MOODYS.COM

23 OCTOBER 2014

NEWS & ANALYSIS India Energy Reforms 2 » India Energy Reforms Are Credit Positive for the Sovereign, Oil

and Gas Companies and Natural Gas Producers

Corporates 6 » Falling Oil Prices Are Credit Negative for E&P, Drilling and Oil

Field Services Companies

Infrastructure 7 » TECO Energy’s Sale of Mining Subsidiary Is Credit Positive

Banks 8 » Close Brothers Sells Its German Securities Business,

a Credit Positive

Insurers 9 » RGA Acquisition of Aurora National Life Is Credit Positive » Aegon’s Sale of Canadian Operation and Ensuing Debt

Repayment Are Credit Positive » China Allows Insurers to Invest in Preference Shares, Credit

Positive for Banks, but Negative for Insurers

US Public Finance 15 » State University of New York’s Expansion of Online Learning Is

Credit Positive

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Monday’s Credit Outlook 17 » Go to Last Monday’s Credit Outlook

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NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 23 OCTOBER 2014

India Energy Reforms

India Energy Reforms Are Credit Positive for the Sovereign, Oil and Gas Companies and Natural Gas Producers Last Saturday, the government of India (Baa3 stable) fully deregulated diesel prices that the government had previously been allowing to increase by INR0.40-INR0.50 per litre a month. Prices will now be at international market rates rather than controlled by the government. At the same time, the government approved a revised domestic natural gas price formula that links gas prices to international benchmarks, effective 1 November. The price of gas will increase to $5.60 per million British thermal units (mmbtu) from the current $4.20/mmbtu. These reforms are credit positive for the sovereign, oil and gas companies and state-owned natural gas producers.

THE SOVEREIGN

Diesel price deregulation is credit positive for the sovereign because it will lower government spending on subsidies to bridge the gap between global market prices and domestic regulated prices. Additionally, deregulation proves to investors that the government remains committed to fiscal consolidation and structural reform. Because the government introduced the measure amid falling global oil prices, it will have a limited inflationary effect.

Over the past four years, the government has introduced several measures aimed at reducing its subsidy burden, including petrol price deregulation, incremental increases in regulated diesel prices and a reduction in the amount of liquefied petroleum gas consumption that the government subsidised. But the government continued to subsidise diesel and other fuels that households use, and as oil prices rose and the Indian rupee depreciated, the government’s fuel subsidy bill grew nearly sixfold to INR855 billion in the fiscal year ended in March 2014, from INR150 billion in fiscal 2010 (see exhibit).

India’s Petroleum Subsidies Rise Despite Government Efforts to Reduce the Burden

Note: Fiscal years end 31 March. Source: India Ministry of Finance

Given India’s widespread commercial use of diesel, price deregulation would have a greater economic and inflationary effect than it would for petrol, and for that reason it was more politically sensitive. But the 20% decline in global crude prices in the second half of this year allowed the government to introduce price reforms without risking an economic contraction or inflation.

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Atsi Sheth Senior Vice President +65.6398.3727 atsi.sheth@moodys.com

Shirin Mohammadi Associate Analyst +971.4.237.9549 shirin.mohammadi@moodys.com

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

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 23 OCTOBER 2014

The government’s action will lower its fiscal deficit, which is credit positive. The total reduction of the subsidy bill will likely be lower this year because of lower oil prices: we estimate that diesel-related subsidies cost the government about 0.3% of GDP in fiscal 2014, down from 0.6% a year earlier, and that costs would have been lower in fiscal 2015. Removing diesel subsidies reduces the government’s exposure to oil price and exchange rate shocks, which have added significantly to government expenditure in the past.

India’s general government fiscal deficit (6.9% of GDP in fiscal 2014) and debt (66% of GDP) are high compared with similarly rated sovereigns, and the elimination of one source of higher deficits demonstrates that the government intends to continue along the path of fiscal consolidation that it outlined in its July budget. Moreover, by allowing markets to set prices, deregulation will also compel domestic demand to adjust more quickly to price signals, preventing the kind of balance-of-payments pressures that have built up when domestic consumption was sheltered from the effect of global oil price increases.

The possible inflationary effect of deregulation is limited by the global oil price scenario. In fact, diesel price deregulation was accompanied by a 5.7% drop in diesel prices. Therefore, we expect a minimal effect on India’s Consumer Price Index inflation (which was 6.5% in September 2014) and GDP growth (which we forecast at 5% this fiscal year).

