MOODYS.COM

13 MAY 2013

NEWS & ANALYSIS Corporates 2 » Delta Air Lines’ Dividend and Stock Buyback Plans Are Credit

Negative » Nielsen Will Sell Trade Show Business for $950 Million, a Credit

Positive » Solvay and Ineos' Joint Venture Limits Exposure to European

PVC Sector » Sinopec Group's Listing of Engineering Unit Is Credit Positive » Texhong Textile's Expansion to Turkey Is Credit Positive

Banks 7 » Competition Among US Banks Weakens Loan Covenants and

Pricing, a Credit Negative » Mexico's Banking Reform Promotes Lending, a Credit Positive

for Banks » Banco Estado Settlement Signals Pressure on Chilean Bank

Profits » Australian Banks Benefit from Regulator's Conservative

Liquidity Standards » Kuwaiti Bank's Increasing Share of Regulated Personal Loans Is

Credit Positive » Loan Recovery from Kingfisher Airlines Is Credit Positive for

Indian Banks » SMBC’s Acquisition of Indonesia Bank Stake Is Credit Negative

Insurers 19

» Ending MBIA's Restructuring Litigation Is Credit Positive for National and MBIA Inc.

Sub-sovereigns 20 » German Länder Tax Revenue Growth Underpins Fiscal

Consolidation, a Credit Positive

US Public Finance 21

» Harrisburg, Pennsylvania Fraud Charges Will Improve US Municipal Disclosure

» Illinois' $1.3 Billion April Income Tax Windfall Will Help Pay Down Overdue Bills

RATINGS & RESEARCH Rating Changes 24

Last week we downgraded Global Tel*Link, Aetna Inc. and Aetna Life Insurance, Banca Monte dei Paschi di Siena, Co-operative Bank, and HSBC Seguros de Vida and upgraded Coventry Healthcare and First Industrial, among other rating actions.

Research Highlights 29

Last week we wrote on Asian corporate liquidity, US loan covenants, US tobacco, French employment tax credits, China property developers, US broadcast television, global base metals, global pharmaceuticals, European building material, US power projects, US toll roads, Uruguay banks, Dutch insurers, global insurance regulation, US excess and surplus insurance, Malaysia, China, Cyprus, Greece, US not-for-profit hospitals, Fannie Mae, US Municipal bond defaults, and US CMBS, among other reports.

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Thursday’s Credit Outlook 34 » Go to Last Thursday’s Credit Outlook

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

NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 13 MAY 2013

Corporates

Delta Air Lines’ Dividend and Stock Buyback Plans Are Credit Negative Last Wednesday, Delta Air Lines Inc. (B2 stable) announced that its board of directors approved the initiation of a quarterly dividend and a share repurchase program that will return up to $1.1 billion to shareholders over the next three years. We regard the capital return program as credit negative because it will distribute a portion of its free cash flow at a time when the airline’s balance sheet leverage remains elevated. Delta’s debt-to-EBITDA was about 6.0x and EBIT-to-interest about 1.5x at 31 March, in line with mid-single-B rating category medians.

However, Delta concurrently said that it has lowered its adjusted net debt target to $7 billion from $10 billion, and that it plans to contribute up to $1 billion more than the annual required contribution to its defined benefit pension plans over the next five years. Delta’s strategy demonstrates its confidence in its ability to generate significant free cash flow, which will balance the payouts to shareholders. If the company progresses toward its net debt target, the resulting decline in balance sheet leverage will strengthen its credit profile. (Delta defines net debt as funded debt, capital leases, net unamortized discount on debt from purchase or fresh-start accounting and seven times annual aircraft rent minus cash and cash equivalents.)

The planned annual dividend of $200 million is about 18% of trailing 12 months free cash flow of about $1.1 billion, which would leave a meaningful amount of free cash flow to support Delta’s targeted reductions in funded debt and underfunded pension plans, as long as the company’s recent operating trends are not disrupted by adverse fundamentals. The dividend and stock buyback will return between $600 million and $1.1 billion to shareholders through 30 June 2016, depending on how much of the $500 million share repurchase authorization it utilizes.

We believe the airline industry could see demand, yields and operating profits come under pressure in upcoming quarters owing to lackluster economic growth, the effects of the budget sequester on US government and corporate spending, and the rollback of the federal payroll tax holiday this year. If sustained, the recent decline in the average spot price of jet fuel to about $2.70 per gallon from about $3.00 per gallon at the beginning of the year should mitigate some of these potential pressure points. If Delta’s free cash flow trails its expectations, we believe the company would balance the allocation of free cash flow between share repurchases and debt repayments.

Jonathan Root, CFA Vice President - Senior Credit Officer +1.212.553.1672 jonathan.root@moodys.com

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 13 MAY 2013

Nielsen Will Sell Trade Show Business for $950 Million, a Credit Positive Nielsen Holdings N.V. (Ba3 positive) said Monday that it plans to sell its Expositions trade show business to Canadian private equity firm Onex Corp. for $950 million. Nielsen will use the proceeds to help pay some 70% of the cost for its pending $1.3 billion acquisition of Arbitron Inc., a credit positive. We affirmed Nielsen’s ratings and changed its rating outlook to positive from stable following the announcement.

Using Expositions’ sale proceeds to help pay for the Arbitron acquisition, announced in December last year, limits the net increase in Nielsen’s debt-to-EBITDA leverage to approximately 4.7x instead of 5.0x and is credit positive. We expect 4%-5% revenue growth, modest margin expansion, and anticipated debt repayments will lower the company’s debt-to-EBIDTA leverage to the low 4x range by the end of 2014, from 4.7x at end-March (pro forma for the acquisition of Arbitron and sale of Expositions). This leverage level could position the company for a ratings upgrade.

Nielsen’s trade show business has a high EBITDA margin (roughly 50%) and good growth prospects in a recovering economy, but is vulnerable to shifts in exhibitor spending that made the business much more cyclical than Nielsen’s remaining operations. We believe Arbitron’s focus on radio audience measurement is a better strategic fit for Nielsen because it complements the company’s television audience ratings business to create a broader media measurement platform for its clients. The incremental earnings and strategic opportunities from Arbitron, and the ability to help fund and limit the net increase in debt-to-EBITDA leverage on the Arbitron acquisition are credit positive because these factors more than offset the earnings loss from selling Expositions, which only contributed about 3% of Nielsen’s revenue and 6% of EBITDA, prior to corporate overhead, for the last 12 months, as of end-March.

John Puchalla Vice President - Senior Credit Officer +1.212.553.0426 john.puchalla@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 13 MAY 2013

Solvay and Ineos’ Joint Venture Limits Exposure to European PVC Sector Last Tuesday, Solvay S.A. (Baa1 negative) and Ineos AG (unrated) announced plans to combine their European chlorvinyls (PVC) activities into a 50-50 joint venture with 2012 pro forma sales of €4.3 billion and recurring EBITDA of €257 million. The combination would be credit positive for Solvay, allowing the company to exit the ailing European PVC sector. The deal would also be credit positive for Ineos, stabilising its PVC subsidiary without committing new capital.

Solvay. When the deal closes in 2013 or early 2014, Solvay will receive €250 million in cash and expects to contribute some working capital-related assets, liabilities, and pension liabilities, all of which will shore up its balance sheet. Carving out the capital intensive and less profitable European PVC operations will also improve Solvay’s overall profitability and capital returns. We estimate its pro forma EBITDA margin will improve to approximately 18.3% from a reported 16.6% in 2012. However, the divestment will not significantly dent Solvay’s debt capacity owing to the disposed assets contributing only modestly to Solvay’s overall earnings and funds from operations.

After the joint venture has operated for three to six years, Solvay will have the option of selling its stake to Ineos and exiting the European PVC sector. The transaction limits Solvay’s downside exposure, while retaining exposure to the upside via a negotiated exit pricing formula that links future payments to a 5.5x multiple of the venture’s mid-cycle EBITDA.

Ineos. For Ineos’ part, its petrochemicals subsidiary, Ineos Group Holdings SA (B2 positive), will consolidate the ownership of a profitable petrochemicals cracker complex in Norway that it currently operates in a 50-50 joint venture with the Ineos PVC subsidiary, Kerling plc (Caa1 negative). Ineos Group Holdings SA will also retain some specialty assets that it will acquire from Kerling and will strengthen its asset footprint and add some earnings capacity.

Ineos will retain a contingent liability to buy out Solvay’s stake in the PVC joint venture. More immediately, however, the transaction limits the risks of future capital recourse to Ineos because it is structured to stabilise the financial profile of the combined PVC subsidiary. The joint venture will have a higher asset base and revenues supporting Kerling’s existing bonds.

