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MOODYS.COM

27 NOVEMBER 2017

NEWS & ANALYSIS Corporates 2 » ZF Friedrichshafen's bond buyback will reduce leverage » English court ruling is credit positive for Dana Gas' sukuk

investors and Islamic finance industry » Shelf Drilling's new contracts in India improve rig utilization, a

credit positive » Toshiba's planned equity financing is credit positive » ABM Investama's tap issuance of $50 million is credit negative » Lodha Developers will benefit from reducing short-term debt

and Indian government's affordable housing push

Banks 9 » Inclusion of IFRS 9 accounting will toughen EBA's 2018 banking

stress test » Binding MREL targets for the largest euro-area banks are

positive for senior bank creditors » Carige's share issue underwriting agreement is credit positive » Eurobank Ergasias' lowers its target for nonperforming

exposures, a credit positive » Turkey's 25-basis-point funding rate increase is credit negative

for banks » China's plan to tighten regulations on financial firms'

shareholding is credit positive » China's new guidelines on asset management products are

credit positive » Malaysia halts new property development amid rising

oversupply, a threat to bank asset quality » Pakistani banks will benefit from textile sector's

increasing exports » Singapore banks move to facilitate e-payments by adopting

common code, a credit positive

Sub-sovereigns 26 » Mexican court ruling on Nuevo Leon property tax subsidies is

credit positive for municipalities

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Monday’s Credit Outlook 27 » Go to Last Monday’s Credit Outlook

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

NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 27 NOVEMBER 2017

Corporates

ZF Friedrichshafen’s bond buyback will reduce leverage On 21 November, ZF Friedrichshafen AG (ZF, Ba1 positive) announced a debt buyback of approximately $1.3 billion, comprising a redemption of $425 million of its 2020 notes and a tender offer for up to $900 million of notes of various tranches due 2020-25. The buyback is credit positive because it will reduce gross leverage by approximately 0.25x as of year-end 2017.

We expect ZF to finance the transaction with existing cash on its balance sheet and proceeds from the disposal of its Global Body Control Systems (BCS) business unit, which the company announced on 30 August 2017. Consequently, ZF’s gross debt-related credit metrics, such as debt/EBITDA, will improve. We believe that ZF’s choice of using existing cash to buy back bonds rather than undertaking major debt-financed acquisitions, as it has in the past, is also credit positive because prior debt-financed acquisitions increased financial leverage. For example, ZF’s acquisition of TRW in 2015 temporarily raised leverage to almost 5x (see exhibit).

ZF Friedrichshafen’s bond buyback will further reduce gross debt/EBITDA

Sources: Company data and Moody’s Investors Service

Although a successful buyback would add to the existing positive pressure on ZF’s Ba1 rating, which we affirmed in August, the company’s recently revised dividend policy is credit negative and will weigh on retained cash flow/net debt and other credit metrics. However, the overall positive pressure on the rating remains in place.

Our positive outlook on ZF’s rating also reflects the gradual deleveraging to below 3.0x of Moody’s-adjusted gross debt/EBITDA. A rating upgrade would be conditional on ZF maintaining debt/EBITDA below 3x (actual was 2.9x at June 2017, while pro forma for the announced bond buyback is 2.7x), EBITA margins above 7%, retained cash flow/net debt above 25% (30% at June 2017) and free cash flow above €500 million (€1.5 billion at June 2017).

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31-Dec-13 31-Dec-14 31-Dec-15 31-Dec-16 12 months to 30-Jun-17

31-Dec-17 Estimate 31-Dec-18 Estimate

Moody's expectation for Ba1: 3.0x-3.5x

Matthias Heck Vice President - Senior Analyst +49.69.70730.720 [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.



English court ruling is credit positive for Dana Gas’ sukuk investors and Islamic finance industry On 19 November, United Arab Emirates-based (UAE) Dana Gas PJSC announced that the English High Court of Justice on 17 November ruled that the purchase undertaking attached to the Sukuk Al Mudarabah that it issued is valid and enforceable under English law, which is the governing law of the sukuk documents (other than the Mudarabah agreement, which is governed by UAE law). The ruling is credit positive for Dana Gas’ sukuk investors because the investors’ claims are enforceable.

The ruling, which is in line with the market’s expectation, is also credit positive for the Islamic finance industry generally because it adds certainty around the legal enforceability of the sukuk transaction documents, which tend to be complex in order to comply with Shari’ah principles. The judge made the ruling without representation from Dana Gas, which claimed it could not attend because Sharjah UAE Federal Court of First Instance issued an anti-suit injunction at the request of and in response to the action by several Dana Gas shareholders, who sought to have the UAE Sharjah Court decide the matter.

The issue began in June 2017 when Dana Gas, facing liquidity challenges at the time, announced that amid the continual development of Islamic financial instruments and their interpretation, it had received legal advice that its sukuk was not Shari’ah compliant and was therefore unlawful under UAE law. As a result, the company advised that restructuring the sukuk was necessary to ensure it complied with the law. The company started legal proceedings in the UAE and UK to protect its interest against any hostile action from the sukuk holders.

Despite the UK ruling, the case is far from ended. Dana Gas advised that it will appeal Friday’s ruling to the English Court of Appeal. Furthermore, the company’s injunction in the UAE courts still stands and it expects a hearing on that in December. Still, the English court ruling is a positive outcome for the investors. We expect going forward that the industry will introduce tighter legal requirements to protect investors from similar issues. In addition, regulatory efforts, especially in the Gulf Cooperation Council countries, to standardise the Shari’ah governing module will help standardise sukuk structures and support the enforceability of the Sharia’h opinion at origination, thereby reducing the complexity and uncertainty associated with these instruments.

Ashraf Madani Vice President - Senior Analyst +971.4237.9542 [email protected]

Nitish Bhojnagarwala Vice President - Senior Analyst +971.4237.9563 [email protected]



Shelf Drilling’s new contracts in India improve rig utilization, a credit positive On Monday, Shelf Drilling Holdings, Ltd. (B2 stable) announced that it had secured three new rig contracts with Oil and Natural Gas Corporation Ltd. (ONGC, Baa1 stable), India’s largest oil exploration and production company. The rigs are scheduled to start operations in January 2018 on three-year tenure. The new contracts are credit positive for Shelf Drilling because they will improve the company’s rig utilization rate and contract backlog. They also signal an ongoing recovery of shallow-water drilling after two years of severe demand and price erosion.

