MOODYS.COM

10 SEPTEMBER 2012

NEWS & ANALYSIS European Sovereign and Bank Crisis 2 » ECB Debt Purchases Can Buy Time for Struggling Sovereigns, but

Crisis Resolution Requires Government Action » Greek Loan Restructuring Proposal Would Be Credit Negative

for Banks » Société Générale's Disposal of Geniki and NSGB Would Be

Credit Positive

Corporates 6 » DuPont's Sale of Performance Coatings Business Is Credit Positive » Advent International's Debt-Funded Acquisition of Serta's and

Simmons' Parent Is Credit Negative » SGS International Acquisition by Private-Equity Firm Onex Will Be

Credit Negative If Debt-Funded » Tech Data's Planned Acquisition of European IT Products

Distributors Is Credit Negative » Phosagro’s Acquisition of Russian Government Stake in Apatit Is

Credit Positive » ConvaTec Acquires 180 Medical Holdings Inc., a Credit Negative » Ocean Rig's New Contract with Repsol and Extended Construction

Options Are Credit Positive » KION's Sale of Stake to China's Weichai Is Credit Positive » Fresenius Withdraws from Further Bidding for Rhoen, a

Credit Positive » China's Approval of Infrastructure Projects Will Help Domestic Suppliers » Number of Mobile Customers Switching Carriers Is Credit Negative

for Korean Telcos » Approval for Indosat's 3G Services on Existing Spectrum Is

Credit Positive

Infrastructure 19 » TransAlta Benefits from Canada's New Coal-Fired Plant

Emission Rules » Brazil Regulator Intervenes in Eight of Rede's Distribution

Subsidiaries, a Credit Negative

Banks 21 » SunTrust's Sale of Coke Shares Sweetens an Otherwise Bitter Bill » Sberbank and BNP's New Consumer Finance Bank Is Positive for

Both, but Negative for Rivals » Japan Post Bank's New Businesses Would Be Credit Negative for

Regional Banks » Nomura Refocuses on Asia, a Credit-Positive First Step to Return

to Sustainable Profitability

Insurers 26 » MassMutual's Acquisition of Hartford's Retirement Plans Group Is

Credit Positive » Hurricane Isaac Is Credit Negative for Combine Re Cat Bond » UK Financial Incentives Consultation Is Credit Negative for the

Insurance Industry » Allianz Life's US Market Conduct Settlement Is Credit Positive

Sub-sovereigns 32 » Japan's Support for Regional and Local Governments Is

Credit Positive

US Public Finance 33 » California Pension Reform Is Credit Positive » California Support for Inglewood School District Is Credit Positive

for It and Other Stressed Districts

RATINGS & RESEARCH Rating Changes 37

Last week we downgraded Reynolds Group Holdings and upgraded Allina Health System, among other rating actions.

Research Highlights 42

Last week we published reports on North American building material, Australian corporates, the J.P. Morgan Asia Credit Index, US wireline and wireless, our liquidity-stress indices, US supermarkets, European building materials, US tobacco, US banks, global resinsurance, US commercial P&C insurers, Qatar, Uruguay, Sweden, Costa Rica, Mexico’s water companies, and Asia securitization, among other reports.

RECENTLY IN CREDIT OUTLOOK

» Articles in last Monday’s Credit Outlook 47 » Go to last Monday’s Credit Outlook

Discover Weekly Market Outlook, our sister publication containing Moody’s Analytics’ review of market activity, financial predictions, and calendar of economic releases.

NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

European Sovereign and Bank Crisis

ECB Debt Purchases Can Buy Time for Struggling Sovereigns, but Crisis Resolution Requires Government Action

Last Thursday, the European Central Bank (ECB) announced a new programme to purchase secondary market debt of euro area sovereigns through outright monetary transactions (OMTs). The initiative supports peripheral sovereigns’ efforts to contain rising yields on their debt. Countries must first apply for either a full or precautionary programme from the European Financial Stability Facility (EFSF, Aaa negative) or European Stability Mechanism (ESM, unrated)1 and adhere to programme conditions, after which the ECB will purchase government bonds with maturities between one and three years. The ECB’s goal is to reduce ‘convertibility’ risk, which is the risk that countries will leave the euro.

The proposal contains a number of credit positive elements for struggling peripheral sovereigns. On the face of it, the avoidance of quantitative limits on OMTs is consistent with ECB President Mario Draghi’s comment on 26 July that the ECB is willing to “do whatever it takes to preserve the euro”. The decision to accept pari passu treatment alongside private creditors removes the spectre of subordination. The explicit linkage between support and conditionality should bolster peripheral governments’ commitment to fiscal consolidation and structural reform. The willingness to link OMTs to entry into EFSF/ESM precautionary support programmes or full programmes gives peripheral governments a wider range of options than before. The ECB also made changes to its collateral framework, which will benefit peripheral country banks.

However, the extent to which OMTs are a departure from past policy should not be overstated. The ECB used the now-discontinued Securities Markets Programme, the ultimate size of which was also never specified, to intervene in sovereign debt markets to “address tensions [which were] hampering monetary policy transmission”, which is a similar reason to that cited in support of OMTs. Its desire to link support to domestic fiscal consolidation is also not new. And the ECB did not suggest that fiscal consolidation programmes in those countries whose debt it might buy need to be stricter. There is little in the initiative that is fundamentally new.

Moreover, the announcement leaves a number of uncertainties. The ECB offered no insight into what short-term yields it thinks are appropriate in each country or what magnitude of purchases may be needed. The decision to provide few details very likely partly reflects continued divisions within the ECB on its role in resolving the crisis. The ECB may hope that the announcement alone will sufficiently reassure investors and remove the need for substantial purchases, but the evolution of the crisis suggests this is unlikely and that the markets will test the ECB’s resolve. How the ECB will overcome any internal tensions should significant purchases be required over a sustained period is unclear. It is also not clear whether Spain (Baa3 review for downgrade) or Italy (Baa2 negative) intend to apply for such programmes, or for how long the amounts available under precautionary programmes facilities would sustain each country if they did.

In any event, OMTs, like other monetary policy tools, will not resolve the debt crisis. The ECB has an essential role to play within the authorities’ crisis resolution framework, and the OMT program reaffirms our assumption that the ECB will ultimately do what it can to support that framework. But

1 In contrast to full programmes, precautionary programmes provide funding before countries face difficulties raising funds in

the capital markets. They tend to be smaller in scale than full programmes (between 2% and 10% of GDP) and shorter in term (one year maturity renewable for six months twice).

Alastair Wilson Chief Credit Officer +44.20.7772.1372 alastair.wilson@moodys.com

Colin Ellis Senior Vice President +44.20.7772.1609 colin.ellis@moodys.com

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

its actions can ultimately do no more than buy time, as its decision to focus on short-term debt purchases implicitly recognises. To the extent that investors believe that euro area authorities will use the time bought to push through domestic fiscal and structural reforms and broader changes to the euro area fiscal and economic governance framework, OMTs will support continued access to debt markets by peripheral sovereigns and banks, a credit positive. But ultimate responsibility for crisis resolution still lies with euro area governments.

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Greek Loan Restructuring Proposal Would Be Credit Negative for Banks

Last Tuesday, Pasok, one of the three political parties forming the current coalition government in Greece, sent a letter to the president of the Hellenic Banking Association encouraging commercial banks to restructure loans of households and companies facing financial and liquidity difficulties. Although not a government proposal, this initiative, if adopted, would be credit negative for Greek banks because it would increase moral hazard among borrowers. It would also lead to further underestimation of the extent of banks’ asset quality deterioration.

The initiative highlights the weakening payment capacity of Greek borrowers. Both retail and corporate borrowers have experienced significant erosion in their repayment ability and, as a result, loan delinquencies have increased over the past three years (see exhibit). According to the Bank of Greece, the country’s banking regulator, the reported level of nonperforming loans (NPLs) in the system increased to 18.7% of total loans in first-quarter 2012. However, the regulator’s official NPL numbers and those of individual banks underestimate the full extent of the asset quality deterioration because they do not capture the surge in the number of restructured loans. According to a 9 March International Monetary Fund report on Greece, banks had restructured around 4% of all loans as of September 2011, suggesting that impaired loans are well over 23% of the banking system’s total gross loans.

Reported Nonperforming Loans at Greek Banks

Source: Bank of Greece

The Pasok recommendation would provide extended loan maturities and lower monthly loan instalments to borrowers with reduced incomes, but would also create moral hazard among wilful defaulters, further compromising Greek banks’ already poor asset quality. In addition, it would delay banks’ recognition of impairments; we view restructured loans as harbingers of future loan losses.

The letter’s recommendation follows the government in 2010 suspending foreclosures for a year on primary residences with outstanding mortgage debt of €200,000 or less. The government has since extended that moratorium every year through 2012, and we expect it to do so for 2013. These forbearance measures carry risks because banks do not implement them in a transparent manner and they do not always provide a sustainable solution to borrowers’ financial difficulties and the repayment of their loans. If economic conditions do not improve significantly, Greek banks will be faced with property repossessions and new loan-losses when the government eventually repeals the measures.

7.0% 6.3% 5.4% 4.5%5.0%

7.7%

10.4%

16.0%

18.7%

0%

5%

10%

15%

20%

25%

30%

35%

2004 2005 2006 2007 2008 2009 2010 2011 Q1 2012

Consumer Loans Mortgage Loans Business Loans All Loans

Nondas Nicolaides Vice President - Senior Analyst +357.25.586.586 nondas.nicolaides@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Société Générale’s Disposal of Geniki and NSGB Would Be Credit Positive

On 30 August, Société Générale (SocGen, A2 stable; C-/baa2)2 announced that it was engaged in discussions to sell its Greek subsidiary, Geniki Bank (unrated) to Piraeus Bank S.A. (Caa2 negative; E/caa3). The day before, SocGen announced that Qatar National Bank (QNB, Aa3 stable; C-/baa1) had expressed interest in buying its Egyptian subsidiary National Société Générale Bank (NSGB, unrated). SocGen said it is evaluating selling both subsidiaries, but that it has not made a decision. A sale of both subsidiaries would be credit positive because it would improve SocGen’s capital position. Selling Geniki would also reduce SocGen’s exposure to Greece and to what we see as the slim risk of the country exiting the euro area.

SocGen owns 99.1% of Geniki, which is the vast majority of the French bank’s Greek-related risk. Geniki at the end of June had €2.1 billion of net loans and €2.0 billion of deposits, and between 2008 and 2011 lost €612 million, including €348 million in 2011, as a result of the Greek sovereign and bank crisis. In addition to its shareholding, SocGen held subordinated debt in Geniki totalling €125 million at the end of June. The group’s banking book net sovereign exposure to Greece was €35 million at the end of June.

With €33.9 billion of core Tier 1 capital at the end of June, SocGen’s exposure to Geniki and, by extension, to the risk of Greece withdrawing from the euro area, is relatively modest. Assuming a nominal disposal price of €1 and no loss on the subordinated debt, we estimate Geniki’s disposal would have a minimal effect on SocGen’s core Tier 1 capital ratio because the book value of SG’s stake in Geniki was €117 million at the end of 2011. Nevertheless, SocGen would benefit from a sale because it would significantly reduce its exposure to Greece.

Meanwhile, NSGB, of which SocGen controls 77.2%, is the second-largest, privately owned bank in Egypt, and at the end of June had €5.0 billion of loans and €6.8 billion of deposits and reported net income of €102 million for the first half of 2012. A transaction would be credit positive because the likely gain on sale would increase capital. We estimate a sale of NSGB would improve SocGen’s core Tier 1 capital ratio by 30-40 basis points, assuming a disposal at its current listed market value of €2.3 billion, versus €277 million for the NSGB stake’s book value at the end of 2011.

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

the corresponding outlooks.

Alessandro Roccati Senior Vice President +44.20.7772.1603 alessandro.roccati@moodys.com

Nick Hill Associate Managing Director +33.1.5330.1029 nick.hill@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Corporates

DuPont’s Sale of Performance Coatings Business Is Credit Positive

On 30 August, E.I. du Pont de Nemours and Company (A2 stable) said it would sell its Performance Coatings business (DPC) to The Carlyle Group for $4.9 billion in cash, plus the assumption of $250 million of unfunded pension liabilities. The move is credit positive for DuPont, which said it would consider using a portion of the undisclosed after-tax proceeds from the sale to strengthen its stressed balance sheet, a strategy consistent with its publicly stated cash flow disciplines.

DuPont, one of the world’s largest chemical companies, has told investors that its strong balance sheet has long served it well, particularly through its 2011 acquisition of Danisco, which added a significant amount of debt, and the financial crisis of 2008-09.

