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TRANSCRIPT
MOODYS.COM
11 OCTOBER 2012
NEWS & ANALYSIS Corporates 2 » Owens Corning Reduces Earnings Guidance amid
Macroeconomic Pressure » Re-Election of Venezuela's President Chávez Is Credit Negative for
Petróleos de Venezuela » Evraz's Purchase of Coal Miner Raspadskaya Is Credit Positive » SK Telecom's Sale of POSCO Shares Is Credit Positive
Banks 7 » Mizuho's Stock Portfolio Losses Are Credit Negative and Highlight
Risks at Japan's Megabanks » Mitsubishi UFJ Lease's Acquisition of Aircraft Lessor Is
Credit Negative » Singapore's New Measures to Stabilize Home Prices Are Credit
Positive for Banks
Sovereigns 12 » Chavez's Re-Election Victory Means Credit Negative Status Quo
for Venezuela » World Bank's Ruling that Ecuador Pay Occidental Petroleum $1.77
Billion Plus Interest Is Credit Negative
Securitization 15 » Ocwen's Acquisition of Homeward Is Credit Positive for
Transferred Loans
CREDIT IN DEPTH US Corporate Covenant Quality 17
September’s US high yield issuance surge was accompanied by the fourth-weakest level of average covenant quality that we have seen since we started scoring it in January 2011. The average Covenant Quality (CQ) score for high-yield bonds issued in September was 3.88 on our scale, where 1.0 is the strongest and 5.0 is the weakest.
RECENTLY IN CREDIT OUTLOOK
» Articles in last Monday’s Credit Outlook 25 » 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 11 OCTOBER 2012
Corporates
Owens Corning Reduces Earnings Guidance amid Macroeconomic Pressure
Owens Corning (Ba1 stable) on Tuesday said it had lowered its 2012 earnings guidance to $280-$310 million, down from $360-$420 million, a meaningful drop of roughly 25%. The lower earnings guidance is credit negative for Owens Corning, which will see weaker credit metrics result from lower-than-expected demand for its composites and roofing businesses.
We don’t expect the change in earnings guidance to jeopardize Owens Corning’s rating or outlook, owing to its franchise value, good liquidity and our expectations that performance will recover in 2013. Even so, we now estimate that the manufacturing products company’s interest coverage (defined as its ratio of EBITA to interest expenses) will weaken toward 2.75x for the full year from 3.00x for the 12 months ended 30 June. Owens Corning’s debt-to-EBITDA ratio could reach nearly 4.0x at year-end 2012, up from 3.7x at the end of the second quarter, according to our estimates.
The financial health of Ohio-based Owens Corning, which produces glass fiber used to reinforce composite materials for transportation, electronics, and other high-performance markets, will improve once the US and European economies return to more normal levels of activity. The company’s composite business will continue to see some headwinds, mainly from Europe, over the next 12 months, but composites will still contribute to Owens Corning’s earnings.
We also expect Owens Corning’s insulation business to rebound in 2013. New housing construction, the primary driver for the insulation business, now shows signs of a sustained revival in the US. Although the roofing business will experience some pressure through the end of 2012, our forecast estimates that new housing starts will rise steeply to 750,000 in 2012 and up to 875,000 in 2013 from 610,000 in 2011.1 Roofing should continue to generate margin percentages at least in the mid-teens, giving the company a source of continued strength.
We see no imminent danger from a liquidity perspective, either, and expect Owens Corning to have a good liquidity over the next 12 months. We expect the company to have enough funds from operations for its normal operating requirements and capital expenditures, and to support its growth initiatives, during the next 12 months.
Owens Corning usually has negative cash from operations in the first quarter of each fiscal year mainly because of seasonal demands in its building materials business segment. The company’s $800 million revolving credit facility due 2016 has ample availability to support such seasonal demands. Alternate sources of liquidity are significant since the company’s assets, with the exception of accounts receivable, are unencumbered.
For all of these advantages, the reduced earnings guidance suggest that macroeconomic forces are taking their toll on Owens Corning’s leverage and interest coverage.
1 See US Homebuyer Sentiment Boosts Industry as Housing Inventory Drops, 28 September 2012.
Peter Doyle Vice President - Senior Analyst +1.212.553.4475 [email protected]
NEWS & ANALYSIS Credit implications of current events
3 MOODY’S CREDIT OUTLOOK 11 OCTOBER 2012
Re-Election of Venezuelan President Chávez Is Credit Negative for Petróleos de Venezuela
Last Sunday’s election of Hugo Chávez to his fourth term as president of Venezuela (B2 stable) is credit negative for the state oil company, Petróleos de Venezuela, S.A. (PDVSA, B2 stable). Mr. Chávez’s 55% victory over challenger Henrique Capriles will further entrench the his interventionist policies and vision, which have already leveraged PDVSA’s balance sheet and reduced its ability to support vital investment in oil production, refineries and other infrastructure.
While Mr. Capriles promised to maintain many of Mr. Chávez’s popular social programs, his candidacy also held out the possibility of increased transparency and some promise that his leadership could de-politicize PDVSA, allowing the company to attract more foreign investment and pursue investments conducive to its longer-term success. As Mr. Chávez enters his fourth six-year term, we expect to see an equal if not greater government reliance on PDVSA’s oil revenues, with the president using his mandate and a strong oil price outlook to fortify social spending.
With global oil prices above $100 per barrel—high by historical standards—Mr. Chávez has ratcheted up spending on social programs over the past few years, particularly as the election approached. PDVSA’s payments to the government for social programs more than quadrupled to $30 billion in 2011 from $7 billion in 2010, benefiting FONDEN, the national development fund; other social programs; and the Gran Misión Vivienda, a state-sponsored housing program. Including income and production taxes and dividends, PDVSA’s total fiscal contributions in 2011 reached $50.7 billion, equal to more than 40% of its revenue and almost three times its capital spending of $17.9 billion.
We see some chance that with his tenure assured for another six years, Mr. Chávez could actually reduce the fiscal demands on PDVSA after the state elections in December. An expected devaluation of the Venezuelan bolívar could also reduce PDVSA’s local operating costs.
Still, we expect relatively little change in the state oil company’s management and oversight. Even with high crude prices and a production profile that appears to have stabilized at around 2.9 million barrels per day (bpd), PDVSA is generating cash flow deficits after capital spending, leading to higher debt. PDVSA’s debt remains manageable, but it has increased rapidly, reaching $36.5 billion in the first quarter of 2012, well above $24.9 billion at the end of 2010. This increase reflects the company’s higher capital spending and rising social payments, royalties and dividends.
Meanwhile, PDVSA has set out a massive capital spending program to develop the Orinoco heavy reserves and offshore natural gas deposits, and to upgrade its refining system. The company’s Siembra Petrolera (oil sowing) program targets increasing oil production to 4.15 million bpd by 2015. Based on recent experience, these projects are likely to face delays and rising costs.
The Chávez government has sometimes adjusted its fiscal demands in line with changing oil prices, but current prices and government policies indicate that PDVSA’s financial leverage will keep increasing in 2012 and beyond. Beyond its traditional debt service, the pursuit of alternative financing and bilateral lending arrangements will commit larger amounts of PDVSA’s future oil production to its own debt service and that of the Venezuelan government.
