Moody's Credit Outlook August 27, 2012

7/31/2019 Moody's Credit Outlook August 27, 2012

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NEWS & ANALYSISCredit implications of current events

2 MOODYS CREDIT OUTLOOK 27 AUGUST 20

Corporates

PayPal Deal with Discover Will Boost Payment Volume for Both, a Credit PositivOn 22 August,eBay Inc.s (A2 stable) PayPal announced a partnership withDiscover Financial

Services(Ba1stable) that will allow consumers to use PayPal at more than 7 million merchant locatio

in the US and potentially more locations internationally. The deal is credit positive for both eBay an

Discover because it will increase payment volumes for both companies beginning in the second quart

of 2013.

EBay, a market leader in e-commerce payments, will expand its presence in brick-and-mortar stores.

Before the Discover deal, it had agreements with just a handful of US retailers, includingHome Dep

Inc.

The alliance follows

(A3 stable) and Abercrombie & Fitch (unrated), that allowed customers to use PayPal at the cash

register.

Starbucks Corporations (Baa3 positive) announcement a week earlier of a

partnership with San Francisco-based startup Square, under which the coffee retailer will invest $25

million in the electronic payment service and use Square to process credit-card and debit-card

transactions in its US stores starting this fall. Squares alliance with a large merchant intensifies the

battle against its direct competitor PayPal.

For Discover, the alliance with a leading online commerce player will generate incremental payment

volumes through its Discover network, potentially expanding its currently modest card payment

market share againstVisa Inc.(A1 stable),MasterCard Incorporated(A3 stable), andAmerican Expr

Compan (A3 stable), as shown in the exhibit.y

Total US Credit & Debit Dollar Volume, First-Quarter 2012 in $ billions

Source: The Nilson Report

It is also consistent with Discovers payments strategy to drive increased acceptance and volume byaggressively pursuing alternative payments and new network/acquirer/issuer partnerships. EBay

estimates that it processes roughly 20% of online transactions globally on a dollar basis through abou

110 million active registered accounts. Equipping PayPal customers with the ability to use their

account at the point of sale may prove popular with consumers as the lines between online and offlin

purchases become blurred.

Visa$614.25

American Express$139.60

Mastercard$283.41

Discover Financial

$31.06

tephen SohnVice President - Senior Credit Officer

[email protected]

urt BeaudouinVice President - Senior Credit Officer

[email protected]
http://www.moodys.com/credit-ratings/Ebay-Inc-credit-rating-809885325http://www.moodys.com/credit-ratings/Ebay-Inc-credit-rating-809885325http://www.moodys.com/credit-ratings/Ebay-Inc-credit-rating-809885325http://www.moodys.com/credit-ratings/Discover-Financial-Services-credit-rating-820331915http://www.moodys.com/credit-ratings/Discover-Financial-Services-credit-rating-820331915http://www.moodys.com/credit-ratings/Discover-Financial-Services-credit-rating-820331915http://www.moodys.com/credit-ratings/Discover-Financial-Services-credit-rating-820331915http://www.moodys.com/credit-ratings/Home-Depot-Inc-The-credit-rating-373800http://www.moodys.com/credit-ratings/Home-Depot-Inc-The-credit-rating-373800http://www.moodys.com/credit-ratings/Home-Depot-Inc-The-credit-rating-373800http://www.moodys.com/credit-ratings/Starbucks-Corporation-credit-rating-600011184http://www.moodys.com/credit-ratings/Starbucks-Corporation-credit-rating-600011184http://www.moodys.com/credit-ratings/Starbucks-Corporation-credit-rating-600011184http://www.moodys.com/credit-ratings/Visa-Inc-credit-rating-820711779http://www.moodys.com/credit-ratings/Visa-Inc-credit-rating-820711779http://www.moodys.com/credit-ratings/Visa-Inc-credit-rating-820711779http://www.moodys.com/credit-ratings/Mastercard-Incorporated-credit-rating-600023500http://www.moodys.com/credit-ratings/Mastercard-Incorporated-credit-rating-600023500http://www.moodys.com/credit-ratings/Mastercard-Incorporated-credit-rating-600023500http://www.moodys.com/credit-ratings/American-Express-Company-credit-rating-40500http://www.moodys.com/credit-ratings/American-Express-Company-credit-rating-40500http://www.moodys.com/credit-ratings/American-Express-Company-credit-rating-40500http://www.moodys.com/credit-ratings/American-Express-Company-credit-rating-40500http://www.moodys.com/credit-ratings/American-Express-Company-credit-rating-40500http://www.moodys.com/credit-ratings/American-Express-Company-credit-rating-40500http://www.moodys.com/credit-ratings/American-Express-Company-credit-rating-40500http://www.moodys.com/credit-ratings/Mastercard-Incorporated-credit-rating-600023500http://www.moodys.com/credit-ratings/Visa-Inc-credit-rating-820711779http://www.moodys.com/credit-ratings/Visa-Inc-credit-rating-820711779http://www.moodys.com/credit-ratings/Starbucks-Corporation-credit-rating-600011184http://www.moodys.com/credit-ratings/Home-Depot-Inc-The-credit-rating-373800http://www.moodys.com/credit-ratings/Home-Depot-Inc-The-credit-rating-373800http://www.moodys.com/credit-ratings/Home-Depot-Inc-The-credit-rating-373800http://www.moodys.com/credit-ratings/Discover-Financial-Services-credit-rating-820331915http://www.moodys.com/credit-ratings/Discover-Financial-Services-credit-rating-820331915http://www.moodys.com/credit-ratings/Ebay-Inc-credit-rating-809885325


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Still, for both eBay and Discover, it will likely take several years for the alliance to gain traction. It fa

the challenges of adoption by both consumers and merchants. It must also outmaneuver a stampede

competitors trying to gain first-mover advantage in the fledgling mobile wallet market, including

Google Wallet, Visa and MasterCard, Isis, Square, and the new Merchant Customer Exchange

initiative, a collaboration of more than a dozen leading retailers.

EBays margins on these point-of-sale transactions are likely to be lower than those from online

transactions. It will have to pay incremental fees to merchant acquirers, which are payment processor

responsible for handling a merchants sales transactions. It will also need to spend on sales and

marketing to prompt consumers to choose their PayPal card over their existing Visa, MasterCard, or

American Express card, or competing wallets, at the point of sale. It will also have to secure merchan

acceptance of its card, although it will be helped by the fact that retailers wont have to buy new

equipment because payments will run through the existing Discover network.

The increased payment volume could also increase the risk that eBay bears in its burgeoning Bill Me

Later loan receivables portfolio, which we estimate could triple or quadruple to $5-$7 billion over th

next several years, even excluding additional volume from the Discover alliance. Bill Me Later, whichwill also be available for physical purchases, enables qualified US consumers to obtain credit at the

point of sale when they make an online purchase. With volumes arising from the penetration of offlin

merchants, the Bill Me Later portfolio could grow at an even faster clip than we anticipated, which w

likely expose eBay to greater credit risk.


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Dex One and SuperMedia Combine in a Not-So-Super Deal for Creditors

Last Tuesday, telephone directory publishersDex One Corp.(Caa3 negative) andSuperMedia Inc.

(Caa3 negative) said that they would merge in a stock-for-stock deal. Theoretically, such a merger

would be credit positive for lenders because we would expect the combined company to cut costs,thereby improving debt coverage. However, because the yellow-pages business is in such a steep

decline, we doubt the combined company will be able to transform the business to digital advertising

from print publishing fast enough to preclude another reduction in debt principal (i.e., another

distressed exchange).

Indeed, we expect another double-digit percentage decline in ad sales and net revenues for directory

publishers this year and next, and forecast operating cash flow falling by similar percentages for a few

years before the combined company realizes the full synergies from the deal in 2015.

The companies estimate annual expense savings of $150-$175 million by 2015, as well as preserved t

attributes tied to Dex Ones bankruptcy of as much as $1.8 billion to improve cash flow. The synerg

are largely related to consolidation of functions and elimination of duplicative activities, such as the

need for only one tax department. Preserving Dex Ones tax attributes will allow the new company toreduce its tax liability. Management expects the consolidated entitys tax payments to be nominal for

several years after the deal closes. In 2011, SuperMedia paid $143 million in cash taxes; Dex Ones ta

liability was $11 million.

More important, it remains to be seen whether the business model is viable. Although the merger ma

enhance digital and mobile-product development, the growth of the digital business will not be fast

enough to offset the steep decline in print directories. Additionally, search-engine marketing offers fe

barriers to entry and little differentiation among providers. One of the conditions to closing the deal

obtaining approvals of credit amendments from Dex Ones and SuperMedias lenders. We believe

lenders to both companies will be asked to reduce the principal amount of the debt they are owed an

expect the lenders will accept. We also expect the combined company to obtain the necessary

approvals.

Dennis Saputoenior Vice [email protected]
http://www.moodys.com/credit-ratings/Dex-One-Corporation-credit-rating-821949824http://www.moodys.com/credit-ratings/Dex-One-Corporation-credit-rating-821949824http://www.moodys.com/credit-ratings/Dex-One-Corporation-credit-rating-821949824http://www.moodys.com/credit-ratings/SuperMedia-Inc-credit-rating-809800308http://www.moodys.com/credit-ratings/SuperMedia-Inc-credit-rating-809800308http://www.moodys.com/credit-ratings/SuperMedia-Inc-credit-rating-809800308http://www.moodys.com/credit-ratings/SuperMedia-Inc-credit-rating-809800308http://www.moodys.com/credit-ratings/Dex-One-Corporation-credit-rating-821949824


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Inmet Enters Credit Positive Precious Metals Stream Financing Deal

Last Monday,Inmet Mining Corporation(B1 stable) said it reached a deal with Franco-Nevada

Corporation (unrated) under which Inmet will receive $1 billion toward development of the massive

Cobre Panama copper mine in Panama. The credit-positive deal will bridge the funding gap forInmets 80% share of the project, which we expect will cost the company $4.9 billion.