DuPont reported sales of $40 billion for the 12 months ended 30 June, with operating profits of $4.2 billion. DPC, a global supplier of vehicle and industrial coating systems, reported $4.3 billion in sales for the same period, and $312 million in operating profit. We estimate that DPC’s EBITDA for 2012 will approach $500 million. DuPont plans to offset a portion of the loss of DPC’s earnings by eliminating in 2013 and early 2014 significant stranded costs associated with DPC.

In recent quarters, DuPont’s credit metrics have been stressed by the debt used to acquire Danisco, and also a $9.3 billion unfunded pension liability at the end of 2011. The unfunded pension liability, a jump up from its $5.5 billion liability a year earlier, equals about 40% of DuPont’s adjusted net debt of $23.1 billion at the end of June 2012. (Our debt adjustments include an additional $9.3 billion for underfunded pensions and $1.8 billion of capitalized rent expenses.)

We expect DuPont to use much of the cash from the DPC sale to strengthen its balance sheet and maintain metrics that better support an A2 rating. DuPont’s ratio of retained cash flow (RCF) to net debt was 20% for the year that ended in June, and its debt to EBITDA ratio was 3.5x. These metrics declined recently because of increased acquisition debt and the increase in DuPont’s unfunded pension liabilities at the end of 2011. A sustainable RCF/net debt ratio above 30% and net debt/EBITDA below 2.3x more closely match DuPont’s A2 rating.

If DuPont achieves $3.92 of the net proceeds from the DPC sale and applies all of it toward debt reduction, the company could improve its leverage to 3.1x, giving little credit for cash balances, or even to 2.7x, giving full credit to June 2012 cash balances to offset debt. In our calculations we assume an estimated 20% tax on gross proceeds of $4.9 billion and the elimination of material stranded costs. The 2.7x ratio (which is still higher than the 2.3x ratio that more closely supports an A2 rating) also reflects DuPont’s $3.5 billion cash balance at the end of June. Typically, DuPont has far more cash on its balance sheet in late December, when it turns many of its agricultural receivables into cash.

Although this sale alone will not bring DuPont’s net debt/EBITDA ratio or other measures near to what is sustainable for an A2 rating, DuPont’s probable use of the cash is an important improvement for its A2 rating.

Bill Reed Vice President - Senior Credit Officer +1.212.553.4653 william.reed@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Advent International’s Debt-Funded Acquisition of Serta’s and Simmons’ Parent Is Credit Negative

Private-equity firm Advent International has informed us that it held bank meetings last Thursday to discuss how it would fund its purchase of a majority interest in AOT Bedding Super Holdings LLC (B2 stable) for $3 billion, nearly $2 billion of which would be debt. The deal is credit negative for AOT because it would leave the company with very high financial leverage.

Advent publicly disclosed on 5 August its agreement to purchase AOT, the parent company of Simmons Bedding Company (B2 stable) and National Bedding Company, LLC (B2 stable), which does business as Serta, for $3 billion. Advent plans to fund the deal with a $1.2 billion senior secured term loan, a $725 million senior unsecured bridge loan, and $1.1 billion of equity, roughly two-thirds of which will come from Advent.

The acquisition will give AOT a debt-to-EBITDA ratio of around 7.5x, which compares with a pre-acquisition, pro forma ratio of 4.5x for Serta and Simmons combined. However, we expect leverage to decrease and that debt-to-EBITDA will fall to below 6x by the end of 2013, owing to a combination of increased earnings and debt paydowns.

AOT’s debt will be guaranteed by its operating subsidiaries. The company will have a dominant market position and offer products across all price points, notably in higher-margin and fast-growing specialty mattresses, including Serta’s iComfort brand and Simmons’ ComforPedic brand.

The longer-term financial policies of Advent are unclear. We think Advent will look to decrease financial leverage for at least the next two years, but it could re-lever after that to fund shareholder returns.

Following last Thursday’s bank meeting, we assigned a B2 Corporate Family Rating and stable outlook to AOT, which will become Serta Simmons Holdings, LLC at closing. We will withdraw the ratings for Serta and Simmons when the deal closes.

Private-equity firms Ares Management LLC and Ontario Teachers Private Capital will maintain a minority stake in AOT.

Kevin Cassidy Vice President - Senior Credit Officer +1.212.553.1676 kevin.cassidy@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

SGS International Acquisition by Private-Equity Firm Onex Will Be Credit Negative If Debt-Funded

Private-equity firm Onex Corporation said on 4 September that it will acquire SGS International Inc. (B1 stable) for $813 million. The deal, if funded with debt, will be credit negative for SGS because it will weaken the graphics-services company’s credit metrics.

Onex said it will make an equity investment of around $260 million through its Onex Partners III fund and that SGS senior management will also make a large equity investment. Onex said the acquisition will likely close in the fourth quarter subject to customary regulatory approvals.

If Onex finances the remainder of the purchase with debt, the disclosed terms imply that the transaction would require as much as $550 million in new debt, plus customary fees and expenses. That would be a sharp increase from SGS’s roughly $255 million in debt on 30 June.

SGS’s lease-adjusted debt-to-EBITDA ratio would then rise above the mid 4x from near 3x, which could pressure the company’s corporate family rating. If its debt level increases, SGS would also likely have trouble maintaining both its interest coverage, which is now around 3x (EBITDA-capex)/interest, and its nearly 5% free-cash-flow-to-debt ratio.

Additionally, because the proposed transaction involves a financial buyer rather than strategic buyer such as a graphic-services competitor, sustainable operating synergies that would reduce the negative effect on pro forma leverage are less likely.

SGS, which provides graphic services to the consumer-products industry, generated around $389 million of revenue for the 12 months that ended on 30 June. Private-equity firm Court Square Capital Partners has owned a majority of the company since 2005.

Benjamin Nelson Analyst +1.212.553.2981 benjamin.nelson@moodys.com

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Tech Data’s Planned Acquisition of European IT Products Distributors Is Credit Negative

Last Wednesday, Tech Data Corporation (Baa3 stable) announced it had reached an agreement to acquire several distribution companies belonging to UK information technology services company Specialist Computer Holdings (unrated) for €277 million ($350 million). The planned acquisition is credit negative because the debt funding we expect Tech Data to use to finance the deal will weaken its leverage following a weaker-than-expected quarter and another recent acquisition.

Tech Data will acquire companies that are part of Specialist Computer Holdings’ Specialist Distribution Group (SDG) division, a distributor of enterprise IT products in the UK, France and the Netherlands. The companies expect to complete the acquisition by Tech Data’s fourth fiscal quarter, which ends 31 January 2013. The announcement comes on the heels of Tech Data reporting lower cash generation in the fiscal second quarter ended 31 July as a result of it using cash to support sales growth in Europe and a bumpy IT systems conversion in the US. Tech Data also announced an agreement in July to acquire Brightstar Corp.’s (Ba3 stable) 50% ownership interest in its Brightstar Europe Limited joint venture for $165.6 million in cash.

Tech Data plans to draw on its European cash balances to fund the Brightstar Europe purchase and we expect it to finance the SDG acquisition by issuing new debt or borrowing under its credit facilities. We estimate that the resulting debt balances will increase Tech Data’s adjusted debt/EBITDA leverage to about 1.8x, pro forma for both acquisitions.

The combination of the increase in leverage and reduction in cash makes effective integration of SDG essential as Tech Data looks to grow its high-end enterprise networking business in Europe. The company has ample external liquidity, but drawings under its available credit lines will further increase leverage. Tech Data has full access to an undrawn $500 million unsecured revolving credit facility maturing in September 2016 and to a $400 million accounts/receivable securitization program that expires in December, which the company expects to extend later this year. Successfully integrating these acquisitions is important to Tech Data maintaining its rating, which incorporates our expectation that Tech Data will replenish its cash balances back to minimum $300 million levels by the end of fiscal 2013, and will operate closer to $500 million in cash balances going forward.

We also expect Tech Data to curtail its stock repurchases and use free cash flow to rebuild cash balances and make progress on debt repayment over 12-18 months after the transaction closes. As a result, we expect to see tangible progress in margin improvement in the third quarter of fiscal 2013, with improving cash balances driven by profitability gains and tangible steps to the remediation of the IT system conversion issues.

We recognize the strategic importance of Tech Data’s SDG acquisition, which shows that the company is willing to tolerate added stress to its credit metrics in the near-term to achieve its goal of diversifying the product lineup, expanding into the higher margin data center segment and moving higher up the customer value chain. But the confluence of the simultaneous integration challenges, liquidity strains and the company’s bumpy IT system conversion could pressure Tech Data’s investment-grade rating. An adverse rating action could result from further operating missteps, an inability to successfully integrate and operate the SDG acquisition, or increasing shareholder remuneration funded with incremental debt.

Gerald Granovsky Senior Vice President +1.212.553.4198 gerald.granovsky@moodys.com

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Phosagro’s Acquisition of Russian Government Stake in Apatit Is Credit Positive

Last Wednesday, Russian phosphate-based fertiliser producer OJSC Phosagro (unrated) said it had won a tender for the Russian government’s 26.67% stake (or 20% of authorized capital) in apatite concentrate producer OJSC Apatit (unrated), raising Phosagro’s direct ownership to around 84% from 57%. The stake cost RUB11 billion (approximately $340 million), an approximately 30% discount to Apatit’s market price on the Russian stock exchange just before its privatisation. The increase in Phosagro’s stake in Apatit is credit positive because it gives it control of Apatit, allowing Phosagro to align the two companies’ strategic, operational and financial interests. In addition, Phosagro can strengthen its vertical integration of apatite concentrate, an ingredient in the production of phosphate fertilizers.

Phosagro’s increased control also means the Russian government no longer has veto rights over major strategic decisions, including reorganizations, liquidation, changes to share capital, and approval of significant transactions.

Although Phosagro will take on additional debt to finance the transaction, its leverage will remain within its stated financial policy of a net debt/EBITDA ratio of less than 1.0x. As of the end of the first half of this year, Phosagro’s net debt/EBITDA ratio was 0.43x and it had a cash cushion of $680 million.

Apatit has the largest proved apatite-nephelin ore reserves in Russia, which as of 1 January 2011 totaled 625.9 million tons, equal to a 75-year supply. By taking control of Apatit, Phosagro will become self-sufficient in phosphate rock, which accounts for around 40% of its total cost of goods sold. Phosagro would also have one of the lowest cost structures of global producers of monoammonium (MAP) and diammonium phosphate (DAP) fertilizers.

Apatit produced more than 75% of Russia’s apatite concentrate in 2011, giving it a near monopoly domestically to set prices for large domestic producers of mineral fertilizers, such as JSC Acron (B1 stable) or JSC Uralchem (unrated). That market power has resulted in Apatit being ensnared in multiple price disputes with its customers, the most recent of which was in May and led Acron to halt production of its NPK complex fertilizers for about a month.

Acron and Uralchem each expressed interest acquiring the government’s stake, thereby gaining some influence over Apatit’s pricing and supply decisions. However, we believe that if one of these companies had participated and won the tender, it could have triggered a shareholder dispute at Apatit. Phosagro’s successful bid, along with permission to increase its stake in Apatit to 100%, removed that risk. We expect Phosagro will continue consolidating the rest of Apatit’s shares by purchasing shares from minority stakeholders.

Phosagro is the largest European producer of phosphate mineral fertilizers and owns chemical companies engaged in the manufacture of various mineral fertilizers, including NPK, DAP, MAP and mono-calcium phosphates. In 2011, the company reported revenues of around $3.4 billion and EBITDA of $1.2 million.

Sergei Grishunin, CFA Assistant Vice President - Analyst +7.495.228.6168 sergei.grishunin@moodys.com

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

ConvaTec Acquires 180 Medical Holdings Inc., a Credit Negative

On 31 August, ConvaTec Healthcare B S.a.r.l. (B2 stable), a leading medical devices company, agreed to acquire 180 Medical Holdings Inc. (180M, not rated), a leading provider of sterile use catheters, urologic and disposable medical supplies. The largely debt-funded transaction is valued at over $320 million and is credit negative for ConvaTec because it continues its practice of aggressive non-organic growth and re-levers the company.

We estimate that ConvaTec’s previously reported small transactions were likely at single-digit purchase multiples, not significantly different from its own adjusted total leverage between 6x-7x. Small purchases allowed for a relatively fast pace of buying throughout the year, with $50 million alone spent in the first half.

