MOODYS.COM

28 JANUARY 2016

NEWS & ANALYSIS Corporates 2 » Dole Food’s Listeria Outbreak and Salad Recall Is Credit Negative

» Select’s Deal for Physiotherapy Delays Deleveraging, a Credit Negative

» Siemens’ Acquisition of CD-adapco Slows Deleveraging, a Credit Negative

» ZF Friedrichshafen’s Sale of Engineered Fasteners and Components Business to ITW Is Credit Positive for Both

» Japan Tobacco Proposes Price Rise without Corresponding Tax Hike, a Credit Positive

Infrastructure 8 » US Regulator Approves Cybersecurity Standards, a Credit Positive

for Regulated Utilities

» New York’s Clean Energy Push Is Credit Negative for Merchant Generators

» Consolidated Edison Diversifies into the Midstream Business, a Credit Positive

» Loss of Major Terminal Operator Would Be Credit Negative for Port of Oakland

Banks 14 » Slowing Deposit Growth Is Credit Negative for Saudi Banks

» Growth of Financial Technology Services Is Credit Negative for Korean Banks

» Malaysia’s Central Bank Cuts Reserve Ratio, a Credit Positive for Banks

Sovereigns 20 » Civil Unrest Is Credit Negative for Tunisia

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» Articles in Last Monday’s Credit Outlook 22

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NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 28 JANUARY 2016

Corporates

Dole Food’s Listeria Outbreak and Salad Recall Is Credit Negative Last Friday, fresh fruit and vegetable producer Dole Food Company, Inc. (B2 stable) temporarily suspended operations at its Springfield, Ohio, salad production facility and announced that it is voluntarily recalling all packaged salads processed at the facility after the US Centers for Disease Control and Prevention identified the plant as the likely source of a multistate listeria outbreak that had hospitalized 12 people and resulted in one death.

The Springfield facility listeria concern is credit negative for Dole because lost revenue from suspended operations and costs associated with the recall and the plant’s cleanup will reduce earnings. However, these actions will not affect Dole’s ratings or outlook because the company will likely see only a modest increase in financial leverage and will have sufficient revolver availability and cash on hand to cover additional expenses.

We estimate that debt/EBITDA will rise to 4.5x by the end of the first quarter of 2016 from 4.3x as of 10 October 2015. Our estimate is based on our assumption that the Springfield plant will be closed for three months and that Dole’s other two salad plants will be able to increase production to partially offset the lost volume.

As of 10 October, Dole had $147 million available under its borrowing-based revolving credit facility and $107 million in cash on hand. Pro forma for a $26 million term loan payment made in the fourth quarter of 2015, a $33 million vessel payment made in the fourth quarter, about $51 million in capital expenditures in the fourth quarter and an expected $35 million vessel payment in the first quarter of 2016, remaining revolver availability plus cash on hand totals $109 million. This should provide adequate liquidity to cover expenses related to the recall and the plant cleanup.

Dominick D’Ascoli Vice President - Senior Analyst +1.212.553.0196 dominick.dascoli@moodys.com

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

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 28 JANUARY 2016

Select’s Deal for Physiotherapy Delays Deleveraging, a Credit Negative Select Medical Holdings Corporation (B1 stable) on Monday announced plans to acquire Physiotherapy Associates Holdings Inc. (unrated), one of the largest providers of outpatient physical therapy services in the US, for $400 million in cash. The debt-financed deal is credit negative for Select because it will delay a reduction in leverage, which we had expected following Select’s acquisition of Concentra Inc. in June 2015.

We expect Select to finance the deal, which the companies expect to close in the first or second quarter of 2016, with an incremental senior secured term loan that will modestly increase pro forma leverage to 5.4x debt/EBITDA from 5.0x as of 30 September 2015 before synergies. Although we believe that Select will realize considerable cost savings by combining its already sizable outpatient physical therapy business with Physiotherapy, we had previously expected that Select’s leverage would continue to decline following its acquisition of Concentra last year through a joint venture arrangement with Welsh, Carson, Anderson & Stowe (WCAS).

Our leverage metric includes the debt and EBITDA from Concentra, but excludes any as-of-yet unrealized synergies from that transaction. However, if we include an estimate of the fair value of the put option related to the portion of Concentra equity held by WCAS, leverage would be about 5.7x. We believe it is reasonable to include this because we expect that Select will ultimately acquire the rest of Concentra that it does not already own. Although Select has the option of using equity to fund these future transactions, we expect that the company will use a combination of debt and available cash.

Concentra has issued about $650 million in debt at the joint venture level, which is consolidated in Select’s financial statements owing to its majority ownership and control of the joint venture. However, the debt is not guaranteed by, and is non-recourse to, both Select and WCAS.

Physiotherapy’s operations will increase Select’s diversification, which will somewhat offset the risks associated with higher leverage. The larger outpatient physical therapy business will decrease Select’s reliance on its specialty hospital segment, which is absorbing changes in reimbursement for services in its long-term acute care hospitals. Select will also be less dependent on Medicare as a source of revenue following the transaction, given that much of the reimbursement for outpatient physical therapy services comes from commercial payers.

Select, based in Mechanicsburg, Pennsylvania, provides long-term acute care hospital services and inpatient acute rehabilitative care through its specialty hospital segment. The company also provides physical, occupational and speech rehabilitation services through its outpatient rehabilitation segment. Select also has a majority interest in a joint venture with WCAS that includes the operations of Concentra, which provides occupational and consumer healthcare services, including workers’ compensation injury care, physical exams and drug testing for employers, and wellness and preventative care in approximately 300 centers across the US and 174 clinics at employer locations.

