MOODYS.COM

19 OCTOBER 2015

NEWS & ANALYSIS Corporates 2 » Xerox Exits Healthcare Contracts, a Credit Negative » AMD’s Planned Joint Venture Is Credit Positive as Liquidity Gets

a Boost » Seagate’s Hard Drive Results Are Credit Negative » Carrizo Oil & Gas’ Equity Offering Is Credit Positive » Sino-Ocean Land’s Planned Investment in Huarong

Delays Deleveraging » China’s Proposed Online Car Service Regulation Would Be

Credit Positive for CAR

Infrastructure 8 » Entergy’s Decision to Close Pilgrim Generation Station in 2019

Is Credit Positive » Audit Shows German Nuclear Power Companies Will Not Face

Shortfalls from Reactor Dismantling

Banks 11 » Wells Fargo Buys More GE Capital Assets, a Credit Positive » GE Capital’s $32 Billion Portfolio Sale to Wells Fargo Is Credit

Positive » Bank of Nova Scotia’s Purchase of JPMorgan’s Credit Card

Operations Is Credit Negative » Cyprus’ Forced Currency Conversion Proposal Creates Moral

Hazard, a Credit Negative for Banks » Citadele Banka’s Initial Public Offering Will Strengthen Its

Capital Base, a Credit Positive » Kenyan Regulators’ Seizure of Imperial Bank Suggests Other

Small Banks Are Unlikely to Get Bailouts

Insurers 18 » Lower ACA Enrollment Projection Is Credit Negative for US

Health Insurers

Sovereigns 19 » Ireland’s 2016 Budget Targets Lower Deficit » Peaceful Elections in Belarus Will Likely Lead to Improved

Relations with EU

US Public Finance 23 » Illinois Budget Impasse Derails November Pension Payment, a

Credit Negative » Extending Federal Financial Aid for Alternative Credentials Is

Credit Positive for Higher Education

Securitization 26 » Final Countdown to $8.5 Billion in Countrywide RMBS

Bondholder Payments Begins » Brazilian Guidance on FIDC Loan Provisioning Is Credit Positive

for Securitizations

RATINGS & RESEARCH Rating Changes 28

Last week we downgraded Infinis Energy and Nota Bank, and upgraded Atlantic Power, among other rating actions.

Research Highlights 33

Last week we published on North American auto parts suppliers, EMEA speculative grade liquidity, European building materials, North American covenant quality, European telecom service providers, US regulated and public power utilities, Entergy, the Brazilian electricity sector, German nuclear power generators, Russian banks, Portuguese banks, Japanese banks, US regional banks concentrated in oil and gas, banks' baseline credit assessments, Asia-Pacific sovereigns, Venezuela, Alberta Canada, Brazilian regional and local governments, French regional and local governments, Western Australia, Illinois not-for-profit hospitals, US public higher education, New York State, Chinese auto ABS, US consumer ABS, Japanese credit card ABS, Russian securitizations and US re-performing RMBS, among other reports.

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Thursday’s Credit Outlook 39 » Go to Last Thursday’s Credit Outlook

NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Corporates

Xerox Exits Healthcare Contracts, a Credit Negative Last Wednesday, Xerox Corporation (Baa2 stable) announced that it would take a $385 million pre-tax charge related to its decision to halt the implementation of its Healthcare Enterprise (HE) Medicaid platform in California and Montana before its full completion. Xerox announced a similar exit from Nevada’s healthcare platform earlier this year.

The curtailed implementations are credit negative for Xerox, despite the likely boost its operating margins will have once Xerox digests the charge from the curtailed California and Montana HE implementations, which were very likely operating at a loss. The company’s involvement in implementing IT systems and processes to help the states run their public health networks is critical to Xerox’s services strategy, which is vital to Xerox given the secular decline of its legacy technology (print and supplies) business. The curtailed implementations will put more pressure on the company to generate incremental revenues and cash flows from its services units.

Xerox is publicly committed to the three remaining states where HE is deployed, plus the significant ongoing implementation of the system in New York State. In total, Xerox provides some type of business process outsourcing services to 35 state governments and continues to provide legacy IT platforms in California and Montana, despite the pending exit of HE implementation in these states.

Earlier this year, Xerox sold its IT outsourcing unit in the latest step to align its services business with the company’s strategic strengths in business process outsourcing. But if Xerox continues to struggle to identify opportunities to grow operating margins and generate a higher return on its investments, its financial metrics will need to be more conservative in order to maintain its current rating and outlook. Over the past year, the company’s adjusted debt/EBITDA leverage has ticked up to more than 2.5x, while operating margins have fallen below 8% for the first time in five years owing to the long-term reorganization of the services businesses.

Signs of stabilization in the services unit would include revenue and margin improvement, along with positive news regarding the HE implementation in New York State. A successful HE deployment in a large state would validate the program’s viability and serve as a springboard to roll out the service in other states. But if Xerox continues to suffer from implementation issues, it may need to pivot from its government healthcare strategy, which is designed to grow revenues by assisting federal and states governments meet their evolving needs. The inability to perform successfully in this arena will likely result in revenue and cash flow losses, or lead the company to take on greater financial and operational risk by acquiring the capabilities that it does not already have.

Gerald Granovsky Senior Vice President +1.212.553.4198 gerald.granovsky@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 19 OCTOBER 2015

AMD’s Planned Joint Venture Is Credit Positive as Liquidity Gets a Boost Last Thursday, Advanced Micro Devices Inc. (AMD, Caa1 negative) said that it had reached a definitive agreement with Nantong Fujitsu Microelectronics Co. Ltd. (unrated) to form a joint venture to conduct assembly, test and packaging services. The agreement is credit positive for AMD because the receipt of around $320 million of after-tax cash proceeds from concluding the transaction will boost much-needed liquidity in 2016, while the company’s operations continue to burn cash.

Subject to regulatory approvals, the company expects to close the transaction in the first half of 2016. Under the terms of the agreement, AMD would own 15% of the joint venture, with Nantong owning the remaining 85%. Natong, a leading China-based outsourced assembly and test service (OSAT) provider, will provide back-end services to AMD for existing and new products, although AMD will also be able to use other OSAT providers for new products. In addition to the pending receipt of $320 million in after-tax proceeds, the transaction will reduce AMD’s annual capital expenditure needs by approximately $40 million. However, the company’s Caa1 corporate family rating and negative rating outlook will be unaffected.

Through the nine months that ended 30 September 2015, AMD’s cash flow less capital expenditures was negative $354 million, resulting in cash balances of $755 million, down from $1.04 billion at the beginning of the year. Based on guidance for the coming fourth quarter, and given that AMD made approximately $70 million of interest payments in its first and third quarters, we expect AMD’s year-end 2015 cash balances to be approximately $750 million.

Considering the slower seasonality of the first quarter, in addition to approximately $70 million of cash interest payments, cash balances in the early part of 2016 will likely fall below $700 million. The cash infusion from the joint venture will be critical to supporting AMD’s liquidity throughout 2016, when we project that the company will continue to burn approximately $200 million of cash. AMD has no debt maturities until 2019, when a $600 million note matures.

Richard J. Lane Senior Vice President +1.212.553.7863 richard.lane@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Seagate’s Hard Drive Results Are Credit Negative Last Thursday, Seagate Technology plc, parent of Seagate HDD Cayman (Baa3 stable), announced that results from its hard disk drive (HDD) segment for the fiscal 2016 first quarter, which ended 2 October 2015, would be below the company’s earlier expectations owing to missed deliveries of its high-capacity HDDs at the upper end of the storage market, a credit negative.

Seagate’s sales miss and lower margin expectations for the fiscal first quarter will likely increase the company’s financial leverage temporarily to more than 2.0x Moody’s-adjusted debt/EBITDA, about one half turn above the company’s reported leverage. We believe that Seagate’s free cash flow generation remained strong in the fiscal first quarter, and management remains committed to a very conservative financial profile.

The late introduction of Seagate’s high-capacity eight-terabyte drive allowed its primary competitor, Western Digital Corp. (unrated), to capture a greater share of the high-end drive market. We believe that Seagate’s HDD results were fully influenced by the missed deliveries of high-capacity HDDs rather than the beginning of a wholesale shift in hyperscale data centers toward faster solid-state drives and away from HDDs. With the launch of new high capacity HDDs in Seagate’s fiscal 2016 second quarter, we expect the company to regain some of its lost market share.

Seagate’s products endure volatile sales cycles affected by various factors that range from macroeconomic forces to periodic product refreshes. At times, these factors allow a company’s new product line to temporarily eclipse its competitors’ offerings.

In Seagate’s fiscal 2016 second quarter, we will look for indications of improved competitiveness in the HDD unit, along with greater revenue and profit contributions from the company’s recent acquisitions. We also expect Seagate to stay well within its announced leverage target of 1.5x over the next 12 months, following the uptick in the fiscal 2016 first quarter.

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

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Carrizo Oil & Gas’ Equity Offering Is Credit Positive Last Thursday, Carrizo Oil & Gas, Inc. (B1 stable) announced a public offering of 5.5 million shares of its common stock. The equity offering is credit positive because we expect Carrizo to use the estimated $212 million in gross proceeds ($244 million including the underwriters’ option to purchase up to 825,000 additional shares) to reduce its debt balances at a low point in the oil and gas commodity price cycle. The offering also illustrates management’s continued commitment to using equity to fund growth.

Carrizo’s management has a good track record of using equity financing, asset sales, joint venture formations and debt to finance growth, while also controlling the company’s financial leverage. The latest equity offering further demonstrates management’s continued focus on managing its leverage profile through the commodity price downturn.

Carrizo will initially use all proceeds to repay revolver drawings, which totaled $181 million as of 14 October. This would reduce Carrizo’s balance sheet debt by 13%. The equity issuance will help support Carrizo’s financial leverage during a period of weak oil and natural gas prices, which we believe will remain in a cyclical low through 2016. As a result of these low prices, as well as the reduced benefit of favorable commodity price hedges, we expect Carrizo’s leverage metrics to weaken in 2015 and 2016. However, based on estimated gross proceeds of $212 million from the equity issuance and the assumption that the company uses all the proceeds for debt reduction, Carrizo’s retained cash flow to debt for 2015 would improve to 31% from 26% in 2015, and to 23% from 20% in 2016.

We expect Carrizo to use a portion of the equity proceeds to pursue small, bolt-on acquisitions. The Permian Basin is a primary focus area for Carrizo for potential acquisitions. The company already has a small footprint in the Permian, with 26,000 net acres there. Further growth in the Permian would help to give Carrizo greater basin intensity in the Permian, increased overall scale and greater geographic diversity. Overall, Carrizo remains fairly small in terms of production and its production profile is concentrated in the Eagle Ford Shale. In the second quarter of 2015, the company’s total production was about 36,000 barrels of oil equivalent per day, 69% of which was from the Eagle Ford Shale.

