MOODYS.COM

18 JULY 2013

NEWS & ANALYSIS Corporates 2

» China’s Slowdown Is Credit Negative for Chemical Sector

» Argentina’s Energy Decree Is Credit Positive for Upstream Producers

» Heineken’s Agreement to Sell Its Hartwall Business Is Credit Positive

» Yuzhou’s Jiading Land Acquisition Is Credit Negative

Infrastructure 7

» Mexico Launches $100 Billion Transport and Telecom Investment Program, a Credit Positive

Banks 9 » MATba and MAE’s Single-Quoting Trading Platform Is Credit

Positive for MATba

» Russia’s Relaxation of Basel III Capital Rules Is Credit Negative for Banks

» Indonesia’s Plan to Tighten Property Lending Is Credit Positive for Banks

US Public Finance 15 » Declining Gaming Revenues Are Credit Negative for Atlantic

City, New Jersey

CREDIT IN DEPTH United Kingdom and Singapore Bank Systems 17

We have changed our outlook for the UK banking system to stable from negative, reflecting the stabilisation of key rating drivers for the standalone credit assessments of UK banks, including the UK’s increasingly stable economic outlook, asset quality improvement, and rising capital ratios, profitability and efficiency ratios owing to lower impairments. We also have revised our outlook on Singapore’s banking system to negative from stable, reflecting the recent period of rapid loan growth and rising real estate prices in Singapore and in regional markets where Singapore banks are active, which have increased the probability of deterioration in banks’ credit quality under adverse conditions.

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Monday’s Credit Outlook 22 » Go to Last Monday’s Credit Outlook

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NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 18 JULY 2013

Corporates

China’s Slowdown Is Credit Negative for Chemical Sector

On Monday, China’s government said that growth in the second quarter had slowed to 7.5% from 7.7% in the first quarter – a drop that masks a far steeper drop in internal consumption; second-quarter growth in industrial and retail sales slowed to 2.3% from 4.4% in the first quarter 2013.

The slowdown is credit negative for global chemical companies that depend on China’s sales, particularly low-rated companies such as Momentive Performance Materials Inc. (Caa1 negative), Momentive Specialty Chemicals Inc. (B3 stable) and Vertellus Specialties Inc. (Caa1 stable). Chemical producers doing business in China depend far more on industrial and retail sales than on construction and infrastructure, which account for most of the growth in China’s GDP.

As European growth continues to contract and the US economy only modestly recovers, global chemicals producers have come to depend on meaningful growth in developing countries, particularly China. The new data confirm the deceleration in China’s growth, with overall growth figures that met our expectations. But internal consumption and net exports were much weaker than we expected. Most of China’s growth came from its capital investments, which benefit a much smaller subset of chemical companies.

Since the second half of 2012, China’s demand for chemicals has been weaker than GDP or industrial production data would imply. Chemical companies never saw the boost in activity that typically follows the Chinese New Year in the first quarter, and they reported flat or declining volumes for that period.

The ongoing slowdown will especially strain highly leveraged chemical companies with outsize exposures to China’s economy or exports. Momentive Performance – a maker of organic silicones, a common ingredient in sealants, cosmetics, and many industrial applications – continues to grapple with large capacity expansions in China in 2011, and an economic slowdown there will delay any meaningful recovery in this market.

Meanwhile, China’s economic slowdown will delay the recovery in the global electronics industry, a problem for Momentive Specialty, a maker of epoxy resins used in circuit boards and many other higher-end industrial applications, as worldwide capacity for that chemical weakens. The same weakness holds risks for Vertellus, which makes chemicals used in a variety of applications ranging from chemical reagents to animal nutrition and feed.

Since Asia accounts for much less than one third of global revenues among non-financial companies in North America and EMEA, the decline in China’s growth has only a limited effect on them. But for certain chemical producers, the Chinese slowdown will worsen their existing overcapacity for specific products, and it implies a longer period before they return to more normal levels of profitability. China already sees overcapacity for epoxies, organo-silicones, phenol and polyethylene terephthalate (PET), the key component of plastic beverage bottles.

The weakening Chinese market for polyvinyl chloride (PVC), a plastic used to make pipes, does not affect North American producers, which have had a structural cost advantage. European PVC producers such as Kerling plc (Caa1 negative) had already faced poor demand and high costs, and China’s new growth figures do not worsen their situation.

John Rogers Senior Vice President +1.212.553.4481 john.rogers@moodys.com

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 18 JULY 2013

China’s weak demand also implies low commodity prices, which will benefit North American producers of specialty chemicals such as PPG Industries, Inc. (Baa1 stable), The Valspar Corporation (Baa2 stable) and Eastman Chemical Company (Baa2 stable). So far in 2013, North American commodity petrochemicals producers continue to generate near record margins: feedstock costs have dropped even further, giving them a continued cost advantage over their peers elsewhere, despite some selling price weakness in their markets.

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 18 JULY 2013

Argentina’s Energy Decree Is Credit Positive for Upstream Producers Last Monday, the Argentine government announced a new decree allowing oil and gas companies to export up to 20% of their production without incurring export duties in exchange for a minimum investment over five years. The decree will result in higher realized prices on oil and gas exports and is credit positive for companies within Argentina’s heavily regulated energy sector, giving companies, including YPF Sociedad Anonima (Caa1 stable), Pan American Energy LLC (B1 negative) and Petrobras Argentina S.A. (B1 negative), a pathway to higher returns on their upstream investments.

