Moody's Credt Outlook - May 12, 2014

1 MOODYS CREDIT OUTLOOK 12 MAY 2014
12 MAY 2014
NEWS & ANALYSIS
Corporates 2
Freeport's Sale of Eagle Ford Shale Properties Is Credit Positive
Caesars' New Term Loan Helps Near-Term Liquidity, but Not
Creditors
Walgreen's Debt Reduction Plan Is Pressured by Alliance Boots'
Acquisition
Legacy Reserves' Asset Deal with WPX Is Credit Positive for
Both
Cimarex's Cana-Woodford Acquisition Is Credit Positive
Platform Equity Issuance Eases Credit Strain from
AgroSolutions Purchase
Mondelez Coffee Business Spinoff and Restructuring Are Credit
Negative
Siemens' New Strategic Plan Will Yield Minor Savings, Not
Enough to Change Credit Quality
ITV's Acquisition of Leftfield Entertainment Group Is Credit
Positive
Alibaba IPO Would Be Credit Positive for Softbank
Decline in Mobile Number Portability Is Credit Positive for
Korea's Mobile Operators
Genting's Casino Project in Las Vegas, Nevada, Is Credit
Negative
Unwinding of Asia Resource Minerals Would Be Credit Negative
for Berau Coal
Infrastructure 18
Colorado Springs Utilities' Liquidity Extinguishes Negative
Credit Effect of Coal Plant Fire
Banks 20
US Department of Justice Says Banks Are Not Too Big to Jail
Bank of Nova Scotia's Investment in Canadian Tire Financial Is
Credit Negative
FirstRand Bank's Contractual Non-Viability Securities Issuance
Is Credit Positive
Problems at Korean Banks' Overseas Operations Are Credit
Negative
Sub-sovereigns 27
German Lnder Tax Revenue Growth Aids Credit Positive Fiscal
Consolidation
US Public Finance 29
New York City Labor Settlement Increases the Three-Year
Budget Gap by $5 Billion
Nassau County, New York, Control Board Approves Union
Contracts, a Credit Negative for the County
New Jersey's Poorest School Districts Face Looming State Aid
Cuts
Less Driving in US Means More Pressure on States
RATINGS & RESEARCH
Rating Changes 38
Last week we downgraded Newmont Mining, Telefonaktiebolaget
LM Ericsson, Centrais Eletricas Brasileiras, Algeco Scotsman Global
Finance and Bank Morgan Stanley, and upgraded Grupo Nacional
de Autopistas, Banco Bilbao Vizcaya Argentaria Paraguay, Banco
Continental, Deutsche Apotheker- und Aerztebank, International
Lease Finance, KBC Bank and Radian Group, among other rating
actions.
Research Highlights 46
Last week we published on Aereo, South American corporate
liquidity, Chinese state-owned enterprises, Brazil electricity
distributors, FirstEnergy Corp, PT Perusahaan Gas Negara Persero,
Chinese banks, Thai banks, Australian banks, Australian mortgage
insurers, Russia and the EU, Pakistan, Brazil, Democratic Republic of
Congo, Sub-Saharan Africa countries, North Carolina municipals,
US municipal bond defaults, US Midwest private colleges, US law
schools, US tobacco settlement bonds and US ABS, among other
reports.
RECENTLY IN CREDIT OUTLOOK

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NEWS & ANALYSIS
Credit implications of current events


Corporates
Freeports Sale of Eagle Ford Shale Properties Is Credit Positive
Last Wednesday, Freeport-McMoRan Copper & Gold Inc. (FCX, Baa3 stable) announced that its oil and
gas subsidiary Freeport-McMoRan Oil & Gas LLC (FM O&G Baa3 stable) had agreed to sell its Eagle
Ford shale assets in Texas to a subsidiary of Encana Corporation (Baa2 stable) for $3.1 billion.
1

Approximately half the after-tax proceeds will be used to repay debt. The remaining $1.4 billion will be
used to acquire certain deepwater Gulf of Mexico (GoM) oil and gas interests from Apache Corporation
(A3 stable) in an agreement that was subsequently announced on Thursday.
The transactions are credit positive for FCX, which will benefit from an immediate reduction of its high
absolute debt levels, which grew by $17.2 billion to $20.2 billion in 2013 after it bought oil and gas assets
that now comprise FM O&G. These announcements are part of FCXs strategic objective to monetize
approximately $4 billion of energy assets to support debt reduction and asset repositioning in the GoM,
including the investment in additional GoM assets. The planned debt repayment also reinforces FCX's
stated commitment to consider divestitures and asset sales as a way to bring total debt down to around $12
billion by the end of 2016.
The balance sheet de-leveraging, albeit modest at this time, will improve FCXs position at its Baa3 rating,
especially at a time when weaker copper and gold prices will cause its earnings and cash flow generation to
decline from recent years. We expect FCXs debt/EBITDA ratio in a 3.0x-3.25x range over the next 12-18
months, assuming prices for copper at $3/pound, gold at $1,100/ounce and oil at $90/barrel of oil
equivalent (BOE). This ratio range is still acceptable for FCXs rating, although absolute debt levels remain
high. However, we expect debt levels to decline as FCX continues to execute its strategy to repay debt down
to around $12 billion by the end of 2016, with debt protection metrics improving commensurately over
this time frame.
The investment in additional GoM assets will complement FCXs existing operations in the area and
contribute to enhanced operating efficiencies, earnings and cash flow generation at FM O&G. FCX will be
receiving Apaches share in the Lucius (11.7% acquired, 23.33% already owned by FCX at 31 December
2013) and Heidelberg (12.5% acquired) projects, and 11 exploration leases. The assets being acquired
contain roughly 55 million BOE of proved, probable and possible reserves. The Lucius and Heidelberg
projects are scheduled to begin production by the second half of 2014 and mid-2016, respectively.

1
See Encanas Redeployment of Proceeds from Asset Sales Is Credit Positive, 7 May 2014.
Carol Cowan
Vice President Senior Credit Officer
+1.212.553.4999
carol.cowan@moodys.com
Arturo Reyes
Associate Analyst
+1.212.553.7245
arturo.reyes@moodys.com

This publication does not announce
a credit rating action. For research
publications that reference Credit
Ratings, 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


Caesars New Term Loan Helps Near-Term Liquidity, but Not Creditors
Last Monday, Caesars Entertainment Corp. (unrated) said its subsidiary, Caesars Entertainment Operating
Company, Inc. (CEOC, Caa3 negative), will issue a $1.75 billion first-lien term loan. We regard this move
as credit negative because it does little to avert the need for an eventual restructuring, which will lead to
creditor losses.
CEOC will raise the term loan under its existing bank credit agreement and use the proceeds to repay more
than $1 billion of debt due in 2015. However, this is only a short-term fix. Although there are no maturities
due in 2014, the company must repay another $1.7 billion in debt in 2016. The ultimate repayment
amount will depend on the outcome of bond tenders, successful syndication of the new term loan and
consent to a bank amendment.
Even so, CEOCs interest burden will continue to exceed EBITDA, which indicates that the company will
be unable to repay or refinance its 2016 debt maturities and that creditors will not receive the full value of
their holdings. If the transactions close as proposed, the amount of first-lien debt will increase by
approximately $900 million, which in turn will lower the recovery prospects for all classes of CEOCs debt.
As we noted in a 2 May report, we believe that an eventual restructuring at Caesars is inevitable because it
has weak liquidity and very high leverage. Assuming the proposed transaction closes, we estimate the
company will experience cash burn of $1.0-$1.2 billion in 2014 and 2015.
Along with the proposed refinancing transaction, CEOC launched an amendment to its bank agreement
aimed at giving CEOC covenant relief under the senior first-lien net debt covenant by raising the level to
7.25x from 4.75x. As we expected, Caesars removed its guaranty from CEOCs existing first- and second-
lien bonds another credit negative by selling 5% of its equity stake in CEOC for the very small amount
of around $6 million.
CEOC, which owns and manages casinos in most regional markets in the US, generated $6.3 billion in
annual revenue in 2013 and has about $18 billion of debt.

Margaret Holloway
Vice President- Senior Credit Officer
+1.212.553.4542
margaret.holloway@moodys.com

NEWS & ANALYSIS


Walgreens Debt Reduction Plan Is Pressured by Alliance Boots Acquisition
Last Tuesday, the UK-based Alliance Boots GmbH (unrated), 45% owned by Walgreen Co. (Baa1 stable),
said it will buy pharmacy chain Farmacias Ahumada S.A. (unrated) for an equity value of MXN8.3 billion,
or about $640 million. Although the acquisition will give Walgreen a sizable retail drug store presence in
Mexico and Chile, the deal is credit negative because it will likely be debt-financed.
A debt-financed deal would increase Alliances debt levels, and by extension those of Walgreen once it
completes its planned purchase of the remaining 55% Alliance stake in 2015. This will make it harder for
Walgreen to meet its net $11 billion debt target by its August 2016 fiscal year-end. Walgreens net debt
currently stands at around $7.1 billion and Alliance Boots net debt was 6.1 billion at 31 March 2013.
The deal is also credit negative because Farmacias Ahumada has a weaker market position than Walgreen
and Boots and Mexicos economy is struggling with weak growth.
Based upon the purchase price of Farmacias Ahumada, we estimate that the transaction will add about 0.1
turns to Walgreen's debt-to-EBITDA after it acquires the remaining stake in Alliance Boots. Given this
potential incremental debt, we now expect Walgreens debt-to-EBITDA to peak near 3.8x after it completes
the purchase next year, versus the current 3.7x (including 45% of Alliance Boots).
We believe Walgreen still has levers it can pull to increase its excess cash reserve, such that it will be able to
bring its debt levels in line with its net $11 billion target by the end of 2016. We therefore believe Walgreen
is still likely to reduce its debt to EBITDA to around 3.25x by the end of fiscal 2016, although we also
think the investment in Farmacias Ahumada may deprive Walgreen of opportunities to make a higher
return on a lower-risk investment.
The acquisition comprises two main businesses, which together operate over 1,400 stores, with combined
revenue of around 835 million (or about $1.4 billion). Farmacias Ahumada has a weaker competitive
position in both its markets than either Boots or Walgreens, which are both recognized as market leaders.
Farmacias Ahumada subsidiary Farmacias Benavides is the third-largest retail pharmacy chain in Mexico
with around 1,000 stores, and Farmacias Ahumada is one of the three-largest retail pharmacy chains in
Chile, with around 400 stores.

Maggie Taylor
Vice President - Senior Credit Officer
+1.212.553.0424
margaret.taylor@moodys.com

NEWS & ANALYSIS


Legacy Reserves Asset Deal with WPX Is Credit Positive for Both
Last Tuesday, Legacy Reserves LP (B2 positive) said it would acquire from WPX Energy Inc. (Ba1 stable)
an interest in natural gas assets in Colorados Piceance Basin for $355 million in cash.
The deal is credit positive for both companies and led us to change the outlook on Legacys corporate
family rating to positive from stable. The Piceance properties will substantially increase Legacys size and
diversification, increasing its total proved reserve base and daily production by more than 50% from year-
end 2013 and first-quarter 2014 levels. Meanwhile, the sale proceeds will help fund WPXs development of
oil-producing properties.
The acquisition includes an escalating working interest (i.e., to 41% from 29%) in 2,730 WPX-operated
natural gas wells across three fields in northwest Colorado. These reserves include 276 billion cubic feet of
natural gas (47 million barrels of oil equivalent, or boe), all of it proved developed reserves.
Along with the cash, Legacy will fund the Piceance acquisition with new incentive distribution rights
(IDRs). When the acquisition closes, Legacy will issue and vest to WPX 100,000 IDRs or 10% of the total,
and an ability to vest in to up to 30%, depending on future asset drop-downs from WPX to Legacy.
Legacy primarily holds long-lived reserves in a small, concentrated part of the Permian Basin of west Texas,
with good exposure to oil production that supports its strong returns, but its production base is small. The
WPX acquisition, along with two small bolt-on purchases announced in March 2014, will boost Legacys
production to 30,868 boe per day (boe/d), up from 19,478 boe/d in the first quarter of 2014.
Buying the Piceance properties will help Legacy expand from its traditional Permian Basin position,
effectively decreasing the companys share of reserves from the Permian to 52% from 78% before the deal.
WPX, a low-cost operator, will continue to operate the wells, which produce about 83% natural gas.
Legacys working interest in the assets automatically step up to 41% in January 2016, and until then,
production will be flat, with only very minimal associated capital expenditures given that all the reserves are
already proved developed.
While the newly created IDRs add complexity to Legacys master limited partnership structure and can
become a costly cash payout over time, WPX will not be able to receive cash distributions from its new
IDRs until Legacys quarterly limited partner distribution rate increases by at least 14% from current levels.
Legacys general partner can reset the IDR splits and also convert the IDRs to limited partner units once
Legacy meets certain distribution thresholds.
The other credit-positive aspect of the deal is that the unvested IDRs provide WPX with an incentive to do
more transactions with Legacy. The IDRs have no voting rights, and Legacys general partner, which owns
18% of Legacys limited partner units, will not own any of the IDRs.
Meanwhile, the sale gives WPX funds for its planned capital expenditures, helping it avoid a significant
increase in debt this year. Although the company is selling down some of its existing Piceance natural gas
production, it retains all of its future development opportunities in that core asset. The deal also allows
WPX to halt its plan to form its own master limited partnership, which would have made its corporate
structure more complex and raised structural subordination issues.

