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6 AUGUST 2015

NEWS & ANALYSIS


Corporates

RECENTLY IN CREDIT OUTLOOK


2

Marines Declare Fighter Jet Combat-Ready, Giving Lift to

Articles in Last Mondays Credit Outlook

15

Go to Last Mondays Credit Outlook

Lockheed Martin and Key Subcontractors

Expros Equity Injection and Debt Paydown Are Credit Positive


GLPs $4.6 Billion Acquisition of US Real Estate Portfolio Is

Click here for Weekly Market Outlook, our sister publication containing
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Credit Negative
Shells Exit from Japan Is Credit Positive for Japanese Refiners
Indosats Early Redemption of $650 Million Bond Is

Credit Positive
Infrastructure

IEnovas Acquisition of Gasoductos de Chihuahua Is

Credit Positive
Banks

Bradescos Acquisition of HSBCs Brazilian Operations Is Credit

Positive for Both


Sovereigns

11

Italys Parliament Approves Credit-Positive Public

Administration Reforms

US Public Finance

12

Congress Extends Federal Aid to Highways and Transit, a

Positive for $11 Billion of GARVEES

Long Island, New York, Governments Benefit from Court Ruling

Barring LIPA Tax Challenge

MOODYS.COM

NEWS & ANALYSIS


Credit implications of current events

Corporates
Russell Solomon
Senior Vice President
+1.212.553.4301
russell.solomon@moodys.com
Jack Kuhns
Associate Analyst
+1.212.553.6946
jack.kuhns@moodys.com

Marines Declare Fighter Jet Combat-Ready, Giving Lift to Lockheed Martin and
Key Subcontractors
Last Friday, the US Marine Corps announced that the F-35B, its variant of the F-35 Lightning II stealth
multirole fighter, had achieved initial operational capability, a significant milestone for a weapons
acquisition program because it indicates that the program is deployment-ready. The Marines credit-positive
assessment is a major step in cementing the future viability of the US Department of Defenses largest
weapons acquisition program and benefits the programs prime contractor, Lockheed Martin Corporation
(Baa1 stable). The achievement is also credit positive for the programs key subcontractors, including United
Technologies Corporations (A2 stable) Pratt & Whitney subsidiary, Northrop Grumman Corporation (Baa1
stable) and BAE Systems plc (Baa2 stable).
The F-35 program is the largest weapons acquisition program in history and is of such scale that favorable
program developments such as last Fridays affect our assessment of Lockheed Martins credit quality. The
program constituted 14%-17% of total revenue during 2012-14, with its forward revenue contribution to
exceed 25% as annual deliveries rise to more than 200 by the end of the decade from 109 in 2014. 1
Although we expect modest margin dilution as lower-margin F-35 sales ramp up, we expect that the F-35
program will support stable operating profit and cash flow as production increases.
The F-35Bs milestone reduces the likelihood of substantial order reductions or outright program
cancellations, and, as a result, enhances our assessment of Lockheed Martins future revenue stability and
operating cash flow capacity. Although the F-35s future looks increasingly assured as elevated geopolitical
risk partially offsets pressure on global defense spending, the programs significant estimated cost of around
$1 trillion over a multi-decade life cycle has made the program a lightning rod for scrutiny that at times
seemed to pose a threat to the program. The advent of a ready-for-war aircraft substantially reduces the risk
of program cancellation or significant order reduction.
Last weeks achievement and the ensuing enhancement of the programs perceived viability both
domestically and internationally further ensure the F-35s future. Under a scenario in which both the
Department of Defense and international security partner nations negotiate large-scale, multi-year aircraft
purchases, the visibility provided to Lockheed Martin and its subcontractors would support cost-reduction
initiatives and improve revenue, cash flow and profitability. Lower unit costs would stoke international
demand for the aircraft, adding order volume that further reduces unit costs and enhances the aircrafts
appeal to international customers.
This development does not affect Lockheed Martins Baa1 senior unsecured rating and stable outlook
because the company continues to maintain a shareholder-friendly financial policy and an increasingly
elevated financial risk tolerance, as evidenced by its $9 billion acquisition of Sikorsky Aircraft from United
Technologies Corporation in July. 2 We expect that the companys elevated shareholder remuneration will
continue to be fully funded from free cash flow and excess liquidity rather than incremental debt.

This publication does not announce


a credit rating action. For any
credit ratings referenced in this
publication, please see the ratings
tab on the issuer/entity page on
www.moodys.com for the most
updated credit rating action
information and rating history.

1
2

See Lockheed Martin: An 'A' for the F-35?, 1 October 2014.


See Sikorsky 'Win' a Near-Term Negative Despite Future Vertical Lift Boost, 22 July 2015.

