Beruflich Dokumente
Kultur Dokumente
Sovereigns Japans Tri-Partisan Consumption Tax Deal Is Credit Positive Icelands Prepayments on IMF and Nordic Government Loans Are Credit Positive Hidroelectricas Insolvency Filing Is Credit Negative for Romania US Public Finance New York State Denies Deficit Financing to Fiscally Troubled Municipalities Rhode Islands Budget Is Credit Positive for Central Falls and Schools, but Leaves Woonsocket and Pensions Unaddressed Contraction in Municipal Variable Rate Demand Debt Is Credit Positive for Weaker Issuer
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CREDIT IN DEPTH
US Banks, Card Networks, Merchant Acquirers and Retailers New debit rules hurt banks and reshape the payment processor market. 41
Banks 13 Changes in Canadian Mortgage Insurance Are Positive, but May Be Too Late JPMorgans Investment in Mexican Subsidiary Is Credit Negative for Other Foreign Wholesale Banks in Mexico Report on Brazils Exchanges Encourages Competition but Is Negative for BM&FBovespa Bank of Englands Decision to Post Collateral in OTC Derivatives Transactions Is Credit Positive for Dealers WestLBs Costly Break-Up Is Credit Positive for Senior Bondholders Russian Central Bank Will Scrutinise Use of Emergency Liquidity Facilities, a Credit Positive Mizuhos Brazilian Acquisition Creates a Credit Positive Beachhead Tighter Lending Rules on Luxury Houses Are Credit Positive for Taiwanese Banks Insurers 25 Tokio Marine to Front-Load Domestic Stock Sales, a Credit Positive Asset Managers 27 Eaton Vances Acquisition of Minority Stake in Hexavest Is Credit Positive Chinas Opening of High-Yield Bond Market Is Credit Positive for International Asset Managers
MOODYS.COM
Corporates
Janice Hofferber, CFA Senior Vice President +1.212.553.4493 janice.hofferber@moodys.com
P&G Cuts Sales and Earnings View as Economic Slowdown Hits Home
Last Wednesday, The Procter & Gamble Company (Aa3 stable) cut its organic revenue and core earnings per share forecasts for the fourth quarter ending 30 June and introduced modest growth expectations for fiscal 2013. The credit negative development shows that economic weakness in Europe and the US is beginning to pinch, and it suggests that P&Gs focus on emerging-markets expansion has cost it a step in defending existing brands and introducing new ones at home. The company said net sales will decline 1%-2% in the current quarter, including foreign-exchange effects, compared with prior guidance of a 1%-2% increase. It expects core earnings of $0.75-$0.79 per share, down from a prior range of $0.79-$0.85. For fiscal 2013, P&G expects organic sales (excluding foreign exchange and M&A) to increase 2%-4% and core earnings per share to be flat to up in the mid single digits from fiscal 2012 results. These estimates are well below its mid-single-digit revenue growth and high-single-digit earnings growth in recent years. The consumer products giant is feeling the effects of economic weakness, market share losses, higher commodity costs and foreign exchange volatility in Europe and the US. Owing to rising fuel costs and lower disposable incomes, consumers in the advanced economies are becoming more price sensitive despite the highly consumable, low-priced nature of the types of everyday necessities P&G makes. P&G is the first US-based multinational consumer products company to disclose that problems in Europe and a slow recovery in the US are affecting its sales and earnings. But recent market share losses suggest that P&Gs pricing is too high in categories such as diapers and laundry, and that its lack of meaningful innovation and slow productivity improvements are beginning to take a toll. Part of the problem may be that P&G has spent heavily to expand in emerging markets, which has cut into its $2 billion product innovation budget while diverting human resources to achieving its goal of reaching an additional 1 billion consumers over the next few years. This strategy has reduced its capacity to defend its market share and create innovative new products in the developed markets. Consequently, US-focused competitors such as Church & Dwight Co. Inc. (Baa2 stable) and Sun Products Corporation (B2 negative) in the US laundry segment, and Unilever N.V. (A1 stable) in European personal care and home care, have gained ground against P&G brands. These competitors have also gained a cost advantage through their limited foreign exchange exposure to the euro. P&G could falter in emerging markets, too. After a decade-long overseas push, P&G generates 40% of its sales in emerging markets and an even lower percentage of its profits. In contrast, Kimberly-Clark Corporation (A2 stable) gets 45% of its sales in emerging markets, and Colgate-Palmolive Company (Aa3 stable) gets about 55%. Nevertheless, P&G has been booking emerging-markets organic sales growth of about 12% a year. But with concerns of slowing growth in China, where P&G is the largest consumer products purveyor, emerging-markets sales may weaken. To be sure, P&G is not alone in its problems. Danone (A3 stable) last Tuesday scaled back its 2012 operating margin forecast, citing weakness in Spain and elsewhere in the European Union periphery, and others may follow suit. Companies that are more at risk include battery maker Energizer Holdings Inc. (Baa3 stable), with nearly 50% sales exposure to Europe, and skin-care and cosmetics maker Estee Lauder Companies (A2 stable), with over 50% of its sales coming from its large and growing Asian business and substantial European business.
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Hammerson Sells a Majority of its Office Properties to Focus on Retail, a Credit Positive
Last Tuesday, Hammerson plc (Baa2 stable) said that it had exchanged contracts to sell to Brookfield Office Properties the majority of its office property portfolio for a total cash sum of 518 million, above pro forma book value with an initial yield1 of 5.2%. The sale, which is Hammersons first step toward focusing on developing and acquiring retail properties, is credit positive as it will improve its profitability as operating costs decrease with its new concentration on a single line of business. In addition, the sale, along with the companys proposed expansion of its retail portfolio, will also enhance the companys franchise value, particularly with respect to its tenant relationships. Hammerson is a real estate investment trust (REIT) with a large portfolio of UK and French prime commercial properties valued at 5.72 billion at 31 December 2011. Following this transaction, the portfolio will be 97% retail, versus 89% before the sale, and 3% office, versus 11% before the sale. Although Hammerson will lose some of the benefits of diversification as a result of the disposal of its office properties, the companys income will be more stable. Rental income from Hammersons offices in the City of London has been more volatile than that of its prime retail properties. For example, the office portfolio was 8.9% over-rented2 at year-end 2011, while a more stable rental growth pattern has led to a potential income increase at rent review3 of 3.8% for its shopping centres and 2.3% for its retail parks. In addition, Hammersons business risk will decline. The company has historically taken calculated, but nevertheless speculative, development risk to optimize its returns on office developments. By contrast, Hammersons retail developments have been partially pre-let, at a minimum by anchor tenants, prior to starting construction. Furthermore, many of Hammersons retail developments are lower-risk extensions and/or refurbishments of existing, successful retail properties. Regarding the enhancement to Hammersons franchise value, office property owners find it difficult to cultivate franchise value because office tenants seldom provide opportunities for repeat business in other locations. National and international retailers prefer to rent from property owners specializing in retail so that they know in advance what kind of landlord/tenant relationship into which they will be entering. For example, a landlords positioning of retailers within a well-designed shopping mall can have a large effect on sales. Enhanced franchise value will translate into better demand for Hammersons shopping centres, which translates into being able to ask and get higher rents from tenants and preserve occupancy rates, particularly during cyclical downturns. Hammerson has identified several retail development projects in which to reinvest sale proceeds; these will produce superior returns on investment compared to acquiring comparable completed and let properties. For example, Hammerson is developing a prime regional shopping centre in Marseille, France, that it expects to open in the spring of 2014. The company estimates a return on the 400 million overall cost of development at around 7.4% a year, with more than 64% of rental income already contracted. Hammerson has also identified 320 million of extension and refurbishment works to its UK retail parks and smaller retail properties, and expects these schemes to produce an average return on cost in excess of 7.5%.
1 2 3
Initial yield is measured by the ratio of rents generated by a property to its purchase price or valuation. Over-rented means that rent paid by the tenant is greater than the open market rent. UK landlords reserve the right to review rents, typically every five years, to raise them to open market rates.
25 JUNE 2012
Indian Competition Commission Fines Cement Cartel, a Credit Negative for Holcim and Lafarge
On 21 June, the Indian Competition Commission concluded its review of alleged collusion in the Indian cement industry and imposed material penalties on the 10 largest Indian cement producers. This long-awaited cartel investigation decision is credit negative for Switzerland-based cement producer Holcim Ltd. (Baa2 negative), and to a lesser extent for France-based Lafarge SA (Ba1 stable). We believe that indirect credit consequences from the competition commissions decision will outweigh the cash effect of the fines on both Holcim and Lafarge. Both issuers currently enjoy aboveaverage operating margins in India compared with the rest of their international operations. But like several other emerging markets, India is exposed to high energy, logistics and salary cost inflation. Holcim and Lafarge have been able to compensate for some of the cost inflation through price increases, but the Competition Commission ruling and increased scrutiny of cement prices are likely to make it much more difficult for these two players to increase prices and maintain their current margins. Holcim is Indias largest cement producer through its two majority stakes in the unrated ACC Ltd. (50.3%) and Ambuja Cements (50.13%). ACC controls 10.4% of the Indian cement market according to the Indian Competition Commission, while Ambuja Cements controls 9.8%. Holcim fully consolidates the two companies into its accounts. Lafarge is a much smaller player, with a 3.2% market share. The two entities controlled by Holcim will have to pay INR23.1 billion (CHF390 million or 324 million) in penalties under the announced ruling, while Lafarge will have to pay INR4.8 billion (67 million). For Holcim, the fines are 2% of adjusted debt and 15% of the groups retained cash flow for the last 12 months ended 31 March, while for Lafarge the fines are 0.4% of its adjusted debt and 5% of retained cash flow. We consider the fines to be exceptional one-off items and exclude them from our retained cash flow calculation for credit metrics. The effect would not be material for either issuer. However, the producers have 90 days from the date of the ruling to pay the fine but 60 days to appeal both the ruling and the size of the penalty. An appeal is likely to delay the payment of the penalty as the case will be brought to the Indian High Court and could also lead to lower cash charges. We do not think that Holcim will need to recapitalize ACC and Ambuja because these two entities have very healthy balance sheets with very little debt, and equity capital covers respectively 6.3x and 6.9x the amount of the penalty.
