MOODYS.COM

17 FEBRUARY 2014

NEWS & ANALYSIS Corporates 2

» PepsiCo Pours on the Returns to Shareholders with a Credit-Negative 35% Distribution Increase

» Mallinckrodt's Deal for Cadence Is Credit Negative » Apache's Argentine Asset Sale to YPF Is Credit Positive for

Apache, Neutral for YPF » Oi and Portugal Telecom Merger Advances with Credit-Positive

Bank Commitment » Imerys' Offer to Acquire Amcol International Is Credit Negative » Woodside’s Investment in Leviathan Would Be Credit Negative » China National Petroleum Discovers Major Natural Gas

Reservoir in China

Infrastructure 9

» Cameron Liquefied Natural Gas Export Permit Is Credit Positive for Sempra Energy

» UK Energy Minister Hints at Possible Breakup of Centrica's Retail Activities, a Credit Negative

Banks 12 » Credicorp Acquires Mibanco, a Credit Positive that Expands Its

Microfinance and SME Share in Peru » Italian Banks' Nonperforming Loan Surge Is Credit Negative » Kazakhstan Devalues Its Currency 19% Versus US Dollar, a

Credit Negative for Banks

Insurers 19

» Argentine Requirement that Insurers Invest More in Infrastructure and SME Projects Is Credit Negative

Sovereigns 21 » Canada's Planned Fiscal Consolidation Is Credit Positive » German Court Casts Doubt on ECB Bond-Buying Program, a

Credit Negative for Euro Area Sovereigns » Iceland's Creditworthiness Is Not Affected by British and Dutch

Effort to Increase Icesave Recoveries » Romania's Improving Trade Balance Is Credit Positive,

Strengthening Growth and Balance of Payments » Egypt Receives UAE Financing to Support Capital Spending, a

Credit Positive » Japan's Shrinking Current Account Surplus Is Credit Negative

» Debt Forgiveness and Restructuring Prepares Myanmar to Enter Global Financial System

US Public Finance 30 » Proposed Michigan Budget Is Credit Positive for Struggling

Municipalities

RATINGS & RESEARCH Rating Changes 33

Last week we downgraded Bombardier, Fiat, Kellogg, HSE Netz, AES Puerto Rico and University of Puerto Rico, and upgraded Ineos Group, BBVA Bancomer, Banco Nacional de México, Banco Santander (México), Banco Mercantil del Norte, HSBC México, Scotiabank Inverlat, Banco Bilbao Vizcaya Argentaria Paraguay, Banco Continental and Banco Regional, among other rating actions.

Research Highlights 41

Last week we published on Indian automakers, European pharmaceuticals, US natural gas transport, US for-profit hospitals, Hong Kong REITS, global transportation equipment, UK water companies, Latin American banks, Tier 1 contingent capital securities, Israeli banks, North American banks, European insurers, Dubai health insurance, US health issuers, Norway, South Africa, Ghana, Slovenia, China, Mexico, German municipals, US military housing, US public housing, CLOs, Canadian ABS, RMBS and covered bonds, Russian securitizations and UK auto ABS, among other reports.

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Thursday’s Credit Outlook 48 » Go to Last Thursday’s Credit Outlook

The next issue Credit Outlook will be Monday 24 February.

NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Corporates

PepsiCo Pours on the Returns to Shareholders with a Credit-Negative 35% Distribution Increase Last Thursday, PepsiCo, Inc. (A1 stable) said it will increase shareholder distributions by 35% to $8.7 billion this year, a credit negative because it will fund the added payouts with debt, increasing leverage. PepsiCo plans to increase this year’s share-repurchase program to $5 billion from $3 billion and its annual dividend per share by 15% to $2.62 from $2.27, or to a total of about $3.7 billion from $3.4 billion.

Although PepsiCo has more than $9 billion of cash, most of it is located overseas. Consequently, it will have to borrow to meet the higher shareholder payouts. This will likely increase debt/EBITDA leverage to about 2.9x by year-end from its current estimated level of 2.6x, despite the benefit of new cost-savings plans. The company’s leverage has increased in recent years owing to debt-funded acquisitions of its own bottling companies and a more aggressive financial policy. Although higher shareholder payouts will further increase leverage, the company’s A1 senior unsecured and Prime-1 short-term ratings and stable outlook remain unchanged.

The increase in shareholder distributions was one of several announcements that PepsiCo made with its release of fourth-quarter and full-year earnings. The company extended its cost-cutting plan by $5 billion over the five years through 2019. It is currently in the final year of a three-year effort to trim costs by $3 billion.

PepsiCo also concluded its strategic review of its North American beverage business without major changes, based on the belief that the current structure maximizes value. Activist investor Nelson Peltz had pressured PepsiCo to spin off the North American beverage business, separating it from the food business, which includes faster-growing Frito-Lay and Quaker. The carbonated soft drink segment has been experiencing declining sales volumes in the US and Europe in recent years. Although this decision eliminates the possibility of transformational events driven by management anytime soon, it is not clear if pressure from investors for strategic changes and further increases in shareholder returns will abate.

PepsiCo’s more aggressive financial policy weakens its position in its current rating category. Further increases to gross debt/EBITDA leverage would likely lead to a downgrade. When we downgraded PepsiCo to A1 in June, we stated that debt/EBITDA greater than 3.0x, retained cash flow to net debt approaching 20% or EBITA margins under 16% could result in a downgrade. Retained cash flow to net debt was 25% and EBITA margins were 16% for the last reported 12 months ended in September.

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

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Mallinckrodt’s Deal for Cadence Is Credit Negative Last Tuesday, specialty pharmaceuticals company Mallinckrodt plc (Ba2, review for downgrade) announced plans to buy Cadence Pharmaceuticals (unrated) for $14 per share or about $1.3 billion in cash.

The acquisition, which Mallinckrodt said it will finance with senior secured debt and cash on hand, is credit negative because it will initially raise Mallinckrodt’s debt/EBITDA to approximately 5x, which is substantially higher than the 3x we expected when the company was spun out of Covidien in mid-2013. We placed Mallinckrodt’s ratings on review for downgrade following the deal’s announcement. Further, the addition of secured debt to Mallinckrodt’s capital structure will subordinate existing bondholders.

The transaction, which Mallinckrodt said it expects to close in mid-to-late March, is also credit negative because Cadence is not yet profitable. Its profitability will depend on continued rapid growth. Cadence reported 2013 revenues of $110.5 million, up from $50.1 million in 2012. Its sole product is Ofirmev, an intravenous (IV) formulation of the pain reliever acetaminophen, used primarily in hospitals. Mallinckrodt said that the deal will be accretive to its fiscal 2014 earnings.

Ofirmev is complementary to Mallinckrodt’s specialty pharmaceuticals business, which, along with medical imaging, is one of the company’s two main business segments. Mallinckrodt’s pharma business is heavily concentrated in opioid pain relievers, where it offers both generic and branded products. While opioids provide generally stable revenues because they are widely prescribed, they are also abused, which has increased regulatory scrutiny. Ofirmev, a non-opioid, can be used on its own to treat mild to moderate pain or combined with an opioid to relieve moderate to severe pain.

The deal highlights rapid consolidation of the specialty pharmaceutical space, where recent acquirers include Forest Laboratories (Ba1 stable), Valeant Pharmaceuticals International, Inc. (Ba3 negative) and Endo Health Solutions (Ba3 negative). A desire for scale and tax benefits drive many of these deals.

Cadence will give Mallinckrodt a presence in the hospital market, where it does not currently offer pharmaceutical products. We expect that a hospital business will provide the company a platform for more acquisitions, which could also be credit negative depending on the company’s leverage appetite.

Dublin, Ireland-based Mallinckrodt reported revenues of $2.2 billion for the 12 months ended 27 December 2013. It completed its spinoff from medical device company Covidien in June 2013.

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

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Apache’s Argentine Asset Sale to YPF Is Credit Positive for Apache, Neutral for YPF Last Wednesday, Apache Corporation (A3 stable) said it had agreed to sell all of its oil and gas operations in Argentina to YPF Sociedad Anónima (B3 negative) for $800 million, plus the assumption of $52 million of bank debt, subject to final closing adjustments. The transaction is credit positive for Apache and credit neutral for YPF.

For Apache, the sale frees up capital for higher-return investments, and is part of the company’s larger portfolio restructuring. For YPF, the transaction will increase its size and scale at a reasonable price and without a significant effect on leverage. The transaction comes as Argentina employs foreign currency controls and is experiencing high oilfield service and labor inflation. In addition, there continues to be a high level of government interference in the energy sector, and it remains unclear to what degree the government will permit energy prices to rise this year. The economic situation in Argentina is another reason why the transaction is credit positive for Apache and only credit neutral for YPF.

Apache’s Argentine assets are heavily weighted toward natural gas and are located in the provinces of Neuquén, Tierra del Fuego and Río Negro. They include 135 million barrels of oil equivalent (boe) of total proven reserves as of year-end 2013 and the effect of concession extensions and pipeline and infrastructure facilities. Daily production in fourth-quarter 2013 averaged 42,729 boe per day, with natural gas accounting for 74% of that amount.

YPF separately agreed to transfer a stake in three concessions from the Apache assets in the Neuquén province to Pluspetrol S.A. (unrated) for $217 million in cash, to jointly explore and develop the Vaca Muerta shale formation. The transfer consists of all prospective acres, with no current proven reserves or production.

Based on the $635 million net price, the transaction with Apache works out to $4.70 per boe of proved reserves, a low price reflecting Argentina’s challenging operating environment. YPF expects to finance the transaction with $150 million in debt from a two-year credit facility, with the remainder funded with cash on its balance sheet. YPF has already obtained a credit line from the Argentine Treasury to finance the transaction.

The transaction continues Apache’s asset-sales program, which in the past six months has yielded more than $7 billion that the company is using to invest in higher-return projects, reduce debt and buy back shares.

Apache’s Argentina assets are only about 7% of its production, 3% of its total proved reserves and an insignificant amount of its cash flow. The sale will free up additional capital to focus on its unconventional liquids-rich production opportunities in the US, particularly in the Permian and Anadarko Basins.

For YPF, the transaction will increase its reserves by 14% from year-end 2012 and its production by 9% from third-quarter 2013. Some of the acquired assets offer upside potential from exploration and development of the Vaca Muerta shale formation, with the concurrent Pluspetrol transaction bringing in another partner to help develop this highly capital-intensive shale resource.

Most notably, the Apache transaction will increase YPF’s natural gas production by 15% from third-quarter 2013 levels and make YPF the largest producer of natural gas in Argentina. However, we do not expect the transaction to result in improved natural gas pricing for YPF. Apache’s total realized price on its Argentine natural gas production of $3.11 per thousand cubic feet in fourth-quarter 2014 is lower than YPF’s $3.91 in third-quarter 2013.

Gretchen French Vice President - Senior Credit Officer +1.212.553.3798 gretchen.french@moodys.com

Peter Speer Vice President - Senior Credit Officer +1.212.553.4565 peter.speer@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Oi and Portugal Telecom Merger Advances with Credit-Positive Bank Commitment Last Monday, a syndicate of Brazilian and international banks said it had committed BRL6 billion ($2.5 billion or €1.8 billion) of capital as part of the merger of Oi S.A. (Baa3 negative) and Portugal Telecom, SGPS, S.A. (PT, Ba2 review for upgrade) announced in October. The commitment is credit positive for both companies because it clears a major hurdle to the merger’s successful closing.

The BRL6 billion is in addition to a BRL2 billion commitment made in October by Oi’s current controlling shareholders and an investment vehicle managed and administered by Banco BTG Pactual S.A. (Baa3 stable, D+/baa3 stable1). The additional commitment guarantees Oi can raise the BRL7.0-BRL8.0 billion of capital it expected to raise when it announced the merger. The capital increase will reduce debt at Oi’s current holding company and its operating company.