The $1 billion, to be received over approximately three years, combined with Inmets $3.3 billion of

cash on hand and more than $600 million of expected free cash flow from its existing mines over the

next three years, will be enough to develop the mine in Panama.

In exchange for the $1 billion funding, Inmet, which is focused primarily on copper and zinc, will se

86% of its share of the gold and silver extracted from the mine to Franco-Nevada for up to $400 an

ounce and $6 an ounce, respectively, far below current market prices. The selling prices are subject to

annual inflation adjustments.

Inmet and its 20% partner, Korea Panama Mining Corp. (unrated), began construction of the Cobre

Panama project in May. The 31-year project has proven and probable reserves of 9.3 million tonnes copper, 5.2 million ounces of gold, 104 million ounces of silver and 169 thousand tonnes of

molybdenum, according to Inmet. Cobre Panama is scheduled to begin commercial production in

2016.

Franco-Nevada will begin to remit the $1 billion once Inmet has already invested $1 billion in the

Panama project, a milestone it expects to reach in the first quarter of 2013. After that and through

2015, Franco-Nevada will pay Inmet $1 for every $3 Inmet invests in the project until Franco-Nevad

has paid the full $1 billion. Inmet will then receive ongoing payments as it delivers gold and silver to

Franco-Nevada under the agreement, which extends over the life of the mine.

Although the deal provides credit-positive funding, it exposes Inmet to risk. Inmets obligation to

deliver gold and silver to Franco-Nevada will be secured by Inmets interest in the Cobre Panama

project, and the amount of gold and silver to be delivered is linked to the amount of copperconcentrate that the mine produces. Therefore, Inmet will be exposed to production risk if the mine

ratio of copper-to-precious metals differs meaningfully from the expectations underlying the deal

between the two companies.

Nonetheless, Inmet has a buffer in the 14% share of precious metals production that it will retain an

an option it has to reduce the production obligation by returning up to 10% of the $1 billion

investment. Additionally, the long duration and non-recourse nature of the transaction, which has

been contracted by a subsidiary and is not guaranteed by Inmet, are positive credit attributes.

Darren Kirk, CFAVice President - Senior Credit Officer

[email protected]
http://www.moodys.com/credit-ratings/Inmet-Mining-Corporation-credit-rating-823126283http://www.moodys.com/credit-ratings/Inmet-Mining-Corporation-credit-rating-823126283http://www.moodys.com/credit-ratings/Inmet-Mining-Corporation-credit-rating-823126283http://www.moodys.com/credit-ratings/Inmet-Mining-Corporation-credit-rating-823126283


6/41



Church & Dwights Expansion into Vitamins Is Credit Negative

Last Monday,Church & Dwight Co. Inc.(Baa2 positive) said it would acquire Avid Health Inc.

(unrated), a maker of gummy-form vitamin supplements, for $650 million in cash. The acquisition,

the companys largest ever, is credit negative because Church & Dwight will be challenged to expandAvid Healths brands beyond the core childrens market and core club-store and mass channels in the

face of deep-pocketed and well-established competitors. The acquisition also involves debt financing,

although it will not increase leverage enough to affect the companys ratings.

Church & Dwight is paying nearly 3x revenue and more than 11x EBITDA for Vancouver, Wash.-

based Avid, whose gummy vitamin brands include Vitafusion for adults and Lil Critters for children

This is a relatively high multiple for Church & Dwight to pay compared with multiples well below 2

sales on most of its major acquisitions since 2000. The price likely reflects strong 20%-plus revenue

growth at Avid and possible competition from other bidders given Avids strong brands, in-house

production and distribution capabilities.

With this foray into nutritional supplements, Church & Dwight is entering a competitive and highly

fragmented category in which it has no experience. There are also no synergies with its existingbusinesses, which are focused on laundry, cat litter and niche personal-care brands such as Orajel, Na

and Trojan.

According to the company, Church & Dwight does have strong relationships with retailers, which it

will need to leverage to expand Avids brands in a marketplace crowded by pharmaceutical companie

specialty supplement makers and private-label providers. Major competitors in the multivitamin

category includeBayer AG(A3 stable), the maker of Flintstones vitamins and One A Day;Pfizer Inc

(A1 stable), the maker of Centrum vitamins;NBTY Inc.(B1 stable), which sells vitamins under

Natures Bounty and other brands; and private-label offerings, includingWalgreen Co.s (Baa1

negative) Finest brand,Costco Wholesale Corp.s (A1 stable) Kirkland brand and the Vitamin Shopp

brand.

Church & Dwight will have to make substantial investments in production capacity, marketing and

promotion, and distribution to expand Avids adult brand in grocery stores investments that could

pressure margins. At the same time, its childrens brand could face headwinds in coming years from a

decline in childbearing in the US. The number of US births has declined every year since the all-time

high of 4.32 million in 2007, falling to 3.96 million last year, according to the National Center for

Health Statistics.

The company will also use debt to fund the acquisition, but we do not expect an effect on its credit

rating. Although the company has increased its dividend over the past year and has ramped up share

repurchases, it will likely suspend buybacks in light of the Avid acquisition. It would take an

acquisition of more than $1 billion to stress Church & Dwights strong credit metrics. At $650

million, the Avid acquisition is its largest ever, surpassing the $380 million acquisition of Orajel in

2008.

anice Hofferber, CFAenior Vice President1.212.553.4493

[email protected]
http://www.moodys.com/credit-ratings/Church-Dwight-Company-Inc-credit-rating-171895http://www.moodys.com/credit-ratings/Church-Dwight-Company-Inc-credit-rating-171895http://www.moodys.com/credit-ratings/Church-Dwight-Company-Inc-credit-rating-171895http://www.moodys.com/credit-ratings/Bayer-AG-credit-rating-95527http://www.moodys.com/credit-ratings/Bayer-AG-credit-rating-95527http://www.moodys.com/credit-ratings/Bayer-AG-credit-rating-95527http://www.moodys.com/credit-ratings/Pfizer-Inc-credit-rating-604000http://www.moodys.com/credit-ratings/Pfizer-Inc-credit-rating-604000http://www.moodys.com/credit-ratings/NBTY-Inc-credit-rating-822208736http://www.moodys.com/credit-ratings/NBTY-Inc-credit-rating-822208736http://www.moodys.com/credit-ratings/NBTY-Inc-credit-rating-822208736http://www.moodys.com/credit-ratings/Walgreen-Co-credit-rating-806000http://www.moodys.com/credit-ratings/Walgreen-Co-credit-rating-806000http://www.moodys.com/credit-ratings/Walgreen-Co-credit-rating-806000http://www.moodys.com/credit-ratings/Costco-Wholesale-Corporation-credit-rating-600012498http://www.moodys.com/credit-ratings/Costco-Wholesale-Corporation-credit-rating-600012498http://www.moodys.com/credit-ratings/Costco-Wholesale-Corporation-credit-rating-600012498http://www.moodys.com/credit-ratings/Costco-Wholesale-Corporation-credit-rating-600012498http://www.moodys.com/credit-ratings/Walgreen-Co-credit-rating-806000http://www.moodys.com/credit-ratings/NBTY-Inc-credit-rating-822208736http://www.moodys.com/credit-ratings/Pfizer-Inc-credit-rating-604000http://www.moodys.com/credit-ratings/Bayer-AG-credit-rating-95527http://www.moodys.com/credit-ratings/Church-Dwight-Company-Inc-credit-rating-171895


7/41



Alpha and Other Appalachian Coal Producers Benefit from Blockage of EPA Rule

A US appeals court ruling on 21 August struck down the US Environmental Protection Agencys

(EPA) Cross-State Air Pollution Rule (CSAPR), giving the beleaguered US coal industry a rare positi

regulatory development. The development is credit-positive for producers concentrated in CentralAppalachia, such asAlpha Natural Resources

The ruling does not affect the industrys longer-term fundamental challenges, such as competition

from low-priced natural gas and other regulations that disadvantage coal. Still, it offers coal producer

in Appalachia temporary reprieve from what was likely to be a material near-term negative. But for

miners of low sulfur coal in the Powder River Basin (PRB), such as

(B1 stable).

Cloud Peak Energy Resources

The US Court of Appeals for the District of Columbia said the EPA overstepped its authority in creatin

the emissions rule. The court sent the rule back to the agency for revisions, which could take years.

(B

stable), the ruling erases what might have been an opportunity to gain market share.

CSAPR would have required 28 states to reduce power-plant emissions that cross state lines. This rul

would have forced roughly 1,000 smaller, older and less-efficient coal-fired power plants (mainly in tMidwest and mid-Atlantic regions) to install expensive technology to reduce emissions, switch to low

sulfur coal, or shut down prematurely. The court ruling means the older power plants can keep

operating for now under the existing, less-stringent rules under the 2005 Clean Air Act.

The rule would have aggravated competitive pressure on the US coal industry amid historically low

natural gas prices and other regulations aimed at curbing emissions. Meanwhile, costs for Appalachia

coal production are already rising amid tightening safety standards, reserve depletion, and difficulty

obtaining permits.

Companies with major operations in Appalachia, such as Alpha,Arch Coal(B2 stable) andJames Ri

Coal(B3 negative) will benefit most from the blocking of CSAPR, since most plants that would have

been affected are in the Mid-Atlantics eastern states. Alpha in particular has a dominant presence in

Central Appalachia with the region's most shipments (by volume) and the largest reserves. In 2011,eastern steam coal provided Alpha with nearly 40% of its revenue.

