MOODYS.COM

9 MAY 2016

NEWS & ANALYSIS Corporates 2 » Quintiles-IMS Merger Creates Pharmaceutical Services Powerhouse » Biogen's Spinoff of Hemophilia Business Is Credit Negative » Bell Canada Boosts Scale and EBITDA with Manitoba

Telecom Acquisition » Brazilian Lawsuit over Dam Disaster Would Be Credit Negative

for Samarco and Owners BHP Billiton and Vale » Petrobras' Asset Sales Signal Progress in Huge Effort to Reduce Debt » Sato Will Benefit from Controlling Shareholder Balder's First-Ever

Acquisition in Norway » Crown Resorts' Reduced Stake in Melco Crown Entertainment Is

Credit Positive » Melco Crown Entertainment's Share Buyback Is Credit Negative

for Subsidiary MCE Finance » Daiichi Sankyo Is Awarded $525 Million in Ranbaxy Damages, a

Credit Positive » Renhe Commercial's Proposed Asset Disposal Is Credit Positive

Infrastructure 12 » Centrica's Equity Issuance Is Credit Positive

Banks 13 » Freddie Mac's Derivative Loss Illustrates the Structural

Deficiency of Its Capital Agreement with US Treasury » Intesa's Sale of Its Card Payment Processing Business Is Credit Positive » China's New Guidance on Loan-Beneficiary Rights Transfer Is

Credit Positive for Banks » Singapore's Proposed Bank Resolution and Bail-in Regime Is

Limited and Credit Positive for Senior Creditors

Insurers 17 » German Proposal to Lower Maximum Guaranteed Rate in Life

Insurance Would Be Credit Positive

Sovereigns 20 » Turkey's Political Turmoil Impairs Reform Outlook and

Increases Vulnerability to External Shocks

Sub-sovereigns 22 » Strong Growth in German Laender Tax Revenues Is Credit Positive

US Public Finance 23 » Time Is Running Out on Solving Detroit Public Schools'

Financial Crisis » State Housing Finance Agency Exemption from Rule on Loan

Insurance Is Credit Positive

CREDIT IN DEPTH US Corporates 25

US Treasury Department Denies Teamster’s $11 Billion Central States Pension Restructuring. The US Treasury Department denied an application from the Teamster Central States Pension Plan to reduce plan benefits, which would have lowered its projected benefit obligation by $11 billion. The rejection is credit negative for sponsors because the plan would have eliminated the need for large, and in some cases unaffordable, increases in pension contributions.

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Thursday’s Credit Outlook 28 » Go to Last Thursday’s Credit Outlook

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NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 9 MAY 2016

Corporates

Quintiles-IMS Merger Creates Pharmaceutical Services Powerhouse Last Tuesday, contract drug developer Quintiles Transnational Holdings Inc. (Ba2 developing) and pharmaceutical data supplier IMS Health Incorporated (Ba3 review for upgrade) announced that they will combine in an all-stock merger of equals valued at about $9 billion. The deal is credit positive for IMS because it will become part of a larger, more diversified company with lower financial leverage. The deal is credit positive for Quintiles, which will also realize the benefits of enhanced scale, diversity and service offerings to pharmaceutical clients. However, Quintiles’ leverage will increase owing to IMS’ higher debt and uncertainty around the details of the final capital structure. Following the merger’s announcement, we placed IMS’ ratings on review for upgrade and affirmed Quintiles’ rating and changed its outlook to developing.

We estimate that the combined company will have pro forma adjusted leverage of around 4.0x debt/EBITDA for the 12 months that ended 31 December 2015. That compares with current leverage of 3.0x for Quintiles and 4.9x for IMS.

The deal will create a pharmaceutical services powerhouse. Quintiles is already the largest contract research organization (CRO) in the world and is roughly twice the size of its next largest competitor. CROs help pharmaceutical clients design and execute testing and clinical trials of new drug candidates. It is also the drug industry’s largest contract sales organization, or CSO, which helps clients bring their new products to the market. IMS is the leading provider of prescription and market data to the pharmaceutical industry. Although competitors exist, none approaches IMS’ global scale or importance to its large customers. About half of its revenues are from data subscriptions, which are very stable and historically have very high renewal rates.

The companies believe that by combining their expertise and data, they will be able to drive greater value for pharmaceuticals clients. For example, Quintiles expects that it will be able to leverage IMS’ vast databases to more quickly enroll patients in clinical trials. The combined company will generate more than $7 billion in net revenue and will benefit from diverse revenue streams, which we believe will lead to stable cash flow generation through a range of economic cycles.

Based on our growth expectations for both companies, we estimate adjusted debt/EBITDA in the mid-3.0x range by the time the deal closes in the second half of 2016. However, we expect the combined company to continue to repurchase its shares to offset dilution as Quintiles’ and IMS’ private-equity owners continue to sell down their stakes. Private-equity firms own around 34% of Quintiles’ shares and the majority of IMS. We also expect the combined company to pursue other, smaller, acquisitions.

Details of the combined company’s capital structure remain unknown. Both Quintiles and IMS have significant amounts of secured debt and unsecured notes in their capital structures. We expect that some portion of Quintiles and/or IMS’ debt will be refinanced as part of the transaction. A change in the mix of secured versus unsecured debt, or in the guarantee and borrower structure of the new company, could lead to upward or downward pressure on some of Quintiles’ instrument ratings, which our developing outlook reflects. However, we see limited downside risk to the Ba2 corporate family rating, given the company’s strong business profile.

Under the terms of the deal, IMS shareholders will receive 0.384 shares of Quintiles’ stock. The combined company will be renamed Quintiles IMS Holdings Inc. and led by both companies’ senior management. The transaction is subject to customary regulatory approvals, as well as approval of both IMS and Quintiles shareholders.

Jessica Gladstone, CFA Senior Vice President +1.212.553.2988 jessica.gladstone@moodys.com

Kevin Stuebe Vice President - Senior Analyst +1.212.553.2999 kevin.stuebe@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 9 MAY 2016

Biogen’s Spinoff of Hemophilia Business Is Credit Negative Last Tuesday, Biogen Inc. (Baa1 negative) announced plans to spin off its hemophilia business into an independent, publicly traded company. Although the move would have a very small financial effect, it is credit negative for Biogen because it will modestly reduce revenue, earnings and business diversity, without any offsetting reduction to debt.

On a pro forma 2015 basis, Biogen will lose about $640 million, or 6% of total revenues, through the spin. Assuming the hemophilia business’ profit margin is similar to that of the whole company, pro forma debt/EBITDA would rise to 1.3x from 1.2x, which is still a very low level of financial leverage. Biogen’s revenues will remain above $10 billion without the hemophilia business.

The spinoff reduces Biogen’s product and therapeutic diversity, which is already highly concentrated in multiple sclerosis. It also eliminates two solid growth drivers, the hemophilia products Eloctate and Alprolix, which Biogen launched in 2014. Biogen’s top three products – Tecfidera, Avonex and Tysabri – will rise to about 80% of revenue from 76%. All three drugs treat multiple sclerosis, leaving Biogen with minimal diversity across therapeutic categories.

The multiple sclerosis category is very competitive, and we expect that future US price increases will be limited, making Biogen more reliant on volume growth. We expect Tecfidera’s market share to remain flat, although the treatable multiple sclerosis population will grow in the low single digits.

The benefits of the spinoff include greater focus on core therapeutic areas including multiple sclerosis and other neurological conditions. New treatments for multiple sclerosis, such as Biogen’s pipeline drug opicinumab, and opportunities in Alzheimer’s disease are future growth drivers. Biogen will also grow from the recent approval in Europe of Benepali, a biosimilar version of immunology drug Enbrel, and several other biosimilar products in its pipeline.

Biogen expects to accomplish the spinoff through a tax-free distribution of shares of the new company to Biogen shareholders. It plans to complete the transaction by the end of 2016 or early 2017. Cash coverage of debt will remain strong at approximately 70%, including our adjustments.

Biogen’s negative outlook reflects the risks related to weak Tecfidera growth and the potential for debt-funded acquisitions or share repurchases that would weaken its credit quality. We could downgrade the ratings if Biogen substantially increases its debt, resulting in debt/EBITDA above 2.0x, faces weak sales of Tecfidera or other key products irrespective of debt/EBITDA, or suffers major setbacks in its research pipeline.

Michael Levesque, CFA Senior Vice President +1.212.553.4093 michael.levesque@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 9 MAY 2016

Bell Canada Boosts Scale and EBITDA with Manitoba Telecom Acquisition BCE Inc., the parent of Bell Canada (Baa1 stable), said last Monday that it planned to acquire Manitoba Telecom Services (MTS, unrated) for CAD3.9 billion ($3.1 billion) in a 55% equity/45% cash transaction.

The transaction is credit positive for Bell Canada, strengthening the company’s efficiencies and increasing its scale without significantly affecting its financial leverage. We presume MTS’ debt would reside with Bell Canada, thereby eliminating structural subordination concerns that could distort the deal’s risk. In fact, the deal increases Bell Canada’s pro forma debt/EBITDA ratio as of the end of 2015 by only about 0.1x to 2.9x.