Shelf Drilling has been able to sign and renew contracts despite competitive pressure on day rates and earnings. The new contracts complement previously announced contract wins, such as the three rigs acquired from Seadrill Limited this year. Two of the three rigs are due to begin operations in January 2018 on two-year contracts with Dubai Petroleum in the Middle East and the third will begin operations in fourth-quarter 2017 on a 10-month contract in West Africa. The company also took delivery of its new Krathong rig in April 2017, which began a five-year contract with Chevron Corporation (Aa2 stable) in Thailand in June 2017.

The announcement is in line with our expectations for the company and supports our stable outlook on Shelf Drilling’s B2 corporate family rating. Despite low contracted day rates, the contracts will improve Shelf Drilling’s earnings and credit metrics in 2018 and help it maintain credit ratios within our expectations for its B2 rating (see Exhibit 1). We expect its Moody’s-adjusted debt/EBITDA to decline to 3.7x in 2018 from the 4.9x peak we forecast for year-end 2017, and EBITDA/interest expense to increase to 2.7x in 2018 from our forecast of 1.7x at year-end 2017.

EXHIBIT 1

Shelf Drilling Holdings’ leverage will improve in 2018 following new contract wins

All figures and ratios are calculated using our estimates and standard adjustments. Sources: Shelf Drilling Holdings, Moody’s Financial Metrics and Moody’s Investors Service forecasts

However, we have less visibility about the company’s earnings beyond 2018 as a result of limited contract coverage. We calculate that the current market utilization is about 60% for 2018, but then declines to 39% for 2019 because contracts for nine rigs are due to expire in India and West Africa (see Exhibit 2). Contract coverage will improve in time as Shelf Drilling contracts some of its available or expiring rigs. Moreover, we continue to expect that some of Shelf Drilling’s non-contracted rigs will have extended delays before securing new contracts because of the industry’s difficult competitive environment.

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Debt/EBITDA Lower B2 expectation Upper B2 expectation

Thomas Le Guay Analyst +971.4.237.9545 [email protected]



EXHIBIT 2

Shelf Drilling Holdings’ marketed utilization remains weak beyond 2018

Market utilization is defined as the actual number of calendar days during which marketable rigs generate day-rate revenue, divided by the maximum number of calendar days during which those same rigs could have generated day-rate revenue. Marketable rigs exclude stacked rigs and rigs operating under non-drilling contracts. Sources: Shelf Drilling Holdings and Moody’s Investors Service forecasts

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Toshiba’s planned equity financing is credit positive On 19 November, Toshiba Corporation (Caa1 negative) announced that its board of directors had approved a plan to issue ¥600 billion of new shares through a private placement. The issuance is credit positive because Toshiba will use the proceeds to eliminate cash obligations related to a parent company guarantee associated with nuclear power construction projects in the US. Additionally, the issuance will improve Toshiba’s negative net worth position. The company expects to close the share placement between 5 and 8 December.

Toshiba expects the issuance to result in a net cash inflow of ¥573.8 billion. Toshiba said it will use share placement proceeds for an early payment of its $5.2 billion parent guarantee (an amount expected as of end December). The guarantee relates to the US nuclear power construction projects of Westinghouse Electric Company LLC (unrated), a former Toshiba subsidiary that filed for bankruptcy in March 2017.

In addition, Toshiba expects at least ¥240 billion as an additional contribution to equity from tax reductions if a sale of claims, including a reimbursement against Westinghouse, and interest related to Westinghouse is completed by the end of March 2018. This tax-reduction effect and the ¥600 billion share issuance will help offset the negative ¥750 billion shareholders’ equity that Toshiba had previously forecast for the fiscal year ending in March 2018.

The equity financing follows Toshiba’s decision to sell its wholly owned memory-chip subsidiary Toshiba Memory Corporation (TMC) for ¥2 trillion to bolster liquidity and resolve its negative net worth status. However, the sale faces execution risk arising from Toshiba’s continued dispute with Western Digital Corporation (Ba1 stable), TMC’s joint venture partner, and legal procedures in key jurisdictions relating to competition laws.

A significant delay in completing the sale of TMC could reduce Toshiba’s liquidity and increase business risk because the memories business requires sizable ongoing capital expenditures to maintain its product and cost competitiveness in the highly competitive NAND flash memory market. It is also unclear whether Toshiba can generate sustainable earnings and cash flow from its remaining businesses after the sale of TMC, its main earnings driver.

Toshiba’s results for the first half of fiscal 2017 (which ends 31 March 2018) showed a significant improvement in operating profit from a year earlier owing to its memories business. The business reported 36.5% operating profit margin and accounted for 88% of Toshiba’s overall consolidated operating profit.

Upward rating pressure could arise if Toshiba successfully secures funding through its planned new shares issuance, strengthens its capital, and stabilizes its earnings and cash flow. Downward rating pressure could arise if the sale of its memory business is not successful or there is evidence of increased strain on its liquidity position or a non-curable breach in its bank debt covenants. Additionally, the rating could be negatively affected if Toshiba’s revised corporate governance structure fails to function properly, leading to a further deterioration in its financial metrics. Evidence of further material accounting irregularities also would negatively affect the rating.

Taishi Yamazaki Associate Analyst +81.3.5408.4032 [email protected]



ABM Investama’s tap issuance of $50 million is credit negative On 20 November, ABM Investama Tbk (P.T.) (Ba3 stable) announced a tap issuance of $50 million under its 7.125% senior unsecured notes due 2022. The additional debt increases the company’s leverage and is credit negative.

Pro forma for the increase in debt, the ABM restricted group’s leverage, as measured by Moody’s-adjusted debt/EBITDA, increased to around 2.7x for the 12 months that ended 30 September 2017, from around 2.5x. Despite the increase in debt, we expect ABM’s leverage to remain below our upper expectation of 3.5x for a Ba3 rating (see exhibit).

ABM’s pro forma leverage is within our upper expectation for its Ba3 rating

Sources: ABM, Moody’s Financial Metrics and Moody’s Investors Service estimates

ABM is an integrated energy company with operations in coal mining, mining services, engineering and logistics. However, the company is reliant on its coal mining segment for around 45% of its revenue. ABM’s credit quality is constrained by execution risk over the next 12-18 months related to the extension of reserve life at one of its key mines.