Financing acquisitions with equity is positive because it helps to offset some of the risks inherent to acquisitions, including valuation, integration and performance risk. Moreover, if the company is successful in purchasing already-producing assets, it would further improve Carrizo’s leverage because cash flows would increase without necessarily a corresponding increase in debt.

Gretchen French Vice President - Senior Credit Officer +1.212.553.3798 gretchen.french@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Sino-Ocean Land’s Planned Investment in Huarong Delays Deleveraging Last Wednesday, Sino-Ocean Land Holdings Limited (Baa3 stable) announced that it will subscribe to China Huarong Asset Management Co., Ltd.’s (Huarong, A3 stable) shares for a total consideration of HKD5.3 billion. The proposed subscription is credit negative for Sino-Ocean Land because it will delay its deleveraging efforts and raise its financial risks.

Sino-Ocean Land will invest in Huarong’s shares through a wholly owned subsidiary, SOL Investment Fund LP (unrated). We estimate that Sino-Ocean Land’s cash/short-term debt ratio will decline by about 20 percentage points on a pro forma basis to a still-strong 287% from 307% as of the end of June 2015. We expect its debt leverage, as measured by revenue/adjusted debt, to fall to below 70% over the next 12-18 months from 72.4% at the end of June 2015 and 78.6% at the end of 2014, as it uses its cash to fund the transaction rather than to reduce debt. Slower progress in reducing debt would weaken the company’s credit quality.

Sino-Ocean Land’s financial risks will also increase because, although it is Huarong’s cornerstone investor, it will have no management control over Huarong, which is principally engaged in distressed assets management and financial services. Additionally, the investment will be subject to a six-month lockup period after the date on which Huarong’s H-shares first list on the Hong Kong Stock Exchange.

The investment comes as Sino-Ocean Land’s sales growth is slowing following the company’s disposal of some projects in 2014 as part of a strategic plan to exit third- and fourth-tier cities in China. The company’s contracted sales for January-September 2015 declined to RMB22.1 billion, a 5.7% drop from a year earlier.

Although the investment delays Sino-Ocean Land’s debt-reduction efforts, we do not expect the transaction to have a material effect on its liquidity because we expect that its investment arm will raise funds to finance part of the transaction such that Sino-Ocean will not need to pay the entire HKD5.3 billion. Also mitigating the effect of the transaction is that Sino-Ocean Land has slowed its purchase of land for its land bank amid higher land prices in the markets where it operates. According to the company, its purchases of land in the first half of 2015 declined by about 33.8% from a year earlier, as measured by gross floor area.

Sino-Ocean Land says that it intends to cooperate with Huarong on the acquisition and disposal of real estate assets, and to work with Huarong’s property units on development projects. However, we expect that it will take time for the two companies to identify projects for cooperation and to align their business interests.

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

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

China’s Proposed Online Car Service Regulation Would Be Credit Positive for CAR On 10 October, China’s Ministry of Transport released a draft of its proposed Online Chauffeured Car Services Regulation. The proposed regulation, if implemented, would be credit positive for Chinese car rental company CAR Inc. (Ba1 stable) because it would improve the quality of the revenues it receives from its chauffeured car service partner UCAR Technology Inc. (unrated).

The proposed regulation, which will be open to consultation for one month, lays down guidelines and a regulatory framework for service providers, vehicles and drivers operating in the online chauffeured car services industry. Local governments will be responsible for fine-tuning and implementing the regulation. UCAR has an operational model that substantially complies with the proposed regulations, and UCAR will thus be among the first companies to operate online chauffeured car services under the proposed regime. CAR leases vehicles to 9.85%-owned UCAR on both a long-term and short-term basis at market prices. UCAR operates leased vehicles and employs professional drivers, an operational model that is in line with the proposed regulations.

UCAR’s competitors, however, will need to adjust their business models in terms of vehicles and drivers to comply with the proposed regulations, given that their services are mostly provided by individuals operating private vehicles. Such adjustments will likely increase their cost structures, and lead to price increases both for UCAR’s competitors and the overall online chauffeured car services industry. A higher price environment would improve UCAR’s profitability.

If UCAR is successful, CAR will benefit by receiving a good stream of leasing revenue from UCAR. CAR has grown both its revenue and profits at a fast pace since it began its collaboration with UCAR in January 2015. As of the end of June 2015, UCAR rented 16,136 vehicles from CAR under long-term contracts, constituting 19% of CAR’s total fleet.

Although CAR will need to purchase more vehicles to lease to UCAR, we expect that CAR will exercise prudence in managing its debt leverage and priority debt. As such, we expect the company’s leverage, as measured by debt/EBITDA, to remain at 3.0x-3.5x over the next 12 months, which is below the rating downgrade trigger of 3.5x.

Gerwin Ho Vice President - Senior Analyst +852.3758.1566 gerwin.ho@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Infrastructure

Entergy’s Decision to Close Pilgrim Generation Station in 2019 Is Credit Positive Last Tuesday, Entergy Corporation (Baa3 positive) announced that it will close its 680-megawatt Pilgrim Nuclear Generating Station in Plymouth, Massachusetts, no later than June 2019. The decision was driven by low energy prices, increased operational costs and murky prospects of market structure improvement. The announcement is credit positive for Entergy because Pilgrim’s increasing cost structure and low power prices would otherwise erode profitability, and the closure will reduce Entergy’s merchant generation exposure and improve the company’s business risk profile. Entergy will decide the exact timing of the Pilgrim shutdown in the first half of 2016, after ongoing discussions with the independent system operator for New England, ISO-NE.

Several factors were behind Entergy’s decision to close Pilgrim. In September 2015, the US Nuclear Regulatory Commission (NRC) downgraded Pilgrim to a Column 4 in its Action Matrix, the lowest designation allowed for plants still in operation. A preliminary estimate of pre-tax operating and maintenance expense (O&M) necessary to respond to enhanced NRC inspections, if Entergy had chosen to continue operations instead of shutting down Pilgrim, is $45-$60 million. This estimate does not include additional capital investments or other costs that could have emerged from keeping the plant running. Entergy expected the increased O&M, coupled with significant capital investments to improve reliability, security and safety, to result in annual after-tax net losses of up to $30 million annually through 2017.

The announcement of Pilgrim’s target closure follows Entergy’s sale of its 583-megawatt natural gas-fired combined cycle gas plant, The Rhode Island State Energy Center (RISEC), to Carlyle Power Partners (unrated) for approximately $490 million. Entergy also shut down the 605-megawatt Vermont Yankee nuclear power plant at the end of 2014, which also operated in ISO-NE.

These decisions, along with the planned shutdown of Pilgrim, allow Entergy to avoid potential incremental operating costs, reduce its exposure to merchant generation uncertainties and improve its business risk profile. Entergy’s unregulated generation exposure consists of approximately 5.5 gigawatts of generation capacity, through its subsidiary Entergy Wholesale Commodities (unrated), the bulk of which is comprised of 4.4 gigawatts of nuclear plants geographically concentrated in the Northeastern US. These plants, which were once profitable, are threatened by low current and forecast energy prices, driven in part by shale gas production.

Although Entergy could benefit from some form of political intervention aimed at maintaining jobs and the tax base associated with the plant, we view Pilgrim as less critical to the employment and tax base of the City of Plymouth than some other challenged generation plants that we have analyzed. For example, Pilgrim’s 600 employees only compose around 1% of the city’s population and tax payments are just over 5% of the city’s operating revenue. By way of comparison, Entergy’s James Fitzpatrick Nuclear Plant, a similarly challenged 850-megawatt plant in Oswego, New York, contributes around 27% of local tax revenues.

Sid Menon Associate Analyst +1.212.553.0165 sid.menon@moodys.com

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Audit Shows German Nuclear Power Companies Will Not Face Shortfalls from Reactor Dismantling On 10 October, the German government said that an external audit had concluded that the country’s biggest nuclear power producers were adequately provisioned against the cost of dismantling their reactors and managing their nuclear waste following a 2022 closure deadline. The finding is credit positive for the nuclear power companies because it dispels industry worries of a substantial provisioning shortfall. The companies affected are EnBW Energie Baden-Wuerttemburg AG (A3 negative), E.ON SE ((P)Baa1 negative), RWE AG (Baa1 negative), Stadtwerke München (unrated) and Sweden’s Vattenfall AB (A3 negative).

The government’s audit, which was conducted by government-appointed auditors Warth & Klein Grant Thornton AG, concluded that the companies’ combined provisions totaled €38.29 billion based on an estimated cost in 2014 prices of about €47.5 billion to dismantle their reactors and safely store their waste (see Exhibits 1 and 2). The auditors found that this combined current money cost estimate, equal to €857 million per reactor, was comprehensive and above international averages, which range from €205 million to €542 million in other countries.

EXHIBIT 1

German Nuclear Power Producers’ Provisions for Dismantling Reactors Company € Millions

E.ON1 €16,567

RWE1 10,367

EnBW1 8,071

Vattenfall2 3,014

Stadtwerke Munchen3 564

Stadtwerke Munchen Outside Germany (295)

Total €38,288

Notes:

1 IFRS. 2 IFRS, €1 = SEK9.3930. 3 German GAAP. Source: Warth & Klein Grant Thornton AG

EXHIBIT 2

Comparison of the Auditor’s and the Nuclear Power Companies’ Current Money Disposal Costs

Companies’ View

€ Millions Auditor’s View

€ Millions

Decommissioning and Dismantling €19,614 €19,719

Container, Transport and Operational Waste 10,252 9,915

Interim Storage 5,653 5,823

Final Repository at Schacht Konrad for Medium- and Low-Level Waste 3,824 3,750

Final Repository for High-Level Waste 8,109 8,321

Total €47,451 €47,527

Source: Warth & Klein Grant Thornton AG

Helen Francis Vice President - Senior Credit Officer +44.20.7772.5422 helen.francis@moodys.com

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

According to the auditors, the companies’ nuclear provisions were calculated by applying an average annual cost increase of 3.57% (inflation of 1.60% plus a nuclear cost escalation rate of 1.97%) to the current money cost estimate of €47.5 billion. This yields a future money cost of €169 billion, which, when discounted at the companies’ average rate of 4.58%, gives the combined balance sheet provision of slightly more than €38 billion.

