MOODYS.COM

6 AUGUST 2015

NEWS & ANALYSIS Corporates 2 » Marines Declare Fighter Jet Combat-Ready, Giving Lift to

Lockheed Martin and Key Subcontractors » Expro’s Equity Injection and Debt Paydown Are Credit Positive » GLP’s $4.6 Billion Acquisition of US Real Estate Portfolio Is

Credit Negative » Shell’s Exit from Japan Is Credit Positive for Japanese Refiners » Indosat’s Early Redemption of $650 Million Bond Is

Credit Positive

Infrastructure 7 » IEnova’s Acquisition of Gasoductos de Chihuahua Is

Credit Positive

Banks 9 » Bradesco’s Acquisition of HSBC’s Brazilian Operations Is Credit

Positive for Both

Sovereigns 11 » Italy’s Parliament Approves Credit-Positive Public

Administration Reforms

US Public Finance 12 » Congress Extends Federal Aid to Highways and Transit, a

Positive for $11 Billion of GARVEES » Long Island, New York, Governments Benefit from Court Ruling

Barring LIPA Tax Challenge

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Monday’s Credit Outlook 15 » Go to Last Monday’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 6 AUGUST 2015

Corporates

Marines Declare Fighter Jet Combat-Ready, Giving Lift to Lockheed Martin and Key Subcontractors Last Friday, the US Marine Corps announced that the F-35B, its variant of the F-35 Lightning II stealth multirole fighter, had achieved initial operational capability, a significant milestone for a weapons acquisition program because it indicates that the program is deployment-ready. The Marines’ credit-positive assessment is a major step in cementing the future viability of the US Department of Defense’s largest weapons acquisition program and benefits the program’s prime contractor, Lockheed Martin Corporation (Baa1 stable). The achievement is also credit positive for the program’s key subcontractors, including United Technologies Corporation’s (A2 stable) Pratt & Whitney subsidiary, Northrop Grumman Corporation (Baa1 stable) and BAE Systems plc (Baa2 stable).

The F-35 program is the largest weapons acquisition program in history and is of such scale that favorable program developments such as last Friday’s affect our assessment of Lockheed Martin’s credit quality. The program constituted 14%-17% of total revenue during 2012-14, with its forward revenue contribution to exceed 25% as annual deliveries rise to more than 200 by the end of the decade from 109 in 2014.1 Although we expect modest margin dilution as lower-margin F-35 sales ramp up, we expect that the F-35 program will support stable operating profit and cash flow as production increases.

The F-35B’s milestone reduces the likelihood of substantial order reductions or outright program cancellations, and, as a result, enhances our assessment of Lockheed Martin’s future revenue stability and operating cash flow capacity. Although the F-35’s future looks increasingly assured as elevated geopolitical risk partially offsets pressure on global defense spending, the program’s significant estimated cost of around $1 trillion over a multi-decade life cycle has made the program a lightning rod for scrutiny that at times seemed to pose a threat to the program. The advent of a ready-for-war aircraft substantially reduces the risk of program cancellation or significant order reduction.

Last week’s achievement and the ensuing enhancement of the program’s perceived viability both domestically and internationally further ensure the F-35’s future. Under a scenario in which both the Department of Defense and international security partner nations negotiate large-scale, multi-year aircraft purchases, the visibility provided to Lockheed Martin and its subcontractors would support cost-reduction initiatives and improve revenue, cash flow and profitability. Lower unit costs would stoke international demand for the aircraft, adding order volume that further reduces unit costs and enhances the aircraft’s appeal to international customers.

This development does not affect Lockheed Martin’s Baa1 senior unsecured rating and stable outlook because the company continues to maintain a shareholder-friendly financial policy and an increasingly elevated financial risk tolerance, as evidenced by its $9 billion acquisition of Sikorsky Aircraft from United Technologies Corporation in July.2 We expect that the company’s elevated shareholder remuneration will continue to be fully funded from free cash flow and excess liquidity rather than incremental debt.