Thomas S. Coleman Senior Vice President +1.212.553.0365 [email protected]
NEWS & ANALYSIS Credit implications of current events
4 MOODY’S CREDIT OUTLOOK 11 OCTOBER 2012
Evraz’s Purchase of Coal Miner Raspadskaya Is Credit Positive
On 4 October, Evraz Plc (unrated), parent company of Russian integrated steel producer Evraz Group S.A. (Ba3 stable) said it would buy an indirect controlling interest in Russian coal miner Raspadskaya OAO (B1 stable). Evraz plc plans to take complete control of Corber Enterprises Ltd (unrated), which until now was 50-50 owned by Evraz Group S.A. and Raspadskaya management. Corber, in turn, owns 82%2 of Raspadskaya (see exhibit).
Ownership of Raspadskaya OAO
Source: Evraz’s bond documentation and data
The purchase is credit positive for Evraz Group S.A. and will give it full self-sufficiency in coking coal, which is in line with the company’s growth strategy and will make it Russia’s largest coking coal producer.
Evraz currently produces 69% of the coking coal it uses, but with the addition of Raspadskaya, that will rise to about 130%. Raspadskaya’s cash costs for coking coal concentrate, $62 per tonne in the first half of 2012, are among the lowest in the industry and less than those of Evraz, which were $79 per tonne in the second quarter of 2012. The lower cost will immediately increase
Evraz’s margins, but will have a more pronounced effect when coking coal prices recover. In addition, Evraz expects to extract operational synergies including the optimal use of different coal grades in the combined portfolio.
2 After cancellation of the treasury shares, which is expected to be approved at the extraordinary shareholders’ meeting on 23
October 2012.
Before the Deal After the Deal
Evraz plc
Evraz Group S.A.
Corber Enterprises Ltd
Raspadskaya OAO
Free float
50%50%
100%
18% 82%
Evraz plc
Evraz Group S.A.
Corber Enterprises Ltd
Raspadskaya OAO
Free float
50%
50%
100%
18% 82%
Managementof Rasp.
Denis Perevezentsev Vice President - Senior Analyst +7.495.228.6064 [email protected]
Karim Nagaria Associate Analyst +7.495.228.6069 [email protected]
NEWS & ANALYSIS Credit implications of current events
5 MOODY’S CREDIT OUTLOOK 11 OCTOBER 2012
The cash-and-shares transaction is structured so that there will be little effect on Evraz’s liquidity. To pay for the acquisition, Evraz will issue new shares, as well as warrants to subscribe for new shares. The warrants can be exercised at any time from 12-15 months after the acquisition is complete. Upon exercise of the warrants, Corber’s former owners would own about 11% of Evraz Plc, which we do not expect to lead to issues with corporate governance. The $202 million cash component is just one quarter of the total purchase price of about $800 million, according to our estimates based on current market valuation, and will be paid in four equal installments beginning the first quarter 2013 until the first quarter 2014. Moreover, because Evraz Plc rather than Evraz Group S.A. is buying the remaining 50% interest in Corber, the acquisition will not erode Evraz Group S.A.’s credit metrics unless the terms or structure change. As of 30 June, Evraz Group S.A.’s leverage, as measured by our adjusted gross debt/EBITDA ratio, stood at 3.47x.
Given that there is no change in ownership in Raspadskaya by its direct parent, Corber, the deal is not subject to Russia’s regulation on joint stock companies, which mandates an offer to minorities. Evraz confirmed that it is not planning to buy out Raspadskaya’s minority shareholders (18% of Raspadskaya’s stock will remain listed on the Russian stock exchange), and will thus incur no further cash outlay, which is also credit positive.
Evraz knows Raspadskaya quite well via its board representation owing to its former 41% indirect ownership and its customer-supplier relationships. Raspadskaya is already a key supplier of coal to Evraz (about 28% of Evraz’s consumption in the first half of 2012) and Evraz is Raspadskaya’s largest customer (about 25% of the miner’s first half 2012 sales).
The transaction is credit neutral for Raspadskaya, whose current management will remain in place until at least year-end 2013, with no planned changes in the company’s dividend policy or capex plans. A change of control of Raspadskaya will not trigger any liquidity event under debt documentation.
Evraz’s management expects the deal will close by the end of 2012 subject to receipt of regulatory approvals.
NEWS & ANALYSIS Credit implications of current events
6 MOODY’S CREDIT OUTLOOK 11 OCTOBER 2012
SK Telecom’s Sale of POSCO Shares Is Credit Positive
Last Monday, SK Telecom Co., Ltd. (SKT, A3 negative), Korea’s largest mobile telecommunications provider, said that it had executed a block sale of nearly half its equity stake in POSCO (A3 review for downgrade), Korea’s largest steel company. The sale of 1.2 million POSCO shares for KRW438 billion ($391 million), equal to a 1.4% stake in POSCO, is credit positive for SKT if, as we believe, the company uses the proceeds to reduce outstanding debt.
This year, SKT’s financial metrics deteriorated, mainly as a result of its debt-funded acquisition in February of a 21% stake in SK Hynix Inc. (Ba3 positive), a Korean semiconductor memory chip manufacturer. SKT raised KRW2.5 trillion in debt to fund the KRW3.4 trillion acquisition, which raised the company’s leverage, as measured by adjusted consolidated debt/EBITDA, to 2.1x for the 12 months ended 30 June from 1.5x in 2011.
We expect SKT to use most of POSCO share sale proceeds to reduce debt. To address its heightened leverage, SKT has conducted a strategic review of its non-core assets for possible monetization. SKT’s sale of POSCO shares is the first step of its potentially large-scale asset sale. If the company deploys all proceeds from this sale to reduce debt, we estimate that its leverage will decrease to 1.9x-2.0x by year-end 2012, versus our estimate of more than 2.0x leverage without any sale of POSCO shares.
SKT’s disposal of half of its stake in POSCO shows its increased commitment to deleverage and the likelihood that it will continue to dispose of non-core assets. If the company also sells its remaining shares in POSCO by year-end 2012, SKT’s leverage would drop to 1.8x-1.9x. As of June, the company had equity holdings worth about KRW1 trillion, with most of these POSCO shares. SKT also had KRW80 billion worth of property that it had designated as investment assets for possible disposal.
Despite the current and prospective sales of non-core assets, intense competition in Korea’s cellular market, high marketing expenses, and regulatory uncertainties, continue to hamper SKT’s ability to improve its debt/EBITDA metric. These factors have been eroding the company’s earnings so that a drop in the ratio’s denominator puts upward pressure on leverage. As shown in the exhibit, a rise in marketing expenditure to lure customers to high-speed, long-term-evolution (LTE) 4G services and cellular-tariff cuts imposed by the regulator have weakened SKT’s profitability since the second half of 2011.
SKT’s Quarterly EBITDA and Marketing Expenditure
Note: We base EBITDA on SKT’s consolidated financials and marketing expense on pro forma consolidation of standalone numbers for SKT and for its 51%-owned subsidiary SK Broadband Co., Ltd. (Baa3 positive); numbers are on reported basis. Sources: SK Telecom, SK Broadband
15%
17%
19%
21%
23%
25%
27%
29%
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
1.30
1Q11 2Q11 3Q11 4Q11 1Q12 2Q12
KRW
trill
ions
EBITDA - left axis Marketing Expense to Revenue - right axis
Serena Won Associate Analyst +852.3758.1527 [email protected]
Yoshio Takahashi Assistant Vice President - Analyst +852.3758.1535 [email protected]
NEWS & ANALYSIS Credit implications of current events
7 MOODY’S CREDIT OUTLOOK 11 OCTOBER 2012
Banks
Mizuho’s Stock Portfolio Losses Are Credit Negative and Highlight Risks at Japan’s Megabanks
Last Friday, Mizuho Financial Group, Inc. (MHFG)3 announced that it expected its subsidiary banks to recognize ¥173.7 billion of losses in its fiscal second quarter because of a sharp decline in the value of Japanese corporate equity shares. The large impairment losses are credit negative for MHFG and two other Japanese megabank groups, Mitsubishi UFJ Financial Group, Inc. (MUFG)4 and Sumitomo Mitsui Financial Group, Inc. (SMFG),5 because they all have large, albeit decreasing, equity holdings.
