CROSS-SECTOR

SECTOR IN-DEPTH20 April 2016

Contacts

Marie Diron 65-6398-8310Senior Vice President/Managermarie.diron@moodys.com

Ilya Serov 612-9270-8162Senior Vice Presidentilya.serov@moodys.com

Matthew Moore 612-9270-8108VP-Sr Credit Officermatthew.moore@moodys.com

Arnon Musiker 61-2-9270-8161Senior Vice President/Managerarnon.musiker@moodys.com

Patrick Winsbury 612-9270-8183Associate ManagingDirectorpatrick.winsbury@moodys.com

Debra Roane 612-9270-8145VP-Sr Credit Officerdebra.roane@moodys.com

Jennifer Wu 612-9270-8169Associate ManagingDirectorjennifer.wu@moodys.com

Rahul Ghosh 65-6398-3714VP-Senior ResearchAnalystrahul.ghosh@moodys.com

Australia Credit

Subdued Commodities Prices and ExternalVulnerabilities Constrain Credit ProfilesSummaryCredit fundamentals in Australia (Aaa stable) remain robust, with moderate gearing in thecorporate sector, a resilient banking sector, and sound macroeconomic trends all providingsupport. However, subdued commodities prices are beginning to challenge some sectorsof the economy and some states. Moreover, risks related to elevated property prices andAustralia’s dependence on external financing remain.

Australia's economy will remain resilient. Key economic metrics – including GDP growthand unemployment – will continue to outperform most developed economy peers. At thesame time, a weaker Australian dollar is benefitting sectors such as education and tourism,including airlines, which have been further buoyed by lower fuel costs.

Government debt will increase further. Subdued commodity prices indirectly weigh ongovernment revenues through weaker corporate and income tax receipts. A marked increasein debt, which we expect to reach 38% of GDP in fiscal 2018 (July-June), will limit somewhatthe government’s room to buffer potential negative shocks through fiscal easing.

Pressure on resources-oriented sectors is unlikely to let up. Iron ore and coal producersand resource-oriented states are coming under particular strain, resulting in some downwardratings pressure amongst related issuers. We do not forecast any material recovery incommodity prices for the foreseeable future due to excess supply in a number of markets(see Appendix 1). Banks are likely to report rising problem loans within their resources-relatedportfolios, although at a manageable pace.

Housing and services bolster Australia’s resilience. States with greater economicdiversification are exhibiting stronger growth. Construction and building material firms,as well as residential mortgage-backed securities (RMBS) transactions and bank mortgageportfolios, have also benefitted from a buoyant housing market. However, these sectors areexposed to a slowdown in housing (see Appendix 2).

External vulnerabilities remain a key credit risk. A key issue for the Australian sovereignand the country’s banking sector is their reliance on overseas funding. This means a relativelygreater vulnerability to event risk for Australia than most other Aaa-rated sovereigns.Meanwhile, while high household leverage and house prices are not an immediate concern,they could amplify the effects of any external shock.

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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 onwww.moodys.com for the most updated credit rating action information and rating history.

2 20 April 2016 Australia Credit: Subdued Commodities Prices and External Vulnerabilities Constrain Credit Profiles

Australian credit fundamentals to weather challenging conditionsCredit fundamentals in Australia (Aaa stable) remain robust, with moderate gearing in the corporate sector, a resilient banking sector,and sound macroeconomic trends all providing support.

However, subdued commodities prices are beginning to challenge some sectors of the economy and some states. Iron ore and coalproducers and resource-oriented states are coming under particular strain, resulting in some downward ratings pressure amongstrelated issuers (Exhibit 1). At the same time, increased financial market volatility underlines the relatively high reliance of banks and thegovernment on foreign funding, which is a source of vulnerability.

Exhibit 1

Commodity-Related Issuers Feeling the StrainRecent rating actions across Australia portfolio

Source: Moody’s Investors Service

Below, we assess some of the key trends that are likely to influence rated entities in Australia over the coming 12 months. Our coreviews towards global commodity prices and Australian property prices are outlined in the Appendix.