MOODYS CREDIT OUTLOOK

6 AUGUST 2015

NEWS & ANALYSIS


Credit implications of current events

Eric Kang, CFA


Analyst
+44.20.7772.1965
eric.kang@moodys.com

Expros Equity Injection and Debt Paydown Are Credit Positive


On Tuesday, oil services company Expro Holdings UK 3 Limited (B3 negative) announced that it had repaid
$283 million of its $1.013 billion mezzanine facility (as of 31 July 2015) from a new equity injection totalling
$334 million. The company also extended to 2021 from 2018 the maturity of $333.4 million of the
remaining facility, after 61.4% of lenders agreed to the extension and to a reset of financial maintenance
covenants. Between the debt repayment and the equity raise, Expros liquidity increased by $51 million. The
lenders that agreed to the deal will receive a higher non-cash coupon (payment-in-kind margin) on the
extended part of the facility, while the cash coupon will not change.
The transaction is credit positive for Expro because the companys pro forma Moodys-adjusted leverage as
of 31 March 2015 will fall to 6.8x from 7.6x. Additionally, Expros already adequate liquidity will improve as
a result of the net $51 million infusion, the cash interest savings that the company estimates will total
approximately $3.3 million for the fiscal year ending 31 March 2016 and $13.6 million in fiscal 2017, and a
longer debt maturity schedule. The transaction also reduces the threat of a covenant breach under the
mezzanine facility because, as part of the covenant reset, the mezzanine lenders also agreed to suspend
covenant tests until 31 December 2016 in addition to wider covenants starting 31 March 2017.
The $334 million equity injection reflects Expro shareholders commitment even amid challenging market
conditions in the oil and gas industry. Indeed, we expect the companys operating performance to
deteriorate further this year as some projects get postponed and others risk being cancelled.
And, as with other companies in the oilfield services industry, pricing pressures will arise as oil companies
seek to lower their cost base and competition increases as new tenders become scarce. Expros main
competitors are large diversified oilfield services companies with stronger financial profiles, including
Schlumberger Ltd. (Aa3 stable) and Halliburton Company (A2 stable). These firms are better able to
withstand pricing pressures and persistently weak market conditions.
UK-based Expro is a leading provider of services and products to the upstream oil and gas industry,
specialising in well flow management. In July 2008, a private-equity consortium led by Arle Capital Partners
and GS Capital Partners VI Fund, L.P. acquired the company, which reported revenues of around $1.3 billion
for fiscal 2015.

MOODYS CREDIT OUTLOOK

6 AUGUST 2015

NEWS & ANALYSIS


Credit implications of current events

Stephanie Lau
Assistant Vice President - Analyst
+852.3758.1343
stephanie.lau2@moodys.com
Elyse Wang
Associate Analyst
+852.3785.1563
elyse.wang@moodys.com

GLPs $4.6 Billion Acquisition of US Real Estate Portfolio Is Credit Negative


On 29 July, Global Logistic Properties Limited (GLP, Baa2 negative) announced that it had entered into a
definitive agreement to acquire a portfolio of logistics-related real estate assets from Industrial Income
Trust (IIT, unrated) valued at $4.6 billion. The acquisition is credit negative because it indicates an increased
risk appetite and potentially will increase leverage substantially. On Monday, we changed GLPs outlook to
negative from stable.
In addition to the $4.6 billion of assets, IITs logistics portfolio will bring debt of around $2.9 billion for
consolidation onto GLPs balance sheet when the transaction closes. The IIT portfolio has assets totaling 58
million square feet spread over 20 major US markets. GLP expects to own 100% of the portfolio upon the
transactions closing by 16 November 2015, and plans to reduce its stake in the portfolio to 10% by April
2016, when it moves the portfolio to a new fund management platform.
If GLP cannot pare down its stake in the portfolio by March 2016, we estimate that GLPs debt leverage, as
measured by adjusted net debt/EBITDA, will increase to around 10x from around 5.5x as of March 2015.
Such a level would not support its Baa2 rating.
The IIT deal follows GLPs February 2015 purchase of a 55% stake in a portfolio of $8.1 billion of US logistics
real estate assets. GLP is still working to reduce to 10% its stake in the $8.1 billion portfolio before the end
of 2015. We consider GLPs objective to become one of the top logistics operators in the US within one year
of its entry into this market as ambitious.
In expanding quickly, GLP has implemented a strategy and established a track record of selling down
interests in acquired companies to reduce the companys risk exposure and financial burden. But GLPs
frequent acquisitions in a new market in a short span of time stresses leverage, notwithstanding its plans for
quick sales of stakes.

