MOODYS.COM

30 MARCH 2015

NEWS & ANALYSIS Corporates 2 » Kraft-Heinz Merger Is Credit Positive for Heinz, Negative for Kraft

» Brown-Forman Boosts Share Buybacks, a Credit Negative

» Lexmark’s Pricey Kofax Deal Is Credit Negative

» Link REIT’s Acquisition of Chinese Mall Will Elevate Its Risk

» India’s Costly Spectrum Auction Is Credit Negative for Telecom Operators

Banks 8 » US Regulator’s Proposed Payday Loan Rules Are Credit

Negative for Lenders

» National Bank of Canada’s Purchase of Stake in African Financial Group Is Credit Negative

» Brazil’s Tax Authority Rejects BM&FBovespa’s Second Appeal in Goodwill Case, a Credit Negative

» Grupo Financiero Ficohsa’s Acquisition of Citibank’s Nicaraguan Subsidiaries Is Credit Positive

» A Deutsche Bank Exit from Retail Banking Would Be Credit Negative

» RBS Sale of Additional Shares in Citizens Financial Is Credit Positive

» Egyptian Government Plan to Pay Salaries Via Direct Deposit Is Credit Positive for Banks

» Malaysian Banks’ Exposure to Troubled 1MDB Is Credit Negative, but Manageable

» India’s Measures to Revive Gas-Based Power Plants Will Benefit Banks

Insurers 23 » Hedge Fund AQR Exits Reinsurance Business, a Positive for

Traditional Players

Sovereigns 25 » Indonesia Gains Investment and Financial Assistance from

Japan, a Credit Positive

Sub-sovereigns 27 » Brazil Supreme Court Resolution on Arrears Is Credit Negative

for States and Municipalities

» Redistribution of Funds Among German Laender Is Credit Positive

» Chinese Regional and Local Government Land Sales Slowed Sharply in 2014, a Credit Negative

US Public Finance 34 » Atlantic City, New Jersey, Emergency Manager Plan Leaves

Open Possibility of Default

Covered Bonds 36 » German Covered Bond Issuers Replace Assets Exposed to Failed

Austrian Lender, a Credit Positive

RATINGS & RESEARCH Rating Changes 38

Last week we downgraded California Resources, Allied Bank Limited, Habib Bank Ltd., MCB Bank Limited, National Bank of Pakistan, United Bank Ltd., Ukraine, nine Ukrainian banks, one Ukrainian leasing company and the cities of Kharkiv and Kyiv in Ukraine, and upgraded Allison Transmission, Tencent Holdings, Reliance Rail Finance, Mitsui Life Insurance Company, Volkswagen Bank and Volkswagen Leasing, among other rating actions.

Research Highlights 47

Last week we published on EMEA high yield corporates, Chinese property developers, global asset prices, US medical products, European paper and forest products, global infrastructure, US gaming, Chinese capital markets, US steel and energy, US corporates, US corporates rated B3 negative and lower, North American airports, US banks, Turkish banks, Latin American banks, global insurers, global money market funds, Pakistan, Sint Maarten, Paraguay, Latin American sovereigns, Sharjah, the Inter-American Development Bank, sovereign ratings, New Jersey, European CLOs, US RMBS, Chinese securitization, Japanese RMBS, US CLOs, European SME ABS, Japanese auto loan ABS, Chinese CLOs and Australian RMBS, among other reports.

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Thursday’s Credit Outlook 54 » Go to Last Thursday’s Credit Outlook

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Our next issue will be Thursday 9 April.

NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Corporates

Kraft-Heinz Merger Is Credit Positive for Heinz, Negative for Kraft Last Wednesday, H.J. Heinz Company (Ba3 review for upgrade) announced that it will merge with the much larger Kraft Foods Group, Inc. (Baa2 review for downgrade) in a stock and cash transaction initiated by Heinz owners Berkshire Hathaway Inc. (Aa2 stable) and Brazil’s 3G Capital (unrated). The merged company will vault to the fourth-largest food company in the world based on food sales, behind strong investment-grade rivals Nestle S.A. (Aa2 stable), PepsiCo, Inc. (A1 stable) and Mondelez International Inc. (Baa1 stable). The new company will be called The Kraft Heinz Company and will generate around $29 billion in revenue, comprising $11 billion from Heinz and $18 billion from Kraft.

Following the announcement, we placed Heinz’s ratings on review for upgrade and Kraft’s ratings on review for downgrade. The deal, which the companies expect to complete in the second half of the year, will weaken Kraft’s financials, but the resulting Kraft Heinz Company would likely carry investment- grade ratings.

The deal is positive for Heinz creditors, which will benefit from the stronger credit profile of Kraft Heinz, including its larger scale, stronger brand portfolio and lower financial leverage than that of Heinz. Kraft boasts seven leading brands with sales in excess of $1 billion, including Kraft, Oscar Mayer, Philadelphia, Velveeta, Lunchables and Planters. At Heinz, only its eponymous brand generates more than $1 billion in sales. Heinz creditors will see debt/EBITDA fall to less than 5x from 6x currently (counting $8 billion of existing Heinz preferred stock as debt). Leverage will fall further as management works toward its two-year target of $1.5 billion of cost savings. The only downside to Heinz is that its well-balanced global footprint will be more weighted to the slow-growth US market, where Kraft generates nearly all of its sales. We expect to upgrade Heinz’s debt ratings to investment grade upon conclusion of our review.

For Kraft, the deal is mostly negative for creditors. Financial leverage is the biggest immediate downside. Debt/EBITDA will be about 4.8x at the closing of the merger, compared with about 3.7x as of 27 December 2014. The cost savings will accelerate delevering and management expects to repay $2 billion of debt in the first two years. However, free cash flow will be paltry in year one owing to the $1.9 billion of planned cash restructuring costs and an aggressive dividend policy that will payout over 75% of earnings that year.

Over the first two years after the merger, we expect financial leverage to give way to event risk. Given the already limited top-line growth opportunities in Kraft’s US-focused business, we suspect that as the company nears the end of its cost-cutting opportunities, it will seek growth through fresh acquisitions. This could happen as soon as two years from closing, by which time the company should have met its savings goals and completed the major deal-plan refinancings, including the refinancing of $9.5 billion of its existing senior secured debt and $8 billion in preferred stock. Notably, 3G and Berkshire completed the leveraged buyout of Heinz, less than two years ago. We expect that any downgrade to Kraft’s current Baa2 ratings would be limited to one notch.

Brian C. Weddington, CFA Vice President - Senior Credit Officer +1.212.553.1678 brian.weddington@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 30 MARCH 2015

Brown-Forman Boosts Share Buybacks, a Credit Negative Last Wednesday, wine and spirits company Brown-Forman Corporation (A1 stable) said that it will increase its share repurchase authorization to allow an additional $1 billion in repurchases through 24 March 2016. The increase is credit negative for Brown-Forman because it signals a more aggressive approach to shareholder returns and significantly exceeds the company’s previous $250 million share repurchase program, which the company had authorized in October 2014 and could be funded from cash flow.

Brown-Forman plans to fund the new repurchases with debt rather than cash flow, which will raise its pro forma financial leverage to 1.8x debt/EBITDA from what we estimate is 1.2x currently. As of 24 March 2015, there was $108 million remaining in the $250 million buyback authorization.

Assuming the company does not continue to make debt-funded share repurchases, we expect Brown-Forman to de-lever relatively quickly, owing to its strong profitability, with EBITA margins in the mid- to high-30% range, and solid growth that will continue to generate substantial cash flows. For the first nine months of the fiscal year ending 30 April 2015, Brown-Forman had underlying operating income growth of 7%, driven by strong performance in its Jack Daniel’s brand, which continues to benefit from the ongoing “premiumization” of the US spirits market and outperformance by the North American whiskey and brown spirits category globally. However, a more permanent shift to a financial policy that involves routinely distributing more cash than the company generates internally could ultimately lead to downward rating pressure.

We expect Brown-Forman’s free cash flow to debt to weaken to the 12%-13% range over the next 12 to 18 months from around 20% in recent years because of the increased debt and as the company increases its capital expenditures to provide capacity for growth. We expect free cash flow/debt to recover to 15% or higher within a year or two. Brown-Forman typically invests about $65 million a year in capital expenditures. However, capex increased to $126 million for fiscal 2014 and will remain elevated until 2016 as the company expands production capacity for its Jack Daniel’s and Woodford Reserve brands, and at the Old Forester distillery in downtown Louisville, Kentucky. The company will fund the additional capital expenditures with operating cash flow.

Based in Louisville, Brown-Forman is a leading American wine and spirits company best known for Jack Daniel’s, on which it relies heavily, despite growing diversification in its product portfolio. Other well-known brands include Finlandia vodka, Southern Comfort, el Jimador, Canadian Mist, Chambord, Woodford Reserve, Sonoma-Cutrer wines and others. Brown-Forman products are sold in more than 160 countries, with the largest operations in the US, Mexico, Australia, the UK, Germany and Poland. Net sales for the 12 months through January 2015 were $3.0 billion.

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

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Lexmark’s Pricey Kofax Deal Is Credit Negative Last Tuesday, laser-printer maker Lexmark International, Inc. (Baa3 stable) said that it would buy software developer Kofax Limited (unrated) for about $1 billion net of acquired cash. The acquisition is credit negative for Lexmark because it will strain its credit metrics and liquidity over the next 18-24 months.

Lexmark plans to tap its overseas cash and short-term investments to fund $700 million of the purchase price, which is a 47% premium to Kofax’s closing stock price of $7.50 on the day before the deal announcement. Lexmark will borrow the remaining $300 million under the company’s two revolving credit facilities. After the acquisition closes, Lexmark’s cash balances will fall to less than $200 million, far lower than historic balances in the $1 billion range. Adjusted financial leverage could approach 2.5x debt/EBITDA, up from 1.9x at year-end 2014. Lexmark expects to complete the acquisition in mid-2015.

We expect that Lexmark will suspend its stock buybacks and use most of the available free cash flow to pay down debt, which will allow it to bring its debt/EBITDA down to the low-2.0x level by the end of this year. We expect further deleveraging next year as Lexmark realizes cost synergies from its recent acquisitions, including Kofax, and further reduces its revolving credit facility borrowings.

Buying Kofax will greatly complement Lexmark’s efforts to expand its software and services capabilities and diversify its business away from the printed pages market, which is contracting. Kofax is a leading provider of smart process applications, which include multi-channel document capture, business process solutions and other analytics tools that help customers manage their unstructured data. After the acquisition closes, pro forma software and services revenues of $1.4 billion will constitute more than one third of the combined company’s total revenue stream, up from less than 20% in 2011.

Even after the acquisition, Lexmark will generate the bulk of its profits from the print and imaging business, which has higher margins than the software and services business. Operating income generated by Lexmark’s software and services units have lagged industry peers, and Lexmark will need to demonstrate margin growth in this segment to overcome the secular decline of the legacy printing and imaging business.

Gerald Granovsky Senior Vice President +1.212.553.4198 gerald.granovsky@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Link REIT’s Acquisition of Chinese Mall Will Elevate Its Risk Last Tuesday, The Link Real Estate Investment Trust (A2 stable) announced that it will acquire EC Mall in Beijing, China, for a total consideration of RMB2.5 billion. The acquisition, the Hong Kong-based Link’s first in China, is credit negative because it will increase the company’s debt leverage, weaken its liquidity and raise its risk profile.

Link will fund the acquisition with internal cash and incremental debt. The total consideration equals around 84% of its cash balance of HKD3.58 billion at the end of September 2014. As a result, this transaction will weaken Link’s liquidity buffer.

However, the company’s liquidity profile will remain adequate, given its sizable cash on hand and undrawn committed five-year revolving bank facilities of HKD5 billion. Subsequent to the acquisition announcement, Link also raised HKD740 million of senior notes through its medium-term note program, which will provide the necessary liquidity to fund its investments.

The acquisition, which the company said will close on 1 April, comes two months after Link announced in that it had made a land acquisition via a joint venture with Nan Fung International Holdings Limited (Baa3 stable) to develop a commercial/office property complex in Hong Kong. It will be the company’s first property development project and its first commercial office venture.

The two projects will likely raise Link’s debt leverage. If Link were to fund the mall acquisition and its entire share of the Hong Kong land premium with debt, we estimate that the company’s pro forma gross debt/EBITDA, including contributions from EC Mall’s estimated annualized rental income, would weaken to around 4.0x from 2.8x for the 12 months ended September 2014 (see exhibit).

Link Real Estate Investment Trust’s Debt/EBITDA, 2010-14

Source: Moody’s Financial Metrics

The mall acquisition will increase Link’s risk profile because this is its first venture into China. But the project is of manageable size relative to Link’s overall portfolio, given that the total consideration constitutes around 2.3% of Link’s total assets as of 30 September 2014. However, we expect Link to continue to increase its investments in China over the next one to two years as it seeks higher returns in this market. Such investments, along with its recent venture into the development business, will likely increase its risk profile further.