1 See Lockheed Martin: An 'A' for the F-35?, 1 October 2014. 2 See Sikorsky 'Win' a Near-Term Negative Despite Future Vertical Lift Boost, 22 July 2015.

Russell Solomon Senior Vice President +1.212.553.4301 russell.solomon@moodys.com

Jack Kuhns Associate Analyst +1.212.553.6946 jack.kuhns@moodys.com

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 6 AUGUST 2015

Expro’s Equity Injection and Debt Paydown Are Credit Positive On Tuesday, oil services company Expro Holdings UK 3 Limited (B3 negative) announced that it had repaid $283 million of its $1.013 billion mezzanine facility (as of 31 July 2015) from a new equity injection totalling $334 million. The company also extended to 2021 from 2018 the maturity of $333.4 million of the remaining facility, after 61.4% of lenders agreed to the extension and to a reset of financial maintenance covenants. Between the debt repayment and the equity raise, Expro’s liquidity increased by $51 million. The lenders that agreed to the deal will receive a higher non-cash coupon (payment-in-kind margin) on the extended part of the facility, while the cash coupon will not change.

The transaction is credit positive for Expro because the company’s pro forma Moody’s-adjusted leverage as of 31 March 2015 will fall to 6.8x from 7.6x. Additionally, Expro’s already adequate liquidity will improve as a result of the net $51 million infusion, the cash interest savings that the company estimates will total approximately $3.3 million for the fiscal year ending 31 March 2016 and $13.6 million in fiscal 2017, and a longer debt maturity schedule. The transaction also reduces the threat of a covenant breach under the mezzanine facility because, as part of the covenant reset, the mezzanine lenders also agreed to suspend covenant tests until 31 December 2016 in addition to wider covenants starting 31 March 2017.

The $334 million equity injection reflects Expro shareholders’ commitment even amid challenging market conditions in the oil and gas industry. Indeed, we expect the company’s operating performance to deteriorate further this year as some projects get postponed and others risk being cancelled.

And, as with other companies in the oilfield services industry, pricing pressures will arise as oil companies seek to lower their cost base and competition increases as new tenders become scarce. Expro’s main competitors are large diversified oilfield services companies with stronger financial profiles, including Schlumberger Ltd. (Aa3 stable) and Halliburton Company (A2 stable). These firms are better able to withstand pricing pressures and persistently weak market conditions.

UK-based Expro is a leading provider of services and products to the upstream oil and gas industry, specialising in well flow management. In July 2008, a private-equity consortium led by Arle Capital Partners and GS Capital Partners VI Fund, L.P. acquired the company, which reported revenues of around $1.3 billion for fiscal 2015.

Eric Kang, CFA Analyst +44.20.7772.1965 eric.kang@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 6 AUGUST 2015

GLP’s $4.6 Billion Acquisition of US Real Estate Portfolio Is Credit Negative On 29 July, Global Logistic Properties Limited (GLP, Baa2 negative) announced that it had entered into a definitive agreement to acquire a portfolio of logistics-related real estate assets from Industrial Income Trust (IIT, unrated) valued at $4.6 billion. The acquisition is credit negative because it indicates an increased risk appetite and potentially will increase leverage substantially. On Monday, we changed GLP’s outlook to negative from stable.

In addition to the $4.6 billion of assets, IIT’s logistics portfolio will bring debt of around $2.9 billion for consolidation onto GLP’s balance sheet when the transaction closes. The IIT portfolio has assets totaling 58 million square feet spread over 20 major US markets. GLP expects to own 100% of the portfolio upon the transaction’s closing by 16 November 2015, and plans to reduce its stake in the portfolio to 10% by April 2016, when it moves the portfolio to a new fund management platform.

If GLP cannot pare down its stake in the portfolio by March 2016, we estimate that GLP’s debt leverage, as measured by adjusted net debt/EBITDA, will increase to around 10x from around 5.5x as of March 2015. Such a level would not support its Baa2 rating.