Dean Diaz Senior Vice President +1.212.553.4332 dean.diaz@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 28 JANUARY 2016

Siemens’ Acquisition of CD-adapco Slows Deleveraging, a Credit Negative On Monday, Siemens Aktiengesellschaft (A1 stable) released financial results for the first quarter of the fiscal year ending 30 September 2016 at the same time that it announced that it had acquired CD-adapco (unrated), a provider of simulation software for industrial applications, for $970 million. Although profitability in Siemens’ industrial business expanded by €175 million from a year earlier, Moody’s-adjusted debt/EBITDA leverage rose as a result of an increase in gross debt. And, while CD-adapco’s activities complement Siemens’ existing businesses and will add approximately $200 million of revenue, the acquisition reduces the pace of deleveraging, which is credit negative.

As a privately held company, CD-adapco’s public financial disclosure is limited. Siemens announced that CD-adapco’s annual revenues total about $200 million, of which more than 80% are recurring. Profitability is in the double-digit percent range and typical for software companies. We assume that CD-adapco’s profit margin is at least comparable to that of Siemens’ Digital Factory division (17.2%), into which CD-adapco will be integrated.

CD-adapco’s largest customers by industry were ground transportation (which constituted 52% of 2015 billings), energy (9%), aerospace and defence (9%) and marine (7%). Siemens expects to close the acquisition in the second half of fiscal 2016 and to use about €300 million of additional disposal proceeds from its hearing aid business, Audiology Solutions, to pay for the acquisition.

Meanwhile, Siemens reported a 4% increase (excluding currency translation effects) in fiscal first-quarter revenue from a year ago and a 10% (or €175 million) increase in profits for the industrial business. These translate into an operating margin of 10.4%. However, Siemens’ improvement in operating profitability did not result in lower leverage: the company’s Moody’s-adjusted debt/EBITDA rose to 2.4x for the fiscal first-quarter from 2.3x as of 30 September 2015.

The increased leverage indicates that the pace of improvement in EBITDA, measured on the basis of the last 12 months, did not overcome a €1.8 billion quarter-over-quarter increase in gross debt. This calculation does not yet take into account effects of the CD-adapco acquisition; we had expected a gradual decline in leverage following Siemens’ acquisition of DresserRand Inc. in June 2015. For the A1 rating, we expect Siemens’ leverage for fiscal 2016 to improve toward 2.0x, driven by a further continuous increase in EBITDA, and at least stable debt levels.

Martin Kohlhase Vice President - Senior Credit Officer +49.69.70730.719 martin.kohlhase@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 28 JANUARY 2016

ZF Friedrichshafen’s Sale of Engineered Fasteners and Components Business to ITW Is Credit Positive for Both On Monday, ZF Friedrichshafen AG (Ba2 positive) and Illinois Tool Works Inc. (ITW, A2 stable) announced that ZF was selling its Global Engineered Fasteners and Components (EF&C) business to ITW for $450 million. The divestment is credit positive for ZF because it releases capital bound in a comparably small non-core business operation. We expect ZF to use the sale proceeds to reduce the company’s currently elevated debt level following its fully debt-funded May 2015 acquisition of TRW for around $13.2 billion.

For ITW, the acquisition is also credit positive because it will increase the scale of the company’s existing automotive original equipment manufacturer (OEM) segment. Adding ZF EF&C will enhance the financial performance of this segment by driving incremental margin expansion following integration and application of ITW’s practices for optimizing the performance of its various businesses, which includes its “80/20” processes. ITW plans to fund the acquisition with cash mainly held by its overseas subsidiaries. The transaction is subject to customary closing conditions and regulatory approvals and the parties expect to close the transaction during the first half of 2016.

Germany-based EF&C is a leading global supplier of engineered fastening systems and interior technical components to the automotive OEM market and has annual sales of around $470 million, versus €32 billion for ZF pro forma for the purchase of TRW. The sale of EF&C is part of ZF management’s strategy to focus its operations on higher growth businesses in the areas of safety, efficiency and electrification and to further develop automated driving.

Pro forma for the transaction, ZF’s adjusted debt as of June 2015 will decrease to approximately €15.6 billion from nearly €16 billion. However, because EF&C is profitable, we expect the effect of the transaction on ZF’s leverage, as measured by debt/EBITDA, to be negligible. Nevertheless, the company will decrease the size of its non-core business, allowing management to focus on core business operations.

ITW can readily fund the acquisition with only a modest effect on a liquidity cushion composed of consolidated cash of approximately $3.0 billion as of 30 September 2015, and an estimated positive free cash flow of more than $150 million in the fourth quarter of 2015. With annual revenue of about $2.5 billion, ITW’s automotive OEM segment accounts for about 19% of the company’s consolidated revenue. Profits of about $616 million lead to an operating margin (reported basis) of about 24% for the last 12 months to 30 September 2015.

Friedrichshafen, Germany-based ZF is a leading global technology company specializing in driveline and chassis technology. The company generates the majority of its revenues from the passenger car and commercial vehicle industries, but also serves the construction and agricultural machinery sectors.

Glenview, Illinois-based ITW is a multinational manufacturer of industrial products and equipment with a portfolio of several hundred business units. Operations span 57 countries and are organized in seven reporting segments; test, measurement & electronics, automotive OEM, polymers & fluids, food equipment, construction products, welding and specialty products. Annual revenues are approximately $14 billion.