The 180M acquisition would likely command a premium multiple (the actual purchase multiple is not disclosed) reflecting the fast-growing nature of its business. Given the purchase price, the acquisition requires significant debt funding to be provided via incremental senior secured debt of $300 million. As a result, the total absolute amount of senior secured debt will increase by almost 20% (12% on total debt basis), which is credit negative for all debt tranches but more so for ConvaTec’s Ba3 senior secured instruments. However, we expect ConvaTec’s total relative leverage to increase only around 5% to 6.8x as compared to our estimate of circa 6.5x prior to this acquisition on pro-forma basis. We expect 180M’s growth to remain strong, and we also expect a higher cash conversion rate than for pure manufacturing businesses given the low asset intensity of a distribution company like 180M, which will mitigate the initial credit negative effect.

As ConvaTec’s largest acquisition since April 2012, when new senior management was put in place, the transaction follows a consolidation strategy common in the sector. However, in our view, both the size and the debt funding are likely to mark the beginning of a period of slower deal making that reflect ConvaTec’s need to integrate recently acquired businesses and preserve sufficient covenant and liquidity headroom under its credit facilities.

Alex Verbov Vice President - Senior Analyst +49.69.70730.720 alex.verbov@moodys.com

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Ocean Rig’s New Contract with Repsol and Extended Construction Options Are Credit Positive

Last Wednesday, Ocean Rig UDW Inc. (B2 stable) announced it had signed a firm drilling contract with Spanish-Chinese oil company Repsol Sinopec Brasil S.A. (unrated) for one of its new rigs. On the same day, Ocean Rig also announced that it had extended to March 2013 from October 2012 the deadline to exercise its options for Samsung Heavy Industries to construct up to three additional drillships.

The contract with Repsol, struck when day rates are near all-time highs, is credit positive because it improves Ocean Rig’s revenue visibility and eliminates the risk of the rig being contracted at unfavourable day rates in the future. Extending the construction options is also credit positive because it gives the company more time to evaluate the outlook for market conditions before committing to ordering the vessels, particularly when the macroeconomic environment is uncertain, oil prices are volatile and there is a threat of rig overbuilding.

Ocean Rig secured its contract with Repsol at an implied fixed rate of more than $600,000 per day for three years, with an option to extend the contract by up to two years, thereby adding $700 million to its current backlog of $2.6 billion. The contracted drillship will operate off the coast of Brazil, consolidating the company’s position in an area where it already has two vessels. Ocean Rig’s new vessel is one of its three seventh-generation drillships to be delivered in the second half of 2013.

Although credit positive, the contract will not affect Ocean Rig’s ratings, because the company remains significantly leveraged with a debt-to-EBITDA ratio of nearly 7.0x, including a bond just launched. Additionally, for 2013, four rigs out of a fleet of nine still have no firm contract. Eirik Raude, the harsh environment ultra deep water (UDW) semi-submersible rig that goes out of work next February, and the second new build are still being marketed. However, Ocean Rig has said that two major oil companies each have signed letters of intent to contract the other two available drillships.

Despite the uncertainties mentioned previously, we expect drillers to continue enjoying favourable dynamics in the UDW sector. We expect exploration and production spending to grow by more than 10% to $611.6 billion in 2012, from $556 billion in 2011, at a time when there are no rigs available for charter in 2012 and a limited number available in 2013. In this context, the extension of Ocean Rig’s construction options with Samsung enhances the company’s planning and strategy flexibility.

Andra Crivii Associate Analyst +44.20.7772.1946 andra.crivii@moodys.com

Douglas Crawford Vice President - Senior Analyst +44.20.7772.5215 douglas.crawford@moodys.com

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

KION’s Sale of Stake to China’s Weichai Is Credit Positive

On 31 August, German engineering company KION Group GmbH (B3 stable) and Chinese automotive and equipment manufacturing company Weichai Power Co., Ltd. (unrated) announced that they had agreed to form a strategic partnership in which Weichai will invest €738 million in KION. The transaction is credit positive for KION because it reduces the group’s leverage.

As shown in the exhibit below, Weichai will invest €467 million in KION for a 25% stake and acquire 70% of KION’s hydraulic business for a consideration of €271 million with an option to increase the stake further. The total investment of €738 million is Germany’s largest direct investment from China. The parties expect the deal to close in the fourth quarter, pending shareholder and regulatory approval.

Source: KION Group GmbH

We expect net debt/EBITDA on a pro forma basis (after the carve-out of KION’s profitable hydraulic business) to fall to around 8.25x from 9.12x in June. Although KION has not disclosed how it will use the transactions proceeds, we expect it will materially reduce debt. The company has a high interest burden on a €3.8 billion debt load (as adjusted by us) arising from a leveraged buyout six years ago by Kolhberg Kravis Roberts and Goldman Sachs and they have said they will retain their current investment.

If KION used the total cash inflow for debt reduction, we estimate gross debt leverage would decrease to 8.8x debt/EBITDA from 9.6x in June, and interest coverage would rise to 1.13x EBIT/interest expense from 1.07x. Such improvements would place KION more solidly in the B3 rating category, but would remain beyond our upgrade triggers of 7.0x debt/EBITDA and 1.5x EBIT/interest expense. Considering that material one-time expenses weigh on current credit metrics and that KION has outperformed the industrial truck market, delivering solid volume growth and improving profitability in the first half of this year, we expect KION to further enhance its debt metrics in the second half of 2012.

KION is a major producer of forklift trucks and material handling equipment. The group which has 13 truck-production sites globally, was spun off from Linde AG in 2006, follows a multi-brand strategy, holds the market-leading position in its business in Europe and ranks second globally. During the 12-month period ending in June, KION generated revenues of €4.6 billion.

Weichai produces a range of products and generated revenue in 2011 of RMB60 billion (around €7.5 billion). The company is a unit of Weichai Holding Group, which is part of Shandong Heavy Industry Group, one of China’s leading industrial equipment manufacturers. In 2011, Shandong Heavy Industry Group reported revenues of RMB122.5 billion (around €15.4 billion).

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

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Fresenius Withdraws from Further Bidding for Rhoen, a Credit Positive

Last Monday, Fresenius SE & Co. KGaA (FSE, Ba1 stable) announced that it will not pursue its bid for Rhoen-Klinikum AG (Baa2 negative), which in April was valued at around €3.9 billion.3 Cancelling the acquisition is credit positive for FSE, eliminating the uncertainty related to the share of Rhoen to be acquired, access to cash flows, synergies, and most importantly, the amount of required debt funding to finance the purchase and its resulting material increase in leverage.

Following the company’s announcement, we concluded the ratings review for downgrade we initiated on 26 April for both companies, confirming Fresenius’ ratings and outlook, and confirming Rhoen’s rating, while lowering its outlook to negative from stable.

Competitors, such as privately owned Asklepios (not rated), acquired blocking minority stakes that prevented FSE from gaining its desired 90% stake in Rhoen. While FSE might have acquired a lower-than-90% stake that would have required less upfront funding, maintaining the same offer price would have made the deal worse for FSE because prospective synergies of some €100 million per annum would not be realized. The cost, which among other things was to include FSE’s necessary disposal of several profitable hospitals to comply with anti-trust regulation, would have likely remained high regardless of the stake acquired.

Debt funding would also have been challenging. Large minority interests would necessarily have resulted in “dividend leakage” to Rhoen’s minority shareholders and FSE would have needed to have separate financing arrangements in place both at Rhoen’s operating level and FSE’s holding company level, which would have raised structural subordination concerns.

Although we believe that FSE may try a different approach to acquire Rhoen, potentially splitting the company with other interested parties, that looks more like a longer-term prospect

The events around FSE’s bid for Rhoen suggest that the prospect of quick consolidation of German hospitals is unlikely. We believe that both Asklepios, the third-largest private hospital operator in Germany (unrated), and Rhoen currently have limited financial flexibility to acquire large assets. Asklepios is constrained by its financial leverage, which increased after it bought its Rhoen stake to defend against FSE’s bid, and its relatively limited access to equity and capital markets as a private company, and Rhoen is constrained because increasing its leverage would be credit negative and jeopardize its rating.

FSE, via its private hospital subsidiary Helios, said that it plans to grow by acquiring individual hospitals (with total purchase prices including capital expenditures commitments averaging around €150 million a year, assuming approximately a 1x revenue multiple that’s typical in the sector). While this amount remains significant, considering that upfront purchase prices of unprofitable operators are usually limited and most of the investment comes in the form of capital commitments spread over several years, negative effects on cash flows should be spread over time.

We believe that Helios can outspend its competitors should a sufficient number of acquisitions become available because it benefits from FSE’s greater financial flexibility and its tolerance for higher leverage. However, the synergistic prospect of each acquisition very much depends on the hospital’s location and the overall fit of individual assets for the portfolio (e.g., patient mix, services range, necessary capital investment). Still, the reduced scope of hospital consolidation should improve both margins and free cash flow generation of Helios and hence its contribution to FSE, which is credit positive.

3 See Moody's Places Fresenius SE & Co. KGaA's Ba1 Rating on Review for a Downgrade Following its Announcement to

Launch a Takeover Bid for Rhoen Klinikum AG, 26 April 2012.

Alex Verbov Vice President - Senior Analyst +49.69.70730.720 alex.verbov@moodys.com

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

China’s Approval of Infrastructure Projects Will Help Domestic Suppliers

Last Wednesday and Thursday, China’s state planning agency, the National Development and Reform Commission (NDRC), approved dozens of infrastructure investments estimated at approximately RMB1 trillion ($160 billion). The investments include 25 railway and subway projects across 18 different cities, highway construction and water-related projects that provide a credit positive stimulus amid China’s slower growth for steelmakers, cement producers, and other construction-materials firms, as well as railway and subway equipment manufacturers.

Among our rated companies, Baosteel Group Corporation (A3 stable) and China Oriental Group Company Limited (Ba2 stable) will benefit most. Baosteel is the world's third-largest steel producer and generates about 89% of its total sales in China’s domestic market. Baosteel’s products include the cold rolled coil (48% of sales in 2011) and hot rolled coil (29% of sales) steel used to build rail lines. China Oriental is China’s largest manufacturer of H-section steel. It produces the hot rolled strips, billets, and rebars used as basic building blocks for railways, highways, and factory plants.

Other companies that are likely to benefit from the approved transport projects include China Tianrui Group Cement Company Limited (B1 stable), the largest cement producer in the Henan and Liaoning provinces, which are near some of the approved projects; West China Cement Limited (Ba3 review for downgrade), one of the leading cement producers in Shaanxi province, which is also near some of the approved projects; China Automation Group Limited (Ba3 negative), which already has a 35% market share of the safety and critical control systems for China's railway signaling; Lonking Holdings Limited (B1 negative), a maker of heavy machinery such as wheel loaders and excavators used to dig subways; and China Liansu Group Holdings Limited (Ba2 stable), one of China’s largest plastic pipe and pipe-fittings manufacturers, which are often used for railway power supply.

Water projects should benefit Beijing Enterprises Holdings Ltd. (Baa1 stable), an investment holding company that owns a 44% stake in Beijing Enterprise Water Group Ltd., one of largest wastewater treatment companies in China. In 2011, the wastewater treatment business contributed 11% to BEHL’s net profit. Sound Global Ltd.

Although RMB1 trillion is a far cry from the massive RMB4 trillion stimulus program launched in late 2008, RMB1 trillion is about 2% of China’s GDP in 2011. The approved transportation-related investment, estimated at around RMB800 billion would amount to nearly 30% of the total fixed-asset investment in transportation in 2011.4

(Ba3 stable), one of the leading turnkey water and wastewater treatment solutions providers in China, should also benefit. It focuses on low-tier cities and rural areas and local governments constituted 63% of its total revenue in 2011.

The government has slated most of the planned projects for completion in three to eight years, but spending could start within months and give a needed boost to China’s economic growth as external demand for the country’s exports slackens. The NDRC did not specify where the funds will come from, but typically local governments have had to foot most of the bill by taking on debt.

4 According to the National Bureau of Statistics of China, fixed-asset investments in transportation-related projects was about

RMB2.7 trillion in 2011.

Franco Leung Assistant Vice President - Analyst +852.3758.1521 franco.leung@moodys.com

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Number of Mobile Customers Switching Carriers Is Credit Negative for Korean Telcos

Last Monday, the Korea Telecommunications Operators Association (KTOA) released data on mobile number portability (MNP) that showed the number of customers who switched their mobile service providers increased in August. Such an increase is credit negative for our rated Korean telecoms, SK Telecom Co., Ltd. (SKT, A3 negative) and KT Corporation (A3 negative), because it means that intense competition will push marketing expenses higher, thereby further reducing these companies’ margins.

According to the KTOA, MNP in August rose 8.5% to 1.13 million from 1.04 million in July (Exhibit 1), and was the fourth-highest number since the association first began releasing the data in 2004.