Although the merger will benefit both companies, it is more credit positive for PT than Oi because the combined company will be financially stronger. A simpler organizational structure at Oi will allow for improved corporate governance and lower dividend payments, while PT bondholders will have less exposure to Portugal’s sovereign and macroeconomic risks. We estimate that the combined company will have total adjusted debt/EBITDA in excess of 4.0x in 2014 and 2015, versus 4.4x for Oi and 5.5x for PT for the 12 months ended 30 September. We expect free cash flow to be negative through the end of 2014, owing partly to Oi’s high capital spending needs.

The Brazilian antitrust authority recently approved the merger. Remaining steps include the successful completion of the capital increase, which is now very likely following the commitment of the bank syndicate, and approvals from shareholders and PT bondholders, regulators in Portugal, the Brazilian telecommunications regulator and the US Securities and Exchange Commission. We do not expect the merger to be completed before April.

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

corresponding rating outlooks.

Soummo Mukherjee Vice President - Senior Credit Officer +55.11.3043.7341 soummo.mukherjee@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Imerys’ Offer to Acquire Amcol International Is Credit Negative Last Wednesday, Imerys S.A. (Baa2 review for downgrade) announced it would launch a tender offer for 100% of the shares of Amcol International (unrated), a US-based supplier of bentonite, for $41 per share, or a total consideration of $1.6 billion, including Amcol’s net debt. The proposed transaction is credit negative for Imerys because the debt-financed deal will raise Imerys’ net debt to approximately €1.2 billion from 2013 net debt of approximately €890 million. Following the announcement, we placed Imerys’ ratings on review for downgrade.

We expect the transaction to result in a deterioration of Imerys’ credit metrics, with its pro forma retained cash flow/net debt falling to the mid-teens from around 20% for the 12 months ended June 2013. Such metrics would be below our requirement for the current rating category. If we were to take a rating action based on the current price offered, we would expect the rating downgrade to be limited to one notch.

The proposed price values Amcol at approximately 11x its 2013 unaudited EBITDA and is a 19% premium over Amcol’s average share price over the past 30 days. Although this valuation is rich, we expect Imerys to be able to extract some revenue and cost synergies from the integration of Amcol, which would make the proposed valuation more attractive.

Amcol is a leading supplier of bentonite, a mineral used in a range of industrial applications including oil drilling, metal casting for the automotive industry, water treatment and concrete water proofing systems.

The proposed transaction makes strategic sense for Imerys because it will give it access to around 35 years of high-quality sodium-bentonite reserves (at current production levels). The acquisition also will further diversify the group’s portfolio of minerals with a commercially viable mineral and expand the company’s already diversified base of end users beyond its base of steel producers, construction companies, paper manufacturers, chemical companies, consumer goods producers and oil and gas companies.

Stanislas Duquesnoy Vice President - Senior Credit Officer +49.69.70730.781 stanislas.duquesnoy@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Woodside’s Investment in Leviathan Would Be Credit Negative On 7 February, Woodside Petroleum Ltd (Baa1 stable) announced that it had agreed to convert a previous in-principle agreement for the acquisition of an interest in the Israeli offshore Leviathan gas fields into a non-binding memorandum of understanding (MoU). As a result of the conversion, several key terms of the deal have changed, including an increase in the initial upfront payment to $850 million from $696 million and a decrease in the amount of equity Woodside is acquiring to 25% from 30%.

The higher purchase price and lower participating equity stake of the potential acquisition are credit negative for Woodside. Also, we believe that the revision of terms may increase the likelihood that the potential acquisition will proceed, which would be credit negative for Woodside, as we have previously noted.

Our credit negative view reflects the large upfront payment required, the likelihood of further conditional payments upon meeting certain milestones, and the potential costs and execution challenges associated with developing the gas field. The project will also be in a new jurisdiction for Woodside, which is based in Australia and primarily operates there.

Woodside’s cash balance of $1.8 billion as of 30 June 2013 combined with our expectation of significantly increased operating cash flow resulting from the start up of Pluto liquefied natural gas (LNG) operations should be more than adequate to fund the proposed upfront purchase price. As a result, the transaction is not likely to have a material effect on Woodside’s key credit metric of retained cash flow to debt, which we expect to be maintained above 35% on an ongoing basis. However, the cash that will fund the acquisition and the project could been used for debt reduction. On a net debt basis Woodside’s pro forma retained cash flow to debt for the 12 months ended 30 June 2013 would weaken to around 42% from around 52%.

The potential stake in Leviathan is part of Woodside’s new strategy to leverage the LNG expertise it gained through the development and operation of the North West Shelf and Pluto LNG projects in Australia. While the acquisition would diversify the company geographically, it also increases the company’s exposure to regulatory and political risk.

Should the acquisition proceed and the project be successfully developed, it will support the company's scale, diversity and cash flow generating ability through increased total production and geographic region.

Woodside's entry into the field is contingent on the execution of a signed, fully termed agreement and certain policy, tax and regulatory approvals from the Israeli Government. According to the announcement, the parties will negotiate toward a fully termed agreement by 27 March 2014.

Matthew Moore Vice President - Senior Analyst +612.9270.8108 matthew.moore@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

China National Petroleum Discovers Major Natural Gas Reservoir in China On 10 February, China National Petroleum Corporation (CNPC, Aa3 stable) announced a major discovery of a natural gas reservoir in the Sichuan Basin. CNPC’s find is credit positive because we expect the reservoir will evolve into proved reserve and production, which will decrease the company’s debt-to-proved-reserves and debt-to-production ratios.

The gas reservoir, with proven geological reserves of around 440 billion cubic meters (bcm), according to the Ministry of Land and Resources, is the largest single gas reservoir of this type discovered in China.2

As shown in the exhibit, the amount of newly added proven geological reserves3 from this reservoir is close to the average 500 bcm that CNPC added annually between 2010 and 2012, according to the company’s most recent published data.

EXHIBIT 1

CNPC’s Natural Gas Discovery and Production Volume 2010-12 in Billion Cubic Meters (bcm) 2010 2011 2012 Average

Addition of proven geological natural gas reserves 570 488 450 503

Addition of proved natural gas reserves 170 123 178 157

Natural gas production 63 68 73 68

Note: 1 billion cubic meters = 35 billion cubic feet

Source: CNPC website and PetroChina filings

Based on CNPC’s 2010-12 data, proved reserves added every year were approximately 30% of additional geological reserves. If we assume the same proportion of the newly discovered geological reserves could turn into proved reserves, the addition would increase CNPC’s proved reserve base by around 132 bcm or 770 million barrels of oil (boe). Assuming other factors remain unchanged, CNPC’s debt/proved reserves metrics would therefore decrease to $4.27/boe from $4.40/boe at year-end 2012, a 3% decrease.

CNPC also said the Phase I and Phase II development of the new gas field has total designed annual production capacity of around 10 bcm, accounting for around 13.7% of its total production of natural gas in 2012. Assuming other factors remain unchanged, when the Phase I and Phase II development is complete, CNPC’s debt/daily oil and gas production metrics would decrease to $21,500/barrel (bbl) from $22,400 /bbl as of 2012-end, a 4% decrease.

The discovery will also help alleviate China’s reliance on imported natural gas, which carries a much higher cost than domestically produced gas. In 2013, natural gas imports in China increased 25% over the prior year, and dependence on imported gas exceeded 30%, according to CNPC Economics and Technology Research Institute.

CNPC, as the largest importer of natural gas, has suffered substantial losses because its imported gas costs are higher than the wholesale price of the gas it sells to domestic clients. PetroChina Company Limited (unrated), the key listed subsidiary of CNPC, recorded a loss of approximately RMB27.5 billion in 1H 2013 on the sale of imported natural gas (including liquefied natural gas). More domestic production thus can alleviate CNPC’s financial losses.

2 The reserve is a monomer marine uncompartmentalized carbonate gas reservoir. 3 Proven geological reserve is a measurement used by Chinese institutions. It is usually much larger than “proved reserve,” which is

defined by the Society of Petroleum Engineers (SPE). We use proved reserve in the calculation of oil and gas companies’ credit metrics.

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

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

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Infrastructure

Cameron Liquefied Natural Gas Export Permit Is Credit Positive for Sempra Energy Last Tuesday, Cameron LNG, LLC (unrated), a subsidiary of Sempra Energy (Baa1 stable), received a US Department of Energy non-free trade agreement permit to export up to 1.7 billion cubic feet a day (bcfd) of liquefied natural gas (LNG). The long-awaited permit is credit positive for Sempra because it will allow Cameron to do business with countries that fall outside the free trade agreement category, such as Japan. The high cost of LNG has become a pressing economic issue in Japan, which is by far the largest LNG consumer in the world.4

This news is also positive for the various Japanese equity sponsors and customers that have backed the Cameron project. Japan is currently paying more than $15 per million British thermal units (mmbtu) for its LNG, almost quadruple the NYMEX natural gas futures prices in the US.

Sempra’s proposed $10 billion liquefaction facility in Louisiana is backed by 20-year tolling and joint venture agreements with GDF SUEZ SA (A1 negative), Mitsubishi Corporation (A1 stable), through a company it jointly owns with Nippon Yusen Kabushiki Kaisha (Baa2 negative), and Mitsui & Co. Ltd. (A2 stable). Securing these creditworthy and experienced partners as 50% equity owners and entering into long-term commercial contracts with them will improve Cameron’s chances of successfully developing, financing and constructing this costly liquefaction facility. The next and last hurdle is an approval from the US Federal Energy Regulatory Commission, which we expect in the first half of this year. Cameron can then make the final decision to proceed and to begin construction in the second half of this year.

Sempra estimates that Cameron could boost its earnings per share by 9%-11% on a compound annual basis by 2019, when the plant is fully operational. From a credit standpoint, the tolling agreements are positive because they will generate a new source of stable cash flows for the next two decades.

Cameron, along with other liquefaction facilities that have already been approved by the Energy Department, also promises to create new demand for natural gas pipeline and storage services. To transport the substantial amounts of natural gas needed to make LNG at the Cameron facility, Mitsubishi has entered into preliminary agreements with Tennessee Gas Pipeline Company (Baa1 stable) and Texas Eastern Transmission L.P. (Baa1 stable). Such contractual arrangements will benefit interstate natural gas pipelines that are contending with an unprecedented erosion of demand for their services.

4 See The Prospect of US LNG Exports Influences Pricing and Gas Markets Worldwide, 1 May 2013.

Mihoko Manabe, CFA Senior Vice President +1.212.553.1942 mihoko.manabe@moodys.com

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

UK Energy Minister Hints at Possible Breakup of Centrica’s Retail Activities, a Credit Negative Last Monday, UK Energy Minister Ed Davey wrote a public letter to the Office of Gas and Electricity Markets (Ofgem), the country’s energy regulator, suggesting that Centrica plc’s (A3 stable) retail supply business, British Gas, could be broken up if an investigation shows that its share of the gas-supply market is excessive. The letter is credit negative for Centrica because a forced breakup would lead to a reduction in its profitability. Furthermore, Mr. Davey’s comments provide further evidence of heightened political risk for energy supply companies in the UK, a key credit consideration to which British Gas is particularly exposed as the largest overall supplier.

Since the privatisation of British Gas in 1986, its gas supply market share has declined to about 40% at the end of 2012 from 100% at the time of privatisation. During that time, competition in the market has increased such that six large and vertically integrated utility groups, including British Gas, now supply 98% of the total market, with the remainder of customers served by smaller independent companies. However, the British Gas market share remains significantly higher than its five rivals, prompting the energy minister to suggest in his letter that the company has taken advantage of this position by charging higher prices. The exhibit below shows the UK’s six largest energy retail groups and their share of the gas-supply market.

UK Gas Supply Market Shares Centrica’s Market Share Is Significantly Higher than Its Rivals

Sources: Ofgem and Moody’s Investors Service

According to Ofgem’s latest publication on the profitability of the UK’s energy retail sector, British Gas had an 11.2% operating margin in domestic gas supply in 2012 and a negative operating margin of 1.6% in domestic electricity supply. This compares with an average margin for the industry of 3.5% in domestic gas and 2.8% in domestic electricity, excluding British Gas.

According to the energy minister’s letter, the difference in the margins between the two fuel types equals around £40 per gas customer per year, which, in his view, could be passed on to them.