Gretchen French
+1.212.553.3798
gretchen.french@moodys.com
Peter Speer
Senior Vice President
+1.212.553.4565
peter.speer@moodys.com

NEWS & ANALYSIS


Cimarexs Cana-Woodford Acquisition Is Credit Positive
Last Wednesday, Cimarex Energy Co. (Ba1 positive) agreed to pay $497.4 million to acquire properties in
Western Oklahomas Cana-Woodford play from QEP Resources, Inc. (Ba1 stable), and to sell a 50%
working interest in the acquired properties to Devon Energy Corporation (Baa1 stable) for $248.7 million.
The deal is credit positive for Cimarex because it will improve the exploration and production companys
Cana-Woodford stake and offer greater opportunities for production growth there. Although Cimarex
intends to fund the transactions $248.7 million net cost by tapping its $1 billion revolving credit facility,
we expect that the company will maintain conservative metrics that will offset increased leverage in the
second quarter this year.
Cimarexs share of the acquired Cana-Woodford assets includes 23,000 barrels of oil equivalent (boe) of
proved developed reserves, 64% of which is natural gas. The acquisition will also add 5.8 million boe/day of
production, 63% of which is natural gas, while maintaining the companys overall diversified production
mix of 50% gas and 50% liquids. We expect Cimarexs average daily production to approach 140,000
boe/day this year. The acquisition adds 50,000 net acres, 30,000 of which are in the oil-rich East Cana
section of Cana-Woodford.
The acquisition, along with the recent performance improvements in Cimarexs existing wells in the Cana-
Woodford play, improves the balance in Cimarexs production growth opportunities between Cana-
Woodford and in the Permian Basin of West Texas. Cimarexs Permian assets will still dominate growth for
now, accounting for 79% of its capital spending in 2014. Over the past several years, Cimarex has grown
organically, with only limited debt. The new Cana acquisition demonstrates that Cimarex is willing to
supplement its organic growth with debt-funded bolt-on acquisitions. Even with the new acquisition,
Cimarex will maintain strong leverage ratios of about $13,500 debt/average daily production, and $4
debt/proved developed boe reserves.
The sale is credit positive for QEP, because this transaction, along with other announced asset sales, repays
the debt that the company borrowed to fund its $950 million acquisition of Permian Basin properties in
February.

Gretchen French
+1.212.553.3798
gretchen.french@moodys.com
Gareth Bossard
Associate Analyst
+1.212.553.7462
gareth.bossard@moodys.com

NEWS & ANALYSIS


Platform Equity Issuance Eases Credit Strain from AgroSolutions Purchase
Last Tuesday, Platform Specialty Products Corporation (B1 stable) announced a $200 million private
issuance of public equity (PIPE) that would support its $1 billion acquisition of Chemtura Corporations
(Ba3 stable) AgroSolutions business. The deal is credit positive for Platform, a special purpose acquisition
company endeavoring to create a much larger specialty chemicals company.
The AgroSolutions acquisition would expand Platforms business diversity with a new vertical in
agricultural chemicals and seed treatment without increasing its debt significantly, since the company is
using equity to support the acquisition. Platforms $200 million PIPE offering, 2 million shares of Platform
stock (which we estimate has a $40 million value), and cash on the balance sheet, $170 million of which
was generated from the exercise of warrants in the first quarter, will all help finance the $1 billion
AgroSolutions purchase.
As part of the transaction, Chemtura will supply active ingredients used to produce agricultural products for
four years at current costs, which will support AgroSolutions margins. Platform expects some additional
synergies and cost-saving opportunities next year, although we do not expect sizable savings for the
combined company.
Buying AgroSolutions will be costly: the $1 billion purchase price and the units $100 million EBITDA
imply a purchase multiple of 10x. But from a business perspective, the acquisition fits Platforms goal of
becoming a much larger company, expanding its product offerings and geographic footprint, contributing
about $450 million in annual revenues with strong EBITDA margins above 20%.
The deal will be manageable from a credit perspective as well. As of March 2014, Platform had a
debt/EBITDA ratio of 4.3x. By contributing equity and using proceeds from its PIPE offering plus at least
$225 million cash, Platform can complete its AgroSolutions purchase by issuing at most $525 million in
debt, keeping its debt/EBITDA below 5x.
A leverage ratio below 5x assumes $100 million or more of EBITDA from AgroSolutions. Since Platform
will generate additional cash before the deal closes in late 2014, the company might be able to put over
$300 million in cash toward the deal, bringing the amount of debt it needs to less than $450 million.

Lori Harris
Analyst
+1.212.553.4146
lori.harris@moodys.com

NEWS & ANALYSIS


Mondelez Coffee Business Spinoff and Restructuring Are Credit Negative
Last Wednesday, Mondelez International, Inc. (Baa1 stable) said it would spin off its high-margin global
coffee business and launch a $3.5 billion restructuring. We regard these actions as credit negative because
both favor shareholders at the expense of creditors.
Mondelez plans to use most of what it expects will be $5 billion in cash proceeds from the spinoff to
repurchase shares and will also receive a 49% equity interest in the new joint venture. If the spinoff closed
today, debt/EBITDA would increase to 4.0x or more from about 3.5x currently, which would adversely
pressure Mondelezs ratings.
As it stands, we expect that it will take at least a year for the company to obtain the necessary regulatory
approvals and complete required worker consultations. By then, we estimate that Mondelez will have cut
costs enough to boost operating profit margins by at least 100 basis points. Put another way, the company
will have boosted operating profit by more than $350 million during this time. This improvement would
reduce debt/EBITDA to around 3.0x by the time of the spinoff, but the ratio will rise back up to 3.5x or
more once the deal is complete.
Although the net effect of the transaction will be credit neutral from a credit-metrics perspective, we view
these actions as credit negative because managements intention to distribute most of the spinoff proceeds to
shareholders indicates that it will likely transfer the benefit of any future operating improvement to
shareholders from creditors.
The $3.5 billion of new restructuring charges is also unwelcome news for creditors because it is a further hit
to free cash flows that are already fully committed to share repurchases through 2016. We expect that a
significant portion of this incremental restructuring activity will be directed toward overhead and other
expense areas that will provide immediate and permanent cost reductions and generate stronger profit
margins and cash flows. But based on recent financial policy, this improvement will eventually lead to more
moves to enhance shareholder interests.

Brian C. Weddington, CFA
+1.212.553.1678
brian.weddington@moodys.com

NEWS & ANALYSIS


Siemens New Strategic Plan Will Yield Minor Savings, Not Enough to Change Credit
Quality
On Wednesday, Siemens Aktiengesellschaft (Aa3 negative) unveiled its new strategic plans to reduce
complexity within the organisation and increase profitability. However, the 1 billion of savings the
company expects the plan to achieve by 2016 is fairly small compared with Siemens 76 billion in
revenues.
Although the announced measures are steps in the right direction, they fall short of radical measures that are
likely to increase Siemens profitability and bring it closer to the levels Siemens peers, such as General
Electric Company (Aa3 stable) has achieved. In the past five years, Siemens generated (Moodys adjusted)
EBITA margins of 9%-13% compared to similarly rated General Electrics 13%-17% over the same period.
Siemens also announced three small M&A transactions and measures that could precede a fourth larger one
in the future. The announced measures include:
The creation of a new divisional structure leading to approximately 1 billion of cost savings
The healthcare business, which had revenues of 14 billion in fiscal 2013 ending September 2013, will
remain part of the group, but will be managed separately
The planned IPO of the small hearing aids business with estimated 650 million in revenues in 2013
The acquisition of Rolls-Royces aero derivative gas turbine business for 785 million in cash. The
acquired business had revenues of 871 million in 2013, of which 60% was services such as maintenance,
spare parts and upgrades
The creation of a joint venture with Mitsubishi-Hitachi Heavy Machinery in the field of metals
technologies, with Siemens 49% stake producing estimated revenues of 2 billion
New target ranges in terms of operating profit margins for each of the new divisions
The structural change should improve Siemens overall complex organisation and lead to a more efficient
decision-making process that reduces the risk of major losses in single projects. The announced disposals
will help Siemens focus on its strategy to become a pure business-to-business player with businesses from
power generation and energy management to building automation and healthcare. The metals business now
being merged with Mitsubishi Hitachi Heavy Machinery has been a weak business for some time and was
not a good fit with other company activities, and the disposal of the hearing aids business removes the last
remaining business-to-consumer-business from Siemens portfolio. However, these two disposals are
relatively insignificant relative to Siemens overall size.
Indeed, a more independently managed healthcare business could preface a divestment in the future, but a
sale could further depress Siemens average operating margins, although it would also give the company
additional strategic flexibility. Healthcare reported an operating profit margin of 15.0% in fiscal 2013
compared to 7.5% for the group as a whole.
The new operating profit margin targets given for each of the new divisions are similar to the previous
targets and do not suggest a significant change in the groups overall profitability. Overall, the groups target
for return on capital remains at 15%-20%. More positively, the company has introduced a target for cost
productivity gains at 3%-5% per year, which should avoid the need for one-off restructuring plans.

Roberto Pozzi
Vice President Senior Analyst
+49.69.7073.0719
roberto.pozzi@moodys.com

NEWS & ANALYSIS


ITVs Acquisition of Leftfield Entertainment Group Is Credit Positive
Last Wednesday, ITV plc (Baa3 stable) announced that it had acquired 80% of US production company
Leftfield Entertainment Group (unrated) for $360 million. The transaction is credit positive for UK-based
ITV.
The acquisition is ITVs largest to date as part of its effort to diversify a large part of its EBITDA from pure
advertising revenues, which have low forward visibility and are prone to wide cyclical swings. In 2013, ITV
acquired two UK-based and two US-based businesses for 198 million (including future potential earn-
outs). Hence, the current acquisition is sizable relative to the companys M&A track record.
Moreover, the Leftfield acquisition involves a higher acquisition multiple than ITVs previous deals. With
an unaudited EBITDA of $38 million, Leftfields valuation is at a12x multiple. With this additional
EBITDA, ITV Studios share of the companys total EBITDA for 2013 would have been around 24%,
compared with 21.5% before the acquisition, and this ratio could grow further in 2014.
Although ITV has not publicly stated how it will fund the acquisition, we believe it will use its large cash
balance, which totalled 518 million at year-end 2013, to fund the majority of the $360 million purchase
price. As such, we expect any increase in actual debt to have a marginal effect on ITVs leverage.
Our leverage analysis will also take into account the put option granted to Leftfield, which amounts to a
further payment by ITV of $440 million in five years for the remaining 20% of Leftfield. Leftfields ability
to exercise the option is conditional on Leftfield achieving EBITDA of $130 million at the time. Although
this put option will increase ITVs Moodys-adjusted leverage, we expect that the ratio will remain well
below our downward rating guidance of adjusted gross debt/EBITDA trending above 2.5x. At year-end
2013, ITVs Moodys-adjusted gross debt/EBITDA was 1.78x.