EXHIBIT 1

Sharp Increase in Mobile Number Portability in July and August

Source: Korea Telecommunications Operators Association

Because MNP data show the number of users who switch their mobile service providers but keep their phone numbers, they indicate the extent of competition in the mobile market. A continuous increase in MNP suggests that the competition in the Korean telecommunication sector remains intense.

With the nationwide rollout of long-term evolution (LTE) mobile networks, also known as 4G, Korea’s three telecom operators, SKT, KT, and LG Uplus (unrated), have initiated aggressive marketing strategies to lure customers to their LTE plans. Those strategies have resulted in an overheated MNP market, as Korea’s mobile market has a penetration rate of more than 100%, and the only way to gain customers is to pull them from rivals.

The telcos’ aggressive marketing strategies have further hurt their margins, which were already under pressure because of the increase in capex related to building out their LTE coverage. In the second quarter, all three telcos reported significantly lower margins and higher marketing expenses (Exhibit 2).

700

750

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1,000

1,050

1,100

1,150

1,200

Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12

Num

ber o

t Mob

ile M

NP

in T

hoou

sand

s

Serena Won Associate Analyst +852.3758.1527 serena.won@moodys.com

Yoshio Takahashi Assistant Vice President - Analyst +852.3758.1535 yoshio.takahashi@moodys.com

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

EXHIBIT 2

Marketing Spending and its Effect on Telcos’ Margins

Source: The companies’ reported financials, Moody’s

The telcos have publicly stated they would seek to contain excessive marketing spending to restore their margins in the second half of the year and meet their 2012 earnings targets. However, in view of the MNP data, we expect competition and marketing expense to remain intense, as the companies are keen to achieve their LTE subscriber targets and achieve sufficient critical mass to reap their investments.

Between our two rated issuers, we believe KT has a stronger motivation to pursue subscriber attraction more aggressively because of its weaker presence in the LTE market than SKT. As Exhibit 3 shows, KT is currently far behind its two competitors in building up its base of LTE subscribers. In the absence of a significant difference in coverage, technological superiority, or handset lineup, it will be challenging for KT to achieve its LTE subscriber target without a large marketing spend.

EXHIBIT 3

Korean Telcos’ LTE Subscribers

Source: Korea Communications Commissions, the companies and KTB Investment & Securities.

10%

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14%

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18%

20%

22%

24%

26%

28%

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1Q2011 2Q2011 3Q2011 4Q2011 1Q2012 2Q2012

KRW

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SKT - left axis KT - left axis LGU+ - left axis Industry Margin - right axis

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SKT KT LGU+

LTE

Subs

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ers

( Mill

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Jun 12 Jul 12 Aug 12 Dec 12 Target

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Approval for Indosat’s 3G Services on Existing Spectrum Is Credit Positive

Last Tuesday, Indosat Tbk (P.T) (Ba1 stable) received approval from the Indonesian telecom regulator to operate 3G services on its 900MHz spectrum. This is credit positive because it provides Indosat with critical spectrum to enhance its 3G data network and services, where the company has significantly lagged behind its peers.

This is the first time such network reallocation has been allowed for 3G services in Indonesia and the approval was faster than we expected.

Reallocating part of its existing 10MHz of 900MHz spectrum has been a key component of Indosat's 3G strategy because it is more efficient in terms of capex required to build out its network. The company estimates it can achieve cost savings of 30%-45% through this strategy, and it does not need to make any further payments to the regulator on the reallocated spectrum.

Indosat's projected capex of IDR6.5-IDR7.0 trillion for 2012 should accommodate the network build-out cost, although the capex spending will increase in the next year as Indosat speeds up its wireless data endeavours. We also expect the company to participate in upcoming auctions for additional 3G spectrum to remain competitive.

Nonetheless, Indosat has recently concluded the sale of 2,500 towers to Tower Bersama Infrastructure Tbk (P.T.) (Ba2 stable) for a cash consideration of about $330 million, part of which will be used to support capex. We therefore expect Indosat to maintain an adjusted debt/EBITDA ratio of 2.5x-3.0x over the next 12-18 months.

With about 51 million total subscribers as of June 2012, Indosat remains the second largest telecommunication operator in Indonesia, but the company has been losing market share, allowing XL Axiata (P.T.) (XL, Ba1 stable), the third-largest player, to significantly close the market-share gap. In 2009, Indosat’s market share was 26% while XL had 19%, whereas the market shares in June 2012 stood at 24% for Indosat and 21% for XL.

Indosat’s 3.3% first-half revenue growth was significantly slower than XL’s 12% revenue growth, or the 9.5% growth for PT Telekomunikasi Selular (Telkomsel, Baa1 stable), mostly as a result of its delayed 3G network rollout. Benefits from the 3G data business should result in accelerated revenue growth for Indosat (XL reported 68% year-over-year data revenue growth in the first half).

Indosat began trial runs in August and will take a few months to ramp up its network, which leaves its market share at risk of being eroded by competitors such as XL, a more established provider of 3G networks and services. We also note that Indosat's peers such as Telkomsel and XL may attempt to refarm some of their 900MHz spectrum; although their 7.5MHz allocation is lower than that of Indosat. However, until refarming occurs, Indosat will have the maximum allocation of spectrum for 3G, which can be used to its advantage if the company executes its strategy well.

We do not expect the company's revenue, financial profile or market position to benefit from the regulatory approval until 2013 at the earliest. Moreover, in the near term, data capacity utilization will remain sub-optimal, which, coupled with the need for promotional and infrastructure-related expenditures, will pressure margins.

Agnes Lee Associate Analyst +65.6398.8326 agnes.lee@moodys.com

Nidhi Dhruv Analyst +65.6398.8315 nidhi.dhruv@moodys.com

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Infrastructure

TransAlta Benefits from Canada’s New Coal-Fired Plant Emission Rules

Last Thursday, the government of Canada announced emissions regulations that will allow coal- fired producers to extend the useful lives of their plants and manage emission reductions on a fleet basis rather than a per-plant basis. The regulations will most affect the Western province of Alberta (Aaa stable), which has the fastest growing demand for electricity in North America because of its oil sands development, and are credit positive for its biggest coal-fired generation producer, TransAlta Corp.

With over 6,000MW of capacity, Alberta is the country’s biggest provincial producer of coal-fired energy, and TransAlta generates more than 3,600MW of low-cost coal-fired generation in the province, which is about 40% of the company’s overall generation portfolio.

(Baa3 stable).

The emission rules, which will be implemented on 1 July 2015, extend the average remaining life across TransAlta’s coal-fired fleet by approximately four years. The fleet’s longer life delays otherwise necessary capital expenditure in new generation, and allows efficient management of greenhouse gas (GHG) emission reduction credits across the company’s fleet.

For units built between 1975 and 1985, the new rules establish a 50-year operating limit from a plant’s commissioning date, or end-of-life by 2030, whichever comes first. Initially, draft emission rules had targeted the earlier of 45 years or the end of the respective power purchase arrangements (PPA) for operating coal-fired generation plants. Units commissioned before 1975 will reach their end-of-life by 2020, or after 50 years of operation, whichever comes first. Final regulations set the emission standards at 420 tonnes/GWh, which reflects the performance of Natural Gas Combined Cycle (NGCC) technology. In addition, companies are permitted to operate their greenhouse gas emission targets on a fleet level as opposed to a plant level: if companies add carbon capture and storage technology at some plants they receive GHG emission credits at other plants to potentially extend their useful lives.

TransAlta should also benefit from improved contract rates once current PPAs expire for Sundance units 1 and 2 in 2017 and Sundance units 3-6, Keephills 1 and 2 and Sheerness in 2020 because Alberta has such strong demand for electricity. As an example, average spot prices per MWh have been at approximately $75 in 2011 compared to PPA prices between CAD30-CAD35 per MWh.

The new regulations effectively put a price on carbon for TransAlta based on the economic opportunity to apply greenhouse gas reduction credits to extend production across the fleet. This may motivate TransAlta to re-evaluate its carbon capture and storage (CCS) technology to shift carbon emission credits across plants. Adding CCS at one plant would allow the company to extend the life at another. Applying the same logic, TransAlta could close inefficient plants early and use the remaining life at other, more economic plants.

Matthias Grasbeunder Associate Analyst +1.416.214.3634 matthias.grasbeunder@moodys.com

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Brazil Regulator Intervenes in Eight of Rede’s Distribution Subsidiaries, a Credit Negative

On 31 August, Brazil’s energy regulator Agencia Nacional De Energia Eletrica (ANEEL) announced it will intervene in the management of eight of Rede Energia S.A.’s (Ca negative) electricity distribution utility subsidiaries, the most important of which are Empresa Energetica De Mato Grosso Do Sul SA (ENERSUL, not rated), Centrais Eletricas Matogrossenses S.A. (CEMAT, Ca negative) and Companhia De Energia Eletrica Do Estado Do Tocantins (CELTINS, Caa3 negative).

The regulator’s intervention in the management of these utilities, which operate under long-term concessions granted by the federal government, is a credit negative for Rede because it will no longer be able to access dividends from these subsidiaries, which were around BRL151 million in 2011 and BRL105 million in the first half of 2012. In addition, Rede, which already has unsustainable levels of debt, will also find it more challenging to sell these assets while they are under government management.

ANEEL’s intervention is based on provisional measure 577 enacted by the federal government on 29 August, just two days prior to the announcement. The measure allows the federal government to intervene in public concessions that are not complying with required operational parameters or that face a distressed financial situation.

Under the new legislation, Rede will have to present an operational and financial recovery plan for each of the affected distribution utilities within two months, which the regulator will then evaluate for feasibility before relinquishing control back to management.

We do not rule out the potential revocation of these concessions and subsequent auction to private investors. Should this scenario materialize, it is unclear how the government would reimburse Rede for any non-depreciated assets under those utility concessions.

We see increased legal risks for Rede because there are no recent precedents for the revocation of Brazilian electricity concessions. A potential bankruptcy protection filing would prove difficult since Rede will have no access to any cash inflow from its subsidiaries while they’re in the government’s hands.

As a result, the investors who bought Rede’s $497 million perpetual bonds (Ca negative) will most likely face a higher debt hair cut, which could exceed 50% of par value.

José Soares Vice President - Senior Analyst +55.11.3043.7339 jose.soares@moodys.com

NEWS & ANALYSIS Credit implications of current events

21 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Banks

SunTrust's Sale of Coke Shares Sweetens an Otherwise Bitter Bill

Last Thursday, SunTrust Banks, Inc. (Baa1 stable) announced the sale of its shares in Coca-Cola Company (Aa3 stable) and the impending sale of more than $3 billion in largely troubled loans and investments. The bank also announced a material increase in its mortgage repurchase reserves. The actions are credit positive and position the company for lower volatility in earnings and capital.

The benefits derived from the sale of Coke stock, most notably a $1.9 billion pre-tax gain, are significant and more than offset the costs associated with meaningfully reducing SunTrust’s lingering credit-related issues. SunTrust's stake in Coke -- both firms are based in Atlanta, Georgia -- dated back to 1919. However, when the financial crisis hit in 2008, SunTrust entered forward purchase agreements with a large counterparty to lock-in the value of its Coke shares. The transactions, which were scheduled to mature in 2014 and 2015, set a cap and a floor on the shares' value. With Coke currently trading above the cap, there was no additional upside for SunTrust to capture before the agreements expired, other than a modest amount of dividend income.

In addition to the large gain that will be reflected in SunTrust’s third-quarter results, we see three benefits to the transaction.

First, SunTrust maximized the incremental capital it could have received from the final sale of its Coke stock. Regulators had already given SunTrust capital credit for the after-tax value of the purchase agreements’ floor price.

Second, SunTrust’s capital position will be less volatile under the emerging regulatory framework. This reflects the fact that market value changes in SunTrust’s unrealized gain on Coke shares would have affected its Basel III capital calculation.

A related benefit concerns the capital treatment of banks’ equity investments in the Federal Reserve’s annual stress test. Specifically, the test’s adverse scenario includes a 50% haircut on equities, giving banks much less incentive to hold equities.

Third, the incremental capital from the sale of Coke shares allows SunTrust to dispose of a large pool of troubled assets at a loss, and also increase its mortgage repurchase reserve, with no net material effect on its capital position. Putting these dispositions and the reserve increase behind it supports the bank’s future earnings stability. Nonetheless, the associated writedowns and expenses, totaling about $725 million pre-tax, reflect poorly on SunTrust's previous decisions to concentrate so heavily in real estate financing leading up to the downturn.

Specifically, SunTrust will transfer about $3 billion in loans to held for sale and incur roughly $250 million in pre-tax charges, reflecting the anticipated sale price on the loans. The bank is also planning to sell $200 million in affordable housing investments and is incurring a $100 million writedown of those assets. The $3 billion in loans to be sold include mortgages and commercial real estate loans that are nonperforming, as well as Ginnie Mae and student loans, some of which are performing. SunTrust’s credit quality metrics will strengthen as a result of these sales and it will have lower real estate related expenses, including reduced foreclosure costs, in future periods.