MTS’ fixed-line footprint is contiguous to Bell Canada’s, and with the acquisition of additional wireless operations in Manitoba, where Bell Canada has historically struggled, Bell Canada can easily achieve synergies that will reduce its overall unit costs.

Scale is the most important benefit of the deal, however, especially as Canada’s broadband communications companies strive to spread their fixed costs across wider customer bases. Although MTS’ 1.3 million fixed-line and wireless subscribers are only about 6% of Bell Canada’s 21.1 million aggregate total, the incremental scale gives Bell Canada a new edge amid slowing 2% annual growth in Canada’s aggregate subscriber base.

The price for gaining this advantage is fairly steep at more than 10x MTS’ estimated EBITDA for 2016, but BCE says that synergies and tax-loss carry-forward benefits effectively reduce the multiple to something closer to its own mid-8x enterprise multiple. The price also includes a scarcity premium: MTS is BCE’s last sizeable telephone company acquisition opportunity in Canada since regulators would likely not approve a takeover of TELUS Corporation (Baa1 negative), and since Saskatchewan Telecommunications (unrated) probably will never be for sale.

Buying MTS also promises additional EBITDA for Bell Canada without incurring capital expenses – arithmetic that is important in assessing free cash flow and dividends. Today, Bell Canada’s EBITDA is growing more slowly than its 5% annual dividend increase target, so buying MTS allows BCE to continue increasing dividends proportionally faster than EBITDA for a time, even if its EBITDA is growing more slowly at a 2%-3% composite rate.

In anticipation of regulatory concerns related to Manitoba becoming a three-wireless-competitor market and also given that Bell Canada would otherwise have had a near 60% market share, BCE arranged to divest a portion MTS’ prepaid subscribers to TELUS. The move balances Manitoba’s wireless market more evenly with Bell Canada having roughly a 40% share, followed by Rogers Communications (Baa1 stable) with about 33% and TELUS at about 27%, but we believe that the reduction in consumer choice from the market moving to three from four players provides a regulatory hurdle. Additionally, buying MTS does not guarantee a transfer of its wireless spectrum, which will likely come under federal regulatory scrutiny before it can change hands. For Bell Canada, the extra market share, scale and EBITDA appear worth today’s unknowns about the deal.

Bill Wolfe Senior Vice President +1.416.214.3847 bill.wolfe@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 9 MAY 2016

Brazilian Lawsuit over Dam Disaster Would Be Credit Negative for Samarco and Owners BHP Billiton and Vale Last Tuesday, the Brazilian state of Minas Gerais’ federal prosecutor sued BHP Billiton Limited (A3 negative) subsidiary BHP Billiton Brasil, Vale S.A. (Ba3 negative) and Samarco Mineração S.A. (Caa2 negative), demanding $44 billion (BRL155 billion) in retribution for last November’s dam disaster at Samarco’s mine. If a federal court ratifies the prosecutor’s lawsuit, it would be credit negative for the three mining companies because the lawsuit would require a nearly immediate $2.2 billion (BRL7.7 billion) deposit from the three companies, along with guarantees for the total $44 billion. The suit would also prohibit the companies from selling fixed assets or paying dividends.

The legal action seeks to remediate damage and compensate communities following a 5 November accident in which a dam near Samarco’s mines and industrial operations burst, released mine tailings, flooded one nearby community and damaged or destroyed other communities downstream. Operations at the site have been suspended since the accident. The suit also seeks damages from several public entities, including the Brazilian government, the states of Minas Gerais and Espírito Santo, and a number of official agencies.

Although we do not expect an immediate cash disbursement, the lawsuit brings additional uncertainties about the amounts that Samarco, a 50/50 joint venture between BHP Billiton and Vale, and its shareholders will need to pay. Additionally, this action would not shield the companies from lawsuits and other claims from additional parties not involved in previous agreements or lawsuits.

BHP Billiton, Vale and Samarco already have an agreement that sets out compensation for companies and entities harmed in the accident: a total of BRL4.4 billion in compensation and a total of BRL500 million for sanitation during 2016-18; BRL800 million to BRL1.6 billion in annual compensation during 2019-21; and BRL240 million in annual compensation during 2022-30. Last Thursday, Brazil’s federal court ratified that agreement, which was made in March. The ratification is relatively positive for the companies because it limits the financial effect of the new lawsuit in connection with claims already addressed in the agreement. However, the new lawsuit also involves parties that did not participate in the agreement.

The prosecutor requested an injunction that would likely give BHP, Vale and Samarco 30 days to make the deposits and provide the guarantees. The timing of a court decision about the lawsuit and the final size of the claim and deposit remain unclear, but if enforced, would jeopardize Samarco’s already tight liquidity as a result of the production suspension since the mine disaster. Samarco had about $2 billion in revenues for 2015 and about $467 million in cash on hand at the end of the year, but until it can resume operations, it will have trouble meeting financial obligations from the lawsuit, forcing it to rely on shareholders to help pay the fines.

Further liabilities over Samarco would also hurt the credit quality of Vale, which generated $25.1 billion in operating revenue during the 12 months through March 2016 and had $3.8 billion in cash on hand at the end of March, with another $2.0 billion available under its committed credit facilities.

By contrast, BHP Billiton would have ample liquidity to fund the required deposit today. As of December 2015, the company had $10.6 billion of cash and equivalents, plus a $6.0 billion undrawn revolving credit facility. Additionally, the company generated around $44.6 billion in revenues for the 12 months through June 2015. Still, liabilities substantially beyond those in the settlement would begin to weaken BHP Billiton’s credit quality.

Barbara Mattos Vice President - Senior Credit Officer +55.11.3043.7357 barbara.mattos@moodys.com

Matthew Moore Vice President - Senior Credit Officer +61.2.9270.8108 matthew.moore@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 9 MAY 2016

Petrobras’ Asset Sales Signal Progress in Huge Effort to Reduce Debt Last Tuesday, Petroleo Brasileiro S.A. - Petrobras (B3 negative) announced that it had reached deals to sell two assets for a total of nearly $1.4 billion in cash. The sales, which are part of a planned $14.4 billion in divestments this year, are credit positive for Petrobras, Brazil’s beleaguered state-owned oil company, because they prove that the company has assets that it can monetize even in a difficult period for the oil industry. It also provides evidence that the company’s divestment strategy is moving forward.

Petrobras will sell its 67% stake in Petrobras Argentina S.A. (PESA, B3 negative) to Argentina’s public utility Pampa Energia (unrated) for $892 million in cash. The oil company will also sell its wholly owned Chilean natural gas distribution company to Southern Cross Group, a Latin American private-equity fund, for $490 million in cash. Both transactions require board and regulatory approvals, but the buyers and sellers expect that the agreements will proceed largely as planned during the approval process.

The $1.4 billion in proceeds are a tiny fraction of Petrobras’ upcoming $21 billion in debt maturing between the second quarter of 2016 and the end of 2017, based on our estimates, plus $19 billion of planned capital spending this year alone. The two assets together constitute just 1.5% of Petrobras’ EBITDA in 2015, and less than 1% of its total debt. Based on this debt load, plus negative free cash flow, Petrobras will need substantial asset sales to meet its cash needs by 2017 if it cannot attract new financing.

Still, a failure to sell these assets would have signaled a far more serious problem for Petrobras, namely a failure to realize its best hope for reducing leverage in a weak energy marketplace. Petrobras, which is 60.5%-owned by the Brazilian government, remains a company of considerable means, with some $231 billion in assets including wells, platforms, refining facilities, pipelines, vessels, other transportation assets, power plants, fertilizers and biodiesel plants. Selling these mostly Brazil-based assets will be difficult amid today’s oil market slump and Brazil’s economic and political struggles.

Until this sale, Argentina was the company’s largest operation outside Brazil, and Petrobras will retain operations there through its 33.6% stake in the Rio Neuquen concession, and in Bolivia, where it retains 100% of the Colpa Caranda fields and owns other pipeline assets that are not part of the transaction. Upon closing of these transactions, Petrobras will no longer operate in Chile and Venezuela, where it had production rights through PESA in association with Petroleos de Venezuela S.A. (Caa3 negative).

The sale will trigger a change-of-control clause in PESA’s $300 million notes due in 2017, which Petrobras guarantees. These notes constituted 89% of PESA’s outstanding debt as of 31 December 2015, and we expect that the notes will be repaid as part of this transaction.

Nymia Almeida Vice President - Senior Credit Officer +52.551.1253.5707 nymia.almeida@moodys.com

Rosa Morales Associate Analyst +52.551.1253.5746 rosa.morales@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 9 MAY 2016

Sato Will Benefit from Controlling Shareholder Balder’s First-Ever Acquisition in Norway Last Friday, Sato Oyj’s (Baa3 stable) controlling shareholder Balder (unrated) announced that it had acquired the four campuses of Hedmark University College (unrated) for NOK700 million (€75 million). The acquisition is credit positive for Sato’s and Balder’s business profiles because it gives them access to a third market in the Nordic region and targets the student housing segment. The campuses are leased under 24-year contracts to the university, which is funded by Norwegian government (Aaa stable).

