1 MOODY’S 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 Länder 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

» Articles in Last Thursday’s Credit Outlook 53 » Go to Last Thursday’s Credit Outlook

Click here for Weekly Market Outlook, our sister publication containing Moody’s Analytics’ review of market activity, financial predictions, and the dates of upcoming economic releases.

NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 12 MAY 2014

Corporates

Freeport’s 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 FCX’s 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 FCX’s 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 FCX’s 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 FCX’s 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 FCX’s existing operations in the area and contribute to enhanced operating efficiencies, earnings and cash flow generation at FM O&G. FCX will be receiving Apache’s 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 Encana’s 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 Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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, CEOC’s 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 CEOC’s 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 CEOC’s 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 Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 12 MAY 2014

Walgreen’s 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 Alliance’s 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. Walgreen’s net debt currently stands at around $7.1 billion and Alliance Boot’s 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 Mexico’s 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 Walgreen’s 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 Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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 Colorado’s Piceance Basin for $355 million in cash.

The deal is credit positive for both companies and led us to change the outlook on Legacy’s corporate family rating to positive from stable. The Piceance properties will substantially increase Legacy’s 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 WPX’s 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 Legacy’s 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 company’s 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. Legacy’s 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 Legacy’s 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 Legacy’s quarterly limited partner distribution rate increases by at least 14% from current levels. Legacy’s 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 Legacy’s general partner, which owns 18% of Legacy’s 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 Vice President – Senior Credit Officer +1.212.553.3798 gretchen.french@moodys.com

Peter Speer Senior Vice President +1.212.553.4565 peter.speer@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 12 MAY 2014

Cimarex’s Cana-Woodford Acquisition Is Credit Positive Last Wednesday, Cimarex Energy Co. (Ba1 positive) agreed to pay $497.4 million to acquire properties in Western Oklahoma’s 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 company’s Cana-Woodford stake and offer greater opportunities for production growth there. Although Cimarex intends to fund the transaction’s $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.

Cimarex’s 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 company’s overall diversified production mix of 50% gas and 50% liquids. We expect Cimarex’s 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 Cimarex’s existing wells in the Cana-Woodford play, improves the balance in Cimarex’s production growth opportunities between Cana-Woodford and in the Permian Basin of West Texas. Cimarex’s 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 Vice President - Senior Credit Officer +1.212.553.3798 gretchen.french@moodys.com

Gareth Bossard Associate Analyst +1.212.553.7462 gareth.bossard@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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 Corporation’s (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 Platform’s 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. Platform’s $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 unit’s $100 million EBITDA imply a purchase multiple of 10x. But from a business perspective, the acquisition fits Platform’s 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 Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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 Mondelez’s 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 management’s 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 Vice President - Senior Credit Officer +1.212.553.1678 brian.weddington@moodys.com

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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 (Moody’s adjusted) EBITA margins of 9%-13% compared to similarly rated General Electric’s 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-Royce’s 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 group’s overall profitability. Overall, the group’s 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 Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 12 MAY 2014

ITV’s 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 ITV’s 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 company’s M&A track record.

Moreover, the Leftfield acquisition involves a higher acquisition multiple than ITV’s previous deals. With an unaudited EBITDA of $38 million, Leftfield’s valuation is at a12x multiple. With this additional EBITDA, ITV Studios’ share of the company’s 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 ITV’s 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. Leftfield’s ability to exercise the option is conditional on Leftfield achieving EBITDA of $130 million at the time. Although this put option will increase ITV’s Moody’s-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, ITV’s Moody’s-adjusted gross debt/EBITDA was 1.78x.

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

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 12 MAY 2014

Alibaba IPO Would Be Credit Positive for Softbank Last Wednesday, Japan’s SoftBank Corp.’s (Ba1 stable) affiliated subsidiary Alibaba Group Holding Limited (unrated), China’s 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 SoftBank’s dependence on having to raise debt to finance acquisitions and business-enhancing investments. Debt-financed acquisitions pushed Softbank’s 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 SoftBank’s issuer and senior unsecured bond ratings to Ba1 from Baa3 to reflect the company’s 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-Mobile’s 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 SoftBank’s credit quality stemming from multiple debt-funded acquisitions last year.