We estimate that a reduction in British Gas’ margins from its most recent reported level (2012) to the sector average (excluding their contribution) would equal around £450 million of EBITDA (around 12% of the group total), although the effect could be less because of cold weather positively affecting this year’s margins. Nevertheless, if the government, in conjunction with the regulator, were to force British Gas to shed customers along with accepting lower margins, the effect would be greater than this initial hit. We

41%

15% 13%

11% 9% 8%

2%0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Centrica SSE E.ON UK RWE npower Scottish Power EDF Energy Others

Scott Phillips Vice President - Senior Analyst +44.20.7772.5206 scott.phillips@moodys.com

Helen Francis Vice President - Senior Credit Officer +44.20.7772.5422 helen.francis@moodys.com

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

estimate that for every 100,000 gas customers that British Gas loses, the company’s EBITDA would fall a further £2 million at these lower margin assumptions.

This latest development is another indication of heightened political risk for all UK energy supply companies, including for SSE plc (A3 stable), Iberdrola S.A.’s (Baa1 negative) Scottish Power Ltd. unit, Électricité de France’s (Aa3 negative) EDF Energy plc unit, RWE AG’s (Baa1 stable) RWE npower plc unit, and E.ON SE’s (A3 negative) E.ON UK plc unit.

The published letter follows a promise in September 2013 by Ed Miliband, the leader of the UK opposition Labour Party, to freeze energy tariffs at the next general election, an action that would be credit negative for the entire industry because companies would be unable to pass on cost increases to customers. Since then, the price of energy, as part of a wider debate about the cost of living for households, has been a highly political issue and will likely be a key campaign topic for all political parties in the run-up to the next general election, scheduled for spring 2015.

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Banks

Credicorp Acquires Mibanco, a Credit Positive that Expands Its Microfinance and SME Share in Peru Last Monday, Credicorp Ltd. (unrated) announced that its indirectly held subsidiary, Edyficar (unrated), a direct subsidiary of Banco de Credito del Peru (BCP, Baa2 stable, D+/baa3 stable5), reached agreement with Grupo ACP Corp (unrated) to purchase its 60.68% controlling share in Mibanco (unrated), Peru’s largest independent microfinance and small and medium-sized enterprise (SME) lender.

The transaction is credit positive for BCP/Edyficar, which, in combination with Mibanco, will become the dominant player in Peru’s microfinance and SME loan market with a 19.5% market share, according to Credicorp. The deal will enhance BCP’s earnings given the higher margins achievable in these generally higher risk, underserved customer segments, particularly in view of the economies of scale and resulting pricing power this business combination entails.

The purchase price of $179.5 million, or 1.3x book (compared with the 2.5x price to book that Credicorp paid in 2009 for Edyficar), is modest for both Credicorp, with a $10.2 billion market capitalization, and BCP, with $2.6 billion in tangible capital.6

The transaction also adds client and product diversification to BCP’s risk profile since microfinance and SME loans are small (up to $200,000) relative to typical commercial loans, and serve a broad range of economic sectors including clothing and textiles, manufacturing, retail and commerce, transportation, and services. BCP has gained experience in the microfinance and SME customer segment via Edyficar. Benefiting from BCP’s broad risk management capabilities and infrastructure, Edyficar’s profit and asset quality metrics now compare favorably with those of Mibanco and its next closest competitor, Crediscotia Financiera (unrated), the wholly owned subsidiary of Scotiabank Peru (Baa2 stable, D+/baa3 stable).

The exhibit below shows the high credit costs related to these asset classes and hence potential earnings volatility, pointing to the opportunity to refine risk management standards to enhance profitability. Mibanco’s pre-provision income (PPI) is eroded by 81% and its return on equity substantially hurt by loan loss provisions, despite high net interest margins and comparable cost-income metrics. Crediscotia shows a similar trend, despite even higher margins.

5 The bank ratings shown in this article are the banks’ foreign currency deposit ratings, standalone financial strength ratings/baseline

credit assessments, and the corresponding rating outlooks. 6 Following the transaction closing, which the companies expect within the next month subject to regulatory approvals, Edyficar will

tender the purchase offer to the minority shareholders of Mibanco that include Holland’s Grupo Triodos (11.87%), Accion Investments in Microfinance (9.4%), the IFC (6.55%), Accion Internacional (6.33%) and La Positiva (4.6%).

Jeanne Del Casino Vice President - Senior Credit Officer +1.212.553.4078 jeanne.delcasino@moodys.com

Lauren Kleiman Associate Analyst +52.55.1253.5734 lauren.kleiman@moodys.com

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Peru’s Leading Microfinance and Small and Medium-sized Lenders, as of December 2013

Financiera Edyficar Mibanco Pro forma Edyficar

+ Mibanco** Crediscotia

Financiera

Financials (PEN Millions)

Assets $3,368 $5,976 $9,343 $3,517

Gross Loans 2,624 4,474 7,098 2,877

Equity 363 656 1,019 536

Net Income 118 35 153 87

Ratios

Return on Average Equity 23.60% 5.44% 11.90% 16.66%

Net Interest Margin 22.60% 19.90% 20.88% 27.48%

Cost/Income 54.22% 58.60% 57.02% 48.75%

Provisions/Pre Provision Income 33.52% 81.46% 64.18% 70.80%

Past Due Loans/Loans 3.91% 5.24% 4.76% 7.15%

Reserves/Past Due Loans 159.74% 139.78% 146.97% 164.81%

BIS Capital* 17.32% 15.36% 16.07% 17.07%

Tier 1 Capital* 11.95% 11.52% 11.67% 11.73%

*As of November 2013

**Our pro forma estimates reflect simple addition of balance sheet and income statement items; pro forma ratios are estimated based on weighted average asset size.

Source: Peru’s Superintendency of Banks, Insurance, and Pension Funds

The combined operation’s performance also stands to benefit from BCP’s diverse funding and capital resources, as well as its extensive branch and ATM network as Peru’s largest lender and deposit-taking institution. BCP commands a hefty 40% market share of low-cost retail deposits, and enjoys strong access to domestic and foreign currency capital markets funding.

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Italian Banks’ Nonperforming Loan Surge Is Credit Negative Last Monday, the Bank of Italy published provisional December data showing that Italian banks’ nonperforming loans (NPLs) rose 24.7% year on year, the largest increase in about two years. The accelerated growth of NPLs is credit negative for Italian banks because it indicates that asset quality is not improving and will likely continue deteriorating this year. Growing NPLs increase the risk that the European Central Bank’s (ECB) comprehensive assessment will result in the bail-in of junior bondholders.

As shown in Exhibit 1, NPLs, which the central bank defines as loans for which the payment is uncertain because of borrower insolvency, regardless of formal judicial status, reached a record €155.9 billion and now account for about 10% of GDP as of the end of 2013. As shown in Exhibit 2, if the provisional numbers are confirmed, the data would be the highest month-on-month increase since January 2011, when the increase was 17%, and the largest annual increase since December 2011, when the increase was 38%.

EXHIBIT 1

Italian Banks’ Nonperforming Loan Stock to GDP, 2008-13

*GDP data based on Moody’s Investors Service estimate Source: Eurostat, the Bank of Italy, and Moody’s Investors Service

EXHIBIT 2

Italian Banks’ Increase in Stock of Problem Loans, February 2011 to December 2013

Source: Bank of Italy and Moody’s Investors Service

2.6%3.9%

5.0%

6.8%

8.0%

10.0%

0%

2%

4%

6%

8%

10%

12%

€0

€20

€40

€60

€80

€100

€120

€140

€160

€180

2008 2009 2010 2011 2012 2013*

€M

illio

ns

Italian NPLs - left axis Italian NPLs / GDP - right axis

2%

12%

22%

32%

42%

52%

62%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Feb-

11

Mar

-11

Apr-

11

May

-11

Jun-

11

Jul-1

1

Aug-

11

Sep-

11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb-

12

Mar

-12

Apr-

12

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb-

13

Mar

-13

Apr-

13

May

-13

Jun-

13

Jul-1

3

Aug-

13

Sep-

13

Oct

-13

Nov

-13

Dec

-13

Month-on-Month Increase - left axis Year-on-Year Increase - right axis

London +44.20.7772.5454

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

As Exhibits 3 and 4 show, non-financial companies are driving the increase in NPLs, with small- and medium-sized enterprises in particular facing increasingly severe pressure from weak domestic demand and constrained credit. Household NPLs increased only moderately in 2013, indicating a stronger resilience to stressed market conditions and significantly lower indebtedness.

EXHIBIT 3

Italian Nonperforming Loans by Segment, December 2013

Source: Bank of Italy and Moody’s Investors Service financial metrics

EXHIBIT 4

Italian Nonperforming Loans by Segment, June 2010 to December 2013

Source: Bank of Italy and Moody’s Investors Service financial metrics

Despite some signs of stabilisation and our expectation that Italy’s GDP will grow 0%-1% in 2014, we expect NPLs will continue increasing this year and even after the economy’s growth resumes. This is because of the likelihood of low economic growth, high unemployment and sluggish domestic demand. Moreover, NPLs tend to lag economic performance, which means they will likely continue rising even after signs of a macroeconomic recovery emerge.

A further increase in the stock of NPLs will be detrimental to banks’ profitability because loan-loss provisions will remain high and the share of non-earning assets on their balance sheet will continue increasing. This, in turn, will negatively pressure banks’ capital position, as the share of NPLs on equity will increase, thereby reducing the buffer for unexpected losses. Banks will be constrained from making new loans, further reducing net interest income, which could limit Italy’s economic recovery.

Non Financial Companies69%

Producer Households9%

Consumer Households21%

Other1%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Non Financial Companies Producer Households Consumer Households

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

The NPL figures increase the risk that the weakest banks among the 15 Italian banks undergoing the ECB’s comprehensive assessment will be in a still-weaker position. If the banks fail the comprehensive assessment, they will need to close any capital shortfall with private resources or by raising more equity. The increase in NPLs will make both options more challenging, thereby raising the possibility of a public intervention and ultimately a bail-in, especially of junior bondholders.

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Kazakhstan Devalues Its Currency 19% Versus US Dollar, a Credit Negative for Banks On 11 February, the National Bank of Kazakhstan announced a new range for the country’s currency, an effective 19% depreciation against the US dollar. The central bank will now allow the tenge to trade between KZT182 and KZT188 per dollar. Previously, the central bank targeted a range of KZT145-KZT155 per dollar, but the tenge bumped against the upper end of the range amid recent capital outflows from emerging markets.

The tenge’s sharp devaluation is credit negative for Kazakh banks because it weakens borrower’s creditworthiness and inflates the size of banks’ foreign-currency denominated liabilities, increasing their debt payments. As of 1 December 2013, around 30% of banking system net loans and 38% of deposits were denominated in foreign currency, making Kazakh banks vulnerable to foreign currency fluctuations. Among banks, the devaluation is most negative for ATF Bank (Caa1 negative, E/caa2 stable7) and Kazkommertsbank (KKB, B2 stable, E/caa1 stable), as shown in Exhibit 1.

EXHIBIT 1

Kazakh Banks’ Exposure to Foreign Currency Risk

Long-Term Bank Deposit

Rating Latest Available IFRS Data

FX Loans to Net Loans

FX Deposits to Total

Deposits

FX Liabilities to Total

Liabilities

Kazkommertsbank B2 Year-end 2012 48% 45% 54%

ATF Bank Caa1 First-half 2013 44% 53% 58%

Halyk Savings Bank of Kazakhstan Ba2 Third-quarter 2013 33% 44% 50%

SB Sberbank JSC Ba2 Year-end 2012 32% 43% 39%

Alliance Bank Caa2 First-half 2013 22% 13% 24%

Bank CenterCredit B2 First-half 2013 19% 21% 27%

Eurasian Bank B1 Third-quarter 2013 19% 32% 27%

Kaspi Bank JSC B1 First-half 2013 6% 25% 27%

Note: Data shows Moody’s rated banks with publicly available currency breakdown.