Oliver Giani Vice President - Senior Analyst +49.69.70730.722 oliver.giani@moodys.com

Jonathan Root, CFA Vice President - Senior Credit Officer +1.212.533.1672 jonathan.root@moodys.com

Dirk Steinicke Associate Analyst +49.69.70730.949 dirk.steinicke@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 28 JANUARY 2016

Japan Tobacco Proposes Price Rise without Corresponding Tax Hike, a Credit Positive Last Friday, Japan Tobacco Inc. (JT, Aa3 stable) announced that it had applied to amend the domestic retail price of its main global premium product, Mevius, by ¥10 to ¥440 starting in April. This price amendment would be credit positive because it will improve JT’s margins in its important domestic tobacco business. If the government approves the price hike, which we think is likely, we expect JT’s proceeds from Mevius, excluding taxes and retailer margins, to rise by around 7% per package, and the operating margin of its Japanese domestic tobacco segment to increase by around 2% on a reported basis.

Mevius, one of JT’s main global premium products, commanded a 32.1% market share in Japan by sales volume in 2014. JT had held an overall market share of 60.4% by sales volume in Japan in 2014. As Exhibits 1 and 2 show, tobacco sales volumes have been declining steadily in Japan owing to factors such as healthier life choices and an aging society (the exception was the fiscal year that ended March 2014, when sales surged ahead of a consumption tax hike). Despite this decline, the domestic tobacco business on a reported basis constituted a material 30% of JT’s total revenue and 43% of total operating profit in the nine months that ended September 2015.

EXHIBIT 1

Tobacco Sales Volumes in Japan Are Decreasing

Source: Tobacco Institute of Japan

EXHIBIT 2

The Smoking Rate in Japan Is Falling

Source: Japan Tobacco

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Takashi Akimoto Analyst +81.3.5408.4208 takashi.akimoto@moodys.com

Kenichiro Sano Associate Analyst +81.3.5408.4157 kenichiro.sano@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 28 JANUARY 2016

The proposed price increase is noteworthy because it is the first hike for Mevius not accompanied by a corresponding tax hike since 1985, when JT was privatized. Pricing strategies are extremely important for tobacco companies to maintain profitability, especially in markets such as Japan, where the smoking rate and domestic sales volumes have been declining.

Each price revision in Japan requires approval from the Minister of Finance, and as such we have viewed the flexibility of tobacco companies’ pricing as somewhat restricted in the absence of a tax hike. However, JT’s increase in retail prices without a corresponding tax hike is in line with current inflation targets set by the Bank of Japan to overcome deflation and achieve sustainable economic growth.

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 28 JANUARY 2016

Infrastructure

US Regulator Approves Cybersecurity Standards, a Credit Positive for Regulated Utilities Last Thursday, the US Federal Energy Regulatory Commission (FERC) issued a final rule (Order 822) regarding critical infrastructure protection (CIP) standards proposed by the North American Electric Reliability Corp. (NERC), the nation’s electric reliability organization. The final rule, which becomes effective 65 days after its publication in the Federal Register, is credit positive for regulated utilities because the rule stresses the importance of cybersecurity and improve the likelihood that these investments will be recovered through regulated rate-setting mechanisms.

Only electric power generation and transmission owners and operators – companies that own or operate the bulk electric system – are affected. Some of the biggest include American Electric Power Company, Inc. (Baa1 stable), Consolidated Edison, Inc. (A3 stable), Duke Energy Corporation (Baa1 negative), Edison International (A3 stable) and The Southern Company (Baa1 negative). Water utilities and gas distribution utilities are not affected.

As a critical infrastructure sector, many utilities must meet defined cyber compliance requirements administered by government agencies such as NERC. These standards ask utilities to identify their critical assets, document and implement a cybersecurity policy and develop an incident-response plan, among other actions.

FERC’s Order 822 directs NERC to make additional changes to the reliability standards that safeguard the cybersecurity of critical bulk electric system (BES) assets. In particular, NERC will modify its standards to ensure that transient electronic devices, such as thumb drives and laptop computers, used at low-impact BES cyber-systems and communication network components and data communicated between bulk electric system control centers are not compromised.

BES assets have a critical role in the nation’s electric system, including control center communications, because they provide reliability coordinators, balance the supply and demand of electricity and offer transmission operators with real-time data on the transmission system’s operations. Since FERC stresses the importance of ensuring that sensitive data is protected and remains available for operators’ use, utilities will invest to meet these requirements. Because some information may be more sensitive than others, FERC gave NERC the flexibility to develop controls that reflect the risk posed by the asset or data being protected. However, Order 822 does not address the risks associated with a transmission system’s supply chain or vendors that have permission to access to the BES assets. NERC is deferring these critical decisions until after a technical conference on 28 January.

NERC carries out regular audits on all bulk power providers to verify their compliance with the latest NERC-developed cybersecurity standards. NERC also provides various cyber defense resources and carries out simulation scenarios for its members to test their defenses. Still, we see an inherent mismatch between the pace that cyber risk is evolving and the rate at which the industry is implementing NERC-developed and government-approved standards. Additionally, setting standards does not in and of itself guarantee safety, since it can also increase the risk that utilities will succumb to a culture of compliance versus a culture of defense.

Lesley Ritter Analyst +1.212.553.1607 lesley.ritter@moodys.com

Jim Hempstead Associate Managing Director +1.212.553.4318 james.hempstead@moodys.com

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 28 JANUARY 2016

New York’s Clean Energy Push Is Credit Negative for Merchant Generators Last Thursday, the New York Public Service Commission (NYPSC) and Governor Andrew Cuomo announced the approval of a 10-year, $5 billion Clean Energy Fund that the New York State Energy Research and Development Authority (NYSERDA) will administer.

