21 december 2017 - jrj.com.cnpg.jrj.com.cn/acc/res/cn_res/invest/2017/12/21/3ed... · 12/21/2017...

MOODYS.COM

21 DECEMBER 2017

NEWS & ANALYSIS Corporates 2 » Campbell’s planned acquisition of Snyder’s-Lance is

credit negative » Hershey’s planned acquisition of Amplify Snack Brands is

credit negative » Total System Services’ planned acquisition of Cayan is

credit negative » Boeing’s failure to win Delta Air Lines’ narrowbody plane order

is credit negative » Increased royalty rate will pressure Sirius XM’s margins, a

credit negative » Sibanye Gold Limited’s proposed acquisition of Lonmin is

credit positive

Banks 9 » Czech banks will benefit from increase in countercyclical

capital buffer » Saudi Arabia’s banks will benefit from government’s private-

sector stimulus » Haitong International’s plan to acquire affiliate’s UK and US

assets is credit positive » Daishi Bank’s merger plan clears antitrust review, a

credit positive

Exchanges 15 » London Stock Exchange Group’s shareholders vote to retain

chairman, a credit positive

Sovereigns 16 » Argentina’s new pension law advances government’s

reform efforts

US Public Finance 17 » Small increase in housing allowance is credit negative for

military housing

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Monday’s Credit Outlook 19 » Go to Last Monday’s Credit Outlook

This is our last issue until Monday, 8 January.

Happy holidays to all!

NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 21 DECEMBER 2017

Corporates

Campbell’s planned acquisition of Snyder’s-Lance is credit negative On Monday, Campbell Soup Company (A3 review for downgrade) said that it had agreed to acquire Snyder’s-Lance Inc. for about $6.1 billion in cash, including $1.1 billion of existing Snyder’s-Lance debt. Although strategically sound, the planned acquisition is credit negative because it will lead to a sharp increase in debt and leverage. After the announcement of the planned transaction, we placed Campbell’s A3 senior unsecured rating under review for downgrade. We affirmed the company's Prime-2 short-term rating, reflecting our expectation that any resulting downgrade is unlikely to exceed two notches.

Campbell expects to complete the acquisition by the second quarter of 2018, financing the deal with $6.2 billion of new unsecured debt. Upon closing, we expect adjusted debt/EBITDA to surge to about 5.0x before synergies, up from 2.2x as of 30 July. The transaction will be initially dilutive to profit margins. But consolidated margins should improve through the realization of revenue and cost synergies.

Notwithstanding the jump in financial leverage, the proposed transaction has strong qualitative merits. Snyder’s-Lance would add market-leading brands in attractive snacks categories, including pretzels, sandwich crackers, kettle chips and deli snacks. It also would double the scale of Campbell’s snacks portfolio to approximately $4.7 billion in sales, from $2.5 billion.

Campbell’s commitment to maintaining investment-grade credit quality includes prioritizing debt reduction after leveraging acquisitions until it restores its credit metrics. The company should be able to sustain a steady pace of deleveraging through debt reduction following the acquisition, supported by the suspension of share buybacks and earnings growth.

But the company’s plan to achieve $345 million in operating profit improvement over four years is aggressive. With this target, Campbell management assumes a more than doubling of Snyder’s-Lance’s EBITDA over the period, which would be challenging to achieve even in ideal operating conditions. Considering that both Campbell and Snyder’s-Lance each have experienced soft core operating performance recently, the integration and execution risks of the transaction will be higher than average. Moreover, Campbell will be simultaneously integrating its recent acquisition of Pacific Foods.

Snyder’s-Lance has experienced mixed operating performance over the past two years and is in the midst of a major restructuring program to turn around unfavorable earnings trends. Snyder’s-Lance also has undergone major changes in senior leadership in recent years, including naming a new CEO last July. Layering on the complexity of Campbell’s integration plan, including managing two direct-to-store delivery networks, will add operational challenges and could be disruptive.

Brian C. Weddington, CFA Vice President - Senior Credit Officer +1.212.553.1678 [email protected]

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



Hershey’s planned acquisition of Amplify Snack Brands is credit negative On Monday, The Hershey Company (A1 review for downgrade) said that it had agreed to acquire Amplify Snack Brands Inc. (B3 review for upgrade) for $1.6 billion in cash. The planned acquisition, which Hershey expects to close in the first quarter of 2018, is credit negative because it will increase leverage. Following the announcement, we placed Hershey’s A1 senior unsecured rating on review for downgrade. We affirmed the company’s Prime-1 commercial paper rating.

Although Hershey has not yet disclosed the mix of cash and debt it will use to finance the acquisition, we expect that adjusted debt/EBITDA will rise to as high as 2.8x before synergies from 1.96x as of 1 October. Our review of Hershey’s ratings will focus on the company’s prospects to reduce leverage following the Amplify acquisition.

