MOODYS.COM

10 FEBRUARY 2014

NEWS & ANALYSIS Corporates 2

» CVS Caremark to Halt Cigarette Sales, Walking Away from $2 Billion of Annual Revenue

» Coca-Cola Partnership with Green Mountain Is Credit Positive for Both

» Australian Building Approvals Are Credit Positive for Boral and Lend Lease

Infrastructure 6

» New England’s Electricity Capacity Auction Will Benefit the Region’s Energy Companies

» Tata Power’s Divestment of Arutmin Coal Is Credit Positive

Banks 10

» BATS’s Post-Merger Leveraged Dividend Is Credit Negative » Narrower Commercial Loan Spreads Are Yet Another Revenue

Challenge for US Banks » Looser Underwriting Accompanies Auto Loan Growth, a Credit

Negative for Eight US Banks » Brazil’s Largest Private Banks’ Asset Quality Improves, a Credit

Positive » An Investec Sale of Kensington Would Be Credit Positive » Commerzbank’s Latest Asset Sale Reduces the Group’s Risk » Philippine Bank Capital Raises Following Basel III

Implementation Are Credit Positive

Insurers 23 » US Farm Bill Is Credit Positive for Crop Insurers » Genworth’s $400 Million Capital Contribution to Mortgage

Units Is Credit Positive

RATINGS & RESEARCH Rating Changes 27

Last week we downgraded KT Corporation, LG Electronics, ONEOK, Thermo Fisher Scientific, 12 Ukrainian banks, Kyiv and Kharkiv Ukraine, Puerto Rico, 13 student loan ABS tranches and $1.2 billion of synthetic collateralized debt obligations, and upgraded Delphi Corporation, Brooklyn Union Gas, KeySpan Gas East, BTA Bank, Genworth Mortgage Insurance, Genworth Residential Mortgage Insurance of North Carolina, Mexico, Paraguay, Black Sea Trade and Development Bank and Athens Greece, among other rating actions.

Research Highlights 35

Last week we published on South African mobile phone, US speculative-grade liquidity, US and Canadian broadband, US corporate refunding risk, Indian oil and gas, US tobacco, Brazilian airlines, Asian liquidity, UK auto retailers, North American solid waste, Japanese shippers, US homebuilders, US utilities, global banks, Australian mutual financial institutions, French specialized financial institutions, US health insurers, Paraguay, emerging markets, Ukraine, Russian sub-sovereigns, US local governments, US state spending, Spanish covered bonds, Banco Santander and European asset-backed commercial paper, among other reports.

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Thursday’s Credit Outlook 41 » Go to Last Thursday’s Credit Outlook

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

NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Corporates

CVS Caremark to Halt Cigarette Sales, Walking Away from $2 Billion of Annual Revenue Last Wednesday, CVS Caremark Corporation (Baa1 stable), the second-largest US pharmacy chain, said it will stop selling cigarettes this October in an effort to more closely align itself with its patients, clients and healthcare providers to improve health outcomes. The move is credit negative because CVS Caremark is leaving behind about $2 billion in annual revenues from the tobacco shopper, or around 17 cents per share annually or almost 4% of its full-year 2014 earnings guidance. Additional sales would be lost if these customers choose to shop at other retail outlets.

Given the timing of the implementation, CVS Caremark estimates that the tobacco exit will cost it a relatively small six to nine cents in earnings per share (EPS), or 1%-2% of total EPS guidance for 2014. CVS Caremark said it expects to help offset this loss by tapping other as-yet undisclosed opportunities and thus has not revised its earnings guidance or five-year plan. If CVS Caremark is unable to recover its 17-cent-per-share earnings loss through alternative steps, we estimate its leverage would only increase by about 0.1x to 2.5x. Its EBITA/interest expense ratio could potentially fall by 0.5 turns to 6.0x, but would remain at levels appropriate for its current rating.

CVS Caremark has the ability to offset the $2 billion revenue loss through its large market position in the rapidly growing specialty pharmacy industry. This division generated about $18.8 billion in revenues in 2012, up from $12.3 billion in 2011, and CVS Caremark estimates that annual specialty drug spending will quadruple to $402 billion by 2020.

We estimate that the entire pharmacy retail channel generates only around 5% of US tobacco sales. Convenience stores, along with tobacco outlets and mass retailers, account for the bulk of tobacco sales in the US. We do not expect other drug store chains to follow CVS Caremark’s example. Walgreen Co. (Baa1 negative) continues to turn the front end of its stores into “quasi” convenience stores and to exit tobacco would contradict that strategy. Rite Aid Corporation (B3 stable) does not yet have enough financial strength to exit any product category.

We expect most tobacco consumers will switch to other retailers, a credit positive for those with small convenient neighborhood locations similar to CVS Caremark. This will benefit convenience stores such as 7-Eleven, Inc. (Baa1 stable), other drug stores and the dollar stores such as Dollar General Corporation (Baa3 stable) and Family Dollar Stores, Inc. (Baa3 stable).

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

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Coca-Cola Partnership with Green Mountain Is Credit Positive for Both Last Wednesday, The Coca-Cola Company (Aa3 stable) said it would acquire a 10% stake in Green Mountain Coffee Roasters Inc. (Ba2 stable) for about $1.25 billion. The companies also signed a 10-year agreement under which Coca-Cola products will be available for Green Mountain’s planned Keurig Cold beverage system currently in development, which will allow consumers to prepare single servings of cold beverages.

