MOODYS.COM

9 SEPTEMBER 2013

NEWS & ANALYSIS Corporates 2

» Jarden Lights up Its Brands with Yankee Candle Deal » Oasis Buys Oil Assets in North Dakota for $1.5 Billion, a Credit Negative » Townsquare's US Radio Acquisitions Are Credit Positive » Coca-Cola FEMSA's Acquisition of Bottler Spaipa Is Credit Negative » Vodafone's Sale of 45% Stake in Verizon Wireless Is Credit Positive » Nokia's Sale of Mobile Phone Business Is Positive for It Negative

for Microsoft » Gazprom's Agreement to Major Terms on China Pipeline Is Credit

Positive » SKF's Acquisition of Kaydon Is Credit Negative » Phones 4U's Sale of Its Mobile Phone Insurance Unit Is Credit Positive » PT Indofood's Takeover Bid Is Credit Positive for China Minzhong

Infrastructure 13 » Alliant Agrees to Sell Minnesota Electric and Natural Gas

Distribution Business, a Credit Positive

Banks 14 » US Crackdown on Consumer Disputes Is Credit Negative for Banks

and Finance Companies » Swiss Banks Benefit from US-Swiss Agreement on Tax Evasion

Dispute » Italy's Financial Transaction Tax Is Credit Negative for Italian Banks » Credit Agricole's Disposal of Its Bankinter Stake Is Credit Positive » Austria's Banks Benefit from Reduced Foreign Currency Loan

Volumes » Banks Serving Russia's Flooded Far East Will See Rising Credit

Losses and Falling Business » Pakistani Banks Will Take a Hit from Flood-Damaged Agricultural

Sector

Insurers 25 » Fidelity & Guaranty Life's Plan to Raise Equity Is Credit Positive » Reduction in Insurance Premium Tax Deduction Is Credit Negative

for Italian Insurers » Poland’s Proposed Pension System Changes Are Credit Negative

for Insurers

Managed Investments 31

» European Commission Proposals Are Credit Negative for Money Market Fund Managers

» Asset Managers' Weak Operational Controls Are Credit Negative

Sovereigns 35 » Cyprus' Liquidity Benefits from Russian Loan Restructuring, but Re-

Default Remains Probable » Armenia’s Customs Union with Russia Undermines EU Association

Agreement, a Credit Negative » Radiation Containment Problems at Fukushima Are Credit

Negative for Japan » IMF's Approval of $6.6 Billion Facility for Pakistan Is Credit Positive » Malaysia's Fuel Price Hikes Are a Credit-Positive Step in Fiscal

Consolidation Plan

US Public Finance 42 » Enrollment Declines Are Credit Negative for Higher Education

RATINGS & RESEARCH Rating Changes 44

Last week we downgraded AK Steel, Verizon Communications, the subordinated debt of 40 banking groups in Singapore, Thailand, India, Philippines, Korea, Taiwan, Hong Kong and Australia; Banca delle Marche, Wing Lung Bank, The South African National Roads Agency, and 66 tranches of US prime jumbo RMBS, among other rating actions.

Research Highlights 49

Last week we published reports on global pharmaceuticals, global auto manufacturers, US wireless, Korean telecoms, Australian regulated utility networks, banking system outlooks on New Zealand, South Africa, the Czech Republic, and Germany; US bank revenue, global reinsurance, Asian banks’ subordinated debt, Corporación Andina de Fomento, Kazakhstan, Fondo Latinoamericano de Reservas, Mongolia, Mexican states, US universities, and structured credit, among other reports.

RECENTLY IN CREDIT OUTLOOK

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

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

NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Corporates

Jarden Lights up Its Brands with Yankee Candle Deal On Tuesday, consumer products company Jarden Corporation (Ba3 stable) announced plans to buy Yankee Candle Investments (parent company to YCC Holdings LLC, B2 stable) for $1.75 billion. The deal, which Jarden plans to fund with a combination of cash on hand, common equity and a mix of bank and bond debt, is credit positive for Jarden, as well as YCC Holdings.

Not only is the transaction consistent with Jarden’s strategy of acquiring leading consumer brands in niche categories, but on a pro forma basis for the 12 months ended 30 June, adding Yankee Candle will increase Jarden’s net sales to approximately $7.7 billion from $6.9 billion, and our adjusted EBITDA to approximately $1.2 billion from about $900 million. Assuming Jarden realizes no cost synergies and funds half of the purchase price with debt and the rest with a combination of equity and cash, pro forma adjusted debt/EBITDA would decrease to around 5.1x from 5.3x and operating margins would improve to around 11% from 10%.

On Wednesday, Jarden said it completed a public offering of 15 million shares of its common stock. The sale raised approximately $680 million, which Jarden plans to put toward the Yankee Candle deal. Jarden also said it will look to steadily decrease leverage and repay debt with free cash flow. Earlier, the company announced plans to stop buying back its shares in order to focus on integrating the acquisition, which it expects to close in the fourth quarter.

The transaction is also credit positive for YCC Holdings because it will become part of a much larger global corporation with potential revenue growth and cost synergies. We are likely to withdraw all of YCC’s and Yankee Candle’s ratings upon the deal closing and subsequent repayment of its debt.

Jarden operates well-known brands in three main categories: outdoor products, where its brands include Coleman, K2, and Rawlings; consumer products, which includes Crock-Pot, Mr. Coffee and Sunbeam; and branded consumables, which includes Ball, First Alert and Quickie. Yankee Candle will become part of the branded consumables segment, which will generate 35% of Jarden’s sales after the acquisition. The acquisition also extends the branded consumables segment into the seasonal staple category and creates opportunities for cross-selling other Jarden products across a broadened distribution platform.

YCC Holdings LLC, through its indirect operating subsidiary, The Yankee Candle Company, Inc., manufactures and distributes premium scented candles through both wholesale and retail channels. In addition to owning 561 retail stores, primarily located in shopping malls, Yankee Candle has approximately 35,000 North American wholesale points of distribution, including independent card stores and retailers such as Kohl’s and Bed, Bath & Beyond. The company, which has been owned by private equity firm Madison Dearborn Partners since 2007, had revenue of $863 million for the 12 months ended 29 June 2013.

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

Michael Zuccaro Assistant Vice President - Analyst +1.212.553.4596 michael.zuccaro@moodys.com

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Oasis Buys Oil Assets in North Dakota for $1.5 Billion, a Credit Negative Oasis Petroleum Inc. (B2 stable) announced plans on Thursday to acquire producing and undeveloped assets across 161,000 net acres within North Dakota’s Williston Basin, for an aggregate purchase price of $1.5 billion.

The acquisitions will be credit negative if Oasis funds them with debt, as we expect. The use of debt would raise the exploration and production (E&P) company’s leverage (as measured by debt to average daily production) by at least half.

For a relatively small oil producer such as Oasis, building up a bigger stake in the Williston Basin makes strategic sense. Oasis will expand its oil production and proved reserves by about 27%, raising to 492,000 acres its presence in Williston’s Bakken/Three Forks play, one of North America’s most dynamic and growing oil-producing regions.

Moreover, the new acquisition lies close to Oasis’ existing holdings, and will expand its production significantly to 43,000 barrels of oil equivalent per day (boe/d) and 216 million boe in proved reserves, well above its current daily production of 9,300 boe and proved reserves of 46 million boe.

Even so, while Oasis did not specify the final financing structure, the company is likely to target the high yield market opportunistically for most of the funding of its new acquisition. Oasis has only about $200 million cash on hand, as well as about $1.4 billion available through a revolver.

The properties Oasis plans to acquire will cost more than $160,000 per flowing barrel, an amount that could increase the company's debt leverage tremendously, raising its near-term debt to more than $60,000 per boe of average daily production before easing in 2014. This would be well above Oasis’ $40,000 debt per boe of average daily production at the end of the second quarter of 2013, and high leverage compared to the company’s E&P peers with similar ratings.

The new assets will help Oasis maintain its strong bias toward crude production, with a mix of about 10% natural gas and 90% crude. We expect natural gas prices to remain historically weak for the foreseeable future, while persistently high crude prices, which allow for favorable hedging, will give Oasis strong cash flow and position the company well to reduce debt leverage. Nevertheless, for the next year, the acquisitions will stretch Oasis’ liquidity materially.

Arvinder Saluja Assistant Vice President - Analyst +1.212.553.1639 arvinder.saluja@moodys.com

NEWS & ANALYSIS Credit implications of current events

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Townsquare’s US Radio Acquisitions Are Credit Positive Townsquare Radio, LLC (B2 stable) on 30 August said it plans to buy 53 US radio stations from Cumulus Media Inc. (B2 stable) in 12 markets for $229 million in cash. The purchase comes as part of Townsquare’s move to add a net 71 stations to its portfolio.

The acquisitions are credit positive for Townsquare, increasing the broadcaster’s scale in attractive, contiguous markets without significantly increasing its leverage. New advertising revenue should boost Townsquare’s annual revenue to some $330 million, well above its roughly $250 million today.

The deal’s financing would include $16 million in new equity, which will help Townsquare keep its leverage in line with today’s ratio of just under 6.0x. The terms of the deal will allow Townsquare to stay in compliance with a 2.4x senior leverage test under its credit agreement, as well as the 2.0x senior leverage and 6.0x total leverage incurrence tests under its indenture.

The transactions increase Townsquare’s scale, raising its complete roster of radio stations to more than 300 nationwide. The deal promises significant operating benefits, offering new footholds in the types of small and midsized markets that it favors, where its stations see less competition from large radio operators.

The sale should also spur Townsquare to make investments to expand its revenue. The new assets from Cumulus, the largest US pure-play radio broadcaster with some 460 stations nationwide, will give Townsquare a boost with significant spot-advertising revenue and the chance to generate further incremental revenue from digital products and live events.1

For Townsquare, a serial acquirer of radio stations, this transaction brings its total roster to 312 stations in 66 markets and is its fifth big addition in three years. By now, Townsquare has successfully assimilated the 55 stations that it bought from Cumulus in April 2012 in exchange for $116 million in cash plus 10 Townsquare stations.2

Both deals with Cumulus illustrate the growing portfolio-rationalization trend among the mature US television and radio sectors, particularly in the absence of attention from private equity firms. US broadcast mergers and acquisitions have taken hold as companies fine-tune operations across geographic clusters to compete more effectively with new media for advertising revenue. Operators are using asset swaps or taking advantage of receptive debt markets and innovative structured financings to fund strategic deals.

Townsquare should have little trouble integrating its new properties. As part of its expansion effort, Townsquare will also add 11 stations in two markets through its acquisition of Peak II Holding LLC (unrated) before exchanging five of the Peak II stations for another 15 stations from Cumulus. Townsquare will assign three stations acquired from Cumulus to a divestiture trust because of US regulatory limits capping broadcast ownership within a single market.

The new deal has no strong credit implications for Cumulus, the largest US pure-play radio broadcaster. Cumulus will use the cash to finance most of its $260 million acquisition of Dial Global, the radio network programming company.

1 Townsquare added to its suite of online and live events in June 2013, acquiring some AOL Music and ComicsAlliance assets,

having already bought Mountain Jam LLC and Saratoga Festivals LLC in late 2012. 2 See Cumulus and Townsquare Station Swap Is Credit Positive for Both Broadcasters, 7 May 2012.

Carl Salas Vice President - Senior Credit Officer +1.212.553.4613 carl.salas@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Coca-Cola FEMSA’s Acquisition of Bottler Spaipa Is Credit Negative On 2 September, Coca-Cola FEMSA, S.A.B. de C.V. (A2 negative) said it would acquire Brazilian bottler Spaipa Industria Brasileira de Bebidas, S.A. (unrated) for $1.86 billion in cash. The acquisition is credit negative because it will significantly increase the company’s leverage. Owing to this increased leverage, we revised the outlook on the company’s A2 rating to negative from stable on 4 September.

The deal extends an acquisition spree for Coca-Cola FEMSA, the largest Coca-Cola bottler in the world. In June, it said it would acquire another Brazilian Coca-Cola bottler, Companhia Fluminense de Refrigerantes, S.A. (unrated), for $448 million in cash. The company made its first foray outside of Latin America in December when it acquired a 51% stake in Coca-Cola Bottling Philippines, Inc. (unrated) for $688.5 million, and it merged with several Mexican bottlers, including Grupo Yoli in January.

The purchase of Spaipa is significantly larger than those prior deals and the company will fund the transaction entirely with debt. The $2 billion of debt that Coca-Cola FEMSA will incur will drive pro forma debt/EBITDA leverage, including our standard adjustments, to 2.2x from 1.5x as of 30 June. Based on the company's projections, we estimate that adjusted leverage will be around 2.1x by the end of this year. The company expects to reduce leverage to around 1.75x by the end of 2014.

Although it will increase leverage, the deal will boost Mexico City-based Coca-Cola FEMSA’s sales volumes in Brazil by 40% to about 819 million unit cases and expand its presence in the populous, adjacent states of Sao Paulo and Paraná. With its expansion in these states adding to its scale in Brazil’s southeast, which includes Rio de Janeiro, Coca-Cola FEMSA will have the opportunity to increase the efficiency of its distribution chain.

Alonso Sanchez Rosario Assistant Vice President - Analyst +52.55.1253.5706 alonso.sanchezrosario@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Vodafone’s Sale of 45% Stake in Verizon Wireless Is Credit Positive On Monday, Vodafone Group Plc (A3 stable) reached an agreement with Verizon Communications, Inc (Baa1 stable) for the sale of its 45% equity stake in Verizon Wireless for $130 billion (£84 billion).

