MOODYS.COM

19 AUGUST 2013

NEWS & ANALYSIS Corporates 2

» Visteon’s Chinese Automotive Supplier Transactions Are Credit Negative

» Whirlpool’s Stake in Chinese Appliance Maker Is Credit Positive » Tata’s Shrinking Market Share Is Credit Negative

Infrastructure 6

» Korea Gas Plan to Raise Equity Is Credit Positive

Banks 8 » Argentina’s Central Bank Softens Liquidity Requirements, a

Credit Positive for Banks » Russia’s High Capital Outflows Are Credit Negative for Its

Banks » New Zealand’s LTV Restrictions Are Credit Positive for Banks

and Covered Bonds

Insurers 13 » Enhanced Supervision of Aviva New York Is Credit Positive for

Policyholders » Willis’ Passive Underwriting Scheme Is Credit Negative for

Lloyd’s of London Participants

Sovereigns 16

» Mexican Energy Reform Would Lift Investment and Growth, a Credit Positive

» Ecuador to Develop ITT Oil Block, a Credit Positive for the Sovereign

» Banking Distress Is Credit Negative for Eastern Caribbean Currency Union

» Netherlands’ Weak Consumer Confidence Undermines Sovereign’s Growth and Fiscal Outlook

US Public Finance 24 » Philadelphia’s $50 Million Commitment Is Credit Positive for

Stressed School District

RATINGS & RESEARCH Rating Changes 26

Last week we downgraded Bank of Barod, Canara Bank, Punjab National Bank, Credito Valtellinese, Raiffeisenbank (Bulgaria), Monroe County New York and the Washoe County Nevada School District, and upgraded Continental AG, Amey Lagan Roads Financial, TPF II/TPF II Rolling Hills, City of Atlanta Georgia Water and Wastewater Enterprise, Successor Agency to the San Diego RDA, among other rating actions.

Research Highlights 36

Last week we published on US TV broadcasters, US gaming, North American solid waste, German regulated energy networks, Japanese banks, Japanese insurers, the LIBOR-manipulation investigation, Austrian banks, US mortgage insurers, Bosnia & Herzegovina, IMF support programs, US higher education, US not-for-profits, the US state of Illinois, US not-for-profit healthcare, US CMBS and US commercial real estate CDOs, among other reports.

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Thursday’s Credit Outlook 41 » Go to Last Thursday’s Credit Outlook

Click here for Weekly Market Outlook, our sister publication containing Moody’s Analytics’ review of market activity, financial predictions, and the dates of upcoming economic releases.

NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Corporates

Visteon’s Chinese Automotive Supplier Transactions Are Credit Negative Last Tuesday, Visteon Corporation (B1 stable) said it had agreed to sell its 50% stake in Chinese joint venture Yanfeng Visteon Automotive Trim Systems Co. Ltd. (unrated) and its direct interests in other related interiors joint ventures to Huayu Automotive Systems Co., Ltd. (unrated). Visteon and Huayu also modified their existing electronics ventures in China to give Visteon majority control of Yanfeng Visteon Automotive Electronics Co. Ltd. The transactions are credit negative for Visteon because the company plans to apply the $1.2 billion of net proceeds to shareholder returns. The deals will also increase the company’s debt/EBITDA leverage.

Visteon expects to complete the transactions in stages by June 2015, but expects to receive 90% of the proceeds at or near the closing of the initial transactions, before the end of 2013. The company plans to return the net proceeds to shareholders through a newly expanded share-repurchase program. In conjunction with the transactions, Visteon’s board authorized an $875 million expansion of the company’s stock-buyback plan to $1 billion over the next two years.

Visteon estimates that it will lose about $100 million in annual EBITDA through the transactions, increasing debt/EBITDA to about 3.4x from 2.7x (including our standard adjustments) for the 12 months ended 30 June.

Notwithstanding the initial effect on leverage, we expect the transactions to bolster Visteon’s competitive position in the important growth market of vehicle electronics and to simplify somewhat its complex corporate structure.

Timothy Harrod Vice President - Senior Analyst +1.212.553.4488 timothy.harrod@moodys.com

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Whirlpool’s Stake in Chinese Appliance Maker Is Credit Positive Last Tuesday, Whirlpool Corporation (Baa3 positive) said it would pay $552 million for a 51% stake in China’s Hefei Rongshida Sanyo (unrated), which manufactures washers, refrigerators and microwave ovens. The deal is credit positive and will provide Whirlpool with another point of entry into the growing Chinese appliance market and modestly improve Whirlpool’s credit metrics. For instance, debt/EBITDA will decrease by one tenth of a turn to 2.9x.

A stake in Hefei Rongshida will also improve Whirlpool’s distribution footprint in China and expand its presence in Asia, which now accounts for less than 5% of revenue. According to Euromonitor, the Asia-Pacific region generated 43% of the major appliance sector’s global sales volume in 2012.

Hefei Rongshida was founded in 1994 and in 2012 reported $636 million in sales, $59 million in EBITDA and $48 million in net earnings. Its brands include Sanyo, Rongshida/Royal Star and Diqua and it has three manufacturing plants in China.

We expect Whirlpool to fund the deal with cash and still maintain strong liquidity. Whirlpool’s liquidity sources include existing cash, expected free cash flow and access to more than $2 billion in committed lines of credit. We estimate that these liquidity sources will total more than $3.6 billion by Whirlpool’s targeted closing date before year-end 2014, which is more than enough to cover a downside scenario of cash use of about $2 billion. In addition to the purchase price, the downside scenario assumes full payment of a $600 million tax assessment in Brazil, which Whirlpool is disputing; debt maturities totaling $600 million; about $50 million in quarterly dividends; and about $30 million in quarterly share repurchases.

Kevin Cassidy Vice President - Senior Credit Officer +1.212.553.1676 kevin.cassidy@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Tata’s Shrinking Market Share Is Credit Negative Last Tuesday, India’s Society of Indian Automobile Manufacturers (SIAM) released July data indicating Tata Motors Limited’s (TML, Ba3 stable) market share of passenger and commercial vehicle sales had declined, a credit negative trend that began in 2008 and will lead to weaker operating performance and key financial metrics. TML’s passenger car market share fell to 8.9% for the four months ended July 2013, from 11.8% in the financial year ended 31 March, while its commercial vehicle market share fell to 52.9% from 56.1%.

The decline came as year-on-year domestic sales of Indian passenger vehicles fell for an eighth consecutive month in July, according to SIAM. Even utility vehicles, which previously had double-digit growth, recorded an 18% decline in monthly sales in July. Commercial vehicles have also seen sales decline for the past nine months with the exception of April.

In the quarter ended 30 June, TML’s standalone sales declined 14% from a year earlier. We estimate annualized manufacturing capacity utilization declined to 36.2% during the quarter ended 30 June from 47.6% for the fiscal year ended 31 March. As a result, TML’s reported EBITDA margin fell to 2.3% from 4.8% a year earlier.

In fiscal 2013, TML breached its bank guarantee debt service coverage ratio covenant, reporting a ratio of 0.10x at the standalone entity, and subsequently obtained a waiver from its guarantors. If TML had not obtained the waiver, it would have been responsible for INR450.6 million of additional costs payable in fiscal 2014.We believe TML’s debt service ratio will remain weak and will continue to require waivers through fiscal 2014 given that overall Indian vehicle sales remain sluggish.

On a consolidated basis, Jaguar Land Rover Automotive Plc (JLR, Ba3 stable) continues to propel the group’s growth. TML reported year-on-year revenue and EBITDA growth of 8% for the June quarter, and marginally higher annualized group debt/EBITDA of 2.16x versus 2.15x a year earlier.

To stem its decline in market share, TML recently launched a marketing initiative called Horizonext, which aims to update TML’s product portfolio and introduce a range of compressed natural gas (CNG) engines to existing cars. However, there has been little product development and no launch of a new platform since the introduction of the Tata Nano in 2009 and the Aria, a crossover sports utility vehicle, in 2010.

Despite a slowdown in India’s auto industry, several brands managed to grow sales, mainly by introducing new models. In March, Honda Motor Co., Ltd. (A1 stable) introduced the Honda Amaze, while the alliance between Nissan Motor Co., Ltd. (A3 stable) and Renault S.A. (Ba1 stable) introduced the Renault Duster in July 2012. Along with the market-share strides by Maruti Suzuki (unrated) and Hyundai Motor Company (Baa1 stable), the Amaze and Duster contributed to TML’s market-share losses.

Although Mahindra & Mahindra Limited’s (unrated) commercial vehicle market share was 21.7% at the end of July, up 370 basis points from April, TML remains the market leader in the commercial vehicles segment (Exhibit 1). However, it ranked fourth in the passenger vehicle segment (Exhibit 2), falling from third place because of market-share gains by Mahindra & Mahindra.