Meanwhile, the ruling takes away the power industrys incentive to switch to PRB coal from Montan

and Wyoming. CSAPR would have increased the demand for coal with lower sulfur content, which

could have benefited the major PRB producers, includingPeabody Energy(Ba1 stable), Cloud Peak

Energy Resources and Arch Coal. But overturning CSAPR benefits the US coal industry overall since

allows many coal-fired power plants to delay their retirement, even if the delay is short-lived.

The EPAs more stringent Mercury and Air Toxics Standards (MATS) requires power plants to insta

and operate maximum achievable control technology to limit emissions and is on track to take effe

by 2015. The MATS rule will probably make many older coal-fired units uneconomical to operate,

particularly on Appalachias doorstep in Mid-Atlantic states. We expect the economics of MATS

compliance to drive more than half of the 50,000 megawatts of coal-fired power capacity retirementsthat we expect over the next decade.

Also, EPAs Carbon Pollution Standard for New Power Plants, proposed in March 2012, would require

reductions in carbon dioxide emissions that necessitate carbon capture and storage technology that is no

yet economically feasible. The standard would effectively prohibit investment in new coal plants.

For all of this, the reprieve comes at a welcome time for an industry that faces an ongoing decline in

coal consumption and prices.

Anna Zubets-AndersonVice President - Senior Analyst

[email protected]
http://www.moodys.com/credit-ratings/Alpha-Natural-Resources-Inc-credit-rating-807691692http://www.moodys.com/credit-ratings/Alpha-Natural-Resources-Inc-credit-rating-807691692http://www.moodys.com/credit-ratings/Alpha-Natural-Resources-Inc-credit-rating-807691692http://www.moodys.com/credit-ratings/Cloud-Peak-Energy-Resources-LLC-credit-rating-821315374http://www.moodys.com/credit-ratings/Cloud-Peak-Energy-Resources-LLC-credit-rating-821315374http://www.moodys.com/credit-ratings/Cloud-Peak-Energy-Resources-LLC-credit-rating-821315374http://www.moodys.com/credit-ratings/Arch-Coal-Inc-credit-rating-600045099http://www.moodys.com/credit-ratings/Arch-Coal-Inc-credit-rating-600045099http://www.moodys.com/credit-ratings/Arch-Coal-Inc-credit-rating-600045099http://www.moodys.com/credit-ratings/James-River-Coal-Company-credit-rating-324775http://www.moodys.com/credit-ratings/James-River-Coal-Company-credit-rating-324775http://www.moodys.com/credit-ratings/James-River-Coal-Company-credit-rating-324775http://www.moodys.com/credit-ratings/James-River-Coal-Company-credit-rating-324775http://www.moodys.com/credit-ratings/Peabody-Energy-Corporation-credit-rating-600042706http://www.moodys.com/credit-ratings/Peabody-Energy-Corporation-credit-rating-600042706http://www.moodys.com/credit-ratings/Peabody-Energy-Corporation-credit-rating-600042706http://www.moodys.com/credit-ratings/Peabody-Energy-Corporation-credit-rating-600042706http://www.moodys.com/credit-ratings/James-River-Coal-Company-credit-rating-324775http://www.moodys.com/credit-ratings/James-River-Coal-Company-credit-rating-324775http://www.moodys.com/credit-ratings/Arch-Coal-Inc-credit-rating-600045099http://www.moodys.com/credit-ratings/Cloud-Peak-Energy-Resources-LLC-credit-rating-821315374http://www.moodys.com/credit-ratings/Alpha-Natural-Resources-Inc-credit-rating-807691692


8/41


9/41



Potential Cash Flow Savings for Selected Companies ($000s Unless Otherwise Noted)Theoretical Contributions

Company

Cash from

Operations Current Law MAP -21 Savings

Savings %Cash fr

Operati

Levi Strauss & Co. $1,848 $71,921 $37,016 $34,906 188

United States Steel Corporation 168,000 456,286 138,828 317,458 18

Meritor, Inc. 41,000 86,571 33,476 53,096 13

Terex Corporation 19,100 56,643 39,352 17,291 9

The New York Times Company 73,927 127,858 63,680 64,178 8

The Manitowoc Company, Inc. 15,600 14,743 2,309 12,434 8

Leucadia National Corporation 9,084 9,010 2,273 6,738 7

Media General, Inc. 16,696 25,908 13,742 12,165 7

OfficeMax, Incorporated 53,679 49,625 12,438 37,187 6

Titan International, Inc. 4,426 6,387 3,323 3,064 6

Unisys Corporation 317,200 302,186 93,030 209,156 6The Boeing Company 3,913,000 3,777,429 1,595,376 2,182,052 5

USEC Inc. 56,300 53,586 22,827 30,758 5

Ashland Inc. 243,000 214,714 90,928 123,786 5

The Babcock & Wilcox Company 173,591 153,375 69,981 83,393 4

Exelis, Inc. 334,000 297,000 138,598 158,402 4

OMNOVA Solutions Inc. 15,700 14,786 7,398 7,388 4

Ryerson Holding Corporation 54,500 54,286 30,598 23,687 4

Brunswick Corporation 89,100 189,458 153,884 35,574 4

Raytheon Company 2,107,000 1,336,857 633,955 702,903 3

The Goodyear Tire & Rubber Company 773,000 515,429 263,112 252,317 3

Lockheed Martin Corporation 4,253,000 2,877,429 1,532,936 1,344,493 3

Visteon Corporation 175,000 74,857 19,898 54,959 3

Cooper Tire & Rubber Company 125,517 61,716 25,108 36,608 2

Snap-on Incorporated 128,500 65,329 28,982 36,346 2

Commercial Vehicle Group, Inc. 7,794 3,930 1,743 2,187 2

Motorola Solutions, Inc. 848,000 389,571 155,770 233,802 2

Huntington Ingalls Industries, Inc. 528,000 251,429 108,018 143,411 2

Textron Inc. 756,000 316,429 113,069 203,359 2

Ferro Corporation 53,233 27,715 13,690 14,025 2

Rock-Tenn Company 461,700 223,500 102,246 121,254 2

Ford Motor Company 9,368,000 2,989,286 800,307 2,188,979 2

Total $25,184,495 $15,095,244 $6,347,890 $8,747,354 3

* List excludes cash flow negative companies and companies with funded ratios in excess of 80%

** Does not exclude foreign plans

Moodys contribution calculated as service cost + 1/7 of reported underfunding

Pro forma contribution calculated as amended service cost + 1/7 amended underfunding

Interest rate assumed to be 156 bps lower

17 year duration used to amend service cost

12 year duration used to amend PBO

Source: Moodys, the companies.


10/41



Atlas Copcos Disposal of Customer Financing Assets Is Credit Positive

Last Monday, Swedish engineering groupAtlas Copco AB(A3 positive) announced it had sold a

portfolio of financing and leasing contracts related to its customer finance activities to an undisclosed

independent bank for approximately SEK1.4 billion (170 million). The transaction, which involvesaround 43% of all assets related to customer financing as of the end of 2011, is credit positive as it

unfreezes capital that Atlas Copco had invested to provide financing for customers and reduces the

counterparty risk from customer finance operations. The company will book a profit of around

SEK100 million in the third quarter of 2012 from the sale of the portfolio.

The SEK1.4 billion proceeds from the disposal will notably strengthen the groups cash position,

resulting in a reduction of net debt (as adjusted by us) by around 6% to around SEK21.2 billion pro

forma as of the end of June 2012. Retained cash flow coverage will slightly improve to 43.9% from

41.2% for the 12 months ended in June. In addition, the transaction increases Atlas Copcos

headroom for new customer financing , providing more room for the company to continue to grow

organically.

Atlas Copco is an international manufacturer of compressed air and gas equipment, generators,industrial tools, assembly systems, and construction and mining equipment. The group generated sal

of SEK88.7 billion (10 billion) in the 12 months ended 30 June 2012. The company a few years ag

established an in-house customer finance operation with a credit portfolio totaling approximately

SEK3.3 billion as of December 2011.

Wen Lissociate Analyst49.69.70730.742

[email protected]

Oliver GianiVice President - Senior Analyst

[email protected]
http://www.moodys.com/credit-ratings/Atlas-Copco-AB-credit-rating-4900http://www.moodys.com/credit-ratings/Atlas-Copco-AB-credit-rating-4900http://www.moodys.com/credit-ratings/Atlas-Copco-AB-credit-rating-4900http://www.moodys.com/credit-ratings/Atlas-Copco-AB-credit-rating-4900


11/41



Russias WTO Entry Is Credit Positive for Russian Steel Companies

Last Wednesday, when Russia joined the World Trade Organization, the European Union terminate

Russias steel quota agreement, which is credit positive for Russian steel companiesMagnitogorsk Iro

& Steel Works(MMK, Ba3 stable),Severstal OAO(Ba1 stable),Novolipetsk Steel OJSC(NLMK,Baa3 stable),Mechel OAO(B2 stable) andEvraz Group S.A.(Ba3 stable). The end of steel quotas

enables Russian producers to gradually increase exports of crude steel products, mainly hot rolled stee

to the EU, which is credit positive.

The EUs terminated quota had capped Russian steel products imports at 3.4 million tonnes for 201

Eurostat estimated total 2011 imports from all countries to the EU at 23.3 million tonnes. The EUs

quotas covered finished products, mainly hot and cold rolled coil, and some long products and didn

cover semi-finished products (slabs and billets), which Russian steelmakers freely export to the EU.

WCO membership lays a foundation for the gradual increase of Russias steel exports to the EU once

end markets recover from the current economic slowdown. Harmonized trade rules will relieve Russi

steelmakers of administrative procedures such as quota sharing, reporting, and receipt of export

licenses. Potential anti-dumping investigations will be streamlined within the framework of WTO

rules.