Amplify’s portfolio of savory snack brands includes SkinnyPop popcorn and Tyrrells potato crisps. The planned acquisition marks a strategy shift for Hershey, given that the savory category is outside of the company’s core focus. Hershey ventured into savory snacks with its 2015 acquisition of premium meat snacks maker Krave, but this is the first time that the company is making such a large investment in the category.

The Amplify acquisition also will pit Hershey against PepsiCo Inc.’s (A1 stable) Frito-Lay unit, a significantly larger competitor with a leading market share in the ready-to-eat popcorn segment. Although the ready-to-eat popcorn market has been growing, competition has intensified. Other segments of the popcorn market – specifically microwavable popcorn – have been in decline.

Hershey’s A1 rating has been supported by strong credit metrics, stable cash flow, strong profit margins, good liquidity and a leading position in the US confectionery market. However, the company has limited product and geographic diversification compared with other global food companies. Hershey generates about 88% of its sales in North America and is exposed to commodity cost fluctuations, especially with regard to cocoa. These risks require Hershey to maintain stronger and more stable credit metrics than are typical of an A1-rated company. Although Amplify will improve Hershey’s product diversification, it will increase the company’s concentration on the US market.

Linda Montag Senior Vice President +1.212.553.1336 [email protected]



Total System Services’ planned acquisition of Cayan is credit negative On Monday, Total System Services, Inc. (TSYS, Baa3 stable) said that it had agreed to purchase merchant acquirer Cayan for about $1.05 billion. Although strategically sound, the planned acquisition is credit negative because it will increase leverage by more than half a turn.

TSYS expects to complete the transaction in the first quarter of 2018. We expect TSYS to finance the Cayan acquisition with revolver drawings and new debt. TSYS maintains an $800 million revolving credit facility maturing in 2021, of which no amounts were outstanding as of 30 September.

Upon closing, we expect pro forma adjusted debt/EBITDA to reach about 3.4x for full-year 2017, up from 2.7x as of 30 September. But management has reiterated its intention to reduce leverage to below 3.0x, which we expect will occur 12-18 months after the transaction’s close. TSYS has a successful track record of deleveraging quickly after debt-funded acquisitions: Following its April 2016 acquisition of TransFirst for $2.35 billion, the company reduced debt/EBITDA to 2.7x from 4.0x in less than a year and a half, and after its July 2013 acquisition of NetSpend for $1.4 billion, TSYS reduced debt/EBITDA to 1.9x by the end of 2015 from about 3.0x upon close.

Deleveraging following the Cayan acquisition will be aided by annual free cash flow exceeding $700 million and at least high-single-digit profit growth, excluding cost synergies. As it has done in the past, TSYS is likely to refrain from significant share repurchases and additional merger and acquisition activity until it restores leverage to its targeted level below 3.0x.

The planned acquisition will yield strategic benefits. Cayan will enhance TSYS’ integrated payment capabilities with faster-growing and higher-yielding small and midsize enterprises (SMEs), a customer segment that reached significant scale with the TransFirst acquisition. The additional processing capabilities will allow TSYS to offer a broader suite of payment solutions to its merchants and partners. This, in turn, will help combat pricing pressure in the company’s core swipe-processing business and improve customer retention rates. Cayan also will add processing scale with its own SME client base, which should drive operating leverage for TSYS as more transactions are processed through its platform.

Stephen Sohn Senior Vice President +1.212.553.2965 [email protected]



Boeing’s failure to win Delta Air Lines’ narrowbody plane order is credit negative Last Thursday, Delta Air Lines, Inc. (Baa3 stable) said that it had placed a firm order for 100 Airbus SE (A2 stable) A321neo aircraft and options on 100 more. The order is credit negative for The Boeing Company (A2 stable), whose 737 MAX 10 was passed over in favor of its Airbus narrowbody rival.

Winning the order from Delta would have been an attractive addition to Boeing’s 737 MAX order backlog, which totaled 4,016 aircraft as of 30 November, versus 5,052 for Airbus’ A320neo family. In particular, an order for 100 of the MAX 10 would have been an important boost to the largest MAX variant, which Boeing launched in June 2017 to better compete with an aircraft with similar seating capacity as the strong-selling A321neo.

We believe that price considerations were likely the key variable in the Delta order. Narrowbody planes manufactured by Boeing and Airbus are highly competitive, offering similar utility to most operators, as well as comparable operating and maintenance costs. Thus, airlines’ aircraft purchase decisions between the two often come down to which offers the lowest purchase price for the aircraft or lowest all-in cost of ownership when including maintenance or other components of a transaction, such as training credits or residual values on trade-ins.

