MOODYS.COM

29 OCTOBER 2012

NEWS & ANALYSIS Corporates 2 » Colgate’s and Kimberly-Clark’s Restructurings Show Strains In

Mature Markets » Target’s Sale of Credit Card Business Is Credit Positive » ADT Activist Shareholder’s Proposed Capital Structure Is

Credit Negative » Removal of Preferred Stock in ARCAS' Funding Structure Is

Credit Positive » Rosneft’s Acquisition of TNK-BP Is Credit Negative for Both » Fosun Pharma’s Hong Kong Listing Is Credit Positive for Parent

Fosun International » India’s Approval of Oil and Gas Development Is Credit Positive for

Reliance Industries » Sumitomo’s Deal to Combine Cable Operations with KDDI Would

Be Credit Positive

Infrastructure 15 » More International Passengers Are Credit Positive for

Sydney Airport

Banks 17 » Consumer Financial Protection Bureau’s Purview Is Credit Negative

for US Debt Collectors » Russian Banks’ Reliance on Tier 2 Capital Is Credit Negative » Increased Capital Requirements Would Be Credit Positive for

Danish Bank Creditors

Ally Financial Asset Sales and ResCap Auction 21 » Ally Financial’s Asset Sales Are Credit Positive » Ocwen’s and Walter’s Purchases of ResCap’s Servicing and

Origination Platforms Are Credit Negative » Ocwen’s Acquisition of ResCap Is Credit Negative for ResCap’s

GMAC-Serviced Transactions

South Korean Covered Bonds 27 » Draft Legislation on Covered Bonds Is Credit Positive for

Korean Banks » Strong Legal Protection in Proposed Korean Covered Bond Act Is

Credit Positive

Insurers 29 » Argentina's Workers' Compensation Insurers Get New Credit

Positive Law

Sovereigns 31 » Laos-China Rail Link Will Be Credit Positive for Laos

Sub-sovereigns 33 » Montréal’s Labour Contract Addresses Pension Contributions, a

Credit Positive » Reform to Mexico’s General Accounting Law Is Credit Positive for

States and Municipalities

Securitization 35 » Australian Regulators' Proposals on Securitisation Are Credit

Positive for RMBS

RATINGS & RESEARCH Rating Changes 36

Last week we downgraded Federal-Mogul; Finmeccanica; Nucor; POSCO; Liberbank; MAPFRE Argentina ART; the Spanish regions of Andalucia, Castilla-La Mancha, Catalunya and Murcia; Pennsylvania State University; the Pennsylvania State System of Higher Education; one Spanish covered bond; and nine Spanish multi-issuer covered bonds, and upgraded Reynolds American, Union Pacific, DTE Energy Center, and two Spanish covered bonds, among other rating actions.

Research Highlights 42

Last week we published on tire manufacturers, US healthcare, oil refineries, Mexican homebuilders, US midstream oil and gas partnerships, US homebuilders, aluminium, Chinese real estate, US infrastructure, US municipal and public power utilities, US life insurers, California school districts, US public finance ratings, US not-for-profit healthcare, US CMBS, and Australian covered bonds, among other reports.

RECENTLY IN CREDIT OUTLOOK

» Articles in last Thursday’s Credit Outlook 46 » Go to last Thursday’s Credit Outlook

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

NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Corporates

Colgate’s and Kimberly-Clark’s Restructurings Show Strains In Mature Markets

Last week, two global consumer-products companies announced substantial restructurings of their mature-market businesses, primarily in Europe. Last Thursday, Colgate-Palmolive Company (Aa3 stable) announced a four-year restructuring program that would involve a 6% reduction of its global work force. A day earlier, Kimberly-Clark Corporation (A2 stable) disclosed plans to reduce the size of its European business, including exiting the diaper category and shuttering plants.

The announcements are credit negative because they provide further confirmation of the challenges that global consumer products companies are facing amid slowing economic growth in the advanced economies. High gasoline prices and lower disposable incomes are making US and European consumers more price sensitive despite the highly consumable, low-priced nature of the everyday necessities these companies sell. The Procter & Gamble Company (Aa3 stable), Energizer Holdings Inc. (Baa3 negative) and Revlon Consumer Products Corporation (B1 stable) have announced similar restructurings in recent months.

Colgate, which sells toothpaste, household cleansers, pet food and personal care products, hopes that the restructuring will free resources for growth initiatives in Latin America and Asia and return its earnings growth to double-digit rates from the high single-digits currently. The company aims to improve the efficiency of its manufacturing and global supply chain to reduce costs and speed product innovation. Colgate expects pretax charges of $1.10-$1.25 billion when it fully implements the restructuring in 2016, and to generate up to $325 million in annual savings. The restructuring includes a workforce reduction of about 2,600 employees.

The restructuring signals a slowdown of Colgate’s business in Europe, the US and Japan, and at its Hill’s Pet Nutrition unit, which collectively equals about 50% of sales. Despite the weakness in these markets, Colgate’s organic growth, market share gains and profitability improvements continue to outpace its peers by a significant margin owing to its strong pricing flexibility and track record of driving global unit volume. If necessary, it could use savings from the restructuring to sustain profitability if macroeconomic conditions weaken, commodity costs increase dramatically or pricing flexibility deteriorates.

Kimberly-Clark, maker of Huggies diapers, Scott tissue and Kotex feminine care products, is also responding to weak growth prospects in Europe. The company will spend up to $350 million to exit the diaper category in Western and Central Europe, reflecting declining growth prospects for the infant and child categories in markets where population growth is stagnating, and to divest other lower-margin businesses, mostly in the consumer tissue segment, over the next couple of years. Kimberly-Clark will close five manufacturing facilities and eliminate as many as 1,500 positions. In total, Kimberly-Clark expects cash costs of the restructuring to exceed $200 million.

By taking actions that affect approximately $500 million of its $3.4 billion of European sales, Kimberly-Clark aims to bring its EBIT margins, currently approaching 13%, more closely in line with its peers that typically earn over 20%. Investing in international markets such as Russia, China and Latin America, while reducing its exposure to volatile raw material prices, would help Kimberly-Clark achieve those goals and continue to drive high-single-digit growth in earnings per share. The company is choosing to exit rather than turn around certain consumer markets and businesses to focus on areas where it has the strongest market positions and growth opportunities.

Janice Hofferber, CFA Senior Vice President +1.212.553.4493 janice.hofferber@moodys.com

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Target’s Sale of Credit Card Business Is Credit Positive

Last Tuesday, Target Corporation (A2 stable) said it had agreed to sell its consumer credit card portfolio to affiliates of The Toronto-Dominion Bank (TD, Aaa stable; B+/aa2 stable)1 in a transaction that values the receivables at “par,” which today would be around $5.9 billion. The sale is credit positive for Target because it will remove virtually all of the risks inherent in operating a sizable credit card business and allow the retailer to reduce debt.

Shedding the credit card business will help Target in the event of a downturn in the US economy. For a large retailer like Target, an in-house credit card business magnifies the effects of an economic rough patch because it heaps rising delinquencies and charge-offs for bad accounts on top of weaker retail sales.

During the last economic downturn, Target’s credit card business weakened considerably. Credit card segment EBIT fell 65% in 2008 and has yet to recover to pre-recession levels, as shown in Exhibit 1. This reflects a shrinking of the receivables portfolio (Exhibit 2) through a combination of consumer deleveraging and write-offs of uncollectible accounts.

EXHIBIT 1

Target’s Credit-Card Operation’s EBIT Contribution 2006-11

Note: Data from 2011 does not include Canada. Source: Company annual reports

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

corresponding rating outlooks.

$4.3 $4.3 $4.1 $4.4

$4.6 $4.8

$0.8 $0.9

$0.3 $0.3 $0.6 $0.7

$5.1 $5.3

$4.4 $4.7

$5.3 $5.4

$0

$1

$2

$3

$4

$5

$6

2006 2007 2008 2009 2010 2011

$ bi

llion

s

Retail Credit Total

Charlie O’Shea Vice President - Senior Analyst +1.212.553.3722 charles.o’shea@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

EXHIBIT 2

Target’s Credit Card Receivables

Source: Company annual reports

The potential for debt reduction at Target is another benefit of the sale. Target said in a press release that it expects to use about 90% of the net sale proceeds to reduce debt and the rest to repurchase shares over time. The application of sale proceeds to debt reduction will reduce debt/EBITDA leverage to about 2.0x from 2.7x currently, which will further solidify the company's A2 rating and stable outlook. Although the company will lose earnings from its credit card business, we expect the corresponding debt reduction to keep its debt-servicing capacity in balance.

Target expects to take a pretax gain of about $150 million in the current quarter to reflect a change in the accounting treatment of its receivables and an additional pretax gain of $350-$450 million on the sale of the portfolio when the deal closes, which the company expects to occur sometime in the first half of 2013.

Target will still be active in the credit card business. The transaction includes a seven-year agreement under which Target will continue to service customer accounts and receive compensation under a profit-sharing arrangement. This will minimize the effect on current Target cardholders, who will continue to interact with Target employees for account servicing. Importantly, TD will bear the liquidity risk as it funds future receivables in the US.

$6.7

$8.6 $9.1

$8.0

$6.8 $6.4

$5.9

$0

$2

$4

$6

$8

$10

2006 2007 2008 2009 2010 2011 10/22/2012

$ bi

llion

s

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

ADT Activist Shareholder’s Proposed Capital Structure Is Credit Negative

Last Thursday, hedge fund Corvex Management LP, which owns a 5% stake in ADT Corporation (Baa2 stable), filed a presentation with the US Securities and Exchange Commission urging ADT to optimize its capital structure and boost shareholder returns. Corvex’s proposal is credit negative for ADT because it urges the company to take on higher levels of debt to return capital to shareholders.

Under the plan, ADT would increase leverage to 3x net debt/EBITDA from approximately 1.5x and maintain a fixed leverage target of 3x. We estimate that Corvex’s proposal would result in total debt of approximately $5 billion, double ADT’s current debt level. Likewise, total debt/EBITDA (as adjusted by us) would increase to about 3.5x on a pro forma basis from 1.8x, while debt/recurring monthly revenues would rise to 20x from 10x. Our stable ratings outlook on ADT reflects an expectation of total debt/EBITDA (as adjusted by us) sustained below 2x. Therefore, such a significant rise in debt could lead to a ratings downgrade.

Liquidity would also be affected by incremental interest expense and any permanent increase in the dividend payout ratio. However, under its current capital structure and dividend policy, we estimate that ADT would generate at least $800 million of steady state free cash flow in 2013. But we expect actual free cash flow generation to be closer to $400 million because of the company’s growth strategy. ADT could service higher levels of debt, but doing so would limit strategic decisions and hamper the company’s long-term prospects in the alarm monitoring services industry, where competition is intensifying from cable and telecommunications providers.

Since its formation in 2010, Corvex has enjoyed some success with activist strategies. For example, Corvex gained a seat on Ralcorp Holdings Inc.’s (Baa3 stable) board in October 2012 and was influential in Corrections Corporation of America’s (Ba1 stable) decision in July 2012 to apply to the Internal Revenue Service for status as a real estate investment trust. Corvex founder Keith Meister previously worked at Icahn Enterprises.

ADT confirmed in an 8-K filing that it has held “constructive discussions with Corvex and others to understand their views.” However, financial policy decisions made by ADT’s board of directors could ultimately be more conservative than what Corvex has proposed.