The news that Argentina would lift the duty on certain exports came a day before Chevron Corporation (Aa1 stable) announced a $1.2 billion deal to partner with YPF to develop the Vaca Muerta oil and natural gas shale formation in the Neuquén province.

The Chevron agreement marks Argentina’s first major upstream foreign investment since April 2012, when the government nationalized YPF, then majority-owned by Spain’s Repsol YPF, which is now called Repsol S.A. (Baa3 stable).1 That move further stalled Argentina’s oil and gas development, and raised questions about the security of foreign corporate investments in the country.

The new decree requires that producers meet local demand for oil and gas, and invest a minimum of $1 billion in Argentina’s oil and gas development over the next five years.

Without incurring export duties on up to 20% of their exports, upstream producers can achieve much higher realized prices on a significant portion of their production, assuming international crude prices remain as high as they are today, which we expect to be the case for at least the next couple of years. Higher realized prices will support higher returns on the producers’ invested capital.

Today, Argentina allows producers to realize a maximum of $70/barrel of oil equivalent (boe) on their exported production. Companies must pay anything above this amount to the government in the form of export duties. This requirement renders realized prices on oil exports roughly $40/barrel below the international market price for crude.

Oil and gas producers in Argentina will not benefit from the new decree until after the end of the required five-year investment period. In the meantime, the Argentine energy sector faces labor unrest, high inflation, low realized prices and heavy government interference.

Nevertheless, the government hopes the decree will spur additional investment in the country’s energy sector, which has suffered from years of under-investment following the economic crisis of 2000-01. Chevron’s agreement with YPF for Vaca Muerta hints at a resurgence of energy development in the country.

1 See Argentina’s Nationalization of YPF Is Credit Negative for YPF and Repsol, 23 April 2012.

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

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 18 JULY 2013

Heineken’s Agreement to Sell Its Hartwall Business Is Credit Positive Last Thursday, Dutch brewer Heineken N.V. (Baa1 stable) said that it had signed a binding agreement to sell its Finnish beverage business Oy Hartwall Ab to Danish beer company Royal Unibrew (unrated) for a total enterprise value of €470 million. The transaction is credit positive for Heineken, which will divest a non-core asset and use the sale proceeds to reduce debt.

Hartwall produces a wide range of non-alcoholic and alcoholic beverages principally in Finland. Despite having a solid market share in its domestic market, Heineken’s management did not consider Hartwall a strategic asset and initiated a review of the company in February to evaluate its options.

Heineken will use sale proceeds to pay down upcoming debt maturities, thereby reducing its debt, which in 2012 rose by €4.2 billion to €13.3 billion as a result of the debt-financed purchase of Asia Pacific Breweries (unrated). Although the proceeds from the Hartwall sale will not offset the increase in debt related to Asia Pacific Breweries, we interpret the disposal as part of the company’s intention to improve its financial position. The company is committed to returning its leverage target of net debt/EBITDA2 to less than 2.5x by the end of 2014 from 3.1x at year-end 2012.

Although the transaction is credit positive, the currently challenging operating environment, particularly across Heineken’s European markets, which accounted for about 60% of the company’s 2012 revenue, threatens its volumes and earnings and could thwart the company’s deleveraging efforts over the next 12 months.

However, if Heineken continues to report growth in other regions, including Asia Pacific, Africa and the Middle East; pursues a disciplined capex policy; reaches its target of €525 million of cost savings; and does not engage in additional acquisitions, we expect the company’s credit metrics to improve.

Heineken expects this transaction, which is subject to customary closing conditions including antitrust approvals, to close in fourth-quarter 2013.

2 Before exceptional items and amortisation of acquisition related intangibles.

Yasmina Serghini-Douvin Vice President - Senior Analyst +33.1.5330.1064 yasmina.serghini-douvin@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 18 JULY 2013

Yuzhou’s Jiading Land Acquisition Is Credit Negative Last Thursday, Yuzhou Properties Company Limited (B1 stable) announced it had bought land in Jiading, Shanghai, for RMB1.3 billion. The purchase is credit negative because it raises the property development company’s financial risk and diminishes its liquidity strength to operate through an economic slowdown over the next 12-18 months. It also elevates the company’s execution risk.

The transaction diminishes Yuzhou’s liquidity. The company had cash on hand of approximately RMB4.3 billion as of March 2013. Although Yuzhou received additional funding on 30 April when it signed a $101.8 million (RMB600 million) syndicated loan facility with six offshore and onshore banks, the company has short-term debt of approximately RMB2.3 billion maturing over the next 12 months, along with around RMB2.8 billion in unpaid land costs, including the Jiading acquisition. We expect the company will fill the gap of RMB200 million, the difference between available cash and short-term payment obligations, with the net cash flow from property sales. Thus far, the company has been on target for 2013, with contract sales as of June of RMB5.7 billion, or 71% of its full-year target of RMB8 billion.

Yuzhou’s execution risk also rises with the Jiading land acquisition. Yuzhou’s focus on residential housing in third- and fourth-tier cities means it has less operating experience in first- and second-tier cities such as Jiading. Moreover, although Yuzhou has operated in Shanghai since 2004, its operating scale there is small and it has completed only a few projects. This means its brand name is less established in Jaiding and its ability to complete pre-sales could be tested. Yuzhou also faces the task of catering to a higher-end market in Jiading, when its core strength is mass-market projects in lower-tier cities.