The company expects that its $375 million increase in the repurchase provision will eliminate the need for any further provisioning related to delinquent mortgages originated prior to 2009 and sold to government sponsored entities (GSEs). This category of loans has accounted for a substantial portion

Allen Tischler Senior Vice President +1.212.553.4541 allen.tischler@moodys.com

NEWS & ANALYSIS Credit implications of current events

22 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

of SunTrust’s mortgage repurchase losses to date. During its conference call announcing these various actions, management suggested that future mortgage repurchase provisions could fall to roughly $10 million per quarter.

NEWS & ANALYSIS Credit implications of current events

23 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Sberbank and BNP’s New Consumer Finance Bank Is Positive for Both, but Negative for Rivals

Last Wednesday, Sberbank (Baa1 stable; D+/ba1 stable),5 Russia’s largest bank, said that it had acquired a 70% stake in BNP Paribas Vostok (unrated), the Russian consumer finance unit of BNP Paribas (A2 stable; C-/Baa2 stable). The joint-venture bank will be renamed Cetelem Bank and will focus on car loans and point-of-sale (POS) loans .6 The partnership is credit positive for both banks. Sberbank will benefit by entering a rapidly growing, high-margin market segment that will enable it to improve its revenue diversification. BNP Paribas will benefit by having access to Sberbank’s unmatched distribution network, and its relationships with large store chains and car dealers.

Cetelem Bank’s aggressive growth plans are credit negative for existing POS market leaders Home Credit & Finance Bank (Ba3 stable; D-/ba3 stable), OTP Bank (Russia), OJSC (Ba2 stable; D-/ba3 stable) and Russian Standard Bank (Ba3 stable; D-/ba3 stable), which together hold 60% of the market. We expect all three banks’ margins to erode because Cetelem Bank will provide lower rates on its loans owing to a lower cost of funding: Sberbank pays 4% on its liabilities, while its POS competitors pay around 9%. Moreover, we expect the current market leaders to lose some of their exclusive partnerships with large retailers to Cetelem Bank, thereby forcing them to enter into higher-risk market segments to grow their operations.

Sberbank will finance Cetelem Bank; BNP, which owns the remaining 30% of the new bank, will provide its advanced risk management and scoring tools that are crucial for credit risk mitigation.

Because Sberbank derives most of its earnings from corporate banking, which were 75% of gross loans at mid-2012, the expansion into the higher-margin POS and car loans will increase its revenue diversification. In addition, Sberbank will cross-sell its existing retail products to its new POS and car loan borrowers.

Prior to the transaction with Sberbank, BNP Paribas Vostok had a relatively weak position in Russia, with a 4.5% market share in POS, a 3% share in car loans and limited distribution, according to market research group Frank Research Group. With Sberbank’s support, including its 19,000 branches and relationships with key retailers and car dealers, Cetelem Bank will be able to expand rapidly and gain market share.

5 The ratings shown are bank’s deposit rating, its standalone bank financial strength rating/baseline credit assessment, and the

corresponding rating outlooks. 6 Point of sale loans are mainly originated at large stores for the purchase of anything from microwaves to furniture.

Eugene Tarzimanov Vice President - Senior Credit Officer +7.495.228.6051 eugene.tarzimanov@moodys.com

NEWS & ANALYSIS Credit implications of current events

24 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Japan Post Bank’s New Businesses Would Be Credit Negative for Regional Banks

Last Monday, Japan Post Bank, Co., Ltd. (unrated) applied to enter two new lending businesses. The bank, the largest domestic bank by assets and 100% owned by the government of Japan (Aa3 stable), plans to provide residential mortgages and corporate loans in the domestic market, and expects to start those businesses in April 2013. The Post Bank’s entry in the residential mortgage business would be credit positive for it and would diversify its portfolio, but would add a formidable competitor to a sector that regional banks count on, and would be credit negative for them.

Regional banks already compete with each other for residential mortgage lending and the Post Bank’s entry in this product will further undermine their already low profitability. However, because the Post Bank has a relatively weak banking franchise in the cities and lacks the services large companies currently receive from the major banks, we do not see major banks being significantly affected by its entry in corporate lending.

Regional banks are suffering from weak corporate loan demand owing to stagnant local economies, and residential mortgage loans are one of their few growth areas. In the past 10 years through March, the balance of outstanding retail loans, which are mostly mortgage loans, at first-tier regional banks increased by ¥14 trillion while exposure to small and mid-size enterprises decreased by ¥4 trillion. However, competition for residential mortgage loans has intensified, reducing margins.

Aside from the Post Bank’s huge lending capacity (conferred by having the largest balance sheet in Japan), the Post Bank also benefits from its government affiliation. This adds to the bank’s already strong franchise value and further disadvantages smaller local financial institutions with relatively weaker retail franchises.

Given the Post Bank’s limited progress in the syndicated loan market since 2007 – its balance of loans outstanding (including syndicated loans) is just ¥4 trillion -- we think its potential entry in the corporate lending sector holds little competitive threat for regional banks.

Kyosuke Kaji Assistant Vice President - Analyst +81.3.5408.4031 kyosuke.kaji@moodys.com

NEWS & ANALYSIS Credit implications of current events

25 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Nomura Refocuses on Asia, a Credit-Positive First Step to Return to Sustainable Profitability

On 6 September, Nomura Holdings’ (Baa3 stable) new management announced plans to return the firm to sustainable profitability, including an increased focus on the firm’s capabilities in Asia and $1 billion of cost cuts that will primarily affect unprofitable European equities and investment banking divisions. The plan is a credit-positive first step that attempts to address the build up in Nomura’s cost base that resulted from its badly timed acquisition of Lehman Brothers’ businesses in Europe and Asia in 2008.

Having already cut costs in the wholesale division by $1 billion over 2011-12, the additional $1 billion of cuts (approximately ¥80 billion) aim to reduce the cost base by 25% by April 2014 to $6 billion from $8 billion in April 2011.

Nomura’s profit target of ¥250 billion pre-tax income for the fiscal year 2015, ending 31 March 2016 (compared to reported profit of ¥85 billion in fiscal 2011) has two main components: 1) cutting back underperforming businesses (including migrating cash equities to their subsidiary, Instinet, and reducing sector and geographical coverage within the investment banking division) and turning a ¥38 billion pre-tax loss in the wholesale division in fiscal 2011 to a pre-tax profit of ¥125 billion by fiscal 2015; and 2) growing revenue in the Japanese retail business to achieve pre-tax profits of ¥100 billion by fiscal 2015, compared to ¥63 billion in fiscal 2011.

Given the weak environment for global capital markets and also the low growth in the Japanese retail market, we think these targets will be difficult to achieve. However, we think Nomura is less likely than global competitors to increase risks in order to meet difficult profit targets because it faces less shareholder pressure than competitors to meet its targets.

Nomura’s strategy to focus on its Asian and cross-border strengths and shift away from its previous ambitions to be a full-service global investment bank could enhance profitability as Asia’s GDP and capital markets grow, but Nomura will be challenged by a number of strong global players also looking to Asia for profit growth amid difficulties in Europe. Moreover, Nomura’s announcement comes as many other banks are looking to restructure their capital market operations. Because Nomura has suffered from greater volatility than many of its peers, and arguably needs more radical restructuring, it will still be challenged to catch up with rivals’ competitivness. Although Nomura’s plan is potentially transformational, its implementation is more likely to be incremental and may be insufficient to ensure top market shares and sustainable profitability for its capital market operations.

Elisabeth Rudman Senior Vice President +44.20.7772.1684 elisabeth.rudman@moodys.com

NEWS & ANALYSIS Credit implications of current events

26 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Insurers

MassMutual’s Acquisition of Hartford’s Retirement Plans Group Is Credit Positive

On 4 September, Massachusetts Mutual Life Insurance Company (MassMutual, financial strength Aa2 stable) announced an agreement to acquire the retirement plans business of Hartford Life Insurance Company (Hartford, financial strength A3 stable) for $400 million. The deal is credit positive for both companies.

MassMutual will supplement and complement its existing 401k business, enabling it to gain scale and expense efficiencies, as well as an opportunity to penetrate new distribution channels. The acquisition price will have a minimal effect on liquidity and capital adequacy. For Hartford, the sale is credit positive because it represents progress in its restructuring efforts, which include the divestitures and shutdown of most of the company’s life insurance operations to focus on its property & casualty businesses.

The deal presents an opportunity for MassMutual to expand its existing retirement services business ($66 billion of assets under management as of 30 June) because Hartford focuses on the large volume, small case 401k market in contrast to MassMutual’s mid-size case orientation. In addition, Hartford utilizes distribution channels MassMutual hasn’t yet penetrated, such as wirehouses and third-party administrators, which will complement MassMutual’s distribution by career agents and registered investment advisors.

However, operational risk comes with integrating Hartford’s $55 billion 401k block into MassMutual which will present significant execution risk and test MassMutual’s management capacity and IT resources. Profitability will be negatively affected for the first few years owing to initial integration costs. The deal will also have minimal effect on MassMutual’s capital adequacy and we expect its NAIC risk based capital (RBC) ratio to remain above the 500% level despite internal financing for the acquisition and the pension plan business’ additional capital requirements.

The low interest rate environment could present challenging financial risks for asset liability management because a portion of the Hartford block to be transferred has minimum rate guarantees and Hartford’s exit announcement elevated cash outflows from the business. In addition, margins for this type of business are relatively low and careful management of likely cost efficiencies from the acquisition will be challenging.

The transaction is the second of three planned business sales for Hartford. Structured as a reinsurance transaction, Hartford expects a gain to net statutory capital of approximately $600 million, including the $400 million ceding commission paid to MassMutual, and a reduction in required risk-based capital. We do not expect the deal to have a material impact on Hartford’s GAAP financial results.

Neil Strauss Vice President - Senior Credit Officer +1.212.553.1934 neil.strauss@moodys.com

NEWS & ANALYSIS Credit implications of current events

27 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Hurricane Isaac Is Credit Negative for Combine Re Cat Bond

Hurricane Isaac struck the US on 28 August and caused insured property losses that two of the three catastrophe modeling firms estimate at between $0.5 and $2.0 billion. The losses are credit negative for bondholders of Combine Re, a $200 million indemnity cat bond that Swiss Re issued in March 2012 for the benefit of two companies, COUNTRY Mutual Insurance Company (unrated) and North Carolina Farm Bureau Mutual Insurance, Inc. (unrated). Combine Re bondholders will not sustain principal losses owing to this event, but Isaac will consume some protective subordination, leaving investors more vulnerable to losses from future qualifying events, which is credit negative. These losses follow earlier losses that have already used up a portion of subordination.

Investors more vulnerable. The first loss layer remaining below the rated tranches will absorb the potential ultimate net losses for this event, leaving cat bond investors more vulnerable to future losses. This vulnerability arises from the fact that the rated tranches in this transaction incur losses to the extent the attachment point is less than the aggregate losses on all qualifying events in a calendar year, rather the loss on each individual event.

The Louisiana landfall of Isaac as a Category 1 hurricane qualified it as a covered event for the Combine Re cat bond under COUNTRY Mutual Insurance Company’s book of business. Combine Re covers against several perils in specific regions of the US, including severe thunderstorms, hurricanes, earthquakes and winter storms, but it excludes hurricanes in Florida.

Earlier events already reduced subordination. Three events earlier this year had already amassed losses for Combine Re under COUNTRY Mutual Insurance Company’s book of business and had eroded the first layer of loss protection to investors. As a result, the attachment level for ultimate net losses of COUNTRY Mutual Insurance Company had fallen to $189.7 million from $300 million.

Less effect on other cat bonds. Unlike Combine Re, the other five cat bonds we rate with exposure to hurricane risk (GlobeCat, EOS Wind, Vega Capital Series 2010-I, Successor X Series 2012-1, and Mythen Re) all cover losses only to the extent the attachment point is less than the loss on any single qualifying event. As a result, only very large and devastating hurricanes can trigger losses to investors. Given the relatively modest estimates of losses from Hurricane Isaac in comparison to Hurricane Katrina, which caused about $44 billion in insured losses, Isaac has little effect on the five cat bonds.

Cat bonds are a form of alternative risk transfer that provides protection to insurers, reinsurers and other entities against extreme events, effectively transferring this risk to the capital markets. Hurricane risk is the most prevalent risk covered by cat bonds. In the first half of this year, about two thirds of cat bond new issuance covers US hurricane risk.

