MOODYS.COM

8 DECEMBER 2014

NEWS & ANALYSIS Corporates 2 » Weatherford's $750 Million Cash Sale of Non-Core Business Is

Credit Positive

» UK Stamp Duty Reform Is Credit Positive for Taylor Wimpey and Other Homebuilders

» Voith's Purchase of KUKA Stake Is Credit Negative

» Telenor and TeliaSonera's Danish Operations Merge, a Credit Positive for the Companies and Sector

Infrastructure 7 » European Gas Infrastructure Utilities Will Benefit from South

Stream Pipeline Cancellation

Banks 10 » American Savings Bank Spinoff Is Credit Positive

» Banreservas' Increase in Paid-in Capital Is Credit Positive

» BBVA Chile's Profitability to Take a Hit from Penalty Against Broker Unit

» Paraguay's Financial Inclusion Plan Is Credit Positive for Banks

» Sasfin Bank's Acquisition of Fintech Is Credit Positive

» Spain's Draft Legislation on Bank Resolution Is Credit Negative

» France Ends Deductibility for Bank Systemic Risk Tax, a Credit Negative

» Capital Increase Allows Kuwait's Burgan Bank to Meet Basel III Capital Standards

Asset Managers 22 » China's Financial Asset Management Regulatory Overhaul Is

Credit Positive

Sovereigns 24 » Sweden's Parliament Rejects Government Budget and Prime

Minister Calls for New Elections, a Credit Negative

» Korea's 2015 Budget Supports Female Participation in Labor Force, a Credit Positive

US Accounting 28 » US Tax Incentives Worth $80 billion Live on, Despite Recent

Crackdown on Inversions

RATINGS & RESEARCH Rating Changes 29

Last week we downgraded Chinos Intermediate Holdings, Cliffs Natural Resources, Occidental Petroleum, Japan, 12 Japanese government-related issuers, Kedr Bank, Nanyang Commercial Bank, Mitsubishi UFJ Securities Holdings and subsidiaries, Nippon Life Insurance, Sony Life Insurance, Fukuoka City and Prefecture, Hammamatsu City, Hiroshima prefecture, Kyoto City, Nagoya City, Niigata prefecture, Osaka City, Sakai City, Sapporo City, Shizuoka City and Prefecture, Japan Expressway Holding and Debt Repayment Agency, East Nippon Expressway, Central Nippon Expressway, West Nippon Expressway, Metropolitan Expressway, Urban Renaissance Agency, Japan Railway Construction, Transport and Technology Agency, New Kansai International Airport, Japan Finance Corporation, Japan Finance Organization for Municipalities, Japan Housing Finance Agency, and Japan Bank for International Cooperation. We upgraded Aeroporti di Roma, Tenaga Nasional Berhad, Neuberger Berman, 38 tranches of First Franklin subprime RMBS and nine classes of J.P. Morgan Chase Commercial Mortgage Securities Corp. Series 2005-LDP5, among other rating actions.

Research Highlights 42

Last week we published on UK telecommunications, Brazilian corporates, North American covenants, Peruvian and Chilean retailers, Brazilian retailers, Mexican retailers, German corporates, Chinese issuers, global asset prices, global corporates, European infrastructure, Southern Energy Power Distribution and Electricity North West, Suez Environment and Veolia Environment, Australian infrastructure, Colombian banks, Japanese regional banks, US mortgage insurers, central clearing counterparties, global reinsurers, global P&C insurers, global life insurers, sovereign geopolitical risks, India, Suriname, Caribbean Development Bank, Japan, International Finance Corp., Turkey, the Lazio region in Italy, English housing associations, Mexican states, US higher education, US community colleges, US not-for-profit healthcare, US local governments, US states, global covered bonds and global CLOs, among other reports.

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Thursday’s Credit Outlook 52 » Go to Last Thursday’s Credit Outlook

NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Corporates

Weatherford’s $750 Million Cash Sale of Non-Core Business Is Credit Positive Weatherford International, LLC (Baa3 stable) on Monday said that it would sell its engineered chemistry and integrity drilling fluids business to an affiliate of The Lubrizol Corporation (Aa2 stable) for $750 million in cash, plus a possible $75 million earn-out tied to the post-closing performance of the businesses. The deal is credit positive for Weatherford and neutral for Lubrizol, whose debt is guaranteed by its parent, Berkshire Hathaway Inc. (Aa2 stable).

The division that Weatherford is selling is not central to its main business as a diversified international energy service and manufacturing company. Weatherford will use the proceeds from the sale to reduce debt, particularly its high $1.6 billion in short-term debt as of September 2014. The move comes as the oilfield services and drilling (OFS) business braces for a difficult period owing to lower oil prices.

The asset sale to Lubrizol is the latest in Weatherford’s ongoing focus on growing its core business lines and divesting non-core business lines, with proceeds from asset sales aimed at reducing elevated financial leverage. Weatherford has generated about $1.8 billion in cash proceeds from asset sales this year, and has directed all of it toward debt reduction. The sale to Lubrizol is Weatherford’s fourth and largest asset sale this year, following the October sale of its investment in ProServe Group Inc (unrated) to affiliates of Riverstone Holdings LLC (unrated) for proceeds of around $200 million, the September sale of its pipeline and specialty services business to Baker Hughes Incorporated (A2 stable) for $246 million in cash, and the July sale of its land drilling and workover rig operations in Russia and Venezuela to Russia’s OJSC Oil Company Rosneft (Baa2 negative) for $500 million in cash. Weatherford has been successful at selling these assets at favorable EBITDA multiples despite headwinds facing the OFS sector.

Weatherford’s success so far in selling assets and reducing debt helps its credit quality just as the OFS market weakens in 2015. Our negative outlook for the global OFS industry for 2015 and early 2016 reflects a significant drop in upstream oil and gas capital spending next year, giving oil producers the upper hand in contract negotiations with oilfield service providers.

We expect the OFS industry’s EBITDA to drop by 12%-17% in 2015. A roughly 25% drop in oil prices from June to November 2014 has worsened the existing weakness in offshore markets, and will strain margins for Weatherford and other companies that offer onshore services.

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

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

UK Stamp Duty Reform Is Credit Positive for Taylor Wimpey and Other Homebuilders Last Wednesday, the UK Chancellor of the Exchequer delivered the UK government’s Autumn Statement, which includes a reform of the stamp duty land tax (SDLT) for residential property sales that effectively reduces the tax liability for 98% of house buyers. The reform is credit positive for UK homebuilder Taylor Wimpey plc (Ba1 stable) because most of its customers will benefit from the savings and will be able to redirect the available funds toward a higher purchase price, although the market will likely adjust over time.

As part of the reform, the stamp duty payable by the house buyer will no longer be assessed as a direct percentage of the purchase price. Instead, it will be calculated based on a series of progressively increasing tax rates applied to different bands of the purchase price. The reform will alleviate artificial price agglomeration around former SDLT tax rate thresholds. Greater demand, more efficient pricing and customers’ ability to pay more will increase both Taylor Wimpey’s revenues and profits since there are no costs associated with this change.

Under the old regime, house buyers paid a stamp duty equal to a straight percent of the purchase price (i.e., 0% for houses up to £100,000, 3% for houses between £100,000 and £250,000, and so on). Following the reform, the buyers will pay stated tax rates on the portions of the purchase price falling within specified bands. For an average UK house selling for £275,000, according to the Office of National Statistics, a buyer will pay £4,500 less than under the old scheme. An average first-time buyer purchasing a house for £210,000 will save £400, and in London, the country’s most expensive real estate market, an average buyer will pay £510,000 for a house and save £4,900.

Although the savings are not large in absolute terms, it is important to understand that stamp duties cannot be financed, and as such buyers must fund these amounts with cash. With the reduction in SDLT, they can now apply that extra cash to the down payment and increased purchase prices, on a leveraged basis.

Also positively, given Taylor Wimpey’s average selling price on private completions was £224,000 for the first half of 2014, the majority of its customer base will benefit from this reform. According to the government, SDLT will be reduced for all buyers purchasing houses for less than £937,500.

Before the reform, many houses were priced just below tax rate thresholds (i.e., £250,000) creating an artificial cluster of product and prices. With the change in the law, house builders will be able to differentiate their product and price it more efficiently.

Maria Maslovsky Assistant Vice President - Analyst +44.20.7772.5502 maria.maslovsky@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Voith’s Purchase of KUKA Stake Is Credit Negative Last Wednesday, Voith GmbH (Baa2 review for downgrade), a German engineering company, announced that it has bought a 25% stake in KUKA AG (Ba2 stable), a German manufacturer of robots and robotic systems, for an undisclosed amount. The purchase is credit negative for Voith because its credit metrics based on net debt will weaken and its liquidity buffer will materially decrease at a time when its operating performance is under pressure. As a result, we placed Voith Baa2 senior unsecured rating on review for downgrade.

Although Voith did not disclose the purchase price, we estimate the price at roughly €500 million based on KUKA’s current market capitalization of around €2 billion, and understand that Voith paid from cash and cash equivalents. Therefore, the purchase has no effect on Voith’s Moody’s-adjusted gross debt/EBITDA ratio, which was 5.8x for the 12-months to March 2014. However, the purchase will lead to a deterioration in the company’s Moody’s-adjusted retained cash flow/net debt ratio to around 15% on a pro-forma basis from 20.4% for the 12-month period to March 2014.

The transaction also materially decreases Voith’s (so far) very strong liquidity buffer. However, we believe that the liquidity profile remains adequate, supported by a €770 million multicurrency syndicated credit facility maturing in 2019 (with an option to extend the maturity for an additional two years), without repeating material adverse change clause and financial covenants, as well as some bilateral committed credit facilities. As of March 2014, Voith reported around €870 million cash and cash equivalents on its balance sheet.

We understand that Voith intends to be a long-term strategic investor in KUKA and it will consolidate the stake using the equity method. We also note that KUKA’s outstanding convertible notes have a dividend cap at €0.50 per share during 2014-16, which correspondents to the low tens of millions of euros per year. Therefore, we do not expect Voith’s stake in KUKA will be a major source of cash flows until 2016 at the earliest.

The transaction comes while Voith’s operating performance and credit metrics are negatively affected by restructuring costs of the so-called Voith 150+ programme. The Voith 150+ programme focuses primarily on Voith’s Paper division, which is struggling amid a structural decline in the demand for graphic grade paper. The programme aims to optimize structures and processes, produce annual costs savings of €150 million and release working capital of €100 million by the end of fiscal 2015 in September.

Martin Fujerik Analyst +49.69.7073.0909 martin.fujerik@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Telenor and TeliaSonera’s Danish Operations Merge, a Credit Positive for the Companies and Sector Last Wednesday, Telenor ASA (A3 stable) and TeliaSonera AB (A3 negative) announced that they had agreed to merge their Danish operations into a new 50-50 joint venture. The deal is credit positive for Telenor, TeliaSonera and Danish integrated incumbent TDC A/S (Baa3 stable) because it will reduce the number of mobile operators in the market to three from four, with Hutchison Whampoa Limited’s (A3 stable) Hi3G as the other remaining player. It will also be credit positive for Hutchison, which will not only benefit from the consolidation, but also may take advantage of any potential remedies imposed by the regulator to approve the deal.

Following this merger, which the companies expect to close next year, we expect operators to shift to improving service quality to differentiate themselves and away from aggressive price competition. Intense competition in the Danish market has reduced revenue and profitability. As Exhibit 1 shows, average revenue per user has declined significantly in recent years for all Danish operators. As recent consolidation in Austria shows, there is potential for price increases when the number of competitors in a market shrinks to three operators from four. The proposed deal in Denmark will lead to more rational price competition, which should help returns and network investments in Denmark, which has declined by more than 30% in the past five years.