OIL AND GAS COMPANIES

Diesel price deregulation is credit positive for state-owned downstream oil marketing companies (OMC) such as Indian Oil Corporation Ltd. (IOC, Baa3 stable), Bharat Petroleum Corporation Limited (BPCL, Baa3 stable) and Hindustan Petroleum Corporation Limited (unrated) because they will no longer incur losses arising from any shortfalls between the government-set sale price of diesel and production costs (i.e., under-recoveries). As the fuel subsidy falls, it reduces the amount that the OMCs will have to borrow to fund fuel under-recoveries on kerosene and liquefied petroleum gas, the two remaining subsidized oil products, until the government reimburses the OMCs three to six months later.

The announcement is also credit positive for state-owned upstream producers Oil and Natural Gas Corporation Ltd. (ONGC, Baa2 stable) and Oil India Limited (OIL, Baa2 stable) because it reduces the fuel subsidy burden they share with the government.

We expect India’s total under-recoveries to fall to INR1.0 trillion for the fiscal year ending 31 March 2015 from INR1.4 trillion a year earlier. This would result in an INR100-INR150 billion reduction in OMCs’ borrowing requirement and an INR10-INR15 billion decline in interest expenses, which the government does not reimburse. Of the three OMCs, IOC will benefit most because it has the largest market share and thus the highest exposure to under-recoveries. We expect IOC’s total borrowings this year to decline by INR50-INR80 billion from INR949 billion in fiscal 2014, while we expect BPCL’s to fall by INR20-INR40 billion from INR332 billion in fiscal 2014.

Market-linked diesel prices will move in tandem with fluctuations in crude oil prices. Over the next few weeks, diesel price deregulation will lower diesel prices given the depressed crude oil environment. Although this will compress the margins of the downstream companies, we do not expect these conditions to persist because crude oil prices are cyclical.

Because the retail sale price of diesel is no longer regulated, and thus no longer controlled by the state-owned OMCs, other Indian refiners such as Reliance Industries Limited (RIL, Baa2 positive) and Essar Oil (unrated) can now market diesel. Although the entry of new players will increase competition, we do not

Rachel Chua Associate Analyst +65.6398.8313 rachel.chua@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 23 OCTOBER 2014

expect these new entrants to threaten the OMCs owing to their well-entrenched market position in India and because we expect any erosion of the OMCs’ market share to be gradual.

We expect ONGC’s and OIL’s portion of the fuel subsidy burden to fall as the country’s total fuel subsidies decline. Although the producers’ share of fuel subsidies in the April-June quarter did not change at $56 per barrel, India’s Ministry of Petroleum and Natural Gas has proposed dividing total fuel subsidies equally between the government and state-owned upstream producers. With the lower burden, we estimate that ONGC’s revenue would increase by INR185-INR195 billion in fiscal 2015 from INR1.8 trillion in fiscal 2014, while OIL’s fiscal 2015 revenue would rise by INR10-INR18 billion from INR113.2 billion the previous year.

ONGC and OIL sell their crude oil to downstream refining and marketing companies at a discount (their share of the fuel subsidies) because the latter sell their refined-oil products at government-set prices, which are lower than their production costs. The government also takes on a share of the fuel subsidies by providing cash compensation to downstream companies. The downstream companies’ under-recoveries, or losses resulting from any shortfalls between their selling prices and production costs, will decline as the selling prices of their products increase.

STATE-OWNED NATURAL GAS PRODUCERS

The gas price increase is credit positive for upstream producers Oil and Natural Gas Corporation Ltd. (ONGC, Baa2 stable) and Oil India Limited (OIL, Baa2 stable) because they will benefit from an increase in revenues. However, the announcement is credit negative for Reliance Industries Limited (RIL, Baa2 positive) because it will not benefit from the revision until it resolves its ongoing arbitration with the government.

The gas price hike will have the largest effect on state-owned ONGC, India’s largest natural gas producer. We estimate that ONGC’s revenues will increase by $400-$600 million in the fiscal year ending in March 2015 and by $1.1-$1.3 billion in fiscal 2016, when the company benefits from a full year of higher gas prices. Gas sales accounted for INR194.2 billion ($3.2 billion), or 11%, of ONGC’s total revenue in fiscal 2014. We expect OIL’s revenues to rise by $40-$50 million in fiscal 2015 and by $100-$120 million in fiscal 2016. Gas sales accounted for INR17.1 billion ($283.2 million), or 15%, of OIL’s total revenue in fiscal 2014. These increases could be even higher thereafter as the production of domestic gas increases with new discoveries. We expect that for every 1 billion cubic meters of gas produced there will be incremental revenue of around $50 million.

The current government’s decision to implement a revised formula is also credit positive for the upstream oil and gas companies because it removes uncertainty around gas prices in India. Gas prices, which were scheduled to nearly double starting 1 April 2014, as per a pricing formula approved by the previous government, have been deferred three times by the government.