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

Mar 2010 Mar 2011 Mar 2012 Mar 2013 Mar 2014 LTM Sep 2014 LTM Sep 2014 pro forma

Franco Leung Vice President - Senior Analyst +852.3758.1521 franco.leung@moodys.com

Lisa Tao Associate Analyst +852.3758.1307 lisa.tao@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Link became a publicly traded company on the Hong Kong Stock Exchange in 2005 when the Hong Kong Housing Authority divested it. Link’s has 141 integrated retail and car park facilities, with an internal floor area approximately 11 million square feet of retail space and around 78,000 car park spaces in Hong Kong.

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

India’s Costly Spectrum Auction Is Credit Negative for Telecom Operators Last Thursday, India’s Department of Telecommunications (DoT) concluded auctions across four spectrum bands at a record-high price of INR1.1 trillion ($17.5 billion). This high cost is credit negative for the country’s telecom operators because it will increase their debt and costs and reduce their ability to fund future expansion.

The total price the operators paid for the spectrum is around 35% higher than the government’s pre-set minimum prices and higher than in any previous Indian spectrum auction, according to DoT results released after the auction.

These payments will cause debt levels to rise significantly for most operators, including Bharti Airtel Ltd. (Baa3 stable) and Reliance Communications Limited (RCOM, Ba3 stable), and will limit their ability to make additional investments over the next 12-24 months, possibly slowing the rollout of 3G/4G networks in India.

The companies will likely opt to defer their spectrum payments, which mitigates the effect on their cash flow. This option requires operators to make upfront payments of 25% or 33%, depending on the spectrum band, within 10 days of the auction’s close, with the balance payable in 10 annual installments after a moratorium of two years.

Bharti paid about INR291billion ($4.6 billion), renewing all expiring licenses and significantly increasing its 3G network. We expect Bharti to fund its upfront payment of around INR78 billion ($1.2 billion) as well as future payments from cash flow rather than additional debt.

The balance after the initial payment will be classified as a deferred liability and raise the company’s pro forma reported debt levels by 27% to around INR1.0 trillion ($16.1 billion). Its pro forma adjusted leverage will likely remain around 3.0x, and at the upper end of the range for its Baa3 rating. But we expect that the company will continue to use cash flow from operations and proceeds from tower asset sales and other monetization activities to reduce debt levels such that leverage trends towards 2.5x over the next 12-24 months.

RCOM paid INR43 billion ($684 million) for 48-megahertz spectrum to replace its 48-megahertz spectrum expiring this year. We also expect RCOM to opt for a deferred payment schedule, which will limit its upfront cash outflow to around INR11 billion ($175 million). But the associated deferred liability will keep leverage high and liquidity will remain strained.

As of 31 December 2014, RCOM had cash and cash equivalents of INR19 billion ($302 million), against short-term debt maturities of INR70 billion ($1.1 billion). Cash from operations will not be sufficient to meet its funding needs, which include spectrum payments and capital expenses, over the next 12-18 months. RCOM needs to raise INR50-INR60 billion ($796-$955 million) over the next 12 months, but given the company’s banking relationships, we do not consider the refinancing risk to be substantial.

Although we expect that the companies will raise tariffs in an effort to recover their spectrum costs, we believe the increases will be gradual, leaving the companies’ debt levels bloated for some time. Growing demand for 3G data services will continue to drive companies’ spectrum cost recovery. We also expect operators to maintain rational pricing, rather than cutting prices in an effort to increase volumes quickly.

Longer term, the spectrum secured will help operators maintain their competitive positions and support their data-growth strategies. The auctions, although expensive, have also minimized spectrum renewal risk over the next five years. The companies’ high debt burdens may also set the stage for recapitalization events and further industry consolidation, which would benefit the incumbent operators. Bharti and RCOM have a record of raising equity and using the proceeds to pay down debt.

Annalisa Di Chiara Vice President - Senior Analyst +852.3758.1537 annalisa.dichiara@moodys.com

Nidhi Dhruv Assistant Vice President - Analyst +65.6398.8315 nidhi.dhruv@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Banks

US Regulator’s Proposed Payday Loan Rules Are Credit Negative for Lenders Last Wednesday, the US Consumer Financial Protection Bureau (CFPB) proposed rules for payday lenders that would restrict some of the lenders’ current practices. The CFPB’s proposed rules are credit negative for payday lenders because they would enforce loan affordability standards that weaken profitability. In particular, the rules would limit the number of allowable rollovers (i.e., refinancings) for payday lending products and reduce loan recoveries by limiting access to consumers’ deposit accounts for repayment.

The payday lenders that would be affected include CNG Holdings, Inc. (Caa1 negative), Ace Cash Express, Inc. (B3 stable), Community Choice Financial Inc. (B3 stable), Creditcorp (B3 stable), Enova International Inc. (B3 negative), Sterling Mid-Holdings Limited (B2 negative) and Speedy Cash Holdings Corp. (Caa1 stable).

The CFPB proposal covers both short-term and longer-term loans that are often marketed to financially vulnerable consumers. Exhibit 1 shows the types of loans affected by the CFPB proposal.

EXHIBIT 1

Loan Types Affected by the US Consumer Financial Protection Bureau’s Proposed Rules » Short-term loans that must be repaid within 45 days » Longer-term loans with an annual percentage rate in excess of 36% where lenders have access to borrower’s bank

account, or hold security interest in the borrower’s vehicle

Includes: Excludes:

» Payday Loans » Pawn Loans with durations of less than 45 days » Deposits Advanced Products » Credit Card Loans » Vehicle Title Loans » Real Estate Secured Loans » Installment Loans » Student Loans » Open-Ended Lines of Credit

Source: US Consumer Financial Protection Bureau

The proposed rules allow either protective or preventive practices to address the so-called payday debt trap, where loans carrying all-in annual percentage rates of nearly 400% are given to borrowers who do not have the means to repay in the original term. Preventive practices focus on ensuring loans are affordable and include underwriting loans to ensure that all principal, interest and fees can be repaid in the original term. Currently, payday lenders perform less rigorous underwriting than lenders of larger installment loans. Protective measures limit the size of the loan, and the number of times a loan can be rolled over or the interest rate charged. Exhibit 2 summarizes the requirements for short-term and long-term loans.

Bill Hsu-Wei Huang, CFA Analyst +1.212.553.4531 hsu-wei.huang@moodys.com

Anna Sherbakova Analyst +1.212.553.7946 anna.sherbakova@moodys.com

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

EXHIBIT 2

Overview of the US Consumer Financial Protection Bureau’s Proposed Rules

Loan

s 45

Day

s or

Les

s

Debt Trap Prevention:

» A 60-day cooling off period

» Borrower cannot have other outstanding covered loans with any lenders

» Subsequent loans within 60 days would require borrowers to have improved financial circumstances

» After three consecutive loans, all lenders are prohibited from making new short-term loans for 60 days

Debt Trap Protection:

» Loans cannot exceed $500, be greater than 45 days, carry more than one finance charge or require borrower’s vehicle as collateral

» Borrower cannot have any other outstanding covered loans with any lender

» Rollovers are capped at two times, followed by a 60-day cooling off period

» Subsequent loans are only permitted if lenders offer an affordable way to pay back the loan

» Borrower cannot be more than 90 days in debt on covered short-term loans in a 12-month period

Loan

s M

ore

than

45

Day

s

Debt Trap Prevention:

» Lenders must determine a consumer’s ability to repay the loan each time the borrower seeks to refinance or re-borrow

» Lender would be prohibited from refinancing into a similar loan without documentation of borrower’s improved financial circumstances

Debt Trap Protection:

First Approach

» Loan principal is $200-$1,000, and the balance decreases over the loan term

» Lender cannot charge an interest rate higher than 28% and an application fee of more than $20

» Borrower has no other covered loans

» Lender can only provide two loans to a consumer within six months; the consumer is limited to one loan at a time

Second Approach

» The amount the borrower is required to pay each month is no greater than 5% of gross monthly income

» Borrower has no other covered loans

» Lender does not provide more than two loans to the borrower in a 12-month period

Source: US Consumer Financial Protection Bureau

As Exhibit 3 shows, payday loans, installment loans and title loans constitute 80% of payday lenders’ revenue base. The proposed rules will make these products less profitable, reduce the number of eligible borrowers and increase the costs of originating loans through hiring more people for underwriting. The most pronounced effect on payday lenders’ profitability will result from requirements to underwrite loans to ensure affordability, limits on rollover loans and limits on interest rates that may be charged.

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

EXHIBIT 3

Aggregate Revenue by Product Type of Rated US Payday Lenders

Note: Aggregate revenues for the most recently reported period. When disclosed, we exclude foreign revenues. Sources: The companies and Moody’s Investors Service

CFPB is also considering restricting payday lenders from repeated and unexpected withdrawals from consumers’ bank accounts. However, those restrictions risk reducing recoveries on delinquent loans.

We note that the proposed regulations are still at an early stage and expect more changes before CFPB finalizes the rules. We expect that the proposed rule will not be finalized until 2016.

Payday Loans44%

Installment Loans32%

Check Cashing Fees7%

Prepaid Debit Card Services2%

Title Loan Fees5%

Other Income10%

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

National Bank of Canada’s Purchase of Stake in African Financial Group Is Credit Negative Last Wednesday, National Bank of Canada (NBC, Aa3/Aa3 negative, a31) announced that it had purchased a 20.9% stake in NSIA Participations (unrated), a financial group based Côte d’Ivoire, for an undisclosed sum. The investment is credit negative because it offers little strategic advantage to NBC, reduces an already low capital position and could create future management distractions.

Although NBC did not make public the financial details of the NSIA transaction, we do not view it as financially material on a standalone basis. NBC is dominant in commercial banking and has the second-highest market share in retail banking in Québec, which supports its high ratings. However, the transaction is an allocation of capital that does not support – and may dilute – NBC’s primary credit strengths at a time when NBC’s first-quarter 2015 common equity Tier 1 ratio (CET1) of 9.3% is the lowest among Canadian banks. Moreover, it signals a trend toward increased exposure to businesses that are geographically remote and could present risk management challenges.

NSIA has operations in 12 countries across West and Central Africa and provides a wide range of banking and insurance products and services to individual and business clients. It is the leading insurance group in French-speaking Africa, and the third-largest banking institution in Côte d’Ivoire. It has assets of approximately €1.2 billion.

NBC said that the expansion into Africa is consistent with its strategy of boosting its international presence through targeted equity acquisitions, as it seeks to diversify beyond its Québec roots and gain a foothold in economies with favorable demographics and low financial markets penetration rates. The NSIA purchase is the third similar transaction in the past several months. Earlier this year, NBC increased its stake in Cambodia-based ABA Bank (unrated) to 42% from 30% in a $20 million deal. In December 2014, NBC acquired a 9.5% stake in AfrAsia Bank Ltd. (unrated), a Mauritius-based bank with operations in Zimbabwe.

In February, NBC reduced its investment in Fiera Capital Corporation (FCC, unrated), a Canadian investment management firm with approximately CAD86 billion in assets under management, via a secondary offering of shares to the public. NBC retained an approximately 22% stake in FCC, a holding we think constitutes a source of stable and growing earnings. The offering generated approximately CAD114 million in proceeds for NBC and increased its CET1 by around 15 basis points. Reducing capital committed to asset management while increasing international minority holdings dilutes NBC’s credit profile.

1 The bank ratings shown in this report are National Bank of Canada’s deposit rating, senior unsecured debt rating and baseline credit

assessment.

David Beattie Senior Vice President +1.416.214.3867 david.beattie@moodys.com

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Brazil Tax Authority Rejects BM&FBovespa’s Second Appeal in Goodwill Case, a Credit Negative Last Wednesday, Brazil’s Administrative Board of Tax Appeals (CARF) rejected BM&FBovespa S.A.’s (Baa1 negative) second appeal to uphold its goodwill amortization for tax purposes. The court’s rejection is credit negative for BM&FBovespa because it increases the chances for a negative final ruling, which would result in a BRL1.0 billion ($311 million) loss, including back taxes and fines for which the company has not provisioned.

BM&FBovespa has the option of appealing to a higher authority at the CARF, or to take the case to court, which would likely postpone a final decision on the matter for years. Management continues to assess the probability of an adverse final ruling as remote, which supports its decision not to provision for the taxes.

If BM&FBovespa were required to fully pay the BRL1.0 billion amount at once, it would consume about 90% of its cash position as of December 2014. Alternatively, the company could opt to use its free cash flow to make the payment. Based on 2014 results, a BRL1.0 billion payment would use about 82% of its cash flow.

However, any decision to use its cash flow to cover the tax payment and fines would result in a one-off decline in funds available for distribution to shareholders. This would mark a break from the past, when cash flow generation was mostly deployed for dividend distribution and share buybacks. From the bondholders’ perspective, BM&FBovespa’s total outstanding debt of $612 million maturing in 2020 is small relative to earnings of $702 million in 2014. Therefore, debt service would not be at risk if the company decides to use its cash flow, but pro forma leverage would weaken to 4.82x debt/EBITDA from 1.24x as of December 2014 and debt service would decline to 2.25x EBITDA/interest from 8.76x.