The IIT deal follows GLP’s February 2015 purchase of a 55% stake in a portfolio of $8.1 billion of US logistics real estate assets. GLP is still working to reduce to 10% its stake in the $8.1 billion portfolio before the end of 2015. We consider GLP’s objective to become one of the top logistics operators in the US within one year of its entry into this market as ambitious.

In expanding quickly, GLP has implemented a strategy and established a track record of selling down interests in acquired companies to reduce the company’s risk exposure and financial burden. But GLP’s frequent acquisitions in a new market in a short span of time stresses leverage, notwithstanding its plans for quick sales of stakes.

Stephanie Lau Assistant Vice President - Analyst +852.3758.1343 stephanie.lau2@moodys.com

Elyse Wang Associate Analyst +852.3785.1563 elyse.wang@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 6 AUGUST 2015

Shell’s Exit from Japan Is Credit Positive for Japanese Refiners Last Thursday, Royal Dutch Shell Plc (Aa1 negative) announced that it will sell 33.2% of its 35.0% stake in Japan’s Showa Shell Sekiyu K.K. (unrated) to Idemitsu Kosan Co., Ltd. (unrated) for an estimated $1.4 billion. Shell’s sale of its stake is credit positive for Japanese refiners because it will pave the way for a full-fledged merger of Idemitsu and Showa Shell, which, in turn, will ease competition in the industry and help all industry players improve profitability.

Japan’s refining industry suffers from overcapacity and excessive competition. As of 1 April 2015, Japan’s refining capacity of 3.92 million barrels per day far exceeded actual demand of 3.2 million barrels per day. The Japanese government’s Agency for Natural Resources and Energy expects demand to decline to 2.9 million barrels per day by 1 April 2019. As a result of overcapacity and excessive competition, Japanese refiners’ profitability has been significantly lower than other industry sectors. Japanese refiners’ average operating margins have remained below 3% over the past five years, compared with 5% or more for most other Japanese industries.

If the industry’s refining capacity falls by 20%, we expect that refiners’ operating margins would improve by as much as 2%. However, such a reduction is currently impractical for most refiners except JX Holdings, Inc. (Baa2 stable) because most have only three refineries and closing one would significantly erode their economies of scale. Merging two competitors would double the number of refineries, thereby improving the merged company’s ability to close one or two refineries and optimize the remaining ones.

Shell’s exit will make Idemitsu the biggest shareholder of Showa Shell, allowing Idemitsu to have significant influence over Showa Shell. Both Idemitsu and Showa Shell each currently have three refineries, making it easier to close a refinery without compromising economies of scale.

A merger between Idemitsu and Showa Shell would also encourage further consolidation in the industry, incentivizing TonenGeneral Sekiyu K.K. (unrated) and Cosmo Oil Co., Ltd. (unrated), currently the second- and fourth-largest refiners, respectively, to further strengthen their existing alliance and consider a full-scale merger to remain competitive against market leader JX Holdings and a merged Idemitsu-Showa Shell.

Should Idemitsu and Showa Shell merge, JX Holdings would face a significantly larger peer, eroding its dominance in the Japanese refining and marketing industry. JX Holdings currently has 36.4% of country’s total refining capacity, followed by TonenGeneral with 17.8% (see exhibit). However, because industry consolidation would increase all players’ pricing power, including JX Holdings’, we believe that all would benefit from reduced competition.

Japanese Refiners’ Share of Total Domestic Refining Capacity

Source: Japan’s Ministry of Economy, Trade and Industry

JX Holdings, Inc.36.4%

Idemitsu Kosan13.7%

Showa Shell Sekiyu K.K11.4%

Tonengeneral Sekiyu K.K17.8%

Cosmo Oil Company, Ltd11.5%

Others9.2%

Kailash Chhaya Vice President - Senior Analyst +81.3.5408.4201 kailash.chhaya@moodys.com

Kenichiro Sano Associate Analyst +81.3.5408.4157 kenichiro.sano@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 6 AUGUST 2015

Indosat’s Early Redemption of $650 Million Bond Is Credit Positive On Friday, Indosat Tbk. (P.T.) (Ba1 stable) announced that it had redeemed its $650 million of US dollar-denominated bonds, constituting about 31% of its total debt, and will ultimately refinance the amount in Indonesian rupiahs. The early redemption is credit positive for the Indonesia-based telecommunications company because lower US dollar debt exposure will reduce the company’s foreign exchange rate risk and hedging costs.