Boeing’s commercial airplanes unit reported an operating margin of 8.8% for the first nine months of 2017, while Airbus reported a commercial aircraft EBIT margin of 4.6% for the same period. At Boeing’s operating margin for the commercial airplane segment, we estimate the opportunity cost of losing the Delta contest at about $500 million of operating profit, spread out over three to four years starting sometime after 2020. However, the order book for the MAX 10 will grow in upcoming years, lessening the blow.

Airbus launched its neo variant about eight months before the launch of the MAX. That head start, that Boeing did not offer a comparably sized model as the A321 and that the A321 was an existing, in-production aircraft, account for the stronger sales performance so far of the Airbus neo program versus that of the MAX. But we believe that Boeing will reduce Airbus’ lead in narrowbody orders in upcoming years because the MAX variant gives it a larger narrowbody model that should attract both existing operators of Boeing narrowbodies and potential new customers.

Although pricing likely was an important factor in the Delta order, we also believe that a new long-term maintenance deal between the airline and United Technologies Corporation’s (A3 review for downgrade) Pratt & Whitney subsidiary also helped tip the scales in Airbus’ favor. Under the agreement, Delta’s maintenance subsidiary, Delta Tech Ops, will be a major maintenance, repair and overhaul provider for the Pure Power PW1100G and PW1500G engines that power A321neos and Bombardier Inc.’s (B3 negative) C Series aircraft, which also are part of Delta’s fleet.

Less clear is whether the trade dispute over Bombardier’s C Series aircraft played a role in Delta’s decision to opt for the A321neo over the 737 MAX. Boeing’s C Series trade complaint focused on an order placed by Delta. In addition, Bombardier and Airbus subsequently agreed to form a partnership under which Airbus will gain a controlling stake in the C Series program.

Jonathan Root, CFA Vice President - Senior Credit Officer +1.212.553.1672 [email protected]



Increased royalty rate will pressure Sirius XM's margins, a credit negative Last Thursday, the Copyright Royalty Board (CRB) ruled that, beginning in 2018, Sirius XM Radio Inc. (Ba3 stable) must increase the royalties it pays to record labels and performing artists for use of their music to 15.5% of its gross revenue, a substantial increase from the 11% it pays currently. The decision is credit negative for Sirius XM. The new royalty structure to which Sirius XM must abide for use of sound recordings and public performances on its satellite radio service will begin 1 January and continue through December 2022, and is subject to certain exclusions and adjustments.

Pro forma for the 15.5% royalty rate, we estimate that the company’s adjusted EBITDA margin would contract roughly 460 basis points to 32.4% from 37% for the 12 months that ended 30 September and adjusted total debt to EBITDA would increase to 4.1x from 3.6x. However, Sirius XM’s existing debt ratings and stable outlook are unaffected.

Sirius XM has operating leverage in its business model owing to annual subscriber growth, relatively stable churn (the rate of customers who discontinue service), and declining subscriber acquisition costs, as well as the ability to offset the higher royalty rate with various cost reduction initiatives. We expect the actual margin degradation to be closer to 300-350 basis points.

The company also could pass on the higher rate to subscribers through price increases, however this might lead to increased customer attrition or slower subscriber growth. With subscriber growth already experiencing a modest slowdown amid declining US new car sales, which our auto industry analysts expect for this year and next, Sirius XM must carefully evaluate the price elasticity of demand for its satellite radio services before deciding to pursue this path.

Sirius XM can move for a rehearing within 15 days from the 14 December decision. To the extent that the CRB considers a rehearing motion, and any subsequent motion responses, and affords the Register of Copyrights with a 60-day period to ensure the decision is void of legal error, the Library of Congress will publish the final determination in the Federal Register. Sirius XM will then have 30 days from the publication date to appeal the ruling to the US Court of Appeals for the District of Columbia Circuit.

Greg Fraser Vice President - Senior Analyst +1.212.553.4385 [email protected]



Sibanye Gold Limited’s proposed acquisition of Lonmin is credit positive Last Thursday, Sibanye Gold Limited (Sibanye-Stillwater, Ba2 stable) announced that it intended to acquire Lonmin Plc in an all-share offer valued at $383 million. The acquisition is credit positive for Sibanye-Stillwater because it will further diversify its operations, increase its scale and add the capability to refine platinum group metals (PGM) products with no additional debt.

Lonmin, currently the world’s third-largest PGM producer, is currently $103 million net cash positive. Lonmin may settle $150 million in current debt facilities, comprising a term loan, before closing the deal, which the companies aim to complete by the second half of 2018, subject to regulatory and shareholder approvals.

Sibanye-Stillwater expects to realise synergies of around $56 million per year by 2021 by reducing overhead after spending around $6 million on restructuring costs. The company envisages a further $60 million in annual synergies by 2021 by improving its PGM processing capability. The company also expects to wring synergies from incorporating the ability to mine through shared boundaries between Lonmin’s and Sibanye-Stillwater’s mines and sharing mining infrastructure. Additionally, Sibanye-Stillwater will significantly reduce Lonmin’s capital expenditures via a revised operational plan that will be limited to constructing a new direct current arc furnace for around $76 million.