The goodwill dispute arises from the 2008 merger between BM&F (Brazil’s derivatives exchange) and Bovespa (cash equities exchange). The tax authorities allege that the company used an inconsistent criteria to value net assets to determine the value of goodwill generated in the merger. Bovespa is amortizing the cost of the merger over 10 years, and, as per the country’s tax law, the amortization expense is tax deductible. This tax-deductible treatment of goodwill amortization creates a tax shield that contributed about 40% of the company’s free cash flow between 2009 and 2014 (see exhibit). Barring an adverse outcome for BM&FBovespa in the tax dispute, this benefit will remain in place until 2017, and the company expects an annual contribution of BRL500 million to cash generation.

BM&FBovespa’s Goodwill Contribution Goodwill amortization creates a tax shield that significantly boosts cash flow.

Source: BM&FBovespa

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Free Cash Flow - left axis Tax Shield Contribution - right axis

Alcir Freitas Vice President - Senior Analyst +55.11.3043.7308 alcir.freitas@moodys.com

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Grupo Financiero Ficohsa’s Acquisition of Citibank’s Nicaraguan Subsidiaries Is Credit Positive Last Wednesday, Panama-based Grupo Financiero Ficohsa (unrated) announced that it had reached an agreement to acquire all of the shares of Banco Citibank de Nicaragua S.A. (Citibank Nicaragua, unrated) and Cititarjetas de Nicaragua S.A. (unrated) for an undisclosed amount. The transaction is credit positive for Ficohsa because it will further diversify its geographical footprint in Central America, drive faster growth and strengthen its earnings.

Citibank is Nicaragua’s fifth-largest bank, with total assets of $250 million as of year-end 2014 and a clear focus on consumer lending. Ficohsa currently has banking subsidiaries in Panama, Guatemala and its core market of Honduras. The transaction, which is subject to the approval of bank regulators in Nicaragua and Panama, follows Ficohsa’s acquisition of Citibank’s consumer operations in Honduras last year. Should this latest acquisition receive regulatory approval, we estimate that the Nicaraguan unit would initially comprise around 7% of Ficohsa’s assets in Central America, with the vast majority (around 80%) still concentrated in Honduras. Given the relatively small size of the transaction, the effect on Ficohsa’s core capital should be limited, assuming that no significant goodwill arises from the deal. We estimate Ficohsa’s core equity to be around 9% of total assets, in line with average for Central America.

Gaining a foothold in Nicaragua will give Ficohsa exposure to a rapidly growing banking system, which has benefited from economic expansion over the past three years. Loan growth in Nicaragua has averaged 23% per year since 2012, while real GDP expanded 4.7% on average over the same period, exceeding the International Monetary Fund’s 4% growth estimate. However, lending remains shallow at 30% of nominal GDP, which is below the 40% average for Latin America and in part reflects the country’s high level of economic informality2 at about 65% of GDP. Other key challenges in Nicaragua include very high levels of dollarization, with about 90% of loans and 75% of deposits in foreign currencies (at Citibank Nicaragua, around 70% of loans and 80% of deposits were in foreign currencies as of December 2014), and risks associated with high lending growth.

The deal will help improve Ficohsa’s earnings generation capacity because it will benefit from Citibank Nicaragua’s highly profitable consumer portfolio, which constituted 85% of its total loans as of year-end 2014 and is largely composed of personal loans and credit cards. Citibank Nicaragua’s net interest margin was 16.9% in December 2014, compared with the system’s 8.2% average. However, Citibank Nicaragua’s return on assets was 1.4%, below the system’s 2.2% average, as a result of stalled loan growth last year, weak efficiency and an increase in loan-loss provisions. Rising loan-loss provisions were a consequence of rising nonperforming loans (NPLs) amid a loan portfolio chiefly devoted to riskier consumer lending. Provisions consumed 31% of Citibank Nicaragua’s gross financial margin by year-end 2014, up from 18% in 2013 and exceeding the system’s 12% average. NPLs, in turn, increased to 2.7% as of December 2014 from 2.0% by year-end 2012 and above the system’s 1.0% average.

Ficohsa should be able to improve the credit quality of its new Nicaraguan subsidiary, owing to its expertise in Central America. Ficohsa is also likely to enhance the modest efficiency of its new Nicaraguan subsidiary owing to Ficohsa’s much larger scale. Continued prudent risk management will be key to sustaining any gains in earnings generation, given continued high loan growth throughout the Nicaraguan banking system.

Although Citibank re-entered Nicaragua in 2007, this transaction adds to the trend of international banks pulling out of Central America by selling to regional financial institutions. Most recently, Bancolombia S.A.

2 Economic informality refers to the economy that is not taxed or regulated by the government and is largely underestimated in the

national accounts.

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

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

(Baa2/Baa2 stable, baa33) bought HSBC’s operations in Panama, while Banco Davivienda S.A. (Baa3/Baa3 stable, ba1) acquired HSBC’s Costa Rica, El Salvador and Honduras operations.

3 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating (where available) and baseline

credit assessment.

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

A Deutsche Bank Exit from Retail Banking Would Be Credit Negative Over the past week, several news outlets, including Reuters, Bloomberg and the Financial Times, have reported that Deutsche Bank AG (A3 stable/A3 review for downgrade, baa34) is considering exiting its retail operations. An exit from retail banking would be credit negative for Deutsche Bank because it would mean abandoning a source of stable and less capital-intensive earnings. It would also mark a significant shift in its current strategy to build a universal bank with better earnings balance across its business lines.

Deutsche Bank’s management has not commented on specific scenarios, but with the bank’s stock trading at 80% of its tangible book value, management has previously stated that it is considering options to boost profitability and shareholder returns. The bank added that it will provide an update on its strategy in the second quarter.

Historically, Deutsche Bank has been more dependent on capital markets earnings than many universal banks, a characteristic that we consider a structural weakness that is difficult for the firm to mitigate. A sale or spinoff of its retail banking operation would only increase this weakness. As shown in the exhibit below, Deutsche Bank’s Private and Business Clients division, which includes retail banking, composed roughly half the earnings from Deutsche Bank’s more stable and less capital-intensive businesses (which, in addition to the Private and Business Clients division include global transaction banking and asset and wealth management) during 2012-14.

Retail Banking Constitutes Nearly Half of Deutsche Bank’s More Stable and Less Capital- Intensive Businesses Data reflect cumulative pretax earnings 2012-14.

Notes: Negative numbers are pretax losses. Retail constitutes 2012-14 cumulative pre-tax earnings of Private Business Clients division. Transaction

and Wealth Management includes cumulative pre-tax earnings of the global transaction banking and the asset and wealth management divisions. Non-core Unit and Corporate Center are the cumulative pre-tax losses reported in the non-core unit and consolidation and adjustments divisions. Restructuring costs include cost-to-achieve and other severance. Litigation includes €400 million of charges for reimbursement of loan-processing fees, originally accounted in the Private Business Clients division.

Source: Deutsche Bank

Earnings streams from more stable businesses are valuable shock absorbers that help protect bondholders from the natural volatility of the capital markets businesses. Retail banking in Germany has been burdened by high cost/income ratios and Deutsche Bank’s Private and Business Clients division earned only a 6% return on allocated equity in 2014, half the firm’s long-run target of 12%. However, despite these weak shareholder returns, the diversification benefits of the retail business add protection for bondholders.

4 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating (where available) and baseline

credit assessment.

€6.4

€6.8

€14.4

-€2.7

-€4.0

-€7.6

-€5.3

-€2.6

€5.4€0

€5

€10

€15

€20

€25

€30

Retail Transaction and Wealth

Management

Capital Markets

Own Debt & Goodwill

Restructuring Litigation Non-core Unit Corporate Center

Reported

€Bi

llion

s

Peter E. Nerby, CFA Senior Vice President +1.212.553.3782 peter.nerby@moodys.com

Riccardo M. Rinaldini Associate Analyst +44.20.7772.1689 riccardom.rinaldini@moodys.com

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

An exit would also carry substantial execution risk. Many questions regarding capitalization, legal entity structure, allocation of deposits and wholesale funding would need to be answered, and may, in fact, help mitigate some of the risks of a reduction in shock absorbers. An appropriately capitalized spun-off retail operation may have better credit quality than Deutsche Bank.

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

RBS Sale of Additional Shares in Citizens Financial Is Credit Positive Last Thursday, Royal Bank of Scotland Group plc (RBS, Baa2 review for downgrade) announced that it had sold, via an initial public offering, 24.7% of its interest in US subsidiary Citizens Financial Group, Inc., which includes Citizens Bank, N.A. (A3 review for upgrade, A3 review for downgrade, a35) and Citizens Bank of Pennsylvania (A3 review for upgrade, a3). The sale is credit positive for RBS because it further reduces its operations outside its domestic market and shows that the group has made material progress in its restructuring. The transaction will also generate a small disposal profit that will marginally benefit the group’s capital position.

RBS sold 135 million shares in Citizens and granted an over-allotment of just over 20 million additional Citizens shares at a price of $23.75 per share, corresponding to proceeds of up to $3.7 billion if the over-allotment option is exercised in full. This follows an earlier sale of a 29.7% stake in Citizens in September 2014 and the expiration of a lock-up period that reduce RBS’ stake to 45.6% (or 41.9% if the over-allotment option is fully exercised).

RBS, which is 79%-owned by the UK government following a £45 billion capital injection in 2009, first announced its intention to dispose of Citizens in November 2013 as part of a number of capital-accretive measures aimed at simplifying and de-risking the bank and strengthening its finances. The sale of additional Citizens shares will not immediately lead to an increase in regulatory capital ratios, because the corresponding reduction in risk-weighted assets of around £68 billion will only be accounted for when RBS deconsolidates Citizens by reducing its ownership stake through additional share sales. We expect that RBS will sell additional Citizens shares later this year, after the expiration of a new 90-day lock-up period and in line with the strategy of a complete sale of Citizens by 2016.

We estimate that the full sale of Citizens will contribute to an approximately 270-basis-point increase in RBS’ common equity Tier 1 ratio (CET1), assuming that the remaining investment will be sold at a price-to-tangible book value of around 100%, which we consider realistic. RBS reported a CET1 of 11.2% at the end of 2014. Citizens’ divestment will also reduce RBS’ leverage.

The transaction will generate a gross small profit of around $50 million, which more than offsets the disposal loss from the sale of the first tranche in September. However, that small profit will only marginally benefit RBS’ overall capital position.

The transaction is also credit positive for Citizens because it marks another important step toward establishing its independence from RBS, which is lower rated. This reduces the risk of dilution to Citizens’ credit profile in the event of RBS’ financial stress. This independence will also allow Citizens to invest in its franchise after several years of being more internally focused with deleveraging, selling off non-core assets and not reinvesting much in the development of its banking franchise. Although positive, the sale does not mitigate the pressure on Citizens to improve its below-average earnings in a difficult market. Higher earnings and growth would make Citizens more attractive to its new public shareholders, an attribute under RBS ownership that was less important.

5 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating (where available) and baseline

credit assessment.

Andrea Usai Vice President - Senior Credit Officer +44.20.7772.1058 andrea.usai@moodys.com

Max Price Associate Analyst +44.20.7772.1778 maxwell.price@moodys.com

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

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Egyptian Government Plan to Pay Salaries Via Direct Deposit Is Credit Positive for Banks Last Monday, Hany Kadry, Egypt’s finance minister, announced that by July the government will stop paying public-sector employees’ salaries in cash and instead will pay them through direct deposits at local banks. The government’s move is credit positive for Egyptian banks because it will increase their access to a steady flow of current account deposits and provide cross-selling opportunities. The move also marks a positive step toward strengthening Egypt’s weak financial intermediation.

We expect that government-owned banks National Bank of Egypt SAE (Caa1 stable, caa26), Banque Misr SAE (Caa1 stable, caa2) and Banque Du Caire SAE (Caa1 stable, caa2), which are favored by government employees, will benefit the most from the government’s decision.

The government’s decision will result in the opening of a large number of bank accounts owing to the Egyptian government employing around 6 million people. Government employees’ aggregate salaries total EGP207 billion ($27.6 billion) a year, compared with aggregate deposits of EGP600 billion at the three above-mentioned banks and a total banking system deposit pool of around EGP1.5 trillion, of which around EGP500 billion are current deposits.

Despite Egypt’s difficult economic environment, deposit growth has been strong in Egypt, growing by a compound annual growth rate of 15% over the three years to November 2014. We expect double-digit growth this year (see exhibit), driven by deepening penetration of the bankable population and healthy remittance flows.

Egypt’s Bank Deposit Growth by Sector

Source: Central Bank of Egypt

The government’s decision will also allow Egyptian banks to increase lending to individuals by offering low-risk salary-assigned loans, which are common in emerging markets. Banks deduct the borrower’s monthly installments on these loans directly from payroll deposits. The banks will be able to generate additional interest income, while taking on little risk given that public-sector employment is relatively stable. Moreover, the banks will have an opportunity to build a relationship with these customers and offer additional products such as mortgages and credit cards that produce interest and fee income.

6 The bank ratings shown in this report are the bank’s domestic deposit rating and baseline credit assessment.

0%2%4%6%8%10%12%14%16%18%20%

0

250

500

750

1,000

1,250

1,500

1,750

EGP

Billi

on

Government Public Sector EntitiesPrivate Business HouseholdForeign Private Sector Deposits Annual Growth - right axis

Melina Skouridou, CFA Analyst +357.2569.3021 melina.skouridou@moodys.com

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

The government’s move is also a positive step in increasing the low levels of financial intermediation in Egypt. Only 8%-10% of the adult population has a bank account in Egypt, while credit to the private sector accounts for around 30% of GDP. Loans to households are at a very low 7%.