However, whether and how quickly these manoeuvres improve Kerling’s credit will depend on the broader recovery in the European PVC segment. This is because the segment remains under stress from the persistent overcapacity related to the reduced level of demand from Europe’s troubled construction industry, its largest customer.

European PVC producers’ profitability and capital returns have been low since 2008, and consequently there has been little incentive to invest capital to upgrade plants to meet new European regulations. As a result, several of the stronger incumbent chemical companies have exited the sector. The Solvay and Ineos deal follows Arkema SA’s (Baa2 stable) disposal of its European PVC assets in 2012.

We maintain that in order to overcome the sector’s challenges the PVC segment must reduce capacity. However, none of the industry’s asset disposals so far has resulted in capacity reductions, and the Solvay-Ineos transaction does not point to any PVC capacity closures. In the absence of sector restructuring, PVC producers such as Kerling will continue to present higher financial risks.

Elena Nadtotchi Vice President - Senior Credit Officer +44.20.7772.5380 elena.nadtotchi@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 13 MAY 2013

Sinopec Group’s Listing of Engineering Unit Is Credit Positive On Friday, the China Petrochemical Corporation (Sinopec Group, Aa3 stable) subsidiary Sinopec Engineering (Group) Co., Ltd. (Sinopec Engineering, unrated) launched an initial public offering (IPO) on the Hong Kong Stock Exchange to raise around HKD13-HKD17 billion. The planned IPO is credit positive for Sinopec Group because it will strengthen its capital base on a consolidated basis. Funds from the IPO, roughly 7x-9x the engineering unit’s capital spending in 2012, will stay at the subsidiary and support its future development, which in turn will improve Sinopec Group’s overall financial profile.

Listing in an overseas market will also allow the engineering unit to win more business from companies not affiliated with Sinopec Group, especially those overseas, through increased brand-name awareness and track-record visibility. Moreover, because Sinopec Group, which itself is 100% owned by the Chinese government, will maintain majority control of the unit, the strengthening of the engineering unit’s credit profile is positive for the group as well.

On a consolidated basis, the IPO proceeds will supplement Sinopec Group’s capital base. The IPO proceeds are about 5% of Sinopec Group’s total capital spending in 2011 and will increase the group’s equity base by around 2%.

The IPO, together with a February 2013 equity placement by Sinopec Group’s main listed subsidiary, China Petroleum and Chemical Corporation (Aa3 stable), indicate the group’s strong access to capital markets. With more assets listed on the public exchange, the information transparency of the whole group will be further enhanced as well.

Although we expect that Sinopec Group will not sell its stakes in the unit immediately, the listing will provide the parent with a venue to dispose of the more liquid shares in the future.

Sinopec Engineering is the largest oil refining and petrochemical engineering company in China in terms of revenue, according to the filing. In 2012, the company’s revenue amounted to RMB38.5 billion, 50% of which it derived from doing business with its parent company.

Kai Hu Vice President - Senior Analyst +86.10.6319.6560 kai.hu@moodys.com

Cindy Yang Associate Analyst +86.10.6319.6570 liu.yang@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 13 MAY 2013

Texhong Textile’s Expansion to Turkey Is Credit Positive Last Wednesday, China National Textile and Apparel Council, the national federation for textile-related industries, announced that Chinese textile producer Texhong Textile Group Limited (Ba3 stable) had agreed to purchase land in northwestern Turkey to build a yarn-production plant. The expansion is credit positive for Texhong because it will increase the company’s revenue and exposure to prospective customers in Europe.

Texhong has sufficient funds to finance the $180 million expansion without taking on additional debt. Apart from the $4.2 million land cost, the rest of the expense will be used to construct the production plant and invest in working capital. Construction will be in three phases; the first phase, with one third of capacity, will be completed by the second half of 2014. We estimate the total funding needs for next 18 months will be around $100-$120 million. Texhong had $84 million cash on its balance sheet as of year-end 2012 and issued $200 million in senior notes in April.

Texhong sells cotton yarn and fabric products to China, Turkey, Brazil, Bangladesh, Japan and South Korea. Establishing a production base in Turkey will help Texhong reduce product-delivery time within Europe to a few days from more than a month, which we believe will help the company retain existing customers. Having a physical presence in Turkey should also increase Texhong’s brand recognition in the region and help it win new customers in Turkey and other European countries. More than half of Turkish textile products are exported to Europe, hence establishing a base in Turkey also opens the door for Texhong to expand its European client base.

The Turkish facility will also help Texhong bypass the 18% tariff on synthetic fiber imports that the Turkish government charges foreign producers. Turkey has a well-developed textile industry with skilled labor force and modern technology, which mitigates execution risk.

Texhong has operating production facilities outside China, which have given management expertise in overseas expansion. The company started building a new plant in southern Vietnam in 2007 and has completed three phrases of 400,000 spindles, which constitutes 40% of Texhong’s total production capacity. A second plant construction in northern Vietnam will increase Vietnam’s production capacity to 50% of Texhong’s total. This expansion contributed to an increase in Texhong’s gross margins to 15.3% in 2012 from 8.1% in 2011 owing to Vietnam’s import tariff exemption on cotton, lower labor costs and cheaper overheads.

Texhong is one of the few Chinese companies to move production overseas amid the high cotton prices and increasing labor costs in China. Its geographic diversity provides a competitive advantage in the fragmented Chinese textile market, which consists mainly of small players.

Nan Nan Associate Analyst +852.3758 1459 nan.nan@moodys.com

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

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 13 MAY 2013

Banks

Competition Among US Banks Weakens Loan Covenants and Pricing, a Credit Negative Last Monday, the US Federal Reserve (Fed) released its quarterly Senior Loan Officer Opinion Survey, which showed that large US banks continue to ease covenants for large and middle market commercial and industrial (C&I) borrowers. At the same time, the survey showed narrowing loan spreads. Both factors are credit negative for US banks.

In the exhibit below, the top line shows that more than 65% of large banks (i.e., banks with assets of more than $20 billion) that participated in the Fed survey reported narrower loan spreads over banks’ cost of funds for large and middle market C&I customers in the most recent quarter. This data shows a continued trend of spread narrowing by the majority of large bank respondents since mid-2010.

Percentage of Large US Banks’ Narrowing Spreads and Weakening Covenants for Large and Middle-Market Commercial and Industrial Loans

Source: US Federal Reserve

The exhibit also shows that nearly half of large bank respondents reported loosening loan covenants, up 55% from the prior quarter’s survey. In fact, no large bank has reported tightening covenants for the past three quarters, a trend corroborated by our North American Covenant Quality Index, which has indicated similar declining covenant quality in seven of the past eight months.

The Fed’s survey reveals that banks continue to have difficulty exercising self discipline regarding easing underwriting standards. This has grabbed the attention of regulators, which in March published interagency guidance on leveraged lending, articulating their concerns about easing underwriting standards and seeking to reinforce stronger risk management practices. Relying on regulators to instill underwriting discipline is further evidence to us that the seeds of the next asset quality problem for banks are being sown today.

Banks are expanding C&I lending in an effort to reduce real estate concentrations. In addition, C&I customers are often large depositors and typically need a range of financial services, creating opportunities for the lender to cross-sell its services. Our rated US banks have, in aggregate, grown C&I loan balances by approximately 10% annually over the past two years. We believe there are inherent tensions between maintaining prudent underwriting standards and pursuing significant loan growth.

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Megan Snyder Associate Analyst +1.212.553.4986 megan.snyder@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 13 MAY 2013

Lower pricing has been followed by less stringent loan covenants. Both reflect conditions in other credit markets that compete with banks. Overall competitiveness within the broader financial sector (banks and non-banks) has increased as credit becomes more widely available. For example, the high-yield corporate bond market has been particularly strong, with issuance of non-investment-grade domestic public bonds we rate up 13% in March versus the average monthly issuance over the past 12 months. This has contributed to bank disintermediation. In addition, the structured finance market has slowly but steadily returned to higher levels of risk-taking, as evidenced by a 171% rise in 2012 in credit card securitization, and a Moody’s Loan to Value ratio1 averaging approximately 100% for loans backing recent commercial mortgage-backed securitizations

In the current low interest rate environment, most banks are experiencing margin compression as asset yields have fallen faster than funding costs. On an aggregate basis, the 15 largest rated banks experienced a 27-basis-point decline in asset yields in the first quarter from a year ago, while total liabilities have only fallen 19 basis points over the same period. Because net interest income accounts for the majority of most rated US banks’ revenue, declining loan yields weaken earnings. Diminished earnings power is a risk to creditors because it reduces coverage for asset quality deterioration.