Suzanne Wingo, CFA, CPA Vice President - Senior Analyst +1.212.553.0571 suzanne.wingo@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Removal of Preferred Stock in ARCAS’ Funding Structure Is Credit Positive

Last Tuesday, private-equity firm The Jordan Group removed the preferred stock component from the equity capitalization structure it is using in its planned purchase of the automotive operations of Sequa Corporation, to be operated under ARCAS Intermediate Holdings (B2 stable). The removal of the preferred stock component — previously $100 million of the $125 million equity contribution — is credit positive for ARCAS because it reduces its adjusted leverage.

The action entails replacing the $100 million of preferred equity in the transaction with common equity, which will reduce ARCAS’ pro forma debt/EBITDA leverage (as adjusted by us) to 3.2x from 4.0x upon Jordan’s completion of the purchase.

This action creates additional financial flexibility to help offset competitive pressures within the air-bag inflator and connectivity segments, industry pricing pressure and the challenges facing ARCAS as a relatively small automotive parts supplier. In addition, the company will be more firmly in its rating over the next 12-18 months, subject to management’s use of free cash flow for debt reduction rather than shareholder friendly actions. As such, the company’s B2 corporate family rating and stable rating outlook are not affected.

Timothy Harrod Vice President - Senior Analyst +1.212.553.4488 timothy.harrod@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Rosneft’s Acquisition of TNK-BP Is Credit Negative for Both

Last Monday, OJSC Oil Company Rosneft (Baa1 review for downgrade) said it would acquire 100% of TNK-BP International Ltd. (Baa2 review for downgrade) through separate deals with BP p.l.c. (A2 stable) and Alfa Group-Access-Renova (AAR, unrated), a consortium of Russian investors. The proposed transactions, which would involve Rosneft paying approximately $45 billion for TNK-BP, are credit negative for Rosneft and TNK-BP because of their considerable scale and the amount of debt they would use to finance the acquisition. In response to the announcement, we placed the ratings of Rosneft and TNK-BP under review for downgrade.

The transaction would transform Rosneft into the largest publicly traded oil and gas company in the world, with production of 4.6 million barrels of oil equivalent (boe) per day and proved reserves of 29 billion boe under the Petroleum Resources Management System’s method of defining and determining reserves.

Although the acquisition of TNK-BP makes operational and strategic sense for Rosneft, the financing necessary to buy out BP and AAR would increase Rosneft’s debt burden substantially. The $45 billion price tag would be paid through existing cash balances at both Rosneft and TNK-BP (approximately $10 billion) and new debt, $3-$4 billion of which we expect Rosneft to finance with international and rouble bonds and the rest to be in the form of loans from domestic and international banks.

Rosneft would pay BP $17.1 billion in cash along with shares equal to 12.84% of Rosneft. BP would then use $4.8 billion of the cash proceeds to acquire additional shares in Rosneft from the Russian government, leaving BP with a 19.75% stake in Rosneft including BP’s 1.25% stake in Rosneft before the announced transaction.

Rosneft also announced that it had agreed in principle to purchase AAR’s stake in BP-TNK for $28 billion in cash. Several aspects of this transaction remain unclear, including the timing, financing and terms of the buyout of AAR shareholders, which contributes to our credit negative view.

Although the transaction would benefit Rosneft in terms of size, scale and synergies primarily in the upstream segment, there are heightened risks for the company in assuming on its balance sheet significant new debt in absolute terms during an unstable market environment and high oil price volatility. With our estimate that pro forma leverage of the new entity would be more than 2.0x debt/EBITDA, Rosneft-TNK-BP would be the most leveraged among its Russian and global peers, whose average leverage hovers around 1.0x. (see exhibit below).

Julia Pribytkova Vice President - Senior Analyst +7.495.228.6071 julia.pribytkova@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Debt/EBITDA Ratio for Global Oil and Gas Companies as of 31 December 2011 Company Debt / EBITDA

Rosneft/TNK post-merger >2.0x

BP p.l.c. 1.73x

Novatek 1.24x

TOTAL S.A. 1.23x

Rosneft 1.16x

SOCAR 1.11x

GAZPROM 1.09x

Conoco Phillips 1.02x

Gazprom Neft 0.76x

Exxon Mobil Corporation 0.65x

TNK-BP 0.59x

LUKOIL 0.55x

Chevron Corporation 0.36x

Source: Moody’s Financial Metrics

For TNK-BP, the deal is negative because of the uncertainty it raises with respect to its capital structure and financial policies as it transitions to being wholly owned by Rosneft. As a result of a change of control, and in the event that Rosneft pursues a full merger with TNK-BP such that the latter ceases to exist as a separate entity, TNK-BP may need to prepay some or all of its approximately $8 billion debt, more than half of which is made up of Eurobonds.

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Fosun Pharma’s Hong Kong Listing Is Credit Positive for Parent Fosun International

Last Wednesday, Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (Fosun Pharma, unrated) announced that it had raised HKD3.966 billion ($512 million) by issuing 336 million new shares (H Shares) on the Hong Kong Stock Exchange. Fosun Pharma’s H share placement is credit positive for parent Fosun International Limited (Fosun, Ba3 negative) because although it will cut its interest in the subsidiary to 40.97% from 48.20%, we expect the transaction to improve Fosun’s leverage and liquidity positions and enhance its earnings stability.

Fosun’s liquidity and leverage have been under negative pressure following the company’s debt-funded growth strategy in recent years. On a pro forma basis, we estimate that Fosun’s ratio of consolidated debt to book capitalization will improve to below 50% by the end of 2012 versus 53.4% at the end of 2011 (see Exhibit 1). In addition, Fosun’s consolidated cash balance post-placement would increase by 40% to RMB15.0 billion from RMB10.9 billion as of June 2012.

EXHIBIT 1

Fosun International’s Consolidated Debt/Book Capitalization Ratio 2007-12

*Pro forma projection Source: Moody’s adjusted financial metrics, company annual reports (2007-11)

A strengthened Fosun Pharma will help Fosun protect its earnings in an economically challenging environment. Fosun Pharma is one of China’s leading pharmaceutical manufacturing and distribution companies and a bright spot within Fosun’s portfolio of companies. While the earnings of Fosun’s other businesses, such as steel and mining, have been volatile, Fosun Pharma’s earnings have been growing steadily. Between 2008 and 2011, Fosun Pharma’s sales maintained a compound annual growth rate of approximately 20% and its average gross profit margin was more than 30%. Both measurements are substantially higher than the group’s consolidated average gross margin during the same period (see Exhibit 2). In the first half of 2012, Fosun Pharma’s contribution to Fosun’s consolidated revenue was 13.2%, but its after-tax profit contribution was 22.5%, excluding investment gains at the parent level (see Exhibit 3).

45.6%

49.3%

47.8%

51.8%

53.4%

49.3%

40%

42%

44%

46%

48%

50%

52%

54%

56%

2007 2008 2009 2010 2011 2012*

Alan Gao Vice President - Senior Analyst +852.3758 1362 alan.gao@moodys.com

Nan Nan Associate Analyst +852.3758.1459 nan.nan@moodys.com

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

EXHIBIT 2

Fosun Pharma’s and Fosun International’s Historical Gross Margins, 2007-12

Source: Company data

EXHIBIT 3

Fosun International’s First-Half 2012 After-Tax Profit by Business Segment

Note: Steel business reported a loss for first-half 2012. Source: Company data

Fosun Pharma plans to spend approximately half of the proceeds from the share placement on acquisitions and consolidation in the areas of pharmaceutical manufacturing, distribution, and other healthcare services and diagnostic products.

Shanghai-based Fosun is one of China’s largest private conglomerates and engages in four core businesses segments: property, steel, mining, and pharmaceutical manufacturing and distribution. Fosun also carries a large investment portfolio of private-equity investments and public investments in both domestic and overseas equity markets.

27% 28%

32% 34%

38%

44%

22% 20%16%

21%

19% 19%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2007 2008 2009 2010 2011 1H2012

Fosun Pharma Fosun International

Pharmaceuticals22.5%

Property44.1%

Mining33.4%

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

India’s Approval of Oil and Gas Development Is Credit Positive for Reliance Industries

Last Tuesday, Reliance Industries Limited (RIL, Baa2 positive) received the Indian government’s approval to further develop its largest oil- and gas-producing block, KG-D6. The approval enables RIL, one of India’s leading energy companies with significant refining and petrochemical operations and a growing exploration and production business, to move ahead with a plan to boost output at KG-D6, which is off India’s eastern coast.

This approval is credit positive for RIL because the continued investment and development at KG-D6 will augment oil and gas production from the basin. As of September, the KG-D6 block accounted for more than 80% of RIL’s total oil and gas production.

RIL holds a 60% interest as the operator of the block, while UK-based BP p.l.c. (A2 stable) owns 30% and Niko Resources (unrated) of Canada owns the remaining 10%. We expect the approval to reverse a two-year decline in gas output since production peaked at 63 million cubic meters a day (mmscmd) in June 2010. Production averaged 30 mmscmd in June 2012, just 37.5% of its target daily rate of 80 mmscmd, owing to reservoir geological complexity that hindered the drilling of new wells.

The government’s approval also signals an improvement in its thorny relationship with RIL. The government had been concerned about KG-D6’s steady decline in gas output in recent years. Relations between RIL and the government were also strained by the results of a Comptroller & Auditor General (CAG) of India audit that followed RIL’s revision of KG-D6’s capital expenditures to $8.80 billion from $2.39 billion. CAG, among other things, raised doubts about the robustness of the data and the assumptions underlying the development plan.

If this improvement in relations between RIL and the government of India continues, we expect both sides to also reach a decision on gas prices. The current gas price of $4.2 per million British thermal units (mmbtu) is due for revision on 1 April 2014, although negotiations began earlier this year. RIL is proposing linking gas prices to a percentage of oil prices. According to Niko Resources, approval of the proposed formula would raise gas prices to $13 per mmbtu, based on current crude oil prices. A combination of an increase in gas prices and production volumes would boost RIL’s cash generation substantially, which would be a further credit positive.

Overall, improved relations with the Indian government are important for RIL, given that block development plans, capital expenditures and gas prices at KG-D6 are subject to government approval under a production sharing contract with the government.

Rachel Chua Associate Analyst +65.6398.8313 rachel.chua@moodys.com

Vikas Halan Vice President - Senior Analyst +65.6398.8337 vikas.halan@moodys.com

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Sumitomo’s Deal to Combine Cable Operations with KDDI Would Be Credit Positive

Last Wednesday, Sumitomo Corporation (A2 stable) and KDDI Corporation (unrated) said they would merge their cable-service operators in a deal they expect to close in fall 2013. The transaction would be credit positive for Sumitomo because it would increase the scale of operations and earnings from the stable cable-service business.

Sumitomo and KDDI each have a stake in Jupiter Telecommunications Co., Ltd. (JCOM), Japan’s largest cable-TV service operator by subscribers, with Sumitomo controlling 40.47% and KDDI controlling 31.08%. KDDI, Japan’s second-largest telecommunications company by revenue, also controls 95.6% of Japan Cablenet Limited (JCN), the country’s second-largest provider by subscribers.

KDDI and a special purpose company called NJ will conduct a tender offer for the remaining 28.45% of JCOM, with NJ buying 19.06% and KDDI buying 9.39%. The ¥216 billion price for the takeover bid is a 33% premium on JCOM’s closing price of ¥82,700 on 19 October. After the completion of the transaction, JCOM will be delisted from the JASDAQ stock market and will merge with NJ. JCOM then will purchase JCN for price that has yet to be determined. Through these transactions, Sumitomo could increase its final stake in JCOM to 50%.

The exhibit below explains how the transaction would work.