Given the transaction’s modest size, which equals around 1% of Balder’s total assets and 2.5% of Sato’s standalone total assets, the acquisition will only marginally increase Balder’s geographic diversification. Nevertheless, the deal’s strategic value is greater than its initial effect suggests because it gives the company access to the third-largest property market in the Nordic region, where Balder intends to grow. Although Sato’s key credit strength remains its exclusive focus on residential properties, which we also regard as a stable asset class, one of the company’s key credit constraints has been its geographic concentration on Finland, and the Helsinki metropolitan area in particular. We therefore positively view that Sato is now part of Balder, a larger and increasingly diversified company.

Hedmark, a multi-campus institution located 120 kilometres north of Oslo, is a small university and the 12th-largest public institution of higher education and research in Norway. The fact that the campuses are leased to the Norwegian government-funded university enhances the stability of the expected rental income. As a comparison, Balder’s leases’ average term is 6.4 years. The property was completed in 2010 and currently holds 8,000 students. We regard student housing as a very stable and growing asset class in the property sector, making Balder’s entry in this segment credit positive.

Although Balder disclosed the deal’s financing details, we expect no effect on either company’s debt metrics from the acquisition because of its small size. At the end of 2015, we estimate that Balder’s leverage (gross debt/total assets) was approximately 56%, while its fixed-charge cover ratio was 3.6x. Sato’s leverage was 57% and its fixed-charge cover was 3.2x. We expect Sato’s leverage and fixed-charge cover ratio to remain around 55%-60% and its fixed-charge cover ratio around 2.5x-3.0x over the next 12-18 months, in line with our expectations for the Baa3 rating.

Sato is a Helsinki, Finland-based residential real estate investment company that reported year-end 2015 rental income of €323 million and total assets of €3.0 billion. Since December 2015, Sato has been 53.3%-owned by Balder, which will fully consolidate Sato for the first time this year. The majority of the combined company’s assets are in Sweden’s major metropolitan areas of Stockholm (20%) and Gothenburg/West (19%), and in Helsinki (33%).

Roberto Pozzi Vice President - Senior Credit Officer +44.20.7772.1030 roberto.pozzi@moodys.com

Anastasija Vovk Associate Analyst +44.20.7772.1536 anastasija.vovk@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 9 MAY 2016

Crown Resorts’ Reduced Stake in Melco Crown Entertainment Is Credit Positive Last Thursday, Australia-based Crown Resorts Limited (Baa2 stable) announced an agreement with Melco Crown Entertainment Limited (MCE, unrated) for the repurchase of 155 million ordinary MCE shares for proceeds of approximately $800 million. Crown’s shareholding in MCE will be reduced to 27.4% from 34.3%. The transaction is credit positive for Crown.

The cash proceeds of $800 million will enhance liquidity at a time when Crown is directly engaged in new developments and projects with a total capital cost of more than AUD6 billion over the next six years. These projects include expansion into Sydney with the Crown Sydney hotel/gaming/residential tower; development of its Alon Las Vegas casino project; and development of a hotel and apartment complex in Melbourne in conjunction with the Schiavello Group. The non-recourse structures of the Alon Las Vegas project and the Melbourne hotel and apartment complex provide a degree of risk mitigation for Crown. However, the lag between construction, completion and revenue generation means Crown will likely face a period of elevated and rising debt, relatively subdued earnings growth, and the construction and development risk associated with the completion of simultaneous large projects. In addition, Crown also advised in February 2016 that it had received an amended assessment from the Australian Taxation Office for AUD362 million.

We expect Crown to apply the cash proceeds initially to debt reduction, which we estimate should improve its financial leverage measured by adjusted debt-to-EBITDA by 0.8x-1.0x to around 2.0x in fiscal 2016 (ending 30 June 2016) based on an exchange rate of $0.75 per AUD compared to its leverage of around 3.0x as of 31 December 2015, as shown below. However, the improvement in financial leverage will be reduced to the extent that the company decides to make a shareholder distribution after completion of the transaction. As of 31 December 2015, Crown’s financial leverage increased to close to 3.0x, which is our guidance for its current Baa2 rating. The increased leverage was largely driven by a $100 million investment in international restaurant and hotel company, Nobu, and its acquisition of a 50% ownership interest in the property and operations of Ellerston in the Hunter Valley, New South Wales, for AUD59.1 million.

Crown Resorts Limited’s Adjusted Debt-to-EBITDA Leverage would improve materially if all the proceeds were applied to debt reduction.

Sources: Company report and Moody’s Investors Service estimate

The reduced shareholding of MCE will have an immaterial earnings effect on Crown given the subdued outlook for a strong and sustainable rise in dividend income from MCE. Crown received approximately AUD53 million from MCE in fiscal 2015, down approximately 44% compared with fiscal 2014, as a result of the very challenging operating environment in Macau’s gaming market. We expect the company to receive dividends of AUD40-AUD60 million from MCE in fiscal 2017, before this transaction. The announced 6.9% reduction in shareholding would translate to earnings reduction of between AUD3 million and AUD4 million, which will have an immaterial effect on Crown.

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Maurice O’Connell Vice President - Senior Credit Officer +612.9270.8167 maurice.oconnell@moodys.com

Shawn Xiong Associate Analyst +612.9270.1421 shawn.xiong@moodys.com

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 9 MAY 2016

Melco Crown Entertainment’s Share Buyback Is Credit Negative for Subsidiary MCE Finance Last Wednesday, Melco Crown Entertainment Limited (unrated), the parent of MCE Finance Limited (Ba3 stable), agreed to purchase 155 million of its ordinary shares from Crown Asia Investments Pty. Ltd. (unrated), a wholly owned subsidiary of Crown Resorts Limited (Baa2 stable), for $801 million.

The internally funded transaction equals around 39% of Melco Crown Entertainment’s unrestricted cash as of March 2016. The transaction is credit negative for MCE Finance because we expect it will provide approximately $600 million of the funding for Melco Crown Entertainment to carry out the buyback, which will materially reduce MCE Finance’s balance sheet liquidity for its own working capital and capital expenditure needs.

MCE Finance’s liquidity will remain adequate after the completion of the transaction. MCE Finance held cash and deposits of around $1.6 billion at the end of 2015, which would fully cover its capex of $350-$400 million this year, debt repayments of about $23 million in 2016, a $350 million special dividend announced in February 2016 and this share buyback.

We expect that MCE Finance will continue to generate positive free cash flow, supported by annual EBITDA of $700-$800 million from the City of Dreams, its flagship gaming property in Macau, and based on its moderate amount of capex. The company also has access to undrawn committed banking facilities totaling $1.25 billion as backup liquidity.

Apart from liquidity, MCE Finance’s established operations in Macau and strong financial metrics support its credit strength. MCE Finance’s adjusted debt/EBITDA was 2.0x in 2015, while its EBITDA/interest was 12.2x. We expect that these ratios will remain largely stable over the next 12-18 months, with adjusted debt/EBITDA at 2.0x-2.5x and EBITDA/interest exceeding 10x -- strong ratios for its Ba3 ratings.

We note that the repurchased shares will be canceled in due course, after the completion of the transaction. As a result, Crown Resorts’ stake will fall to about 27.4% from 34.3% upon completion of the transaction. Nevertheless, Crown Resorts will remain Melco Crown Entertainment’s second-largest shareholder after Melco International Development Limited’s (unrated) 37.9% stake.

Kaven Tsang Vice President - Senior Credit Officer +852.3758.1304 kaven.tsang@moodys.com

Iris Liu Associate Analyst +852.3758.1532 yijie.liu@moodys.com

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 9 MAY 2016

Daiichi Sankyo Is Awarded $525 Million in Ranbaxy Damages, a Credit Positive Last Friday, the International Court of Arbitration in Singapore ordered the Singh brothers, Malvinder Mohan and Shivinder Mohan, the former owners of Ranbaxy Laboratories Limited (unrated), to pay approximately ¥54.6 billion (INR34 billion) to Daiichi Sankyo Company Limited (DSL, A1 stable) as compensatory damages and interest for losses it incurred on the acquisition of Ranbaxy in 2008. The court also ordered the Singh brothers to pay an additional ¥1.6 billion ($15 million) to reimburse attorney fees and arbitration costs. The total expected award to DSL is ¥56.2 billion ($525 million).

The verdict handed down by the International Court of Arbitration is credit positive because this substantial sum will materially compensate DSL for the losses it incurred with Ranbaxy’s acquisition. If the verdict is enforced without modification, the cash inflow will substantially increase DSL’s liquidity and debt repayment ability. The ¥56.2 billion cash inflow will be around 27.5% of DSL’s consolidated debt of ¥204 billion reported as of 31 December 2015. If the payout is used entirely to repay existing debt, it will reduce the company’s last 12 months pro forma adjusted debt/EBITDA to 1.0x from 1.4x, improving its credit quality significantly.