ABM’s TIA mine, which accounted for about 70% of its coal production for the nine months that ended September 2017, is nearing the end of its life. TIA’s concession area has a total of 24 million tons of coal reserves left. Based on the current production plan, the reserves will be depleted prior to 2021. The company plans to extend the mine life by acquiring neighboring mines.

We expect the company to utilize proceeds from the tap issuance to supplement funding for acquisitions required to extend the coal reserves. The increase in debt to boost reserves will not be immediately earnings accretive: there will be a period of high leverage until the company acquires new assets to extend mine life and the newly acquired mines start supplementing ABM’s earnings.

Operationally, ABM reported strong results for the nine months that ended September 2017. Revenue increased around 25% for the restricted group, mostly driven by improved thermal coal prices and sales. The Newcastle Thermal Coal price has averaged around $86 per ton year to date, up around 30% from the average for 2016. At the same time, ABM is ramping up its coal production. Coal production increased about 26% in the nine months to September 2017, compared with the same period in 2016.

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2014 2015 2016 LTM Sep 2017 Pro forma for tap issue

Adjusted debt/EBITDA Upper expectation for Ba3 rating

Saranga Ranasinghe Assistant Vice President - Analyst +65.631.126.15 [email protected]



Lodha Developers will benefit from reducing short-term debt and Indian government’s affordable housing push Last Tuesday, Lodha Developers Private Limited (LDPL, B2 stable) announced that it will use a tap issuance by its wholly owned subsidiary Lodha Developers International Limited to reduce short-term debt, a credit positive. Separately, on 16 November, India’s Union Cabinet expanded the eligibility of interest subsidies for middle-income earners, which will improve housing affordability. The company will benefit from the Union Cabinet’s action, which will increase demand for affordable housing in India.

LDPL as of 30 September had around INR30 billion of short-term debt due in the next 12 months in India. The company will use the proceeds from the tap issuance under its 12% $200 million senior unsecured bonds due in 2020 to refinance the high-cost debt, extending LDPL’s debt maturity schedule.

Meanwhile, the government’s move to increase the size limit of homes that are categorized as affordable will allow buyers of such homes to be eligible for a 3%-4% interest subsidy on home loans under the government’s credit-linked subsidy scheme. LDPL has about 42% of its projects by sales value in the affordable category and will benefit from improved demand for affordable housing.

The government’s increased focus on the affordable-housing segment is part of its commitment to “Housing for All” targets in urban areas by 2022. The biggest and most significant policy directive for the real-estate sector was granting infrastructure status to affordable housing, which allowed developers to borrow at lower interest rates. The government also has provided direct and indirect tax incentives to developers of affordable housing projects, improving profit margins for companies such as LDPL.

We estimate that LDPL’s domestic operating sales will grow 15%-18% over the next 12 months, while cash collection will continue rising. LDPL’s Indian operations, which currently account for all revenue and earnings, delivered strong operating results in fiscal 2017 (which ended March 2017) and for the six months that ended September 2017. Operating sales improved 8% in fiscal 2017 from a year earlier, and improved almost 50% in the first half, which ended September 2017, from a year earlier. We expect this growth momentum to continue given our expectation for increased demand in the affordable housing segment (see exhibit).

Lodha Developers Private Limited’s operating sales will grow over the next two fiscal years

Fiscal years end in March. Sources: The company and Moody’s Investors Service forecasts

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Saranga Ranasinghe Assistant Vice President - Analyst +65.631.126.15 [email protected]



Banks

Inclusion of IFRS 9 accounting will toughen EBA’s 2018 banking stress test On 17 November, the European Banking Authority (EBA) set out its draft methodology for a new round of stress tests that the European Union’s 49 biggest banks must undergo next year. Similar to the 2016 stress tests, the 2018 exercise will examine banks’ resilience to both base-case and stressed-case scenarios over a three-year horizon, based on a common methodology and prescribed macro-economic scenario parameters. The EBA test will again abstain from setting a minimum capital threshold below which a bank would fail, as in 2014. However, even without set hurdles, the market will benchmark the adverse scenario results, expressed in stressed capital ratios, against banks’ minimum capital requirements, and thereby single out the weaker performers.

The first-time inclusion of International Financial Reporting Standard 9 (IFRS 9), a new accounting rule that takes effect 1 January 2018, will make next year’s stress test tougher than the last one and will likely translate into greater provisioning needs and therefore lower common equity Tier 1 ratios in the prescribed stress-case scenario. The new rules demand that banks set aside higher loan-loss provisions further in advance of default, which is credit positive for banks. While we expect that the initial effect of IFRS 9 will be limited, and therefore digestible for most EU banks, risk provisioning requirements under simulated stressed market conditions will likely be greater using the IFRS 9 rules. However, the size of provisioning will also strongly depend on the macroeconomic scenario assumptions that have yet to be published.

Our expectation of a limited initial effect of IFRS 9 is based on our projection of a 50-60 basis point decline in the ratio of common equity Tier 1 to risk-weighted assets for many European banks. However, we also expect that the initial effect will vary across regions. When additionally taking into account varying stating-point capital levels, capital ratios of banking systems starting from a weak position, including Italy and Portugal, are more at risk of stressed capital ratios falling closer to (or even below) the applicable minimum requirements (see Exhibit 1).

EXHIBIT 1

Tangible common equity as a percent of risk-weighted assets In most European countries, banks made progress in shoring up capital in 2016, except in Italy and Portugal.

Our TCE ratios are below regulatory ratios in countries rated lower than A3, reflecting our risk-weight adjustments for sovereign bond holdings. Sources: Moody’s rated banks and Moody’s Investors Service

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Katharina Barten Senior Vice President +49.69.7073.0765 [email protected]



In the EBA’s 2018 stress test, the initial effect on capital ratios will likely be amplified when simulating stressed economic conditions. Europe’s weaker banking systems with relatively large but still performing portfolios that have deteriorated over time will experience greater capital effects under the new rules than banks that benefitted from systemwide asset quality improvements amid benign credit conditions in recent years. Such quality improvements have resulted in low nonperforming exposures in a number or European countries, including France, Germany and the UK (see Exhibit 2).

EXHIBIT 2

Problem loans as a percent gross loans Stocks of problem loans vary widely across Europe and will drive simulated losses in the 2018 stress test.

Sources: Moody’s rated banks and Moody’s Investors Service

The objective of the 2018 stress test is to assess the resilience of EU banks and banking systems to shocks. The results will inform the supervisory review and evaluation process, the European Central Bank’s annual in-depth evaluation of each bank’s risk exposure. This evaluation forms the basis of the regulators’ decisions on bank-specific minimum capital requirements for the subsequent year.