George Teng Associate Analyst +65.6398.8312 george.teng@moodys.com

Alan Greene Vice President - Senior Credit Officer +65.6398.8318 alan.greene@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

EXHIBIT 1

Tata Motors Maintains Its Market Lead in Commercial Vehicles in India

Source: Society of Indian Automobile Manufacturers

EXHIBIT 2

Tata Motors Is Now Fourth in Passenger Vehicles in India

Note: Global Big Four are Toyota Motor Corporation, Volkswagen Aktiengesellschaft, Ford Motor Company and General Motors Company Source: Society of Indian Automobile Manufacturers

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NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Infrastructure

Korea Gas Plan to Raise Equity Is Credit Positive Last Tuesday, Korea Gas Corporation (Kogas, A1 stable) said it planned to raise KRW700 billion in equity by the end of October through an issuance of new shares. The equity raise is credit positive for Kogas because it will reduce the company’s reliance on debt to develop and secure natural gas overseas and expand its gas supply in Korea.

The KRW700 billion will account for 10%-15% of Kogas’ 2013 investment budget of KRW5-KRW6 trillion. The investment budget is high relative to its internal cash sources, which include cash on hand of KRW468 billion at 30 June and what we project will be around KRW2 trillion of annual operating cash flow over the next two to three years. As a result, the company finances its investments mainly with debt.

Although the equity raise is credit positive, the increase in equity capital will not be sufficient to materially improve Kogas’ credit quality because the company’s leverage is high. We expect Kogas’ retained cash flow (RCF) to debt to improve by just 0.2 to 0.3 percentage points over our previous projection of 6.0%-7.0% during the next 12-18 months. The company’s RCF/debt was 5.5% as of 30 June. We expect funds from operations (FFO) to interest coverage to improve by 0.1x-0.2x over our 2.5x-3.0x projection. FFO/interest was 2.4x as of 30 June.

Kogas’ credit quality has been under pressure since 2008 as a result of the company’s large investments and the absence of a consistent mechanism to pass through fuel-cost increases to customers (see exhibit).

Kogas’ Financial Metrics Have Been Weak Since 2008

* Last 12 months Sources: Kogas, Moody’s Financial Metrics

We expect the Korean government to subscribe directly to around 22%, or KRW160 billion, of the new shares, as it had previously earmarked the investment in its 2013 budget. The subscription suggests the government continues to view Kogas as strategically important to the country’s natural gas sector.

Although the issuance of new equity will likely lower the government’s ownership in Kogas, we do not expect the government’s willingness to support the company during periods of stress to wane, owing to Kogas’ important policy role and the government’s majority ownership. As of 30 June, the government owned 61% of Kogas through a direct 26.9% stake and indirectly via Korea Electric Power Corporation

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Mic Kang Vice President - Senior Analyst +852.3758.1373 mic.kang@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

(A1 stable), which held a 24.5% stake, and local governments, which collectively own 9.6%. We expect the Korean government to maintain a controlling stake of more than 50% through direct and indirect ownership, even if relevant government-related entities do not subscribe to the new shares.

Kogas essentially holds a monopoly over the import, transmission and wholesale of natural gas in Korea.

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Banks

Argentina’s Central Bank Softens Liquidity Requirements, a Credit Positive for Banks On 9 August, the Central Bank of Argentina announced that banks can now deduct their automated teller machines’ (ATM) daily withdrawals from their minimum reserve requirements, freeing up an average daily amount of more than ARS5 billion (around $900 million) in liquidity currently placed at the central bank. The measure is credit positive for Argentinean banks because additional liquidity will curtail the recent increase in their funding costs, and will free up capital for lending and other profitable investments, compared with earning the current 0% yield on legal reserves.

BADLAR, the benchmark interest rate for peso deposits, had risen to 17.6% as of early August from 14.9% in mid-April (see exhibit), reflecting the public’s demand for more attractive bank deposit returns, as opposed to buying dollars in the informal market. As a result, higher funding costs have translated into higher-rate loans and more restrictive lending policies, negatively affecting banks’ loan volumes and earnings.

Argentina’s Benchmark Peso Deposit Rate, BADLAR

Source: Central Bank of Argentina

The new measure also partly offsets the negative effects of a rule introduced in October 2012, which excluded cash held in banks’ branches from the liquidity reserve calculation. The exclusion compelled banks to deposit as much as ARS23 billion in the central bank (at a 0% rate) to meet liquidity requirements.

The new rule establishes that the liquidity reserve deduction will be greater when the ATM is located in rural areas, benefiting banks with a presence in those provinces, or when the ATM is shared by various banks’ clients. Banks that will benefit the most are those with the largest ATM networks in the system: Banco Santander Río S.A. (Caa1 stable, E+/b3 negative),1 Banco Macro S.A. (Caa1 stable, E+/b3 negative), Banco de la Nación Argentina (unrated), Banco de la Provincia de Buenos Aires (unrated) and HSBC Bank Argentina (Caa1 stable, E+/b3 negative), whose ATM networks account for roughly half of the ATMs systemwide.

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

assessment and the corresponding rating outlooks.

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Fernando Albano Assistant Vice President - Analyst +54.11.5129.2624 fernando.albano@moodys.com

Valeria Azconegui Assistant Vice President - Analyst +54.11.5129.2611 valeria.azconegui@moodys.com

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

At the same time, the new regulation partly offsets the negative effect on banks’ profitability of caps on fees and commissions and of mandatory lending to small companies at below market rates, which the government imposed as part of its goal to stimulate economic growth and protect consumers.

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Russia’s High Capital Outflows Are Credit Negative for Its Banks Last Tuesday, Andrey Klepach, Russia’s deputy economic development minister, said that net private sector capital outflows2 were $6-$7 billion in July. This sum was in addition to the $38.4 billion net outflow for the January-June period, which exceeded the government’s forecast full-year net outflow of $30-$35 billion. Because there is a positive correlation between capital outflows and Russian banks’ asset quality, we expect the increase in capital outflows to lead to higher problem loans, a credit negative (see exhibit below).

Net Private Sector Capital Flows and Overdue Loans

Note: Capital flows are three-month moving averages. Source: Central Bank of Russia

The intensifying capital flight from Russia reflects investors’ negative sentiment and declining investment activity in Russia, which negatively affects economic growth and translates into weakening creditworthiness of companies and more problem loans for banks. Weakening investment activity in Russia has already negatively affected economic growth, which slowed to 1.2% in the second quarter versus a year ago, and is the slowest growth rate since 2009.

Low confidence is also likely to negatively affect the supply and demand for credit, leading to higher credit risks for banks because companies will find it more difficult and costly to refinance their previous loan commitments.

Additionally, increasing net capital outflows negatively pressure the rouble, which in the first half of this year lost 10% of its value against the US dollar because of the increasing demand for hard currencies. Ongoing pressure on the rouble from capital outflows is likely to lead to higher credit risks for the 20% of Russia’s loans denominated in foreign currencies.

2 Difference between foreign assets and foreign liabilities of Russian banks and companies.

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Lev Dorf Analyst +7.495.228.6056 lev.dorf@moodys.com

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

New Zealand’s LTV Restrictions Are Credit Positive for Banks and Covered Bonds Last Tuesday, the Reserve Bank of New Zealand (RBNZ) released further details on how it was going to implement restrictions on high loan-to-value (LTV) residential mortgage lending. These restrictions are credit positive for New Zealand banks because they will reduce their exposures to higher risk lending at a time when house prices are at historic highs. These restrictions are also credit positive for New Zealand’s covered bond programmes, which primarily rely on bank credit quality.

The proposal will be particularly beneficial to New Zealand’s four major banks: ASB Bank Limited (Aa3 stable, C+/a2 stable),3 ANZ Bank New Zealand Limited (Aa3 stable, C/a3 stable), Bank of New Zealand (Aa3 stable, C/a3 stable) and Westpac New Zealand Limited (Aa3 stable, C/a3 stable). These four banks hold approximately 85% of all New Zealand residential loans.

The introduction of an LTV limit will benefit banks by providing a buffer against declining house prices before the size of the loan exceeds the value of the property. Although the RBNZ has yet to set the limit, we expect it to materially reduce the amount of lending done at LTVs above 80%. The proportion of newly originated loans with LTVs of more than 80% rose to 30% in February 2013 from 24% in October 2011.

Among the major banks, Bank of New Zealand is likely to be the least affected owing to its having the lowest proportion of residential mortgages with LTVs of more than 80% (see exhibit below). We note that although the new restrictions will only apply to new lending, the LTV breakdown on outstanding loans provides a snapshot of how willing banks have been in the past to expand in particular LTV segments.