Sibanye-Stillwater still has two years remaining on an existing processing agreement with Anglo American Platinum Limited, a subsidiary of Anglo American plc (Baa3 stable). Sibanye-Stillwater’s ability to process its own PGM products will transform it into an integrated PGM mine-to-market operation, which not only will improve its mine-to-market costs but also its understanding of fundamental dynamics in the global PGM market.

Sibanye-Stillwater will add 650,000-680,000 ounces of platinum sales with the acquisition, shifting the balance of its production to a majority PGM producer with around 83% of gold and PGM production sourced from South Africa (see exhibit). Sibanye-Stillwater will become the world’s second-largest PGM producer after Anglo American Platinum. Lonmin will add 54.9 million ounces to Sibanye-Stillwater’s PGM reserves, with additional opportunity offered by its 307.1 million ounces of resources.

Douglas Rowlings Vice President - Senior Analyst +971.4.237.9543 [email protected]



Sibanye-Stillwater will become predominantly a PGM producer with the Lonmin acquisition Production split by metal grouping and region

Sources: Company data and Moody’s Investors Service forecasts

Sibanye-Stillwater expects to produce around 3.8 million ounces of gold and PGM with the Lonmin acquisition. This will make the company’s precious metal production comparable to that of AngloGold Ashanti Limited (Baa3 positive). At the same time, Sibanye-Stillwater expects the additional EBITDA from Lonmin to help deleverage and reach a target of 1x net debt/EBITDA within two years.

Lonmin is in advanced negotiations with its lending banks on a pre-emptive waiver to extend the testing of a tangible net worth (TNW) covenant at its fiscal year-end on 30 September 2017. Lonmin expects that the Sibanye-Stillwater transaction will make the lending banks comfortable enough to extend the TNW covenant. The covenant test may be negated following consummation of the transaction because all debt can be repaid using cash balances that at 30 September 2017 totalled $253 million.

Gold 58%

PGM42%

Before acquisition metal split

Gold 46%

PGM54%

After acquisition metal split

South Africa80%

US20%

Before acquisition regional split

South Africa83%

US17%

After acquisition regional split



Banks

Czech banks will benefit from increase in countercyclical capital buffer On Monday, the Czech National Bank (CNB) raised banks’ countercyclical capital buffer by 25 basis points to 1.25% of risk-weighted assets, effective January 2019. As a result, Czech banks either will have to hold more regulatory capital or reduce their risk-weighted assets. The move is credit positive for Czech banks because it ensures that they retain capital to preserve their existing solid capital bases amid strong loan growth. The buffer is a macro-prudential tool regulators use to moderate excessive credit growth, and marks the second increase in the countercyclical capital buffer this year, following a 50-basis-point hike in June.

The CNB increased the buffer because of rising house prices fueled by mortgage-loan growth. The central bank perceives real estate prices as exceeding levels indicated by the fundamentals. The CNB also raised concerns about loan growth in the commercial-real estate sector and low levels of loan-loss provisions that banks are setting aside, and indicated that it may increase the buffer further if the strong credit growth continues.

In third-quarter 2017, average property prices in the Czech Republic grew by 16% from a year earlier, while Czech households’ financial strength eroded because of increasing indebtedness, as reflected by an increase in household leverage (as calculated by the ratio of debt to gross disposable income) to 59.2% in 2016 from 57.1% in 2015, according to Eurostat. Mortgage credit is Czech banks’ biggest exposure and comprised 36% of banks’ total loan book as of September 2017, or 23% of Czech GDP. Between 2012 and 2017, mortgage loans grew 6.4% annually on average (see Exhibit 1) amid sometimes relaxed underwriting guidelines and a period of historically low interest rates, resulting in historically low mortgage lending rates.

EXHIBIT 1

Czech banks’ mortgage loan growth and asset quality trends

Sources: Czech National Bank, Czech Statistical Office and Moody’s Investors Service

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

0100200300400500600700800900

1,0001,1001,2001,300

CZK

Bill

ions

Loans for House Purchase - left axis House Price Index 2010 = 1000 - left axis Mortgage NPLs - right axis

Arif Bekiroglu Assistant Vice President - Analyst +44.20.7772.1713 [email protected]

Aleksander Blacha Associate Analyst +44.20.7772.5282 [email protected]