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Sergei Grishunin Assistant Vice President - Analyst +7.495.228.6168 sergei.grishunin@moodys.com Artem Frolov Assistant Vice President - Analyst +7.495.228.6110 artem.frolov@moodys.com
Russias New Guarantee Programme Is Credit Positive for ChelPipe and Other Domestic Corporates
Last Wednesday, ChelPipe Group (unrated), Russias second-largest pipe producer, said it soon expected to receive state guarantees of around RUB30 billion ($880 million) from a RUB107 billion ($3.2 billion) state guarantee programme aimed at supporting domestic corporates if the euro area crisis escalates and spreads. Disbursement of the guarantees would be credit positive for domestic corporates, as they are likely to aid their debt restructuring efforts by making it easier to obtain cheaper and longer-term financing under challenging market conditions. If it receives a disbursement, ChelPipe plans to use the state guarantees to refinance at a lower cost part of its RUB100 billion debt obligation, which will mature this year. The company incurred most of this debt in 2008-09 to finance a large capex programme totaling around RUB44 billion to produce large diameter pipes. In May 2012, ZAO OMK (unrated), another Russian large diameter pipes producer, received state guarantees totalling RUB21 billion to finance its RUB50 billion capex. Under the programme, the government will provide loan guarantees to eligible corporates for terms of up to five years for up to 50% of the total loan amount (or up to 70% in the case of corporates in the military defense industry). To be eligible for the programme, corporates must not have filed for bankruptcy or have any overdue liabilities to the state. In addition, corporates must provide additional loan security so that the total security (including the state guarantee) covers 100% of loan principal. Furthermore, corporates must reduce the amount of executive compensation to an amount agreed upon with the government until the guarantee expires. Unlike so-called state comfort letters, which represent an intention, rather than an obligation, by the state to repay the debt of an insolvent company, state guarantees oblige the state to repay creditors within 30 days of an issuers default, provided the borrower has adhered to the conditions of state guarantee. If rated corporates receive state guarantees under the programme, the degree of the credit enhancing effect would depend on several factors. These include the underlying credit profile of the issuer, the strength of its ties if any with the Russian state, the terms and conditions of the guarantees, the validity of the guarantee and its enforceability, and the proportion of debt covered by guarantees. At this stage, the government has yet to finalise the list of strategically important companies eligible under the programme. However, under a similar RUB300 billion programme implemented in Russia during the financial crisis in 2009, large industrial corporates operating in such industries as metals and mining, agriculture, machinery, petrochemical and real estate were the main beneficiaries. This time, we also would expect that similar industries would benefit the most, while oil and gas companies are less likely to apply for state guarantees. We view the proactive stance taken by the government in setting up the guarantee as positive because the government can implement the measures quickly if economic conditions deteriorate, which recent developments suggest could happen. The Russian economy heavily relies on revenues from its oil and gas exports, and oil prices have fallen substantially in the past three months to around $90 per barrel of Brent from $125 in March. In addition, the main domestic stock markets are down more than 20% since reaching highs in March, and the ruble is down by around 13% against the US dollar.
25 JUNE 2012
Ping Luo Vice President - Senior Analyst +852.3758.1353 ping.luo@moodys.com Kai Hu Vice President - Senior Analyst +86.10.6319.6560 kai.hu@moodys.com
Chinas New Foreign-Exchange Policy Will Help Chinese Firms with Overseas Investment or Offshore Debt
On 15 June, the Chinese State Administration of Foreign Exchange (SAFE) announced a new policy to allow onshore entities of Chinese domestic companies to obtain foreign-currency loans within China for lending to their offshore entities. The new policy, which takes effect on 1 July, also relaxes restrictions on individuals who provide guarantees to their offshore investments. The move by SAFE is credit positive for Chinese corporate issuers with overseas investments or offshore debt, particularly non-property, high-yield issuers, as it provides a new foreign-currency funding channel for these issuers, which often had limited offshore liquidity resources. Texhong Textile Group Limited (Ba3 negative) and Winsway Coking Coal Holding Limited (Ba3 negative), both of which have overseas investments and offshore debt, are among our rated issuers that would benefit from the policy. The permission to use domestic, foreign-currency loans for cross-border, inter-company borrowing provides alternative liquidity to service these companies offshore debt, and we expect it to help them better match the currencies in which they borrow with the funding currencies of their overseas investments. SAFEs allowance of individual guarantees, usually by a firms major shareholders, also facilitates the borrowing companys offshore financing. It is usually difficult for Chinese high-yield issuers to obtain offshore bank loans because of issuers limited overseas assets and lack of extensive, foreign banking relationships. They often have to rely on offshore capital markets, which are volatile and subject to investors risk appetite for Chinese companies. Whenever offshore debt and equity market investors enthusiasm for Chinese companies wanes, as has occurred in recent months, Chinas high-yield issuers, in particular, face challenges securing funds from offshore channels to fund their overseas investments or refinance their offshore debt. Chinese corporations usually have better onshore banking relationships but must cope with various restrictions on transferring capital overseas. Previously, such companies had limited channels to invest abroad owing to Chinas strict controls over the countrys capital account. Common channels include dividend distributions on foreign direct investment, repayment of registered, inter-company loans from offshore entities, borrowing from offshore banks under domestic bank guarantees, and inter-company advances using foreign currency they already own, but limited to 30% of the sending firms registered capital. All these channels require cumbersome approval procedures, and some may even involve high costs, such as withholding taxes for repatriation of dividends. SAFE promulgated the new policy as the Chinese government tries to encourage more domestic, private-sector companies to invest abroad. The policy is yet another sign of Chinas gradual relaxation of its capital-account controls for outbound investments. We note that total foreign currency loans available for lending are still small, with total foreign currency deposits of $378 billion, or 3% of total deposits in China, and loans of $566 billon, or 6% of all loans in China as of May 2012. However, both figures have been increasing. Among our rated Chinese companies, we believe non-property, high yield issuers would most benefit from this new policy. The policy opens up a new funding avenue for them, as long as they have good onshore banking relationships, available domestic credit facilities, or assets for collateral to secure new bank loans. Chinese state-owned enterprises and other investment grade corporates usually have better offshore liquidity resources and therefore less need for such loans. Meanwhile, we expect Chinese property issuers to continue facing a tightening credit market.
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High-yield issuers such as Texhong and Winsway both have offshore debt outstanding and overseas investments, and their onshore operations have relatively healthy liquidity profiles. The new policy from SAFE provides an additional alternative to the companies funding channels.
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KRW trillion
Note: Figures include the performance of the environmental division, which is relatively small, compared with GS E&Cs plant business. Source: GS E&C
GS E&C has accumulated large-scale orders in its plant business over the past few years, owing to its competitive position in the Middle East, where demand for petrochemical and refinery plants has been robust. As of March, its order backlog for the segment, including orders for its environmental business, stood at KRW15.7 trillion, or about 3.6 years of revenue. New order wins for its plants business were sluggish in first-quarter 2012, down 75% from a year earlier, owing to the postponement of large-scale projects in the Middle East. However, we expect new order wins for 2012 to exceed the KRW5.8 trillion ($5 billion) of orders in 2011 because a number of large projects, which GS E&C is in a strong position to win, are due to be launched during the year. These projects include LG Chems ethylene plant in Kazakhstan ($2 billion), the Petro Rabigh project in Saudi Arabia ($2 billion), and a gas plant in Venezuela ($1 billion).
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Infrastructure
Alexandre Leite Vice President - Senior Analyst +55.11.3043.7353 alexandre.leite@moodys.com
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Banks
William Burn Analyst +1.416.214.3632 william.burn@moodys.com Andriy Stepanyants Associate Analyst +1.416.214.3853 andriy.stepanyants@moodys.com
Changes in Canadian Mortgage Insurance Are Positive, but May Be Too Late
Last Thursday, Jim Flaherty, Canadas Minister of Finance, announced rule changes for governmentbacked insured mortgages that seek to reduce consumer mortgage indebtedness and cool the housing market. The changes are the latest in a series that began in 2008, and come against a backdrop of rising consumer leverage in Canada. On 15 June, Statistics Canada released data showing that debt to household income increased to a record 152%. The new rules are credit positive for Canadian banks, but may be too late to avoid a housing correction. By law, Canadian borrowers must buy insurance on all mortgages with loan-to-value (LTV) ratios of more than 80%. The latest rule change marks the fourth revision since 2008 of the government mortgage insurance program, and will apply to new loans when the rule comes into force in July. The changes are:
Further reduction in the maximum amortization period to 25 years from 30 years. It was 35 years before March 2011. Reduction in the maximum refinancing amount to 80% LTV from 85%. It was 90% before March 2011. Limit on the maximum total debt service (all debt obligations and home-related expenses) to 44% of gross household income from 45%. Withdrawal of government-backed insurance for homes with a purchase price greater than CAD1 million.
Shorter loan amortizations will immediately cool home sales by requiring increased monthly payments. For a typical loan of CAD350,000, monthly payments will rise 11% (see Scenario 1 in the exhibit below), which has approximately the same effect as a 1% increase in rates with a 30-year amortization period. Alternatively, in Scenario 2, if monthly payments stay constant, the maximum purchase price achievable by the borrower would fall around 9%. Notably, the government did not increase the minimum 5% down payment requirement for new home purchases as it seeks to strike a balance between a controlled slowdown and an abrupt dislocation. Effect of Mortgage Insurance Rule Changes on a Borrower with CAD18,000 Down Payment
Scenario Loan Amount CAD 000s Loan Term in Years Monthly Payment Rate LTV House Price Monthly Payment CAD 000s Percent Change House Price Percent Change
Base Case 1 2
30 25 25
4% 4% 4%
na 11% na
na na -9%
Scenario Descriptions 1 Amortization shortened to 25 years; loan amount unchanged 2 Amortization shortened to 25 years; loan amount reduced to maintain same payment Source: Moodys calculations
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The changes announced last week will enhance the stability of Canadian banks, as they will result in Canadian borrowers holding more equity in their homes. By limiting the amount that Canadians can borrow against the value of their homes, these rules will tend to lead to stronger debt service and will also create an equity buffer that banks can access if necessary through the sale of the property. Both of these trends reduce the risk in the uninsured consumer credit portfolios of the Canadian banks. Banks generally have unsecured credit exposure (e.g., credit cards) to borrowers with insured mortgages. The new rules are positive for all Canadian banks, and particularly for Canadian Imperial Bank of Commerce (Aa2 stable; B-/a1 stable)4 and The Toronto-Dominion Bank (Aaa negative; B+/aa2 negative) because of their leading shares in consumer credit cards. However, the governments moves may have come too late, owing to the build-up in consumer debt that has already occurred. Previous rule changes had some effect in countering the stimulus provided by historically low interest rates, but failed to stop Canadian household leverage from increasing. Moreover, slowing growth in household disposable income will be a headwind for consumers trying to deleverage. Canadian consumers reliance on low interest rates to support high debt loads remains a risk. The Bank of Canada estimates that if interest rates rise 325 basis points by mid-2015, the proportion of households with total debt service ratios of 40% or more will increase to approximately 20% from 11.5% in 2011. 5 The tightening of total debt service guidelines announced as part of this package of changes will help to improve the resilience of Canadian consumers.