MOODYS CREDIT OUTLOOK

6 AUGUST 2015

NEWS & ANALYSIS


Credit implications of current events

Kailash Chhaya
Vice President - Senior Analyst
+81.3.5408.4201
kailash.chhaya@moodys.com
Kenichiro Sano
Associate Analyst
+81.3.5408.4157
kenichiro.sano@moodys.com

Shells Exit from Japan Is Credit Positive for Japanese Refiners


Last Thursday, Royal Dutch Shell Plc (Aa1 negative) announced that it will sell 33.2% of its 35.0% stake in
Japans Showa Shell Sekiyu K.K. (unrated) to Idemitsu Kosan Co., Ltd. (unrated) for an estimated $1.4 billion.
Shells sale of its stake is credit positive for Japanese refiners because it will pave the way for a full-fledged
merger of Idemitsu and Showa Shell, which, in turn, will ease competition in the industry and help all
industry players improve profitability.
Japans refining industry suffers from overcapacity and excessive competition. As of 1 April 2015, Japans
refining capacity of 3.92 million barrels per day far exceeded actual demand of 3.2 million barrels per day.
The Japanese governments Agency for Natural Resources and Energy expects demand to decline to 2.9
million barrels per day by 1 April 2019. As a result of overcapacity and excessive competition, Japanese
refiners profitability has been significantly lower than other industry sectors. Japanese refiners average
operating margins have remained below 3% over the past five years, compared with 5% or more for most
other Japanese industries.
If the industrys refining capacity falls by 20%, we expect that refiners operating margins would improve by
as much as 2%. However, such a reduction is currently impractical for most refiners except JX Holdings, Inc.
(Baa2 stable) because most have only three refineries and closing one would significantly erode their
economies of scale. Merging two competitors would double the number of refineries, thereby improving the
merged companys ability to close one or two refineries and optimize the remaining ones.
Shells exit will make Idemitsu the biggest shareholder of Showa Shell, allowing Idemitsu to have significant
influence over Showa Shell. Both Idemitsu and Showa Shell each currently have three refineries, making it
easier to close a refinery without compromising economies of scale.
A merger between Idemitsu and Showa Shell would also encourage further consolidation in the industry,
incentivizing TonenGeneral Sekiyu K.K. (unrated) and Cosmo Oil Co., Ltd. (unrated), currently the secondand fourth-largest refiners, respectively, to further strengthen their existing alliance and consider a full-scale
merger to remain competitive against market leader JX Holdings and a merged Idemitsu-Showa Shell.
Should Idemitsu and Showa Shell merge, JX Holdings would face a significantly larger peer, eroding its
dominance in the Japanese refining and marketing industry. JX Holdings currently has 36.4% of countrys
total refining capacity, followed by TonenGeneral with 17.8% (see exhibit). However, because industry
consolidation would increase all players pricing power, including JX Holdings, we believe that all would
benefit from reduced competition.
Japanese Refiners Share of Total Domestic Refining Capacity
Others
9.2%
Cosmo Oil Company, Ltd
11.5%

JX Holdings, Inc.
36.4%

Tonengeneral Sekiyu K.K


17.8%

Showa Shell Sekiyu K.K


11.4%

Idemitsu Kosan
13.7%

Source: Japans Ministry of Economy, Trade and Industry

MOODYS CREDIT OUTLOOK

6 AUGUST 2015

NEWS & ANALYSIS


Credit implications of current events

Nidhi Dhruv
Assistant Vice President - Analyst
+65.6398.8315
nidhi.dhruv@moodys.com
Maisam Hasnain
Associate Analyst
+852.3758.1420
maisam.hasnain@moodys.com

Indosats Early Redemption of $650 Million Bond Is Credit Positive


On Friday, Indosat Tbk. (P.T.) (Ba1 stable) announced that it had redeemed its $650 million of US dollardenominated bonds, constituting about 31% of its total debt, and will ultimately refinance the amount in
Indonesian rupiahs. The early redemption is credit positive for the Indonesia-based telecommunications
company because lower US dollar debt exposure will reduce the companys foreign exchange rate risk and
hedging costs.
Indosat exercised its option to redeem the bonds five years earlier than their maturity date of July 2020 and
paid down $150 million using internal cash and IDR700 billion (about $54 million) from its IDR3.1 trillion
rupiah-denominated bond issue in June 2015. It paid $500 million through US dollar revolver credit facilities
from various banks.
We expect the revolvers to decline gradually over the next 12-18 months because the company plans to pay
them down through rupiah-denominated bonds issued over three to four tranches, subject to market
conditions. Pro forma for this rupiah-denominated refinancing, Indosats US dollar exposure will decline to
12% of total debt, versus 41% in December 2013 (see exhibit below).
Indosats Ratio of US Dollar Debt to Total Debt
IDR Debt in USD Equivalent - left axis
$2.5

USD Debt - left axis

41%

45%

39%

$2.0

$ Billions

USD Debt/ Total Debt - right axis


40%
36%

35%
30%

$1.5

25%
20%

$1.0

15%

12%

10%

$0.5

5%
$0.0

0%
Dec-13

Dec-14

Mar-15
Pro forma $650M bond
redepmtion

Mar-15
Pro forma refinancing $650M
debt to IDR

Note: Debt calculations include finance lease obligations.