Indosat exercised its option to redeem the bonds five years earlier than their maturity date of July 2020 and paid down $150 million using internal cash and IDR700 billion (about $54 million) from its IDR3.1 trillion rupiah-denominated bond issue in June 2015. It paid $500 million through US dollar revolver credit facilities from various banks.

We expect the revolvers to decline gradually over the next 12-18 months because the company plans to pay them down through rupiah-denominated bonds issued over three to four tranches, subject to market conditions. Pro forma for this rupiah-denominated refinancing, Indosat’s US dollar exposure will decline to 12% of total debt, versus 41% in December 2013 (see exhibit below).

Indosat’s Ratio of US Dollar Debt to Total Debt

Note: Debt calculations include finance lease obligations. Sources: Indosat and Moody’s Investors Service estimates

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

41% 39%

36%

12%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

Dec-13 Dec-14 Mar-15Pro forma $650M bond

redepmtion

Mar-15Pro forma refinancing $650M

debt to IDR

$ Bi

llion

s

IDR Debt in USD Equivalent - left axis USD Debt - left axis USD Debt/ Total Debt - right axis

Nidhi Dhruv Assistant Vice President - Analyst +65.6398.8315 nidhi.dhruv@moodys.com

Maisam Hasnain Associate Analyst +852.3758.1420 maisam.hasnain@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 6 AUGUST 2015

Infrastructure

IEnova’s Acquisition of Gasoductos de Chihuahua Is Credit Positive Last Friday, Mexico’s Infraestructura Energetica Nova, S.A. de C.V. (IEnova, Baa1/Aaa.mx stable) announced that it had reached an agreement with Mexican state-owned oil company Petróleos Mexicanos (PEMEX, A3/Aaa.mx stable) to acquire the 50% equity interest in Gasoductos de Chihuahua (unrated) that it did not own for $1.325 billion. Upon closing the transaction, IEnova will own 100% of Gasoductos de Chihuahua. The transaction is credit positive for IEnova because it will improve the company’s cash interest coverage and leverage starting in 2016, expand its asset base and strengthen its leadership in the sector.

Gasoductos de Chihuahua owns and operates three natural gas pipelines, an Ethane pipeline, a liquid petroleum gas pipeline and a liquid petroleum gas storage terminal. The new joint venture between IEnova and Pemex will own a 50% stake in the Los Ramones Norte Pipeline, a 273-mile (440-kilometer) pipeline currently under construction. IEnova owns six natural gas pipelines, a liquefied natural gas regasification terminal, three local distribution companies, a gas compression station, a wind project and a gas-powered electricity plant.

IEnova will obtain a bridge loan to fund the transaction, but expects to take out the full amount of this loan via a combination of equity and long-term debt either this year or next year. IEnova’s base-case assumption is that it will raise approximately $1.325 billion of equity to repay the bridge loan. Under this scenario, the acquisition will temporarily weaken the company’s credit metrics, with improvements coming over the next two years.

As shown in Exhibit 1, IEnova’s cash interest coverage (funds from operations plus interest expense divided by interest expense) would deteriorate in 2016 but start recovering in 2017. Leverage, as measured by funds from operations/debt, will also weaken by year-end 2015 before improving next year after incorporating full-year cash flows from Gasoductos de Chihuahua (see Exhibit 2).