MHFG’s consolidated impairment losses of stocks for the second quarter of the fiscal year ending in March 2013 are more than twice as high as the ¥76.0 billion losses it recorded in the fiscal first quarter. We expect the losses to reduce MHFG’s quarterly profits to a negligible amount because its average quarterly profit before tax during fiscal 2012 was ¥179.1 billion.
Declines in Japanese electric utility and electrical appliance manufacturer stocks fueled the losses, and we expect the other megabanks to experience similar results. MUFG’s fiscal first-quarter stock impairment loss on a consolidated basis was ¥64.6 billion, while SMFG’s was ¥87.4 billion.
To limit the effect of stock price volatility on their capital, Japanese megabanks have reduced their equity holdings, resulting in a sharp decline in the percentage of equity holdings to their Tier 1 capital (see exhibit). The continuing reduction in equity investments makes this risk more manageable than in the past.
Three Japanese Megabank Group’s Japanese Stock Portfolio Amounts and Ratio to Tier 1 Capital
Notes: Amount is acquisition cost of equity holdings classified as other securities with fair value on consolidated basis. Ratio is percentage of equity holdings to consolidated Tier 1 capital. Source: Company reports, Moody’s
3 MHFG’s domestic subsidiary banks are Mizuho Bank, Ltd. (MHBK, A1 stable; C-/baa1 stable), Mizuho Corporate Bank,
Ltd. (MHCB, A1 stable; C-/baa1 stable) and Mizuho Trust & Banking Co., Ltd. (MHTB, A1 stable; C-/baa1 stable). The bank ratings shown in this report are the bank’s deposit rating, its standalone bank financial strength rating/baseline credit assessment and the corresponding rating outlooks.
4 MUFG’s subsidiary banks are Bank of Tokyo-Mitsubishi UFJ, Ltd. (Aa3 stable; C/a3 stable) and Mitsubishi UFJ Trust and Banking Corporation (Aa3 stable; C/a3 stable).
5 SMFG’s subsidiary bank is Sumitomo Mitsui Banking Corporation (Aa3 stable; C/a3 stable).
25%
35%
45%
55%
65%
75%
¥0.0
¥0.5
¥1.0
¥1.5
¥2.0
¥2.5
¥3.0
¥3.5
¥4.0
¥4.5
¥5.0
2008 2009 2010 2011 2012Ra
tio to
Tie
r 1
Capi
tal
Amou
nt in
¥tr
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n
MUFG Amount SMFG Amount MHFG AmountMUFG Ratio SMFG Ratio MHFG Ratio
Tetsuya Yamamoto Vice President - Senior Analyst +81.3.5408.4053 [email protected]
NEWS & ANALYSIS Credit implications of current events
8 MOODY’S CREDIT OUTLOOK 11 OCTOBER 2012
Mizuho’s improvement is due largely to several rounds of significant capital raising (¥1.3 trillion) between 2009 and 2010. Its equity investments remain 37% of its Tier 1 capital. Because the Nikkei Stock Average at 9,000 or below could hit the three megabank groups’ profit and loss and capital, and it closed at 8,870 at the end of September, we expect MUFG and SMFG to also record higher losses on their equity portfolios. However, in our baseline scenario, we incorporate losses from the banks’ equity holdings based on an assumption that the Nikkei index falls to 7,000 (it closed at 8,769 on 9 October). Given the Nikkei’s 8,870 close at the end of the quarter, the latest series of impairment losses will not affect the three group’s ratings.
The megabanks’ significant capital raising and earnings recovery since fiscal 2010 from losses in fiscal 2009 has improved their resiliency against stress scenarios. Nevertheless, the fundamental problems facing Japanese megabanks still exist. Operating profitability relative to their balance sheets remains low, suggesting they have weak earnings cushions to absorb unanticipated stress in equities, interest rates and credit, despite stronger capital cushions.
NEWS & ANALYSIS Credit implications of current events
9 MOODY’S CREDIT OUTLOOK 11 OCTOBER 2012
Mitsubishi UFJ Lease’s Acquisition of Aircraft Lessor Is Credit Negative
Last Thursday, Mitsubishi UFJ Lease & Finance Co., Ltd. (MUFJL, A3 stable) said that it would acquire all of the outstanding equity interests of JSA International Holdings, L.P. (unrated) for about ¥100 billion. The transaction is credit negative for MUFJL because the company will use cash on hand and bank borrowings to finance it, thereby increasing leverage, decreasing liquidity, and possibly increasing earnings volatility. These risks outweigh the diversification benefits of the acquisition.
JSA International is a leading aircraft leasing company with a fleet of around 70 aircraft, held through affiliates such as Jackson Square Aviation, LLC, a full-service aircraft leasing company that specializes in sale-leaseback transactions. Buying JSA International fits with MUFJL’s plan to accelerate its global expansion. Aircraft leasing is one area the company has targeted in anticipation of increasing demand for airplanes from emerging markets and a growing percentage of aircraft leasing as a means of aircraft financing.
However, at about one fourth the size of MUFJL’s total equity of ¥420 billion as of 31 March, the acquisition price is relatively large and will negatively affect MUFJL’s capital structure by increasing leverage and reducing liquidity. As of 31 March, the company had ¥51.8 billion of cash and cash equivalents, which was about a half of the acquisition price. If the company funds 100% of the acquisition from additional external borrowings, its debt/equity ratio will increase to about 7.1x from 6.9x as of 31 March.
Although expanding overseas provides MUFJL an opportunity to generate higher profit margins and diversify geographically (because more than 90% of its revenues are generated in the domestic market, which has limited growth opportunities), earnings volatility is likely to increase. The aircraft leasing business has a relatively high risk profile owing to the cyclicality of aircraft demand and volatile secondary market prices for used aircraft.
Although the acquisition will hurt MUFJL’s credit metrics, we expect the company to benefit from Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU, Aa3 stable; C/a3 stable)6 funding owing to its strategic importance to BTMU and Mitsubishi UFJ Financial Group, Inc. (MUFG, unrated). MUFG-related entities (including BTMU) have a combined ownership stake of more than 20% of MUFJL, and there is meaningful operational integration with BTMU with overlapping customer bases, personnel exchanges, and cooperation in a number of business areas.
6 The ratings shown are Bank of Tokyo-Mitsubishi UFJ, Ltd.’s deposit rating, its standalone bank financial strength
rating/baseline credit assessment and the corresponding rating outlooks.
Maki Hanatate Vice President - Senior Credit Officer +81.3.5408.4029 [email protected]
NEWS & ANALYSIS Credit implications of current events
10 MOODY’S CREDIT OUTLOOK 11 OCTOBER 2012
Singapore’s New Measures to Stabilize Home Prices Are Credit Positive for Banks
Last Friday, the Monetary Authority of Singapore (MAS), the central bank of Singapore, announced new restrictions on residential property loan tenures to reduce the credit risks associated with a property price bubble. We expect the measures to reduce the threat of loan losses to Singaporean banks by requiring more prudent loan terms domestically.7 A secondary benefit of the measures is that they may also help contain housing price appreciation.