Sources: Indosat and Moodys Investors Service estimates

Although Indosat had about $589.5 million of principal and interest hedges in place as of March 2015, these
hedges have short tenors that the company typically rolls over every one to three months. Given that the
maturities of its hedges are shorter than its US dollar debt maturities, the company is exposed to foreign
exchange volatility. However, following the bond redemption, and once the company refinances its $500
million revolvers with rupiah-denominated debt, its hedging needs will decline. In the meantime, the
company will need to hedge its exposure to the US dollar-denominated bank revolver facilities, but because
the revolvers are shorter-term facilities with maturities of two to three years, they are more economical to
hedge.

MOODYS CREDIT OUTLOOK

6 AUGUST 2015

NEWS & ANALYSIS


Credit implications of current events

Infrastructure
Adrian Javier Garza, CFA
Assistant Vice President - Analyst
+52.55.1253.5709
adrianjavier.garza@moodys.com
Julio Zarandona
Associate Analyst
+52.55.1555.5302
julio.zarandona@moodys.com

IEnovas Acquisition of Gasoductos de Chihuahua Is Credit Positive


Last Friday, Mexicos Infraestructura Energetica Nova, S.A. de C.V. (IEnova, Baa1/Aaa.mx stable) announced
that it had reached an agreement with Mexican state-owned oil company Petrleos Mexicanos (PEMEX,
A3/Aaa.mx stable) to acquire the 50% equity interest in Gasoductos de Chihuahua (unrated) that it did not
own for $1.325 billion. Upon closing the transaction, IEnova will own 100% of Gasoductos de Chihuahua.
The transaction is credit positive for IEnova because it will improve the companys cash interest coverage
and leverage starting in 2016, expand its asset base and strengthen its leadership in the sector.
Gasoductos de Chihuahua owns and operates three natural gas pipelines, an Ethane pipeline, a liquid
petroleum gas pipeline and a liquid petroleum gas storage terminal. The new joint venture between IEnova
and Pemex will own a 50% stake in the Los Ramones Norte Pipeline, a 273-mile (440-kilometer) pipeline
currently under construction. IEnova owns six natural gas pipelines, a liquefied natural gas regasification
terminal, three local distribution companies, a gas compression station, a wind project and a gas-powered
electricity plant.
IEnova will obtain a bridge loan to fund the transaction, but expects to take out the full amount of this loan
via a combination of equity and long-term debt either this year or next year. IEnovas base-case assumption
is that it will raise approximately $1.325 billion of equity to repay the bridge loan. Under this scenario, the
acquisition will temporarily weaken the companys credit metrics, with improvements coming over the next
two years.
As shown in Exhibit 1, IEnovas cash interest coverage (funds from operations plus interest expense divided
by interest expense) would deteriorate in 2016 but start recovering in 2017. Leverage, as measured by funds
from operations/debt, will also weaken by year-end 2015 before improving next year after incorporating
full-year cash flows from Gasoductos de Chihuahua (see Exhibit 2).
EXHIBIT 1

IEnovas Cash Interest Coverage


14x
12x
10x
8x
6x
4x
2x
0x
2014

2015E

2016E

2017E

2018E

2019E

Note: Calculated as funds from operations plus interest expense divided by interest expense.
Sources: IEnova and Moodys Investors Service

MOODYS CREDIT OUTLOOK

6 AUGUST 2015

NEWS & ANALYSIS


Credit implications of current events

EXHIBIT 2

IEnovas Funds from Operations to Debt


70%
60%
50%
40%
30%
20%
10%
0%
2014

2015E

2016E

2017E

2018E

2019E

Sources: IEnova and Moodys Investors Service

The transaction requires approval from IEnovas shareholders and the Comisin Federal de Competencia
(Mexicos antitrust agency), among others. The company expects to receive the approvals in the next 120
days.