EXHIBIT 1

Monthly Blended Danish Mobile Average Revenue Per User

Source: The companies (TDC average residential and business monthly average revenue per user)

The Telenor-TeliaSonera joint venture will be similar in size to TDC, the market leader (see Exhibit 2), with a combined mobile subscriber market share of around 40%, approximately 3.5 million mobile customers and revenues of more than DKK9 billion.

100

110

120

130

140

150

160

170

180

190

2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3

DKK

Telenor TeliaSonera TDC

Conchita Izaguirre Associate Analyst +34.91.768.824 concepcion.izaguirre@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

EXHIBIT 2

Comparison of Mobile Operators’ Market Shares in Denmark in 2013

Source: Company data

The two companies expect annual efficiency gains of more than DKK800 million starting in 2019, from many areas including distribution, sales and marketing, call centres, network and IT. However, to achieve these synergies, the companies will have to incur integration costs of around DKK800 million over the next two years.

The transaction requires approval from the European Commission, which could impose remedies such as the sale of assets or spectrum to Hi3G or some of the approximately 40 mobile virtual network operators in Denmark, which have a combined market share of approximately 7%.

We do not expect the transaction to have a material effect on TDC, Telenor or TeliaSonera’s credit metrics. The Danish operations of Telenor and TeliaSonera are small, constituting around 4.5% and 5.2%, respectively, of group revenues and 1.9% and 4.2%, respectively, of group EBITDA. Given that the joint venture will be consolidated as an associate, its contribution will not be reflected in the consolidated revenues or EBITDA of Telenor or TeliaSonera. However, the deconsolidation of both companies’ Danish operations will be partly compensated by the dividends they expect to be received from the joint venture.

TeliaSonera18%

Telenor22%

Hi3G12%

Others7%

TDC41%

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Infrastructure

European Gas Infrastructure Utilities Will Benefit from South Stream Pipeline Cancellation Last Monday, Russian President Vladimir Putin announced that the South Stream pipeline project, which would have shipped gas from Russia across the Black Sea to Europe, would not go ahead. The cancellation of the project, which sought to bypass Ukraine as a gas export route to Europe, is credit positive for some European utilities with gas infrastructure.

Mr. Putin blamed the project’s cancellation on European Union’s (EU) requirement for third-party access and said that Russia would instead export gas to Turkey. Russia accounts for about one third of the EU’s gas supplies, half of which flow through Ukraine.

The cancellation of South Stream, which would have had annual capacity of 63 billion cubic meters (bcm), follows last year’s abandonment by a consortium of Turkish and central European oil and gas companies of the Nabucco pipeline project from Turkey to Austria. This was a blow to southern and central European countries that rely heavily on Russian gas, such as Bulgaria, Slovakia and Hungary, and therefore these countries are likely to push for increased interconnection and reverse flow capacity to remove current bottlenecks that constrain gas flows within Europe. This would offer long-term growth opportunities to gas transmission companies such as SNAM S.p.A. (Baa1 stable) and to a lesser extent Enagas S.A. (Baa2 positive) and TIGF SA (Baa2 stable), although higher capex could weigh on their leverage ratios.

Other European utilities that stand to benefit from the cancellation include companies that own existing gas import infrastructure such as liquefied natural gas (LNG) regasification terminals (see Exhibit 1). There are currently 24 LNG terminals under study or planned in Europe, with a combined annual capacity of more than 140 bcm, and some of these projects may move forward if the outlook for European gas demand improves.

EXHIBIT 1

European Utilities with Existing Liquefied Natural Gas Regasification Capacity

Company Country Sites and Ownership Percentage Gross Import Capacity (bcm)

Enagas S.A. (Baa2 positive)

Spain Barcelona (100%), Bilbao (40%), Cartagena (100%), Huelva (100%)

47.7

Gas Natural SDG, S.A. (Baa2 stable)

Spain Mugardos, Sagunto (21%) 12.4

N.V. Nederlandse Gasunie (A2 stable)

Netherlands Gate LNG (47.5%) 12.0

GDF SUEZ SA (A1 stable) France Fos-Cavaou (>70%), Fos-sur-Mer (100%), Montoire (100%)

23.8

National Grid Plc (Baa1 stable)

UK Isle of Grain (100%) 20.5

SNAM S.p.A. (Baa1 stable) Italy Panigaglia (100%) 3.3

Sources: International Group of Liquefied Natural Gas Importers and Moody’s Investors Service

Joanna Fic Vice President - Senior Analyst +44.20.7772.5571 joanna.fic@moodys.com

Paul Marty Vice President - Senior Analyst +44.20.7772.1036 paul.marty@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

For eustream a.s.,1 which transports about one third of Russia’s gas to the EU, the cancellation’s effect will depend on whether Russia embarks on alternative gas transit projects to Europe that bypass Ukraine.

With an annual capacity of 90 bcm, eustream forms part of the central corridor, which is the largest transit route in Europe for gas flow between Russia and Western and Southern Europe (see Exhibit 2). Following the 2012 commissioning of the Nord Stream pipeline, which bypassed Eastern Europe via the Baltic Sea, eustream’s competitive position substantially weakened, with the company’s volumes of shipped gas tumbling to 56 bcm in 2012 from 73.5 bcm in 2011.

EXHIBIT 2

Key Gas Transmission Routes and Projects in Europe

Source: eustream

1 eustream issues guaranteed notes through SPP Infrastructure Financing B.V. (Baa1 negative).

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

More generally, because we expect domestic production to decline by the end of the decade primarily as a result of lower output from the UK, the EU may seek alternative sources of gas. This would provide a boost to the Trans Adriatic Pipeline project, in which Enagas owns a 16% interest. The project, with a planned annual capacity of 10-20 bcm, would transport gas from Azerbaijan across the Adriatic Sea to Italy.

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Banks

American Savings Bank Spinoff Is Credit Positive Last Wednesday, the thrift American Savings Bank, FSB (ASB, A3 stable, C/a3 stable2) and its parent, Hawaiian Electric Industries, Inc. (HEI, P-2 stable) announced that the bank would be spun off to shareholders. The spinoff is credit positive because it improves ASB’s flexibility in its capital management including lowering its dividend.

Historically, ASB has paid out the majority of its earnings to HEI. Year to date, the dividend payout has averaged a high 70% of ASB’s earnings. In earlier years, when the bank was not growing, the dividend payout sometimes exceeded 100%. These dividends helped support HEI’s very sizable capital investment programs and its high dividend to HEI shareholders. With the spinoff announcement, ASB’s management stated that as a public company, the dividend payout ratio is likely to be cut to 30%-40% of earnings, which is considerably less than it paid to HEI.

The retention of a greater proportion of earnings will permit a faster capital growth. This and the creation and accounting of a deferred tax asset would help rectify ASB’s lower regulatory capital ratios relative to same-rated peers. ASB’s Tier 1 capital ratio as of 30 June 2014 was 11.5%, or 90 basis points below the peer median. However, we do not think the improvement from earnings retention will be dramatic because ASB is likely to return a significant portion of its earnings to shareholders through both dividends and share repurchases because its home market is highly profitable and growth opportunities are limited.

ASB’s operations center on Hawaii, where it is a distant third (12.5% of Hawaii deposits) behind market leaders Bank of Hawaii (Aa3 stable, B/aa3 stable) and BancWest’s First Hawaiian Bank (A2 stable, C+/a2 stable), which each have deposit market share of more than 30%. The market is characterized by comparatively high margins in the spread business, resulting in above average profitability. In response to capital generation being higher than market growth, payouts to shareholders through the combination of dividends and share repurchases have been high. For example, Bank of Hawaii’s total payout to shareholders was 89% of net income over the past five years, of which 50% was through dividends.

Therefore, we also expect ASB as a publicly traded company to pay out a high percentage of net income to shareholders through dividends and share repurchases, if appropriate growth opportunities are not available. Nonetheless, a higher component of share repurchases over dividends benefits its risk profile because they can be easily reduced while dividends are rarely cut and only in the most severe of economic scenarios.

The spinoff will also allow ASB to raise capital independently. We do not expect that equity issuance is necessary because of ASB’s good capital generation capability. Nevertheless, it remains an option. A large number of banks issued capital in response to the damages brought upon by the Great Recession.

2 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.

Rita Sahu, CFA Vice President - Senior Analyst +1.212.553.1648 rita.sahu@moodys.com

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Banreservas’ Increase in Paid-in Capital Is Credit Positive Last Tuesday, the Dominican Republic’s Chamber of Deputies passed a law aimed at increasing the paid-in capital of state-owned Banco de Reservas de la Republica Dominicana (Banreservas, B1 stable, E+/b3 negative3), the country’s largest bank, to as much as DOP10 billion ($220 million) by 2016 from the current level of DOP3.5 billion ($80 million).

The measure is credit positive for Banreservas because it shows the government’s willingness to support the bank’s core capital, which had fallen significantly in recent years as a result of robust loan growth and sizable dividend transfers. However, the increase in the paid-in capital will be funded with the bank’s earnings, rather than via an injection from the government. The legislation passed the Senate in October and now awaits presidential approval.

The law prescribes an increase of the paid-in capital by DOP2 billion by capitalizing retained earnings from 2013. The bank will be authorized to raise its paid-in capital by up to another DOP4.5 billion with its 2014 and 2015 net income to reach DOP10 billion by 2016. Banreservas’ current net income is sufficient to meet these goals, provided that it significantly reduces its dividend payout. The bank earned DOP5.2 billion in the nine months to September 2014, a 45% increase from a year earlier, although most of that was a result of higher security trading and lower loan-loss provisions. Thus, profitability in 2015 should increase at a slower pace.

If the DOP4.5 billion increase in paid-in capital materializes by 2016, Banreservas would be able to grow its loan portfolio by as much as 15%, half of its current growth rate of 30%, without a further decline in capital. In less than two years, Banreservas’ reported Tier 1 ratio declined by a hefty 550 basis points, falling to 10.7% as of September 2014 from 16.2% as of December 2012, due to high loan growth and sizeable dividend payments.

Although Banreservas’ capital appears to have remained relatively robust despite this decrease, when we apply a 100%-risk weighting to government securities and loans, which comprise about 40% of the bank’s assets and as prescribed for B-rated sovereigns per Basel guidance, the Tier 1 ratio drops to less than 6%. Hence, further declines would jeopardize the bank’s standalone creditworthiness.

We note that the law does not actually force the bank to reach the targeted DOP10 billion. Nor does it ring-fence its core capital from dividend transfers. However, the initiative has the support of Banreservas’ board of directors, the country’s Central Bank and the president, which increases the probability that the bank will execute the capital plan as intended.

However, we believe there is still a risk that the government will continue to use the bank to help finance its persistent fiscal deficits, related in part to the ailing state-owned electric transmission and distribution system. In December 2013, a law that refinanced $800 million of short-term loans (around 20% of total loans) and accounts receivables extended to the Ministry of Finance undermined the bank’s standalone solvency and liquidity. The restructuring followed an $80 million dividend payment in June 2013, equal to 1.34x the bank’s 2012 net income, which was a reversal of the bank’s nearly full retention practice for 2012 and 2011. Nevertheless, Banreservas has been able to offload part of its government exposure by selling last November about a third of its public sector loan portfolio, totaling $488 million, to foreign investors.

3 The ratings shown in this report are Banreservas’ local deposit rating, standalone bank financial strength rating/baseline credit

assessment and the corresponding rating outlooks.