4 5
The ratings shown are the banks deposit rating, its standalone bank financial strength rating/baseline credit assessment and the corresponding rating outlooks. Bank of Canada Financial System Review, June 2012 (pages 20-21).
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JPMorgans Investment in Mexican Subsidiary Is Credit Negative for Other Foreign Wholesale Banks in Mexico
Last Monday, JPMorgan Chase & Co. (A2 negative) announced it would make a capital increase of $250 million in its Mexican subsidiary Banco JPMorgan, S.A. (unrated), a sizable 80% boost to current equity of about $310 million. The capital increase is credit positive because it strengthens Banco JPMorgans balance sheet and enables it to lend and finance M&A activity, as well as enhance its capabilities in the debt and equity capital markets at a time of increasing business opportunities in Mexico. At the same time, JPMorgans move adds competition to an already highly competitive market, with negative credit implications for foreign wholesale bank peers operating in Mexico, particularly Bank of America Mxico, S.A. (BAMSA, Baa2 review for downgrade; D+/baa3 review for downgrade), 6 Deutsche Bank Mxico, S.A. (Baa1 review for downgrade; D/ba2 stable), and Banco Credit Suisse Mxico, S.A. (Baa1 stable; D+/baa3 stable). With the new capitalization, Banco JPMorgan will become the second most important foreign wholesale bank in Mexico in terms of capital (see exhibit below), rising from a distant third. All these wholesale banks cater to large domestic corporations, a broad universe of subsidiaries of foreign companies, and a deep institutional investor market. Foreign Wholesale Banks in Mexico
As of 31 March 2012
Capital MXN millions Loans MXN millions Assets MXN millions
Banks
Ratings
ING Bank, S.A. (Mexico) Bank of America Mxico, S.A. Banco JP Morgan, S.A. (Mexico) Bank of Tokyo-Mitsubishi UFJ (Mxico), S.A. Barclays Bank Mxico, S.A. Deutsche Bank Mxico, S.A Banco Credit Suisse Mxico, S.A. The Bank of New York Mellon, S.A. Royal Bank of Scotland Mxico, S.A. UBS Bank Mxico, S.A.
Source: Comisin Nacional Bancaria y de Valores, Moodys
Baa3 review for downgrade; D-/ba3 review for downgrade Baa2 review for downgrade; D+/baa3 review for downgrade Unrated Aa1.mx stable; D/ba2 stable Baa2 review for downgrade; D/ba2 stable Baa1 review for downgrade; D/ba2 stable Baa1 stable; D+/baa3 stable Unrated Unrated Unrated
8,210 4,761 4,271 3,480 2,835 2,502 2,113 719 644 491
45,293 92,778 39,661 12,058 25,867 172,091 56,536 780 4,097 7,439
Yet, how JPMorgan seeks to generate returns on the additional capital will be critical to its performance and to the competitive landscape. Banco JPMorgans improved capacity to lend pesos onshore to the subsidiaries of foreign corporations will pit it against market leaders BAMSA and Deutsche Bank Mxico as they leverage their balance sheets for investment banking deals. An increase in Banco JPMorgans ability to finance M&A will directly affect the strong leads that Banco Credit Suisse Mxico and BAMSA have traditionally held in this area. A larger capital base would help Banco
6
The bank ratings shown in this report are the banks deposit rating, its standalone bank financial strength rating/baseline credit assessment and the corresponding rating outlooks.
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JPMorgan challenge market share dynamics in a much more fragmented debt capital market, where Deutsche Bank Mxico and BAMSA lead today. A stronger balance sheet also comes at an auspicious time when Mexicos onetime most active foreign wholesale bank, ING Bank, S.A. (Mexico) (Baa3 review for downgrade; D-/ba3 review for downgrade) has significantly contracted both its loan book and trading volumes as its parent bank ING Bank N.V. (A2 negative; C-/baa1 negative) focuses on its European subsidiaries. Increased capital for Banco JPMorgans brokerage house 7 will increase its capabilities in Mexicos much smaller equity capital markets. Stock brokerage services, advisory services and bond underwriting are activities that Mexican regulations state can only be performed by brokerage house vehicles, not by banks. JPMorgans investment also closely follows Bank of Tokyo-Mitsubishi UFJ, Ltd.s (Aa3 stable; C/a3 stable) $200 million capital increase in Bank of Tokyo-Mitsubishi UFJ (Mxico), S.A. (Aa1.mx stable; D/ba2 stable) in the first quarter. That investment underscores general interest in Mexico, but does not pose a threat to other foreign wholesale banks in Mexico given Bank of Tokyo-Mitsubishis primary focus on servicing Japanese corporations operating in Mexico.
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Alexandre Albuquerque Assistant Vice President - Analyst +55.11.3043.7356 alexandre.albuquerque@moodys.com Ricardo Kovacs Vice President - Senior Analyst +55.11.3043.7308 ricardo.kovacs@moodys.com
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Bank of Englands Decision to Post Collateral in OTC Derivatives Transactions Is Credit Positive for Dealers
Last Thursday, the Bank of England (BOE) announced that starting next year it would begin providing collateral to its over-the-counter (OTC) derivatives counterparties when the value of the position is in the counterparties favour. This effort will collateralise foreign exchange and interest rate derivatives undertaken by the BOE for its own balance sheet and as an agent for the UK Treasury. The decision is credit positive for large derivatives dealers such as Barclays Bank plc (A2 negative; C/baa2 stable), 9 HSBC Bank plc (Aa3 negative; C/a3 stable) and Royal Bank of Scotland plc (A3 negative; D+/baa3 stable), as it will reduce the costs generated by uncollateralised derivatives transactions. The BOEs action also sets an important precedent for other governments and supranational organisations that currently do not post collateral. The decision will also benefit the BOE because its counterparties will cease to incorporate their expected funding costs into derivatives prices. Derivatives dealers continue to operate through unilateral credit support annexes with most sovereign and supranational counterparties. As a result, dealers do not receive collateral to fund their mark-tomarket gains, but have to post collateral when they experience mark-to-market losses. Hedging these positions with sovereigns involves additional costs as financial counterparties always apply two-way collateral agreements. The BOEs announcement considers that posting collateral would help its counterparties provide better prices driven by lower costs. Until now, just a handful of financially vulnerable countries such as Ireland and Portugal have posted collateral to their derivatives counterparty. Therefore, the BOE will become the first central bank to post collateral for its derivatives operations for economic reasons rather than to reassure counterparties on its credit. The Basel III regulatory framework proposes higher credit valuation adjustment for uncollateralised claims. As a result, derivatives dealers with sizable uncollateralised positions would face additional capital requirements, although the European Union draft legislation makes an exemption for sovereign clients. The BOEs decision is likely to improve derivatives dealers profitability since they will not have to assume any additional capital charges or funding costs. Furthermore, dealers would potentially mitigate their counterparty exposure since the BOE will provide foreign currency securities to counterparties instead of UK government bonds in pounds. We consider it unlikely that financial regulators will require all sovereigns and supranational entities to follow the BOEs example. However, we expect this decision to encourage some central banks to revisit their position regarding collateral posted for derivatives transactions if they want dealers to provide better prices.
The ratings shown are the banks deposit rating, its standalone bank financial strength rating/baseline credit assessment and the corresponding rating outlooks.
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10 11
The bank ratings shown in this report are the banks deposit rating, its standalone bank financial strength rating/baseline credit assessment and the corresponding rating outlooks. Including all support rendered since 2005 and contingent liabilities relating to assets and liabilities that need to be unwound.
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Maxim Bogdashkin Assistant Vice President - Analyst +7.495.228.6052 maxim.bogdashkin@moodys.com Anna Avdeeva Associate Analyst +7.495.228.6059 anna.avdeeva@moodys.com
Russian Central Bank Will Scrutinise Use of Emergency Liquidity Facilities, a Credit Positive
On 17 June, Mikhail Sukhov, deputy chairman of the Central Bank of Russia (CBR), stated that banks whose reliance on CBR funding exceeds 10% of liabilities will be subject to increased monitoring by the regulator. We view this development as credit positive for Russian banks as it signifies CBRs efforts to address at an early stage potential liquidity problems. The CBRs emergency liquidity facilities were among the most important tools of systemic support in Russia during the 2008-09 financial crisis. Banks borrowed from CBR during the entire crisis, with their dependence on CBR funding peaking at 14% of liabilities in January 2009 (see Exhibit 1).
EXHIBIT 1
Currently, most Russian banks do not rely on CBR borrowings, which accounted for only 4.5% of total liabilities at the end of May 2012. However, a limited number of banks (Exhibit 2) increased their CBR funding, mainly to finance opportunistic strategies in foreign exchange or securities markets, or loan growth. In some cases, excessive reliance on CBR funding may also signal bankspecific liquidity problems. Mr. Sukhov said as much, noting that excessive demand for CBR funding by certain banks may signal potential problems that their regulatory reporting does not show. Therefore, these banks will be required to explain the need for CBR funding, and we expect that they will have to revisit their funding strategies.