Sovereign: Government debt to increase furtherWeaker commodity prices and slower demand from China (Aa3 negative) will continue to weigh on Australian investment and somecommodities exports. We expect Australia’s economy to expand by around 2.5% in 2016 and 2017, below the 3%-4% rates enjoyedduring the 2000s.

Nonetheless, in relation to the potential severity of the shock to the economy from a commodity price correction, GDP growthwill remain relatively resilient. Australia’s economy is performing well in a global context, with growth in line with other Aaa-ratedcommodity-producing sovereigns, such as New Zealand, Canada and Norway, which face similar pressures (Exhibit 2).

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3 20 April 2016 Australia Credit: Subdued Commodities Prices and External Vulnerabilities Constrain Credit Profiles

Exhibit 2

Australian Growth Has Proven Resilient and in Line With Global PeersReal GDP Growth for Selected Commodity Producing Countries, %

Source: Moody's Investors Service

This resilience largely owes to a flexible economic structure and strong institutions, which are helping the economy find new sourcesof growth to offset the drag from lower mining investment and export incomes, and we expect this adjustment to continue overthe next few years. Low interest rates and a depreciating Australian dollar will continue to provide stimulus to domestic-orientedindustries, such as construction, retail trade, healthcare, education, and accommodation and food services, which are large contributorsto employment and output.

Government debt is moderate, at around 35% of GDP in fiscal 2015, below the Aaa median of about 42% (Exhibit 3). However, fiscalspace has been eroded by a stretch of budget deficits since 2009 which has caused the government debt-to-GDP ratio to rise morethan 20 percentage points. The government’s objective to balance the budget by fiscal 2021 will be challenging in the absence ofbroad-ranging revenue raising measures and given existing commitments to spending on welfare, education and health. As a result, weforecast a further increase in debt in the next few years, a credit negative for the sovereign.

Exhibit 3

Government Debt Lower Than Peers Despite Rising TrendAustralia's Government Debt versus Aaa-Rated Peers, % of GDP

Source: Moody's Investors Service

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4 20 April 2016 Australia Credit: Subdued Commodities Prices and External Vulnerabilities Constrain Credit Profiles

The credit pressures facing Australia are both external and domestic. Economic and financial developments in China willcontinue to pose a downside risk to Australian growth. Moreover, Australia’s reliance on external financing is unusually high for a Aaacredit, which is a source of vulnerability, as capital flows are prone to sudden shifts.

Domestically, the stock and rate of change in private debt, particularly household debt, raises the economy’s vulnerability to negativeshocks.

Nevertheless, we view these as risks as manageable. Both fiscal and monetary policymakers have some room to buffer a slowdownin growth. Moreover, as explained below, proactive prudential policy has enhanced the resilience of the banking sector to a housingmarket correction.

Sub-sovereign: Economic performance across states is divergingA combination of falling commodity prices, a weaker Australian dollar, and high property prices has led to economic contraction inresource-dependent Australian states and territories, reversing some of the strong growth they enjoyed during the long commoditiesboom. Those with more diversified economies, in contrast, have continued to expand in the low- to mid-single digit range.

The resource-dependent states of Western Australia (WA, Aa2 stable), the Northern Territory (NT, Aa1 negative) and, to a lesser extent,Queensland (Aa1 negative) are bearing the brunt of the commodities downturn. The completion of large investments in liquefiednatural gas (LNG) and iron ore projects, coinciding with a sharp drop in commodity prices, falling business investment, and weakeninghousing markets in the case of WA and NT, have created a drag on economic growth (Exhibit 4).

Exhibit 4

Resource-Dependent States Are UnderperformingEconomic growth by state, % change

Sources: Moody’s Investors Service, Australian Bureau of Statistics

As a result of these pressures, we downgraded WA to Aa2 from Aa1 in February 2016.1

New South Wales (NSW, Aaa stable) and Victoria (Aaa stable), which are more economically diversified than the three commodity-exporting states, have benefitted from a fall in interest rates and the Australian dollar since the end of the mining boom. Thesefactors have bolstered growth in housing, higher education, tourism and agriculture, and will in turn support tax revenues. Housingmarkets have been buoyant in Sydney and Melbourne, with prices rising by 14.3% and 10.5% respectively in the year to February 2016.However, this increase has raised the risk of the housing market slowing, and a sharper correction cannot be ruled out.