The changes will prompt banks to be more selective real estate lenders and will also dampen bank loans for highly leveraged purchases. Among our rated Singaporean banks, United Overseas Bank Limited (UOB, Aa1 stable; B/aa3 stable)8 and Oversea-Chinese Banking Corp. Ltd. (OCBC, Aa1 stable; B/aa3 stable) are potentially the most affected by the new measures since housing loans comprised 29% of UOB’s total loan portfolio and 25% of OCBC’s as of the second quarter, compared with 21% for DBS Bank Ltd. (DBS, Aa1 negative; B/aa3 negative). In addition, UOB and OCBC have had higher growth rates in their housing loans than DBS. Comparing first- and second-quarter 2012 year-over-year housing loan growth, UOB recorded 19% and 17% housing loan growth respectively, while OCBC recorded 21% for both quarters. These were higher than DBS’s 7% first-quarter and 9% second-quarter growth rates.9
The measures, effective 6 October, apply to public and private residential properties. Although this is the sixth batch of housing-loan-related measures since 2009, these are the first to contain explicit restrictions on the tenure of housing loans. The key measures include the following:
» An absolute limit of 35 years for all new housing loans.
» In addition, for new housing loans to individuals: if the loan tenure exceeds 30 years, or the sum of the loan tenure and the age of the borrower exceeds 65 years, the loan-to-value (LTV) limit will be reduced to 40% from 60% if the borrower has one or more outstanding housing loans, or reduced to 60% from 80% if the borrower has no outstanding housing loans.
» The LTV limit is reduced to 40% from 50% for new housing loans to entities such as corporations.
Accoding to MAS, the average tenure for new housing loans has increased to 29 years from 25 years since 2009. In addition, more than 45% of financial institutions’ new housing loans have tenures longer than 30 years. Consequently, we expect the new guidance to diminish speculative activities and prevent individuals from overleveraging. The lower LTV limits will also provide more buffer for banks in case of declining property prices.
As seen in the exhibit, housing prices were still rising and scaling record highs in the third-quarter despite a slowing pace of appreciation for private housing since the first measures were announced in September 2009. We believe the MAS’ latest efforts are justified for two reasons. First, there are signs of re-accelerating prices as reflected in the private and public housing third-quarter respective quarter-on-quarter price gains of 0.5% and 2.0% from second-quarter 2012 gains of 0.4% for private housing and 1.3% for public housing. Second, there is a risk of accelerating price appreciation following the US Federal Reserve’s implementation of a third round of monetary easing.
7 New measures apply to residential properties in Singapore. 8 The ratings shown are the bank’s deposit rating, its standalone bank financial strength rating/baseline credit assessment and
the corresponding rating outlooks. 9 Owing to the lack of disclosures of LTV ratios from individual banks, we adopt measures such as recent housing loans growth
and housing loans as a percentage to total loans portfolio as a proxy to arrive at our conclusion.
Shaoyong Beh Associate Analyst +65.6398.8309 [email protected]
NEWS & ANALYSIS Credit implications of current events
11 MOODY’S CREDIT OUTLOOK 11 OCTOBER 2012
Singapore House Price Indices, Fourth Quarter 1998 = 100
Source: Urban Redevelopment Authority, Housing & Development Board. Third-quarter 2012 data are flash estimates.
Although these measures will likely pressure loan growth and thus bank profitability, these costs are more than offset by preventing a further buildup in housing market excess that could potentially expose the banks to losses.
100110120130140150160170180190200210220
Private Property Price Index Public Housing Resale Price Index
NEWS & ANALYSIS Credit implications of current events
12 MOODY’S CREDIT OUTLOOK 11 OCTOBER 2012
Sovereigns
Chávez’s Re-Election Victory Means Credit Negative Status Quo for Venezuela
On 7 October, Hugo Chávez was elected to serve his fourth consecutive term as president of Venezuela (B2 stable). Despite a strong showing by the unified opposition candidate, Henrique Capriles, Mr. Chávez won by a commanding margin with nearly 55% of the vote. Mr. Chávez is likely to view his margin of victory as a strong mandate to push ahead with his so-called Bolivarian revolution and maintain macroeconomic policies that over the past 14 years of his presidency have led to stagnating private sector investment and macroeconomic imbalances, which we believe are increasingly unsustainable and credit negative.
In addition to increased government spending financed by oil revenue and debt, Mr. Chávez’s unorthodox policies include pervasive price and foreign exchange controls and significant state intervention in the economy. These measures have produced major economic distortions, including an overvalued currency, supply constraints, and average inflation of 27% over the past five years, the highest in our rated universe,10 which continue to drive high levels of capital flight.
Signs of economic improvement this year, including a GDP growth rate of 5% and a decline in inflation (albeit to a still high rate of 18% year-on-year as of August), supported Mr. Chávez’s victory. However, a sharp depreciation in the black market exchange rate reflects concerns about the sustainability of these improvements. GDP growth was driven largely by a 20% increase in real government expenditures, while the drop in inflation was attributable to price controls and increased government subsidies.
We expect inflation will rebound next year if, after regional elections on 16 December, Mr. Chávez devalues the currency, which at $1=VEF4.3 is highly overvalued. Although this will relieve some of the pressure on the fiscal accounts and the balance of payments, any relief will be short-lived.
Mr. Chávez is likely to interpret the election results as a clear sign of continued widespread public support for his revolution, notwithstanding Mr. Capriles’ relatively strong performance.
While the elections appear to have been free, and the results have not been contested by Mr. Capriles, it was never really a fair fight. Mr. Chávez’s ability to marshal enormous state resources for his candidacy, and his high degree of control of the media, gave Mr. Capriles an uphill battle, notwithstanding widespread popular discontent with certain aspects of the government’s performance. In this context, Mr. Capriles’ performance should be encouraging to the opposition. In December, regional elections will reveal how much of the support for Mr. Chávez was for the candidate himself rather than for his movement.
Although Mr. Capriles had pledged to maintain the overall thrust of Mr. Chávez’s social programs, he was committed to a program of gradual economic reform that could have addressed many of Venezuela’s imbalances in the longer term. Given the hopes his candidacy raised, the loss by a still relatively large margin will disappoint his supporters, and will put pressure on the opposition’s still fragile coalition. If this causes the coalition to break apart, it will reduce the chances for regime change and the adoption of a more sustainable policy mix that would come with it, even if Mr. Chávez’s cancer returns within the next four years and an early presidential election is required.
10 Belarus was second highest with average annual inflation of 26.1% during that time period.
Aaron Freedman Vice President - Senior Analyst +1.212.553.4426 [email protected]
NEWS & ANALYSIS Credit implications of current events
13 MOODY’S CREDIT OUTLOOK 11 OCTOBER 2012
World Bank’s Ruling that Ecuador Pay Occidental Petroleum $1.77 Billion Plus Interest Is Credit Negative
Last Friday, more than six years after Occidental Petroleum Corporation’s (A1 stable) original request for arbitration with Ecuador (Caa1 stable) after the country took over Occidental’s production assets in 2006, the World Bank’s International Center for Settlement of Investment Disputes (ICSID) ordered Ecuador to pay Occidental $1.77 billion plus accrued interest through the date of the ruling of $530 million. However, because the government plans to appeal, the penalty due is likely to be less than $1.77 billion. In either case, the ICSID’s ruling against Ecuador is credit negative for the sovereign because it will pressure government finances.
President Rafael Correa’s government has 120 days from the date of the ruling to appeal. The process of reviewing and deciding upon Ecuador’s appeal will likely take up to two years and push the financial burden to 2013 or 2014.