Christian Azzi
Analyst
+44.20.7772.5470
christian.azzi@moodys.com

NEWS & ANALYSIS


Alibaba IPO Would Be Credit Positive for Softbank
Last Wednesday, Japans SoftBank Corp.s (Ba1 stable) affiliated subsidiary Alibaba Group Holding
Limited (unrated), Chinas largest e-commerce company by sales, filed plans with the US Securities and
Exchange Commission for an IPO that would raise as much as $20 billion. The planned IPO is credit
positive for SoftBank, which owns a 34.4% stake in Alibaba, because it will provide the Japanese
telecommunications company with a source of alternative liquidity if it decides to sell some of its Alibaba
shares in the future and uses the proceeds to fund acquisitions or reduce leverage.
Cash from future potential sales of Alibaba shares would reduce SoftBanks dependence on having to raise
debt to finance acquisitions and business-enhancing investments. Debt-financed acquisitions pushed
Softbanks adjusted debt/EBITDA to around 4.0x in the fiscal year that ended 31 March from 3.2x a year
earlier. In July 2013, we downgraded SoftBanks issuer and senior unsecured bond ratings to Ba1 from
Baa3 to reflect the companys significantly weakened financial profile after the company increase its debt by
around 1.8 trillion ($21.6 billion) to finance its acquisition of Sprint Communications Inc. (Ba2 stable)
the same month.
SoftBank could use the proceeds to fund major acquisitions if it chooses to do so. Such targets reportedly
include T-Mobile USA, Inc. (Ba3 stable), the cost of which could exceed $20 billion based on T-Mobiles
market capitalization of around $25 billion as of 6 May. Funding such a deal with a significant portion of
its internal cash would ease the pressure on SoftBanks credit quality stemming from multiple debt-funded
acquisitions last year.
Acquiring T-mobile would enhance SoftBanks presence in the global telecommunications and Internet
markets, which would support the companys credit quality. T-Mobile, which is owned by Germanys
Deutsche Telekom AG (Baa1 stable), is the fourth-largest US telecommunications operator.

Peggy Furusaka
+81.3.5408.4027
peggy.furusaka@moodys.com

NEWS & ANALYSIS


Decline in Mobile Number Portability Is Credit Positive for Koreas Mobile Operators
On 2 May, the Korea Telecommunications Operators Association reported a significant drop for March
and April in the number of subscribers who switched mobile carriers through a regulatory system that
allows them to keep their phone numbers (mobile number portability, or MNP). The slowdown in the
number of subscribers switching carriers is credit positive for major Korean mobile operators such as SK
Telecom Co. Ltd. (SKT, A3 stable) and KT Corporation (Baa1 stable) because it indicates that their
marketing expenses, including handset subsidies, have declined and that their EBITDA margins will
improve in the second quarter.
The number of consumers who used MNP last month fell about 70% to 398,050, the lowest figure since
April 2006, from 1.3 million in February, the highest since June 2009. The decline resulted from a
regulatory crackdown in mid-March on excessive handset subsidies (Exhibit 1).
EXHIBIT 1
Korean Mobile Subscribers Switching Carriers
Number of subscribers using mobile number portability declined significantly after regulatory intervention in mid-March

Source: Korea Telecommunications Operators Association

As Exhibit 2 shows, the telcos marketing expenses and MNP activity are positively correlated because
subscribers switch mobile carriers when a competing carrier offers a higher handset subsidy than a
subscribers current carrier. Telcos have offered increasingly higher subsidies in an effort to win and retain
long-term evolution (LTE) subscribers, who generate higher average revenue per user than customers with
traditional plans. The subsidies increase the companies marketing costs and subsequently reduce their
EBITDA margins. In effect, MNP is an inverse and near-term leading indicator for EBITDA margins.
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p
r
-
1
0
J
u
l
-
1
0
O
c
t
-
1
0
J
a
n
-
1
1
A
p
r
-
1
1
J
u
l
-
1
1
O
c
t
-
1
1
J
a
n
-
1
2
A
p
r
-
1
2
J
u
l
-
1
2
O
c
t
-
1
2
J
a
n
-
1
3
A
p
r
-
1
3
J
u
l
-
1
3
O
c
t
-
1
3
J
a
n
-
1
4
A
p
r
-
1
4
T
h
o
u
s
a
n
d
s
Mobile Number Portability Apr-14 Feb-14
June 2009
April 2006
Yoshio Takahashi
Assistant Vice President - Analyst
+852.3758.1535
yoshio.takahashi@moodys.com
Clara Kim
Associate Analyst
+852.3758.1565
clara.kim@moodys.com
Minjib Kim
Associate Analyst
+852.3758.1527
minjib.kim@moodys.com

NEWS & ANALYSIS


EXHIBIT 2
Korean Mobile Carriers Marketing Expense to Service Revenue (Standalone)

Sources: Moodys Investors Service, KT, SKT, LGU, Korea Telecommunications Operators Association

Large handset subsidies that SKT, KT, and LG Uplus Corporation (LGU, unrated) offered during the first
quarter boosted their marketing expenses and contributed to their weak EBITDA margins. We expect that
their marketing expenses will decline and their EBITDA will increase in the second quarter because of the
steps that industry regulators have taken to limit handset subsidies. We estimate SKTs EBITDA margin
will exceed 30% in the second quarter from the reported 23% in the first quarter, while KTs will rise to
more than 20% from 19% over the same period, excluding one-time expenses for an employee early
retirement program it rolled out in April (Exhibit 3). We also expect 2014 leverage, as measured by
debt/EBITDA, to remain in line with our expectation of 1.4x-1.5x for SKT and 2.2x-2.3x for KT.
EXHIBIT 3
Second-Quarter Consolidated EBITDA Margins for SKT, KT and LGU Are Likely to Improve

Note: KTs fourth-quarter margins tend to be weak owing to seasonal increase in some expenses related to its fixed-line business. All three telcos have
fixed-line businesses, but KTs is much larger. KTs reported fourth-quarter 2013 and second-quarter 2014 EBITDA margins exclude one-time expenses,
including expenses for an employee early retirement program in April 2014.
Sources: Moodys Investors Service, KT, SKT, LGU

0
1
2
3
4
0%
10%
20%
30%
40%
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14E
M
N
P

(
M
i
l
l
i
o
n
s
)
MNP right axis KT SKT LGU
0%
5%
10%
15%
20%
25%
30%
35%
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14E
KT SKT LGU

NEWS & ANALYSIS


The Korean government allows telcos to subsidize up to KRW270,000 ($270) of the cost of each mobile
phone handset they sell to customers as part of a wireless tariff plan. But companies have frequently offered
much higher subsidies in their fight for LTE customers. On 13 March, Korean regulators imposed strong
penalties on all three telcos for their first-quarter violations of the governments guideline, including
suspending their acquisition of new subscribers for 45-59 days. The regulators also directed the telcos to
take steps to stop excessive handset subsidies.
We expect that regulators will continue their efforts to curb excessive handset subsidies throughout this year
to enhance fair competition. In fact, Koreas National Assembly passed a handset distribution law on 2 May
that will require telcos to follow the ceiling for handset subsidies set by the government beginning in
October 2014.

NEWS & ANALYSIS


Gentings Casino Project in Las Vegas, Nevada, Is Credit Negative
Last Wednesday, Malaysias Genting Berhad (Baa1 stable) unveiled details for the $4 billion multi-phased
development of Resorts World Las Vegas. The project is credit negative for Genting Berhad because it will
further increase the groups capital expenditure (capex) over the next two years, which in turn will increase
net debt leverage to around 1.0x from 0.3x at December 2013. Genting is also readying a bid on an
integrated casino resort project in Japan, which if won will also increase its leverage.
The company expects to begin the 24- to 36-month construction phase in Las Vegas in the second half of
this year, building on an 87-acre site along the Las Vegas Strip. The first phase will involve a more than
100,000-square-foot gaming floor, hotel tower, retail village and showroom. The Nevada Gaming Control
Board has recommended a gaming license for the project and final approval will be decided by the Nevada
Gaming Commission on 22 May. Genting bought the site from Boyd Gaming Corporation (B2 stable) in
March 2013 for $350 million.
With a number of expansion projects already underway, the Las Vegas development increases our estimate
of Gentings annual capex to MYR7.0-MYR11.0 billion ($2.2-$3.4 billion) from MYR5.0-MYR7.0 million
($1.5-$2.2 billion) during 2014-16. Projected capex includes the renovation of Resorts World Genting,
Malaysia, the development of an integrated casino resort on Jeju Island in Korea, other gaming
developments across the US and UK, expansion at non-gaming subsidiaries, and maintenance capex across
all operations.
Higher capex will result in negative free cash flow over the next two to three years and also threatens to
weaken the groups leverage. We expect consolidated net debt/EBITDA to gradually rise closer to our rating
Baa1 parameter of 1.0-1.5x over the next three years from 0.3x as of 31 December 2013, subject to equity
exercises across the group. Genting has outstanding warrants, exercisable over five years, that could raise up
to MYR5.9 billion ($1.8 billion).
The project also entails execution risk because it is Gentings first foray into Las Vegas, where gaming
growth has slowed in comparison to Asia and major resort development has been absent over the past
decade. As such, the EBITDA contribution of the initial phases of the project is uncertain.
The weakened credit profile arising from the investment in Las Vegas will reduce Gentings ability to make
a bid to develop an integrated casino resort project in Japan via its 51%-owned subsidiary, Genting
Singapore. But if a bid is successful, we expect the project to begin in 2016 with a sizable capex outlay that
we estimate would exceed the $5.6 billion development of Resort World Sentosa in Singapore. The scale of
this project could further stretch Gentings leverage and prolong the period of weakened credit metrics.