EXHIBIT 1

IEnova’s Cash Interest Coverage

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

0x

2x

4x

6x

8x

10x

12x

14x

2014 2015E 2016E 2017E 2018E 2019E

Adrian Javier Garza, CFA Assistant Vice President - Analyst +52.55.1253.5709 adrianjavier.garza@moodys.com

Julio Zarandona Associate Analyst +52.55.1555.5302 julio.zarandona@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 6 AUGUST 2015

EXHIBIT 2

IEnova’s Funds from Operations to Debt

Sources: IEnova and Moody’s Investors Service

The transaction requires approval from IEnova’s shareholders and the Comisión Federal de Competencia (Mexico’s antitrust agency), among others. The company expects to receive the approvals in the next 120 days.

0%

10%

20%

30%

40%

50%

60%

70%

2014 2015E 2016E 2017E 2018E 2019E

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 6 AUGUST 2015

Banks

Bradesco’s Acquisition of HSBC’s Brazilian Operations Is Credit Positive for Both On Monday, HSBC Holdings plc (A1 stable) announced that it had reached an agreement to sell its two Brazilian subsidiaries, HSBC Bank Brasil S.A. - Banco Multiplo (Baa2/Baa1 negative, baa33) and HSBC Serviços e Participações Ltda (unrated), to Banco Bradesco S.A. (Baa2 negative, baa2) for $5.2 billion. The sale, which is subject to regulatory approval, is credit positive for HSBC because despite resulting in an accounting loss, it will free up capital that HSBC can redeploy to growth markets.

The transaction is also credit positive for Bradesco because it will increase its domestic market share, and improve revenues and cost synergies that will enhance future earnings generation, helping to offset an immediate reduction in capital.

HSBC last June announced its intention to sell its Brazilian operations as part of its strategic plan to improve profitability by disposing of certain low-return activities and selling non-strategic assets. Although the sale price for the Brazilian business is 1.8x tangible book value, HSBC expects to report a loss because of an accounting adjustment mainly related to the reversal of $1.7 billion of foreign exchange reserves and allocated goodwill. However, the disposal will shrink HSBC’s risk-weighted assets by $37 billion and result in a 50-basis-point net increase in HSBC’s common equity Tier 1 ratio, which was 11.6% at the end of June 2015. HSBC has indicated that it will use the increase to support growth in its key markets, particularly in Asia.

As part of the deal, HSBC also reserves the option to maintain a wholesale banking license in Brazil, which it has indicated it will use to continue servicing a small number of key large corporate clients.

Bradesco will acquire HSBC Brasil’s retail, insurance and wholesale businesses, including its derivatives and foreign exchange trading operations and its corporate sales unit. Main benefits include access to HSBC’s branch network in Brazil’s South and Southeast regions, where Bradesco’s footprint is smaller, and a larger presence in the segment catering to high-income clients. Additionally, the integration of HSBC Brasil’s insurance operation will further strengthen Bradesco’s insurance business. Bradesco projects results of BRL1.2 billion for 2015, driven by HSBC Brasil’s operations, cost reductions and the elimination of intra-group expenses.

Bradesco’s total assets will rise by BRL187 billion to around BRL1.2 trillion following the acquisition. This will narrow the gap with its next-largest competitor, Itau Unibanco S.A. (Baa2 negative, baa2), which reported assets of BRL1.23 trillion at the end of June 2015. Bradesco’s domestic market share in loans will increase to 16.9% from 14.7% as of March 2015, while its share of deposits will rise to 13.8% from 10.7% at the same date. Bradesco and Itau Unibanco are Brazil’s two largest privately owned banks.

Bradesco’s all-cash payment equals approximately 12% of its second-quarter 2015 regulatory capital. However, the deal comes with a high capital consumption because of the significant amount of goodwill, which the bank estimates will exceed 50% of the acquisition price. Post-transaction, the merged company’s pro forma Tier 1 ratio will fall 280 basis points to 10% from 12.8% in June 2015 for Bradesco alone. Meanwhile, the combined entity’s pro forma total capital ratio will drop to 13.5% from Bradesco’s standalone level of 16% in June 2015. These estimates are based mostly on the banks’ combined operation and the deduction of goodwill. However, Bradesco’s strong earnings generation and moderate growth of risk-weighted assets over the next two years can restore its Tier 1 ratio above the regulatory minimum of

3 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating (where available) and baseline

credit assessment.