Major New Zealand Banks’ Residential Mortgage Loan-to-Value Ratios 0% - 59% 60% - 69% 70% - 79% 80% - 89% > 90%

ANZ Bank New Zealand 39% 16% 23% 14% 8%

ASB Bank 30% 19% 30% 14% 8%

Bank of New Zealand 34% 17% 34% 7% 8%

Westpac New Zealand 41% 16% 21% 14% 7%

Average 36% 17% 26% 13% 8%

Source: The banks, data as of 31 March 2013.

The proposal is also credit positive for New Zealand covered bonds because they rely primarily on the financial strength of the issuing banks, and the banks will benefit from having lower risk profiles. Banks will tighten their underwriting criteria of mortgage loans and reduce their appetite for residential mortgages with LTVs of more than 80%. In addition, the new restrictions will improve the credit quality of cover pools because banks will have a smaller selection of high-LTV loans to sell into those pools. This is particularly relevant for ANZ Bank and Westpac New Zealand, which have in their cover pools the highest proportion of loans with LTVs of more than 80%, at 5.1%4 and 4.6%, respectively.

By comparison, only a 0.2% of ASB’s cover pool are loans with LTVs of more than 80%. Bank of New Zealand’s cover pool does not have loans with LTVs greater than 80%.

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

assessment and the corresponding rating outlooks. 4 All bank statistics on cover pools are from June 2013 covered bond investor reports, with the exception of ANZ Bank New

Zealand’s data, which is from a July covered bond investor report.

Daniel Yu Assistant Vice President - Analyst +612.9270.8198 daniel.yu@moodys.com

Karen Burkhardt Associate Analyst +612.9270.8130 karen.burkhardt@moodys.com

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

The RBNZ advised that it would announce any decision to implement LTV restrictions at least two weeks before the restrictions take effect. This latest proposal is one of four macro-prudential tools the RBNZ announced in March to curb rapid asset price growth during times of excessive credit growth.5

5 See New Zealand Proposals to Curb Credit Growth Are Credit Positive for Banks, 4 March 2013.

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Insurers

Enhanced Supervision of Aviva New York Is Credit Positive for Policyholders Last Thursday, the New York Department of Financial Services (DFS) announced that Apollo Global Management LLC (unrated) and the DFS had reached an agreement on enhanced supervision of Aviva Life and Annuity Company of New York (Aviva NY, unrated). The agreement is a condition of DFS approving Athene Holding Ltd’s (an Apollo affiliate) purchase of Aviva USA (unrated), Aviva NY’s parent. Enhanced supervision of Aviva NY is credit positive for policyholders and creditors.

The acquisition of a life insurer by an alternative investment manager (AIM) is credit negative because AIMs generally have higher risk appetites and a more aggressive approach to balance sheet management. However, the agreement for enhanced supervision by DFS should largely mitigate these risks. The agreement also sets the stage for similar developments with regulators in other states to address concerns that AIMs’ short-term horizon will lead them to take actions that undermine insurance company creditor and policyholder interests.

On 21 December 2012, Aviva Plc (A3 stable) announced that it had agreed to sell Aviva USA to Athene, an insurance group affiliated with Apollo, in a $1.8 billion transaction the companies expect to close before year-end. Aviva USA’s subsidiaries include Aviva Life & Annuity and Aviva NY.

According to the DFS, Apollo has agreed to certain terms that provide additional protection to Aviva NY policyholders beyond what would be required under normal regulatory standards. These include the following:

» Heighted capital standards: Athene will maintain Aviva NY’s risk-based capital (RBC) ratio at a minimum 450% authorized control level (or 225% company actual level, or CAL)

» Backstop trust account: Athene will also create a backstop trust account funded with approximately $35 million to provide additional financial security to Aviva NY. The additional capital could be used to maintain Aviva NY’s RBC ratio at the minimum 225% CAL

» Enhanced regulatory scrutiny of operating dividends, investment, reinsurance: Athene will need prior written approval from the DFS for material changes in Aviva NY’s operations, including dividends, investments and reinsurance transactions

» Stronger disclosure and transparency requirements: In addition to disclosing more information on its operations to the DFS, Aviva NY will file quarterly RBC reports instead of the annual reports normally required

The DFS has regulatory authority over the New York-domiciled company, but only has limited influence over the affiliated company’s operations. Still, the agreement between the DFS and Apollo illustrates how insurance regulators can take additional supervisory steps to address their concerns over AIMs’ involvement in the life insurance space.

On 31 July, the DFS announced a similar agreement with Guggenheim Partners LLC (unrated), related to that AIM’s planned acquisition of Sun Life Financial Inc.’s (preferred stock Baa2 (hyb) stable) New York-domiciled insurance entity, Sun Life Insurance and Annuity Company of New York (unrated). On 2 August, Sun Life closed the sale of Sun Life Assurance Company of Canada (US) (financial strength Baa2 review for downgrade) to Delaware Life Holdings, a company owned by Guggenheim shareholders.

Scott Robinson Senior Vice President +1.212.553.3746 scott.robinson@moodys.com

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

The protracted low interest rate environment, regulatory constraints and earnings pressures have led many life insurers to explore divesting underperforming segments or blocks of their US life and annuity business. Many AIM acquisitions have focused on annuity blocks and the DFS has recently taken additional supervisory actions related to these acquisitions; we have created an exhibit that shows New York-domiciled insurers and the size of their fixed-annuity blocks.

Top 20 Groups with New York-Domiciled Insurance Entities Ranked by Fixed Annuity Reserves (Excluding Mutual Companies)

Ultimate Parent Statutory Entity Domiciled in New York Financial Strength Rating

Total Entity Annuity Net

Reserves $ Millions

Total Consolidated

NY Annuity Net Reserves

$ Millions

MetLife Inc. Metropolitan Life Insurance Co. Aa3 negative 64,164

MetLife Inc. First MetLife Investors Insurance Co. unrated 427 64,592

AXA AXA Equitable Life Insurance Co. Aa3 negative 18,533

AXA MONY Life Insurance Co. Aa3 review for downgrade 322 18,856

American International Group United States Life Insurance Co. in the City of New York A2 stable 14,935 14,935

AEGON NV Transamerica Financial Life Insurance Co. A1 stable 6,685

AEGON NV Transamerica Advisors Life Insurance Co. of New York unrated 25 6,710

Allstate Corp. Allstate Life Insurance Co. of New York A1 stable 3,978

Allstate Corp. Intramerica Life Insurance Co. unrates 3 3,981

Genworth Financial Inc. Genworth Life Insurance Co. of New York A3 stable 3,301 3,301

LinCo.ln National Corp. Lincoln Life & Annuity Co. of New York A1 stable 2,063 2,063

Manulife Financial Corp. John Hancock Life Insurance Co. of New York A1 stable 1,920 1,920

Jackson National Life Group (Prudential plc)

Jackson National Life Insurance Co. of New York A1 stable 1,506 1,506

Ameriprise Financial Inc. RiverSource Life Insurance Co. of New York Aa3 stable 1,365 1,365

Delaware Life Holdings (Shareholders of Guggenheim)

Sun Life Insurance and Annuity Co. of New York unrated 721 721

Allianz Group Allianz Life Insurance Co. of New York unrated 595 595

Symetra Financial Co.rp. First Symetra National Life Insurance Co. of New York unrated 585 585

Wilton Re Holdings Ltd. Wilton Reassurance Life Co. of New York unrated 539 539

Aviva Plc Aviva Life and Annuity Co. of New York unrated 454 454

Great-West Insurance Group (Power Corporation of Canada Group)

Great-West Life & Annuity Insurance Co. of New York Aa3 stable 422 422

Fidelity & Guaranty Life Group (Harbinger Holdings, LLC)

Fidelity & Guaranty Life Insurance Co. of New York unrated 351 351

American National Insurance Farm Family Life Insurance Co. unrated 279

American National Insurance American National Life Insurance Co. of New York unrated 95 374

Athene Holding Ltd. Presidential Life Insurance Co. unrated 271 271

Phoenix Companies Inc. Phoenix Life Insurance Co. Ba2 review for downgrade 270 270

Source: SNL Financial LC. Contains copyrighted and trade secret materials distributed under license from SNL. For recipient’s internal use only.

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Willis’ Passive Underwriting Scheme Is Credit Negative for Lloyd’s of London Participants Last Tuesday, Dominic Casserley, CEO of Willis Group Holdings plc (Baa3 stable), said in an interview with the Financial Times that the insurance broker was close to signing up several leading London insurers to a “passive underwriting” scheme. Such a scheme would be credit negative for Lloyd’s of London insurance market participants because the incremental capacity supplied to the sector under the arrangement will negatively affect premium rates.