Among Czech Republic’s six largest banks, the capital ratios of Ceskoslovenska Obchodni Banka, a.s. (CSOB, A2 stable, baa11) have declined in recent quarters, gradually eroding the bank’s cushion over the regulatory requirements. MONETA Money Bank, a.s. (Baa2 stable, baa2) is currently able to meet the new capital requirements (see Exhibit 2), and aims to reduce its Common Equity Tier 1 to 15.5% from 18.1% as of September 2017. As a result of the higher countercyclical capital buffer, CSOB, MONETA, Komercni Banka a.s. (A2 stable, baa1) and UniCredit Bank Czech Republic and Slovakia, a.s. (covered bonds Aa3), which have modest cushions over their minimum capital requirements, may have to limit dividend payouts, reduce risk-weighted assets or raise additional capital. UniCredit retained all of its 2016 and 2015 profit and already benefits from Tier 2 capital and Komercni issued subordinated debt in November 2017, which should increase the banks’ cushions above minimum requirements. We expect the banks to take further steps to strengthen their capital position. Ceska Sporitelna, a.s. (A2 stable, baa1) and Raiffeisenbank, a.s. (Baa2 stable, ba1) already rely on Additional Tier 1 capital and Tier 2 instruments to meet increased capital requirements.

EXHIBIT 2

Top six Czech banks’ regulatory capital requirements and composition as of September 2017

Komercni Banka’s total capital ratio includes €100 million of subordinated debt (0.58% of risk-weighted assets). Sum of Pillar 1 and Pillar 2 requirements for CSOB, Komercni and MONETA based on publically available data. We assume the Pillar 2 is the system average of 1.7% for the other banks. Data for UniCredit Bank Czech Republic and Slovakia and Raiffeisenbank as of December 2016. UniCredit Common Equity Tier 1 includes the bank’s entire 2016 net profit. Sources: Banks’ financial reports, Czech National Bank and Moody’s Investors Service

1 The bank ratings shown in this report are the bank’s deposit rating and Baseline Credit Assessment.

4.5%

1.5%2.0%

2.5%

1.0% - 3.0%

1.7%

0%2%4%6%8%

10%12%14%16%18%20%

Basel IIIRequirement -

Czech Republic

Ceska CSOB Komercni UniCredit BankCzech Republic and

Slovakia, a.s.

Raiffeisenbank, a.s. MONETA

Common Equity Tier 1 Additional Tier 1 Tier 2Capital Conservation Buffer Systemic Risk Buffer Countercyclical Buffer = 1.25%Pillar 2 Phased-in Pillar 1 Phased-in Pillar 1+2



Saudi Arabia’s banks will benefit from government’s private-sector stimulus Last Thursday, the Saudi Arabian government announced a SAR72 billion ($19.2 billion) program to support private-sector growth over the next four years. The credit-positive plan, which will focus mainly on housing and small business, is part of a SAR200 billion stimulus that has aimed to boost economic growth and employment since 2014, when falling oil prices slowed growth. We expect that this program will support Saudi banks’ credit growth in 2018, which will benefit their profitability.

As part of Saudi Arabia’s Vision 2030 economic transformation program, and ahead of the budget announcement for 2018, the stimulus package seeks to diversify the economy to non-oil sectors. Although specifics about the stimulus remain unclear, the focus will be on housing (SAR21 billion), new economic projects (SAR10 billion), small companies (a fund of SAR2.8 billion) and distressed companies (SAR1.5 billion). The government also announced that it will reduce a number of government fees by as much as SAR7 billion for small businesses. We expect that this plan, SAR24 billion of which should be spent in 2018, will support private-sector growth and bank lending.

Low oil prices prompted the Saudi government to tackle its deficits with subsidy cuts, additional taxes and fees, and reductions in government spending – all of which negatively affected non-oil real GDP growth (see exhibit). We expect non-oil real GDP growth to be 1.2% this year and 1.5% next year, down from an average of 6.8% for 2010-14. This slowdown resulted in a year-over-year decline in bank credit volume in October 2017 of 1.8%, versus a year earlier, when the year-over-year growth was 6.3%, hurt by lower business volume, particularly fee- and commission-based income such as trade and foreign-exchange transactions (non-interest income in September 2017 fell 8% from a year earlier). Additionally, slowing economic conditions have affected borrowers’ repayment capacity, leading Saudi banks’ loan-loss provisions in September 2017 to rise 23.6% from a year earlier.

Saudi banks’ lending growth has fallen in line with government spending in recent years

Sources: Saudi Arabian Monetary Authority and Moody’s Investors Service

The stimulus should positively affect banks, particularly real estate lending, which increased 16.4% in June 2017 from the previous year, constitutes around 15% of banks’ total credit and is a key growth area for banks. Lending to small and midsize enterprises (SMEs), which currently accounts for less than 5% of total lending, is another pillar of Saudi Arabia’s economic diversification: Vision 2030 expects SMEs’ contribution to GDP to reach 35% by 2030 from 20% as of 2015, and that banks will allocate up to 20% of their overall funding to SMEs. We expect these two lending segments to contribute positively to a pick-up in banks’ lending in 2018, which we expect will grow by around 4%.