With the assurance of the revised prices, upstream producers can evaluate the commercial feasibility of exploratory fields. Additionally, higher gas prices will encourage upstream producers to invest further in exploration and production in India, particularly for offshore gas fields that are not commercially viable at current prices. The government has also indicated that there will be a premium on the gas prices at complex offshore fields, but has not provided further details.

For RIL, the government’s decision to withhold the gas price increase at its largest producing block at the Krishna-Godavari (KG) basin is credit negative because it delays the increase in revenues that the company

Rachel Chua Associate Analyst +65.6398.8313 rachel.chua@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 23 OCTOBER 2014

would have collected from the price hike. If RIL were able to benefit from the price increase, we would have expected its revenues to increase by $50-$60 million in fiscal 2015 and by $130-$150 million in fiscal 2016. Upstream oil and gas production is a small part of RIL’s predominantly downstream business, accounting for INR107 billion ($1.8 billion), or 2%, of its total revenue in fiscal 2014.

RIL’s natural gas output at its KG-D6 block has fallen below its target production over the past few years. The government has maintained that it will suppress gas prices at the block at $4.20/mmbtu until RIL makes good on the shortfall in gas volume and the ongoing arbitration is resolved. Output at the KG-D6 block averaged 12.8 million metric standard cubic meters per day in the July-September quarter, just 16% of its daily target.

The revised gas price formula does not include any Asian liquefied natural gas benchmarks, which typically command higher prices, but instead references Canadian and Russian domestic gas prices. As a result, this new formula results in a lower gas price than the $8.00-$8.40/mmbtu forecast under a pricing formula approved by the former administration, but never implemented.

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 23 OCTOBER 2014

Corporates

Falling Oil Prices Are Credit Negative for E&P, Drilling and Oil Field Services Companies Oil prices have dropped more than 25% since June, and more than 5% in just the past two weeks, as a result of a convergence of demand concerns, increased supply and Saudi Arabia’s statement that it plans to defend its market share. Lower prices are credit negative for exploration and production (E&P) companies. Their revenues will immediately take a hit, with most of the drop falling straight to the bottom line because of their high operating leverage. Persistently lower oil prices will also hurt drilling and oil field services companies as E&P companies reduce capital spending and their demand for services.

Oil prices have traded in a $20 band for several years, including a similarly sharp price drop in early 2012. The global market has been well supplied during this period, with prices supported by strong demand in China, India and other emerging markets, and ongoing geopolitical risk in the Middle East and North Africa.

This recent sharp drop in prices is the result of market expectations of weaker demand in China and Europe, and Saudi Arabia’s threats that it will defend its 11% market share,1 rather than act as the Organization of the Petroleum Exporting Countries’ (OPEC) – and the world’s – swing producer. The other significant factor weighing on prices is the strengthening US dollar. The euro has weakened to about $1.28 from about $1.40 in June, and because oil is denominated in dollars, a stronger dollar leads to lower oil prices.

Despite growing supply, particularly in the US, longer-term pricing should remain above $80, primarily because of global demand growth. However, over the next several months we could easily see prices dip into the $70s. On 18 September, we lowered the base-case price assumptions we use for our credit analysis for West Texas Intermediate (WTI) to $85 per barrel from $90 and for European Brent to $90 from $95 through 2015. Those assumptions and our stress-case price of $60 per barrel remain unchanged.

To be sure, although the drop in oil prices will negatively affect producers, including integrated oil companies and national oil companies, hedges and lower operating costs can help offset the effect. In addition, despite the media’s focus on the effect that the drop in oil prices will have on revenue, our analysis focuses more on unit costs and cash margins, which will drop proportionally less than prices.

E&P companies have the ability to adjust their capital expenditures and will begin to moderate their activity and slow down projects at the margin. Drillers and service companies will feel the most pain as producers react quickly to cut their costs. Even if there is not a dramatic drop in rig counts or activity, we would expect to see pushback on prices and dayrates that service companies are able to charge producers. Drillers and service companies without contracts or that work on a “call out” basis will be hurt the most.

If lower oil prices persist and E&P companies reduce their development activity, we would see production growth slow in North America. Shale wells typically have high initial decline rates, so a slowdown in activity would reduce throughput volumes for midstream companies. Gathering and processing companies with a percentage of proceeds contracts will see lower revenue. Retail fuel prices tend to be sticky on the way down, so refiners’ margins will benefit until pump prices catch up with lower feedstock costs.