MOODYS CREDIT OUTLOOK

6 AUGUST 2015

NEWS & ANALYSIS


Credit implications of current events

Banks
Alexandre Albuquerque
Assistant Vice President - Analyst
+55.11.3043.7356
alexandre.albuquerque@moodys.com
Andrea Usai
Vice President - Senior Credit Officer
+44.20.7772.1058
andrea.usai@moodys.com
Ceres Lisboa
Senior Vice President
+55.11.3043.7307
ceres.lisboa@moodys.com

Bradescos Acquisition of HSBCs Brazilian Operations Is Credit Positive for Both


On Monday, HSBC Holdings plc (A1 stable) announced that it had reached an agreement to sell its two
Brazilian subsidiaries, HSBC Bank Brasil S.A. - Banco Multiplo (Baa2/Baa1 negative, baa3 3) and HSBC
Servios e Participaes Ltda (unrated), to Banco Bradesco S.A. (Baa2 negative, baa2) for $5.2 billion. The
sale, which is subject to regulatory approval, is credit positive for HSBC because despite resulting in an
accounting loss, it will free up capital that HSBC can redeploy to growth markets.
The transaction is also credit positive for Bradesco because it will increase its domestic market share, and
improve revenues and cost synergies that will enhance future earnings generation, helping to offset an
immediate reduction in capital.
HSBC last June announced its intention to sell its Brazilian operations as part of its strategic plan to improve
profitability by disposing of certain low-return activities and selling non-strategic assets. Although the sale
price for the Brazilian business is 1.8x tangible book value, HSBC expects to report a loss because of an
accounting adjustment mainly related to the reversal of $1.7 billion of foreign exchange reserves and
allocated goodwill. However, the disposal will shrink HSBCs risk-weighted assets by $37 billion and result in
a 50-basis-point net increase in HSBCs common equity Tier 1 ratio, which was 11.6% at the end of June
2015. HSBC has indicated that it will use the increase to support growth in its key markets, particularly
in Asia.
As part of the deal, HSBC also reserves the option to maintain a wholesale banking license in Brazil, which it
has indicated it will use to continue servicing a small number of key large corporate clients.
Bradesco will acquire HSBC Brasils retail, insurance and wholesale businesses, including its derivatives and
foreign exchange trading operations and its corporate sales unit. Main benefits include access to HSBCs
branch network in Brazils South and Southeast regions, where Bradescos footprint is smaller, and a larger
presence in the segment catering to high-income clients. Additionally, the integration of HSBC Brasils
insurance operation will further strengthen Bradescos insurance business. Bradesco projects results of
BRL1.2 billion for 2015, driven by HSBC Brasils operations, cost reductions and the elimination of intragroup expenses.
Bradescos total assets will rise by BRL187 billion to around BRL1.2 trillion following the acquisition. This will
narrow the gap with its next-largest competitor, Itau Unibanco S.A. (Baa2 negative, baa2), which reported
assets of BRL1.23 trillion at the end of June 2015. Bradescos domestic market share in loans will increase to
16.9% from 14.7% as of March 2015, while its share of deposits will rise to 13.8% from 10.7% at the same
date. Bradesco and Itau Unibanco are Brazils two largest privately owned banks.
Bradescos all-cash payment equals approximately 12% of its second-quarter 2015 regulatory capital.
However, the deal comes with a high capital consumption because of the significant amount of goodwill,
which the bank estimates will exceed 50% of the acquisition price. Post-transaction, the merged companys
pro forma Tier 1 ratio will fall 280 basis points to 10% from 12.8% in June 2015 for Bradesco alone.
Meanwhile, the combined entitys pro forma total capital ratio will drop to 13.5% from Bradescos
standalone level of 16% in June 2015. These estimates are based mostly on the banks combined operation
and the deduction of goodwill. However, Bradescos strong earnings generation and moderate growth of
risk-weighted assets over the next two years can restore its Tier 1 ratio above the regulatory minimum of
3

The bank ratings shown in this report are the banks deposit rating, senior unsecured debt rating (where available) and baseline
credit assessment.

MOODYS CREDIT OUTLOOK

6 AUGUST 2015

NEWS & ANALYSIS


Credit implications of current events

9.5%, including a countercyclical buffer, that Brazilian authorities will require starting in 2019. Over the past
12 months, Bradescos retained earnings were BRL8 billion, which equaled approximately 1.5% of riskweighted assets in full-year 2014.
Banco Bradescos Capital Replenishment

Jun. 2015

Net Income

Treasury Share
& Asset Valuation

- 0.3

Dec. 2014

87.0
- 2.9

Interest on Equity
& Dividends

- 5.1

Net Income

8.7

81.5

Interest on Equity
& Dividends

0.5

Treasury Share
& Asset Valuation

Net Income

Dec. 2012

Interest on Equity
& Dividends

Net Income

70.9
- 4.1

- 7.0

Interest on Equity
& Dividends

70.0
- 3.9

Treasury Share
& Asset Valuation

7.0

Treasury Share
& Asset Valuation

55.6

12.0

Dec. 2013

15.1
11.4

Dec. 2011

BRL Billions

100
90
80
70
60
50
40
30
20
10
0

Note: Treasury Share & Asset Valuation refers to adjustments for the acquisition of treasury shares and for changes in asset valuations.
Source: Banco Bradesco

Bradescos dominant market share in fee-based businesses such as insurance have historically supported its
high internal capital generation, contributing one third of the banks net earnings over the past 10 years.
Revenues also benefit from Bradescos conservative credit underwriting. In June 2015, Bradesco reported a
high return on equity of 21.9%, above the historical average of 20%. The bank estimates that by 2018 it will
generate a capital increase of roughly 250 basis points as a result of the acquisition, and assuming it
maintains its current capital retention rate.

