in some extent restocking. We expect stable or slightly improved prices in 2015 as a result of higher demand but lower iron ore prices.

Effect on Australian Corporates of Decline in Iron Ore Price Iron ore, Australia’s largest export commodity by value, has been experiencing sharp price declines since the start of 2014 due to large increases in supply and lower growth rates for steel production in China. This trend will exert a direct negative impact on our rated Australian producers over the next 6-12 months. To preserve margins, we expect the miners to reduce their scope of work and renegotiate contracts with the providers of mining services, which will in turn further reduce earnings and cash flows at the latter.

US Apparel: Off-Price Apparel and Home Retailers to Remain One of Leading Retail Groups The off-price apparel and home channel, which sells major-label brands at big discounts, can sustain above-average growth rates in the 6%-8% range for the next five years. We expect it to outperform the broader apparel sector by 4%, driven by new store openings and modest comparable store sale growth.

RESEARCH HIGHLIGHTS Notable research published the week ending 19 September 2014

50 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

China Ban on Low-Grade Coal Has Limited Impact on Rated Asian Miners China’s National Development and Reform Commission (NDRC) announced minimum standards on the quality of commercial coal used in the country from January 2015 in an effort to reduce pollution and chronic oversupply. The Chinese restrictions, which apply to domestically produced and imported coal, will not impact the four rated Indonesian miners because their exports to China already meet the new standards.

Infrastructure

Infrastructure Spending Push Will Boost Brazil’s Construction and Utilities, but Private Financing Is Less Assured The proposed timeframe for a BRL940 billion ($400 billion) surge in spending on Brazil’s infrastructure through 2017 largely depends on Brazil overcoming institutional and regulatory hurdles for private investment. Infrastructure spending is the only viable option to sustain solid economic growth in the coming years, and investments will remain a top development priority for Brazil regardless of who wins the October 2014 election.

UK Electricity Networks: RIIO-ED1 Draft Determinations In-Line with Expectations On 30 July 2014, the UK energy regulator – the Office of the Gas and Electricity Markets (Ofgem) –announced Draft Determinations for five of the six distribution network operator groups, setting the sector’s output requirements and revenue entitlements for the eight year regulatory period known as RIIO-ED1, which ends March 2023. Overall, we view the Draft Determinations as tough but in line with our expectations. Issuers should demonstrate financial metrics commensurate with existing ratings, albeit with significantly less headroom than recent levels.

RESEARCH HIGHLIGHTS Notable research published the week ending 19 September 2014

51 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Financial Institutions

Paraguay Banking System Outlook The outlook for the banks is stable as they benefit from a rise in financial intermediation, steady growth of new business and a more diversified funding mix, helping to offset some of the risk associated with Paraguay’s volatile economy, which remains dependent on the highly cyclical agriculture sector. Significant financial dollarization also creates risk, but the system can better manage it given lenders’ strengthened core earnings and significant reserves.

US Excess and Surplus Insurance Sector Profile The US Excess & Surplus sector is undergoing a period of growth and strong profitability, driven by higher rates and an improving economy, as well as insurers’ limited appetite for risk at inadequate prices. Because they aren’t subject to rate or form regulation, E&S insurers can navigate the property and casualty cycle with strong balance sheets, despite challenges from catastrophe losses and low interest rates.

Indian Banks Could Need $26-37 Billion in External Capital for Basel III Compliance Rated public-sector banks currently meet minimum capital requirements, but barely. Weak asset quality has depressed the banks’ profitability and ability to generate capital internally, leaving them reliant on periodic capital injections from the government. And if profitability remains at these levels, internal capital generation will not match loan growth, and India’s public sector banks will find it difficult to increase their capital levels quickly.

Cyprus Banking System Outlook Our outlook for the Cypriot banking system remains negative. Problem loans at Cypriot banks will continue to grow over the next 12-18 months, resulting in further losses for the banks and leading to the need for additional capital. Asset quality will deteriorate because of declines in lower corporate earnings and in household’s net worth of households, high unemployment and a drop in real estate prices. Moreover, the banks’s funding bases are vulnerable, owing to fragile depositor confidence following 2013 resolution of the two largest banks, which triggered depositor losses, and to the continued controls on cross-border transfers.

Rating Basel III Capital Securities in China: Answers to Frequently Asked Questions Chinese banks’ issuance of Basel III securities is growing, and we expect Chinese banks continue to issue more Basel III-compliant securities in the years ahead. China’s big five banks had RMB 639 billion of “old-style” subordinated debt outstanding at end-2013.