1 In 2013, according to the US Energy Information Administration.

Steven Wood Managing Director +1.212.553.0591 steven.wood@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 23 OCTOBER 2014

Infrastructure

TECO Energy’s Sale of Its Mining Subsidiary Is Credit Positive

Last Monday, TECO Energy, Inc. ((P) Baa1 stable) announced that it had agreed to sell its wholly owned coal mining subsidiary, TECO Coal (unrated), to Cambrian Coal Corporation (unrated) for up to $170 million. The sale of TECO Coal is credit positive for TECO and its principal subsidiary, Tampa Electric Company (TEC, A2 stable), because TECO will use the proceeds to retire debt. The sale will also reduce TECO’s earnings volatility and eliminate the potential contagion risk associated with this non-core subsidiary. The company expects to close the transaction by year-end.

TECO Coal is operating on an approximately break-even basis, so the sale’s pro forma effect is principally a modest reduction of parent company debt to about $920 million from $1.04 billion pro forma as of 30 September 2014. The sale price includes future contingent consideration of $50 million if certain coal benchmark prices reach specific levels in the next five years. Pro forma for the recent acquisition of New Mexico Gas Company (unrated), if we assume that TECO uses the initial proceeds of $120 million from the sale to pay down debt held and guaranteed at TECO Finance, Inc. (Baa1 stable), parent-level debt, which accounted for about 30% of consolidated debt as of 30 September 2014, would decline to about 25%.

TECO Coal’s earnings have been slowly declining as a result of tighter pricing margins, particularly for its metallurgical coal business. Selling the coal mining business will eliminate TECO’s exposure to commodity-related businesses and improve its liquidity profile by removing potential unexpected calls on cash. As a result of this sale agreement, TECO Coal will be classified as an asset held for sale and TECO will record a non-cash charge of $65 million after tax, to TECO Coal’s approximate $200 million book value to reflect the appropriate fair market value of TECO Coal.

Currently, TEC’s regulated utility earnings account for about 96% of TECO’s consolidated earnings. With the sale of TECO Coal, TECO will have transformed itself into a fully regulated utility holding company with a more stable and predictable revenue base and cash flow stream because TECO will derive essentially all of its future earnings from its regulated utilities. Pro forma for the recent acquisition of New Mexico Gas Company and the sale of TECO Coal, we expect TECO’s ratio of cash flow pre-working capital to debt to remain at around 20% over the next few years. Subsequent to the sale of TECO Coal, we expect management to continue to focus on TECO’s core regulated utility businesses.

Jeffrey Cassella Assistant Vice President - Analyst +1.212.553.1665 jeffrey.cassella@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 23 OCTOBER 2014

Banks

Close Brothers Sells Its German Securities Business, a Credit Positive On Monday, Close Brothers Group PLC (Baa1 stable) sold its German securities subsidiary Close Brothers Seydler Bank AG (unrated) to Oddo & Cie (unrated) for £36 million, generating a disposal profit of around £10 million. The sale, which is subject to regulatory approval, is credit positive for Close Brothers because it reduces earnings volatility, generates additional capital that the group can invest in its banking business and ends a geographical diversification effort that, in our view, never achieved enough scale to be worthwhile.

Close Brothers acquired Seydler Bank, its main non-UK subsidiary, in 2005 to expand its securities and market-making operations, which it mainly undertakes through its wholly owned subsidiary Winderflood Securities (unrated). However, the group did not pursue further meaningful international acquisitions.

Seydler Bank generated a £6.9 million operating profit in the financial year ended 31 July 2014. Although this corresponded to only 3% of total group operating profits for the period, and thus had a limited effect on the group’s overall results, the disposal will help reduce Close Brothers’ overall group earnings volatility because securities and capital markets related operations are inherently volatile, and largely depend on market conditions (see exhibit below).

Seydler Bank’s Operating Profit

Source: The company

We expect the profit from the disposal of Seydler Bank and the corresponding reduction in risk-weighted assets to lead to an approximately 15-basis-point increase in Close Brothers’ capital ratios. At the end of July 2014, the group reported a fully loaded common equity Tier 1 ratio of 13.1%, which is well above the average of the largest UK banks of 10.4%.

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Andrea Usai Vice President - Senior Credit Officer +44.20.7772.1058 andrea.usai@moodys.com

Max Price Associate Analyst +44.20.7772.1778 maxwell.price@moodys.com

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 23 OCTOBER 2014

Insurers

RGA Acquisition of Aurora National Life Is Credit Positive On Tuesday, Reinsurance Group of America, Inc. (RGA, Baa1 stable) announced that its flagship insurer, RGA Reinsurance Company (RGA Re, financial strength A1 stable), is acquiring Aurora National Life Assurance Company (unrated), a wholly owned subsidiary of Swiss Reinsurance Company Ltd. (financial strength Aa3 stable), for an undisclosed amount. The acquisition is credit positive for RGA because the acquired business has a high percentage of payout annuities, which will diversify RGA’s earnings away from mortality risk. Premature deaths, relative to actuarial expectations at the time of pricing, hurt the profitability of mortality reinsurance, but boost profits of products such as payout annuities.