The deal is credit positive for Coca-Cola because it will help it penetrate the single-serve, pod-based, at-home segment of the cold beverage industry, a growing category currently dominated by Soda Stream International Ltd. (unrated), which has already introduced a machine. This will provide Coca-Cola with a new distribution channel amid a long-term decline in the traditional packaged carbonated soft drink category in the US. Coca-Cola will have the option to increase its Green Mountain stake to 16% during the 36 months following the initial investment. Coke expects that its independent bottlers will play a role in pod distribution, although that role is not entirely clear as of now.

The deal is also credit positive for Green Mountain because it will gain access to Coca-Cola’s vast resources and exclusive rights to its brands. The company intends to use proceeds from Coke’s investment for share buybacks and to fund investment in the new cold-beverage system. The company plans to introduce Keurig Cold in fiscal year 2015, which begins after its current fiscal year-end in September.

The $1.25 billion investment for a 10% stake in Green Mountain is manageable for Coca-Cola, which had more than $17 billion in cash and short-term investments as of 30 September.

The partnership could allow for deeper cooperation beyond soft beverages, allowing Coca-Cola to diversify its product offerings and distribution model and benefit from the growing at-home pod coffee market.

The transaction provides an even bigger boost for Green Mountain because it will gain access to Coca-Cola’s research and development, sales and marketing and global distribution. In addition, it will have the exclusive right to use Coke’s globally recognized brands in its beverage system. Green Mountain will fund the development of Keurig Cold and it will manufacture the pods for the system. We expect that Green Mountain will model the Keurig Cold on its Keurig hot-beverage system, which provides a platform for multiple brands from different partners. The company sells the brewing machines and the high-margin, single-serve portion packs.

Securing a strong partner such as Coca-Cola gives Green Mountain added heft as it continues to compete against other hot-beverage systems, such as the Nespresso machine from Nestle S.A. (Aa2 stable), Verismo from Starbucks Corporation (Baa1 positive) and Tassimo from Mondelez International, Inc. (Baa1 stable). Nevertheless, we expect a gradual decline in Green Mountain’s coffee market share and margins as the category matures. Furthermore, the ultimate success of the Keurig Cold system remains to be seen.

Linda Montag Senior Vice President +1.212.553.1336 linda.montag@moodys.com

Brian Weddington Vice President - Senior Credit Officer +1.212.553.1678 brian.weddington@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Australian Building Approvals Are Credit Positive for Boral and Lend Lease Last Monday, the Australian Bureau of Statistics (ABS) released figures for December 2013 that showed the trend for approved dwelling units rose 25% in the 12 months to December 2013,1 and that the trend has now risen for 24 months. The data indicate that a recovery in residential housing construction will gain further traction, which will support building material and construction companies such as Boral Limited (Baa3 stable) and, to a lesser extent, Lend Lease Group (Baa3 stable). Lend Lease has a lower exposure to Australian residential construction than Boral.

The exhibit below shows the trend in the Australian dollar-based value of housing approvals since 2008, measured on a quarterly basis.

Quarterly Value of New Home Building Approvals in Australia

Note: Trend data smoothes out variability Source: Australian Bureau of Statistics

An undersupply of housing and strong increases in property prices over the past year support the likelihood that approvals will translate into actual construction. Largely driving underlying demand is household formation, which heavily depends on population growth. Australian residential construction has lagged population growth for the past decade, creating an undersupply. The number of dwelling units completed in the September 2013 quarter totaled 389,000, almost identical to the 386,000 completed in the September 2003 quarter, while ABS statistics show that the population increased 19% to 23.4 million from 19.7 million during the same period.

Furthermore, according to property information provider RP Data, home values increased 9.8% in 2013 across all capital cities. This will help stimulate building activity by shoring up builders’ margins. Record low interest rates and a surge in sentiment in the Property Council of Australia-ANZ Property Industry Confidence Survey to a record high in the March 2014 quarter also support the premise that construction activity will continue to recover.

A beneficiary will be Boral’s Australian building products division, which supplies bricks, roofing and timber products. Although the division accounted for around 11% of Boral’s revenue for the fiscal year ended June 2013, it generated an EBIT loss of AUD40 million in the period. Returning the division to

1 The Australian Bureau of Statistics trend is defined as the long-term movement in a time series without calendar-related and

irregular effects, and is a reflection of the underlying level.

4

6

8

10

12

14

16

AUD

Bill

ions

Maurice O’Connell Vice President - Senior Analyst +612.9270.8167 maurice.o’connell@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

profitability is a key goal for Boral and the ABS approvals data provide encouraging signs that the company can achieve that goal over the next 12-24 months.

The ABS data show a stronger trend for apartment construction, compared with single-family houses. This reduces the benefits for Boral because apartments require fewer building products per dwelling than houses. But single-family houses have also shown solid increases in approvals, rising 16% in trend terms over 2013. Boral will also benefit from improving housing starts in the US and the benefits from aggressive cost-cutting measures it implemented in 2013.

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Infrastructure

New England’s Electricity Capacity Auction Will Benefit the Region’s Energy Companies Last Wednesday, ISO New England Inc. (ISO-NE), the independent power grid operator for New England, announced the results of its latest annual capacity auction for 2017-18. The auction sets the price that power producers will receive in exchange for keeping their power plants ready to produce on notice and are in addition to wholesale power market revenues the producers obtain for power they actually produce as needed.