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List of Rated Banks That Borrowed Above 10% of Liabilities from the CBR as of May 2012
Bank CBR Funding % Total Liabilities Borrowings from CBR ($ millions) Bank ratings*
EXHIBIT 2
CentroCredit Bank StarBank Derzhava Bank Solidarnost Rosdorbank ING Bank Eurasia Stroykredit Bank SME Bank Nota bank SMP Bank Natixis (ZAO) Sovcombank MTS Bank Locko-bank Tatfondbank Rusfinance Bank
57% 27% 27% 21% 20% 14% 17% 14% 13% 13% 11% 11% 10% 10% 10% 10%
$921 $88 $82 $114 $72 $1,000 $162 $320 $208 $413 $57 $201 $403 $155 $223 $216
B3 stable; E+/b3 stable Ba2.ru ** B3 stable; E+/b3 stable B3 negative; E+/b3 negative B3 stable; E+/b3 stable Baa2 negative; D/ba2 stable Caa1 stable; E/caa1 stable Baa2 stable; E+/b1 stable B3 positive; E+/b3 stable B3 stable; E+/b3 stable Ba3 stable; E+/b1 stable B2 stable; E+/b2 stable B1 negative; E+/b2 stable B2 stable; E+/b2 stable B3 stable; E/caa1 stable Baa3 review for downgrade; E+/b1 stable
*The ratings shown are the banks deposit rating, its standalone bank financial strength rating/baseline credit assessment and the corresponding rating outlooks. ** National Scale Rating. National Scale Ratings are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. Source: Central Bank of Russia, Moodys calculations
Although we expect banks to resort to CBR liquidity facilities only in extraordinary cases, some players opt to fund their conventional banking operations with accessible and still cheap CBR sources. The cost of CBR three-month repo financing, currently the most popular CBR instrument, could be up to 300 basis points cheaper than a three-month unsecured interbank loan. While this choice is rational from a cost perspective, the utilisation of the CBRs limits and tying up liquid assets in repo deals decreases the maneuvering room that these banks will have in the event of a liquidity squeeze. As a result, we expect the CBRs increased monitoring will discourage banks from using overly aggressive liquidity management and improve banks liquidity.
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12 13
14
The bank ratings shown in this article are the banks deposit rating, its standalone bank financial strength rating/baseline credit assessment and the corresponding rating outlooks. The domestic subsidiary banks are the Bank of Tokyo-Mitsubishi UFJ, Ltd. (Aa3 stable; C/a3 stable) and Mitsubishi UFJ Trust and Banking Corporation (Aa3 stable; C/a3 stable) for MUFG; and Sumitomo Mitsui Banking Corporation (Aa3 stable; C/a3 stable) for SMFG. The domestic subsidiary banks are Mizuho Bank, Ltd. (A1 stable; C-/baa1 stable), Mizuho Corporate Bank, Ltd. (A1 stable; C-/baa1 stable), and Mizuho Trust & Banking Co., Ltd. (A1 stable; C-/baa1 stable).
22
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Tighter Lending Rules on Luxury Houses Are Credit Positive for Taiwanese Banks
Last Thursday, Taiwans central bank announced tighter lending rules on all luxury housing units, including a 60% cap on loan-to-value ratios (LTV) and a ban on interest-only mortgages. The tightening, which marks the first time that Taiwans regulator has imposed explicit lending rules on luxury houses, is credit positive for Taiwanese banks because the proposed rules will help dampen real estate speculation. The central bank defines luxury houses as units with a price higher than TWD80 million ($2.7 million) in the metropolitan Taipei area, and higher than TWD50 million ($1.7 million) in other areas. A stable property market is important to Taiwanese banks as housing loans 15 accounted for around 29% of total loans as of the end of 2011. The exposure was even higher among some of our rated banks, including Land Bank of Taiwan (Aa3 stable; D/ba2 stable), 16 Hua Nan Commercial Bank Ltd. (A3 stable; D+/ba1 stable), Cathay United Bank Co., Ltd. (A2 stable; C-/baa2 stable), Taipei Fubon Bank Co. Ltd. (A2 stable; C-/baa2 stable), and E. Sun Commercial Bank Ltd. (Baa1 stable; D+/baa3 stable). These banks had mortgage books exceeding 32% of their total loans at the end of 2011. We expect the LTV cap will provide an extra buffer for Taiwanese banks in the event of a major price correction. The central bank has observed that, compared with normal mortgages, banks usually make luxury housing loans at higher LTVs and lower lending rates. The maximum LTV on luxury housing loans can reach as high as 80%-97%, while the average LTV on a normal mortgage is 71%. 17 We note that Taiwans new LTV limit is lower than that of Hong Kong, where the Hong Kong Monetary Authority, the de facto central bank, last year lowered the LTV cap for housing units with prices higher than HKD10 million ($1.3 million) to 50%. Previously, the LTV cap for housing units with prices between HKD8 million ($1.0 million) and HKD12 million ($1.5 million) was 60%, while the LTV cap for housing units with prices higher than HKD12 million was 50%. Although the tightening in lending will slow banks mortgage growth, the central banks moves emphasize the importance of a healthier and more rational real estate market, a positive for banks asset quality. Property prices in Taiwan have risen significantly since 2009 (see Exhibit 1). Since mid-2010, Taiwans government bodies, including the central bank, Financial Supervisory Commission, and Ministry of Finance, have implemented several measures aimed at cooling the overheated property market, especially in the metropolitan Taipei area. These measures have helped stabilize housing prices in Taiwan since third-quarter 2011 and slowed the growth of new mortgage origination between August 2011 and January 2012.
15 16 17
Including home improvement loans for renovation or maintenance. The ratings shown are the banks deposit rating, its standalone bank financial strength rating/baseline credit assessment and the corresponding rating outlooks. This ratio is taken from the central banks press release, which provides only the maximum LTV on luxury housing loans and average LTV on normal mortgage.
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EXHIBIT 1
Q12007
Q12010
Q22008
Q22004
Q22011
Q22006
Q22009
Q32011
Q32008
Q32004
Q32006
Q22005
Q42008
Q42004
Q42006
Q32009
Q32005
Q42009
Q42005
Q22007
Q22010
Q32007
Q32010
Q42007
Q12004
However, weve observed a rebound in new mortgages underwritten by the five major banks 18 since February 2012 and believe that these latest measures reflect the governments determination to maintain a stable property market. Statistics published by the central bank (Exhibit 2) show that new mortgage origination as a percentage of total new loans for the five major banks increased to 7.9% in April from a low of 4.5% in January, while the new mortgage growth rose 1% in April, compared with a 46% contraction in January.
EXHIBIT 2
New Mortgage Originations and Ratio of New Mortgages to Total New Loans for The Five Major Banks
New Mortgages - right axis 12% 10% 8% 6% 4% 2% 0% New Mortgages / Total New Loans - left axis 70 60 50 40 30 20 10 0
Q42010
Q12008
Q12006
Q12009
Q12005
Q42011
2011/07
2011/10
2010/04
2010/08
2010/06
2010/09
2010/03
2010/05
2010/02
Note: Data are for Bank of Taiwan, Taiwan Cooperative Bank, First Commercial Bank, Hua Nan Commercial Bank and Land Bank of Taiwan. Source: Central Bank of Republic of China (Taiwan)
18
These five banks are Bank of Taiwan (Aa3 stable; D+/baa3 stable), Taiwan Cooperative Bank (unrated), First Commercial Bank (A3 stable; D+/ba1 stable), Hua Nan Commercial Bank, and Land Bank of Taiwan.
24
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2012/04
2011/12
2012/03
2011/01
2010/11
2010/07
2012/02
2010/10
2011/08
2011/04
2011/11
2011/06
2010/01
2011/09
2011/03
2011/05
2012/01
2011/02
2010/12
TWD billions
Q12012
Q12011
Insurers
Natsuko Ishida Analyst +81.3.5408.4059 natsuko.ishida@moodys.com
260
130
170
120
45
60
50
95
187
206
1,323
19
Tokio Marines operating non-life subsidiaries are Tokio Marine Nichido & Fire Insurance Co., Ltd. (financial strength Aa3 stable) and Nisshin Fire & Marine Insurance Co., Ltd. (unrated).
25
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EXHIBIT 2
Net Gain on Sales of Domestic Stocks - billions [A] Tokio Marine (Aa3 stable) Mitsui Sumitomo (A1 stable) Aioi Nissay Dowa (A1 negative) Sompo Japan (A1 stable) Nipponkoa (unrated) Market Value of Stocks on Balance Sheet - billions [B] Tokio Marine Mitsui Sumitomo Aioi Nissay Dowa Sompo Japan Nipponkoa Percentage Gain to Balance Sheet Amount [A]/[B] Tokio Marine Mitsui Sumitomo Aioi Nissay Dowa Sompo Japan Nipponkoa 1% 1% 1% 1% 4% 1% 1% 3% 1% 3% 3% 5% 10% 1% 4% 2% 1% 4% 2% 2% 5% 2% 3% 1% 2% 6% 2% 1% 3% 3% 4,714 3,010 1,169 2,100 1,158 3,487 2,245 846 1,523 858 2,199 1,380 613 1,019 601 2,737 1,724 718 1,239 680 2,204 1,510 663 1,163 602 1,924 1,418 602 984 541 61 24 17 19 43 45 24 25 22 23 68 66 58 14 24 60 10 31 28 12 116 35 23 16 11 122 24 6 32 18
Note: Combined figures of Aioi and Nissay Dowa are used up to March 2011 Source: Company disclosures (non-consolidated) and Moodys
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Asset Managers
Rory Callagy Vice President - Senior Analyst +1.212.553.4374 robert.callagy@moodys.com
27
25 JUNE 2012
Chinas Opening of High-Yield Bond Market Is Credit Positive for International Asset Managers
Last Wednesday, the China Securities Regulatory Commission (CSRC) approved rules that would allow the countrys RMB2 trillion ($315 billion) mutual fund industry to invest in Chinas newly created high-yield corporate bond market. The approval is credit positive for international asset managers that have local presence in China, expertise in high-yield corporate bonds, and strong distribution capabilities. Potential beneficiaries, to name a few, include international asset managers such as Invesco Holding Company Limited (A3 stable) and Franklin Resources, Inc. (A1 stable), which have joint ventures with local asset managers. In addition to providing a new investment opportunity, fees for high-yield bonds are typically higher than those for highly liquid traditional asset classes. Accordingly, the opening of Chinas high-yield bond market to mutual funds will allow asset managers that are already well positioned within China to diversify their product line into a higher-margin segment, which we expect will improve their profit margins and revenue diversification. The opening of the high-yield corporate bond market to mutual funds is the latest development in a series of regulatory changes by Chinese authorities to liberalise and develop the countrys domestic capital markets. Chinas renminbi-denominated bond market, of which high-yield bonds are a subset, has grown quickly to become the biggest bond market in Asia (see Exhibit 1).