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Malaysian Banks’ Exposure to Troubled 1MDB Is Credit Negative, but Manageable Last Thursday, Malaysia’s Prime Minister and Finance Minister Najib Razak, said that the country’s banks’ exposure to 1Malaysia Development Berhad (1MDB, unrated) totaled around MYR5 billion ($1.36 billion) as of January 2015. This reported exposure, which marks the first time that the government has publicly disclosed Malaysian banks’ exact exposure to the troubled government-owned development company, is credit negative, but relatively small compared with Malaysian banks’ capital buffers, and the worst-case credit loss would be manageable for the banks.

The announcement addresses questions about 1MDB’s potential liabilities to Malaysian banks, particularly considering that the company’s total debt as of 31 March 2014 was MYR41.9 billion, more than 8x the amount of the banks’ exposure.

Of 1MDB’s total debt, MYR5.8 billion (0.5% of GDP) was backed by an explicit government guarantee and an additional MYR11.0 billion (1.0% of GDP) was supported by a government-issued letter of comfort as of 31 March 2014. Other borrowings were either collateralized – like those from the Malaysian banks – or supported by third-party guarantees, such as from the International Petroleum Investment Corporation (Aa2 stable).

We do not expect these liabilities to migrate to the federal government’s balance sheet. However, a MYR950 million line of credit that the Ministry of Finance extended to 1MDB earlier this year, in part to alleviate 1MDB’s liquidity pressures, carries a risk that further government support would materially undermine the fiscal consolidation trend that underpins our positive outlook on Malaysia’s A3 sovereign rating.

Although no Malaysian bank has publicly confirmed or denied its exposure to 1MDB, we suspect that some of Malaysia’s large banks have moderate exposures. We also understand that bank loans to 1MDB are well collateralized, so any possible losses for the banks will be smaller than their exposures.

In the exhibit below, we stress test large Malaysian banks to a 1MDB loss. We simulate a scenario where 1MDB defaults and the exposure of every large Malaysian bank is MYR2 billion and the loss is one third of that amount owing to protection provided by collateral. We then assess this MYR667 million loss against the banks’ common equity Tier 1 ratios. In our scenario, the six large Malaysian banks maintain good capital buffers, with manageable negative effects on their capital ratios. This assessment is conservative because it excludes retained earnings that the banks will likely generate to cover higher loan-loss provisions. Banks such as Malayan Banking Berhad (A1 review for downgrade/A3 positive, a37), Public Bank Berhad (A1 review for downgrade, a3) and Hong Leong Bank Berhad (A2 review for downgrade/A3 positive, baa1) fare the best in our stress test because of their larger capital bases and higher capital buffers.

7 The bank ratings shown in this report are the bank’s local currency deposit rating, senior unsecured debt rating (where available) and

baseline credit assessment.

Eugene Tarzimanov Vice President - Senior Credit Officer +65.6398.8329 eugene.tarzimanov@moodys.com

Simon Chen Vice President - Senior Analyst +65.6398.8305 simon.chen@moodys.com

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

NEWS & ANALYSIS Credit implications of current events

21 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Simulation of 1MDB Failure on Malaysian Banks’ Common Equity Tier 1 Ratios CET1 ratios of Malaysian banks decline by 19-97 basis points from assumed 1MDB losses.

Notes: Scenario simulates a point-in-time MYR667 million loss for every bank. CET1 ratio = Common Equity Tier 1 ratio. Data as of 31 December 2014,

except for CIMB Bank and RHB Bank, whose data are as of 31 September 2014. Maybank = Malayan Banking Berhad; Public Bank = Public Bank Berhad; CIMB Bank = CIMB Bank Berhad; RHB Bank = RHB Bank Berhad; Hong

Leong Bank = Hong Leong Bank Berhad; AmBank = AmBank (M) Berhad. Source: Moody’s Investors Service

The Malaysian government established 1MDB in 2008 as a strategic development company. During the past few years, the company embarked on large-scale acquisitions and accumulated substantial amounts of debt. The company recently changed its senior management and has undergone a strategic review of its operations.

0%

2%

4%

6%

8%

10%

12%

Maybank Public Bank CIMB Bank RHB Bank Hong Leong Bank AmBank

Reported CET1 Ratio Stressed CET1 after 1MDB Loss

NEWS & ANALYSIS Credit implications of current events

22 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

India’s Measures to Revive Gas-Based Power Plants Will Benefit Banks Last Wednesday, the government of India approved measures to revive and improve the utilization of stranded gas-based power generation plants in the country. This is credit positive for India’s banks because they have significant credit exposure to such plants. Among the biggest beneficiaries of these measures are IDBI Bank Ltd. (Baa3/Baa3 review for downgrade, ba3 review for downgrade8), State Bank of India (SBI, Baa3 stable, ba1) and ICICI Bank Limited (Baa3 stable/Baa2 review for downgrade, baa3).

Power generation plants that use regasified liquefied natural gas (RLNG) as their fuel base have been facing significant availability and pricing challenges because the actual domestic production of liquefied natural gas (LNG) has been significantly lower than the assumptions made when the plants were set up. At the same time, importing LNG at prevailing prices has proved difficult because it increased generation costs, which, in turn, raised prices beyond the reach of buyers.

Among our rated banks, IDBI Bank has an especially high exposure to gas-based power plants and would be the key beneficiary of these measures. SBI and ICICI Bank have exposure to Ratnagiri Power Plant, which is the largest gas-based power plant in India, and would benefit as well.

The government has now taken steps to make the import of LNG economically feasible for supply to these stranded plants by making the various stakeholders share the higher costs. The central and state governments will provide exemptions from certain applicable taxes and levies on the incremental LNG being imported, while gas transporters and re-gasification terminals will reduce their transportation tariffs, marketing margins and re-gasification charges on the incremental LNG. Power developers will forego their return on their equity. The Indian government has also proposed to provide support to power distribution companies that buy this power.

The government estimates that there are 24,150 megawatts of gas-grid-connected power generation capacity in India. Of this, 14,305 megawatts of capacity has currently no supply of domestic gas and thus is stranded. The remaining 9,845 megawatts has also been working at a sub optimal level based on the limited quantity of domestic gas in the country.

This capacity involved a significant level of investment, at around $16 billion, most of which was bank financed. To put this in context, the total exposure of the banking system to the power sector at the end of January 2015 totaled around $88 billion, or 9% of total outstanding bank credit. Thus, banks had a material exposure to gas-based power plants that had a high risk of turning into nonperforming loans. Hence, if these measures lead to a revival of these plants, it would be a significant credit positive for Indian banks.

8 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating (where available) and baseline

credit assessment.

Srikanth Vadlamani Vice President - Senior Credit Officer +65.6398.8336 srikanth.vadlamani@moodys.com

NEWS & ANALYSIS Credit implications of current events

23 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Insurers

Hedge Fund AQR Exits Reinsurance Business, a Positive for Traditional Players Last Monday, hedge fund AQR Capital Management decided to exit the reinsurance business, citing a tough industry outlook. The withdrawal is credit positive for traditional reinsurers, which have been squeezed by AQR Re and other so-called insurance-linked securities funds (ILS funds) that have flooded the reinsurance market over the past five years, betting principally on natural catastrophe risk. We expect that more subscale ILS funds will follow AQR’s lead and either exit or partner with traditional reinsurers, either of which would alleviate competition for traditional reinsurers.

AQR’s exit shows that ILS funds, despite being able to deliver a cheaper product, cannot undercut reinsurance prices without bound. Even as ILS funds have taken market share and returns from traditional reinsurers, their own returns have suffered (see exhibit). According to the Eurekahedge ILS Advisors Index, ILS funds on average delivered only a 5.44% return last year, one of their least profitable years on record despite an absence of significant insured catastrophe losses. As a result, some of their pension fund clients, desiring at least a 6%-8% return, have pulled back from the sector, including Illinois Teachers Retirement System, which pulled out of AQR Re last fall.

Comparison of Returns of Traditional Reinsurers and Insurance-Linked Securities Funds

Sources: SNL Financial, company reports, Moody’s Investors Service and Eurekahedge ILS Advisors Index

AQR’s exit also shows that competition is forcing both ILS funds and traditional reinsurers to increase economies of scale and scope. Despite delivering inception-to-date annual net returns of 4.7% and 15.8% for its two funds, AQR Re concluded that “due to consolidating market dynamics, it will become increasingly difficult to put larger amounts of capital to work to achieve attractive risk-adjusted returns for our investors, and ever more important to be in multiple lines of business, many of which we are not currently in.” Among traditional reinsurers, these challenges have motivated three merger deals in the past three months: RenaissanceRe Holdings Ltd. and Platinum Underwriters Holdings Ltd.; XL Group plc and Catlin Group Ltd.; and AXIS Capital Holdings Ltd. and PartnerRe Ltd.

Because ILS funds and traditional reinsurers share similar challenges, we expect to see more partnerships between the two groups as an amicable solution, similar to the one between Amlin plc and Leadenhall Capital. However, many of these future arrangements will likely pair traditional reinsurers directly with interested investors rather than with ILS fund managers. Third-party investors provide cheap reinsurance capital and management fees to traditional reinsurers, which, in turn, provide underwriting expertise and access to products and sales channels to third-party investors. Partnerships can also run in reverse, as is the

-2%

2%

6%

10%

14%

18%

22%

2006 2007 2008 2009 2010 2011 2012 2013 2014

Traditional Reinsurers Insurance-Linked Securities Funds

Kevin T. Lee, CFA, ACAS Vice President - Senior Credit Officer +1.212.553.2907 kevin.lee@moodys.com

NEWS & ANALYSIS Credit implications of current events

24 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

case of Allied World and Aeolus Capital, where Aeolus is the ILS fund that provides underwriting expertise and the reinsurer provides capital.

We acknowledge that more alternative reinsurance capital will likely enter the industry, even as some capital leaves. Alternative capital has grown to about $60 billion, or 18% market share in property catastrophe reinsurance, according to Guy Carpenter estimates. That compares with our own estimate of $580 billion of traditional reinsurance capital. With interest rates still low, the relative returns of reinsurance as an asset class and the diversification benefits will remain attractive for some investors. However, AQR’s exit shows the limits to the ILS business model and argues for consolidation among ILS funds.

NEWS & ANALYSIS Credit implications of current events

25 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Sovereigns

Indonesia Gains Investment and Financial Assistance from Japan, a Credit Positive Last Wednesday, Indonesia (Baa3 stable) President Joko Widodo concluded his first state visit to Japan (A1 stable) with a promise from Japan of $1.2 billion in infrastructure-related financing, $2.6 billion in direct investment from auto manufacturers and $3 billion in sectors including textiles, fisheries and power. The financing is credit positive for Indonesia because it supports the Widodo administration’s efforts to improve domestic infrastructure, offsets the effect of lower commodity prices on growth and consolidates Indonesia’s economic relationship with its largest trading partner.

Since 2012, growth in foreign-investor-driven investment in Indonesia has decelerated (Exhibit 1), and GDP growth declined to 5.0% in 2014 from 5.6% in 2013 and 6.0% in 2012. Since prices of Indonesia’s commodity exports, which are 52.2% of total exports, will likely remain low over the next year, non-commodity investment is key to GDP growth. And infrastructure investment is the cornerstone of the government’s strategy to revive investment.

EXHIBIT 1

Indonesia’s Real Year-on-Year Change in Gross Fixed Capital Formation Foreign-investor-driven investment has turned negative.

Sources: Badan Pusat Statistik and Haver Analytics

The government is implementing its strategy to revive investment through several measures. It has directed savings from lowered fuel subsidies to infrastructure development, increasing allocations to capital expenditures by 80% in 2015 over the previous year’s actual spending. It has also simplified the process of obtaining investment-related permissions from the government. Last week’s state visits to Japan and China (Aa3 stable) shored up support from Indonesia’s largest trading partners for infrastructure and manufacturing.

Japan and China are Indonesia’s top export destinations, and rank second and third as sources of foreign direct investment (see Exhibit 2). Last week’s bilateral economic initiatives will likely maintain the pace of growth in investment from both countries. Inflows as of 2014 from Japan have increased 57.4% since 2010, while those from China jumped by 201.4%, although from a much lower base, during the same period.

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%Foreign Investor-Driven Domestic Investor-Driven

Atsi Sheth Senior Vice President + 65.6398.3727 atsi.sheth@moodys.com

Amelia Tan Associate Analyst +65.6398.8323 amelia.tan@moodys.com

NEWS & ANALYSIS Credit implications of current events

26 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

EXHIBIT 2

Direct Investment into Indonesia Japan is a major source of direct investment flows into Indonesia.

Source: Bank Indonesia

Japan’s pledged foreign direct investment and bilateral financing provides Indonesia with reliable long-term financing amid uncertainty around international financing costs and risk appetite. Indonesia’s current account deficit and the large weight of commodities in its export basket have pressured the rupiah’s exchange rate in recent weeks. When the promised funding crystallizes, it will support Indonesia’s balance of payments and its growth.