The $1.77 billion penalty amounts to 2.7% of Ecuador’s 2011 GDP and 10% of 2011 government expenditures. The government has run deficits averaging 1.3% of GDP for the past 11 years and has not accrued fiscal savings; its oil stabilization funds were eliminated in 2008.
Therefore, to pay the penalty, the government would have to either reallocate budgeted spending for 2013 or 2014, receive additional external loans, or tap its international reserves, the Reservas Internacionales de Libre Disponibilidad (RILD). Below we examine each option more closely.
» Reallocate 2013 or 2014 budgeted spending. The government’s 2013 and 2014 budget plans call for $21 billion in expenditures each year. To utilize existing resources to pay the $1.77 billion penalty would require cutting 8% of budgeted expenditures, which would most likely come from capital expenditures ($7.8 billion), because cutting capital expenditures is less politically sensitive than cutting current spending. Still, cutting budgeted capital spending to help pay the penalty will be difficult given that much of the capital expenditure in the country is tied to loans from China and multilaterals.
» Additional external loans. As we noted in our 24 September Credit Analysis for Ecuador, the government’s access to external financing is relatively limited and, since the country’s 2008 default, consists primarily of the two multilaterals, the Inter-American Development Bank (IADB) and the Andean Development Corporation (CAF), and China. Loans from multilaterals have remained steady over the past several years and we do not expect them to increase. And securing an additional loan from China expressly for the purpose of paying the amount owed to Occidental is highly unlikely because most of China’s loans to Ecuador thus far have been tied to specific investments projects (e.g., hydroelectric plants and oil refinery repairs). It is, however, possible that the government could seek out additional external funding sources.
» Tap international reserves. As of 5 October, the RILD held just $4.6 billion. It is unlikely that the government would use a significant percentage of its reserves to make the payment owed to Occidental.
Given the appeal, we think that Ecuador is unlikely to have to make an immediate decision regarding which of the above three options it would use when it comes time to make a payment to Occidental. Nevertheless, the most likely option in our view is a combination of the first and second options: reallocating budgeted spending or securing additional external loans.
Sarah Glendon Assistant Vice President - Analyst +1.212.553.4534 [email protected]
NEWS & ANALYSIS Credit implications of current events
14 MOODY’S CREDIT OUTLOOK 11 OCTOBER 2012
In the past, Ecuador has been party to 13 other international arbitration cases (eight of them under ICSID rules) that have been resolved: five were decided in favor of Ecuador, four were amicably resolved, and four were decided against Ecuador. (In addition, it currently has outstanding arbitration cases with Perenco and Chevron.11) The Occidental penalty for $1.77 billion is larger than each of the four past judgments against Ecuador. In the four other cases that were decided against Ecuador, the amount owed was eventually reduced, indicating that this is also likely to be the case with the amount due to Occidental.
11 See “Credit Opinion: Ecuador, Government of” 26 September 2012
NEWS & ANALYSIS Credit implications of current events
15 MOODY’S CREDIT OUTLOOK 11 OCTOBER 2012
Securitization
Ocwen’s Acquisition of Homeward Is Credit Positive for Transferred Loans
On 3 October, Ocwen Financial Corporation (B1 stable) announced it would acquire Homeward Residential Holdings (B1 stable) and its origination and servicing operating subsidiaries from WL Ross & Co. The acquisition will ultimately be credit positive for the loans serviced by Homeward owing to Ocwen’s better servicing performance. However, loan performance initially will likely deteriorate as Ocwen experiences challenges integrating Homeward’s large servicing portfolio and platform into its own and attempts to resolve Homeward’s lingering bank reconciliation issues.
Ocwen’s better servicing will improve the performance of Homeward’s loans. The effect of the servicing transfer, despite initial challenges, will be credit positive. The servicing performance for Homeward loans will improve upon successful completion of the integration because Ocwen has better collection roll rates, and loss mitigation cure and cash flowing rates than does Homeward, while it maintains comparable foreclosure and real estate owned (REO) timelines. The exhibit compares each of these three metrics for Homeward and Ocwen.
Homeward and Ocwen Servicing Performance Comparison
Homeward Ocwen
Subprime Alt-A Subprime Alt-A
Collections
Current Loans Rolling Worse 19.2% 11.0% 15.7% 10.1% 30-59 Days Past Due Loans Rolling Better 32.7% 34.9% 42.6% 41.7% 30-59 Days Past Due Loans Rolling Worse 55.0% 48.4% 41.6% 43.8% 60-89 Days Past Due Loans Rolling Better 29.2% 31.5% 38.8% 39.7% 60-89 Days Past Due Loans Rolling Worse 67.3% 63.0% 58.6% 53.9% Loss Mitigation Total Cure and Cash Flowing Rate 31.4% 18.9% 34.2% 27.9% Foreclosure & REO Timelines Foreclosure Referral to Foreclosure Sale (less Freddie Mac Timeline)
188 days 172 days 178 days 163 days
Foreclosure Sale to REO Sale 232 days 284 days 310 days 276 days
Source: June 2011 to June 2012 Trustee Reported Data
Challenges remain for the integration of the portfolios. The large size of Homeward’s servicing portfolio relative to Ocwen’s will pose challenges to the integration of the platforms, and adds to concerns regarding the company’s rapid growth. Ocwen’s portfolio has already grown to more than $130 billion from $55 billion in mid-2010 through a series of acquisitions. The purchase of Homeward, itself the result of several platform integrations, will add to Ocwen’s servicing portfolio 422,000 mortgage loans with an unpaid principal balance of $77 billion. To support its previous growth, Ocwen tripled the number of its employees to over 5,000 in the past two years. Now it will need to hire and train additional servicing employees to support this acquisition.
Gene Berman Assistant Vice President - Analyst +1.212.553.4139 [email protected]
Francis Wissman Assistant Vice President - Analyst +1.212.553.2808 [email protected]
Cecilia Lam Analyst +1.415.274.1727 [email protected]
NEWS & ANALYSIS Credit implications of current events
16 MOODY’S CREDIT OUTLOOK 11 OCTOBER 2012
As the company continues to scale up its operations, maintaining its servicing quality will be a challenge from a staffing perspective. There is risk of staff attrition at Homeward, specifically at its 1,200-employee servicing site in Dallas. As a result, Ocwen will likely lessen its reliance on Homeward’s US-based operations and transition the servicing of the acquired loans to its largely offshore-based servicing model and operations, which will expand with the addition of Homeward’s servicing site and 1,100 employees in Pune, India.
Integration challenges also include resolving the aged reconciliation issues that have plagued Homeward in the past and persist today. Resolving these issues while it simultaneously incurs expenses related to them will be paramount for Ocwen. Homeward has a material high volume of unresolved reconciliations caused by reporting inconsistencies between two internal systems. The company had taken steps to resolve the issue including increasing staff and hiring outside consultants to identify differences and correct reporting errors. However, Homeward fell short in not implementing a new investor reporting system to resolve the root causes of the aged items.
CREDIT IN DEPTH Detailed analysis of an important topic
17 MOODY’S CREDIT OUTLOOK 11 OCTOBER 2012
Covenant Quality Near Record Low as US Bond Issuance Booms in September
AVERAGE COVENANT QUALITY SCORE IS FOURTH WORST SINCE JANUARY 2011 » High–yield issuance soars. High-yield bonds issued in the US during the month of September
reached a record $46.6 billion,12 driven by historically low yields, a temporary respite from macroeconomic concerns and demand from investors seeking to apply cash hoards to achieve higher returns.