The sale is credit positive for Vodafone because some of the substantial proceeds from this sale will be retained in the business to reduce net debt; pay for the acquisition announced earlier this year of Kabel Deutschland Holding AG (Ba2 review for upgrade), which is the largest cable operator in Germany; and accelerate capex to support Vodafone’s competitive position in its core markets.

The total consideration primarily consists of approximately £38.0 billion in cash, around £38.9 billion in new Verizon shares that will be distributed to Vodafone's shareholders, and a £3.2 billion note payable to Vodafone. The remainder consists of Verizon's 23.1% stake in Vodafone Italy, valued at around £2.3 billion and £1.6 billion of liabilities assumed by Verizon.

Vodafone plans to distribute 71% (or £54.3 billion) of the net proceeds from the sale to its shareholders, while around £23 billion will be retained in the business to support a new £6 billion organic investment programme and improve its financial profile. This use of proceeds balances the interests of shareholders and creditors, and is in line with Vodafone’s renewed explicit commitment to an A3 rating.

The sale is another demonstration of Vodafone’s ability to release value from its non-controlled shareholdings. It follows sales over the past few years of its 3.2% stake in China Mobile for £4.3 billion, its holdings in Softbank's financial instruments for around £3.1 billion, its 44.0% stake in the French telecommunications operator SFR for £7.0 billion and its 24.4% stake in the Polish mobile operator Polkomtel for around £800 million.

After the announced Verizon Wireless transaction, Vodafone's adjusted debt/EBITDA will improve to below 2.0x, well below the 3.1x as of fiscal year-end 2013 in March. The group's retained cash flow/adjusted net debt ratio will improve post-transaction to around 35%, benefitting from the future lower dividend payout associated with the reduced share count.

However, after this sale, Vodafone will lose its largest cash-flow-contributing asset, it will have no exposure to the large and profitable US market, reducing its geographical diversification and weakening its business profile. Vodafone will no longer have a comparable non-core asset to sell in case of difficulties.

Vodafone has said that it will continue to review the group’s capital structure and potential for further shareholder returns, depending on operating performance and the availability of investment opportunities.

We believe that there is a high degree of certainty that this transaction will receive the required approvals from shareholders and government authorities and that any variations to the structure will not be material for the ratings.

Iván Palacios Vice President - Senior Credit Officer +34.91.768.8229 ivan.palacios@moodys.com

Juan Laiseca Associate Analyst +34.91.768.8243 juan.laiseca@moodys.com

NEWS & ANALYSIS Credit implications of current events

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Nokia’s Sale of Mobile Phone Business Is Positive for It, Negative for Microsoft On Tuesday, Nokia Oyj (B1 developing) announced it had agreed to sell its mobile phone and smartphone business to Microsoft Corporation (Aaa stable) for a consideration of €5.4 billion ($7.2 billion).

The agreement is credit positive for Nokia and its fully controlled subsidiary Nokia Networks and Solutions B.V. (NSN, B1 developing) because it will shed a loss-making operation and relieve some pressure on NSN to support the parent company. The transaction is credit negative for Microsoft because acquiring the handset unit will likely require additional investment to effect a better integration of Microsoft’s overall mobile strategy.

Nokia expects the transaction to close in the first half of 2014, subject to approval by Nokia’s shareholders, regulators and other customary closing conditions.

The agreement is credit positive for Nokia. In selling the mobile phone and smartphone unit, Nokia will eliminate a business that reported an operating loss of €1.1 billion in 2012, despite generating €14.9 billion in revenues. The unit also faces major challenges re-establishing itself as a credible player in an industry characterized by rapid technology shifts and short product life cycles.

The transaction also has the potential of strengthening Nokia’s financial profile, depending on how the company uses the sale proceeds. At the end of June 2013, Nokia had gross cash of €7.0 billion and net cash of €2.7 billion (excluding the €1.4 billion of net cash at NSN) and access to a fully available €1.5 billion long-term revolving credit facility. Nokia has yet to say how it will use the €5.4 billion. However, we expect the company to use at least some of the funds to strengthen its remaining core businesses and repay the bridge financing it used in August to acquire the 50% in NSN it did not already own. Such moves would be more positive than fully distributing the funds to shareholders.

Upon completion of the deal, Nokia will include three core businesses: NSN, its wireless infrastructure subsidiary, which had revenue of €2.8 billion in second-quarter 2013; HERE, its mapping and location platform, which had revenue of €233 million in second-quarter 2013; and Advanced Technologies, a new unit that will monetize its patent portfolio. NSN and HERE produced a combined underlying operating margin of 11.1% in the second quarter, up from 1.9% a year earlier, which highlights the transition these businesses are currently undergoing.

Nokia’s improved finances should also benefit NSN because the subsidiary will be under less pressure to upstream cash to the parent. Nokia’s agreement with Microsoft includes €1.5 billion of financing arrangements that eliminate the need for NSN to help finance Nokia’s €1.7 billion purchase from Siemens of the 50% in NSN that it acquired in August.

The transaction is credit negative for Microsoft. Microsoft’s acquisition of the handset unit indicates that its partnership with Nokia has not been as productive as both companies anticipated (smartphones using the Windows Phone 8 operating system have market share in mid- to low-single digits). As a result, Microsoft is taking control to effect a better integration of its overall mobility strategy. This will likely require additional investment.

Microsoft does not expect that the acquisition will be accretive until the fiscal year beginning 1 July 2014 (on a non-GAAP basis). The company estimates it will need to ship about 50 million units per year to achieve operating income breakeven, a volume that is about 40% more than the most recent run rate. Yet, the transaction does not affect Microsoft’s Aaa debt rating given its substantial cash resources. We expect that Microsoft will use a portion of its cash (which as of 30 June totaled about $77 billion, including $69.3

Roberto Pozzi Vice President - Senior Analyst +49.69.70730.719 roberto.pozzi@moodys.com

Richard Lane Senior Vice President +1.212.553.7863 richard.lane@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

billion held at foreign subsidiaries), and probably its non-US cash so the transaction would be a tax-effective use of those funds. Moreover, Microsoft has considerable cash-generating capacity. We expect that it will generate more free cash flow than the planned purchase price by the time the transaction closes.

Both Microsoft and Nokia missed the early market on smartphones. Microsoft had been partnering with Nokia, with Microsoft providing the operating system and Nokia the devices. However, it remains a distant third in mobile phone operating systems behind Android- and Apple-based phones, although it has made some slight gains, having passed Blackberry in operating system market share.

As a direct handset device manufacturer, Microsoft will need to balance its role as it continues to work with other partners running the Microsoft system on their devices, notably HTC and Samsung. Devices are not a Microsoft strength; its introduction of the Surface tablet has been a disappointment, and the company took an inventory write-down recently. Nonetheless, the Microsoft deal with Nokia highlights the market opportunity of smartphones and the importance of effectively and elegantly integrating hardware and software to provide a differentiated user experience. In addition, Microsoft may be able to use its new role as a smartphone maker to build tools to provide an integrated platform around its Windows8 operating system.

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Gazprom’s Agreement to Major Terms on China Pipeline Is Credit Positive Last Thursday, OJSC Gazprom (Baa1 stable) and China National Petroleum Corporation (CNPC, Aa3 stable) signed an agreement on the major terms of pipeline gas supply to China. Terms for the deal, which was initially announced in March, will pave the way for Gazprom to pursue its production growth plans, diversify sales channels away from Europe, and economically justify development of its own LNG capacity in the Far East.

The parties now have an understanding on the export volumes and starting date, take-or-pay conditions and the level of prepayments from the buyer (not yet disclosed). Gazprom expects to sign the final terms before year-end.

The agreement envisages annual offtake of 38 billion cubic meters (bcm) of gas over 30 years starting from 2017 via the Power of Siberia pipeline (POS, a Irkutsk region-Yakutia-Khabarovsk-Vladivostok gas trunkline), which has yet to be built. The preliminary investment cost of the project is estimated at $60 billion, but is subject to adjustments.

While the parties have agreed on volumes and the transportation route, price remains an issue. The newly reached agreements are not linked to the Henry Hub index price, a positive for Gazprom, which sells its gas near index prices domestically but seeks a premium for its Far East investment-intensive project. According to various media sources, officials at Gazprom and CNPC are discussing a compromise that would involve China making an upfront payment of $25-$30 billion, which would finance Gazprom’s ambitious Eastern Gas Programme interest-free, and allow the parties to close the pricing gap (which according to the same sources is currently $60-$70/bcm).

The deal would be beneficial for China, which currently imports 20 bcm of pipeline natural gas from Turkmenistan for approximately $10/million British thermal units (MMbtu) (with a view to potentially increase imports to 65 bcm), but remains largely dependent on liquefied natural gas (LNG) imports at $15-$18/MMbtu. A 38 bcm per annum (bcmpa) pipeline, potentially expandable to 60 bcmpa, would decrease China’s LNG imports as well the price premium it currently pays. For Gazprom, the project would provide sustainable long-term offtake and boost the development of its Eastern Siberia gas deposits. Gazprom’s contemplated 61 bcmpa and 4,000-kilometer-long POS project would not only service the Chinese supply contract, but will transport Eastern Siberian gas to the projected 15 million tonnes (mt) Vladivostok LNG plant. Located a little over 1,000 kilometres northwest of Tokyo, Japan, Vladivostok LNG together with Sakhalin-2 would be the nearest supplier to Japan and South Korea and will be able to efficiently compete with Qatari and Australian LNG producers.

Gazprom’s plan to increase its LNG output and to develop Eastern Siberia in conjunction with the Chinese supply agreement could be a step toward boosting Gazprom’s share in the global LNG output from the meager 5% it has now. It will also secure long-term offtake for 8%-10% of the company’s gas output, and eventually help to recover gas production to levels recorded in the middle of the last decade (approximately 550 bcmpa), which would be credit positive.

Julia Pribytkova Vice President - Senior Analyst +7.499.228.6071 julia.pribytkova@moodys.com

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

SKF’s Acquisition of Kaydon Is Credit Negative Last Thursday, Swedish bearing manufacturer SKF AB (A3 stable) announced it would acquire US-based manufacturing company Kaydon Corporation (unrated) for $1.15 billion. The deal is credit negative for SKF because it will materially increase SKF’s net debt leverage at least initially and possibly signals a change in the company’s financial policy.

SKF plans to complete the transaction via a cash tender offer of $35.50 a share, implying a 22% premium on last Wednesday’s closing price. Including Kaydon’s $95 million of net debt, the transaction pegs the company’s value at approximately $1.25 billion, or 12.7x EBITDA as per June 2013 and adjusted by the company for certain extraordinary effects.

Given that SKF will finance the transaction with a combination of debt and cash on hand without raising additional equity, SKF’s net debt (including our adjustments) will increase to SEK28.9 billion ($4.4 billion) from SEK20.3 billion as of June 2013. As a result, we expect leverage and cash flow coverage metrics to worsen, at least initially, with net debt leverage rising to around 3.0x from 2.3x currently.

Strategically, Kaydon would improve SKF’s global footprint, complement its product range and broaden its diversification of customer industries. The deal would add 19 manufacturing units, including 13 in the US, to SKF’s base of 140 manufacturing sites in 28 countries. Such an addition would limit the expense of setting up new plants in the US, which, in turn, would enhance SKF’s free cash flow generation. Kaydon has operations in friction control, velocity control and specialty products, a portfolio of established brands and a regional focus on North America, where it derives 62% of revenues. SKF plans to generate additional sales of $50 million and cost synergies of $30 million once it fully integrates Kaydon.

The deal, which the companies expect to close in the fourth quarter of this year and which has already won the approval of Kaydon’s management, is subject to customary terms and conditions and regulatory clearances.

Based in Gothenburg, Sweden, SKF is the leading supplier of roller bearings, seals, mechatronics (i.e., integration of mechanical and electronic engineering with software engineering), services and lubrication systems. In 2012, it generated sales of SEK64.6 billion. Ann Arbor, Michigan-based Kaydon manufactures bearings and other custom engineered products and in 2012 generated sales of $475 million and had EBITDA of $104 million, as adjusted by the company for certain extraordinary effects.

Oliver Giani Vice President - Senior Analyst +49.69.70730.722 oliver.giani@moodys.com

NEWS & ANALYSIS Credit implications of current events

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Phones 4U’s Sale of Its Mobile Phone Insurance Unit Is Credit Positive Last Thursday, Phones 4U (whose subsidiary Phones4u Finance plc we rate B2 stable) announced that it had agreed to sell its Lifestyle Services Group (LSG) division, a leading UK mobile phone insurance firm, to Assurant, Inc. (Baa2 stable) for up to £107 million, including £17 million of deferred consideration, subject to performance criteria. The acquisition is credit positive for Phones 4U because it will improve the company’s liquidity unless the cash proceeds are used to pay dividends.

Assurant is paying a price equal to 9.1x LSG’s EBITDA of £11.7 million for the 12 months ended 30 June, which will positively affect Phone 4U’s liquidity by raising the company cash reserves to around £170 million pro forma for the transaction.

It is unclear how Phones 4U and its sponsors will utilise the cash. If the company uses the sale proceeds to pay down debt, we estimate that it would reduce debt/EBITDA (as adjusted by us) to around 3.9x on a pro forma basis from 4.5x as of June 2013. Phones 4U is unlikely to consider redeeming all or part of its debt until after April 2014, when the redemption price falls to £104.75 from £109.50.

The company can distribute close to £70 million to shareholders as per the terms of its current debt documentation. Doing so, however, is unlikely to significantly affect the company’s credit profile on a standalone basis because liquidity is already supported by high cash reserves of £84.7 million and an undrawn £125 million revolving credit facility due 2017. Both were sufficient to meet the company’s needs over the next 12-18 months as of June 2013.