The Japanese government’s financing will be used for the mass rapid transit system in Jakarta as well as a Java-Sumatra transmission line project. Japanese support for these high profile infrastructure projects could spark similar investments elsewhere in Indonesia. Moreover, it was accompanied by bilateral investments and export promotion initiatives that could result in additional financing from Japan over time.

Private-sector Japanese investment in manufacturing announced in the wake of the state visit will support manufacturing and non-commodity exports. Indonesia’s expanding middle class supports a fast-growing car market that Japanese manufacturers are eager to supply. Its strategic location and membership of the Association of South East Asian Nation allow Indonesia to serve as a manufacturing base for exports to other markets in the region. In addition, rupiah depreciation and low wages have lowered costs and made Indonesia more competitive for manufacturers.

$0

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$10

$12

$14

Korea Malaysia People's Republic of China Japan Singapore

$ Bi

llion

NEWS & ANALYSIS Credit implications of current events

27 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Sub-sovereigns

Brazil Supreme Court Resolution on Arrears Is Credit Negative for States and Municipalities On Wednesday, Brazil’s Supreme Court partially overruled a constitutional amendment outlining the rules that Brazilian regional and local governments (RLGs) and the federal government must follow regarding arrears with suppliers and workers. This change is credit negative for all Brazilian sub-sovereigns because they now face tighter repayment schedules and limitations on alternative ways to fulfill their debt obligations to creditors, which will depress their liquidity.

As a result of this ruling, RLGs will have to clear their arrears in five years starting on 1 January 2016, instead of 15 years as the previous rules outlined. As of June 2014, states and municipalities had accumulated arrears with a nominal value of BRL96.4 billion ($30.3 billion), excluding inflation adjustments.

The liabilities are particularly significant for the states of São Paulo (Baa2 negative), Paraná (Baa3 negative), Rio Grande do Sul (unrated), Minas Gerais (Baa3 negative) and the Federal District (unrated), whose arrears constituted around 40% of the total (see Exhibit 1). In addition to these states, the burden of payment will be high for Rondonia (unrated), Piaui (unrated), Paraiba (unrated), Santa Catarina (unrated) and Mato Grosso do Sul (unrated), whose arrears accounted for more than 10% of their respective total revenues for 2014. The ruling is also negative for most Brazilian cities, which owe 41% of total arrears. Although most arrears derive from state courts rulings and are related to goods-and-service providers, a small portion that cannot be identified by RLG is derived from labor courts and federal courts.

Francisco Vazquez Ahued Assistant Vice President - Analyst +52.55.1253.5735 francisco.vazquez-ahued@moodys.com

Paco Debonnaire Analyst +55.11.3043.7341 paco.debonnaire@moodys.com

NEWS & ANALYSIS Credit implications of current events

28 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

EXHIBIT 1

Brazilian State and City Arrears as of June 2014

State Arrears from State Tribunales In BRL Billions Arrears as a Multiple of

Investment Expenditures Arrears as a Percent of

Total Revenues

Rondonia (unrated) BRL0.4 4.7x 21%

Distrito Federal (unrated) 3.7 2.6x 20%

Rio Grande do Sul (unrated) 6.9 7.0x 18%

Paraná (Baa3 negative) 5.9 6.7x 16%

Piaui (unrated) 1.0 1.1x 15%

Paraiba (unrated)1 1.1 1.3x 14%

Sao Paulo (Baa2 negative) 21.4 2.4x 13%

Santa Catarina (unrated) 1.9 0.9x 10%

Mato Grosso do Sul (unrated) 1.0 1.6x 10%

Sergipe (unrated) 0.5 0.9x 7%

Alagoas (unrated) 0.4 0.3x 6%

Minas Gerais (Baa3 negative) 3.4 0.9x 5%

Bahia (unrated) 1.8 0.7x 5%

Goias (unrated) 0.9 0.4x 5%

Amazonas (unrated) 0.7 0.4x 5%

Rio Grande do Norte (unrated)1 0.4 1.6x 4%

Mato Grosso (unrated) 0.4 0.2x 3%

Tocantins (unrated) 0.2 0.2x 3%

Pernambuco (unrated)1 0.4 0.2x 2%

Ceara (unrated)1 0.4 0.2x 2%

Maranhao (Ba1 negative) 0.3 0.2x 2%

Acre (unrated) 0.1 0.1x 2%

Roraima (unrated) 0.1 0.2x 2%

Rio de Janeiro (unrated) 0.7 0.1x 1%

Espirito Santo (unrated) 0.2 0.1x 1%

Para (unrated) 0.2 0.1x 1%

Amapa (unrated) 0.1 0.0x 0%

City Arrears from State Tribunales 39.2

State and City Arrears from Labor Tribunals 1.5

State and City Arrears from Federal Tribunals 0.5

Total Arrears BRL96.4

Note: 1 Capital expenditures and total revenues for 2013.

Sources: Conselho Nacional de Justica, Sistema do Tesouro Nacional and Moody’s Investors Service

In addition to changing the time frame to clear the arrears, the Supreme Court also changed the index used to update the value of the debt at the date of payment for inflation. Arrears from states and municipalities accumulated before 25 March 2015 will continue to be adjusted using the Basic Index of Savings (Índice Básico da Caderneta de Poupança, also known as Taxa Referencial, or TR), a reference interest rate for

NEWS & ANALYSIS Credit implications of current events

29 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

personal savings accounts. But any arrears built up after 26 March will be updated using the Special Broad Consumer Price Index (Indice de Precios ao Consumidor Amplo - Especial, IPCA-E), which is more representative of the real inflation rate. Because IPCA-E is higher than TR (see Exhibit 2), we expect the stock of arrears to grow faster than would have been the case using the previous index.

EXHIBIT 2

IPCA-E Year-on-Year Growth and Taxa Referencial Annualized Yield

Sources: Instituto Brasileiro de Geografia e Estatística, Banco Central do Brasil and Moody’s Investors Service.

The ruling also puts limitations on the RLGs’ ability to use compensation mechanisms (such as netting out arrears with tax receivables, for example) to reduce the amount of obligations actually paid, and establishes that starting 26 March out-of-court settlements can only result in a write-off of up to 40% of the debt face value.

Given Brazil’s Fiscal Responsibility Law restrictions on RLGs contracting debt, we do not expect debt to increase materially as a consequence of this ruling. Combined with a faster decrease in RLG arrears, this is a credit benefit. But, we expect arrear payments to crowd out spending in areas such as infrastructure investment and transfers to the population, which risks exacerbating political tensions and hurting economic growth, which would exert downward pressure on some states’ credit quality. We would not rule out an amendment to this decision in the future and we note that some RLGs such as the state of São Paulo have already publicly expressed their concerns over the ruling.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Jan-

04

May

-04

Sep-

04

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05

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-05

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05

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06

May

-06

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06

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07

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-07

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07

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08

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-08

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09

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-09

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10

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-10

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10

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11

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-11

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11

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12

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-12

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13

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-13

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13

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14

May

-14

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14

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15

Taxa Referencial Annualized IPCA-E Year-on-Year Growth

NEWS & ANALYSIS Credit implications of current events

30 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Redistribution of Funds Among German Laender Is Credit Positive Last Tuesday, Germany’s Ministry of Finance published 2014 data on the fiscal equalization system that showed €20.4 billion of redistributed funds to regional governments (Laender) last year, a more than 7% increase over 2013 levels. The high volume of redistribution reflects the strong solidarity in Germany’s federal system, combined with very high central government support for the Laender, a credit positive for the sector. Our German Laender ratings of Aaa and Aa1 reflect the Government of Germany’s (Aaa stable) support of the Laender and their strong interlinkage.

Germany’s fiscal equalization system combines several elements, including distribution of value-added taxes (VAT) among Laender, payments to financially weaker Laender from wealthier Laender, general federal transfers to weaker Laender and supplementary federal grants for special purposes. The 2014 data shown in Exhibit 1 excludes specific federal transfers.

EXHIBIT 1

Redistributed Funds via Germany’s Fiscal Equalization System

Sources: Germany’s Ministry of Finance and Moody’s Investors Service calculations

In 2014, the redistribution of VAT among the Laender totalled €7.8 billion, versus €7.3 billion in 2013. With transfers of €2.3 billion, the Land of Nordrhein-Westfalen (Aa1 stable) was the largest contributor to this part of the system, followed by Free State of Bavaria (Aaa stable) and Land of Baden-Wuerttemberg (Aaa stable), with about €2 billion each. The Free State of Saxony (unrated) received €2.4 billion and was the largest recipient of the redistributed VAT.

Transfers to financially weaker Laender from financially stronger Laender totalled €9.0 billion in 2014, compared with €8.4 billion in 2013. Only Bavaria, Baden-Wuerttemberg, Hessen (unrated) and Hamburg (unrated) were contributors; the remaining 12 Laender were recipients that benefitted from their wealthier peers’ equalization payments.

With general federal transfers of totalling €3.5 billion in 2014, the central government supported weaker, mainly East German, Laender, but some West German Lander received such federal grants to improve their financial strength to an adequate level.

-€7-€6-€5-€4-€3-€2-€1€0€1€2€3€4€5

€Bi

llion

s

Value Added Tax Financial Equalisation General Federal Grants

Harald Sperlein Vice President - Senior Analyst +49.69.70730.906 harald.sperlein@moodys.com

Juliane Sarnes Associate Analyst +44.20.7772.1392 juliane.sarnes@moodys.com

NEWS & ANALYSIS Credit implications of current events

31 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

The total redistribution volume of €20.4 billion in 2014 equalled 6.4% of aggregate Laender 2014 revenues. On an individual basis, the transfers varied significantly (see Exhibit 2). For example, the Land of Thuringia (unrated) received 23% of total revenues from the equalization mechanism, while Bavaria contributed around 13% of its revenues to the system.

EXHIBIT 2

German Laender Transfers to or from the Equalisation System as a Percentage of Total Revenues

Sources: German Ministry of Finance and Moody’s Investors Service calculations

German central and Laender governments are currently negotiating the fiscal equalization system for the years after 2019. Over the past months, several reform proposals have been discussed by leading politicians and the public. We expect no negative credit implications for the Laender sector from a newly adjusted system in the future.

-15% -10% -5% 0% 5% 10% 15% 20% 25%

Thuringia (unrated)Saxony-Anhalt (Aa1 stable)

Saxony (unrated)Mecklenburg Western-Pomerania (unrated)

Berlin (Aa1 stable)Bremen (unrated)

Brandenburg (Aa1 stable)Saarland (unrated)

Schleswig-Holstein (unrated)Lower Saxony (unrated)

Rhineland-Palatinate (unrated)Nordrhein-Westfalen (Aa1 stable)

Hamburg (unrated)Baden-Wuerttemberg (Aaa stable)

Hessen (unrated)Bavaria (Aaa stable)

NEWS & ANALYSIS Credit implications of current events

32 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Chinese Regional and Local Government Land Sales Slowed Sharply in 2014, a Credit Negative Last Tuesday, China’s (Aa3 stable) Ministry of Finance released data on regional and local government land sales that showed sharply slower sales growth of 3.1% in 2014, versus 45% growth in 2013, a credit negative. Land sales accounted for 24% of regional and local governments’ total revenues, and deteriorating land sales indicate weakening fiscal and debt metrics for the sector.

The Ministry of Finance identified 15 provinces, including Liaoning, Yunnan, Heilongjiang and Hainan, whose land sales declined. Jilin released its own statistics showing its slowdown. In contrast, ministry data showed that land sales growth accelerated year over year in 16 other provinces, including Beijing, Tianjin, Hunan, Qinghai and Shaanxi. Guangdong, Shandong and Sichuan released their own data showing land sales growth. Differentiated investment demand and real estate development resulted in the performance differences among the provinces. Exhibit 1 shows the differentiation among 27 provinces as indicated by available fund revenues, a booking category in fiscal accounting to capture statistics of land sales. In 2014, 86% of fund revenues was accounted for by land sales.

EXHIBIT 1

Chinese Province Land Sales Growth

Source: China’s provincial finance bureaus

As proxies for land sales, governmental fund revenues grew at a lower rate or shrunk at a higher rate in 2014 than in 2013 for 25 provinces. Beijing defied the national trend because of continued demand for properties in the Chinese capital. Tianjin’s reversal in 2014 was an aberration owing to the local government’s push for land sales during the year. For 2015, Tianjin has budgeted a 30% decrease of land sales.

Exhibit 2 presents the effect of the change in land sales on total provincial revenue. Liaoning and Yunnan saw the biggest revenue declines of 10.9% and 5.8%, respectively.