Dylan Yeo
Associate Analyst
+65.6398.8317
dylan.yeo@moodys.com

NEWS & ANALYSIS


Unwinding of Asia Resource Minerals Would Be Credit Negative for Berau Coal
Last Tuesday, Asia Resource Minerals plc (ARM, unrated), which owns 84.7% of Indonesian coal miner
Berau Coal Energy Tbk (P.T.) (BCE, B1 negative), announced that a number of the companys major
shareholders had proposed unwinding the UK-based holding company and delisting it from the London
Stock Exchange.
The proposal is credit negative because delisting ARM would mean that its financial statements, which
consolidate BCE, would no longer be subject to the listing rules of the UK regulator, the Financial Conduct
Authority. Removing that layer of regulatory oversight at BCE will likely weaken transparency and
accountability at the coal miner, which has had a history of corporate governance issues. An independent
review in 2013 revealed accounting irregularities, weaknesses in accounting practices, and $201 million of
expenses with no clear business purpose. The company has also been plagued by two rounds of key
executive and board member changes in the past three years.
The proposal is also credit negative if the shareholder distribution were to exceed cash balances at ARM and
distribute cash from BCE. Any decline in BCE's cash balance would erode the company's liquidity, which is
key for it to weather a period of persistently weak coal prices that are pressuring margins and cash flows
industry-wide. Newcastle thermal coal prices are currently trading at around $73 per ton, and we believe
they will need to recover closer to our long-term price assumption of $80 for companies such as BCE to
lower leverage. BCEs credit metrics are stretched for its rating. We expect its adjusted debt/EBITDA to
deteriorate to 4.5x-5x in 2014 versus the 3.75x we think is more appropriate for a B1 rating. BCEs strong
cash balances currently support its rating, but any reduction in cash other than for deleveraging purposes
would be credit negative and put the ratings under more pressure.
Samin Tan-controlled affiliates, Borneo Lumbung Energi and Metal (unrated) and RACL (unrated), which
own 48% of ARM, made the proposal. To enact the distribution, ARM would allocate its shares in BCE to
ARM shareholders. The Samin Tan affiliates believe the delisting would lower costs and potentially lead to
a distribution in excess of $500 million. This is a larger amount than ARM had initially indicated when it
promised to use at least $400 million of the $501 million in proceeds from the sale of its stake in Bumi
Resources Tbk (P.T.) (Ca stable) in March this year to fund a shareholder distribution.
Although ARM had a low cash balance as of 31 December 2013, excluding cash at BCE, we believe its cash
balance following the sale of Bumi Resources is now just over $500 million, which could fall short of the
planned distribution amount. Accordingly, any payout in excess of ARM's cash balances would require a
contribution from BCE, which had $408 million of unrestricted cash as of year-end 2013. At this point,
BCE's intended use of cash balances remains unclear. However, its 2017 bond indenture would allow up to
a $25 million dividend payment without bondholder approval, which protects the bondholders.
Weaker liquidity at BCE because of a more aggressive financial posture would also increase BCE's
refinancing risk while it prepares to refinance upcoming debt maturities. The distribution of ARM shares
would also create uncertainty about the board of directors composition and shareholder control at BCE,
further complicating refinancing plans. The company's next maturity is July 2015, when its $450 million
12.5% senior secured notes come due.
ARM aims to reach a decision on whether to proceed with the BCE share distribution by 3 June. Certain
other shareholders have indicated a preference to maintain the existing corporate and governance structure,
so the proposed distribution and de-listing is by no means assured.
Brian Grieser
Vice President - Senior Analyst
+65.6398.3713
brian.grieser@moodys.com
Rachel Chua
Associate Analyst
+65.6398.8313
rachel.chua@moodys.com

NEWS & ANALYSIS


BCE is an investment holding company listed on the Indonesian Stock Exchange. It has a 90% interest in
PT Berau Coal (unrated), Indonesias fifth-largest producer and exporter of thermal coal. Berau operates
three active mines and has estimated resources of about 2.2 billion tons, with probable and proven reserves
estimated at 509 million tons.

NEWS & ANALYSIS


Infrastructure
Colorado Springs Utilities Liquidity Extinguishes Negative Credit Effect of Coal Plant
Fire
Last Monday, a fire led to the outage of Colorado Springs Utilities Systems (Utilities, Aa2 stable) 254-
megawatt coal-fired Martin Drake Power Plant in downtown Colorado Springs, Colorado. Although the
fire resulted in the shutdown of the Drake plant, we expect Utilities automatic cost adjustment mechanism
and ample liquidity to mitigate the effects of the outage.
We expect Utilities to use its monthly electric cost adjustment mechanism to recover higher fuel and
replacement purchased power costs. However, there will be a short-term mismatch in cash flows, whereby
the cost recovery will lag the immediately incurred costs. The electric cost adjustment allows for recovery of
variable fuel and purchased power costs. The utility also has a history of passing through timely rate
increases, which have helped support its strong financial position. Utilities also has strong internal liquidity
(200 days of cash on hand as of December 2013) that it can use to absorb the higher replacement power
costs while Drake undergoes repairs and a change in the electric cost adjustment is made. However, if
Utilities waits to use the electric cost adjustment or decides to absorb some of the higher replacement power
costs, liquidity levels and debt service coverage would decline.
The severity of the credit effect is small now, but could grow depending on the magnitude of the damage,
the repair costs and time and the publics perception of the plant and Utilities response to the incident.
Increased public scrutiny and outcry may negatively affect Utilities willingness to pass through higher
short-term costs to customers and environmental activists may view this as an opportunity to build support
against the coal-fired plant.
Loss of the Drake plant is material because the coal-fired plant is one of Utilities lowest cost baseload power
resources, providing about one third of its annual power needs and 22% of its power capacity. The exhibit
below shows the effect of the loss of the Drake plant from a capacity perspective relative to Utilities all-time
peak demand.
EXHIBIT 1
Colorado Springs Utilities Systems Power Sources

Source: Colorado Springs Utilities System

-
200
400
600
800
1,000
1,200
2014 Net Summer Capability 2014 Net Summer Capability - Excluding Drake
M
e
g
a
w
a
t
t
Drake Baseload Capacity (Coal) Baseload Capacity (Hydro and Coal)
Intermediate Capacity (Combined Cycle) Peaking Capacity (Natural Gas)
Long Term Purchase Power Agreements Peak Demand (904 MW - June 2012)
Federico Beckmann
Associate Analyst
+1.212.553.1953
federico.beckmann@moodys.com
John Medina
+1.212.553.3604
john.medina@moodys.com

NEWS & ANALYSIS


The plant outage will force Utilities to replace the cheaper coal-fired power generated from Drake with
more expensive power generated from Utilities gas plants or purchased from other electric providers in the
region. Liquidity and debt service coverage for 2014 will weaken if Utilities does not recover the higher
energy costs before December 31. Moreover, if the outage extends through the summer, replacement power
costs could spike given the increase in demand tied to the summer.
Based on data compiled by SNL Financial, Drakes total variable cost during 2010-12 was around $25 per
megawatt-hour at a 68% average capacity factor, while total variable cost at Utilities 480-megawatt
combined cycle natural-gas-fired Front Range facility was approximately $36 per megawatt-hour at a 31%
average capacity factor. Given that Utilities generated 1.5 million megawatt-hours of electricity from Drake
in 2013, the financial effect could be substantial under a protracted outage.
Although the Colorado Springs Fire Department blamed the fire on lubricating oil coming in contact with
high temperature steam pipes, the fires root cause remains under investigation. The repair costs will likely
be covered by insurance, although insurance payments are not generally timely. If insurance proceeds are
not adequate, Utilities will have to pay the repair costs from cash on hand because these costs are not
automatically recoverable through the electric cost adjustment mechanism. These costs can be recovered
from a base rate increase that requires city council approval and takes longer to implement. Given the
downtown location of the plant, the fire was highly publicized and the investigation is likely to attract
significant public attention. The plant was also undergoing upgrades to comply with the US Environmental
Protection Agencys Mercury and Air Toxics Standards ruling; however, we understand that the fire did not
damage the new technology.

NEWS & ANALYSIS


Banks
US Department of Justice Says Banks Are Not Too Big to Jail
Last Monday, US Attorney General Eric Holder in a US Department of Justice (DOJ) video indicated a
greater willingness to pursue criminal charges against large banks the DOJ believes have violated the law.
This is credit negative for any large bank operating in the US that is being investigated by the DOJ.
Given the confidence-sensitive nature of financial institutions, the credit challenges for a bank facing a
criminal charge begin before the legal outcome, starting with client reactions. If a banks primary operating
entity or indeed any affiliate with significant operations in the US were subject to a criminal charge, we
think it would be difficult for that bank to avoid a potentially significant loss of client business in the US.
In particular, institutional clients are likely to be quite confidence-sensitive. Some might voluntarily choose
to disassociate themselves from a bank facing criminal charges. Others, such as pension funds, fiduciaries or
governments, are likely to have internal policies or legal prohibitions preventing them from continuing to
do business with a bank under criminal investigation.
Over the past decade, even as the DOJ pursued a number of actions against large banks for violations of the
law, it generally refrained from pursuing criminal charges against them. In March 2013, Attorney General
Holder gave Congressional testimony in which he acknowledged that concerns about the effect on a firms
many employees and the broader economy have at times influenced the DOJs actions. Critics said the
Attorney Generals statement meant that under DOJ policies, large banks were too big to jail.
In the DOJ video, Attorney General Holder directly addresses this charge, saying that although the DOJ
has to consider that criminal charges against a financial institution can sometimes trigger follow-on actions
by financial regulators, including the loss of the institutions charter, the potential for such severe
consequences simply means that federal prosecutors conducting these investigations must go the extra mile
to coordinate closely with the regulators that oversee these institutions day-to-day operations. So long as
this coordination occurs, it is fully possible to criminally sanction companies that have broken the law, no
matter their size.
We believe the DOJs concerns about unintended consequences of criminal charges will be addressed by
reasonable regulatory assurances that a criminal charge will not result in the revocation of a banks charters
or licenses.
But for confidence-sensitive firms, criminal charges can still cause significant harm, even when charters or
licenses are not revoked. In 2002, a loss of client confidence following the criminal indictment of the
accounting firm Arthur Andersen led to that firms failure, and in 1989 a no- contest plea to criminal
violations by the securities firm Drexel Burnham Lambert Inc. contributed to its bankruptcy the following
year.
UBS AG (A2 stable, C-/baa2 stable
2
) is a rare, recent example of a bank subject to a criminal charge. In
2012, as part of a settlement over accusations that it had attempted to manipulate various interbank rates

2
The ratings shown are UBS AGs deposit rating, its standalone bank financial strength rating/baseline credit assessment and the
corresponding rating outlooks.
David Fanger
Senior Vice President
+1.212.553.4342
david.fanger@moodys.com

NEWS & ANALYSIS


including LIBOR, a Japanese subsidiary of the bank pled guilty to one count of wire fraud in the US.
3
The
bank was able to obtain the necessary waivers so it was not legally prevented from any activities as a result of
this criminal violation, and although it is difficult to isolate its effect, the violation did not appear to lead to
a significant loss of clients. However, UBS had also already undergone a significant strategic repositioning,
multiple senior management changes, had cooperated extensively with regulatory authorities, and the
criminal violation involved only a small non-US affiliate. Had the affiliate been US-based, or were these
other factors not in evidence, we think the client fallout would have been more severe.

3
See UBS Libor Settlement is Credit Negative for Global Investment Banks, 20 December 2012.

NEWS & ANALYSIS


Bank of Nova Scotias Investment in Canadian Tire Financial Is Credit Negative
Last Thursday, Bank of Nova Scotia (BNS, Aa2 stable, B-/a1 stable
4
) announced that it had agreed to
acquire a 20% equity interest in Canadian Tire Financial Services (CTFS, unrated) for CAD500 million
and provide CTFS with a CAD2.25 billion credit card funding facility that will increase CTFSs ability to
finance its credit card portfolio and reduce its funding risk.
The acquisition is credit negative for BNS because it will increase its exposure to unsecured consumer credit
and to CTFSs credit profile, which is less creditworthy than BNSs existing book. Moreover, the
acquisition is capital-dilutive because of the unfavorable treatment of equity investments in risk-weighted
assets.
Canadian Tire is a national general merchandise retailer with more than 490 stores in Canada. CTFS,
Canadian Tires financial services arm, has 1.8 million active credit card customers and CAD4.4 billion in
receivables. The Canadian Tire partnership will introduce the BNS brand to an audience of retail shoppers
that will benenfit the bank through joint marketing opportunities. In addition, CTFSs higher revenue
yields will be accretive to BNSs earnings. CTFS generated revenues of CAD1 billion and net income before
taxes of CAD320 million in 2013.
As of January this year, BNSs Canadian credit card book was CAD4 billion, and we estimate the
transaction will expand the banks credit card exposure by roughly 22%. Although the acquisition will
increase BNSs customer base and provide cross-selling opportunities, the credit quality of the receivables
portfolio is lower and will dilute BNSs current credit metrics, which have historically been among the
strongest in Canada.
Credit card delinquencies at Glacier Credit Card Trust, the Canadian Tire securitization vehicle, are almost
1.5x higher than the average delinquency levels at major Canadian banks (see exhibit). Net charge-offs are
also almost double at Glacier as a result of the higher delinquency rates. Average monthly payment rates are
much lower for Glacier, which indicates that more customers are rolling over their balances and using their
cards as a means to finance their purchases instead of as a form of payment. Although not consolidated, this
investment would increase BNSs provision for credit loss ratios if it were.