10

MOODYS CREDIT OUTLOOK

6 AUGUST 2015

NEWS & ANALYSIS


Credit implications of current events

Sovereigns
Thorsten Nestmann
Vice President - Senior Analyst
+49.69.7073.0943
thorsten.nestmann@moodys.com
Polina Gotmann
Associate Analyst
+49.69.7073.0925
polina.gotmann@moodys.com

Italys Parliament Approves Credit-Positive Public Administration Reforms


On Tuesday, the upper house of Italys (Baa2 stable) parliament approved an enabling law 4 on public
administration reform, which aims to improve the public sectors quality of service, transparency and
efficiency. The approval follows the lower houses approval in July, and the next step will be the government
enacting implementing decrees by the end of this year that contain details on the measures envisaged by
the public administration reform guidelines set forth in the enabling law. When implemented, the public
administration reform will raise Italys growth potential and improve investor confidence, a credit positive.
The public administration reforms involve a number of measures, including improving and redistributing
human resources and changing the organization of state-owned enterprises to increase their efficiency and
cost-effectiveness. Regulations will be simplified and aligned with European regulations to foster
competition. The reform package also includes the digitalization of the public administration, including the
launch of a communication platform for citizens, companies and general government agencies as a single
point to online services to allow for things such as electronic invoicing and payment. This will simplify
citizens and companies access to government services, increase transparency and reduce corruption.
The public administration reforms are just one area of reform under way in Italy. Others include labor
market reform (Jobs Act 5), changes to electoral law and the balance of power between the upper and the
lower house of parliament, 6 and justice reform. Similar to the labor market reform, the public
administration reform is being implemented as an enabling law, which sets the guidelines.
According to government estimates, the public administration reform will increase GDP overall by 0.4% by
2020. This is slightly less than the estimated effect of the labor reform, for which the government is
estimating a 0.6% overall effect on GDP by 2020. To put these two reforms in perspective, the government
expects the combined effect of all structural reforms to raise GDP by 1.8% by 2020, which implies an
increase of the average annual GDP growth rate of 0.36%.
In this context, successful implementation of the public administration enabling law and other structural
reforms may lead to an increase of our GDP growth forecast from the 1.1% on average currently forecast for
2017-19. We expect Italys economy to grow by 0.5% in 2015 and 1% in 2016, after negative GDP growth
over the past three years.

4
5
6

11

The enabling law sets the guidelines for reform in the public administration.
See Italy Credit Analysis, 20 February 2015.
See Italy, Government of: Approval of the New Electoral Law Credit Positive If Accompanied by Senate Reform, 6 May 2015.

MOODYS CREDIT OUTLOOK

6 AUGUST 2015

NEWS & ANALYSIS


Credit implications of current events

US Public Finance
Julius Vizner
Assistant Vice President - Analyst
+1.212.553.0334
julius.vizner@moodys.com

Congress Extends Federal Aid to Highways and Transit, a Positive for $11 Billion
of GARVEES
Last Thursday, the US Congress extended federal aid to highways and transit through 29 October and
transferred $8 billion to the Highway Trust Fund (HTF) to avert a disruption in the flow of federal funds to
states and transit agencies. Although the three-month extension continues the status quo of short-term
solutions and stagnant federal transportation funding, the US Senate also sent a long-term spending bill
with increased funding to the US House of Representatives, the first since 2005 and a credit positive for $11
billion in bonds secured by federal transportation aid (GARVEEs). We expect the House to take up its own
long-term transportation bill in September when it returns from recess and works to reconcile the two bills.
The latest short-term extension is the 34th since 2009, when the last long-term transportation spending
authorization expired. Without the extension, federal payments to state departments of transportation,
including those that secure GARVEEs, would have ceased on 1 August. Recently, the US Department of
Transportation (DOT) warned states that without the $8 billion transfer, payments would have been
delayed starting 1 August. Exhibit 1 lists the GARVEEs secured by federal transportation grants that we rate.
EXHIBIT 1