» Covenant quality near the weakest since January 2011. The issuance surge was accompanied by the fourth weakest level of average covenant quality that we have seen in any month since we started scoring it in January 2011. The average Covenant Quality (CQ) score for high-yield bonds issued in September was 3.88 on our scale, where 1.0 is the strongest and 5.0 is the weakest. In another sign of weak covenant quality, secured bonds made up 11.8% of total issuance, below the historical average of 21.6%. CQ scores of bonds from private-equity backed companies were also worse in September.
» More single-B rated bonds had low covenant quality. In the “sweet spot,” or single-B, portion of the high-yield market, 28.6% of bonds ranked in our weakest category of covenant quality (CQ4.2-5.0) in September, compared with the historical average of 9.4% (excluding high-yield lite bonds13). Among them were single-B-rated bonds from Tesoro Logistics, L.P., Cablevision Systems Corporation and Nielsen Finance LLC.
» Historic relationship between ratings and covenant quality holds. September issuance continued to exhibit the inverse correlation between covenant structures and speculative-grade rating levels: higher-rated bonds had weaker covenant packages than lower-rated bonds because investors expected weaker credits to offer more protection. Nevertheless, in each of the three rating categories (Ba, B and Caa/Ca), September’s average CQ scores were worse than the historical average.
12 Junk Debt Issuance Hits Post-Crash High, Dow Jones, 1 Oct. 2012, citing Dealogic’s data. 13 We define a high-yield lite package as lacking either or both a restricted payments or debt incurrence covenant.
Alexander Dill Vice President - Head of Covenant Research +1.212.553.1338 [email protected]
About Our Covenant Quality Database and Covenant Scoring Our High-Yield Covenant Database contains covenant data for more than 1,000 bonds issued globally since January 2010. It includes the key contents of our Covenant Quality Snapshots, which provide pre-sale and post-sale analyses of the strengths and weaknesses of covenant packages, and it adds information such as book runners, private-equity sponsors, credit ratings, loss given default and the use of proceeds – about 150 data points in all.
The database, which we will launch online soon, will provide investors with an easy-to-navigate desktop application that offers a first-of-its-kind ability to search and compare covenants across issuers and industries.
The database includes our Covenant Quality (CQ) Scores, which assess the degree of protection that a bond covenant package offers to investors. We provide an overall CQ score for a covenant package, as well as individual numerical scores that indicate the level of protection in six key risk areas: cash leakage, investments in risky assets, leveraging, liens subordination, structural subordination and event risk (change of control). CQ scores are a weighted average of the scores in these six key risk areas, and they are assigned according to a five-point scale, with CQ1 as the most protective covenant packages and CQ5 as the weakest. The scoring range for the six key risk areas is 1.0 (strong) to 5.0 (weakest).
For more details, please see our Covenant Quality Scoring Criteria and Frequently Asked Questions.
CREDIT IN DEPTH Detailed analysis of an important topic
18 MOODY’S CREDIT OUTLOOK 11 OCTOBER 2012
SEPTEMBER 2012 HIGH-YIELD ISSUANCE APPROACHES HISTORICAL LOW IN COVENANT QUALITY
Exhibit 1 shows the decline in covenant quality of US bonds that began in July. Weak covenant protection is often (but not always) associated with periods of high issuance volume, and September followed this pattern. The decline in covenant quality is evident whether or not high-yield lite bonds are included. On either basis, September was the second worst month in 2012 for covenant quality. Only January was worse.
EXHIBIT 1
Monthly Covenant Quality CQ Scores in 2012
Source: Moody’s
In 2011, average CQ scores for US bonds were somewhat erratic, resulting from choppy issuance volume as macroeconomic concerns heightened in summer 2011. The weakest average covenant quality score in 2011 was CQ 4.09 in September, followed by CQ 4.01 in November (includes high-yield lite). However, these scores are based on only a small number of bonds. We have found that in periods of abnormally light issuance, issuance is often dominated by more creditworthy issuers with weak covenants.
CQ SCORES BY RATING CATEGORY
Exhibit 2 shows the average CQ scores by rating category in September, compared with the historical average back to January 2011. The average CQ score in each of the three rating categories is worse than the historical average. Nevertheless, despite the worsening quality across the rating spectrum, the expected inverse correlation holds: higher-rated bonds have weaker packages than lower-rated bonds. Investors expect that issuers with worse credit quality will offer a higher level of protection.
3.92
3.76
3.84
3.56 3.51
3.26
3.61 3.71
3.883.72
3.14
3.46
3.32 3.373.05
3.34
3.41
3.65
2.70
3.20
3.70
4.20
4.70
Jan-
12
Feb-
12
Mar
-12
Apr-
12
May
-12
Jun-
12
Jul-1
2
Aug-
12
Sep-
12
Overall Score (incl HY-Lite) Overall Score (excl HY-Lite)
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19 MOODY’S CREDIT OUTLOOK 11 OCTOBER 2012
EXHIBIT 2
CQ Scores By Rating Category: September 2012 versus Historical Average (January 2011–September 2012)
Source: Moody’s
PROFILE OF SEPTEMBER BONDS
Exhibit 3 shows the average CQ score for September’s bonds against the historical average across several categories. As with Exhibit 2, September’s bonds show weaker covenant quality in all high-yield rating categories. September CQ scores for sponsored issuers’ bonds were worse than the historical average. The only exception is secured bonds, which as a group provided higher protection than the historical average.
Source: Moody’s
Several features stand out for bonds with full covenant packages that ranked in our lowest CQ scoring category. In one respect, Rockwood Specialities Group, Inc. is not an outlier. Its CQ score was the lowest of the September crop of bonds with full packages, (Weakest: 4.79), but many similarly rated bonds (Ba2) offer only high-yield lite packages, all of which we assigned a 5.0. Historically, high-yield lite bonds rated Ba2 have comprised 39.4% of the market.14 Much more notable is the level of weakness in packages of bonds rated B1 and below, where higher protection is expected. They are
14 See Latest Covenant-Lite Bond Data Show Trend to More Covenant-Heavy Packages in 2011, 14 June 2011.
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Ba B Caa All Spec-Grade
Historical Overall Scores Overall Sept 2012 incl HY-Lite
EXHIBIT 3
Historical versus September 2012 CQ Scores by Rating Category, Sponsored, Package Type and Secured
Comparison Item Historical CQ Avg.
(Jan. '11 thru Aug. '12) Sep 2012 CQ Avg.
Ba Rating 4.25 4.50
B Rating 3.49 3.71
Caa/Ca Rating 3.09 3.45
Sponsored 3.43 3.69
Excluding High-Yield Lite (i.e., full HY covenant package) 3.33 3.64
Secured 3.00 2.74
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20 MOODY’S CREDIT OUTLOOK 11 OCTOBER 2012
listed in Exhibit 4. Overall, the high-yield lite percentage was somewhat but not significantly higher in September versus the historical average.
In the “sweet spot” of the high-yield market – bonds rated B1 through B3 – those with “weakest” covenant quality by CQ score comprised 28.6% in September compared with the historical average of 9.4%. However, single-B rated bonds in either the “weakest” or “weak” categories – the bottom two tiers of covenant quality – comprised 61.9% in September compared with 63.1% historically. Bonds in the B rating category that ranked either “strong” or “good” comprised only 14.3% of September issuance compared with 19.2% historically. One of the Caa-rated bonds in September, or 7.7% of Caa-rated bonds, was in the weakest category versus 3.0% historically, and 61.5% were in the weak or weakest category versus 39.0% historically. Caa-rated bonds in the good or strong categories of covenant quality comprised 15.4% versus 28.0% historically.