4
The bank ratings shown in this report are the banks deposit rating, its standalone bank financial strength rating/baseline credit
assessment and the corresponding rating outlooks.
Fadi Abdel Massih
Associate Analyst
+1.416.214.3834
fadi.massih@moodys.com
David Beattie
+1.416.214.3867
david.beattie@moodys.com

NEWS & ANALYSIS


Comparison of Canadian Tire Financial Services Credit Card Portfolio with Major Canadian Banks
Trust Sponsor Sponsor Rating
Credit Ratios 2013*
Delinquency Ratio
Net Charge-Off
Ratio
Average Monthly
Payment Rate
Canadian Credit Card
Trust
National Bank of
Canada
Aa3 stable, C/a3
stable
2.0% 4.2% 39%
Golden Credit Card
Trust
Royal Bank of
Canada
Aa3 stable,
C+/a2 stable
6.0% 2.2% 46%
Master Credit Card
Trust II
Bank of Montreal Aa3 stable,
C+/a2 stable
3.1% 2.8% 44%
CARDS II Trust Canadian Imperial
Bank of Commerce
Aa3 stable,
C+/a2 stable
6.4% 3.8% 39%
System Average 5.4% 3.2% 42%
Glacier Credit Card
Trust
Canadian Tire Unrated 7.9% 5.9% 24%
*All data is for calendar year 2013, except for the Bank of Montreals, which is for month-end December 2013; CIBC data is as of the fiscal year ended
May 2013 and includes the Aerogold portfolio; average monthly payments are based on an unweighted average of the credit card trusts of the four
banks.
Source: Company reports and Moodys Investors Service analysis

The all-cash acquisition will have a slight negative effect on BNSs CET1 ratio. Canadian Tire also holds a
put option to sell an additional 29% to BNS within the next 10 years at the then fair market value. The
additional ownership could at a later stage increase non-controlling interest at the bank which doesnt
entirely qualify for regulatory capital. The non-controlling interest account for BNS is above the average of
Canadian peers, due to the structure of investments the bank has made.

NEWS & ANALYSIS


FirstRand Banks Contractual Non-Viability Securities Issuance Is Credit Positive
Last Monday, International Finance Corporation (IFC, Aaa stable) announced that it had invested $172.5
million (or around ZAR1.8 billion) through a private placement in FirstRand Bank Limiteds (A3 negative,
C-/baa1 stable
5
) contractual non-viability Tier 2 securities. At the same time, FirstRand is in the process of
issuing up to ZAR2 billion of similar Basel III-compliant Tier 2 notes in the local market. These
subordinated debt issuances are credit positive for FirstRands senior creditors because they provide an extra
loss-absorption cushion and help meet Basel III liquidity requirements.
Under South Africas Basel III framework, any new capital-qualifying securities other than common equity
must contain explicit terms that impose losses on investors under certain conditions. FirstRands contractual
non-viability subordinated debt will be classified as Tier 2 under Basel IIIs regulatory-eligible capital. It has
language written directly into its contractual terms specifying that the securities absorb losses through a
partial or full principal write-down at the point of non-viability, as determined by the regulator.
These two issuances, totalling approximately ZAR3.8 billion, are credit positive for FirstRands senior
unsecured creditors and depositors because the new debt is more loss-absorbing, compared to outstanding
plain-vanilla Tier 2 debt. Thus, it provides better protection to senior creditors of the bank. Basel III-
compliant capital securities are likely to suffer larger losses than other securities that do not have explicit
loss-absorption language and only suffer losses in a bank liquidation. FirstRand issued these notes to partly
replace its existing Tier 2 debt of approximately ZAR6.9 billion as of end-December 2013, which phases
out as recognized capital over the next nine years.
The prospective new Tier 2 debt of up to ZAR2 billion to be placed in the local market will be subject to
bail-in under the forthcoming implementation of the resolution regime in South Africa. The contractual
loss-absorption features of these notes will no longer apply once a statutory loss-absorption regime is
officially introduced in South Africa, at which point the relevant legislation will govern these notes.
These issuances of long-term debt will also help the bank in its efforts to meet the net stable funding ratio
(NSFR) liquidity requirement under Basel III, as the new Tier 2 debt has maturity of at least 10 years. The
net stable funding ratio needs to be at least 100% by 2018, and aims to promote banks more stable long-
term funding sources to finance their operations. Currently, none of the large South African banks meets
this ratio.
The IFC placement is the first cross-border investment of Basel III-compliant Tier 2 instrument in South
Africa and one of the first few in an emerging market, indicating FirstRands ability to raise a new source of
funding that improves its funding diversification in the countrys challenging economic environment.

5
The bank ratings shown in this report are the banks deposit rating, its standalone bank financial strength rating/baseline credit
assessment and the corresponding rating outlooks.
Nondas Nicolaides
+357.25.586.586
nondas.nicolaides@moodys.com
George Korniliou, CFA
Associate Analyst
+357.25.586.586
george.korniliou@moodys.com

NEWS & ANALYSIS


Problems at Korean Banks Overseas Operations Are Credit Negative
Last Wednesday, Koreas Financial Supervisory Service (FSS) announced that loan-loss provision charges by
foreign branches of Korean banks jumped by more than 116% in 2013, which led to a 29% year-on-year
decline in the profits of foreign branches. The higher provisions were driven by fraudulent loans made by
Korean banks Tokyo branches,
6
and exposure to troubled Korean shipbuilding and construction firms.
These findings are credit negative for Korean banks because they suggest that the banks overseas operations
have weak controls and risk management, and consequently, poor asset quality. Many Korean banks have
adopted a strategic focus to expand their overseas operations in light of Koreas subdued operating
environment. According to the FSS, Korean banks overseas assets rose 11.3% CAGR between 2010 and
2013 (Exhibit 1), led by significant growth in Asia. Korean banks foreign assets were $77.8 billion as of 31
December 2013, which accounted for 4.4% of the banks total assets and indicates that there is still ample
room for growth. Echoing this development, the number of overseas branches grew to 152 in 2013 from
142 in 2012. However, the current data suggests that overseas Korean banks continue to face the same asset
quality and corporate governance issues as they do at home.
EXHIBIT 1
Total Assets of Foreign Branches of Korean Banks

Source: Financial Supervisory Service

As Exhibit 2 shows, Korean banks nonperforming loan (NPL) ratios rose across all major Asian markets,
but in Japan, the NPL ratio rose a sharp 1.7 percentage points, a result of fraudulent loans in the Tokyo
branches. Korean banks worsening asset performance in the rest of Asia also echoed several high-profile
defaults over the past year, with the rise in Chinas NPLs reflecting the STX Group default, and in both
Singapore and Vietnam, the NPLs reflecting the debt-rescheduling workout program of Ssangyong
Engineering and Construction Co., Ltd. (unrated).

6
The FSS is currently investigating Kookmin Bank, Woori Bank and Industrial Bank of Korea regarding fraudulent loans in Tokyo
branches.
0%
2%
4%
6%
8%
10%
12%
14%
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
2011 2012 2013
$

B
i
l
l
i
o
n
s
Total Assets at Foreign Branches left axis Growth right axis
Jeffrey Lee
Associate Analyst
+852.3758.1515
jeffrey.lee@moodys.com

NEWS & ANALYSIS


EXHIBIT 2
Korean Banks Nonperforming Loan Ratio by Region

Source: Financial Supervisory Service, Financial Statistics Information System

These results also cast doubt on whether Korean banks can earn adequate returns on their overseas business
to justify their additional costs, including credit costs. Although their reported return of 0.64% on their
foreign assets is still higher than their overall system return on assets of 0.21%, it had already fallen by 32
basis points at year-end 2013 from a year earlier.

0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
Korea US Japan China Singapore Vietnam
2011 2012 2013

NEWS & ANALYSIS


Sub-sovereigns
German Lnder Tax Revenue Growth Aids Credit Positive Fiscal Consolidation
Last Thursday, the German Ministry of Finance said that German Lnder (i.e., states) tax revenues will
grow 3.3% to 252.2 billion in 2014 from a year earlier, and another 4.1% in 2015, exceeding last
Novembers forecast. Tax revenue growth is credit positive for the German Lnder because it will help
improve their financial performance and reduce their sizable debt levels. Because the Lnder have a very
rigid expenditure structure, revenue strongly predicts their overall financial performance.
The German Lnder are largely dependent on tax revenue growth nationwide because on average, 73% of
their budget is made of shared taxes. The Ministry of Finance revised its forecast annual tax growth to
3.3%-4.1% from now until 2018. The predictability of this revenue stream, at least for the next two years,
will allow the Lnder to progress toward budgetary consolidation. German Lnder have been engaged in
consolidation efforts in the past few years following the implementation of new fiscal rules,
7
including a
requirement (the so-called debt brake mechanism) that each Land structurally balance its budget starting in
2020.
German Lnder Financial Results Reflect Rising Tax Revenues

Source: German Ministry of Finance

Although the Ministry of Finances latest tax estimate is credit positive for all German Lnder, those most
pressured to consolidate their budgets to comply with the debt-brake mechanism -- the highly indebted
Nordrhein-Westfalen (Aa1 stable) and Berlin (Aa1 stable) -- will benefit the most. However, Berlin has
significantly improved its financial performance over the past years, resulting in a financial surplus in 2012
and 2013, an improvement that still appears very remote for Nordrhein-Westfalen.
Other Lnder, such as Brandenburg (Aa1 stable) and Saxony-Anhalt (Aa1 stable), which had comparatively
lower debt, achieved considerable financial surpluses in 2013. Among the least indebted Lnder, Bavaria
(Aaa stable) and Baden-Wuerttemberg (Aaa stable) have reported financial surpluses over the past years.

7
See German Lnder: High Ratings Reflect Robust Institutions and Strong Debt Affordability, 21 December 2012.
-30
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-5
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10
190
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240
250
260
270
280
290
2007 2008 2009 2010 2011 2012 2013 2014e 2015e 2016e 2017e 2018e
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Actual Lnder Tax Revenues - left axis May 2014 Tax Estimate - left axis
November 2013 Tax Estimate - left axis Financing Surplus (Deficit) - right axis
Harald Sperlein
+49.69.70730.906
harald.sperlein@moodys.com
Massimo Visconti
+39.02.91481.124
massimo.visconti@moodys.com

NEWS & ANALYSIS


However, despite favourable tax revenue growth, Baden-Wuerttemberg anticipates a deficit of 3% of total
revenues this year, while Bavaria may even accelerate its plan to repay its debt over time.
German Lnder closed 2013 with an aggregate deficit of 2.3 billion or 0.8% of their total revenues. Based
on this new tax estimate, we expect the sector to end up with a slight financial surplus of up to 1% of total
revenues for 2014.
Half the 16 Lnder had financial surpluses in 2013. For 2014, we expect that up to 10 Lnder will have
financial surpluses, driven primarily by the favourable tax-revenue trend and ongoing consolidation efforts.