Rodrigo Araya Senior Vice President - Manager +1.212.553.1494 rodrigo.araya@moodys.com

NEWS & ANALYSIS Credit implications of current events

28 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

UK Financial Incentives Consultation Is Credit Negative for the Insurance Industry

On 5 September, Martin Wheatley, the managing director of the Financial Services Authority (FSA) and the chief executive officer designate of the Financial Conduct Authority (FCA),7 announced the opening of a consultation process aimed at agreement on new standards on incentive schemes in the financial services industry. As part of the consultation process, the FSA published draft guidance on how it expects firms, including insurers and insurance intermediaries, to manage their sales incentive schemes. The guidance may be more rigorously enforced depending on the outcome of the consultation process. This initiative has clear advantages for insurance customers, but is likely to reduce insurance company revenues and profitability as a result of sales disruption on implementation, making it credit negative for the insurance industry.

The FSA outlined the research behind its decision in its paper, Guidance Consultation - Risk to Customers from Financial Incentives, based on a review of 22 authorised firms, including insurers, banks, building societies and investment firms. The regulator concluded that

» The vast majority of firms had incentive schemes that increased the risk of mis-selling. Examples included an inappropriate incentive bias between different products and a disproportionate reward for marginal sales

» Few firms had effective systems and controls in place to adequately monitor and manage the increased risks of mis-selling arising from their incentive schemes.

The consultation does not include plans to impose an outright ban on commissions. Rather, the report puts pressure on firms to better manage their incentive schemes and gives a strong indication of how the FCA will expect firms to treat customers in the future.

The proposed guidance applies to all firms in retail financial services with staff that are part of an incentive scheme and deal directly with retail customers, most notably in-house sales and advisory teams, intermediaries and appointed representatives. Therefore, life insurers, general insurers and insurance intermediaries fall under the scope and will have until 31 October to respond to the consultation paper. The FSA estimates that the insurance industry accounts for 44% of all UK financial services firms that could be affected, as shown in the exhibit below.

Firms with Incentive Schemes and Potentially Affected by FSA Modifications Number of Firms

General insurance intermediaries 5,961

General insurers 578

Life insurers 288

Total firms across all sectors 15,687

Insurance industry as percent of total firms across all sectors 44%

Source: Financial Services Authority

Insurance product lines we expect to be most affected include income protection, critical illness and commercial lines, which are more dependent on staff and advisory teams to educate and sell products to customers. Companies operating in these lines will be faced with the prospect of reduced revenues and profitability in the near term, a credit negative for the insurance industry as a whole. Furthermore,

7 With effect from 2 April 2013, the FSA will be replaced by the Financial Conduct Authority (FCA) and Prudential

Regulation Authority (PRA).

Helena Pavicic Associate Analyst +44.20.7772.1397 helena.pavicic@moodys.com

David Masters Vice President - Senior Analyst +44.20.7772.1605 david.masters@moodys.com

NEWS & ANALYSIS Credit implications of current events

29 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

longer-term adverse effects will persist unless alternative distribution channels are found that can compensate for the lost sales.

Smaller players in these lines will particularly struggle because business will flow to larger companies with multiple distribution channels. Furthermore, smaller insurers and insurance intermediaries are likely to incur a disproportionate cost increase as remuneration structures change and firms are required to implement and enhance governance standards on incentive schemes. This could result in smaller players exiting from certain insurance product lines altogether.

Mitigating these risks, the initiative may improve the quality of sales advice and reduce the potential for mis-selling, which has historically been a recurring issue for a wide variety of insurance products and companies.

NEWS & ANALYSIS Credit implications of current events

30 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Allianz Life’s US Market Conduct Settlement Is Credit Positive

Last Tuesday, the Florida Office of Insurance Regulation announced a multi-state agreement with Allianz Life Insurance Company of North America (Allianz Life; financial strength A2 stable) related to a market conduct review including suitability and misrepresentation issues arising from the sale of fixed annuities. The settlement is credit positive for Allianz Life because it requires minor changes to the company’s existing business practices, but removes a management distraction, avoids costly state-by-state reviews, and the total financial penalty of $10 million is modest.

The regulatory settlement agreement was reached between Allianz Life and more than 40 states, led by Florida, Iowa, Minnesota, and Missouri, regarding the sale of fixed annuity products (including fixed-indexed annuities8) between 2001 to 2008. In aggregate over this review period, Allianz Life’s fixed annuity sales volumes totaled $50.4 billion and approximately 750,000 policies.

The terms of the settlement require Allianz Life to implement corrective action and remediation plans. Under the corrective action plan, Allianz Life will make modest changes to its business practices involving its agent oversight/training, complaints review, disclosures, annuity replacements, and advertising materials. Most of the processes are currently in effect at the company and will not necessitate material changes.

A review conducted by Allianz Life will evaluate previously filed or new complaints (through 31 March 2013) for annuities sold during the review period for any misrepresentation or suitability issues. Remediation of justified complaints would allow the owner to rescind their contract and receive a refund of the net funds paid into the annuity. We expect payments for any remediation annuities to be manageable. Given the current low interest rate environment, most of the investment portfolio is in an unrealized gain position and could be liquidated to meet any required outflows.

In addition to the corrective actions and remediation plans, Allianz Life will pay an aggregate $10 million penalty divided among the states based on the number of contracts in each state. This fine is very modest relative to the company’s earnings (i.e., $478 million statutory net income in 2011) and capital. The settlement avoids much greater costs and use of management time than had separate state reviews been conducted. According to the settlement agreement, Allianz Life resolved the review in part “to avoid the disruption of its business,” and did not admit to any violations or wrongdoing.

Despite this market conduct challenge and class action lawsuits over the years regarding annuity products, Allianz Life remains an industry leader in terms of market share. According to LIMRA, a market researcher for the life insurance industry, Allianz Life ranked second in US individual fixed annuity sales in 2011 at $6.5 billion. The exhibit below shows the top industry sales of US individual fixed annuities for full-year 2011 and first-half 2012.

8 Fixed-indexed annuities are a type of fixed annuity that credits interest using a formula linked to the performance of an equity

market index subject to various caps and participation rates.

Shachar Gonen Assistant Vice President - Analyst +1.212.553.3711 shachar.gonen@moodys.com

NEWS & ANALYSIS Credit implications of current events

31 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

US Individual Fixed Annuity Sales, $ millions

First-Half 2012 Sales Rank Company

Insurance Financial Strength Rating 2011 1H 2012

1 Allianz Life of North America A2 stable $6,549 $2,921

2 New York Life Aaa stable 5,783 2,552

3 AVIVA Baa1 review for downgrade 4,542 2,307

4 AIG Companies A2 stable 8,542 2,037

5 American Equity Investment Life unrated 5,090 1,897

6 Great American A3 positive 2,961 1,650

7 Jackson National Life A1 stable 2,261 1,305

8 Lincoln Financial Group A2 positive 3,043 1,252

9 Security Benefit Life unrated 1,227 1,108

10 Fidelity & Guaranty Life Ba1 stable NA 1,077

Top 10 43,435 18,107

Total Industry 81,000 36,400

Top 10 share 54% 50%

Source: US Individual Annuities Sales Survey, LIMRA

NEWS & ANALYSIS Credit implications of current events

32 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Sub-sovereigns

Japan’s Support for Regional and Local Governments Is Credit Positive

On 7 September, the central government of Japan (Aa3 stable) announced measures to support regional and local governments’ (RLGs) short-term financing needs by allowing them to borrow short-term funds from the central government. The measures are credit positive for the RLGs and mitigate the credit negative effects of the central government’s postponed 4 September transfer of ¥4.1 trillion of local allocation tax (LAT) payments to the RLGs.

The LAT transfer was postponed because a parliamentary impasse is preventing issuance of deficit-financing bonds. The Diet’s motion on 29 August to censure Prime Minister Yoshihido Noda and force an early election has brought the Diet’s legislative process to a standstill. Without new deficit-financing bond issuance, the central government will be unable to finance its budgeted expenses beyond October or November.

The LAT transfers comprise around 25% of RLG revenues, but reliance on them differs for each RLG. For instance, LAT accounts for 30% of Niigata Prefecture’s (Aa3 stable) total revenues, but only 0.5% for Nagoya City (Aa3 stable).

LAT funds are allocated based on a system of equalization designed to reduce fiscal disparities between RLGs, and to guarantee minimum services for residents. LAT is distributed four times yearly, with the 4 September ¥4.1 trillion payment (about 23% of total LAT in fiscal 2012) postponed until October or November or later, according to an official at the Ministry of Finance.

The central government’s spending deferment should not create a major liquidity problem if payments are delayed only two or three months. Most RLGs have sufficient resources at this time of the fiscal year from their own-source taxes and reserves, and weight larger expenditures toward the 31 March end of the fiscal year. However, we expect RLGs that are more dependent on LAT revenue, like Niigata, will need to make up for shortfalls in LAT revenues, but we expect the less dependent RLGs, like Nagoya City, to be unaffected.

In the event that the RLGs do need extra funding because of the delay in LAT transfers, they can borrow short-term funds from the central government, banks or issue bonds under their rinzai-sai programs. Rinzai-sai programs allow bond issuance to make up for shortfalls in LAT revenues. Issuance is usually at year-end, so issuance now would increase interest costs over the additional six months the bonds would be outstanding.

We rate Japanese RLGs the same Aa3 stable rating as Japanese government bonds, reflecting the close linkage between the central government and RLGs, the established LAT equalization system, and the strong oversight system by the central government.

The current political stalemate has made it difficult for the Diet to forge and implement comprehensive fiscal and supply-side measures to rein in Japan’s large budget deficits and very large and growing government debt, which is credit negative for Japan.9 Given the close linkage between the central government and RLGs, any negative developments at the central government level would pressure RLG credit profiles.

9 Please see Censure and Political Stalemate in Japan Are Credit Negative, 3 September 2012.

Yuka Tamba Vice President - Senior Analyst +81.3.5408.4216 yuka.tamba@moodys.com

Debra Roane Vice President - Senior Credit Officer +612.9270.8145 debra.roane@moodys.com

NEWS & ANALYSIS Credit implications of current events

33 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

US Public Finance

California Pension Reform Is Credit Positive

On 31 August, California’s legislature passed pension reform that the state’s main pension plan estimates will save as much as $15 billion over the next 30 years on a present value basis. Such savings are credit positive for both the state (A1 stable) and local governments that participate in the state’s cost-sharing pension plan.

The reform affects the California Public Employees’ Retirement System, (CALPERS, Aa3 stable), a state and local government cost-sharing plan in which many local governments participate, and the California State Teachers Retirement System (CALSTRS, Aa3 stable), a plan where contributions come from the state, school districts and employees.

The bill would require new employees to pay half the cost of their benefits and work longer before they can retire. It also reduces formulas for calculating benefits and caps pension payments. Retirement payouts for new workers would be based on wages capped at about $110,000 a year, or $132,000 for those not covered by the federal Social Security system, adjusted for inflation. For most new civil servants who aren’t police officers or firefighters, the minimum retirement age for full benefits would increase to 67 from 55.

The state and the participating local governments are required each year to contribute the actuarially required contribution (ARC) to CALPERS, which has been steadily increasing. CALPERS announced 1% returns in fiscal 2012, versus a 7.5% target, which will result in a higher ARC in the future. Currently, the state spends about $3.3 billion, or 4% of its budget, on pension contributions. The exhibit below shows CALPERS’ and CALSTRS’ financials for 2011.

Financials for California’s Two Largest Pensions, Year-End 2010

California Public Employees'

Retirement System ($ millions) California State Teachers'

Retirement System ($ millions)

Plan Actuarial Value of Assets $257,070 $140,291

Plan Actuarial Accrued Liabilities $308,343 $196,315

State Actuarial Value of Assets $97,346

State Actuarial Accrued Liabilities $121,446

Unfunded Liabilities (UAAL) $51,273 $56,024

Funded Ratio 83.4% 71.5%

Market Value of Assets as of FYE $241,762 $155,346

Market Value of Assets as of Actuarial Valuation Date $201,632 $130,007

Plan Employer Actual Contributions ($) $7,465 $2,200

State ARC (Actuarial) ($) $3,277

State Actual Contributions ($) $3,277 $568

Source: 2010 Actuarial Valuations

CALPERS said the changes may save the state and local governments $12-$15 billion on a present value basis, or $42-$55 billion on a nominal basis, over the next 30 years. This number is not very large compared with the unfunded liability of the plan (reported to be $51 billion in the 2010 actuarial valuation), and will not result in significant near-term savings. Based on CALPERS estimates, only 3%

Emily Raimes Vice President - Senior Credit Officer +1.212.553.7203 emily.raimes@moodys.com

Eric Hoffmann Senior Vice President +1.415.274.1702 eric.hoffmann@moodys.com

NEWS & ANALYSIS Credit implications of current events

34 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

of the projected savings occur over the next five fiscal years. What is significant, however, is that the state is taking a step to reduce the large and growing costs to the state and local governments.