In an arbitration request filed with the International Court of Arbitration in November 2012, DSL accused the Singh brothers of concealing and misrepresenting certain critical information in 2008. DSL argued that it purchased a 63.9% stake in Ranbaxy, while being unaware of the US Food and Drug Administration’s (USFDA) investigation of Ranbaxy for faulty pharmaceutical products sold in the US. Soon after the acquisition, Ranbaxy pleaded guilty of the wrongdoings in relation to drugs manufactured at its units in India. Ranbaxy, then under the management control of Daiichi, had to pay $500 million to the US department of justice to settle criminal and legal suits.

DSL paid ¥488 billion in November 2008 to acquire a controlling stake in Ranbaxy. However, it took a ¥351 billion special write down in fiscal 2009, which ended 31 March 2009, when Ranbaxy stock nosedived as a result of USFDA sanctions. We estimate DSL recovered ¥380 billion in gross proceeds (based on the market price of shares on that day) when it sold its entire Ranbaxy investment in April 2015. This additional award by the International Court of Arbitration, if paid in full, would further cut DSL’s losses on its 2008 Ranbaxy investment.

Some uncertainties related to the timing and the extent of the final payout remain because of the sheer complexity involved in cross-border disputes and because of an almost assured appeal by the Singh brothers. Nevertheless, we consider the International Court’s verdict to be credit positive.

Kailash Chhaya Vice President - Senior Analyst +81.3.5408.4201 kailash.chhaya@moodys.com

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 9 MAY 2016

Renhe Commercial’s Proposed Asset Disposal Is Credit Positive On 29 April, Renhe Commercial Holdings Company Limited (Caa1 negative) announced the proposed disposal of its underground shopping malls in China to Apex Assure Limited (unrated), a company wholly owned by Mr. Dai Yongge, who is also the controlling shareholder of Renhe, for a consideration of $1 billion in cash.

The asset sale, pending shareholder, third party and regulatory approvals, would be credit positive for Renhe. The cash proceeds of $1 billion (approximately RMB6.5 billion) from the sale will significantly alleviate pressure on Renhe’s liquidity and improve its financial metrics.

The assets to be sold are 23 completed shopping malls, 11 malls under construction and 10 malls in the planning stage. Onshore debt totaling RMB3.2 billion (relating to the assets for sale) will also be transferred to the purchaser. After the disposal, Renhe will focus on its agricultural market business of operating eight wholesale agricultural produce markets across six cities in China, which it acquired from a related party in July 2015.

Excluding the assets it will sell, we estimate that Renhe held around RMB500 million in cash on hand at the end of April 2016, against total outstanding debt of approximately RMB4.94 billion. All of the debt will mature over the coming six months.

The sales proceeds will enable Renhe to discharge all of its outstanding debt and to register a net cash position. The remaining cash from the transaction, totaling RMB1.5 billion, will be used for future capital expenditure on its agriculture market business, the e-commerce trading platform and other general working capital purposes, as shown in the exhibit.

Renhe’s Planned Use of the Sales Proceeds

Source: Renhe Commercial Holdings Company Limited

Renhe’s adjusted EBITDA/interest should improve to approximately 1x in 2016 from 0.4x in 2015 because its interest expense will fall as the company repays outstanding debt. The agriculture market business (the company’s future business focus) will likely bring between RMB900 million and RMB1 billion in revenue for Renhe in 2016.

Renhe does not own the underlying investment properties related to its agricultural market business. The properties are leased under a 20-year agreement with a related party. The lack of ownership adds some uncertainty over the viability of the company’s operations.

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ons

Payment of Outstanding Debt After Disposal Capex for E-commerce Trading PlatformCapex for Agriculture Market Business General Working Capital Purposes

Cindy Yang Analyst +86.106.319.6570 liu.yang@moodys.com

Victor Wong Associate Analyst +852.3758.1569 victor.wong@moodys.com

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 9 MAY 2016

Infrastructure

Centrica’s Equity Issuance Is Credit Positive On 5 May, the UK utility Centrica plc (Baa1 review for downgrade) announced that it would raise £700 million of new equity. The issuance proceeds will be used to fund the previously announced acquisition of Neas Energy, an energy trading business, for £200 million including working capital, and a planned £150 million acquisition of a consumer-facing business. The remaining proceeds will be used to reduce debt by £350 million, a credit positive. However, Centrica remains on review for downgrade because of the effect of low energy prices on its entire industry.

In isolation, the debt reduction will improve Centrica's funds from operations to net debt by less than two percentage points and retained cash flow to net debt by one percentage point, with some additional benefit likely from the cash flow of the acquired businesses. However, the equity issuance is the latest in a series of significant actions Centrica’s new management team has made to strengthen the company’s balance sheet. These have included a 30% reduction of the dividend, the introduction of a scrip dividend alternative and the issuance of a £1 billion hybrid bond in 2015.

Taken together, these measures have raised equity (including the 50% credit we assign to hybrid equity in our analysis) or conserved dividends totalling £1.7 billion since the end of 2014, contributing to a significant reduction in adjusted net debt and reversing the significant increase seen in the years leading up to 2014, as shown in the exhibit.

Centrica’s Adjusted Net Debt, £ Billions Net debt has diminished with contributions from equity.

Source: Moody’s Investors Service

In addition, the company significantly reduced capital and operating expenditure as of July 2015 and sold two wind farms in February 2016, which will strengthen Centrica’s credit.

The planned acquisition of the consumer-facing business seems consistent with the new strategy, announced in July 2015, to focus on customer-facing operations.

Centrica’s rating remains on review for downgrade. We announced the review on 13 February, following a sharp drop in oil, gas and power prices and the risk that measures the company previously announced might be insufficient to achieve credit metrics consistent with the ratings guidance for the Baa1 rating of retained cash flow to net debt in the mid-20% range and funds from operations to net debt in the mid-30% range, in the intermediate term. We expect to conclude the review by mid-May.

£0

£1

£2

£3

£4

£5

£6

£7

£8

£9

2011 2012 2013 2014 HybridIssuance

ScripDividend

DividendReduction

Other 2015 EquityPlacing

WindSales

Acquis-itions

2015Pro Forma

£ Bi

llion

s

Adjusted Net Debt Equity Raised or Dividends Conserved Other

Graham Taylor Vice President - Senior Analyst +44.20.7772.5206 graham.taylor@moodys.com

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 9 MAY 2016

Banks

Freddie Mac’s Derivative Loss Illustrates the Structural Deficiency of Its Capital Agreement with US Treasury On Tuesday, Freddie Mac (Aaa stable) reported a $200 million comprehensive loss1 for first-quarter 2016, primarily resulting from a $4.6 billion derivative loss. The loss is credit negative because it illustrates the structural deficiency of its preferred stock purchase agreement (PSPA) with the US Treasury, which precludes Freddie Mac from accumulating capital, as well as the volatility of Freddie Mac’s derivative portfolio, which economically hedges its interest rate risk.

The amended PSPA between Freddie Mac and the US Treasury has two important capital components. First, the amount of capital that Freddie Mac is allowed to maintain declines each year. It began at $3.0 billion in 2013, but is $1.2 billion in 2016, $600 million in 2017, and zero in 2018. Quarterly earnings that would increase capital above this schedule must go to the US Treasury as dividends. Second, Freddie Mac can draw up to $140.5 billion from the US Treasury whenever its net worth declines to less than zero. The ability to draw capital from the US Treasury does not expire.

The declining maximum capital schedule increases the probability and size of capital draws. For example, if a large derivative loss resulted in a comprehensive loss of $3.0 billion, that loss would eat through Freddie Mac’s $1.2 billion in capital and Freddie would request $1.8 billion of capital from the US Treasury. The $1.8 billion request would bring Freddie Mac’s capital back up to zero and reduce its $140.5 billion of available capital to $138.7 billion.

If the derivative loss were to reverse in the next quarter, resulting in $3.0 billion of comprehensive income, Freddie Mac’s capital would increase to $3 billion, but the company would dividend $1.8 billion to the US Treasury to bring its capital back down to the maximum amount in 2016 of $1.2 billion. However, the $1.8 billion dividend would not replenish Freddie Mac’s available capital from the US Treasury, which remains $138.7 billion. In 2018, when Freddie Mac is not allowed to have any capital, the same $3 billion swing in derivative value would cause a $3 billion capital call and a $3 billion dividend, more quickly reducing capital available to Freddie.