NEWS & ANALYSIS


US Public Finance
New York City Labor Settlement Increases the Three-Year Budget Gap by $5 Billion
Last Wednesday, City of New York, New York (Aa2 stable) Mayor Bill de Blasio released a budget
recommendation that describes the full financial effects of the contract settlement that the city reached last
week with teachers and the citys expected extension of most of those costs to the rest of the citys
workforce. The plan is credit negative because it shows how personnel costs drive the citys budget and
challenge its finances, even in a strong economy. The plan more than doubles the citys forecast budget gaps
for the fiscal years ending 30 June 2016 and 2017, and triples the gap for fiscal 2018.
On 1 May, Mr. de Blasio announced a tentative agreement on a new contract for the citys teachers that
includes retroactive 4% pay increases each for 2009 and 2010 for employees who remain with the city
during fiscal years 2015-21 and for retirees during that period, which will be paid between fiscal 2015 and
fiscal 2020. The contract also includes a 10% total base wage and salary increase through fiscal 2018.
The city has a history of pattern bargaining, in which raises for one union are what other union members
agree to, and the newly released budget assumes that outstanding contracts will include the 10% wage
increases. Finally agreeing to what those costs are and incorporating them into the citys budget is
significant: salaries and wages average 31% of the citys total budget, while total personnel costs, which
include pension contributions, fringe benefits such as employee and retiree health care and social security
contributions, average 55% of total revenue.
Because personnel costs consume so much of the budget, the costs of the overall labor settlement now are
driving up the citys forecast of outyear budget gaps. In the earlier version of the financial plan, the forecast
gaps for fiscal years 2016-18 were arcing downward as the economy and revenue continued to recover
strongly, although they didnt reflect the full costs of the eventual contract settlements that the city now
expects.
Reflecting those settlements, salaries and wages in the budget proposal are 2.9% greater than estimates in
the last version of the citys financial plan for fiscal 2015, 4.9% greater for fiscal 2016, 5.8% for fiscal 2017
and 10.3% for 2018. Combined with other spending increases and somewhat more conservative revenue
estimates, the result is a significantly larger budget gap in the later years of the financial plan. Although the
city in February forecast a cumulative gap between fiscal 2016 and 2018 of just less than $2 billion, it is
now nearly $7.5 billion (see exhibit). Moreover, the forecast gaps in the new plan range from 2.9% to 4.0%
of forecast revenue during those years, compared with in February, when their range was 1.4%-0.5%.
Nick Samuels
+1.212.553.7121
nicholas.samuels@moodys.com

NEWS & ANALYSIS


New York City Budget Gaps Grow

Source: New York City Office of Management and Budget

The new employee costs reflect $3.4 billion in offsets that the city expects through healthcare savings it has
negotiated with the unions and the use of $1 billion from a city labor fund that offsets healthcare premium
costs for employees. Although the city has negotiated the right to enforce the health savings through
arbitration, there could still be roadblocks to reaching its targets in the years and amounts it expects. If all
unions negotiating do not agree to the pattern settlement, the budget gaps and the citys challenges to close
them would intensify.

$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
2016 2017 2018
$

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February Plan May Plan

NEWS & ANALYSIS


Nassau County, New York, Control Board Approves Union Contracts, a Credit
Negative for the County
Last Saturday, the Nassau County Interim Finance Authority (NIFA, Aa1 stable), Nassau County, New
Yorks (A2 stable) state-appointed control board, approved labor contracts that include wage increases for
various collective bargaining units, ending a three-year wage freeze. NIFA estimates that the increases could
cost the county $130 million over the four years of the contract. The countys approach to covering the
costs is credit negative because it will rely on growth in volatile and new and untested revenue sources.
NIFAs ongoing oversight, including additional safeguards in the event revenues are not sufficient to cover
increased expenses, mitigates those risks. However, NIFA relinquished its ability to freeze wages for the
duration of the contracts.
The Nassau County Office of Legislative Budget Review (OLBR) had estimated that the new contracts
could cost Nassau from $119.7-$292.4 million over the life of the contracts. However, the estimates did
not factor in projected savings from attrition or the realization of healthcare costs. According to NIFA,
when factoring in these estimates, the cost of the contracts is approximately $130 million. Positively for the
county, the collective bargaining units have given up wage increases for the fiscal year ended 31 December
2013, reducing its potential liability to $101 million from $232 million. In addition, the unions agreed to
contribute more toward healthcare costs, work rule changes, pension contributions for new employees and
new salary levels for new employees.
To offset the cost of the contracts, the county will rely on growth in highly variable revenue streams,
including fines for traffic violations and fee increases for various county departments that require the
passage of local legislation. Nassaus financial position is already weak and its comptroller expects fiscal
2013 to end with expenses exceeding revenues, despite the benefit of the wage freeze. The county had a net
cash position
8
of negative 14% of operating revenues at the end of 2012, one of only three counties in New
York State facing such a predicament.
The traffic violation revenues would come partly from the installation of speed cameras around the countys
56 school districts. Nassau estimates that the violations caught on camera will yield $25-$72 million of
revenue. However, this revenue is likely to be volatile as drivers become familiar with the location of the
cameras and the number of violations declines. Separately, the county projects that fee increases at some
departments will generate $10-$20 million annually.
The countys revenue challenges include a 12.4% decline in sales tax revenues in first-quarter 2014 from a
year earlier (see exhibit). The county budgeted a 2% sales tax growth for fiscal 2014 and will need at least
6% growth over the remainder of the year to meet its budget. Notably, the budget did not include any
projections for contract expenses.

8
Unrestricted plus restricted cash, net of outstanding cash flow notes.
Valentina Gomez
Analyst
+1.212.553.4861
valentina.gomez@moodys.com
Robert Weber
+1.212.553.7280
robert.weber@moodys.com

NEWS & ANALYSIS


Nassau County Sales Tax Revenues Declined in First-Quarter 2014
Year-over-year quarterly percent change in sales tax

Source: New York State Department of Taxation and Finance

NIFA, which instituted the wage freeze in 2011 in an attempt to improve the countys deteriorating
financial position, mandated that the county revise its multi-year plan to include the contractual increases.
In addition, although NIFA relinquished its power to freeze wages over the contract period, it gained
authority to force county departments to institute budgetary amendments, including termination of
employees. NIFA has also required that the county account for $30 million in total expense reductions.

-15%
-10%
-5%
0%
5%
10%
15%

NEWS & ANALYSIS


New Jerseys Poorest School Districts Face Looming State Aid Cuts
On 5 May, New Jersey (Aa3 negative) Education Commissioner David Hespe said the state would likely
cut aid to school districts to help close a $1 billion state budget gap for the current fiscal year.
Even minor reductions in education aid would be credit negative for the states school districts, which
generally carry low cash and fund balances and are limited by state law from increasing revenues. Cuts are
likely to strain already narrow financial positions and increase reliance on short-term borrowing, especially
for districts serving the poorest communities.
The state appropriated $12.4 billion for school aid (38% of total appropriations) in its fiscal 2014 (ending
30 June) budget. Because the formula for state aid distributes more money to districts with lower income
levels, those districts are most susceptible to cuts.
The state awarded 56% of its 2014 education aid appropriations to the 31 districts designated as the most
in need, the so-called Abbott districts. State aid constitutes 79% of Abbott districts combined 2014
operating budgets. Districts such as Trenton Public Schools, Camden City Public Schools, Newark Public
Schools and Elizabeth Public Schools are the most vulnerable to a formulaic cut (see Exhibit 1).
EXHIBIT 1
New Jersey Abbott Districts Are Most Vulnerable to State Aid Cuts
Abbott Districts 2014 Aid Appropriated 2014 Operating Budget Aid as Percent of Budget
Pleasantville Public School District $64,764,049 $74,017,368 87%
Union City School District $177,586,799 $203,397,266 87%
Bridgeton Public Schools $79,845,066 $91,758,620 87%
Orange Board of Education $73,355,220 $85,663,515 86%
Camden City Public Schools $279,550,217 $326,556,365 86%
Trenton Public Schools $227,809,033 $266,918,101 85%
Passaic City Public Schools $228,040,644 $268,180,875 85%
Elizabeth Public Schools $363,472,698 $434,428,334 84%
East Orange School District $177,959,050 $214,058,963 83%
Irvington Board of Education $112,230,897 $135,343,767 83%
West New York Board of Education $93,166,144 $112,749,825 83%
Newark Public Schools $714,315,679 $866,285,174 82%
Plainfield Public Schools $121,223,240 $147,839,677 82%
Asbury Park Public School District $55,360,170 $67,559,592 82%
Pemberton Township Schools $83,458,345 $102,226,870 82%
Paterson Public Schools $399,287,859 $490,825,287 81%
Note: All districts are unrated except for East Orange, which has a lease rating of A2.
Source: State of New Jersey

Funding for Abbott districts has been litigated for decades, and in the past the state has restored aid to
Abbott districts more quickly than to other districts.
Dan Seymour, CFA
Analyst
+1.212.553.4871
dan.seymour@moodys.com
Kristina Piccarreto
Associate Analyst
+1.212.553.4771
kristina.piccarreto@moodys.com

NEWS & ANALYSIS


All New Jersey school districts are subject to limitations that heighten sensitivity to late-year cuts. Districts
operate under a 2% property tax cap. State law further limits flexibility by prohibiting districts from
keeping unassigned reserves above 2% of budget. While most districts maintain higher overall fund balance
levels than 2% by restricting or assigning a portion of their reserves, New Jersey School districts maintain
reserves below the national median (see Exhibit 2).
EXHIBIT 2
New Jersey and US School District Median Fund Balances as a Percentage of Revenue
New Jersey School Districts Reserves Are Weak

Source: Moodys Investors Service

The state cut K-12 school aid in the middle of fiscal 2010, prompting many districts to use unassigned
reserves, resulting in fiscal pressure across the sector (see Exhibit 3). From 2010 to 2012, we downgraded
the ratings of 106 NJ school districts, and upgraded 18. The fiscal effect from a cut in 2014 could be more
drastic because it comes several months later in the fiscal year.
EXHIBIT 3
New Jersey School District Unassigned Fund Balance as a Percent of Revenues
Mid-year Cut in State Aid Depressed Reserves in 2010

Source: Moodys Investors Service

9%
7%
9%
12%
15%
16%
19%
20%
0%
5%
10%
15%
20%
2009 2010 2011 2012
New Jersey US
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
2006 2007 2008 2009 2010 2011 2012 2013

NEWS & ANALYSIS


The effects of a state aid reduction will depend on the timing and form of the cuts. A current-year reduction
between now and June 30 would leave little time for districts to cut expenditures. This would likely prompt
districts to use unassigned reserves.
A deferral of 2014 aid into 2015 would have a more moderate effect. The state distributes its aid to school
districts in 20 installments throughout the year, and in recent years has deferred late-year payments into
subsequent years. Assuming the state eventually remits the aid, the deferral would result in temporarily
weakened cash balances. The districts without sufficient unrestricted cash would likely resort to cash flow
borrowing, which would pose the ongoing threat of an eventual withdrawal of the deferred aid altogether.
Regardless of the state fiscal situation, the New Jersey school district sectors bonds are protected by the
New Jersey School District Enhancement Program (Aa3 stable), under which a reserve fund would cover
any school district debt service shortfalls.

NEWS & ANALYSIS


Less Driving in US Means More Pressure on States
Last Wednesday, the US Energy Information Administration reduced its forecast for motor fuel usage to a
1.2% average annual decline through 2040 from last years projection of a 0.9% decline. The shift toward
less driving per-capita and higher fuel efficiency is credit negative for state gas tax bonds because it will
reduce pledged revenues for the $36 billion of debt we rate and pressure states to find new ways to fund
transportation infrastructure investments.
Beyond the cyclical effects of the 2007-09 recession and subsequent weak recovery that reduced vehicle
miles traveled and motor fuel usage, Americans seem to be driving less (Exhibit 1), which will lead to less
gas consumed, and taxed, in the future (Exhibit 2).
EXHIBIT 1
Vehicle Miles Traveled in the US per Capita

Source: Federal Highway Administration, US Census

EXHIBIT 2
Predicted US Motor Gasoline Consumption

Source: Energy Information Administration

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Julius Vizner
+1.212.553.0334
julius.vizner@moodys.com

NEWS & ANALYSIS


Reduced demand for gasoline reduces pledged revenues for bonds that are secured in whole or in part by
state gas taxes. Several factors have converged to create this trend:
Sustained elevated fuel prices work against the typical flat per-gallon state gas tax as people respond to
high prices by driving less or buying more fuel-efficient cars or taking mass transit
Cyclically, weak labor markets including a declining labor force participation rate means fewer people are
driving to work or have the means to do so than before
Federally mandated fuel efficiency standards will increase to 50 miles per gallon (mpg) from 30 mpg in
2012, so even with an improving economy, not as much gas will be pumped
Record-high mass transit use and renewed dynamism in some city centers suggests that alternative forms
of transportation will continue to compete with car driving
Several states, such as Pennsylvania (Aa2 stable) and Virginia (Aaa stable), have raised transportation
revenues in response to gas tax weakness, and others, such as Delaware (Aaa stable), are contemplating
doing so. The federal gas tax, a flat 18.4 cents per gallon since 1993, is a victim of the same dynamic, which
has led to stagnant federal transportation grant levels to states since 2009 and has forced states to choose
between identifying own-source revenues or paring down capital plans.
Bonds that are at risk over the long term are either secured solely by a gas tax or have relatively low levels of
debt service coverage, such as Rhode Islands Motor Fuel Tax Revenue Bonds (A3 stable), for which
pledged revenues cover maximum annual debt service a relatively thin 1.2x. Most state gas tax bonds are
structured to withstand the projected deterioration in gas taxes and still have sufficient revenues to pay debt
service. The median debt service coverage level in this sector was 4.1x as of fiscal 2013, leverage constraints
are typically more than 2x revenues, and most are secured by additional revenue streams, although those are
also typically related to driving.
This trend could also have a negative effect on toll revenue bonds. Slower than gross domestic product
national traffic growth reflects demographic shifts and changing driving patterns for younger drivers,
meaning that the rate of traffic growth is slowing down overall. Reduced traffic and traffic growth, if not
offset by toll rate increases, would have a negative credit effect on toll roads, particularly those that have
escalating or back-loaded debt service and that rely on traffic growth to meet covenanted debt-service
coverage metrics.