The auction cleared at $7.025 per kilowatt per month, more than twice the price in the 2016-17 auction. There was also a small capacity shortfall, with 33,700 megawatts of bids against 33,855 megawatts of required capacity. The auction results are the latest in a series of developments in New England, including power plant shutdowns and gas price increases, that are credit positive for US and Canadian power producers, natural gas pipelines, power transmission developers and demand-response service providers.

The results portend stronger cash flows for power producers. The biggest beneficiary will be Exelon Corp. (Baa2 stable), which owns about 2.1 gigawatts of capacity near Boston, Massachusetts. NRG Energy, Inc. (Ba3 stable), Dominion Resources Inc. (Baa2 stable), NextEra Energy, Inc. (Baa1 stable) and Entergy Corporation (Baa3 stable) will also benefit from significant additional cash flows. Calpine Corp. (B1 stable), Dynegy Inc. (B2 stable) and PSEG Power LLC (Baa1 stable) will benefit, too, although less so.

A significant amount of new capacity that cleared the auction included exports from Canada, with Hydro-Quebec (Aa2 stable) a significant beneficiary. Generators in upstate New York are also likely to benefit from exports to New England.

These positive developments for power producers will create opportunities for other infrastructure development in New England. Last month, the New England States Committee on Electricity (NESCOE), which represents the six New England governors, asked ISO-NE to assist with the development of electric transmission lines to support imports of electricity from Canada and other states and renewable energy within New England. Northeast Utilities (Baa1 stable) will be the primary beneficiary of network opportunities, although its transmission line proposal is currently facing some local opposition in New Hampshire.

Natural gas prices in New England have also risen sharply in recent months owing to a shortage of pipeline transport capacity. This constraint provides opportunities for gas pipeline developers. Spectra Energy Corp. (Baa2 stable) and Kinder Morgan Inc. (Ba2 stable) already have pipelines projects in the region, with Spectra targeting a 2017 in-service date. NESCOE also asked ISO-NE to assist in receiving regulatory approval for a gas pipeline tariff whose rates would be collected through regional electric network service rates. Usually, pipelines are supported by contracts with shippers such as local gas distribution companies, gas marketers and power producers. NESCOE’s proposal, if implemented, would support additional pipelines.

Power producers have struggled in the past few years as low demand growth for power, low natural gas prices and new environmental regulations shuttered power plants. Now, it appears that New England will be the first region in the US where power producers will experience a turnaround, since both capacity prices and energy prices are soaring. We expected an increase in the capacity price because of the planned

Swami Venkataraman, CFA Vice President - Senior Credit Officer +1.212.553.7950 swami.venkat@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

shutdown of power plants with capacity totaling 3.2 gigawatts. However, the increase was greater than we expected, especially in the region around Boston, which cleared as a separate sub-region of ISO-NE at a price of $15 per kilowatt per month.

Energy prices in ISO-NE’s region have also spiked in the past few months because natural gas-fueled power plants normally set the wholesale price of electricity on an hourly basis. Energy prices have thus risen in tandem with gas prices and we expect them to remain elevated for the next two to three years. Power plants based on coal, nuclear, oil and other cheaper fuels, in particular, are seeing much higher profit margins.

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Tata Power’s Divestment of Arutmin Coal Is Credit Positive On 31 January, the Tata Power Company Limited (TPC, B1 negative) said it would sell its 30% stake in PT Arutmin Indonesia (unrated) to a Bakrie Group (unrated) entity. Arutmin is majority-owned by Bumi Resources Tbk (P.T.) (Ca stable) and operates a mine spread over several pits in South Kalimantan, Indonesia. The sale is credit positive for TPC because it will enhance its liquidity and allow it to reduce its leverage.

TPC will receive around $500 million from the sale, which includes stakes in associated companies in coal trading and infrastructure. The sale is subject to certain conditions and restructuring actions. We expect TPC and Bumi to complete the deal in the second quarter. Exhibit 1 shows TPC’s group structure after the divestment.

EXHIBIT 1

Tata Power Company’s Group Legal Entity Structure After Arutmin Divestment

Source: Tata Power Company

Tata Sons

100% 51% 74%

74% 51% 100%

30%26%-30%

30%

70%

29.81%

Tata Power Company Ltd (B1 negative)

Coastal Gujarat Power Ltd

Tata Power Delhi Distribution Ltd

Maithon Power

Bakrie Group

Bumi (Ca stable)

A Bakrie Group entity has agreed to a 30% stake in Arutmin in

January 2014

ArutminCoal Opcos

(including KPC)

Tata Power Renewable Energy

Ltd

Powerlinks Transmission Ltd

Industrial Energy Limited

Coal SPV

100%

Ray Tay Assistant Vice President - Analyst +65.6398.8306 ray.tay@moodys.com

Guo Qiang Lau Associate Analyst +65.6398.3719 guoqiang.lau@moodys.com

Rachel Chua Associate Analyst +65.6398.8313 rachel.chua@moodys.com

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

If TPC follows through on plans to use most of the proceeds to pay down debt, we project its adjusted debt to book capitalization will decline to 63%-67% for the fiscal year ending 30 March 2015 from around 72% for fiscal 2013 (see Exhibit 2).