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Binding MREL targets for the largest euro-area banks are positive for senior bank creditors Last Wednesday, the European Union’s (EU) Single Resolution Board (SRB) published high- level policy covering Minimum Requirements for Eligible Liabilities (MREL) that will apply to banks in 2018, including detail of its planned requirements for EU banks’ first binding targets for loss-absorbing capacity.

Based on SRB numbers, the largest and most complex 76 euro-area banking groups will need to issue €117 billion of new MREL-eligible liabilities, of which at least €47 billion will need to be new subordinated liabilities (an average MREL target of 26% of risk-weighted assets).

The additional loss-absorbing capacity is credit positive for senior bank creditors because it dilutes the losses that they would otherwise bear. The first decisions on formal targets for the largest banks will be made between now and the end of first-quarter 2018.

The SRB is also mandating that the requirements be put into place within a maximum of four years, although each bank’s timeline will be decided on a case-by-case basis, with some banks instructed to meet the requirements more quickly. The SRB has made clear that the timeline will account for some banks’ constrained ability to quickly achieve the targets, including some banks’ need to issue junior-senior (or senior non-preferred) debt. This new debt class has yet to be rolled out across all member states, although EU co-legislators endorsed its introduction last week and expect it to be available to banks in all jurisdictions before the end of 2018.

The SRB has not significantly changed its default calculation of MREL requirements for the banks for which it is directly responsible. Its starting point, based on a bail-in and recapitalisation approach to resolution, requires a bank to have a loss-absorption amount equal to its minimum regulatory capital requirements, plus a recapitalisation amount equal to its Basel Pillar 1 and Pillar 2 capital requirements, plus a market confidence charge (see exhibit).

Single Resolution Board’s default calculation for 2018 Minimum Requirements for Eligible Liabilities

Source: Single Resolution Board

This year, the SRB made bank-specific adjustments to risk-weighted assets (RWA) to take into account recovery options and any divestments it deemed credible, plus balance sheet shrinkage ahead of a resolution. Overall, this will likely make binding requirements lower than last year’s indicative targets, although the SRB may still make adjustments to meet a benchmark of 8% of total assets (the amount needed to be bailed-in before a bail-out can be provided under the EU’s bank recovery and resolution directive).

Loss Absorption Amount Recapitalisation Amount Market Confidence Charge

Pillar 1 Pillar 2 Requirement Combined Buffer

Simon Ainsworth Senior Vice President +44.20.7772.5347 [email protected]



The use of discretion to limit the type of liabilities banks can count as MREL is also credit positive. The SRB is requiring the most important banks to meet their MREL requirements with instruments that are subordinated to existing senior debt. This will apply not just to global systemically important banks, where they will require recapitalisation of 13.5% RWA + buffers by means of subordination, but also for banks that are domestically important (12.5% of RWA + buffers) and on a case-by-case basis for other banks.

More generally, the SRB will not allow inclusion of junior deposits or third-country liabilities as MREL unless banks can demonstrate they can be used effectively; although liabilities held by retail investors, which might also be a barrier to effective resolution, cannot be excluded from bearing losses under the legal framework. Adjustments to MREL requirements are also likely where large volumes of liabilities are excluded from a resolution. These improvements to MREL quality should support the effectiveness of the resolution regime, particularly where the bail-in tool is needed.

However, delays in setting MREL requirement for individual legal entities, including internal MREL targets to facilitate a single point of entry resolution for banking groups and setting binding targets at group and entity levels for smaller banks is credit negative and will delay the point at which the BRRD can be reliably used for these banks.



Carige’s share issue underwriting agreement is credit positive On 18 November, Banca Carige S.p.A. (B3 developing, ca1) announced an underwriting agreement with four institutions for its €500 million share issue, existing shareholders’ formal commitment to subscribe to 30% of the share issue, and the issuing price of €0.01 per share.

The agreements and pricing are credit positive because they increase the chance that the bank’s capital increase will succeed, reducing the risk of supervisory intervention. Unlike the pre-underwriting agreement, which included a number of bank-specific conditions, the underwriting commitment with Deutsche Bank, Credit Suisse, Barclays and Equita Sim is now more binding, subject only to general conditions such as the market environment and investor feedback. This means that the share issue will go ahead except in case of a significant market event or little or no investor interest in the pre-marketing phase.

Furthermore, the roughly 30% or €150 million formally committed by existing shareholders reduces the amount to be sold into the market. The bank’s CEO Paolo Fiorentino estimates that almost €300 million is effectively, although not formally, committed.

In addition, the issue price of new shares of €0.01 and the resulting valuation of about 25% of tangible book value (below peers, which are trading at around 40%-50% of tangible book value), while extremely dilutive for existing shareholders, appears aimed to attract new investors anticipating value appreciation following the bank’s restructuring. The option period for existing shareholders will terminate on 6 December.

In September 2017, the bank announced an expanded €1 billion recapitalisation plan by year end to make it possible for the bank to reduce its stock of problem loans as per the request of its supervisor, the European Central Bank, in December 2016. We perceived a high risk that Carige’s proposed recapitalisation would fail and an intervention from the supervisory authorities would ensue. The agreements, together with about €300 million capital already raised through the exchange of subordinated bonds for discounted new senior bonds and asset disposals, reduce this risk. If the recapitalisation proves successful, Carige’s credit quality will strengthen. If however the share issue were to fail, we expect Carige would be subject to supervisory intervention, likely culminating in a wind-down similar to the one applied to the Veneto banks. In that case, the government compensated the buyer of the Veneto banks and no losses were imposed on senior debt investors, but shareholders and owners of subordinated debt lost their investments.

1 The bank ratings shown in this report are Carige’s deposit rating and its baseline credit assessment

London +44.20.7772.5454



Eurobank Ergasias’ lowers its target for nonperforming exposures, a credit positive On 16 November, Eurobank Ergasias S.A. (Caa3 stable, caa22) announced its nine-month results for 2017 and increased targets for a bigger reduction in its nonperforming exposures (NPEs), as agreed with the regulatory authorities. The lower level of NPEs, which we believe the bank can achieve, is credit positive because it will reduce the bank’s downside risks on solvency and intensifies its efforts to normalise its balance sheet through further asset quality improvements and rationalisation through loan sales and liquidations. Reducing Eurobank’s NPEs, as with other Greek banks, remains a key priority in its endeavour to restore domestic depositors’ confidence and its creditworthiness in the international capital markets.