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

2010 2011 2012 2013 2014 2015 2016 2017Forecast

2018Forecast

SAR

Billio

ns

Government spending - left axis Non-oil Real GDP growth - right axis

Olivier Panis Vice President - Senior Credit Officer +971.4.237.9533 [email protected]



Although real estate and SME lending are key growth areas for banks, it remains unclear how the stimulus mechanisms will involve banks, especially given that banks regard SME lending as higher risk and that the segment’s growth will rely on improved quality of financial reporting. Saudi Arabia’s implementation of a value-added tax in 2018 and the development of a risk information database from the Saudi credit bureau SIMAH will help. Earlier this month, the government announced that it expects a new bankruptcy law to take effect in the next three months, which also would benefit banks as they increase their lending to the higher-risk real estate and SME segments.



Haitong International’s plan to acquire affiliate’s UK and US assets is credit positive Last Friday, Haitong International Securities Group Ltd. (Baa2 stable) announced that it will acquire Haitong (UK) Limited (Haitong UK) and Haitong Securities USA LLC (Haitong USA) for $29.31 million from affiliate Haitong Bank S.A. The transaction is credit positive for Haitong International because it will enhance its investment banking operations in the UK and US and broaden its presence in those markets. Additionally, the acquisitions will further solidify Haitong International’s strategic position in its parent group. The acquisition is relatively small, so it will not have a material financial effect on Haitong International.

Upon completion of the transaction, which is subject to regulatory approval, we expect Haitong International to integrate the acquired operations into its existing businesses in the UK and US under a unified brand, which will help it obtain new clients. After the acquisition, Haitong International will be able to broaden its scope of business in the UK and the US.

The acquisition is part of a restructuring of overseas operations that parent Haitong Securities Co., Ltd. has been undertaking over the past two years and will further enhance Haitong International’s strategic position as the group’s core offshore investment banking arm. Haitong Securities Co., Ltd. bought Haitong International, previously Taifook Securities Group Limited, in 2009, and Haitong Bank, formerly Banco Espirito Santo de Investimento, in 2015. Over the past two years, the group has taken steps to separate Haitong Bank’s commercial banking and investment banking businesses. In 2016, Haitong Bank’s business in India, mainly an investment banking operation, was transferred to Haitong International, which is now the largest offshore subsidiary of a Chinese brokerage by total assets. The exhibit below shows how Haitong Securities Co. Ltd.’s footprint overseas has expanded over the past few years.

Haitong Securities’ overseas exposure has been increasing Overseas exposure as a proportion of total assets

Source: Company financial reports and Moody’s Investors Service calculations

The acquisition cost for Haitong UK and Haitong US is equivalent to about 1% of Haitong International’s total equity as of the end of June 2017. The two businesses are relatively small: Haitong UK had around £5 million in total assets at the end of 2016, while Haitong USA held about $14.9 million, indicating that Haitong International is paying 1.87x book value for the UK business and 1.13x for the US business.

Integration costs likely will hurt Haitong International’s profitability over the next one to two years. Also, if Haitong UK remains unprofitable, it will dent Haitong International’s earnings. However, the UK unit’s performance has improved, with its net loss narrowing to £24.5 million in 2016 from £42.7 million a year earlier. Also, Haitong International has ample room to absorb losses of this size. Additionally, the losses at the UK operation will be offset by contributions from Haitong USA, which commenced operations in September 2016 and is profitable.

17%

13%

20%

29%

0%

5%

10%

15%

20%

25%

30%

2013 2014 2015 2016

Sean Hung Assistant Vice President - Analyst +852.3758.1503 [email protected]

Crystal Guo Associate Analyst +852.3758.1476 [email protected]



Daishi Bank’s merger plan clears antitrust review, a credit positive Last Friday, Japan’s Fair Trade Commission (FTC) approved the merger of The Daishi Bank, Ltd. (A2 stable, baa12) and The Hokuetsu Bank, Ltd. The approval is credit positive for Daishi Bank because it removes a major regulatory hurdle to the merger, which will allow the bank to reduce costs and improve operational efficiency by consolidating overlapping branches in the banks’ home market of Japan’s Niigata prefecture.

Daishi Bank and Hokuetsu Bank had originally planned to establish a holding company by April 2018 and complete the merger in 2020, but had been delayed because of antitrust concerns over the banks’ combined dominance in Niigata. The two now aim to establish a holding company by 1 October 2018. The holding company, Daishi Hokuetsu Financial Group, will become the 11th-largest regional banking group in Japan by total assets, with a loan market share of approximately 55% in Niigata, based on data as of the end of March 2017.