EXHIBIT 1
RMB trillions
15 10 5 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
As Chinas bond market develops, there will be better price transparency and risk-return assessments for investors, which, in turn, encourages additional foreign investment. With the introduction of the high-yield bond market, experienced asset managers with a presence in China now have an enhanced pool of local investments to match the global capital seeking to invest in China. Global investors appetite for fixed-income investments in China has already been growing as evidenced by the wellsubscribed issuances of dim sum bonds (renminbi-denominated bonds issued outside mainland China), which have reached $5.4 billion this year. In the Chinese bond market, institutional investors are dominated by state-owned financial enterprises. High-yield bonds will also significantly enhance the opportunity for domestic investors to take stakes in small and medium-sized enterprises (SMEs) that make up the vast majority of the Chinese economy. Mutual funds such as Franklin Templetons Surging Income Bond Fund, Invescos Great Wall
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Sustaining Income Bond Fund, and Deutsche Banks Harvest Bond Open-Ended Fund and Harvest Credit Bond Fund are ready to take advantage of the opening of the high-yield bond market. We expect international asset management companies that have built a local market presence over the years through joint ventures and affiliates to benefit from the increasing liberalisation of the fund industry and the growing availability of capital markets instruments. Exhibit 2 is a list of international asset managers that are authorized by the CSRC to manage mutual funds within China and have holding companies that we rate. Authorised Fund Management Companies in China with International Affiliation
Company Name International Stakeholder Moody's Rated Entity / Parent of Stakeholder
EXHIBIT 2
Guotai Asset Management Co., Ltd. Bosera Asset Management Co., Ltd. Changsheng Fund Management Co., Ltd. Harvest Fund Management Co., Ltd. Great Wall Fund Management Co., Ltd. UBS SDIC Fund Management Co., Ltd. China Merchants Fund Management Co., Ltd. Fortune SGAM Fund Management Co., Ltd. Morgan Stanley Huaxin Fund Management Co. Guotai Junan Allianz Fund Management Co., Ltd. Fortis Haitong Investment Management Co., Ltd. Invesco Great Wall Fund Management Co., Ltd. AEGON-Industrial Fund Management Co., Ltd. SWS MU Fund Management Co., Ltd. China International Fund Management Co., Ltd. Bank of China Investment Management Co., Ltd. Franklin Templeton Sealand Fund Management Co., Ltd. Huatai-PineBridge Fund Management Co., Ltd. ICBC Credit Suisse Asset Management Co., Ltd. Bank of Communications Schroder Fund Management Co., Ltd. CITIC-Prudential Fund Management Company Ltd. HSBC Jintrust Fund Management Company Limited First State Cinda Fund Management Co., Ltd. Lombarda China Fund Management Co., Ltd. KBC-Goldstate Fund Management Co., Ltd. AXA-SPDB Investment Managers Co., Ltd. ABC-CA Fund Management Co., Ltd. Minsheng Royal Fund Management Co., Ltd. BNY Mellon Western Fund Management Co., Ltd.
Allianz SE ING Investment Management DBS Group Deutsche Asset Management Invesco Asia UBS Asset Management ING Investment Management Societe Generale Asset Management Morgan Stanley Asset Management Allianz Asset Management Fortis Investment Management Invesco Asia AEGON Asset Management Mitsubishi UFJ Asset Management JPMorgan Asset Management BlackRock Franklin Templeton PineBridge Investments Credit Suisse Asset Management Schroder Investment Management Ltd Prudential Asset Management HSBC Asset Management Lombarda China Fund Management Co. Goldstate Securities / KBC AXA Investment Managers Amundi RBC Asset Management BNY Mellon Asset Management
Allianz SE, Aa3 ING Group N.V., A3 DBS Bank Ltd, Aa1 Deutsche Bank AG, A2 Invesco Holding Company Limited , A3 UBS AG, A2 ING Group N.V., A3 Societe Generale , A2 Morgan Stanley, Baa1 Allianz SE, Aa3 Fortis Bank, A2 Invesco Holding Company Limited , A3 AEGON N.V., A3 Mitsubishi UFJ Trust and Banking Corporation, Aa3 JPMorgan Chase & Co, A2 BlackRock Inc., A1 Franklin Resources, Inc., A1 Prudential Public Limited Company, A2 Credit Suisse Group AG, A1 Schroders, not rated Prudential Public Limited Company, A2 HSBC Holdings plc, Aa3 Banca Lombarda e Piemontese S.p.A., Baa2 KBC Group NV, Baa1 AXA, A2 Groupe Crdit Agricole, A2 Royal Bank of Canada, Aa3 BNY Mellon Corporation, Aa3
Colonial First State Global Asset Management Commonwealth Bank of Australia, Aa2
Source: China Securities Regulatory Commission, Authorised Asset Management Companies as of February 2012.
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Sovereigns
Thomas Byrne Senior Vice President - Regional Credit Officer +65.6398.8310 thomas.byrne@moodys.com David Erickson Associate Analyst +65.6398.8334 david.erickson@moodys.com
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Japans Conundrum: Tightening Japanese Government Bond Yields against Deteriorating Government Finances
10 Year JGB Yield - left axis 2.5% 2.0% 1.5% General Government Budget Deficit - right axis 12% 10%
6% 1.0% 0.5% 0.0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 4% 2% 0%
However, raising tax rates can also thwart growth, and policymakers fear a bring-forward and subsequent slowdown in private consumption and GDP growth similar to what accompanied the increase in the consumption tax in 1997. As such, supply side measures that increase productivity and investment in the domestic economy are crucial for long-term fiscal sustainability. A succession of LDP and DPJ governments following the Koizumi administration (2001-06) has been unable to pass measures that would lead to substantive fiscal consolidation. Mr. Noda has been constrained by a large faction within his own party that has been against raising the consumption tax. By staking his political career on passage of the consumption tax bill and deferring DPJ- supported social welfare issues, a guaranteed minimum pension and health care reform for the elderly, to consideration by a proposed council, Mr. Noda gained the backing of the two opposition parties and most likely the passage of the tax bill. Mr. Noda reportedly intends to bring the bill to a vote in the lower house on 26 June. Even with the agreement to raise the consumption tax, the government will not achieve its ultimate goal of eliminating the primary deficit by 2020 without implementing further reforms. Therefore, resolute political leadership is essential to advance a reform agenda and overcome policy inertia and gridlock that have characterized Japans politics since the Koizumi administration succeeded in reining in the fiscal deficit before the onset of the global financial crisis. Without such progress, Japan risks reaching a tipping point where the market demands a risk premium on JGBs, making deficit financing and debt refinancing very costly.
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Percent of GDP
8%
Yield
Icelands Prepayments on IMF and Nordic Government Loans Are Credit Positive
Last Monday, the Central Bank of Iceland announced that Iceland (Baa3 negative) would prepay ISK171 billion on its outstanding loans from the International Monetary Fund (IMF) and the Nordic governments, the second time this year that the country has made an early repayment on its substantial loans extended by official creditors. 20 The prepayment is credit positive as it improves Icelands external debt maturity profile and will help limit the risk of excessive exchange rate volatility as the country gradually loosens its strict capital controls. The original total loan from the IMF and the Nordic governments was 3.5 billion, or approximately ISK558 billion at current exchange rates. Including the first repayment, Iceland has now repaid 55.5% of the combined loans from the IMF and Nordic governments. 21 The early repayment to the IMF and the Nordic governments has only a limited impact on Icelands overall public debt levels because the government has repaid official creditors with the proceeds of a recent Eurobond issue. 22 The transaction reduces Icelands gross external debt by 2.6% of GDP to approximately 173% of GDP. The early repayments cover principal that is due to the IMF in 2013 and 2014, and repayments that are due to the Nordic governments in 2016-18. The exhibit below shows the repayment profile for Icelands Treasury and Central Bank combined, before the March and June pre-payments, and the new repayment profile. As the exhibit shows, the most substantial repayment on Icelands public-sector external debt occurs in 2016, when the countrys first post-crisis Eurobond matures. Until then, repayments on external debt by the government and central bank are comparatively moderate at ISK895 billion, including the second prepayment, and fully covered by foreign-exchange reserves, which were ISK1,063 billion as of May. Icelands Combined Treasury and Central Bank Foreign Debt Payment Schedule (ISK Billions)
Before Prepayments kr.250 kr.200 kr.150 kr.100 kr.50 kr.0 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E After Prepayments
Note: Includes projected interest due Before Prepayments: As of the end of March 2012 Source: International Monetary Fund, Icelandic Government Debt Management, Bloomberg
20
21 22
32
ISK billions
The first repayment in March 2012 was equal to 705 million, or nearly 21% of the total loans outstanding, and covered maturities of 2013 to the IMF and 2014-16 payments due to the Nordic governments. See Iceland: Early Part-Repayment of IMF and Nordic Loans is Positive, 22 March 2012. The pari passu clause requires the Icelandic authorities to make proportional pre-payments to the IMF and the Nordic governments. According to Icelandic authorities, the transaction leads to an increase in government gross debt by 2.6% of GDP. This is due to the fact that the IMF and Norway extended their loans directly to the Central Bank of Iceland. As a result, these liabilities do not appear under government debt. However, we include these loans in our calculations of general government debt.