-40%

-20%

0%

20%

40%

60%

80%

100%2014 2013

Nicholas Zhu, Ph.D. Vice President - Senior Analyst +86.10.6319.6536 nicholas.zhu@moodys.com

NEWS & ANALYSIS Credit implications of current events

33 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

EXHIBIT 2

Chinese Province Total Revenue Changes Caused by Land Sales

Province Percentage Change

in Land Sales in 2014 Land Sales Share

of Total Revenue in 2013 Percent Change in

Total Revenue in 2014

(A) (B) (A) * (B)

Beijing 69.6% 33.0% 23.0%

Tianjin 29.1% 24.5% 7.1%

Hunan 28.1% 19.1% 5.4%

Shandong 10.2% 35.0% 3.6%

Chongqing 10.1% 35.3% 3.6%

Guangxi 14.9% 21.7% 3.2%

Guangdong 10.6% 30.4% 3.2%

Jiangsu 8.0% 39.2% 3.1%

Shaanxi 15.5% 19.3% 3.0%

Fujian 7.2% 41.0% 3.0%

Shanghai 8.2% 34.1% 2.8%

Qinghai 20.1% 7.1% 1.4%

Sichuan 0.6% 27.5% 0.2%

Xinjiang 0.0% 12.2% 0.0%

Ningxia -0.8% 17.9% -0.1%

Henan -1.7% 24.6% -0.4%

Gansu -4.1% 14.0% -0.6%

Jilin -4.4% 18.8% -0.8%

Shanxi -4.3% 24.6% -1.1%

Zhejiang -3.8% 48.4% -1.8%

Jiangxi -6.9% 29.3% -2.0%

Heilongjiang -14.4% 14.2% -2.0%

Hebei -7.9% 28.5% -2.3%

Hainan -8.2% 30.3% -2.5%

Inner Mongolia -22.3% 14.9% -3.3%

Yunnan -31.3% 18.6% -5.8%

Liaoning -34.4% 31.7% -10.9%

Source: China’s provincial finance bureaus

The overall declining trend in land sales continued in the first two months of 2015, with a 36.2% total land sales decline versus the same period a year ago. To assist the provinces whose land sales, and therefore revenues, declined, the central government has implemented a policy package that includes a RMB1 trillion debt-for-bond swap and RMB600 billion of new bond issuance to reduce regional and local government debt, the debt-service burden and cash-flow stress. In terms of liquidity relief, the RMB600 billion of new bond issuance equals 14% of total land sales, or a 14.4-percentage-point compensation for the lower growth of land sales last year. Jiangsu became the first province to take advantage of the relief package, announcing on Wednesday that it would issue RMB64.8 billion of three-, five-, seven- and 10-year bonds. In addition, Minister of Finance Lou Jiwei on Friday stated that increasing the size of the RMB1 trillion debt-for-bond swap was under consideration.

NEWS & ANALYSIS Credit implications of current events

34 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

US Public Finance

Atlantic City, New Jersey, Emergency Manager Plan Leaves Open Possibility of Default Last Tuesday, Atlantic City, New Jersey (Caa1 negative), Emergency Manager Kevin Lavin released his plan to address the city’s looming 2015 liquidity crisis and long-term structural budget gap. He identified an enormous $101 million gap in 2015 alone, nearly 40% of the city’s 2014 budget. Mr. Lavin will move to implement his proposed short-term solutions over the next 90 days, while negotiating with casinos and creditors, among others, on a long-term restructuring plan. Implementing the proposals may still be subject to New Jersey Governor Chris Christie’s approval. Without rapid legislative action, state aid and timely property tax payments from struggling casinos, the plan’s aggressive timeline leaves open the possibility of default.

Long-term restructuring options will be difficult to implement. Casinos must agree to an alternative tax payment that converts casino property taxes to payment in lieu of taxes (PILOTs) in order to stabilize the city’s revenues. That will involve cooperation from the school district and the county to agree on a plan to potentially reduce their annual revenues. It will also require cooperation from the casinos, which are still owed approximately $200 million for additional tax appeal refunds.

Mr. Lavin’s plan calls for the state legislature to pass bills proposed last year that would direct $17.5 million in excess investment alternative taxes (IAT) on gaming revenues and $30 million of Atlantic City Alliance (ACA) marketing funds to the city. The IAT revenues would be passed on after debt service is paid on Casino Reinvestment Development Authority, NJ IAT bonds (Baa3 negative). ACA marketing funds do not have associated debt.

Mr. Lavin’s plan also calls for Atlantic City to delay or defer $42 million in state health benefit and pension payments for the year, although state approval may be required for this measure. Given the city’s cash flow projections and assuming that pension and health benefit payments are delayed or deferred, the state legislature will have only three months to adopt the two bills before the city reaches a liquidity and debt service crisis.

Debt service payments (see exhibit) may be at risk if both bills are not adopted swiftly and the revenue infusion is not timely. In fact, Mr. Lavin’s short-term solutions provide for “debt deferrals” as a to-be-determined placeholder, or “TBD,” as written in the plan. Moreover, his options for long-term restructuring include potential impairment to bondholders in the form of restructuring amortization schedules and the extension of maturities. We may consider any of these events to be a default or distressed exchange, in line with our Caa1 rating on the Atlantic City’s general obligation debt.

Josellyn Yousef Assistant Vice President - Analyst +1.212.553.4854 josellyn.yousef@moodys.com

NEWS & ANALYSIS Credit implications of current events

35 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Atlantic City, New Jersey, 2015 Debt Service Schedule

Due Date Amount

15-Feb $3,351,263

31-Mar $40,075,000*

1-Apr $653,143

1-May $1,803,585

1-Jun $1,553,475

15-Jun $256,550

15-Jul $62,491

1-Aug $3,535,575

4-Aug $12,300,000

15-Aug $2,740,013

1-Oct $79,688

1-Nov $2,358,585

1-Dec $2,168,475

15-Dec $11,036,550

Note: * City in conversations with the state to extend repayment date.

Source: Atlantic City, New Jersey

Additionally, the possibility of casinos’ late or delinquent property taxes is not included in Mr. Lavin’s already dire liquidity projections, even though Revel and Trump Taj Mahal property tax payments in 2014 were delinquent. Should a casino become delinquent on its property tax payments, Mr. Lavin’s short-term solutions will be insufficient to prevent a 2015 debt service default. His adjusted base case liquidity projection assumes that all of his proposed solutions are implemented on time, which is optimistic. If, again, Revel and Trump Taj Mahal were to miss their property tax payments, which totaled approximately $55 million in 2014, the city’s liquidity would be even worse than projected.

Atlantic City’s $12.3 million bond anticipation note (BAN) maturity on 4 August still relies on uncertain market access. It will be difficult to refinance the BAN given that it is scheduled to mature near Mr. Lavin’s deadline for receiving IAT and ACA revenues. Repayment of a $40 million state loan due 31 March may also face market access risk, but the city has indicated that it is in communication with the state to extended the repayment date.

NEWS & ANALYSIS Credit implications of current events

36 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Covered Bonds

German Covered Bond Issuers Replace Assets Exposed to Failed Austrian Lender, a Credit Positive Last Wednesday, the German Stock Exchange Gazette (Boersen-Zeitung) reported that Pfandbrief issuers organised in the Association of German Pfandbrief Banks (vdp) had substituted cover pool assets exposed to failed Austrian lender Heta Asset Resolution AG (state-guaranteed senior unsecured debt Ca negative) with performing assets to support their public-sector covered bond programmes.

The credit-positive decision demonstrates the importance that the German banking industry places on the reputation of the Pfandbrief product. The two programmes that benefit most from the Heta asset substitution are HSH Nordbank AG Public - Sector Covered Bonds (Aa2) and Deutsche Hypothekenbank AG Public-Sector Covered Bonds (Aa2) because they had the greatest percentage of Heta assets in their cover pools.

On 4 March we downgraded Heta’s state-guaranteed senior unsecured debt ratings to Ca from Caa1 after the Austrian Financial Market Authority (FMA) on 1 March announced that it would initiate resolution measures on Heta. Germany’s Pfandbrief Act does not force issuers to substitute nonperforming cover assets and allows them to be included in the calculation of the over-collateralization that protects covered bond investors.

The Austrian FMA on 1 March declared a payment moratorium on unsecured obligations of Heta, the wind-down remnant of the former state-owned bank Hypo Alpe-Adria-Bank International AG. The payment moratorium includes Heta’s state-guaranteed liabilities and assets that have been eligible for cover bond programmes governed by the German Pfandbrief Act. As of 30 September 2014, state-guaranteed claims against Heta that are included in German public-sector Pfandbriefe cover pools that we rate totalled €658 million.

As the exhibit below shows, the affected covered bond programmes’ over-collateralization levels in all cases exceeded the Heta exposures. This implies that covered bond investors were already shielded from potential losses on Heta exposures because the issuers voluntarily maintained high over-collateralization levels. Indeed, in all cases even a complete write-off of Heta exposures would not have resulted in a reduction of over-collateralization levels below the statutory level of 2% as per the Pfandbrief Act. Removing the Heta exposure has further strengthened investors’ position because assets affected by the Heta payment moratorium have been replaced with good quality assets, thereby maintaining the over-collateralization level and strengthening its quality.

Patrick Widmayer Assistant Vice President - Analyst +49.69.70730.715 patrick.widmayer@moodys.com

Martin Lenhard Vice President - Senior Analyst +49.69.70730.743 martin.lenhard@moodys.com

Alexander Zeidler Vice President - Senior Analyst +44.20.7772.8713 alexander.zeidler@moodys.com

NEWS & ANALYSIS Credit implications of current events

37 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

German Public-Sector Covered Bond Programmes’ Exposure to Heta Asset Resolution and Cover Pool Over-Collateralisation

Note: Berlin Hyp AG did not disclose its Heta exposure. Source: Moody’s Investors Service

The removal of the Heta exposures is a fresh example of the type of issuer discretion we observed during the financial crisis, when issuers voluntarily substituted underperforming and nonperforming assets with well-performing assets, thereby maintaining the viability of this important funding source. It differentiates covered bonds from other structured finance instruments that transfer asset risk to new owners and it is a positive factor that we consider in our analysis of covered bonds.

Heta’s liability structure is dominated by so-called grandfathered debt, legacy debt that carries a deficiency guarantee from the Austrian State of Carinthia (Baa3 negative). Debt benefitting from deficiency guarantees was a common funding source for public-sector banks in Austria and Germany before state-guaranteed bonds were banned under European Union’s competition law. In consideration of the deficiency guarantee, the Pfandbrief Act allows covered bond issuers to register state-guaranteed claims in their public-sector cover pools.

0%

2%

4%

6%

8%

10%

12%

14%

16%

HSH Nordbank AG

Deutsche Hypothekenbank AG

Deutsche Pfandbriefbank AG

Muenchener Hypothekenbank eG

Hypothekenbank Frankfurt AG

Heta Exposure Over-Collateralisation

RATING CHANGES Significant rating actions taken the week ending 27 March 2015

38 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Corporates

Allison Transmission, Inc. Upgrade 6 Aug ‘14 23 Mar ‘15

Corporate Family Rating Ba3 Ba2

Outlook Stable Stable

The upgrade reflects our view that the company has become increasingly well positioned to weather the cyclicality in the medium- and heavy-duty truck markets, owing to its sound operating flexibility and liquidity.

BMW – Bayerische Motoren Werke Aktiengesellschaft Outlook Change 22 Jul ‘11 24 Mar ‘15

Senior Unsecured Rating A2 A2

Short-Term Issuer Rating P-1 P-1

Outlook Stable Positive

The outlook change reflects our expectation that BMW will deliver strong operational performance in the next 12 months aided by a diversified range of premium models, its solid market positions in premium segments of major car markets (in particular, the US and China), and the planned introduction of new models and model updates in 2015.

California Resources Corp. Downgrade 4 Sep ‘14 23 Mar ‘15

Corporate Family Rating Ba1 Ba2

Outlook Stable Stable

The downgrade reflects the difficult pricing environment for an oil-focused producer like California Resources Corp. with limited commodity price hedge protection, unlike most of its peers that have had hedging programs in place for a number of years. The timing of the spinoff from Occidental Petroleum Corporation (A2 stable) just as oil prices began their abrupt slide has left California Resources Corp. exposed to low oil prices, high leverage and more limited financial flexibility than what was originally expected.

H.J. Heinz Company Review for Upgrade 26 Jan ‘15 25 Mar ‘15

Corporate Family Rating Ba3 Ba3

Outlook Stable Review for Upgrade

The review follows the announcement that Heinz and Kraft Foods Group, Inc. have agreed to a merger to create The Kraft Heinz Company, a nearly $30 billion global food company, and reflects our expectation that the combined entity will likely have a significantly stronger credit profile than Heinz. Based on the companies’ stated financing plan, the merger will likely result in an investment-grade company. The review will focus on the financing plan for the proposed merger, and on the composition and longer-term operating strategy of the new senior management team of Kraft-Heinz.

RATING CHANGES Significant rating actions taken the week ending 27 March 2015

39 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Kraft Foods Group, Inc. Review for Downgrade 25 May ‘12 25 Mar ‘15

Long-Term Issuer Rating Baa2 Baa2

Outlook Stable Review for Downgrade

The review follows the announcement that H.J Heinz Company have agreed to a merger to create The Kraft Heinz Company, a nearly $30 billion global food company, and reflects our belief that the higher leverage of the combined entity may result in a weaker overall credit profile that could lead to a downgrade of Kraft’s debt instrument ratings.

The review will focus primarily on the financing plan for the proposed merger, and on the composition and longer-term operating strategy of the new senior management team of Kraft-Heinz.