Acquiring T-mobile would enhance SoftBank’s presence in the global telecommunications and Internet markets, which would support the company’s credit quality. T-Mobile, which is owned by Germany’s Deutsche Telekom AG (Baa1 stable), is the fourth-largest US telecommunications operator.

Peggy Furusaka Vice President - Senior Credit Officer +81.3.5408.4027 peggy.furusaka@moodys.com

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 12 MAY 2014

Decline in Mobile Number Portability Is Credit Positive for Korea’s 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 subscriber’s 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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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 Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 12 MAY 2014

EXHIBIT 2

Korean Mobile Carriers’ Marketing Expense to Service Revenue (Standalone)

Sources: Moody’s 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 SKT’s EBITDA margin will exceed 30% in the second quarter from the reported 23% in the first quarter, while KT’s 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: KT’s 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 KT’s is much larger. KT’s 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: Moody’s 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

MN

P (M

illio

ns)

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 Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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 government’s 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, Korea’s 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 Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 12 MAY 2014

Genting’s Casino Project in Las Vegas, Nevada, Is Credit Negative Last Wednesday, Malaysia’s 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 group’s 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 Genting’s 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 group’s 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 Genting’s 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 Genting’s 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 Genting’s leverage and prolong the period of weakened credit metrics.

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

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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 company’s 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. BCE’s 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. BCE’s 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 Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 12 MAY 2014

BCE is an investment holding company listed on the Indonesian Stock Exchange. It has a 90% interest in PT Berau Coal (unrated), Indonesia’s 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 Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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 System’s (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 public’s 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 System’s 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

Meg

awat

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 Assistant Vice President - Analyst +1.212.553.3604 john.medina@moodys.com

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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, Drake’s 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 fire’s 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 Agency’s Mercury and Air Toxics Standards ruling; however, we understand that the fire did not damage the new technology.

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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 bank’s 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 firm’s many employees and the broader economy have at times influenced the DOJ’s actions. Critics said the Attorney General’s 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 institution’s 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 DOJ’s 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 bank’s 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 firm’s 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 stable2) 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 AG’s 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 Credit implications of current events

21 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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 Credit implications of current events

22 MOODY’S CREDIT OUTLOOK 12 MAY 2014

Bank of Nova Scotia’s Investment in Canadian Tire Financial Is Credit Negative Last Thursday, Bank of Nova Scotia (BNS, Aa2 stable, B-/a1 stable4) 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 CTFS’s 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 CTFS’s credit profile, which is less creditworthy than BNS’s 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 Tire’s 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, CTFS’s higher revenue yields will be accretive to BNS’s earnings. CTFS generated revenues of CAD1 billion and net income before taxes of CAD320 million in 2013.

As of January this year, BNS’s Canadian credit card book was CAD4 billion, and we estimate the transaction will expand the bank’s credit card exposure by roughly 22%. Although the acquisition will increase BNS’s customer base and provide cross-selling opportunities, the credit quality of the receivables portfolio is lower and will dilute BNS’s 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 BNS’s provision for credit loss ratios if it were.

4 The bank ratings shown in this report are the bank’s 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 Vice President – Senior Credit Officer +1.416.214.3867 david.beattie@moodys.com

NEWS & ANALYSIS Credit implications of current events

23 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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 Montreal’s, 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 Moody’s Investors Service analysis

The all-cash acquisition will have a slight negative effect on BNS’s 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 doesn’t 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 Credit implications of current events

24 MOODY’S CREDIT OUTLOOK 12 MAY 2014

FirstRand Bank’s 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 Limited’s (A3 negative, C-/baa1 stable5) 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 FirstRand’s senior creditors because they provide an extra loss-absorption cushion and help meet Basel III liquidity requirements.

Under South Africa’s Basel III framework, any new capital-qualifying securities other than common equity must contain explicit terms that impose losses on investors under certain conditions. FirstRand’s contractual non-viability subordinated debt will be classified as Tier 2 under Basel III’s 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 FirstRand’s 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 FirstRand’s ability to raise a new source of funding that improves its funding diversification in the country’s challenging economic environment.

5 The bank ratings shown in this report are the bank’s deposit rating, its standalone bank financial strength rating/baseline credit

assessment and the corresponding rating outlooks.