Mina Sawamura Assistant Vice President - Analyst +81.3.5408.4033 mina.sawamura@moodys.com

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Deal Structure for Sumitomo’s and KDDI’s Merger of Cable Assets

Source: The companies

Current Status

Step 1: Establishment of NJ and joint tender offerKDDI will purchase all shares until the number of shares owned by Sumitomo and KDDI are equal.NJ will purchase all shares exceeding such number of shares.

Step 2: After delisting, JCOM will absorb NJ.

Final structure

50% 50%

28.45%

31.08%40.47%

Sumitomo KDDI

JCOM Minority Shareholders

28.45%

31.08%40.47%

Sumitomo KDDI

JCOM Minority Shareholders

NJ

Joint Tender Offer

50% 50%

Sumitomo KDDI

JCOM

NJ

50% 50%

Sumitomo KDDI

JCOM

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Sumitomo is the one of the largest trading companies in Japan and has invested in various businesses. One of its core areas is media, including broadcast and telecommunications, which have generated stable earnings. Through this integration, as Sumitomo’s final share in JCOM increases, dividend income for Sumitomo will also increase, thereby enhancing Sumitomo’s earning stability.

JCOM and JCN’s major strength is that they provide telecommunications, Internet and broadcasting services under one umbrella, which gives them an advantage over rivals that provide just one or two of these services. The only other competitor offering a trio of comparable services is Nippon Telegraph and Telephone Corporation (NTT, Aa2 stable).

The transaction offers a number of benefits to Sumitomo’s credit profile. The new JCOM will hold more than 50% of market share in Japan’s cable-TV market, and expects to deliver synergy-related savings that will further enhance Sumitomo’s stable earnings.

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Infrastructure

More International Passengers Are Credit Positive for Sydney Airport

On 19 October, Sydney Airport Finance Company Pty Ltd (Baa2 stable) released passenger numbers for Sydney Airport, Australia’s largest airport, for the quarter ended 30 September that showed an increase in passengers, a credit positive for Sydney airport.

Growth was particularly apparent in the 5% year-to-date growth of international passengers versus only 3% growth for the same period a year ago, despite uncertainty in the global economic environment. The international passenger growth trend exceeded our base-case growth rate expectation of 2%-3% for Sydney Airport, as well as trend growth.

The trend in passenger growth is positive for the airport’s credit, given that revenue for airports is directly linked to passenger numbers. While international passengers currently comprise around 35% of Sydney’s total passenger base, they contribute around 75% of total passenger revenues owing to the higher per capita charges the airport levies on international passengers. We estimate that if sustained the additional international passengers (i.e., above trend growth) will generate about an extra AUD7 million of EBITDA for Sydney during 2012.

The continuing growth reflects a sustainable increase in passenger numbers owing to market penetration by new low-cost carriers to Sydney Airport such as Air Asia X (unrated) and Singapore Airlines-owned Scoot Pte Ltd. (unrated). These airlines commenced services to Sydney Airport in April and June, respectively. Sydney’s international passenger growth rate increased as the new low cost carrier services ramped up. We expect this trend to continue as low-cost carriers add low-cost capacity to stimulate international passenger growth, particularly from Asian countries.

Sydney’s domestic passenger numbers have also increased, with year-to-date growth of 1.3% at September 2012 against 0.2% for the same period a year ago. However, we expect the rate of increase in domestic passenger numbers to taper off as domestic airlines limit additional capacity in order to preserve their yields, resulting in overall domestic passenger growth of between 2% and 3% for 2012. We regard domestic passenger volume growth as secondary to international passenger growth on Sydney’s credit metrics given the higher revenue contribution from international passengers.

If the growth trend continues, Sydney’s international passenger growth rate will outperform Australia Pacific Airports (Melbourne) Pty Ltd (A3 stable), which reverses the pattern of recent years. The exhibit below contrasts Sydney Airport’s recent increasing growth rate with Melbourne Airport’s, measuring both on a year-to-date calendar basis of aggregate international passenger numbers.

Arnon Musiker Vice President - Senior Analyst +612.9270.8161 arnon.musiker@moodys.com

Surani Meegahage Associate Analyst +612.9270.8177 surani.meegahage@moodys.com

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Sydney and Melbourne Airports’ Year-to-Date International Passenger Growth Rates

Source: Sydney Airport , Melbourne Airport, Bureau of Infrastructure and Regional Economics (BITRE)

Melbourne’s past outperformance was driven by a “catch up” factor as airlines established direct connections with Melbourne (Australia’s second most populous city), thereby allowing passengers to fly directly to Melbourne as opposed to traditional connections through Sydney. We expect Melbourne’s international growth rate to decline to 3%-4% as the growth in its passenger base matures. We factor in this anticipated reduction in Melbourne Airport’s international passenger volumes in our credit analysis of the airport.

0%

2%

4%

6%

8%

10%

12%

14%

Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12

Melbourne Airport Sydney Airport

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Banks

Consumer Financial Protection Bureau’s Purview Is Credit Negative for US Debt Collectors

Last Wednesday, the US Consumer Financial Protection Bureau (CFPB) announced that it would have regulatory purview over debt collectors with annual receipts of more than $10 million starting 2 January 2013. We expect CFPB regulatory oversight to increase the firms’ compliance requirements and costs, including more management time, legal expense, internal audit staff and reporting systems, which would adversely affect the firms’ profitability, a credit negative.

The CFPB would have purview over larger debt collectors, which it defines as companies with more than $10 million in annual receipts from relevant debt collection activities (excluding annual receipts from collecting debts originally owed to a medical provider).2 The CFPB would likely begin with examinations of the largest debt collectors, which, like the rest of the industry, have already been regulated by a number of state and federal entities. Other state and federal regulators would still continue to oversee this sector’s activities, including licensing of debt collectors and regulation of collection practices.

Given this definition, the following rated issuers would fall under the CFPB’s supervision: Asset Acceptance Capital Corp. (AACC, B1 stable) and SquareTwo Financial Corporation (B2 stable), which buy defaulted debt and collect the proceeds for themselves, and Expert Global Solutions, Inc. (B2 stable), West Corporation (B2 stable), DCS Business Services, Inc. (B2 stable) and iQor US, Inc. (B3 stable), which do not make material purchases of defaulted debt, but rather collect debt for other companies in return for a recovery fee.

2 See Defining Larger Participants of the Consumer Debt Collection Market, Bureau of Consumer Financial Protection,

October 2012.

Olga Khodosh Analyst +1.212.553.4468 olga.khodosh@moodys.com

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

Suzanne Wingo, CFA, CPA Vice President - Senior Analyst +1.212.553.0571 suzanne.wingo@moodys.com

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Russian Banks’ Reliance on Tier 2 Capital Is Credit Negative

Last Thursday, Sberbank (Baa1 stable; D+/ba1 stable) sold $2 billion of subordinated bonds. The sale brought to $5.5 billion the amount of subordinated debt that Russian banks have issued in October alone, and compares with just $2.3 billion for January-September. The surge in subordinated debt issuance is credit negative for Russian banks because they are increasingly relying on this non-core capital instrument to support their growth (see Exhibit 1). Subordinated debt, which is treated as Tier 2 capital, has a lower loss-absorption capacity compared with core Tier 1 capital.3

EXHIBIT 1

Russian Bank’s Tier 2 Capital as Percent of Total Capital

Source: Adapted from Central Bank of Russia data.

A higher Tier 2 component in total capital weakens banks’ ability to withstand internal and external shocks. Operating conditions for Russian banks are likely to remain challenging through the remainder of 2012 and in 2013 owing to our expectations of slower economic growth. Moreover, Russian economic performance faces material downside risks because of uncertainties around oil prices and potential capital flight if the euro area crisis intensifies.

Two factors driving subordinated debt issuance higher in October are weakening regulatory capital (see Exhibit 2) and the fact that new subordinated debt will become more expensive in October 2013 when the Central Bank of Russia shifts to Basel III capital calculations.

3 Subordinated capital does not absorb losses during ongoing banking operations. It will absorb losses once the bank is placed

under administration owing to liquidation or financial rehabilitation.

29.5%

30.0%

30.5%

31.0%

31.5%

32.0%

32.5%

33.0%

33.5%

1-Apr-12 1-May-12 1-Jun-12 1-Jul-12 1-Aug-12 1-Sep-12

Vladlen Kuznetsov Assistant Vice President - Analyst +7.495.228.6060 vladlen.kuznetsov@moodys.com

Eugene Tarzimanov Vice President - Senior Credit Officer +7.495.228.6060 eugene.tarzimanov@moodys.com

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

EXHIBIT 2

Russian Banks’ Regulatory Capital Ratios and Credit Growth

Source: Central Bank of Russia, Moody’s forecast

Banks’ internal capital generation has not kept pace with their rapid credit growth. In addition, Russian banks are struggling to raise capital from shareholders or the markets. Because they are reluctant to dial back their lending growth or to deleverage, at the risk of jeopardizing their earnings, they are using subordinate debt issuance to fuel loan growth. However, as they issue more subordinate debt, banks’ overall capital quality has declined because their share of Tier 2 capital is growing.

Under Basel III, subordinated bonds issued after October 2013 will be subject to mandatory triggers4 to convert debt into ordinary shares once a bank’s core Tier 1 falls below 6.4%. As a result, we expect that investors in these instruments will ask for higher coupons because of the conversion risk. Until then, we expect Russian banks to continue to actively issue subordinated debt.

Banks issuing subordinated debt are typically large institutions whose loan growth has outpaced the overall market, including Sberbank, Bank VTB, Gazprombank, Alfa Bank and Nomos Bank. Exhibit 3 provides the list of subordinated issuance since the beginning of 2012.

EXHIBIT 3

Russian Bank Subordinated Bond Issuance in 2012 Bank Rating Amount, $ million End of Placement Maturity

Sberbank Baa1 stable; D+/ba1 stable $2,000 25-Oct-12 29-Oct-22

VTB Baa1 negative; D-/ba3 negative 1,500 4-Oct-12 17-Oct-22

Gazprombank Baa3 stable; D-/ba3 stable 1,000 25-Oct-12 Perpetual

Alfa Bank Ba1 stable; D/ba2 stable 750 19-Sep-12 26-Sep-19

AK BARS Bank B1 negative; E+/b3 negative 600 13-Jul-12 13-Jul-22

HCFB Ba3 stable; D-/ba3 stable 500 17-Oct-12 24-Apr-20

Nomos Bank Ba3 stable; D-/ba3 stable 500 19-Apr-12 26-Apr-19

Gazprombank Baa3 stable; D-/ba3 stable 500 27-Apr-12 3-May-19

Russian Standard Bank Ba3 stable; D-/ba3 stable 350 3-Oct-12 10-Apr-18

Bank Saint Petersburg Ba3 negative; D-/ba3 negative 17-Oct-12 100 24-Oct-18

Total

$7,800

Source: www.cbonds.info

4 New subordinated bonds will effectively become contingent convertible (“CoCo”) bonds.

-10%

0%

10%

20%

30%

40%

50%

60%

5%

7%

9%

11%

13%

15%

17%

19%

21%

23%

2006 2007 2008 2009 2010 2011 2012 F

Tier 1 - left axis Total CAR - left axis Credit Growth - right axis

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Increased Capital Requirements Would Be Credit Positive for Danish Bank Creditors

On 19 October, the consultation period on proposed amendments to the Danish Financial Business Act ended. We expect these proposed amendments to increase some banks’ capital requirements, allocating additional capital in areas where a bank has specific risks. The proposals are credit positive for Danish bank creditors because they would provide the Danish Financial Services Authority (DFSA) with additional tools to address banks that fail to meet capital requirements.