As shown in Exhibit 1, US and Latin American traditional business (mostly mortality) accounted for 33% of RGA’s pre-tax operating income for the first half of 2014. Given the modest growth rate of the traditional mortality business, we expect that growth will come from other businesses, such as asset intensive, which primarily concentrates on the investment risk within underlying annuities.

EXHIBIT 1

Reinsurance Group of America’s Pretax Operating Income by Segment, Year to Second-Quarter 2014

Source: Reinsurance Group of America

During its investor day on 20 May 2014, RGA provided more detail on its longevity business, and broke it out separately for 2009-13. Payout annuities, such as the ones in the Aurora block, would be classified in this segment. As shown in Exhibit 2, RGA has grown its longevity business gradually for the past five years. Longevity is a significant growth opportunity for US life insurers and reinsurers. A wave of recent large pension risk transfer transactions by Prudential Financial Inc. (Baa1 stable) and smaller transactions by companies such as RGA have heightened interest in the opportunity.

US and Latam Traditional33%

US and Latam Asset Intensive21%

US and Latam Financial Reinsurance6%

Canada13%

Europe, Middle East and Africa14%

Asia13%

Weigang Bo, CFA, CPA Associate Analyst +1.212.553.4331 weigang.bo@moodys.com

Scott Robinson, CFA, FSA Senior Vice President +1.212.553.3746 scott.robinson@moodys.com

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 23 OCTOBER 2014

EXHIBIT 2

RGA’s Longevity Business Pre-Tax Operating Income as a Percent of Total

Source: Reinsurance Group of America

The acquired business primarily is composed of restructured pre-1993 life and annuity contracts of Executive Life Insurance Company (unrated). On a pro forma basis, Aurora would have accounted for approximately 14% of RGA Re’s statutory assets as of 30 June 2014. As shown in Exhibit 3, 67% of the acquired reserves ($2.7 billion) back annuities, primarily payout annuities. Pending the transaction’s close, RGA expects to reposition about 30% of the acquired investment portfolio, a move that will modestly increase yield and strengthen asset-liability matching, although at the expense of modest incremental credit risk.

EXHIBIT 3

Aurora National Life Assurance Company’s Key Product Types by Reserves as of 31 December 2013

Source: Reinsurance Group of America

The key risk that RGA faces in this transaction is that policyholders live longer than RGA’s pricing estimates. RGA will also face investment and asset liability management risk as payout annuities require reinvestment of coupons over long durations. RGA will need to invest in longer duration and less liquid assets to match liabilities. The transaction will also use a portion of its excess capital, which was around $500 million as of 30 June 2014. However, after the transaction, we expect RGA Re to retain robust regulatory capital levels, with National Association of Insurance Commissioners-Company Action Level risk-based capital of more than 350%.

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US & Latam - Traditional Asset Intensive - GlobalFinancial Reinsurance - Global Longevity - GlobalLongevity as Percent of Total - right axis

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Life33%

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 23 OCTOBER 2014

Aegon’s Sale of Canadian Operation and Ensuing Debt Repayment Are Credit Positive Last Thursday, global insurer Aegon N.V. (A3 stable) announced that it had reached an agreement to sell its Canadian life insurance operations to Wilton Re (unrated) for CAD600 million (€423 million) and said that it will use the proceeds to repay existing debt. Although the sale will generate a loss of CAD1.6 billion for Aegon (the Canadian operation had a CAD2.2 billion book value as of 30 June 2014, including a valuation reserve), the transaction is credit positive because it will improve Aegon’s profitability and solvency. Moreover, the debt repayment will fully offset the sale’s negative effect on the group’s financial leverage and earnings coverage. Aegon expects to complete the sale in the first quarter of 2015, subject to regulatory approval.

Aegon’s Canadian operations have been a drag on the group’s profitability, which will improve once Aegon completes the sale. Between the end of June 2013 and the end of June 2014, the Canadian operations’ International Financial Reporting Standards (IFRS) return on equity was 1% (based on underlying earnings after tax), while Aegon’s consolidated return on shareholders’ equity was 8%. Based on full-year 2013 figures, we estimate that the sale will improve Aegon’s return on average equity by around 20 basis points on a pro forma basis.