EXHIBIT 2

Tata Power Company’s Debt/Capitalization Will Improve With Arutmin Divestment

Source: Moody’s Financial Metrics and Moody’s Investors Service projections

Although TPC benefits from the share of earnings from its interests in its Indonesian coal mines, declining coal prices and margins have eroded the cash contributions to TPC. The company reported EBIT margins from mining and coal trading fell to 11.4% in fiscal 2013 from 21.6% a year earlier. The debt reduction benefits will outweigh the loss of cash contributions from Arutmin following the sale. TPC’s ratio of funds from operations to interest coverage will rise above 1.8x in fiscal 2016 when it is fully reflected in the ratio from our projection of 1.6x for fiscal 2014.

In addition, the coal supply to TPC’s power plants should not be disrupted. TPC will retain its 30% stake in Bumi-controlled PT Kaltim Prima Coal (unrated), which will continue to supply sufficient coal to TPC’s power plants, according to their existing coal supply agreement.

The sale of TPC’s stake will not affect Bumi’s credit quality because the sale is occurring between TPC and Bakrie Group, and therefore will not affect Bumi’s 70% stake in Arutmin. The deal requires Bumi’s approval under the terms of an existing shareholder agreement between Bumi and TPC.

58% 59% 63%67%

72%

67% -72% 63% -

67%

0%

10%

20%

30%

40%

50%

60%

70%

80%

FYE 3/2009 FYE 3/2010 FYE 3/2011 FYE 3/2012 FYE 3/2013 FYE 3/2014 FYE 3/2015

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Banks

BATS’s Post-Merger Leveraged Dividend Is Credit Negative Last Monday, BATS Global Markets, Inc. (B1 stable) announced that it had completed its merger with Direct Edge Holdings, LLC (unrated). Immediately following the merger close, the company paid out a $210 million special dividend to its shareholders. The distribution of this substantial debt-financed special dividend is credit negative because it demonstrates the company’s aggressive financial policy and greater tolerance for leverage.

With this merger, the combined company, which retains the BATS Global Markets name, becomes the second-largest exchange operator in the US. Although we expect the new BATS to have significantly larger scale, improved margins and potentially a more diversified revenue stream, its shareholder-friendly financial policy limits these benefits for bondholders. Indeed, the $210 million dividend is the firm’s second-largest shareholder payment in the past 15 months: in November 2012, BATS borrowed $300 million to finance a shareholder distribution of the same amount, which brought leverage to 4.4x trailing 12 months EBITDA as of 30 September 2012.

As part of this strategic expansion, the company borrowed $500 million of new funded debt, principally to pay the $210 million dividend and to refinance $256 million of its existing debt. After having substantially delevered since 2012 through a combination of debt reduction and improved operating performance after the successful merger integration of Chi-X Europe (see exhibit below), the new debt issuance will raise leverage to approximately 3.0x on a pro forma basis, excluding projected synergies and onetime items, from 2.3x before the merger. We expect the leverage ratio to spike higher than 3.0x this year because of substantial integration costs.

BATS’ Global Markets Financial Leverage

Note: TTM = Trailing 12 months Leverage calculations are based on reported EBITDA, which does not exclude any onetime items. Source: Company financials

Based on the strategic rationale of the merger and BATS’s projected synergies, the company’s profitability, and therefore its ability to pay down debt, would be enhanced. However, it is uncertain whether that would result in lower leverage because of the company’s demonstrated appetite for debt-financed shareholder distributions. In addition, the increased leverage reduces the company’s incremental debt capacity.

$300

$288

$277

$267

$256

4.4x

3.8x

3.0x2.5x 2.3x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

5.0x

$230

$240

$250

$260

$270

$280

$290

$300

$310

TTM 9/30/12

2012 TTM 3/31/13

TTM 6/30/13

TTM9/30/13

$ M

illio

ns

Debt - left axis Leverage - right axis

Anna Sherbakova Associate Analyst +1.212.553.7946 anna.sherbakova@moodys.com

Ana Arsov Associate Managing Director +1.212.553.3763 ana.arsov@moodys.com

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Notwithstanding potential strategic and financial benefits of the merger, BATS’s aggressive financial policy and management’s continued tolerance for periodic spikes in leverage are a credit constraint and important considerations in our ongoing assessment of the company’s credit quality.

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Narrower Commercial Loan Spreads Are Yet Another Revenue Challenge for US Banks Last Monday, the US Federal Reserve released its quarterly Senior Loan Officer Opinion Survey, which showed a continuation of the negative trends in commercial and industrial (C&I) lending practices by large US banks. Survey respondents continued to ease covenants for large and middle-market C&I borrowers, while also narrowing loan spreads, which together increase the possibility of future loan problems and lower net-interest margins. Diminished earnings reduce coverage for asset quality deterioration.

The survey showed that more than 65% of large bank respondents (i.e., banks with assets of more than $20 billion) reported narrowing loan spreads over their cost of funds for large and middle-market C&I customers over the past three months. In fact, the data have showed persistent spread narrowing by the majority of large bank respondents since mid-2010.