Georges Hatcherian Analyst +52.55.1555.5301 georges.hatcherian@moodys.com

Vicente Gomez Associate Analyst +52.55.1555.5304 vicente.gomez@moodys.com

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

BBVA Chile’s Profitability to Take a Hit from Penalty Against Broker Unit Last Wednesday, BBVA Corredora de Bolsa Limitada (unrated), BBVA Chile’s (Baa1 stable, D+/baa3 stable4) wholly owned securities broker, was fined CLP26.5 billion ($43 million) in civil penalties by Santiago’s Court of Appeals for illegal actions of the broker’s ex-employees in connection with the 2003 Corfo-Inverlink trading scandal. The fine is credit negative for BBVA Chile, because it will capitalize the broker to cover the provisioning charge for CLP30 billion ($48.7 million) to assure its license to conduct business. The amount of the capital infusion equals almost one quarter of the bank’s expected 2014 earnings, which it will take time to recoup, particularly in light of slower-than-expected loan growth for Chile in 2015.

Although BBVA Corredora will contest this ruling, which itself is a reversal of an earlier decision, to Chile’s Supreme Court, the company will take a provisioning charge equal to the fine during the fourth quarter of 2014.

The legal action includes criminal penalties against former executives of Inverlink, following earlier sanctions on former executives of BBVA Corredora. Given the size of the civil penalty relative to BBVA Corredora’s capital, the authorities are clearly penalizing the bank owner for poor internal controls.

The Corfo-Inverlink affair uncovered weaknesses in Chile’s system of trading bank certificates of deposit (CDs) and raised questions about the role and effectiveness of regulators. Several high-ranking public officials were forced to resign in the wake of the scandal. The Ministry of Finance immediately proposed changes to the capital markets reform law to promote improved controls and to empower securities regulator the Superintendency of Broker-Dealers and Insurance (SVS) to prohibit disreputable traders from participating in the market.

BBVA Chile will easily absorb the fine through earnings, supported by a strong balance sheet, which explains our continued stable outlook for the bank (see exhibit).

BBVA Chile Will Absorb Provisioning Charge via Earnings, CLP Billions

2010 2011 2012 2013 Sept. 2014 2014E

Total Assets 7,407 8,553 9,370 10,133 11,852 12,395

Total Shareholders’ Equity 499 543 638 667 717 703

Pre Provision Income 107 130 125 141 143 160

Net income 48 74 65 50 87 86

Pre-Provision Income/Risk-Weighted Assets 1.7% 1.8% 1.6% 1.7% 2.0% 1.7%

Return on Average Assets 0.7% 0.9% 0.7% 0.5% 1.1% 0.8%

Return on Equity 9.8% 14.3% 11.0% 7.8% 16.9% 12.5%

Problem Loans / Gross Loans 2.2% 1.9% 1.2% 1.5% 1.5% 1.5%

Loan Loss Reserves / Problem Loans 81% 106% 148% 116% 110% 108%

Tier 1 Ratio 8.1% 7.6% 8.1% 7.9% 7.7% 7.3%

Sources: Company reports and Moody’s Investors Servicer

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

credit assessments, and the corresponding rating outlooks.

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

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

The fine against BBVA Corredora comes on the heels of fines levied against other financial institutions in Chile. In October, the SVS fined Banchile Corredores de Bolsa (unrated), its ex-investment manager and Linzor Asset Management (unrated), although in much smaller amounts of around $7 million in connection with the Cascadas Case. However, fines imposed on brokerage Larrain Vial (unrated) and executives for that same case totaled $48 million. These sanctions reflect a more aggressive stance by authorities in Chile in investigating, prosecuting and imposing fines. Increased regulatory and legal scrutiny is resulting in higher operating costs for financial institutions and affecting their profitability.

The Corfo-Inverlink Affair dates back to March 2003, when Chile’s government development agency CORFO reported that an employee had stolen bank CDs and other securities that belonged to the agency. The CORFO employee was accused of having sold the securities to the stockbroker of local financial conglomerate Inverlink, who, in turn, sold them into the secondary market to raise cash for its ailing operations. The government placed a stop payment on the instruments, which led to outflows from mutual funds equivalent to 27% of mutual fund net asset values. To avoid contagion at banks whose fund management affiliates participate in this market, the banks agreed with the government to guarantee the immediate repayment of the stolen instruments and to assume the loss in case the courts found them to be implicated in the illegal sale or that their internal controls were faulty.

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Paraguay’s Financial Inclusion Plan Is Credit Positive for Banks Last Tuesday, the Paraguayan Central Bank launched the National Strategy of Financial Inclusion Project, which aims to facilitate access to the formal economy among the unbanked population, reduce inequality and poverty, and foster economic development. The Financial Inclusion Project is credit positive for Paraguayan banks because it will boost financial intermediation.

In Paraguay (Ba2 positive), 71% of the population do not have a bank account, 42% do not use a formal financial product, 33% of total rural areas are unbanked, and 60% of all households savings are in cooperatives. The project, which will be implemented gradually between March 2015 and 2018, aims to raise the percentage of adults with savings accounts to 50% from the current 29%, and expand access to mortgages for first-time home buyers. Authorities aim to achieve these goals with financial literacy programs and stronger consumer protection regulations, which started earlier this year. We expect the improvement of the population’s financial education to be a gradual and long process.

Banks will likely benefit from a broader retail deposit base and increased consumer finance lending, which currently accounts for just 16% of total loans system-wide. Banks’ loans to clients are only 60% of bank assets currently, suggesting significant room for growth in credit cards and personal loans, which carry higher interest margins.

The project is the result of more than a year of research and studies, and is supported by international financial organizations, such as the Inter-American Development Bank. The Central Bank has already improved the regulatory framework to provide increased protection guarantees to financial consumers. More importantly, it has started to enhance financial education to develop responsible debtors and avoid the misuse of the financial services, which will help protect the financial health of the banking system. In addition to expanding access, the program also aims to improve the quality and reduce the cost of financial services through increased coordination between the public and private sector, which will be managed by different task forces.

Financial intermediation in Paraguay has been rising and the country’s loan-to-GDP ratio climbed to 38% in 2013, from 34% in 2010. Moreover, a series of laws passed in 2013 have enhanced Paraguay’s institutional strength, which will attract greater levels of investment. A new Public-Private Partnership law was included in the recent reforms, which will create opportunities for banks to provide financing for infrastructure projects, and to offer credit to firms that operate roads, railways, ports, and airports.

Credit growth has averaged 24% a year for the past four years, driven largely by agribusiness lending (agriculture loans together with cattle raising), as well as commerce and increasing demand for consumer credit, as shown in the exhibit below. Additionally, banks’ asset quality is adequate. Banks’ system-wide nonperforming loan (NPL) ratio has remained stable around 2.1%-2.4%, given adequate risk management practices, rapid lending growth and periodic portfolio sales. Banks also have ample loan loss reserves.

Valeria Azconegui Assistant Vice President - Analyst +5411.5129.2611 valeria.azconegui@moodys.com

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Paraguay’s Sectoral Loan Growth

Source: Central Bank of Paraguay

We expect loan growth to slow to a more sustainable pace as a result of a general slowdown in economic growth, which we believe decelerated to around 4.8% this year from 13.6% in 2013. However, we expect credit will still be up a healthy 15% in 2014, and will continue to outpace GDP growth next year as banks benefit from the government’s financial inclusion initiative, together with rising household purchasing power. We expect banks to gradually diversify and reduce their dependence on the agriculture sector.

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

Agriculture Commerce Consumer Cattle raising Services Industry Financial Sector

$ Bi

llion

2010 2011 2012 2013 2014

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Sasfin Bank’s Acquisition of Fintech Is Credit Positive Last Tuesday, Sasfin Bank Limited (Baa2.za stable5) announced the acquisition of the rental finance company Fintech Proprietary Limited. The acquisition is credit positive for Sasfin, because it will enhance its franchise in the niche rental finance market and provide critical mass for cross-selling opportunities, with limited to no effect on its capital and funding metrics.

Pending the completion of its due-diligence and regulatory approvals, Sasfin Bank, which is a well-established player in the rental, lease and instalment sale market in South Africa, will pay ZAR172 million with cash drawn from the bank’s excess liquidity, resulting in goodwill of only around 4% of the bank’s capital base. We expect Sasfin Bank will retain a high common equity Tier 1 ratio above the 20.4% it reported as of September 2014.

Sasfin Bank will take over Fintech, which operates in the same market as Sasfin, providing rental finance for a range of products that includes light office equipment, heavy manufacturing and construction plant and machinery. This transaction will enhance Sasfin Bank’s strong franchise within the niche rental finance market, which is its core business, while also providing cross-selling opportunities.

The bank will instantly gain access to more than 10,000 additional clients, with good potential for recurring business and cross-selling products and services. This would include potential deposits and the transactional banking services that the bank will officially introduce next month, aiming to become the primary bank for a bigger number of clients. Sasfin Bank can also leverage synergies and cost savings through the integration of the acquired operations onto its new core banking platform.

In addition, the bank pro forma total assets base will expand by around 13% to approximately ZAR8 billion ($724 million). Despite the increase in the bank’s asset base and loan book, Sasfin Bank will remain a very small player in South African commercial banking with total market share by assets of less than 0.3%. The acquisition will likely move Sasfin Bank to the 8th largest local bank in South Africa from the 11th largest, but its core business in equipment rental finance will comprise a high 65% of total loans post acquisition (as shown below), up from 59% in October 2014. Its limited products and services diversification compared with larger South African banks is a constraint on its national-scale rating.

5 The bank rating shown in this report is the bank’s national-scale long-term issuer rating and the corresponding rating outlook.

Nondas Nicolaides Vice President - Senior Credit Officer +357.25.586.586 nondas.nicolaides@moodys.com

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Sasfin Bank’s Pro-Forma Loan Book Profile, Post Fintech Acquisition Total net loans ZAR5.2 billion

Source: Sasfin Bank

Nonetheless, the acquisition will make Sasfin Bank a more visible player in the commercial banking space, which is likely to also benefit its deposit gathering efforts in conjunction with its transactional banking offering.

In terms of funding and liquidity, Sasfin Bank will marginally increase its wholesale market funding dependence, especially via securitisation in view of Fintech’s existing securitised funding. Indicatively, customer deposits to total non-equity liabilities will decline to around 45% from 52% as of October 2014, while its core liquidity (including regulatory reserves) to total assets will decrease to around 12.9% from 14.5% in October.

Equipment Rental finance65%

Trade finance13%

Capital Equipment finance 10%

Debtor finance7%

Commercial Property Finance 3%

Other secured loans1%

Taxi Finance1%

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Spain’s Draft Legislation on Bank Resolution Is Credit Negative On 28 November, the Spanish government approved draft legislation for the implementation of the European Bank Recovery and Resolution Directive (BRRD). Although Spain has had a restructuring and resolution regime in place since 2012, this draft law is credit negative for bondholders because, for the first time, it limits the use of public funds for bank resolutions and includes burden-sharing with all types of unsecured creditors.

Spain is now the fourth country to proceed with the European BRRD’s implementation at the national level (Germany enacted BRRD and both Austria and the Netherlands have drafted legislation for its implementation). Although Spain’s proposed law is still subject to change, we expect that most provisions of the BRRD will not change, notwithstanding any marginal adjustments to fit the BRRD within the local legal framework. Pending parliament’s approval, the new law will complement and enhance Spain’s existing Law on Restructuring and Resolution of Credit Institutions (Law 9/2012).

The draft law closely mirrors the main aspects of the BRRD as adopted by the European Parliament on 15 April. The draft law prescribes burden-sharing with unsecured creditors as stipulated in BRRD, which effectively narrows authorities’ options to deal with failing banks. While the draft law is likely to be implemented during 2015, the bail-in tool will become effective in January 2016, as per BRRD requirement. The Fondo de Reestructuración Ordenada Bancaria (FROB), which has been in charge of all bank restructuring cases since 2012, will be appointed as resolution authority and will work in conjunction with Bank of Spain in this capacity.