However, Phones 4U needs to maintain high levels of cash reserves in order to support growth in its mobile virtual network operator (MVNO) segment launched in March 2013. The MVNO segment will negatively affect the company’s credit metrics and cash in the short term because of differences in revenue recognition and working capital movements between its new MVNO and its core distribution segments.

In selling the LSG unit, Phones 4U is disposing of a non-core asset that in 2012 generated EBITDA of £7.6 million, or just 5.9% of Phone 4U’s overall EBITDA. LSG’s earnings and revenue historically have been more volatile than the company’s mobile phones segment. Its margins have been hurt by increases in claim volumes and the average cost of claims because the cost of replacing mobile phones rose sharply in 2011 and 2012. Although LSG’s 2012 EBITDA fell 16% from the 2011 level, performance in the first half of this year improved to £6.7 million from £1.9 million a year earlier.

Although LSG added revenue diversification to Phones 4U’s business model, the division posed regulatory and execution risk. Selling mobile phone insurance has become a complex business, and the majority of LSG’s services are sold through third parties such as banks as part of a package to add value to core products such as current accounts.

With its headquarters in Staffordshire, England, Phones 4U is a leading independent mobile phone retailer and insurance provider in the UK. The company has a network of 698 stores across the UK, 159 of which are concessions within large electrical retail stores.

Simon West Associate Analyst +44.20.7772.5479 simon.west@moodys.com

Margaux Pery Analyst +44.20.7772.5626 margaux.pery@moodys.com

NEWS & ANALYSIS Credit implications of current events

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PT Indofood’s Takeover Bid Is Credit Positive for China Minzhong Last Wednesday, Indonesia-based PT Indofood Sukses Makmur Tbk (unrated), said it had increased its stake in Singapore-based vegetable processor China Minzhong Food Corporation Ltd (Ba3 review for upgrade), to more than 50% from 33.4% via its takeover offer for all outstanding shares of China Minzhong at a price of SGD1.12 per share. We put China Minzhong’s Ba3 rating on review for upgrade in response to the announcement.

PT Indofood has become the single largest shareholder of China Minzhong, well ahead of Franklin Templeton’s 11.1% and management’s 8.02%. A large food production and packaging company with a stronger credit profile than China Minzhong, PT Indofood’s majority stake implies a degree of support for China Minzhong and will bolster its operations, finances and scale.

Operationally, the two companies can share best practices and operational expertise. From a financial perspective, PT Indofood can provide more direct support to fund China Minzhong’s industrialized farming strategy. China Minzhong budgeted RMB2 billion for total capital expenditures in 2013-14, and its earlier plan to raise funding via bond issuance did not materialize. A prospective increase in equity from PT Indofood will strengthen China Minzhong’s ability to invest in new industrialized plants.

Food safety and large-scale production are high on the Chinese government’s agenda, and it stated clearly in its 12th Five-Year Plan that it would encourage large-scale modern farming. The operational and financial leverage PT Indofood can lend to China Minzhong would make it one of the strong players in a highly fragmented industry. This would better position China Minzhong to benefit from preferential national policies.

China Minzhong’s share price fell last Monday after the shortseller Glaucus Research issued a report challenging the company’s accounting integrity. Allegations included the fabrication of customer relationships and related-party transactions. China Minzhong subsequently issued a full statement refuting all of the allegations, corroborated by customer certifications. PT Indofood’s bid for all the shares of China Minzhong followed on Wednesday.

Listed on the Singapore Stock Exchange in April 2010 and started as a collective enterprise specializing in dehydrated vegetables, China Minzhong Food Corporation Ltd has been operating its vegetable processing business for 40 years. It produces more than 100 types of processed vegetables for customers in 26 countries.

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

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Infrastructure

Alliant Agrees to Sell Minnesota Electric and Natural Gas Distribution Business, a Credit Positive On 3 September, Alliant Energy Corporation (Baa1 stable) announced agreements to sell the southern Minnesota electric and natural gas distribution business of its subsidiary Interstate Power and Light Company (IPL, A3 stable) for a total consideration of $128 million, subject to customary closing adjustments and pending regulatory approval.

The disposal, which the companies expect to complete in 2014, is credit positive for Alliant and IPL because the resulting reduction in IPL’s rate base (around $130 million) is not significant compared to its main operations in Iowa (rate base of around $2.6 billion) and management plans to use the proceeds to strengthen the group’s balance sheet.

The electric operations will be sold to Southern Minnesota Energy Cooperative (SMEC, unrated), which consists of 12 neighboring electric cooperatives, and the parties will also execute a 10-year wholesale agreement for IPL to supply power. The natural gas business will be sold to Minnesota Energy Resources Corporation (unrated), a subsidiary of Integrys Energy Group, Inc. (Baa1 stable).

Selling this portion of the business will help fund the group’s capex, allowing the utility to register credit metrics that are commensurate with the lower end of the A-rating category; specifically cash flow from operations pre-working capital (CFO pre-WC) to debt in the low 20% and CFO pre-WC interest coverage of 4x.

The acquisition is credit neutral for Integrys given the transaction’s small size and scope but it will somewhat strengthen its subsidiary’s operations in Minnesota, adding 10,600 accounts to its existing 214,000 customer base.

Lesley Ritter Analyst +1.212.553.1607 lesley.ritter@moodys.com

Natividad Martel Vice President - Senior Analyst +1.212.553.4561 natividad.martel@moodys.com

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Banks

US Crackdown on Consumer Disputes Is Credit Negative for Banks and Finance Companies Last Wednesday, the US Consumer Financial Protection Bureau (CFPB) issued a bulletin notifying firms that supply information to consumer credit bureaus of their responsibility to investigate consumer disputes forwarded by the credit bureaus. The CFPB bulletin is credit negative for US banks and finance companies, particularly those with substantial consumer lending operations, because such firms face additional compliance-related expenses and/or financial penalties.

The CFPB is ramping up pressure on so-called furnishers that supply information to consumer credit bureaus1 to comply with the provisions of the Fair Credit Reporting Act, particularly those regarding investigations of consumer disputes that the furnishers receive from the credit bureaus. Specifically, the bulletin notifies furnishers that their systems must be capable of receiving information (including documents submitted by consumers), investigating disputes, providing investigation results and correcting inaccurate information. The CFPB’s pressure seeks to improve the accuracy of credit reports, which have a significant influence on the financial affairs of US consumers.

The CFPB stated that if it determines that a furnisher has engaged in any acts or practices that violate the FCRA or other federal consumer financial laws, it will take appropriate supervisory and enforcement actions to address violations and seek all appropriate corrective measures, possibly including restitution to consumers. The CFPB also said it will continue to review furnishers’ compliance with these requirements.

Most affected by the CFPB’s bulletin are US banks and finance companies, particularly those with substantial credit card and other consumer lending operations. Such companies include the Big Six US credit card firms: American Express Company (A3 stable), Bank of America Corporation (Baa2 review direction uncertain), Capital One Financial Corporation (Baa1 stable), Citigroup, Inc. (Baa2 review direction uncertain), Discover Financial Services (Ba1 stable) and JPMorgan Chase & Co. (A2 review for downgrade). Consumer finance lenders Springleaf Finance Corporation (Caa1 positive) and Citigroup’s OneMain Financial (unrated) also face additional compliance-related expenses to ensure that their dispute-handling systems comply with the FCRA’s requirements.

The CFPB’s bulletin is just the latest in a series of actions aimed at preventing unfair and deceptive acts and practices by consumer lenders and servicers and ensuring that these firms comply with federal laws. Other recent actions have been directed at auto finance companies engaged in indirect auto lending (i.e., via dealers)2 and payday lenders.3

1 The largest of which are Equifax Information Services LLC, TransUnion LLC, and Experian Information Solutions, Inc. 2 See US Consumer Financial Protection Bureau’s Fair Lending Guidance Is Credit Negative for Auto Lenders, 25 March 2013. 3 See US Crackdown on Payday Lending Is Credit Positive for Targeted Banks, 29 April 2013.

Curt Beaudouin, CFA Vice President - Senior Credit Officer +1.212.553.1474 john.beaudouin@moodys.com

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Swiss Banks Benefit from US-Swiss Agreement on Tax Evasion Dispute On 29 August, the Swiss Federal Department of Finance and the US Department of Justice (DoJ) signed a joint statement4 defining a framework under which Swiss banks can cooperate with the DoJ in order to resolve discussions and/or settle claims of tax evasion related to US citizens. The framework supports a resolution of the US tax evasion probe and individual bank settlements, including fines to compensate for past misconduct, without violating Swiss banking secrecy laws. For Swiss banks, the joint statement is credit positive.

Although the terms, conditions, and in particular, potential fines remain subject to negotiations between the DoJ and each bank, the joint statement defines an important milestone to establish a solution for the tax evasion dispute.5

The agreement applies to all Swiss banks -- except those that are currently under DoJ investigation (so called category 1 banks) -- and offers voluntary participation in a unilateral US program. Full compliance with the program will make the participating banks eligible for either a non-prosecution agreement (NPA) or a non-target letter (NTL). The joint statement defines the framework for negotiations with the DoJ for banks in categories 2 to 4.

US-Swiss Categorization of Swiss Banks in Tax Dispute

Type of Bank Suggested Measure Penalty Document Aimed for from US Department of Justice Category

Banks under formal investigation by the DoJ (not part of 29 August agreement)

Negotiations with the DoJ on continued information exchange and fine

Individually negotiated Deferred prosecution agreement or Non-prosecution agreement

1

Banks that have reason to believe that they have committed tax-related offenses

Negotiations with the DoJ on information exchange and fine

20%-50% of affected assets

Non-prosecution agreement

2

Banks that have not committed any tax-related offenses

Verification and delivery of internal investigation by independent examiner

No fine Non-target letter 3

Banks with a local client base (in line with FATCA)

Verification by independent examiner

No fine Non-target letter 4

Source: Moody’s

Category 1 banks already under DoJ investigation include Credit Suisse AG (A1 stable, C-/baa1 stable),6 Bank Julius Baer & Co. AG (A1 negative, C+/a2 negative) and Zuercher Kantonalbank (Aaa stable, C+/a2 stable). These banks will continue to cooperate with the DoJ and will have to negotiate fines on an individual basis, seeking an NPA or a DPA with the DoJ.

Compliance with the NPA or non-target letter requirements and milestones will add administrative costs for all banks involved in the US tax dispute, but category 1 and 2 banks face additional and uncertain

4 See Joint Statement between the U.S. Department of Justice and the Swiss Federal Department of Finance, 29 August 2013. 5 See Swiss Rejection of Plan to Aid US Tax Evasion Probe is Credit Negative for Bank, 24 June 2013 and Switzerland Permits

Banks to Provide Leaver Lists to US Tax Authorities, a Credit Positive, 1 August 2013. 6 The bank ratings shown in this report are the banks’ deposit rating, their standalone bank financial strength ratings/baseline credit

assessment and the corresponding rating outlooks.

Michael Rohr Vice President - Senior Analyst +49.69.70730.901 michael.rohr@moodys.com

Mathias Kuelpmann, CFA Senior Vice President +49.69.70730.928 mathias.kuelpmann@moodys.com

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

penalty costs. We anticipate that the potential penalties will be significantly higher than fines negotiated on earlier settlements, which totalled 4% of undeclared assets for UBS AG (A2 stable, C-/baa2 stable) and 6% for Wegelin & Co. (unrated).

In addition, US authorities have substantial discretion in their negotiations with category 1 banks. For this group, we expect final penalties to depend on the estimated amount of undeclared assets (and resulting tax loss), the degree of cooperation with the US authorities, the severity of the offense and maybe the profitability of the business. We expect more severe treatment of banks that became host to US clients who shifted undeclared assets away from UBS AG in 2008, when US authorities prosecuted UBS.

While we expect Swiss banks that participate in the program to pay a high price relative to their limited engagement with US clients in the past, we note that the Swiss banks we rate display sound capitalization and enjoyed relatively stable profitability in the first half of this year as well as in 2012. Consequently, we do not expect claim settlements to jeopardize their credit profiles.

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Italy’s Financial Transaction Tax Is Credit Negative for Italian Banks On 2 September, Italy introduced a tax on equity derivatives and high-frequency equity trading (i.e., very rapid computerised trading using proprietary algorithms). The tax, which took effect upon its introduction last Monday, is credit negative for Italian banks because it taxes their profits without providing incentives to reduce risk-taking.

Italy is the first country in the world to introduce this type of tax, although similar taxes in the rest of the European Union (EU) are planned. Italy’s tax rate is 0.02% of the trade amount for high-frequency trading and fixed charges for equity derivatives, depending on the type of contract and notional amount. Deals executed off-exchange will be subject to a higher charge.

The tax will add another layer of cost (e.g., transaction costs and expenses for required monitoring and process adjustment) to banks’ trading operations and, by reducing volumes on the Italian stock market, will constrain revenues. In addition, it makes Italian banks less competitive than their foreign rivals because, although the tax applies regardless of where the transaction is executed or the counterparty’s country of domicile, Italian authorities will have difficulty imposing the tax on foreign banks outside of Italy. The tax could also discourage equity risk hedging, which often uses equity derivatives. Additionally, if Italy’s banks try to avoid or minimise tax payments by using their international networks to move or restructure activities affected by the new legislation it would paradoxically add risk management challenges, a further credit negative. The tax follows France and the UK imposing taxes on cash equity trades in March 2013.

We expect the effects of the tax to be small because equity trading (both proprietary and client-driven) is a small contributor to Italian banks’ revenues; the only significant trading by Italian banks is of government bonds, which are exempt from the tax. The effect of the tax is also minimised by banks’ ability to pass part of the cost on to clients and market-makers’ exemption from it.