EXHIBIT 4
September Bonds Rated B1 and Below in Weakest CQ Category
Issuer Security Sector
Rating at
issuance CQ
Score
Cablevision Systems Corporation $750m 5.875% Senior Notes due 2022 Media, Cable Television
B1 4.60
Nielsen Finance LLC $800m 4.50% Senior Notes due 2020 Misc. Industries B2 4.56
Tesoro Logistics, L.P. $350m 5.875% Senior Notes due 2020 Energy, Oil & Gas - Midstream [MLP]
B1 4.37
Regency Energy Partners LP $700m 5.5% Senior Notes due 2023 Energy, Oil & Gas - Midstream [MLP]
B1 4.35
tw telecom inc. $480m 5.375% Senior Notes due 2022 Telecommunications B1 4.27
Alpha Natural Resources, Inc $500m 9.75% Senior Notes due 2018 Mining B2 4.24
Sky Growth Acquisition Corporation (Par Pharmaceuticals)
$490m 7.375% Senior Notes due 2020 Pharmaceutical Caa1 4.22
Source: Moody’s
With respect to the upper levels of covenant quality, no bonds scored “strong.” This, however, is in line with the US historical average of 1.4% of total scored bonds. Bonds scoring in the “good” category of covenant quality in September were: K. Hovnanian Enterprise Inc.’s first (CQ: 1.89) and second lien (CQ: 2.06) notes, ADS Waste Holdings, Inc.’s senior unsecured notes (CQ: 2.32), Reynolds Group Issuer Inc.’s secured bonds (CQ: 2.51) and International Wire Group, Inc.’s secured notes (CQ: 2.54).
Exhibit 5 shows all US high-yield issuers whose bonds were covered in our Covenant Quality Snapshots in September, ranked by low to high covenant quality as reflected in the CQ score. Those issuers at the top with no bars (a CQ score of 5.0) are high-yield lite packages.
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21 MOODY’S CREDIT OUTLOOK 11 OCTOBER 2012
EXHIBIT 5
September Bonds Ordered by CQ Score
Source: Moody’s
1.001.502.002.503.003.504.004.505.00
K. Hovnanian Enterprises, Inc.K. Hovnanian Enterprises, Inc.
ADS Waste Holdings, Inc.Reynolds Group Issuer Inc.
International Wire Group, Inc.General Cable Corporation
PDC EnergyValeant Pharmaceuticals International, Inc
Gray Television, Inc.Ryerson Inc.
Carrizo Oil & Gas, Inc.Wolverine World Wide Inc
Ryerson Inc.Sinclair Television Group, Inc
DJO Finance LLCNCR Corporation
Intelsat Jackson Holdings S.A.AOT Bedding Super Holdings, LLC
Biomet, Inc.HealthSouth Corporation
Lender Processing Services, Inc.NRG Energy, Inc.
Catalent Pharma Solutions, Inc.SBA Communications Corporation
Midstates Petroleum Company Inc.Forest Oil Corp.
Hiland Partners LPAtlas Pipeline Partners, L.P.
Bristow Group Inc.Starz, LLC
CDRT Holding CorporationTesoro CorporationTesoro Corporation
Continental Rubber of America CorporationSky Growth Acquisition Corporation (Par Pharmaceuticals)
Alpha Natural Resources, Inctw telecom inc.
Regency Energy Partners LPTesoro Logistics, L.P.Nielsen Finance LLC
Cablevision Systems CorporationRockwood Specialties Group, Inc.
American Axle & Manufacturing, Inc.Rock-Tenn CompanyRock-Tenn CompanyVerisk Analytics, Inc.QEP Resources, Inc.
D.R. Horton, Inc.Ryland Group, Inc. (The)
Sotheby'sMGM Resorts International
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22 MOODY’S CREDIT OUTLOOK 11 OCTOBER 2012
Source: Moody’s
Strong Weakest
1.0 1.8 2.6 3.4 4.2 5.0
Lower 3.2 to
3.4
Upper3.4 to
3.6
Lower4.0 to
4.2
Upper 1.8 to
2.0
Lower 2.4 to
2.6
Upper 2.6 to
2.8
CQ5Good Moderate Weak
CQ Scoring Key
← Stronger Weaker →CQ1 CQ2 CQ3 CQ4
CREDIT IN DEPTH Detailed analysis of an important topic
23 MOODY’S CREDIT OUTLOOK 11 OCTOBER 2012
Appendix
SEPTEMBER ISSUANCE: CQ AND RISK CATEGORY SCORES
Issuer Description of Notes Rating at Issuance RP Score PI Score
Debt Score
Lien Score
Structure Score
CoC Score
Overall Score
K. Hovnanian Enterprises, Inc. $577m 7.25% Senior Secured First Lien Notes due 2020
B3 1.80 2.80 2.05 1.75 2.00 1.50 1.89
K. Hovnanian Enterprises, Inc. $220m 9.125% Senior Secured Second Lien Notes due 2020
Caa2 1.80 2.80 2.05 2.75 2.00 1.50 2.06
ADS Waste Holdings, Inc. $550m 8.25% Senior Notes due 2020 Caa1 1.80 2.25 2.90 3.00 1.65 1.50 2.32
Reynolds Group Issuer Inc. $3250m 5.75% Senior Secured Notes due 2020
B1 2.00 3.95 2.90 1.25 2.90 3.35 2.51
International Wire Group, Inc. $250m 8.5% Senior Secured Notes due 2017
B3 1.90 3.00 3.35 2.75 1.75 2.00 2.54
General Cable Corporation $600m 5.75% Senior Notes due 2022 B1 1.75 3.05 3.25 3.00 3.00 1.50 2.61
PDC Energy $500m 7.75% Senior Notes due 2022 B3 1.70 4.50 3.80 2.65 1.90 2.70 2.82
Valeant Pharmaceuticals International, Inc
$500m 6.375% Senior Notes due 2020 B1 3.70 3.85 3.25 2.00 2.50 1.50 2.92
Gray Television, Inc. $300m 7.5% Senior Notes due 2020 Caa2 3.50 3.75 2.60 4.25 2.00 2.95 3.25
Ryerson Inc. $600m 9% Senior Secured Notes due 2017
Caa2 1.95 2.60 4.05 4.15 3.50 3.10 3.25
Carrizo Oil & Gas, Inc. $300m 7.5% Senior Notes due 2020 B3 3.05 4.45 3.80 3.40 1.35 2.95 3.27
Wolverine World Wide Inc $375m 6.125% Senior Notes due 2020 B2 4.00 3.10 3.95 2.75 2.15 2.55 3.33
Ryerson Inc. $300m 11.25% Senior Notes due 2018 Caa3 1.70 2.60 4.05 5.00 3.50 3.10 3.36
Sinclair Television Group, Inc $500m 6.125% Senior Notes due 2022 B2 4.90 3.35 2.25 5.00 1.65 1.50 3.44
DJO Finance LLC $440m 9.875% Senior Notes due 2018 Caa1 2.90 4.45 3.40 4.25 2.50 3.35 3.46
NCR Corporation $600m 5% Senior Notes due 2022 Ba2 4.40 1.90 4.50 2.90 3.00 1.80 3.48
Intelsat Jackson Holdings S.A. $640m 6.625% Senior Notes due 2022 Caa2 3.50 4.55 3.00 3.00 4.50 4.80 3.61
AOT Bedding Super Holdings, LLC $650m 8.125% Senior Notes due 2020 Caa1 3.15 4.20 3.30 4.75 2.00 4.80 3.66
Biomet, Inc. $825m 6.5% Senior Notes (Add-On) due 2020
B3 3.00 4.65 3.65 4.75 2.50 3.60 3.69
Biomet, Inc. $800m 6.5% Senior Subordinated Notes due 2020
Caa1 3.00 4.65 3.65 5.00 2.50 3.60 3.74