According to Eurobank’s revised plan, its NPEs will decline €400 million more by the end of this year and by the end of 2019 compared to its initial plan, reducing the stock of NPEs to €12.1 billion. The bank’s NPE reduction plan was originally submitted to the Bank of Greece and the European Central Bank’s Single Supervisory Mechanism in September 2016 and targeted around a 40% decrease of the €20.6 billion NPEs the bank reported in June 2016. Based on the progress achieved each year and the bank’s estimates, Eurobank must submit revised targets and the measures to achieve these targets.

As of September 2017, Eurobank reported an NPE balance of €19.4 billion, down from €20.6 billion in June 2016 (see exhibit below). According to the revised targets, the bank aims for a further €1 billion decrease of its NPE balance by the end of 2017, mainly from the October sale of €600 million of on-balance-sheet nonperforming unsecured consumer loans, but also from write-offs and loan curing, and (to a lesser extent) collateral liquidations. In addition, the revised action plan targets a €2.8 billion NPE reduction in 2018 through loan restructuring and curing, an increased amount of collateral liquidations and write-offs, as well as additional sales of NPE loan portfolios. Accordingly, Eurobank will reduce its NPE balance to €15.6 billion by year-end 2018 and €12.1 billion by year-end 2019, compared to the initial plan’s projections of €16.1 billion by year-end 2018 and €12.5 billion by year-end 2019.

Eurobank Ergasias’ actual NPEs versus 2016 NPE targets submitted to regulatory authorities

Source: Eurobank Ergasias

We expect Eurobank to marginally outperform its targets for 2017 owing to the sale of a €1.5 billion portfolio of nonperforming unsecured consumer loans in October 2017 to Intrum Justitia AB (Ba2 positive), a leading European debt purchaser. The transaction reduced the bank’s on-balance-sheet reported stock of NPEs by around €620 million without affecting its income statement or regulatory capital. It also provides an opportunity for the bank to earn fees through its NPE servicer subsidiary.

2 The bank ratings shown in this report are Eurobank Ergasias’ deposit rating and baseline credit assessment.

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Nondas Nicolaides Vice President - Senior Credit Officer +357.25.693.006 [email protected]

Stelios Kyprou Associate Analyst +357.25.693.002 [email protected]



Eurobank aims for a similar transaction in 2018 to reduce its NPE balance, while improvement in the country’s economic conditions will enable further loan curing through restructurings. During the first nine months of 2017, Eurobank reported a net decline of NPEs of around €1.1 billion.

Concurrently, we note that Eurobank’s NPEs are at the higher end of rated banks globally, but are the lowest among local peers. As is the case with all Greek banks, Eurobank’s asset quality significantly deteriorated amid the nation’s financial crisis and deep recession; its NPE to gross loans ratio was 44.7% as of September 2017. Asset quality problems are more acute in the group’s domestic operations, where the NPE ratio was 48.2% compared with 21.1% for its international operations as of September 2017. In addition, the legislative measures implemented earlier in 2017, such as electronic auctions on foreclosed properties and out-of-court workouts for small businesses, have yet to be fully implemented and or produce significant results, although momentum is likely to pick up in 2018.



Turkey’s 25-basis-point funding rate increase is credit negative for banks On 21 November, Turkey’s (Ba1 negative) central bank raised banks’ weighted average cost of funding 25 basis points (bp) to 12.25% as the Turkish lira (TRY) weakened to a record low and amid persistent high inflation. The rate hike is credit negative for Turkish banks because it raises their costs and at only 25 bp, is unlikely to significantly reduce currency depreciation or inflation. The combination of the lira’s depreciation and domestic inflation will likely increase banks’ problem loans from the low 3.0% level at September 2017 and lead to higher loan-loss charges that reduce the banks’ profitability.

Because 32% of Turkey’s total bank loans as of September 2017 were foreign-exchange (FX) denominated, primarily in US dollar and euro, if the USD/TRY exchange rate remains at or above Tuesday’s all-time low of 4:1 (it was 3.94 as of late Friday), for the next few quarters, problem loans will increase. A sustained depreciation in the lira will reduce the repayment ability of corporate borrowers that have no FX revenue and are unhedged. Moreover, persistently high inflation of 11.8% in October, the highest since 2008, versus the central bank’s 5% target (plus or minus 2%) will also increase problem loans by eroding corporate profitability and the purchasing power of consumers, who comprise 24% of the systemwide loan portfolio at 30 September 2017 (see exhibit).

Turkey’s small and mid-size enterprises, consumer and corporate loans at September 2017

Sources: Central Bank of Turkey and Moody’s Investor Service

The Turkish lira’s depreciation -- 13% in the past three months and 5% in the past month -- will also reduce capital ratios as FX-denominated risk-weighted assets increase while lira-denominated regulatory capital, the numerator, remains unchanged. A deterioration of bank capital will also reduce banks’ ability to lend, lowering economic growth.

The government currently favours a low interest rate policy, and the central bank has kept the policy interest rate unchanged at 8% since November 2016. The central bank relies on a number of tools besides its policy rate for monetary policy, including the funding rate for banks and an interest rate corridor meant to squeeze lira liquidity. This combination of tools temporarily stabilised the exchange rate after a 370 bp funding rate increase this year and increased foreign borrowing, but proved ineffective to rein in inflation.

Consumer loans and credit cards - TRY24%

SME loans - TRY21%

SME loans - FX4%

Corporate loans - TRY23%

Corporate loans - FX28%

London +44.20.7772.5454



China’s plan to tighten regulations on financial firms’ shareholding is credit positive On 16 November, the China Banking Regulatory Commission published for public comment a draft regulation on commercial banks’ shareholding. The draft regulation raises the bar for investor qualification, demands the long-term commitment of significant shareholders’ (those owning a 5% or greater stake) investment, and requires annual disclosures of significant shareholders and related parties. The proposed regulation is credit positive for China’s financial firms because it will limit the systemic transmission of financial risks, improve the quality of the firms’ capital and strengthen their corporate governance.

The draft regulation will serve as a benchmark for regulating non-bank financial institutions including rural credit cooperatives, trust companies, financial leasing companies, automobile and consumer finance companies, and financial asset management companies, which are a type of specialist firm that works out nonperforming financial assets. More stringent investor qualifications include a ban on leveraged acquisition of shares, in line with the authorities’ policy priority of deleveraging the financial system and the real economy. In addition, the draft regulation will limit system interconnectedness by restricting any investor from becoming a significant shareholder of more than two banks or a majority shareholder of more than one bank.