Tencent Holdings Limited Upgrade 28 Mar ‘14 23 Mar ‘15

Corporate Family Rating A3 A2

Outlook Stable Stable

The upgrade reflects Tencent’s stronger-than-expected operating performance and its ability to maintain a stable credit profile in a fast-growth phase for the company. Tencent reported strong growth in cash flow in fiscal year 2014 as its revenue continued to rise above our expectations, driven by increased monetization on its mobile platform.

RATING CHANGES Significant rating actions taken the week ending 27 March 2015

40 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Infrastructure

Fortum Oyj Review for Downgrade 16 Nov ‘12 26 Mar ‘15

Issuer Rating A2 A2

Senior Unsecured Rating A2 A2

Outlook Negative Review for Downgrade

Prompting the review is Fortum’s recently announced sale of its Swedish distribution activities for €6.6 billion, which follows earlier disposals of smaller grids in Norway and Finland. The company’s long-term targets for strengthening its financial profile may not offset the anticipated upswing in risk for its business profile, following the disposal of these low-risk assets.

Jersey Central Power & Light Co. (JCPL) Outlook Change 26 Feb ‘13 24 Mar ‘15

Senior Unsecured Rating Baa2 Baa2

Senior Secured Rating A3 A3

Outlook Negative Stable

The outlook change follows the resolution of JCPL’s long-standing base rate and storm cost recovery cases at the New Jersey Board of Public Utilities (BPU). We view the decision as balanced.

Reliance Rail Finance Pty Ltd. Upgrade 17 Jul ‘14 26 Mar ‘15

Senior Secured Rating B1 Ba3

Subordinated Debt Rating B3 B2

Outlook Positive Positive

The upgrade reflects Reliance Rail’s solid operating track record over the past 12 months, which resulted in gradual improvement in reliability as well as lower than expected revenue abatements.

RATING CHANGES Significant rating actions taken the week ending 27 March 2015

41 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Financial Institutions

Five Pakistani Banks Downgrade 26 Mar ‘15

Following the publication of our new bank methodology on 16 March 2015, we downgraded to Caa1 from B3 the local-currency deposit ratings on five Pakistani banks – Allied Bank Limited, Habib Bank Ltd., MCB Bank Limited, National Bank of Pakistan and United Bank Ltd. – and assigned positive outlooks.

Nine Ukrainian Banks and One Leasing Company Downgrade 26 Mar ‘15

Because of the weakening of Ukraine’s credit profile, we took rating actions on nine Ukrainian banks and one leasing company, downgrading the baseline credit assessments and local-currency deposit ratings on seven banks and the foreign-currency debt ratings on three. We assigned negative outlooks to all of the affected ratings.

Mitsui Life Insurance Company Limited Upgrade 19 Oct ‘06 24 Mar ‘15

Insurance Financial Strength Baa2 Baa1

Outlook Stable Stable

The upgrade reflects the insurer’s improved financial flexibility, owing to its strong affiliation with both Mitsui and Sumitomo group companies, led by Sumitomo Mitsui Banking Corporation (A1 stable). The ratings outlook is stable.

Permanent tsb p.l.c. Review Direction Uncertain 20 Dec ‘13 26 Mar ‘15

Baseline Credit Assessment caa3 caa3

Outlook Review for Downgrade Review Direction Uncertain

We changed the status on Permanent tsb’s caa3 baseline credit assessment to a review with direction uncertain from review for downgrade, in light of the approval in principle by the European Commission of the bank’s restructuring plan, the endorsement provided by the ECB’s Single Supervisory Mechanism of the bank’s recapitalisation plan and the more positive financial results disclosed by the bank.

RATING CHANGES Significant rating actions taken the week ending 27 March 2015

42 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Sumitomo Corporation Review for Downgrade 5 Jun ‘06 26 Mar ‘15

Long-term rating A2 A2

Senior Unsecured (Domestic) A2 A2

Outlook Stable Review for Downgrade

The review for downgrade was prompted by the company’s announcement that it would report a net loss of about ¥85 billion for the fiscal year ending 31 March 2015. There are questions about Sumitomo Corp’s ability to generate adequate earnings and cash flow, and its ability to reduce its leverage to a level consistent with its A2 rating. The rating action also reflects questions about Sumitomo Corp’s risk management, as it relates to investment selection and timing.

Volkswagen Bank and Volkswagen Leasing Upgrade 23 Mar ‘15

We upgraded to A2 from A3 the long-term global local currency senior debt ratings on Volkswagen Bank, S.A. and Volkswagen Leasing, S.A. de C.V., and placed both entities’ global local currency ratings on review for further upgrade. These actions follow a similar action on the senior debt ratings of Germany-based parent Volkswagen Financial Services AG, which were upgraded to A2 and remain on review for further upgrade. The review will focus on our Advanced Loss Given Failure (LGF) analysis, which will incorporate 2014 full-year data, and entail further analysis of the banks’ securities, for which subordination levels and volume thresholds are likely to lead to some LGF notching benefits.

RATING CHANGES Significant rating actions taken the week ending 27 March 2015

43 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Sovereigns

Pakistan Outlook Change

25 Mar ‘15

Gov Currency Rating Caa1 Caa1

Senior Unsecured Caa1 Caa1

Foreign Currency Deposit Ceiling Caa2/NP Caa2/NP

Foreign Currency Bond Ceiling B3/NP B3/NP

Local Currency Deposit Ceiling B1/NP B1/NP

Local Currency Bond Ceiling B1/NP B1/NP

Outlook Stable Positive

The outlook change is based on a strengthening external liquidity position, continued efforts toward fiscal consolidation, and the government’s steady progress in achieving structural reforms under the IMF program. Our rating continues to reflect reflects Pakistan’s structurally large fiscal imbalances, high debt servicing costs, dependence on foreign creditors and substantial refinancing needs.

Ukraine Downgrade

24 Mar ‘15

Gov Currency Rating Caa3 Ca

Senior Unsecured Caa3 Ca

Foreign Currency Deposit Ceiling Ca/NP Ca/NP

Foreign Currency Bond Ceiling Caa2/NP Caa3/NP

Local Currency Deposit Ceiling Caa1/NP Caa2/NP

Local Currency Bond Ceiling Caa1/NP Caa2/NP

Outlook Negative Negative

The key driver of the downgrade is the likelihood of external private creditors incurring substantial losses as a result of the government’s plan to restructure the majority of its outstanding Eurobonds. Also included in the restructuring is the external debt of state-guaranteed entities and selected other state-owned enterprises, and the Eurobonds issued by the capital city of Kiev.

RATING CHANGES Significant rating actions taken the week ending 27 March 2015

44 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Sub-sovereigns

Province of British Columbia, Canada Outlook Change 5 Oct ‘06 26 March ‘15

LT Issuer rating Aaa Aaa

Senior Unsecured (Domestic) Aaa Aaa

Senior Unsecured (Foreign) Aaa Aaa

Senior Unsecured MTN (Domestic) (P)Aaa (P)Aaa

Senior Unsecured MTN (Foreign) (P)Aaa (P)Aaa

Senior Unsecured Shelf (Foreign) (P)Aaa (P)Aaa

Commercial Paper (Domestic) P-1 P-1

Commercial Paper (Foreign) P-1 P-1

Other Short Term (Foreign) (P)P-1 (P)P-1

Outlook Negative Stable

We believe the province has presented a credible plan of consistent balanced budgets with little risk that the debt burden will exceed current forecasts, leading to the stable outlook. While we remain highly attentive to the high debt burden of the province, our current forecasts are for it to remain at current levels and, as importantly, for interest expense to remain manageable as well. In our view, debt affordability and the province’s ability to ensure timely payments to bondholders remains consistent with the Aaa rating.

City of Vancouver, Canada Outlook Change 11 Jan ‘94 26 Mar ‘15

Senior Unsecured (Domestic) Aaa Aaa

Outlook Negative Stable

The rating action reflects our expectation that Vancouver will maintain a reduced debt burden and strengthened liquidity profile over the next few years following the repayment of the remaining outstanding debt associated with its interest in the Olympic Village development.

City of Kharkiv, Ukraine Downgrade 8 April ‘14 26 Mar ‘15

LT Issuer Rating (Domestic) Caa3 Ca

LT Issuer Rating (Foreign) Caa3 Ca

Outlook Negative Negative

The main driver of the downgrades is the likelihood of private creditors incurring substantial losses from debt restructuring and the increase in systemic risk stemming from deterioration of the Ukrainian government’s credit profile, as reflected in our recent downgrade of the sovereign’s government bond rating to Ca with a negative outlook.

RATING CHANGES Significant rating actions taken the week ending 27 March 2015

45 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

City of Kyiv, Ukraine Downgrade 10 Oct ‘14 26 Mar ‘15

LT Issuer Rating (Domestic) Caa3 Ca

LT Issuer Rating (Foreign) Caa3 Ca

Senior Unsecured (Foreign) Caa3 Ca

Outlook Negative Negative

The main driver of the downgrades is the likelihood of private creditors incurring substantial losses from debt restructuring and the increase in systemic risk stemming from deterioration of the Ukrainian government’s credit profile, as reflected in our recent downgrade of the sovereign’s government bond rating to Ca with a negative outlook.

RATING CHANGES Significant rating actions taken the week ending 27 March 2015

46 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

US Public Finance

County of Broward Florida Airport Enterprise Outlook Change 21 Nov ‘14 23 Mar ‘15

Revenue Bonds A1 A1

Outlook Negative Stable

The stable outlook reflects the less complex nature of the airport’s remaining ongoing construction and improvement projects, the completion of the elevated runway on time and on budget, and our expectation of continued strong enplanement growth for the year.

Franciscan Alliance Outlook Change 30 Oct ‘13 26 Mar ‘15

Revenue Bonds Aa3 Aa3

Outlook Negative Stable

The stable outlook reflects a strong rebound of all operating metrics, which translated into a notable strengthening of the balance sheet. Franciscan Alliance has a broad geographic diversity and generally well positioned individual hospitals with leading market shares in key markets, as well as a healthy investment portfolio and well established leadership with centralized business functions.

Structured Finance

17 US Card ABS Notes Placed on Review for Upgrade We placed on review for upgrade the ratings of eight classes of asset-backed securities (ABS) issued out of American Express Credit Account Master Trust and the related American Express Credit Account Secured Note Trusts; five classes of ABS issued out of Capital One Multi-asset Execution Trust; and one class of ABS issued out of Chase Issuance Trust. The review for upgrade reflects the 16 March 2015 update of our methodology for rating credit card receivables-backed securitizations, which incorporate changes in how we measure the sponsor risk of default in relation to the exposure that credit card ABS transactions have to entities of banking groups. In particular, we now use the sponsor’s Counterparty Risk Assessment, which we introduced for banks as part of our revised bank rating methodology on 16 March 2015, rather than the sponsor’s senior unsecured debt rating to measure the probability that it will shut down its credit card portfolio.

RESEARCH HIGHLIGHTS Notable research published the week ending 27 March 2015

47 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Corporates

EMEA Corporates: New High-Yield Issuance from Euro Area Periphery Unlikely to Reach Record This Year Following a record 2013, corporate high-yield issuance in 2014 in the five countries that make up the euro area periphery – Italy, Spain, Portugal, Greece and Ireland – increased to $30 billion from$24 billion in 2013. However, lower new issuer volume in 2015 is likely on the back of a more cautious market in the second half of 2014. The euro area is again confronted with risks of high unemployment, deflationary pressure and slowing momentum for structural reforms in some countries.

China Property Focus - March 2015 We continue to expect nationwide home sales to record a narrower year-over-year decline of 0%-5% compared with 7.8% in 2014 and 8.9% for the 12-month period ended February 2015. In the first two months of 2015, national sales declined by 16.7% year over year. However, we expect that our rated property developers will outperform the sector for the rest of 2015, as industry consolidation continues.

Global Asset Price Monitor: Gap in Overheating Signals Between Advanced Economies and Emerging Markets Is the Widest Since 2005 Moody’s Global Asset Price Monitor shows that, on average across countries and asset classes, asset prices are not unusually elevated. However, this average embeds very different trends across markets. For instance, across asset classes, bond prices are generally high following the start of quantitative easing by the European Central Bank, a number of interest rate cuts by other central banks and ongoing strong flows in US fixed income markets. By contrast, property and equity prices are around their 10-year average levels.

US Medical Products and Devices: New Products and M&A Synergies Drive Profits Even as Patient Volume Trends Remain Weak The medical device sector’s aggregate organic EBITDA will grow about 2.5%-3.5% over the next 12 to 18 months. Product launches and initial synergies from acquisitions set to be completed in early 2015 will fuel the profitability, offsetting weak hospital volume trends, pricing pressure and negative effects from foreign exchange. Growth in emerging markets will slow, but will still exceed growth in developed markets.

European Paper and Forest Products Companies: 2014 Results Show Turnaround Is Gaining Momentum, Albeit Not for All Among the nine rated European paper and forest products companies that have so far reported their financial results for 2014, six recorded solid single-digit to low double-digit percentage earnings growth. The improvements in the financial performance of these companies – Metsa Board Corporation (B1 positive), Mondi Plc (Baa2 stable), Sappi Limited (Ba3 stable), Smurfit Kappa Group Plc (Ba1 stable), Stora Enso Oyj (Ba2 stable) and UPM-Kymmene (Ba1 stable) – mainly reflects their efforts to reposition or broaden their business profiles away from the mature European paper market through sizeable and ongoing investments in related segments and through cost-cutting.