We estimate the tax’s effect on Banca IMI Spa (Baa2 negative, D+/baa3 negative),7 the corporate and investment bank of Intesa Sanpaolo Spa (Baa2 negative, D+/baa3 negative), will be less than €10 million, compared with a €643 million profit in 2012. Banco Popolare Societa Cooperativa (Ba3 negative, E+/b3 negative), through its subsidiary Banca Aletti (unrated) is another Italian bank active in the equity market that could be marginally affected.

Imposing a tax on financial transactions has been under consideration among EU member states since 2011, but none has implemented a measure like Italy’s before now. When all EU member countries uniformly apply a tax like Italy’s to a broader range of financial transactions, it would reduce some types of risky trading that threaten banks’ risk profiles. However, given that only Italy has implemented this tax, it is unlikely that risky proprietary trading will decline.

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

assessments and the corresponding rating outlooks.

London +44.20.7772.5454

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Credit Agricole’s Disposal of Its Bankinter Stake Is Credit Positive Last Wednesday, Crédit Agricole S.A. (CASA, A2 stable, D/ba2 stable; baa2 adjusted BCA)8 completed a private placement to institutional investors to sell its remaining 7.6% stake in Spain’s Bankinter S.A. (Ba1 negative, D+/ba1 negative) and recorded a net capital gain of €106 million. The stake sale and reduced exposure to euro-area peripheral countries is credit positive for CASA.

This asset disposal follows CASA’s sale of its Emporiki Bank (unrated) stake in February, which reduced CASA’s gross exposure to Greece to a $1.4 billion shipping portfolio and €150 million of convertible bonds (as of the transaction close) from €22 billion of loans and €5 billion of equity and net refinancing (as of end-June 2012).

Despite these sales, CASA and its parent Groupe Credit Agricole (GCA, unrated) still have significant, although decreasing residual exposures to Italy that continue to present a major credit risk, as well as exposures to Greece, Ireland and Portugal, as shown in the exhibit below.

Groupe Credit Agricole’s Exposure to Euro-Area Peripheral Countries

Notes: Sovereign exposures are banking book only (insurance not included). *Second-quarter 2012 exposures to Greece include Emporiki, which was deconsolidated in the third quarter of 2012 and its sale was finalised in the first quarter of this year. Source: Company data.

GCA’s credit exposure to Italy is large: net loans were €59 billion at the end of June. GCA maintains a significant presence in the Italian retail and corporate markets and in consumer finance, mainly through its subsidiaries Cassa Di Risparmio Di Parma E Piacenza S.P.A. (Cariparma, Baa2 negative, C-/baa2 negative) and Agos Ducato (unrated). At end-June, GCA reported net loans of €38 billion to retail customers and €18 billion to corporate clients. GCA’s credit profile in Italy through its subsidiaries is weak, but better than the system average: nonperforming loans at Cariparma were 9.6% of all loans at end-June; and at its consumer finance unit Agos Ducato, nonperforming loans stood at 13.5% of all loans at year-end 2012. We expect asset quality in Italy to continue to deteriorate in coming quarters because of the weak economy. GCA’s net sovereign exposure to Italy was €4.8 billion at end-June.

GCA reported €7.1 billion net loans in Spain at end-June, of which €1.5 billion were to retail customers and €4.8 billion were to corporates. GCA operates in Spain mainly through Crédit Agricole Corporate and

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

assessment and the corresponding rating outlooks.

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

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Investment Bank (A2 stable, D-/ba3 stable) and through its subsidiary Bankoa (Ba1 negative, D-/ba3 negative), which recorded €1.4 billion customer loans at end-2012. GCA’s €270 million net exposure to Spanish sovereign debt is less material and was managed down from €1.8 billion at end-June 2011.

CASA’s baa2 adjusted baseline credit assessment takes into account its significant exposures to pressured European markets, in particular Italy, that convey considerable tail risk. We estimate GCA’s loans and sovereign euro-peripheral exposures equaled 131% of its Tier1 capital at end-June 2013. Longer term, the bank’s strategy to reduce these exposures could benefit its overall risk profile and reduce this tail risk.

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Austria’s Banks Benefit from Reduced Foreign Currency Loan Volumes Last Monday, Austria’s Financial Market Authority (FMA) published its second-quarter lending survey, which shows that foreign currency (FX) loan volume to private borrowers fell below €30 billion for the first time since 2005. Year on year, FX loan volume fell by €5.3 billion or 15.4%. Adjusted for exchange rate movements,9 FX loan volume is down €17 billion or 37% since its peak in 2008 and now accounts for 22% of the volume of outstanding loans to local households down from 31% in 2008. The decline in FX loan exposure is credit positive for Austria’s banks.

FX loan exposure is a concern for Austria’s banking system and led the FMA in 2008 to advise the country’s banks to stop new FX lending to private households. Prior to 2008, a significant part of mortgage loans in Austria were denominated in foreign currencies, mainly Swiss francs, which still account for 94.5% of FX loans. Since the beginning of 2008, the Swiss franc has appreciated by 34.1% against the euro, which will require borrowers to pay back significantly higher euro amounts than when they received the loans.

Foreign Currency Loans to Austrian Private Households (HH) and Non-Financial Companies (NFC)

Note: Unadjusted for foreign exchange effects, on a foreign currency-adjusted basis the volume of foreign currency loans has fallen by €17 billion or 37% since 2008. Source: Oesterreichische Nationalbank

According to FMA data, at year-end 2012, about three quarters of FX loans were bullet loans involving repayment vehicles, such as capital-based insurance contracts used to accumulate capital to repay the bullet payment at the end of the contract. According to a 2011 FMA survey, the repayment vehicles revealed a coverage shortfall of €5.3 billion. Although updated data is not available, we expect this shortfall to have stabilised in the meantime, particularly given that in September 2011, the Swiss National Bank pegged the Swiss franc (CHF) to the euro at an exchange rate of 1.2 CHF/EUR. We expect Austrian banks and their customers will find solutions to the shortfall and banks will be able to absorb the remaining potential losses.

Nevertheless, Austrian banks remain exposed to risks from foreign currency lending owing to their extensive activities in Central Eastern Europe (CEE). Foreign currency lending in CEE also includes lending in euros to the extent that countries have a different local currency. FX lending increases the counterparty risk to the extent that the borrower relies on income streams in local currency to repay the loan. At year-end 2012, direct cross-border foreign currency loans granted to borrowers in CEE accounted for €37.7 billion (down 2.1% year on year). In addition, the total volume of FX lending by the Austrian top six credit institutions 9 Changes in FX loan volumes referred to in this article are all adjusted for FX movements. This accounts for effect the FX

movement would have had on the outstanding loan volume without any repayment.

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Loans to HH - CHF Loans to HH - Other Currencies Loans to NFC - CHF Loans to NFC - Other Currencies

2008 2009 2010 2011 2012 Q213

Mathias Kuelpmann, CFA Senior Vice President +49.69.70730.928 mathias.kuelpmann@moodys.com

Mira Carey Associate Analyst +49.69.70730.755 mira.carey@moodys.com

NEWS & ANALYSIS Credit implications of current events

21 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

through their subsidiaries in CEE accounted for €79 billion (down 5.4% year on year) accounting for 43.6% of their loan book. More than half of this volume was denominated in euros. Swiss Franc and US dollar-denominated loans accounted for 18.1%.

Since 2008, Austria’s central bank, Oesterreichische Nationalbank, and the FMA have taken various measures to curb Austrian banks’ foreign currency lending by imposing more stringent regulation and stricter criteria on the banks. This regulation refers to both FX lending domestically and in CEE. No measures have been taken so far to address the problem of euro mortgage loans, given that local capital markets in CEE are at an early stage of development and local currency funding is unavailable. Bank funding has to rely on the euro-denominated covered bond market. This exposure is likely to remain given that capital markets in CEE are still at an early stage.

NEWS & ANALYSIS Credit implications of current events

22 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Banks Serving Russia’s Flooded Far East Will See Rising Credit Losses and Falling Business Last Tuesday, Russia’s Deputy Prime Minister and presidential envoy to the Far Eastern Federal District Yuri Trutnev said that almost 100 thousand people are directly affected by the ongoing flooding in the Russian Far East. Mr. Trutnev estimated that flood-related damages would exceed $1 billion. The prolonged flooding is credit negative for banks operating in this region because it will lead to increased credit losses for lenders and reduce their business activity.

The flooding mostly hit rural areas, causing severe damages to uninsured residential and commercial property, agricultural lands and the crops. Thousands of people have evacuated from the flooded areas and damaged infrastructure has disrupted business. We also expect increased delinquencies in retail loans because ongoing flooding will likely weaken retail borrowers’ payment discipline.

Banks actively operating in the region -- after officials urged them to do so -- have said they’ll consider working with borrowers who suffered from the floods to restructure their debts, or arrange for a payment moratorium. These banks are Sberbank (Baa1 stable, D+/ba1 stable),10 Russian Agricultural Bank (Baa3 stable, E+/b3 stable), Asian - Pacific Bank (B2 stable, E+/b2 stable), Vostochny Express Bank (B1 stable, E+/b1 stable), Home Credit & Finance Bank (Ba3 stable, D-/ba3 stable) and Nomos Bank (Ba3 stable, D-/ba3 stable).

According to the Central Bank of Russia, around 2,000 banking offices (including branches, outlets and points of sales) operate in the Far Eastern Federal District representing 22 small and mid-size regional banks and a number of large federal banks. We expect smaller regional banks with a high concentration of business in the region will face more problems than large federal banks, which benefit from diversified franchises and see less effect from the flood.

10 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.

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

NEWS & ANALYSIS Credit implications of current events

23 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Pakistani Banks Will Take a Hit from Flood-Damaged Agricultural Sector On 1 September, the Pakistan’s National Disaster Management Authority (NDMA) reported that 1.24 million acres of land were damaged from floods. In addition to the tragic loss of lives, Pakistani officials estimate losses to the country’s agriculture economy at approximately PKR200 billion ($1.9 billion) or 0.8% of GDP. The hit to agriculture is credit negative for Pakistani banks.

The floods will reduce harvests, negatively affecting farmers’ revenues, which will increase the banks’ already high levels of nonperforming agricultural loans.11 Banks will be compelled to increase provisions, which will reduce their profitability.

Among rated banks, we expect the largest effect on United Bank Ltd (Caa2 negative, E/caa1 stable),12 which has the highest exposure to the agriculture sector at 12.3% of the bank’s total loan book. Habib Bank Ltd (Caa2 negative, E/caa1 stable) and National Bank of Pakistan (Caa2 negative, E/caa1 stable) will be less affected as their exposures are smaller at 5.6% and 4.7% of total loan books, respectively. We expect that the effect will be negligible for MCB Bank Limited (Caa2 negative, E/caa1 stable) and Allied Bank Limited (Caa2 negative, E/caa1 stable), which have less than 1% exposure to the agriculture sector.

With a systemwide 11.6% NPL ratio among agribusiness loans, asset quality in the agriculture business is already weak. We expect that the floods and farmers’ reduced capacity to repay loans will significantly affect banks’ asset quality because agriculture loans accounted for 9% of total system loans as of 30 June, according to the State Bank of Pakistan data. An increase in nonperforming agricultural loans will increase banks’ total NPL levels, which stood at 14.8% as of 30 June.

Additionally, rising provision costs will exacerbate the banks’ declining profitability, as net interest margins (NIMs) have already weakened despite rising yields on government securities that account for around half of the interest earned in the first half of the year. Net income declined by 14% year on year in the first half of this year, as net interest income stood at 3.2% of total assets, down from 3.5% in first-half 2012.

Pakistan’s Agribusiness Loans and Nonperforming Loans

Source: State Bank of Pakistan

11 Widespread floods in July 2010 increased agribusiness NPLs in the three months from December 2010 to March 2011 by 5.6

percentage points to 12.2%. 12 The bank ratings shown in this report are the bank’s foreign currency deposit rating, its standalone bank financial strength

rating/baseline credit assessment and the corresponding rating outlooks.

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Ilias Avgeris, CFA Associate Analyst +357.25.693.002 ilias.avgeris@moodys.com

Melina Skouridou, CFA Analyst +357.25.693.021 melina.skouridou@moodys.com

NEWS & ANALYSIS Credit implications of current events

24 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

We expect that reduced agriculture revenues will inevitably have negative effects on other related sectors of the economy, such as food products because of a raw materials shortage and resulting higher prices. Lower profitability on the food products sector and declining disposable income on the retail sector will hurt those segments of the banks’ loan portfolios (11% and 9% of the banks’ total loan books respectively), adding to the negative pressures on the banks’ asset quality and profitability.

NEWS & ANALYSIS Credit implications of current events

25 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Insurers

Fidelity & Guaranty Life’s Plan to Raise Equity Is Credit Positive On 29 August, Fidelity & Guaranty Life (FGL, unrated, formerly Harbinger F&G, LLC) filed a Form S-1 to raise at least $100 million of equity in a primary public offering. FGL is the parent of Fidelity & Guaranty Life Holdings, Inc. (B1 positive), which is the parent of Fidelity & Guaranty Life Insurance Company (FGLIC, financial strength Ba1 positive).

The equity offering is credit positive because it establishes a public equity market for FGL and reduces capital dependence on its parent, the Harbinger Group, Inc. (B2 stable), which acquired FGLIC from Old Mutual plc (Baa2, negative) for approximately $350 million less than three years ago.

We expect the majority of the public offering proceeds will be used to either support organic growth or to finance in-market acquisitions, a credit positive. However, FGL also plans to use a portion of the proceeds to pay a dividend to Harbinger, which dampens the benefits of the equity offering. The offering plan indicates that Harbinger will retain a majority stake in FGL.