Aegon’s Canadian business is also capital consumptive. The Canadian operation’s assets at year-end 2013 totalled CAD10.0 billion, or 2% of Aegon’s consolidated IFRS total assets, while the Canadian operations’ shareholders’ equity totalled CAD1.6 billion, or 5% of Aegon’s consolidated IFRS equity (including debt equity instruments). We therefore expect the sale to improve Aegon’s solvency.

However, the sale of the Canadian operations will deprive Aegon of earnings, negatively affecting the group’s earnings coverage. The loss resulting from the sale will also negatively affect the group’s financial leverage (28.8% at year-end 2013) by around one percentage point.

Aegon announced that it will use the proceeds of the transaction to repay $500 million of senior debt bearing a coupon rate of 4.625% and maturing in December 2015. This repayment will further improve the group’s return on equity by around 10 basis points and will not affect the group’s regulatory solvency position, since senior debt is not eligible regulatory capital. In addition, as illustrated in the exhibit below, the debt repayment will offset the negative effect of the sale on both the group’s financial leverage and earnings coverage after 2015.

Effect of Aegon’s Sale of Its Canadian Operations and Debt Repayment on Key Credit Metrics

2013 2013 Pro Forma for the Sale of

the Canadian Operations

2013 Pro Forma for the Sale of the Canadian Operations and the

Debt Repayment

Return on Average Shareholders’ Equity1 6.5% 6.7% 6.8%

Return on Average Capital2 4.5% 4.6% 4.7%

Earnings Coverage3 2.20x 2.16x 2.24x

Financial Leverage4 28.8% 29.9% 29.0%

Total Leverage5 41.1% 42.5% 41.9%

Note: Data are based on net underlying earnings for the Canadian operations of €18 million per year. 1 Net underlying earnings divided by average adjusted shareholders’ equity (includes our equity credit for hybrid instruments). 2 Net underlying earnings divided by average adjusted financial debt (financial debt, including preferred stock plus Moody’s adjustments for

pension deficit, hybrid, and operating lease) plus adjusted shareholders’ equity 3 Adjusted earnings before interest and taxes divided by interest expense and preferred dividends 4 Adjusted debt divided by [adjusted debt plus shareholders’ equity] 5 [Financial debt, including preferred stock plus operating debt plus Moody’s adjustments for pension and operating lease] divided by [financial debt

plus operating debt plus Moody’s adjustments for pension and operating lease plus shareholders’ equity] Source: Moody’s Investors Service

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

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 23 OCTOBER 2014

China Allows Insurers to Invest in Preference Shares, Credit Positive for Banks, but Negative for Insurers Last Friday, the China Insurance Regulatory Commission (CIRC), China’s insurance regulator, announced rules that allow insurance companies to invest in preference shares, in line with separate guidance from the China Securities Regulatory Commission, which includes insurers as qualified investors in preference shares. The new rules are credit positive for Chinese banks because it opens the way for insurance companies, which have significant investment capacity, to absorb banks’ forthcoming issuance of these securities. However, the rules are credit negative for Chinese insurers because their investments in banks’ preference shares will increase their already-substantial exposure to banks.

We expect the CIRC’s action to increase Chinese banks’ incentive to tap preference shares as a source to raise Tier 1 capital. Allowing insurers to purchase preference shares will strengthen the domestic market’s capacity to absorb banks’ issuance and thus improve their pricing to banks’ advantage. As Exhibit 1 shows, six Chinese banks to date have announced plans to sell a total of RMB340 billion in preference shares, with RMB265 billion being onshore issuance.

EXHIBIT 1

Chinese Banks that Have Announced Preference Share Plans

Bank

Amount of Preference Shares,

RMB Billions Market Status

Agricultural Bank of China 80 Onshore Approved by regulators

Bank of China 60 Onshore

- RMB40 billion issued to offshore investors on 15 Oct 2014 - RMB60 billion of onshore issuance approved by regulators 40 Offshore

Industrial & Commercial Bank of China

45 Onshore Awaiting regulatory approval

35 Offshore

Pudong Development Bank 30 Onshore Approved by regulators

Industrial Bank 30 Onshore Approved by CBRC

Ping An Bank 20 Onshore Awaiting regulatory approval

Total 340

Onshore Issuance 265

Offshore Issuance 75

Sources: The companies and Moody’s Investors Service

We expect more banks to issue preference shares because they are a more efficient channel for Chinese banks to add to their Tier 1 capital than ordinary shares. Ordinary shares involve more procedures and issuing costs, and dilute issuers’ return on equity.

Chinese banks stand to benefit from a deeper and broader onshore investor base for preference shares. Some banks’ Tier 1 capital ratios are closer to the regulatory requirement under Basel III (Exhibit 2), so they need preference shares to replenish their Tier 1 capital. Additionally, small and midsize banks’ limited overseas franchises and footprints restrict their issuance to onshore investors, which makes their ability to tap the sizable investment funds that domestic insurers offer more important.