The acquisition reflects Yuzhou’s attempt to build a more balanced land bank portfolio. Having established market positions in lower-tier cities over the past few years, it has been constrained by limited demand and lower margins from the properties’ relatively low sale prices. To expand its operating scale and increase profitability, Yuzhou has entered first- and second-tier cities, where land costs are higher, but demand significantly outstrips supply. From this perspective, the Jiading acquisition adds both quantity and quality to Yuzhou’s land bank.

Although this new strategy is logical, Yuzhou will be subject to more challenges in managing the cash flow for the project in Jiading than for those in Yuzhou’s core markets. Apart from higher land costs, which the company must pay upfront, Shanghai has more stringent requirements on pre-sales that lengthen the time it takes to begin selling properties before their completion. Pre-sales in Shanghai can only begin when the shell of a building is complete; pre-sales in lower-tier cities can begin as soon as the base of the building is finished. As a result, Yuzhou’s Jaiding project will require more upfront investment and cash flow will take longer to materialize than it would in lower-tier cities.

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

Fiona Kwok Associate Analyst +852.3758.1522 fiona.kwok@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 18 JULY 2013

Infrastructure

Mexico Launches $100 Billion Transport and Telecom Investment Program, a Credit Positive Last Monday, Mexico President Enrique Peña Nieto introduced the Investment Program for Transport and Telecommunication 2013-18, which contains about $100 billion (MXN1.3 trillion) of infrastructure projects sponsored by the federal government. This initiative is credit positive because it will jumpstart activity in Mexico’s weak construction sector and provide it with much-needed certainty during the program.

The plan will spur revenues of the leading construction companies and concessionaries, such as Empresas ICA, S.A.B. de C.V. (B2 review for downgrade), IDEAL (Baa3 stable), OHL Mexico, the local subsidiary of Spain’s Obrascon Huarte Lain S.A. (Ba2 negative), Promotora y Operadora de Infraestructura, S.A.B. de C.V. (unrated) and Grupo Mexicano de Desarrollo (unrated). At the same time, the multi-year program will determine their medium-term financing requirements.

The program emphasizes transport infrastructure by dedicating $44 billion to transportation, 47% more than the National Infrastructure Plan for 2007-12 had. Investments in roads and trains, including Mexico’s first high-speed rail, account for more than 80% of the transport program.

Mr. Peña Nieto also announced that total investments for infrastructure will be at least $300 billion (MXN4 trillion), with state oil company Petroleos Mexicanos (Baa1 stable), state energy company Comision Federal de Electricidad (Baa1 stable) and the national water commission, Comision Nacional del Agua (unrated), all participating.

We expect the ambitious program to reverse the deceleration of Mexico’s (Baa1 stable) economy by boosting the construction industry, which accounts for 6% of the sovereign’s GDP and positively influences all other sectors. Earlier this month, the International Monetary Fund cut its 2013 GDP growth projection for Mexico to 2.9% from 3.4%. In 2012, the country’s economy grew by 3.9%.

We note that Mexico’s construction activity was significantly affected by the political cycle. Since the presidential elections in July 2012, the investment trend in construction has been negative (see exhibit), and in March construction activity fell 2.3% from a year earlier.

Adrián Javier Garza Assistant Vice President - Analyst +52.55.1253.5709 adrianjavier.garza@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 18 JULY 2013

Mexican Construction Investment, Cycle-Trend Adjusted Index and Growth Rate (Base Year=2003)

Source: Instituto Nacional de Estadística y Geografía

-0.6

-0.4

-0.2

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0.2

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Index Level - left axis Change in Index - right axis

Elections

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 18 JULY 2013

Banks

MATba and MAE’s Single-Quoting Trading Platform Is Credit Positive for MATba On 11 July, Mercado a Término de Buenos Aires S.A. (MATba, B1 negative) and Mercado Abierto Electrónico (MAE, unrated) signed an operational, technological and commercial agreement to expand their businesses and electronic stock-trading platforms. The agreement is credit positive for MATba, the main Argentinean agricultural futures and options market, because it widens its business prospects by allowing it to offer its products to members of MAE, an Argentinean electronic securities and foreign-currency trading market. It also allows MATba to broaden its client base and increase revenues given the companies’ expectation of a rise in volumes and transactions.

The deal, which awaits approval by Argentina’s National Securities Commission (Comisión Nacional de Valores, CNV), involves allowing both markets to trade their respective products on a single integrated platform called SUMA (Unified System of Argentinean Markets). SUMA would provide more than 700 agents of both institutions equal access to both markets’ products.

As the exhibit below shows, the trading volumes of both markets have grown significantly over the past four years. MATba, which has a market cap of $9.6 million (ARS52 million), recorded a 133% jump in pre-tax income to $2.1 million in 2012 from $900,000 in 2008, mainly because of trading volume, and it has recorded a return on equity of 23.3% over the last 12 months ending March 2013. MAE, which has a market cap of $3.1 million (ARS16 million), registered a 117% increase in trading volume to $84 billion in 2012 from $39 billion in 2009. MAE’s platform trades government and private fixed-income securities, foreign currencies and swaps, government currency and interest rate futures and central bank notes.