The economies of South Australia (Aa1 stable) and Tasmania (Aa1 negative), which are more narrowly based and less affluent, have alsobenefitted from more supportive domestic conditions.

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5 20 April 2016 Australia Credit: Subdued Commodities Prices and External Vulnerabilities Constrain Credit Profiles

The commodities downturn poses a fiscal challenge for the resources-dependent states, given their reliance on royalty revenues,and will weigh on their tax revenues as their economies slow. These states are now building a recovery in royalty income into theirprojections, but this is not assured if commodity prices remain low.

Most states project improvements over the next four years, and five expect to be near balance or in surplus by fiscal year 2018/19(Exhibit 5).

However, we view the potential for more sluggish revenue growth as a risk across all states, potentially undermining their plans toachieve fiscal balance.

Exhibit 5

Some States Closer to Fiscal Balance than OthersFiscal Balance and Forecasts by State, % of GSP

Sources: Moody’s Investors Service, Australian States Mid-Year Review Reports fiscal year 2015/16

Aside from resource-related revenues, any shortfall in the budgeted 5.2% average increase in Goods and Services (GST)-backedCommonwealth grants over the next four years would dampen the outlook for states, which rely on such grants for nearly 24% oftheir revenues. In addition, there is a risk that state governments’ resolve to eliminate deficits, in some cases after several years of costcontrols, might loosen on the back of weaker economic growth.

Corporates: Resource, property and construction sectors face downside risksMost rated corporates in Australia are well positioned, with moderate gearing and strong liquidity. The lower Australian dollar is alsoadding support to sectors such as education, manufacturing, tourism and the airlines, which have been further buoyed by lower fuelcosts. For example, these factors are contributing to Qantas Airways Ltd’s leverage reduction, reflected in an upgrade of its issuerrating, to Baa3 from Ba1, in February.2

Unsurprisingly, however, corporates in the resources or resources-related sector are feeling the pressure from lower commodity prices,while those in the construction and building materials sectors will face challenges from a housing slowdown.

Construction and Building Materials, Property Developers, REITS and RetailResidential property construction continues to support the construction and building materials sectors, but the sector will facechallenges should activity cool broadly, particularly given that the sharp slowdown in resources-related spending is already taking itstoll. Larger, listed residential property developers with a degree of international diversification are better placed to withstand thesechallenges.

Commercial construction has been subdued for some time and will not fully compensate for a slowdown in residential housing. Butthere is still a large pipeline of state and federal projects on road and rail which will provide a measure of support.

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6 20 April 2016 Australia Credit: Subdued Commodities Prices and External Vulnerabilities Constrain Credit Profiles

Office real estate investment trusts (REITs) will be challenged to maintain earnings growth in an environment of high vacancy rates(Exhibit 6). However, they are more exposed to the more economically diversified cities of Sydney and Melbourne than the moreheavily resources-dependent centres of Perth and Brisbane.

Exhibit 6

Rising CBD Office Vacancy Rates Is Greatest Challenge to SectorNational capitals CBD vacancy rates, %

Sources: Moody’s Investors Service, Property Council of Australia

In the retail REIT space, negative rental reversions are being offset by quite strong non-discretionary spending, largely due to the wealthfrom strong house price increases. Consequently, we expect resilience and rating stability in the retail REIT sector for the remainder of2016.

Within the retail sector itself, rating actions have been driven exclusively by company-specific factors: Woolworths (Baa2 negative) wasdowngraded by one notch in March, reflecting negative comparable-store sales in its core supermarkets division.

Mining and Mining Services CompaniesThe slowdown in Chinese demand is having a particularly marked effect on Australian exporters with high exposure to iron ore andcoal (Exhibit 7). Demand in India (Baa3 positive) and other emerging economies -- as well as from traditional buyers such as Japan (A1stable) and Korea (Aa2 stable) -- will take up some of the slack in Chinese demand, but not enough to fully compensate for it.