25 JUNE 2012
The early repayments are positive because they will help reduce the risk of excessive exchange rate volatility as Icelands authorities ease the countrys strict controls on capital outflows, which we expect to start in earnest in 2013-14. 23 Hence, it is positive that the authorities attempt to reduce capital outflows linked to their own debt maturities that would otherwise exert additional pressure on the exchange rate. Still, even taking into account the reduced foreign-currency outflows linked to official payments, the size of potential capital outflows in the coming years remains substantial and properly sequencing the liberalization of capital outflows to maintain exchange rate and financial stability will be the major challenge for Icelandic policy-makers. Foreign investors have been unable to withdraw approximately ISK425 billion (24% of 2012 GDP) of krna-denominated assets since the government imposed strict capital controls in late 2008. Most of those investors will want to exit the country as soon as the government lifts the restrictions on capital outflows. Depreciation pressure on the krna will also likely arise from the settlement of the estates of the banks in the winding-down process as well as foreign-currency debt payments by domestic companies. The Icelandic authorities estimate that foreign creditors of the failed banks are due to receive around ISK190 billion (11% of GDP) in foreign currencies out of the settlement of the failed banks estates. In addition, they estimate foreign-currency debt payments that are due by Icelandic companies total up to ISK80 billion per year in 2012 and 2013, rising to more than ISK100 billion per year after that, assuming no change in income. 24
23
24
The Central Bank has been conducting foreign-exchange auctions since February this year to allow the most impatient foreign investors to exit the country. While this is the first step in the capital account liberalization strategy of the Icelandic authorities, the amounts of capital outflows so far have been moderate. See Central Bank of Iceland: Financial Stability Report, June 2012.
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Atsi Sheth Vice President - Senior Analyst +1.212.553.4873 atsi.sheth@moodys.com Richard Miratsky Vice President - Senior Analyst +420.22.166.6350 richard.miratsky@moodys.com Andrew Schneider Associate Analyst +1.212.553.4749 andrew.schneider@moodys.com
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US Public Finance
Robert Weber Assistant Vice President - Analyst +1.212.553.7280 robert.weber@moodys.com
25 26
All local government data are from the government itself or its audited financial statements Source: New York State Comptroller
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25 JUNE 2012
Vito Galluccio Analyst +1.212.553.2738 vito.galluccio@moodys.com Geordie Thompson Vice President - Senior Credit Officer +1.212.553.0321 geordie.thompson@moodys.com
Rhode Islands Budget Is Credit Positive for Central Falls and Schools, but Leaves Woonsocket and Pensions Unaddressed
On 15 June, Rhode Island (Aa2 negative) Governor Lincoln Chafee signed the states fiscal 2013 budget. The $8.1 billion budget includes a material increase in funding for schools, which is credit positive both for school districts and for cities and towns. The budget also appropriates $2.6 million for Central Falls (Caa1 negative) retirees, paid out over five years, allowing the city to continue its bankruptcy exit plan. 27 However, the legislature adjourned without approving any additional financial assistance for cash-strapped Woonsocket (B2 review for downgrade) 28 or provisions to alleviate mounting pension-related challenges for local governments in the state. In the budget, the state increased school aid funding by $34 million, or 3.9%, marking the third consecutive annual increase in school funding (Exhibit 1). State funding for education now stands at over $900 million, well above the pre-recession peak.
EXHIBIT 1
$ millions
$700 $600 $500 $400 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Rhode Island House Fiscal Advisory Staff, November 2011 report and 2013 Budget
In addition, recent changes in the states distribution formula for school aid more heavily incorporate changes in population and socioeconomic factors, which result in greater increases in education funding for local governments that have experienced greater population growth and declines in personal income. Exhibit 2 shows the districts with the 10 biggest increases and decreases in education aid in the 2013 budget. For example, while total state education aid was up 3.9% in 2013 compared with fiscal 2012, Barrington (Aa1) will receive a 42% increase and Chariho Regional Schools (Aa3) will receive a 14% cut.
27 28
See Central Falls, Rhode Island, Receives Credit Positive Bankruptcy Ruling, 16 January 2012. See Rhode Island Says No to Woonsockets Supplemental Tax Levy, a Credit Negative, 4 June 2012.
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EXHIBIT 2
Although direct non-education aid for cities and towns is flat versus 2012 (Exhibit 3), the additional school funding will benefit most Rhode Island cities and towns because these municipalities bear responsibility for school financial operations and, on average, allocate more than half of their operating budgets to school funding.
EXHIBIT 3
$ million
$150 $100 $50 $0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Additionally, the Rhode Island budget appropriates $2.6 million for Central Falls retirees to mitigate significant cuts to their pensions as a consequence of the citys Chapter 9 bankruptcy plan. The funds are the result of negotiations between the state-appointed receiver for Central Falls and the retirees, and the appropriation allows the city to continue with its plan to emerge from bankruptcy later this year. The legislature adjourned without approving any additional financial assistance for the city of Woonsocket, which is currently under the control of a state budget commission. The city is struggling with a $10 million accumulated deficit and an imminent cash shortage stemming from overspending in school operations. The legislatures refusal to pass a supplemental tax levy prompted the school board to vote last week for a takeover of the schools by the Rhode Island Department of Education, which the department is currently reviewing.
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The state also failed to enact pension reform measures for local governments. Legislation passed last November made significant changes to the states pension system, including changes to employee benefits, but neglected to address the states 36 locally administered plans. Members of the legislature have publicly stated that they intend to take up local pension reform, but the delay into the next legislative year highlights the significant political hurdles theyll have to surmount.
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Contraction in Municipal Variable Rate Demand Debt Is Credit Positive for Weaker Issuers
On 15 June, the Securities Industry and Financial Markets Association (SIFMA) released data showing that the amount of variable-rate demand obligations (VRDOs) outstanding as of the end of the first quarter declined 19% to $290 billion from a year earlier (see exhibit). The sharp decline indicates that a broad range of issuers have successfully reduced their exposure to bank supported variable rate demand debt and the associated risks. This is credit positive for financially weak issuers. Unwinding these exposures has increased in importance owing to the credit pressure on many banks that provide credit and liquidity for VRDOs, and the reduced number of highly rated banks willing to provide replacement letters of credit and liquidity facilities for weaker borrowers. Contraction of Municipal Variable Rate Market Continues in 2012
$430 $410 $390 $370
$ billions
Jan-10
Jun-10
Jun-11
Jul-10
Oct-10
Dec-10
Mar-10
Aug-10
Feb-11
Apr-11
Sep-11
Nov-11
Jan-12
Jan-11
Jul-11
Sep-09
Nov-09
May-11
Nov-10
Oct-09
Dec-09
Source: SIFMA
The decline in the outstanding amount of VRDOs reflects multiple factors, including issuers gravitating towards simpler debt structures and a low interest rate environment that makes fixed rate refinancing attractive. Although some of the contraction reflects issuers proactive effort to reduce the risks associated with VRDOs, some of the decline is likely the result of a lack of other options by weaker issuers looking to extend or substitute their bank facilities. About one quarter of VRDOs with support facilities that expired last year from issuers rated A or below were redeemed, refunded with fixed rate debt or a direct purchase from a bank, or converted to a structure that does not require bank support. Although issuers have been successful in finding solutions to the historically high volume of expiring credit facilities over the last past two years, we expect it will be more challenging going forward. In 2008, there was a spike in issuance of VRDOs after the auction rate market unraveled. Since most of these facilities expired in three to five years, many are now up for renewal. With fewer banks providing these facilities and a challenging landscape for those banks that remain, weaker issuers may find it difficult to extend the expiration date of the existing facility or to secure a substitute bank facility. The decline in availability and affordability will likely force many issuers to seek alternative financing. Variable-rate demand debt exposes issuers not only to the credit of the bank providing credit or liquidity support, but also to general market risk. A market disruption or a credit event related to the specific bank facility provider could cause investors to put bonds back to the issuer. In the event of a failed remarketing, the bank would be required to purchase the bonds. These bank-owned bonds (also known as bank bonds) are usually subject to an accelerated amortization schedule and higher interest
39
May-10
Aug-09
25 JUNE 2012
Mar-12
Feb-10
Apr-10
Jul-09
Oct-11
Sep-10
Dec-11
Mar-11
Aug-11
Feb-12
rates, which may add stress to an issuers cash flows. Upon expiration of the facility, issuers are also subject to renewal risk as bank facilities typically have one to three-year terms. With continued challenges in the banking sector and a shrinking pool of banks providing credit and liquidity facilities, it is likely the multi-year trend of decline in the VRDO market will persist. For those weaker issuers rotating out of the VRDO structure, the associated risk reduction is credit positive.
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CREDIT IN DEPTH
Detailed analysis of an important topic
Stephen Sohn Vice President - Senior Credit Officer +1.212.553.2965 stephen.sohn@moodys.com Curt Beaudouin, CFA Vice President - Senior Analyst +1.212.553.1474 john.beaudouin@moodys.com Maggie Taylor Vice President - Senior Credit Officer +1.212.553.0424 margaret.taylor@moodys.com
New Debit Rules Hurt Banks and Reshape the Payment Processor Market
Merchant Acquirers Reap Some Momentary Gains from Durbin Amendment; Retailers Benefit This is an extract from a larger report found here. The Durbin Amendments reform of debit interchange fees and routing practices hits banks the hardest and makes payment processing more competitive. Merchant acquirers 29 and retailers benefit from lower swipe fees, but banks are losing revenue. We expect banks to attempt to offset lost revenue by raising fees for other products and cutting expenses, although this process will be difficult and the timing is unclear. Visa will retain its market leadership position in the signature debit-processing space. With the loss of its exclusive payment network arrangements, Visa will face greater competition in the personal identification number (PIN) debit space, but will take steps to preserve its leadership position in the more profitable signature debit market. (With PIN debit, the customer enters a PIN on a keypad at the point of sale, while with signature debit the customer signs a receipt at the point of sale.) Shifts in PIN debit market share will not materially affect the credit profiles of rated payment processors. The small fees generated by PIN debit (albeit at high profit margins) and the number of processors competing to take share from Visa will likely render any share gains immaterial to these payment processing companies. Merchant acquirers, notably the smaller ones, will be short-term beneficiaries of lower interchange fees. Small acquirers typically have more bundled pricing agreements than the larger players, which mainly have interchange-plus agreements. 30 We expect these acquirers to keep a portion of the interchange savings until competition forces greater pricing transparency. Retailers will use the savings from lower debit fees to offset escalating operating costs. We dont expect lower debit fees to result in a material improvement in retailers earnings, which are pressured by other rising costs. Nor do we expect the benefit of lower debit fees to flow through to lower prices for consumers, though this may have been one of the original intentions of the Durbin Amendment. What is the Durbin Amendment? The Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act authorizes the Federal Reserve to regulate debit interchange fees and network routing of debit transactions. The legislation specifically addresses debit-card transaction fees from payments processed through networks operated by Visa Inc. (A1 stable) and MasterCard Inc. (A3 stable). Because Durbin relates only to debit card transaction fees and does not address credit card fees directly, it does not apply to networks operated by American Express Company (A3 stable) and Discover Financial Services (Ba1 stable). The two key provisions of the Durbin Amendment are as follows:
Debit interchange fees. Effective 1 October 2011, the debit interchange fees (fees that merchants pay to banks to process debit card payments from consumers) were significantly curtailed. Banks (other than those with less than $10 billion in assets, which are exempt from the ruling) can only charge debit interchange fees of up to 21 cents plus 5 basis points of the transactions value, not including a 1 cent allowance for meeting certain fraud prevention standards.