This current money cost estimate, and the real average discount rate of around 1%, are in line with the estimates we published in September1 for EnBW, E.ON and RWE (neither Vattenfall, which has €3 billion of provisions, nor Stadtwerke München were part of our report). The audit found that the provisions needed range between €29 billion and €77 billion under scenarios using different interest and cost-growth assumptions. The €38 billion is based on reasonable assumptions.

Although the audit dispels concerns triggered last month by press reports that the auditors might uncover a significant shortfall in provisions, other potentially credit-negative uncertainties remain. The German government on 14 October established a commission to review the financing of the nuclear phase-out, and is preparing legislation to ensure that long-term nuclear liabilities remain with the parent companies of the nuclear plant operators. Rapid prefunding, or exposure to unquantifiable long-term risks, such as those related to the costs of final storage, would be negative for the utilities. We expect that the companies will seek a cap on these liabilities.

The commission also is likely to consider whether an external fund should be created to finance the dismantling of nuclear plants and nuclear waste management, backed by contributions from the companies. If the government adopted this approach, the industry’s contributions risk adding financial pressure on the companies at a time when they are already suffering from weak power prices. Our outlooks on all four companies’ ratings are negative, partly reflecting uncertainty about their nuclear waste management obligations.

We expect that negotiations between the industry and the government will likely take into account the companies’ multi-billion euro compensation claims against the government for shutting their nuclear plants early, and for nuclear taxes.

1 See Nuclear Shutdown Costs Stress German Power Generators, 24 September 2015.

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Banks

Wells Fargo Buys More GE Capital Assets, a Credit Positive Last Tuesday, Wells Fargo & Company (A2 stable) announced that it will acquire another $32 billion in assets from General Electric Capital Corporation (GE Capital, A1 stable), including two businesses, Commercial Distribution Finance and Vendor Finance, and a book of middle-market corporate loans and leases. Although few terms were disclosed, the transaction is credit positive because Wells Fargo is buying well-run, market-leading franchises that will support its earnings growth during a challenging revenue environment.

Commercial Distribution Finance provides inventory financing to 40,000 dealers for a wide range of durable goods ultimately sold to consumers, including RVs, electronics, motorsports and other products, and had about $13 billion of assets at 30 June. Vendor Finance provides financing for manufacturers, dealers and end-users in specific industries and products, including office imaging, construction and other equipment. That business had assets of roughly $9 billion at 30 June. In both cases, the businesses will be added to Wells Fargo’s wholesale banking segment, with Wells Fargo expecting to retain GE Capital’s experienced management teams and systems.

We suspect that Wells Fargo is paying an attractive price for the acquired businesses and assets because GE Capital is a motivated seller and there are a limited pool of buyers for such large loan and lease portfolios. GE Capital is driven to shed businesses so it can persuade US regulators to drop their designation of GE Capital as a systemically important financial institution. Nonetheless, it seems to us that GE Capital retained some bargaining power because the acquisition’s third component, approximately $10 billion of middle-market loans, adds little value to Wells Fargo, which on its own has proven to be a good generator of quality commercial loans.

On a pro forma basis, the acquisition will increase Wells Fargo’s loan and lease portfolio by only 3%. That limits the risk of any missteps in the due-diligence or integration process. We do not expect any such missteps since we consider Wells Fargo to be a prudent acquirer. Furthermore, we note that Wells Fargo will take a lifetime credit mark – a discount to the unpaid principal balance of the acquired loans and leases – when the transaction closes in the first quarter of 2016. With respect to funding, although Wells Fargo has a large pool of available liquidity, its management team indicated that it will add some term funding in order to maintain its liquidity buffers.

Wells Fargo has been a big beneficiary of GE Capital’s contraction. These acquisitions were Wells Fargo’s third purchase of GE Capital assets in 2015. In April, it disclosed the purchase of GE Capital commercial real estate mortgages, a transaction that has already closed, and in September, it agreed to acquire GE Railcar Services, which will make Wells Fargo the second-largest railcar and locomotive leasing company in North America when that deal closes in the first quarter of 2016. Although GE Capital has remaining foreign assets for sale, Wells Fargo’s management indicated that it is unlikely to be a buyer.

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

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

GE Capital’s $32 Billion Portfolio Sale to Wells Fargo Is Credit Positive Last Tuesday, General Electric Capital Corp. (GE Capital, A1 stable) reached an agreement to sell a $32 billion portfolio of loans and leases and associated business platforms in GE Capital’s Commercial Distribution Finance, Vendor Finance and Corporate Finance operations to Wells Fargo & Company (A2 stable). The sale is credit positive for GE Capital because it advances the firm’s credit-positive downsizing strategy past the halfway point and provides a return of capital that GE Capital will use to repay debt and bolster liquidity.

General Electric Company (A1 stable) is selling most of GE Capital’s businesses to make capital available for investment opportunities in GE’s industrial divisions and to provide a return of capital to GE shareholders. Since announcing its revised strategy earlier this year, GE Capital has reached sale agreements totaling $126 billion of ending net investment (ENI), with sale closings occurring through the first quarter of 2016. The transaction with Wells Fargo moves the company past the halfway mark toward its $200 billion downsizing objective. GE Capital’s ENI (net of liquidity) declined to $271 billion at the end of the third quarter from $363 billion at the end of 2014.

GE Capital on 14 October received regulatory approval to proceed with the split-off of private-label credit card lender Synchrony Financial and will likely do so as early the week of 19 October. GE Capital’s $5.5 billion franchise finance business is all that remains of US assets slated for sale. The company will rely on planned divestitures in non-US markets to complete the downsizing by the end of 2016.

The sale strengthens GE Capital’s capital and liquidity. The company’s capital position weakened after recording $16 billion of after-tax charges to reclassify non-core businesses as held for sale in the first quarter of this year; additional discontinued operations charges since then contributed to a total net loss of $17.9 billion through the third quarter. GE Capital will pay no dividends to GE until it builds Tier 1 common capital to 14%. We expect that the company will reach this level during the fourth quarter, after having reached 13.7% at the end of the third quarter, a 230-basis-point increase from the second quarter. Net proceeds from the pending sale, although not disclosed, together with existing cash balances and future asset sale proceeds will allow the company to maintain its target 24-month liquidity ratio of 100% while also recommencing payouts to GE. Management expects to return $3 billion of capital to GE by the end of 2015 and a total of $35 billion by the conclusion of the downsizing plan.

As a result of the downsizing, GE will seek a reversal of GE Capital’s designation as a systemically important financial institution from the US Treasury Department’s Financial Stability Oversight Council by early 2016. GE Capital’s retained businesses, including its aircraft leasing, energy finance and healthcare equipment finance businesses are more closely aligned with GE’s industrial businesses and therefore continue to have strategic importance. An upcoming corporate reorganization will move certain of the retained businesses into a new international unit that will be regulated by the UK Prudential Regulation Authority.

Mark Wasden Vice President - Senior Credit Officer +1.212.553.4866 mark.wasden@moodys.com

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Bank of Nova Scotia’s Purchase of JPMorgan’s Credit Card Operations Is Credit Negative On Thursday, Bank of Nova Scotia (BNS, Aa2/Aa2 negative, a12) and JPMorgan Chase Bank, N.A. (JPM, Aa2/Aa3 stable, a3) announced that BNS will acquire a MasterCard and private-label credit card portfolio and the related credit card operations from JPM. Although not financially material, this transaction is credit negative because it is part of a series of growth initiatives focused on increasing the bank’s exposure to non-mortgage consumer loans, which are particularly prone to rapid deterioration during an economic shock and exhibit higher defaults and loss severities than mortgage portfolios. It is also indicative, in our view, of BNS’ increased risk tolerance and strategic imperative to increase net interest margins by shifting the asset mix toward higher yielding, unsecured categories of consumer credit at a time of record Canadian consumer leverage.

BNS’ common equity Tier 1 ratio (CET1) will fall by less than 10 basis points, primarily from the CAD1.7 billion in acquired assets. The acquisition will be accretive to BNS’ earnings in year one. The banks did not disclose any further financial details.

The credit card portfolio that BNS is acquiring is associated with Sears Canada Inc. (unrated). The private-label agreement with Sears Canada ends on 15 November 2015, and therefore the portfolio is in run-off. Sears Canada sold its credit card division in 2005 to JPM for CAD2.2 billion. Sears Canada’s department store business has experienced sales declines for the past 10 years under hedge fund ownership. In our view, without the linkage to a retailer, those balances associated with the Sears private-label program are exposed to higher-than-normal credit losses. The business has about 2 million customers.

We expect that BNS will offer new MasterCard and other products to the most creditworthy of those clients currently dealing with JPM, while managing down the business. BNS currently offers Visa and American Express cards in Canada, although BNS is a MasterCard issuer outside of Canada. JPM’s credit card operations in Canada include a bilingual call center in Ottawa, Ontario, with fraud, collections, recovery and customer service expertise.

2 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating and baseline credit assessment.

David Beattie Senior Vice President +1.416.214.3867 david.beattie@moodys.com

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Cyprus’ Forced Currency Conversion Proposal Creates Moral Hazard, a Credit Negative for Banks Last Monday, the Cypriot Parliament’s Financial and Budgetary Affairs Committee gave the Central Bank of Cyprus (CBC) a two-week deadline to formulate options that will reduce the debt burden of borrowers who received mortgages in Swiss francs. Specifically, the committee proposed to retroactively fix the exchange rate to the prevailing rate when the loans were granted, mainly between 2008-10. Forced conversion would cost Cypriot banks €250 million, according to the local newspaper Financial Mirror. But the bigger credit negative is the moral hazard that the proposal creates among borrowers of the much larger amount outstanding of euro-denominated mortgages. The proposal makes the banks’ restructuring of their high stock of nonperforming loans (NPLs) more challenging. It would also delay the recovery of Cypriot banks’ profitability since they would likely continue to be loss-making for a fifth consecutive year.

The plan encourages all mortgage borrowers to delay loan restructuring in hope of more debt relief. Cypriot banks face a large stock of problem loans, with the ratio of NPLs to gross loans as of June 2015 at 52.7% for Bank of Cyprus Public Company Limited (Caa3 stable, caa33) and 54.9% for Hellenic Bank Public Company Ltd. (Caa2 stable, caa3). Given the relatively high median net wealth of individuals, which was €266,900 in 2010 (the latest data available), according to the European Central Bank, and the high savings rate in the country averaging 19.7% before the financial crisis, we believe 10%-20% of delinquent small and midsize enterprise and retail borrowers are strategic defaulters that have the capacity to repay but opt not to do so.