RATING CHANGES
Significant rating actions taken the week ending 9 May 2014


Corporates

Avon Products, Inc.
Outlook Change
13 Feb 14 5 May 14
Senior Unsecured Rating Baa3 Baa3
Outlook Stable Negative

The outlook change reflects our view that competitive, economic and structural headwinds will make it
difficult for Avon to stem revenue erosion and quickly execute a turnaround strategy.
Bayer AG
Outlook Change
12 Apr 13 8 May 14
Senior Unsecured Rating A3 A3
Short Term Issuer Rating P-2 P-2
Outlook Positive Stable

The stable outlook reflects our expectation that following the OTC acquisition Bayer will put in place a
permanent capital structure that will include a meaningful hybrid component, and that it will continue to
deleverage so that debt to EBITDA falls below 2.5 times in 2015.
Newmont Mining Corporation
Downgrade
24 Jan 14 5 May 14
Outlook Review for Downgrade Negative

The downgrade reflects the contraction in Newmonts operating performance and weakening debt
protection metrics, given the plunge in gold and copper prices.
Telefonaktiebolaget LM Ericsson
Downgrade
7 Feb 13 5 May 14
Senior Unsecured Rating A3 Baa1
Outlook Negative Stable

The downgrade reflects the stabilization of the companys profitability at weaker levels than in the past, as
well as our expectation of an only partial recovery in the next 12-18 months, given intense competition in
the communication equipment industry. It also reflects our expectation that the companys leverage will not
sustainably fall below 1.25 times, the level necessary to maintain a A3 rating.

RATING CHANGES


21
st
Century Oncology, Inc.
Review for Upgrade
9 Oct 13 8 May 14
Corporate Family Rating B3 B3
Outlook Stable Review for Upgrade

The review was prompted by 21st Centurys announcement that it plans to reduce debt with proceeds from
its initial public offering of common stock and preferred stock offering, and refinance and extend the
maturity of a portion of its existing debt.
The review will focus on the companys capital structure after the equity offering and refinancing
transaction, as well as the amount of proceeds from the sale of shares. We will also evaluate the company's
liquidity profile, financial policy, and reimbursement risk given its high reliance on government payors.

RATING CHANGES


Infrastructure

Centrais Eletricas Brasileiras SA - Eletrobras
Downgrade
19 Dec 12 6 May 14
Foreign Currency Issuer Rating Baa3 Baa3
Senior Unsecured Bonds Baa3 Baa3
Baseline Credit Assessment Ba3 B1
Outlook Negative Negative

The downgrade of the baseline credit assessment is because we expect Electrobras standalone credit metrics,
while improving, to remain weak over the medium term given the expected low internal cash flow as
measured by funds from operations during this period. The affirmed issuer rating reflects Eletrobras'
dominant position in the Brazilian electricity industry, with material operations in the generation and
transmission businesses, as well as the implicit support of its major shareholder, the Federal Government of
Brazil (Baa2 stable). Eletrobras' weak credit metrics and the federal government's political interference on
the company's business and financial strategy constrain the ratings, as do the company's evolving corporate
governance practices and the lack of clarity as to its sizeable capital expenditures program and respective
funding.
Grupo Nacional de Autopistas (GANA)
Upgrade
1 April 11 5 May 14
Certificados Bursatiles Ba1 Baa3
Outlook Stable Stable

The upgrade reflects better-than-anticipated credit metrics as a result of the increase in tariffs in 2012, 2013
and 2014 and an improved traffic profile. The action also incorporates our expectation of improved
economic prospects for Mexico in the medium-to-long term.
ITC Great Plains LLC
Outlook Change
20 Jan 11 5 May 14
Outlook Stable Positive

The outlook change reflects the diminished construction risk because ITCGP has completed two of its
three large transmission projects that began in 2010. ITCGP's financial metrics will continue to improve,
and once the third project, the Kansas V-Plan, is completed by year-end, ITCGP will be well positioned for
an upgrade that brings the rating into a similar ratings category as ITC Holdings' other operating
subsidiaries.

RATING CHANGES


Financial Institutions

The downgrade reflects continued weakness in the firm's earnings and profitability, as well as expectations
of a slower recovery than previously anticipated. Underperformance has also delayed the decline in Algeco's
leverage and accumulation of tangible capital, and has pressured its liquidity.
AXA
Outlook Change
16 Feb 12 9 May 14
Long Term Rating A2 A2

The outlook change reflects our expectations that AXA's actions in the last five years, including the de-
risking of the new business in life insurance, the improvement in the P&C profitability and the group's
continued asset liability management discipline, will continue to support a strong level of underlying
earnings, and the global macroeconomic environment will continue to improve.
Banco Bilbao Vizcaya Argentaria Paraguay
Upgrade
10 Jan 13 8 May 14
Bank Financial Strength/ Baseline
Credit Assessment
D-/ba3 D/ba2

In upgrading BBVA Paraguay's standalone rating, we recognize the bank's funding profile and earnings
generation capacity, coupled with its satisfactory capital base and adequate risk management practices that
are aligned to those of its parent, BBVA Spain.
Banco Continental S.A.E.C.A.
Upgrade
10 Jan 13 8 May 14
Credit Assessment
D-/ba3 D/ba2

The upgrade reflects the improvement of Continental's financial fundamentals over the last two years,
particularly its earnings generation power deriving from its diversified funding sources and loan book, its
above-average efficiency metrics, as well as its prudent risk management practices as illustrated in a lower
than average nonperforming loan ratio and ample reserve coverage.
Algeco Scotsman Global Finance PLC
Downgrade
18 Sep 12 6 May 14
Senior Secured (Foreign/Domestic) B3 Caa1
Senior Unsecured (Foreign) B1 B2

RATING CHANGES


Bank Morgan Stanley AG
Downgrade
22 Aug 13 8 May 14
Credit Assessment
C-/baa1 D+/baa3
Long Term Bank Deposits
(Foreign/Domestic)
Baa1 Baa2

The downgrade reflects our view that the sale of Morgan Stanleys private banking business, currently
conducted through BMSAG, will have an adverse impact on the financial profile of BMSAG, and that
BMSAG's financial profile will become more aligned with, and more dependent upon, Morgan Stanley's
financial profile as the announced transactions are completed. In addition, the transfer of Morgan Stanleys
Asian wealth management business will reduce scale and profitability.
Bank Vontobel AG
Outlook Change
12 Aug 08 6 May 14
Long Term Rating A1 A1
Outlook Stable Negative

The negative outlook reflects the potential franchise risks should the bank's long-standing business and
strategic partnership with its minority shareholder Raiffeisen Schweiz not be extended. Should this happen,
it is less likely that Raiffeisen Schweiz would support Bank Vontobel in case of need.
Deutsche Bank AG
Review for Downgrade
21 Jun 12 6 May 14
Credit Assessment
C-/Baa2 C-/baa2
Supported Long-Term Debt and
Deposits
A2 A2
Short-Term Prime - 1 Prime - 1

The review for downgrade follows Deutsche Bank's announcement of a 34% decline in net income for the
first quarter of 2014. Management is attempting to strengthen profitability and rebalance the bank's
earnings mix in the face of heightened regulatory and litigation costs, the continuing drag of its legacy
portfolio, and weak market conditions within DB's banking and capital markets franchises. These
headwinds are persistent and structural in nature.

RATING CHANGES


Deutsche Apotheker- und Aerztebank eG
Upgrade
3 Dec 13 7 May 14
Credit Assessment
D+/ba1 C-/baa2
(Foreign/Domestic)
A2 A1
Senior Unsecured (Foreign/Domestic) A2 A1

The upgrade reflects the bank's continued reduction of higher-risk legacy assets and strongly improved
capital ratios at a pace beyond our previous expectations. apoBank's essentially complete divestment of non-
core legacy risk portfolios has materially reduced asset-quality-related vulnerabilities. In parallel, apoBank
continued to strengthen both quantity and quality of its capital base.
Emirates NBD PJSC
Outlook Change
18 Jun 13 8 May 14
Long Term Rating Baa1 Baa1

The change in outlook reflects our view that, while large, concentrated related-party risks continue to leave
the bank susceptible to event risk related to the Dubai government and constrain the bank's standalone
rating, the overall improving Dubai operating environment moderates the risk of credit events over the
period of the outlook.
International Lease Finance Corporation
Upgrade
15 Jun 12 6 May 14
LT Corporate Family Ratings
(Domestic)
Ba3 Ba2
Senior Unsecured (Domestic) Ba3 Ba2

The rating action reflects AerCap's pending acquisition of ILFC from American International Group for $3
billion of cash and 97.6 million AerCap common shares, for a total estimated transaction value of $6.9
billion. Proceeds of new $2.6 billion senior notes will partially fund the cash consideration.
KBC Bank N.V.
Upgrade
15 Jun 12 8 May 14
Credit Assessment
D+/baa3 C-/baa2
(Foreign/Domestic)
A3 A2

RATING CHANGES


The upgrade was prompted by the improved visibility on KBC Bank's solvency and expectation of a
stabilised bottom-line profitability; and the full restoration of KBC Bank's liquidity to a robust position.
Undermined by the performance of the Irish and Hungarian loan portfolios, asset quality remains a
weakness and continues to offset these strengths to some extent.
Radian Group Inc.
Upgrade
27 Feb 13 7 May 14
Senior Unsecured (Domestic) Caa1 B3

The upgrade reflects the improving credit profile of Radian Guaranty, its flagship operating subsidiary.
There has been a significant improvement in operating profits generated by the mortgage insurance
business; stabilization of, and increased visibility, into losses on the legacy mortgage insurance portfolio;
continued improvement in US housing fundamentals; and also continued improvement in consolidated
financial resources.

RATING CHANGES


Sovereigns

Portugal
Review for Upgrade
13 Feb 12 9 May 14
Long-Term Issuer Rating Ba3 Ba2
Outlook Negative Review for Upgrade

The following key factors triggered the rating action:
Portugal's fiscal situation has improved more rapidly than initially targeted and the public debt ratio will
start declining this year, albeit from a very high level. The budget deficit was reduced a full percentage
point of GDP more than envisaged last year, indicating the government's strong commitment to fiscal
consolidation.
The country will conclude its three-year EU/IMF support programme in the near future, without the
need for a precautionary credit line from the European Stability Mechanism. Portugal has regained access
to the public debt markets and in addition the government has built up sizeable cash buffers.
Portugal's economic recovery is gaining momentum, with signs of broadening beyond exports, which
continue to perform strongly. We believe that economic growth will be sustained over the medium term
because the Portuguese authorities have implemented a wide range of structural reforms.
Gulf Investment Corporation G.S.C.
Rating Assigned
8 May 14
Long-term Issuer Rating A2
Outlook Stable
Short-term Issuer Rating P-1

The ratings reflect our view that although the bank's business model is inherently riskier than other
similarly rated multilateral development banks (MDBs), overall risk is mitigated by its strong capital
position and low leverage. In addition, GIC benefits from healthy liquidity conditions derived from a well-
managed issuance program and demonstrated access to a diversified investor base. The rating also balances
GIC's lack of contractual support against the relatively strong ability and propensity of its shareholders to
provide support.