If the proposals are implemented, the DFSA would distinguish between, lower, “hard,” and additional “soft” capital requirements. Hard requirements refer to the legal 8% minimum capital requirement. Soft requirements refer to higher capital requirements that the DFSA would determine and would reflect additional credit risk assessments, risks related to areas such as borrower and industry concentration, as well as non-credit related risks.

The proposals call for the DFSA to revoke the licenses of banks that fail to meet hard requirements. Banks that fail to meet soft requirements would need to undertake measures to meet those requirements within a timeframe set by the DFSA. Measures could include implementing a recovery plan, sales of branches or a merger. Undertaking such measures and meeting those soft requirements would enable institutions to avoid having to involve Financial Stability, the government-backed vehicle mandated to take over, sell and wind down struggling Danish banks.

Since 2008, a range of Danish banks have failed because of insufficient capital against risk positions, particularly with respect to commercial real estate exposures. Among the banks that failed were Roskilde Bank, Fionia Bank, Amagerbanken, and Fjordbank Mors.5 Property lending was 15% of rated banks’ credit exposures at year-end 2011, and the property sector continues to face challenges, as reflected by the increase in office vacancy rates to 9.2% in April, the highest level observed since 1988, when the data first became available.

The proposal also includes oversight by the DFSA on the framework for determining reference rates, such as the Copenhagen Interbank Offered Rate (CIBOR). Such oversight is credit positive because it adds transparency to previously unregulated procedures, which affect the majority of Danish credit institutions.

5 See Denmark: Repeat Use of Bank Resolution Regime Negative for Creditors, 1 July 2011.

Oscar Heemskerk Vice President - Senior Credit Officer +44.20.7772.5532 oscar.heemskerk@moodys.com

Jessica Svantesson Associate Analyst +44.20.7772.1564 jessica.svantesson@moodys.com

NEWS & ANALYSIS Credit implications of current events

21 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Ally Financial Asset Sales and ResCap Auction

Ally Financial’s Asset Sales Are Credit Positive

Last Friday, auto lender Ally Financial Inc. (B1 stable), announced that it was pursuing strategic alternatives for subsidiary Ally Bank’s agency mortgage servicing rights for a portfolio of $122 billion home loans and its mortgage correspondent and broker lending operations. The announcement came after Ally last Tuesday sold its Canadian auto finance operations to Royal Bank of Canada (Aa3 stable; C+/a2 stable)6 for $4.1 billion and on 18 October sold its Mexican insurance subsidiary to ACE Ltd. (unrated) for $865 million. Separately, Residential Capital LLC (ResCap, unrated), Ally’s mortgage finance unit now in bankruptcy, last Wednesday announced winning bids for the sale of its mortgage servicing and lending businesses and home loan portfolios. The asset sales and ResCap developments are credit positive for Ally because they generate capital to repay the US government for the federal aid the company received during the financial crisis and reduce direct and contingent exposures to non-core operations. In addition, these transactions advance Ally’s strategy of narrowing its strategic focus to US auto finance.

Non-core international and mortgage operations were about 18% of Ally’s consolidated assets of $178.6 billion at the end of the second quarter. Ally’s international operations, put up for sale in May, had total assets of $31 billion and a net book value of $7.6 billion at 30 June, while Ally’s mortgage servicing rights were $1.1 billion at that time (post deconsolidation of ResCap). Ally’s sale of Mexican insurer ABA Seguros and the sale of Ally Credit Canada Limited and ResMor Trust will generate total proceeds of nearly $5 billion and gains of about $1 billion. We expect Ally’s sale of remaining international operations in Europe and Latin America and the sale of mortgage servicing rights to generate cash of more than $4 billion.

Ally will use most proceeds from the sales to accelerate paying back $17.2 billion of capital the US government injected into Ally during the credit crisis. The US Treasury owns 74% of Ally’s shares and $5.7 billion of mandatorily convertible preferred stock, which has a 9% annual dividend. The size of the US Treasury's equity stake suggests that its exit will be a gradual one, staged through multiple offerings of shares. Ally’s own efforts to simplify its capital structure should materially reduce its cost of capital.

The sale of non-core businesses will streamline Ally’s operations and reduce its use of market funding. The sales will initially weaken Ally’s net interest margin because international average asset yields are relatively higher than in the US. But a higher proportion of Ally’s post-sale assets will be funded by low-cost deposits in Ally Bank, contributing to a lower overall cost of funding. Because strong competition from banks for auto loans has pressured yields, lower funding costs are critical to preserving Ally’s net interest margin. Ally has expanded its used car lending business as an additional strategy to enhance margins, but this increases the risk that it will need higher loss provisions.

The significance to Ally of the ResCap auctions is that it moves the company toward resolving creditor claims before the bankruptcy court. We expect this will culminate with the elimination of Ally’s further contingent exposure to ResCap’s obligations. Ocwen Financial Corporation (B1 stable) and Walter Investment Management Corp. (B1 stable) won the auction for ResCap’s mortgage servicing and lending businesses with a bid of $3 billion, while Berkshire Hathaway Inc. (Aa2 stable) submitted the winning $1.5 billion bid for ResCap’s home loan portfolio. Both bids are subject to

6 The ratings shown are Royal Bank of Canada’s deposit rating, its standalone bank financial strength rating/baseline credit

assessment and the corresponding rating outlooks.

Mark L. Wasden Vice President - Senior Credit Officer +1.212.553.4866 mark.wasden@moodys.com

NEWS & ANALYSIS Credit implications of current events

22 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

bankruptcy court approval. Proceeds of the sales will benefit ResCap’s unaffiliated creditors. As part of the bankruptcy plan, Ally pledged $750 million of cash in exchange for a shield against future creditor claims. Ally has sufficient capital to absorb additional costs that could reasonably arise during the ongoing bankruptcy process.

NEWS & ANALYSIS Credit implications of current events

23 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Ocwen’s and Walter’s Purchases of ResCap’s Servicing and Origination Platforms Are Credit Negative

Last Wednesday, residential mortgage servicers Ocwen Financial Corporation (B1 stable) and Walter Investment Management Corp. (B1 stable) were the successful bidders at the bankruptcy auction of Residential Capital, LLC’s (ResCap, unrated) residential mortgage servicing and origination platforms. The purchases are the latest in a string of deals that has fueled Ocwen’s and Walter’s dramatic growth over the past several years by taking advantage of opportunities created by the financial crisis. The operational complexities of the ResCap acquisition, against the backdrop of that extraordinary growth, is credit negative for Ocwen and Walter.

Under a joint bidding arrangement, Walter would acquire ResCap’s servicing rights on approximately $50 billion of Fannie Mae mortgage loans along with ResCap’s origination and capital markets platforms. Ocwen would acquire ResCap’s servicing platform and the servicing and subservicing rights on the approximately $160 billion of remaining ResCap-serviced mortgage loans. The $3 billion bid is subject to approval by the Bankruptcy Court, which has scheduled a hearing for 19 November. The parties expect the transaction to close on 31 March 2013.

Ocwen and Walter derive the majority of their revenues from special servicing or the servicing of credit impaired or seriously delinquent loans. With delinquencies skyrocketing and home prices plummeting since the financial crisis, the companies have been able to acquire billions of dollars of servicing business, leading to their extraordinary growth (see Exhibit 1).

EXHIBIT 1

Recent Acquisitions Accelerate Ocwen’s and Walter’s Rapid Growth, 2007 = 100%

Notes: Pro forma numbers include the ResCap acquisition, Ocwen’s recently announced agreement to acquire Homeward Residential, Inc., and Walter’s recently announced agreement to acquire Reverse Mortgage Solutions, Inc. The number of loans that Walter services will increase to approximately 1.5 million upon closing of the ResCap and Reverse Mortgage Solutions acquisitions, an approximately 250% rise in the number of loans that Walter/Green Tree serviced at the end of 2007. Source: Company disclosures

Upon completion of the ResCap acquisition, Ocwen would surpass US Bank as the fifth-largest US residential mortgage servicer, while Walter would become the 10th (see Exhibit 2) -- substantial rises for two servicers that did not rank in the top 20 only a couple of years ago.

0%

100%

200%

300%

400%

500%

600%

700%

2007 2008 2009 2010 2011 2Q12 Pro Forma

Ocwen Walter

Warren R. Kornfeld Senior Vice President +1.212.553.1932 warren.kornfeld@moodys.com

NEWS & ANALYSIS Credit implications of current events

24 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

EXHIBIT 2

Acquisitions Push Ocwen and Walter into the Mortgage Servicer Top 10

Rank Servicer Total Servicing June 2012 $ billions Market Share

1 Wells Fargo & Company $1,863 18.3%

2 Bank of America Mtg. & Affiliates 1,598 15.7%

3 Chase 1,078 10.6%

4 Citi 494 4.9%

Ocwen/Homeward/ResCap Pro Forma 360 3.5%

5 US Bank Home Mortgage 254 2.5%

6 Residential Capital/Ally Financial 329 3.2%

7 Nationstar Mortgage 188 1.8%

8 PHH Mortgage 185 1.8%

9 Sun Trust Mortgage Inc. 152 1.5%

Walter/ResCap Pro Forma 144 1.4%

10 PNC Mortgage 132 1.3%

11 Ocwen Financial Corporation 123 1.2%

12 BB&T Mortgage 98 1.0%

13 HSBC North America 94 0.9%

14 Walter Investment Management 86 0.8%

15 MetLife Home Loans 84 0.8%

16 Flagstar Bank 82 0.8%

17 OneWest Bank 77 0.8%

18 Fifth Third Bank 75 0.7%

19 Capital One Financial 69 0.7%

20 Homeward Residential, Inc. 68 0.7%

Total 10,179 100%

Note: Pro forma numbers include the ResCap acquisition, Ocwen’s recently announced agreement to acquire Homeward Residential, Inc., and Walter’s recently announced agreement to acquire Reverse Mortgage Solutions, Inc.

Sources: Inside Mortgage Finance, company disclosures and pro forma projections

However, the size of the ResCap acquisition would create operational complexities for both Ocwen and Walter. At approximately $160 billion, the ResCap servicing portfolio that Ocwen is acquiring is larger than its existing servicing portfolio, and when combined with its recently announced acquisition of Homeward Residential, Inc., Ocwen would triple in size. The ResCap acquisition would increase the number of loans that Walter services by approximately 40%.

The exposure to integration complexities and growing pains is credit negative, but typically are confined to deterioration in servicing metrics (e.g., delinquency rates, call center statistics, account reconciliations or investor reporting) that improve as the servicer integrates the additional servicing volume. However, given the heightened regulatory and litigation environment, residential mortgage servicers have little room for operational issues.

NEWS & ANALYSIS Credit implications of current events

25 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

In addition to the sheer size of the ResCap acquisition, the joint bid and its multiple steps requires a high level of coordination between Ocwen and Walter. The additional operational complexities of sorting out the different parts of ResCap while trying to maintain servicing performance of a massive servicing portfolio is credit negative for Ocwen and Walter.

NEWS & ANALYSIS Credit implications of current events

26 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Ocwen’s Acquisition of ResCap Is Credit Negative for ResCap’s GMAC-Serviced Transactions

Last Wednesday, Ocwen Financial Corporation (B1 stable), partnering with Walter Investment Management Corporation (B1 stable), successfully bid $3 billion in a bankruptcy auction for Residential Capital LLC’s (ResCap, unrated) mortgage origination and servicing assets. Ocwen will take over the servicing platform for the private-label residential mortgage-backed securities (RMBS) serviced by ResCap’s primary servicing entity, GMAC Mortgage. The acquisition will be credit negative for these GMAC-serviced private-label RMBS because pool performance will likely deteriorate as Ocwen integrates such a large portfolio and platform into its own rapidly growing servicing portfolio.