The CBC opposes the parliament’s intentions, and, according to the Financial Mirror, a CBC official told members of parliament that the central bank “believes that any government-imposed remedy would yield significant losses to the banking institutions…entailing a significant legal and moral hazard.” The banks’ progress in restructuring NPLs has been slow, and although we expect that the recently amended legal framework expediting auctions of foreclosed assets will support banks’ restructuring efforts,4 the framework has not been tested yet.

The Bank of Cyprus, with a €1 billion portfolio of Swiss franc loans, has the highest exposure among banks operating in the country (see exhibit). According to the Financial Mirror, a report the central bank presented to the parliament states that following the conversion of these mortgage loans to euros at the propose rates, Cypriot banks would face losses of €250 million. Of these, Bank of Cyprus would face losses of around €147 million and Hellenic Bank around €11 million.

3 The bank ratings shown in this report are the banks’ deposit rating and baseline credit assessment. 4 See Cypriot Banks Will Benefit from Foreclosure Law, April 2015.

Melina Skouridou, CFA Analyst +357.2569.3021 melina.skouridou@moodys.com

Antypas Asfour, CFA, PRM Associate Analyst +357.2569.3033 antypas.asfour@moodys.com

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Cypriot Banks’ Market Share of Swiss Franc Mortgage and Other Loans as of December 2014

Sources: Banks’ financial statements and the Central Bank of Cyprus

The loss is significant against the banks’ profitability: Bank of Cyprus reported a modest after-tax profit of €60 million for the six months that ended in June 2015, while Hellenic Bank reported a €500,000 profit. Consequently we estimate that Bank of Cyprus’ pro forma Tier 1 capital ratio would decline to 14.6% from 15.2%5 as of June 2015, while the effect on Hellenic Bank would be negligible.

5 Bank of Cyprus’ Tier 1 ratio includes the effect of the sale of its Russian subsidiary, which it completed in September.

Hellenic Bank5%

Bank of Cyprus34%

Alpha Bank (Cyprus)28%

Piraeus Bank (Cyprus)1%

Other32%

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Citadele Banka’s Initial Public Offering Will Strengthen Its Capital Base, a Credit Positive On Thursday, Latvia’s SC Citadele Banka (B1 positive, b36) announced that it planned to raise capital via an initial public offering (IPO) of ordinary B shares on Nasdaq OMX Riga and global depository receipts on the London Stock Exchange. The capital raise, which the bank expects will raise €115 million, is credit positive because it will strengthen the bank’s tangible common equity ratio to almost 17% from 12% as of the end of June 2015, facilitating credit growth and enhancing the bank’s ability to absorb credit losses.

Citadele Banka plans to use a majority of the proceeds to increase its presence in the Baltics and strengthen its franchise in Latvia, where it currently has a 7% market share, according to the Association of Latvian Commercial Banks. The bank plans to expand its core business of focusing mainly on small and midsize businesses and households, which management believes are currently underserved. Citadele Banka is also planning to repay €34.7 million of subordinated debt (equivalent to 64% of the bank’s subordinated debt) currently held by the Latvian Privatisation Agency. Doing so would reduce the bank’s reliance on subordinate funding to 1% of total liabilities.

The planned capital increase would significantly boost Citadele Banka’s tangible common equity (see exhibit), bringing the bank’s capital adequacy in line with its Latvian peers. The IPO follows the bank’s privatisation in April, when a consortium led by US private-equity firm Ripplewood Advisors LLC acquired the bank, allowing the bank to strengthen its capital buffers. Before the privatisation, Citadele Banka was subject to maximum capital restrictions by its government owners (50 basis points above the regulatory minimum), resulting in a maximum capital ratio of 10.9%. Since the privatisation, the bank has improved its capital base mainly through an optimisation of its risk-weighted assets.

SC Citadele Banka’s Ratio of Tangible Common Equity to Risk-Weighted Assets

Source: Company reports and analysts’ estimates

The shares will be offered to investors in and outside of Latvia, Lithuania and Estonia, and existing shareholders will maintain their control given that we expect that the new shares will have limited voting rights. The transaction awaits final regulatory approval from the Latvian financial services authority, which we expect will come the week of 19 October, and we expect to see further details regarding pricing in the coming weeks.

6 The ratings shown are SC Citadele Banka’s deposit rating and baseline credit assessment.

4.8%5.3%

6.5%

10.4%

8.7%

11.9%

16.7%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2010 2011 2012 2013 2014 Q2 2015 Post IPO Estimate

Effie Tsotsani Analyst +44.20.7772.1712 effie.tsotsani@moodys.com

Aleksander Henskjold Associate Analyst +44.20.7772.1954 aleksander.henskjold@moodys.com

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Kenyan Regulators’ Seizure of Imperial Bank Suggests Other Small Banks Are Unlikely to Get Bailouts Last Tuesday, the Central Bank of Kenya (CBK) placed Imperial Bank Ltd. (unrated) under statutory management for one year, the second bank to be placed under Kenya’s version of receivership in two months following the seizure of Dubai Bank Ltd. (unrated) on 14 August. The CBK’s treatment of Imperial Bank is credit negative because it will likely lead to tougher funding conditions for Kenya’s smaller banks. The action also informs our view that Kenyan authorities are unwilling to support troubled small and midsize banks.

The CBK’s action followed the regulator receiving information from the bank’s board of directors about inappropriate banking practices, such as lending malpractice. The CBK appointed Kenya Deposit Insurance Corporation as receiver for Imperial Bank for 12 months. Payments to the bank’s creditors have been suspended and any subsequent payments will depend on recoveries from the proposed resolution plan and the creditor hierarchy. Depositors are guaranteed maximum payments of KES100,000 ($953) in event of a bank failure, an amount that covers more than 90% of the total number of depositor accounts in Kenya.

Imperial Bank is a midsize bank with operations in both Kenya and Uganda. The bank was Kenya’s 17th-largest bank by assets, with total assets of KES56.6 billion ($613.3 million) as of the end of 2014. That amount constituted 1.8% of total industry net assets and customer deposits. In Uganda, Bank of Uganda has taken over the management of Imperial Bank’s operations there, although unlike Kenya, the bank has not been closed.

We expect that the wider systemic implications of Imperial Bank’s failure will be limited, although we do see a high likelihood of tougher funding conditions for smaller banks. As of June 2015, Imperial had interbank exposures of KES1.6 billion, while the bank in September issued unsecured subordinated debt totalling KES2 billion; these are relatively small exposures, and thus our expectation of a limited risk of a systemic crisis.

However, because Imperial Bank is the second bank to be seized this year, we expect market confidence toward smaller Kenyan banks to suffer. This may include both deposit withdrawals and a hike in interbank rates while their ability to offer correspondent banking related services would be impaired. As of December 2014, there were 32 banks in Kenya with deposit market shares of less than 3% accounting for a combined 26% of industry assets and deposits.

Imperial Bank’s seizure also indicates that Kenyan authorities are unlikely to extend support to small and midsize banks in need. Nevertheless, the larger banks’ systemic importance to Kenya’s financial and payment system leads us to expect some level of government support in case of need. This is particularly true for the six banks that the CBK classifies as large,7 which constituted almost 50% of industry assets and deposits as of the end of 2014. Despite a limited track record of government support toward banks in Kenya, there have been cases when the government provided support to other important corporates in the country such as Kenyan retail chain Uchumi Supermarkets, Mumias Sugar Company, Kenya Airways, and energy utility firms Kenya Power and KenGen.

7 Kenya Commercial Bank Limited (B1 stable, b1), Co-operative Bank of Kenya Ltd (unrated), Equity Bank Ltd. (unrated), Barclays

Bank of Kenya Ltd. (unrated), Standard Chartered Bank (K) Ltd. (unrated), and Commercial Bank of Africa Ltd (unrated). The ratings shown for Kenya Commercial Bank are its local currency deposit rating and baseline credit assessment.

Christos Theofilou Assistant Vice President - Analyst +357.2569.3004 christos.theofilou@moodys.com

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Insurers

Lower ACA Enrollment Projection Is Credit Negative for US Health Insurers On Thursday, the US Department of Health and Human Services (HHS) released its projection for the number of enrollees on the Affordable Care Act (ACA) healthcare exchanges at the end of 2016, announcing that it will manage to an “effectuated enrollment” (i.e., enrolled and current with premium payments) of 10 million people. The 10-million-person enrollment projection is only 900,000 higher than the 9.1 million that the HHS expected to be enrolled at the end of 2015 and only half the last Congressional Budget Office (CBO) estimate of 20 million enrollees at the end of 2016. For the health insurance sector as a whole, the net increase in enrollment will be even less than 900,000 because the HHS projection includes individuals that it expects will switch coverage to exchange policies from non-exchange polices.

Low enrollment growth is credit negative for health insurers that invested in participating on the exchanges on the expectation of sizable membership growth. This is especially an issue for smaller insurers, particularly those without another distinct significant line of business, such as the health cooperatives, which were just recently established and funded by the ACA. These entities have been relying on increased volume to absorb fixed operating costs and introduce some healthier and younger enrollees to improve the overall risk profile of the insured pool.

In a recent article, Forbes estimated that health insurers lost approximately $4 billion on ACA insurance plans in 2014, which appears credible to us, based on recent health insurer and HHS filings. Based on our analysis and the fact that insurers have instituted significant rate increases for 2016, we expect that the sector will also incur significant losses in 2015. With the increase in enrollment in ACA plans to 9 million in 2015 from approximately 7 million in 2014, insurers expected that there would be significant membership growth in future years and that these enrollees would be healthier individuals, stabilizing the risk profile of the pool and eventually creating a profitable business for insurers. The new membership projection challenges this assumption.

In fact, a number of factors pointed to a more robust 2016 enrollment period, including an increase in the penalty for individuals not having health insurance during 2016 (to $695 or 2.5% of taxable income versus $325 or 2% of taxable income in 2015) and an improved interface on Healthcare.gov making it easier to compare and choose plans. In addition, HHS stepped up its outreach programs for the upcoming open enrollment period that begins on 1 November 2015, specifically targeting communities with large uninsured populations.

HHS claims that the modest enrollment projection reflects a number of different factors, including increased difficulty in reaching the estimated 10.5 million remaining uninsured individuals eligible to purchase health insurance on the exchange. For some of these individuals, including those who purchased plans on the exchanges in 2015, cost is likely a factor because the premiums for many health insurance plans on the exchanges have increased by double digits. The 2016 plans also tend to come with greater out-of-pocket expenditures and a narrower provider network (i.e., a smaller choice of doctors). In fact, HHS expects that approximately 1 million of the 9.1 million individuals enrolled in 2015 will not re-enroll in 2016. HHS also notes that fewer employers have dropped health benefits for their workers, resulting in fewer individuals eligible for exchange plans.