We can already observe the stark results of narrower spreads: banks’ net interest revenue on C&I loans has declined over the past year despite growth of the underlying portfolios. The exhibit below depicts the trend for the large rated US banks that disclose their average C&I balances, and the related loan yields, in their earnings releases. We use banks’ average balance sheets because that is where they disclose the data necessary to calculate their net interest revenue from C&I loans. The graph shows the relationship between the rate of growth in banks’ C&I loan portfolios on the horizontal axis and the rate of growth in net interest revenue from C&I loans on the vertical axis.

Growth in Average C&I Loans versus Growth in C&I Net Interest Revenue, Fourth-Quarter 2012 to Fourth-Quarter 2013

Key: BAC = Bank of America Corporation; BBT = BB&T Corporation; CMA = Comerica Incorporated; FITB = Fifth Third Bancorp; HBAN = Huntington Bancshares Incorporated; KEY = KeyCorp; PNC = PNC Financial Services Group, Inc.; RF = Regions Financial Corporation; STI = SunTrust Banks, Inc.; USB = U.S. Bancorp; WFC = Wells Fargo & Company Note: Ratings in exhibit are the banks’ baseline credit assessments. We calculate net interest revenue as the average yield on C&I loans less the average cost of the banks’ total funding including the banks’ non-interest bearing deposits. Source: Company earnings releases

The fact that all of the banks fall below the 45-degree line indicates that the rate of growth in C&I net interest revenue was appreciably less than the growth rate of C&I loans across the industry, contributing to the reduction in banks’ net interest margins. This is particularly troubling given the ongoing underwriting deterioration captured in the Federal Reserve’s survey. In short, banks are being paid less to take on more risk. Only Bank of America Corporation (Baa2 stable), KeyCorp (Baa1 stable), Regions Financial Corporation (Ba1 stable) and U.S. Bancorp (A1 stable) grew their C&I net interest revenue in fourth-quarter 2013 from a year earlier, but they did so at a slower pace than the rate of growth in their C&I loan portfolios.

BAC (baa2)

BBT (a1)

CMA (a2) FITB (a3)HBAN (a3)

KEY (a3)

MTB (a2)

PNC (a2)

RF (baa3)

STI (a3)

USB (aa3)

WFC (a2)

(10%)

(5%)

0%

5%

10%

15%

(10%) (5%) 0% 5% 10% 15%

Growth in Quarterly Average C&I Balances

Gro

wth

of C

&I N

et In

tere

st R

even

ue

Megan Snyder Associate Analyst +1.212.553.4986 megan.snyder@moodys.com

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

The difference in C&I portfolio yields between the banks has also compressed. In fourth-quarter 2013, the difference between the minimum and maximum C&I loan yields for the banks in Exhibit 1 was 86 basis points, down from 106 basis points a year earlier. This is further evidence of the heightened industry competition for C&I borrowers and reduced accretion income that are likely continue in 2014.

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Looser Underwriting Accompanies Auto Loan Growth, a Credit Negative for Eight US Banks Last Monday, the US Federal Reserve Board released its quarterly Senior Loan Officer Opinion Survey, which showed that auto loan underwriting standards continued to ease. This is credit negative for eight US banks whose loans are skewed toward auto lending and whose portfolios, in most cases, have grown at a high rate in the past year.

Exhibit 1 shows the rated US banks whose auto loans exceed 10% of total loans (left axis), while the diamonds show year-over-year growth (right axis). Santander Holdings USA, Inc. (Baa2 negative) is the most committed, with auto loans making up more than one third of its total loans and whose portfolio grew by a 25% for the 12 months ended 30 September 2013.2 Of these eight banks, only Fifth Third Bancorp (Baa1 stable) and RBS Citizens Financial Group, Inc., parent of RBS Citizens, NA (A3 stable, C/a3 stable3), grew less than 10% in that period.

EXHIBIT 1

US Rated Banks Most Committed to Auto Lending Auto Loan Concentrations and Growth, Third-Quarter 2012 to Third-Quarter 2013

Key: SHUSA = Santander Holdings USA, Inc.; COF = Capital One Financial Corporation, Amarillo = Amarillo National Bancorp, Incorporated; TD US = TD Bank US Holding Company; HBAN = Huntington Bancshares Incorporated; FITB = Fifth Third Bancorp; BMO US = BMO Financial Corp.; RBS Citizens = RBS Citizens Financial Group, Inc. Note: Ratings shown in the exhibit are the lead banks’ standalone baseline credit assessments. Source: Federal Reserve FR Y-9C reports

The latest survey highlighted a decrease in loan spreads causing looser underwriting. However, for us, the most pertinent sign of easing in underwriting is the extension of loan tenors. Loan extensions support the affordability of a car owner’s monthly payments, but conversely, they can lead to a higher severity of loss for the lender in the event of a default.

Exhibit 2 shows the extending of loan tenors for new vehicles (solid line) and for used vehicles (dotted line). The exhibit shows that tenors for new cars are up to 65 months, even though consumers typically buy a car every 36 months. Because of this disparity, vehicle depreciation tends to be greater than the principal

2 We adjusted loan balances for Santander Holdings USA to include auto loans held at its auto finance subsidiary, Santander

Consumer USA Holdings Inc. 3 The bank ratings shown are the bank’s deposit rating, its standalone bank financial strength rating/baseline credit assessment and

the corresponding rating outlooks.