Russian steelmakers have a high degree of vertical integration into iron ore, coking coal, and scrap

operations and enjoy the benefits of regulated domestic gas prices (i.e., currently estimated at about

$100/thousand cubic meter as opposed to about $350-$500/thousand cubic meter in Europe) and

cheap non-unionized local labor costs (of about $7-$8/hour). Even when adjusted for lower

productivity, low domestic slab cash costs prevail. The ruble exchange rate, freely set, and mainly

ruble-denominated costs also help Russian steel producers stay very competitive versus their Europea

peers. Although Russian steel producers have widely diversified operations globally, the profitability o

their overall businesses is by and large driven by their low-cost Russian steel plants and local mining

facilities located in close proximity to each other. Finally, some of the Russian low-cost steel plants ar

close to the European countries. Severstals Cherepovets and NLMKs Lipetsk plants are in theEuropean part of Russia, which positions them to benefit when European end markets recover from

recession.

We believe the cancellation of quotas will take at least two to three years to affect steelmakers financ

results. We expect Russias steelmakers to limit their exports to the EU, not only because of Europes

recession-dulled demand, but also because of WTO members anti-dumping and protective measure

A special working group will be created with monitoring and conflict resolution functions with

representatives from the Commission of European communities, Eurofer, Russias Ministry of

Economic Development, Russias Ministry of Industry and Trade, and the Russian Steel Association

This group will impose volume restrictions and provide a forum for open discussion of trade issues.

Denis Perevezentsev, CFA, ACCAVice President - Senior Analyst

[email protected]
http://www.moodys.com/credit-ratings/Magnitogorsk-Iron-Steel-Works-credit-rating-600061961http://www.moodys.com/credit-ratings/Magnitogorsk-Iron-Steel-Works-credit-rating-600061961http://www.moodys.com/credit-ratings/Magnitogorsk-Iron-Steel-Works-credit-rating-600061961http://www.moodys.com/credit-ratings/Magnitogorsk-Iron-Steel-Works-credit-rating-600061961http://www.moodys.com/credit-ratings/Severstal-OAO-credit-rating-600045105http://www.moodys.com/credit-ratings/Severstal-OAO-credit-rating-600045105http://www.moodys.com/credit-ratings/Severstal-OAO-credit-rating-600045105http://www.moodys.com/credit-ratings/Novolipetsk-Steel-OJSC-credit-rating-600065082http://www.moodys.com/credit-ratings/Novolipetsk-Steel-OJSC-credit-rating-600065082http://www.moodys.com/credit-ratings/Novolipetsk-Steel-OJSC-credit-rating-600065082http://www.moodys.com/credit-ratings/Mechel-OAO-credit-rating-809656281http://www.moodys.com/credit-ratings/Mechel-OAO-credit-rating-809656281http://www.moodys.com/credit-ratings/Mechel-OAO-credit-rating-809656281http://www.moodys.com/credit-ratings/Evraz-Group-SA-credit-rating-808831835http://www.moodys.com/credit-ratings/Evraz-Group-SA-credit-rating-808831835http://www.moodys.com/credit-ratings/Evraz-Group-SA-credit-rating-808831835http://www.moodys.com/credit-ratings/Evraz-Group-SA-credit-rating-808831835http://www.moodys.com/credit-ratings/Mechel-OAO-credit-rating-809656281http://www.moodys.com/credit-ratings/Novolipetsk-Steel-OJSC-credit-rating-600065082http://www.moodys.com/credit-ratings/Severstal-OAO-credit-rating-600045105http://www.moodys.com/credit-ratings/Magnitogorsk-Iron-Steel-Works-credit-rating-600061961http://www.moodys.com/credit-ratings/Magnitogorsk-Iron-Steel-Works-credit-rating-600061961


12/41



Infrastructure

US Court NOX the SOX off EPAs Air Pollution Rule, a Credit Positive for Coal-Fired Power Plants

On 21 August, the US Court of Appeals (DC Circuit) vacated the US Environmental Protection

Agencys (EPA) air transport rule, known as the Cross State Air Pollution Rule (CSAPR), after initia

staying its implementation in December. The decision is credit positive for coal-fired power plants,

which would have had to invest in environmental safeguards.

In the meantime, the court ordered the Clean Air Interstate Rule (CAIR) to stay in place while the

EPA reconsiders its approach to sulfur dioxide (SO2, or SOx) and nitrogen oxide (NOx) emissions tha

cross state lines and affect down-wind states abilities to meet National Ambient Air Quality Standar

But because the EPAs more stringent and recently finalized Mercury and Air Toxics Standards

(MATS) take effect in 2015, future regulations covering SO2 and NOXwill have only a limited effect

Nevertheless, the decision is still credit positive forEnergy Future Holdings Corp.

CSAPR would have affected roughly 1,000 coal-fired power plants across 28 states, primarily in the

Midwest and Mid-Atlantic regions. Consequently, the decision is also credit positive for other large,

less-compliant coal generators, such as

(EFH, Caa3

negative) because it can push off expensive environmental capital investments. In addition, EFH will

see a much-needed boost to cash flow, because its less-compliant coal-fired generation can continue

burning its lignite coal, instead of more costly Powder River Basin coal, for now.

Edison Mission Energy(Ca negative) and itsHomer City

FundingLLC plant (Caa1 negative).

But for companies that have already invested heavily in their environmental compliance equipment,

the action is credit negative because increased competition from the less compliant generators will

create more electricity volume than originally expected, which should help keep power prices low,thereby reducing margins.

For example,Sandy Creek Energy Associates, L.P.

However, if un-scrubbed coal plants can stay in the market longer than previously expected, then thi

will have a depressing effect on wholesale energy markets in Texas, and the financial benefits of

investing in environmental compliance equipment will be delayed. Lower market prices for power wisqueeze Sandy Creeks merchant margin, which is factored into its rating.

(B1 negative) is a coal-fired power project under

construction in Texas. Although Sandy Creek has locked up much of its expected volumes with

contractual power-purchase agreements, a portion of its capacity remains exposed to the wholesale

merchant market. Sandy Creek has already made the substantial investment in scrubbers to reduce it

emissions of SO2 and NOX, and in a bag house to help capture particulate matter that contributes to

smog. These investments, which will position Sandy Creek as one of the cleanest and most efficient

coal-generating plants in the US, would have met the CSAPR compliance mandates.

ick DonnerVice President - Senior Credit Officer

[email protected]
http://www.moodys.com/credit-ratings/Energy-Future-Holdings-Corp-credit-rating-820590323http://www.moodys.com/credit-ratings/Energy-Future-Holdings-Corp-credit-rating-820590323http://www.moodys.com/credit-ratings/Edison-Mission-Energy-credit-rating-700450http://www.moodys.com/credit-ratings/Edison-Mission-Energy-credit-rating-700450http://www.moodys.com/credit-ratings/Edison-Mission-Energy-credit-rating-700450http://www.moodys.com/credit-ratings/Homer-City-Funding-LLC-credit-rating-600069907http://www.moodys.com/credit-ratings/Homer-City-Funding-LLC-credit-rating-600069907http://www.moodys.com/credit-ratings/Homer-City-Funding-LLC-credit-rating-600069907http://www.moodys.com/credit-ratings/Homer-City-Funding-LLC-credit-rating-600069907http://www.moodys.com/credit-ratings/Sandy-Creek-Energy-Associates-LP-credit-rating-820473969http://www.moodys.com/credit-ratings/Sandy-Creek-Energy-Associates-LP-credit-rating-820473969http://www.moodys.com/credit-ratings/Sandy-Creek-Energy-Associates-LP-credit-rating-820473969http://www.moodys.com/credit-ratings/Sandy-Creek-Energy-Associates-LP-credit-rating-820473969http://www.moodys.com/credit-ratings/Homer-City-Funding-LLC-credit-rating-600069907http://www.moodys.com/credit-ratings/Homer-City-Funding-LLC-credit-rating-600069907http://www.moodys.com/credit-ratings/Edison-Mission-Energy-credit-rating-700450http://www.moodys.com/credit-ratings/Energy-Future-Holdings-Corp-credit-rating-820590323http://www.moodys.com/credit-ratings/Energy-Future-Holdings-Corp-credit-rating-820590323


13/41



Portugal Cuts Payments to Electricity Generators, Credit Negative for EDP andEndesa

On 20 August, theRepublic of Portugal(Ba3 negative) published a ministerial order (by the Ministe

of Economy and Employment) that enacts part of a wider package of measures announced in May2012 by reducing capacity payments to electricity generators. The news confirms the credit negative

effect for the countrys biggest owner of generation capacity,Energias de Portugal S.A. (EDP, Ba1

negative), and also for Spanish utilityEndesa S.A.(P-2 review for downgrade), owned by ItalysEnel

S.p.A.

Capacity payments are fees that generators collect in exchange for having electric power generation

assets, such as coal-fired and natural gas-fired electric generating plants, ready to serve a regions elect

demand. In Portugal, such capacity payments were introduced in 2011 and were therefore only in

existence for one and a half years. The new measures will see the government pay reduced capacity

payments starting in January 2014 but also make no capacity payments while Portugals austerity

programme (agreed to by the troika of the IMF, the European Union and the European Central

Bank) is in place: its currently slated to end in December 2013.

(Baa1 review for downgrade), which also owns generation capacity in Portugal.

The government says the measures will cut the total amount it pays in capacity payments to 252

million between now and 2020, saving441 million over the eight years compared with the 693

million it would otherwise have paid. EDP expects the measures to hit its 2014 revenues to the tune

37 million, which is roughly 2% of expected net profit, as already included in EDPs 2012-2015

Business Plan announced to the market in May 2012.

The Portuguese government will cut capacity payments made to thermal generators by 70%, reducin

the payments to 6,000 per megawatt (MW) of capacity per year from todays level of20,000. Cut

will also extend to incentives to hydro generation development in the country, which will be hit by

varied levels of cuts.