Insurance brokers usually place complex specialist insurance and reinsurance policies into the London market on a subscription basis, and insurers decide whether to participate in the co-insured arrangement and what share of risk to accept. Under passive underwriting schemes, a select group of insurers strikes an agreement with brokers to automatically subscribe to a pre-determined share of all risks that have active Lloyd’s participation, and as a result these “passive insurers” simply follow the decisions made by their London market rivals.

In March, Aon Corporation (guaranteed senior unsecured Baa2 positive) launched a similar scheme, guaranteeing Berkshire Hathaway Inc. (Aa2 stable) a share of any business it places in the London market. Although Berkshire must rely on Lloyd’s underwriting expertise to price risks, it benefits from a lower expense base by avoiding the costs of using its own underwriters. Doing so increases Berkshire’s chances of achieving better returns than the Lloyd’s syndicates it follows. The scheme proposed by Willis, the world’s third-largest broking group, could be even larger than Aon’s, because it would involve several leading insurers. Willis hopes to launch the scheme in a matter of weeks.

The Willis scheme would be particularly detrimental to smaller Lloyd’s of London syndicates, which do not have lead capabilities or operations outside Lloyd’s, and those without the ability to be price leaders and thus are most negatively affected by general market price changes. We expect such deals to further hurt premium rates given the incremental amount of capacity.

In addition, the proposed arrangement could spur similar broker deals, which in turn would contribute to more difficult market conditions for all London market insurers.

Helena Pavicic Associate Analyst +44.20.7772.1397 helena.pavicic@moodys.com

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Sovereigns

Mexican Energy Reform Would Lift Investment and Growth, a Credit Positive Last Monday, Mexico (Baa1stable) President Enrique Peña Nieto presented a comprehensive reform proposal for the energy sector that we expect will attract increased investment, have a significant effect on the oil industry and ultimately lift Mexico’s growth potential, all credit positive for the sovereign.6

The reform would allow the federal government to sign risk- and profit-sharing contracts with public and private companies that would expand the exploration and extraction of hydrocarbons. Companies would be allowed to compete directly with state oil company Petroleos Mexicanos (PEMEX, Baa1stable). The reform would also allow third parties to participate in refining, transporting, storing and distributing hydrocarbons. 7

We expect the reform to lead to higher investment in the energy sector and increased oil production by fostering private-sector involvement. The government expects oil production to increase to 3 million barrels a day by 2018 and 3.5 million by 2025, from 2.5 million today. The government expects natural gas production to increase to 8 billion cubic feet a day by 2018 and 10.4 billion by 2025, from 5.7 billion today.

The reform will change PEMEX’s tax regime, increasing its after-tax income and providing it with budgetary autonomy. At the same time, it will impose higher corporate governance standards. Given that 38% of federal government revenues are oil-related, a change in the tax regime could have a negative effect on government finances. However, increased production would partially compensate for any decline.

The reform proposal neither contemplates the possibility of concessions, nor does it allow for participating private companies to book proved reserves for their investments. However, government officials have indicated that participating companies will be allowed to register the economic interest of their risk-sharing contracts under US Securities and Exchange Commission rules.

Some market participants expressed disappointment that the proposal did not include concessions for exploration and extraction, or the possibility for companies to book reserves. Such a proposal would have had little chance of passage in Congress, since the government considers the nation’s ownership of hydrocarbons as a matter of national sovereignty. Although the government’s proposal is not as friendly as markets had expected, it will nevertheless introduce fundamental changes in the energy sector.

The energy reform requires amending articles 27 and 28 of the Mexican constitution, which will need a two thirds majority vote in both chambers of Congress and approval by a simple majority in at least 51% of state congresses. Government officials have indicated that the administration intends to make a strong push to pass the amendments and complementary legislation by the end of the year.

We expect the main elements of the reform proposal will remain in place, even after concessions to garner sufficient political support. We think there is a 60% probability that, including votes coming from

6 For the effect of the proposal on state oil company PEMEX, see Mexico’s Energy Reform Proposal Would Encourage PEMEX

Expansion, 15 August 2013. 7 The reform would also break the state’s monopoly in electric power generation, aiming to lower electricity costs, without the state

losing its steering role in the national electricity system and its exclusiveness in transmitting and distributing energy.

Ariane Ortiz Marrufo Associate Analyst +1.212.553.4872 ariane.ortizmarrufo@moodys.com

Mauro Leos Vice President - Senior Credit Officer/Manager +1.212.553.1947 mauro.leos@moodys.com

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

conservative opposition party (PAN), the ruling PRI would get sufficient support to pass the reform. Still, the ability of the left-of-center PRD party and other groups opposed to the reform to mobilize public opinion and rally to block reform remains a material risk.

From a sovereign credit risk perspective, a rise in investments would lift potential growth, which we currently estimate to be 2.5%-3.5%. Relatively low GDP growth rates of around 3% have been a longstanding weakness of Mexico’s sovereign credit profile.

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Ecuador to Develop ITT Oil Block, a Credit Positive for the Sovereign Last Thursday, Ecuador (Caa1 stable) President Rafael Correa issued Executive Decree No. 74, which permits the government to develop the Ishpingo Tambococha Tiputini (ITT) oil block in the Yasuni National Park. The government’s plan to develop a portion of the ITT oil block is credit positive because it will provide a boost to government revenues beginning in 2016.

Before the decree, ITT had been protected under the United Nations Development Program-administered Yasuni-ITT Initiative, which set up trust funds and collected payments from the international community in exchange for Ecuador agreeing not to develop the block. The idea behind the initiative was that the international community8 would compensate the government for roughly 50% of the revenues lost by not developing ITT, while simultaneously protecting the Yasuni National Park.

However, international compensation was minimal, according to the president’s official announcement, with payments to the trusts totaling just $13.3 million to date, making the goal of reaching $3.6 billion unlikely. Therefore, the government liquidated the trust funds and opened up the ITT block for development by Ecuador’s state-owned oil company, Petroamazonas (unrated).

According to the government, the ITT oil fields hold nearly 850 million barrels of oil, or roughly 10% of the country’s proved reserves, based on the BP Statistical Review of World Energy’s calculation that Ecuador’s proved reserves were 8.2 billion barrels at the end of 2012. Authorities expect the construction phase in ITT to last until 2015, with oil production in the Tambococha and Tiputini fields beginning in 2016 and peaking at roughly 170,000 barrels per day beginning in 2017. This compares with the government’s production of 522,000 barrels per day as of May 2013. Given that oil is an important source of government revenues, and constituted 31% of central government revenues in 2012, the additional production from ITT will provide a boost to government revenues beginning in 2016.

Given that 84% of Ecuador’s population supported the Yasuni-ITT Initiative, according to a 2011 opinion poll, there is likely to be popular opposition to the president’s decision to develop the block. Nevertheless, Mr. Correa remains very popular, having been re-elected in February 2013 with 57% of the vote, and he has stated that the government would use the additional revenues from ITT for public investment and poverty reduction, areas that already have improved under his administration.

8 This includes governments, foundations, the private sector and individuals globally.

Sarah Glendon Assistant Vice President - Analyst +1.212.553.4534 sarah.glendon@moodys.com

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Banking Distress Is Credit Negative for Eastern Caribbean Currency Union Last Monday, the Eastern Caribbean Central Bank (ECCB) assumed control of Caribbean Commercial Bank (Anguilla) (unrated) and the National Bank of Anguilla (unrated), two domestically owned banks operating in Anguilla (unrated), a British territory that is part of the Eastern Caribbean Currency Union (ECCU). We expect the fiscal costs associated with recapitalizing these banks, which account for 77% of Anguilla’s total banking system assets or about 150% of GDP, will adversely affect the sovereign’s creditworthiness.

Although limited transparency of the banks’ balance sheets precludes an exact estimate of the ultimate cost of the bank rescue, we expect recapitalization needs to be as much as 10%-20% of GDP.9 In the absence of deposit insurance in the ECCU, the government faces an implicit liability to avoid a haircut on deposits. The failed banks hold over 60% of domestic deposits, and the lack of government action to safeguard these deposits would be politically unpalatable and could trigger a bank run that could spill over into the rest of the ECCU.

At the same time, providing a backstop to deposit holders will stress Anguilla’s limited revenues. The island has limited fiscal reserves and a small tax base (it has a population of 15,000), leaving the government dependent on grants and transfers from the UK to meet its financing needs. This leaves Anguilla with few options but to finance the bank bailouts through new borrowing.