The draft law also contemplates the creation of a national resolution fund, which will be integrated into the European Single Resolution Fund (SRF) on 1 January 2016. This resolution fund will be used to support failing banks after the minimum burden-sharing with unsecured creditors. Spanish banks will have to contribute to the resolution fund in proportion to their total liabilities and according to their risk profile.

The current legal framework in Spain (i.e., Law on Restructuring and Resolution of Credit Institutions), which was adopted in 2012, is less restrictive and allowed Spanish authorities to take a wide range of actions in dealing with the recapitalization of Bankia, S.A. (B1 negative, E+/b3 negative6), NCG Banco S.A. (Caa1 negative, E/caa2 stable) and Catalunya Banc SA (B3 review for upgrade, E/caa2 stable). For these failed banks, losses were imposed on junior instruments, but senior creditor bail-in was not contemplated. Spain’s implementation of BRRD would give the national government less flexibility, and a failure similar to past failures would be handled according to the new law.

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

assessment and the corresponding rating outlooks.

Maria Vinuela Analyst +34.91.768.8237 maria.vinuela@moodys.com

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

France Ends Tax Deductibility for Bank Systemic Risk Tax, a Credit Negative Last Tuesday, the French parliament adopted a provision of the country’s 2015 finance law whereby the systemic risk tax (SRT) paid by French banks will no longer be tax deductible, a credit negative.

Parliament enacted the SRT in France’s 2011 finance law in order to impose an ex-ante levy on banks that would compensate the government for expenses it would incur if a bank rescue required public funds. The SRT, which is proportional to banks’ risk-weighted assets, was amended in 2012 to double what the government collects to €900 million per year from the initial plan of collecting €450 million. Other European Union countries such as the UK and Germany have also set up such funds.

By approving this tax measure, the French parliament has endorsed the view that tax deductibility is at odds with the government’s objective of protecting taxpayers from a bank’s bailout. Indeed, taxpayers are effectively contributing to the cost of a bank rescue if the SRT is tax deductible, and that rationale prompted Germany to make SRT not deductible.

France’s SRT will be phased out by 2019 and replaced by a European Union (EU) tax that has the same purpose. Moreover, the French parliament has decided that the forthcoming EU tax will not be tax deductible, either.

According to Article 102 of the Capital Requirement Regulation (CRR), European member states must set up national resolution funds that will be progressively mutualised in a pan-European resolution fund. Banks will start paying the tax next year. The Fund will be available for the EU Resolution Board in January 2016 to take action if a bank under resolution cannot be restored without receiving public support. Between 2015 and 2024, the fund’s size will reach as much as €55 billion.

French banks will have to pay €15-€16 billion based on the most recent public estimates, which would equal 29% of the EU Fund. France’s five largest banks will bear the bulk of the cost. Those banks are Banque Fédérative du Crédit Mutuel (Aa3 negative, C-/baa2 stable), BNP Paribas (A1 negative, C-/baa1 negative), Credit Agricole SA (A2 negative, D+/ba1 stable), BPCE (A2 negative, D/ba2 stable) and Société Générale (A2 negative, C- /baa2 stable). The EU’s finance ministers will discuss and decide on the contribution of each EU country’s banking system as early as this month. One important topic regards the possibility of banks paying their dues based on a “commitment to pay” rather than in cash, which would make a material difference in cost.

We note that France’s systemic risk tax will remain in place until 2019, even after the creation of the new EU tax. We estimate it will cost banks an additional €2.3 billion on top of the €15-€16 billion they will pay for the EU tax. That means that French banks could pay more than €17 billion over the next years, a significant amount if it is not tax deductible and an amount that will weigh on banks’ profitability and retained earnings.

Alain Laurin Associate Managing Director +33.1.5330.1059 alain.laurin@moodys.com

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Capital Increase Allows Kuwait’s Burgan Bank to Meet Basel III Capital Standards Last Wednesday, Kuwait-based Burgan Bank SAK (A3 stable, D+/ba1 stable7) announced that it had successfully completed a KWD103 million ($352 million) rights issue. The capital increase is credit positive because it will provide additional buffers against increased credit risks from the bank’s rapidly growing international operations, predominantly in countries experiencing political and economic uncertainty that expose the bank to higher systemic risks. It will also assist Burgan in meeting Kuwait’s accelerated Basel III implementation regime.

The rights issue, fully subscribed by existing shareholders, will raise the bank’s capital ratios by approximately 200 basis points. It follows a successful issuance of $500 million in Basel III-compliant additional Tier 1 (AT1) securities in September, which had already added 290 basis points to the ratios. Following the latest issuance, we estimate that Burgan Bank’s Basel II Tier 1 ratio has increased to around 15.2% from 13.2%, and its total capital adequacy has risen to around 20.5% from 18.6% (see Exhibit 1).

EXHIBIT 1

Burgan Bank’s Capital Issuances Have Improved Its Basel II Capital Ratios

* Moody’s Investors Service estimates. Sources: Burgan Bank and Moody’s Investors Service

The recent issuances will allow Burgan Bank to meet the accelerated Basel III implementation in Kuwait. By 2016, Kuwaiti banks must meet a common equity Tier 1 ratio of 9.5%, a Tier 1 ratio of 11.0% and a total capital minimum of 13.0%. There are no transitional arrangements for new capital deductions or any phase-out periods for legacy Tier 2 capital. Burgan Bank has not yet publicly disclosed its capital ratios under Basel III, but we roughly estimate that the new capital standards could cut its total capital ratio by up to 400 basis points, because of capital deductions for its substantial minority interests and the ineligibility of its legacy Tier 2 capital, and its Tier 1 ratio by a lesser extent.

The new capital will provide additional buffers against increased credit risks, mainly from the bank’s rapidly growing cross-regional operations. The bank’s total loan book grew by 20% between third-quarter 2013 and third-quarter 2014, compared with an average of 7% for other Kuwaiti banks, driven by higher growth domestically and its operations in Turkey (Burgan Bank A.S., Ba2 stable, E+/b2 stable) and Algeria (Gulf Bank Algeria, unrated) (see Exhibit 2).

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.

9.9%

13.2%

15.2%15.4%

18.6% 20.5%

0%

3%

6%

9%

12%

15%

18%

21%

0100200300400500600700800900

1,0001,100

Dec-13 Sep-14 Post Rights Issue*

KWD

Mill

ions

CET1 Capital - left axis AT1 Capital - left axisTier 2 Capital - left axis Tier 1 Ratio - right axisCapital Adequacy Ratio - right axis

Alexios Philippides Analyst +357.25.693031 alexios.philippides@moodys.com

NEWS & ANALYSIS Credit implications of current events

21 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

EXHIBIT 2

Burgan Bank’s Loan Growth Between Third-Quarter 2013 and Third-Quarter 2014

* Growth in Turkey in local currency terms was 52%. Sources: Burgan Bank and Moody’s Investors Service

Burgan Bank is the second-largest conventional (non-Islamic) bank in Kuwait, with total consolidated assets of $26 billion at the end of September 2014, and the most geographically diversified. More than 40% of its loans were booked from its subsidiaries in the Middle East and North Africa (see Exhibit 3), contributing around half of the bank’s revenue. As a result, Burgan Bank’s credit portfolio is largely composed of new loans, some of which are in relatively stressed markets facing economic slowdown and regional political uncertainty, exposing the bank to potential asset quality deterioration, underlining the need for the additional capital.

EXHIBIT 3

Burgan Bank’s Loan Book Breakdown by Location of Booking Entity as of September 2014

Sources: Burgan Bank and Moody’s Investors Service

0% 10% 20% 30% 40%

Tunisia

Iraq

Algeria

Jordan

Turkey*

Kuwait

Total Loan Book

Kuwait59%Tukey

19%

Jordan12%

Algeria8%

Iraq2%

Tunisia0%

NEWS & ANALYSIS Credit implications of current events

22 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Asset Managers

China’s Financial Asset Management Regulatory Overhaul Is Credit Positive On 30 November, China’s five regulators jointly issued new regulations for financial asset management companies (AMCs) that take effect 1 January 2015. The new regulations are credit positive for China’s AMCs because they will lead to a more effective regulatory regime for the AMCs and also clarify key standards regarding their capital management and funding. The five regulators are the China Banking Regulatory Commission, the Ministry of Finance, the People’s Bank of China, the China Securities Regulatory Commission and the China Insurance Regulatory Commission.

The regulations will more accurately capture the evolving business model of China’s AMCs, which have expanded beyond their core business of distressed asset management and diversified to other financial services, including brokerage, trust, banking and insurance (see Exhibit 1). Consequently, the new regulations are more comprehensive than just focusing on AMCs’ banking-related activities. Large AMCs, such as China Cinda Asset Management Co., Ltd. (Cinda, A3 stable) and China Huarong Asset Management Co., Ltd. (Huarong A3 stable), will be in good position to further diversify their business away from distressed asset management because they have already made structural and commercial changes that should allow them to meet the new regulatory requirements with little difficulty.

EXHIBIT 1

China’s Asset Management Companies Have Expanded Their Business to Other Financial Services

Financial Service Cinda Huarong Orient Greatwall

Distressed Asset Management √ √ √ √

Securities √ √ √

Insurance √

√ √

Financial Leasing √ √ √ √

Trust √ √ √ √

PE investment √ √ √ √

Real Estate Investment √ √ √ √

Mutual Fund √

Credit Rating Services

√

Banking

√

Futures and Commodities Trading √ √ √ √

Note: Cinda = China Cinda Asset Management Co. Ltd.; Huarong = China Huarong Asset Management Co. Ltd; Orient = China Orient Asset Management Corporation; and Greatwall = China Great Wall Asset Management Corporation.

Sources: Company data and Moody’s Investors Service

Additionally, the inclusion of the China Securities Regulatory Commission and the China Insurance Regulatory Commission as the major regulators in the new regime is also a credit positive development because many AMCs have securities and insurance subsidiaries that fall under their regulatory purview.

Aside from a broader coverage of business activities, the new regulations also specify how AMCs should strengthen their corporate governance, risk management, internal transactions, capital management, financial stability, information management and disclosure.

Sean Hung Assistant Vice President - Analyst +852. 3758.1503 sean.hung@moodys.com

NEWS & ANALYSIS Credit implications of current events

23 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

The regulations set specific standards regarding the sector’s capital management and funding. In particular, AMCs will now need to satisfy a 12.5% minimum capital requirement (versus 10.5% for banks and leasing companies). Although this threshold is not particularly conservative, it nonetheless will ensure a meaningful level of loss-absorption capacity. The 12.5% minimum capital requirement will also temper the industry’s recent strong growth, which is straining its capitalization and its risk management capability. By their very nature of being a depository for troubled assets, AMCs face greater asset quality risks than commercial banks.

Finally, the new regulations also note that, subject to regulatory approvals, AMCs could issue hybrid debt or preference shares with principal write-down or conversion to equity at the point of non-viability to replenish their capital. AMCs would benefit from increasing diversification in capital raising and funding sources.

EXHIBIT 2

China’s State-Owned Asset Management Companies’ Assets Growth

Note: Cinda = China Cinda Asset Management Co. Ltd.; Huarong = China Huarong Asset Management Co. Ltd; Orient = China Orient Asset Management Corporation; and Greatwall = China Great Wall Asset Management Corporation. Sources: Company data and Moody’s Investors Service

The stringent capital and risk management requirements, however, may increase the industry’s entry barrier. This would make it more difficult and time consuming for local and provincial government to set up AMCs to handle rising bad loans owed by local governments and financial institutions amid the economic slowdown.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

50

100

150

200

250

300

350

400

450

Cinda Huarong Orient Greatwall

RMB

Billi

ons

Total Assets 2011 - left axis Total Assets 2013 - left axis Growth Rate - right axis

NEWS & ANALYSIS Credit implications of current events

24 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Sovereigns

Sweden’s Parliament Rejects Government Budget and Prime Minister Calls for New Elections, a Credit Negative Last Wednesday, Sweden’s (Aaa stable) Rikstag voted down the minority government’s 2015 budget proposal and instead approved the centre-right opposition Alliance’s8 shadow budget proposal, prompting Prime Minister Stefan Löfven to call for snap elections.