The government says the payment cuts will reduce the amount paid by consumers for electricity by

approximately105 million by 2013. The measures are part of a wider package announced in May,

aimed at saving Portugal around 1.8 billion in payments to the electricity sector by 2020.

Helen FrancisVice President - Senior Credit Officer

[email protected]
http://www.moodys.com/credit-ratings/Portugal-Government-of-credit-rating-614650http://www.moodys.com/credit-ratings/Portugal-Government-of-credit-rating-614650http://www.moodys.com/credit-ratings/Portugal-Government-of-credit-rating-614650http://www.moodys.com/credit-ratings/Energias-de-Portugal-SA-credit-rating-450300http://www.moodys.com/credit-ratings/Energias-de-Portugal-SA-credit-rating-450300http://www.moodys.com/credit-ratings/Energias-de-Portugal-SA-credit-rating-450300http://www.moodys.com/credit-ratings/Endesa-SA-credit-rating-12860http://www.moodys.com/credit-ratings/Endesa-SA-credit-rating-12860http://www.moodys.com/credit-ratings/Endesa-SA-credit-rating-12860http://www.moodys.com/credit-ratings/ENEL-SpA-credit-rating-600045247http://www.moodys.com/credit-ratings/ENEL-SpA-credit-rating-600045247http://www.moodys.com/credit-ratings/ENEL-SpA-credit-rating-600045247http://www.moodys.com/credit-ratings/ENEL-SpA-credit-rating-600045247http://www.moodys.com/credit-ratings/ENEL-SpA-credit-rating-600045247http://www.moodys.com/credit-ratings/ENEL-SpA-credit-rating-600045247http://www.moodys.com/credit-ratings/Endesa-SA-credit-rating-12860http://www.moodys.com/credit-ratings/Energias-de-Portugal-SA-credit-rating-450300http://www.moodys.com/credit-ratings/Portugal-Government-of-credit-rating-614650


14/41



Banks

Bolivias New Foreign Exchange Tax Is Credit Negative for BanksLast Tuesday, the Bolivian House of Representatives passed a bill to tax all foreign exchange

transactions with a 0.7% levy for 36-months. The new bill, which we expect the Senate will pass and

enact into law, aims to enforce de-dollarization policies. Its passage would be credit negative for

Bolivian banks because it will reduce income in foreign exchange operations as the tax reduces net

spreads. The measure excludes foreign exchange transactions carried out by the Central Bank of

Bolivia.

Bolivian banks derive their gains in foreign exchange transactions from bid-offer spreads, instead of

fees and commissions. For 2011, Autoridad de Supervisin del Sistema Financiero data showed gains

from spreads in foreign exchange operations reached BOB575.3 million, which is equivalent to 11.6%

of the systems aggregate gross operating income (see exhibit below). Therefore, the measure will

diminish an important earnings source, adding pressure to banks profitability. For the past two yearfinancial entities have been limited to a maximum regulated bid/offer spread of BOB12 cents,

however, most entities operate within a narrower spread. The new bill forces banks to widen their

spreads in order to compensate for this additional tax, which will affect trading volumes.

Because of their activity in the foreign exchange market, we expectBanco Ganadero S.A.(B1 stable,

E+/b1 stable),1Banco Bisa S.A.(B1 stable, D-/ba3 stable), andBanco Nacional de Bolivia S.A.

Bolivia Banks Income from Foreign Exchange Spread Operations

(B1

stable, D-/ba3 stable) will be the most affected by this new tax. Banco Ganadero gets 20.3% of its

revenue from foreign exchange, Banco Bisa, 22.4%, and Banco Nacional 17.2%. Banks foreign

exchange transactions are largely related to export/imports operations and to a lesser extent,

remittances.

Source: Autoridad de Supervisin del Sistema Financiero

Financial institutions have been the target of increasing taxation byBolivias government(Ba3 stable

A bill passed late last year established an additional 12.5% tax on those financial entities whose return

on equity surpasses 13%. Additionally, the regulatory agency has introduced measures to direct bank

1 The ratings shown are the banks foreign deposit ratings, their standalone bank financial strength rating/baseline creassessment and their corresponding rating outlooks.

509.6

486.5

512.3

575.313.9%

13.4%12.3%

11.6%

0%

2%

4%

6%

8%

10

12

14

16

2008 2009 2010 2011

440

460

480

500

520

540

560

580

600

BOBmillions

Income from FX Spread Operations - left axis

Income from FX Spread Operations / Aggregate Gross Operating Income - right axis

uis Ruvirassociate Analyst54.11.5129.2622

[email protected]
http://www.moodys.com/credit-ratings/Banco-Ganadero-SA-credit-rating-600046056http://www.moodys.com/credit-ratings/Banco-Ganadero-SA-credit-rating-600046056http://www.moodys.com/credit-ratings/Banco-Ganadero-SA-credit-rating-600046056http://www.moodys.com/credit-ratings/Banco-BISA-SA-credit-rating-600023585http://www.moodys.com/credit-ratings/Banco-BISA-SA-credit-rating-600023585http://www.moodys.com/credit-ratings/Banco-BISA-SA-credit-rating-600023585http://www.moodys.com/credit-ratings/Banco-Nacional-de-Bolivia-SA-credit-rating-600023586http://www.moodys.com/credit-ratings/Banco-Nacional-de-Bolivia-SA-credit-rating-600023586http://www.moodys.com/credit-ratings/Bolivia-Government-of-credit-rating-108200http://www.moodys.com/credit-ratings/Bolivia-Government-of-credit-rating-108200http://www.moodys.com/credit-ratings/Bolivia-Government-of-credit-rating-108200http://www.moodys.com/credit-ratings/Bolivia-Government-of-credit-rating-108200http://www.moodys.com/credit-ratings/Banco-Nacional-de-Bolivia-SA-credit-rating-600023586http://www.moodys.com/credit-ratings/Banco-Nacional-de-Bolivia-SA-credit-rating-600023586http://www.moodys.com/credit-ratings/Banco-BISA-SA-credit-rating-600023585http://www.moodys.com/credit-ratings/Banco-Ganadero-SA-credit-rating-600046056http://www.moodys.com/credit-ratings/Banco-Ganadero-SA-credit-rating-600046056


15/41



lending to specific economic sectors named by the government as productive, including mining,

industrial and agriculture sectors that may not necessarily be aligned to the banks strategy.

The proposed bill increases uncertainty in a still-partially dollarized economy, and might work again

the governments express intention to de-dollarize. The level of financial dollarization in Bolivia,measured as the percentage of dollar deposits in the financial system, declined to 32% as of July 2012

from over 90% in the early 2000s2 as a result of overall growing economic stability as well as several

measures that included higher legal reserves for foreign-currency deposits. However, while we do not

expect the new tax to disrupt Bolivias foreign exchange market, depositors have proven to be sensitiv

to government measures and there have been deposit outflows from the banking system.

Bolivian banks have performed well, benefiting from a supportive operating environment of growth

and stability. Although we expect the financial system to be able to absorb the effects of this tax, we a

concerned that the proposed tax of FX trading, the higher taxes on banks profits and the additional

restrictions on asset allocation will hurt the systems profitability.

2 Source: Autoridad de Supervisin del Sistema Financiero (ASFI).


16/41



Higher Allowance on Tax-Free Saving Accounts Is Credit Negative for FrenchBanks

Last Wednesday, the French government announced an increased allowance on popular tax-free savin

accounts and indicated that further increases will be forthcoming.3 Banks have to transfer largeportions of this type of deposits to the Caisse de Dpts et Consignation (CDC, Aaa negative), a

government agency that funds social housing and infrastructure investments. French tax-free savings

accounts are guaranteed by the French state and banks receive a commission on the funds collected

from the CDC.

The credit-negative higher tax-free allowance makes it more difficult for major French banks to

increase their deposit funding at a time when they are striving to reduce their reliance on wholesale

funding. It will also be marginally credit negative for French insurers, reducing life insurance inflows

the near term.

We believe that the most affected rated banking groups will be GroupeBPCE(BPCE, A2 stable;

D/ba2 stable),4 Groupe Crdit Mutuel (Banque Fdrative du Crdit Mutuel, Aa3 stable; C-/baa2

stable) andGroupe Crdit Agricole(CASA, A2/ negative; D/ba2 negative) because they have the largstocks of tax-free deposits. Other large French banks, namelyBNP Paribas(A2 stable; C-/baa2 stable

andSocit Gnrale(A2 stable; C-/baa2 stable) will be affected less by the increased allowances on

tax-free deposits because they have smaller stocks of these deposits, reflecting their more limited shar

of the domestic retail banking market.

The distribution of Livret A, whose ceiling has been increased by 25% to 19,1255 and of the Liv

de Dveloppement Durable (LDD), whose allowance has been doubled to 12,000, was opened to

domestic banks in January 2009. Prior to 2009, tax-free deposits were collected only by Groupe Cais

dEpargne, now part of Groupe BPCE, La Banque Postale (unrated) and Groupe Crdit Mutuel.

These savings have become increasingly popular among retail customers in recent years because retur

on a post-tax basis have been more attractive than those on ordinary bank deposits and money marke

funds. In addition, they are more liquid than other retail savings products, such as life insurance. The

total outstanding amount of these deposits was 202 billion6 at 30 June 2012, as shown in the exhib

below.

However, the stocks of these deposits held by individual banks vary considerably, with the greater

proportions being held by the three historical players and/or those banks with the larger domestic ret

market shares. In addition, the proportions of tax-free deposits transferred to the CDC relative to the

tax-free deposit stock varies across banks because new entrants are gradually moving towards the

unified centralisation rate of 65%. To ensure a level playing field, a convergence mechanism has been

introduced to align banks centralisation rates by 2022.

3 The French government has indicated that the relevant decree will be published in September and that the increaallowances will be effective as soon as practicable.