FGL’s access to the prospective equity offering proceeds, along with the bulk of a $300 million March 2013 debt issue by Fidelity & Guaranty Life Holdings, Inc. should afford FGL ample capital to grow organically or consider opportunistic acquisitions.

Substantial or rapid growth presents risks relating to competitive pricing and/or overly aggressive product features of FGLIC’s substantial fixed-indexed annuities business, which could weaken the company’s credit quality. FGLIC’s sales are predominately fixed-indexed annuities sold to the middle-income market through independent marketing organizations. Consumer appetite for the products has grown over the past three years, particularly as a share of the total fixed annuity market (see exhibit).

Ann G. Perry Vice President - Senior Credit Officer +1.212.553.4607 ann.perry@moodys.com

NEWS & ANALYSIS Credit implications of current events

26 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Individual Fixed-Index Annuity Net Premiums, $ Millions

Net Premiums

Rank Entity Name 2012 2011 2010

1 Allianz Group $5,394 $6,310 $6,855

2 Guggenheim Capital LLC 4,232 1,718 711

3 Aviva Plc 4,035 4,371 5,145

4 American Equity Investment 3,333 4,113 3,720

5 American Financial Group Inc. 2,042 1,860 862

6 Sammons Enterprises Inc. 1,987 2,209 1,889

7 Jackson National Life Group 1,534 1,610 1,479

8 Lincoln National Corp. 1,337 1,494 2,026

9 ING Groep N.V. 1,167 1,433 1,818

10 National Life Group 908 796 995

11 Phoenix Companies Inc. 741 889 192

12 Pacific MHC 670 7 0

13 National Western Life 664 811 902

14 Forethought Financial Grp Inc. 634 427 405

15 Fidelity & Guaranty Life Group 619 752 714

Total Industry $32,764 $31,864 $30,758

Fixed Index Annuity % All Fixed Annuity Net Premium 54% 40% 42%

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

The fixed-indexed annuity marketplace has experienced changes in the competitive landscape over the last few years with several sizeable acquisitions by alternative investment managers including Guggenheim Partners’ purchase of Security Benefit Life Insurance Company and the pending acquisition of Aviva Life and Annuity by Athene Holding, Ltd.

NEWS & ANALYSIS Credit implications of current events

27 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Reduction in Insurance Premium Tax Deduction Is Credit Negative for Italian Insurers On 31 August, the Italian government passed a decree that significantly reduces the tax deductibility of life and accident insurance premiums and affects both new and existing policies. Reducing the tax benefits of life and accident policies is credit negative for Italian insurers because it will reduce sales from what they otherwise would have been and increase lapses on policies already written.

In 2012, 6 million Italians benefited from the tax deductibility of insurance premiums, with around €4 billion of insurance premiums, or approximately 5% of all life and accident premiums, classified as tax deductable. The decree will more than halve the maximum tax-deductible amount for life and accident policies to €630 in 2013 from €1,291, and further reduce it to €230 per year beginning in 2014.

Sales of life premiums in Italy have been declining for a few years and have declined by more than 20% from their peak in 2010 and are now at 2006 levels. The accident line is one of the most profitable in the Italian P&C market, with a combined ratio13 of 80% in 2012, and although it accounted for 8% of all P&C premiums in 2012, the segment constituted 17% of overall P&C insurance underwriting profit.

More importantly, the decree also affects policies sold in previous years, which increases the risk that clients will let existing policies lapse. However, mitigating this risk is the associated surrender charges that reduce the value of a policy when redeeming before maturity.

In the past few years, the Italian government has put pressure on insurers either directly by increasing their tax burden, or indirectly by reducing the tax benefits of its products, such as increasing the regional tax on productive activities (IRAP) for insurers in 2011 and taxing life reserves in 2010.

Exhibits 1 and 2 list the largest insurers operating in the Italian life and accident lines, the most likely to be affected by this change.

EXHIBIT 1

Italy’s Largest Life Insurance Writers in 2012 Rank Gross Written Premiums € billions Insurers Insurance Financial Strength Ratings

1 €12.4 Generali Baa1 negative

2 10.5 Poste Vita Unrated

3 7.8 Mediolanum Vita Unrated

4 5.4 Unipol Baa2 negative

5 5.1 Intesa Sanpaolo Vita Unrated

6 5.0 Allianz Italia A3 negative

7 4.8 Fideuram Vita Unrated

8 2.8 Cardif Unrated

9 2.4 Aviva Italia Unrated

10 1.8 Cattolica A2 stable

Source: Istituto per la Vigilanza sulle Assicurazioni (IVASS)

13 The ratio between the amount that an insurance company has to pay out in expenses and in claims as percentage of the amount of

money that it receives from customers in premiums.

Antonello Aquino Senior Vice President +44.20.7772.1582 antonello.aquino@moodys.com

NEWS & ANALYSIS Credit implications of current events

28 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

EXHIBIT 2

Italy’s Largest Accident Insurance Writers in 2012 Rank Gross Written Premiums € millions Insurers Insurance Financial Strength Ratings

1 €774 Generali Baa1 negative

2 773 Unipol Baa2 negative

3 327 Allianz Italia A3 negative

4 136 Reale Mutua Unrated

5 125 Cattolica Unrated

6 120 AXA Italia Unrated

7 101 Groupama Unrated

8 60 Vittoria Unrated

9 54 Helvetia Unrated

10 54 Banca Carige Unrated

Source: Istituto per la Vigilanza sulle Assicurazioni

NEWS & ANALYSIS Credit implications of current events

29 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Poland’s Proposed Pension System Changes Are Credit Negative for Insurers Last Wednesday, the Government of Poland (A2 stable) proposed changing the country’s pension system, including transferring private pension fund portfolios invested in government bonds to the public social security system, Zakład Ubezpieczeń Społecznych (ZUS). The government will also give workers the option to continue contributing a portion of their salaries to privately run funds or switch to ZUS. Monthly contributions to ZUS would be treated as revenue to Poland while future pension payout obligations would be ignored under Eurostat reporting.

The changes are credit negative for insurance companies managing private pension funds because the funds’ assets and liabilities will shrink by around 40%, thereby hurting profitability, and will limit insurers’ ability to attract new business. The proposed measures will be submitted to parliament for approval and we expect them to take effect by mid-2014.

As of 31 July, private pension funds held PLN281 billion ($86.8 billion or 17.2% of GDP) in assets, including PLN121.2 billion in government bonds and PLN111.4 billion in equities. Initially, a 7.3% deduction from individual employees’ salaries funded private pension funds, but that deduction fell to 2.3% in May 2011 and rose to 2.8% this year (see Exhibit 1). The current 16.2 million members of the private pension fund system will have three months to decide whether to opt into the public scheme, for which the mandatory contribution is 19.52% of salaries. If they decide to remain with private pension fund system, their contributions will be frozen at 2.92%.

EXHIBIT 1

Polish Employees’ Mandatory Contributions to the Pension System as a Percent of Salary

Source: Zakład Ubezpieczeń Społecznych

A transfer of more than 40% of private pension funds’ assets and liabilities will hurt insurers’ profitability because a reduction in the amount of funds the insurers manage will result in a decline in management fee income. Furthermore, these measures will leave insurers with funds’ assets mainly composed of equity investments (see Exhibit 2), implying potentially more volatile fund values and income streams.

19.52%

7.3%

2.3% 2.3% 2.8% 2.92%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2009 2010 May-11 2012 2013 2014 and After

Mandatory Pension Contribution Of Which to Private Pension Funds

Jaime Reusche Assistant Vice President - Analyst +1.212.553.0358 jaime.reusche@moodys.com

Nadine Abaza Associate Analyst +44.20.7772.1541 nadine.abaza@moodys.com

NEWS & ANALYSIS Credit implications of current events

30 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

EXHIBIT 2

Poland’s Private Pension Fund Providers’ Asset Allocation as of July 2013

Source: Polish Financial Supervision Authority

Moreover, freezing worker contributions to private pension funds to 2.92% of salaries significantly limits insurers’ ability to generate new business. In 2011, contributions to private pension funds totaled PLN15 billion. Following implementation of these new measures, we expect insurers offering private pension funds to offset the loss of this business by directing customers to voluntary retirement savings accounts and life insurance.

Exhibit 3 lists the top private pension providers in Poland, based on market share.

EXHIBIT 3

Poland’s Top Private Pension Fund Providers by Total Assets as of July 2013 Pension Fund Provider Share of Total Assets

ING Verzekeringen N.V. (Baa2 developing) 25%

Aviva Plc ((P)A3 stable) 22%

PZU (unrated) 13%

AXA (A2 negative) 6%

Assicurazioni Generali S.p.A (Baa1 negative) 5%

AEGON N.V. (A3 stable) 4%

Allianz SE (Aa3 negative) 3%

Source: Polish Financial Supervision Authority

Equities39%

Other debt11%

Bank deposits7%

T-bills43%

NEWS & ANALYSIS Credit implications of current events

31 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Managed Investments

European Commission Proposals Are Credit Negative for Money Market Fund Managers Last Thursday, the European Commission (EC) published proposals to reduce the systemic risk posed by European money market funds (MMFs). The proposals, affecting nearly €1 trillion in investor assets, dictate strict investment and liquidity rules and require constant net asset value (CNAV) MMFs to hold a 3% capital buffer. Although these measures would make MMFs more creditworthy, they are credit negative for MMF managers if, as we expect, they reduce CNAV funds’ attractiveness and cause investors to move their monies to other products.14

The rules will apply to all MMFs domiciled, managed or marketed in the European Union (EU). The proposal requires MMFs to hold at least 10% of their assets under management (AUM) in instruments that mature daily and 20% that mature within a week. This requirement is intended to make MMFs more resilient and less vulnerable to runs, such as those that occurred in the 2008 financial crisis.

The measures are intended to work with “know your customer procedures,” stress-testing processes, restrictions on eligible assets (e.g., very limited options to invest in asset-backed commercial paper) and diversification rules (e.g., maximum 5% of fund AUM per security and 10% per obligor). MMF asset managers will also be required to conduct internal credit risk assessments and expand certain public disclosures, for example, on any document used for marketing purposes.

Under the proposal, CNAV MMFs will need a NAV buffer amounting to 3% of their assets. The buffer, kept in a reserve account and segregated for the fund’s sole usage, would cover any difference between the fund’s constant unit price and its market value. While the capital buffer serves as first-loss protection for MMF investors, CNAV asset managers will incur capital costs, further challenging a business that currently earns less than 10 basis points (bp) on managed assets. According to the Institutional Money Market Fund Association, for managers to earn a sufficient rate of return on capital and continue to offer CNAV MMFs, they would have to increase MMF fees by at least 30 bp. If the capital buffer costs were passed through to investors in the form of additional fees (or lower yields), investors will likely move their money into a more competitive alternative money market investment.

Managers could respond by replacing their CNAV MMFs with variable net asset value (VNAV) MMFs. However, VNAV MMFs are likely to be less attractive to institutional investors for tax and accounting reasons. Earlier this year, Treasury Strategies, a global treasury and liquidity management consulting firm, published a survey indicating that 69% of European investors that currently use only CNAV MMFs would either reduce or entirely stop investing in MMFs if the CNAV framework disappeared. Therefore, even if CNAV funds were to be transformed into VNAV MMFs, it is likely that the existing AUM in MMFs would decline, a credit negative for European CNAV MMF managers.

As shown in the following exhibits for euro-denominated rated CNAV MMFs,15 rated MMF portfolios are largely consistent with the proposed new investment requirements in terms of 1) overnight liquidity (over 30% of AUM as of end of second quarter 2013 – see Exhibit 1), 2) top three obligor concentration ratio

14 See Money Market Funds and Regulatory Reform: A Business Model Hangs in the Balance, 13 May 2013. 15 See Euro Prime Money Market Funds Q2 2013: Credit and Market Risk Profiles Stabilise; AUM Drops 12%, 29 July 2013.

Marina Cremonese Assistant Vice President - Analyst +44.20.7772.8621 marina.cremonese@moodys.com

Vanessa Robert Vice President - Senior Credit Officer +33.1.5330.1023 vanessa.robert@moodys.com

NEWS & ANALYSIS Credit implications of current events

32 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

(20.6% of AUM on average – see Exhibit 2), and 3) weighted average maturity average of 43 days (see Exhibit 3). An exception is their ABCP exposure (8.7% over the last 12 months – see Exhibit 4).

EXHIBIT 1

Euro-Denominated Prime Money Market Funds – Overnight Liquidity Trend

Note: We define liquidity as securities maturing overnight, cash, and Aaa- and high Aa-rated government securities maturing within 18 months as a percentage of AUM. Source: Moody’s

EXHIBIT 2

Euro-Denominated Prime Money Market Funds - Top Three Obligor Concentrations

Note: Obligor Concentration captures the degree of asset concentration in the MMF portfolio. It is measured by taking the top three group exposures in the portfolio as a percentage of AUM. We exclude several categories of assets with minimal risk such as Aaa- and high Aa-rated sovereigns, supranationals, and government agency securities as well as traditional overnight repos collateralized by Aaa- and high Aa-rated sovereigns. Source: Moody’s

0%5%

10%15%20%25%30%35%40%45%50%

Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13

MMFs in third quartile MMFs in second quartile

Average Median

Minimum Proposed Regulatory Requirement

10%

15%

20%

25%

30%

35%

Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13

MMFs in second quartile MMFs in third quartile

Average Median

Maximum proposed regulatory requirement

NEWS & ANALYSIS Credit implications of current events

33 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

EXHIBIT 3

Euro-Denominated Prime Money Market Funds - Maturity Buckets and WAM Trend

Source: Moody’s

EXHIBIT 4

Euro-Denominated Prime Money Market Funds - Asset Profile

Source: Moody’s

The proposed reforms will need to be agreed with the European Council and Parliament, a process unlikely to be completed before 2014 May’s European elections.