The approval is credit negative for unregulated merchant generators in the state because peak load demand, the time frame where merchant generators earn the highest margin, will decline owing to the substantial ramp-up in energy efficiency and increased renewable energy deployment. Energy efficiency measures and solar-generated power reduce peak electric load, the period of the day during which power demand is the greatest and accompanying power prices are often the highest.

Merchant unregulated projects likely to be negatively affected by New York’s green push include Empire Generating Co. LLC (B1 stable), whose asset is located north of New York City, and Astoria Energy LLC (Ba3 stable) and TPF II Power, LLC (B1 stable), whose assets are concentrated in the New York City area. Larger unregulated power companies that have a material New York State presence, including Entergy Corporation (Baa3 positive), NRG Energy, Inc. (Ba3 stable) and Dynegy Inc. (B2 positive), will be affected to a lesser extent because their business mix is more geographically and operationally diverse.

Our expectation about the greening revolution’s negative affect on merchant generators is based on the negative credit effect already experienced by merchant generators in California and Texas, where similar programs have been implemented for several years.1 In these states, wholesale power prices continue to suffer as a substantial proportion of new electric generation resources comes from solar or wind generation. Most of this new development has been contracted solar or wind farms that satisfy regional demand, resulting in a substantial amount of excess generation supply and lower wholesale power prices borne by unregulated power producers.

Importantly, the renewable growth story has occurred in California and Texas, irrespective of market design. In California, a top-down, public-policy approach adopted through the state’s renewable portfolio standard was the driving force behind the growth in renewables, while in Texas, which does not have a renewable portfolio standard, it was a market-driven, more bottom-up approach. Although new natural-gas-fired generation has been added to both states’ power mix in the past several years, and low wholesale power prices are influenced by other factors such as low natural gas prices, renewables and energy efficiency programs have had a meaningful influence on overall wholesale power pricing.

New York State already has a small but growing base of rooftop solar installations as part of its community solar initiative. Tech giant Google Inc.’s Project Sunroof, unveiled in 2015, has the potential to indirectly lead to further solar penetration in New York State as a result of Clean Energy Fund investment. Energy efficiency will also continue to affect merchant generators, although we expect its effect to materialize slowly, whereas wind and long-distance transmission bringing low-cost hydro from Canada will also reduce wholesale power pricing.

The fund will initially operate four portfolios with $2.7 billion in funding dedicated to market development; $961 million dedicated to New York’s solar initiative, NY-Sun; $782 million to the New York Green Bank; and $717 million committed to innovation and research. The NYPSC’s approval of this fund is ultimately part of New York’s signature energy plan, Reforming the Energy Vision.

1 See Flood of Renewables Throws Cold Water on Outlook for California’s Power Generators, 6 October 2015, and Power Market

Doldrums in the Lone Star State, 20 May 2015.

Charles Berckmann Assistant Vice President - Analyst +1.212.553.2811 charles.berckmann@moodys.com

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 28 JANUARY 2016

Consolidated Edison Diversifies into the Midstream Business, a Credit Positive Last Friday, Consolidated Edison, Inc. (CEI, A3 stable) announced that it had acquired a 12.5% stake in the Mountain Valley Pipeline (MVP), a gas pipeline construction project sponsored by EQT Midstream Partners, LP (EQM, Ba1 review for downgrade), signaling an entry into the midstream business. Concurrently, CEI’s utility subsidiary Consolidated Edison Company of New York (CECONY, A2 stable) signed a 20-year contract to transport gas on that pipeline. These developments are credit positive because they diversify CEI into a new, stable business outside its core utility operations, while expanding CECONY’s gas supply sources.

The MVP investment will barely register a financial effect on a company as large as CEI. The company’s approximately $410 million share of the construction cost is less than 1% of its assets and less than 1% of its earnings, according to our estimates.

This investment, however, is strategically significant as CEI braces for regulatory reform and stagnant earnings in its core utility operations in New York. Utility subsidiaries account for substantially all of its earnings currently, but since 2013, CEI has about doubled its investments in non-utility energy infrastructure to diversify from the geographic and jurisdictional concentration of New York. Including MVP, about one quarter of CEI’s $7.5 billion capital budget for 2016-17 will be for non-utility infrastructure.

CEI’s non-utility investments to date have mostly been in renewable power projects. We believe these power projects will generate relatively stable cash flow, typically under 20-year contracts with creditworthy counterparties. The MVP investment is consistent with this approach, based on its contracts that have similarly long tenors and a comparable business risk profile. With a price tag of $3.0-$3.5 billion, MVP poses more construction risk upfront than renewable power projects, but the pipeline’s revenues will be more predictable, since they do not vary with sales volumes as power projects do.

As with many of its power projects, CEI is mitigating the risk of the MVP investment by partnering with others. In addition to CEI’s 12.5% stake, MVP is a joint venture also owned by EQM, which has a 45.5% interest; affiliates of NextEra Energy, Inc. (Baa1 stable), which have a 31% stake; WGL Holdings, Inc. (A3 stable), with 7%; Vega Energy Partners (unrated), with 3%; and RGC Resources (unrated), with 1%.

CEI joins a growing group of utility companies that have entered the midstream business by taking a stake in a gas pipeline. In addition to the cash flow diversification they gain from owning the pipeline, these utility companies as customers have a greater interest in the success of the pipeline. This midstream investment trend will likely be confined to utilities on the East Coast, which can connect to pipelines being built to transport rising gas production from the Marcellus and the Utica shale plays.