Anguilla’s economy contracted for five consecutive years through 2012 (Exhibit 1), while public debt rose to 35.9% of GDP from 15.3% over the same period. The decline in economic activity, combined with a high degree of borrower concentration in Anguilla’s $110 million economy, resulted in a rapid deterioration of banks’ loan portfolio, with 35% of loans classified as nonperforming at the end of 2011, significantly above the ECCU average of 15.3% and the ECCB’s prudential guideline of 5% (Exhibit 2).

EXHIBIT 1

Real GDP Growth in the Eastern Caribbean Currency Union

Source: Eastern Caribbean Currency Union

9 Larger than a similar rescue in 2011 of ABI Bank in Antigua, another ECCU member, which the International Monetary Fund

estimates will cost the government about 11% of GDP.

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

F

ECCU Anguilla

Edward Al-Hussainy Assistant Vice President - Analyst +1.212.553.4840 edward.al-hussainy@moodys.com

Petar Atanasov Associate Analyst +1.212.553.4515 petar.atanasov@moodys.com

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

EXHIBIT 2

Nonperforming Loans As a Percent of Total Loans in the Caribbean

Source: Eastern Caribbean Currency Union; data for third-quarter 2012, except Anguilla (2011)

The failure of systemically important banks under the oversight of the ECCB highlights a weak regulatory environment, poor capital adequacy and inadequate loan-loss provisioning among domestic banks. The banking crisis in Anguilla follows similar collapses in Antigua in 2009-11 and reflects the ECCU’s financial-sector instability following a range of shocks, including the failure of two systemically important regional insurance companies, the collapse of a region-wide Ponzi scheme and the effect of several neighboring sovereigns’ debt restructurings.10 The financial sector’s deterioration has been particularly acute for sovereigns with large banking sectors (Exhibit 3) and exacerbates the risk of contingent fiscal liabilities impairing already weak sovereign balance sheets.

EXHIBIT 3

Bank Assets As a Percent of GDP in Eastern Caribbean Currency Union

Source: International Monetary Fund, Eastern Caribbean Currency Union; data are for 2011-12

We expect regulators to increase the pressure on domestic banks to consolidate and deleverage. As a result, credit conditions will remain tight following bank credit to the private sector in the ECCU contracting by

10 There have been five sovereign defaults in the ECCU over the past decade: Grenada (2004 and 2013), St. Kitts (2011), Antigua

(2010) and Dominica (2003); see More Caribbean Sovereign Debt Restructurings Are Likely, 20 May 2013.

35%

17%

16% 14% 13% 13%

10% 9% 9% 8% 8% 7%

5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Angu

illa*

Beliz

e

St L

ucia

Baha

mas

Antig

ua

Barb

ados

Dom

inic

a

St K

itts

Gre

nada

Mon

tser

rat

St V

ince

nt

Jam

aica

Trin

idad

144%199%

124%79% 59%

25%69% 38%

130%67%

113%

112%92%

106%59%

68%

0%

50%

100%

150%

200%

250%

300%

St. K

itts

and

Nev

is

Angu

illa

Mon

tser

rat

St. L

ucia

Antig

ua&

Barb

uda

Gre

nada

Dom

inic

a

SVG

Domestic Banks Foreign Banks

NEWS & ANALYSIS Credit implications of current events

21 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

0.6% in 2012 and 1.4% in 2011 after growing an average of 11.9% annually in 2005-10. Such contraction further delays an economic recovery in the region.

NEWS & ANALYSIS Credit implications of current events

22 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Netherlands’ Weak Consumer Confidence Undermines Sovereign’s Growth and Fiscal Outlook Last Wednesday, the Netherlands’ (Aaa negative) Bureau for Economic Policy Analysis (CPB), the official Dutch independent economic forecasting board, announced further cuts to its 2013 and 2014 real GDP growth forecasts. Such reductions, which reflect ongoing growth challenges, are credit negative because they adversely affect the government’s ability to bring its deficit below 3% of GDP in 2014.

The Dutch economy contracted by 1.8% year on year in the second quarter. In addition, the outlook for 2013 is weak and will remain so through at least 2014, with household consumption shrinking by 2.4% year on year in second-quarter 2013; the unemployment rate (as defined by Eurostat), hitting 7.0% in July; and exports, previously a source of support for growth, declining by 0.3% over the same period.

The weak outlook is the result of a very severe hit to consumer confidence arising from Netherlands-specific challenges that have compounded the negative effects of the global financial crisis and euro area sovereign debt crisis, rather than fundamental competitiveness problems. The challenges include the following:

» A 19.3% house-price decline in nominal terms since prices hit a peak in third-quarter 2008

» A reduction in pension benefits by 66 of the Netherlands’ 415 pension funds to meet the requirement of De Nederlandsche Bank, the country’s central bank and pension fund regulator, that every pension fund have a funding ratio of at least 105%. This affects 2 million active members, 1.1 million pensioners and 2.5 million pension holders who have changed jobs but have not moved their pension rights to their new employers’ pension funds11 – the equivalent of more than one quarter of the Dutch population over the age of 20

» Policy uncertainty about several areas, most notably the tax treatment of mortgages

Since first-quarter 2008, Greece (C) and Cyprus (Caa3 negative) have been the only other euro area countries to have experienced more severe deterioration in confidence levels than the Netherlands (see Exhibit 1).

EXHIBIT 1

Dutch Consumer Confidence Has Declined Significantly Since Its Peak in Second-Quarter 2011 Change in consumer confidence from each peak until second-quarter 2013

Source: European Commission, Moody’s

11 This may not be 2.5 million individuals, as some workers may have more than one pension in this category.

-35

-30

-25

-20

-15

-10

-5

0

Cypr

us

Gre

ece

Net

herla

nds

Port

ugal

Slov

akia

Belg

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Slov

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Luxe

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Aust

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Finl

and

Fran

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Ger

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Spai

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Italy

Irela

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Perc

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Sarah Carlson Vice President - Senior Credit Officer/Manager +44.20.7772.5348 sarah.carlson@moodys.com

Stefan Triendl Associate Analyst +44.20.7772.5560 stefan.triendl@moodys.com

NEWS & ANALYSIS Credit implications of current events

23 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

The CPB projects that private consumption will contract by 2.25% in 2013 and by 0.75% in 2014 and that public spending will decline by 1.25% in 2013. These factors led the CPB to project that the Dutch economy’s GDP will shrink by 1.25% in 2013 and expand by 0.75% in 2014 (see Exhibit 2); it had previously forecast a 1% contraction in 2013 and a 1% expansion in 2014. As a result, we now forecast that the economy will contract by 1.3% in 2013 and grow by 0.6% in 2014, based on our expectation of lacklustre international demand and continued weakness in domestic demand.

EXHIBIT 2

Netherlands’ Growth Has Been Lacklustre and Its Recovery Will Be Weak in 2014

Source: Statistics Netherlands, Dutch Bureau for Economic Policy Analysis, Moody’s

The Netherlands’ weak growth will be a key driver of the government’s 2014 budget proposals, which the government will announce on 17 September. Without further measures, the CPB expects the deficit to increase to 3.9% in 2014 from 3.0% of GDP in 2013. In March, the government announced additional spending cuts for 2014, but postponed the plans following the agreement of a so-called social accord, a deal between the government, the country’s national labour federation and the largest business federation. We expect that the government will revive some of the plans in the upcoming budget, but it is likely that these additional cuts will also fall short of bringing the deficit in line with the 3% of GDP Maastricht target.

-6-5-4-3-2-101234

2008

-Q

1

2008

-Q

2

2008

-Q

3

2008

-Q

4

2009

-Q

1

2009

-Q

2

2009

-Q

3

2009

-Q

4

2010

-Q

1

2010

-Q

2

2010

-Q

3

2010

-Q

4

2011

-Q

1

2011

-Q

2

2011

-Q

3

2011

-Q

4

2012

-Q

1

2012

-Q

2

2012

-Q

3

2012

-Q

4

2013

-Q

1

2013

-Q

2

2013

2014

Perc

enta

ge P

oint

s

Quarter-on-Quarter Change Year-on-Year Change

NEWS & ANALYSIS Credit implications of current events

24 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

US Public Finance

Philadelphia’s $50 Million Commitment Is Credit Positive for Stressed School District Last Thursday, Michael Nutter, the mayor of Philadelphia, Pennsylvania (A2 stable), announced that the city would borrow $50 million to provide the Philadelphia School District (Ba2 negative) with sufficient operating funds to start the school year on time on 9 September. Mr. Nutter also said that the city would repay the funds using its own operating revenues if the city council does not extend a 1% sales tax to secure a bond issue. The announcement is credit positive for the school district because it will help the district retain student enrollment, which is declining as pupils move to charter schools. Given the four-year period to pay back the borrowing, this level of assistance for the district will not materially affect the city’s finances.