The increase in reported covenant weakening is also a risk. Combined with thinner pricing, banks are underwriting an increasing number of C&I loans with fewer protections. As a result, when the next downturn comes, it will be more difficult, and more costly, for many of these lenders to resolve a problem loan than would have been the case if covenants were tighter.

1 Unlike the loan-to-value ratios used in the underwriting of a loan, our loan-to-value ratio incorporates values that reflect

capitalization rates that have prevailed for extended periods of time historically, making our assessment of refinance risk consistent across different interest rate environments.

NEWS & ANALYSIS Credit implications of current events

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Mexico’s Banking Reform Promotes Lending, a Credit Positive for Banks Last Wednesday, Mexican President Enrique Peña Nieto announced a financial system reform aimed at boosting bank lending and economic growth. The reform is credit positive for Mexican banks because it creates specialized courts that will streamline the bankruptcy process and facilitate enforcement of collaterals and guarantees, which has been a major barrier to more active lending. The reform also introduces a government-owned credit bureau that will allow banks to use reliable and comprehensive data in their underwriting.

Bank lending levels. The reform will allow bank regulator Comisión Nacional Bancaria y de Valores to periodically evaluate bank lending and limit banks’ proprietary trading if the regulator considers its lending volume too low. Mexico has traditionally lagged other Latin American countries in loans relative to GDP. The exhibit below illustrates Mexico’s modest level of credit intermediation.

Bank Lending to GDP in Mexico and Select Regional Peers, 2012

Note: Argentina data as of 2011 Sources: Moody’s, Superintendencia de Bancos e Instituciones Financieras (Chile), Banco Central do Brasil, Superintendencia Financiera de Colombia, CNBV, Superintendencia de Banca y Seguros (Peru), International Monetary Fund and the World Bank.

Enforcement of collateral. The slow, cumbersome and uncertain enforcement of collateral has traditionally been a major obstacle to bank lending in Mexico, especially for loans to small and medium-sized enterprises (SMEs). We anticipate that this segment will offer the bulk of loan growth potential during the next 12-18 months, which makes a well-working legal framework and assured guarantee repossession attractive to banks. Moreover, loans to SMEs contribute to volume growth in a high-margin asset class at a time of strong economic growth. During 2012, SME loans grew 13.5%, outpacing overall commercial loans, which grew 7%.

The banks that stand to gain the most are experienced commercial lenders. These include BBVA Bancomer, S.A. (A2 stable, C-/baa1 stable),2 Banco Santander (México), S.A. (Santander México, A3 stable, C-/baa1 stable), Banco Mercantil del Norte, S.A. (A3 negative, C-/baa2 negative) and Banco Nacional de México, S.A. (Banamex, A2 stable, C-/baa1 stable), and regional banks focused on SME lending, such as Banco Regional de Monterrey, S.A. (Baa3 stable, D+/ba1 stable) and Banco del Bajío, S.A. (Baa3 stable, D+/ba1 stable).

2 The ratings shown are the bank’s local currency deposit rating, its standalone bank financial strength rating/baseline credit

assessment and the corresponding rating outlooks.

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Chile Brazil Colombia Mexico Peru Argentina

Felipe Carvallo Assistant Vice President - Analyst +52.55.1253.5738 felipe.carvallo@moodys.com

David Olivares Vice President - Senior Credit Officer +52.55.1253.5705 david.olivares@moodys.com

Busy Juárez Associate Analyst +52.55.1253.5731 busy.juarez@moodys.com

Lauren Kleiman Associate Analyst +52.55.1253.5734 lauren.kleiman@moodys.com

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 13 MAY 2013

Credit bureau. The reform will improve the quality of loan origination through creation of a centralized government-owned credit bureau enabling banks to cross-reference borrower information and better estimate expected credit losses. Mexico’s two existing credit bureaus, Buro de Crédito and Círculo de Crédito do not readily share information and do not include information from unregulated financial companies such as non-bank financial institutions (sofomes) or pawn shops, which are major sources of financing for low-income consumers, another source of growth potential for the next 12-18 months. A centralized credit bureau will benefit those banks focused on consumer-lending products, including BBVA Bancomer, Banamex and Santander México.

The reforms require the amendment of at least 34 different laws, and will therefore take some time before they are enacted. However, we are confident of implementation given that the reforms are part of a cross-party accord (Pacto por México) signed by all major political parties in Mexico and because they will ensure economic growth by providing broader access to credit.

NEWS & ANALYSIS Credit implications of current events

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Banco Estado Settlement Signals Pressure on Chilean Bank Profits Last Monday, state-owned Banco del Estado de Chile (Aa3 stable, C/a3 stable)3 said it reached a settlement with Chile’s Consumer Protection Agency (SERNAC) and the National Association of Consumers (CONADECUS) over alleged pricing abuses and will return fees totaling approximately $12 million (CLP5.7 billion) to 425,863 savings account customers, avoiding a class action suit. Although the payment equals only 5% of Banco Estado’s 2012 net income and is already provisioned for, the implications of the class action suit and its outcome is credit negative for Chilean banks and other consumer-oriented financial companies.

At a minimum, banks’ cost of doing business will go up as more of their resources are used to inform customers, negotiate changes in fees, and respond to customer complaints to avoid the increased exposure to potential regulatory fines and litigation costs. Profits will also be curtailed as banks’ latitude in charging fees for services will be more limited, together with interest rate caps on consumer loans that are currently under consideration in the congress.4

The suit brought by CONADECUS to the Supreme Court on the customers’ behalf alleged that the bank illegally raised fees on accounts between January 2003 and November 2011 without advising or reaching agreement with the account holders.

This case was the latest in a series of legal settlements and/or regulatory fines for Chilean financial companies related to pricing abuses on consumer banking products and showed that increased regulatory enforcement applied even to the state-owned Banco del Estado.

Most large and medium-sized banks active in consumer and mortgage banking, including Banco de Chile (Aa3 stable, B-/a1 stable), Banco Santander-Chile (Aa3 negative, C+/a2 negative), Banco de Credito e Inversiones (A1 stable, C/a3 stable), BBVA (Chile) (Baa1 stable, D+/baa3 stable), CorpBanca (Baa1 negative, D+/baa3 negative), and Banco Itau Chile (A3 stable, C-/baa2 stable), as well as banks associated with retailers such as Banco Falabella (not rated) and Banco Ripley (not rated), are subject to these profit constraints because they specifically target consumers for new business growth, particularly with credit cards and mortgages. These mortgage and credit card portfolios had double-digit growth during 2012 and we expect similar growth in 2013 in line with strong credit demand and despite the increased regulatory scrutiny and constraints. The banks will be challenged to adjust their overall pricing models and product offers to compensate for any loss of fee income or increased costs.

3 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 See our Banking System Outlook: Chile, February 2013.

Jeanne Del Casino Vice President - Senior Credit Officer +1.212.553.4078 jeanne.delcasino@moodys.com

NEWS & ANALYSIS Credit implications of current events

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Australian Banks Benefit from Regulator’s Conservative Liquidity Standards Last Monday, the Australian Prudential Regulation Authority (APRA), released a second consultation package on Basel III liquidity reforms. APRA proposes adopting only limited components of the Basel Committee on Banking Supervision (BCBS) liquidity standards promulgated in January 2013, which are more relaxed than the original December 2010 standards. APRA will therefore impose more conservative liquidity requirements than the BCBS, which is credit positive for Australia’s banks.

APRA Liquidity Coverage Ratio Requirements Are Tougher Than Those of BCBS

Amendments BCBS APRA

High Quality Liquid Assets New “Level 2B” assets allowed: Unencumbered equities, corporate debt securities and RMBS, subject to haircuts

No Level 2B assets allowed

Minimum Liquidity Coverage Ratio 60% in 2015, climbing to 100% by 2019 100% in 2015

Cash In/Outflow Assumptions Outflow assumptions materially reduced Similar to the revised Basel standard

Sources: Basel Committee on Banking Supervision, Australian Prudential Regulation Authority

The key elements of APRA’s proposals, which will almost certainly be adopted, are as follows:

1. APRA will not loosen the definition of high quality liquid assets (HQLA) to include unencumbered equities, RMBS or corporate debt securities, as now allowed by the BCBS.

Market participants hoping to stimulate the securitization market by including RMBS in the definition will be disappointed, as will smaller banks, which would have gained increased access to lower cost funding and thus, better competitiveness versus larger banks that fund at lower costs. However, maintaining strict definitions supports transparency and investor confidence in Australian banks’ HQLA during stressed market conditions.