MATba’s and MAE’s Trading Volumes

Source: Mercado a Término de Buenos Aires and Mercado Abierto Electrónico

0

20

40

60

80

100

120

0

5

10

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2004 2005 2006 2007 2008 2009 2010 2011 2012

$ Bi

llionTo

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MAE in $ Billions- right axis MATba in Tons - left axis

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

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

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 18 JULY 2013

The single platform will also boost market liquidity and increase the range of products available for investors in each market, by allowing them to more easily trade agricultural derivatives on a single platform. SUMA will also improve the efficiency and transparency of price settlement in the Argentinean market, in line with Argentina’s new local Capital Markets Law. The law, enacted in December 2012, aims to strengthen and protect the Argentinean capital markets by, among other things, providing access to new investors and creating a federally integrated capital markets through the interconnection of different trading platforms.

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 18 JULY 2013

Russia’s Relaxation of Basel III Capital Rules Is Credit Negative for Banks Last Friday, the Central Bank of Russia (CBR) published an updated plan on Basel III implementation in Russia that has lower requirements, including minimum capital adequacy ratios, than an earlier proposal. These changes are credit negative for Russian banks because they will reduce banks’ incentive to strengthen their capital buffers.

The new plan envisages reducing the minimum core Tier 1 requirements to 5.0% from the previous proposal of 5.6% and lowering the minimum Tier 1 capital ratio to 5.5%, before rising to 6.0% on 1 January 2015, from the earlier proposal of 7.5%. The CBR also plans to push back the implementation date to 1 January 2014 from 1 October 2013, and lower the core Tier 1 trigger for hybrid instruments conversion/principal write-down to 5.5% from 6.4%.

We previously estimated3 that three of Russia’s top 20 banks by assets cumulatively needed a relatively small $700 million of capital to comply with the CBR’s previously proposed Basel III requirements. These relaxed minimums eliminate that shortfall, and provide no incentive for banks to strengthen their Tier 1 capital adequacy, which is currently at a 10-year minimum. Exhibit 1 compares large Russian banks’ compliance with the new and previously proposed capital rules, if they were implemented today.

EXHIBIT 1

Tier 1 Ratios of Russia’s Top 20 Banks as of 1 June 2013 Against Proposed Basel III Minimums

*Pro forma including a RUB102.5 billion new share issue in May 2013. Source: Central Bank of Russia, Moody’s

The CBR’s proposed new ratios are closely aligned with the Basel Committee’s suggested minimums, while the previously proposed requirements implied a 1.25x multiple to the Bank for International Settlements (BIS) ratios (see Exhibit 2). Under the new rules, the 1.25x multiple does not change for the total capital adequacy ratio, but is lower for the core Tier 1 and Tier 1 ratios.

3 See Russian banks: Basel III rules will improve quality of capital, 11 July 2013.

0%2%4%6%8%

10%12%14%16%18%

Actual Tier 1 Ratio Old Minimum Tier 1 Ratio Proposal New Minimum Tier 1 Ratio Proposal

Svetlana Pavlova Assistant Vice President - Analyst +7.495.228.6052 svetlana.pavlova@moodys.com

Eugene Tarzimanov Vice President - Senior Credit Officer +7.495.228.6051 eugene.tarzimanov@moodys.com

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 18 JULY 2013

EXHIBIT 2

Russia’s Basel III Implementation Plan versus the Bank for International Settlements Minimums

Pre-Basel III 1-Jan-13 1 Jan 2014* 1-Jan-15

Core Tier 1

Russia’s New Proposal na na 5.00% 5.00%

Russia’s Previous Proposal na na 5.60% 5.60%

BIS Guidelines 2.00% 3.50% 4.00% 4.50%

Tier 1

Russia’s New Proposal 5.00% 5.00% 5.50% 6.00%

Russia’s Previous Proposal 5.00% 5.00% 7.50% 7.50%

BIS Guidelines 4.00% 4.50% 5.50% 6.00%

Total Capital

Russia’s New Proposal 10.00% 10.00% 10.00% 10.00%

Russia’s Previous Proposal 10.00% 10.00% 10.00% 10.00%

BIS Guidelines 8.00% 8.00% 8.00% 8.00%

*The CBR’s previous proposal called for a 1 October 2013 start date.

Source: Central Bank of Russia, Bank for International Settlements

We note that emerging market countries have taken different approaches to Basel III capital ratios, with some countries such as Brazil and Mexico aligning their capital requirements with the minimum levels proposed by the Basel Committee, while others such as India and the Philippines set their capital requirements at higher levels (see Exhibit 3). We believe the latter approach is more appropriate for countries with high economic volatility and rapid credit growth, such as Russia.

EXHIBIT 3

Basel III Capital Requirements Core Tier 1 Tier 1 Total

Russia’s Previous Proposal 5.60% 7.50% 10.00%

Russia’s New Proposal 5.00% 6.00% 10.00%

BIS Guidelines 4.50% 6.00% 8.00%

Brazil 4.50% 6.00% 8.00%

Mexico 4.50% 6.00% 8.00%

India 5.50% 7.00% 9.00%

Philippines 6.00% 7.50% 10.00%

Note: Targets to be reached 1 January 2015 (or 1 March 2015 for India), excluding the conservation buffer where applicable

Source: Bank for International Settlements, national bank regulators

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 18 JULY 2013

Indonesia’s Plan to Tighten Property Lending Is Credit Positive for Banks On 11 July, Bank Indonesia (BI), Indonesia’s bank regulator, announced that it will tighten maximum loan-to-value (LTV) ratios on property lending, particularly residential mortgage loans, starting in September. These measures will be credit positive for Indonesian banks.