Freddie Mac will not need to draw funds from the US Treasury in the first quarter because the $200 million comprehensive loss will be absorbed by the company’s $1.2 billion capital buffer. But because Freddie Mac’s allowed capital base will decline by $600 million annually and reach zero in January 2018, it is only a matter of time before Freddie Mac incurs a quarterly loss that exceeds its capital, requiring that it request a draw from the US Treasury. The capital buffer was designed to decline to zero over five years because of the expectation that government-sponsored enterprise reform would be enacted within this period. We believe that reform, if it occurs at all, is a long way off, probably more than five years. In light of this, and the capital call-dividend cycle we explained, we expect that the PSPA will be amended again to allow a modest amount of capital to build beyond 2018.

1 Comprehensive income or loss equals net income or loss (a $354 million loss) plus the change in fair value of cash flow hedges

($34 million), available-for-sale securities ($119 million) and changes in defined benefit plans ($1 million).

Brian Harris, CPA Senior Vice President +1.212.553.4705 brian.harris@moodys.com

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 9 MAY 2016

Intesa’s Sale of Its Card Payment Processing Business Is Credit Positive On 2 May, Intesa Sanpaolo Spa (A3/Baa1 stable, baa32) signed an agreement for the sale of its card payment processing subsidiaries Setefi and Intesa Sanpaolo Card to the private equity firms Advent, Bain Capital and Clessidra, for approximately €1 billion in cash. Intesa expects the transaction to be completed by year end, subject to regulatory authorisation. The sale is credit positive for Intesa because it will generate an €895 million net capital gain, equivalent to about 35 basis points (bp) in its capital ratio.

Intesa has sound capital, with 13.1% common equity Tier 1, which is 360 bp above the European Central Bank (ECB) prudential requirements (referred to as supervisory review and evaluation process). Nevertheless, the capital gain will effectively offset Intesa’s €845 million investment in Atlante,3 the Italian bank rescue and bad loan fund, which the ECB could decide to deduct from Intesa’s regulatory capital calculation. In addition, the capital gain will lift Intesa’s profits at a time when earnings of European banks are under pressure. Intesa did not disclose a net profit target for 2016 but a €3 billion dividend target, against which the capital gain is significant.

Moreover, Intesa will dispose of non-core processing activities, which require growing investments and economies of scale to operate efficiently. The buyers have proven experience in the European payment sector, through the acquisitions of Istituto Centr. delle Banche Popolari Italiane (Ba2 stable) in Italy, WorldPay Group Plc (Ba2 stable) in the UK and Nets Holding A/S (B2 stable) in the Nordic countries, which should ensure a strengthened technology platform. At the same time, the bank will retain the core commercial activities of card issuing (15 million cards) and merchant acquisition through 364,000 points of sale, maintaining customer relationships. Against these benefits, Intesa gives up €60 million of net income in 2015, equivalent to just 2% of the bank’s consolidated net income.

2 The ratings shown are Intesa Sanpaolo Spa’s deposit rating and senior unsecured debt rating, and its baseline credit assessment. 3 See Large Italian Banks’ Stake in Bank Rescue Fund Is Credit Negative, 25 April 2016.

LONDON +44.20.7772.5454

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 9 MAY 2016

China’s New Guidance on Loan-Beneficiary Rights Transfer Is Credit Positive for Banks On 2 May, it became public that the China Banking Regulatory Commission (CBRC) had issued guidance on Chinese banks’ loan-beneficiary rights transfers, a business in which banks sell the unearned gains of their loans to other parties. Under the new guidance, banks must hold capital and provisions for loans that they move off their balance sheets through beneficiary rights transfers. Additionally, the notice stipulates that the selling banks include in their nonperforming loan (NPL) statistics the beneficiary rights transfer of NPLs for which they still retain risk.

The new guidance is credit positive for Chinese banks because it materially reduces the attractiveness of loan-beneficiary rights transfers that could move loans off banks’ balance sheets without a complete risk transfer. By transferring loan-beneficiary rights, banks were able to move existing loans off their balance sheets to improve their capital and asset quality metrics, but some banks appeared to have arranged informal repurchase commitments with the buyers and retained the credit risks. The CBRC in July 2015 stipulated that banks must register their incremental loan and loan-beneficiary rights transfers with the China Banking Credit Asset Registration and Transfer Center. Last year, RMB22 billion of incremental loan-beneficiary rights transfers were registered, mostly sold by city commercial banks.

It remains unclear whether the guidance signals the start of a new round of regulatory actions that will curb shadow banking growth with stringent capital and provision requirements, or a more limited clamp-down on one product that will result in banks finding ways to offer similar products under a different guise. Chinese banks have been actively expanding their shadow banking activities, with these products often evolving in response to regulatory actions in order to circumvent regulatory constraints and boost margins. Although loan-beneficiary rights transfers are just one type of shadow banking product, the credit effect would be material if such capital and provision requirements were to be applied to the credit and quasi-credit portions of banks’ wealth management products and investments in loans and receivables, two key shadow banking channels.

According to the notice, after the loan-beneficiary rights are transferred, the selling banks must set aside capital based on the full amount of these loans, and charge provisions for these loans according to the accounting treatment and risks retained. This will negatively affect the selling banks’ short-term net income and capital adequacy ratio. The buyers of the loan-beneficiary rights are mostly other banks’ off-balance-sheet wealth management products, which are not subject to capital requirements.

The guidance also prohibits banks from using proceeds from wealth management product sales to directly or indirectly invest in loan-beneficiary rights sold by themselves. Despite restrictions on the direct usage of wealth management product proceeds, banks are currently actively channeling the proceeds from wealth management products into various assets through trust companies, asset management schemes of securities companies, mutual fund subsidiaries and insurers. The new guidance’s restriction on the use of wealth management product proceeds in both direct and indirect ways shows that the CBRC has adopted a “see-through” principal that tracks the origin of funding to regulate the flow of wealth management product proceeds.

In addition, the guidance adds to data transparency by reducing banks’ ability to hide NPLs through loan-beneficiary rights transfers. The notice requires that banks selling the beneficiary rights of NPLs include the part on which they retain risks in their reported NPL balance, NPL ratio and provision coverage ratio. It also stipulates that only qualified institutional investors can invest in NPL beneficiary rights. Wealth management products, trust schemes and asset management schemes sold to retail investors are banned from investing in NPL beneficiary rights.

David Yin Assistant Vice President - Analyst +852.3758.1517 david.yin@moodys.com

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 9 MAY 2016

Singapore’s Proposed Bank Resolution and Bail-in Regime Is Limited and Credit Positive for Senior Creditors On 29 April, the Monetary Authority of Singapore (MAS) published its responses to market participants’ comments on its proposed enhancements to the resolution regime for financial institutions, as well as a second-round consultation paper on the proposed legislative amendments to effect the policy proposals. The policies in these second-round consultations will be submitted for legislative approval. If approved, MAS’ policy would be a limited bank resolution and bail-in regime, which is credit positive for banks’ senior creditors, who will not be subject to bail-in.

Only subordinated liabilities issued after implementation of the relevant statutory regime in Singapore would be subject to bail-in, alongside the banks’ Basel 3 compliant debt.

As we noted in our previous comment, the MAS has proposed excluding all existing and prospective senior debt, all customer deposits, and interbank liabilities from the scope of bail-in. (Singapore’s very limited scope of bail-in-able liabilities is in stark contrast to the proposed regime in Hong Kong, which subjects to bail-in all liabilities apart from insured deposits.)

However, subordinated liabilities are in short supply in Singapore: to date, the three largest banks have issued around $6 billion of Basel III-compliant securities, which equal only 0.8% of their consolidated assets. Given that the MAS does not intend to introduce additional capital requirements such as total loss absorbency capacity beyond the higher loss absorbency requirement for domestic systemically important banks, Singapore banks have little incentive to issue more subordinated debt.

But the limited amount of subordinated liabilities alone will not provide sufficient loss-absorbing capacity in the event of bank non-viability, which places greater importance on MAS’ sound supervision, macro-prudential measures, and stringent capital and liquidity requirements consistent with Basel III. In addition, the consultation paper clarified questions related to resolution funding arrangements and proposed establishment of a Resolution Fund.

With the establishment of the Resolution Fund, the MAS would fund the resolution of a financial institution and subsequently recover these costs from the industry. The purpose of the Resolution Fund is to ensure timely access to funds to implement resolution measures, which include providing capital to a financial institution under resolution after losses have been imposed on unsecured subordinated creditors and equity holders. The amount that each bank will have to contribute to the fund after the resolution of a distressed bank would depend on factors such as its risk profile and benefits that the bank had derived from the resolution of the resolved institution or from the resolution regime in general. As such, we would expect larger banks to bear a greater proportion of the costs.

Although Singapore is moving toward specific legislation that enables the orderly resolution of a failed bank and the effect of a bank failure and resolution on depositors and other creditors is also being addressed in the proposed legislation, we expect Singapore banks to continue to benefit from extraordinary government support in case of need given the highly concentrated nature of the Singapore banking system and banks’ crucial role domestically.