4 The ratings shown are banks deposit rating, their standalone bank financial strength rating/baseline credit assessments the corresponding outlooks.

5 The French government has also indicated that the allowance on the Livret A will be increased by a further 25% by the ethis year and that an additional 50% increase would be considered depending on the actual needs for social housing fundin

6 According to the Banque de France, this amount also includes the outstanding stock of Livret Bleu, which were distribuby Credit Mutuel until 2009, when they were replaced by Livret A. However, the outstanding deposits remained classifieLivret Bleu.

Andrea UsaiVice President - Senior Analyst

[email protected]
http://www.moodys.com/credit-ratings/BPCE-credit-rating-821697766http://www.moodys.com/credit-ratings/BPCE-credit-rating-821697766http://www.moodys.com/credit-ratings/BPCE-credit-rating-821697766http://www.moodys.com/credit-ratings/Banque-Federative-du-Credit-Mutuel-credit-rating-79650http://www.moodys.com/credit-ratings/Banque-Federative-du-Credit-Mutuel-credit-rating-79650http://www.moodys.com/credit-ratings/Banque-Federative-du-Credit-Mutuel-credit-rating-79650http://www.moodys.com/credit-ratings/Groupe-Credit-Agricole-credit-rating-600012538http://www.moodys.com/credit-ratings/Groupe-Credit-Agricole-credit-rating-600012538http://www.moodys.com/credit-ratings/Groupe-Credit-Agricole-credit-rating-600012538http://www.moodys.com/credit-ratings/BNP-Paribas-credit-rating-91000http://www.moodys.com/credit-ratings/BNP-Paribas-credit-rating-91000http://www.moodys.com/credit-ratings/BNP-Paribas-credit-rating-91000http://www.moodys.com/credit-ratings/Societe-Generale-credit-rating-684250http://www.moodys.com/credit-ratings/Societe-Generale-credit-rating-684250http://www.moodys.com/credit-ratings/Societe-Generale-credit-rating-684250http://www.moodys.com/credit-ratings/Societe-Generale-credit-rating-684250http://www.moodys.com/credit-ratings/BNP-Paribas-credit-rating-91000http://www.moodys.com/credit-ratings/Groupe-Credit-Agricole-credit-rating-600012538http://www.moodys.com/credit-ratings/Banque-Federative-du-Credit-Mutuel-credit-rating-79650http://www.moodys.com/credit-ratings/BPCE-credit-rating-821697766


17/41



Outstanding Balances of French Tax-Free Savings Accounts versus Remuneration

Source: Banque de France statistics

French banks are large users of wholesale funding, but they are trying to reduce their reliance throughasset reduction, business disposals and higher customer deposits. The increases in tax-free allowances

will encourage depositors to convert ordinary bank deposits into tax-free savings. This, in combinatio

with gradually rising centralisation rates, will reduce the amount of deposits available for bank fundin

However, we believe that this loss of deposit funding will be partly offset by the retained portions of

Livrets that are not transferred to the CDC, which reflect the conversions of non-balance sheet

deposits, such as life insurance policies and investment funds. Banks have been actively promoting th

re-intermediation of such funds over the past years to reduce their wholesale funding reliance.

0.5

1.0%

1.5%

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0

50

100

150

200

250

300

350

billion

Livret A - left axis Livret Bleu left axis LDD left axis Interest Rate - right axis


18/41



Insurers

AIG Marks Credit Positive Milestone as New York Fed Auctions Last of MaidenLane III

On 23 August, the Federal Reserve Bank of New York (FRBNY) announced the sale of all remaining

assets in Maiden Lane III (ML III), a special purpose vehicle established in 2008 to relieveAmerican

International Group, Inc.

The unwinding of ML III also marks the end of FRBNY support extended to AIG during the financ

crisis of 2008-09. The only remaining government support for AIG is the US Treasurys ownership o

AIG common stock. The Treasury has completed three registered public offerings of AIG shares in

2012, reducing its ownership stake to about 53% from about 77% at the start of the year. We expect

the Treasury to sell more AIG shares as market conditions permit.

(AIG, Baa1 stable) of certain volatile exposures to the US housing market.

The ML III asset sales are credit positive for AIG, allowing ML III to fully redeem the subordinated

interest held by AIG.

The ongoing reduction/termination of government support for AIG reflects improving trends at the

company and growing investor appetite for its debt and equity securities. AIG is taking steps to enhance

the performance of core operations as it continues to exit noncore businesses. An eventual separation fro

the government would further strengthen AIGs brand and its ability to fund itself in the capital market

The FRBNY created ML III in late 2008 to assume certain volatile exposures from AIG. Specifically,

ML III purchased $62 billion par amount of multi-sector collateralized debt obligations (CDOs)

insured by AIG Financial Products Corp. through credit default swaps. The CDOs included

significant exposure to subprime residential mortgages. The aggregate purchase price of the ML III

assets was approximately 48% of par and was funded by a ~$24 billion senior loan from the FRBNY

and a $5 billion subordinated loan from AIG.

Gradual improvement in the US housing market and economy boosted the values and liquidity of M

III assets over the past year. The FRBNY announced its intent to sell ML III assets in April 2012 and

completed those sales last week. Cash proceeds were applied first to repay the FRBNY senior loan, an

then to repay the AIG subordinated loan, with residual amounts allocated two-thirds to the FRBNY

and one third to AIG. The FRBNY received full repayment of its senior loan along with a net gain o

$6.6 billion (including accrued interest).

AIGs total cash proceeds on its subordinated ML III interest will exceed $8 billion, including $77

million received in June, $6.0 billion in July, approximately $1.9 billion in August and the remainde

due in the weeks ahead. This monetization has enhanced AIGs liquidity while freeing up capital tha

was supporting its ML III position. Earlier this month, AIG used a portion of the ML III proceeds to

repurchase $3 billion of its common stock from the Treasury, whose total offering was $5.75 billion;

public investors purchased the remaining $2.75 billion.

AIG's ratings reflect the strong market presence and diversification of its core insurance

operations,Chartis(financial strength A1 stable) andSunAmerica Financial Group(financial strength A

stable); the continuing monetization of noncore holdings; and the liquidity buffer held by the parent to

support subsidiaries as needed. Offsetting these strengths are the relatively weak profitability of the core

operations (on a combined basis), the remaining exposure to certain noncore holdings with weaker cred

profiles, and the complexity of risk management across numerous business lines and regions.

ruce BallentineVice President - Senior Credit Officer

[email protected]
http://www.moodys.com/credit-ratings/American-International-Group-Inc-credit-rating-45500http://www.moodys.com/credit-ratings/American-International-Group-Inc-credit-rating-45500http://www.moodys.com/credit-ratings/American-International-Group-Inc-credit-rating-45500http://www.moodys.com/credit-ratings/Chartis-credit-rating-601600http://www.moodys.com/credit-ratings/Chartis-credit-rating-601600http://www.moodys.com/credit-ratings/Chartis-credit-rating-601600http://www.moodys.com/credit-ratings/SunAmerica-Financial-Group-credit-rating-820024482http://www.moodys.com/credit-ratings/SunAmerica-Financial-Group-credit-rating-820024482http://www.moodys.com/credit-ratings/SunAmerica-Financial-Group-credit-rating-820024482http://www.moodys.com/credit-ratings/SunAmerica-Financial-Group-credit-rating-820024482http://www.moodys.com/credit-ratings/Chartis-credit-rating-601600http://www.moodys.com/credit-ratings/American-International-Group-Inc-credit-rating-45500http://www.moodys.com/credit-ratings/American-International-Group-Inc-credit-rating-45500http://www.moodys.com/credit-ratings/American-International-Group-Inc-credit-rating-45500


19/41



Insurers Ability to Prune Variable Annuity Features and Maintain Sales Is CreditPositive

Last Monday, LIMRA, a market researcher for the life insurance industry, released second-quarter da

showing thatMetLife, Inc.(A3 stable) was the third-largest provider of variable annuities (VAs), versbeing the largest a year earlier. The drop in the rankings was the result of MetLife taking steps to

curtail VA product features, including minimum income payout guarantees, and reduce sales as it see

to lower the risk of a product that is highly popular with consumers, yet costly to insurers.Prudentia

Financial Inc.(Baa2 positive), currently the top writer of VAs, has indicated that it, too, intends to

reduce product guarantees.

Insurers ability to de-risk in the face of seemingly insatiable consumer demand for variable annuity

guarantees is credit positive and allows them to sell products more on their own terms. As an exampl

almost all variable annuity writers have 1) lowered the guaranteed benefits by reducing roll-up rates

(i.e., the compound annual growth rate of the minimum guaranteed income payout); 2) lowered the

cost of providing guarantees by reducing the maximum allowable equity investment exposure; or 3)

introduced features such as an automatic rebalancing of customers portfolios from equities to bonds reduce investment risk as market volatility increases. Such moves are a welcome change in a market

that historically has offered commodity-like, competitive products with ever-rising guarantees to driv

sales.

VAs can provide a company with solid growth and, in the case of newer VA products, the potential f

high returns on equity. However, VA products also carry substantial risk owing to uncertainties relat

to policyholder behavior (such as exercising the right to annuitize or start taking periodic withdrawal

the heightened volatility of regulatory capital and earnings, and the risks associated with managing a

hedging program. In particular, low interest rates drive up the cost of hedging since many of the mos

popular guarantee features provide a lifetime income, whose costs increase as rates fall. Moreover,

many VA writers only partially (or not at all) hedge interest rate risk because of the high cost of

hedging interest rates when rates are low and because the misalignment between the accounting for

hedges and the accounting for liabilities produces income volatility. For those reasons, we consider thVA product line as having one of the higher risk profiles.