Alexandre Albuquerque Assistant Vice President - Analyst +55.11.3043.7356 alexandre.albuquerque@moodys.com

Andrea Usai Vice President - Senior Credit Officer +44.20.7772.1058 andrea.usai@moodys.com

Ceres Lisboa Senior Vice President +55.11.3043.7307 ceres.lisboa@moodys.com

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 6 AUGUST 2015

9.5%, including a countercyclical buffer, that Brazilian authorities will require starting in 2019. Over the past 12 months, Bradesco’s retained earnings were BRL8 billion, which equaled approximately 1.5% of risk-weighted assets in full-year 2014.

Banco Bradesco’s Capital Replenishment

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

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

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NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 6 AUGUST 2015

Sovereigns

Italy’s Parliament Approves Credit-Positive Public Administration Reforms On Tuesday, the upper house of Italy’s (Baa2 stable) parliament approved an enabling law4 on public administration reform, which aims to improve the public sector’s quality of service, transparency and efficiency. The approval follows the lower house’s approval in July, and the next step will be the government enacting implementing decrees by the end of this year that contain details on the measures envisaged by the public administration reform guidelines set forth in the enabling law. When implemented, the public administration reform will raise Italy’s growth potential and improve investor confidence, a credit positive.

The public administration reforms involve a number of measures, including improving and redistributing human resources and changing the organization of state-owned enterprises to increase their efficiency and cost-effectiveness. Regulations will be simplified and aligned with European regulations to foster competition. The reform package also includes the digitalization of the public administration, including the launch of a communication platform for citizens, companies and general government agencies as a single point to online services to allow for things such as electronic invoicing and payment. This will simplify citizens’ and companies’ access to government services, increase transparency and reduce corruption.

The public administration reforms are just one area of reform under way in Italy. Others include labor market reform (Jobs Act5), changes to electoral law and the balance of power between the upper and the lower house of parliament,6 and justice reform. Similar to the labor market reform, the public administration reform is being implemented as an enabling law, which sets the guidelines.

According to government estimates, the public administration reform will increase GDP overall by 0.4% by 2020. This is slightly less than the estimated effect of the labor reform, for which the government is estimating a 0.6% overall effect on GDP by 2020. To put these two reforms in perspective, the government expects the combined effect of all structural reforms to raise GDP by 1.8% by 2020, which implies an increase of the average annual GDP growth rate of 0.36%.

In this context, successful implementation of the public administration enabling law and other structural reforms may lead to an increase of our GDP growth forecast from the 1.1% on average currently forecast for 2017-19. We expect Italy’s economy to grow by 0.5% in 2015 and 1% in 2016, after negative GDP growth over the past three years.

4 The enabling law sets the guidelines for reform in the public administration. 5 See Italy Credit Analysis, 20 February 2015. 6 See Italy, Government of: Approval of the New Electoral Law Credit Positive If Accompanied by Senate Reform, 6 May 2015.

Thorsten Nestmann Vice President - Senior Analyst +49.69.7073.0943 thorsten.nestmann@moodys.com

Polina Gotmann Associate Analyst +49.69.7073.0925 polina.gotmann@moodys.com

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 6 AUGUST 2015

US Public Finance

Congress Extends Federal Aid to Highways and Transit, a Positive for $11 Billion of GARVEES Last Thursday, the US Congress extended federal aid to highways and transit through 29 October and transferred $8 billion to the Highway Trust Fund (HTF) to avert a disruption in the flow of federal funds to states and transit agencies. Although the three-month extension continues the status quo of short-term solutions and stagnant federal transportation funding, the US Senate also sent a long-term spending bill with increased funding to the US House of Representatives, the first since 2005 and a credit positive for $11 billion in bonds secured by federal transportation aid (GARVEEs). We expect the House to take up its own long-term transportation bill in September when it returns from recess and works to reconcile the two bills.