2. APRA will continue to require banks to be fully compliant with the liquidity coverage ratio by 2015 instead of the gradual phase-in by 2019 that BCBS allows. This requirement ensures that banks continue to improve their liquidity and funding profiles at a faster pace, which is credit positive for them.

Australian banks continue to rely on wholesale funding, with a heavy offshore component. This is partly due to structural factors, such as the high allocation of retail savings to Australia’s mandatory superannuation scheme, which hamper the collection of stable deposits.

Because Australia has low levels of government debt outstanding, and thus low levels of HQLA, to further improve liquidity coverage ratios, banks are likely to focus on lengthening funding maturities. Although longer funding maturities incrementally raise funding costs, in light of banks’ strong risk-adjusted profitability, the improved funding stability would outweigh any earnings considerations.

3. APRA will apply almost all of the BCBS reduced cash outflow assumptions under a stress scenario, which will make it easier for the banks to meet their liquidity coverage ratio requirements without accessing the Reserve Bank of Australia’s Committed Liquidity Facility, which will be operational in 2015 and will charge a 15 basis point commitment fee.

Patrick Winsbury Senior Vice President +612.9270.8183 patrick.winsbury@moodys.com

NEWS & ANALYSIS Credit implications of current events

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The Committed Liquidity Facility will provide guaranteed access to the Reserve Bank’s discount window, whose funds can be included in the liquidity coverage ratio calculation. A mechanism such as the Committed Liquidity Facility is permitted under Basel III for banking systems where there are insufficient HQLA on issue for banks to meet their liquidity coverage ratio requirements, which is the case in Australia.

As a result of the reduced cash outflow assumptions, the banks’ liquid asset coverage of total liabilities by HQLA and the Committed Liquidity Facility will not have to be as high as under the original BCBS proposals. Nevertheless, the Committed Liquidity Facility will still result in a net improvement in Australian banks’ liquidity coverage.

We see the Committed Liquidity Facility as being critical to Australian banks’ credit profiles because without access to it, banks will be unable to meet their Basel liquidity coverage ratio targets owing to the dearth of HQLA, despite APRA’s adoption of reduced cash outflow assumptions. One remaining issue is to what degree APRA will permit banks to rely on the facility in order to meet their liquidity coverage ratio targets.

NEWS & ANALYSIS Credit implications of current events

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Kuwaiti Bank’s Increasing Share of Regulated Personal Loans Is Credit Positive Last Monday, the Central Bank of Kuwait (CBK) issued its Monthly Monetary Statistics bulletin, which indicated that regulated personal lending remains the key driver of credit growth among Kuwait’s banks. In March, regulated personal loans increased 19.3% year on year and accounted for 26.7% of domestic credit, compared with 23.6% a year earlier. The increase is credit positive because such loans exhibit significantly lower delinquencies than other loan types and improve the granularity of Kuwaiti banks’ otherwise concentrated loan books.

Regulated personal loans comprise consumer loans for the purchase of consumable and durable products, and loans for restoring or supplementing the purchase of private residences (Kuwait does not have a mortgage market in the traditional sense because banks may not own or hold residential real estate as collateral). Banks predominantly extend regulated personal loans to Kuwaiti nationals, more than 90% of whom are employed or pensioned by the Kuwaiti government (Aa2 stable). Banks grant loans based on a borrower’s salary,5 and cap the monthly payment instalments so that they do not exceed 40% of the borrower’s monthly salary (or 30% of a monthly pension). Given job security and Kuwait’s extensive welfare system, such customers’ repayment ability is generally high. As a result, we estimate that Kuwaiti banks’ non-performing loan (NPL) ratio for regulated personal loans was 2.3% at year-end 2012 versus the system average of 5.4% (see exhibit).

Kuwaiti Banks’ Regulated Personal Loan Volume and Non-Performing Loan Ratio

* System NPLs and regulated personal loan NPLs are estimates based on the rated banks’ figures Source: Central Bank of Kuwait, Banks’ financial statements, other data provided by rated banks

Regulated personal loans grew to KWD7.3 billion ($25.5 billion) in March versus KWD6.1 billion in March 2012, following a 25% hike in public sector salaries and a 12.5% rise in pensions during 2012, both of which increased customers’ borrowing capacity. In contrast, lending to the corporate sector increased by 1%, reflecting lower-than-expected government capital spending (a key driver of growth in Kuwait’s private-sector economy) as implementation of the four-year development plan, launched in 2010, continued to stall, and high credit risks associated with real estate and investment company lending. By shifting banks’ loan book composition toward lower risk consumer lending, combined with a gradual

5 Regulated personal loans are salary-assigned (i.e., customers may receive regulated personal loans from the banks into which they

deposit their salaries, and may not change banks until such loans are paid off). Monthly instalments are deducted from customers’ salaries before the balance is released to their accounts. Delinquencies arise in rare cases when customers lose or resign from their jobs and, in the past, in those cases where customers became over-indebted. We understand that such occurrences have been reduced as indebtedness limitations imposed by the regulator have been applied and monitored more strictly.

0%

2%

4%

6%

8%

10%

12%

0

1

2

3

4

5

6

7

8

Dec-09 Dec-10 Dec-11 Dec-12

KWD

bill

ions

Regulated Personal Loans - left axis Regulated Personal Loans NPL Ratio* - right axis

Total NPL Ratio* - right axis

Ilias Avgeris, CFA Associate Analyst +357.25.693.002 ilias.avgeris@moodys.com

Stathis Kyriakides, CFA Assistant Vice President - Analyst +357.25.693.005 stathis.kyriakides@moodys.com

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 13 MAY 2013

deleveraging of corporate loans (specifically to real estate and investment companies), banks have also helped reduce credit concentrations.

Although regulated personal loans are of generally better credit quality, a recent law clears the way for the government to buy and restructure (at borrowers’ request) regulated personal loans. This legislation may create moral hazard if consumers’ credit conduct is influenced by anticipation of future government support. The law, soon to be ratified by the Emir,6 will facilitate lengthening the repayment period and lowering the interest charged.

Kuwait’s dominant retail franchises, National Bank of Kuwait S.A.K. (Aa3 stable, C/a3 stable)7 and Kuwait Finance House (Aa3 review for downgrade, C-/baa2 review for downgrade), have benefitted most from the increase in Kuwaiti nationals’ borrowing capacity. Of the KWD1.2 billion growth in regulated personal lending over the 12 months to March, these two banks combined accounted for approximately 60% of the increase, which is broadly in line with their combined market share.

6 Application of the law will be framed by central bank directives to be drafted subsequent to the ratification of the law. 7 The bank ratings shown in this report are the banks’ long-term deposit ratings, their standalone bank financial strength

ratings/baseline credit assessments and the corresponding rating outlooks.

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 13 MAY 2013

Loan Recovery from Kingfisher Airlines Is Credit Positive for Indian Banks Last Monday, State Bank of India (SBI, Baa3 stable, D+/ba1 stable)8 Chairman Pratip Chaudhuri told reporters that the consortium of 17 lenders to Kingfisher Airlines (unrated) had recovered INR8-INR10 billion from the sale of collateral pledged by the grounded carrier. This development is credit positive for India’s banks because it reflects the progress banks are making in loan recovery from non-performing borrowers, which is essential to mitigate losses when commercial non-performing loans (NPLs) are rising.

The 17 banks have a combined exposure of around INR70 billion to Kingfisher, with SBI having the largest exposure at INR13.5 billion as of December 2012. Although the recovered amount is less than 15% of the total outstanding exposure, the banks recovered the amount over 45 days. Such swift timing points to an efficient legal process and reduces the risk of a costly and protracted recovery procedure. It is also a positive development for banks’ otherwise deteriorating asset quality (see Exhibit 1).

EXHIBIT 1

Non-Performing Loan Trend for 11 Rated Indian Public-Sector Banks

Source: Moody’s calculation of weighted average non-performing loan ratios, based on quarterly financial statements from the banks.

The loan recovery also suggests that banks have become more proactive in pursuing loan recoveries from private-sector non-performing borrowers, as Kingfisher is privately owned and unlikely to benefit from government support. This stands in contrast to non-performing loans of state-owned enterprises, which banks generally do not pursue because of their expectation of the borrower receiving state support. Such was the case in 2011 with state-owned airline Air India, when banks waited for the Indian government to provide a capital injection to the distressed airline.