Source: Moody’s Investors Service and banks’ IFRS data

Most Kazakh banks’ foreign-currency loans are denominated in US dollars. A depreciating tenge worsens the asset quality of such loans as many of them are granted to corporate and small and medium-sized enterprise borrowers who do not hedge the foreign-exchange risk of their operations. At the same time, key Kazakh exporters that may benefit from a currency depreciation tend to borrow overseas instead. While Kazakh banks’ retail loans are mostly in local currency, the likely rise in inflation stemming from the tenge devaluation will also have an adverse effect on the quality of these loans. Domestic borrowers’ weakening debt servicing capacity may lead to asset quality deterioration, negatively affecting banks’ profitability and capitalization.

On the liabilities side, in addition to inflating the size of foreign-currency liabilities in tenge terms, depreciation increases the risk depositors will shift further out of local-currency deposits into foreign-currency denominated deposits or remove deposits from the banking system. This may also exacerbate currency mismatches between assets and liabilities.

7 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.

Maria Malyukova Analyst +7.495.228.6106 maria.malyukova@moodys.com

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

While Kazakh banks’ total external borrowings decreased significantly from the 2008 pre-crisis level, thereby reducing refinancing risks, the currency devaluation increases the cost of remaining foreign debt payments. As of year-end 2013, total external market borrowings of Kazakh banks amounted to $10.9 billion (13% of total liabilities), of which $6.3 billion were foreign debt securities.

This is the second devaluation since 2009, when the tenge depreciated 20% (see Exhibit 2), and we expect that the negative effect for banks will be less than in 2009 because of lower amounts of foreign currency loans and external debt.

EXHIBIT 2

USD/KZT Exchange Rate

Source: National Bank of Kazakhstan

0

20

40

60

80

100

120

140

160

180

200

Apr-

07

Jul-0

7

Oct

-07

Jan-

08

Apr-

08

Jul-0

8

Oct

-…

Jan-

09

Apr-

09

Jul-0

9

Oct

-09

Jan-

10

Apr-

10

Jul-1

0

Oct

-10

Jan-

11

Apr-

11

Jul-1

1

Oct

-11

Jan-

12

Apr-

12

Jul-1

2

Oct

-12

Jan-

13

Apr-

13

Jul-1

3

Oct

-13

Jan-

14

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Insurers

Argentine Requirement that Insurers Invest More in Infrastructure and SME Projects Is Credit Negative Last Tuesday, Argentina’s Superintendencia de Seguros de la Nación (SSN), the country’s insurance regulator, published a resolution requiring Argentine insurers to increase their investment allocation in infrastructure development and small and medium-sized enterprise (SME) projects to 8%-18% of total investments from 5%-12%. The increase is credit negative for Argentine insurers because of the limited liquidity and weak credit quality of the assets underlying those projects. The new regulation will effectively force insurers to invest in risky projects to meet their quotas, which will negatively affect capital adequacy on a risk-adjusted basis.

The new measure, which expands upon an original mandate in 2012, is the latest of several SSN regulatory initiatives in recent years that are credit negative for insurers, including the repatriation of foreign investments, a prohibition against using international reinsurance and the nationalization of the private pension system. These moves reflect Argentina’s volatile operating environment, which continues to exert significant negative pressure on insurers’ credit quality.

As a result of the new resolution, we expect insurers’ investments related to these projects this year to move toward the levels shown in the third row of Exhibit 1, based on specific percentages stipulated for each sector, and to reach the required allocation by 30 September.

EXHIBIT 1

Comparison of Argentine Insurers’ Current and Future Exposure to Infrastructure and SMEs Projects Under the New Measure

Workers’ Compensation

Property and Casualty Life Annuities Total

Total Investments as of June 2013 ARS20 billion ARS31 billion ARS11 billion ARS27 billion ARS88 billion

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

8% (5%) 18% (10%) 18% (12%) 14% (12%) 14% (10%)

Our Estimate of Investments in Infrastructure and SME Projects as a Percent of Capital, Pro Forma June 2013 (Actual June 2013)

43% (27%) 44% (24%) 50% (33%) 128% (110%) 55% (37%)

Source: Argentina Superintendencia de Seguros de la Nación

Although insurer funds invested in these projects will remain below 20% of total invested assets for all insurance sectors, we expect infrastructure and SME investments as a percentage of industry-wide capital to increase to a significant 55% from 37% on a pro forma basis as of the fiscal year ended 30 June 2013, adding strain on insurers’ overall liquidity and risk-adjusted capitalization.

As the bottom row of Exhibit 1 shows, we project on a pro forma basis as June 2013 that the annuity and life sectors will have the most exposure at 128% and 50% of capital, respectively, reflecting their asset-intensive businesses and higher investment leverage. The property and casualty sector’s exposure would be 44% of capital, while workers’ compensation would be 43%, which although lower than the annuity and life sectors, is still a significant concentration.

Nicolas Odella Associate Analyst +54.11.5129.2628 nicolas.odella@moodys.com

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

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Exhibit 2 lists the top 20 Argentine insurers exposed to infrastructure and SME projects, based on each insurer’s level of investment leverage (invested assets relative to capital). We do not rate most of the 20 most affected insurers, although the two we do rate – Nación Seguros de Retiro (financial strength B2 negative) and, to a much lesser extent, Provincia Seguros (B3 negative) – are among the 20 groups with the largest projected exposure relative to capital.

EXHIBIT 2

The 20 Most Exposed Argentine Insurers to Infrastructure and SMEs Projects

Company Category

Total Investments

ARS Million - June 2013

Minimum Required

Investment

Estimated Required Investment as

Percent of 30 June 2013 Capital

Instituto Autarquico Provincial del Seguro de Entre Rios Seguro de Retiro

Annuity 64 14% 1886%

Orígenes Seguros de Retiro Annuity 7,449 14% 443%

Unidos Seguros de Retiro Annuity 624 14% 343%

Profuturo Cia. de Seguros de Retiro Annuity 466 14% 282%

La Segunda Seguros de Retiro Annuity 269 14% 250%

Nación Seguros de Retiro Annuity 2,381 14% 220%

La Estrella Compañía de Seguros de Retiro Annuity 4,066 14% 213%

Zurich International Life Limited Sucursal Argentina Life 3,531 18% 177%

Binaria Seguros de Retiro Annuity 752 14% 138%

Federacion Patronal Seguros P&C 5,601 18% 125%

Prudential Seguros Life 838 18% 116%

San Cristóbal Seguro de Retiro Annuity 1,228 14% 106%

Compañia de Seguros La Mercantil Andina P&C 564 18% 101%

Galicia Retiro Compañia de Seguros Annuity 90 14% 92%

SMG Life Compañia de Seguros de Retiro Annuity 1,014 14% 92%

HSBC Seguros de Retiro (Argentina) Annuity 3,927 14% 89%

Aseguradora Total Motovehicular P&C 95 18% 86%

Instituto Autarquico Provincial del Seguro de Entre Rios P&C 394 18% 85%

Provincia Seguros P&C 1,140 18% 84%

Argos Compañía Argentina de Seguros Generales P&C 126 18% 84%

Source: Superintendencia de Seguros de la Nación

NEWS & ANALYSIS Credit implications of current events

21 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Sovereigns

Canada’s Planned Fiscal Consolidation Is Credit Positive On Wednesday 12 February, Canada (Aaa stable) released its 2014-15 federal budget that projects a modest surplus of 0.3% of GDP by 2015-16. The authorities’ commitment to fiscal consolidation and remaining on track to achieve the goal of returning to a balanced budget by 2015 is credit positive.

Based on planned fiscal consolidation, Canadian authorities project that the ratio of federal debt to GDP will fall to 25% by 2021-22 from 33% currently, as shown in the exhibit below. We estimate general government debt (including federal government as well as provincial and municipal debt issuers) at more than 80% of GDP8 currently, which is well above the 45% median for Aaa-rated sovereigns. However, we expect that declining federal debt ratios, combined with the fiscal consolidation that the provincial governments are pursuing, will also lead to a decline in general government debt ratios, which would support sovereign creditworthiness.

Downward Trajectory of Canada Federal Government Debt Supports Its Credit Profile

Source: Canada 2014 Budget

Despite signs of a softening housing market and lower consumer confidence, we expect that GDP growth in 2014 will accelerate to around 2.3% from its close to 1.7% in 2013 as the economic model shifts toward one that is more export-oriented. The authorities’ commitment to expenditure controls evident in Wednesday’s budget counterbalances the possibility of weaker government revenue during this transition, which will support achievement of the balanced budget target.

Despite additional spending attributable to disaster relief as a result of flooding in Alberta last year, the government expects the current 2013-14 deficit to be 0.9% of GDP, just below the 1.0% deficit that was presented in the 2013 budget. Meanwhile, the projected fiscal deficit of 0.1% of GDP in 2014-15 remains modest by global standards, and some slippage in the targeted deficit would not add material negative pressure to the sovereign credit profile.9

8 For international comparisons, we look at general government debt. In the case of Canada, the 80% of GDP figure refers to all

federal, provincial and municipal debt securities and liabilities on a national account basis. These figures may differ from those presented in the budget.

9 See Canada's Planned Fiscal Consolidation Supports Aaa Rating and Stable Outlook, 12 February 2014.

20%

22%

24%

26%

28%

30%

32%

34%

2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

Perc

ent o

f GD

P

Steven A. Hess Senior Vice President +1.212.553.4741 steven.hess@moodys.com

Renzo Merino Associate Analyst +1.212.553.0330 renzo.merino@moodys.com

NEWS & ANALYSIS Credit implications of current events

22 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

German Court Casts Doubt on ECB Bond-Buying Program, a Credit Negative for Euro Area Sovereigns On 7 February, the German Constitutional Court preliminarily opined that the European Central Bank’s (ECB) outright monetary transactions programme (OMT) in its current form is beyond the ECB’s powers. The uncertainty that the ruling creates over a key policy initiative is credit negative for euro area sovereigns.

The court outlined three criteria that it believes must be in place before the OMT, the ECB’s bond-buying programme, is consistent with the ECB’s mandate. First, the ECB must be excluded from a debt restructuring, implying that the ECB is a senior creditor. Second, the amounts of an individual country’s bonds that the ECB can purchase must be limited. Third, OMT cannot interfere with the formation of market prices where possible.

The court stopped short of ruling that OMT violated German law and instead referred several questions, including whether the OMT is compatible with European Union law, to the European Court of Justice for its interpretation. It is unclear when the European Court of Justice will rule on the issue. Unlike the German court, whose jurisdiction is limited to German institutions such as the Bundesbank, the European Court of Justice has jurisdiction over the ECB.

The announcement of OMT, along with ECB President Mario Draghi’s promise in July 2012 to do “whatever it takes” to protect the euro, was the catalyst for stabilising euro area sovereign credit conditions in fall 2012, and it remains an important factor in maintaining investor confidence in the euro area sovereign debt market. Investors considered the OMT announcement to be so credible that the programme has not yet needed to be activated. However, any material doubt over the programme’s legality could complicate its activation and its credibility. As such, the German court’s findings are credit negative for euro area sovereigns.

A European Court of Justice endorsement of the German court’s findings would hamper the OMT’s effectiveness, particularly if the German court’s conditions were implemented in full. Conversely, a European Court of Justice endorsement of the ECB’s policy, although credit positive for euro area sovereigns, would drive a wedge between the European Court of Justice and the German court. In the meantime, we do not think that the German court’s finding will prevent the ECB from implementing the OMT should it need to do so. However, doing so before the European Court of Justice makes a final ruling could complicate the discussions in the ECB’s governing council about how to proceed with the OMT. Moreover, the German court’s ruling potentially blocks the Bundesbank from participating in any purchases.