The latest short-term extension is the 34th since 2009, when the last long-term transportation spending authorization expired. Without the extension, federal payments to state departments of transportation, including those that secure GARVEEs, would have ceased on 1 August. Recently, the US Department of Transportation (DOT) warned states that without the $8 billion transfer, payments would have been delayed starting 1 August. Exhibit 1 lists the GARVEEs secured by federal transportation grants that we rate.

EXHIBIT 1

Rated GARVEE Bonds Secured by Federal Transportation Grants

Issuer Rating Debt Outstanding

$ Millions

Alabama Federal Aid Highway Finance Authority A1 $368

Alaska Railroad Corporation A3 $129

Arizona Transportation Board Aa2 $372

California Department of Transportation A2 $127

Chicago Transit Authority A3 $861

Commonwealth of Massachusetts Aa2 $353

Delaware Transportation Authority A1 $94

District of Columbia (2011/2012) A1/A2 $120

Georgia State Road and Tollway Authority (Reimbursement/Grant Anticipation Revenue Bonds)

A1/A2 $913

Idaho Housing and Finance Association A2 $633

Kentucky Asset/Liability Commission A2 $625

Maine Municipal Bond Bank A2 $114

Maryland Transportation Authority Aa1 $416

Michigan (2009B/2007) A1/A2 $721

Missouri Highways & Transportation Commission Aa1 $797

Montana Department of Transportation A2 $96

New Hampshire A2 $167

New Jersey Transit Corporation A3 $492

New Jersey Transportation Trust Fund Authority A3 $53

North Carolina A2 $779

Ohio Aa2 $988

Oklahoma Department of Transportation A2 $47

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

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 6 AUGUST 2015

EXHIBIT 1

Rated GARVEE Bonds Secured by Federal Transportation Grants

Issuer Rating Debt Outstanding

$ Millions

Rhode Island Economic Development Corporation A2 $279

Southeastern Pennsylvania Transportation Authority A3 $178

Tri-County Metropolitan Transportation District, OR A3 $165

Washington A2 $727

West Virginia Commissioner of Highways A2 $27

Source: Moody’s Investors Service

The long-term bill passed by the Senate, known as the DRIVE Act, would increase highway spending by 19% and transit spending by 25% by 2021. This step indicates progress toward predictable and growing federal transportation aid, which would be credit positive for GARVEEs and the states and transit agencies that issue them.

Even if Congress had failed to pass the extension and transfer sufficient funds to the HTF, upcoming GARVEE debt service payments would have been adequately protected from a short-term interruption in federal grants, according to our review of bond documents and GARVEE issuer debt service payment procedures. For example, Alaska Railroad Corporation (A3 stable) and California’s GARVEEs (A2 stable) had payments due on 1 August. Alaska Railroad Corporation pre-funds its GARVEEs one year in advance, while the California’s Department of Transportation pays debt service on a reimbursement basis, so its debt service is not affected by a short-term lapse. Other states have available funds that they can use to pay debt service in the event of an interruption in grant payments, although those are not pledged.

The short-term extension does not address the ongoing annual structural imbalance between HTF revenues and expenditures (see Exhibit 2). Absent a long-term solution, we expect a continued need for short-term extensions and general fund support of the HTF, exposing states and transit agencies to interruptions in the flow of grants. Should Congress fail to support the HTF with a transfer from the general fund or find new revenues, the DOT will need to cut grants by 27% to align spending with tax revenues, according to data for the fiscal year ended 30 September 2014, the latest full year available.