The recovery from Kingfisher, a non-performing loan that the banks had largely provisioned, will most benefit the five largest lenders to the airline. Including SBI, the five largest lenders as of December 2012 are Punjab National Bank (Baa3 stable, D+/ba1 negative), whose exposure totals INR8.0 billion; IDBI Bank Ltd. (Baa3 stable, D-/ba3 stable), with INR8.0 billion; Bank of India (Baa3 stable, D/ba2 negative), with INR5.7 billion; and Bank of Baroda (Baa3 stable, D+/ba1 negative), with INR5.0 billion.

Together, these five banks hold almost 57% of Kingfisher’s outstanding loans, which equals 2.3% of the five banks’ combined Tier 1 capital. On a standalone basis, SBI’s exposure to Kingfisher equalled about

8 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.

2.34%

2.58% 2.99%

3.21% 3.17%

3.57% 3.99% 4.07%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Vineet Gupta Vice President - Senior Analyst +65.6398.8336 vineet.gupta@moodys.com

Daphne Cheng Associate Analyst +65.6398.8339 daphne.cheng@moodys.com

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 13 MAY 2013

2.5% of its gross NPLs and 1.7% of its Tier 1 capital. However, while IDBI’s exposure to Kingfisher is smaller than that of SBI, it has the highest exposure relative to its Tier 1 capital (4.3%) and thus benefits most from any progress in the recovery (see Exhibit 2).

EXHIBIT 2

The Five Banks with the Largest Exposure to Kingfisher Airlines Relative to Tier 1 Capital

Note: Based on financials as of the end of December 2012 Source: Moody’s calculation

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

IDBI Bank Punjab National Bank Bank of India Bank of Baroda State Bank of India

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 13 MAY 2013

SMBC’s Acquisition of Indonesia Bank Stake Is Credit Negative Last Wednesday, Sumitomo Mitsui Banking Corporation (SMBC, Aa3 stable, C/a3 stable9) said that it would acquire up to 40% of the common stock of PT Bank Tabungan Pensiunan Nasional Tbk (BTPN; unrated), a commercial bank in Indonesia. The investment will expose SMBC to Indonesian retail banking and microfinance, sectors in which the company has limited experience, making the acquisition credit negative for SMBC.

SMBC’s lack of experience in Indonesia is apt to make it challenging for SMBC to transfer its management and product expertise to BTPN and improving upon BTPN’s existing franchise. To date, SMBC’s overseas exposures have mainly been restricted to large Japanese and foreign investment-grade corporations. SMBC’s stake in BTPN exposes it to retail and microfinance in an emerging market where its experience is limited.

SMBC will immediately acquire 24.26% of the outstanding common stock of BTPN, with the remaining 15.74% to be acquired in later months, pending regulatory approval. SMBC expects the acquisition will total $1.5 billion.

The acquisition is small compared to SMBC’s total unconsolidated assets of ¥116 trillion (approximately $1.16 trillion) as of end-September 2012, but will be SMBC’s largest single equity investment in a bank outside of Japan.

9 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.

Mutsuo Suzuki Senior Vice President +81.3.5408.4051 mutsuo.suzuki@moodys.com

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 13 MAY 2013

Insurers

Ending MBIA’s Restructuring Litigation Is Credit Positive for National and MBIA Inc. On 8 May, MBIA Inc. (Caa1 review for downgrade) announced a commutation settlement with Société Générale (SocGen, A2 stable, C-/Baa2)10 that also agreed to dismiss the litigation challenging MBIA’s 2009 restructuring that split the group’s resources and risks. This agreement together with the comprehensive settlement reached earlier this week with Bank of America Corporation (BAC, Baa2 negative) ends the protracted restructuring litigation with bank plaintiffs commenced in 2009.

This settlement is credit positive for the group’s muncipal insurance writer National Public Finance Guarantee Corporation (National, financial strength Baa2 review for downgrade), because the risk of re-combining National with its much weaker affliate MBIA Insurance Corporation (financial strength Caa2 review for downgrade) is essentially eliminated. The resolution of the restructuring litigation and repayment of the secured loan by MBIA Corp. removed substantial obstacles to National’s start as a municipal-only guarantor. National’s pre-tax net income was $142 million in the first quarter of this year, and $569 million in 2012, based on MBIA’s reported segment results. The resolution of the litigation and the possible resumption of business would enhance National’s ability to pay dividends, benefiting MBIA Inc. As of 31 March, National’s statutory surplus was $2.1 billion.

The settlements with BAC and SocGen are milestones for MBIA in bringing to a close the protracted litigation that has prevented National from getting back on its feet to resume normal business operations. Following the 2009 restructuring, various creditors and counterparties of MBIA Corp. totaling 18 plaintiffs sued MBIA under the Article 78 of the New York Civil Practice Law and Rules. The plaintiffs argued that the New York Insurance Department’s decision to restructure the company was “arbitrary and capricious” and an abuse of discretion. The restructuring split MBIA’s financial resources and exposures between a well-capitalized municipal bond insurer National, and its financially much weaker sister company, MBIA Corp., which holds legacy structured finance exposures. Besides the Article 78 suit, there were also other lawsuits against MBIA’s restructuring, including one, from the same bank plaintiffs, charged under fraudulent conveyances.

In March, a Court ruled that the New York Insurance Department’s approval was within the its authority. The Article 78 court ruling favorable to MBIA and the firm’s settlements with some of the plaintiffs limits the remote, but remaining, risk that any of the three counterparties that dismissed the transformation litigation without prejudice could re-file.

10 The bank ratings shown in this report are the banks’ deposit ratings, their standalone bank financial strength ratings/baseline credit

assessments and the corresponding rating outlooks.

Helen Remeza Vice President - Senior Analyst +1.212.553.2724 helen.remeza@moodys.com

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 13 MAY 2013

Sub-sovereigns

German Länder Tax Revenue Growth Underpins Fiscal Consolidation, a Credit Positive Last Wednesday, the German Ministry of Finance said that German Länder tax revenues will grow 2.4% to €241.9 billion in 2013 from a year earlier, and that it expects tax revenues to increase by an average annual rate of 3.4% through 2017. Such revenue growth is credit positive for German Länder because it will help improve their fiscal performance and reduce their sizable debt.

Tax revenues, on average, account for about 70% of the Länder’s total revenue. Given the Länder have a very rigid expenditure structure, revenue is a strong predictor of their overall budgetary performance (see exhibit).

German Länder Tax Revenues, 2003-17

Source: German Ministry of Finance, May 2013

Although the ministry’s latest tax estimate is credit positive for all German Länder, those under greater pressure to consolidate their budgets, in particular, will benefit the most. Such Länder include Berlin (Aa1 negative) and Nordrhein-Westfalen (Aa1 negative), both of which have tight budgets and are in the process of reducing their very high debt levels, which are 290% and 240% of operating revenues, respectively. Other Länder, such as Brandenburg (Aa1 negative) and Saxony-Anhalt (Aa1 negative), which had comparatively lower debt and balanced accounts in 2012, will also likely benefit as they can more swiftly reduce debt.

Seven of Germany’s 16 Länder balanced their budgets in 2012, and we expect a slightly higher number (perhaps two or three more) of German Länder to report surpluses in 2013, driven primarily by revenue growth and planned expenditure-cutting measures.

German Länder have been engaged in consolidation efforts in the past few years following the adoption of new fiscal rules implemented in the constitution,11 including a requirement that each Länd structurally balance its budget starting in 2020.

11 See German Länder: High Ratings Reflect Robust Institutions and Strong Debt Affordability, 21 December 2012.

-€40

-€35

-€30

-€25

-€20

-€15

-€10

-€5

€0

€5

€10

€170

€180

€190

€200

€210

€220

€230

€240

€250

€260

€270

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013e 2014e 2015e 2016e 2017e

€bi

llion

€bi

llion

Actual Länder Tax Revenues - left axis Länder May 2013 Tax Estimate - left axis

May 2012 Tax Estimate - left axis Financing Deficit - right axis

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

Massimo Visconti Vice President - Senior Credit Officer +39.02.9148.1124 massimo.visconti@moodys.com

NEWS & ANALYSIS Credit implications of current events

21 MOODY’S CREDIT OUTLOOK 13 MAY 2013

US Public Finance

Harrisburg, Pennsylvania Fraud Charges Will Improve US Municipal Disclosure On 6 May, the Securities and Exchange Commission (SEC) charged Harrisburg, Pennsylvania, with securities fraud for having incomplete and misleading information about its 2009-11 finances. The charges focused on the city’s budget and public speeches, signaling potentially broader scrutiny of public statements and public documents in the absence of securities disclosure filings. While the city avoided fines and did not admit to wrongdoing, the Harrisburg fraud charge alerts the growing number of distressed municipalities about the SEC’s stepped-up scrutiny. Increased enforcement gives municipal issuers a stronger incentive to provide accurate and timely financial disclosure.