The bank regulator said it will lower LTV caps to 60% for second mortgage loans and 50% for third mortgage loans, from the 70% cap on all mortgages that BI introduced in March 2012. In addition, banks will be restricted from extending loans that are used as down payments for the purchase of a home. We expect these measures will reduce demand on residential properties for investment or speculation. They will also instill more prudent lending and establish a common prudential standard among banks.

Despite the implementation of the 70% LTV cap, property loans continue to exhibit signs of overheating, with housing loan growth rising by 22.4% year on year as of the end of April and apartment purchases surging 80.4% (see Exhibit 1). In particular, the new LTV caps will slow loan growth to owners of multiple homes who, according to BI, totaled only 31,300 persons, but accounted for 10.2% of total home loans outstanding at the end of April 2013.

EXHIBIT 1

Indonesia’s Year-over-Year Home-Loan Growth

Source: Bank Indonesia

We also expect the measures, when combined with the central bank’s recent 50-basis-point interest rate hike, to slow property price appreciation. BI has now raised the benchmark overnight interest rate by 75 basis points in less than a month.

All these measures should help stabilize house prices by raising the costs of financing speculative/investment demand. Reflecting the recent strong price trend, the average residential home price in the greater Jakarta area rose 22.6% year on year as of the end of March, far exceeding the average annual growth rate of 14.3% during 2008-12 and average income growth rate of 12.4%.

Although nine of Indonesia’s banks will benefit from the tighter loan measures, Bank Tabungan Negara (P.T.) (Baa3 stable, D/ba2 stable)4 will benefit the most, given its housing loan exposure is 67.2% of its 4 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.

35%33%

35%44%

24%19% 18% 18%

22%

46%

56% 53%

86% 80%84%

79% 80%

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Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13

All Home Loans Apartment Loans

Wee Siang Ng Vice President - Senior Analyst +65.6398.8329 weesiang.ng@moodys.com

Falemri Rumondang Associate Analyst +65.6398.8330 falemri.rumondang@moodys.com

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 18 JULY 2013

total loan book (see Exhibit 2). In contrast, the effect on Bank Rakyat Indonesia (P.T.) (Baa3 stable, D+/baa3 stable), Bank Danamon Indonesia TBK (P.T.) (Baa3 stable, D/ba2 positive) and Bank Mandiri (P.T.) (Baa3 stable, D+/ba1 stable) will be much smaller, given their low exposures to housing loans.

EXHIBIT 2

Exposures to Housing Loans for Rated Banks in Indonesia, Year-End 2012

BTN = Bank Tabungan Negara; Panin = Panin Bank; Permata = Bank Permata; BCA = Bank Central Asia; CIMB Niaga = PT Bank CIMB Niaga Tbk; BNI = Bank Negara Indonesia; Mandiri = Bank Mandiri; BRI = Bank Rakyat Indonesia; Danamon = Bank Danamon Indonesia TBK. Source: The banks

67%

21%17% 16% 15%

13%6%

3% 3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

BTN Panin Permata BCA CIMB Niaga BNI Mandiri BRI Danamon

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 18 JULY 2013

US Public Finance

Declining Gaming Revenues Are Credit Negative for Atlantic City, New Jersey On 10 July, the New Jersey Division of Gaming Enforcement released data on behalf of the casino industry showing that 2013 gaming revenue in Atlantic City, New Jersey (general obligation Baa1 negative), is heading toward its worst annual performance in 22 years, a credit negative for the economically struggling city. It is also credit negative for the Casino Reinvestment Development Authority (CRDA), which has two series of bonds related to the Atlantic City gaming industry.

The regional gambling destination is facing increasingly stiff competition because of new casinos in surrounding states and the proliferation of gambling websites. Combined, these factors eliminate the kind of scarcity that previously allowed Atlantic City casinos to thrive.

The downward trend in gaming revenues has led to steep declines in the city’s assessed valuations because the city factors gaming revenues and profitability into the casinos’ property tax assessments and, thus, property tax bills. Atlantic City’s gaming revenue declines began in 2006 as the economy was entering the recession. Since then, annual gaming revenues declined 41% through 2012 and were down another 11% in the first half of 2013, compared with a year earlier. The decline in June was particularly noteworthy because it marked the sixth consecutive year-over-year decline for June and because of the decline’s magnitude relative to previous years (see Exhibit 1). The average annual decline of June revenues had been 8%, but revenues in June 2013 dropped 12.6% from June 2012 levels.

EXHIBIT 1

Atlantic City, New Jersey’s June Gaming Revenues, by Year

Source: New Jersey Division of Gaming Enforcement

While the steep gaming revenue drops are bad news for Atlantic City, the city can mitigate these declines to some extent by increasing property tax rates and by the recent agreements with eight of the 13 casinos to freeze assessment valuations over the next couple of years.

To date, the city has successfully increased its property tax rate enough to grow the levy each year. The city’s recently adopted 2013 budget shows a levy decrease for the first time in many years (see Exhibit 2), but the city plans to make up for the gap in 2013 by using a loan from the US Federal Emergency Management

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Vito Galluccio Analyst +1.212.553.2738 vito.galluccio@moodys.com

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 18 JULY 2013

Agency related to Superstorm Sandy. Beyond 2013, city officials say they plan to continue to increase the property tax rate to offset assessed value declines.