Sean Hung Assistant Vice President - Analyst +852.3758.1503 sean.hung@moodys.com

Sally Yim Vice President - Senior Credit Officer +852.3758.1450 sally.yim@moodys.com

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 23 OCTOBER 2014

EXHIBIT 2

Listed Chinese Banks’ Adequacy Ratios and Regulatory Requirements at the End of June 2014

ICBC = Industrial & Commercial Bank of China; CCB = China Construction Bank; ABC = Agricultural Bank of China; BOC = Bank of China; BoCom = Bank of Communications; CMB = China Merchants Bank; SPDB = Pudong Development Bank; CITICB = China CITIC Bank; Minsheng = China Minsheng Bank; IB = Industrial Bank; CEB = China Everbright Bank; PAB = Ping An Bank; HXB = Huaxia Bank; BOBJ = Bank of Beijing; BONJ = Bank of Nanjing; BONB = Bank of Ningbo; CQRC = Chongqing Rural Commercial Bank. Sources: The banks and Moody’s Investors Service

For insurers, the CIRC’s action will promote their role as major investors in bank preference shares, which we think will negatively affect their credit profiles because such investments increase insurers’ already-substantial exposure (both through fixed income and equity investments) to banks. As of the end of September 2014, insurance companies already held nearly 70% of total outstanding sub-debt issued by banks, according to ChinaBond.com. As Exhibit 3 shows, data from the top life insurers generally suggest substantial holdings in financial bonds issued by banks and other financial institutions, of which more than 90% are issued by banks. Moreover, many Chinese life insurers allocate significant shares of their equity portfolio to Chinese bank shares.

EXHIBIT 3

Top Five Chinese Life Insurers' Investment in Financial Bonds, Ranked by Premium Income as of 31 December 2013

Rank Insurer Debt Securities,

RMB Millions Financial Bond,

RMB Millions Total Assets, RMB Millions

Financial Bond as Percent of Total Debt

Securities Financial Bond as Percent of

Total Assets

1 China Life Insurance Co. Ltd. (financial strength A1 stable)

873,817 Not disclosed 1,972,941 N/A N/A

2 Ping An Life Insurance Co. Ltd. (unrated)

579,312 300,616 1,164,267 51.9% 25.8%

3 New China Life Insurance Co. Ltd. (unrated)

281,157 35,271 565,849 12.5% 6.2%

4 China Pacific Life Insurance Co. Ltd. (unrated)

313,295 118,229 589,865 37.7% 20.0%

5 PICC Life Insurance Co. Ltd. (financial strength A3 stable)

119,549 65,150 366,913 54.5% 17.8%

Sources: The companies and Moody’s Investors Service

7%

8%

9%

10%

11%

12%

13%

14%

Core Tier-1 Ratio Tier-1 Ratio CARRequired Core Tier-1 Ratio Required Tier-1 Ratio Required CAR

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 23 OCTOBER 2014

Although insurers that shift their investments to banks’ new Basel III securities from banks’ legacy subordinated debt could narrow their duration mismatches owing to the perpetual feature of preference shares, any improvement in maturity matching will be more than offset by the additional credit risk inherent in bank preference shares. Compared with old-style subordinated debt, preference shares are riskier because investors are exposed to the risk of not receiving dividends and principal write-downs in a scenario when the issuing bank’s capital position deteriorates.

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 23 OCTOBER 2014

US Public Finance

State University of New York’s Expansion of Online Learning Is Credit Positive Last Thursday, the State University of New York (SUNY, Aa2 stable) announced a major expansion of its online learning platform, Open SUNY+, in an effort to grow total system enrollment by 20% over the next five years. This expansion is credit positive for SUNY because it will create an opportunity to grow market share and revenue at a time when the overall pool of graduating high school students in New York is stagnant. Should SUNY be successful in its ambitious goal of achieving 20,000 new students per year, net tuition revenue would increase by $140 million annually (accounting for 50% growth over current net tuition revenue of $1.4 billion when fully phased in).

Although SUNY was not an early online market leader such as University System of Maryland (Aa1 stable) and Arizona State University (Aa3 stable), it has more than 150 fully online degree programs and some key incumbent strengths that will help it succeed in the competitive online market. SUNY’s favorable pricing and brand recognition materially increase its prospects for volume growth in an increasingly crowded field. With net tuition per student of just $6,991 (cost of two semesters after scholarships), SUNY is priced much lower than many competitors. The median net tuition per student in fiscal 2013 was $8,347 for all Moody’s-rated public universities, and $21,589 for private universities, while the average net tuition per student in fiscal 2012 for four-year private for-profit institutions was $21,734, according to the US Department of Education.