EXHIBIT 2

Highway Trust Fund Spending Versus US Excise Tax Receipts

Sources: US Department of Transportation and Moody’s Investors Service 2015 forecast

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

$55

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F

$ Bi

llion

s

General Fund Transfers Excise Tax Receipts Outlays

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 6 AUGUST 2015

Long Island, New York, Governments Benefit from Court Ruling Barring LIPA Tax Challenge On 29 July, a New York state appellate court ruled that the Long Island Power Authority (LIPA, Baa1 stable) was prohibited from challenging the assessment on its Northport power plant, which could have resulted in lower property taxes. The ruling is credit positive for the Northport-East Northport Union Free School District (Aa2) because the power plant contributes 40% of the district’s property tax revenue. Additionally, the ruling will benefit other local governments on New York’s Long Island with tax bases that also have significant exposure to LIPA.

LIPA pays approximately $73 million in property taxes annually on the plant, around $52 million of which supports the Northport school district’s operations (see exhibit below). LIPA filed the original lawsuit challenging the plant’s 2010 assessed value and sought to recover nearly $270 million in property taxes paid since then. The ruling also affects the Town of Huntington (Aaa negative), where LIPA is responsible for approximately 77% of the town’s property tax revenue. Town management estimates that making up for the lost revenue of a successful LIPA tax appeal would require a 15% increase in the town’s property tax rate and a 60% increase in the school district’s rate. The school district would have likely issued long-term debt to cover the full property tax reimbursement, increasing its debt burden and annual debt service obligations.

LIPA Property Taxes and All Property Taxes to Northport School District

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

A loss of annual property tax revenue from LIPA, which were 40% of the district’s tax revenue in 2014, would shift the tax burden to other property taxpayers in the district, with a likely adverse effect on local businesses and homeowners.

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

$0$10$20$30$40$50$60$70$80$90

$100$110$120$130

2010-2011 2011-2012 2012-2013 2013-2014 2014-2015

$ M

illio

ns

LIPA Property Taxes All Property Taxes

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

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

15 MOODY’S CREDIT OUTLOOK 6 AUGUST 2015

NEWS & ANALYSIS Corporates 2

» Honeywell’s Planned Acquisition of Melrose Industries’ Elster Unit Is Credit Positive

» A UPS Acquisition of Coyote Logistics Would Be Credit Negative

» Delphi’s Planned Acquisition of HellermannTyton Is Credit Negative

» A Wabtec Acquisition of Faiveley Transport Would Be Credit Positive

» Brazil Demand for Fine Payment Heightens Threat to Votorantim Cimentos’ Liquidity

» Solvay’s Acquisition of Cytec Is Credit Negative for Both

» GKN’s Acquisition of Fokker Technologies Is Credit Positive

» Falling Copper Prices and Zambian Power Reductions Tarnish FQM’s Credit Metrics

» Baidu’s Greater Investment in Online-to-Offline Business Is Credit Negative

Infrastructure 14

» SSE’s Acquisition of Gas Assets Improves Internal Sources of Supply

» ENGIE Clinches Credit-Positive Nuclear Contribution Reduction and Reactor Extension

Banks 18

» Ally Financial Will Benefit from Ally Bank’s Ability to Fund Riskier Loans

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

» Guatemala’s Weakening Economic Confidence Is Credit Negative for Banks

Insurers 24

» Sirius Group’s Sale to China Minsheng Investment Corp. Is Credit Negative

» Argentina’s New Civil and Commercial Code Has Mixed Implications for Insurers

Sovereigns 27

» Ireland Reports Strong First-Quarter Growth, a Credit Positive

» Slovenia’s Privatisation Strategy Builds Momentum, a Credit Positive

US Public Finance 31

» Michigan Supreme Court Affirms State Pension Reforms, Credit Positive for the State

» Glendale, Arizona, Renegotiates Smaller Subsidy to Pro Hockey Team, a Credit Positive

RATINGS & RESEARCH Rating Changes 35

Last week we downgraded Advanced Micro Devices and Teva Pharmaceutical Industries, and upgraded Michigan, Southeast Housing and 26 US subprime RMBS, among other rating actions.

Research Highlights 38

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

16 MOODY’S CREDIT OUTLOOK 6 AUGUST 2015

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EDITORS PRODUCTION ASSOCIATE News & Analysis: Jay Sherman Alisa Llorens