Mihoko Manabe, CFA Senior Vice President +1.212.553.1942 mihoko.manabe@moodys.com

Richa Patel Associate Analyst +1.212.553.9475 richa.patel@moodys.com

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 28 JANUARY 2016

Loss of Major Terminal Operator Would Be Credit Negative for Port of Oakland On 19 January, Ports America (unrated), the largest private terminal operator and stevedore in the US, requested that the Port of Oakland (A2 stable) enter into a termination and handback agreement that allows Ports America Outer Harbor Terminal, LLC (PAOH, unrated) to terminate the remaining 44-year concession for the Outer Harbor Terminal, and vacate terminal operations by 31 March 2016. The termination is credit negative for the Port of Oakland because PAOH provided nearly $38 million, or 25% of maritime revenues for the fiscal year that ended 30 June 2015, and most of that amount was in the form of fixed lease payments not tied to volumes. The lease termination also exposes the port to remarketing risk because the terminal concession must now be rebid in an environment of slowing global demand, low freight rates and profitability for shippers, and weakness in Asia-Pacific, the dominant trade served by the port.

Ports America has indicated that it is terminating to refocus its operations to the larger gateway ports in Tacoma, Washington, and Los Angeles, California. It is a decision consistent with our view that the industry is moving toward larger vessels calling at fewer ports, increasing both competition among ports and the capital investment required by terminal operators to operate competitively.

Ports America’s decision comes just before the opening of the expanded Panama Canal, which will allow the deployment of larger, more economic vessels from Asia on all-water services to the East Coast. The current environment of weak global trade, combined with depressed freight rates and profitability for liners, is likely to prioritize sailing services to the most efficient and economic ports. Because more than half of the global container fleet has been too large to transit the canal, certain services have been confined solely to the West Coast. With the expanded canal, larger vessels deployed on all-water services from Asia to the East Coast are likely to prioritize over Oakland major West Coast gateways such as Vancouver, Seattle-Tacoma and Los Angeles-Long Beach, which have the water depth, terminal capacity and cargo volume sought by mega-ships, as well as superior rail infrastructure.

In 2009, PAOH was awarded a 50-year concession to operate berths 20-24 at Oakland’s Outer Harbor Terminal. In August 2010, PAOH assumed the lease for the adjacent berths 25-26 marine terminal from International Transportation Service, Inc., and combined both leaseholds to create one terminal. However, the recovery in container throughput at Oakland has been weak and baseline volume is lower than at its larger West Coast competitors, Los Angeles-Long Beach and Seattle-Tacoma, where the recovery in throughput volume has been stronger (see exhibit).

Cumulative Throughput Growth of US West Coast Ports Oakland’s container recovery lags that of peers.

Sources: Ports of Los Angeles, Long Beach, Tacoma, Seattle, Metro Vancouver and Oakland

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Moses Kopmar Analyst +1.212.553.2846 moses.kopmar@moodys.com

NEWS & ANALYSIS Credit implications of current events

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We expect the ultimate financial and operating effect of the termination to be manageable because Oakland has sufficient capacity to redirect cargo to its four other terminals, strong liquidity (including a $200 million bank-supported commercial paper program) and pledged revenues from the combined security of airport and seaport revenues. The lost revenues will be partially offset by the redirection of cargo to other terminals, which will improve utilization at these terminals and reduce renewal risk for certain contracts set to expire over the next seven years, and result in additional above-minimum annual guarantee revenues to the port. However, absent a new lease signing over the next five months, we expect Oakland’s fiscal 2017 revenues to decline overall, and the consolidation of cargo into fewer terminals to risk increasing congestion at berths, container yards and intermodal connections, which the port may have to manage through extended gate hours and work schedules in order to retain cargo.

NEWS & ANALYSIS Credit implications of current events

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Banks

Slowing Deposit Growth Is Credit Negative for Saudi Banks Between 17 and 22 January, Saudi banks released high-level annual results for 2015 that indicated a significant slowdown in deposit growth to 1% in 2015 from 12% in 2014. In the context of oil prices that have declined by more than 75% since June 2014 and a 14% reduction in the 2016 Saudi government budget, this lower deposit growth is credit negative for Saudi banks. Lower deposit growth will limit banks’ capacity to lend and refinance existing borrowers and increase borrowing costs, which will reduce asset quality and drive increased provisioning costs for banks.

During 2010-14, a time of high oil prices, Saudi banks had abundant low-cost liquidity. As a result, banks increased their lending at a compound annual growth rate of 13%. Access to non-interest bearing deposits also improved to 51% of total assets from 42%, leading to a decline in banks’ cost of funding to 0.5% in 2014 from 2.1% in 2008, which supported domestic banks’ return on assets of 2% as of June 2015.

However, persistently low oil prices (we project the Brent price will average $33 per barrel in 2016 and $38 in 2017) is leading the Saudi government to report material fiscal deficits of 15% in 2015 and a projected 12.7% in 2016. These deficits will result in less government spending, a key engine of the Saudi economic growth, which in turn will contribute to a softening of Saudi Arabia’s non-oil real GDP growth, which we forecast will fall to 2.8% in 2016 from a 5.7% average during 2010-15. Consequently, we expect lower profits and savings from the private sector to flow into the banking system. Indeed, between June and November 2015, private-sector deposits fell by 3%.