Importantly, SUNY has both geographic and program diversity, and a large base of alumni (approximately 2.4 million living in New York), giving it high name recognition across the state that will also help it attract online students. The SUNY system reaches almost every corner of the state, and includes an array of institutions that vary in size, have unique missions and serve diverse student populations. These include community colleges, four-year university colleges, three academic medical centers, technology colleges and four university centers (Albany, Binghamton, Buffalo and Stony Brook) that specialize in undergraduate education, research and advanced graduate and professional degree offerings. As a result, SUNY is able to offer a broad array of academic and technical programs through its online options.

SUNY’s role as an important driver of economic development within the state and its strategic partnerships with New York government and businesses will help SUNY reach New Yorkers in need of additional education. The 56 new Open SUNY+ programs (bringing the number of programs to 64) are tailored specifically to New York industries in need of workforce development and introduce new certificate programs and expand the options for associate, bachelor and master degrees. The platform allows SUNY to broaden its outreach to a larger market, including non-traditional students and professionals in need of certification. SUNY estimates that there are approximately 6.9 million adults in New York that hold a high school diploma, but no college degree.

Increased flexibility with online delivery, and a dedicated online student services portal will also assist with degree completion and graduation rates for existing students, important measures in current public policy debates about gauging the success of colleges and universities.

SUNY’s growth plan is aggressive, but even achieving a portion of its goal of raising headcount by 100,000 over the next five years would be credit positive and would generate additional tuition revenue and provide an advantage for SUNY over competitors with less robust online offerings. Since SUNY charges the same tuition for online courses, the potential for SUNY to grow online net tuition revenue through Open

Eva Bogaty Vice President - Senior Analyst +1.415.274.1765 eva.bogaty@moodys.com

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 23 OCTOBER 2014

SUNY+ is directly correlated to its ability to attract online students. Student-related charges accounted for approximately 20% of SUNY’s $9.4 billion of operating revenue in the fiscal year ended 30 June 2013. With no projected growth in the number of high school graduates through 2018, and heightened competition for undergraduate students, online enrollment will become an important source of tuition revenue growth.

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

17 MOODY’S CREDIT OUTLOOK 23 OCTOBER 2014

NEWS & ANALYSIS Corporates 2 » Tyco International's Cash Outlays to Resolve Asbestos Liabilities

Are Credit Negative » SGL Carbon's Capital Increase Is Credit Positive » Weir's Acquisition of Trio Is Credit Positive » Tata Steel UK Holdings Will Sell Long-Steel Business and

Refinance Its Debt; Credit Positives

Infrastructure 7 » Gas Natural's Debt-Funded Acquisition of CGE Is

Credit Negative

Banks 9 » US Banks' Earnings Get Help from Very Low Credit Costs » Banks Would Benefit from Higher Minimum Haircuts on

Securities Financing Deals » IOSCO Recovery Mechanisms for Central Counterparty

Clearinghouses Are Credit Positive » Increased Mortgage Lending Will Benefit Korean Banks and

Alleviate Household Debt » Indonesia's Proposed Bank Leverage Requirements Are

Credit Positive

Insurers 19 » Chinese Insurers' Increased Exposure to Trust Products Is

Credit Negative

Sovereigns 21 » Ebola's Economic Legacy Will Linger Long After Current Crisis

Is Contained » Malaysia's Plan to Shrink Budget Deficit Is Credit Positive

Securitization 25 » US Private Student Loan Dischargeability Would Be Credit

Negative for ABS

RATINGS & RESEARCH Rating Changes 27

Last week, we downgraded Darden Restaurants, Walgreen, CEMIG Distribuicao, CB Renaissance Credit, Russia and Baja California, and upgraded Essar Steel Algoma, Sociedad Concesionaria Autopista Vespucio Sur, Arrow Global Finance, Daiwa Securities Group, Invesco, four tranches of SDART 2013-5 subprime auto loan ABS and three classes of J.P. Morgan Chase Commercial Mortgage Securities 2005-LDP3, among other rating actions.

Research Highlights 36

Last week, we published on Asian refining & marketing, Singapore REITs, North American bond covenant quality, crossover credits, US cable, Canadian broadband, UK grocery retailers, YieldCos, Peterborough plc, UK water, US P&C insurers, Chinese ETFs, Brazil, Indonesia, European sovereigns, Africa, Venezuela, Southeast Asian sovereigns and banks, Chinese regional governments, Toronto, US regional public universities, European SME ABS, global CLOs and European RMBS and ABS, among other reports.

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