Rated GARVEE Bonds Secured by Federal Transportation Grants


Issuer

Rating

$368

Alabama Federal Aid Highway Finance Authority

A1

Alaska Railroad Corporation

A3

$129

Arizona Transportation Board

Aa2

$372

California Department of Transportation

A2

$127

Chicago Transit Authority

A3

$861

Commonwealth of Massachusetts

Aa2

$353

Delaware Transportation Authority

A1

$94

District of Columbia (2011/2012)

A1/A2

$120

Georgia State Road and Tollway Authority (Reimbursement/Grant


Anticipation Revenue Bonds)

A1/A2

$913

Idaho Housing and Finance Association

A2

$633

Kentucky Asset/Liability Commission

A2

$625

Maine Municipal Bond Bank

A2

$114

Maryland Transportation Authority


Michigan (2009B/2007)
Missouri Highways & Transportation Commission

12

Debt Outstanding
$ Millions

Aa1

$416

A1/A2

$721

Aa1

$797

Montana Department of Transportation

A2

$96

New Hampshire

A2

$167

New Jersey Transit Corporation

A3

$492

New Jersey Transportation Trust Fund Authority

A3

$53

North Carolina

A2

$779

Ohio

Aa2

$988

Oklahoma Department of Transportation

A2

$47

MOODYS CREDIT OUTLOOK

6 AUGUST 2015

NEWS & ANALYSIS


Credit implications of current events

EXHIBIT 1

Rated GARVEE Bonds Secured by Federal Transportation Grants


Issuer

Debt Outstanding
$ Millions

Rating

Rhode Island Economic Development Corporation

A2

$279

Southeastern Pennsylvania Transportation Authority

A3

$178

Tri-County Metropolitan Transportation District, OR

A3

$165

Washington

A2

$727

West Virginia Commissioner of Highways

A2

$27

Source: Moodys Investors Service

The long-term bill passed by the Senate, known as the DRIVE Act, would increase highway spending by 19%
and transit spending by 25% by 2021. This step indicates progress toward predictable and growing federal
transportation aid, which would be credit positive for GARVEEs and the states and transit agencies that
issue them.
Even if Congress had failed to pass the extension and transfer sufficient funds to the HTF, upcoming
GARVEE debt service payments would have been adequately protected from a short-term interruption in
federal grants, according to our review of bond documents and GARVEE issuer debt service payment
procedures. For example, Alaska Railroad Corporation (A3 stable) and Californias GARVEEs (A2 stable) had
payments due on 1 August. Alaska Railroad Corporation pre-funds its GARVEEs one year in advance, while
the Californias Department of Transportation pays debt service on a reimbursement basis, so its debt
service is not affected by a short-term lapse. Other states have available funds that they can use to pay debt
service in the event of an interruption in grant payments, although those are not pledged.
The short-term extension does not address the ongoing annual structural imbalance between HTF revenues
and expenditures (see Exhibit 2). Absent a long-term solution, we expect a continued need for short-term
extensions and general fund support of the HTF, exposing states and transit agencies to interruptions in the
flow of grants. Should Congress fail to support the HTF with a transfer from the general fund or find new
revenues, the DOT will need to cut grants by 27% to align spending with tax revenues, according to data for
the fiscal year ended 30 September 2014, the latest full year available.
EXHIBIT 2

Highway Trust Fund Spending Versus US Excise Tax Receipts


General Fund Transfers

Outlays

Excise Tax Receipts

$55
$50
$45
$40

$ Billions

$35
$30
$25
$20
$15
$10
$5
$0
1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014 2015F

Sources: US Department of Transportation and Moodys Investors Service 2015 forecast

13

MOODYS CREDIT OUTLOOK

6 AUGUST 2015

NEWS & ANALYSIS


Credit implications of current events

Tiphany Lee-Allen
Analyst
+1.212.553.4772
tiphany.lee-allen@moodys.com

Long Island, New York, Governments Benefit from Court Ruling Barring LIPA
Tax Challenge
On 29 July, a New York state appellate court ruled that the Long Island Power Authority (LIPA, Baa1 stable)
was prohibited from challenging the assessment on its Northport power plant, which could have resulted in
lower property taxes. The ruling is credit positive for the Northport-East Northport Union Free School
District (Aa2) because the power plant contributes 40% of the districts property tax revenue. Additionally,
the ruling will benefit other local governments on New Yorks Long Island with tax bases that also have
significant exposure to LIPA.
LIPA pays approximately $73 million in property taxes annually on the plant, around $52 million of which
supports the Northport school districts operations (see exhibit below). LIPA filed the original lawsuit
challenging the plants 2010 assessed value and sought to recover nearly $270 million in property taxes paid
since then. The ruling also affects the Town of Huntington (Aaa negative), where LIPA is responsible for
approximately 77% of the towns property tax revenue. Town management estimates that making up for
the lost revenue of a successful LIPA tax appeal would require a 15% increase in the towns property tax rate
and a 60% increase in the school districts rate. The school district would have likely issued long-term debt
to cover the full property tax reimbursement, increasing its debt burden and annual debt service obligations.
LIPA Property Taxes and All Property Taxes to Northport School District