HealthSouth Corporation $275m 5.75% Senior Notes due 2024 B1 4.50 4.10 4.10 4.75 1.50 1.50 3.81
Lender Processing Services, Inc. $600m 5.75% Senior Notes due 2023 Ba2 4.85 3.80 4.50 4.00 1.65 1.50 3.83
NRG Energy, Inc. $990m 6.625% Senior Notes due 2023 B1 2.50 4.20 4.00 4.75 5.00 3.20 3.85
Catalent Pharma Solutions, Inc. $250m 7.875% Senior Notes due 2018 Caa1 3.55 4.20 3.65 4.00 5.00 3.35 3.86
SBA Communications Corporation $500m 5.625% Senior Notes due 2019 B2 3.65 3.25 2.90 5.00 5.00 4.50 3.90
Midstates Petroleum Company Inc. $600m 10.75% Senior Notes due 2020 Caa1 3.10 4.45 4.15 5.00 2.50 4.30 3.94
Forest Oil Corp. $500m 7.5% Senior Notes due 2020 B1 4.50 5.00 3.70 5.00 2.40 1.50 3.94
Hiland Partners LP $400m 7.25% Senior Notes due 2020 B3 4.75 3.05 4.50 5.00 2.40 3.50 3.96
Atlas Pipeline Partners, L.P. $325m 6.625% Senior Notes due 2020 B2 5.00 4.95 4.00 5.00 2.15 1.50 4.11
Bristow Group Inc. $450m 6.25% Senior Notes due 2022 Ba3 4.50 3.40 4.65 4.65 2.40 3.20 4.12
Starz, LLC $500m 5% Senior Notes due 2019 Ba2 5.00 2.70 4.00 4.50 3.40 3.65 4.13
CDRT Holding Corporation $450m 9.25% Senior PIK Toggle Notes due 2017
Caa1 3.20 4.10 4.25 5.00 5.00 3.75 4.15
CREDIT IN DEPTH Detailed analysis of an important topic
24 MOODY’S CREDIT OUTLOOK 11 OCTOBER 2012
Issuer Description of Notes Rating at Issuance RP Score PI Score
Debt Score
Lien Score
Structure Score
CoC Score
Overall Score
Tesoro Corporation $450m 4.25% Senior Notes due 2017 Ba1 3.25 4.15 4.50 5.00 4.40 4.00 4.19
Tesoro Corporation $475m 5.375% Senior Notes due 2022 Ba1 3.25 4.15 4.50 5.00 4.40 4.00 4.19
Continental Rubber of America Corporation
€950m 4.5% Senior Secured Notes due 2019
Ba3 4.60 5.00 4.15 4.75 2.65 3.10 4.21
Sky Growth Acquisition Corporation (Par Pharmaceuticals)
$490m 7.375% Senior Notes due 2020 Caa1 4.95 4.50 3.70 4.75 2.00 4.55 4.22
Alpha Natural Resources, Inc $500m 9.75% Senior Notes due 2018 B2 5.00 4.70 4.40 4.15 2.40 3.50 4.24
tw telecom inc. $480m 5.375% Senior Notes due 2022 B1 5.00 4.45 4.00 4.65 1.40 5.00 4.27
Regency Energy Partners LP $700m 5.5% Senior Notes due 2023 B1 5.00 4.35 3.45 5.00 3.40 5.00 4.35
Tesoro Logistics, L.P. $350m 5.875% Senior Notes due 2020 B1 4.75 3.50 4.35 5.00 3.40 4.00 4.37
Nielsen Finance LLC $800m 4.5% Senior Notes due 2020 B2 5.00 5.00 4.05 5.00 4.35 3.60 4.56
Cablevision Systems Corporation $750m 5.875% Senior Notes due 2022 B1 5.00 5.00 3.00 5.00 5.00 4.60
Rockwood Specialties Group, Inc. $1250m 4.625% Senior Notes due 2020
Ba2 5.00 5.00 4.70 5.00 5.00 3.60 4.79
American Axle & Manufacturing, Inc. $550m 6.625% Senior Notes due 2022 B2 5.00
Rock-Tenn Company $350m 3.5% Senior Notes due 2020 Ba1 5.00
Rock-Tenn Company $350m 4% Senior Notes due 2023 Ba1 5.00
Verisk Analytics, Inc. $350m 4.125% Senior Notes due 2022 Ba1 5.00
QEP Resources, Inc. $650m 5.25% Senior Notes due 2023 Ba1 5.00
D.R. Horton, Inc. $350m 4.375% Senior Notes due 2022 Ba2 5.00
Ryland Group, Inc. (The) $250m 5.375% Senior Notes due 2022 B1 5.00
Sotheby's $300m 5.25% Senior Notes due 2022 Ba3 5.00
MGM Resorts International $1000m 6.75% Senior Notes due 2020 B3 5.00
Source: Moody’s
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25 MOODY’S CREDIT OUTLOOK 11 OCTOBER 2012
NEWS & ANALYSIS Corporates 2 » Vanguard Defection Is Credit Negative for MSCI » Berry Directs $471 Million IPO Towards Debt Reduction, a
Credit Positive » Petrobras Makes a Debt-Reduction Move with $6 Billion Gulf
Asset Sale » Mondi and SCA’s Sale of Aylesford Mill Is Credit Positive for Both » Coastal Greenland’s Asset Swap Is Credit Positive
Infrastructure 7 » Transmission Line Decision Is Credit Negative for NorthWestern » Government Plan to Inject Capital into Korea Gas Corp. Is
Credit Positive
Banks 10 » Deposit Growth at Large US Banks Is Credit Positive » Tighter Regulatory Scrutiny of US Credit Card Banks Is
Credit Negative » Liikanen Group Proposals for Tougher EU Bank Regulation Are
Credit Positive » European Requirements for Central Counterparties Would Be
Credit Positive for Clearing Members » TORM’s Lenders Benefit from Its Debt Restructuring Amid
Shipping Woes » Declines in Tourism and Hotel Occupancy Are Credit Negative for
Lebanese Banks
Sovereigns 20 » Banque Internationale à Luxembourg’s Exit from Dexia Is Credit
Positive for Luxembourg
Sub-sovereigns 21 » Italy Tightens Controls on Regional and Local Governments, a
Credit Positive
US Public Finance 22 » Florida’s Citizens Property Insurance Rate Increase Is
Credit Positive
Securitization 24 » T-Mobile’s Planned Merger with MetroPCS Is Credit Positive for
Cell Tower ABS
RATINGS & RESEARCH Rating Changes 26
Last week we downgraded Becton Dickinson, Eskom Holdings, five South African Banks, two South African development banks, Cantor-Fitzgerald, BGC Partners, the Argentine municipality of Rio Cuarto, 12 South African local governments, East Rand Water Care, Tasmanian Public Finance Corp., and 10 tranches of US student loan ABS, and upgraded Progressive Waste Solutions and Realogy, among other rating actions.
Research Highlights 34
Last week we published on the North American leveraged finance, Singapore REITs, European retailers, Chilean toll roads, Brazilian utilities, EMEA public private partnerships, European insurers, Brazilian insurers, the Arab Petroleum Investments Corp., Austria, African sovereigns, US state local governments, student loan ABS, and US subprime mortgage servicers, among other reports.
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Report: 145990
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EDITORS PRODUCTION ASSOCIATE News & Analysis: Elisa Herr and Jay Sherman Amanda Kissoon