The exhibit shows sales of VAs for full-year 2011, first-quarter 2012, second-quarter 2012, and year

date through second-quarter 2012.

cott Robinsonenior Vice [email protected]
http://www.moodys.com/credit-ratings/MetLife-Inc-credit-rating-600052530http://www.moodys.com/credit-ratings/MetLife-Inc-credit-rating-600052530http://www.moodys.com/credit-ratings/MetLife-Inc-credit-rating-600052530http://www.moodys.com/credit-ratings/Prudential-Financial-Inc-credit-rating-600060514http://www.moodys.com/credit-ratings/Prudential-Financial-Inc-credit-rating-600060514http://www.moodys.com/credit-ratings/Prudential-Financial-Inc-credit-rating-600060514http://www.moodys.com/credit-ratings/Prudential-Financial-Inc-credit-rating-600060514http://www.moodys.com/credit-ratings/Prudential-Financial-Inc-credit-rating-600060514http://www.moodys.com/credit-ratings/Prudential-Financial-Inc-credit-rating-600060514http://www.moodys.com/credit-ratings/MetLife-Inc-credit-rating-600052530


20/41



US Variable Annuity Sales, $ millionsFirst Half 2012

Sales Rank CompanyInsurance Financial

Strength Rating1 FY 2011 Q1 2012 Q2 20

1 Prudential Annuities A2 positive $20,236 $4,943 $5,34

2 Jackson National Life A1 stable 17,494 4,383 5,25

3 MetLife Aa3 stable 28,439 4,926 4,6

4 TIAA-CREF Aaa stable 13,442 3,397 4,14

5 Lincoln Financial Group A2 positive 9,356 2,341 2,5

6 AXA Equitable Aa3 negative 7,096 2,343 2,2

7 AIG Companies A2 stable 8,013 2,252 2,34

8 RiverSource Life Insurance Aa3 stable 6,397 1,593 1,17

9 AEGON USA A1 stable 5,254 1,195 1,28

10 Nationwide Financial A1 stable 7,376 1,244 1,16

11 Allianz Life of North America A2 stable 3,791 1,031 96

12 Pacific Life A1 stable 3,318 848 1,00

13 New York Life Aaa stable 2,343 591 7

14 Thrivent Financial for Lutherans unrated 2,329 650 64

15 Protective Life A2 stable 2,349 567 6

16 Fidelity Investments Life unrated 1,768 474 43

17 Guardian Life of America Aa2 stable 1,127 502 3

18 Northwestern Mutual Life Aaa stable 1,311 335 40

19 John Hancock A1 stable 1,791 205 3

20 Hartford Life A3 stable NA 2 307 16

Top 20 $146,246 $34,126 $35,84

Total Industry $159,300 $36,800 $38,60Top 20 share 92% 93% 93

1. Insurance financial strength (IFS) rating and outlook for the lead life insurance company as of 24 August 2012.

2. Did not qualify in Top 20 for 2011

Source: US Individual Annuities Sales Survey, LIMRA

For several years, VA sales have remained concentrated among MetLife, Prudential andJackson

National Life Insurance Company(insurance financial strength A1 stable). MetLifes second-quarter

year-to-date sales of $9.5 billion, down from $12.6 billion a year ago, are a result of MetLife managin

its sales (e.g., by reducing the roll-up rate of its popular GMIB Max product). We expect Prudential

VA sales momentum to slow by years end, although it may experience robust sales during its transiti

to a less-risky product.Although insurers ability to modify VA product features and still attract customers has helped impro

VAs risk/reward tradeoff, product diversity is still a credit benefit. Notwithstanding their ability to

pull back on product features and raise prices, VAs still carry material risks such as uncertain

policyholder behavior, low interest rates, and the potential for accounting volatility, all of which mak

managing overall exposure to VAs critical in managing tail risk exposure.
http://www.moodys.com/credit-ratings/Jackson-National-Life-Insurance-Company-credit-rating-423735http://www.moodys.com/credit-ratings/Jackson-National-Life-Insurance-Company-credit-rating-423735http://www.moodys.com/credit-ratings/Jackson-National-Life-Insurance-Company-credit-rating-423735http://www.moodys.com/credit-ratings/Jackson-National-Life-Insurance-Company-credit-rating-423735http://www.moodys.com/credit-ratings/Jackson-National-Life-Insurance-Company-credit-rating-423735http://www.moodys.com/credit-ratings/Jackson-National-Life-Insurance-Company-credit-rating-423735


21/41



Money Market Funds

SECs Cancellation of Money Fund Reform Vote Is Credit Positive for FundManagers

Last Thursday, the US Securities and Exchange Commission (SEC) announced the cancellation of a

much anticipated vote on proposed changes to money market fund (MMF) regulations. The

cancellation, and possible abandonment of the SEC initiative, is at least a temporary credit positive

reprieve for money fund managers.

Among firms benefiting areFMR LLC(A2 negative),JP Morgan Chase Bank, N.A.(Aa3 stable; C/a

stable),7Blackrock, Inc.

The broad outline of money fund reform options under consideration were set out for the first time i

a statement released by SEC Chairman Mary L. Schapiro last week. Two options in particular were

credit negative for money fund managers. The first would have required money market funds to floa

their net asset values, which would likely have led to losses in AUM. The statement did not make any

distinctions between fund types. As of 15 August, MMF assets stood at $2.6 trillion, with prime fund

accounting for 55% of money fund assets, followed by government funds and tax-exempt funds. (See

Exhibit 1.)

(A1 stable) and, in particular, firms that have assets under management

(AUM) concentrated in money funds, like Federated Investors (not rated) and firms with more limit

capital, such as Vanguard (not rated). However, in our opinion, the SECs decision, unless reversed,

may lead other regulatory bodies to pursue MMF reform.

EXHIBIT 1

Distribution of Money Market Fund Assets

Source: Investment Company Institute, 15 August 2012

Under the second option, funds could continue to target maintaining a $1.00 net asset value, provid

they adopted a capital buffer of less than 1% of fund assets, adjusted to reflect the risk profile of

funds. The capital buffer was intended to absorb the day-to-day fluctuation in share prices and would

have been combined with a requirement to hold back 3% of a shareholders investment for a period

30 days. That holdback would have taken a so-called "first-loss" position and provided extra capital t

a money market fund that suffered losses greater than its capital buffer during that 30-day period.

7 The bank ratings shown are the banks foreign deposit ratings, their standalone bank financial strength rating/baseline creassessment and their corresponding rating outlooks.

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Prime funds Government funds Tax-Exempt funds

$billions

Henry Shillingenior Vice [email protected]

Dagmar H. SilvaVice President - Senior Analyst

[email protected]
http://www.moodys.com/credit-ratings/FMR-LLC-credit-rating-600048843http://www.moodys.com/credit-ratings/FMR-LLC-credit-rating-600048843http://www.moodys.com/credit-ratings/FMR-LLC-credit-rating-600048843http://www.moodys.com/credit-ratings/JPMorgan-Chase-Bank-NA-credit-rating-164500http://www.moodys.com/credit-ratings/JPMorgan-Chase-Bank-NA-credit-rating-164500http://www.moodys.com/credit-ratings/JPMorgan-Chase-Bank-NA-credit-rating-164500http://www.moodys.com/credit-ratings/BlackRock-Inc-credit-rating-820502996http://www.moodys.com/credit-ratings/BlackRock-Inc-credit-rating-820502996http://www.moodys.com/credit-ratings/BlackRock-Inc-credit-rating-820502996http://www.moodys.com/credit-ratings/BlackRock-Inc-credit-rating-820502996http://www.moodys.com/credit-ratings/JPMorgan-Chase-Bank-NA-credit-rating-164500http://www.moodys.com/credit-ratings/JPMorgan-Chase-Bank-NA-credit-rating-164500http://www.moodys.com/credit-ratings/FMR-LLC-credit-rating-600048843


22/41



Sustaining positive yields in an historic low-interest-rate environment led fund firms to waive fees th

estimated at $5.2 billion in 2011,8 eroding profitability in a business with tight margins. The

additional cost of providing a capital buffer would have further diminished the economic viability of

money funds and also could have led to a reduction in AUM. According to our analysis, it would tak

from a few months to almost three years of management fees, assuming an average fee of 21 basis

points (bp), to recoup the cost of the capital buffer limited to risk-adjusted prime funds, based on

potential sizing of the required capital buffer (See Exhibits 2 and 3).

EXHIBIT 2

Amount of Required Capital for US Money Market Funds Based on Different Capital Scenarios

Potential Required Capital Percentages

Potential Application of Required CapitalAssets in$ billions

1.0% RequiredCapital

$ millions


$ millions

0.20% RequirCapit

$ millio

All money market fund assets $2,600 $26,000 $13,000 $5,20

Prime fund assets $1,405 $14,050 $7,025 $2,8

Prime fund assets less treasuries and agencies $1,199 $11,990 $5,995 $2,39

Prime fund assets less treasuries, agencies andrepurchase agreements

$955 $9,510 $4,755 $1,90

EXHIBIT 3

Years Required to Earn Back Required Capital

Potential Required Capital Percentages

Potential Application of Required Capital


Years Required toRecoup Capital


Years Required toRecoup Capital

0.20% RequirCapit

Years Required Recoup Capit

Prime funds 2.6 years 1.3 years 0.5 yea

Prime fund assets less treasuries and agencies 0.2 years 0.1 years 0.04 yeaPrime fund assets less treasuries, agenciesand repurchase agreements

0.1 years 0.1 years 0.03 yea

Note: Repurchase agreements include transactions collateralized by securities other than Treasury and government agencies and may theref

be overstated. We assume money fund management fees are 21bp, base d on the average reported by the ICI (refer to footnote 2), which like

overstates fees owing to the dominance of institutional funds subject to lower management fees. The amount of required capital buffers mi

also vary depending on levels of assets under management and extent of investments in treasury and government agency securities or

potentially other risk-mitigating strategies. Financing costs are excluded from our estimates.