The draft regulation also raises the entry barrier for significant shareholders by setting up a prior-approval process to screen out investors that have overdue bank debts or outstanding court judgments against defaults. Investment pools such as funds, insurance asset-management plans or trust plans cannot own more than 5% of a bank if they are ultimately controlled by a single entity. The higher barrier will diversify the investor base for banks and reduce system interconnectedness. The tighter ownership rules are particularly relevant for rural commercial lenders, which are transforming themselves to commercial banks from mutual institutions of credit cooperatives (see Exhibit 1).

EXHIBIT 1

Gradual transformation of credit cooperatives to commercial banks in rural China as a percent of all bank owners’ equity

Source: China Banking Regulatory Commission

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Rural commercial banks Rural credit cooperatives

Nicholas Zhu, Ph.D. Vice President - Senior Analyst +86.10.6319.6536 [email protected]



In the banking regulator’s view, there is abundant capital to invest in bank shares, attracted by the sector’s higher profitability. As Exhibit 2 shows, rural commercial banks have had profitability and capital metrics second only to China’s big five banks.

EXHIBIT 2

Chinese banks’ capital and profitability metrics as of September 2017

Circle size denotes relative magnitude of assets. Source: China Banking Regulatory Commission

Securing quality capital will improve banks’ creditworthiness. The draft regulation will improve the quality of capital that banks receive from significant shareholders by annually certifying a shareholder’s ability to inject capital into investee firms in times of need. The draft regulation also requires a five-year lockup period of significant shareholders’ investment to protect banks’ ability to create long-term value.

Additionally, the draft regulation tightens the enforcement of existing rules on connected-party transactions by expanding the scope of the rule. Emphasizing a “see-through” principle to improve disclosure on the ultimate beneficiaries of shareholding, the draft regulation specifies connected parties include investors’ controlling shareholder, actual controlling entity, affiliated entities, entities acting in concert and ultimate beneficiaries.

Big five banks

Joint-stock commercial banks

City commercial banks

Rural commercial banks

All commercial banks

0.80%

0.85%

0.90%

0.95%

1.00%

1.05%

1.10%

1.15%

1.20%

11.5% 12.0% 12.5% 13.0% 13.5% 14.0% 14.5%

Ret

urn

on a

sset

s

Capital adequacy ratio



China’s new guidelines on asset management products are credit positive On 17 November, China’s regulatory authorities, including the People’s Bank of China, the China Banking Regulatory Commission, the China Securities Regulatory Commission, the China Insurance Regulatory Commission and the State Administration of Foreign Exchange, jointly published for comment draft guidelines to regulate financial institutions’ asset management business. The guidelines would establish a comprehensive regulatory framework covering all asset management products originated by banks, trust companies, securities companies, mutual fund management companies, insurance companies and futures companies.

The draft guidelines are credit positive for Chinese financial institutions because the coordinated approach will reduce the scope for regulatory arbitrage. Small and mid-sized banks will benefit most because they originate and manage large amounts of asset management products, and they also have large investments in asset management products originated by other financial institutions. The guidelines will reduce the increasing interconnection among financial institutions. They will also increase the transparency of small and mid-sized banks’ investments in loans and receivables, and reduce their reliance on short-term market funding.

Chinese financial institutions have significantly expanded their asset management products in recent years (see exhibit), which increases system interconnectedness and exposes them to liquidity and credit risks.3

Outstanding asset management products originated by Chinese financial institutions at year-end 2016

Source: The People’s Bank of China

The guidelines classify asset management products, regardless of originating institutions, by their fund-raising method (public or private) and their investment scope (fixed income, equity, commodity and derivative, and mixed), and will subject them to uniform requirements regarding their investment target, leverage and disclosure so as to reduce regulatory arbitrage.

The guidelines will limit credit risk from investments in non-standard credit assets that ultimately provide financing to corporate borrowers. They broaden the definition of non-standard credit assets as any credit asset that is not traded in the interbank market or exchanges with reliable pricing and high liquidity. They also reiterate that investments in non-standard credit assets by asset management products must comply with regulatory requirements on investment cap, risk reserve and liquidity management.

3 See Measures to Curb Shadow Banking Benefit Banks but also Bring Adjustment Risks and Quarterly China Shadow Banking

Monitor.

5.9

23.1

17.5

9.2

16.9 17.6

1.7

0

5

10

15

20

25

Banks - on balancesheet

Banks - off balancesheet

Trust companies Mutual funds Mutual fundmanagementcompanies'segregatedaccounts

Securitiescompanies

Insurancecompanies

RM

B tri

llion

s

David Yin Vice President - Senior Analyst +852.3758.1517 [email protected]



The guidelines will address some liquidity risks arising from duration mismatch between invested assets and tenor of asset management products. They set a minimum 90-day tenor for closed-end asset management products, and prohibit investment in non-standard credit assets that will end after the maturity date for closed-end products, or the next subscription date for open-end products.

The guidelines will require banks to book proper capital and provisions by limiting use of asset management products established by non-bank financial institutions as pass-through channels, which mask banks’ true investment targets.4 The guidelines ban asset management products from investing in other asset management products that are themselves holders of asset management products, except in cases where those products are mutual funds.

The guidelines also target an end of the implicit guarantee provided by financial institutions to investors of asset management products, which will clarify financial institutions’ contingent liabilities. They define implicit guarantee behaviors, and stipulate that asset management products with implicit guarantee features will be regulated as bank deposits.

The announced schedule provides financial institutions with a grace period to adjust to the new guidance, which will limit potential disruption on system liquidity, asset quality and financial stability. Between now and the full enforcement date of 30 June 2019, existing products can be refinanced until the underlying invested assets mature.

4 See Investments in Loans and Receivables Increase System Risks, 22 June 2016.



Malaysia halts new property development amid rising oversupply, a threat to bank asset quality On 20 November, the day after Malaysia’s Second Finance Minister Johari Abdul Ghani said the government has since 1 November frozen approvals of luxury property developments indefinitely and temporarily halted the development of shopping malls, commercial complexes and condominiums priced above MYR1 million to address oversupply in the property market, Works Minister Datuk Fadillah Yusof said the freeze would be applied on a case-by-case basis. The freeze followed Bank Negara Malaysia’s report earlier this month that suggests the oversupply in Malaysia’s property market is worsening. The volume of Malaysia’s unsold and vacant properties has risen substantially over the past three years and is likely to increase, raising the risk of a material decline in property prices that would diminish bank asset quality.