The city’s emergency support reflects significant negative pressure on the district related to the growth of charter schools. Philadelphia, like many other large urban US school districts, has lost a significant number of students to charter schools, resulting in revenue diversion to charters. For the 2013-14 school year, approximately 62,000, or more than 30% of a 198,000-student population, will attend one of 84 charters in the district. By comparison, approximately 16% of students were enrolled in charter schools in 2008. The district has effectively lost its monopoly position as provider of public education and must compete with charters for students. A delayed school year opening, even if temporary, would further exacerbate enrollment declines as parents scramble to place children in schools outside the district.

Pennsylvania law requires that school districts fund charter schools in their districts at their prior-year per-pupil spending level, minus certain permitted deductions. As shown in the exhibit below, Philadelphia School District’s payments to charter schools in fiscal 2012 rose to $533 million, or 24% of general fund expenditures, from $126 million, or 13%, in fiscal 2008. Moreover, the state in 2011 eliminated payments that reimbursed K-12 school districts for a portion of revenues lost to charter schools, and initiated several million in aid cuts to the district, exacerbating its financial turmoil. The district issued a $300 million deficit financing bond in October 2012 to close a projected three-year budget gap, even after significant expenditure cuts the prior fiscal year, but had to close a large remaining deficit to balance its fiscal 2014 budget.

Philadelphia School District’s Payments to Charter Schools Have Risen Rapidly

Source: Philadelphia School District audited financials and fiscal 2014 budget

The city’s decision to borrow money for the benefit of the school district for operating purposes is an unusual and significant action. A pattern of such support would be credit negative for the city if it were

$0

$100

$200

$300

$400

$500

$600

$700

$800

2008 2009 2010 2011 2012 2013 (estimate) 2014 (budget)

$ M

illio

ns

Michael D’Arcy Analyst +1.212.553.3830 michael.darcy@moodys.com

NEWS & ANALYSIS Credit implications of current events

25 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

prolonged or if it added materially to the city’s financial obligations. The addition of $50 million to Philadelphia’s $4.4 billion of general fund-supported debt would equal a 0.1% growth in debt and a 4.3% rise in related debt-service costs. It is extremely rare for a US local government to borrow to provide financial relief for another local government, even if they are coterminous. In conducting what amounts to deficit financing on behalf of a separate municipal entity with its own bonding authority, the city is taking on the role of a parent government. This is unprecedented because typically more senior levels of government, such as the state, assume such a role.

The mayor and city council are disputing over what proportion of receipts from a 1% city sales tax would go to the district (some of which would support debt service on the $50 million borrowing) versus the city pension fund. The mayor requires council approval to issue debt, but has stated that the city will find another means to borrow the funds absent an agreement with city council.

RATING CHANGES Significant rating actions taken the week ending 16 August 2013

26 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Corporates

America Movil S.A.B. de C.V. Review for Downgrade

22 Nov ’12 12 Aug ‘13

Senior Unsecured Rating A2 A2

Outlook Stable Review for Downgrade

The review follows the announcement that America Movil intends to make a voluntary tender offer in cash for all the issued and outstanding shares of Koninklijke KPN N.V. In our view, the potential benefits of controlling KPN could be outweighed by the heightened operational challenges and financial debt burden resulting from the transaction. If funded with debt, the transaction would put America Movil’s leverage above our 1.5x threshold for the A2 rating category.

The review will focus on the outcome of America Movil’s intended offer in relation to the company’s ultimate ownership and capital structure and how the transaction will be financed. It will also take into consideration America Movil's plans for KPN's debt, as well as post-transaction deleveraging.

CITIC Pacific Limited Review for Downgrade

6 Jan ’12 16 Aug ‘13

Long Term Issuer Rating Ba1 Ba1

Outlook Negative Review for Downgrade

The review was prompted by further delays in the Sino Iron project in Western Australia and the high level of uncertainty over the project’s completion and economic returns. The first and second production lines of the project encountered technical problems in first-half 2013. The first line resumed load commissioning in late July and repair of key components of the second line will take longer than anticipated, according to the company.

The review will focus on the situation regarding the first and second lines of the Sino Iron project, the availability of a detailed implementation plan and capex for the remaining lines and any actions the company and/or CITIC Group could take to preserve the financial profile of CITIC Pacific.

Continental AG Upgrade

28 Sep ’12 12 Aug ‘13

Corporate Family Rating Ba2 Ba1

Outlook Positive Stable

The upgrade reflects Continental’s strong credit metrics over the past year, which are commensurate with investment-grade rating levels on a standalone basis. Given that Continental now appears unlikely to combine with its major shareholder, Schaeffler AG (B1 positive), in the medium term and that the form of such a combination could be less drastic than previously indicated, a widening of the difference in the two companies' corporate family ratings to three notches is justified.

RATING CHANGES Significant rating actions taken the week ending 16 August 2013

27 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Lafarge SA Outlook Change

5 Aug ’11 12 Aug ‘13

Corporate Family Rating Ba1 Ba1

Outlook Stable Negative

The outlook change was prompted by the company’s weak first-half 2013 results, with a 2% decline in revenues and a 9% decline in EBITDA. Although this weak performance could have been partially due to the very cold weather in North America and Europe in March and flooding in the second quarter, underlying market conditions have remained weak in Western and Eastern Europe, and Lafarge's credit metrics have deteriorated since year-end 2012.

Lanxess AG Outlook Change

17 Jul ’07 14 Aug ‘13

Long Term Issuer Rating Baa2 Baa2

Outlook Stable Negative

The negative outlook reflects our view that expected recovery in earnings will be slower and will start from a lower base, taking into account Lanxess’ adjusted earnings guidance for 2013 and declining prices for feedstock and rubber products. This will leave the Baa2 rating weakly positioned in the next 12-18 months.

Revlon Consumer Products Corporation Confirmation

5 Aug ’13 16 Aug ‘13

Corporate Family Rating Ba3 Ba3

Outlook Review for Downgrade Negative

The confirmation concludes the review for downgrade we initiated on 5 August 2013 following Revlon’s announced $660 million debt-funded acquisition of The Colomer Group. We expect that the acquisition will help Revlon maintain the improved operating stability it has achieved over the past few years, and that it will continue to generate meaningful free cash flow. In addition, we believe Revlon is committed to reducing leverage following the acquisition, so that debt/EBITDA leverage will decline and be sustained below 5.0x.

RATING CHANGES Significant rating actions taken the week ending 16 August 2013

28 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Infrastructure

Amey Lagan Roads Financial, plc. Upgrade

1 Jul ‘11 13 Aug ‘13

Index-Linked Guaranteed Secured Bonds/Index-Linked Guaranteed Senior Secured Loan

Baa3 Baa2

Outlook Positive Stable

The upgrade reflects the sound operational performance of the project as it continues to transition to steady-state operations. The project company is constructing and upgrading various roads to the south and west of Belfast, Northern Ireland, and subsequently their operation and maintenance.

HSE Netz AG Review for Downgrade

20 Apr ‘11 14 Aug ‘13

Senior Secured Debt Rating Baa1 Baa1

Outlook Stable Review for Downgrade

The rating action reflects the deterioration in the credit quality of HSE Netz's parent HEAG Südhessische Energie AG, which is to some extent driven by the negative developments in the German energy sector. It also reflects our view that the financing structure of HSE Netz does not fully insulate the company from the credit risk of the wider group.

PPL Montana, LLC Outlook Change

26 Mar ‘04 14 Aug ‘13

Pass Through Certificates Rating Baa3 Baa3

Outlook Stable Negative

The outlook change reflects the severely diminished financial performance we expect in 2014 and 2015 given expiring hedges and challenging market conditions. Further pressuring expected cash flows are higher than previously expected required capital expenditures and lower forecasted tax sharing benefits between PPL Montana and PPL Corporation. PPL Montana is a wholly owned subsidiary of PPL

RATING CHANGES Significant rating actions taken the week ending 16 August 2013

29 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

TPF II LC, LLC/TPF II Rolling Hills, LLC Upgrade

25 Jul ‘13 14 Aug ‘13

Senior Secured Term Loan B2 B1

Senior Secured Working Capital Facility

B1 Ba3

Outlook Stable Stable

The upgrade is driven by lower leverage in the project's capital structure as its secured term loan is being reduced to $350 million from $475 million, a reduction of over 26%. Correspondingly, the distribution that will be paid to the project’s sponsors has been reduced to about $230 million from $351 million.