$ Millions

LIPA Property Taxes

All Property Taxes

$130
$120
$110
$100
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
2010-2011

2011-2012

2012-2013

2013-2014

2014-2015

Source: Northport-East Northport Union Free School District Audited Financial Statements

A loss of annual property tax revenue from LIPA, which were 40% of the districts tax revenue in 2014,
would shift the tax burden to other property taxpayers in the district, with a likely adverse effect on local
businesses and homeowners.
The courts decision is also credit positive for other Long Island local governments where LIPA has filed tax
appeals because it may set a precedent for similar cases against LIPA. The law firm that handled the
Northport case has filed a similar suit on behalf of the North Shore Central School District (Aa1). LIPA is the
districts second-largest taxpayer, accounting for 8% of assessed values for the fiscal year ended 30 June
2014. The district receives $24 million annually in revenue from LIPA properties in the district, which
constitutes nearly 25% of fiscal 2014 operating revenues. A ruling in favor of the school districts would also
positively affect Nassau County (A2 stable), which guarantees tax appeal settlements and tax levies for its
underlying districts.

14

MOODYS CREDIT OUTLOOK

6 AUGUST 2015

RECENTLY IN CREDIT OUTLOOK


Select any article below to go to last Mondays Credit Outlook on moodys.com

Sovereigns

NEWS & ANALYSIS


Corporates

Honeywells Planned Acquisition of Melrose Industries Elster


Unit Is Credit Positive

27

Ireland Reports Strong First-Quarter Growth, a Credit Positive


Slovenias Privatisation Strategy Builds Momentum, a
Credit Positive
US Public Finance

A UPS Acquisition of Coyote Logistics Would Be


Credit Negative

31

Michigan Supreme Court Affirms State Pension Reforms, Credit


Positive for the State

Delphis Planned Acquisition of HellermannTyton Is


Credit Negative

Glendale, Arizona, Renegotiates Smaller Subsidy to Pro Hockey


Team, a Credit Positive

A Wabtec Acquisition of Faiveley Transport Would Be


Credit Positive

RATINGS & RESEARCH

Brazil Demand for Fine Payment Heightens Threat to


Votorantim Cimentos Liquidity

Rating Changes

Solvays Acquisition of Cytec Is Credit Negative for Both

Last week we downgraded Advanced Micro Devices and Teva


Pharmaceutical Industries, and upgraded Michigan, Southeast Housing
and 26 US subprime RMBS, among other rating actions.

GKNs Acquisition of Fokker Technologies Is Credit Positive


Falling Copper Prices and Zambian Power Reductions Tarnish
FQMs Credit Metrics
Baidus Greater Investment in Online-to-Offline Business Is
Credit Negative
Infrastructure

Research Highlights
14

SSEs Acquisition of Gas Assets Improves Internal Sources


of Supply
ENGIE Clinches Credit-Positive Nuclear Contribution Reduction
and Reactor Extension
Banks

35

18

Ally Financial Will Benefit from Ally Banks Ability to Fund


Riskier Loans
Banco PSA and Santander (Brasil) Car Loan Partnership Is
Credit Positive

38

Last week we published on US homebuilders, Asian corporates,


European alcoholic beverage manufacturers, US chemicals, North
American covenant quality, Japanese corporate liquidity, UK retail, US
corporate defaults, Latin American telecommunications, US nuclear
power generators, Bolivian banks, Lebanese banks, Austrian banks,
Gazprombank, The Bank of New York Mellon and State Street Corp,
Vietnamese banks, Eurasian sovereigns, Sri Lanka, Dominican
Republic, Cyprus, Nicaragua, L&Q Group, SANRAL, Prague, Spanish
regions, Michigan public universities, US variable-rate demand bonds,
Japanese ABS and RMBS, UK RMBS and Finnish covered bonds, among
other reports.

Guatemalas Weakening Economic Confidence Is Credit


Negative for Banks
Insurers

24

Sirius Groups Sale to China Minsheng Investment Corp. Is Credit


Negative
Argentinas New Civil and Commercial Code Has Mixed
Implications for Insurers

15

MOODYS CREDIT OUTLOOK

6 AUGUST 2015

16

MOODYS CREDIT OUTLOOK

6 AUGUST 2015

EDITORS

PRODUCTION ASSOCIATE

News & Analysis: Jay Sherman

Alisa Llorens

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