Rebaca Tan Associate Analyst +65.6311.2610 rebaca.tan@moodys.com

Eugene Tarzimanov Vice President - Senior Credit Officer +65.6398.8329 eugene.tarzimanov@moodys.com

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 9 MAY 2016

Insurers

German Proposal to Lower Maximum Guaranteed Rate in Life Insurance Would Be Credit Positive Last Monday, the German Ministry of Finance recommended lowering the maximum guaranteed interest rate on traditional life insurance policies to 0.9% starting in January 2017, from 1.25% currently. If confirmed, this reduction would be credit positive for German life insurers because it would gradually lower their average guaranteed rate and lower insurers’ risk of not obtaining an investment yield higher than their average guaranteed rate. Additionally, the rate cut would reduce the attractiveness of traditional guaranteed products and support the sales of products that are less risky to insurers, which would further improve German insurers’ risk profile.

As shown in Exhibit 1, German life insurers’ investment returns are declining toward their average guaranteed rate, and low interest rates increase the spread deficiency risk -- the risk that investment yields fall below the average guaranteed rate.

EXHIBIT 1

German Investment Returns Are Declining Faster than the Average Guaranteed Rate

Note: * Reported investment yield excluding capital gains realized to finance the additional interest rate reserve, which German insurers must build. Sources: German Association of Actuaries, German Association of Insurers, Bundesanstalt für Finanzdienstleistungsaufsicht and Moody’s Investors Service

As shown in Exhibit 2, the guaranteed rate offered on new traditional policies4 is currently higher than the 20-year euro swap rate that insurers can obtain in the market. As a result, new business at the current maximum guaranteed rate would destroy value unless insurers take additional asset risk to generate higher returns than the swap rate. In contrast, a decrease of the maximum guaranteed rate to 0.9% would allow insurers to sell products with a positive difference between the 20-year swap rate and the guaranteed rate, thereby reducing the overall spread deficiency risk.

4 In practice, competition causes insurers to offer the maximum guaranteed rate allowed by law.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2010 2011 2012 2013 2014 2015

Estimated Average Guaranteed Rate Estimated Investment Yield*

Benjamin Serra Vice President - Senior Credit Officer +33.1.5330.1073 benjamin.serra@moodys.com

Martina Seydoux Associate Analyst +44.20.7772.1531 martina.seydoux@moodys.com

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 9 MAY 2016

EXHIBIT 2

The Guaranteed Rate on New German Policies Is Higher than the 20-Year Euro Swap Rate

Sources: Bloomberg and the insurers

The reduced guaranteed rate will make traditional policies less attractive for policyholders, who will be more inclined to purchase alternative products, notably hybrid products, with returns that are partly linked to equity market performance. These products require less capital and are less risky for insurers.

Large German life insurers, including Allianz Lebensversicherungs AG (financial strength Aa2 negative), AXA Lebensversicherung AG (financial strength Aa3 stable), Generali Lebensversicherung AG (financial strength A3 stable), ERGO Lebensversicherung AG (financial strength Aa3 stable) and Zurich Deutscher Herold Lebensversicherung AG (financial strength A1 stable), have already reduced or stopped selling traditional products. Still, even with a greater focus on new hybrid products, traditional products remain most popular in Germany and constitute 59% of life insurers’ sales in 2015 (see Exhibit 3). We expect the proportion of non-traditional products to further increase after the reduction in the guaranteed rate, a credit positive.

EXHIBIT 3

Traditional Products with Guarantees Composed 59% of German Insurers’ New Business in 2015 on an Annual Premium-Equivalent Basis

Source: German Association of Insurers, based on German life insurers with combined market share of 84%

0%

1%

2%

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7%

Mar

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00

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-01

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-14

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-15

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-16

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16

20-years Euro Swap Rate Maximum Guaranteed Rate

Traditional policies subject to maximum guaranteed rate59%

Policies including "new" hybrid guarantees37%

Unit-linked (guarantees from retirement phase)4%

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 9 MAY 2016

The overall effect on insurers’ balance sheets will be limited because guarantees on existing business would remain unaffected and new business in any one year typically constitutes around 3% of existing insurance liabilities. Additionally, it is unlikely that additional sales of the new hybrid products would fully offset the reduction in sales of traditional products, given that policyholders are likely to find these new products less attractive than traditional products. Therefore, we expect a decline in life insurance sales overall, slowing down the improvements in insurers’ risk profile.

Although the change in law is subject to approval by Bundesrat (the body of federal states in Germany), we believe there is a high likelihood that Bundesrat will follow the recommendation of the Ministry of Finance and approve the change.

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 9 MAY 2016

Sovereigns

Turkey’s Political Turmoil Impairs Reform Outlook and Increases Vulnerability to External Shocks On Thursday, Turkey’s (Baa3 negative) Prime Minister Ahmet Davutoglu announced his resignation, six months after being elected. The unsettled political environment associated with Mr. Davutoglu’s resignation is credit negative for Turkey because it increases the risk of delaying the implementation of reforms aimed at enhancing growth and reducing Turkey’s external vulnerability. Preserving investor confidence is key for Turkey, which depends on external capital to meet its external financing needs. Mr. Davutoglu’s replacement will be selected at a Justice and Development Party (AK Party) leadership conference scheduled for later this month.

The resignation coincides with heightened geopolitical risks arising from the conflicts in Syria and Iraq, which are spilling over into Turkey and having a major negative effect on tourism. Additionally, President Recep Tayyip Erdogan’s plans to transform Turkey’s parliamentary system into a presidential one have led to increasing speculation that snap parliamentary elections will occur later this year. The AK Party hopes the elections will give it the 330 seats required to call a referendum on the required constitutional changes. Turkey had two parliamentary elections in 2015.

This most recent political development could further delay Turkey’s reforms, which include measures designed to increase domestic savings, improve labour market flexibility, reduce energy dependence and improve the education system. These reforms would enhance growth, reduce Turkey’s external vulnerability, and, importantly, preserve the strength and independence of key institutions.

In this context, the political uncertainty may adversely affect investor confidence, and consequently, financial stability. The Turkish economy is extremely dependent on external capital and carries high levels of foreign-currency debt. As the exhibit below shows, Turkey’s current account deficit is forecast to fall to 3.5% of GDP ($26.3 billion) this year from a peak of 7.7% of GDP ($63.6 billion) in 2013 mainly because of low oil prices, but it still remains high compared with other emerging market countries. Additionally, Turkey has external gross financing needs equal to 26.7% of GDP this year and next; this is the highest level among the large emerging-market sovereigns we rate.

Turkey’s Current Account Balance as Percent of GDP versus Other Emerging-Market Countries’

Sources: Haver Analytics and Moody’s Investors Service

-10%

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2010 2011 2012 2013 2014 2015

South Africa India Indonesia Turkey Brazil

Alpona Banerji Vice President - Senior Credit Officer +44.20.7772.1063 alpona.banerji@moodys.com

Nina Delhomme Associate Analyst +44.20.7772.1086 nina.delhomme@moodys.com

NEWS & ANALYSIS Credit implications of current events

21 MOODY’S CREDIT OUTLOOK 9 MAY 2016

Such large gross financing needs mean Turkey’s economy is extremely vulnerable to shocks. Indeed, last year throughout the electoral cycle, fragile investor sentiment led to an increase in borrowing costs, with the 10-year Turkish government bond yield rising to 10.5% at the end of 2015 from 7.9% in 2014. The local currency, the lira, which depreciated more than 28% against the US dollar in 2015, has recently weakened, despite having stabilised earlier this year.

Concurrently, Turkey’s external shock absorption capacity has deteriorated. Because of capital outflows last year, foreign-exchange reserves declined by $11.8 billion, although the decline would have been larger but for $9.4 billion of unrecorded inflows (net of errors and omissions). This vulnerability is best highlighted by Turkey’s high external vulnerability indicator,5 which we forecast will rise to 186.8% this year from 177.8% last year.

5 We calculate this measurement as the sum of short-term external debt, currently maturing long-term external debt and total

non-resident deposits over one year divided by official foreign-exchange reserves.

NEWS & ANALYSIS Credit implications of current events

22 MOODY’S CREDIT OUTLOOK 9 MAY 2016

Sub-sovereigns

Strong Growth in German Laender Tax Revenues Is Credit Positive Last Wednesday, the German Ministry of Finance said that German Laender tax revenues will grow a surprisingly high 3.7% in 2016, up from its 2.9% estimate in November. The credit-positive upward revision for 2016 and following years reflects Germany’s strong economy and will benefit Laender fiscal consolidation. Based on the new tax estimates, we expect the sector to report a surplus of more than 1% of total revenues for 2016. We expect this trend to continue, although at a slowing pace, over the next two to three years.

Given that the Laender have a very rigid expenditure structure and on average more than 70% of their budget is composed of shared taxes, tax revenue strongly predicts overall financial performance, as shown below.

German Laender Estimates and Actual Tax Revenue

Sources: German Ministry of Finance and Moody’s Investors Service

The ministry’s latest tax estimate includes a surprisingly large increase in tax revenues for all German Laender, which allows them to comply with Germany’s debt-brake mechanism. Highly indebted Laender include Nordrhein-Westfalen (Aa1 stable) and Berlin (Aa1 stable). Berlin has made significant progress in reducing its debt and has returned to financial surpluses since 2012, while Nordrhein-Westfalen still has financial deficits, but has targeted a balanced budget by 2019, one year ahead of the debt-brake requirement.