EXHIBIT 2

Atlantic City’s History of Assessed Values and City Levies, 2008-12

Source: Atlantic City, New Jersey, Audited Financial Statements

The city’s decreasing gambling revenue is also credit negative for Casino Reinvestment Development Authority, which has outstanding hotel revenue bonds (Baa1 negative) secured by hotel fees and revenue bonds (Baa2 negative) secured by parking revenue and a portion of Atlantic City’s casino gaming tax revenue. The revenues that secure both of these bond issues tend to correlate with Atlantic City’s gaming revenues and the overall economic activity of the casino sector, although hotel fees less so.

The number of city hotel rooms booked in June dropped by an unusually large 73% compared with June 2012, primarily because two large concerts that occurred in June 2012 did not return in June 2013. Similarly, hotel fees increased in 2012 (see Exhibit 3), but a portion of the increase was related to non-recurring visits to the grand opening of a new casino, Revel Atlantic City. A key indicator of future credit quality will be whether hotel revenues stabilize at current levels or decline.

EXHIBIT 3

Casino Reinvestment Development Authority Hotel Fee Revenue, 2009-12

Source: Casino Reinvestment Development Authority

$0

$5

$10

$15

$20

$25

$0

$50

$100

$150

$200

$250

2008 2009 2010 2011 2012 2013

$ M

illio

ns

$ Bi

llion

sAssessed Values - left axis City Levy - right axis

$15.0

$15.1

$15.2

$15.3

$15.4

$15.5

$15.6

$15.7

2009 2010 2011 2012

$ m

illio

ns

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17 MOODY’S CREDIT OUTLOOK 18 JULY 2013

United Kingdom and Singapore Bank System Outlooks

In the past week, we changed our outlook on the UK banking system to stable from negative, and changed our outlook on Singapore’s banking system to negative from stable. In this article we summarize our view of the two countries’ banking systems. Our full reports can be accessed here for the UK and here for Singapore.

UNITED KINGDOM

Our outlook for the United Kingdom banking system is stable. The outlook expresses our expectation of how bank creditworthiness will evolve in the UK over the next 12-18 months.

We have changed our outlook for the UK banking system to stable from negative, reflecting the stabilisation of the key rating drivers for the standalone credit assessments of UK banks, namely: 1) the UK’s increasingly stable economic outlook despite its low growth prospects; 2) the resulting improvement in the outlook for asset quality despite downside risk to commercial real estate and peripheral euro area exposures; 3) continuing improvements in capital ratios driven in part by more stringent capital requirements; 4) our expectation that banks will maintain improvements in funding and liquidity metrics over the outlook period; and 5) improving profitability and efficiency ratios owing to lower impairments.

However, we maintain the view that the UK authorities will continue to take steps to reduce the level of systemic support extended to the banking system and have therefore assigned a deteriorating outlook to this key driver of banks’ long-term ratings. On average, our expectation of systemic support results in three notches of uplift from the standalone credit assessments in the long-term debt and deposit ratings of the large UK banks.

Operating environment. Although the UK continues to face the prospect of low economic growth, we do not expect a deterioration in the operating environment for a number of reasons. For example, despite increasing concerns about a potential increase in policy rates, we expect the Bank of England to maintain low interest rates over the outlook period, supporting households and corporates in servicing their debt obligations. In addition, unemployment has not increased as much as in previous recessions, supporting banks’ asset quality. Although regulatory changes will continue to generate uncertainty for banks as regulators develop and introduce new rules, we expect UK systemic risk will be reduced by stricter capital and funding requirements, including significant loss-absorbing capital buffers, and by the Financial Policy Committee’s ability to set counter-cyclical buffers.

Systemic support. We expect a further decline in government support for UK financial institutions. We view proposals for ring-fencing, bail-ins and the recent agreement by the European Council on bank bail-ins to be generally credit negative for senior bondholders.

Asset quality and capital. Despite the downside risk posed by some banks’ commercial real estate concentrations and exposure to peripheral European economies, we expect the aggregate level of impairments to continue declining and non-performing loans to stabilise at the current level of around 5% for the system as a whole. Overall, we believe that UK banks are sufficiently capitalised to sustain losses from both our central and adverse stress scenarios. More specifically, once the large UK banks execute their capital plans to address the additional capital buffer requirements recently imposed by the Prudential Regulation Authority (PRA), and which we deem achievable, we believe that UK banks will be well-capitalised for the risks they face and will compare favourably to their European peers.

Laurie Mayers Associate Managing Director +44.20.7772.5582 laurie.mayers@moodys.com

Carlos Suarez Duarte Vice President - Senior Analyst +44.20.7772.1061 carlos.suarezduarte@moodys.com

Michael Eberhardt, CFA Vice President - Senior Analyst +44.20.7772.8611 michael.eberhardt@moodys.com

Ferenc Csoke Analyst +44.20.7772.1618 ferenc.csoke@moodys.com

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18 MOODY’S CREDIT OUTLOOK 18 JULY 2013

Profitability and efficiency. We expect profitability to recover from its very low current levels, reflecting an improvement in asset quality and already high levels of provisions for conduct-related costs. However, bank profitability will continue to be pressured by low interest rates, the increasing costs of prudential regulation and a heightened level of conduct-related scrutiny, which could lead to additional one-off regulatory charges.

Funding and liquidity. We expect liquidity and funding to remain strong, with some reduction in the quantity and quality of liquidity buffers, coupled with a continued reduction in reliance on short-term wholesale funding.