The events are credit negative for the sovereign because they increase policy uncertainty and delay policy implementation. Indeed, according to the now-caretaker prime minister, the new elections will be held on 22 March, hence a new government will not be formed for several months. The Rikstag is now using the opposition budget to set fiscal policy for 2015.

Moreover, this political crisis creates unusual political uncertainty in Sweden, a country where politics have historically been characterized by a high degree of stability and consensus, with some opposition parties usually supporting the government’s budget when a minority coalition is in power. This general harmony across political parties and pragmatic decision making has guaranteed policy continuity and efficient coalition governance for more than four decades, with six coalitions out of 13 governments since 1970. The defeat of the budget and the organization of snap elections, which has happened only one other time in 1958, challenges this consensus-led model and reflects Sweden’s recently rising political fragmentation.

Defeat of the government’s budget is an outcome of that fragmentation. Indeed, the Sweden Democrats (SD) party, a far-right anti-immigration party that controls 49 of the parliament’s 349 seats, announced the day prior to the vote that it would support the centre-right opposition’s shadow budget. According to Swedish law, opposition parties are allowed to present their own alternative budget and the budget that gathers the highest number of votes is adopted. Given the minority position of the outgoing red-green coalition, which holds 138 seats (and 159 with the support of the Left Party), and the fact that the centre-right opposition Alliance made up of four parties that control 141 seats, the support (or abstention) of the SD was essential to have the budget adopted.

The SD Party became the third-largest party in parliament when it won 13% of the vote in September general elections. At the same time, support for the traditional political parties declined.

8 Alliance is a four-party political alliance (formerly called Alliance for Sweden) that governed Sweden from 2006 until the September

2014 election. It consists of the Moderate Party, the Liberal People’s Party, the Centre Party, and the Christian Democrats.

Sarah Carlson Vice President - Senior Credit Officer +44.207.772.5348 sarah.carlson@moodys.com

Marine Bourdery Associate Analyst +44.207.772.1086 marine.bourdery@moodys.com

NEWS & ANALYSIS Credit implications of current events

25 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

EXHIBIT 1

Parties Represented in Sweden’s Parliament and Their Number of Seats Political fragmentation in Sweden has increased

2010 2014

Note: The parties of the current red-green coalition are indicated in green. Those that formed the Alliance coalition are in grey. Source: Moody’s Investors Service

Although this political crisis creates uncertainty regarding the government’s capacity to effectively implement its policies and the content of the budget that will be adopted, it is unlikely to undermine the strength of Sweden’s public finances given their robust starting position and overall consensus among political parties on the need to reduce the deficit after years of moderately expansionary policy. However, political differences are still quite significant on the modalities of fiscal consolidation.

Sweden still exhibits very strong fiscal metrics with government debt at 38.6% of GDP in 2013 as well as highly favourable debt affordability (see Exhibit 2). In spite of moderate fiscal deficits over the past years, public finances remain healthy and the delay in budget adoption is not likely to jeopardize the government’s fiscal strength. Moreover, Sweden has a strong fiscal framework with a net fiscal surplus target of 1% of GDP on average over the business cycle, a target on which the main political parties agree.

EXHIBIT 2

Sweden’s Debt and Financial Balance, As Percentage of GDP

Sources: Eurostat and Moody’s Investors Service forecasts

Left Party19

Social Democratic Party112

Green Party25

Centre Party23

Christian Democrats19

Liberal Party24

Moderate Party107

Sweden Democrats20

Left Party21

Social Democratic Party113

Green Party25

Centre Party22

Christian Democrats16

Liberal Party19

Moderate Party84

Sweden Democrats49

-3%

-2%

-1%

0%

1%

2%

3%

4%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F

General Government Gross Debt - left axis General Government Financial Balance - right axisGovernment Surplus Target - right axis

NEWS & ANALYSIS Credit implications of current events

26 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Korea’s 2015 Budget Supports Female Participation in Labor Force, a Credit Positive Last Tuesday, the Korean National Assembly passed an amended version of the government’s 2015 budget bill. Measures in the budget to boost the labor supply, with a goal to increase female employment, are credit positive.

To achieve a higher overall labor force participation rate, more women need to work in Korea’s formal economy. The government is targeting a 61.9% female labor force participation rate by 2017 and has been encouraging companies to offer flexible hours and other incentives to help those women balance work and home life. The new budget expands support for working women by lowering childcare costs and expanding free child care programs for children aged three to five.

More women workers will help to increase the labor supply and boost Korea’s potential growth rate. This would offset Korea’s shrinking labor force, a consequence of its graying population, which constrains its long-term growth prospects.

A key element of President Park Guen Hye’s “474” economic revitalization strategy is to boost the labor force participation rate to 70% (the 7 in 474), boost real GDP growth to 4% (the first 4 in 474) and boost per-capita income to $40,000 (the last 4 in 474).

Korea’s 2014 labor force participation rate of around 63% is similar to rates in other advanced economies, but its 56% 2013 rate of female labor force participation is much lower, and also much lower than the male participation rate of 78%. In many advanced economies such as Germany and Sweden, the female labor force participation rate tends to be 70%-80%, and the gap between female and male participation rates is much smaller (see exhibit below).

Korea’s Female Labor Force Participation Rate Lags That of Most Advanced Economies

Note: Data as of 2013. Source: Organization for Economic Cooperation and Development

A higher labor force participation rate would support public finances by providing the government with a larger tax revenue base, ensuring the continuity of Korea’s sound government finances.

Two workers per household would also improve household finances. Korean households have increased their borrowing over the past decade to debt levels similar to some of the most indebted advanced economies relative to disposable income and GDP. Korea’s household debt was 71.5% of GDP in at year-

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Korea (Aa3) Japan (A1) United States (Aaa) Germany (Aaa) Sweden (Aaa)

Perc

ent o

f Wor

king

Age

Pop

ulat

ion

Female Male

Shirin Mohammadi Associate Analyst +971.4.237.9549 shirin.mohammadi@moodys.com

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

NEWS & ANALYSIS Credit implications of current events

27 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

end 2013, up from 62.3% in 2008. High household debt constrains domestic demand, and with it, economic growth.

The approved KRW375.4 trillion budget for 2015 entails a 5.5% increase in expenditures from 2014 with the projected fiscal deficit at KRW33.4 trillion (2.1% of GDP). The budget was passed within the legal deadline for the first time in 12 years because of the National Advancement Act which came into force this year. The Act mandates that the budget vote must he held on 2 December. This had the effect of forging compromise between ruling and opposition parties, as was seen in the ruling Saenuri Party abandoning its opposition to the free day care program.

NEWS & ANALYSIS Credit implications of current events

28 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

US Accounting

US Tax Incentives Worth $80 billion Live on, Despite Recent Crackdown on Inversions On 3 December, the US House of Representatives approved a bill9 that extends for another year many, but not all, existing corporate tax breaks that were due to expire at the end of this year. Although the senate and the president have yet to vote, there appears to be bi-partisan support for the bill. Research-and-development tax credits and an additional five years to fund multi-employer benefits, and most significantly, bonus depreciation, are among the continuing benefits.

Keeping these tax breaks for another year is credit positive, resulting in more near-term liquidity. The extension of bonus depreciation is especially helpful for companies with meaningful levels of capital expenditures.

The total estimated cost of these extensions (i.e., the reduction in US tax revenues) in 2015, according to the Joint Committee on Taxation, is just over $80 billion. The extension of bonus depreciation costs the most, over one half the total, at nearly $45 billion. This amount is the difference between the first-year deduction (on a corporate tax return) of 50% of the cost of the depreciable asset, less the depreciation rate using the normal accelerated method (called the Modified Accelerated Cost Recovery System or MACRS). This difference translates into immediate cash savings via lower 2015 corporate cash tax payments.

The exhibit below is for illustrative purposes only and shows the possible tax benefit in 2015 as a percentage of capital expenditures that qualify, assuming property lives of 3-20 years.

Illustrative 2015 US Tax Benefit as a Percentage of Capital Expenditures

Property Life in Years 3 5 7 10 15 20

MACRS depreciation rate 33.3% 20.0% 14.3% 10.0% 5.0% 3.8%

Bonus depreciation rate 50.0% 50.0% 50.0% 50.0% 50.0% 50.0%

2015 (first year) tax benefit on capital expenditures 16.7% 30.0% 35.7% 40.0% 45.0% 46.3%

Source: Moody’s Investors Service

This relief comes, ironically, just after the US Treasury removed the fuel that powers tax inversions. New rules now meaningfully constrain the inversion strategy. Regardless of this loss, those companies that were contemplating an inversion may welcome the credit-positive continuation of what now seems like a year-end ritual in which the US Congress extends valuable tax benefits slated for the chopping block. However, the extension merely delays the eventual tax bill and the benefits would be credit negative if used in ways that are not accretive to creditors.

9 Tax Increase Prevention Act of 2014 (H.R. 5771).

Jason Cuomo Vice President - Senior Accounting Analyst +1.212.553.7795 jason.cuomo@moodys.com

RATING CHANGES Significant rating actions taken the week ending 5 December 2014

29 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Corporates Amazon.com, Inc.

Outlook Change 26 Nov ‘12 1 Dec ‘14

Senior Unsecured Rating Baa1 Baa1

Outlook Stable Negative

The outlook change follows Amazon’s announcement that it is issuing a sizeable amount of new senior unsecured notes, which we believe will further exacerbate the company’s already weak interest coverage.

Chinos Intermediate Holdings A, Inc. Downgrade 21 Feb ‘14 5 Dec ‘14

Corporate Family Rating B2 B3

Outlook Negative Stable

The downgrade reflects J. Crew’s continued declining earnings trend stemming from weak execution in a challenging apparel retail environment and compounded by high promotional activity, inventory markdowns and cost de-leveraging due to weaker-than-expected sales. The company has meaningfully underperformed since the November 2013 $500 million debt-financed dividend, particularly within its J. Crew retail stores.

Cliffs Natural Resources Inc. Downgrade 17 Oct ‘14 4 Dec ‘14

Corporate Family Rating Ba2 Ba3

Outlook Review for Downgrade Negative

The downgrade reflects the company’s weak debt protection metrics, as evidenced by the EBIT/interest ratio of 1.1x for the 12 months ended 30 September 2014 and increasing leverage. It also reflects our expectations regarding the challenges and costs Cliffs faces in restructuring its business footprint, as well as execution challenges around selling the balance of its US coal operations and its Asia Pacific iron ore operations.

RATING CHANGES Significant rating actions taken the week ending 5 December 2014

30 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Occidental Petroleum Corporation Downgrade 18 Feb ‘14 2 Dec ‘14

Long-Term Issuer Rating A1 A2

Short-Term Issuer Rating P-1 P-1 (confirmed)

Outlook Review for Downgrade Stable

The downgrade reflects our view that the spin-off of California Resources Corporation, along with the sale and monetization of other non-strategic assets, leaves Occidental Petroleum Corporation a smaller and less diversified company.

RP Crown Parent, LLC Outlook Change 12 Dec ‘13 2 Dec ‘14

Corporate Family Rating B3 B3

Outlook Stable Negative

The outlook change reflects ongoing execution risks related to the company’s strategy to stabilize and grow its sales base. If RP Crown’s software sales do not rebound in the next three to four quarters, its financial leverage could become unsustainable and liquidity could erode significantly.

RATING CHANGES Significant rating actions taken the week ending 5 December 2014

31 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Infrastructure Aeroporti di Roma S.p.A.