Kathrin Muehlbronner Vice President - Senior Credit Officer +44.20.7772.1383 kathrin.muehlbronner@moodys.com

Thorsten Nestman Vice President - Senior Analyst +49.69.70730.943 thorsten.nestman@moodys.com

NEWS & ANALYSIS Credit implications of current events

23 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Iceland's Creditworthiness Is Not Affected by British and Dutch Effort to Increase Icesave Recoveries On 10 February, the Icelandic Deposit Insurance Fund (TIF) revealed that the British and Dutch governments via their deposit insurance funds had filed a claim against it for payment of at least ISK556 billion (approximately 30% of estimated 2013 GDP). The two funds -- the British Financial Services Compensation Scheme (FSCS) and the Dutch central bank (DNB) – demand full payment by the TIF in relation to their citizens’ deposits with Icesave, a subsidiary of the failed Icelandic bank Landsbanki, or a court decision that TIF was under the obligation to pay the minimum insured deposit of €20,887 per depositor.

Although the current dispute has no effect on the creditworthiness of the government of Iceland (Baa3 stable), media reports and investor concern about a potential sovereign liability prompted Iceland’s Prime Minister Sigmundur Gunnlaugsson to reiterate this point. The European Free Trade Association (EFTA) Court, the highest legal authority involving European Economic Area member states such as Iceland, ruled in early 2013 that the Icelandic government was not liable for any Icesave obligations.

The FSCS and DNB in 2008 compensated Icesave deposit holders in their countries. The TIF estimates that including unpaid interest and cost, the renewed claim could amount to around ISK1 trillion.

The lawsuit resurrects the Icesave dispute in which British and Dutch authorities had originally demanded payment from the government of Iceland, claiming that maintaining an adequately funded deposit insurance fund was a sovereign obligation and therefore the government was liable for TIF’s payment obligations. However, TIF is a private company responsible for collecting fees from financial institutions in Iceland so as to provide protection for deposit holders in Iceland. The TIF has ISK18 billion at its disposal, a fraction of the claims. The UK and the Netherlands have already received around 60% of their claims via recoveries from the Landsbanki estate.

Whatever the outcome of this latest dispute may be, there is no direct effect on the Icelandic government because the EFTA Court ruling unequivocally established that there is no payment obligation for the sovereign. At the same time, it is clear that the TIF would be unable to fulfil its purpose if it was ordered to pay the full amount claimed by the FSCS and the DNB. The claim was filed in November 2013; however, it is unclear when the court will rule in the case.

Kathrin Muehlbronner Vice-President - Senior Credit Officer +44.20.7772.1383 kathrin.muehlbronner@moodys.com

NEWS & ANALYSIS Credit implications of current events

24 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Romania’s Improving Trade Balance Is Credit Positive, Strengthening Growth and Balance of Payments Romania’s (Baa3 negative) central bank released balance of payments data last Thursday that showed the country’s trade deficit was €3.4 billion in 2013, about 54% lower than in 2012. This improved trade performance is credit positive because it reduces Romania’s external financing needs.

The rise in exports that underpinned the improved trade performance also helped Romania’s GDP growth accelerate to 2.6% in the first three quarters of 2013, from 0.7% in 2012. Moreover, export growth reflects international competitiveness and integration into the European manufacturing chain, which could spur investment that increases GDP growth to between 2% and 3% in the next two years, from an average of -1.2% between 2009 and 2012.

Romania’s current account deficit, which peaked at 13.5% of GDP in 2007 and averaged 4.4% of GDP between 2009 and 2012, has increased the country’s dependence on foreign financing. Consequently, external debt was 77.6% of GDP in 2012, up from 50.6% in 2007. The current account deficit was driven by the trade deficit, which averaged 5.8% of GDP between 2009 and 2012. The halving of the trade deficit in 2013 has lowered the current account deficit to under 1% of GDP, which significantly reduces the foreign capital needed to finance this deficit. This differentiates Romania from those emerging markets with rising external financing needs that have suffered capital account and currency volatility in recent months.

The reduction in the Romania’s 2013 trade deficit reflects the 10% growth of merchandise exports while merchandise imports grew 1%. Strong export growth in a year of subdued GDP growth among its European trading partners mirrors competitiveness gains from Romania’s declining inflation in 2013. In 2014, the anticipated recovery in Europe will benefit Romania’s exports, about 70% of which go to EU countries.

Moreover, the high share of transport equipment and vehicles in Romania’s trade (42% of exports and 35% of imports) indicate the economy’s integration into Europe’s manufacturing production chain. The export potential, deepening regional integration and growth of these sectors will support investment and GDP growth in Romania over the next two years.

Atsi Sheth Vice President - Senior Credit Officer +1.212.553.4873 atsi.sheth@moodys.com

Andrew Schneider Associate Analyst +1.212.553.4749 andrew.schneider@moodys.com

NEWS & ANALYSIS Credit implications of current events

25 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Egypt Receives UAE Financing to Support Capital Spending, a Credit Positive Last Monday, Egyptian Finance Minister Ahmed Galal announced a EGP33.9 billion ($4.9 billion) supplemental appropriation bill to the state budget. Although the bill will increase Egypt’s (Caa1 negative) budget deficit, the supplemental spending will have minimal cost to the government because financing will be via concessional aid from the United Arab Emirates (UAE, Aa2 stable). Moreover, the fiscal stimulus package will be mostly directed toward investment, which will boost Egypt’s growth prospects. For these reasons, the supplemental bill is credit positive.

This is the second increase in budgeted expenditures in the current 2013-14 fiscal year, which ends June 2014. It follows a EGP29.6 billion package first announced in August 2013 and increased two months later, but which did not receive direct external support. The new supplementary budget contains more capital expenditure than current expenditure, which will improve Egypt’s economic growth prospects. Real GDP growth fell to a two-year low of around 1.0% in the third quarter of 2013 from 2.5% a year earlier – a markedly weaker performance than in the five years before the January 2011 revolution and through the global financial crisis, during which real growth averaged 6.2%.

Investment spending, the largest portion of the package at EGP19.8 billion, will help to rebuild infrastructure after three years of economic disruption following the revolution. It includes EGP2 billion earmarked for the Suez Canal axis project. Government investment spending for fiscal year 2012-13 was EGP39.5 billion, or about 6.7% of total expenditures, down from EGP 48.4 billion, or 13.2% of total expenditures, for fiscal year 2010-11. Together with the initially budgeted EGP63.7 billion and the first stimulus package, total government investment will rise to 14.2% of overall government spending (see Exhibit 1).

EXHIBIT 1

Egypt’s Government Capital Spending Will Bounce Back in Fiscal 2013-14

*Includes two supplementary budgets. Sources: Egypt Ministry of Finance

In addition, one third of the supplemental spending, EGP11 billion, will go to social programmes, including a minimum wage increase in the public sector and increasing pensions. This will positively affect private consumption.

The UAE’s aid package adds to support already pledged from countries in the Gulf Cooperation Council since the military overthrew President Mohamed Morsi and his cabinet on 3 July 2013 (see Exhibit 2).

0

100

200

300

400

500

600

700

800

2008-09 2009-10 2010-11 2011-12 2012-13 2013-14*

EGP

Billi

on

Current Spending Capital Spending

Mathias Angonin Associate Analyst +971.4.237.9548 mathias.angonin@moodys.com

Steffen Dyck Assistant Vice President +65.6398.8324 steffen.dyck@moodys.com

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

NEWS & ANALYSIS Credit implications of current events

26 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Saudi Arabia (Aa3 stable) has provided $3.6 billion out of $5 billion it pledged, and Kuwait (Aa2 stable) has donated another $2.7 billion out of $4 billion it pledged.

EXHIBIT 2

Financial Support to Egypt, July 2013-December 2013 Central Bank of Egypt Deposits Fiscal Grants Petroleum Imports Total

Saudi Arabia $2 billion $0 $1.6 billion $3.6 billion

UAE $2 billion $1 billion $1.2 billion $4.2 billion

Kuwait $2 billion $0 $700 million $2.7 billion

Total $6 billion $1 billion $3.4 billion $10.4 billion

Sources: Central Bank of Egypt and Egypt Ministry of Finance

Despite the likely positive effect on growth and the fiscally neutral financing from the UAE, Egypt continues to face fiscal challenges. The Ministry of Finance has reaffirmed its commitment to reduce the fiscal deficit to 10% of GDP this fiscal year. But despite higher grants, we expect the fiscal deficit to exceed this target. Furthermore, the increase in current expenditure areas – in particular, the 17.6% increase in compensation of civil servants in the first half of the fiscal year from a year earlier – will ratchet up government spending in future budgets. Until the economy grows again, Egypt will continue to rely on external grants to finance its large deficits.

NEWS & ANALYSIS Credit implications of current events

27 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Japan’s Shrinking Current Account Surplus Is Credit Negative Last Monday, the government of Japan (Aa3 stable) announced that in December the current account balance remained in deficit for the third consecutive month and widened to a record ¥638.6 billion (about $6.2 billion), but still remained in surplus for 2013. At only ¥3.3 trillion (approximately 0.7% GDP), it was the smallest annual surplus since at least 1985. The shrinking current account surplus is credit negative for Japan because prolonged deterioration would erode one of Japan’s main credit strengths – its large net creditor external position.

Only a very large positive net income balance is offsetting Japan’s large trade deficit and keeping the current account in surplus. The country’s large net international investment asset position of more than 60% of GDP – the highest among large, advanced economies – is a continuing strength for Japan, which leads to net investment flows into Japan of approximately 3% of GDP annually.

The decline in the current account surplus means that Japan’s savings-investment balance is closer to reaching a tipping point in which national savings are inadequate to finance domestic credit needs, creating a dependency on external debt. This would ultimately have negative consequences on government funding costs, and the sustainability of the very large stock of government debt at more than 200% of GDP.

The widening trade deficit, which reached ¥10.6 trillion in 2013, drove shrinkage in the current account surplus as imports rose 25.3% in December and 15.4% for the full year 2013. Power producers’ continued increase in demand for petroleum and liquefied natural gas (LNG) was a major driver of the rapid rise in imports last year as Japan’s nuclear power plants have been shuttered since the 2011 earthquake and Fukushima nuclear power plant disaster. Prior to the disaster, nuclear power provided 29% of the country’s power supply. Mineral fuel imports grew to around 5.8% of GDP in 2013 from 5.1% of GDP in 2012 and 3.6% of GDP in 2010, as shown in the exhibit below.

Japan’s Rise in Mineral Fuel Imports and Fall in the Current Account Surplus

Source: Bank of Japan and Ministry of Finance

The recent widening of the trade and current account deficits has occurred despite the yen’s more than 20% weakening against the dollar last year. Despite the higher cost of imports, companies and consumers seem to have made purchases in advance of the April hike in the consumption tax.

Also, despite the improved cost competitiveness of exports in foreign markets following the weakening of the yen, export volumes remained relatively flat, and in nominal terms exports were up only 9.0% last year. The lacklustre performance mainly reflects relatively weak economic expansion in China and among Japan’s

0%

1%

2%

3%

4%

5%

6%

7%

2009 2010 2011 2012 2013

Perc

ent o

f GD

P

Current Account Balance Mineral Fuels Imports

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

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

NEWS & ANALYSIS Credit implications of current events

28 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

other major trading partners. Another factor is that Japan’s manufacturers shifted production capacity overseas to offset the loss in competitiveness from the appreciation of the yen in the years before the Bank of Japan adopted its extraordinary monetary easing in early 2013. The 2013 rise in domestic energy prices also added to domestic manufacturers’ production costs. Lastly, Japan’s brand competitiveness has slipped amid lagging innovation, especially in Japan’s consumer electronics, and is reflected in the 27 January downgrade of Sony (Ba1 stable), once a global leader.

NEWS & ANALYSIS Credit implications of current events

29 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Debt Forgiveness and Restructuring Prepares Myanmar to Enter Global Financial System Last Tuesday, Germany (Aaa negative) signed an agreement with Myanmar (unrated) forgiving 50% of the approximately $1.4 billion of bilateral debt Myanmar owes and rescheduling the other half to be repaid over 15 years, with a seven-year grace period. Clearing the legacy arrears will help the new, reform-minded government normalize its financial relations with official creditors, integrate Myanmar into the global financial system, and receive for fresh funding, particularly for infrastructure improvements. The agreement supports the country’s growth potential and strengthens Myanmar’s ability to repay its remaining rescheduled debt.