Nondas Nicolaides Vice President - Senior Analyst +357.25.586.586 nondas.nicolaides@moodys.com

George Korniliou, CFA Associate Analyst +357.25.586.586 george.korniliou@moodys.com

NEWS & ANALYSIS Credit implications of current events

25 MOODY’S CREDIT OUTLOOK 12 MAY 2014

Problems at Korean Banks’ Overseas Operations Are Credit Negative Last Wednesday, Korea’s 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 Korea’s 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 China’s 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

$ Bi

llion

s

Total Assets at Foreign Branches – left axis Growth – right axis

Jeffrey Lee Associate Analyst +852.3758.1515 jeffrey.lee@moodys.com

NEWS & ANALYSIS Credit implications of current events

26 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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 Credit implications of current events

27 MOODY’S CREDIT OUTLOOK 12 MAY 2014

Sub-sovereigns

German Länder Tax Revenue Growth Aids Credit Positive Fiscal Consolidation Last Thursday, the German Ministry of Finance said that German Länder (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 November’s forecast. Tax revenue growth is credit positive for the German Länder because it will help improve their financial performance and reduce their sizable debt levels. Because the Länder have a very rigid expenditure structure, revenue strongly predicts their overall financial performance.

The German Länder 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 Länder to progress toward budgetary consolidation. German Länder 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 Länder Financial Results Reflect Rising Tax Revenues

Source: German Ministry of Finance

Although the Ministry of Finance’s latest tax estimate is credit positive for all German Länder, 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 Länder, 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 Länder, Bavaria (Aaa stable) and Baden-Wuerttemberg (Aaa stable) have reported financial surpluses over the past years.

7 See German Länder: High Ratings Reflect Robust Institutions and Strong Debt Affordability, 21 December 2012.

-€30

-€25

-€20

-€15

-€10

-€5

€0

€5

€10

€190

€200

€210

€220

€230

€240

€250

€260

€270

€280

€290

2007 2008 2009 2010 2011 2012 2013 2014e 2015e 2016e 2017e 2018e

€Bi

llion

s

€Bi

llion

s

Actual Länder Tax Revenues - left axis May 2014 Tax Estimate - left axisNovember 2013 Tax Estimate - left axis Financing Surplus (Deficit) - right axis

Harald Sperlein Vice President - Senior Analyst +49.69.70730.906 harald.sperlein@moodys.com

Massimo Visconti Vice President - Senior Credit Officer +39.02.91481.124 massimo.visconti@moodys.com

NEWS & ANALYSIS Credit implications of current events

28 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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 Länder 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 Länder had financial surpluses in 2013. For 2014, we expect that up to 10 Länder will have financial surpluses, driven primarily by the favourable tax-revenue trend and ongoing consolidation efforts.

NEWS & ANALYSIS Credit implications of current events

29 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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 city’s expected extension of most of those costs to the rest of the city’s workforce. The plan is credit negative because it shows how personnel costs drive the city’s budget and challenge its finances, even in a strong economy. The plan more than doubles the city’s 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 city’s 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 city’s budget is significant: salaries and wages average 31% of the city’s 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 city’s 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 didn’t 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 city’s 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 Vice President - Senior Credit Officer +1.212.553.7121 nicholas.samuels@moodys.com

NEWS & ANALYSIS Credit implications of current events

30 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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 city’s challenges to close them would intensify.

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NEWS & ANALYSIS Credit implications of current events

31 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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 York’s (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 county’s approach to covering the costs is credit negative because it will rely on growth in volatile and new and untested revenue sources. NIFA’s 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. Nassau’s 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 position8 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 county’s 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 county’s 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 Assistant Vice President - Analyst +1.212.553.7280 robert.weber@moodys.com

NEWS & ANALYSIS Credit implications of current events

32 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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 county’s 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.

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NEWS & ANALYSIS Credit implications of current events

33 MOODY’S CREDIT OUTLOOK 12 MAY 2014

New Jersey’s 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 state’s 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 Credit implications of current events

34 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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: Moody’s 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: Moody’s Investors Service

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2006 2007 2008 2009 2010 2011 2012 2013

NEWS & ANALYSIS Credit implications of current events

35 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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 sector’s 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 Credit implications of current events

36 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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 year’s 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 Assistant Vice President - Analyst +1.212.553.0334 julius.vizner@moodys.com

NEWS & ANALYSIS Credit implications of current events

37 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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 Island’s 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

38 MOODY’S CREDIT OUTLOOK 12 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

Senior Unsecured Rating Baa1 Baa2

Outlook Review for Downgrade Negative

The downgrade reflects the contraction in Newmont’s 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 company’s 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 company’s leverage will not sustainably fall below 1.25 times, the level necessary to maintain a A3 rating.