RATING CHANGES Significant rating actions taken the week ending 16 August 2013

30 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Financial Institutions

Financial Strength Rating of Three Indian Banks Lowered On 16 August, we lowered the bank financial strength ratings (BFSRs) and baseline credit assessments (BCAs) of three Indian public sector banks. At the same time we downgraded their local currency deposit ratings by one notch and their senior unsecured debt ratings or issuer ratings. The foreign currency deposit ratings were affirmed. The lower assessments primarily reflect the challenges of the current macroeconomic environment in India, which have been exacerbated by the depreciating rupee and high levels of inflation. Measures by the Reserve Bank of India to support the currency have not reversed the depreciation, implying that interest rates may remain elevated for a longer time. Against such a backdrop, we expect public sector banks in particular to find it difficult to respond to slower economic growth, deteriorating asset quality, and declining margins.

The three banks and their ratings after the action are Bank of Baroda (Baa3 stable, D/ba2 negative),12 Canara Bank (Baa3 stable, D/ba2 negative) and Punjab National Bank (Baa3 stable, D-/ba3 stable). We affirmed the ratings of Union Bank of India (Baa3 stable, D/ba2 negative), but changed the outlook on its bank financial strength rating to negative. The outlooks on the BSFR of Bank of Baroda and Canara Bank are also negative; the outlook on that of Punjab National Bank is stable.

Credito Valtellinese Downgrade

14 May ‘13 13 Aug ‘13

Long-Term Deposit Rating Baa3 / Prime-3 Ba3 / Not-Prime

Standalone Financial Strength/ Baseline Credit Assessment

D + / ba1 E+ / b1

Outlook Negative Negative

CreVal's profitability deteriorated sharply in 2012 and also in the first half of 2013, mainly because of substantial increase in loan-loss charges. We also consider CreVal’s capital to be low, given the recessionary environment in Italy and the likelihood of weak recurring profitability over the next two years.

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

assessments and the corresponding rating outlooks.

RATING CHANGES Significant rating actions taken the week ending 16 August 2013

31 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Raiffeisenbank (Bulgaria) Downgrade

30 Jul ’12 14 Aug ‘13

Long-Term Deposit Rating Ba1 Ba2

Standalone Financial Strength Rating/ Baseline Credit Assessment

D - / ba3 E+ / b1

Outlook Stable Negative

The rating action is primarily driven by (1) Raiffeisenbank's weakening asset quality, owing to legacy exposures to the construction and real estate sector, which continue to perform poorly, and the growing delinquencies in its broader loan portfolio within the context of Bulgaria's challenging operating environment; and (2) subsequent pressure on the bank's profitability stemming from the non-performing part of its real estate portfolio and other problematic exposures, which in turn weaken the bank's interest income and raise provisioning needs.

RATING CHANGES Significant rating actions taken the week ending 16 August 2013

32 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Sub-sovereigns

Yellowknife, Northwest Territories, Canada New

12 Aug ‘13

Issuer rating Aa2

Outlook Stable

The rating is supported by consistent and positive operating outcomes, strong governance and management policies and a developed institutional framework for municipalities in the Northwest Territories of Canada. The rating also reflects the city's narrow economic base, as well as anticipated debt issuances over the medium term to finance capital expenditures, which will result in a relatively high debt burden for the city.

Faroe Islands Review for Downgrade

18 Apr ‘11 13 Aug ‘13

Issuer rating Aa3 Aa3

Outlook Stable Review for Downgrade

The review follows a vote on 31 July by EU member states in favor of implementing sanctions against Faroe Islands' fishing exports. This action follows ongoing disputes between the EU and the Faroe Islands over fishing quotas, which escalated in March 2013 when the Faroe Islands unilaterally set its own 2013 quota for herring and mackerel. The EU has stated that the European Commission will take a final decision on the proposed sanctions this month. At present, the extent of the potential sanctions is unknown. However, if implemented, sanctions could include restrictions on Faroese herring and mackerel exports to the EU, which would hurt the Faroese economy.

RATING CHANGES Significant rating actions taken the week ending 16 August 2013

33 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

US Public Finance

15 California Transit Agencies Review for Downgrade

14Aug ‘13

Outlook Review for Downgrade

The review is prompted by the possibility that the agencies will lose federal grants that, on average, comprise about 13% of their operating revenue and 40% of their capital funding. The Federal Transit Act mandates that the US Department of Labor (DoL) must certify that certain transit employee protections, including the right to collective bargaining, are in place before the Federal Transit Administration can issue a grant. In California, transit unions have asserted that the California Public Employees' Pension Reform Act of 2013 infringes on their right to collective bargaining. As a result, the DoL has not certified various grants to seven rated California transit agencies, threatening over $3 billion of federal aid and challenging their finances.

City of Atlanta, Georgia Water and Wastewater Enterprise Upgrade

14 Jun ‘11 14 Aug ‘13

Revenue Bonds A1 Aa3

Outlook Stable Stable

The upgrade reflects the system's stable financial ratios, including debt service coverage and liquidity, the recent extension of the municipal option sales tax and the extension of the system's sanitary sewer overflow consent decree, which mitigates the need for significant rate increases and debt issuances in the near term.

Jefferson County, Alabama Affirmation

13 Feb ‘13 15 Aug ‘13

Sewer Revenue Warrants Ca Ca

Outlook Negative Negative

The rating on Jefferson County’s $3.1 billion in outstanding sewer revenue warrants reflects the significant expected loss on them given the county's bankruptcy filing, proposed plan of adjustment and the likely degree of insufficiency of net sewer revenues relative to debt service. We would expect the proposed restructuring of the sewer warrants to lead to a recovery toward the high end of the Ca rating category. The negative outlook reflects the possibility that the ultimate recovery rate could fall below 35% if the proposed restructuring fails to materialize as currently envisioned.

RATING CHANGES Significant rating actions taken the week ending 16 August 2013

34 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Monroe County, New York Downgrade

14 Jun ‘12 13 Aug ‘13

General Obligation A3 Baa1

Outlook Stable Negative

The downgrade reflects a significant weakening in the county's financial position, with a structurally-imbalanced operating budget dependent on nonrecurring revenues and reliance on cash flow borrowing to maintain operations. The county ran an operating deficit in fiscal 2012 and may do so again in fiscal 2013 given aggressive budgeting.

Portland, Oregon Outlook Change

13 Feb ‘13 15 Aug ‘13

GOULT Aaa Aaa

GOLT Aa1 Aa1

Moral Obligations Aa2 Aa2

Urban Renewal Bonds Aa3 Aa3

Gas Tax Revenue Bonds Aa2 Aa2

Outlook Review for Downgrade Stable

We had placed the ratings on review for downgrade because of the city's large adjusted net pension liability relative to its rating category under our new approach to analyzing pension liabilities for local governments. The confirmation primarily reflects the city's overall strong credit fundamentals that include its role as a regional center for a broad and resilient metro economy. The stable outlook reflects our expectation that recovery for Portland's economy and tax base will be at least comparable to that of its peers.

Successor Agency to the San Diego RDA, California Upgrade

14 Jun ‘12 13 Aug ‘13

TABs Ba1 Baa3

Outlook Review for Withdrawal Stable

The upgrade reflects the ample semi-annual debt service coverage provided by the total incremental revenues available to the successor agency. Based on conservative estimates for 2014 debt service coverage for all debt is 2x, after payment of pass-through obligations.

RATING CHANGES Significant rating actions taken the week ending 16 August 2013

35 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Washoe County School District, Nevada Downgrade

21 Sep ‘12 13 Aug ‘13

General Obligation Aa2 Aa3

Outlook Negative Stable

The downgrade reflects the district's somewhat weakened financial health as a result of two consecutive years of draws on General Fund reserves due to a structural imbalance. The rating also takes into account the district's sizeable tax base, above average socioeconomic indicators, and strong management.

RESEARCH HIGHLIGHTS Notable research published the week ending 16 August 2013

36 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Corporates

US Broadcast Television’s Ad Growth Reflects Slow US GDP Gains as Merger Activity Picks Up

Our outlook for the US Broadcast TV industry remains stable. We expect core revenue among pure-play broadcasters to grow by 1%-3% in 2013 and 2014, with auto advertising growing in line with our expectations for GDP. Overall ad demand will begin to rise in fourth-quarter 2013 as health insurance and medical care providers try to educate viewers and market new policies stemming from the Affordable Care Act, much of which takes effect next year.

US Gaming: Connecticut Casinos Need a Massachusetts Miracle

New gaming licenses in Massachusetts pose both a threat and an opportunity for Connecticut’s two casino operators. Both the Mohegan and Mashantucket tribes have applied for gaming licenses in the neighboring state. If they are awarded licenses to operate there, their prospects will brighten considerably, but if not, both will see continuing deterioration in gaming revenue amid heightened competition.