We expect that other Laender in Eastern Germany, such as Brandenburg (Aa1 stable) and Saxony-Anhalt (Aa1 stable), which had comparatively lower debt, will continue to report financial surpluses this year. Among the least indebted Laender, Bavaria (Aaa stable) will continue to have considerable surpluses, as will Baden-Wuerttemberg (Aaa stable).

German Laender closed 2015 with a slight financial surplus on an aggregate basis. On an individual basis, the majority of the 16 Laender were able to report balanced budgets, driven primarily by the tax revenue trend, very low interest cost and ongoing fiscal consolidation efforts.

-€15

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2010 2011 2012 2013 2014 2015 2016e 2017e 2018e 2019e 2020e

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llion

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llion

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Actual Laender Tax Revenues - left axis Laender May 2016 Tax Estimate - left axisLaender November 2015 Tax Estimate - left axis Financing Surplus (Deficit) - right axis

Juliane Sarnes Associate Analyst +44.20.7772.1392 juliane.sarnes@moodys.com

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

NEWS & ANALYSIS Credit implications of current events

23 MOODY’S CREDIT OUTLOOK 9 MAY 2016

US Public Finance

Time Is Running Out on Solving Detroit Public Schools’ Financial Crisis On 5 May, the Michigan House of Representatives narrowly approved a rescue package for Detroit Public Schools (DPS, Caa1 negative). The late night legislative session resulted in six bills aimed at overhauling the district and providing additional funding. While progress toward a workable solution to the district’s fiscal situation is credit positive, the differences between the house bills and the package of senate bills, passed in March, remain stark. We anticipate that lawmakers will begin to reconcile the bills soon because the district is quickly running out of resources to operate. The legislature now has less than two months to compromise on a reform package or the district’s financial position will possibly force a bankruptcy filing.

Failure to implement a solution increases risks to all of the district’s bondholders. Presently, we expect bondholders of the district’s GOULT debt to remain unimpaired because all of the district’s GOULT debt is enhanced by the State of Michigan’s School Bond Qualification Program. However, the state’s commitment to the program has never been tested under a Chapter 9 scenario.

District finances have steadily deteriorated, even under direct state oversight since 2009. General fund reserves have narrowed dramatically, and the district’s funds are so meager that it risks being unable to pay its obligations, including payroll. The nearly $50 million in emergency state funding appropriated in April was only meant to ensure cash flow through fiscal 2016, which ends 30 June.

Although the emergency funding bought time to work out a legislative solution, lawmakers remain divided. The recently passed Republican-sponsored house bills include less funding for the district’s transition costs than the senate package. The house bills also contain stringent union provisions, including financial consequences for teacher sick-out actions, like the one that occurred 2 May. Municipal strikes are illegal in the State of Michigan (Aa1 stable). The bi-partisan senate package of bills includes nearly $200 million in additional transition funding, no specific union restrictions, and a commission that would oversee the opening and closing of city schools, including charters.

Supporters of the reform measures, led by Governor Rick Snyder, refuse to publicly comment on contingency strategies if an adequate rescue package of bills is not passed. Options appear limited. Additional emergency funding would provide immediate cash flow relief, but would not solve the significant operating deficit. Alternatively, the district could seek bankruptcy protection under Chapter 9, which would require a recommendation by the emergency manager and approval by the governor.

Holders of state aid revenue debt (Series 2011A, Series 2012, Series 2014, and Series 2015E – all unrated) are at risk given the district’s severely constrained reserves, despite a first claim on state aid. Debt service on this debt is paid directly from a set aside of state aid that would otherwise be available for the district’s general operations, contributing to the district’s cash flow crunch. The fact that outstanding debt has a senior lien on state aid drives the emergency manager’s conclusion that the district may not be able to make payroll after 30 June. Debt service on existing state aid revenue debt totals $105.3 million in fiscal 2017, which includes set-aside payments of $26.1 million in July and $26.2 million in August. Without an infusion of a significant amount of additional cash beyond the district’s existing short-term borrowing authority in fiscal 2017, it would be highly unlikely that the district would have resources to make payroll and debt service throughout the year.

Andrew Van Dyck Dobos Analyst +1.312.706.9974 andrew.vandyckdobos@moodys.com

NEWS & ANALYSIS Credit implications of current events

24 MOODY’S CREDIT OUTLOOK 9 MAY 2016

State Housing Finance Agency Exemption from Rule on Loan Insurance Is Credit Positive Last Tuesday, the US Department of Agriculture (USDA) released a rule finalizing loan requirements to be considered a “qualified mortgage” under its Single-Family Housing Guaranteed Loan Program (SFHGLP). The finalized rule exempts state housing finance agencies (HFAs) from the SFHGLP requirements, a credit positive for HFA programs because the exemption supports increases in HFA loan originations.

The exemption allows HFAs to expand their lending programs and thus loan originations. As of 31 December 2015, Moody’s-rated HFA bond programs financed $31.8 billion in outstanding single-family whole loans, 8% of which were USDA insured (see exhibit). The automatic classification of HFA loans as qualified loans will offer HFAs a competitive advantage over conventional lenders in the origination of USDA-guaranteed loans because borrowers would not have to meet the SFHGLP’s underwriting standards, particularly those pertaining to lower-income borrowers who take out smaller loans. We expect that this will allow HFAs to increase originations of USDA-insured loans for their whole-loan portfolios and for loans that are securitized by Ginnie Mae for inclusion in HFA mortgage-backed securities programs or for sale in the secondary market.

USDA-Insured Loans Constitute 8% of Moody’s-Rated Single-Family Whole-Loan Portfolios

Source: Moody’s Investors Service state housing finance agency survey

The SFHGLP is a USDA loan program aimed at borrowers whose primary residence is in a rural area, a requirement to be eligible for the program. SFHGLP provides a 90% guarantee to approved lenders. This deep coverage strengthens HFA financial performance by mitigating the potential loan loss of programs from delinquencies and defaults of these loans.

HFAs are state entities that make single-family loans to low- to middle-income first-time homebuyers. HFAs programs typically originate loans with high loan-to-value ratios, given that first-time homebuyers are typically unable to make large down payments and thus require mortgage insurance. HFA borrowers obtain mortgage insurance from government insurance providers such as the Federal Housing Administration, the USDA and the US Department of Veterans Affairs or from primary mortgages insurers.

The qualified mortgage definition comes from rules issued by the Consumer Financial Protection Bureau and requires that lenders, when originating mortgage loans, make reasonable and good-faith determinations that borrowers have the ability to repay their loans. In addition to the USDA, the Consumer Financial Protection Bureau and Federal Housing Administration had already chosen to exempt HFA loans from their qualified mortgage standards.

FHA/VA41%

PMI45%

USDA8%

Other6%

Ferdinand S. Perrault Vice President - Senior Analyst +1.212.553.4793 ferdinand.perrault@moodys.com

CREDIT IN DEPTH Detailed analysis of an important topic

25 MOODY’S CREDIT OUTLOOK 9 MAY 2016

US Treasury Department Denies Teamster’s $11 Billion Central States Pension Restructuring On 6 May, the US Treasury Department announced that it had denied an application from the Teamster Central States, Southeast and Southwest Areas Pension Plan (Central States) to reduce plan benefits, which would have lowered its projected benefit obligation (PBO) by $11 billion. The rejection is credit negative for sponsors because the plan would have eliminated the need for large, and in some cases unaffordable, increases in pension contributions.

Central States’ three largest contributors in 2014 were ABF Freight Systems Inc. (unrated), which contributed $74 million; Jack Cooper Transport Company, Inc. (Caa1, stable), which contributed $34 million; and YRC Worldwide Inc. (B3 stable), which contributed $32 million. The remaining contributions came from small and midsize enterprises or large corporations with few Teamster employees, such as Dean Foods Company (B1 stable), which contributed $9 million; Kellogg Company (Baa2 stable), which contributed $5 million; and SUPERVALU Inc. (B1 stable), which contributed $8 million.

One reason Treasury rejected the application was its 7.5% investment return assumption, which Treasury considered unrealistically high. If Central States chooses to refile the application it must do so using a lower return assumption. The only way to make the math work with a lower return assumption is to either decrease plan benefits more than they were in the rejected plan, increase sponsor contributions or some combination of both.

Despite the Treasury Department’s application denial, we believe many other plans will be allowed to reduce benefits because of the Multiemployer Pension Reform Act of 2014 (MPRA), which established a new process for multiemployer pension plans (MEPPs) to temporarily or permanently reduce pension benefits if the plan is projected to run out of money. However, the MPRA only allows vested benefit cuts after all other possible rehabilitation plans have been exhausted.