Steve Zaharuk Senior Vice President +1.212.553.1634 stephen.zaharuk@moodys.com

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Sovereigns

Ireland’s 2016 Budget Targets Lower Deficit Last Tuesday, the government of Ireland (Baa1 positive) presented its 2016 budget, the last one before a general election will have to be called by April 2016 at the latest. The budget targets a general government deficit of 1.2% of GDP, which is lower than the deficit of 1.7% of GDP that the government presented in April in its most recent Stability Programme. Given Ireland’s strong economic growth (we expect real GDP growth of 4% in 2016), the new target seems achievable, and this year’s budget deficit will likely be in line with our expectation of 2.1% of GDP, which is lower than the initially budgeted deficit of 2.3%. Ireland’s public finances are improving at a very fast pace, which is credit positive (see Exhibit 1).

EXHIBIT 1

Ireland’s General Government Deficits as a Percent of GDP

Sources: Ireland’s National Treasury Management Agency and Moody’s Investors Service forecasts

That said, the budget signals a loosening of fiscal policy compared with past years, with the government using all of the fiscal space that domestic and European fiscal rules allow. The budget contains well-flagged tax cuts and spending increases that total €1.5 billion (0.7% of GDP), the upper end of the government’s own estimates of its fiscal space for next year (€1.2-€1.5 billion). Additionally, the government increased spending in the last quarter of the current year by around €1.2 billion, more than we expected.8 This spending increase will not endanger budgetary targets because tax revenues – particularly corporate income taxes linked to the multinational sector – will likely be €2.3 billion (or 5.5%) higher than the government budgeted.

The increase in spending this year is relevant, because starting next year Ireland will be subject to the preventive arm of the European Commission’s (EC) fiscal compact, which imposes tight limits on spending increases. The higher spending base in 2015 carries over into a correspondingly higher level of spending next year. According to the EC’s expenditure benchmark rule, real expenditure growth should be below the 10-year average potential real GDP growth rate. Ireland’s independent fiscal council has raised some questions about whether the 2015 spending increase is compatible with the spirit of the EC rules.9

8 The increased spending refers to net voted current and capital spending, as presented by the government. 9 Ireland is not subject to the European Commission’s expenditure benchmark rules this year because it is still in the Excessive

Deficit Procedure, which the country will exit once Eurostat confirms that the 2015 deficit was below the 3% of GDP threshold.

-8.7% -8.1% -5.8% -3.9% -2.1% -1.2%

-10.6%

-8.6%

-7.5%

-5.1%

-2.3%-1.7%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2011 2012 2013 2014 2015F 2016F

Actual Deficit and Moody's Forecast Budgeted Deficit

Kathrin Muehlbronner Senior Vice President +44.20.7772.1383 kathrin.muehlbronner@moodys.com

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

We note that spending growth remains far more moderate than in earlier periods of rapid economic growth and rising tax revenues. Even including the 2015 additional spending, total voted spending (excluding in particular debt interest payments) would increase by just 2% between 2014 and 2016. This compares with annual increases in voted spending of 12% over 2000-07 (see Exhibit 2). Additionally, following several years of very tight fiscal policy and significant tax increases, the reversal of some past tax increases, particularly personal income taxes, signals a move toward a normalisation of Ireland’s fiscal stance. In this context, the EC’s fiscal rules impose tighter spending limits now than before the financial crisis.

EXHIBIT 2

Ireland’s Year-over-Year Change in Gross Voted Expenditures

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

Ireland’s rapid economic growth is the key driver of its improving fiscal position, and it is helping to reduce the public debt ratio at a faster pace than we previously expected. Nominal GDP growth will likely be around 11% this year, and a still-strong 5.5% next year. Combined with an average interest rate on the public debt of 3.3%, and a primary surplus approaching 2% of GDP in 2016, Ireland’s debt dynamics are positive. We expect the general government debt ratio to drop to around 97% of GDP by the end of this year and to below 94% by the end of 2016, similar to the government’s own expectations (see Exhibit 3). These forecasts do not include any potential proceeds from the sale of bank assets that the government pledged to use exclusively for debt reduction.

EXHIBIT 3

Ireland’s General Government Debt as a Percent of GDP

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

-6%

-3%

0%

3%

6%

9%

12%

15%

18%

21%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F2016F

0%

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40%

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80%

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100%

110%

120%

130%

2010 2011 2012 2013 2014 2015F 2016F 2017F 2018F

NEWS & ANALYSIS Credit implications of current events

21 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Peaceful Elections in Belarus Will Likely Lead to Improved Relations with EU Last Monday, Belarus (Caa1 negative) President Alexander Lukashenko was declared the winner of the country’s 11 October presidential election. Although observers from the Organization for Security and Co-operation noted some irregularities with the vote, the election occurred without any reports of violence or human rights violations, increasing the likelihood that the European Union (EU) will lift certain economic sanctions.

The increased likelihood of a suspension of sanctions is credit positive for Belarus. Although the lifting of sanctions is unlikely to provide a direct uplift this year to the Belarusian economy, which we expect will contract by 3.6% in 2015, Belarus stands to benefit from increased trade, investment, and financing ties with the West. Moreover, Belarus faces tight external funding conditions over the next few years, a key credit vulnerability, and has relied almost exclusively on Russia for extraordinary funding since 2010. Rebuilding relationships with the West, including with the International Monetary Fund (IMF), would make Belarus less reliant on Russian aid. A warming of relations with the West also has the possibility of motivating Russia (which provided far less financial assistance to Belarus this year than in the past) to provide Belarus with more significant support.

The peaceful outcome of the 11 October election stands in stark contrast to the reports of violence against protestors and the jailing of political opponents during and after the 2010 presidential election. Those events prompted the EU, which has had only limited formal relations with Belarus over the past 20 years, to broaden sanctions in place since 2004. Those measures included an embargo on the sale or trade of arms and related material, the freezing of assets and restricting international travel of certain Belarusians, and sanctions against specific companies controlled by or providing financial support to said Belarusians.

Recently, Western leaders have seized on the opportunity to reengage with Mr. Lukashenko’s government. Moreover, despite the sanctions, EU-Belarusian trade in goods has continued to grow, even as trade with the EU as a percent of overall trade has stayed relatively constant since 2000. Trade with the EU accounted for roughly 26.3% of overall trade in 2014, making the EU Belarus’ second main trade partner after Russia. Foreign direct investment from the EU, however, is still relatively low, at just 0.6% of GDP in 2013.

Increasing ties with the EU would help diversify Belarus’ economy and make it less vulnerable to economic downturns in Russia. Our forecast of a 3.6% contraction in Belarus this year is mostly due to a fall in exports to Russia, which we forecast will contract by 4% in 2015. In 2013, 45% of Belarusian exports went to Russia.

Improving political and economic relations with the West would also increase the possibility of receiving extraordinary financing from Western creditors, including the European Investment Bank and the IMF, which would help to relieve the country’s external funding pressure. Belarus will pay close to $3.7 billion in foreign-currency debt-service this year, most of which has already been disbursed. However, because Belarus must service roughly $3.5 billion in debt payments in 2016, $2.9 billion in 2017 and $3.1 billion in 2018 (see exhibit) with forecasted foreign exchange reserves of just $1.5 billion for the end of 2015, government liquidity risk remains high.

Anna Snyder Associate Analyst +1.212.553.4037 anna.snyder@moodys.com

Ernest Sergenti Assistant Vice President - Analyst +1.212.553.4196 ernest.sergenti@moodys.com

NEWS & ANALYSIS Credit implications of current events

22 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Belarus’ Foreign Currency Debt Service Schedule by Currency Next year’s foreign currency payments exceed Belarus’ current foreign exchange reserves.

Source: Belarus Ministry of Finance

Improving relations with the West increases the likelihood that Western financial support (or additional support from Russia to compete with Western support) will come. Although additional pledges of support are most likely to materialize only if Mr. Lukashenko continues to make progress on political and economic reforms, access to non-Russian sources of funding would significantly reduce credit risks associated with external funding pressure over the next few years.

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

2015 2016 2017 2018

$ Bi

llion

s

External Foreign Currency Payments Domestic Foreign Currency Payments

NEWS & ANALYSIS Credit implications of current events

23 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

US Public Finance

Illinois Budget Impasse Derails November Pension Payment, a Credit Negative On Wednesday, Illinois (A3 negative) Comptroller Leslie Geissler Munger announced that she would delay the scheduled November installment payment of about $550 million into the state’s pension funds because the state’s cash on hand is insufficient to meet all of its payment obligations. The credit-negative payment delay reflects Illinois’ outsize unfunded pension obligations, the lapse of an existing tax package that would have yielded roughly $5 billion in the current fiscal year, and the continued failure of the state’s political leadership to enact a fiscal 2016 budget.

At nearly 5x the 50-state median, Illinois’ adjusted net pension liabilities are the largest of any US state (see exhibit). The state’s $6.7 billion pension contribution for the fiscal year that ended June 2014 was more than 10% of its total governmental revenues, but still short of the $7.8 billion that would have met its actuarial required contribution, a minimum standard needed to achieve full funding. The underpayment ensures the continued deterioration of Illinois’ pension plans’ funding status. Furthermore, the gap between the state’s statutory contribution and the amount that would reasonably amortize its pension liability is only a portion of the state’s structural imbalance, which has resulted in repeated and large payable balances at fiscal year-ends.

Illinois Adjusted Net Pension Liabilities to Revenue versus the 50-State Median

Sources: State of Illinois and Moody’s Investors Service

Illinois Governor Bruce Rauner, a Republican, and the Democrat-led legislature have not yet agreed on a budget for fiscal 2016, which has a projected $5 billion deficit because of the loss of revenue from the lapse last January of a 2011 tax package and other factors. The state’s current spending is governed by a combination of continuing appropriations, court orders and consent decrees that are not sized to the state’s current revenue. The lapsed tax package was part of a larger structural balance plan that included pension reform and paying down the state’s backlog of unpaid bills. With the lapse of the tax package and the Illinois Supreme Court’s rejection of pension reform last May, the state reverted to accumulating unpaid bills, which the comptroller’s office estimates at $6.9 billion.