Mergers are becoming vital for many of the more than 100 regional banks in Japan as they struggle to remain profitable amid ultra-low interest rates and population declines. Japan’s Financial Services Agency has been urging regional banks to consider mergers, but antitrust concerns have been a potential hindrance. The FTC’s decision last Friday marks the first time it has cleared a plan to create a banking group with a majority market share in a prefecture.

That said, the FTC is unlikely to approve the long-delayed merger of Fukuoka Financial Group, Inc.’s Shinwa Bank and the Eighteenth Bank, a deal that would create a group with a 70% loan market share in their home market of Nagasaki prefecture. The FTC has been reviewing the deal for more than a year, and the two banks have put the plan on hold indefinitely after two delays to give the FTC more time to complete its review. The stalemate indicates that the FTC believes the combined bank would be too dominant to the detriment of fair competition and customer protection.

The FTC’s approval of the Daishi Bank-Hokuetsu Bank merger and its stance on the Shinwa Bank-Eighteenth Bank deal will serve as a benchmark for the extent of the antitrust watchdog’s tolerance toward a single institution’s dominance in a market. This will help other banks minimize the risk of an FTC rejection when pursuing mergers.

2 The bank ratings shown in this report are The Daishi Bank’s deposit rating and Baseline Credit Assessment.

Yuri Nishizaki Associate Analyst +81.3.5408.4048 [email protected]

Tetsuya Yamamoto Vice President - Senior Analyst +81.3.5408.4053 [email protected]



Exchanges

London Stock Exchange Group’s shareholders vote to retain chairman, a credit positive Last Tuesday, at a general meeting of shareholders, 79% of London Stock Exchange Group plc’s (LSEG, A3 stable) voting shareholders opposed a resolution to immediately remove the company’s chairman from office. This outcome is credit positive for LSEG because it makes for a smoother transition to appoint a new CEO and chairman, and lessens the risk of a transition that could change financial and strategic policies that support creditors.

The vote was called by The Children’s Investment Master Fund, an LSEG shareholder, following the board’s October decision to implement a CEO succession plan and before LSEG’s 29 November announcement that its CEO had agreed to depart with immediate effect and its chairman would not stand for re-election at the company’s 2019 annual meeting.

Because LSEG’s board had unanimously recommended that shareholders vote against the resolution, a vote in favor of the immediate removal of the chairman would have risked weakening the board and destabilizing the company. Board members may have felt pressured to resign, and the company would have faced an increased challenge in attracting a suitably qualified CEO. In such circumstances, there would be an increased risk of operational and regulatory challenges developing at the company, and of changes in financial or strategic policies that could be detrimental to creditors.

LSEG’s interim CEO is capable of overseeing the company with the board’s support until a new CEO is appointed, and the inherent risks during this period of leadership transition are mitigated by the underlying health and diverse range of LSEG’s operating activities and its commitment to adhere to its existing financial plan, including its long-held 1x-2x operating net leverage target.

Donald Robertson Senior Vice President +1.212.553.4762 [email protected]



Sovereigns

Argentina’s new pension law advances government’s reform efforts On Tuesday, Argentina’s (B2 stable) Congress approved a pension reform law that changes how pension and other social expenditures are indexed. The new law will lower the government’s social security disbursements by 0.6% of GDP in 2018 and is part of a broader reform effort following midterm election wins in October. Lower social security payments support fiscal consolidation efforts and the push for broader reforms indicates that the government is using its political capital to continue macroeconomic stabilization efforts, a credit positive.

After the midterm elections, Argentina’s government announced an ambitious set of policy reforms including reducing certain corporate taxes to improve competitiveness; labor reforms aimed at lowering the cost of hiring in Argentina and increasing the share of formal employment; and a change in how pension outlays are calculated to help reduce pension payments and, in turn, reduce the fiscal deficit. Pension reform was the first of these reforms to be approved. The new pension formula adjusts payments based mainly on past inflation. Compared with the previous mechanism, which was indexed to salary increases and changes in social security revenue, the new payment structure will be less volatile and result in higher payments during a recession but smaller outlays as the economy expands.

Argentina’s pension payment formula is used for other social spending, such as conditional cash transfers, so changes to the pension formula have ripple effects across much of the government’s spending. We expect the new indexing formula to result in savings of about 0.6% of GDP next year and potentially more over time (see exhibit).

Argentina’s government social spending as a percent of GDP will decrease next year

Sources: Argentina’s Ministerio de Hacienda and Moody’s Investors Service forecast

The fiscal savings from pension reform will not automatically reduce the fiscal deficit. The central government has reached a preliminary agreement with all but one of the country’s provinces, in which it plans to raise fiscal transfers to them, and this will be paid in part by the pension savings. In exchange for higher transfers from the central government, the provinces agreed not to increase their own government spending above inflation. We estimate the extra fiscal transfers from the central government to the provinces in 2018 at about 0.4% of GDP.