Source: Moodys

While the cancellation of a vote on these money fund reforms is positive for fund managers, the SEC

decision does not mean that further reforms will be called off. To the contrary, unless reversed, other

regulators and agencies, such as the Federal Reserve, US Treasury and Comptroller of the Currency alikely to advocate further reforms to address the susceptibility of money market funds to runs that

increase systemic market risk. Such efforts could be pursued separately or through the Financial

Stability Oversight Council which under the Dodd-Frank Act has the authority to designate individu

non-bank financial companies as systemically important financial institutions. Entities designated as

systemically important would be under the supervision and regulation of the Federal Reserve.

8 Investment Company Institute, Trends in the Expenses and Fees of Mutual Funds, 2011, 23 April 2012.


23/41



Sovereigns

Developing Southeast Asias Accelerating Economic Growth Is Credit PositiveLast Monday,Thailand(Baa1 stable) reported unexpectedly strong GDP results for the second quart

mimicking similarly robust economic growth in other developing countries in the Association of

Southeast Asian Nations (ASEAN). Economic resilience in these countries is credit positive because i

supports government revenues and mitigates the need for stimulus spending to support growth.

Developing Southeast Asias accelerating economic growth bucks the trend of lackluster growth in

other parts of Asia, particularly inChina(Aa3 positive) and Asias newly industrialized economies

(NIEs) ofHong Kong(Aa1 positive),Singapore(Aaa stable),South Korea(A1 positive), andTaiwan

(Aa3 stable).

Thailands economy grew 4.2% year-on-year, up from 0.4% in the previous quarter. By

comparison,Indonesias (Baa3 stable) real GDP growth accelerated to 6.4% in the second quarter

from 6.3% in the first quarter, whileMalaysias (A3 stable) rose to 5.4% from 4.9%. We expect

thePhilippines (Ba2 positive),economy, which grew by 6.4% in the first quarter, the fastest rate in

ASEAN, to show similarly healthy second-quarter growth.

By contrast, growth has decelerated or otherwise remained relatively stagnant in other countries in A

(Exhibit 1). Weak final demand in the US and the euro area has created considerable headwinds for

the NIEs given their reliance on international trade. In the second quarter, Taiwan recorded a small

contraction, while real GDP growth in Hong Kong, Korea, and Singapore remain relatively low.

Meanwhile, Chinese growth decelerated to 7.6% year-on-year in the same period, its lowest pace ofgrowth since the first-quarter 2009, raising the threat of a negative spillover into the rest of Asia given

Chinas role in stimulating the regions recovery following the global financial crisis.

EXHIBIT 1Real GDP Growth in Asia

Note: NIEs weighted by 2011 nominal GDP at market exchange rates.

Source: Haver Analytics and national statistical agencies.

-10%

-5%

0%

5%

10%

15%

2010 Q2 Q3 Q4 2011 Q2 Q3 Q4 2012 Q2

Year-Over-YearChange

Indonesia Malaysia

Thailand NIEs (Hong Kong, Singapore, South Korea and Taiwan)

China

hristian de GuzmanVice President - Senior Analyst

[email protected]
http://www.moodys.com/credit-ratings/Thailand-Government-of-credit-rating-747330http://www.moodys.com/credit-ratings/Thailand-Government-of-credit-rating-747330http://www.moodys.com/credit-ratings/Thailand-Government-of-credit-rating-747330http://www.moodys.com/credit-ratings/China-Government-of-credit-rating-599085http://www.moodys.com/credit-ratings/China-Government-of-credit-rating-599085http://www.moodys.com/credit-ratings/China-Government-of-credit-rating-599085http://www.moodys.com/credit-ratings/Hong-Kong-Government-of-credit-rating-375515http://www.moodys.com/credit-ratings/Hong-Kong-Government-of-credit-rating-375515http://www.moodys.com/credit-ratings/Hong-Kong-Government-of-credit-rating-375515http://www.moodys.com/credit-ratings/Singapore-Government-of-credit-rating-680430http://www.moodys.com/credit-ratings/Singapore-Government-of-credit-rating-680430http://www.moodys.com/credit-ratings/Singapore-Government-of-credit-rating-680430http://www.moodys.com/credit-ratings/Korea-Government-of-credit-rating-440230http://www.moodys.com/credit-ratings/Korea-Government-of-credit-rating-440230http://www.moodys.com/credit-ratings/Korea-Government-of-credit-rating-440230http://www.moodys.com/credit-ratings/Taiwan-Government-of-credit-rating-732845http://www.moodys.com/credit-ratings/Taiwan-Government-of-credit-rating-732845http://www.moodys.com/credit-ratings/Indonesia-Government-of-credit-rating-405130http://www.moodys.com/credit-ratings/Indonesia-Government-of-credit-rating-405130http://www.moodys.com/credit-ratings/Indonesia-Government-of-credit-rating-405130http://www.moodys.com/credit-ratings/Malaysia-Government-of-credit-rating-460522http://www.moodys.com/credit-ratings/Malaysia-Government-of-credit-rating-460522http://www.moodys.com/credit-ratings/Malaysia-Government-of-credit-rating-460522http://www.moodys.com/credit-ratings/Philippines-Government-of-credit-rating-607410http://www.moodys.com/credit-ratings/Philippines-Government-of-credit-rating-607410http://www.moodys.com/credit-ratings/Philippines-Government-of-credit-rating-607410http://www.moodys.com/credit-ratings/Philippines-Government-of-credit-rating-607410http://www.moodys.com/credit-ratings/Malaysia-Government-of-credit-rating-460522http://www.moodys.com/credit-ratings/Indonesia-Government-of-credit-rating-405130http://www.moodys.com/credit-ratings/Taiwan-Government-of-credit-rating-732845http://www.moodys.com/credit-ratings/Korea-Government-of-credit-rating-440230http://www.moodys.com/credit-ratings/Singapore-Government-of-credit-rating-680430http://www.moodys.com/credit-ratings/Hong-Kong-Government-of-credit-rating-375515http://www.moodys.com/credit-ratings/China-Government-of-credit-rating-599085http://www.moodys.com/credit-ratings/Thailand-Government-of-credit-rating-747330


24/41



In Indonesia, Malaysia, and Thailand, net exports significantly weakened economic growth (Exhibit

2). The countries commodity exports, including petroleum, crude palm oil, rubber, and natural gas,

have been hurt by softening prices. In addition, weaker external demand has dampened shipments of

their manufactured goods, such as automobiles and electronic products. In contrast, the strong

domestic demand has supported imports.

EXHIBIT 2

Growth Drivers in Developing ASEAN

Source: National statistical agencies.

Domestic demand, particularly private consumption and investment spending, has offset contracting

net exports. In Thailand, the continued recovery following last years floods has driven construction

activity and private capital spending. Historically high rates of gross fixed capital formation are partia

attributed to Malaysias wide-reaching Economic Transformation Programme and, in Indonesia,

strong inflows of foreign direct investment in recent quarters. In each of these countries, low inflation

has sustained favorable consumer sentiment and private household spending.

The relatively small contribution of public consumption to overall growth year-to-date suggests a

degree of policy flexibility for governments to pursue stimulus spending. Benign inflation and relativ

healthy external buffers contribute to stable financing conditions. The buoyancy of fiscal revenue thu

far reflects healthy labor markets and the continued profitability of businesses, both of which are

correlated to high economic growth. Nevertheless, commodity price volatility will have differing effe

on fiscal revenue, while expenditures will likely be muted by smaller subsidy bills.

Although developing ASEANs immunity to external headwinds may not last for long, central banks

these countries have the flexibility to cut rates to stimulate activity and relieve pressure on fiscal

authorities to increase deficit spending, thereby raising debt ratios. Thailand has already cut its policy

rate twice to aid flood reconstruction. However, in Indonesia, exchange rate concerns limit monetary

policymakers range of options.

-6

-4

-2

0

2

4

6

8

10

12

Indonesia Malaysia Thailand

Percenta

ge-PointContributiontoYear-

Over-YearGrowth

P rivate Con su mp tion P ub lic Con su mp tion Gro ss in vestmen t Net exp orts Oth ers Overall GDP


25/41



Sub-sovereigns

Brazil Increases 17 States Borrowing Capacity, a Credit PositiveOn 16 August, thegovernment of Brazil(Baa2 positive) authorized 17 states9 to borrow up to

BRL42.2 billion in 2012, or 20% of the states debt at year-end 2011. In our view, this is credit

positive and will promote investment in infrastructure, which is important to the states economic

growth and development. Our expectations for economic growth in Brazil for the next couple of yea

and the high correlation between GDP and states revenue (Exhibit 1) indicate that the Brazilian stat

will be healthy enough to absorb new debt without jeopardizing the declining debt-to-revenue trend

the past 10 years (Exhibit 2).

EXHIBIT 1

Real GDP and States Revenue

Source: Moodys and Brazils Ministry of Finance.

EXHIBIT 2

Debt-to-Revenue Trend for Brazils States

Source: Brazils Ministry of Finance.

9 The 17 states are Acre, Alagoas, Amazonas, Bahia, Cear, Esprito Santo, Maranho, Mato Grosso do Sul, Mato Grosso, PParaba, Pernambuco, Rondnia, Roraima, Santa Catarina, Sergipe and So Paulo.

-5%

0%

5%

10%

15%

20%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013

Revenue Percent Change Real GDP Percent Change

0

0

1.

1.

2

2

050

100

150

200

250

300

350

400

450

Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

BRLbillions

Stock of Debt - left axis Revenue - left axis Debt/Revenue X Times - right axis

atricio

Moody's Credit Outlook August 27, 2012

Documents

Transcript of Moody's Credit Outlook August 27, 2012