30

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100%

Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13

WAM

in D

ays

0-7 days 8-15 days

16-30 days 31-90 days

91-180 days 181-397 days

WAM in days WAM Maximum Regulatory Requirement

0%

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50%

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70%

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90%

100%

Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13

Time Deposits CDs Commercial Paper Government & Gov Agencies

Corporate Bonds ABCP Repurchase Agreements Other

NEWS & ANALYSIS Credit implications of current events

34 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Asset Managers’ Weak Operational Controls Are Credit Negative Last Tuesday, the UK Financial Conduct Authority16 (FCA) fined Aberdeen Asset Managers Limited (unrated) and Aberdeen Fund Management Limited (unrated) a combined £7.2 million for failing to segregate institutional investors’ money from their own over a three-year period ended in August 2011. This is the latest example of UK regulators imposing fines on asset managers owing to operational irregularities that result in the violation of regulatory standards. Such violations are credit negative because they point to asset managers’ persistently weak operational controls and have detrimental effects on investors’ confidence.

Aberdeen Asset Managers Limited and Aberdeen Fund Management Limited each breached the FCA’s rules requiring asset managers to identify and properly protect investor money placed in money market deposits17 with third-party banks. The average sum of money deposited each day was £685 million. Although no client money was lost as a result of the error, investor funds would have been at risk of sustaining a loss had these firms become insolvent between September 2008 and August 2011. The Aberdeen entities failed to obtain the correct documentation from third-party banks when setting up the affected accounts, and used inconsistent naming conventions when setting up the accounts, thereby creating uncertainty over the accounts’ ownership. This operation control failure put unsegregated client monies at risk of getting caught up in the estate of the asset manager.

The Aberdeen fine is part of a larger crackdown by the UK regulator, which has become more vigilant in protecting investor money since the collapse of Lehman Brothers in 2008. In that case, a failure to correctly segregate client assets resulted in a shortfall of more than $1 billion in client money at Lehman Brothers International Europe. Several other asset managers have been subject to similar fines in recent years. J.P. Morgan Securities plc (Aa3 stable)18 was fined £33.3 million in June 2010 for commingling client funds and BlackRock, Inc. (A1 stable) was fined £9.5 million last year for failing to protect a daily average of £1.36 billion of client money held with third parties during 2006-10. Barclays Capital Securities Limited (unrated) and Integrated Financial Arrangements (unrated) were penalized £1.12 million and £3.5 million, respectively, for similar breaches in 2011.

In response to the sustained operational weakness among asset managers regarding safeguarding investor assets, the FCA this year introduced a new penalty regime19 for breaches of client asset rules that results in increased financial penalties. The regulator also published a consultation paper in July setting out proposals to strengthen the client asset regime applicable to about 1,500 regulated firms that safeguard and administer assets and/or hold client money. The proposals include measures to facilitate faster and greater return of client assets, reducing the effect on consumers and on the market if a firm becomes insolvent. We expect the final rules to be published in the first half of 2014.

16 The Financial Conduct Authority is one of the successors to the Financial Services Authority. Launched 1April, its mission is to

regulate the UK retail and wholesale financial services firms. 17 When clients have large cash balances in their portfolios, asset manager may place the client’s cash in MMDs to generate a higher

return. 18 At the time of the fine, this firm’s name was JPMorgan Securities Ltd. 19 The new penalty regime is calculated as a percentage of average client money and client safe custody asset balances. Go here for

more information.

Marina Cremonese Assistant Vice President - Analyst +44.20.7772.8621 marina.cremonese@moodys.com

Vanessa Robert Vice President - Senior Credit Officer +33.1.5330.1023 vanessa.robert@moodys.com

NEWS & ANALYSIS Credit implications of current events

35 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Sovereigns

Cyprus’ Liquidity Benefits from Russian Loan Restructuring, but Re-Default Remains Probable On 30 August, the government of the Russian Federation (Baa1 stable) approved the restructure of its €2.5 billion loan to Cyprus (Caa3 negative), which it made in December 2011. The restructured loan reduces the interest rate and extends the maturity date, easing the government’s liquidity needs in 2016. However, Cyprus’ very substantial economic and financial challenges threaten public finances sustainability and may necessitate further debt restructurings.

Under the newly agreed terms, the original 2016 bullet repayment (see Exhibit 1) will be rescheduled into eight equal semi-annual instalments beginning in 2016, and the interest rate will be reduced to 2.5% from 4.5% until 2016.

EXHIBIT 1

Cyprus’ General Government Debt Maturity Schedule, as of July 2013

Source: Cyprus Debt Management Office and Moody’s

The Russian government’s loan restructuring agreement moves Cyprus closer to meeting the burden-sharing measures mandated in the adjustment programme underlying the European Commission, European Central Bank and International Monetary Fund (i.e., the Troika) bailout.

The Russian loan amendments will have only a very limited effect on the government’s deficits over the Troika’s programme period (2013-16). We estimate the resulting reduction in interest expenses at less than 1% of 2012 GDP over 2013-16. Nonetheless, the amendments substantially reduce financing needs in 2016 by extending the maturity profile of Cyprus’ public debt shortly after the end of the Troika’s programme, which further alleviates the risk of a liquidity shortage in that year. The change in the redemption schedule, however, appears to be less favourable than originally envisaged under the Troika’s adjustment programme, which assumed the repayments would take place later, during 2018-22.

€0.0

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€2.0

€2.5

€3.0

€3.5

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029+

€Bi

llion

s

Before Russian Debt Restructuring After Russian Debt Restructuring

Daniel Marty Associate Analyst +44.20.7772.1429 daniel.marty@moodys.com

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

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

NEWS & ANALYSIS Credit implications of current events

36 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Additionally, as was the case for the debt exchange completed by the Cypriot authorities on 1 July,20 the absence of significant debt relief from Russia leaves the Cyprus government debt trajectory broadly unchanged. As a result, we still project debt to GDP will peak at around 140% in 2016, two years later and 15 percentage points higher than the programme anticipates (see Exhibit 2).

EXHIBIT 2

Cyprus’ Public Finance Trajectory, as Percent of GDP

Sources: Cyprus Debt Management Office, Eurostat and Moody’s

We expect Cyprus’ economy to contract in the low double digits in real terms this year and the recession to continue until 2015 and have a limited expectation that offshore gas fields will contribute to growth. This leaves Cyprus government debt susceptible to major restructurings over the coming years.

20 See Moody’s Says Cypriot Debt Exchange Amounts to a Default, 1 July 2013.

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2010 2011 2012 2013F 2014F 2015F 2016F

Total Expenditures - left axis Total Revenues - left axis Debt - right axis

NEWS & ANALYSIS Credit implications of current events

37 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Armenia’s Customs Union with Russia Undermines EU Association Agreement, a Credit Negative Last Tuesday, Armenian President Serzh Sargsyan, following talks with the Russian President Vladimir Putin, announced that the Government of Armenia (Ba2 stable) will join the Customs Union of Russia, Belarus and Kazakhstan. This abrupt change in stance is credit negative for Armenia because it undermines the sovereign’s prospects of signing a comprehensive Association Agreement with the European Union (EU) in November and therefore precludes the binding convergence process toward institutional EU standards, including convergence on governance and gradual economic integration. In addition, Armenia’s already high economic and financial exposure to Russia is set to intensify.

The Association Agreement (AA) offers Eastern Partnership countries (Armenia, Azerbaijan, Belarus, Georgia, Republic of Moldova and Ukraine) an alternative to outright EU membership in view of widespread expansion fatigue in the EU. Under the European Neighbourhood Policy Action Plan, the EU has provided more than €500 million in assistance to Armenia in a progressive manner, with €157.3 million (or 2.1% of GDP) earmarked for 2011-13 primarily in the areas of democratic structures and good governance, trade and investment, as well as socioeconomic reform and sustainable development.

After its successful negotiations with the EU for the Deep and Comprehensive Free Trade Area (DCFTA) in 24 July, Armenia was widely expected to sign the EU’s AA in November—a goal shared by Ukraine, Moldova and Georgia, even as the Ukraine and Moldova in particular face increased pressure from Russia to join the Customs Union, according to several media reports. The DCFTA is not compatible with the Customs Union especially in the economic sphere relating to the Free Trade Agreement, and Armenia’s decision to join the Customs Union elicited an EU announcement that it would review those programmes that are directly linked to the signature of the AA/DCFTA.

While the EU is Armenia’s largest export market (Exhibit 1), the Armenian economy remains deeply exposed to economic and financial spillovers from Russia. For instance, Russia is by far the largest bilateral trading partner (Exhibit 1) and foreign direct investor with a share of 49.7% as of 2011 inflows.

EXHIBIT 1

Armenia’s Export Destinations as Percent of 2012 Total

Source: International Monetary Fund, Moody’s

Russia is also able to leverage Armenia’s energy dependency as well as its reliance on remittances from Russia, which account for around 90% of the total in end-2012 (Exhibit 2).

Russia20%

Germany 11%

Bulgaria 9%

Belgium 9%

Iran7%

USA6%

Canada6%

Georgia 6%

Netherlands 5%

Switzerland5%

Other EU 5%

Other11%

EU 39%

Elisa Parisi-Capone Assistant Vice President - Analyst +1.212.553.4133 elisa.parisi-capone@moodys.com

Michail Michailopoulos Associate Analyst +49.69.70730.740 michail.michailopoulos@moodys.com

NEWS & ANALYSIS Credit implications of current events

38 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

EXHIBIT 2

Remittances to Armenia

Note: 2013 data refer to August 2012 to July 2013 Source: Central Bank of Armenia, Moody’s

For instance, Armenia imports about 75% of its energy needs, with natural gas supply from Russia amounting to 80% of total energy imports and 60% of primary energy supply.21 Gazprom controls almost the entire gas distribution network via Armrosgazprom and Armenia is considering the sale of its remaining 20% stake to Gazprom. This arrangement exposes Armenia to unilateral supply shocks, the latest of which saw the tariff price for natural gas in Armenia increase 18% in July 2013.

Russia is also Armenia’s main military ally amid the landlocked country’s strained relations with neighbouring Azerbaijan and Turkey, and friendly but limited trade relations with Iran. Its border with Georgia is basically the only open trade route. While one important aspect of the European Neighbourhood Policy (ENP) Action Plan signed in 2006 includes the peaceful solution of the Nargorno-Karabakh conflict (an area where the EU saw new avenues and opportunities to support conflict settlement efforts in the region due to the closer relationship with Armenia) Armenia remains a member of the regional collective security treaty organization led by Russia, Belarus, Kazakhstan, Kyrgyzstan and Tajikistan, and relies on Russia as its main arms supplier. In addition to maintaining a military base in Armenia until 2044 under a 2010 agreement, Russia and Armenia signed a further “military-technical” cooperation agreement in June.

21 See Poverty and Distributional Impact of Gas Price Hike in Armenia, World Bank, July 2012.

0%

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15%

$0.0

$0.5

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2004 2005 2006 2007 2008 2009 2010 2011 2012 July 2013

$ Bi

llion

s

Annual Total Net Non-commercial Inflows - left axis

Annual Net Non-commercial Inflows from Russia -left axis

Annual Total Net Non-commercial Inflows as Percent of GDP - right axis

NEWS & ANALYSIS Credit implications of current events

39 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Radiation Containment Problems at Fukushima Are Credit Negative for Japan On 3 September, the Government of Japan (Aa3 stable) announced that it would be spending approximately ¥47 billion ($480 million) to combat increasingly dangerous radiation levels at the crippled Fukushima Dai-ichi nuclear power plant. Continuing issues at Fukushima are credit negative for the sovereign.

The ¥47 billion, while only about 0.01% of 2012 GDP, is only one of many expensive bills the government will likely be on the hook to pay to decommission and clean up Fukushima over the coming years.

These costs include potentially massive compensation for damages and the plant’s cleanup, which Prime Minister Shinzo Abe said on 28 August that the government would take over from the plant’s owner and operator, the Tokyo Electric and Power Company Inc.

And although Prime Minister Abe’s Roadmap to Growth depends on providing an inexpensive and stable supply of electricity, partially by restarting nuclear power stations, public pressure is keeping nuclear power plants shuttered, complicating the government’s ability to put the economy on a growth trajectory. Public pressure to find an alternative to nuclear power has necessitated importing fuel and has raised power costs, impeding industrial growth and dimming the investment climate.

Before the March 2011 Tohoku earthquake and tsunami that caused Fukushima’s meltdown, nuclear energy accounted for about 30% of Japan’s power supply. In the months following the quake, all nuclear reactors across Japan were taken offline for regular maintenance checks. Only two reactors were restarted in July 2012, and they are being shut down this month for routine maintenance tests, which leaves Japan without any active nuclear power plants.

While Fukushima continues to dominate headlines with news of rising levels of radiation and radioactive water leaking into the Pacific Ocean, public resistance to restarting reactors will likely continue to prevent most nuclear plants from being restarted quickly. As a result, Japan will continue to have to import fossil fuels, putting pressure on the trade balance, which has slipped to a deficit since the temblor and tsunami from a surplus before (see exhibit below). The broader measure of trade in goods, services and income inflows, the current account, however remains in surplus, although a smaller surplus than before the nuclear crisis. A shift into a current account deficit would be credit negative and would indicate net reversal of savings in Japan’s economy, although we do not expect that to happen in the next year or two.