29 30
A merchant acquirer is a payment processor responsible for handling the merchants sales transactions. Interchange plus means the interchange fee (a pass-through fee from the merchant to the card issuing bank) plus a processing fee; the two elements are broken out separately in a pricing agreement.
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CREDIT IN DEPTH
Detailed analysis of an important topic
This represents a decrease of about a half of the historical average debit-card interchange fee of 44 cents per transaction from retailers on an average debit purchase of about $39 (equal to 1.15% of the purchased amount). However, as the purchase amount becomes larger, the percentage reduction in debit fees becomes greater given the fixed nature of the mandated pricing model (i.e., the variable component has been cut sharply to five basis points).
Network exclusivity. Effective 1 April, debit-card issuers were required to provide merchants with a choice of at least two unaffiliated networks through which to route their transactions, which seeks to lower processing costs. This routing provision will break up the exclusive payment network arrangements that Visa had with many banks.
Unlocking Visas exclusive contracts (i.e., deals with banks whereby a debit card processes only Visa Signature and Visa Intralink (PIN debit) transactions) will likely dilute its market share in the PIN debit space, the less profitable of the two types of debit networks (the other being signature debit). We expect the increased competition to benefit other PIN debit network operators such as MasterCard (Maestro), First Data Corporation (B3 stable) (STAR), Discover Financial Services (PULSE), Fidelity National Information Services Inc. (Ba1 stable) (NYCE), and Fiserv Inc. (Baa2 stable) (ACCEL/Exchange). Who are the winners and losers of the new debit card rules? As shown in the exhibit below, a range of participants in the debit card payment cycle have been affected by the new Durbin rules. Retailers (upper right) are clearly the winners because they have the greatest ability to adapt to the new rules and deal with or even benefit from its financial consequences. Navigating the Durbin Amendment
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CREDIT IN DEPTH
Detailed analysis of an important topic
Although one of the original intentions of the Dodd-Frank reforms may have been to protect the consumer, we believe that none of the cost savings to retailers will flow through to the consumer in the form of lower prices. We expect retailers will keep the majority of the savings to help defray their rising operating costs. Conversely, banks (lower left) are clearly the losers, as they struggle to adapt to the new rules and replace lost revenues. The rest of this report discusses the effects of the Durbin Amendment on banks, the card networks, merchant acquirers, and retailers. It may be found here.
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RATING CHANGES
Significant rating actions taken the week ending 22 June 2012
Corporates
Choice Hotels International, Inc.
20 Jun 12
Downgrade
22 Jun 12
Baa3 Negative
Choice recently decided to materially increase its financial leverage, most likely to fund a potential $600 million shareholder dividend. Choices actions will lead to a significant deterioration in debt and cash flow metrics for an extended period and reveal a financial policy that is considerably more aggressive than we had anticipated, leading to the downgrade. Codere S.A.
26 Jan 12
Downgrade
21 Jun 12
B1 Negative
The downgrade reflects the increased business risk affecting its operations in Argentina and Spain. We also have concerns about Codere's liquidity profile over the medium term if the group is unable to access the cash flows generated by its Argentinean operations on a sustained basis. The business environment in Argentinawhere Codere generated 57% of EBITDA in 2011is becoming more challenging and unpredictable as the Argentinean government continues to tighten foreign-exchange controls and limits company dividends as it fights a flight of capital from the country. CHS/Community Health Systems, Inc.
15 Jun 11
Outlook Change
20 Jun 12
B1 Negative
B1 Stable
The outlook change reflects our expectation that Community Health will maintain strong margins while integrating recently acquired facilities and investing in capital projects. While ongoing investigations remain a risk, we do not expect them to detrimentally affect Community Health's very good liquidity position in the near term. We expect Community Health to maintain margins through its focus on cost management and improvements at recently acquired facilities, among other efforts.
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25 JUNE 2012
RATING CHANGES
Significant rating actions taken the week ending 22 June 2012
Flowserve Corporation
1 Jun 12
Upgrade
22 Jun 12
Baa3 Stable
Recent reductions in working capital inefficiencies and an increase in the clarity of its capital structure strategy led to the upgrade. We expect Flowserve to achieve modest earnings growth and over $300 million of free cash flow over the next year, supported by Flowserves strong market position within the fragmented flow control industry. We also expect Flowserve to maintain good liquidity as it implements its recently announced $1 billion stock repurchase program. RBS Global, Inc.
21 Apr 10
Upgrade
19 Jun 12
B3 Stable
B2 Stable
The upgrade primarily reflects RBS Globals improved financial leverage as a result of an initial public offering by RBS Globals parent company, Rexnord Corporation. Proceeds from the IPO will be used to redeem $300 million of subordinated debt co-issued by RBS and Rexnord LLC. Although company leverage is still high, ratings are supported by high cash balances and availability of revolving credit. Walgreen Co.
5 Apr 12
A3 P-2 Stable
The review for downgrade is prompted by Walgreen's announcement that it had entered into an agreement to purchase 45% of the equity of Alliance Boots. Walgreen intends to finance this transaction with a combination of additional debt, equity, and excess cash. In addition, the review reflects the sizable amount of debt already held by Alliance Boots, and the economic climate in Europe, where Alliance Boots has a sizable amount of business.
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25 JUNE 2012
RATING CHANGES
Significant rating actions taken the week ending 22 June 2012
Financial Institutions
Banks and Securities Firms
Downgrades
21 June 12
We downgraded the ratings of 15 banks and securities firms with global capital markets operations because of our reassessment of the volatility and risks faced by creditors of firms with global capital markets operations.. We downgraded the long-term senior debt ratings of four firms by one notch, 10 firms by two notches and of one firm by three notches. In addition, we downgraded the short-term ratings of four firms operating companies to Prime-2 and the short-term ratings of their holding companies to Prime-2. We downgraded the short-term ratings of the holding companies of a further two firms to Prime-2. These rating actions conclude the review initiated on 15 February 2012. All of the banks affected by these actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities. However, they also engage in other, often market-leading business activities that are central to our assessment of their credit profiles. These activities can provide important shock absorbers that mitigate the potential volatility of capital markets operations, but which also present their own risks and challenges. In the past these risks have led many such institutions to fail or to require external support to avoid failure, including several firms affected by these rating actions. In addition to the credit implications of capital markets operations, these actions reflect the size and stability of earnings from non-capital markets activities at each firm, as well as each firms capitalization and liquidity buffers and other considerations were applicable, such as exposure to the European operating environment, any record of risk management problems and risks from exposure to US residential mortgages, commercial real estate or legacy portfolios. For more information, please see our special comment Key Drivers of Rating Actions on Firms with Global Capital Markets Operations and the Global Investment Bank Ratings List excel file.
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25 JUNE 2012
RATING CHANGES
Significant rating actions taken the week ending 22 June 2012
Downgrades
21 June 12
We downgraded Lloyds TSB Bank plc's senior debt and deposit ratings by one notch, to A2 from A1. We also lowered the banks baseline credit assessment to baa2 from baa1, within the C- standalone bank financial strength rating range. The outlook on the C-/baa2 standalone bank financial strength rating/baseline credit assessment is stable and that on the A2 debt and deposit ratings is negative, reflecting our view that government support for large UK banks will be reduced over the medium term. The Prime-1 short-term rating was confirmed. The drivers of the downgrade and lower standalone credit profile were the bank's sensitivity to the increasingly challenging operating environment in the UK and in Europe more widely and Lloyds' still-high use of wholesale funding, which implies that it would be vulnerable to changes in investor sentiment toward European banks. The A2 senior debt rating of the holding company was downgraded to A3, in line with our views on the structural subordination of holding companies. The senior debt ratings of Bank of Scotland plc were downgraded to A2 from A1, and the senior debt ratings of HBOS plc were downgraded to A3 from A2. The insurance financial strength ratings of Scottish Widows plc and Clerical Medical Investment Group Ltd. were downgraded by one notch, to A2 from A1, and the subordinated debt ratings of both insurers were downgraded to Baa2 (hyb) from Baa1 (hyb). The outlook on all these ratings is stable. Citigroup Subsidiaries
Downgrades
22 June 12
Following our downgrade of its parents, Citigroup Inc. (Citibank) and Citibank N.A., on 21 June 2012 we downgraded the ratings of Citibanks three subsidiaries in Japan. We downgraded Japan Ltd.s long-term deposit rating to Baa1 from A2, its baseline credit assessment to baa3 from baa1, and its short-term deposit rating to Prime-2 from Prime-1. The ratings outlook is stable. We also downgraded the long-term ratings of Citigroup Japan Holdings Inc. (CJH) and Citigroup Global Markets Japan Ltd (CGMJ), to Baa3 from Baa1. The short-term rating of CGMJ was downgraded to Prime-3 from Prime-2. The rating outlook for CJH and CGMJ is negative. Outside of Japan, we also downgraded the long- and short-term senior unsecured ratings of Citigroup Pty Ltd, to Baa1/Prime-2 from A2/Prime-1, and lowered its standalone bank financial strength rating/baseline credit assessment to C-/baa1 from C+. At the same time, we affirmed the long- and short-term deposit ratings of Citibank Korea at A2/Prime-1. All these ratings carry a stable outlook. The rating action on Citigroup P/L concludes the review initiated on 21 February 2012. The ratings on Citibank Korea were not on review.