These developments are credit negative for Malaysian banks. According to Bank Negara Malaysia, the banking system’s total loan exposures to property segments with acute oversupply (i.e., commercial property and high-end high-rise residential) account for 8% of total bank lending, and the impaired loan ratios for the segments are low at 1.1%-1.2%.

In the event of a protracted period of supply overhang, we expect a material decline in property prices as market valuation adjusts to reflect the lack of demand. In such a scenario, the quality of housing loans with high loan-to-value (LTV) ratios are most at risk. We understand from our rated banks in Malaysia that 20%-30% of mortgages booked each year have LTV ratios of 90% or higher at the time of origination. Furthermore, we believe that suspending new property development will not correct the oversupply situation over the next five years, when property projects now in development enter the market.

Much of the new supply is in Malaysia’s key states, where supply-demand imbalances in various segments of the property market, including residential housing, commercial office and retail shopping complex, have occurred since 2015. These states include Kuala Lumpur, Penang and Johor, which the central bank has warned will likely have the largest property market imbalances in the country.

Johor has the largest share of unsold residential units in Malaysia (27%), followed by Selangor (21%), Kuala Lumpur (14%) and Penang (8%). According to Bank Negara Malaysia, the large volume of unsold properties reflects that the majority of newly completed properties were priced above MYR250,000 (the barometer for affordable housing in Malaysia) and do not cater to households’ demand for affordable new housing.

In the commercial office segment, vacancy rates have risen steadily since 2015. Bank Negara Malaysia estimates that office vacancy rates could rise to 32% by 2021, from 24% in first-quarter 2017, considering the large development projects such as Tun Razak Exchange and Bukit Bintang City Centre in Kuala Lumpur that are underway.

In the retail shopping complex segment, total retail space per capita has increased sharply in key Malaysian states over the years, and now surpasses regional markets such as Hong Kong and Shanghai. The large incoming supply of retail space will exacerbate the oversupply situation and raise the vacancy rates across Kuala Lumpur, Penang and Johor from current levels of 13%-30%.

Other than the recent government measure targeted to limit new property developments, it remains unclear what additional measures the Malaysian authorities would take to ensure the existing excess supply in various property segments and new supply entering the market can be effectively deployed and utilized. In our view, the increasing oversupply and the prospects of a material property price correction will continue to build as new supply enters the market and poses a risk to Malaysian banks’ asset quality.

Simon Chen, CFA Vice President - Senior Analyst +65.398.8305 [email protected]



Pakistani banks will benefit from textile sector’s increasing exports Last Tuesday, the State Bank of Pakistan released data showing that textile exports increased 16.9% in October versus a year earlier, the highest annual growth since December 2013, when growth in textile exports began a declining trend (see Exhibit 1). A continuation of the current growth trend, which will be aided by the recovery in the textile sector that we anticipate, would be credit positive for Pakistani banks because it would improve banks’ asset quality.

EXHIBIT 1

Pakistan’s annual growth of monthly textile exports

Source: State Bank of Pakistan

The textile sector remains one of the largest borrowers of the Pakistani banking system, accounting for 15% of total loans to the private sector as of September 2017 and 12% of banks’ loan book as of the same period. The sector also poses the greatest source of credit risk to banks because 22% of loans extended to the textile sector were problematic as of June 2017, the highest nonperforming ratio among all sectors (see Exhibit 2), versus an overall average of 9.3%. Against that backdrop, a recovery in the sector would support bank asset quality by allowing banks to reduce their problematic exposures.

EXHIBIT 2

Pakistani banks’ nonperforming loan ratios by industry


-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17

0%

5%

10%

15%

20%

25%

30%

Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Jun-17

Agribusiness Individuals Energy Textile Sugar

Corina Moustra, CFA Associate Analyst +357.25.693003 [email protected]

Constantinos Kypreos Senior Vice President +357.25.693009 [email protected]



Textile exports for January-October 2017 grew 4.4% over the year-earlier level and compared with a contraction in earlier years (see Exhibit 3). The textile sector is a key contributor to Pakistan’s economy and the most important manufacturing sector, providing employment to around 40% of the workforce. The textile sector also accounts for more than 50% of total exports, and the recent weaknesses in this sector arising from constraints in energy supply, weak global demand (particularly from China, one of Pakistan’s key textile markets) and a loss of competiveness relative to other textile exporting countries in the region, have contributed to the recent underperformance of overall exports.

EXHIBIT 3

Recent trends in Pakistan’s textile exports


A recovery in the textile sector, which the authorities are also trying to support through a PKR180 billion export package announced earlier in the year offering incentives to export-oriented sectors of the economy, would lead to a sustained increase in exports. Revival of exports would alleviate renewed pressure on the external front that the authorities are currently facing against the background of a widening current account deficit and declining foreign currency reserves. Easing these pressures would help maintain business confidence and demand for credit from the private sector, which has had double-digit growth rates in recent months at levels not seen since 2008, and would support the banks’ lending growth.

4.2%

1.8%

-2.7%

-6.5%-7.1%

4.4%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

$0

$2

$4

$6

$8

$10

$12

$14

$16

2013 2014 2015 2016 Jan 2016 - Oct 2016 Jan 2017 - Oct 2017

$ Bi

llion

s

Textile exports - left axis Annual growth - right axis



Singapore banks move to facilitate e-payments by adopting common code, a credit positive On 21 November, Singapore’s three largest banks DBS Bank Ltd. (DBS, Aa1/Aa1 stable, a15), Oversea-Chinese Banking Corp Ltd (OCBC, Aa1/Aa1 stable, a1) and United Overseas Bank Limited (UOB, Aa1/Aa1 stable, a1) announced that they are joining the Network for Electronic Transfers (Singapore) Pte Ltd (NETS) Quick Response (QR) code platform.

The banks’ move is credit positive for the three banks because it advances a unified QR payments system in Singapore. Facilitating e-payment channels also allows the banks to address the gap in their service that fin-tech firms might otherwise exploit, as has happened in China, where e-payments have grown strongly but banks are not benefiting. Currently, each bank operates a competing QR payment system with differing QR code platforms; a unified QR code platform will be able to accept payments from customers using the various banks’ payment apps, which will ultimately improve interoperability and facilitate a switch to cashless solutions.