Together with Myanmar’s recent engagement with multilateral institutions such as the International Monetary Fund (IMF) and the World Bank, the country’s renewed diplomatic efforts signal that it remains on the path towards normalizing relations with bilateral and multilateral lenders, which bodes well for continued foreign investor interest.

The approximately $700 million of debt relief from Germany, equal to about 1.2% of GDP, is part of the phased implementation of an agreement signed in January 2013 by the Paris Club, a group of creditor countries. The agreement calls for the countries in the group to cancel and reschedule debt on terms similar to those Germany has accepted.

A reduction in Myanmar’s external debt stock is important because the country’s repayment capacity is limited: foreign reserves are low, the current account has been in deficit and, until recently, international sanctions restricted foreign direct investment inflows. As a result, arrears have built up in recent decades to as high as $10.8 billion in fiscal 2011, according to the IMF. Myanmar over the past two years has worked to clear arrears with both multilateral and bilateral lenders, cancelling some debt and rescheduling the rest. The Paris Club and the IMF project Myanmar’s arrears will be cleared by the end of the current fiscal year ending 31 March. A milestone event that will help Myanmar achieve that goal was Japan’s debt forgiveness last year.

In addition to the IMF expectation that Myanmar will reduce its external debt stock to 19.7% of GDP in the current fiscal year from 36.1% in the fiscal year ended 31 March 2010, the clearance of arrears with Germany and other bilateral and multilateral creditors will allow Myanmar to resume borrowing to fund important development initiatives that would accelerate economic growth. Some creditors are unable to provide new loans while arrears are outstanding. For example, the World Bank could not extend new loans until Myanmar’s arrears to it were cleared in January 2013. Thereafter, the World Bank announced a number of new loans including a $2 billion development program (approximately 3% of fiscal 2013 GDP) on 26 January. The extension of new loans will aid the passage of structural reforms and support public spending on infrastructure, which Myanmar needs to translate its abundant natural resources into more sustainable growth.

The clearance of arrears also has strategic economic implications. The government worked closely with the IMF under a staff-monitored program to undertake structural reforms in 2013, helping to move Myanmar towards integration into the global financial system. Since its 2010 emergence from 50 years of semi-autarkic economic policies with the election of the military-backed Union Solidarity and Development Party, Myanmar has implemented a host of reforms. Reforms include abandoning a currency peg and passing a new foreign investment law to liberalize the investment regime and a new central bank law that gives the Central Bank of Myanmar greater freedom from political interference, a step towards monetary stability and fiscal discipline. Together, these developments bode well for continued foreign investor interest in the country.

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

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

NEWS & ANALYSIS Credit implications of current events

30 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

US Public Finance

Proposed Michigan Budget Is Credit Positive for Struggling Municipalities On 5 February, Michigan (Aa2 positive) Governor Rick Snyder released his proposed fiscal 2015 budget, which would increase municipal statutory revenue sharing 15% and establish a $10 million emergency reserve fund for distressed school districts. The proposals are credit positive for municipalities hit hardest by the economic downturn. However, statewide per-pupil funding to school districts would only receive a modest gain.

After years of cuts, the governor proposed a 15% increase in revenue sharing under the Economic Vitality Incentive Program (EVIP), which provides state aid to municipalities. The EVIP increase primarily comes in the form of a population-based supplemental payment with adjustments to deliver funding to distressed municipalities and reward those that meet a certain standard of best practices. Municipalities whose unemployment rates or violent crime rates are within the state’s top 25%, or communities that have a state-approved deficit elimination plan, would receive proportionately greater aid. Greater aid would also be provided for complying with new best practices standards, which would reward the strongest municipalities meeting criteria such as a credit ratings of Aa3 or higher, maintenance of minimum reserves and low-unfunded liabilities.

Exhibit 1 lists municipalities that are likely to receive the most needs-based adjusted EVIP funding. Flint, Highland Park, Inkster and Pontiac (all unrated), and Detroit (Caa3 negative) are all under state oversight per Act 436 and have some of the highest violent crime and unemployment rates in the state. According to 2012 FBI data, Flint had the highest violent crime rate in the state adjusted for population, followed by Saginaw. Pontiac’s 18.8% unemployment rate as of November 2013 was one of the highest in the state at 18.8%, followed by 15.9% in Flint and 15.1% in Detroit: the state average was 7.8%. Using fiscal 2012 data, Detroit received $121 million in EVIP aid, 11% of its general fund budget. Flint received $6 million (11%) and Pontiac drew $4 million (11%). Highland Park and Inkster each got $1 million (13% and 8%, respectively).

Detroit would also benefit from the governor’s budget proposal, formalizing a plan to provide the bankrupt city with $350 million in aid from tobacco settlement funds via $17.5 million annual installments over 20 years.

David Levett Associate Analyst +1.312.706.9990 david.levett@moodys.com

NEWS & ANALYSIS Credit implications of current events

31 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

EXHIBIT 1

Michigan Municipalities Most Likely to Benefit from Needs-Based Adjustments

City 2012 Violent Crime for Each 100 Residents

Under PA 436 State Oversight?

Unemployment Rate November 2013

Flint 2.7 Yes 15.9%

Saginaw 2.4 No 13.9%

Benton Harbor 2.3 Yes 8.1% (Berrien County)

Detroit 2.1 Yes 15.1%

Fruitport 2.0 No 7.9% (Muskegan County)

Highland Park 2.0 Yes 20.1%

Muskegon Heights 1.9 No 7.9% (Muskegan County)

Inkster 1.5 Yes 10.6%

Hamtramck 1.1 Yes 9.3% (Wayne County)

Buena Vista Township 1.0 No 8.1% (Saginaw County)

Ecorse Not available Yes 9.3% (Wayne County)

Lincoln Park 0.6 Yes 6.9%

Pontiac Not available Yes 18.8%

River Rouge Not available Yes 9.3% (Wayne County)

Royal Oak Township Not available Yes 7.3% (Oakland County)

Source: Federal Bureau of Investigation Criminal Justice Information Service, Michigan Department of Treasury and Bureau of Labor Statistics

The proposed budget includes $10 million to create a distressed district emergency grant fund to assist school districts facing severe cash flow disruptions. The proposal comes in the wake of last year’s debt service payment defaults by Pontiac School District (senior most revenue-backed debt Caa1 negative) and Buena Vista School District (unrated), both of which experienced severe cash-flow shortfalls threatening operations. Buena Vista was subsequently dissolved. The governor is also proposing a plan to identify troubled school districts earlier through a multi-agency team that will develop an early warning system.

The budget calls for only modest increases in per-pupil funding for all school districts, which is not likely to alleviate the fundamental pressures facing the sector (we downgraded more than 50 Michigan school districts in 2013, over 20% of our portfolio). Per-pupil funding, known as the foundation allowance, is critical for Michigan school districts because they have no ability to increase revenues for operations beyond what is allocated by the state. The minimum foundation allowance in fiscal 2015 would increase by 1.6% to $7,187 and basic foundation funding would grow by 1% to $8,132.10 While positive for districts, the increase still leaves the foundation allowance below that of fiscal 2010, as shown below.

10 Proposal A created three main foundation allowances (the minimum, basic and maximum) starting in fiscal 1995.

NEWS & ANALYSIS Credit implications of current events

32 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

EXHIBIT 2

Michigan School District Per-pupil Funding Has Not Yet Fully Recovered

2010 2011 2012 2013 2014 2015

Proposed

Minimum Foundation Funding $ 7,316 7,316 6,846 6,966 7,076 7,187

Change

0.0% -6.4% 1.8% 1.6% 1.6%

Basic Foundation Funding $ 8,489 8,489 8,019 8,019 8,049 8,132

Change

0.0% -5.5% 0.0% 0.4% 1.0%

Source: Michigan House Fiscal Agency, The Basics of the Foundation Allowance – fiscal 2013--14 Update

The budget includes a credit positive $784 million appropriation to the Michigan Public School Employees Retirement System (MPSERS) to comply with a 2012 law that essentially capped school district contributions to the system. The state is required to make up the difference between district payments and an actuarially calculated contribution. While positive, we note that continued increases in state contributions to pensions may limit funding available to districts in subsequent budgets.

RATING CHANGES Significant rating actions taken the week ending 14 February 2014

33 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Corporates Boardwalk Pipelines, LP

Outlook Change

15 Nov ‘03 10 Feb ‘14

Senior Unsecured Rating Baa2 Baa2

Outlook Stable Negative

The outlook change follows Boardwalk Pipelines’ announcement that it is substantially reducing its distributions to investors in response to weaker-than-expected earnings in its core pipeline and storage operations. It also reflects the possibility of earnings declining even further and of leverage remaining elevated for an extended period.

Bombardier Inc. Downgrade

14 Jan ‘13 13 Feb ‘14

Corporate Family Rating Ba2 Ba3

Outlook Negative Stable

The downgrade of Bombardier's ratings reflects its higher-than-expected cash consumption in 2013 and our view that the company's negative cash flow and elevated leverage will persist longer than we previously expected.

Comcast Corporation Affirmation

13 Feb ‘13 13 Feb ‘14

Senior Unsecured Rating A3 A3

Short-Term Issuer Rating P-2 P-2

Outlook Positive Positive

The affirmation follows the announced merger between Comcast and Time Warner Cable, which we do not anticipate to increase Comcast’s debt. The affirmation also reflects Comcast’s significant record of successful integration, strong retention initiatives, innovative technology development and strong cable operating cash flow margins.

Fiat S.p.A. Downgrade

1 Jan ‘14 11 Feb ‘14

Corporate Family Rating Ba3 B1

Outlook Review for Downgrade Stable

The downgrade follows Fiat’s weaker-than-expected performance in fiscal year 2013 and the company’s significant challenges in terms of achieving its outlook guidance for the current fiscal year. The downgrade also reflects our concern that Fiat may not be able to offset any further profitability deterioration in its Latin American operation through anticipated improvements in other regions and in its Luxury and Performance division.

RATING CHANGES Significant rating actions taken the week ending 14 February 2014

34 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Goodyear Tire & Rubber Company Outlook Change

19 Feb ‘13 13 Feb ‘14

Corporate Family Rating Ba3 Ba3

Outlook Negative Positive

The outlook change reflects the transformative impact of the $1.15 billion cash contribution to Goodyear’s pension plan, which reduces pro forma leverage to about 3.9x for year-end 2013, compared with about 5.3x for the last 12 months ended 30 September 2013.

Ineos Group Holdings S.A. Upgrade

1 May ‘13 10 Feb ‘14

Corporate Family Rating B2 B1

Outlook Positive Stable

The upgrade reflects Ineos's resilient performance in 2013. It also reflects our expectation that the company’s North American operations will continue to post strong operating performance and that higher utilization at its European operations in 2014 will lead to improving credit metrics and continued strong liquidity.

Kellogg Company Downgrade

19 Nov ‘13 12 Feb ‘14

Senior Unsecured Rating Baa1 Baa2

Short-Term Issuer Rating P-2 P-2

Outlook Review for Downgrade Stable

The downgrade reflects Kellogg's announcement of weaker-than-expected operating performance, especially in US cereals and snacks. The company also announced a major restructuring program that will limit its capacity for future debt reduction.

Time Warner Cable, Inc. Review for Upgrade

13 Jan ‘14 13 Feb ‘14

Senior Unsecured Rating Baa2 Baa2

Short-Term Issuer Rating P-2 P-2

Outlook Review for Downgrade Review for Upgrade

The rating action follows Time Warner’s announced agreement to merge with Comcast Corporation via an all-stock merger, from which we do not anticipate an increase in Time Warner’s debt. The review will focus on the various benefits that may come with larger scale, including cost savings, stronger customer retention and revenue opportunities. It will also focus on integration risks. Lastly, the review will consider the potential for lower leverage and particularly the likelihood that Comcast will replicate its past strategy of putting cross guarantees in place between itself and acquired debt issuers to simplify the legal credit structure into a single lower-leveraged credit.