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25 JUNE 2012
RATING CHANGES
Significant rating actions taken the week ending 22 June 2012
Downgrades
20 June 12
Long-Term Local & Foreign Currency Deposits Short-Term Local & Foreign Currency Deposits Standalone Bank Financial Strength/Baseline Credit Assessment
These downgrades were prompted by the weakened financial capacity of the Belgian parent group, KBC Bank, which we downgraded on 15 June 2012. The one-notch downgrade of CSOB Czech Republic's long-term deposit ratings and standalone bank financial strength rating/baseline credit assessment also reflects the more difficult operating environment in the Czech Republic, which we believe will likely dampen earnings generation and pressure asset quality. ING Bank Slaski S.A.
21 Feb 12
Downgrades
18 June 12
Long-Term Deposits Short-Term Local & Foreign Currency Deposits Standalone Bank Financial Strength/Baseline Credit Assessment
The downgrades of the ratings of these subsidiaries of ING Bank N.V. follow our downgrade of the parent bank on 15 June. We maintain very high parental support assumptions for ING Bank Slaski, the subsidiary in Poland, reflecting its 75% strategic ownership by ING Bank N.V., the close brand association between the two entities, and our view that the Polish market remains strategic for the Dutch group and provides an opportunity for diversification. We also maintain a very high probability of parental support for ING Bank Eurasia, the Russian subsidiary, reflecting the parent's 100% ownership
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25 JUNE 2012
RATING CHANGES
Significant rating actions taken the week ending 22 June 2012
Downgrade
18 June 12
Long-Term Deposits Short-Term Local & Foreign Currency Deposits Standalone Bank Financial Strength/Baseline Credit Assessment
The one-notch downgrade was prompted by our downgrade of Rabobanks standalone ratings, from which we impute rating uplifts for the Polish subsidiary. Nonetheless, we believe that the probability of parental support for Rabobank remains very high, given Rabobanks role as a long-term strategic shareholder in BGZ, its record of providing foreign-currency funding and capital resources to BGZ and its long-term interest in the Polish agribusiness sector. Natixis Bank (ZAO)
21 Feb 12
Downgrade
18 June 12
Long-Term Deposits Short-Term Rating National Scale Rating Standalone Bank Financial Strength/Baseline Credit Assessment
The downgrade of Natixis Bank (ZAO), the Russian subsidiary of Natixis, follows our 15 June downgrade of the French parent, The long-term ratings of ZAO nonetheless continue to incorporate one notch of uplift because of our parental support assumptions.
Sovereigns
Turkey, Government of
5 October 10
Upgrade
20 June 12
Ba2 Positive
Ba1 Positive
The key drivers for the rating action were, first, the significant improvement in Turkey's public finances and increased shock-absorption capacity of the government's balance sheet and, second, policy actions that have the potential to address external imbalances, such as the large current account deficit, which is the largest credit risk facing the country. The government's financial strength has been improving steadily over the past decade. Key supports to the government's ratings include its effectiveness, transparency and rule of law.
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25 JUNE 2012
RATING CHANGES
Significant rating actions taken the week ending 22 June 2012
Sub-sovereigns
Istanbul, Metropolitan Municipality of (Turkey)
5 Oct 10
Upgrade
21 June 12
Ba2 Positive
Ba1 Positive
Upgrade
21 June 12
Upgrade
21 June 12
The action on these Turkish sub-sovereigns follows our upgrade of Turkey's government bond rating to Ba1 from Ba2, with positive outlook. The action on Turkey's sovereign rating has direct implications for sub-sovereign ratings given their close operating and financial linkages with the Turkish government.
US Public Finance
New York State Thruway Authority (NY)
16 June 11
Outlook Change
18 June 12
A1 Stable
A1 Negative
The negative outlook speaks to an as yet uncertain finance plan for a new Tappan Zee Bridge across the Hudson River north of New York City, and the risks associated with the execution and management of a design-build contract and the environmental permitting. The authority expects to debt finance most of the cost of the Tappan Zee Bridge replacement. An essential crossing that connects Rockland and Westchester Counties, the bridge is a key part of New Yorks thruway system and provides nearly 19.5% of the authoritys toll revenues.
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25 JUNE 2012
RATING CHANGES
Significant rating actions taken the week ending 22 June 2012
Structured Finance
Downgrades of Global Banks and Securities Firms June Drive Negative Rating Actions on over 100 Structured Finance Securities We downgraded securities that have a direct linkage to the downgraded global banks and securities firms, which act as key counterparties in the affected transactions. We placed on review for downgrade those securities that have strong indirect linkage to the downgraded banks unless issuers and their agents have communicated plans to implement protection mechanisms that will reduce the credit linkage to these banks. We did not take immediate rating actions on securities with indirect exposure to downgraded banks if we concluded those exposures have a small effect on the securities' credit quality, or that the likelihood of the timely implementation of effective structural protection mechanisms was high. For more information, please see the press releases Moody's downgrades 28 European structured finance transactions directly exposed to firms with global capital markets operations,Moody's downgrades 26 US structured finance transactions directly exposed to firms with global capital markets operations and Moody's downgrades 37 structured finance transactions directly exposed to firms with global capital markets operations.
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25 JUNE 2012
RESEARCH HIGHLIGHTS
Notable research published the week ending 22 June 2012
Corporates
European Telecommunications Service Providers: Moody's Credit Metrics Preview Higher Leverage as Accounting Continues to Evolve
We look at Europes five-largest telecom service providers in the first of four reports explaining some of our significant adjustments to the financial statements of major European companies This additional reports will cover automobile manufacturing, pharmaceuticals and retail.
Canadian Broadband Communications Quarterly: Ratings Steady as Increased Competition Continues to Impact Operational Results
We find no rating changes in the industry over the last quarter despite the credit negative of increased competition, thanks to a reasonable amount of financial flexibility. Although the rated Canadian broadband communications should maintain their ratings, weaker subscriber growth trends for both wireless and fixed-line operations as well as somewhat lower EBITDA per subscriber measures will be the norm.
A Year's Worth of Loan Agreements Shows Where Benefits Tilt Toward Borrowers
We reviewed 45 leveraged loans from the past year totaling more than $100 billion and found that certain loan covenant provisions provide greater flexibility to corporate borrowers and private-equity sponsors, although they also contain lender-friendly elements. This review marks the first anniversary of our loan service, which highlights key gaps that lenders confront in loan covenant provisions.
Global Integrated Oil Industry: High Oil Prices and Depressed Natural Gas Keep Pressure on Integrated Oil Companies
Our stable outlook for the industry is based on our expectation of essentially flat to slightly higher operational cash flow in 2012. We expect oil prices to remain volatile as Middle East political tensions persist; Europes debt crisis remains unresolved and general pressures on global economic growth continue. In addition, we expect natural gas prices to remain depressed as the unconventional shale drilling boom continues.
National Oil and Gas Companies: Government Goals Are a Key Credit Driver for National Oil Companies
In our report, we place each of our rated state-owned national oil company (NOCs) that we rate into one of four categories depending on the sponsoring governments goals. Goals such as maximizing the governments revenue and the countrys employment tend to hurt credit quality. As governmentrelated issuers, the NOCs have ratings that are closely tied to the ratings of the sovereign government.
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25 JUNE 2012
RESEARCH HIGHLIGHTS
Notable research published the week ending 22 June 2012
US Manufacturing Industry - Cash Pile Declines as Spending on Shareholder Returns and Acquisitions Surges
US manufacturers cash holdings declined 23% in 2011, with outlays for acquisitions and returns to shareholders growing faster than capital expenditures. Despite these cash outflows, liquidity remains strong and operating cash flow-to-debt metrics are healthy. Share repurchases by manufacturers tripled in value in 2011, while dividend payments jumped 20%.
Financial Institutions
New Debit Rules Hurt Banks and Reshape the Payment Processor Market
The Durbin Amendments reform of debit interchange and routing practices hits banks the hardest and makes payment processing more competitive, while merchant acquirers and retailers are benefiting from the changes. We expect that banks will attempt to make up for lost revenue by raising fees for other products and cutting expenses, though this process will be difficult.
53
25 JUNE 2012
RESEARCH HIGHLIGHTS
Notable research published the week ending 22 June 2012
Sovereigns
Venezuela Credit Analysis
Venezuelas B1 domestic currency and B2 foreign currency government bond ratings reflect, among other factors, very weak institutions marked by an absence of checks and balances on executive authority and a highly pro-cyclical fiscal policy, with a rapid increase in spending and corresponding growth in debt at a time of historically high oil revenues. Credit strengths include a large if volatile current account surplus, significant assets in the public sector, and the governments control of some of the worlds largest oil reserves.
Sub-sovereigns
Russian Regions: Stable Outlook, but Credit Risks May Grow in Medium Term
We have a stable outlook on the Russian regional sector because we expect economic growth in Russia to continue, although it will decelerate. We also expect contained funding deficits and manageable debt affordability. At the same time, we caution that future challenges may lead to further differentiation in the credit quality of the rated regions.
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25 JUNE 2012
RESEARCH HIGHLIGHTS
Notable research published the week ending 22 June 2012
US Public Finance
Cash Flow Risks Drive Downgrades of California Tax Allocation Bonds
Heightened risks of missed or untimely debt service payments on California Tax Allocation Bonds (TABs) have led us to downgrade all TABs that had been rated Baa3 or higher to Ba1. These risks arose from the challenges in implementing a state law that mandated the dissolution of all redevelopment agencies,. In this report, we detail the risks associated with the dissolution law and the recent events that revealed them.
Structured Finance
CLO Interest Newsletter
Because a managers CLO loan portfolios have substantially similar obligors, consolidation among managers. will make diversifying CLO tranche holdings more difficult in the future. Also discussed: bank downgrades will limit CLOs from purchasing additional participations, changing covenants to extend a CLOs life typically has negative credit impact, but no rating impact, among other topics.
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25 JUNE 2012
EDITORS
News & Analysis: Jay Sherman, Elisa Herr and Andre Varella Rating Changes & Research Highlights: Robert Cox Final Production: Barry Hing
PRODUCTION ASSOCIATE
David Dombrovskis
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