Passage of these reforms demonstrates the government’s commitment to structural adjustments that will support government finances and preserve macroeconomic stability, and pave the way for the passage of further reforms.

5%

6%

7%

8%

9%

10%

11%

12%

13%

2016 2017 2018 Foreast

Spending under current budget plans Spending after pension reform

Gabriel Torres Vice President - Senior Credit Officer +1.212.553.3769 [email protected]



US Public Finance

Small increase in housing allowance is credit negative for military housing Last Friday, the US Department of Defense (DOD) announced that the Basic Allowance for Housing (BAH) provided to military personnel will increase by an average of 0.7% in 2018, the smallest increase in BAH funding in the past three years. The increase is credit negative for the $9.5 billion of rated privatized military housing project financings because it may not keep up with increases in operating expenses at many bases. Despite the small increase, we expect debt service coverage ratios for project financings to remain largely stable next year, given a strong 2.4% increase in average BAH funding over the past five years, including the 2018 amount.

Military housing projects, which rent units, rely on BAH payments as their primary source of revenue for developers, and in turn, bondholders. The 2018 increase, which is primarily tied to the cost of living off-base or in private housing, is the lowest increase since a 0.5% increase in 2015 (see exhibit). The last decline was before 2012.

Basic Allowance for Housing increase for 2018 is the lowest since 2015

Source: US Department of Defense

Although the overall increase in BAH rates is credit negative for the sector, the DOD establishes specific BAH funding levels for each military base, depending on certain characteristics of the local real estate market. This means that the increase for service members will vary depending on location. Additionally, BAH rates can vary by the specific pay grades of personnel and their number of dependents. Thus, we expect a wide dispersion of rates among individual bases and service personnel next year.

For 2018, approximately 40% of the military housing areas will receive decreases in the BAH. These declines are partially mitigated by the Individual Rate Protection policy that protects service members from any decreases as long as their duty station, pay grade or dependent status has not changed.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

2012 2013 2014 2015 2016 2017 2018

Dmitriy Plit Assistant Vice President - Analyst +1.212.553.7463 [email protected]



Service members can take their BAH to rent accommodations off-base. Next year will mark the fourth phase of a congressionally approved five-year plan that requires BAH recipients to pay for a percentage of their off-base housing costs out of pocket. The 2018 BAH rates will cover only 96% of housing costs, leaving service members to pay the remaining 4%. Next year, the share will hit the maximum of 5%. Without this cost-cutting measure, the average 2018 BAH rate would have been higher.

BAH rental payments are pledged by developers to bondholders. As a result, the BAH levels, which are set annually, directly affect military housing projects’ ability to pay required debt service to bondholders.

RECENTLY IN CREDIT OUTLOOK Select any article below to go to last Monday’s issue of Credit Outlook


NEWS & ANALYSIS Corporates 2 » Western Digital mends fences with Toshiba over memory

sale, a credit positive » Target buys Shipt, boosting same-day delivery capabilities, a

credit positive » For Petrobras, IPO of subsidiary strengthens ability to reduce

debt burden in 2018 » BAE Systems’ Typhoon aircraft contract with Qatar is

credit positive » Crown’s divestments in favor of home-market focus in

Australia is credit positive

Banks 7 » Brazilian banks agree to compensate customers’ inflation-

related losses, a credit positive » European Commission proposal to lower capital

requirements for banks’ green assets is credit negative » Danske Bank’s acquisition of SEB Pension Denmark is

credit positive » Steinhoff’s alleged accounting irregularities threaten South

African banks’ profitability » Indian public-sector banks’ capital raises are credit positive

Exchanges 13 » Intercontinental Exchange’s gain on Trayport sale is

credit positive

Sub-sovereigns 14 » Mexico’s reform of Financial Discipline Law is credit negative

for states and municipalities » Brazilian states and municipalities get more time to pay

arrears, a credit positive

MOODYS.COM

Report: 1106411

© 2017 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES (“MIS”) ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MOODY’S PUBLICATIONS MAY INCLUDE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY’S OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. CREDIT RATINGS AND MOODY’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY’S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

MOODY’S CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS OR MOODY’S PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.

ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.

All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moody’s publications.

To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.

To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.

NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.

Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any rating, agreed to pay to Moody’s Investors Service, Inc. for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be reckless and inappropriate for retail investors to use MOODY’S credit ratings or publications when making an investment decision. If in doubt you should contact your financial or other professional adviser.

Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

EDITORS SENIOR PRODUCTION ASSOCIATE Jay Sherman Amanda Kissoon

21 december 2017 - jrj.com.cnpg.jrj.com.cn/acc/res/cn_res/invest/2017/12/21/3ed... · 12/21/2017...

Documents