Upgrade

18 Feb ‘14 4 Dec ‘14

Senior Unsecured Rating Baa3 Baa2

Provisional Rating (EMTN) Programme (P) Baa3 (P) Baa2

Outlook Positive Positive

The upgrade reflects Aeroporti di Roma S.p.A.’s strong financial performance, underpinned by traffic growth of 5.9% in the first 10 months of 2014, which was due mainly to an increase in airline capacity; and tariff increases under the new regulatory framework approved at the end of 2012.

Eandis (CVBA) Outlook Change

13 Mar ‘14 2 Dec ‘14

Issuer Rating/Senior Unsecured Debt Rating A1 A1

Senior Unsecured MTN Programme (P)A1 (P)A1

Outlook Stable Negative

The outlook change follows Eandis's announcement that the exit of Electrabel SA as a shareholder in the seven distribution system operators would result in Eandis raising additional debt of €400 million as the final portion of a total €965 million debt amount raised to pay out Electrabel.

Tenaga Nasional Berhad Upgrade

25 May ‘06 2 Dec ‘14

Senior Unsecured Bond Ratings Baa1 A3

BCA Baa3 Baa2

Outlook Stable Positive

The upgrade reflects the application of our rating methodology for government-related issuers, which combines the company's standalone credit quality or baseline credit assessment of baa2; and one notch of uplift based on our joint default analysis approach. This approach assumes a high level of support from the Malaysian government in a stress situation.

RATING CHANGES Significant rating actions taken the week ending 5 December 2014

32 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

E.ON SE Review for Downgrade

29 Aug ‘14 1 Dec ‘14

Senior Unsecured Ratings A3 A3

Outlook Negative Review for Downgrade

The review for downgrade is prompted by E.ON SE's new proposed corporate strategy, which plans to split the group into two separate publicly listed companies by combining E.ON SE's conventional generation, global energy trading and exploration and production businesses into the "new company" and spinning its majority share capital off to shareholders.

Concessionaria Auto Raposo Tavares S.A. Outlook Change

8 Nov ‘12 1 Dec ‘14

Corporate Family Rating Ba2 Ba2

Outlook Stable Negative

The outlook change reflects our view that the materially lower GDP growth prospects for Brazil will have a direct impact on Concessionaria Auto Raposo Tavares S.A.’s forecasted revenues and credit metrics, because the company's operation is highly exposed to the Brazilian macroeconomic environment.

RATING CHANGES Significant rating actions taken the week ending 5 December 2014

33 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Financial Institutions

12 Japanese Government-Related Issuers Downgraded to A1

3 Dec ‘14

We downgraded the ratings of 12 Japanese government-related issuers to A1 from Aa3, following the downgrade of the Government of Japan to A1 from Aa3. The outlooks are stable. The issuers are Japan Expressway Holding and Debt Repayment Agency; East Nippon Expressway Company Limited; Central Nippon Expressway Company Limited; West Nippon Expressway Company Limited; Metropolitan Expressway Company Limited; Urban Renaissance Agency; Japan Railway Construction, Transport and Technology Agency; New Kansai International Airport Company Limited; Japan Finance Corporation; Japan Finance Organization for Municipalities; Japan Housing Finance Agency; and Japan Bank for International Cooperation. The downgrade reflects the linkages between the central government and these GRIs.

Kedr Bank Downgrade 15 Jul ‘14 2 Dec ‘14

Long-Term Local and Foreign Currency Deposit Ratings

B3 Caa2

Baseline Credit Assessment/Bank Financial Strength Rating

E+ / b3 E / ca

Outlook (Deposit Ratings) Negative Review for Downgrade

Outlook (BFSR) Stable Stable

The downgrade reflects the increased risks for creditors following the Central Bank of Russia's decision to impose temporary administration measures on Kedr Bank.

Nanyang Commercial Bank Downgrade 7 May ‘13 2 Dec ‘14

Long-Term Bank Deposit Ratings Aa3 A3

Baseline Credit Assessment/Bank Financial Strength Rating

C / a3 C- / baa1

Outlook (Deposit Ratings) Negative Stable

Outlook (BFSR) Negative Stable

The downgrade reflects the bank’s weaker risk profile as a result of growing mainland exposure. The bank's mainland exposures have grown strongly in the past two years, owing largely to the rapid expansion of its mainland subsidiary, Nanyang Commercial Bank.

RATING CHANGES Significant rating actions taken the week ending 5 December 2014

34 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Neuberger Berman Group

Upgrade 6 Mar ‘12 2 Dec ‘14

Senior Unsecured Debt Rating Ba1 Baa3

Outlook Stable Stable

The upgrade reflects the expected completion of the remaining Lehman equity repurchase; and improvement in Neuberger Berman Group’s credit profile, led by solid organic assets under management growth, strong effective fee rate growth and a significant strengthening of the firm's investment capabilities and distribution reach.

Tokio Marine & Nichido Fire Insurance Co. Review for Downgrade 20 Feb ‘12 2 Dec ‘14

Insurance Financial Strength Rating Aa3 Aa3

Outlook Stable Review for Downgrade

The review for downgrade follows our downgrade of the Government of Japan's rating to A1 from Aa3 with a stable outlook. Tokio Marine's credit profile is correlated with that of the Japanese government, owing to its direct exposure to the government as well as its broader dependence on the Japanese economy. The review will focus on whether Tokio Marine's geographical diversification is material enough to warrant maintaining a one-notch difference from the Japanese government bond rating.

Mitsubishi UFJ Trust International Limited Review for Downgrade 24 Aug‘11 2 Dec ‘14

Long-Term Domestic and Foreign Currency Issuer Rating A1 A1

Outlook Stable Review for Downgrade

The review for downgrade reflects the downgrade of the long-term deposit and debt ratings of Mitsubishi UFJ Trust International Limited’s parent, Mitsubishi UFJ Trust and Banking Corporation, to A1 from Aa3, which followed the downgrade of Japan’s government bond rating to A1 from Aa3. The review will focus on the reassessment of parental support in the event of stress.

Mitsubishi UFJ Securities Holdings and Subsidiaries Downgraded 2 Dec ‘14

We downgraded the ratings of Mitsubishi UFJ Securities Holdings Co., Ltd (MUSHD) and its two subsidiaries, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd (MUMSS) and Mitsubishi UFJ Securities International plc (MUSI). The downgrade follows the downgrade of the Government of Japan's rating to A1 from Aa3, which prompted the downgrade of the Bank of Tokyo-Mitsubishi UFJ, Ltd (BTMU) to A1 from Aa3. BTMU is the principal operating subsidiary of the Mitsubishi UFJ Financial Group, Inc. (MUFG), which owns 100% of MUSHD. The downgrade, therefore, incorporates our view that MUMSS, MUSI and MUSHD are strategically important subsidiaries of MUFG.

RATING CHANGES Significant rating actions taken the week ending 5 December 2014

35 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Kutxabank Outlook Change 4 Apr‘14 2 Dec ‘14

Bank Financial Strength Rating/Baseline Credit Assessment

D / ba2 D / ba2

Outlook Stable Positive

The outlook change reflects the bank's improving risk-absorption capacity. The bank's transitional Common Equity Tier 1 (CET1) ratio stood at 12.9% in Q3 2014, compared with 12.1% in Q1 2014, while the leverage ratio reached 7.4%, the highest among Spanish banks.

SMBC Nikko Securities Review for Downgrade 24 Aug‘11 2 Dec ‘14

Long-term Issuer Rating (Domestic) A1 A1

Senior Unsecured Debt Rating A1 A1

Outlook Stable Review for Downgrade

The review for downgrade reflects the downgrade of the long-term deposit and debt ratings of SMBC Nikko Securities’ (SMBC Nikko) parent, Sumitomo Mitsui Banking Corporation (SMBC) to A1 from Aa3, following the downgrade of Japan’s government bond rating to A1 from Aa3. The rating, therefore, incorporates our view of the very high probability of parental support in the event of stress, given the strategic importance of SMBC Nikko's wholesale business to SMBC's corporate banking business as well their business integration. The review will focus on the reassessment of parental support in the event of stress.

Nippon Life Insurance Company and Sony Life Insurance Co, Ltd Downgraded 2 Dec ‘14

We downgraded the insurance financial strength ratings (IFSR) of two Japanese life insurers following the downgrade of the Government of Japan to A1 stable from Aa3. Specifically, we downgraded the IFSR of Nippon Life Insurance Company to A1 from Aa3 and its subordinate (foreign currency) rating to A3(hyb) from A2(hyb). We also downgraded the IFSR of Sony Life Insurance Co, Ltd to A1 from Aa3.

RATING CHANGES Significant rating actions taken the week ending 5 December 2014

36 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Sovereigns

Government of Japan Downgrade

1 Dec ‘14

Gov Currency Rating Aa3 A1

Foreign Currency Deposit Ceiling Aaa/P-1 Aaa/P-1

Foreign Currency Bond Ceiling Aaa/P-1 Aaa/P-1

Local Currency Deposit Ceiling Aaa/P-1 Aaa/P-1

Local Currency Bond Ceiling Aaa/P-1 Aaa/P-1

Outlook Stable Stable

The downgrade reflects heightened uncertainty around the achievability of Japan’s fiscal deficit reduction goals; uncertainty around the timing and effectiveness of growth-enhancing policy measures, against a background of deflationary pressures; increased risk of rising yields on Japanese government bonds and of reduced debt affordability over the medium term.

RATING CHANGES Significant rating actions taken the week ending 5 December 2014

37 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Sub-sovereigns Japan Sub-sovereign Downgrades

3 Dec ‘14

The downgrades follow our downgrade of Japan’s rating to A1 from Aa3. They also reflect the increased systemic risk for regional and local governments given their close linkages with the central government.

Fukuoka City LT Issuer Rating (Domestic) Aa3 A1

LT Issuer Rating (Foreign) Aa3 A1

Senior Unsecured Debt Rating (Domestic) Aa3 A1

Outlook Stable Stable

Fukuoka Prefecture LT Issuer Rating (Domestic) Aa3 A1

LT Issuer Rating (Foreign) Aa3 A1

Senior Unsecured Debt Rating (Domestic) Aa3 A1

Outlook Stable Stable

Hamamatsu City LT Issuer Rating (Domestic) Aa3 A1

Senior Unsecured Debt Rating (Domestic) Aa3 A1

Outlook Stable Stable

Hiroshima Prefecture LT Issuer Rating (Domestic) Aa3 A1

LT Issuer Rating (Foreign) Aa3 A1

Senior Unsecured Debt Rating (Domestic) Aa3 A1

Outlook Stable Stable

Kyoto, City of LT Issuer Rating (Domestic) Aa3 A1

Senior Unsecured Debt Rating (Domestic) Aa3 A1

Outlook Stable Stable

Nagoya, City of LT Issuer Rating (Domestic) Aa3 A1

LT Issuer Rating (Foreign) Aa3 A1

Senior Unsecured Debt Rating (Domestic) Aa3 A1

Outlook Stable Stable

Niigata Prefecture LT Issuer Rating (Domestic) Aa3 A1

LT Issuer Rating (Foreign) Aa3 A1

Senior Unsecured Debt Rating (Domestic) Aa3 A1

Outlook Stable Stable

RATING CHANGES Significant rating actions taken the week ending 5 December 2014

38 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Osaka City LT Issuer Rating (Domestic) Aa3 A1