0%

4%

8%

12%

16%

20%

24%

28%

0%

5%

10%

15%

20%

25%

30%

35%

SHUSA(baa1)

COF(a3)

Amarillo(a3)

TD US(a2)

HBAN(a3)

FITB(a3)

BMO US(a3)

RBS Citizens(a3)

Year-over-Year Grow

th RateAuto

Loa

ns to

Tot

al L

oans

Q3 2012 - left axis Q3 2013 - left axis Year-over-Year Growth Rate - right axis

Rob McGregor Associate Analyst +1.212.553.3685 rob.mcgregor@moodys.com

Joseph Pucella Vice President - Senior Credit Officer +1.212.553.7455 joseph.pucella@moodys.com

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

reduction of the car loan. This results in banks often rolling the negative equity into the new car loans, resulting in higher loan-to-values and increasing the chances of higher loss severity.

EXHIBIT 2

US Auto Loan Underwriting Has Become More Aggressive Average Loan Tenors and Rates, Fourth-Quarter 2009 to Third-Quarter 2013

Source: Experian

With this backdrop, an Experian’s report on 6 February showed a rise in auto delinquencies, which illustrates the higher risks in this segment. The report stated that 2.18% of car loans were 30-59 days past due, the highest level since the fourth-quarter 2011, while 0.56% were 60- 89 days past due, the highest level since the fourth-quarter 2010, and 0.24% were 90-180 days past due, the highest level since the fourth-quarter 2010.

55

57

59

61

63

65

67

Num

ber o

f Mon

ths

Average Loan Term New Average Loan Term Used

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Brazil’s Largest Private Banks’ Asset Quality Improves, a Credit Positive Last Tuesday, Itau Unibanco S.A. (Baa2 stable, C-/baa1 stable4) announced a major decline in its nonperforming loan (NPL) ratio, in line with the improving asset quality that Banco Bradesco S.A. (Baa2 stable, C-/baa1 stable) and Banco Santander (Brasil) S.A. (Baa2 stable, C-/baa2 stable) each reported on 30 January. This credit-positive trend among Brazil’s three largest private banks by assets reflects their stricter credit underwriting and is particularly noteworthy given the country’s challenging economic environment. Lower credit costs provide a needed boost to banks’ profitability amid tight credit spreads and subdued business volumes.

As shown in Exhibit 1, NPL ratios for all three banks have decreased substantially, reaching their lowest levels in five years. The declines are mostly driven by improvements in asset quality and moderate credit growth, in contrast to what happened in 2010, when the NPL metric fell amid aggressive portfolio expansion of around 20%.

EXHIBIT 1

Brazil’s Top Three Private Banks’ Nonperforming Loan Ratios

Source: The banks

Despite some improvements across different loan segments, households have been the main contributor to the declines in the three banks’ problem loans. The improvements reflect efforts to improve underwriting standards and move to more creditworthy borrowers after the delinquency peak of 2011-12; a shift toward a less risky loan mix, including a robust increase of payroll loans and residential mortgages; a decline in vehicle loans; and a strong labor market in which unemployment is running at historical lows.

4 The bank ratings shown in this report are the banks’ deposit ratings, their standalone bank financial strength ratings/baseline credit

assessments and the corresponding rating outlooks.

5.6%

4.9%

5.9%

4.2%

3.6%3.9%

4.9%

3.9%

4.5%4.8%

4.1%

5.5%

3.7% 3.5% 3.7%

0%

1%

2%

3%

4%

5%

6%

Itau Unibanco S.A. Banco Bradesco S.A. Banco Santander (Brasil) S.A.

2009 2010 2011 2012 2013

Alcir Freitas Vice President - Senior Analyst +55.11.3043.7308 alcir.freitas@moodys.com

Thiago Scarelli Associate Analyst +55.11.3043.7347 thiago.scarelli@moodys.com

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

EXHIBIT 2

Lower Delinquencies in the Brazilian Banks’ Household Loan Portfolio Drove Asset Quality Improvement Itau Unibanco Banco Bradesco Banco Santander

Note: Bradesco does not disclose its aggregate corporate NPL ratio. Source: The banks

Better asset quality is a key element to the Brazilian banking system’s credit strength, particularly because persistently modest economic growth (we expect GDP to expand by around 2% for both 2013 and 2014) is impairing business volume and narrow credit spreads are pressuring aggregate net interest margins, although at a slower pace in the past months than prior months.

One immediate consequence of lower delinquency rates is the reduction in provisions the banks need to set aside for potential future losses. This ongoing improvement in NPLs has already led to a relative decline in reserve buffers, but current levels are compatible with the decline in future expected losses, as we have detailed.

This year, we see limited room for further declines in delinquency owing to the negative effects of rising interest rates, still-high levels of household indebtedness, persistently high inflation and low economic growth. At the same time, we recognize that most recent loan vintages carry a better risk profile, partially offsetting the risk of NPL spikes.

This year, the banks’ managements expect to keep the pace of loan portfolio growth at around 10%-14%, indicating pretty much the same risk appetite as in 2013, when loan portfolio growth was 13.3% for Itau Unibanco, 10.8% for Bradesco and 9.3% for Santander.