Japanese Liquefied Natural Gas Imports Versus the Overall Trade Balance Nuclear Crisis Sends Trade Balance into Deficit

Source: Haver Analytics

¥0

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Trade Balance - left axis LNG Imports - right axis

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

40 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

IMF’s Approval of $6.6 Billion Facility for Pakistan Is Credit Positive Last Wednesday, the International Monetary Fund’s (IMF) executive board approved $6.6 billion of financial assistance to Pakistan (Caa1 negative) under a three-year extended fund facility (EFF), slightly larger than the staff-level agreement of $5.3 billion made in July. The IMF’s approval of assistance is credit positive because it allows Pakistan to avert a looming balance-of-payments crisis and provides incentives for the government to implement structural reforms to boost growth.

However, the commitment of Pakistan’s new government under Prime Minister Nawaz Sharif will determine the extent to which the country reaps the benefits of the IMF’s assistance. A previous IMF program, a 23-month stand-by arrangement (SBA) agreed to in November 2008, was suspended and later terminated because the government did not follow through with implementing fiscal reforms, specifically a goods and services tax.

The IMF’s funding comes at a crucial time for Pakistan, given that widespread floods and supply-side constraints have resulted in subdued growth and that rapidly dwindling foreign reserves pose a significant risk to Pakistan’s external payments position. The initial disbursement will be $545 million, with the IMF distributing the rest over the life of the program, pending quarterly reviews. Pakistan will also benefit from the EFF allowing for a longer repayment period of 4.5-10.0 years. By comparison, SBAs’ typical repayment period is 3.25-5.00 years.

Despite a modest current account deficit of 1% of GDP in the fiscal year ended in June, Pakistan’s foreign exchange reserves have diminished to a precarious level because of financial outflows of debt and equity, and large repayments to the IMF from the previously suspended loan agreement. Foreign reserves fell to $5.2 billion in August from $10.4 billion a year before. Additional repayments due this year alone would have further weighed on reserves, leaving a very slim cushion for dealing with worsening current account or financial account developments.

We expect the IMF’s assistance to boost foreign reserves to $7.3 billion through fiscal 2014, based on our projections for increasing pressure on Pakistan’s current account balance, which would widen to 1.4% of GDP as import growth outpaces growth in exports. Our estimates are more pessimistic than the IMF’s, which assume that the current account deficit narrows to 0.6% of GDP and reserves climb to $9.6 billion.

Successful completion of the program would entail meaningful fiscal consolidation. This year, the government implemented some measures to reduce the fiscal deficit, including adjusting electricity tariffs to lower energy subsidies. However, continued funding disbursements will also require authorities to undertake more difficult reforms, such as broadening the tax base, pruning exemptions and restructuring or privatizing public-sector enterprises. The IMF expects such reforms will narrow the fiscal deficit to 5.8% in fiscal 2014 from 8.8% of GDP in fiscal 2013.

The EFF, if implemented successfully, would boost Pakistan’s growth potential. However, over the next year, we expect year-on-year growth will remain subdued at 3.0%-3.5%, versus 3.6% in fiscal 2013, because of fiscal adjustment measures and recent widespread flooding, which has affected more than a million people and damaged crops and agricultural output.

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

Tom Byrne Senior Vice President - Regional Credit Officer +65.6398.8310 thomas.byrne@moodys.com

NEWS & ANALYSIS Credit implications of current events

41 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Malaysia’s Fuel Price Hikes Are a Credit-Positive Step in Fiscal Consolidation Plan Last Tuesday, the Malaysian government reduced fuel subsidies on diesel and a lower grade of petrol by MYR0.20 per liter. The fuel price hike is a credit positive step in the government’s larger fiscal consolidation plan, details of which are to be unveiled in October’s budget speech. Because the reduction is relatively minor, further progress on subsidy rationalization and other fiscal reforms will be necessary to meet the government’s fiscal targets. Significant adjustments to the fiscal framework that broaden the tax base and reduce the subsidy burden have been largely absent since 2008.

The government expects savings from this round of fuel subsidy revisions to reach MYR1.1 billion for 2013 and MYR3.3 billion for 2014. However, this is dwarfed by the MYR37.6 billion allocated for the total subsidy bill, which accounts for 18.6% of current (or operating) expenditures in this year’s budget. Subsidies were 21.4% of 2012 operating expenditures, up from 8.5% in 2007 and only 3.6% in 2003.

Prime Minister Najib Razak also announced larger cash handouts to low-income households to mitigate the effect of higher fuel prices on their purchasing power. Therefore, significantly lower fiscal deficits will require additional adjustments to the subsidy framework. Despite a weaker electoral mandate after May’s elections, the ruling Barisan Nasional government has demonstrated its resolve to implement its fiscal reform agenda.

Nevertheless, the window to make difficult fiscal reforms is already closing. The prospect of a tapering US Federal Reserve quantitative easing program has already led to a selloff in emerging markets. Non-resident holdings of Malaysian government securities have declined since May, following 16 uninterrupted quarters of increasing external demand for these local currency instruments. The shift in investor sentiment prompted the government to acknowledge the immediate need to allay investors’ concerns about fiscal sustainability. A disorderly selloff on a larger scale could adversely affect the government’s new debt issuance.

The government has also committed to maintaining a full-year surplus in the operating budget, while keeping this year’s overall fiscal deficit under 4% of GDP. However, fiscal transfers contributed to expenditure growth in the run-up to the elections in May, while revenues were constrained by the relatively weak performance of the commodities sector. Consequently, the federal government registered the largest overall fiscal and current deficits through the first half of any year on record. We forecast the deficit at more than 4% of GDP, and the lack of additional reforms would place the government’s fiscal targets increasingly out of reach.

Given the government’s relatively poor showing in the May elections, delaying fiscal reforms will make them more politically difficult as the next general elections, which are due in 2018, draw nearer. Measures such as more extensive subsidy rationalization or a proposed goods and services tax involve long implementation periods. The measures announced in the 2014 budget speech, scheduled for 25 October, will be particularly crucial in determining the path of fiscal consolidation over the course of the current administration’s term in office.

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

NEWS & ANALYSIS Credit implications of current events

42 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

US Public Finance

Enrollment Declines Are Credit Negative for Higher Education Last Tuesday, the US Census Bureau announced that overall enrollment in US universities declined in fall 2012 for the first time in six years. Although graduate enrollment has been declining for the past two years, this is the first year that undergraduate enrollment also dipped. Enrollment declines in higher education are credit negative because they heighten competitive pressure for all universities. This limits opportunity to grow tuition revenue, now the primary revenue for the majority of public and private universities.

Precipitous enrollment declines for fall 2013 have already pressured the credit profiles of three rated universities: Loyola University, Louisiana (private university, A2 review for downgrade); Central College, Iowa (private college, Baa3 review for downgrade); and Saint Mary’s College of Maryland (public university, A1 review for downgrade). As shown in the exhibit, among traditional undergraduate colleges and universities, the credit effect is more severe for lower-rated, tuition-dependent colleges and universities that lack a strong brand name or market position. For higher rated universities with established student demand, the effect is minimal.

US University Median Change in Full-Time Equivalent Enrollment, Fall 2011 to Fall 2012 Graduate and Undergraduate Enrollment Declines Are More Severe For Lower Rated Universities Public Universities

Source: Moody's Municipal Financial Ratio Analysis

Private Universities

With the fall 2012 enrollment declines most pronounced for students over the age of 25, the credit effect is most acute for community colleges and for the 30% of universities we rate where more than 25% of total enrollment is at the graduate level. Declining graduate enrollment can disproportionately affect a university since students in graduate programs typically generate more revenue per student than in undergraduate programs.

These enrollment challenges will continue over the next several years for all levels of higher education, but are likely to become more pronounced for lower-rated undergraduate colleges that have a regional student draw. Families continue to be extremely price sensitive even as the economy slowly recovers, and affordability of undergraduate education remains a top line subject in the media and for the Obama administration. The increasingly competitive environment makes it more difficult for colleges to predict the number of students that will enroll, and also makes students and families even more sensitive to any slight changes to financial aid policies or tuition increases. Moreover, the declining number of high school

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

Aaa Aa A Baa & Below

Undergraduate Graduate

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

Aaa Aa A Baa & Below

Undergraduate Graduate

Eva Bogaty Vice President - Senior Analyst +1.212.553.7124 eva.bogaty@moodys.com

NEWS & ANALYSIS Credit implications of current events

43 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

graduates through 2014 nationwide will in certain parts of the country decrease substantially for even longer.

Enrollment in community colleges and part-time graduate programs tends to be countercyclical to the economy. While some of the graduate enrollment declines in 2012 can be attributed to an economic uptick, the length and slow pace of the economic recovery, with a prolonged period of high unemployment has caused a fundamental reappraisal of the value of post-secondary education. The lack of growth in full-time employment has discouraged adult students, and we expect to see continued pressure on demand for graduate education. This trend has been especially evident with the dramatic decline in law, education, and business school applications over the past few years.

RATING CHANGES Significant rating actions taken the week ending 6 September 2013

44 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Corporates

AK Steel Corporation Downgrade

24 Jul ’13 3 Sep ‘13

Corporate Family Rating B2 B3

Outlook Review for Downgrade Stable

The downgrade reflects the likelihood of stagnating operating performance in 2013-14 given the continuing weak demand environment affecting the steel industry. The company’s ability to generate earnings is also hindered by its high debt balances.

Alliant Techsystems Inc. Review for Downgrade

22 Sep ’10 6 Sep ‘13

Corporate Family Rating Ba2 Ba2

Outlook Stable Review for Downgrade

The review follows the announcement of an agreement to acquire Bushnell Group Holdings, Inc. for $985 million. The transaction will raise ATK's funded debt by almost 80%.

Fibria Celulose S.A. Outlook Change

20 Dec ’11 3 Sep ‘13

Corporate Family Rating Ba1 Ba1

Outlook Stable Positive

The change in outlook reflects the company’s improving operational performance and decreasing level of debt, along with our expectation that the depreciation of the Brazilian real will help offset potentially weaker pulp prices, supporting a continued deleveraging of Fibria's balance sheet. Our positive outlook is further bolstered by Fibria’s continued management of capex and dividends distribution and affiliation with Votorantim Participações S.A. (Baa3 positive).

Getty Images, Inc. Review for Downgrade

28 Sep ’12 3 Sep ‘13

Corporate Family Rating B2 B2

Outlook Stable Review for Downgrade

The review was prompted by the company’s weaker-than-expected results through second-quarter 2013, increased debt-to-EBITDA ratios and reduced free cash flow generation. Financial metrics are outside our expectations for the B2 rating, and are likely to remain so for at least two to three fiscal quarters.

RATING CHANGES Significant rating actions taken the week ending 6 September 2013

45 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Nokia Oyj Outlook Change

22 Aug ’13 5 Sept ‘13

Corporate Family Rating B1 B1

Outlook Negative Developing

The change in outlook follows the announcement that the company has agreed to sell its core Devices & Services business to Microsoft Corporation. We view the proposed sale as a positive step for the company, as it will eliminate a loss-making business as well as improve its business profile.

Starbucks Corporation Review for Upgrade

29 Apr‘13 3 Sep ‘13

Senior Unsecured Rating Baa2 Baa2

Outlook Stable Review for Upgrade

The review is based on the added liquidity from the company’s proposed offering of $750 million in senior unsecured notes due in 2023, along with continued improvement in earnings and cash flows. The offering and added liquidity should offset enough of the financial liability related to the company's binding arbitration with Kraft to support a higher rating.

Verizon Communications, Inc. Downgrade

29 Oct ’08 2 Sep ‘13

Senior Unsecured Rating A3 Baa1

Outlook Stable Stable

The downgrade is based on the company’s decision to purchase Vodafone Group Plc's stake in Verizon Wireless, which will result in a materially higher amount of leverage than our prior forecast. The large amount of debt and high level of capex offset the company’s diverse mix of revenue and strong market position across all business segments.

RATING CHANGES Significant rating actions taken the week ending 6 September 2013

46 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Infrastructure

Broadcast Australia Finance Pty Ltd. Outlook Change

27 Mar ‘06 4 Sep ‘13

Senior Secured Rating Baa2 Baa2

Outlook Stable Negative

The change to a negative outlook primarily reflects an increased level of uncertainty surrounding the outcome of contract negotiations between BA and its principal counterparties for broadcast transmission services, The higher uncertainty decreases the predictability and visibility of future cash flows from the company's core operations.

Mildura Base Hospital Pty Ltd. (MBH) Review for Upgrade

1 Sep ‘08 5 Sep ‘13

Senior Secured Rating Baa1 Baa1

Outlook Stable Review for Upgrade

The review for upgrade follows a proposed restructure in the Mildura Base Hospital project’s debt and ownership, under which the State of Victoria (Aaa stable) will acquire the facility and substitute as the issuer of MBH's outstanding bond. The review is prompted by the very strong credit profile of the new obligor.

RATING CHANGES Significant rating actions taken the week ending 6 September 2013

47 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Financial Institutions

Asian Bank Subordinated Debt Ratings Downgraded Because of Higher Bail-In Risk In conclusion to our review of subordinated debt initiated on 3 June, we have downgraded the subordinated debt ratings of 40 banking groups in Asia-Pacific (excluding Japan), and affirmed the ratings of three others. The downgrades vary from one to three notches and reflect the change in our base assumptions regarding the probability of systemic support for this class of debt. There has been an international trend towards imposing losses on holders of subordinated debt securities (creditor "bail-in") as a pre-condition for distressed banks to receive government support. Our actions lowered the subordinated debt ratings of banks in Singapore, Thailand, India, Philippines, Korea, Taiwan, Hong Kong and Australia. See also our report The World Has Changed: The Support Probability for Bank Subordinated Debt in Asia-Pacific Has Significantly Diminished.