The stable outlook for the system is compatible with the stable outlook on the standalone credit assessments of most UK banks. However, we maintain a negative outlook on the long-term debt and deposit ratings of the large UK banks, reflecting our view that the UK authorities will continue to take steps to reduce the level of systemic support in light of the UK and other European Union governments’ preference for burden-sharing with creditors (rather than taxpayers’ funds) to finance bank resolutions.

EXHIBIT 1

Overview of Key Drivers for UK’s Stable Banking System Outlook Operating environment Stable − Gradual, albeit slow, economic recovery

− Low interest-rate environment expected to continue − Moderate unemployment levels

Asset quality and capital Stable − Asset quality is slowly improving as residential property prices have stabilised

− Downside risk due to the banks’ exposure to commercial real estate − Enhanced loss absorbency and strengthened capital levels

Funding and liquidity Stable − Liquidity expected to remain strong in 2013 − Reduced reliance on unsecured wholesale funding expected to

continue

Profitability and efficiency Improving − Improving profitability ratios driven by stabilisation of asset quality − Cost-cutting plans are expected to generate savings over the

medium term

Parental and systemic support Deteriorating − Systemic support likely to decline driven by the government’s focus on institutional changes intended to allow burden-sharing rather than using taxpayers’ funds to resolve failing banks

− Recovery and resolution framework is negative for bondholders − Proposed ring-fencing arrangements present uncertainty for bank

creditors

Source: Moody’s

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19 MOODY’S CREDIT OUTLOOK 18 JULY 2013

EXHIBIT 2

Key Indicators for the UK Banking System 2012 2011 2010 2009

Pre-Provision Income/ Risk-Weighted Assets 2.2% 2.3% 2.8% 2.9%

Net income/ Risk-Weighted Assets 0.8% 0.7% 0.7% 0.4%

(Market Funds - Liquid Assets)/Total Assets (4.3%) (1.5%) 1.7% 4.9%

Gross Loans/Due to Customers 84% 91% 113% 120%

Cost to Income ratio 64% 62% 56% 54%

Tier 1 ratio 13.2% 12.6% 12.7% 11.6%

Tangible Common Equity / Risk-Weighted Assets 12.7% 12.5% 12.5% 10.0%

Problem Loans/Gross Loans 5.1% 5.4% 5.5% 4.6%

Problem Loans / (Shareholders Equity + Loan Loss Reserves) 32.7% 36.5% 38.7% 39.1%

Source: Banks’ financial statements, Moody’s

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20 MOODY’S CREDIT OUTLOOK 18 JULY 2013

SINGAPORE

Our outlook for the Singapore banking system is negative. The outlook expresses our expectation of how bank creditworthiness will evolve in Singapore over the next 12-18 months.

We have revised our outlook on Singapore’s banking system to negative from stable. The two main drivers underpinning our opinion are the recent period of rapid loan growth and rising real estate prices in Singapore and regional markets where Singapore banks are active. These have increased the probability of deterioration in banks’ credit profiles under adverse scenarios.

Singapore’s banking system has been operating in a favorable operating environment for an extended period, with low interest rates and strong economic growth domestically and in the surrounding region. This environment has given rise to strong credit growth and asset inflation in both the real estate and financial markets. Domestically, household debt increased to 77.2% of GDP as of March from 64.4% at the end of 2007. For the same time period, prices for private property grew 1.2x and prices for Housing Development Board5 (HDB) real estate 1.7x.6 Regionally, we observe similar or even more dramatic trends.

With the potential risk of a turn in the interest rate cycle, we view strong asset inflation and credit growth trends as vulnerabilities, because this combination would likely cause credit costs to rise from their currently low base. If interest rates rise, we expect rising credit costs will outweigh any potential increases in lending margins.

While it is difficult to predict turning points in banking credit cycles, the increased likelihood of tightening of US monetary policy, with a higher probability of a tapering of quantitative easing during our outlook period, is a potential trigger. There will be effects on interest rates in Singapore and the surrounding region, as well as on capital flows in and out of the emerging markets where Singapore banks are active.

It is also important to consider the risks posed by the banks’ exposures to other markets of the region, given that Singapore banks generate over 37% of their assets from overseas, which exposes them to the risks of operating in high-growth emerging markets. In this context, 77% of Singapore banks’ non-performing loans (NPLs) were related to loans made by borrowers outside Singapore in 2012, versus 65% in 2008.

We recognize that Singapore banks have strong financial metrics that explain why we continue to assign them the highest average ratings, both on standalone and supported bases, relative to all banking systems globally. Our outlook is a directional, forward-looking view of the trend in the banks’ relative credit quality, which we consider as having potentially reached, or is close to reaching, a cyclical peak.

Together, these factors result in a banking system profile that is more exposed to changes in global credit cycles. The negative outlook differs from the stable outlook on two of the three domestic banks’ individual deposit and debt ratings as well as our sovereign rating. Our sovereign outlook places more emphasis on the government’s strong fiscal position, which we expect will continue, despite our negative outlook for the banking system.

5 Public housing in Singapore is developed and managed by the HDB, which operates as a statutory board, an organization under the

Singapore government with autonomy to perform an operational function. Qualified citizens may purchase HDB property under a 99-year lease, and resell property to qualified buyers at market prices, subject to certain conditions (e.g., minimum occupation periods).

6 Urban Redevelopment Authority (URA), Quarterly Release of Real Estate Statistics (26 April 2013) - All Residential Property Price Index; Housing Development Board (HDB), Quarterly Release of Public Housing Data (26 April 2013) - Resale Price Index.