The comptroller writes the state’s checks, and when faced with a cash shortfall must manage spending priorities. Of the items classified by the comptroller’s office as “high priority” spending, 43% is under court order and includes payroll, foster care, and other health and social service spending. Another 14% consists of items under continuing appropriation or statutory requirement, including most of the state’s debt service obligations. State officials insist that debt service payments will remain the first priority. The state took

0%

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75%

100%

125%

150%

175%

200%

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275%

Illnois 50-State Median

Marcia Van Wagner Vice President - Senior Credit Officer +1.212.553.2952 marcia.vanwagner@moodys.com

NEWS & ANALYSIS Credit implications of current events

24 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

corrective action in August when the late budget resulted in a missed required transfer to the debt service fund of the Metropolitan Pier and Exposition Authority of Illinois (Baa1 negative), which, unlike most of the state’s debt obligations, requires appropriation. The comptroller has stated that delayed pension contributions will be made up later in the year as cash balances improve from seasonally low November levels.

The state is now in the second quarter of fiscal 2016. As the budget impasse continues, less scope is available to address the current year’s budget gap through either spending reductions or revenue increases and the likelihood of additional credit-negative cash-management actions increases.

NEWS & ANALYSIS Credit implications of current events

25 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Extending Federal Financial Aid for Alternative Credentials Is Credit Positive for Higher Education Last Wednesday, the US Department of Education announced a pilot program allowing federal grants and loans to apply to non-degree programs and credit-bearing courses provided in partnership with a non-accredited entity. Access to federal financial aid, which totaled $134 billion to 13 million borrowers in the fiscal year that ended 30 September 2014,10 will improve the ability of students to pay for non-degree credentials. This credit-positive development will enhance and diversify revenue opportunities for universities, with non-degree credentials attracting new participants and supplementing traditional degree programs.

The availability of federal financial aid for non-credit programs will accelerate the proliferation of alternative credentials, a relatively small but fast-growing market segment. For example, the US Department of Education projects that coding boot camp graduates will increase 240% in a single year, rising to more than 16,000 in 2015. Alternative credentials reflect an individual’s mastery of a specific topic over a short and intense period of study. Unlike the more traditional professional licenses or vocational certificates, the recent boom of alternative credentials are meant to serve as building blocks toward a complete education as opposed to a fully prescribed course of study.

Used by recent graduates to differentiate themselves in the job market, mid-career individuals to advance or shift industries, or those who would not otherwise pursue a traditional degree, this trend expands rather than cannibalizes the existing educational market. The relatively rapid pace of content obsolescence, particularly in science and technology fields, will aid the long-term demand for non-degree programs or certifications.

The availability of federal financial aid and technological advances magnify the potential upside of alternative credentials. Federal grants and loans broaden and deepen the pool of prospective students by improving access for middle- and lower-income individuals. Online course delivery allows a significantly larger scale than most universities can achieve with campus-based continuing education or non-credit courses. Even with campus-based programs, the shorter nature of alternative credentials has the potential to attract more cohorts of students than a typical semester-based degree. Large public universities and large urban private universities with a history of serving adult learners are best positioned to benefit from granting credentials.

Universities with leading programs in high-demand fields or expertise in online course delivery can benefit financially without expanding their own non-credit programs. Revenue opportunities can come from licensing of content, use of technological infrastructure or consulting. The financial aid pilot expands aid to college coursework with more than half of content or instruction from a non-accredited party. Non-accredited parties include massive open online course platforms, such as edX and Coursera, coding boot camp providers and other entities that do not easily fit into existing accrediting criteria. These partnerships also benefit the college contracting for the content by broadening their programmatic offerings without investing their own resources.

As with any opportunity, the growing popularity of alternative credentials and online course delivery also add risks, including brand dilution from poor execution, significant variance in quality between core academic offerings and the credentials, or a flooding of the market with a product. Small, thinly resourced, non-selective colleges will face increasing pressure as other market participants realize the financial gains of these trends.

10 The Federal Student Aid Annual Report FY 2014, November 2014.

Karen Kedem Vice President - Senior Credit Officer/Manager +1.212.553.3614 karen.kedem@moodys.com

NEWS & ANALYSIS Credit implications of current events

26 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Securitization

Final Countdown to $8.5 Billion in Countrywide RMBS Bondholder Payments Begins Last Tuesday, The Bank of New York Mellon, the trustee for 530 Countrywide residential mortgage-backed security (RMBS) trusts, announced that its tax counsel and the US Internal Revenue Service (IRS) had ruled on relevant portions of the $8.5 billion settlement agreement between Bank of America and Countrywide RMBS bondholders. This move satisfies certain conditions of the agreement, thereby allowing the credit-positive settlement to move forward. According to the settlement agreement, Bank of America has 120 days from 13 October to render payment to the trustee. We expect final payout to occur by the end of first-quarter 2016.

Each of the 530 Countrywide RMBS trusts will receive a portion of the $8.5 billion payment. A trustee-appointed expert will use a projection of each trusts’ total losses to determine how much of the settlement each trust will receive. Cash-flowing senior certificates will receive the largest payout, most likely in one lump sum, and some subordinate certificates that have taken losses will see balances written back up.

The payouts are part of a settlement agreement releasing Bank of America from claims alleging that mortgage originator and servicer Countrywide Financial, a subsidiary of Bank of America, had breached representations and warranties and mortgage servicing standards in the run-up to the financial crisis of 2008. Bank of America acquired Countrywide Financial in 2008.

Bank of America and the trustee signed the settlement agreement in 2011, initiating certain immediate servicing changes. Further progress toward satisfying bondholder claims subsequently slowed, however, pending court approval, which lingered materially until 2014. Once the court approved the settlement, the trustee sought IRS and tax counsel opinions on certain aspects of the agreement. On 5 October, the trustee’s tax counsel received a private letter ruling from the IRS that allowed for the settlement to proceed.

Mark Branton Assistant Vice President -Analyst +1.212.553.4175 mark.branton@moodys.com

NEWS & ANALYSIS Credit implications of current events

27 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Brazilian Guidance on FIDC Loan Provisioning Is Credit Positive for Securitizations Last Monday, Comissão de Valores Mobiliários (CVM), Brazil’s capital markets regulator, released guidance to trustees and auditors of fundos de investimentos em direitos creditórios (FIDCs) on procedures to determine nonperforming loan (NPL) provisioning levels. This guidance is credit positive for senior tranches of securitizations because it will divert more collateral cash flow to them sooner when forward-looking measures of collateral credit quality are signaling increased expected losses.

CVM’s guidance establishes that trustees should focus only on the expected losses related to the underlying assets. It clarified that the practice of not recognizing NPL provisioning based on the argument that current subordination levels are sufficient to repay senior shares is not acceptable because it distorts the valuation of subordinated tranches and delays the breach of minimum subordination triggers. We expect that with this clear guideline for NPL provisioning, senior tranches will better benefit from available over-collateralization and performance triggers in a more timely and effective manner.

The regulator also clarified that NPL provisioning should be forward-looking and incorporate expected future losses. Therefore, some trustees’ practice of determining NPL provision amounts by comparing the level of incurred losses vis-à-vis original loss expectations should no longer be applicable. This is because the practice does not take into account the effect of changes in the economic conditions that erode the expected cash flows from the receivables pool.

Last year we highlighted that inadequate NPL provisioning can mask poor performance in Brazil’s FIDCs. If trustees do not provide adequate NPL provisioning for potential pool losses owing to obligor delinquencies and defaults, the collateral’s net asset value will be inflated and senior tranches will be under-collateralized. After the minimum subordination requirement is satisfied, obligor payments will flow to subordinated shares, even if remaining cash flows are insufficient to pay down the senior shares.

The possibility of inadequate NPL provisioning increased under the CVM instruction 489, a 2011 regulation that amended the application of Brazilian Central Bank Resolution 2682 to FIDCs to grant trustees more flexibility in setting levels for NPL loss provisioning. We think the new CVM guidance reduces the risks of inadequate provisioning in FIDCs related to the flexibility allowed by the regulation because it clarifies the good practices that trustees should apply and clearly points out bad practices to avoid.

We expect that all rated FIDCs will benefit from the guidelines because initial performance trends will be projected and any expected deterioration on expected cash flows will be reflected in the NPL provisioning levels.

Joao Daher Associate Analyst +55.11.3043.7331 joao.daher@moodys.com

Daniela Jayesuria Vice President - Senior Analyst +55.11.3043.7305 daniela.jayesuria@moodys.com

RATING CHANGES Significant rating actions taken the week ending 16 October 2015

28 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Corporates

Anheuser-Busch InBev SA/NV Review for Downgrade 16 Sep ‘15 13 Oct ‘15

Long-Term Issuer Rating A2 A2

Short-Term Issuer Rating P-1 P-1

Outlook Developing Review for Downgrade

The review for downgrade follows the announcement that the company has reached an agreement in principle to acquire SABMiller PLC (A3/Prime-2) for approximately £44 per share or approximately $106 billion in cash and shares, and to mutually request an extension of the deadline under UK takeover rules to continue negotiations. We will consider, among other things, the significant increase in leverage and likely time period to reduce leverage as a result of the partially debt funded acquisition, as well as the execution risks associated with meeting regulatory requirements.

Dell Inc. Review for Upgrade 4 Feb ‘15 12 Oct ‘15

Corporate Family Rating Ba2 Ba2

Outlook Stable Review for Upgrade

The review for upgrade reflects our view that despite the significant increase in debt and initial leverage, Dell’s overall credit profile will be enhanced with the acquisition of EMC, a merger that will create the largest private technology company in the world based on revenues.

EMC Corporation Review for Downgrade 23 Mar ‘15 12 Oct ‘15

Senior Unsecured Rating A1 A1

Short-Term Issuer Rating P-1 P-1

Outlook Stable Review for Downgrade

The review for downgrade follows the announcement that EMC will be acquired by Dell Inc. (Ba2 review for upgrade) for $24.05 per share in cash in addition to tracking stock linked to a portion of EMC’s economic interest in the VMware, Inc. for a total transaction value of about $67 billion. We expect that the combined company will allocate a majority of its cash flow to debt repayment. Accordingly, adjusted debt to EBITDA will likely decrease to below 4x by the end of 2017.

RATING CHANGES Significant rating actions taken the week ending 16 October 2015

29 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Eutelsat SA Outlook Change 28 Nov ‘13 13 Oct ‘15

Long-Term Issuer Rating Baa3 Baa3

Outlook Stable Positive

The outlook change reflects the continued steady operating performance of Eutelsat and the potential application of free cash flow towards debt reduction to facilitate ratings improvement over time.