Exhibit 7

Exporters With Iron Ore and Coal Exposure Have Felt Brunt of Weaker Chinese DemandPrices for iron ore and thermal coal, rebased January 2014 = 100

Sources: Moody’s Investors Service, Bloomberg

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7 20 April 2016 Australia Credit: Subdued Commodities Prices and External Vulnerabilities Constrain Credit Profiles

The effects of the downturn in commodity prices and demand are very visible in deteriorating earnings, staff cuts, and delays or evensuspension of new projects. The indirect effect on companies in the mining services sector has also been considerable.

Large Australian miners have moderated the negative impact by large-scale cost reductions and, at today’s commodity prices, aregenerating sufficient cash flow to provide scope for debt reduction to further support their credit profiles going into 2017-18. Thishas limited the negative rating impact of such companies relative to global peers: BHP Billiton Limited is rated at A3 negative andFortescue Metals Group Limited at Ba3 negative, following two- and one-notch downgrades respectively in March.3

Australian dollar weakness has also helped to reduce costs. Combined with a rebound in the gold price, this has supported gold minerssuch as Newcrest Mining Limited, affirmed at Baa3 stable in March.4

Conversely, we expect lower-rated mining and mining service companies to face increased refinancing risk as their export earnings havecome under pressure. As such, we are focused on their ability to fund themselves internally and to repay debt as it comes due. In thisenvironment, we expect more assets will be put up for sale and the industry will see some consolidation.

Infrastructure: Stable in the face of testing credit conditionsThe stable credit profiles of most issuers in the rated Australian infrastructure portfolio, despite challenging credit conditions, reflecttheir strong market positions, essential nature, low operating risk and strong liquidity.

The infrastructure sector has manageable refinancing risk, with annual debt raisings by rated issuers over each of the past threecalendar years amounting to between two and four times the amount of debt maturing over the 18 months to June 2017. The provenability of rated issuers to raise funding from a diversity of markets further mitigates their exposure to the closure of any single fundingmarket.

A minority of issuers in our portfolio, however, have material exposure to commodity risk. This can be either indirect, as with issuersin the coal logistics chain -- such as the coal terminals and rail haulage operators, which have contracts with resources producers -- ordirect, such as Origin Energy Limited (Baa3 negative), which has earnings directly linked to oil prices through its 37.5% investment inthe Australia Pacific LNG project.

Consequently, we have downgraded the ratings of dedicated coal terminals, DBCT Finance Pty Ltd and Adani Abbot Point Terminal PtyLtd to Ba2 negative, as well as below-rail services provider Australian Rail Track Corporation to A1 stable.5.

With the exception of Origin Energy, most of the other Australian unregulated energy utilities earn the bulk of their revenue from salesof electricity and gas to domestic customers which are not directly affected by international oil prices.

Whilst we have seen oil-linked pricing becoming more common in domestic gas contracts -- a reflection of the alternative channel toexport markets through the recently completed large LNG export terminals -- we expect domestic gas prices in Australia to rise againstthe trend of falling oil prices. This reflects the additional demand for feedstock gas by the LNG plants and the uncertainty over thedevelopment of new gas supply in the domestic market.

We expect electricity prices in the national electricity market to remain around prevailing levels over the next 12-18 months,notwithstanding the falling cost of fuel (gas and coal) in international markets. This is because a majority of Australia’s power stationssource their coal from domestic sources on a cost plus margin basis. Wholesale prices, however, are subject to some downside risk inthe medium term, due to the additional supply coming from new renewable generators and declining per capita demand for energy.

Banking Sector: Resilient amid weakening credit cycle, active and complex regulatory agendaAustralian banks’ capital levels are strong and improving, funding structures remain stable, and asset quality has so far proven robust.However, weak commodities markets will likely result in increased loan impairments in bank portfolios over time.

Australian banks’ direct exposure to the resources sector is relatively low. For the four majors, direct commodity exposureranges between 1.0% and 2.2% of their total exposures. The major banks’ resources exposures are relatively well diversified acrosssectors, but do have a larger weighting to oil and gas companies and related industries (Exhibit 8).

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8 20 April 2016 Australia Credit: Subdued Commodities Prices and External Vulnerabilities Constrain Credit Profiles

Exhibit 8

Large Australian Banks’ Direct Exposure to Commodities Sector Is Low

Sources: Moody’s Investors Service, company reports

Problem loans from this sector are likely to increase in the coming quarters and losses could become significant relative to the banks’current loan-loss buffers. Resources exposures, on average, represent around 46% of the major banks’ Common Equity Tier 1 capitaland loan loss reserves. Nevertheless, given the banks’ strong earnings, we expect the increase in credit costs to be manageable.