Gene Fang Vice President - Senior Analyst +65.6398.8311 gene.fang@moodys.com

Wee Siang Ng Vice President - Senior Analyst +65.6398.8329 weesiang.ng@moodys.com

Nick Caes Associate Analyst +65.6398.8332 nick.caes@moodys.com

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21 MOODY’S CREDIT OUTLOOK 18 JULY 2013

Historically, Singapore has been a high-support system. However, we note that government policy to deal with ailing banks has evolved globally. While significant variations exist across countries, governments have generally revised policies to make support for bank subordinated debt less probable than before. These developments led to a methodology update on 31 May 2013,7 in which we changed our approach to assessing systemic support for such debt. In this context, for Singapore specifically, we have put on review for downgrade the bank subordinated debt ratings that previously benefited from an uplift linked to our prior assessment of systemic support.

EXHIBIT 3

Overview of Key Drivers for Singapore’s Negative Banking System Outlook Operating environment

Deteriorating - Low interest rates driving potential asset bubbles - Increasing probability of a turn occurring in the interest rate cycle - Similar trends to impact exposure outside Singapore

Asset quality and capital

Deteriorating/Stable - Reported asset quality ratios remain solid, but do not reflect latent risks of potential asset bubbles - Potential change in credit cycle likely increases pressure on asset quality + Substantial buffer of capital and reserves

Funding and liquidity Stable + Large and stable deposit base = Moderate use of market funding, despite recent increase in foreign currency borrowing

Profitability and efficiency

Deteriorating - Competition for deposits placing continued pressure on margins - Likely increase in credit costs to more historically normalized levels = Potential increase in NIM from rising interest rates, but likely offset by rising credit costs

Systemic support Stable = Recent Singapore bank proposals for Basel III-compliant securities assume no bail-in regime - However, global trends towards bail-in features in bank resolution schemes could pressure the Monetary Authority of Singapore (MAS) to adopt similar measures

Source: Moody’s

EXHIBIT 4

Key Indicators for the Singapore Banking System* 2012 2011 2010 2009

Pre-Provision Income/ Average Risk-Weighted Assets (RWA) 2.56% 2.45% 2.73% 2.70%

Net income/ Average RWAs 2.03% 1.83% 2.07% 1.66%

(Market Funds - Liquid Assets)/Total Assets -16.68% -15.57% -19.10% -21.40%

Liquid Assets/Total Assets 33.73% 34.70% 37.61% 38.84%

Cost-to-Income Ratio 43.46% 44.30% 42.42% 39.52%

Tier 1 Ratio 14.92% 13.48% 15.50% 14.11%

Tangible Common Equity (TCE)/RWAs 14.20% 12.44% 13.78% 12.47%

Problem Loans/Gross Loans 1.20% 1.28% 1.60% 2.37%

Problems Loans/(Shareholders’ Equity + Loan Loss Reserves (LLR)) 6.68% 7.38% 7.77% 10.67%

* Rated Banks’ Average

Source: Banks’ financial statements, Moody’s

7 See Rating Methodology: Global Banks, 31 May 2013.

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

22 MOODY’S CREDIT OUTLOOK 18 JULY 2013

NEWS & ANALYSIS Corporates 2

» Raytheon Wins US Navy Contract to Develop Electronic Jamming System, a Credit Positive

» Kroger's Agreement to Buy Harris Teeter for $2.5 Billion Is Credit Positive

» Tribune's Exit from Newspapers Will Result in Credit-Negative Loss of Cash Flow

Infrastructure 5

» Political Risk Increases for PG&E, California's Largest Utility

Banks 6 » Proposed US Leverage Requirement Is Credit Positive for

Banks » US Crackdown Is Credit Negative for Consumer Debt

Collectors » A European Single Resolution Mechanism Is Credit Negative

for Bank Bondholders » RCI's Strong Deposit Growth Is Credit Positive

Insurers 11 » US Life Insurers Would Benefit from Public Pension Plan

Proposal » UK Life Insurers Face Credit-Negative Competition from

Government Pension Scheme » Assicurazioni Generali Buys Out Minority Interests in Its

German Insurance Operations, a Credit Positive

Asset Managers 16

» Alternative Asset Managers Get Credit-Positive Lift from US Advertising Rule Change

Sovereigns 18 » Massive Financial Aid to Egypt from Gulf Governments Is

Credit Positive » Czech Republic's New Liquidity Management Reduces

Borrowing Requirements

US Public Finance 21 » San Francisco Community College's Looming Loss of

Accreditation Is Credit Negative

Securitization 23 » US Used Car Price Declines Are Credit Negative for Auto

Securitizations

RATINGS & RESEARCH Rating Changes 25

Last week we upgraded Expro Holdings UK, Prudential Financial, Jalisco State in Mexico, and 40 US subprime RMBS tranches, and downgraded Post Holdings, Banco Populare, Banca Italease, Unicaja Banco, Clark County School District in Nevada, North Las Vegas, and 42 Italian and Portuguese RMBS tranches, among other rating actions.

Research Highlights 33

Last week we published reports on US multi-employer pension plans, US consumer durables, US healthcare, Georgia Power Company, banking systems in Switzerland, the UK, Kuwait, Russia and South Africa; US property & casualty insurers, Latin American insurance, Columbian insurance, Costa Rica, Belarus, three US states’ late fiscal budgets, European CMBS, and US self-storage securitizations, among other reports.

MOODYS.COM

Report: 156444

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