According to CALPERS’ preliminary estimate, the bulk of the projected savings would benefit local governments. Schools and local governments would receive 19% and 58% of the savings, respectively. The remaining 23% would benefit the state.

However, because the reform legislation primarily affects newly hired rather than current employees, the greatest benefit for local governments is likely to be from the pressure these reforms create in labor negotiations. Local governments could see far greater benefits than those discussed above if employee unions to agree to greater pension contributions from their current members as labor contracts are renewed.

By creating a new 50/50 cost-sharing standard for new employees, we expect the new law to normalize a similar sharing standard for current employees. If that doesn’t happen by 2018, the new law permits local governments to impose a 50/50 split on bargaining groups for their normal costs, defined as pension benefits earned in the current year rather than prior years. California labor law previously required that collective bargaining determine the sharing of such costs.

The reforms passed will apply to cities that do not participate in the CALPERS cost-sharing plan but have agent plans with CALPERS. Charter counties or cities with their own pension plans, including San Jose, Los Angeles and San Diego, are exempt from the new rules.

NEWS & ANALYSIS Credit implications of current events

35 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

California Support for Inglewood School District Is Credit Positive for It and Other Stressed Districts

On 31 August, the California state legislature approved an emergency loan and the state takeover of financially troubled Inglewood Unified School District (Baa1 negative).10 The legislation is credit positive for the school district, which will benefit from the state’s direct oversight and a much needed $29 million cash infusion. If needed, the district will also have access to an additional $26 million loan.

Additionally, the legislation is credit positive for other financially challenged California school districts: it demonstrates the state’s emergency support mechanism and distinguishes the state’s approach to school districts from its “hands off approach” on other types of distressed local governments.

School districts in California still face risks as a result of the weak state economy, the distressed housing market in some parts of the state, and high state unemployment. In addition, possible "trigger" cuts in the fiscal 2013 state budget will become effective if voters fail to approve ballot propositions to raise taxes in November.

The state takeover and emergency loan to Inglewood Unified School District should stabilize the district’s financial condition, which has been weakened by several years of fiscal challenges and inadequate financial controls. In the absence of the emergency loans, the county office of education projected that the district would be cash insolvent by March 2013 and exhaust its reserves on an accrual basis by June 2013. Several factors have contributed to its weak financial condition: 1) a structural budget imbalance after several years of funding reductions without sufficient expenditure cuts; 2) cash deferrals of state funding have narrowed the district’s liquidity position; and 3) declining enrollment, which gradually narrowed annual operating revenues but was not matched with equal expenditure cuts.

The $29 million infusion will provide liquidity totaling 23.8% of the district’s unaudited fiscal 2012 revenues and prevent near-term cash insolvency. The long-term operating challenges will benefit from new state management expertise, which will help stabilize district operations. New streamlined governance will largely eliminate local political considerations from the district’s near-term decision making. State Superintendent of Public Instruction, Tom Torlakson, will assume the role of the district’s board and appoint a state administrator to manage the district; the prior board will be relieved of its authority, but will hold an advisory capacity. California’s Fiscal Crisis and Management Assistance Team (FCMAT), which is tasked with supporting and educating distressed school districts, will also intercede.

California school districts benefit from the state’s fiscal oversight process. The financial rescue and oversight process benefiting Inglewood Unified School District was established in 1992 in Assembly Bill 1200. It distinguishes school districts from other types municipalities for which the state takes a hands-off approach. Among other goals, AB 1200 sought to prevent school district’s fiscal insolvency and eliminate the possibility of them filing for bankruptcy. Since its passage, the state has provided emergency loans to seven school districts.

Beyond the direct intervention process, AB 1200 enacted a wide-ranging county-led fiscal oversight process for school districts. This process establishes regular reporting, budget oversight, and financial standards.

As of last spring, 12 districts, including Inglewood, were identified as facing near-term insolvency absent any action (see exhibit), which prompted several of them to structurally balance their

10 California Senate Bill 533.

Julian Metcalf Associate Analyst +1.415.274.1710 julian.metcalf@moodys.com

NEWS & ANALYSIS Credit implications of current events

36 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

operations. Those that are unable to do so on their own, benefit from the state’s intervention process, which benefits districts’ fundamental credit profiles and holders of a school district’s unsecured debt, such as leases and certificates of participation that are typically paid from operational revenues. This differs from general obligation debt, which is paid by the district’s county treasurer-tax collector from the district’s voter-approved, unlimited property tax levy, which is dedicated to the bonds and separate from districts’ operational revenues.

California School Districts Facing Insolvency Local Educational Agency County Total Budget $ millions GO Rating

Cotati-Rohnert Park Unified Sonoma $46.40 A2 negative

Inglewood Unified Los Angeles 124.9 Baa1 negative

Paso Robles Joint Unified San Luis Obispo 56.2 A2 negative

Portola Valley Elementary San Mateo 11.4 Aa2

Cottonwood Union Elementary Shasta 7.7 Unrated

Hot Springs Elementary Tulare 0.5 Unrated

La Grange Elementary Stanislaus 0.3 Unrated

Nevada City Elementary Nevada 8.2 Unrated

Pacheco Union Elementary Shasta 4.7 Unrated

South Monterey County Joint Union High Monterey 18.8 Unrated

Travis Unified Solano 41.4 Unrated

Vallejo City Unified Solano 139.6 Unrated

Source: California Department of Education, Second Interim Status Report, Fiscal 2011-12

RATING CHANGES Significant rating actions taken the week ending 7 September 2012

37 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Corporates

Avaya, Inc. Outlook Change

21 Dec ‘09 4 Sep ‘12

Corporate Family Rating B3 B3

Outlook Stable Negative

The negative outlook reflects the possibility of further downward ratings pressure over the next year as Avaya gets closer to its 2014 term loan maturity. The company will be challenged to achieve positive free cash flow given the difficult economic environment. Avaya is operating at just under breakeven free cash flow levels, partly because of ongoing restructuring expenses. While the company has made significant strides in reducing its cost structure, the improving margins have not been sufficient to offset the recent decline in revenues and upfront cash restructuring costs.

Claire’s Stores, Inc. Review for Upgrade

13 Feb ‘12 5 Sep ‘12

Corporate Family Rating Caa2 Caa2

Outlook Stable Review for Upgrade

Claire's announcement that it is pursuing a $625 million add-on to the senior secured first lien notes due 2019 as well as a refinancing of its first lien secured revolver prompted the upgrade review. The successful completion of the transaction will eliminate a substantial upcoming maturity and provide Claire's with enough increased liquidity and near-term financial flexibility to warrant a higher rating. The review will consider that although the proposed refinancing will improve liquidity, it will result in a slightly higher weighted average cost of debt, and will not materially reduce Claire’s significant leverage.

Reynolds Group Holdings Limited Downgrade

11 Jul ‘11 6 Sep ‘12

Corporate Family Rating B2 B3

Outlook Negative Stable

RGHL’s pro-forma credit metrics are below forecasted levels and their future improvement may proceed more slowly than originally projected. Stressed from a series of debt financed acquisitions, RGHL's credit metrics have little room for any negative variance in operating performance. Free cash flow remains minimal relative to debt.

RATING CHANGES Significant rating actions taken the week ending 7 September 2012

38 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Mitsui O.S.K. Lines, Ltd. Review for Downgrade

2 Feb ‘12 4 Sep ‘12

Long-Term Issuer Rating Baa1 Baa1

Outlook Negative Review for Downgrade

We are concerned that the continued weak shipping industry and uncertain global economy, which will lead to a reduction in earnings and cash flow, may delay an improvement in MOL's financial leverage. MOL's dry bulkers and tanker segments are facing extremely weak charter conditions for non-long-term contracts and we do not expect rates to recover in the medium term, because of an oversupply of freight capacity and weakening shipping volumes.

Fresenius SE & Co. KGaA Confirmation

26 Apr ‘12 6 Sep ‘12

Corporate Family Rating Ba1 Ba1 (confirmed)

Outlook Review for Downgrade Stable

The confirmation follows Fresenius’ announcement that it will not be pursuing a revised bid for Rhoen, having failed to secure the required 90% approval in its initial bid in June 2012. This announcement eliminates significant uncertainty and the risk that Fresenius' leverage would increase.

Valeant Pharmaceuticals International, Inc. Review for Downgrade

28 Sep ‘11 4 Sep ‘12

Corporate Family Rating Ba3 Ba3

Outlook Negative Review for Downgrade

The review for downgrade follows the announcement that Valeant will acquire Medicis Pharmaceutical Corporation for $44 per share or approximately $2.6 billion in cash. Funding sources will include new debt. This acquisition may push Valeant's leverage beyond our tolerance level for the Ba3 rating despite solid strategic rationale, although we note that Valeant's ratings remain supported by its good size and scale, a high level of product and geographic diversity, and the lack of any major patent cliffs as compared to other pharmaceutical companies.

RATING CHANGES Significant rating actions taken the week ending 7 September 2012

39 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Sovereigns

Ireland Ceiling Lowered

12 July ‘12 5 September ‘12

Gov Currency Rating Ba1 Ba1

Foreign Currency Deposit Ceiling Aaa A3

Foreign Currency Bond Ceiling Aaa A3

Local Currency Deposit Ceiling Aaa A3

Local Currency Bond Ceiling Aaa A3

Outlook Negative Negative

The lower ceiling means that the highest rating that can be assigned to a domestic issuer in Ireland or to a structured finance security backed by Irish receivables is now A3. We have also adjusted the short-term foreign-currency debt and deposit ceilings to Prime-2 from Prime-1. These changes have limited rating implications for fundamental credits in Ireland. As for structured finance transactions, those backed by Irish receivables had already been subject to a maximum SF rating of A1. We are now likely to downgrade those rated above A3 to a maximum rating of A3. We are also likely to downgrade covered bond ratings backed by Irish receivables whose senior-most tranche ratings currently exceed A3.

Portugal Ceiling Lowered

13 February ‘12 5 September ‘12

Gov Currency Rating Ba1 Ba1

Foreign Currency Deposit Ceiling Aaa A3

Foreign Currency Bond Ceiling Aaa A3

Local Currency Deposit Ceiling Aaa A3

Local Currency Bond Ceiling Aaa A3

Outlook Negative Negative

This means that the highest rating that can be assigned to a domestic issuer in Portugal or to a structured finance security backed by Portuguese-domiciled receivables has now been lowered to Baa3. At the same time, we have also adjusted the short-term foreign-currency debt and deposit ceilings to Prime-3 from Prime-1. These changes have no rating implications for rated issuers in Portugal, as none are currently rated above the revised ceiling level of Baa3. The lower ceilings are based on our assessment of the risks of economic and financial instability in Portugal the likely impact on all other borrowers and structured finance instruments in the country if income and access to liquidity and funding were significantly curtailed under stressful conditions.

RATING CHANGES Significant rating actions taken the week ending 7 September 2012

40 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Supranational

European Union Outlook Change

3 September ‘12

Gov Currency Rating Aaa Aaa

Foreign Currency Deposit Ceiling Aaa Aaa

Foreign Currency Bond Ceiling Aaa Aaa

Local Currency Deposit Ceiling Aaa Aaa

Local Currency Bond Ceiling Aaa Aaa

Outlook Stable Negative

The change reflects the negative outlooks now assigned to the Aaa sovereign ratings of key contributors to the EU budget: Germany, France, the UK and the Netherlands, which together account for around 45% of EU budget revenue. It is reasonable to assume that the EU's creditworthiness should move in line with the creditworthiness of its strongest key member states considering the significant linkages between member states and the EU, and the likelihood that the large Aaa-rated member states would likely not prioritise their commitment to backstop EU debt obligations over servicing their own debt obligations.

European Atomic Energy Community Outlook Change

3 September ‘12

Gov Currency Rating Aaa Aaa

Foreign Currency Deposit Ceiling Aaa Aaa

Foreign Currency Bond Ceiling Aaa Aaa

Local Currency Deposit Ceiling Aaa Aaa

Local Currency Bond Ceiling Aaa Aaa

Outlook Stable Negative

In an action related to the change in outlook to negative for the European Union, we have also changed to negative our outlook on the Aaa long-term issuer rating and the provisional (P)Aaa MTN programme rating of the European Atomic Energy Community (Euratom), on whose behalf the European Commission is also empowered to borrow. Euratom's key credit characteristics are identical to the EU's, particularly the backing by the EU's budgetary resources and by the European Commission's right to call for additional resources from member states, if needed. For these reasons, Euratom's ratings tend to move in line with the EU's.