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

39 MOODY’S CREDIT OUTLOOK 12 MAY 2014

21st 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 Century’s 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 company’s 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 Significant rating actions taken the week ending 9 May 2014

40 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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

Senior Unsecured Rating Baa1 Baa1

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 Significant rating actions taken the week ending 9 May 2014

41 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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

Outlook Negative Stable

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

Bank Financial Strength/ Baseline 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 Significant rating actions taken the week ending 9 May 2014

42 MOODY’S CREDIT OUTLOOK 12 MAY 2014

Bank Morgan Stanley AG Downgrade

22 Aug ‘13 8 May ‘14

Bank Financial Strength/ Baseline Credit Assessment

C-/baa1 D+/baa3

Long Term Bank Deposits (Foreign/Domestic)

Baa1 Baa2

The downgrade reflects our view that the sale of Morgan Stanley’s 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 Stanley’s 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

Bank Financial Strength/ Baseline 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 Significant rating actions taken the week ending 9 May 2014

43 MOODY’S CREDIT OUTLOOK 12 MAY 2014

Deutsche Apotheker- und Aerztebank eG Upgrade

3 Dec ‘13 7 May ‘14

Bank Financial Strength/ Baseline Credit Assessment

D+/ba1 C-/baa2

Long Term Bank Deposits (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

Outlook Negative Stable

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

Bank Financial Strength/ Baseline Credit Assessment

D+/baa3 C-/baa2

Long Term Bank Deposits (Foreign/Domestic)

A3 A2

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

44 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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 Significant rating actions taken the week ending 9 May 2014

45 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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

46 MOODY’S CREDIT OUTLOOK 12 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 Brazil’s weakening economic growth rate and reduced refinancing. However, the US Fed’s 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 Chile’s 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 China’s 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 Notable research published the week ending 9 May 2014

47 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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

RESEARCH HIGHLIGHTS Notable research published the week ending 9 May 2014

48 MOODY’S CREDIT OUTLOOK 12 MAY 2014

Infrastructure

Brazil Electricity Auction Reduces Distributors’ Exposure to Spot Market, a Credit Positive The 30 April auction’s 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 Corp’s Prospects for Remaining Investment Grade Two primary factors will drive FirstEnergy’s (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 PGN’s proposed issuance of senior unsecured bonds reflect the Indonesian company’s pricing power and stable margins, strong growth potential, and sound financial metrics. PGN’s 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 Notable research published the week ending 9 May 2014

49 MOODY’S CREDIT OUTLOOK 12 MAY 2014

Financial Institutions

Moody’s Ratings of China’s 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 Notable research published the week ending 9 May 2014

50 MOODY’S CREDIT OUTLOOK 12 MAY 2014

Sovereigns

Russia & the EU: EU Economies Would Be Resilient to a Russian Recession Our base case forecast that Russia’s GDP will contract by 1% in 2014 has negligible credit implications for the EU’s 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 Pakistan’s Caa1 government bond rating reflects our assessment of the country’s very low institutional and fiscal strength and relatively weak growth path. A precarious external position and large government financing needs leave the sovereign’s 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 Brazil’s 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, Brazil’s 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 country’s economy and its very low per capita income relative to rated peers, which are offset by the country’s 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 Notable research published the week ending 9 May 2014

51 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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 state’s 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 Notable research published the week ending 9 May 2014

52 MOODY’S CREDIT OUTLOOK 12 MAY 2014

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 Monday’s Credit Outlook on moodys.com

53 MOODY’S CREDIT OUTLOOK 12 MAY 2014

Corporates » Merck’s Balanced Use of Proceeds Makes Divestiture

Credit Positive » Activist Hedge Fund Third Point Gains Foothold on

Sotheby’s Board, a Credit Negative » Viacom’s Planned $757 Million Channel 5 Purchase Will

Add to Revenue Diversity and Cash Flow » Encana’s Redeployment of Proceeds from Asset Sales Is

Credit Positive

Infrastructure » Brazil Electricity Auction Reduces Distributors’ Exposure to

Spot Market, a Credit Positive

Banks » Brazil’s 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 » Florida’s 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