RATING CHANGES Significant rating actions taken the week ending 14 February 2014

35 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Infrastructure HSE Netz AG (HSE Netz)

Downgrade

13 Nov ‘13 13 Feb ‘14

Senior Secured Notes Baa2 Baa3

Outlook Review for Downgrade Stable

The downgrade reflects our updated view that the consolidated credit quality of the HSE AG group, to which HSE Netz belongs, continues to act as a constraint on HSE Netz's rating. The long-term consolidated credit quality of the HSE AG group would be in line with a low investment-grade rating over the medium term should shorter-term challenges be addressed through the strategic repositioning of the group and an ongoing cost savings programme.

Thames Water (Kemble) Finance PLC Outlook Change

5 April ‘11 11 Feb ‘14

Senior Secured Notes B1 B1

Outlook Stable Negative

The outlook change reflects the increased likelihood that a challenging regulatory price review will curtail cash flow generation at Thames Water. We expect the review to significantly reduce the amount of dividends being upstreamed to the Kemble holding company level.

Anglian Water (Osprey) Financing plc Outlook Change

17 Jan ‘11 11 Feb ‘14

Senior Secured Notes Ba3 Ba3

Outlook Stable Negative

The outlook change reflects the increased likelihood that a challenging regulatory price review will curtail cash flow generation at Anglian We expect the review to significantly reduce the amount of dividends being upstreamed to the Osprey holding company level.

AES Puerto Rico L.P. Downgrade

4 Oct ‘13 10 Feb ‘14

Secured Bonds Rating Ba1 Ba2

Outlook Stable Negative

AES PR’s revenues are entirely dependent on Puerto Rico Power Authority (PREPA), which in turn is heavily dependent on the economic health of Puerto Rico. On 7 February, we downgraded the ratings of both these entities to Ba2 with a negative outlook.

RATING CHANGES Significant rating actions taken the week ending 14 February 2014

36 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Financial Institutions Upgrades on Mexican Banks Following Mexico’s Upgrade to A3

12 Feb ‘14

We upgraded the ratings of several Mexican banks following our upgrade of Mexico’s government bond ratings and country ceilings to A3 from Baa1. Included in the action were the long-term foreign currency deposit ratings of BBVA Bancomer, S.A., Banco Nacional de México, S.A. (Banamex), Banco Santander (México), S.A. (Santander México), Banco Mercantil del Norte, S.A. (Banorte), HSBC México, S.A. (HSBC México) and Scotiabank Inverlat, S.A. (Scotiabank México).These ratings were upgraded to A3 from Baa1.

Foreign Currency Deposit Ratings of Three Paraguayan Banks Upgraded 11 Feb ‘14

We upgraded, to Ba3, from B1, the long-term global foreign-currency deposit ratings of Banco Bilbao Vizcaya Argentaria Paraguay S.A., Banco Continental S.A.E.C.A. and Banco Regional S.A.E.C.A. The outlook on all these ratings is stable..The rating actions follow our upgrade of Paraguay's sovereign ratings, including the government bond rating and the country ceilings for bonds and deposits, in local and foreign currency.

RATING CHANGES Significant rating actions taken the week ending 14 February 2014

37 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Assured Guaranty Re Ltd. Outlook Change

11 Jan ‘13 10 Feb ‘14

Long-Term Rating Baa1 Baa1

Outlook Stable Negative

Assured Guaranty Re Overseas Ltd

Outlook Change

11 Jan ‘13 10 Feb ‘14

Long-Term Rating Baa1 Baa1

Outlook Stable Negative

Assured Guaranty Mortgage Insurance Company

Outlook Change

11 Jan ‘13 10 Feb ‘14

Long-Term Rating Baa1 Baa1

Outlook Stable Negative

There has been downward credit rating migration among certain large exposures within the insured portfolios of Assured's operating companies, most notably the general obligation bonds issued by the Commonwealth of Puerto Rico. Assured's ratings reflect its leadership position in the financial guaranty insurance sector, its strong overall capital profile and ongoing de-risking through insured portfolio amortization. These strengths are tempered by the fact that Assured operates in an industry that has not recovered from the financial crisis and, like its peers, the fact the company faces significant headwinds from declining fundamentals in the sector, including a dramatic reduction in insurance usage, moderate prospective profitability and still-meaningful legacy risk.

Royal Bank of Scotland Group plc Review for Downgrade

5 Nov ‘13 12 Feb ‘14

Senior Unsecured (Foreign) Baa1 Baa1 Review for Downgrade

Senior Unsecured (Domestic) Baa1 Baa1 Review for Downgrade

Senior Unsecured MTN (Foreign) (P)Baa1 (P)Baa1 Review for Downgrade

Senior Unsecured MTN (Domestic) (P) Baa1 (P) Baa1 Review for Downgrade

The review follows publication of a trading update in which RBS's management indicated that the group's year-end 2013 results (scheduled to be published on 27 February 2014) would be materially impacted by additional provisions for pending litigations and conduct-related costs. As a result, the bank will report a weaker than anticipated regulatory capital position at end-December 2013, weakening its standalone credit profile.

RATING CHANGES Significant rating actions taken the week ending 14 February 2014

38 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

RBS Citizens, NA Review for Downgrade

6 Nov ‘13 12 Feb ‘14

Standalone Financial Strength/ Baseline Credit Assessment

C/a3 C/a3

Long-Term Deposit Ratings A3 A3

Outlook Stable Ratings Under Review

The review follows our placing the ratings of the Royal Bank of Scotland, its parent, on review, and reflects the potentially negative influences that a weaker parent can exert over its subsidiaries.

Banco Santander S.A. (Spain) Outlook Change

24 Oct ‘12 11 Feb ‘14

Long-Term Rating Baa2 Baa2

Outlook Negative Stable

The outlook change reflects our view that the downside risks to the bank's credit profile have substantially decreased because of the gradual economic improvement in Spain. We also take comfort from Santander's strong earnings diversification, which will continue to offset expected ongoing negative asset-quality trends, as well as from the group's improved capitalisation levels and its ability to generate capital in times of stress. The improved capitalization should make Santander's credit profile resilient against any further asset-quality pressures.

Santander Consumer Finance S.A. Outlook Change

24 Oct ‘12 14 Feb ‘14

Long-Term Rating Baa2 Baa2

Outlook Negative Stable

The change in outlook reflects: (1) the stable outlook of its standalone rating, (2) the stable outlook of its parent Banco Santander S.A's ratings, as well as (3) the stable outlook of Spain's Baa3 government rating. SCF's stabilising asset-quality indicators and strong earnings diversification should enable it to offset pressures arising from the modest growth prospects -- albeit improving -- in some of SCF's core markets, namely the peripheral European countries.

Banco Santander-Chile Outlook Change

26 Feb ‘13 13 Feb ‘14

Long-Term Rating Aa3 Aa3

Outlook Negative Stable

The rating action follows similar actions on its parent Banco Santander S.A.'s ratings. The negative outlook on Santander Chile's ratings had reflected the negative outlook on the parent's standalone ratings.

RATING CHANGES Significant rating actions taken the week ending 14 February 2014

39 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Banco Santander Puerto Rico Review for Downgrade

12 Dec ‘13 11 Feb ‘14

Standalone Financial Strength/ Baseline Credit Assessment

D+/ba1 D+/ba1 (Review for Downgrade)

Popular, Inc.

Review for Downgrade

7 Oct ‘13 11 Feb ‘14

Senior Unsecured MTN (Domestic) (P)B1 (P)B1

Outlook Negative Review for Downgrade

FirstBank Puerto Rico

Review for Downgrade

12 Dec ‘13 11 Feb ‘14

Standalone Financial Strength/ Baseline Credit Assessment

E+/b2 E+/b2 (Review for Downgrade)

The reviews of the three banks’ ratings follow our downgrade of the general obligation rating of the Commonwealth of Puerto Rico. Our reviews will focus on the potential effect of further deterioration in the Puerto Rican economy and the commonwealth's fiscal condition on the credit profiles of BSPR, Popular and FirstBank.

Banco Cetelem Argentina S.A. Review for Downgrade

6 Nov ‘13 5 Feb ‘14

Senior secured MTN (Foreign) (P)B3 (P)B3 (Review for Downgrade

Senior secured MTN (Domestic) (P) Ba3 (P) Ba3 (Review for Downgrade

The review follows the announcement that the Group ST is acquiring Cetelem Argentina from BNP Paribas Personal Finance and COFICA BAIL S.A. With the announced change in ownership and control, guarantees provided by BNP Paribas will likely no longer be available.

Banco Bilbao Vizcaya Argentaria, S.A. Outlook Change

24 Oct ‘12 11 Feb ‘14

Long-Term Rating Baa3 Baa3

Outlook Negative Stable

The outlook change reflects our view that the downside risks to the bank's credit profile have substantially diminished, given gradual economic recovery in Spain. Spanish assets represent 55% of the group's loan book.

RATING CHANGES Significant rating actions taken the week ending 14 February 2014

40 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Standard Bank Plc Review with Direction Uncertain

4 Jul ‘13 11 Feb ‘14

ST Bank Deposits (Domestic) P-2 P-2

Senior Unsecured MTN (Foreign) Baa3 Baa3

ST Bank Deposits (Foreign) P-2 P-2

Outlook Negative Review with Direction Uncertain

The review follows the recent announcement that Standard Bank Group in South Africa has reached an agreement to sell a majority stake in its UK subsidiary Standard Bank Plc (SBP) to Industrial & Commercial Bank of China Ltd. Currently, SBP's ratings are fully aligned with those of Standard Bank Group (SBG), as we view the UK subsidiary as a highly-integrated and harmonised entity within SBG.

Sovereigns Government of Jamaica

Outlook Change

6 Mar‘13 12 Feb’ 14

Long-Term Issuer Rating Caa3 Caa3

Outlook Stable Positive

The outlook change is based on, first, recent and anticipated improvements on key fiscal and debt metrics, and, second, expectations that Jamaica's government will continue meeting targets under its current IMF program. In May 2013 the IMF approved a $932 million arrangement under the International Monetary Fund (IMF) Extended Fund Facility. Since then, two reviews conducted by the IMF have found that Jamaica has met all the quantitative criteria.

US Public Finance University of Puerto Rico, PR

Downgrade

19 Dec ‘13 10 Feb ‘14

University System Revenue Bonds Ba1 Ba3

Educational Facilities Revenue Bonds Ba2 B1

Outlook Review for Downgrade Negative

The downgrade reflects the University of Puerto Rico’s high reliance on the commonwealth for operating revenue and for governance, coupled with its reliance on the Government Development Bank for liquidity and financial management support. The outlook reflects the commonwealth's negative outlook, along with pressures on enrollment and pledged revenues.

RESEARCH HIGHLIGHTS Notable research published the week ending 14 February 2014

41 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Corporates

New Model Introductions Key to Indian Auto Market in 2014 and a Turning Point for Tata

The new model introductions following the Indian Auto Expo show will boost auto sales in the coming months. However, the boost will be short lived because consumer spending remains constrained, owing to high inflation and tight credit conditions, which squeeze affordability. As a result, we expect total domestic sales of passenger vehicles and light commercial vehicles to remain flat in 2014.

Earnings Growth Set to Accelerate for Most European Pharmaceutical Companies After Mixed Performance in 2013

We expect the earnings growth of most rated European pharmaceutical companies to accelerate as the impact of patent expiries recedes. In 2014, emerging markets will continue to be a growth driver for most companies. However, as was the case last year, fluctuations in local exchange rates in certain markets could dent companies’ sales and profits in their functional currencies.

Upcoming 2014 Elections & Indian Credit: A Fragmented Coalition Will Be the Biggest Threat to Credit Quality

A strong showing by one of the major parties in the upcoming general elections in India would not, by itself, lead to an improvement in economic growth and fiscal consolidation, which are two determining factors of the country’s credit quality. If a coalition of smaller, regional parties without a common economic reform agenda were to take the helm, borrowing costs would likely go up, weakening the rupee and delaying economic recovery.