Harrisburg defaulted in June 2009 when it failed to honor its guarantee obligations on approximately $280 million of incinerator bonds issued by the Harrisburg Authority in 2003. The incinerator project experienced cost overruns, failed to raise tip fees and by 2007 needed city support for debt payments. The city paid $4 million on the guaranteed debt in June 2007, a fact the city failed to disclose in its audited financial report. The SEC charged that the omission of that payment failed to indicate to bondholders the possibility of future guarantee payments. Indeed, the city’s financial position deteriorated rapidly after that point, marked by depleted reserves owing to multiple payments on incinerator debt in 2009 and 2010. It defaulted on direct general obligation bonds in September 2010.

The SEC’s charges are the first to involve failure of a municipal issuer to submit its disclosures to the Electronic Municipal Market Access (EMMA) system. The city’s 2009 audit was filed 32 months after fiscal year-end, and its 2010 audit was filed 24 months after year-end. The SEC also charged that in the absence of official disclosure, investors relied on other public statements to gauge the city’s financial health. Information on the city’s website, including the 2009 state-of-the-city address, mid-year fiscal report and 2009 budget, misstated Harrisburg’s credit rating and failed to report payments made on the incinerator debt. Harrisburg has pledged to fully disclose financial information going forward, and the SEC did not impose fines.

The SEC’s action is the last of a number of fraud cases involving incomplete or misleading information. As we commented in March 2013, the SEC found that the state of Illinois (A2 negative) misled investors by failing to include material information about the state’s pension plan. Illinois settled with the SEC and is taking remedial steps to enhance its pension disclosure policies. The SEC also found the state of New Jersey (Aa3 stable) failed to disclose that pension benefits had increased and the plans were underfunded. Penalties were not imposed against Illinois or New Jersey.

Other recent examples of financial misstatements include the cities of Stockton and San Bernardino, California, both of which defaulted on debt in 2012. Both cities restated financial audits that showed actual performance was worse than originally reported. The SEC also charged the city of Victorville, California and the Southern California Logistics Airport Authority with fraud for inflating assessed property values in official statements. The airport authority defaulted in December 2011 after tax increment values declined dramatically and revenues fell short of amounts needed to pay debt service.

The SEC’s stepped up enforcement of disclosure requirements, both in terms of quality and timeliness, should be credit positive for the industry long term.

Coby Kutcher Associate Analyst +1.212.553.3884 coby.kutcher@moodys.com

Anne Van Praagh Managing Director - Chief Credit Officer Public Sector Ratings +1.212.553.3744 anne.vanpraagh@moodys.com

NEWS & ANALYSIS Credit implications of current events

22 MOODY’S CREDIT OUTLOOK 13 MAY 2013

Illinois’ $1.3 Billion April Income Tax Windfall Will Help Pay Down Overdue Bills Last Tuesday, Illinois Governor Pat Quinn announced a $1.3 billion income tax revenue windfall for April that the state is using to pay off a portion of its approximately $8 billion of overdue bills. The surplus receipts, the result of impending federal tax increases that last November and December led to asset sales, are part of a broader trend with credit-positive implications for Illinois (A2 negative) and other US states.

Illinois’ projected fiscal 2013 revenues improved by a total of $1.3 billion after personal income tax collections surged 33% last month to $3.15 billion before refunds as a result of businesses and individuals rushing to sell assets and take other investment earnings before the end of December to avoid the fiscal cliff’s federal tax increases. The state’s corporate tax receipts rose 47% to $824 million. Overall, Illinois’ gross general fund tax revenues grew 29% to $4.82 billion, according to the state legislature’s Commission on Government Forecasting and Accountability. An agreement to avert the fiscal cliff, and subsequent legislation, has prevented the imposition of higher federal tax rates on all but the wealthiest taxpayers.

Although many other states have yet to report April taxes, evidence of improved collections has already surfaced elsewhere, and we attribute some of the improvement to businesses and individuals selling assets in anticipation of an expiration of Bush-era tax rates. In Connecticut (Aa3 stable), the state comptroller reported that as of 1 May taxable investment gains contributed to a $247 million revenue improvement over month-earlier estimates. Massachusetts (Aa1 stable) reported that its April income tax collections were almost 20% ($364 million) higher than April 2012 collections.

To be sure, income tax collections on asset sales timed to beat a 2012 year-end deadline are a one-time gain, and such sales may mean lower taxable activity in the future. But because the expiration of Bush-era tax cuts for wealthy taxpayers will increase the amount of income subject to federal income taxes, it will continue to benefit many states, including Illinois, that use federal adjusted gross income as the starting point for calculating taxable income.

US states’ personal income tax collections in general have been improving separately from the asset sales. Collections rose faster for Illinois than for other states in recent years, because of income-tax increases that took effect in 2011 (see exhibit). States’ personal income tax collections grew 10.8% in the October-December quarter versus a year earlier, according to the State University of New York’s Rockefeller Institute of Government, which tracks quarterly state tax collections. State tax collections have been improving steadily since the first quarter of 2010, according to the institute’s data.

Change in Select US State Income Tax Collections

Source: US Census Bureau, Annual Survey of State Government Finances & Census of Governments

-20%

-10%

0%

10%

20%

30%

40%

2008 2009 2010 2011 2012

Connecticut Illinois Massachusetts Michigan Ohio

Ted Hampton Vice President - Senior Analyst +1.212.553.2741 ted.hampton@moodys.com

NEWS & ANALYSIS Credit implications of current events

23 MOODY’S CREDIT OUTLOOK 13 MAY 2013

The revenue growth has been credit positive for US states, although prudent budgeting remains paramount given the risks inherent in the economy’s tenuous recovery. Improving tax receipts so far has allowed many states to rebuild financial reserves they had used up after the recession. Ohio (Aa1 stable) is on track to contribute to its rainy day fund for the third consecutive year, while Michigan (Aa2 positive) expects to add to its reserve fund for the second consecutive year, pushing the fund’s balance to $505 million, the highest level in a decade.

For Illinois, any above-forecast tax revenues have a more urgent use: a backlog of overdue bills that has put fiscal pressure on goods and services vendors as well as municipalities, universities and other public entities. Last year, the state’s General Assembly passed a resolution that any surplus from fiscal 2013 (which ends 30 June) go toward reducing outstanding accounts payable. The state’s comptroller has already spent the bulk of April’s windfall to pare down bills, primarily for Medicaid, under existing legislative appropriations. Illinois now is on track, according to a state official, to further reduce outstanding bills through the end of the coming fiscal year, to the $5.5-$6.5 billion range by the end of fiscal 2014, which starts 1 July, depending on the budget legislation enacted.

RATING CHANGES Significant rating actions taken the week ending 10 May 2013

24 MOODY’S CREDIT OUTLOOK 13 MAY 2013

Corporates

CEVA Group plc Review for Upgrade

8 Apr ‘13 7 May ‘13

Corporate Family Rating Caa3 Caa3

Outlook Review for Downgrade Review for Upgrade

CEVA failed to pay interest on interest due April 1 in a default. The review reflects the fact that, following a debt equitization, CEVA's leverage will fall materially. Instrument ratings will be based on our Loss Given Default methodology following the assignment of a revised corporate family rating, but we caution that an upgrade of the corporate family rating will not necessarily lead to an upgrade of existing instrument ratings.

Claire’s Stores, Inc. Outlook Change

26 Sep ‘12 9 May ‘13

Corporate Family Rating Caa1 Caa1

Outlook Stable Positive

The outlook change reflects Claire's value positioned price points, international geographic presence, well-known brand name and high margins relative to its specialty peers’, as well as its good liquidity profile. The positive outlook incorporates our expectation that Claire's earnings will improve modestly, leading to an improvement in its currently very weak credit metrics.

Compagnie Generale De Geophysique-Veritas Confirmation

25 Sep ‘12 9 May ‘13

Corporate Family Rating Ba2 Ba2

Outlook Review for downgrade Negative

The confirmation follows the completion of CGGVeritas’ acquisition of the Geoscience division of Fugro N.V. and takes into account CGGVeritas’ first-quarter results, which exceeded our expectations. The $1.3 billion acquisition was financed in line with our expectations.

Global Tel*Link Corporation Downgrade

11 Nov ‘11 7 May ‘13

Corporate Family Rating B2 B3

Outlook Stable Stable

The downgrade reflects Global Tel*Link’s high leverage and modest EBITDA growth profile. In the past, the company has reduced leverage quickly after incurring debt for M&A or dividends, but leverage may this time remain elevated following its proposed dividend recap, due to low organic growth and intense competitive pressure.