The deficits are also driving the government to draw on its reserves and deposits, and increase debt issuances, which were mostly subscribed by autonomous government-related entities in 2015. These two factors explain the reduction in public-sector deposits placed with banks (time and savings deposits from these sources fell by 13.6% year-to-date as of November 2015), a trend that we expect will continue over the next 12 months (see Exhibit 1).

EXHIBIT 1

Annual Growth of Saudi Banks’ Deposits and Saudi Government Expenses Both bank deposits and government expenses are correlated to oil prices.

Sources: Bank financial statements, US Energy Information Administration and Moody’s Financial Metrics

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Olivier Panis Vice President - Senior Credit Officer +971.4.237.9533 olivier.panis@moodys.com Jonathan Parrod Associate Analyst +971.4.237.9546 jonathan.parrod@moodys.com

NEWS & ANALYSIS Credit implications of current events

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We expect banks’ muted deposit growth to moderate their lending expansion, with loan growth in 2016 falling to 5%, the lowest since 2010, from 8% in 2015. And, because their regulatory loan-to-deposit ratio increased to 81% as of December 2015, near the regulatory cap of 85%, from 76% a year earlier, we expect banks to become more selective in their lending, leading to tightening liquidity conditions for Saudi borrowers.

The deposit-growth slowdown is also increasing banks’ cost of funding, which reached a floor in 2014. Although we expect non-interest-bearing deposits to remain the main source of funding, their proportion should gradually decrease in favour of more expensive term deposits and long-term borrowing. Combined with our expectation that interest rates will increase in line with US rates (the Saudi riyal is pegged to the US dollar), we expect banks to pass on the increased cost to the borrowers. This will help stabilize banks’ profitability, but increase customers’ borrowing costs. As a result, we expect the ratio of nonperforming loans to gross loans to increase over the next 12 months to 2.5% from 1.4% as of June 2015 and provisioning costs to gradually increase (see Exhibit 2).

EXHIBIT 2

Saudi Banks’ Nonperforming Loans Will Increase with Tightening Liquidity

Sources: The banks and Moody’s Investors Service

We do not expect Saudi banks’ high capital and reserve buffers to significantly change over the next 12-18 months, and their profitability should remain one of the strongest among G-20 countries. However, prolonged liquidity tightening would amplify the negative effects on asset quality and associated costs, and risk denting these buffers.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 F-2%0%2%4%6%8%10%12%14%16%18%20%22%24%26%28%30%

Customer Deposit Growth - right axis Loan Growth - right axisNPLs to Gross Loans - left axis

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 28 JANUARY 2016

Growth of Financial Technology Services Is Credit Negative for Korean Banks On Monday, five crowd-funding companies launched crowd-funding services in Korea, which will be followed later this year by the planned opening of Internet-only banks. These initiatives, which are part of Korea’s Financial Services Commission’s (FSC) push to drive innovation in the banking sector, are credit negative for Korean banks because the new competition comes at a time when banks’ profitability is falling to historically low levels.

Financial sector reform and innovation have been a top policy agenda for the FSC since 2013, and in 2014 led to an effort called technology financing, which promotes lending to companies that lack collateral but have promising technology. That effort was followed in January 2015 by the launch of an Innovation Index, which evaluates and ranks banks’ technology financing, including their efforts to reduce conservative underwriting practices and promote corporate social responsibility. The FSC’s 2015 policy direction for financial reform called for promoting financial technology (fintech), including establishing Internet-only banks and crowd-funding operations.

In November 2015, the FSC granted preliminary approvals to two consortiums, Kakao Bank and K-Bank, to set up Internet-only banks that would begin operating this year. Kookmin Bank (A1/A1 stable, baa12) has a 10% stake in Kakao Bank and Woori Bank (A1/A1 negative, baa2) has a 10% stake in K-Bank.

The FSC’s efforts to enhance innovation and consumer convenience by disrupting traditional ways of banking is quickly achieving results and lowering bank profits. Meanwhile, progress toward deregulation, which would improve bank profits, has been slow. In fact, banks’ return on assets (ROA) was a low 0.44% in the third quarter of 2015, versus a peak ROA of 1.22% in the second quarter of 2011 (see exhibit). Although historically low interest rates of 1.5% were a main driver of weakening profitability, pro-consumer policies that have been in place over the past few years have deterred non-interest income growth. We expect that these new technologies will also negatively affect banks’ profitability.

Korean Banks’ Average Return on Assets

Note: Exhibit excludes policy banks. Source: The Bank of Korea

2 The bank ratings shown in the report are the bank’s deposit rating, senior unsecured debt rating (where available) and baseline

credit assessment.

0.0%0.1%0.2%0.3%0.4%0.5%0.6%0.7%0.8%0.9%1.0%1.1%1.2%1.3%

Mar

-11

May

-11

Jul-

11

Sep-

11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-

12

Sep-

12

Nov

-12

Jan-

13

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-13

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-13

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13

Sep-

13

Nov

-13

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14

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-14

May

-14

Jul-

14

Sep-

14

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-14

Jan-

15

Mar

-15

May

-15

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15

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15

Sophia Lee, CFA Vice President - Senior Credit Officer +852.3758.1357 sophia.lee@moodys.com

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 28 JANUARY 2016

Even though Kookmin Bank and Woori Bank have stakes in the two approved Internet-only bank consortiums, we expect the fintech industry’s growth to be driven by technology companies, and that the growth will likely take market share away from banks, particularly for simple banking transactions and small loans. The growth potential for fintech services is significant: based on a Bank of Korea survey of 2,500 households on the usage of mobile financial services, 87% of respondents said they owned a smartphone, but just 36.4% have used mobile banking services.