LT Issuer Rating (Foreign) Aa3 A1

Senior Unsecured Debt Rating (Domestic) Aa3 A1

Outlook Stable Stable

Sakai City LT Issuer Rating (Domestic) Aa3 A1

Senior Unsecured Debt Rating (Domestic) Aa3 A1

Outlook Stable Stable

Sapporo, City of LT Issuer Rating (Domestic) Aa3 A1

LT Issuer Rating (Foreign) Aa3 A1

Senior Unsecured Debt Rating (Domestic) Aa3 A1

Outlook Stable Stable

Shizuoka City LT Issuer Rating (Domestic) Aa3 A1

LT Issuer Rating (Foreign) Aa3 A1

Senior Unsecured Debt Rating (Domestic) Aa3 A1

Outlook Stable Stable

Shizuoka Prefecture LT Issuer Rating (Domestic) Aa3 A1

LT Issuer Rating (Foreign) Aa3 A1

Senior Unsecured Debt Rating (Domestic) Aa3 A1

Outlook Stable Stable

Japan Expressway Holding and Debt Repayment Agency Senior Secured Debt Rating (Domestic) Aa3 A1

Backed Senior Secured Debt Rating (Domestic) Aa3 A1

Backed Senior Unsecured Debt Rating (Domestic) Aa3 A1

Outlook Stable Stable

East Nippon Expressway Company Limited LT Issuer Rating (Domestic) Aa3 A1

Backed Senior Secured Debt Rating (Domestic) Aa3 A1

Senior Secured Shelf registration rating (Domestic) (P)Aa3 (P)A1

Outlook Stable Stable

Central Nippon Expressway Company Limited LT Issuer Rating (Domestic) Aa3 A1

Senior Unsecured Debt Rating (Foreign) Aa3 A1

Backed Senior Secured Debt Rating (Domestic) Aa3 A1

Backed Senior Unsecured Debt Rating (Foreign) Aa3 A1

Senior Secured Shelf registration rating (Domestic) (P)Aa3 (P)A1

Outlook Stable Stable

RATING CHANGES Significant rating actions taken the week ending 5 December 2014

39 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

West Nippon Expressway Company Limited LT Issuer Rating (Domestic) Aa3 A1

Senior Secured Debt Rating (Domestic) Aa3 A1

Backed Senior Secured Debt Rating (Domestic) Aa3 A1

Senior Secured Shelf registration rating (Domestic) (P)Aa3 (P)A1

Outlook Stable Stable

Metropolitan Expressway Company Limited LT Issuer Rating (Domestic) Aa3 A1

Backed Senior Secured Debt Rating (Domestic) Aa3 A1

Senior Secured Shelf registration rating (Domestic) (P)Aa3 (P)A1

Outlook Stable Stable

Urban Renaissance Agency LT Issuer Rating (Domestic) Aa3 A1

Senior Secured Debt Rating (Domestic) Aa3 A1

Backed Senior Secured Debt Rating (Domestic) Aa3 A1

Outlook Stable Stable

Japan Railway Construction, Transport and Technology Agency LT Issuer Rating (Domestic) Aa3 A1

Senior Secured Debt Rating (Domestic) Aa3 A1

Outlook Stable Stable

New Kansai International Airport Company Limited LT Issuer Rating (Domestic) Aa3 A1

Senior Secured Debt Rating (Domestic) Aa3 A1

Senior Unsecured Debt Rating (Domestic) Aa3 A1

Senior Secured Shelf registration rating (Domestic) (P)Aa3 (P)A1

Outlook Stable Stable

Japan Finance Corporation LT Issuer Rating (Domestic and Foreign) Aa3 A1

Senior Secured Debt Rating (Domestic) Aa3 A1

Backed Senior Secured Debt Rating (Domestic) Aa3 A1

Backed Senior Unsecured Debt Rating (Foreign) Aa3 A1

Senior Secured Shelf registration rating (Domestic) (P)Aa3 (P)A1

Backed Senior Unsecured Debt rating (Foreign) Aa3 A1

Outlook Stable Stable

RATING CHANGES Significant rating actions taken the week ending 5 December 2014

40 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Japan Finance Organization for Municipalities LT Issuer Rating (Domestic and Foreign) Aa3 A1

Senior Secured Debt Rating (Domestic) Aa3 A1

Senior Unsecured Debt Rating (Foreign) Aa3 A1

Backed Senior Secured Debt Rating (Domestic) Aa3 A1

Backed Senior Unsecured Debt Rating (Domestic and Foreign)

Aa3 A1

Senior Unsecured Medium Term Note Program Rating (Domestic)

(P)Aa3 (P)A1

Backed Senior Unsecured Shelf registration rating (Foreign)

(P)Aa3 (P)A1

Outlook Stable Stable

Japan Housing Finance Agency LT Issuer Rating (Domestic) Aa3 A1

Outlook Stable Stable

Japan Bank for International Cooperation LT Issuer Rating (Domestic and Foreign) Aa3 A1

Backed Senior Secured Debt Rating (Domestic) Aa3 A1

Backed Senior Unsecured Debt Rating (Foreign) Aa3 A1

Outlook Stable Stable

RATING CHANGES Significant rating actions taken the week ending 5 December 2014

41 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Structured Finance

Rating Upgrades and Downgrades on First Franklin Subprime RMBS On 4 December we upgraded the ratings of 38 tranches and downgraded the ratings of three tranches from 18 First Franklin transactions, backed by subprime mortgage loans and affecting approximately $1.7 billion in securities. The upgrades reflect the improving performance of the related pools and the faster pay-down of the bonds. The downgrades reflect increasing under-collateralization on the bonds over time.

Rating Upgrades on JPMCC 2005-LDP5 CMS On 4 December we upgraded the ratings of nine classes and affirmed 12 classes of J.P. Morgan Chase Commercial Mortgage Securities Corp. Series 2005-LDP5, affecting approximately $3 billion of structured securities. The upgrades reflect the increase in credit support as a result of pay-downs and amortization.

RESEARCH HIGHLIGHTS Notable research published the week ending 5 December 2014

42 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Corporates

UK Telecommunications: BT's Potential Acquisition Of O2 Or EE Will Force Further Consolidation And Convergence In UK Market The combination of BT Group Plc and O2 UK or EE would accelerate fixed-mobile convergence in the UK market. Vodafone, H3G, Virgin Media, Sky and TalkTalk are not directly affected by the current discussions between BT and O2/EE, but they will be assessing how the competitive landscape might change. A deal would improve BT’s business risk profile, but the ultimate credit impact depends on the funding mix.

Brazil Corporates: Prolonged Energy Rationing Would Hit Steel and Metals and Mining Operations Hardest Energy rationing next year would strain all Brazilian companies that rely more heavily on electricity. Among the most affected would be steelmakers, petrochemicals and metals and mining companies, which would have to reschedule production or even reduce their output. Conversely, companies with excess energy, such as pulp and paper makers and sugar and ethanol producers, could sell their surplus.

Moody's High-Yield Covenant Database: Canadian Bonds Offer Stronger Protections than US Bonds but Covenant Quality is Converging High-yield bonds issued by Canadian non-financial companies continue to offer stronger investor protections than those issued by US companies, but have followed the same negative trend as seen in the US, with the gap between Canadian and US high-yield bond covenant quality narrowing as a result. Canadian high-yield bond covenant quality has declined as restricted payment and debt carve-out baskets have grown, while the bonds have weakened in three of our key risk areas.

Peruvian and Chilean Retailers: Peruvian Economy Gives Its Retailers an Edge Peru’s strong domestic economy gives retailers and diversified companies with operations there an edge over their Chilean competitors. While both Peru and Chile have experienced sharp economic downturns this year, the Peruvian retail sector will grow at one of the fastest rates in Latin American next year, while in Chile consumer spending will weaken through 2018.

Brazilian Retailers: Inflation and Tighter Credit Will Constrain Consumer Confidence and Hurt Sales in 2015 Brazil’s retail industry is losing steam after a decade of rapid growth fueled by a benign economic environment, easy credit availability and government welfare programs. Higher inflation and tightening credit conditions will dampen consumer confidence next year, though demographic trends, rising incomes and government social welfare programs will still support spending.

Mexican Retailers: Sales Growth to Accelerate as Economic Recovery Boosts Consumption A weak economy and a new set of taxes brought down disposable incomes in Mexico this year and led consumers to cut back on their spending, but the country’s economy is picking up again. As a result, we expect retail sales to strengthen late this year, and to reach robust levels in 2015. Commercial activity is Mexico’s second-most important business sector.

RESEARCH HIGHLIGHTS Notable research published the week ending 5 December 2014

43 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

German Corporate Bond Market: Slow but Steady Growth Likely in 2015; Bank Lending Revival Limits 2014 Issuance While bond issuance in Germany remained high in 2014, growth was limited by banks coming back into the market. Bank lending activity rose on the back of strengthened bank balance sheets and low funding rates. We expect this trend to continue into 2015, and forecast that bond issuance levels will rise only moderately next year.

China Compendium Our compendium of China-based rated issuers is designed to enable investors to more easily identify and compare the key financial metrics and credit profile summaries of China-based issuers by providing a single, aggregated reference source of our major publicly rated issuers along with, in most cases, their key financial data and ratios, and explanatory summaries for our ratings.

Global Asset Price Monitor: Elevated Prices Mainly in Advanced Economies' Bond Markets Sharp and prolonged asset price corrections can have a significant economic impact, with potential negative implications in particular for sovereigns’ and banks’ creditworthiness. Unusually high asset prices flag the risk that such corrections may occur. In this first report of a regular series, we look at asset prices across a range of countries and asset classes, highlighting where prices are particularly high.

Industry Credit Risk: Recent Trends for Global Corporates This special comment updates our annual industry credit risk report for nonfinancial, non-utility corporate issuers. The report explores credit risk at the industry level. We present indicators of default risk and rating transition risk in the context of recent history, as well as forecasts for the next 12 months. In addition, we explore the relative pricing of debt across industries to identify the sectors currently trading at a discount.

RESEARCH HIGHLIGHTS Notable research published the week ending 5 December 2014

44 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Infrastructure

Europe’s €315 Billion Investment Plan is Credit Positive for Infrastructure Projects The European Commission has announced an ambitious investment plan to stimulate some €315 billion of strategic investments in Europe over the next three years. The plan, pending European Council endorsement, is credit positive for infrastructure project developers and construction companies such as Vinci S.A. (Baa1 stable) and Bouygues S.A. (Baa1stable) and others that are active in the sectors supported by the plan.

GB Electricity Distribution Networks: RIIO-ED1 Final Determination Favours ENW and SSEPD We view Scottish and Southern Energy Power Distribution and Electricity North West as the relative winners from GB energy regulator Ofgem’s Final Determination for five of the six electricity distribution groups for the forthcoming eight-year price control period. The two groups received the largest percentage increase in total expenditure allowances relative to the Draft Determination. They also received the largest rewards for total expenditure submissions below Ofgem’s benchmark.

Suez Environment Company and Veolia Environment: Subdued Industrial Production Creates Challenges for European Environmental Services Companies Subdued industrial production in Europe presents challenges for environmental services companies, because the revenues generated by their waste processing businesses are driven by waste volumes, which are in turn tied to industrial production. Companies most exposed to subdued European industrial production include Suez Environnement Company (A3 stable) and Veolia Environnement S.A. (Baa1 stable), whose waste businesses account for more than 30% of EBITDA.

Australian Infrastructure: Stable Outlook Reflects Favorable Fundamentals but M&A Risks Are Increasing Our stable outlook on Australian infrastructure companies reflects the modest level of domestic economic growth and a slight fall in the unemployment rate. However, pressure is growing in some sectors as a result of reduced demand for Australia’s resources, which will exacerbate the downturn in the mining industry, with knock-on effects on other sectors. An expected increase in M&A activity could also weaken credit profiles if debt-funded.