Pool performance will deteriorate. As a result of the operational challenges associated with such a large servicing integration, the transactions will have higher delinquency roll rates, a slippage in cure and cash flow rates, and extended foreclosure and property disposition timelines. Ocwen’s servicing portfolio of some $207 billion, which already includes its recent acquisition of the servicing portfolio of Homeward Residential, will take on another $126 billion in mortgage servicing rights from ResCap as a result of this transaction.

Maintaining service quality will be a significant challenge because of staffing attrition. Staffing attrition will be inevitable for some months as GMAC staff both on and offshore anticipate an eventual transition to Ocwen’s largely offshore-based model. The uncertainty regarding job security will lead GMAC’s strongest performers to seek other employment. As staff seek opportunities elsewhere, the quality of collection will likely deteriorate. One mitigating factor for the staffing challenges will be that Ocwen will most likely retain staff previously assigned to agency servicing acquired by Walter as part of the acquisition. This will allow Ocwen to fill open positions left by attrition and shift responsibilities where appropriate.

Upon transfer of the portfolio, Ocwen will likely address staffing needs through limited stay bonuses and retention packages. Together with Walter, Ocwen has committed to offering employment to at least 65% of ResCap’s 2,000 US-based employees. In addition, GMAC’s main servicing locations in Pennsylvania and Iowa have little competition from other servicing employers. Nonetheless, Ocwen will likely terminate ResCap’s offshore outsourcing relationships, which constitute approximately half of GMAC’s servicing staff, and increase staff at Ocwen’s own servicing operations in India.

Operational hurdles will challenge Ocwen. Given the company’s extremely high rate of growth, operational challenges will magnify as Ocwen integrates two large servicing platforms. The daunting challenge is to maintain loans on multiple servicing systems in this process, hire and train a large number of employees, while eventually transferring loans to Ocwen’s offshore-based model and to its proprietary servicing system. GMAC’s manually intense, staff-heavy cash movement and remittance processes will be vulnerable during a period of staff reductions. Also, trust remittances and investor reporting are prone to erroneous reporting and late remittances.

William Fricke Vice President - Senior Credit Officer +1.212.553.4586 william.fricke@moodys.com

Gene Berman Assistant Vice President - Analyst +1.212.553.4139 gene.berman@moodys.com

NEWS & ANALYSIS Credit implications of current events

27 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

South Korean Covered Bonds

Draft Legislation on Covered Bonds Is Credit Positive for Korean Banks

Last Wednesday, Korea’s financial regulator, the Financial Services Commission (FSC), announced draft legislation that will allow all local banks, Korea Housing Finance Corporation (KHFC, Aa3 stable; ba1 stable)7 and Korea Finance Corporation (KoFC, Aa3 stable; ba1 stable), to sell covered bonds.8 The legislation is credit positive for Korean banks because it would give them surer access to funding, diversify their foreign currency funding and lengthen their debt maturities.

Covered bond issuance would give Korean banks surer access to foreign currency funding by enabling them to diversify into secured funding that is more resilient to market shocks. This will reduce their reliance on foreign currency senior unsecured bonds issuance and borrowings, which we estimate accounted for as much as 63% of foreign currency funding among the seven largest banks by foreign currency assets as of June 2012.9

In 2008, during the global financial crisis, only government policy banks such as Korea Development Bank could tap offshore public US dollar-denominated market while the private banks could not obtain unsecured funding. By contrast, covered bonds promise to be a more stable funding source: recent experience from European and Australian covered bonds markets suggest that covered bond issuance remained relatively stable even when unsecured debt markets experienced severe disruptions.10 By our calculation, if the seven banks issued 4% of their total assets as covered bonds (the cap preferred by the FSC), it would equal 43% of their total foreign currency bonds issuance and borrowings.

Covered bond issuance would also lengthen Korean banks’ debt maturities. The opening of the Australian covered bond market allowed Australian banks to tap issues with tenors of 10 years or more. This would appeal to Korean banks as the ability to issue long-tenor covered bonds would boost their capacity to offer long-term, fixed-rate amortizing mortgage loans and help address some of the risks arising from the funding mismatch in their mortgage portfolio. Recognizing structural vulnerabilities of mortgages,11 the FSC in June 2011 issued a regulatory mandate that banks grow their long-term and fixed-rate mortgage lending to 30% of their total mortgages by 2016. We see current covered bond legislation as a policy step that will help banks meet this target.

We do not expect covered bond issuance to lead to significant subordination issues for banks’ senior unsecured creditors as current legislation includes a regulatory cap of 8% on the issuance amount as a percentage of total assets. Furthermore, the FSC has indicated that it would seek to reduce the cap further to 4% after the passage of the legislation through presidential decree, which, if it materialized, would further marginalize subordination concerns.

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

the corresponding rating outlooks. 8 Two conditions are that an institution must have equity capital exceeding KRW100 billion and with a BIS ratio above 10%. 9 The seven largest banks by foreign currency assets are The Export-Import Bank of Korea (Aa3 stable), Hana Bank (A1 stable;

C-/baa1 stable), Kookmin Bank (A1 stable; C-/baa1 stable), Korea Development Bank (Aa3 negative; D/ba2 stable), Korea Exchange Bank (A2 positive; C-/baa2 stable), Shinhan Bank (A1 stable; C-/baa1 stable) and Woori Bank (A1 stable; C-/baa2 stable).

10 See Australian Covered Bonds: One Year On, 22 October 2012. 11 These vulnerabilities include that non-amortizing, interest-only mortgages were three fourths of total mortgages, variable rate

mortgages were 95% of total mortgages, and the maturity of relatively short-dated mortgages was about 14 years. Data as of the end of 2011 for Hana Bank, Kookmin Bank, Shinhan Bank and Woori Bank.

Hyun Hee Park Analyst +852.3758.1514 hyunhee.park@moodys.com

NEWS & ANALYSIS Credit implications of current events

28 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Strong Legal Protection in Proposed Korean Covered Bond Act Is Credit Positive

Last Wednesday, Korea’s financial regulator, the Financial Services Commission (FSC),12 published a draft version of the Covered Bonds Act. The bill, if enacted, is credit positive for Korean covered bonds because it will provide strong legal protection and cover pool registration and provide for an independent party to monitor the management of the cover pool.

Provides dual recourse and separation of assets. Similarly to the covered bonds laws in other jurisdictions, the bill has clearly specified the dual recourse nature of covered bonds. Investors of covered bonds will have priority claims against the cover pool and recourse against the issuer on any shortfall amount.

The bill enhances legal certainty and avoids legal disputes. The bill specifies both the issuer’s primary obligation to repay the covered bonds and the investors’ rights to submit a senior unsecured claim against a defaulting issuer as well as participate in its bankruptcy and rehabilitation proceedings.

The bill has additional details that are credit positive with respect to protecting investors’ rights and interests. For instance, it provides for a strong separation of the cover pool from the issuer’s bankruptcy assets. It also has expanded the eligible assets list and will include cash acquired through management, operation and disposition of the assets, as well as derivative transactions entered into pursuant to the covered bond issuance plan. Such clarification will ensure that the cover pool will capture all the assets, rights and claims pertinent to covered bond transactions.

The act will provide stronger legal certainty and protection than that of the guidelines on covered bonds that the FSC and the Financial Supervisory Service (FSS)13 issued in 2011. Unlike guidelines, statutory laws have binding power over the courts.

Identification and registration of the cover pool and maintenance of a separate ledger provides ring fencing of assets and transparency. Requirements to register the details of the covered bonds issuance with the FSC and to keep a separate ledger for the cover pool further enhance protection. These provisions are credit positive because they support the separation of assets by registering the pool and identifying its assets, ensuring that covered assets will be available to investors.

These provisions are another improvement over the guidelines because they offer better asset identification and ring fencing. Provisions similar to those of the bill also exist in the covered bonds laws of other jurisdictions.

The appointment of a cover pool monitor provides additional protection. The bill provides additional checks and balances for a covered bond transaction by stipulating that a qualified cover pool monitor has to conduct independent monitoring of the cover pool. The duties of the cover pool monitor include cover pool audits, inspections on compliance with the covered bond issuance plan and relevant laws and regulations, a review of the issuer’s management, disposition and execution of the cover pool, and preparation and submission of a quarterly report to the regulator. Although the guidelines have provisions providing similar protection, the bill has included more details on the arrangement.

12 The Financial Services Commission is a central government body in charge of financial policy and market oversight. 13 The Financial Supervisory Service’s primary function is to examine and supervise financial institutions, but it can extend to

other oversight and enforcement functions outlined by the Financial Services Commission and Securities and Futures Commission.

Jerome Cheng Vice President - Senior Credit Officer/Manager +852.3758.1309 jerome.cheng@moodys.com

NEWS & ANALYSIS Credit implications of current events

29 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Insurers

Argentina's Workers’ Compensation Insurers Get New Credit Positive Law

Last Wednesday, Argentina’s (B3 negative) Congress passed a new law for workers’ compensation (WC) insurers. A key provision of the law gives injured workers the option of either accepting the compensation benefits established in the law or filing a lawsuit in civil court to seek greater payments, a credit positive for insurers.

Over the past several years, many WC claimants filed lawsuits. As shown in Exhibit 1, the increasingly litigious climate added a meaningful source of claims volatility and underwriting losses for WC insurers, and called into question the future of the labor-risk system itself.

EXHIBIT 1

Argentina Workers’ Compensation Loss Ratio and Outstanding Lawsuits

Source: National Superintendence of Insurance (SSN)

Several factors make this new law credit positive for WC insurers. Going forward, claimants will have to choose between accepting the benefits established by this new law or trying to get more compensation through a civil trial filed in the Civil Justice Court. This will most certainly dissuade many claimants from taking direct legal action against WC insurers because such cases usually take significant time to conclude. Fewer legal actions against WC insurers will lower legal costs associated with thousands of outstanding lawsuits and will improve the predictability of underwriting results, allowing WC insurers to focus more on strategic business objectives.

The new law also sets a semi-annual automatic WC benefit adjustment pegged to a new salary index and other new benefits, including a new extra payment equal to 20% of the settled payment for a claim. However, as they have successfully done in the past, WC insurers will likely be able to offset the higher mandated benefit payments under the new law with a corresponding premium increase to policyholders.

Exhibit 2 below shows the top 10 WC insurers ranked by gross premiums written (GPW) in Argentina as of 30 June and the high concentration of this line of business. Several of the key players shown below belong to large, diversified local and international insurance groups.