NPLs Households NPLs Total NPLs Companies

6.6%6.9%

5.8%

4.9% 4.8%

3.7%

3.5%3.2%

2.0%1%

2%

3%

4%

5%

6%

7%

8%

9%

Dec-11 Dec-12 Dec-13

6.1% 6.2%

5.0%

3.9% 4.1%3.5%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Dec-11 Dec-12 Dec-13

6.8%

7.8%

5.1%4.5%

5.5%

3.7%

2.4%

3.3%2.4%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Dec-11 Dec-12 Dec-13

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

An Investec Sale of Kensington Would Be Credit Positive On Thursday, Investec PLC (Ba1 negative) announced that it was considering selling certain UK assets of Kensington, its intermediary mortgage business in the UK and Ireland, after receiving expressions of interest. If a sale were to occur, it would be credit positive for Investec’s bondholders because the sale would improve Investec’s risk profile and capital ratios and signal that Investec has a more cautious risk appetite.

Kensington is Investec’s originator and distributor of higher-risk prime self-certified and buy-to-let mortgages and has been a source of significant loan impairments for the group since Investec acquired Kensingon in 2007. As of 30 September 2013, Investec’s consolidated assets in Kensington were almost £2.9 billion, £2.3 billion of which were UK-based. The quality of the Kensington assets is significantly worse than that of Investec’s core loan book, with 35% of the book being more than 90 days in arrears or in repossession and a weighted average loan-to-value ratio of 91%.

At £814 million as of 30 September 2013, Investec’s net exposure to the assets originated, warehoused and securitised by Kensington was much lower than Kensington’s total consolidated assets because Investec’s credit exposure is limited to certain assets. Nonetheless, the exposure was still nearly 65% of the bank’s common equity Tier 1 capital (CET1). As of 30 September 2013, Investec’s CET1 was 9.1%, up from 8.8% as of 30 March 2013.

The partial elimination of this risk would allow Investec to deploy the proceeds into expanding other segments, including Investec’s lower-risk wealth and investment management business. Over the past few years, Investec has made a series of investments in its wealth and investment management business to facilitate a shift toward less capital-intensive business activities.

The sale of some of the assets in Kensington would support the change in the strategy outlined by the bank in November, with greater focus on running off some legacy assets originated before 2008 (see exhibit). The rationale is two-fold: as with the recent strategic review of the group’s underperforming Australian businesses, we consider the sale of Kensington to be a partial response to shareholder pressure to boost Investec’s profitability, which is currently below its UK peers. A sale of Kensington would also allow Investec to take advantage of the improving valuation of these legacy assets amid an improving UK economy.

Kensington’s Warehouse Legacy Assets In a Runoff Scenario

Source: Investec PLC data for the six months ended September 2013

£1.48

£0.86 £0.81

£0.56

£0.50 £0.49

£1.24 £1.13 £1.03 £0.96 £0.88

£0.0

£0.5

£1.0

£1.5

£2.0

£2.5

March 2008 March 2013 Sep 2013 March 2014 Estimate

March 2015 Estimate

March 2016 Estimate

March 2017 Estimate

March 2018 Estimate

£ Bi

llion

Kensington – UK Warehouse Loans Kensington – Ireland

Michael C. Eberhardt, CFA Vice President - Senior Analyst +44.20.7772.8611 michael.eberhardt@moodys.com

Ferenc Csoke Analyst +44.20.7772.1618 ferenc.csoke@moodys.com

Mario Mico Associate Analyst +44.20.7772.1643 mario.mico@moodys.com

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

It is noteworthy to highlight that so far, the interest of third parties is only on certain UK assets of Kensington, and that Investec is still in the early stage of the negotiations.

Investec PLC is rated one notch below its group banking subsidiary, Investec Bank Plc (Baa3 negative, D+/baa3 stable5). This notching reflects the structural subordination of Investec PLC, the balance of the risk profile of the legacy Kensington wholesale mortgage portfolio and the stability of income and potential capital generation of Investec Asset Management, another subsidiary in the group.

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

assessment and the corresponding rating outlooks.

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Commerzbank’s Latest Asset Sale Reduces the Group’s Risk Last Thursday, Commerzbank AG (Baa1 stable, D+/ba1 stable6) announced that it had sold €710 million of nonperforming loans from its Spanish commercial real estate (CRE) portfolio to international investors. The sale is credit positive for Commerzbank.

Commerzbank reported that the transaction reduced risk-weighted assets by €600 million, had a positive net effect on capital and marked a 50% reduction of the volume of nonperforming loans in the group’s Spanish CRE portfolio since January 2013. The €20 million positive capital relief effect is small in the context of the group’s €25 billion common equity Tier 1 capital as of 30 September 2013, and will not visibly improve its regulatory capital ratios. However, the €710 million sale marks a 12% reduction in the group’s €6.1 billion impaired portfolio relating to its CRE exposure.

Commerzbank’s asset sale is the latest of a string of higher-risk portfolio sales during recent quarters that improve the group’s asset quality. The transaction fully fits Commerzbank’s strategy to quickly unwind its disproportionately large non-core asset segment, which will support the gradual recovery of its franchise.

Commerzbank successfully cut non-core assets by more than 20% to €138 billion in the nine months to September 2013, without compromising its capital ratios. Non-core assets accounted for more than 25% of total group assets as of December 2012, and recent reductions have exceeded its targets for unwinding them. The group achieved much of the reduction in higher-risk areas of the non-core asset unit, particularly in CRE, where assets were 30% lower as of September versus December 2012.