SABMiller Plc Review Direction Uncertain 24 Oct ‘11 14 Oct ‘15

Senior Unsecured Rating A3 A3

Short-Term Issuer Rating P-2 P-2

Outlook Stable Review Direction Uncertain

The review with direction uncertain follows the combined announcement on 13 October of both Anheuser-Busch InBev SA/NV’s (ABI, A2 review for downgrade) and SABMiller’s boards that they had reached an agreement in principle on ABI’s intention to make an offer to acquire SABMiller’s entire share capital. If SABMiller were to accept ABI’s proposal, the financial leverage of the combined group would likely increase to levels not consistent with SABMiller’s current A3 rating.

United States Steel Corporation Review for Downgrade 24 Oct ‘11 13 Oct ‘15

Corporate Family Rating Ba3 Ba3

Outlook Stable Review for Downgrade

The review for downgrade reflects the deterioration in US Steel’s performance and debt protection metrics and our expectations that continued contraction will be evidenced given the challenging conditions facing the US steel industry, particularly for flat-rolled and tubular products.

RATING CHANGES Significant rating actions taken the week ending 16 October 2015

30 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Infrastructure

Abengoa Yield Plc Outlook Change 22 Jul ‘15 12 Oct ‘15

Corporate Family Rating Ba3 Ba3

Senior Unsecured Rating B1 B1

Outlook Stable Negative

The outlook change reflects the deterioration in the company’s liquidity profile considering the full use of its $415 million revolving credit facility. This is a material credit negative particularly in the context of the current lack of access to the capital markets and the company’s high leverage.

Bristol Water plc Outlook Change 23 Mar ‘11 16 Oct ‘15

Senior Secured Bonds Baa1 Baa1

Outlook Negative (6 Feb 2015) Stable

The outlook change follows the publication of Bristol Water’s final price determination for the five-year regulatory period 2015-20 by the Competition and Markets Authority (CMA). It also reflects some improvement in Bristol Water’s price determination following the CMA review, with a price reduction of 16% as compared to the 19% cut determined by Ofwat; the company’s plan to cut spending over the period to 2020; and our expectation that ratios will remain commensurate with the guidance for the current rating, including an adjusted interest coverage of at least 1.4x.

Atlantic Power Corporation Upgrade 3 Feb ‘14 13 Oct ‘15

Corporate Family Rating B2 B1

Outlook Stable Stable

The upgrade reflects the considerable amount of debt reduction ($310 million) achieved to date this year using proceeds from the sale of its wind portfolio. The upgrade also reflects the large reduction in corporate overhead and drastic dividend cuts that have taken place over the past few years, both of which we consider credit positive.

TerraForm Power Operating LLC Outlook Change 20 Jan ‘15 12 Oct ‘15

Corporate Family Rating Ba3 Ba3

Senior Unsecured Rating B1 B1

Outlook Positive Stable

The outlook change reflects the current capital market conditions. Both TERP and SUNE are effectively locked out of the equity markets, which will hamper their financial strategy.

RATING CHANGES Significant rating actions taken the week ending 16 October 2015

31 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Infinis Energy Plc Downgrade 11 Nov ‘14 12 Oct ‘15

Corporate Family Rating Ba3 B1

Probability of Default Rating Ba2-PD Ba3-PD

The downgrade reflects our expectation that Infinis’ leverage will remain higher for longer in the context of a soft power price environment and following the negative consequences of the recent UK government’s Summer Budget.

Financial Institutions

Banco del Bajio, S.A. Outlook Change 5 Jun ‘15 14 Oct ‘15

Long-Term Bank Deposits Baa3 Baa3

Baseline Credit Assessment ba1 ba1

Counterparty Risk Assessment Baa2 (cr) Baa2 (cr)

Outlook Positive Stable

We changed the outlook because the economic and financial reform package approved by the government in 2013 have not led to an improvement in BanBajío’s profitability or business prospects. The bank’s profitability continues to be challenged by low efficiency and relatively higher funding costs. In addition, the bank’s asset quality will remain exposed to the risks related to its high single borrower concentrations as well as related party loans.

Nota Bank Downgrade 27 Sep ‘13 13 Oct ‘15

Long-term Bank Deposits B2 Caa3

Senior Unsecured B2 Caa3

Baseline Credit Assessment b2 ca

Adj. Baseline Credit Assessment b2 ca

Counterparty Risk Assessment B1 (cr) Caa2 (cr)

Outlook Stable Review for Downgrade

The downgrades follow the Central Bank of Russia’s announcement that it had taken Nota Bank into temporary administration because the bank was not able to meet its financial obligations owing to liquidity pressure. The temporary administration will assess the quality of Nota Bank’s assets and the potential recovery of the bank’s liquidity. Given that the bank is now under administration, it is unlikely to maintain its operations and meet its financial obligations without reliance on external extraordinary support.

RATING CHANGES Significant rating actions taken the week ending 16 October 2015

32 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Banco del Bajio, S.A. Outlook Change 5 Jun ‘15 14 Oct ‘15

Long-Term Bank Deposits Baa3 Baa3

Baseline Credit Assessment ba1 ba1

Counterparty Risk Assessment Baa2 (cr) Baa2 (cr)

Outlook Positive Stable

We changed the outlook because the economic and financial reform package approved by the government in 2013 have not led to an improvement in BanBajío’s profitability or business prospects. The bank’s profitability continues to be challenged by low efficiency and relatively higher funding costs. In addition, the bank’s asset quality will remain exposed to the risks related to its high single borrower concentrations as well as related party loans.

Sub-sovereigns

COMAPA Z.C. Outlook Change 7 Feb ‘14 14 Oct ‘15

Long-Term Issuer Rating Ba2 Ba2

NSR Long-Term Issuer Rating (Domestic) A2.mx A2.mx

Outlook Stable Positive

The outlook change reflects our expectations that COMAPA’s metrics will continue strengthening in the medium term. The water company’s policy of not contracting additional long-term debt should ensure that its outstanding liabilities remain low. The outlook change also reflects our expectations that the agreement to sell treated water to Petroleos Mexicanos will materially improve the quality of COMAPA’s cash flow in the next 12-18 months.

US Public Finance

Hawaii Outlook Change 3 Jul ‘12 12 Oct ‘15

GO Bonds Aa2 Aa2

Outlook Stable Positive

The outlook change reflects Hawaii’s restoration of reserves, and its pro-active measures to improve the funding of its pension and other post-employment benefits (OPEB) liabilities, including the state’s plans to fund fully its OPEB annual required contribution, combined with strong revenue trends.

RESEARCH HIGHLIGHTS Notable research published the week ending 16 October 2015

33 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Corporates

North American Automotive Parts Suppliers: Profit Growth to Slow on Strong Dollar, Cooling US Auto Sales Gains The strong dollar, smaller gains in US car sales and the costs of new automotive platforms will slow profit growth among auto parts suppliers. We expect median industry EBITA to grow 3%-4% in both 2015 and 2016, down from 10.7% growth in 2014. But gradually improving profits will continue to support strong cash generation.

EMEA Speculative Grade Liquidity: Liquidity Stabilizes in 2015 After Two Years of Steady Decline We expect the EMEA Liquidity Stress Index to remain stable around current levels, though it could rise in 2016 if market access remains limited for companies with weaker credit profiles. Furthermore, the macroeconomic prospects of the UK, Germany, France and other major EMEA regions will be a key driver of companies’ ability to generate cash flow and retain adequate liquidity next year.

European Building Materials: Cement Volumes, Prices in North America and UK Support Stable Outlook EBITDA for the European building materials industry will grow by around 2%-4% on average over the next 12-18 months. This will be driven by solid growth in sales volumes of building materials, including cement, aggregates and ready-mix concrete, and stronger pricing in North America, the UK and some emerging markets such as Egypt.

North American Covenant Quality: September Rebounds From Worst on Record The Covenant Quality Index, which is a three-month rolling average covenant quality score, improved to 4.33 from 4.53 in August, though it continues to reflect weakest-level covenant protection. September’s high-yield bonds saw a material boost in their average covenant quality score, owing to the stronger covenant protections coming particularly from the media and publishing and telecommunications sectors.

Russian Corporates: Most Companies Have Sufficient Liquidity to Repay Debt Through 2016 The liquidity of the large majority of rated Russian non-financial companies remains sufficient to repay debt through the end of 2016. Liquidity remains a key credit focus, given our expectation that the Russian economy will stay in recession next year and that credit conditions will likely remain challenging for domestic banks and borrowers.

European Telecom Service Providers: Expected Revenue Growth Stabilises Outlook for into 2016 We forecast average revenue growth of around 1%-2% for the European telecommunications service provider industry in the next 12-18 months as the result of an improved overall operating environment. This will be underpinned by increasing demand for broadband, improved consumer spending capacity and a change in focus from price competition to value leading to price increases.

RESEARCH HIGHLIGHTS Notable research published the week ending 16 October 2015

34 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Infrastructure US Regulated and Public Power Utilities: In a Major Cyber Attack, the Likelihood Of Government Relief Is High A large-scale cyber attack that significantly disrupts electric power service and severely damages utility infrastructure would be materially credit negative for the companies involved. But the likelihood of the government stepping in to help utilities return to full operations and recover financially is high.

Entergy Continues to Trim Merchant Generation, a Credit Positive On 13 October, Entergy Corporation (Entergy; Baa3, Positive) announced that it will close its 688-megawatt Pilgrim Nuclear Generating Station in Plymouth, Massachusetts, no later than June 2019. The decision was driven by low energy prices, increased operational costs and murky prospects of market structure improvement. The announcement is credit positive for Entergy because Pilgrim’s increasing cost structure and low power prices would otherwise erode profitability, and the closure will reduce Entergy’s merchant generation exposure and improve the company’s business risk profile.

Brazilian Electricity Sector: Agreement on Renewal of Distribution Concessions Bodes Well for Stability On 9 September, the Federal Court of Auditors (TCU) published a technical note agreeing on the renewal of 32 concessions that expired in July 2015 and six concessions that will expire in 2016, subject to certain conditions. This agreement is credit positive because it removes much of the uncertainty that had overshadowed the concession renewal process. Nevertheless, the protracted period of discussion and negotiation involving the TCU, federal government and the regulator ANEEL leaves some questions about to the robustness and predictability of the current regulatory framework.

Audit Results Are Credit Positive for German Nuclear Power Generators The German government on 10 October said an external audit had established that the country’s biggest nuclear power producers were adequately provisioned against the cost of dismantling their reactors and managing their nuclear waste. The finding is credit positive for EnBW (A3 negative), E.ON ((P)Baa1 negative), RWE (Baa1 negative), Stadtwerke München (unrated) and Sweden’s Vattenfall AB (A3 negative) because it dispels concerns the review might expose a substantial provisioning shortfall.