50%

55%

60%

65%

70%

75%

80%

85%

-

20

40

60

80

100

120

140

160

2004 2005 2006 2007 2008 2009 2010 2011 2012

Thou

sand

s

Workers Compensation Stock of Lawsuits and Mediations - left axis

Claim Loss & Adjustment Expense Ratio (Percent of Net Premiums Earned) - right axis

Alejandro Pavlov Vice President - Senior Analyst +54.11.5129.2629 alejandro.pavlov@moodys.com

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

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

NEWS & ANALYSIS Credit implications of current events

30 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

EXHIBIT 2

Largest Argentine Workers’ Compensation Insurers

Company

Insurance Financial Strength

Rating IFSR National Scale Rating

Gross Premiums Written as of

June 2012 ARS millions

Workers Compensation

Market Share

Prevención Aseguradora de Riesgos del Trabajo -- -- 2,433 21.4%

Consolidar Aseguradora de Riesgos del Trabajo -- -- 1,155 10.1%

AsociartAseguradora de Riesgos del Trabajo -- -- 1,027 9.0%

Qbe Argentina Aseguradora de Riesgos del Trabajo -- -- 919 8.1%

Provincia Aseguradora de Riesgos del Trabajo -- -- 883 7.8%

La Caja Aseguradora de Riesgos del Trabajo ART -- -- 881 7.7%

Mapfre Argentina ART B3 negative Baa1.ar negative 861 7.6%

La Segunda Aseguradora de Riesgos del Trabajo B2 negative A1.ar negative 782 6.9%

Liberty ART -- -- 582 5.1%

Federacion Patronal Seguros -- -- 354 3.1%

All Others -- -- 1,511 13.3%

Total Worker Compensation Gross Premiums Written 11,388 100.0%

Source: National Superintendence of Insurance (SSN)

Exhibit 3 shows the increasing importance of the workers compensation segment for the local insurance market vis-à-vis the stagnant evolution of other insurance sectors. WC insurers’ frequent rate adjustments because of rising claims, labor market growth and the slow growth of the life/retirement business lines have contributed to the WC segment’s well above-average growth rate compared with the rest of the insurance sector.

EXHIBIT 3

Argentina Workers’ Compensation Gross Premium Written as Percent of Total Insurance Market

Source: National Superintendence of Insurance (SSN)

0%

5%

10%

15%

20%

25%

30%

-

10

20

30

40

50

60

70

2004 2005 2006 2007 2008 2009 2010 2011 2012

ARS

billi

ons

Total Insurance Market GPW - left axis Workers Compensation GPW - left axis

WC GPW / Total GPW - right axis

NEWS & ANALYSIS Credit implications of current events

31 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Sovereigns

Laos-China Rail Link Will Be Credit Positive for Laos

On 18 October, the National Assembly of the Lao People’s Democratic Republic (unrated) approved a long-awaited $7 billion project to build a railway link with China. The rail link between the Lao capital, Vientiane, and the Chinese border will provide a critical export portal for the landlocked country’s vast mineral resources.14 Scheduled for completion in 2017, a Laos-China rail link would promote and enhance the Southeast Asian nation’s macroeconomic linkages with its economically dynamic northern neighbour, a credit positive.

The 420-kilometre rail link will run from Vientiane to Luang Namtha on the Laos-China border. Originally envisaged as a joint venture between the national governments of Laos and China (Aa3 positive), China’s official involvement now entails financing the project with a loan to Laos from the state-owned Export-Import Bank of China. We expect a groundbreaking ceremony for the project to take place during the ninth Asia-Europe Meeting summit in Vientiane on 5-6 November.

Laos is a small, poor economy whose recent growth has been driven by large natural resource projects, including copper, gold, hydroelectric and timber, most of which the country exports to Thailand, China and Vietnam.15 Growth has averaged 7.7% over the past five years. The ongoing expansion of mining and hydropower production should help to sustain annual real GDP growth at close to 8%, according to the International Monetary Fund (IMF), though future growth prospects are susceptible to volatile prices for mineral commodities and electricity demand in neighbouring countries.

Initially, the project will benefit China more than Laos, given the majority of the rail link construction and rolling stock manufacturing will fall to Chinese companies. But after commencing operation, the rail link promises an opportunity for Laos to better capitalize on its membership in the ASEAN16-China Free Trade Agreement and increase and diversify its exports to China, which is keen to secure potash and agricultural products from Laos.

Stronger exports growth would help reduce the country’s persistent current account deficit and balance of payments vulnerability. The current account deficit has averaged around 20% of GDP over the past five years, a constraint on sovereign creditworthiness. Passenger services on the rail link would also offer greater business integration opportunities with China. The World Bank’s 2013 Ease of Doing Business Index placed Laos 163rd out of 185 countries,17 in part because chronic infrastructure deficiencies and cross-border trading difficulties hinder business opportunities. The rail link also offers a boost to Laos’ important tourism sector, where nearly one in every 10 workers is employed.

Growth-promoting projects like the Laos-China rail link complement recent structural reform efforts to improve the business climate and trade integration, and would enhance the central government’s revenue generation capacity and debt servicing ability. Fiscal deficits have averaged 3.9% over the past five years, while shallow domestic capital markets and a lack of captive sources of financing such as pension funds or social security institutions has meant a reliance on loans from the central bank, in effect, monetizing part of the deficit. The IMF estimates that Laos carried a debt-to-GDP burden of around 53% in 2011,18 much of which is denominated in foreign currency (nearly 88% of total public

14 Laos has substantial deposits of coal, gold, bauxite, tin, copper and other metals. 15 Seventy percent of Laos’s exports go to Thailand (35%), China (25%) and Vietnam (10%). 16 Association of Southeast Asian Nations. 17 See http://www.doingbusiness.org/rankings 18 See Lao People's Democratic Republic: Staff Report for the 2012 Article IV Consultation, 18 October 2012.

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

Matt Robinson Director of Sovereign Research +44.20.7772.5635 matt.robinson@moodys.com

NEWS & ANALYSIS Credit implications of current events

32 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

sector debt as of the end of 2010). However, concessional terms on which multilateral and bilateral lenders provide credit allow the government to carry a relatively high debt burden for a country with weak intrinsic economic, institutional and financial capabilities.

NEWS & ANALYSIS Credit implications of current events

33 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Sub-sovereigns

Montréal’s Labour Contract Addresses Pension Contributions, a Credit Positive

On 20 October, unionized blue-collar employees of the City of Montréal, Quebec (Aa2 stable), agreed to a new five-year labour contract. The contract, which brings both pension fund reform and cost certainty, is credit positive because it will help reduce by 3% the city’s increasingly burdensome salary expenses by shifting more pension contributions to workers.

Under the new contract, employees’ share of pension contributions will rise to 45% from 30%, while the city’s contribution will fall to 55% from 70%. Such a shift will provide considerable relief from the rising costs that Montréal has endured in recent years. In 2008, Montréal’s pension expenditures were CAD198 million, and we expect them to rise to CAD581 million in 2012. The pace of pension expenditure growth has far exceeded the 5% annual increase in city revenue, and is quickly approaching 10% of the city’s total revenue. Blue-collar workers account for 13% of the city’s total current service cost for pensions and the city expects the new contract to save the city CAD50 million in pension contributions over the next three years.

The contract’s 55/45 contribution split is tilted more to Montréal than the 50/50 split for Quebec’s provincial public services because although the contribution of Montréal employees contribution rises to the maximum allowable under Canadian law, 9.0% of their pay, that is not enough to achieve a 50/50 split. However, Montréal is making additional adjustments that will help cut pension costs, such as setting the retirement eligibility age at 55 instead of allowing employees to be eligible for retirement after 30 years of service.

The five-year agreement also includes 2% annual wage increases during 2013-15, stepping up to 2.5% in 2016 and 2017. Because the contract covers approximately 20% of the city’s labour force, it provides considerable wage cost certainty over the next five years. The wage increases in the new contract are modest, reflecting the annual rate of inflation, and will not negatively affect the city’s financial position.

Although soaring pension costs are not unique to Quebec, the topic has become an important and visible issue for municipalities in the province. Earlier this year, the Union des municipalities de Québec, an organization representing more than 275 Québec municipalities, urged the provincial government to implement measures that would limit future pension contributions by municipalities. While the province did not act, the municipalities’ call shed light on their growing concern about pension costs.

Montréal’s contract may serve as a proactive example for other municipalities to follow, particularly because we expect the city to pursue similar agreements with its remaining unions.

Michael Yake Assistant Vice President - Analyst +1.416.214.3865 michael.yake@moodys.com

NEWS & ANALYSIS Credit implications of current events

34 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Reform to Mexico’s General Accounting Law Is Credit Positive for States and Municipalities

Last Thursday, Mexico’s Congress approved a series of reforms to the General Government Accounting Law (GAL)19 that impose strong financial reporting obligations on Mexican states and municipalities, a credit positive.

Relatively limited oversight and poor governance have been characteristics of local governments in Mexico (Baa1 stable) and, in some cases, have contributed to poor financial performance at both state and municipal levels. GAL was originally approved in 2008 to standardize financial reporting for states and municipalities. GAL was to become effective in December 2012, an unattainable date given the poor preparedness at both the state and municipal levels.

The recently approved reforms set a much clearer path toward effective implementation of the accounting law by extending GAL’s implementation date and securing the necessary support mechanisms to ensure that all layers of government comply with its accounting and disclosure provisions. The law will become effective in December 2013 for states and December 2014 for municipalities. In addition, state governments will directly support municipalities that have 25,000 or fewer residents, which is 69% of municipalities in Mexico, comprising only 13% of the country´s population.

Mexico’s Congress also incorporated severe sanctions to ensure compliance by local administrations, including penalties on government officials who fail to comply with its terms or who seek to lengthen or derail its implementation.

The reforms strengthen the general oversight that the federal government, Congress, interested parties and the general public will exert over the financial accounts of states and local governments. More importantly, GAL will render financial reporting in two key items more transparent and timely: debt and personnel spending. Off-balance-sheet liabilities and short-term obligations that until now have been unreported and behind recent episodes of financial stress will need to be fully disclosed.

States will be required to fully report to the federal government on the status and assignments of their personnel in the fields of health (more than 80,000 employees) and education (close to 900,000 employees). The law also mandates full disclosure of the use of public security and social infrastructure funds transferred by the federal government. By their respective implementation dates, states and municipalities will need to publish online their quarterly financial information no later than 30 days after the end of the quarter.

With the reforms, the board created in 2008 to oversee the transition to the new accounting rules will be strengthened to include the country’s Auditor General in addition to representatives from the federal, state and municipal governments and specialized bodies. The board will provide the local governments all the technical assistance they require as they adjust their accounting manuals and procedures and will ensure that the deadlines are met.

These regulatory changes contribute to better follow-up and prompt detection of any financial deterioration or mismanagement, and the stronger transparency is likely to improve sub-sovereigns’ credit quality.

19 Ley General de Contabilidad Gubernamental.

Francisco Uriostegui Associate Analyst +52.55.1253.5728 francisco.uriostegui@moodys.com

Eduardo Garcia Bejos Associate Analyst +52.55.1253.5716 eduardo.garcia@moodys.com

Alejandro Olivo Vice President - Senior Credit Officer +52.55.1253.5742 alejandro.olivo@moodys.com

NEWS & ANALYSIS Credit implications of current events

35 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Securitization

Australian Regulators’ Proposals on Securitisation Are Credit Positive for RMBS

Last Monday, the Reserve Bank of Australia (RBA) outlined new data requirements as part of repo eligibility criteria for residential mortgage-backed securities (RMBS). The Australian Prudential Regulation Authority (APRA) also announced a number of proposed changes to the regulatory regime governing securitisation, including proposed requirements for minimum junior note retention by RMBS issuers that are authorised deposit-taking institutions (ADIs).

The proposals are credit positive for Australian RMBS because the RBA’s requirements will enhance data transparency and consistency, better enabling investors to assess the credit risks of RMBS. APRA’s proposal will also improve the alignment of interest between RMBS issuers and investors.

New data requirements promote transparency and consistency. The RBA’s new reporting requirements will benefit RMBS because transparency will be greater as a result of consistent, comparable, and publicly available reporting via a secure website managed by or on behalf of the information provider or through a data warehouse with expertise in handling the new reporting requirements. Better transparency will help investors and policymakers better understand Australian RMBS and the securitised mortgage markets, leading to more informed decisions.