RATING CHANGES Significant rating actions taken the week ending 10 May 2013

25 MOODY’S CREDIT OUTLOOK 13 MAY 2013

Nielsen Holdings N.V. Outlook Change

20 Feb ‘13 7 May ‘13

Corporate Family Rating Ba3 Ba3

Outlook Stable Positive

The outlook change follows the company's announcement that it has signed a definitive agreement to sell its Expositions trade show business to Onex Corp. Nielsen plans to use the proceeds to mitigate about 70% of the borrowing needs related to its pending acquisition of Arbitron Inc. The de-leveraging resulting from the sale, projected earnings growth and additional debt repayment could reduce Nielsen’s debt-to-EBITDA leverage to about 4x by the end of 2014.

NXP B.V. Outlook Change

7 Nov ‘12 6 May ‘13

Corporate Family Rating B1 B1

Outlook Stable Positive

The outlook change was prompted by our increased confidence in NXP's ability to sustain solid profitability in its major high performance mixed signal segment and generate material amounts of positive free cash flow through the cycle. Free cash flow will be applied to debt reduction, and as a result we expect adjusted debt/EBITDA to fall to around 3.0x from around 3.6x at 31 March 2012 in the next 12 to 18 months.

RATING CHANGES Significant rating actions taken the week ending 10 May 2013

26 MOODY’S CREDIT OUTLOOK 13 MAY 2013

Financial Institutions

Aetna Inc. Downgrade

2 Nov ‘12 7 May ‘13

Senior Unsecured Rating Baa1 Baa2

Aetna Life Insurance Company Downgrade

2 Nov ‘12 7 May ‘13

Insurance Financial Strength Rating A1 A2

Coventry Health Care, Inc Upgrade

11 Aug ‘11 7 May ‘13

Senior Debt Rating Baa3 Baa2

The rating actions follow the announcement that Aetna had completed its acquisition of Coventry Health Care, Inc. The downgrade of Aetna’s ratings reflects the adverse financial effect of the transaction on Aetna, as it includes the issuance of $2 billion of long-term debt, approximately $500 million of short-term debt, and the assumption of Coventry's approximate $1.6 billion of outstanding senior notes. The upgrade for Coventry reflects the alignment of its ratings with Aetna's ratings based on the assumption of Coventry's outstanding debt by Aetna and Aetna's plans to integrate Coventry's operations and businesses, providing increased diversification and potentially improved market positioning. We note the enhanced business profile of the combined entity, which has approximately 22 million medical members as well as increased product diversity.

Banca Monte dei Paschi di Siena Downgrade

30 Jan ‘13 9 May ‘13

Long-term Debt and Deposit Ratings Ba2 B2

Standalone Bank Financial Strength / Baseline Credit Assessment

E/caa1 E/caa3

The downgrade reflects increasing pressure on MPS’s profitability, asset quality and capitalization, despite a €4.1 billion capital injection from the Italian government. MPS reported a net loss for 2012 of €3.2billion. The ongoing recessionary environment is also a challenge, as it will be difficult for MPS to reduce its costs in line with its business plan, as well as make it difficult for the bank to restore capital adequacy through internal profit generation.

RATING CHANGES Significant rating actions taken the week ending 10 May 2013

27 MOODY’S CREDIT OUTLOOK 13 MAY 2013

Co-operative Bank plc Downgrade

26 Feb ‘13 9 May ‘13

Deposit and Senior Debt Ratings A3/Prime 2 Ba3/Not Prime

Standalone Bank Financial Strength / Baseline Credit Assessment

C-/baa1 E+/b1

Outlook Review for Downgrade Review for Downgrade

The bank faces risk of further substantial losses in its non-core portfolio, as demonstrated recently by the unexpectedly significant deterioration of its commercial real estate exposures. We also view its vulnerability to losses as heightened by the low level of provisions held against its lending portfolio. A third reason for the downgrade is the bank's slow progress in realising merger-related revenue and cost benefits has diminished its ability to replenish capital through earnings. The rating remains on review for further downgrade.

First Industrial L.P. Upgrade

16 Jun ‘09 6 May ‘13

Senior Secured Rating Ba3 Ba2

Preferred Stock Rating B2 B1

The upgrade reflects First Industrial's progress in leasing up its portfolio as evidenced by occupancy rates increasing to 89.6% for first quarter 2013 from 87.4% for the same quarter a year earlier. The upgrade also reflects significant deleveraging. We expect the REIT's leasing momentum to continue, and its occupancy and profitability to grow in the near term.

HSBC Seguros de Vida Downgrade

23 Jun ‘09 6 May ‘13

Global Local-Currency Insurance Financial Strength

Ba3 B1

The downgrade reflects the deterioration in the insurer’s standalone credit profile, primarily driven by weaker asset quality and capital adequacy. As a result of a regulatory change in the local Argentine insurance market, the company had to repatriate its higher-quality foreign assets to lower-quality domestic sovereign bonds and other local instruments that carry speculative-grade ratings.

Korea Development Bank Outlook Change

5 Sep ‘12 10 May ‘13

Outlook on Long-Term Deposit Rating

Negative Stable

Long-Term Rating Aa3 Aa3

The change to a stable outlook reflects our view that KDB's ultimate parent, KDB Financial Group (unrated) is unlikely to be privatized, at least over the next one to two years.

RATING CHANGES Significant rating actions taken the week ending 10 May 2013

28 MOODY’S CREDIT OUTLOOK 13 MAY 2013

US Public Finance

Passaic County, New Jersey Outlook Change

13 Dec ‘12 6 May ‘13

Fixed Rate Bonds Aa3 Aa3

Outlook Stable Positive

The outlook change reflects the county's carefully managed financial position and that we expect financial operations to be structurally balanced, augmenting cash and reserve positions. The Aa3 rating reflects the county's large and diverse tax base with average wealth profile, satisfactory financial operations and moderate debt position.

Structured Finance

Methodology Update Leads to Reviews for Upgrades on Some US CLOs and CBOs On 9 May, we placed on review for upgrade all tranches currently rated Aa1(sf) and below in nine cash flow collateralized loan obligations (CLOs) and three synthetic collateralized bond obligations (CBOs) in the US. The actions affected 49 tranches in 12 transactions, totaling approximately $4.3 billion of rated balance. The actions are the result of updates to our methodology for rating and monitoring CLOs. All of the affected transactions have material exposure to collateral other than first-lien loans, the treatment of this non-first-lien collateral is changed under the revised methodology. In addition to our press release, see our highlights of the new methodology or the complete methodology.

RESEARCH HIGHLIGHTS Notable research published the week ending 10 May 2013

29 MOODY’S CREDIT OUTLOOK 13 MAY 2013

Corporates

Moody's Asian Liquidity Stress Index - May 2013

Our Asian Liquidity Stress Index inched up to 27% in April from 26.9% in March. The slight increase reflects the addition of one company to the roster of those with our weakest speculative-grade liquidity score. The liquidity sub-index for Chinese speculative-grade companies also rose slightly, to 31.0% from 30.9% in March, with this change also reflecting the addition of one company with a very weak liquidity score.

Frequently Asked Questions: Moody's Pre-Closing Loan Covenant Quality Snapshots

This report answers frequently asked questions about our Pre-Closing Loan Covenant Quality Snapshots. These include, What are Moody’s Pre-Closing Loan Covenant Quality Snapshots?, What are the major elements of Pre-Closing Loan Covenant Quality? and “What are the criteria for Pre-Closing Loan Covenant Quality Snapshots?

US Tobacco Industry: Operating Profit to Rise Despite Declining Cigarette Sales Volume

Our stable outlook for the US tobacco industry reflects our expectations for operating profit growth of 4.5% in 2013 and 4.0% in 2014 amid continuing uncertainty surrounding tax, litigation and regulatory initiatives. Revenue will rise in a range of 3.5%-4.0% each year, as the industry retains solid pricing flexibility. Cigarette sale volumes will continue to decline, however.

French Employment Tax Credit Provides Reinvestment Boost to Corporates

Beginning this year, companies based in France will benefit from a tax credit designed to encourage competitiveness and job creation. The Crédit d’Impôt pour la Compétitivité et l’Emploi is calculated as a percentage of wages paid to salaried employees in a given calendar year, and is intended to be reinvested in research, innovation, employment, training, the exploration of new markets and the recovery of working capital.

China Property Developers: Sales Growth Will Slow Amid Housing-Market Controls

Our stable outlook for the Chinese property industry reflects our expectation for around 10% year-over-year growth in the value of residential property sales over the next 12 months. Ongoing urbanization and favorable mortgage financing for first-time home buyers will continue to support demand for housing, while new government guidelines to further clamp down on investment-property demand will slow housing-price increases.