Housing risks are rising, but are long-term in nature. Concerns regarding Australia’s housing market have risen somewhat overthe past two years, given the rapid price appreciation which occurred in Sydney and Melbourne between 2013 and 2015. We think thestructural imbalances in the market – low affordability and high household leverage – could lead to a gradual adjustment over the longrun, although a sharper correction cannot be wholly ruled out.

In the near term, however, a number of mitigating factors will continue to support stability.

First, interest rates are likely to remain low the foreseeable future, helping borrowers repay their mortgages.

Second, banks’ portfolios are fairly healthy. Average loan-to-value ratios (LVR) are in the high-40s range. In our stress tests, residentialmortgage portfolios do not generate excessive losses, including in scenarios based on developments in the US during 2007-09.

Third, mortgage insurance remains an important pillar of support, and capital levels of the mortgage insurance firms remaincomfortably above regulatory minima.

Finally, macroprudential measures in 2015 have helped to firm up underwriting standards. Exhibit 9 shows that these initiatives arehaving some impact and, in our view, the credit quality of the 2016 origination vintage should improve.

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9 20 April 2016 Australia Credit: Subdued Commodities Prices and External Vulnerabilities Constrain Credit Profiles

Exhibit 9

Macroprudential Measures Taking EffectNew housing loans by type, % of total new housing loan approvals

Sources: Moody’s Investors Service, Australian Prudential Regulation Authority

Meeting incoming regulatory changes will result in an adjustment of the banks’ liabilities structures, potentially at afundamental level. We expect capital levels to continue increasing on the back of domestic initiatives and the Basel IV regulatoryagenda. Furthermore, discussions over total loss absorbing capacity (TLAC) requirements and a proposed net stable funding ratio(NSFR) standard could also impact Australian banks credit profiles going forward.

Structured Finance: Early signs of delinquenciesThe impact of the slowdown in the resources sector has been varied for both residential mortgage-backed securities (RMBS) and asset-backed securities (ABS).

Some early signs of delinquencies have emerged, given the rise in unemployment in the highly resources-dependent states of WesternAustralia and Queensland, but for rated RMBS overall, geographic diversity and improved loan-to-value ratios due to price appreciationwill afford some protection. Strong house price growth in recent years means that borrowers at risk of default can still sell their housesquickly and at prices sufficient to fulfill their repayment obligations.

Within our rated RMBS portfolio, the current average loan to value ratio of mortgages – based on house values at origination – is63.2%. After considering price appreciation, this ratio falls to 52.3%, meaning that borrowers have benefited from a weighted averagehouse price rise of 28.1%. Such a level of appreciation provides an additional 10.9 percentage points in terms of an equity buffer forabsorbing losses if loans default.

Loans originated in 2013-15 during the peak period of the housing boom are the most closely watched. These loans will most probablybe included in those new RMBS deals which typically comprise mortgages originated one to three years earlier. In addition, we expectthese new deals will includes a greater proportion of riskier investment and interest-only loans.

However, new underwriting rules will improve the quality of collateral over the longer term, despite the situation for individualtransactions depending on the spread of the seasoning for loans.

By contrast, for ABS, the downturn in the mining regions will have a more direct impact on their collateral than RMBS, as suchtransactions are exposed to loans to small- and medium-sized enterprises and commercial borrowers. Such entities have direct andindirect exposures to the resources sector.

But for now, ABS should prove resilient in the near term, given that the increased risks flowing from the mining regions are mitigatedby geographic diversity and tightening lending standards.

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Appendix 1: Outlook for Commodity PricesWe do not forecast any material change in commodity prices in the next few years. For energy, metal and mining commodities weassume that, by 2017, price levels will still be significantly below 2014 levels.

A large inventory build-up, a slow supply response and muted demand for commodities from China and other key importers willcontinue to put pressure on commodity prices this year and next.

While commodity prices have recovered somewhat from their end of 2015 lows, we expect these pressures to drive them closer againto our long-run average assumptions.