The requirements specify that issuers will need to provide a range of detailed information in a standardised reporting template for their securities to be repo eligible. The reporting will cover both transaction-related data as well as information regarding underlying assets. It will include transaction and security information, summary pool statistics as well as anonymous loan-level data. The issuers must provide the data at least quarterly and keep it up to date and accurate.

While some of this information is already available in the market, reporting standards vary considerably among issuers. Also, very limited data is currently available on most self-securitised transactions because issuers often hold these RMBS on balance sheet.

The RBA’s proposed reporting template is consistent with the Bank of England’s and European Central Bank’s ABS reporting templates, further enhancing international comparability.

Retention of junior RMBS improves alignment of interests. Another credit positive development is APRA’s proposal that ADI originators of RMBS must retain a minimum of 20% of the junior notes in their RMBS deals. APRA intends this requirement, described by APRA as “skin in the game,” to better align the interests of issuers with those of investors. There are no requirements currently for ADIs to hold junior notes in their deals.

Better alignment of interests will also result in greater investor confidence in Australian securitisations while helping to restore and protect Australian ADIs’ access to local and global securitisation markets.

Bryan Reid Associate Analyst +612.9270.8113 bryan.reid@moodys.com

RATING CHANGES Significant rating actions taken the week ending 26 October 2012

36 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Corporates

Abbott Laboratories Outlook Change

19 Oct ‘11 25 Oct ‘12

Senior Unsecured Rating A1 A1

Short-Term Issuer Rating P-1 P-1

Outlook Negative Stable

The outlook change follows disclosure of Abbott's planned capital structure after separating its proprietary pharmaceutical business into a new public company, AbbVie, Inc. Based on the post-separation capital structure and our belief that management will moderate shareholder initiatives and acquisition activity, the company should be able to return to credit ratios that can support its A1 rating within 12 to 24 months of the separation.

Akzo Nobel N.V. Review for Downgrade

18 Aug ‘10 23 Oct ‘12

Senior Unsecured Rating Baa1 Baa1

Short-Term Issuer Rating P-2 P-2

Outlook Stable Review for Downgrade

The review follows AkzoNobel’s disappointing results in the period to 30 September 2012 due to the significant underperformance of its Decorative Paints division. While the company continues to execute its restructuring program, expected improvements in profitability and cash flow generation are unlikely to sufficiently compensate for the issues encountered in that division.

The review, therefore, will focus on the scope of the downturn in that segment, the degree to which the restructuring program may have to be stepped up and the financial implications on the company's margins and operating cash flows in the near and medium term.

Federal-Mogul Corporation Downgrade

6 Apr ‘09 25 Oct ‘12

Corporate Family Rating B1 B2

Outlook Stable Stable

The downgrade reflects the company's deteriorating credit metrics as reduced European automotive demand and weaker commercial vehicle demand in North America pressure the firm’s operating performance. While announced restructuring actions and any additional headcount reductions will help mitigate these pressures, we expect the company's credit metrics to be more consistent with a B2 rating over the intermediate term.

RATING CHANGES Significant rating actions taken the week ending 26 October 2012

37 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Finmeccanica S.p.A. Downgrade

16 Jul ‘12 25 Oct ‘12

Senior Unsecured Rating Baa2 Baa3

Outlook Review for Downgrade Stable

Finmeccanica’s key credit metrics remain very weak for the rating category, with high financial leverage and poor profitability measures. The company's performance has been adversely affected by significant restructuring activities and related financial accounting charges as new management undertakes more stringent measures to reduce inefficiencies and improve core profitability.

Nucor Corporation Downgrade

1 Oct ‘12 22 Oct ‘12

Senior Unsecured Rating A2 A3

Short-Term Issuer Rating P-1 P-2

Outlook Review for Downgrade Negative

The downgrade reflects Nucor's weaker debt protection and higher leverage metrics. Although the company has shown improvement since the depths of the recession, the current economic environment and challenges facing Nucor and the US steel industry more generally make it unlikely that the company’s metrics will return to those appropriate for an A2 rating on a sustained basis over the next 18 months.

POSCO Downgrade

25 Jul ‘12 24 Oct ‘12

Senior Unsecured Rating A3 Baa1

Outlook Review for Downgrade Negative

The downgrade primarily reflects our expectation that POSCO's financial leverage will remain elevated over the next one to two years, given its high debt level, the persistent sluggishness in the regional steel industry and the company's slow progress in its deleveraging initiatives. Given that China’s demand for steel is likely to be weaker than expected in the next 12-18 months, improvement in the profitability of POSCO's steel business is expected to be marginal in 2013, following an approximate 20% decline this year.

RATING CHANGES Significant rating actions taken the week ending 26 October 2012

38 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Reynolds American Inc. Upgrade

13 Sep ‘11 23 Oct ‘12

Senior Unsecured Rating Baa3 Baa2

Outlook Positive Stable

The upgrade reflects our expectation that RAI's organic growth will remain positive as more revenue is generated by smokeless products, and that the company's financial policies will remain consistent with past practice and not materially impact its strong credit metrics. The stable outlook is based on our expectation that RAI will continue to grow profits, sustain positive operating cash flows and maintain strong financial and liquidity metrics to offset certain weak characteristics of its business.

Union Pacific Corporation Upgrade

15 Aug ‘11 26 Oct ‘12

Long-Term Issuer Rating Baa2 Baa1

Short-Term Issuer Rating P-2 P-2

Outlook Positive Stable

The upgrade considers the company's improved operating trends with an operating ratio which, at 68%, is among the best in the rail industry. We expect that the company will be able to sustain an operating ratio in the range of 70% or lower throughout the economic cycle, despite potential headwinds that could adversely affect demand for rail freight in general. We anticipate that, because of strong margins, UP will be able to generate operating cash flow in the range of $4 to $6 billion through 2013, even in the event of a mild recession

Infrastructure

DTE Energy Center, LLC (DTEEC) Upgrade

30 Jul ‘10 23 Oct ‘12

Senior Secured Bonds Ba3 Ba2

Outlook Stable Positive

The rating action recognizes the continued improvement in the financial and operational performance of Chrysler Group LLC (Ba2 positive), DTEEC's only customer and sole source of revenues. The action also reflects the consistent, stable and predictable financial performance that DTEEC demonstrated before, during and after the Chrysler restructuring.

RATING CHANGES Significant rating actions taken the week ending 26 October 2012

39 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Financial Institutions

On 24 October, we took a range of actions on the ratings of 31 Spanish banking groups, following our 16 October confirmation of the Spanish government’s Baa3 debt rating, with negative outlook, which we had placed on review for downgrade. Our actions on the banks fall into five groups:

Spanish Banks

» Rating reviews resolved after confirmation of the Spanish government rating. We had placed these banks on downgrade review because of their potential sensitivity to a further sovereign downgrade, but their ratings are now confirmed. This group of 11 banks includes Banco Santander, SA (Baa2 negative, C- /baa2 negative).20

» Rating reviews resolved reflecting the sovereign confirmation and enhanced clarity about planned mergers. These banks are in mergers that that are far enough advanced that we have sufficient information about the credit profile of the combined entities and the status of the merger processes so that we have a degree of clarity about the impact of the government's bank restructuring and recapitalisation initiative for them. Banks in this group are Caixabank (Ba2 negative), La Caixa, (Baa3 negative, D+/ba1 negative) Banco Sabadell (Ba1 negative, D/ba2 negative) and Banco CAM (Ba1 negative, E+/b3 on review for upgrade).

» Ratings that remain on review reflecting continuing uncertainty related to planned mergers. In this group are Caja Laboral (Baa3 on review for downgrade, D+/baa3 on review for downgrade), Banco Popular Español, SA (Ba1 on review for downgrade, D/ba2 on review for downgrade), Unicaja Banco, SA (Ba1 on review for downgrade, D/ba2 on review for downgrade), and Banco CEISS (B1 on review, direction uncertain, E+/b2 on review, direction uncertain).

» Ratings that remain on review for downgrade reflecting bank-specific factors. The confirmation of the Spanish government's rating removed one aspect of the ongoing rating reviews for these banks. However, bank-specific concerns primarily relating to the highly stressed operating environment have led us to continue keeping these banks on downgrade review. There are 11 banks in this group.

» Ratings directly tied to the Spanish government rating as a result of a guarantee or direct ownership. Following the confirmation of the Spanish government's bond rating, we also confirmed at Baa3, with a negative outlook, the backed senior debt of 18 institutions. We assigned the backed-Baa3 ratings based on the unconditional guarantee, which directly links these ratings to the Spanish government.

Separately, we also downgraded the ratings of Liberbank to Ba3 from Ba2, following the break-up of its planned merger with Ibercaja.

Spanish Bank Subsidiaries

On 25 October, we confirmed the long- and short-term ratings of the US mainland subsidiaries of Banco Santander S.A. and BBVA. We continued the review for downgrade of the Puerto Rican subsidiaries of Banco Santander S.A. and BBVA. Additionally, we confirmed the A2/P-1 debt and deposit ratings of Santander UK Plc. Separately, we confirmed the long- and short-term ratings of five Latin American subsidiaries of BBVA and Banco Santander S.A.. All these actions conclude the reviews that were initiated on 27 June 2012.

20 The ratings shown are deposit rating, the standalone bank financial strength rating/baseline credit assessment and the

corresponding rating outlooks.

RATING CHANGES Significant rating actions taken the week ending 26 October 2012

40 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

MAPFRE Argentina ART Downgrade

27 Jun ’1 2 25 Oct ’12

Insurance Financial Strength Ba3 B3

The downgrade positions the rating at the company's rating at its stand-alone credit profile. Driving the action is the impending sale of the company by MAPFRE S.A. and the removal of the three notches of ratings uplift that MAPFRE S.A.'s ownership and support provide. The rating reflects a lack of product diversification—common to all workers' compensation insurers in Argentina, very weak and deteriorating capitalization, and poor asset quality. In addition, the weak operating environment of Argentina and the significant regulatory risks of the workers' compensation segment constrain the company's credit profile.

Sub-sovereigns

We downgraded by one or two notches the ratings on five Spanish regions – Andalucia (to Ba2 from Baa3), Extremadura (to Ba1 from Baa3), Castilla-La Mancha (to Ba3 from Ba2), Catalunya (to Ba3 from Ba1, and Murcia (to Ba3 from Ba1). At the same time, we confirmed the ratings of the Basque Country and the Diputacion Foral de Bizkaia at Baa2, one notch above the sovereign bond ratings. In addition, the ratings of the regions of Madrid, Castilla y Leon and Galicia were confirmed at Baa3, on par with the sovereign ratings. Finally, we confirmed the ratings of the region of Valencia and of four government-related entities in Valencia at B1. All these regions carry negative outlooks in line with the negative outlook on the Baa3 sovereign bond rating of the Government of Spain.

Spanish Regions

We downgraded the ratings of Andalucia, Castilla-La Mancha, Catalunya and Murcia because of deterioration in their liquidity positions, as apparent in their very limited cash reserves and their significant reliance on short-term credit lines to fund operating needs. In addition, Catalunya, Andalucia and Murcia face large debt redemptions in fourth-quarter 2012 when retail bonds issued in 2011 are due to mature.

Naples, City of Review for Downgrade

16 Jul ‘12 24 Oct ‘12

Senior Unsecured Ba1 Ba1

Outlook Negative Review for downgrade

We placed the city of Naples on review for downgrade following the recent disclosure of €430 million in doubtful receivables (uncollectable taxes and service charges accrued in previous years) in FY2011. This imbalance, which represents one third of its annual operating budget, reflects Naples' persistently poor revenue-generating capacity, which is a structural challenge for the city.