Chinese Compendium - February 2014

The number of investment-grade ratings among our major China-based rated issuers has grown considerably over the past five years, owing to a number of state-owned enterprises and their subsidiaries deciding to access the offshore bond markets. We expect the onshore credit supply to remain stable. The development of onshore monetary and capital markets amid reforms gives companies more funding channels, while the increasing convertibility of the renminbi gives them more flexibility to support their offshore subsidiaries.

US Natural Gas Transportation: Boardwalk Pipeline Cuts Its Distribution as Impact of Robust Shale Production Spreads Citing reduced revenues from firm transportation contract renewals, contract expirations and reduced storage opportunities, which Boardwalk Pipeline estimates will lead to a 28% decline in its distributable cash flow, BWP will slash its first-quarter cash distribution by more than 80%. By increasing its distribution coverage ratio to around 4x, BWP intends to redirect its internally generated cash flow to help fund growth capital spending and reduce leverage.

RESEARCH HIGHLIGHTS Notable research published the week ending 14 February 2014

42 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

US For-Profit Hospitals Outlook Changed to Positive as Expanded Coverage and Easier Comps Fuel Profit Growth

Our outlook change for the US for-profit hospital sector reflects our expectation that aggregate same-facility EBITDA growth will approach 7% over the next 12 to 18 months. Hospital operators will benefit from a reduction in bad debt expense as the uninsured population declines, owing to the Affordable Care Act. Prior-year comparisons will improve as a result of the significant decline in performance by some for-profit hospitals in 2013, especially with respect to volumes, and the anniversary of the 2% cut in Medicare reimbursement from sequestration in April 2014.

Hong Kong Real Estate Investment Trusts: Proposed Code Changes Would Raise REITs' Risk Profiles But Support Market Development

Changes proposed by the Hong Kong Securities and Futures Commission for Hong Kong real estate investment trusts (REITs) would increase the REITs’ execution and financial risk by allowing them to invest in property development and financial instruments. However, the heightened risk would be manageable because of the limited amount that REITs could invest outside of income-generating real estate. Moreover, we believe REITs would remain cautious.

Transportation Equipment Manufacturers: Record Orders Bode Well for Revenues, But Will Abate

The recent record order intake is credit positive for transportation equipment manufacturers Alstom, Bombardier and Siemens because it suggests strong revenue growth in a significant part of their businesses. Although we expect the jump in orders to subside, orders will likely continue to flow at a modest rate and translate into significant revenue growth for 2014-17, if the three companies’ manufacturing capacity and utilization also rise.

Infrastructure

Highly leveraged UK Water Sector Companies Most Exposed to Cuts in Allowed Returns

The Water Services Regulation Authority (Ofwat), the economic regulator for the water and sewerage companies in England and Wales, recently published guidance for the return companies will be allowed to earn on their assets over the five years starting April 2015. The guidance from Ofwat indicates a significant reduction in allowed returns, reflecting low interest rates and recent regulatory precedents. Highly leveraged companies are most exposed.

RESEARCH HIGHLIGHTS Notable research published the week ending 14 February 2014

43 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Financial Institutions

Regional Consolidation Has Mixed Credit Implications for Latin American Banks

Cross-border mergers and acquisitions proliferated in Latin America’s banking sector in 2011-13, fueled by regional growth opportunities, divestments by global banks and favorable financing conditions. Such bank consolidation is broadly credit positive because it enhances franchise value and earnings potential. Nevertheless, credit and rating implications for buyers may vary depending on the risks associated with each individual deal.

Additional Tier 1 Contingent Capital: Securities Have Common Features, But Structural Differences Pose Degrees of Credit Risk to Investors

Increasing issuance by banks of Additional Tier 1 (AT1) contingent capital securities in 2014 will pose various degrees of risks for investors, as many contain notable structural differences. Our report looks at some common features and highlights differences among loss absorption mechanisms including loss absorption triggers for all the bank securities issued in 2013.

Israel Banking System Outlook

Our outlook on Israel’s banking system is now stable, after being negative since 2012. The change reflects our expectation of gradually improving macroeconomic conditions; increasing capital buffers to absorb unexpected losses; and strong liquidity and stable, deposit-based funding.

Quarterly North American Banking Teleconference

This report details remarks made during our 30 January financial institutions teleconference, at which we reviewed recent trends in commercial mortgage-backed securities (CMBS) and the linkage of this business to banking. We also discussed the current environment for US regional banks as well as how the large US banks are implementing fundamental business model changes that address the “new normal” for the banking industry.

European Insurance CFOs optimistic About Increasing Profitability; Low Interest Rates Remain Key Concern

Our first annual survey of our rated European insurers finds low interest rates and weak economic growth continuing to be a concern of industry CFOs, although they have a more buoyant outlook on industry profitability. In addition, CFOs anticipate relatively modest debt issuance and limited M&A activity in 2014.

Dubai Health Insurance: Mandatory Health Cover Will Provide Market Growth Opportunities, But Profitability Likely to Be Low

The mandatory health cover recently imposed by the UAE Government will result in significant growth opportunities for insurers. Still, mandatory health cover may be a relatively weakly performing business line, owing to strict regulations that cap premiums while reducing market share amid increasing competition in the non-mandatory market place.

RESEARCH HIGHLIGHTS Notable research published the week ending 14 February 2014

44 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Q4 2013 Insurance CDS Spreads Tighten: US Health Insurers in Focus

CDS spreads narrowed across all insurance sectors during the last quarter of 2013, as business confidence improved, but we temper the recent good earnings results with the uncertainty facing the sector from the impact of the Affordable Care Act (ACA) and an anticipation of a return to more normal medical trend growth with an improving economy.

RESEARCH HIGHLIGHTS Notable research published the week ending 14 February 2014

45 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Sovereigns

Norway Credit Analysis The Norwegian government’s prudent policies and robust balance sheet primarily support the Aaa rating. Norway also has substantial hydrocarbon reserves and the world’s second-largest sovereign wealth fund.

South Africa: Answers to Frequently Asked Questions About the Credit Impact of Election Year Politics and the Rand's Depreciation The steep depreciation of the rand will lead to only marginally lower growth than had been expected in 2014 and therefore will have only limited impact on the South African government’s Baa1 rating and negative outlook. The depreciation will, however, add to inflationary pressures in South Africa, leading to higher interest rates. Contributing to the rand’s weakness is a degree of investor uncertainty brought on by this year’s elections.

Ghana Credit Analysis The key constraint to Ghana’s B1 rating is the ongoing weakness in the government’s fiscal position, which was also a major driver of our decision to change the outlook on the rating to negative from stable in December 2013. In addition, delays in fiscal consolidation plans and election considerations are likely to keep interest rate premia elevated, particularly if oil and gas production and exports fail to expand as much as forecast.

Slovenia Credit Analysis Slovenia’s substantial wealth level, a strong institutional framework and a high value-added export base support its Ba1 stable government bond rating. Slovenia’s major credit constraints include a weak macroeconomic environment and the government’s deteriorating debt metrics. The economy has been in recession since early 2012.

Chinese Compendium - February 2014 The Compendium is designed to enable investors to more easily identify and compare the key financial metrics and credit profile summaries of China-based issuers. The publication provides a single, aggregated reference source of our major publicly rated issuers along with, in most cases, their key financial data and ratios, as well as explanatory summaries for our ratings. This is the first issue.

Key Drivers for Moody's Decision to Upgrade Mexico's Sovereign Rating to A3 from Baa1 The approval of wide-ranging reforms drove the 5 February upgrade. Reflecting a political will to address longstanding structural issues, the reforms put Mexico on a more solid footing, improve medium-term economic prospects, and strengthen a fiscal outlook that includes higher government savings and additional financial buffers.

RESEARCH HIGHLIGHTS Notable research published the week ending 14 February 2014

46 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Sub-sovereigns

New Joint Issue Highlights Growth of the German Municipal Bond Market Six German cities jointly issued €400 million in bonds recently, the largest municipal bond ever issued in Germany. This joint issuance is credit positive for German local governments because it provides another funding source for German municipalities and could make up for gradual declines in bank lending, Joint issuance also somewhat lowers the overall cost of funding compared to individual capital market borrowing.

US Public Finance

Military Housing Allowances Increase Nationally For Third Straight Year, but Base-to-Base Volatility Heightens In December 2013, the US Department of Defense increased the national Basic Allowance for Housing (BAH) rates by an average of 5% for 2014, the third consecutive year with a lift. The increase is set to boost revenues and improve debt service coverage, a credit positive for the privatized military housing sector. However, BAH rates vary widely by location and a significantly larger number of bases with rated housing projects will deal with decreases in 2014.

Public Housing Capital Funding Remains Stable in 2014 But Annual Appropriation Risks Persist The 2014 federal budget passed last month allocates $1.88 billion to the Public Housing Capital Fund. This level of funding ameliorates some of the risk associated with Capital Fund financings issued by, or on behalf of, Public Housing Authorities. However, the sector remains vulnerable to appropriation cuts.

RESEARCH HIGHLIGHTS Notable research published the week ending 14 February 2014

47 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

Structured Finance

An Introduction to Moody's Credit Risk Analysis of CLOs We summarize the key aspects of our credit risk analysis of CLOs. We base our ratings of CLO tranches on the expected credit loss (EL) to investors of those tranches. We detail how we calculate EL and compare it to our expected loss benchmarks. We also detail key elements of our qualitative analysis. Our ratings reflect both quantitative and qualitative considerations.

2014 Outlook - Canadian ABS, RMBS and Covered Bonds We are maintaining a stable outlook for Canadian asset-backed securities (ABS), residential mortgage-backed securities (RMBS) and covered bonds because of the improving Canadian economy, which will support already strong collateral performance. Delinquency and charge-off rates for credit card receivables, which are currently back to their pre-crisis levels, will continue to improve in 2014.

Russian Securitisation Market Update: Performance Remains Stable in 2014 Robust collateral performance, continued, albeit slower, economic growth and stabilised house prices underpin our current stable outlook for the performance of Russian residential mortgage-backed securities (RMBS) and asset-backed securities (ABS) in 2014. Our collateral performance outlook remains stable. We expect 2014 issuance to increase slightly.

Moody's CLO Interest Newsletter In this issue we update our manager league tables through 2013, and find CIFC and Highland still dominate the US. Also discussed: how CLO 2.0 refinancings enhance excess spread and offset the negative effects of loan re-pricings, the US intergovernmental agreement with the Cayman Islands, which will simplify and lower the cost of compliance for CLOs formed there, and the Lehman bankruptcy court’s decision to apply the safe harbor for swaps when swap agreements include liquidation provisions.

UK Auto ABS: Higher UK Used Car Values Is Credit Positive UK auto asset-backed securities (ABS) will benefit from higher recovery rates on defaulted contracts and reduced numbers of voluntary terminations. Both these credit positive elements are a function of (1) higher used car values in 2014 driven by increasing demand for UK vehicles; and (2) the limited supply of newly used cars following lower new car sales in previous years.

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

48 MOODY’S CREDIT OUTLOOK 17 FEBRUARY 2014

NEWS & ANALYSIS Corporates 2 » Uralkali’s Investment in Brazil Deepwater Terminal Is Credit

Positive » Sophos' Acquisition of Cyberoam Is Credit Positive » Genting's Bet on Jeju Island Resort and Casino Is Credit Positive

Infrastructure 7 » EDP - Energias do Brasil Divests Majority Stake in Sao Manoel

Power Plant, a Credit Positive

Banks 8 » Cypriot Banks' Nonperforming Loans Pressure Capital Buffers » Ghana's Monetary Tightening Is Credit Negative for Its Banks

Insurers 12 » Proposed Changes to Affordable Care Act Are Credit Negative

for Health Insurers » CNA Financial Agreement to Sell Life Insurance Subsidiary Is

Credit Positive

Asset Managers 15 » UK Regulatory Scrutiny Is Credit Negative for State Street

MOODYS.COM

Report: 165004

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EDITORS PRODUCTION ASSOCIATE News & Analysis: Elisa Herr, Jay Sherman and Laura Kahn

David Dombrovskis

Ratings & Research: Robert Cox Final Production: Barry Hing