Banca delle Marche Downgrade

25 Jan ‘13 5 Sep ‘13

Long-Term Senior Debt and Deposit Ratings

B3 Caa1

Bank Financial Strength Rating / Standalone Credit Assessment

E/caa3 E/ca

The downgrade is based on the substantial deterioration in the bank’s level of capital and asset quality, along with the likely failure of a planned capital strengthening. The bank will almost certainly require external support and has already been placed under the administration of the Bank of Italy. An influx of new problem loans and the need to increase provisioning on all deteriorated assets led to significant loan loss charges of €452 million for the six months ended June 2013,

Wing Lung Bank Downgrade

24 Jun ‘13 2 Sep ‘13

Long-Term Rating A2 A3

The downgrade reflects the risks associated with the bank’s rapid loan growth, which accelerated, especially in relation to mainland exposures, in the first half of 2013. The bank's Tier 1 ratio fell to 9.1% at the end of 2013 from 10.0% at the end of 2012 because of this rapid loan growth. The increase in mainland exposures and weakened capitalizations leave the bank vulnerable to deteriorations in the mainland economy, despite strong asset quality metrics.

RATING CHANGES Significant rating actions taken the week ending 6 September 2013

48 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Sovereigns

Democratic Republic of Congo Rating Assigned

6 Sep ‘13

Gov Currency Rating B3

Foreign Currency Deposit Ceiling Caa1

Foreign Currency Bond Ceiling B2

Local Currency Deposit Ceiling B2

Local Currency Bond Ceiling B2

Outlook Stable

The main drivers of DRC's ratings are the fragile economy; very weak institutional strength, although indicators have gradually improved over the past 10 years; and weak fiscal fundamentals despite multilateral debt forgiveness in 2010. The ratings also reflect the country’s elevated vulnerability to economic and political risks, arising from its relatively limited fiscal and foreign-exchange reserves, growing regional economic disparities and recurrent instability in the eastern part of the country.

Sub-sovereigns

The South African National Roads Agency Downgrade

26 Sep ‘12 6 Sep ‘13

Issuer rating Baa2/A2.za Baa3/A3.za

Outlook Negative Review for Downgrade

The downgrade is driven by the significant deterioration in the company's cash flows, which are necessary to meet its operating expenses and to service its very high debt levels taken on to fund the Gauteng Freeway Improvement Project (GFIP). A strain in cash flow has arisen from the prolonged delay in the realisation of e-toll revenue earmarked to repay GFIP-related debt, and casts doubt on the company's financial health in the medium term.

Structured Finance

Actions on US Prime Jumbo RMBS Issued from 2003-2004 On 2 September we downgraded the ratings of 66 tranches and confirmed the ratings of four tranches backed by US Prime Jumbo RMBS loans issued by miscellaneous issuers in 2003-2004, affecting $1.3 billion. The actions are a result of the recent performance of the underlying pools and reflect our updated loss expectations on the pools. In addition, the downgrades reflect the exposure of the affected bonds to tail risk due to the pro-rata pay nature of the transactions.

RESEARCH HIGHLIGHTS Notable research published the week ending 6 September 2013

49 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Corporates

Global Pharmaceutical Industry: Outlook Remains Stable as Earnings Growth in 2014 Will Offset Flat Performance in 2013

Our stable outlook reflects our expectation that the global pharmaceutical industry will post 3% aggregate EBITDA growth in 2014. We also expect growth to return for the remainder of 2013, offsetting the weakness in the first half. Growth in 2014 will be supported by the high number of US Food and Drug Administration approvals and modest number of patent expirations.

Global Automotive Manufacturers: Chinese Demand Fuels Uptick in Sales Growth Forecast

Our stable outlook is based on global light vehicle sales growth of 3.2% in 2013 and revised Chinese car demand estimates, with car market growth in China continuing to be above GDP growth rates. Global automotive sales growth and Chinese demand offset declining demand for light vehicles in Brazil and Russia.

US Wireless Industry: Verizon's Financial Flexibility Reduced, Rivals Stand to Gain in Vodafone Deal AT&T, T-Mobile and Sprint stand to benefit from Verizon’s $130 billion acquisition of Vodafone Group Plc’s stake in Verizon wireless as the high debt load could constrain Verizon in upcoming spectrum auctions, making spectrum more affordable for these competitors. However, we do not expect the deal to change the landscape; Verizon and AT&T will remain well positioned unless and until Sprint and T-Mobile consolidate into a viable national competitor.

Spectrum Auction Results Are Credit Positive for Major Korean Telcos

The outcome of the recent Long-term Evolution (LTE) spectrum auction is credit positive for SK Telecom Co Ltd (A3 stable) and KT Corporation (A3 negative), largely because they secured the necessary spectrum bandwidths at reasonable costs, and avoided excessive competition.

Infrastructure & Project Finance

Australian Regulated Utility Networks: No Major Surprises in Draft Rate of Return Guidelines; Sector Outlook Remains Negative

We do not see any rating actions as a result of the framework under the Australian Energy Regulator’s recently released draft rate-of-return guideline. Part of the “Better Regulation” program originated from the new National Electricity and Gas Rules introduced in November 2012, the draft guideline does not change our view that the new rules are credit negative for the network sector.

RESEARCH HIGHLIGHTS Notable research published the week ending 6 September 2013

50 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Financial Institutions

New Zealand Banking System Outlook

New Zealand’s stable banking system outlook is based on continuing economic improvements, bolstered by post-earthquake reconstruction in Christchurch and low interest rates. We expect GDP growth will average 2.1% in 2013 and 2.6% in 2014.

South Africa Banking System Outlook

Our negative outlook for the South African banking system persists based on expectations for sluggish economic growth over the next 12-18 months. A poorly performing operating environment, the banks’ sizable holdings of sovereign securities linked to the political and fiscal pressures facing South Africa and funding challenges underpin our negative outlook.

Czech Republic Banking System Outlook

Our negative outlook for the Czech banking system reflects expectations that a weak macroeconomic environment in the euro area and a fragile domestic economy will negatively affect bank performance. We forecast the economy will contract by 0.3% in 2013, adding risk to our 1.8% GDP growth estimate for 2014.

US Banking Quarterly Credit Update

Profitability ratios improved for US banks in second-quarter 2013, but persistent challenges and diminishing benefits from the levers used thus far to combat economic pressures temper our outlook. Headwinds such as low short-term interest rates, the competitive lending environment and high overhead ratios remain. Coupled with seasonally weaker capital markets in the second half of the year, we expect US banks to post weaker revenues for the remainder of 2013.

Global Reinsurance Outlook

Our stable outlook on the global reinsurance industry is underpinned by the industry’s resilience in this challenging operating environment, underwriting discipline and improvements in risk management, as well as firmer pricing in some primary insurance markets. Challenges remain, however, including increased competition from alternative markets, continued low interest rates and soft demand stemming from economic conditions in North America and Europe.

Global Reinsurance Industry Credit Analysis

Our stable outlook for the global reinsurance industry reflects its sound financial position, but also recognizes that it faces a challenging and fluid business environment. Our outlook is also based on operating and underwriting discipline and improvements in risk management. Increased competition from alternative markets, continued low interest rates and sluggish economic conditions will constrain earnings growth, but any adverse effects of these headwinds should be mitigated as reinsurers adapt to the marketplace.

Reinsurance Monitor Feature articles in this month’s edition outline our outlook for the global reinsurance industry, recap 2Q 2013 reinsurance earnings results and share the perspective of the CFO of the California Earthquake Authority on how the traditional and alternative reinsurance markets have developed over the nearly two decades the CEA has been in business, and on the place of government in cat risk coverage.

RESEARCH HIGHLIGHTS Notable research published the week ending 6 September 2013

51 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Germany Banking System Outlook

Our outlook change to stable from negative reflects the ability of German banks to withstand shocks following a year of reduced crisis-related losses and improved capital strength. Our outlook is also supported by the stable operating environment, more benign credit environment and strengthening of the banks’ capital buffers due in part to more stringent capital requirements. Our outlook is somewhat moderated by pressure on profit margins from low interest rates and overcapacities in 2013-14.

The World Has Changed: The Support Probability for Bank Subordinated Debt in Asia-Pacific Has Significantly Diminished

In conclusion to our review of subordinated debt initiated on 3 June, we have downgraded the subordinated debt ratings of 40 banking groups in Asia-Pacific (excluding Japan), and affirmed the ratings of three others. The downgrades vary from one to three notches and reflect the change in our base assumptions regarding the probability of systemic support for this class of debt.

Sovereigns

Corporación Andina de Fomento

The Corporación Andina de Fomento’s (CAF) Aa3 rating reflects its broadening membership and improved credit quality of its members, its improved capital adequacy ratios, and its increased portfolio diversification. Credit challenges include the bank's continued high exposure to its lower-rated members, its lack of Aaa-rated members, low levels of callable capital, and relatively weak capital adequacy ratios.

Kazakhstan Credit Analysis

We recently changed the outlook on Kazakhstan’s Baa2 to positive from stable. The key drivers for the outlook change were (1) reduced risk to the sovereign balance sheet from contingent liabilities in the banking sector; (2) the country’s improved external liquidity position due to an increase in the National Oil Fund’s assets and a sharp reduction of external banking sector debt; and (3) the favourable medium-term GDP growth outlook due to increasing oil production.

Fondo Latinoamericano de Reservas (FLAR) FLAR’s Aa2 reflects a solid financial standing that includes a strong liquidity position, limited financial leverage, and high coverage ratios. The institution enjoys high asset quality as a result of its preferred creditor status and strict guidelines for managing its investment portfolios.

Mongolia Credit Analysis

Mongolia’s B1 reflects the country’s credit strengths, including its strong growth, based on rich natural resources; as well as its credit challenges, stemming from a narrowly-diversified economy, pro-cyclical fiscal policy, and an unpredictable investment regime. Credit weaknesses primarily arise from growth volatility, due in turn to a heavy dependence on global commodity prices and demand from China.

RESEARCH HIGHLIGHTS Notable research published the week ending 6 September 2013

52 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

Sub-sovereigns

Mexican States Remain Resilient to Drop in Participaciones, For Now

In the first half of 2013, Mexican states received participaciones that were 4.7% below the budgeted amount. Shortfalls in participaciones can pose a credit risk to the states because such transfers, on average, represent 70% of a state’s discretionary revenues. Although the recent drop in federal transfers has not constituted a shock to the sector, if the trend of lower participaciones continues it could generate significant fiscal imbalances for the states and lead to negative rating pressures.

US Public Finance

Performance Based Funding Introduces New Risk for US Universities

President Obama recently announced a multi-pronged college affordability plan, the cornerstone of which is performance based federal funding. With more than $150 billion in annual federal financial aid at stake, the shift in funding would have significant implications for the higher education sector. We expect changes to be phased in over time, mitigating a shock to the system.

Structured Finance

Structured Credit Perspectives

Topics in this month's edition of our newsletter include: liquidations of TruPS CDOs remain unlikely despite the recent Tropic I CDO liquidation and bank TruPS CDOs benefit from the continued US housing market recovery, among others.

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

53 MOODY’S CREDIT OUTLOOK 9 SEPTEMBER 2013

NEWS & ANALYSIS Corporates 2

» Joy Global’s Share Buyback Adds to Pressure from Weak Mining Conditions

» Korean Construction Companies Will Benefit from Government’s Latest Property Stimulus

Banks 5

» BATS Gets an Edge over Incumbent Exchanges » Argentine Banks Will Benefit from Households’ Lower Tax

Burden » UK Loosens Large Banks’ Liquidity Requirements, a Credit

Negative

Insurers 10 » Radian’s Mortgage Insurance Settlement with Freddie Mac Is

Credit Positive

Sovereigns 12 » Ghana’s Election Decision Is Credit Positive

Sub-sovereigns 14

» Italy’s New Municipal Service Tax Is Credit Positive for Cities’ Finances

US Public Finance 15 » Harrisburg, Pennsylvania, Receiver’s Debt Plan Favors

Revenue Bonds over General Obligations » San Francisco Water Utility’s Credit Quality Will Not Be

Affected by Forest Fire

CREDIT IN DEPTH Japan 18

“Abenomics,” the colloquialism referring to the Japan Revitalization Strategy of Prime Minister Shinzo Abe’s government, aims to push the economy into a new era of growth and rejuvenation after more than two decades of economic stagnation. The first two “arrows” of the Revitalization Strategy, aggressive monetary easing and fiscal stimulus, have provided a temporary boost. But achieving long term growth hinges on the success of structural reforms to boost the economy’s potential growth rate. Prospects for success are constrained by the country’s fundamental macroeconomic challenges.

RATINGS & RESEARCH Rating Changes 23

Last week we downgraded SPX Corporation and Metropolitan Water Reclamation District of Greater Chicago, and upgraded Brocade Communications Systems, Church & Dwight Co. and 29 US subprime RMBS tranches issued 2005-06, among other rating actions.

Research Highlights 29

Last week we published on European building materials, US amusement parks, Malaysian corporates, European auto parts suppliers, the JPMorgan Asia Credit Index, Brazilian banks, US P&C insurers, Islamic banks in Oman, Taiwanese insurers, our global macro outlook, Serbia, Ecuador, the euro area periphery, Czech Republic, Poland, Estonia, Israel, the US Treasury Offset Program, US not-for-profit hospitals, CLOs and Asia-Pacific structured finance, among other reports.

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EDITORS PRODUCTION ASSOCIATE News & Analysis: Elisa Herr, Jay Sherman and Neil Buckton

David Dombrovskis

Ratings & Research: Robert Cox Final Production: Barry Hing