Q3 2014 Canadian Banking Quarterly: Capital Markets Earnings and Wealth Gains Offset Modest Canadian Personal & Commercial Performance In third-quarter 2014, stronger M&A activity, as well as a robust loan and debt/equity pipeline, resulted in a greater reliance on the capital markets for the Canadian banks, a credit negative because of the risks associated with this business, including the complexity, opacity and volatility of the sector’s earnings. On the plus side, wealth management gains were powered by rises in equity values and net sales.

RESEARCH HIGHLIGHTS Notable research published the week ending 19 September 2014

52 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Global Reinsurance – Industry Scorecard The global reinsurance sector’s financial position remains sound, but the industry must contend with a rapidly evolving and challenging business and competitive environment. Our negative sector outlook reflects the industry’s changing environment as pressures on many fronts grow simultaneously, including an oversupply of capacity, new entrants in the form of non-traditional capital, more substitute products, low interest rates, and greater bargaining power of buyers. Earnings growth will likely be constrained as a result. We believe that the reinsurers best able to cope with these challenges will be those that have already paid their dues with clients and have the necessary scale, superior claims service, whole-account capability and a solid insurance platform.

RESEARCH HIGHLIGHTS Notable research published the week ending 19 September 2014

53 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Sovereigns

International Investment Bank The credit strengths supporting the International Investment Bank’s A3 rating are its (1) very high amount of usable equity in relation to its development assets, (2) very low leverage and (3) very large amount of callable capital from its mostly investment-grade rated shareholders. The amount of usable and callable capital will remain at a comfortable level, despite significantly increasing business activity, as outlined in the bank’s 2013-17 strategy.

Armenia Analysis Closely linked to Russia’s economy, Armenia’s growth in the coming years will not be without challenges. Weaker-than-expected net exports and slowing remittances in first-half 2014 underscore Armenia’s significant trade and financial exposure to Russia, leading us to revise our growth forecast to 2.1% in 2014 and 2.3% in 2015 from 3.2% and 3.6%, respectively.

Malaysia Analysis The Malaysian government kicked off its long-delayed fiscal reform program in 2013, prompting an outlook change on the A3 sovereign rating to positive from stable last November. Despite the subsequent drag on growth from fiscal consolidation, the Malaysian economy has performed strongly in the first half of 2014. Real GDP growth averaged 6.4% year-on-year over this period, higher than only China’s among major countries in the Asia-Pacific.

United States of America Analysis The US government’s Aaa rating and stable outlook reflect a variety of credit strengths, including a very large and diverse economy, as well as a strong track record of relatively solid long-term GDP and productivity growth. In addition, despite the deterioration since the financial crisis, the federal government’s ratio of debt to GDP is stabilizing and will likely remain near current levels for the remainder of the decade, given the steep decline in budget deficits over the past few years. After that, spending on social programs is projected to put pressure on federal budget deficits and, consequently, debt ratios.

Costa Rica: Key Drivers Behind Downgrade of Sovereign Rating to Ba1 from Baa3 The downgrade of Costa Rica’s government bond rating to Ba1 from Baa3 reflects our expectation that material fiscal improvements are unlikely in the next one to two years. Costa Rica’s entrenched democratic tradition has led to a cumbersome process of consensus-building. During the past few administrations, the government’s weak position in Congress has delayed approval of legislation because of the need to forge ad-hoc alliances, impeding efforts to approve significant fiscal reforms.

Dominican Republic: Four Factors That Weigh Heavily on the Sovereign's Credit Profile The Dominican Republic has sustained robust economic growth since 2005, and the medium-term growth outlook is broadly favorable given a relatively high potential growth rate. Authorities have also partially reversed the large 2012 fiscal deficit, with prospects for continued consolidation remaining favorable. Nevertheless, increasing uncertainty on the fiscal front is creating substantial challenges that could weigh heavily on the sovereign’s credit prospects.

RESEARCH HIGHLIGHTS Notable research published the week ending 19 September 2014

54 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Inside Moody's Africa (Newsletter) - September 2014 This compendium brings together our recent research on African sovereign, banking and corporate finance credit, in keeping with the continent’s favorable growth prospects, rising international issuance and increasing investor demand for credit ratings and research over the past few years. This edition covers our downgrade of four South African banks, the credit implications of the Ebola outbreak for West Africa, and more.

RESEARCH HIGHLIGHTS Notable research published the week ending 19 September 2014

55 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Sub-sovereigns UK Sub-Sovereign Quarterly This newsletter aims to provide regular insight into our analysis of credit events concerning UK local governments, housing associations, universities other government-related issuers, and developing-market trends in these sectors. This edition discusses the credit positive implications of a municipal bond agency for UK local governments, English housing associations’ continued struggles with welfare reforms, and more.