RATING CHANGES Significant rating actions taken the week ending 7 September 2012

41 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Sub-sovereigns

Guadalajara, Mexico; Municipality o f Outlook Change

16 Apr ‘08 6 Sept ’12

Issuer rating Ba1 Ba1

NSR A1.mx A1.mx

Outlook Stable Negative

The outlook change reflects the significant risk that the recent deterioration in key credit factors will continue. Despite still-positive gross operating margins, consolidated financial results and debt metrics deteriorated during 2011, mainly because of an increase in operating expenditures. Salaries and general services drove the higher expenditures, reflecting both expenditures related to security and the Pan-American Games. Returning to the gross operating surpluses of previous years will be a challenge.

US Public Finance

Allina Health System (MN) Upgrade

1 Jun ‘11 6 Sep ‘12

Underlying Rating A1 Aa3

Outlook Positive Stable

The rating upgrade reflects favorable financial performance in FY 2011, growth in unrestricted cash and investments, improved debt metrics, and a strong management team that has driven the improvements to profitability and balance sheet measures. The improvements have happened while Allina has been implementing progressive strategies in anticipation of health care reform and value-based purchasing. The stable outlook reflects our belief that operating margins, liquidity ratios, and debt metrics will at least be maintained if not improve over the next 12 - 18 months.

RESEARCH HIGHLIGHTS Notable research published the week ending 7 September 2012

42 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Corporates

Our outlook for the sector is stable, as US federal government spending will not boost the US building materials sector meaningfully between now and late 2013, and public sector spending will contract slightly. We expect operating income to grow by -3% to 7% over the next 12 - 18 months as residential private and non-residential private point to a weak recovery and public construction faces fiscal headwinds.

North American Building Materials: Tepid US Economy Provides More Nudge Than Push for Building Materials Companies

Our outlook for the sector is stable overall, although uneven financial performance and low growth will dominate. The sector continues to be challenged by low growth and weak commodity prices, while global events, such as the ongoing Euro debt crisis, continue to elevate uncertainty and potential downside risk.

Australian Corporate Sector Outlook

Our report examines credit trends and rating movements for issuers in the J.P. Morgan Asia Credit Index (JACI), most of which we rate. Tracking the total return performance of select Asian bonds denominated in US dollars, the JACI is a market-capitalization weighted index covering 15 Asian markets (excluding Japan and Australia).

JACI: A Rating Perspective: Using J.P. Morgan Asia Credit Index as the Basis

Our outlook for the US fixed-line telecommunications industry is stable as operating income will edge up slightly in 2012 and 2013 as cost cuts and TV services gains offset continued weakness in voice services. We estimate that operating income for the US wireline industry will edge up only 1% in 2012 and 2013.

US Wireline: Cost Cuts, Gains in TV Services Will Help Keep Operating Income Steady in 2013

Our positive outlook for the US wireless industry is based on the expectation that industry revenue will rise by about 4% to 5% this year and next and that industry leaders AT&T and Verizon Wireless will see a big jump in cash flow in 2012 and 2013. We expect that EBITDA minus capital spending—a proxy for free cash flow—will increase almost 11% this year for the nine companies we cover in this report, before increasing an additional 12%-13% in 2013.

US Wireless Industry: Cash Flow Will Jump in 2012-13, at Least for AT&T Mobility and Verizon Wireless

Our Liquidity-Stress Index climbed to 3.5% in August from its 3.1% record-low in July, but remains at a historically low level, indicating that companies have adequate liquidity to manage cash needs over the next 12 months. But risks remain from the ongoing debt problems in Europe, and a weakening US economy could reduce corporate cash flow or hamper refinancing.

SGL Monitor Flash: Moody's Liquidity-Stress Index Climbs to 3.5% from Record Low

RESEARCH HIGHLIGHTS Notable research published the week ending 7 September 2012

43 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

US supermarkets will continue to lose revenue to alternative food retailers but the rate of loss will slow as supermarkets strive to increase customer traffic and the number of items customers purchase per visit. Our report examines the changing competitive landscape, and identifies those operators best positioned for the future.

US Supermarket Industry: Supermarkets Fight to Retain Sales Amid Competition From Alternative Food Retailers

Our Asian LSI rose to 21.8% in August from 16.8% in July. It is now at its highest level since the first quarter of 2010 and the change in August largest month-on-month rise since we started tracking the data. However, the index remains well below the high of 37% recorded in fourth quarter 2008.

Moody's Asian Liquidity Stress Index - September 2012

The third phase of the European Emissions Trading System (EU ETS) is set to start in 2013. In line with most other sectors, the building materials industry, and cement producers in particular, will maintain their status of having exposure to carbon leakage at least until the end of 2014 and will therefore continue to receive 100% of their benchmark allocation at no cost.

European Building Materials: Third Phase of Emissions Trading Scheme Brings Manageable Risks

We are maintaining our stable outlook for building materials companies in Europe, Middle East and Africa, which has been in place since March 2011. Overall, growth in cement consumption volumes will continue to be modest during the second half of 2012 across all the markets in which these companies are active.

EMEA Building Materials Industry: Increased Demand From the US Should Offset Continued European Weakness

We are maintaining our stable outlook for the US tobacco industry as we continue to expect operating profit growth, although profit margin expansion may stall. The litigation environment remains uncertain, but it is moderating.

US Tobacco Operating Profits to Rise Modestly as Litigation Climate Slowly Improves

RESEARCH HIGHLIGHTS Notable research published the week ending 7 September 2012

44 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Financial Institutions

The negative outlook reflects ongoing challenges in the domestic operating environment, including low interest rates, high unemployment and weak economic growth. In addition, the threat of contagion stemming from the European sovereign debt crisis is undermining economic recovery in the US and exposes banks to a heightened risk of shocks.

United States of America Bank System Outlook

The stable outlook for reinsurers over takes into account the industry’s resilience, improvements in underwriting and risk management, a possible pickup in demand for reinsurance due to impending regulations and hardening in some primary insurance markets.

Global Reinsurance Outlook

The stable outlook reflects our view that improved premium rates should help support the sector’s profitability in the next 12-18 months, aided by likely further reserve releases. Nevertheless, accident year combined ratios in excess of 100%, together with declining investment yields, suggest the need for continued pricing improvement.

US Commercial P&C Insurance: Outlook Remains Stable

The US commercial lines P&C insurance sector remains financially sound, with high asset quality, good profitability, strong capital adequacy and moderate financial leverage. Nevertheless, pricing improvements will need to continue to reduce accident year loss ratios to acceptable levels.

US Commercial Lines P&C Insurance: Industry Scorecard

Articles in the latest issue look at the outlook for the global reinsurance industry, recap second-quarter 2012 earnings, discuss the pressures on the US life reinsurance industry to expand beyond its core business and note some of the questions we will be asking leaders of the reinsurance sector during the Rendez-vous de Septembre in Monaco.

Moody's Reinsurance Monitor (Newsletter) - September 2012

The US P&C insurance industry continued to report meaningful reserve redundancies through 2011 earnings, with about $12.1 billion in reserve releases compared with $10.7 billion in 2010. Excluding a sizable reserve strengthening of $5.0 billion by Chartis in 2010, reserve releases declined year over year.

US P&C Insurers Sustain Meaningful Reserve Redundancies in 2011; Releases Expected to Slow

Based on 2012 survey data from our rated issuers, we expect P&C insurance rates to continue to rise in 2012 for major commercial lines. If rate increases continue at the current pace and loss ratio trends remain moderate, commercial insurers’ ex-catastrophe underwriting profitability will improve in the remainder of 2012 and 2013.

Commercial Lines Pricing Improving, but More Rate Increases Are Needed

RESEARCH HIGHLIGHTS Notable research published the week ending 7 September 2012

45 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Sovereigns

Qatar’s very high economic and government financial strengths support its current rating (Aa2 stable). The hydrocarbon-driven boom has led to very rapid real GDP growth – 17.4% on average between 2006 and 2011 – which has boosted per capita GDP to the second-highest level in the world. The government has run large fiscal surpluses for more than a decade given that its fiscal break-even oil price is much lower than prevailing global oil prices.

Qatar Analysis

A debt structure with a maturity profile that exceeds that of most Baa-rated countries support the government's credit resiliency, as do gross financing needs that are among the lowest for sovereigns that we rate. Ample government liquidity buffers place Uruguay (Baa3 positive) in a strong position relative to similarly rated countries as the authorities are capable of managing stress scenarios, including those involving events that could restrict market access. We assigned an investment-grade rating to Uruguay earlier this year.

Uruguay Analysis

Sweden’s Aaa government debt rating is based on our assessment of the country’s economic strength, reflecting both its high GDP per capita and a resilient, diversified economy. Healthy productivity gains, low wage and price inflation, and the country’s dominant niche in the high-technology market have bolstered competitiveness for more than a decade, leading to sizeable current account surpluses. The rating is also underpinned by its very high institutional strength ranking.

Sweden Analysis

Costa Rica’s Baa3 government bond rating is supported by a relatively well-diversified economic base, whose main sectors include high-value-added manufacturing, agriculture, and tourism. Costa Rica is poorer and smaller than rated peers but is growing faster. Although Costa Rica’s 2011 nominal GDP of $44 billion is lower than the $55 billion median for Baa-rated sovereigns, the country is catching up. We forecast Costa Rica will grow 3.4% in the five years to 2013, versus a 2.7% average for other Baa-rated sovereigns. Another important factor supporting the ratings are Costa Rica’s strong institutions.

Costa Rica Analysis

Sub-sovereigns

Thin operating margins, numerous inefficiencies and limited infrastructure investment continue to restrict the performance of water companies in Mexico, which have a structural dependence on transfers from higher levels of government to cover their operating expenditures and capital investment needs. Such dependence puts a growing strain on all layers of government to ensure the continuous operation of the companies.

Mexico’s Water Companies: Ongoing Challenges

RESEARCH HIGHLIGHTS Notable research published the week ending 7 September 2012

46 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

Structured Finance

Articles in the latest issue look at: Brussels 2012, standardized reporting of modified mortgages in Australia is credit positive for covered bonds, banks and RMBS, and how receivables of credit card purchases and cash advances show similar performance under a revised law.

Structured Thinking: Asia Pacific Newsletter

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

47 MOODY’S CREDIT OUTLOOK 10 SEPTEMBER 2012

NEWS & ANALYSIS Corporates 2 » IBM’s $1.3 Billion Acquisition of Kenexa Is Credit Positive » Novatek’s Natural Gas Supply Contracts Are Credit Positive » Daikin, Japan’s Top Air Conditioner Maker, to Buy Goodman in

Credit Negative Deal

Infrastructure 6 » German Law to Share Wind Farm Connection Costs Is Credit

Positive for Transmission Operators

Banks 7 » Delay in Stress Testing for Smaller US Banks Is Credit Negative » US Loan Maturities Create Major Refinancing Risk for 2016 » Brazil Injects Capital in Caixa, but Quality and Quantity

Are Wanting » Colombia’s Deduction of Goodwill from Capital Is Credit Positive

for Banks » Guatemalan Banking Reform Is Credit Positive for Banks

and Depositors » Rising Loan-Loss Provisions Are Credit Negative for Italian Banks

Insurers 16 » State-Owned Brazilian Surety Insurer Would Be Credit Negative

for Private Competitors

Closed-End Funds 18 » Invesco’s US Municipal Fund Merger Is Credit Positive for

Leverage Providers

Sovereigns 20 » Censure and Political Stalemate in Japan Are Credit Negative

US Public Finance 21 » US Budget Cuts Would Hurt the Credit Quality of School Districts

Receiving Federal Aid

RATINGS & RESEARCH Rating Changes 23

Last week we downgraded Maritimes & Northeast Pipeline, 3CIF, and 3i Group, and upgraded Jaguar Land Rover, CNO Financial Group, Export-Import Bank of Korea, Industrial Bank of Korea, Korea Finance Corporation, Korea Housing Finance Corporation, Korea Development Bank and Korea Student Aid Foundation, The Republic of Korea, Daejeon Metropolitan City (Korea), and the Gwinnett County Hospital Authority in Georgia, among other rating actions.

Research Highlights 29

Last week we published on US coal producers, Russian steel companies, Korean government-related issuers, China's property market, iron ore, US manufacturers, Central and Eastern European automakers, US life insurers, money market funds, CEE sovereigns, Denmark, and US credit cards ABS, among other reports.

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EDITORS PRODUCTION ASSOCIATE News & Analysis: Elisa Herr , Jay Sherman and Sharon Adams

David Dombrovskis

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