Central States’ PBO, in accordance with the Retirement Protection Act of 1994, was $54 billion at the end of 2014, and it held $18 billion in assets, equaling a 33% funded level. With more than 200,000 retirees receiving benefits, another 130,000 eligible to receive future benefits and only 65,000 actively employed participants, the trustees concluded that without the requested benefit reductions the plan would fail.

More than 200,000 of the Central States’ participants are so-called orphans, whose former employers either went bankrupt or voluntarily withdrew from the plan and make no contributions to it. Given these funding and demographic issues, the plan’s trustees calculated that the fund needs $11 billion in funding to prevent insolvency and meet its long-term obligations. With Congress unlikely to infuse $11 billion into the fund, the trustees cut benefits in order to save the plan.

Despite these challenges, Treasury denied the application because it failed to meet some of the technical requirements of the MPRA. The three main reasons Treasury cited for its denial were 1) inappropriate assumptions, including an assumed rate of return of 7.5%, which Treasury deemed too high; 2) inequitable distribution of benefit reductions; and 3) overly technical language to inform participants of the proposed cuts.

Without benefit cuts, the plan will almost certainly require assistance from the Pension Benefit Guarantee Corporation (PBGC) in the next 10 years. According to the Governmental Accountability Office (GAO), this would have wide-ranging effects outside of the Central States pension fund. In 2013, the GAO estimated that if a “large and troubled” plan were to require assistance by the PBGC, all benefits paid to MEPP participants relying on the PBGC would be reduced to less than 10% of the guarantee level. In this case, retirees’ maximum benefit would be less than $1,500 a year. Because Central States is the third-largest US MEPP by number of participants, second-largest by PBO and largest by underfunding, we believe it fits the description of “large and troubled.”

Wesley Smyth Vice President - Senior Accounting Analyst +1.212.553.2733 wesley.smyth@moodys.com

CREDIT IN DEPTH Detailed analysis of an important topic

26 MOODY’S CREDIT OUTLOOK 9 MAY 2016

According to the Secretary of the Treasury, Jacob Lew, Central States may choose to reapply and propose even larger cuts in order to meet MPRA requirements. We expect that Central States will re-file an application using different assumptions and benefit reduction formulas. If a future filing includes benefit cuts larger than the original application but makes no adjustment to sponsor contributions, this would retain the credit positive quality of the rejected plan. If a new application includes higher benefit cuts but also includes higher sponsor contributions then this would still be credit positive, just not as much as had the current plan been approved. We believe that Central States will be forced to tread a very narrow line in allocating the pain between sponsors and beneficiaries or it will risk another rejection. What is certain is that with only $1 coming into the plan for every $3.46 going out, Central States moves closer to insolvency each day without benefit cuts. In the case of a plan insolvency, large charges to exit the plan (withdrawal liabilities) will probably be triggered for plan sponsors, which would be credit negative. Since Central States filed its application for benefit reductions, four other plans have filed similar applications with the Treasury (see Exhibit 1).

EXHIBIT 1

US Multiemployer Plans that Have Applied for Benefit Reductions

Plan Name Liability*

$ Millions

Net Plan Assets

$ Millions Percent Funded

Participant Data

Orphans Total Employed Inactive

Pre-retirees Retirees

Central States, Southeast And Southwest Areas Pension Plan

$53,728 $17,863 33% 401,646 65,324 16% 129,700 32% 206,622 51% 206,782

Iron Workers Local 17 Pension Fund

$363 $86 24% 1,971 632 32% 302 15% 1,037 53% Not Disclosed

Road Carriers Local 707 Pension Fund

$878 $73 8% 4,664 835 18% 776 17% 3,053 65% 1,049

Teamsters Local 469 Pension Plan

$280 $121 43% 1,823 144 8% 636 35% 1,043 57% 1,508

Iron Workers Local 16 Pension Fund

$199 $86 43% 1,119 278 25% 181 16% 660 59% Not Disclosed

Note: * Liability in accordance with the Retirement Protection Act of 1994. Orphans are participants who do not have an employer making contributions to the plan owing to the employer’s bankruptcy or voluntary withdrawal from the plan.

Source: Individual pension plan annual reports

We cannot predict which plans will file for benefit reductions, and thus extrapolate which companies will benefit, but when we looked at the funded status of the largest 123 MEPPs for our annual funding update, 73 disclosed funding levels of 50% or less, 23 plans disclosed retirees populations of more than 50% and 17 disclosed both funding levels below 50% and retiree populations of more than 50% (see Exhibit 2). Although these metrics may not be the most accurate in predicting which plans will file for benefits, all five plans that have so far filed for benefit reductions disclosed funding levels below 50% and retiree populations of more than 50%.

CREDIT IN DEPTH Detailed analysis of an important topic

27 MOODY’S CREDIT OUTLOOK 9 MAY 2016

EXHIBIT 2

US Multiemployer Plans with Funded Status under 50% and Retiree Population above 50%

Plan Name Liability*

$ Millions

Net Plan Assets

$ Millions Percent Funded

Participant Data

Total Employed Inactive Pre-

Retirees Retirees

Trucking Employees of North Jersey Welfare Fund Inc. - Pension Fund

$894 $203 23% 6,980 797 11% 1,659 24% 4,524 65%

Western Pennsylvania Teamsters and Employers Pension Plan

$2,621 $750 29% 23,520 5,291 22% 5,541 24% 12,688 54%

Iron Workers Local No. 25 Pension Fund $1,505 $496 33% 5,149 1,531 30% 833 16% 2,785 54%

Central States, Southeast and Southwest Areas Pension Plan

$53,728 $17,863 33% 401,646 65,324 16% 129,700 32% 206,622 51%

Iron Workers District Council of Southern Ohio & Vicinity Pension Trust

$1,488 $504 34% 5,075 1,507 30% 865 17% 2,703 53%

Operating Engineers Pension Trust $4,850 $1,764 36% 31,068 9,823 32% 5,177 17% 16,068 52%

Operating Engineers Local 324 Pension Fund

$3,240 $1,183 37% 17,778 4,986 28% 3,457 19% 9,335 53%

Local 705 International Brotherhood of Teamsters Pension Trust Fund

$2,779 $1,101 40% 16,016 4,719 29% 3,026 19% 8,271 52%

Chicago Newspaper Publishers Drivers Union Pension Trust

$210 $83 40% 899 175 19% 164 18% 560 62%

Teamsters Pension Trust Fund of Philadelphia & Vicinity

$3,974 $1,586 40% 26,148 7,612 29% 5,077 19% 13,459 51%

United Mine Workers of America 1974 Pension Plan

$10,004 $4,165 42% 109,869 10,103 9% 7,548 7% 92,218 84%

Boilermaker-Blacksmith National Pension Trust

$18,157 $7,697 42% 74,469 24,040 32% 13,055 18% 37,374 50%

Bakery & Confectionery Union & Industry International Pension Fund

$11,245 $4,802 43% 112,469 23,381 21% 31,254 28% 57,834 51%

Graphic Communications International Union Local 1198 NY Printers League Pension Fund

$138 $59 43% 1,792 32 2% 460 26% 1,300 73%

Alaska Teamster - Employer Pension Plan

$1,449 $634 44% 8,326 2,743 33% 1,382 17% 4,201 50%

Automotive Machinists Pension Plan $1,540 $685 44% 9,287 1,664 18% 2,685 29% 4,938 53%

Central Pennsylvania Teamsters Defined Benefit Plan

$2,043 $992 49% 30,091 6,601 22% 5,279 18% 18,211 61%

Note: * Liability in accordance with the Retirement Protection Act of 1994.

Source: Individual pension plan annual reports

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28 MOODY’S CREDIT OUTLOOK 9 MAY 2016

NEWS & ANALYSIS Corporates 2 » Collapse of Merger Gives Baker Hughes $3.5 Billion in Cash

at Halliburton's Expense » International Paper's Acquisition of Weyerhaeuser's Pulp

Assets Is Credit Positive for Both » CommScope's PIK Note Repayment Is Credit Positive » The Navigator Company Slashes Interest Expense with New

Financing, a Credit Positive » Evergrande's Increased Stake in Shengjing Bank Is

Credit Negative » Korea's SK Telecom and KT Corporation Win Spectrum at

Auction, a Credit Positive for Both

Infrastructure 9 » Energy Future Holdings' New Reorganization Plan Is Credit

Positive for Texas Competitive Electric » Energias do Brasil's BRL1.5 Billion Capitalization Is Credit

Positive for It and Its Subsidiaries » Australian Airports Face Credit-Negative Airline Capacity Cuts

Pressuring Revenue

Banks 13 » Italy's New Framework on Nonperforming Loan Foreclosures Is

Credit Positive for Banks and SME Securitisations » Details of European Commission's State Aid Approval for HSH

Nordbank Present Credit-Negative Challenges

Sovereigns 16 » US Cruise Ships Set Sail for Cuba, a Credit Positive for

the Sovereign » IMF Program Will Ease Sri Lanka's Liquidity Pressures, but Not

Its Fiscal Challenges

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