Global Infrastructure Focus Newsletter - March 2015 We found that the vast majority of infrastructure ratings on average during 1983-2014 are investment-grade and are particularly concentrated in the single-A range. In contrast, only half of non-financial corporate ratings are investment-grade.

RESEARCH HIGHLIGHTS Notable research published the week ending 27 March 2015

48 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

US Gaming Industry: The Weather May Be Getting Warmer, but Gaming Revenues Are Still Out in the Cold Following recent performance improvements in December and January, US gaming revenues have begun to chill again. So far, monthly gaming revenues for this past February are up just 0.3%, according to data released by 11 of the 18 states we regularly track, on the back of a 6.8% improvement this past December and a particularly robust 9.9% gain in January.

China’s Capital Market Poised for Further Growth as Reform Deepens China’s capital market has grown into a sizeable entity in terms of aggregate financing and market participants, and is set to embrace greater growth opportunities as policymakers have defined its further development as one of their national strategies. However, with the liberalization of interest rates and loosening control of capital flows to and from China, the country’s capital market has tended to become more volatile and more susceptible to trends in the global capital market, and risk management needs to be strengthened to cope with these challenges.

US Steel and Energy Industry: Weak Prospects for Distributors in 2015 We expect substantially weaker operating results for some of our rated steel and energy industry distributors in 2015, based on significantly lower product pricing and weaker energy sector demand. Companies that sell carbon steel, stainless steel and aluminum products, and oil country tubular goods, are likely to be hurt by substantially lower prices, while distributors exposed to valves, fittings and flanges should see more stable pricing, though substantially weaker demand.

US Corporates: Macroeconomics and Corporate Policies Erode Credit Quality in 2015 US investment-grade non-financial corporate credit quality is set to deteriorate this year as companies limit capital investment while paying out more in dividends and otherwise reward shareholders. Meanwhile, investor appetite for corporate debt remains strong. Investors and companies are taking their cues from elevated macroeconomic uncertainty, slow and uneven economic growth and expansionary money policies, including low interest rates.

Moody’s B3 Negative and Lower Corporate Ratings List: Oil & Gas Downgrades Help Push List to a Two-Year Peak The number of companies on our B3 Negative and Lower list reached a two-year peak as of 1 March, and oil and gas companies are accounting for an increasing proportion of the list as falling oil prices lead to more rating downgrades in the energy sector. Although since the list’s inception, companies from the energy sector have constituted, on average, 8% of the category, they comprised 14% of the total, the highest percentage ever, at the start of March 2015.

RESEARCH HIGHLIGHTS Notable research published the week ending 27 March 2015

49 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Infrastructure

North American Airport Capital Expansion Trends Air travel in North America has dipped in recent years, but future passenger growth will be stronger. US airports will be spending primarily to update facilities rather than to expand them. Canadian airports generally share two goals: to optimize the use of their existing facilities without adding capacity and to only add capacity when necessitated by traffic growth.

Financial Institutions

US Banking Quarterly Credit Update – 4Q14 The rated US banks had a credit positive fourth quarter, supported by a second consecutive quarter of moderate loan growth. Commercial and industrial loans, which grew by more than 10% (annualized) in each of the first two quarters of 2014, grew by only 1% in the third and fourth. The growth in multifamily and auto loans, both of which have grown rapidly in recent years, also continued to slow a bit, but remained elevated.

Turkey Banking System Outlook The negative outlook reflects difficult operating conditions and the weak macro growth environment, which will fuel moderate asset-quality erosion. A rise in funding costs is also possible because of the weak Turkish Lira, and because the banks’ high reliance on capital markets funding could weaken investor sentiment towards Turkish bank paper.

Latin America Banks: Funding Needs Remain Subdued Amid Slow Growth Debt issuance by banks throughout the region will decline on a drop in banks’ funding needs resulting from record issuance in 2012 and the weakening of some the region’s largest economies in 2014. Rising domestic interest rates, falling loan growth, the prospect of rising interest rates in the US and Brazil’s Petrobras corruption scandal are also contributing to the ongoing decline.

Low Interest Rates are Credit Negative for Insurers Globally, but Risks Vary by Country The investment returns of life insurers worldwide will continue to fall owing to sustained low interest rates. Lower returns will hurt insurers’ profits and increase their risk of losses and capital declines. Not all insurers in each of the 21 markets we surveyed face the same level of risk. However, generally speaking, life insurers in Germany, the Netherlands, Norway and Taiwan are the most exposed to low interest rates, while companies in Australia, Brazil, Ireland, Mexico and the UK are the least exposed

Money Market Funds: Global Shift to VNAV Is No Game Changer In light of changes to the rules governing US money market funds and similar proposals are under consideration in Europe, some funds will soon change from a constant net asset value (CNAV) to a variable net asset value (VNAV) format. Regulators in both regions have argued that, in a financial crisis, the greater price transparency of VNAV funds will lower the likelihood of run risk. However, based on our analysis of what happened in France’s all-VNAV market during 2007-08, we think that, in practice, the behavior of investors in VNAV funds during a crisis, including the desire to race to cash, matches what we would expect to see in CNAV funds.

RESEARCH HIGHLIGHTS Notable research published the week ending 27 March 2015

50 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Sovereigns

Government of Pakistan: Key Drivers Behind the Positive Outlook The outlook change is based on a strengthening external liquidity position, continued efforts toward fiscal consolidation, and the government’s steady progress in achieving structural reforms under the IMF program. Our rating continues to reflect reflects Pakistan’s structurally large fiscal imbalances, high debt servicing costs, dependence on foreign creditors and substantial refinancing needs.

Sint Maarten Analysis Sint Maarten’s (Baa1 stable) government bond rating is supported by comparatively high economic development and moderate debt levels. The rating is constrained by the relatively new and untested governance institutions although we expect nation-building support and fiscal oversight from the Netherlands to continue for a few more years.

Paraguay Analysis Key drivers of our 20 March upgrade to Baa1 with a stable outlook are 1) improved fiscal framework and boosting infrastructure investment as the government implements the package of reforms approved in 2013, 2) efforts to diversify the economy are producing positive results, and 3) improved governance and institutional strength.

Latin America Sovereigns: Credit Profiles Stabilizing Amid Lower Growth, Moderate External Vulnerabilities After a decade of steady gains, there will be less positive movement in ratings and the credit quality of the Latin America and Caribbean sovereigns, according to our outlook. Generally lower growth will widen some deficits, making it even more important for sovereigns to execute on structural reforms. Risks from debt levels are only low-to-moderate, however, while vulnerabilities to external shocks are also moderate.

Sharjah Analysis Sharjah’s A3 rating is primarily supported by the emirate’s strong fiscal and government debt position, characterised by small fiscal deficits, low but rising levels of government debt and manageable wider public-sector debt. Sharjah’s 2014 sukuk issuance added to debt, yet it reduced borrowing costs and improved the debt maturity profile.

Inter-American Development Bank Credit strengths of the Aaa-rated Inter-American Development Bank (IADB) include its solid capital base, strong commitment from non-borrowing shareholders, sound financial management, and preferred creditor status.

Inter-American Investment Corporation The IIC’s Aa2 rating reflects robust capitalization and adequate financial management, strong asset performance despite its private sector focus and its close relationship with the Aaa-rated Inter-American Development Bank (IADB).

RESEARCH HIGHLIGHTS Notable research published the week ending 27 March 2015

51 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Sovereign and Related Ratings: Credit Effects of Currency Redenomination Recent negotiations between Greece and its official creditors have reignited market concerns that Greece might at some point leave the euro area and redenominate sovereign euro debt and the euro assets and liabilities of domestic residents into a new currency. Our report summarizes how we determine when a default has occurred in the event of a currency redenomination, and how we would reflect the credit implications of such a redenomination in our ratings on the sovereign and other domestic borrowers.

US Public Finance

Decoding New Jersey Municipal Accounting New Jersey statutory accounting is a form of modified cash accounting that differs from GAAP. We explain the a four-step adjustment we apply to New Jersey balance sheets to facilitate comparative analysis with municipalities in other states.

RESEARCH HIGHLIGHTS Notable research published the week ending 27 March 2015

52 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Structured Finance

European Broadly Syndicated CLOs Continue to Follow 2.0 Template, With Minor Deviations European broadly syndicated loan (BSL) collateralized loan obligations (CLOs) issued in 2014 and 2013 feature similar collateral and structures. However, there are some differences between the two vintages. For example, 2014 deals are characterized by lower bond exposure and fixed-rate asset limits. Furthermore, they all permit purchases of non-euro collateral and require currency risk to be hedged.

US RMBS: Prepayments on Re-Performing Loans Will Remain Low, with Limited Refinancing Opportunities for Borrowers Voluntary prepayments on modified re-performing loans will remain low. Although these borrowers are currently performing on their mortgages, previously offered loan modifications have significantly reduced the interest rates on the re-performing loans, limiting future refinancing opportunities for these borrowers. Moreover, the overall collateral profile of loans to re-performing borrowers remains weak compared with the collateral profile of loans to always-performing borrowers, with generally high current loan-to-value ratios on the re-performing loans, low credit scores and low debt-to-income ratios.

China Securitization: Unified Real Estate Registration Will Be Credit Positive for Chinese RMBS On 1 March, the Interim Regulation on Real Estate Registration took effect in China to begin the process of unifying individual city and county real estate registration systems into a single national real estate register. The unified real estate registration system will be credit positive for China’s residential mortgage-backed securities, because it will make it more efficient to transfer the ownership of mortgage assets from loan originators to residential mortgage-backed securities trustees, and improve the accuracy and consistency of registered information.

Japanese RMBS: Increase in Real Wage Is Credit Positive Japan’s annual spring wage negotiations between employers and unions will likely deliver the highest pay increases in 21 years. The wage rises, along with a weak growth in Japan’s consumer price index, will help boost real incomes. This situation will be credit positive for Japanese residential mortgage-backed securities because it will increase borrowers’ abilities to make loan repayments.

US CLOs: Delayed Draw Securities As Refi, Re-pricing or Additional Issuance Mechanism Is Credit Neutral Some US CLOs are issuing delayed draw securities at closing that they can use in the future for refinancings, re-pricings and issuing additional securities. Although delayed draw securities add some complexity to CLO structures, this new feature is credit neutral.

Sharp Oil Price Decline Will Mildly Support European SME ABS The sharp decline in oil prices since June 2014 will have a limited credit impact for most European asset-backed securities (ABS) collateralised by loans granted to small- and medium-sized enterprises (SMEs). The impact is low because of securitized portfolios’ very low direct exposure to the oil and gas industries.

RESEARCH HIGHLIGHTS Notable research published the week ending 27 March 2015

53 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

Japanese Auto Loan ABS: Mini-Vehicle Tax Hike Will Have Little or No Effect on Japanese Auto Loan ABS Performance The 1 April increase in the ownership tax will have a very limited impact on the performance of auto loans in new auto loan asset backed securities (ABS) transactions, because the tax amount is relatively low, auto loan ABS obligors are typically of good quality and other government tax relief measures will help offset the impact of the mini-vehicle tax hike.

EMEA ABS SME: Growth In Spanish Household Spending is Credit Positive With 2.4% growth in 2014, household consumption in Spain is significantly contributing to the country’s economic recovery, benefitting small- and medium-sized enterprises (SMEs). We expect that household consumption will continue to rise in 2015. The return to growth of retail trade commerce will particularly favor SMEs most exposed to this sector.

Chinese CLOs Perform Well, But More Underlying Loan Defaults Expected Chinese collateralized loan obligations have performed well since the market re-opened in 2012. We expect defaults to rise, however, given that originators securitized some low quality loans in the second half of 2014.

Australian RMBS: Mortgage Delinquencies Are at Their Lowest Point Since 2006, but Some Mining Regions Deteriorate Australian residential mortgage delinquencies have declined to the lowest level since 2006, against a backdrop of record-low interest rates, rising house prices and a relatively steady macroeconomic environment. However, performance varied across different regions.

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

54 MOODY’S CREDIT OUTLOOK 30 MARCH 2015

NEWS & ANALYSIS Corporates 2 » Tenet Delays Deleveraging to Bolster Outpatient Business, a

Credit Negative

Infrastructure 4 » Sabesp’s BRL1 Billion Pension Compensation Deal with State

of São Paulo Is Credit Positive

Banks 5 » Brazil Defines Systemically Important Banks in Line with

Basel Framework, a Credit Positive

» Banca Carige to Launch a Larger-than-Expected Capital Increase, a Credit Positive

» Ukrainian Banks Show Sharp Drop in Capital Adequacy Ratios, a Credit Negative

» Vietnam Bank Mergers Gain Momentum, a Boon for Banking System Stability

MOODYS.COM

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EDITORS PRODUCTION ASSOCIATE News & Analysis: Jay Sherman and Elisa Herr Sol Vivero Ratings & Research: Robert Cox