North American Solid Waste Industry: Slow Economic Growth, Shift to Recycling to Weigh on Volumes, Pricing

Our outlook for the US and Canadian solid waste industry is stable. Solid waste pricing and volumes will post weak gains at best, and the industry will see only a modest uptick in pricing and nearly flat volumes over the next 12-18 months, due in part to the slow US economic recovery. Profitability will be under pressure from sliding prices for recycling commodities and increased price competition among industry participants.

Infrastructure & Project Finance

German Regulated Energy Networks: Regulatory Changes Have Proved Beneficial to Date but Affordability Issues May Exert Negative Pressure on Electricity TSOs

Changes to the German incentive-based regulatory regime for energy networks have resulted in greater certainty of earning a timely return on expansion investments for regulated network operators in Germany, a credit positive. However, in the medium to long term, we see challenges in the continued focus of national energy policy on renewable energy generation.

RESEARCH HIGHLIGHTS Notable research published the week ending 16 August 2013

37 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Financial Institutions

Japanese Banks Would Benefit from Sustainable Growth and an End to Deflation

Ending deflation and achieving sustainable nominal GDP growth would be credit positive for Japan’s domestic banking sector. One of the keys to revitalizing growth is increased private sector capital formation, which in turn should invigorate financial intermediation between savers and borrowers, the core function of the banking sector. The result would be an increase in lending.

Abenomics’ Effect on Japanese Insurers A gradual increase in interest rates, accompanying a rise in economic growth, would be credit positive for Japanese insurers. Ending deflation and achieving stronger nominal GDP growth would cause an increase in the risk-free rate which would, in turn, be credit positive for the sector as insurers have been most disadvantaged by Japan’s extended period of low interest rates. Accordingly, life insurers will be among the biggest beneficiaries of a more normal interest rate environment.

LIBOR Litigation and Regulatory Risks – Answers to Frequently Asked Questions

The recent dismissal by the New York Federal District Court of antitrust and racketeering claims with regard to alleged LIBOR manipulation is credit positive for those banks that participate in LIBOR-setting panels, but the banks remain vulnerable to fraud-based and other legal claims. Inter-dealer brokers have also recently come under investigation, and have less financial flexibility to absorb any potential LIBOR-related fines and legal damages.

Despite Improvements, Austrian Banking System’s Capitalisation Remain Challenged

Despite progress in bolstering capital buffers at some Austrian banks, we maintain our view that capitalisation levels for the Austrian banking system as a whole remain challenged. Many Austrian banks still have weaker capital positions and higher risk profiles compared with European peers. Despite some improvement in capital positions since 2008, we consider that the loss-absorption capacity of most Austrian banks will remain limited in a stressed economic environment.

New Business, Improving Housing Market and Burn-off of Legacy Books Support US Mortgage Insurers’ Higher Second-Quarter Profits

Second-quarter results were driven by a lower delinquency rate that reflects better housing fundamentals, and the slow but steady burn-off of the pre-2009 legacy book. New business is making up an increasing share of mortgage insurers’ books, with the cumulative effect of over four years of profitable business increasingly flowing through earning premiums. In addition, rising interest rates will have an increasing impact on the industry, seen in higher unrealized losses on investment portfolios, increased net investment income and a shift to less single-premium business.

RESEARCH HIGHLIGHTS Notable research published the week ending 16 August 2013

38 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Sovereigns

Bosnia & Herzegovina’s Divisive Political Environment Impedes EU Candidacy, a Credit Negative

Bosnia & Herzegovina (B3 stable) has so far been unable to secure formal candidate status for membership of the European Union (EU) because the country’s political divisions continue to prevent the adoption of constitutional changes that are prerequisites for the country’s candidacy. This is credit negative because EU funding and enhanced foreign investor confidence linked to candidacy status consequently remain out of reach.

IMF Program Participation Underscores Sovereign Credit Challenges

Countries in IMF support programs face significant default risk because of their long-term vulnerabilities despite the obvious boost these programs generally give them. Our study finds that during 1983-2012, among all sovereigns that entered IMF programs, 16.4% defaulted over a five-year horizon.

RESEARCH HIGHLIGHTS Notable research published the week ending 16 August 2013

39 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

US Public Finance

Downward Rating Momentum Continues in 2013 for US Higher Education and Not-for-Profits

In the first half of 2013, there were 19 downgrades compared to nine upgrades among rated US universities and not-for-profit organizations. The significant number of upgrades demonstrates that a limited number of organizations have turned the corner and are recovering after a period of restructuring, expense management, and the slow return of consumer and donor confidence. Governance and management capabilities stand out as differentiating factors in upward and downward rating activity.

Heightened Pressure on Revenue Growth for US Public Universities in Fiscal 2012 Slowed revenue growth highlights the increasing need for public universities to focus on cost containment, according to our fiscal year 2012 medians. During fiscal year 2012, operating revenue grew at a rate lower than inflation at half of rated public universities.

Private College and University Medians Highlight Challenges in Post-Recession Era

Our fiscal year 2012 fiscal median data for US not-for-profit private college and university reflect continued muted net tuition revenue growth, flat to declining enrollment, and the difficulty of controlling expenses for multiple years. Governing boards and management teams continue to exhibit fiscal stewardship by holding median operating margins relatively constant.

Illinois-Linked Credits Capped at State General Obligation Rating

Ratings on revenue bonds issued by the State of Illinois are capped at the state’s general obligation (GO) rating. The Build Illinois sales tax revenue bond program’s strong legal structure provides credit quality comparable, but not superior, to the state’s GO bonds, while the Metropolitan Pier & Exposition Authority’s expansion project debt and the state’s civic center bond ratings are notched off of the state GO, due to non-appropriation risk. We expect to continue to move the ratings of these credits in tandem with the state GO.

US Not-For-Profit Healthcare Quarterly Ratings: Patient Volume Declines Drive High Pace of Downgrades

Downgrades outnumbered upgrades two to one for the second consecutive quarter. A common driver behind 10 of the 14 downgrades was material admissions declines.

RESEARCH HIGHLIGHTS Notable research published the week ending 16 August 2013

40 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

Structured Finance

US CMBS and CRE CDO Second-Quarter Surveillance Review

Our base expected loss for conduit/ fusion transactions is 9.06%, down from 9.07% in first-quarter 2013. We expect the share of specially serviced loans to decrease due to improving real estate markets and increased servicer resolutions. The overall share of specially serviced loans decreased 76 basis points to 10.28%, from 11.04% in the first quarter.

Moody’s/RCA CPPI: Hotels in Major Markets See Sharp Price Growth The Moody’s/RCA Commercial Property Price Indices national all-property composite index for US commercial real estate increased by 2.1% in June. Apartment prices increased by 0.7%, while core commercial prices were up 2.6%. Major market hotel prices have gained 19.2% over the last two quarters, more than double the 7.9% appreciation achieved by non-major market hotels over the same period.

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

41 MOODY’S CREDIT OUTLOOK 19 AUGUST 2013

NEWS & ANALYSIS Corporates 2

» Rockwell Collins’ Planned Acquisition of Arinc Is Credit Negative

» Pinnacle Foods’ Plan to Buy Wish-Bone for $580 Million Is Credit Negative

» Mexico’s Energy Reform Proposal Would Encourage PEMEX Expansion

» America Movil’s Takeover of KPN Is Positive for KPN, Negative for America Movil

» Bright Food Will Benefit from Fonterra’s Milk Powder Contamination Scare

» Pollution Allegations Against Tianneng Power Are Credit Negative

» IOI Bondholders Reject Property Spinoff Plan, a Credit Positive

Banks 9

» Brazil Central Bank Strengthens Rules to Investigate Managers of Failed Banks, a Credit Positive

» Sweden’s Implementation of EU Bank Bail-In Plan Is Credit Negative

Sovereigns 13

» Weaker Growth in Japan Jeopardizes Economic Revitalization

US Accounting 15 » Proposals to Improve US Auditor Reports Are Positive for

Investors

CREDIT IN DEPTH US Coal Producers 17

Business conditions for US coal producers will remain depressed through 2014, with companies with the strongest liquidity coping most easily with this period of weakness. Coal producers’ efforts to restructure credit lines, renegotiate financial maintenance covenants and raise funding has kept the industry’s cumulative cash balance relatively steady as EBITDA plunged and free cash flow turned negative. Some of these companies have bolstered liquidity and bought themselves time, but they will eventually have to adjust their capital structures if their performance does not improve.

MOODYS.COM

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EDITORS PRODUCTION ASSOCIATE News & Analysis: Jay Sherman, Elisa Herr and Alexis Alvarez

David Dombrovskis

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