RESEARCH HIGHLIGHTS Notable research published the week ending 5 December 2014

45 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Financial Institutions

Colombia’s Banking System Outlook Is Stable Over the next year or so, the Colombian banks will benefit from new business opportunities owing to strong internal demand, major infrastructure investment, and improvements in manufacturing output. Profitability will improve, with rising interest rates supporting lending spreads and helping offset intensifying competition. And both acquisitions and organic growth are slowing, which will minimize risks to asset quality and enhance both profitability and capitalization.

Japanese Housing Loan Growth Is Credit Positive for Tokyo-Area Banks Housing loans in Japan grew 13% over the five years ended March 2014, with four banks operating in prefectures near Tokyo posting growth of 30%, compared with just 3% for overall system loan growth. The growth at the Tokyo area banks reflects primarily a shift in market share to the commercial banks from the public sector, as well as a shift to Tokyo and metropolitan areas from other parts of Japan, reflecting demographic trends. Even with this growth, the banks have maintained fairly conservative lending criteria; moreover, those we rate focus on borrowers with very stable employment.

US Mortgage Insurance Third Quarter Earnings: Continued Improvements Despite Tepid Originations Other than Genworth (Ba1 positive) and startup National (unrated), the US private mortgage insurers reported net profits for the third quarter. Earnings were generally lower than in the second quarter owing to seasonal factors and adjustments to loss reserves. New insurance written improved significantly over the second quarter and was down only slightly from third-quarter 2013, despite a significant decline in mortgage originations.

The Key to Central Clearing Counterparty Credit Strength Is Default Management Central clearing counterparties’ robust default management operations are a key contributor to their historical soundness. The main tools to mitigate the effects of a clearing member default are (1) selective membership access and monitoring to help ensure members’ operational and financial soundness and (2) pre-funded and contingent resources to cover losses; i.e., the waterfall. Properly structured waterfalls cover the majority of losses from a defaulting member in the first loss stage, and are therefore at the heart of a CCP’s default management operations.

Global Reinsurance Outlook Is Negative: Buyers Wield Strong Bargaining Power, Explore Cheaper Alternatives to Traditional Reinsurance We expect the sector to evolve further into a tiered market where buyers increasingly favor select reinsurers and alternatives to traditional reinsurance. Large reinsurance buyers have been buying fewer reinsurance treaties and ceding less premium. Some smaller buyers have been doing the same.

Global P&C Insurance Outlook Is Stable: Industry Spans Large, Mature Markets and High-Growth Emerging Markets Our outlook for the global property & casualty (P&C) insurance sector is stable, as P&C premiums keep pace with economic growth in advanced economies and outpace economic growth in emerging economies. We expect P&C premiums to grow at low single digits in North America and most of Europe, and considerably faster in emerging markets.

RESEARCH HIGHLIGHTS Notable research published the week ending 5 December 2014

46 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Global Life Insurance Outlook Is Stable: Economic Recovery, Rising Asset Prices and Product Mix Offset Low Interest Rates Our outlook for the global life insurance sector remains stable despite continued low interest rates, reflecting leading economies’ gradual recovery and insurers’ reduced dependence on investment margins. Higher GDP growth and lower unemployment rates will support life insurers’ sales.

RESEARCH HIGHLIGHTS Notable research published the week ending 5 December 2014

47 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Sovereigns

How Geopolitical Risks Affect Creditworthiness The credit implications of geopolitical concerns will depend crucially on the magnitude and persistence of any such risks. Acute geopolitical tensions can have severe and long-lasting adverse implications for economic growth and credit. At present, we identify geopolitical risk as one of the four main drivers of sovereign creditworthiness in 2015, particularly in the Middle East and Commonwealth of Independent States regions.

India Analysis India’s Baa3 government bond rating with a stable outlook reflects the strong growth potential of its large and diverse economy. However, it also accounts for the country’s persistent and high fiscal deficits, recurrent inflationary pressures, as well as regulatory and infrastructure constraints on competitiveness. The stable outlook is based on our expectation that growth will accelerate further over the next two years, boosted by policies to increase investment and reduce macroeconomic imbalances.

Suriname Analysis Suriname’s rating balances a favorable growth outlook and relatively low government debt and interest burdens against an elevated economic and fiscal vulnerability to commodity price volatility and low institutional capacity. The country’s mineral wealth supports its positive economic prospects, with capital investment of up to $1 billion (about 17% of 2014 projected GDP) expected in a new large mining project that will be under development for the next two years.

Caribbean Development Bank The Caribbean Development Bank’s Aa1 rating reflects a number of significant credit strengths, including: (1) strong capital adequacy ratios; and (2) higher liquidity levels than those of most multilateral development bank peers despite past failures to comply with a strict liquidity policy. The rating could face upward pressure if the bank meaningfully diversifies its loan portfolio and reduces its exposure to troubled credits, though we view this as unlikely.

Japan Analysis Japan’s A1 rating and stable outlook reflect fundamental features that make an extraordinarily high level of government debt affordable. However, we think unfavorable fiscal and economic trends, unless corrected, will eventually start to erode Japan’s debt affordability and overall credit profile. Credit challenges stem from a policy framework that depends heavily on monetary expansion, with few signs as yet of a sustainable fiscal framework.

International Finance Corporation The International Finance Corporation’s Aaa rating and stable outlook reflect its robust capital base, abundant liquidity, diversified portfolio, tested preferred creditor status, highly rated shareholders, and high degree of shareholder commitment. These strengths are counteracted by its somewhat riskier business model, which focuses on private borrowers in high-risk markets, as well as its relatively high and rising levels of non-performing loans.

RESEARCH HIGHLIGHTS Notable research published the week ending 5 December 2014

48 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Moody's Sovereign Monitor: Focus on Turkey Turkey’s large and dynamic economy benefits from diverse trade linkages and a strong government balance sheet with low debt levels, representing important potential shock absorbers. However, Turkey has recently faced increasing credit challenges, including a weakened currency and rising cost of financing as a result of heightened political tensions and lower global liquidity. These factors have the potential to adversely affect foreign and domestic investor confidence and also weaken the country’s medium-term economic growth prospects.

RESEARCH HIGHLIGHTS Notable research published the week ending 5 December 2014

49 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Sub-sovereigns

The Region of Lazio: Debt Restructuring Alleviates Budgetary Pressures The central government has recently allowed nine regions, including Lazio, to restructure about €16 billion of old costly debentures into cheaper 30-year government loans. The Region of Lazio has submitted €5.3 billion to the process, more than any other region. If fully implemented, the restructuring will lead to substantial cost savings and a reduction in exposure to private sector creditors. The cost of financing is equivalent to the yield to maturity on Italian Treasury bonds of comparable duration, currently 2.89%, which will alleviate budgetary pressures caused by a rigid cost structure and a very high debt burden.

English Housing Associations: Low Inflation Limits Rent Increases and Erodes Margins, a Credit Negative English Housing Association rent increases will be capped at 2.2% next year when the Consumer Price Index measure of inflation replaces the Retail Price Index’s as the rent-setting benchmark. The new ceiling is 0.8 of a percentage point lower than the HAs had expected, following a drop in CPI inflation in September 2014. The change is credit negative for the sector as it will weigh on rental income growth and margins next year.

Mexican States: Stable Outlook Reflects Low Deficits and Moderate Debt Growth The Mexican states' debt will continue to grow at an average rate of 8% in 2015, albeit down from the average 22% annual rise between 2010 and 2013. The median debt to revenue ratio will remain around 20%, although two states will have debts in excess of 40% of revenues. We expect the fiscal consolidation that started in 2013 to continue. Projected revenue and expenditure trends will limit the sector's combined deficit to around 1.4% in 2015, if expenditure controls remain effectively in place - expenditure growth remains a key risk to track. In addition, federal transfers will grow more slowly. Although debt increased significantly in previous years, declining interest rates have kept debt servicing costs low. Mexico's GDP growth prospects for 2014-15 remain modest, within the 2%-3% range.

RESEARCH HIGHLIGHTS Notable research published the week ending 5 December 2014

50 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

US Public Finance

US Higher Education: Negative Outlook Reflects Slow Tuition Revenue Growth The negative outlook reflects our expectation that the annual change in aggregate operating revenue for four-year colleges and universities will decline and remain below 3% (modest real growth in a low-inflation environment) over the next 12-18 months. Slowed revenue growth, coupled with mounting expenses, will contribute to weaker operating performance in fiscal year 2015. There are some signs of stability, including overall strong student demand and balance sheet strengthening. The outlook for the entire sector has been negative since January 2013.

US Community Colleges: Negative Outlook Reflects Declining Enrollment We are maintaining our negative outlook for US community colleges that issue revenue bonds and are forecasting that, over the next 12 to 18 months, aggregate revenue growth, a key indicator for the outlook, will be less than 3% annualized. Declining enrollment will drive lower net tuition revenue in calendar years 2015 and 2016, resulting in budgetary challenges, because this is the largest revenue stream supporting the community colleges. Other sources of revenue, including operating support from state governments and tax revenues (for some colleges), will grow modestly, but we do not expect them to reach pre-recession highs during the outlook period.

US Not-for-Profit Healthcare: Negative Outlook Reflects Low Growth The negative outlook for the sector reflects our expectation that the fundamental business, financial and economic conditions in the sector will remain weak over the next 12-18 months. After falling each year from a high of 7% in 2009, we expect operating cash flow growth to be low but relatively stable over the next two years, ranging from -0.5% to +1.5%. This forecast reflects weak revenue growth stemming from a variety of reimbursement pressures and margin contraction related to investments hospitals are making to comply with the Affordable Care Act and new reimbursement models.

US Local Governments: Stable Outlook Reflects Slow Recovery of Property Tax Revenues US local governments continue their slow recovery from the economic downturn, supporting our stable outlook on the sector. Property tax revenues are growing slowly but steadily, driven by a stabilizing housing market and local governments’ general willingness to use their property taxing authority. Some areas of pressure remain, though fewer than last year.

US States: Stable Outlook Reflects Moderate Tax Revenue Growth We expect state tax revenue growth in 2015 to rise faster than in 2014 but to remain in a range of 5% to 6%, which is moderate for the sector and consistent with our stable outlook. Revenue growth will be higher in 2015 because the temporary factors that restrained growth in 2014 to less than 3% have disappeared.

RESEARCH HIGHLIGHTS Notable research published the week ending 5 December 2014

51 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

Structured Finance

Comparing Legal Frameworks for Covered Bonds: Eligibility Criteria and Cover Pool Management Before Issuer Default Our scoring of eligibility criteria for cover pool assets in Germany, France, Spain, Sweden, Norway and Finland shows that Norway has the edge over the other countries analyzed when both the covered bond law and market practice are taken into account. However, considering the covered bond law alone, Sweden scores the highest.

Global CLO Outlook: Performance Will Remain Strong Improving economic conditions will keep leveraged loan default rates low. Although loan underwriting is weakening, potentially setting the stage for more defaults and lower recovery rates in the future, CLO transaction terms and credit enhancement will not deteriorate.

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

52 MOODY’S CREDIT OUTLOOK 8 DECEMBER 2014

NEWS & ANALYSIS Corporates 2 » SABMiller’s Bottling Operations Merger with Coca-Cola in

Africa Is Credit Positive

Banks 3 » European Proposal on Minimum Own Funds and Eligible

Liabilities Is Credit Positive for Senior Bank Creditors » Germany’s Bank Resolution Rules Are Credit Negative,

Except for Development Banks and Grandfathered Debt » Municipality Finance Plc Would Benefit from Finland’s

Proposed Municipal Law » China’s Introduction of Deposit Insurance Is Credit Negative

for Small Banks » Report Shows New Singapore Mortgages Are Less Risky, a

Credit Positive for Banks

Sovereigns 12 » Venezuela Sells Part of Petrocaribe Debt Claims, a

Credit Positive

Sub-sovereigns 13 » Some Slovakia Regions Will Gain, Others Lose, from Central

Government’s Motor Vehicle Tax Plan

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