The three banks founded NETS in 1985 as a debit network to drive the adoption of electronic payments in Singapore. However, the debit card network’s usage has been largely concentrated with merchants that typically transact at large ticket amounts, given costly debit card acceptance terminals and sizeable transaction fees, where scale benefits are more prevalent.

A movement to a QR-based system will ultimately allow consumers to scan a QR code and make payments directly to smaller retail enterprises that traditionally transact with small ticket cash amounts without merchants having to put in place costly debit acceptance terminals. NETS and the three banks are also offering rebates and fee waivers to smaller retail enterprises that traditionally transact with small ticket cash amounts to adopt the QR initiative.

DBS, OCBC, and UOB have QR-based payment systems, but they have not gained wide acceptance given the variance in QR code standards. In addition, the participation of foreign bank subsidiaries, which held close to 40% of domestic deposits at 30 September 2017, in the NETS QR initiative increases the likelihood of Singaporean customers’ acceptance and will promote positive network effects. Through this partnership, the number of NETS QR acceptance points will triple to around 100,000 by year-end 2018 from the current 30,000, increasing the number of QR acceptance points for the three banks.

Enrolling smaller retail enterprises would create a sea change in customer payment patterns: according to an August 2016 Monetary Authority of Singapore-commissioned KPMG study of Singapore’s payment ecosystem, around 60% of consumers pay in cash,6 with a large majority of such cash payments taking place with smaller retail enterprises.

5 The bank ratings shown in this report are the banks’ deposit ratings and senior unsecured debt ratings, and their baseline credit

assessments. 6 Excluding transactions that use of Stored Value Facilities that are mostly used for public transportation.

Komaresan Subramanian Associate Analyst +65.6311.2602 [email protected]



Sub-sovereigns

Mexican court ruling on Nuevo Leon property tax subsidies is credit positive for municipalities Last Tuesday, Mexico’s supreme court ruled that a law passed in the State of Nuevo Leon (Ba2 negative) requiring all municipalities to provide property tax subsidies was unconstitutional. The decision is credit positive for Mexico’s municipalities such as Monterrey (Ba2 stable) and San Pedro Garza García (Baa3 stable) because it will help preserve growth in own-source revenue.

Following a statewide update to property value tables in late 2016, Nuevo Leon’s congress approved a decree in February 2017 obliging municipalities to apply up to a 100% subsidy on the increase in homeowners’ taxes, along with additional subsidies on property transfers and special-event taxes. The subsidies would have significantly curbed growth in municipal property tax collections. Both San Pedro and Monterrey rely on property taxes for around half of their total own-source revenue, and tax growth has been robust in 2017, rising 27% in the first half of the year in San Pedro and 34% in Monterrey. The court ruling means that operating performance in these municipalities will continue to strengthen. The decision will also help preserve their budgetary autonomy.

San Pedro, which had challenged the law, is one of Mexico’s wealthiest municipalities, with own-source revenue equaling 54% of total revenue, far above the 33% median for all Mexican municipalities that we rate. The municipality’s property tax collections are rising this year not only because of the update in property values, which rose by around 26%, but also because the state approved an increase in the tax rate levied on properties transfers to 3% from 2% this year. We estimate that this revenue growth will allow San Pedro to meet new spending needs while maintaining high gross operating balances equal to around 25% of operating revenue in 2017 and 2018.

Monterrey, the capital city of Nuevo Leon, has own-source revenue to total revenue equal to 39.6% and we expect that total tax increases will boost operating revenue by 11% in 2017 and that its operating balance will equal a historically high 10.3% of operating revenue. Monterrey has important capital expenditures this year and next, so the solid operating balance will finance most of these expenditures without increasing debt levels (see exhibit).

San Pedro’s and Monterrey’s own-source revenue growth will support high gross operating balances

Source: Municipalities’ financial statements and Moody’s Investors Service estimates

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

2013 2014 2015 2016 2017 Estimate

San Pedro - Gross operating balance/operating revenues Monterrey - Gross operating balance to operating pevenuesSan Pedro - Own source revenue growth Monterrey - Own source revenue growth

Matthew Walter Assistant Vice President - Analyst +52.55.1253.5736 [email protected]

Maria del Carmen Martinez-Richa Vice President - Senior Analyst +52.55.1253.5729 [email protected]



In addition to the concrete benefit to these municipalities’ own-source revenue, the ruling also helps ensure that municipalities in Nuevo Leon will maintain control over their spending and revenue collection. The decision indicates that the constitution does not permit the state to direct municipalities to provide tax exemptions, and may set a positive precedent for all Mexican municipalities.

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


NEWS & ANALYSIS Corporates 2 » GE’s mounting end-market challenges outweigh cash flow

boost from dividend cut » GKN’s latest profit warning for 2017 is credit negative » Bharti Airtel’s Infratel stake sale is credit positive, but profit

challenges remain » Yuexiu REIT’s proposed commercial complex acquisition is

credit negative

Infrastructure 8 » PJM’s proposed power market reform would be credit

positive for generators » Regulator’s approval of Public Service New Mexico’s

renewable investment is positive; general rate case order is still pending

» TransCanada’s Keystone pipeline leak is credit negative

Banks 12 » EU rules improve harmonization of bank creditor rankings,

but are credit negative for German senior bank debt » Commercial International Bank’s dollar-denominated Tier 2

issuance is credit positive » FirstRand Bank’s acquisition of Aldermore will reduce capital

and earnings » Kenyan banks will incur losses from Kenyan Airways’

debt restructuring » SBM Bank (Mauritius) Ltd.’s declining common equity Tier 1

capital ratio is credit negative » Thai regulators approve payment system using quick

response codes, a credit positive for banks

Insurers 23 » Argentina’s regulation limiting insurers’ investment in central

bank securities is credit negative

Clearing Houses 25 » SEC approves Fixed Income Clearing Corporation’s

committed repurchase facility, a credit positive

Sovereigns 27 » Greece’s latest bond exchange offer is another step toward

restoring capital markets access, a credit positive

Sub-sovereigns 29 » For Mexico’s State of Durango, pension reform is

credit positive

Securitization 31 » Entry of new tower suppliers is credit negative for wireless

tower companies and their ABS » J.G. Wentworth’s restructuring will not disrupt servicing of its

structured settlement ABS

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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 Elisa Herr and Jay Sherman Amanda Kissoon

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