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 28 JANUARY 2016

Malaysia’s Central Bank Cuts Reserve Ratio, a Credit Positive for Banks On 21 January, Bank Negara Malaysia (BNM), Malaysia’s central bank, reduced to 3.5% from 4.0% the amount of cash that Malaysian banks must set aside as interest-free reserves (the statutory reserve requirement or SRR) at the central bank, effective 1 February. This action is credit positive for banks because it will have a moderating effect on funding costs, which have risen because of deposit competition following the implementation of the liquidity coverage ratio, and improve banks’ liquidity, which tightened following capital outflows.

System statutory deposits were MYR48.5 billion ($11.4 billion) as of November 2015, and we estimate that the lower SRR should return MYR 6.1 billion to the banking system. In addition to lowering the reserve requirement, BNM held the overnight policy rate, the rate at which banks lend to each other, at 3.25%. A lower overnight policy rate would have led to more borrowing by already indebted households and driven banks’ already depressed net interest margins (NIMs) lower.

With BNM’s action, we expect that deposit competition will ease, which should stabilize NIMs and profitability. Among our rated banks, Public Bank Berhad (A3 stable, a33) and CIMB Bank Berhad (A3/A3 stable, baa2) would benefit the most because their funding costs (the ratio of interest expense to average total funding) rose the most in 2015. As shown in Exhibit 1, Public Bank Berhad’s funding costs climbed 18 basis points, while CIMB Bank Berhad’s rose seven basis points (see Exhibit 1).

EXHIBIT 1

Malaysian Banks’ Funding Costs Rose in 2015 Funding costs are as measured by the ratio of interest expense to average total funding.

Note: September 2015 ratio is annualized. Sources: The banks and Moody’s Investors Service

The central bank’s measure will also stabilize Malaysian banks’ NIMs, which have tightened over the past year owing to an elevated cost of funding. The average NIM among Malaysia’s six large banks fell to 2.23% in September 2015 from 2.41% a year earlier (see Exhibit 2).

3 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating (where available) and baseline

credit assessment.

3.04%

1.58%

2.16% 2.13%

1.23%1.54%

2.28% 2.24%

1.65%

3.09%

1.65%

2.21% 2.16%

1.29%1.42%

2.46% 2.29%

1.66%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

AmBank (M)Berhad

CIMB BankBerhad

CIMB GroupHoldingsBerhad

Hong LeongBank Berhad

HSBC BankMalaysiaBerhad

MalayanBankingBerhad

Public BankBerhad

RHB BankBerhad

StandardChartered

Bank MalaysiaBerhad

Dec-14 Sep-15

Dan Pek Associate Analyst +65.6311.2601 dan.pek@moodys.com

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 28 JANUARY 2016

EXHIBIT 2

Malaysian Banks’ Net Interest Margins

Note: AMMB Holdings = AMMB Holdings Berhad; CIMB Group = CIMB Group Holdings Berhad; HLB = Hong Leong Bank Berhad; Maybank = Malayan Banking Berhad; Public = Public Bank Berhad; RHB Capital= RHB Capital Berhad. Sources: The banks

The BNM’s measures aim to address tightening liquidity in the system following slowing deposit growth and capital outflows. The latter is as a result of political challenges surrounding the ruling party and investor aversion to emerging market exposure. As Exhibit 3 shows, MYR24.5 billion of portfolio and investment capital left the country during the third quarter of 2015.

EXHIBIT 3

Malaysia’s Net Portfolio and Investment Inflows/Outflows and Deposit Growth

Note: Deposit growth applies to retail and non-bank corporate deposits. Source: Bank Negara Malaysia

1.50%

1.75%

2.00%

2.25%

2.50%

2.75%

3.00%

Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15

AMMB Holdings CIMB Group HLB Maybank Public RHB Capital

0%

2%

4%

6%

8%

10%

12%

14%

16%

-40

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-20

-10

0

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50

60

Mar

-10

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-10

Jul-

10

Sep-

10

Nov

-10

Jan-

11

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-11

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-11

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11

Sep-

11

Nov

-11

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12

Mar

-12

May

-12

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12

Sep-

12

Nov

-12

Jan-

13

Mar

-13

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13

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13

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14

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-14

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14

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15

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15

MYR

Bill

ions

Portfolio & Financial Derivatives - left axis Change in Customer Deposits - right axis

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 28 JANUARY 2016

Sovereigns

Civil Unrest Is Credit Negative for Tunisia Last Friday, a nation-wide curfew was imposed in Tunisia (Ba3 stable) after four days of protests and riots across the country. The protests and riots mark a sharp escalation in tensions in a country that over the past year has had multiple terrorist attacks, delayed progress on structural economic reform and a recent split in the majority Nidaa Tounes party. The latest incidents, the largest since the protests that ousted former dictator Zine al-Abidine Ben Ali, are credit negative for Tunisia because they disrupt the country’s transition to a sustainable growth model.

The unrest was triggered by the death of a man electrocuted after climbing a power pole to protest having been rejected from a job. Protests first broke out in the city of Kasserine before spreading to several other towns and cities, including Gafsa, Beja, Sidi Bouzid and Tunis, the capital. The protests, which included Molotov cocktails being hurled at police and the looting of stores and warehouses, injured 60 police officers and 40 protestors, and prompted Prime Minister Habib Essid to cut short his visit to the World Economic Forum in Davos, Switzerland.

The latest violence threatens to deal further economic damage to a country that has already endured substantial setbacks over the past year on its path to political stability and economic recovery. Tunisia is already under a state of emergency following the November 2015 suicide attack against a presidential guard bus in downtown Tunis that killed 12. That attack, plus attacks in June and March of last year, have depressed tourism and brought business confidence to a new low.