RESEARCH HIGHLIGHTS
Notable research published the week ending 9 May 2014


Corporates
FAQ: Implications If Aereo Wins in Court
The outcome of the court battle between tech start-up Aereo and a group of broadcasters will have
significant ramifications for the broadcast industry, with a win by Aereo creating an array of challenges for
networks and stations in the absence of new regulation. In this report, we look at some of the key issues the
case has unleashed.
Corporate Liquidity in Argentina: Liquidity Risk Intensifies for Corporates
Sixteen of the 21 rated non-financial companies we reviewed have elevated liquidity risk, with significant
debt coming due in the short term, limited cash in relation to upcoming maturities, sizable negative free
cash flow and a lack of access to committed bank credit facilities, or some combination of these factors.
Corporate Liquidity in Brazil: Liquidity of Brazilian Corporates Remains Solid
The liquidity of Brazilian non-financial companies continued to improve in 2013, despite Brazils
weakening economic growth rate and reduced refinancing. However, the US Feds tapering process, along
with high interest rates, inflationary pressures and foreign-currency volatility, will constrain improvement
over the next 12-18 months.
Corporate Liquidity in Chile: Low Liquidity Cushion, but Solid Credit Profiles
Rated Chilean non-financial corporates continue to have solid credit quality, though just three have low or
medium liquidity risk. Most benefit from sustained access to bank funding in the local credit markets,
strong market positioning and Chiles favorable macro environment, which encourages investment given
the low volatility of expected returns.
Corporate Liquidity in Mexico: Most Mexican Companies Will Maintain Solid Liquidity
Through 2015
Rated Mexican non-financial companies should be able to cover short-term debt maturities, current
maturities of long-term debt, operating expenses and regular capital expenditures until the end of next year
with cash on hand, free cash flow or committed bank lines. Just three of the 25 companies we reviewed for
this report have high liquidity risk.
Corporate Liquidity in Peru: Despite Economic Growth, Most Rated Companies Have High
Liquidity Risk
Ten of the 14 rated non-financial companies in Peru featured high liquidity risk at the end of 2013, mainly
because of high capital expenditures and a lack of committed bank credit facilities. However, these
companies continue to have strong access to international debt markets, and Peru has been posting
impressive growth.
Chinese State-Owned Enterprises: Increased Dividend Payouts Are Credit Negative for
Chinese Central SOEs
Chinas Ministry of Finance has announced an increase in the dividends that central state-owned enterprises
must pay to the government in 2014. The higher payments will reduce the free cash flow of the enterprises,
particularly highly profitable ones such as China National Petroleum Corporation, China Petrochemical

RESEARCH HIGHLIGHTS


Corporation, China National Offshore Oil Corporation, State Grid Corporation of China and China
Three Gorges Corporation, and are therefore credit negative.

RESEARCH HIGHLIGHTS


Infrastructure
Brazil Electricity Auction Reduces Distributors Exposure to Spot Market, a Credit Positive
The 30 April auctions outcome is credit positive for the distribution companies because it allows them to
lock in a lower purchase price and substantially reduce their exposure to the spot market, thereby providing
significant relief to their liquidity positions.
FAQ: FirstEnergy Corps Prospects for Remaining Investment Grade
Two primary factors will drive FirstEnergys (Baa3 negative) credit quality over the next few months: the
ongoing utility rate case for subsidiary Jersey Central Power & Light, and merchant power price trends in
the Pennsylvania-New Jersey-Maryland regional power market. A back to basics move towards regulated
investments and a recent dividend cut are significant positive credit developments.
FAQ: PT Perusahaan Gas Negara Persero Tbk
The provisional (P)Baa3 rating we assigned to PGNs proposed issuance of senior unsecured bonds reflect
the Indonesian companys pricing power and stable margins, strong growth potential, and sound financial
metrics. PGNs increasing exposure to its upstream business raises capex and execution risks, but the long-
term benefits will help diversify its business and sources of supply.

RESEARCH HIGHLIGHTS


Financial Institutions
Moodys Ratings of Chinas Big Five Banks Frequently Asked Questions
Our recent rating actions reflect our reassessment of the amount of ongoing direct and indirect support
these banks might receive from the national authorities, who already hold large equity stakes in these banks.
Our FAQ further explains our reasoning behind the actions, and addresses investors frequently asked
questions about the big Chinese banks.
Thailand Banking System Outlook
The outlook for Thailand's banking system remains stable, as it has been since 2010, reflecting stable
liquidity and funding conditions and the banks' ability to withstand the expected moderate increase in non-
performing loans over the next 12-18 months.
House Price Inflation Not yet a Concern for Australian Banks but Risks Are Increasing
Australian house prices have been rising rapidly in recent quarters, raising concerns with regard to their
sustainability and the possible negative impact on the quality of Australian banks residential mortgage
portfolios and broader financial stability. These developments are not yet a threat to Australian banks credit
profile, as the extent of overvaluation appears to be limited.
Australian Mortgage Insurance Companies: A Scorecard Update
Australian lenders mortgage insurance (LMI) companies continue to benefit from their strong market
positions, conservative underwriting practices, and strong financial profiles, as demonstrated by their
healthy capital levels and low loss ratios. Nonetheless, our assessment of the industry takes into account the
LMIs relative lack of geographic diversification, which could expose them to potentially higher business
volatility and potentially negative changes in the Australian economy.

RESEARCH HIGHLIGHTS


Sovereigns
Russia & the EU: EU Economies Would Be Resilient to a Russian Recession
Our base case forecast that Russias GDP will contract by 1% in 2014 has negligible credit implications for
the EUs economy and the credit profiles of EU issuers. However, in very negative and unlikely scenarios,
certain EU countries, sectors and issuers would experience material setbacks to revenues, profits and the
value of assets held in Russia with potential but in most cases manageable effects on their credit profiles.
Pakistan Analysis
Pakistans Caa1 government bond rating reflects our assessment of the countrys very low institutional and
fiscal strength and relatively weak growth path. A precarious external position and large government
financing needs leave the sovereigns susceptibility to event risks high.
Brazil: Vulnerability to Financial Flows Reversal in Post-QE World Is Moderate
In Brazil, we do not expect a scenario of a sudden stop, but a reduction of capital flows could weaken
Brazils external position given the larger current account deficit that is expected. Nevertheless, given the
dynamics of its financial account over the past few years and growing external buffers, Brazils vulnerability
to a decrease in capital inflows is moderate.
Brazil: Current Account Deterioration Poses Moderate Risk as FDI Funds Most of the
Deficit
The three main factors driving the current account deficit are: (1) a narrowing trade surplus; (2) a widening
services deficit; and (3) a persistent net income deficit. The trade surplus has also fallen significantly in
recent years as exports performance has lagged. The services deficit has widened as Brazilians incomes
expanded, allowing for greater travel abroad.
Democratic Republic of the Congo Analysis
Our decision to assign a B3 sovereign rating to the Democratic Republic of the Congo (DRC) with a stable
outlook, primarily reflects the fragility of the countrys economy and its very low per capita income relative
to rated peers, which are offset by the countrys robust growth prospects. Driving the growth prospects are
significant foreign investment in the mining sector and the expected rise in domestic consumption as the
economy recovers from the civil wars of the last two decades. We expect economic growth to average 10.2%
over the next two years, which is 3.4% above the average rate over the past 10 years.
Company Law Improvements Are Credit Positive for OHADA Member States in West and
Central Africa
Earlier this year, member states of the Organization for Harmonization of Business Law in Africa
(OHADA) adopted a revised companies code to simplify corporate procedures, introduce new financing
options for firms, and strengthen corporate governance. The reforms are credit positive for the 17 OHADA
member states in Sub-Saharan Africa as they will further reduce transaction costs both into the region and
among OHADA members, boost investment and lead to the creation of new small and medium enterprises.

RESEARCH HIGHLIGHTS


US Public Finance
Municipal Credit Deterioration Can Occur Despite Strong Oversight in North Carolina
The multi-notch downgrade of various debt obligations of the City of Salisbury, a rarity for a local
government within North Carolina (Aaa stable), reveals that local governments that take on nonessential
projects can still experience material credit weakening despite strong state oversight. Localities in North
Carolina benefit from strong state oversight in the form of the states Local Government Commission;
however, our rating action shows that municipalities in North Carolina can still expose themselves to credit
deterioration.
US Municipal Bond Defaults and Recoveries, 1970-2013
Municipal bond defaults have increased in number since the financial crisis, but remain extremely
infrequent, with the seven rated defaults in 2013, after five in 2012, bringing the average over 2008-13 to
five per year, compared with 1.3 per year before the crisis. There has also been a shift towards general
government defaults and bankruptcies, although they continue to be rare.
Demographic Declines Intensify Competition Among Small Midwest Private Colleges
Declining numbers of high school graduates in the Midwest exacerbate an already highly competitive
environment, causing financial deterioration at many small private colleges in the Midwest. Availability of
affordable and high-quality public options will weaken these colleges ability to maintain enrollment and
grow net tuition revenue. With constrained revenue forecasts, expense controls will be vital to long-term
fiscal sustainability.
Law Schools Challenged to Adapt to Fundamental Changes in the Legal Industry
Enrollment declines and heightened price sensitivity at law schools reflect reduced job opportunities and
income expectations in the legal field, changes that reflect a structural shift rather than any cyclical trend.
Business model changes will be essential for long-term sustainability, particularly for standalone law schools
and those without strong brands.

RESEARCH HIGHLIGHTS


Structured Finance
Decline in Cigarette Shipments Will Hurt US Tobacco Settlement Bonds
The National Association of Attorneys General recently released data showing that domestic cigarette
shipment volumes fell 4.9% in 2013, one of the largest annual declines since the group began reporting the
figures in 1999. The drop in shipments is credit negative for tobacco settlement bonds because the size of
the payments the securitizations receive from the tobacco companies largely depends on annual shipment
volumes.
Asset Performance Will Drive Solid Credit Performance of US ABS
We expect that the credit performance of US asset-backed securities that we rate will continue to be solid
over the next few years, reflecting strong performance of the underlying assets. Modest improvement in the
US economy and relatively tight lending standards will drive the stable asset performance.

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


Corporates
Mercks Balanced Use of Proceeds Makes Divestiture
Credit Positive
Activist Hedge Fund Third Point Gains Foothold on
Sothebys Board, a Credit Negative
Viacoms Planned $757 Million Channel 5 Purchase Will
Add to Revenue Diversity and Cash Flow
Encanas Redeployment of Proceeds from Asset Sales Is
Credit Positive
Infrastructure
Brazil Electricity Auction Reduces Distributors Exposure to
Spot Market, a Credit Positive
Banks
Brazils New Loan Portability Rules Will Pinch Banks
Profitability
Bulgarian Banks Higher Capital Does Not Mean Greater
Ability to Absorb Losses
Sovereigns
Thailand Court Decision to Remove Prime Minister Is
Credit Negative
US Public Finance
Floridas Performance-Based Funding for Public
Universities Will Help Some Schools and Hurt Others
Part-Time Faculty Votes to Unionize at a Maryland
College, a Positive for Union, but Negative for Universities
Securitization
Decline in Cigarette Shipments Will Hurt US Tobacco
Settlement Bonds

MOODYS.COM

Report: 170199

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EDITORS PRODUCTION ASSOCIATES
News & Analysis: Jay Sherman, Elisa Herr and
Alexis Alvarez
Shubhra Bhatnagar
Wing Chan
Ratings & Research: Robert Cox
Final Production: Barry Hing

Moody's Credt Outlook - May 12, 2014

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