RESEARCH HIGHLIGHTS Notable research published the week ending 16 October 2015

35 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Financial Institutions

Russia Banking System: Protracted Economic Downturn Drives Negative Outlook The negative outlook reflects our views that trends in the Russian economy, and consequently the operating environment for Russian banks, will remain challenging over the next 12-18 months, with detrimental consequences for asset quality and profitability. The continuing barriers on cross-border market access leave the banking system dependent on relatively expensive funding from the central bank and domestic wholesale sources, thereby encouraging banks to retrench and reduce lending.

Portugal Banking System Outlook: Economic Recovery, Weaker Problem Loan Inflow Drive Stable Outlook We expect real GDP growth in Portugal to accelerate to 1.7% in 2015 and 1.8% in 2016, outpacing the euro area average of 1.5% for both years. The country’s modest economic recovery, though vulnerable to external shocks, will help stabilize Portuguese banks’ credit fundamentals, slow the growth of new problem loans, and return the banking sector to profitability, albeit at weak levels.

Japan Banking System Outlook: Strong Liquidity, Low Domestic Asset Risk Drive Stable System Outlook The stable outlook reflects our expectation that Japanese banks’ operating environment, asset risk and liquidity will remain stable over the next 12-18 months. These factors outweigh ongoing pressure on domestic profitability, as banks have little room to further cut costs. In addition, overseas credit risk is rising for the three mega-bank groups, though offshore risk is low for most other banks.

Amarillo, BOK, CFR, HBHC & TCBI: Low Energy Prices Will Lead to Higher Provisions for US Regional Banks Concentrated in Oil & Gas US banks BOK Financial Corporation, Cullen/Frost Bankers, Inc., Hancock Holding Company, Amarillo National Bank and Texas Capital Bancshares, Inc. have sizeable direct energy loan exposures relative to their tangible common equity. As a result, persistently low oil and gas prices increase the likelihood of material credit losses for these banks. Low energy prices also have negative implications for the credit performance of these banks’ commercial and consumer loan portfolios, which are concentrated in regional economies that are heavily dependent on the energy sector for business activity and employment.

Banks’ Baseline Credit Assessments: Key Analytical Considerations Our new bank rating methodology includes a number of components designed to help accurately predict bank failures and determine how each creditor class is likely to be treated when the bank enters resolution. These new components reflect insights gained from the crisis and the fundamental shift in the banking industry and its regulation. Key changes to the methodology include the addition of a macro profile to our baseline credit assessment framework, as well as an assessment of potential differences in losses across the liability structure (Loss Given Failure analysis).

RESEARCH HIGHLIGHTS Notable research published the week ending 16 October 2015

36 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Sovereigns

Asia-Pacific Sovereigns: Trans-Pacific Partnership to Bolster Trade and Growth, a Credit Positive On 5 October, 12 countries announced they had reached agreement on the Trans-Pacific Partnership. The conclusion of the free trade agreement is credit positive for all involved sovereigns, as it will reduce the cost of trade and open up new investment opportunities, encouraging growth. While the degree of benefit will vary significantly, based on the level of protection that each country’s industries currently enjoy and the extent to which their businesses will be able to enter new markets, Asian economies look likely to be the biggest winners from the deal.

Venezuela Sovereign Analysis Venezuela’s Caa3 sovereign rating and stable outlook reflect substantial economic and credit challenges that include a large external funding gap and tightening availability of foreign exchange that heightens the risk of a balance of payments crisis, large macroeconomic imbalances and relative price distortions, poor governance indicators and inflation performance that reflect weak institutions, elevated sociopolitical tensions and a highly contentious political system.

Sub-sovereigns

Province of Alberta: Despite Strong Credit Metrics, Low Oil Prices Challenge Budgetary Rebalancing Persistently low oil prices continue to create budgetary challenges for the Province of Alberta (Aaa, stable). The Albertan economy will experience a light recession in 2015, and its government will face sustained deficits if it fails to lower expenditure as a proportion of revenues over the next few years. The provincial government has raised its latest deficit projection for 2015-16 to CAD5.9 billion ($4.5 billion), and this could increase to CAD6.5 billion if oil prices remain at current levels.

Brazilian Regional and Local Governments: Rio Grande Do Sul Crisis Undermines Financial Oversight A liquidity crisis at the Brazilian state of Rio Grande Do Sul (RGS, unrated) has called into question the federal authorities’ financial supervision of regional and local governments (RLGs), a credit negative for the RLG sector. The federal government might grant RGS relief on a portion of the state’s debt. We would view this negatively, as it would likely prompt other states to seek forgiveness on their federal government obligations in turn, undermining their creditworthiness.

RESEARCH HIGHLIGHTS Notable research published the week ending 16 October 2015

37 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

French Regional and Local Governments Make Progress Toward Universal Bond Market Access French regional and local government (RLG) debt will grow as a proportion of revenues over the next two years as cost reductions fail to keep pace with reduced central government transfers. We expect the sector to increase its recourse to bond financing as RLGs diversify their funding away from commercial banks. Agence France Locale, a recently launched bank owned by and dedicated to the financing of French local authorities, could also stimulate RLG bond issuance.

Western Australia Confronts a Slowing Resource Sector Falling commodity prices and China’s economic slowdown have shaved several billions of dollars from mining-oriented Western Australia’s annual revenues, triggering a deterioration in its fiscal and debt metrics. Although the state benefits from a financial buffer as a result of Australia’s system of revenue equalization grants, its plan to eliminate its budget deficit by fiscal 2018-19 will largely depend on it achieving targeted cost cuts, as a further slowdown in revenues remains a risk.

US Public Finance

Illinois Not-for-Profit Hospitals Not-for-profit hospitals in Illinois benefit from strong liquidity and margins, state regulations that provide competitive barriers and manageable future capital needs. These favorable characteristics position hospitals to fund strategic initiatives and manage leverage. Illinois hospitals will be challenged by low population growth, increasing competition from consolidation and uncertainties related to Medicaid funding given state budget challenges.

US Public Higher Education and the Effect of GASB 68 FAQs In the next few months, many US public universities will issue financial statements that comply with Governmental Accounting Standards Board (GASB) Statement 68, which requires increased disclosure of the defined-benefit pension plans. The credit impact will be limited, owing to the difference in how we calculate and apply discount rates to adjusted net pension liabilities and our view of net pension liabilities as debt-like obligations.

New York Special Tax Bonds Demonstrate Strong Credit Quality New York state authorities recently issued special tax debt through six separate entities, which are rated higher than the issuer’s general obligation (GO) debt. We generally view GO credit quality as more robust than special tax obligations, but a higher rating can be achieved if the legal structure is truly separated from the government’s general obligations. The separation of the special tax revenues insulates bondholders.

RESEARCH HIGHLIGHTS Notable research published the week ending 16 October 2015

38 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

Structured Finance

Chinese Auto ABS: Delinquencies Stable in Q2 2015, but Likely to Increase Slightly The delinquency rates for Chinese auto loan asset-backed securities remained stable between the first and second quarters of 2015, ending the uptrend in delinquencies that began when the 2014 vintage transactions were issued last year. Delinquency amounts actually decreased in the second quarter; however, due to the rapid decline in outstanding portfolio balances, delinquency ratios were unchanged in the first and quarters of this year.

US Household Debt Dynamics Bolster the Credit of Consumer Cyclicals US households’ increasing willingness to take on debt is boosting the prospects of domestically focused industries and enhancing the value of such firms’ credit. With the consumer deleveraging cycle lurching toward an end, borrowing growth is supporting rising home and auto sales, supporting sectors with a domestic focus, which have frequently underperformed the credit markets in the past decade.

Japan Credit Card Default Rates Remain Low, Despite Higher Balances Loans for Japanese credit card purchases will continue to perform well with default rates remaining low, despite a rise in the average outstanding balance for each loan. Current higher levels of credit card balances reflect more frequent use of credit cards in the purchase of goods and services, as opposed to a run-up in credit card debt owing to consumer hardship. Furthermore, Japan’s Installment Sales Law, which requires originators to adequately assess the ability of obligors to repay debt, will prevent any easing of underwriting standards. Russian RMBS and ABS Performance Will Deteriorate as the Domestic Economy Weakens The weak domestic economy in Russia (Ba1 negative) has meant that the outstanding asset-backed securities and residential mortgage-backed securities deals have registered significant increases in delinquencies, despite some signs of stabilization in their performance metrics earlier in the year. Moreover, if a further drop in oil prices exerts downward pressure on the economy, delinquencies could accelerate at a faster rate.

US Re-performing RMBS Performance Is Strong to Date Early performance trends on Towd Point and Citigroup’s 2015 residential mortgage-backed securities transactions backed by modified re-performing loans and performing seasoned loans show steady voluntary prepayments and low levels of delinquencies, indicating strong collateral performance to date. Differences in individual pool performance can be attributed to the underlying pools’ characteristics and the length of demonstrated clean payment history without a delinquency as of issuance. As a result of the strong performance and structural aspects of the deals, credit enhancement on the issued bonds has been building since issuance.

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

39 MOODY’S CREDIT OUTLOOK 19 OCTOBER 2015

NEWS & ANALYSIS Corporates 2 » Dell’s Planned Acquisition of EMC Is Credit Positive » SCA’s Acquisition of Wausau Would Broaden Access to North

American Tissue Market, a Credit Positive

Banks 4 » Liquidation of Honduras’ Banco Continental Is Credit

Negative for the Country’s Banks » Banca Marche’s Rescue by Interbank Fund May Not

Protect Bondholders » Banco Comercial Portugues Plan to Merge Its Angolan

Subsidiary with BPA Is Credit Positive » Russian Proposal to Remove Extra Bank Capital Requirements

Is Credit Negative » Hong Kong’s Revised Bank Resolution Regime Is Credit

Negative for Non-Deposit Senior Unsecured Creditors

Sub-sovereigns 11 » Veracruz, Mexico, Raises Payroll Tax Rate by 50%,

a Credit Positive

US Public Finance 13 » New York City’s Transit Agency Gets $9 Billion for Capital

Plan, a Credit Positive » Federal Safety Oversight of Washington Metropolitan Area

Transit Authority Is Credit Negative

Securitization 15 » Colony American Finance’s SFR Securitization Protects Senior

Bonds with Accelerated Principal Payments

MOODYS.COM

Report: 185068

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For Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail clients. It would be dangerous for “retail clients” to make any investment decision based on MOODY’S credit rating. If in doubt you should contact your financial or other professional adviser.

For Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

EDITORS PRODUCTION ASSOCIATE News & Analysis: Jay Sherman and Elisa Herr Sol Vivero Ratings & Research: Mina Kang