As the exhibit below shows, tourism receipts collapsed by 35% by the end of 2015 from the end of 2014 (40% in US dollar terms). Economic growth over the first three quarters of 2015 fell to an average of 0.7% from year-earlier levels and from an annual rate of 2.3% in 2014.

Annual Tourism Receipts in Tunisian Dinar and US Dollars

Sources: Tunisia Ministry of Tourism and Haver Analytics

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2010 2011 2012 2013 2014 2015

Billi

ons

TND USD

Elisa Parisi-Capone Assistant Vice President - Analyst +1.212.553.4133 elisa.parisi-capone@moodys.com

Jeffrey Christiansen Associate Analyst +971.4.237.9574 jeffrey.christiansen@moodys.com

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 28 JANUARY 2016

Widening divisions in the Nidaa Tounes party – including the resignation of its secretary general in December and the resignations of 22 parliamentary members on 10 January – constrain its ability to address the growing unrest. The party is in an increasingly difficult position to focus on important initiatives agreed to with the International Monetary Fund (IMF) with respect to improving the business environment, implementing a new investment code, containing the public wage bill and reforming Tunisia’s three public banks. (The last IMF program expired in December, but Tunisian officials are eager to agree to a new program.) This latest outbreak of violence creates an even greater risk of delay in implementing the new Development Strategy for 2016-20, which is designed to boost growth after Tunisia fell in the World Economic Forum’s Global Competitiveness Index ranking to 92nd (out of 140) in 2015-16 from 32nd (out of 142) in 2010-11.

Moreover, measures taken by the government to appease the protesters and shore up domestic security are likely to slow the process of fiscal and external adjustment even further. The government’s response to the terror attacks last year, including support for the tourism sector, cost around one percentage point of GDP. Although France immediately pledged $1.1 billion to help Tunisia address its unemployment problem over the next five years, we still believe that unrest poses downside risk to our 2016 deficit forecast of 4.9% of GDP.

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

21 MOODY’S CREDIT OUTLOOK 28 JANUARY 2016

NEWS & ANALYSIS Corporates 2 » Johnson & Johnson Job Cuts Will Create Efficiencies and

Reinvestment Opportunities » Performance Deterioration at Key Subsidiaries Weighs on

Baosteel Group's Credit Quality » Semiconductor Manufacturing Int'l Benefits from Shanghai

Integrated Circuit Investment

Infrastructure 6 » US Federal Appeals Court Ruling Is Credit Negative for Coal-

Dependent Sectors and States » Sabesp Considers Suspending Water Conservation Program

Amid Improved Supply, a Credit Positive » Rising Cost of Nuclear Waste Storage Is Credit Negative for

Electricité de France

Banks 9 » Energy-Driven Capacity Utilization Decline Portends Broader

Downturn in US Banks' Commercial Credit Quality » Leading Brazilian Banks Create Centralized Credit Bureau, a

Credit Positive » UK Enforcement Action against Former Co-Operative Bank

Executives Is Credit Positive for All Banks » National Bank of Greece's Finansbank Sale Will Enhance

Liquidity and Capital » Poland's New Tax Threatens Banks' Profitability, a

Credit Negative » Russia Revises Bank Resolution Framework, a Credit Negative

for Corporate Depositors, but Positive for Individual Depositors

» Swedish Banks' Risks Will Decline If Moderate Depreciation of Swedish Home Prices Is Sustained

» A Protracted Period of Low Oil Prices Is Credit Negative for Nigerian Banks

» Bank of Tokyo-Mitsubishi UFJ Buys 20% Stake in Filipino Bank, a Credit Positive

Insurers 23 » Argentina's About Face on Foreign-Currency Assets and

Infrastructure Investments Is Credit Positive for Insurers » Zurich Insurance Fourth-Quarter Expected Net Loss Is

Credit Negative

Sovereigns 26 » Return of Ebola Challenges Sierra Leone's Economic Recovery » Georgia Will Benefit from Ukrainian Trade Passing Through

the Sovereign

US Public Finance 30 » Atlantic City Moves Closer to Default and Bankruptcy after

Governor Vetoes Aid Package

CREDIT IN DEPTH US Collateralized Loan Obligations 32

The weakening credit quality of oil exploration & production companies and oilfield services companies is credit negative for US CLOs. We placed on review for downgrade the ratings of a large number of these companies, reflecting our expectation that their credit quality will decline with oil prices. Among the US CLOs we rate, seven have exposures of 5% or more to the companies we placed on review for downgrade.

RATINGS & RESEARCH Rating Changes 34

Last week, we downgraded Ecopetrol, McDermott International, Wynn Resorts, VTB Bank (Azerbaijan), OJSC Bank of Baku, UniBank Commercial Bank, MBIA Mexico and Baltinvestbank, and we upgraded ACE Seguros, among other rating actions.

Research Highlights 38

Last week, we published on European food retailers, China’s metro companies, Singapore’s industrial REITs, US fallen angels, US covenant quality, US lodging and cruise, global oil and gas, US speculative grade liquidity, Mexican state-owned development banks, the Kyrgyz Republic, Germany, China’s regional and local governments, US prime auto loan ABS, European CMBS, India and China securitization, US ABS, US CMBS and European RMBS & ABS, among other reports.

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Report: 187315

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EDITORS PRODUCTION ASSOCIATE News & Analysis: Jay Sherman and Elisa Herr Amanda Kissoon