US Public Finance

California Water and Sewer Utilities’ Rate Increases Will Largely Offset Drought’s Financial Impact California water and sewer utilities’ recent and planned rate increases will offset their expected sales volume decline resulting from the drought and increased water conservation. Furthermore, in the early years of the drought, sales volume and gross revenues had increased. Therefore, the utilities’ projected sales volume decline will likely lead to a return to normal financial performance rather than the below-average performance that the unusual severity of the drought might suggest.

Reform Flexibility in Ohio Lessens Pension Stress Four large plans encompass nearly all public pension liabilities in Ohio (Aa1 stable). Declines in the funded status for these plans have not directly translated to increased budget pressure for the state and its local governments, however. Instead, broad statewide reforms have relied on legal flexibility to reduce benefit levels and increase employee contributions.

Not-for-Profit Organizations Confront Ongoing Revenue Pressure in Fiscal 2013 Medians Fiscal year 2013 not-for-profit organization medians reflect intensifying revenue pressure, with a rising number of organizations unable to generate top-line growth. Revenue strains will force organizations to continue to contain costs to maintain stable operating performance. However, growing financial reserves, with stronger philanthropy and investment returns supported by market conditions, partially mitigate these pressures.

RESEARCH HIGHLIGHTS Notable research published the week ending 19 September 2014

56 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

Structured Finance

ABS Spotlight In this September edition, we’re announce the publication of our updated approach to rating credit card ABS. We also examine the implications of dealership consolidation on auto floorplan ABS, assess why the SEC’s adoption of Regulation AB II is credit positive for auto ABS, assess the impact of for-profit school closures on student loan ABS, and analyze why falling US farmland prices will minimally affect equipment-backed ABS performance.

CLO Interest In this September edition, we discuss how losses will remain in US CLO cash flow tranches, the role of key managerial agreement provisions and their effect on CLO credit risk, among other topics.

ResiLandscape In this September edition, we discuss how the duration of reperformance and modification terms drive default rates on reperforming loans, foreclosure timelines remaining long in New York and New Jersey, the strong performance of STACR and CAS transactions, among other topics.

Credit Insight: European RMBS and ABS In this September edition, we comment on credit positive trends in Europe for structured finance transactions on the back of the economic recovery in some countries as well as legal and structural developments. We also discuss the credit negative impact of the continued house price decline in Spain. Furthermore, we examine the credit positive impact of an amendment to the Italian Securitisation Law, which limits set-off risk, for Italian ABS consumer loan transactions.

Australian Residential Mortgage Delinquency Map May 2014: Delinquencies Fall Amid Record Low Interest Rate and Strong Housing Market Australian residential mortgage delinquencies have fallen for the fourth consecutive year, against the backdrop of record low interest rates and rising house prices. The proportion of residential mortgages across Australia that were more than 30 days in arrears fell to 1.4% in May 2014, from 1.6% in April 2013 and 1.9% in 2011. Steady economic growth also contributed to the decline, despite the increase in unemployment over the year.

Declining Cigarette Shipments Will Continue to Harm Performance of Tobacco Settlement ABS At the current 3%-4% rate of decline in cigarette shipments, bonds representing roughly 80% of outstanding tobacco settlement ABS will default before they fully pay down. The higher-priority bonds have substantially or fully paid off, leaving weaker, lower-priority bonds in the pools that are vulnerable to shipment declines and the resulting lower annual payments from the tobacco companies.

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

57 MOODY’S CREDIT OUTLOOK 22 SEPTEMBER 2014

NEWS & ANALYSIS Corporates » Vail Resorts' Deal for PCMR Melts Lease Litigation, a

Credit Positive » Danaher Boosts Dental Revenues with Purchase of

Nobel Biocare » Orange's Purchase of Jazztel Would Enhance Its

Spanish Operations » TDC's Purchase of Get Will Raise Its Leverage » HeidelbergCement Readies Sale of Hanson Building Products

Unit, a Credit Positive » Sinopec's Stake Sale of Its Retail Unit Is Credit Positive » CITIC Limited Faces Compensation Payments for Alleged

Misconduct, a Credit Negative

Infrastructure » SNAM's Acquisition of TAG Is Credit Positive

Banks » HSBC USA's FHFA Settlement Is Credit Negative and Adds to

Profitability Challenges » Israeli Banks' Increased Capital Requirement for Housing

Loans Is Credit Positive.

MOODYS.COM

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EDITORS PRODUCTION ASSOCIATE News & Analysis: Elisa Herr, Jay Sherman and Robert Cox

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Ratings & Research: Robert Cox