RATING CHANGES Significant rating actions taken the week ending 26 October 2012

41 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

US Public Finance

Our 26 October downgrade of Pennsylvania State University from Aa1 reflects the substantial financial impact we expect from future settlements and possible judgments arising from sexual abuse claims made by victims of convicted former assistant football coach, Gerald Sandusky. The university's board has taken actions to provide an expedited settlement process, including hiring a nationally known law firm with expertise in settling high profile multiple claim cases, which offer prospects of settling substantial numbers of claims within a year or less. However, the total number of claims and the ultimate full cost to the university is unknown and may not be known for years. Investigations by the State Attorney General and the US Department of Justice remain active and further charges could emerge. The action also reflects governance and institutional culture challenges facing the university.

Penn State Downgraded to Aa2, Outlook Stable

State System of Higher Education, PA Downgrade

17 Feb ‘12 23 Oct ‘12

Long Term Rating Aa2 Aa3

Outlook Stable Stable

The downgrade reflects PASSHE's constrained revenue due to weakening state support, declining enrollment, political limitations on the system's ability to raise tuition and fees, and challenges in reducing expenditures in light of the pervasiveness of system labor unions. The rating action incorporates the system's very large and growing liability for employee retirement benefits and rising annual costs related to these benefits. Also driving the rating action is the downgrade of the Commonwealth of Pennsylvania to Aa2 from Aa1, which took place 16 July 2012.

Structured Finance

On 25 October we confirmed the ratings of 18 Spanish covered bonds (single-cedulas, i.e. covered by individual issuers), upgraded two, downgraded one, kept 12 on review for downgrade and four on review with direction uncertain. Additionally, we are continuing our review for downgrade of 51 Spanish multi-issuer covered bonds (multi-cedulas), while also confirming the rating of one, downgrading nine and placing 12 on review with direction uncertain. The actions follow the conclusion of the rating reviews of several Spanish issuers' unsecured ratings, and our recent confirmation of Spain’s Baa3 sovereign rating with a negative outlook.

Multiple Actions on 110 Spanish Covered Bonds, Including Multi-Cedulas

RESEARCH HIGHLIGHTS Notable research published the week ending 26 October 2012

42 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Corporates

The price fluctuations of natural and synthetic rubber have a significant impact on the operating performance of tire manufacturers, and we therefore expect currently declining prices to be credit positive for the companies we rate in the industry. Michelin, in particular, is likely to benefit, as these materials account for around 65% of its raw material costs.

Declining Rubber Prices Are Credit Positive for Tire Manufacturers

This issue compares what we know about the two major presidential candidates’ plans for Medicare and provides our opinion on what each approach could mean for insurers’ credit quality. Our assessment of President Obama’s approach is based on the provisions related to Medicare in the Affordable Care Act, while our assessment of former Gov. Mitt Romney’s intentions are based on information available on his campaign website.

Moody's Healthcare Quarterly Newsletter

We revised our outlook for the global independent refining and marketing (R&M) sector to stable from negative on 23 October. While EBITDA likely will be weaker in 2013 than in 2012, it will still fall within the -10% to +10% range that indicates a stable industry outlook. While worldwide growth in demand for refined products will slow through 2013, global demand for distillate will increase in line with our forecast of 2.9%-3.9% GDP growth worldwide.

Refining and Marketing Industry: Capacity Rationalization Eases Pressure From New Refineries and Slowing Global Growth

The sector has benefited in recent years from favorable market fundamentals, including strong demand for low-income housing that exceeds supply and the abundant availability of mortgage financing. However, over the past two years, significant changes have occurred in the housing industry as a result of government initiatives to provide more sustainable communities.

Mexican Homebuilders: Challenges Ahead in an Evolving Industry

An analysis of the high-yield bond covenant packages of 19 US midstream oil and gas master limited partnerships (MLPs) and 55 US independent exploration and production companies (E&Ps) reveals a gulf between the two sectors. MLPs offer the least investor protection of any US non-financial corporate sector, while E&Ps offer protection close to the average for US non-financial companies.

Moody's High-Yield Covenant Database: Midstream MLP Covenants Offer Least Investor Protection; E&Ps Near US Average

US homebuilders are bulking up on land. The companies that performed the best during the downturn worked down their inventories quickly and proficiently and now, in most cases, must replenish depleted supplies. Most of the companies that emerged from the crisis in reasonably good shape had greater size and scale than those that went bankrupt.

US Homebuilders Return to the Land

RESEARCH HIGHLIGHTS Notable research published the week ending 26 October 2012

43 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

In addition to weak prices, we expect subdued demand caused by slowing global economic growth, high inventory levels and stable aluminium production to keep prices low during the next six months, which will be credit negative for all aluminium producers, including our rated issuers. One producer, Alcoa Inc., reported a 66% year-on-year decline in third-quarter EBITDA.

Weak Aluminium Prices, Slowing Demand Will Continue to Dull Producers' Prospects

China’s property market recorded total contract sales in September of RMB540 billion, an increase of around 20% from RMB452 billion in August, our newsletter says. Also discussed: downward pricing pressures stabilize in September, sales of 15 rated developers on are on track, capital markets remain active for developers, among other stories.

China Property Focus - October 2012

Infrastructure

Several infrastructure sectors, such as airports and ports, have witnessed rating downgrades because of weak economic conditions and a lack of willingness among some issuers to maintain their financial profile through the economic cycle. From a credit perspective, however, we expect issuers to continue to avail themselves of their rate-setting and cost-cutting flexibility to maintain a financial profile appropriate for their rating category.

US Public Infrastructure: Slow Economic Recovery Tests Willingness to Manage Rates and Costs

Despite the contraction in real household incomes in recent years, residential electricity and natural gas have remained affordable. But increased amounts of government transfer payments have been supplementing household incomes. The potential reduction of these payments is a risk to the affordability of these utilities for some households. Other downside risks for affordability include heightened regulatory compliance costs and unexpected increases in natural gas prices.

US Municipal & Public Power Utilities: Household Electric Utility Affordability-Impact of Recession

Financial Institutions

The credit impact on US life insurers’ of the ongoing European crisis will be modest, as the industry’s holdings comprise higher quality financial institutions and sovereigns with more robust economies. That will protect the industry somewhat even if economic conditions deteriorate.

US Life Insurers Have Moderate Exposure to European Financial Institutions and Sovereigns; Credit Risk Modest Relative to Capital

RESEARCH HIGHLIGHTS Notable research published the week ending 26 October 2012

44 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

US Public Finance

The number of US public finance rating downgrades decreased in the third quarter of 2012 as compared to the second quarter, but the dollar amount of downgraded debt increased and pushed the 2012 YTD total above $200 billion. The $216.6 billion of total debt we downgraded through three quarters exceeds the $193.5 billion for all of 2011.

US Public Finance Rating Revisions for Q3 2012: Year-to-Date Downgrades 80% of All Rating Changes and Exceed $200 Billion

If California voters reject two tax initiatives for school funding on the November ballet, Propositions 30 and 38, we would place school districts with weak liquidity on downgrade review, given that they are not well positioned to handle the mandated cuts in state funding that would ensue. As many as 150 of California’s 327 rated districts could face fiscal pressures.

California School Districts Face Mounting Credit Pressure If Tax Initiative Fails in November Election

As regional economies recover slowly, additional local governments will likely have credit quality that descends into the speculative grades, although currently there are only 30 spec-grade issuers out of close to 8,000 rated cities, counties and school districts. In the past year we downgraded 10 local governments to spec grade and upgraded four into investment grade.

Speculative-Grade US Local Government Sector: Still Small but Growing

We outline the processes and tools we use to monitor ratings on over 13,700 public finance obligors. We leverage quantitative and qualitative tools in multiple steps to identify credits that have material changes in their financial, economic or demographic situation. Each step of the surveillance process entails a higher degree of analyst scrutiny to identify ratings that may require a rating or outlook change.

Moody’s Framework for Monitoring US Public Finance Ratings

The $3.2 billion of upgraded debt of the not-for-profit healthcare sector in the third quarter far surpassed the dollar amount of downgraded debt, $957.3 million, for a ratio of 3.3 to 1. The number of upgrades, 12, also surpassed the number of downgrades, 7, for a ratio of 1.7 to 1. The predominance of upgrades reflected an increase in merger and acquisition activity in the sector and not a fundamental change in its underlying credit conditions, which remain negative.

US Not-For-Profit Healthcare Quarterly Ratings: Driven by M&A Activity, Upgrades Surpass Downgrades in Third Quarter 2012

The rating downgrade is attributable to a sizable 32% increase in direct debt that weakens all debt measures. Multiple strategic initiatives will occupy management and demand careful oversight, including acquisitions, divestitures, new joint operating agreements, along with expansion of information technology and continued focus on the revenue cycle and expense controls. Contributing to the stable outlook is CHI’s strong geographic diversification across 19 states and 74 acute care hospitals with a mixture of urban and rural hospitals that diversifies cash flow sources.

Key Drivers of Catholic Health Initiatives Downgrade to Aa3

RESEARCH HIGHLIGHTS Notable research published the week ending 26 October 2012

45 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

Structured Finance

The scores and metrics of US property markets were generally stable in third-quarter 2012, with no sector score changing by more than two points since the second quarter.

CMBS: Red - Yellow - Green - Update Third-Quarter 2012 Assessment of US Property Markets

One year after its debut, the Australian covered bond market is approaching a steady state: transaction structures have been bedded down, issuance volumes are stabilizing, and the investor base is gradually expanding. We continue to view the ability to issue covered bonds to be a credit positive for Australian banks.

Australian Covered Bonds: One Year On

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

46 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2012

NEWS & ANALYSIS Corporates 2 » ADM’s Acquisition of Australia’s GCL Would Be Credit Negative » BP’s Sale of 50% Stake in TNK-BP to Rosneft Is Credit Positive » CGGVeritas’ Completion of Rights Offering Is Credit Positive » Thailand’s Auction of 3G Licenses Is Credit Positive for

True Corporation

Infrastructure 6 » Aeroporti di Roma Reaches Tariff Increase Agreement, a

Credit Positive

Banks 7 » US Banks Adhere to Accounting Guidance on Chapter 7 Borrowers » Brazilian Regulators Intervene in Banco BVA, a Credit Negative » Belgian Banks to Benefit from New Covered Bond Framework » Hungary’s Extension of Bank Levy Is Credit Negative for Banks

Insurers 13 » Prudential Inches Closer to Being Named Systemically Important, a

Credit Positive » OneBeacon’s Disposal of Asbestos and Pollution Liabilities Will

Reduce Reserve Volatility » ACE Limited’s Mexican Insurer Acquisition Is Credit Positive » Argentine Regulation Compelling Insurers to Invest in

Infrastructure Is Credit Negative » Delay in Solvency II Implementation Would Be Credit Negative for

European Insurers » Court Ruling on Terminated Life Policies Is Credit Negative for

German Insurers

Sovereigns 21 » Angola’s Creation of a Sovereign Wealth Fund Is Credit Positive

CREDIT IN DEPTH US Debt-Funded Dividends Recall the Credit Boom 23

Recent debt-funded dividend recapitalizations show debt investors’ willingness to accept structures that prevailed prior to the credit crisis. Third-quarter dividend recaps were more likely to employ high leverage of more than 6x. We have also seen a return of PIK toggle deals that allow companies to pay interest with more debt in certain situations, rather than cash.

MOODYS.COM

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

David Dombrovskis

Ratings & Research: Robert Cox Final Production: Barry Hing