US Broadcast Television: Buyers and Sellers Benefit as New Wave of Arbitrageurs Stake Their Claims

Mergers and acquisitions in the US broadcast television sector represent more than an example of the M&A activity picking up in other US corporate sectors, since broadcast deals now offer an additional sweetener for the buyer: immediate arbitrage opportunities. The value of M&A deals among US pure-play television broadcasters will surpass $3.5 billion and could exceed $6 billion in 2013-14.

RESEARCH HIGHLIGHTS Notable research published the week ending 10 May 2013

30 MOODY’S CREDIT OUTLOOK 13 MAY 2013

Global Base Metals: Worldwide Negative Sentiments Take Toll on Industry

Our negative outlook for the global base metals industry takes into account subdued prices over the next 12 to 18 months and further risk amid an uncertain global economic recovery. Monthly averages peaked in February and have fallen steadily through April, and we currently see little impetus that would materially reverse the 2013 slide in prices.

Global Pharmaceuticals Relative Comparison: Pipeline Quality, Patent Exposures and Other Key Operating Metrics

This report compares 17 global branded pharmaceutical companies on several key credit attributes, including drug pipeline quality and exposure to patent expirations. It also compares product and therapeutic diversity, as well as financial flexibility as measured by debt/EBITDA.

US Housing Recovery Will Support European Building Materials Producers

European building materials companies’ performance and their ability to successfully deleverage in 2013 will remain largely dependent on the continued recovery of the US private residential market and on strong trading conditions in Asia and Latin America. In the US, cement volumes are likely to improve by low- to mid-single-digits, while European demand for building materials will remain lackluster in 2013 even in historically resilient markets such as Germany and France.

Infrastructure & Project Finance

US Power Project Finance Rides the Covenant-lite Wave

US power project loans are sharing in the trend towards looser structural features and lender protections. As investors and lenders emphasize yield over risk, they appear willing to accept loosened covenants that are more akin in their flexibility to “covenant-lite” loans in corporate lending than traditional power project loans.

Managed Lanes are HOT! Unique Risks and Benefits Versus Traditional Tolling Highway planners in the US are looking more and more at tolled managed lanes as a way to increase capacity or throughput on existing heavily congested roads. Toll managed lanes have risk profiles different from toll roads because their operating histories are limited, their dynamic tolling systems are difficult to execute, and traffic volumes on the lanes are likely to be very volatile.

RESEARCH HIGHLIGHTS Notable research published the week ending 10 May 2013

31 MOODY’S CREDIT OUTLOOK 13 MAY 2013

Financial Institutions

Uruguay Banking System Outlook Our outlook for the Uruguayan banking system remains stable, We expect continued economic growth and favorable labor market conditions to sustain the growth in consumer lending and banks’ profitability over the next 12 to 18 months, despite rising inflation and some signs of asset quality deterioration.

Dutch Insurance: Adverse Economy and Margin Pressures Underlie Negative Outlook Our negative outlook on the Dutch insurance industry is because we the economic environment to remain adverse and for ongoing competition to continue to impair profitability. The Dutch insurers will continue to target volumes at the expense of margins in new business lines, while closed books of business carry high cost risks in the prolonged low interest-rate environment.

Global Insurance Regulators Battle Doubts and Delays Over Solvency Modernization Global insurance solvency regimes will undergo significant changes in coming years, moving toward more principles-based approaches with incentives for improved risk management. However, the new regulatory regimes and any resulting change in regulatory ratio levels are not expected to directly affect ratings.

Profitability Rises in US Excess and Surplus Insurance; Pricing Momentum Continues Pure play excess and surplus (E&S) lines companies collectively reported direct written premium growth of 11% during 2012, the highest level in over seven years, following a 2.4% increase in 2011. This top line growth primarily reflects pricing improvement, growth in the economy, and a transition by certain standard (admitted) carriers away from E&S lines and back to core standard lines.

RESEARCH HIGHLIGHTS Notable research published the week ending 10 May 2013

32 MOODY’S CREDIT OUTLOOK 13 MAY 2013

Sovereigns

Malaysian Election Comment: Continuity of Pro-Growth Policy Assured, While Credit Profiles of Petronas and Other Malaysian Entities Maintained Barisan Nasional’s retention of government assures the continuation of Malaysia’s (A3 stable) pro-growth policy, an outcome which is credit positive for the sovereign rating and the ratings of government-related issuers. At the same time, Barisan Nasional’s populist fiscal agenda clouds the prospects for fiscal reform.

China Credit Analysis China’s Aa3 foreign and local currency bond ratings and stable outlook are supported by the country’s relatively high economic strength and very high government financial strength. Governance and transparency challenges constrain the sovereign’s institutional strength at a moderate assessment.

Cyprus: Lessons on Capital Controls from Iceland We look at the key features of Iceland’s capital control regime, introduced November 2008, and find possible lessons for Cyprus. We conclude that maintaining effective capital controls is not an easy undertaking given that the risk of circumvention is high. Capital controls, however, allow a country some breathing room to recover without the risk of destabilising capital outflows.

Greece: Approval of Omnibus Bill, First Major Privatisation and Surpassed Fiscal Targets Are Credit Positive The bill’s approval is credit positive as it reflects increased political commitment to fiscal consolidation and the economic reform agenda, rejuvenates and streamlines the public-sector workforce, and paves the way for disbursements under the Second Economic Adjustment Program. The country’s first major privatisation reflects improved investor confidence and will help the government meet its fiscal targets.

RESEARCH HIGHLIGHTS Notable research published the week ending 10 May 2013

33 MOODY’S CREDIT OUTLOOK 13 MAY 2013

US Public Finance

Not-for-Profit Hospitals: The Pursuit of Value The ability to deliver quality care at an affordable cost is becoming increasingly important to the financial strength and credit quality of not-for-profit hospitals, as reimbursements shift toward rewarding value in healthcare. Hospital managers are pursuing four specific objectives as they respond to the change. These are achieving breakeven performance with Medicare rates, building scale through non-traditional methods, improved patient experience, and cultivating informed leadership.

Fannie Mae HFA Preferred Risk Sharing Offers HFAs New Financing Opportunities But Carries Some Credit Risks The Fannie Mae HFA Preferred Risk Sharing program creates an attractive product for the housing finance agencies (HFAs) that can enhance their revenue streams. The program, however, does include some risk because the HFAs retain some responsibility for the performance of the loans they generate under it.

US Municipal Bond Defaults and Recoveries 1970-2012 Municipal bond defaults have increased in number since the start of the financial crisis, but remain extremely infrequent. With five defaults in 2012, there has been an average of 4.6 defaults per year over the 2008-12 period, much higher than the 1.3 per year average in the preceding 1970-2007 period. Although downside pressure in the municipal sector may persist for some time, we expect municipal defaults to remain few in number.

Structured Finance

CMBS: Red - Yellow - Green® Update First-Quarter 2013 Assessment of US Property Markets The outlook for the major US property markets was broadly stable in first quarter 2013, consistent with the generally slow pace of both construction and absorption. The overall composite score increased one point to Green 68. Overall levels of construction and absorption remained modest, but strong RevPAR growth in the hotel sectors pushed the composite score up.

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

34 MOODY’S CREDIT OUTLOOK 13 MAY 2013

NEWS & ANALYSIS Corporates 2

» Crestwood-Inergy Merger Expands Midstream Companies’ Scale, Offerings and Reach

» Nord Anglia Education Acquires WCL Group, a Credit Positive

Infrastructure 5

» PG&E’s $2.25 Billion Penalty Recommendation Is, Ironically, Credit Positive

Banks 6

» GSE Debate Will Grind Reform to a Halt, a Credit Positive for Bondholders

» Bank of America Settlement with MBIA Is Credit Positive » Spanish Banks’ Increased Transparency on Loan Refinancings

Helps Creditors Assess Risk

Insurers 11 » MBIA’s Settlement with Bank of America Is Credit Positive

Asset Managers 13 » Man Group’s Plan to Extinguish All Outstanding Debt Is

Credit Positive

Sovereigns 15

» Malaysia's Election Outcome Assures Country's Pro-Growth Policy and Supports Petronas

» Bangladesh Strikes and Factory Disasters Are Credit Negative

MOODYS.COM

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EDITORS PRODUCTION ASSOCIATE News & Analysis: Elisa Herr, Jay Sherman and Wendy Arthur

David Dombrovskis

Ratings & Research: Robert Cox Final Production: Barry Hing