In particular, we expect iron ore prices to remain under considerable pressure and assume an average price of $40/tonne (iron ore 62%Fe China) for 2016 and 2017 -- and $30/tonne for both years in our stress-case scenario. We assume an average copper price of $2.15/lb in 2016 and 2017, with the stress-case price at $1.90/lb for both years, and recovery prospects are likely to be delayed beyond 2017.Thermal coal and metallurgical coal assumptions are at $55/tonne (Newcastle thermal coal) and $70/tonne (high-quality metallurgicalcoal) for 2016 and 2017, respectively.

Our expectation is for oil prices to remain subdued, but with a partial rebound over the medium term. Our assumption for Brent Crudeis $33 per barrel in 2016, then $38 in 2017 and $43 in 2018. We have a stressed price assumption of $25.

Based upon our revised, weaker global growth expectations for 2016, softening demand, the strength of the US dollar, and continueduncertainty surrounding metal demand in China, we assume that base metal prices will remain under downside pressure. We expectthat the base metals downturn will be deeper and longer.

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11 20 April 2016 Australia Credit: Subdued Commodities Prices and External Vulnerabilities Constrain Credit Profiles

Appendix 2: Outlook for Australian Property PricesOn the outlook for the housing market nationally, the CoreLogic-Moody’s Analytics Australian Forecast Home Value Index expectshouse price appreciation to slow in 2016, which is in line with our view.

This forecast reflects lower income growth as the Australian economy transitions away from mining-related investment, as well as thestrong build-up of housing supply in several major cities over the last two years. Nevertheless, accommodative policy, robust rentalgrowth, and a recovering labour market are expected to support valuations over the medium term.

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Moody's Related ResearchSovereign and Sub-Sovereign Research

» Government of Australia – Aaa Stable: Quarterly Update, March 2016 (1019468)

» Australian States & Territories: Progress on Improving Financial Performance, but Risks Remain, April 2016 (1019334)

Selected Corporate and Financial Institutions Research

» Australian Mining Sector Ratings: Review Summary, April 2016 (189004)

» Australian Coal Logistics Network: Revenue Diversification, Lower Leverage Separate Coal Hauliers from Coal Terminals, April 2016 (1022660)

» Australian Banks: Pressure on Resources Sector Points to Weakening Credit Cycle, March 2016 (1021732)

» Australian Banks: Heard From the Market: Macroeconomic Risks and Evolving Regulations Dominate Investor Concerns, February 2016 (1013449)

Structured Finance Research

» RMBS – Australia: Record Low Rental Yields Increase Risks for Residential Property Investors, April 2016 (1020998)

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of thisreport and that more recent reports may be available. All research may not be available to all clients.

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13 20 April 2016 Australia Credit: Subdued Commodities Prices and External Vulnerabilities Constrain Credit Profiles

Endnotes1 See Rating Action: Moody's downgrades Western Australia's rating to Aa2 from Aa1; changes outlook to stable, February 2016.

2 See Rating Action: Moody's upgrades Qantas to Baa3; outlook stable, February 2016.

3 See Rating Action: Moody's downgrades BHP Billiton to A3; outlook negative and Moody's downgrades Fortescue's CFR to Ba3; outlook negative, March2016.

4 See Rating Action: Moody's confirms Newcrest's Baa3 rating; outlook stable, March 2016.

5 See Rating Action: Moody's downgrades DBCT's rating to Ba2; outlook negative, Rating Action: Moody's downgrades Adani Abbot Point Terminal's ratingto Ba2; outlook negative and Rating Action: Moody's downgrades ARTC to A1; outlook stable

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Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY'S affiliate, Moody's InvestorsService 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 intendedto 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, yourepresent 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 orindirectly 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 asto 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 investors. It would be recklessand inappropriate for retail investors to use MOODY'S credit ratings or publications when making an investment decision. If in doubt you should contact your financial or otherprofessional adviser.

Additional terms 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'sOverseas 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 NationallyRecognized Statistical Rating Organization ("NRSRO"). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by anentity 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 registeredwith 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 preferredstock 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 feesranging from JPY200,000 to approximately JPY350,000,000.

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

REPORT NUMBER 1022830