In the third quarter of last year, Commerzbank sold its entire UK CRE portfolio, which comprised €5 billion in loan assets. Similar to its Spanish CRE book, this portfolio also had a high percentage of nonperforming loans. Commerzbank followed the UK sale with the December sale of €280 million of nonperforming ship finance assets. As Exhibit 2 shows, all of these transactions had a positive effect on Commerzbank’s asset quality metrics.

Risk Reduction in Commerzbank’s Non-Core Unit

Source: Commerzbank

6 The ratings shown are the banks’ deposit ratings and standalone bank financial strength ratings/baseline credit assessments, and

respective outlooks.

€10.0

€10.5

€11.0

€11.5

€12.0

€12.5

€50

€52

€54

€56

€58

€60

€62

€64

€66

€68

Dec-12 Mar-13 Jun-13 Sep-13

€Bi

llion

€Bi

llion

Risk-Weighted Assets - left axis Nonperforming Loans - right axis

Katharina Barten Vice President - Senior Credit Officer +49.69.70730.765 katharina.barten@moodys.com

NEWS & ANALYSIS Credit implications of current events

21 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

The non-core assets burden Commerzbank’s franchise, as illustrated by the €1.5 billion operating loss it contributed to group results in 2012. We expect another sizable loss for 2013 from non-core assets, considering the €745 million operating loss reported for the nine months to September, and the ongoing (and sometimes costly) efforts to shed the assets. However, the latest transactions demonstrate Commerzbank’s strong commitment to unwinding the non-core asset unit at a good pace, with positive implications for its franchise.

In addition, the accelerated balance sheet cleanup is an effective preparation for the asset quality review and stress test that the European Central Bank, in cooperation with the European Banking Authority, is presently conducting to assess the robustness of Europe’s largest banks. Every reduction in underperforming assets reduces the potential for any parameter adjustments to the group’s nonperforming loans, given that the harmonisation of problem-loan reporting and provisioning across Europe are focal points of the asset quality review. Commerzbank’s comments that the latest two portfolio sales were possible at only minor losses indicate that its collateral and provisioning levels are close to market values. Importantly, Commerzbank’s 11.0% core equity Tier 1 ratio under the Basel III phase-in rules implies that the bank is well positioned for the asset quality review, which will benchmark banks against a common equity Tier 1 threshold rate of 8%.

NEWS & ANALYSIS Credit implications of current events

22 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Philippine Bank Capital Raises Following Basel III Implementation Are Credit Positive Last Thursday, Philippine National Bank (PNB, Ba2 stable, E+/b1 positive7) announced that it had raised PHP11.6 billion ($256 million) in new equity capital through a stock rights issue, two days after Bank of the Philippine Islands (BPI, Baa3 positive, D+/baa3 stable) announced it had raised PHP25 billion ($550 million) in a similar issuance. The additional equity capital is credit positive for the two banks because it will increase their loss-absorption capacity and boost their common equity Tier 1 capital well beyond the Basel III minimum. Moreover, the additional capital will better position both banks to pursue business expansion.

These capital-raising initiatives reflect a broader industry trend toward capital optimization in response to the implementation of Basel III in the Philippines on 1 January. The country introduced the new rules in a single step rather than the gradual phase-in approach that other countries are using. This prompted a number of banks, including BDO Unibank, Inc. (Baa3 positive, D+/ba1 stable), Metropolitan Bank & Trust Company (Baa3 positive, D+/baa3 stable) and Rizal Commercial Banking Corporation (Ba2 stable, D-/ba3 stable), to dispose of non-core assets and replace non-complaint Basel III securities with core equity or Basel III-compliant securities. These actions are credit positive because they improve the quality of capital and come as Philippine banks’ lending grows at a rate of 15% or more.

Pro forma for the capital raise, BPI’s common equity Tier 1 (CET1) capital ratio will rise to 18.6% from 14.7% reported as of the end of September 2013, while PNB’s CET1 capital ratio will rise to 19.7% from 17.0%. These increases will make both banks among the best-capitalized banks in the Asia-Pacific region. Both banks’ higher capital levels are also well above the Basel III minimum of 8.5%, including a capital conservation buffer of 2.5% for the Philippine banks.

BPI, the Philippines’ third-largest bank, had been in talks in 2012 to acquire PNB, but the talks ended last year. PNB is the fifth-largest bank by assets following its merger with Allied Banking Corporation (ABC) in February 2013. If BPI had acquired a combined PNB and ABC, we estimated that BPI’s capital ratio would have declined by 3.5 percentage points if the acquisition had been paid for using a 50-50 mix of cash and newly issued equity.

Both BPI and PNB intend to utilize a portion of the proceeds from their rights issues to support their expansions plans. Like other Philippine banks, BPI and PNB have been experiencing margin pressure in a low-interest-rate environment. The proceeds from the rights issues will allow both banks to capitalize on the higher-yielding retail sector, given its low penetration rate, where retail loans equaled just 6% to GDP as of September 2013, versus 27% for Thailand as of September 2013. The annual growth rate of consumer loans has averaged around 15% between 2008 and 2012.

In addition to supporting business growth, the fresh equity capital will also offset the effect on their capital adequacy ratios of their Tier 2 subordinated debt securities no longer being eligible as capital under Basel III. BPI retired its PHP5 billion non-Basel III compliant Tier 2 subordinated debt securities in December, while PNB’s PHP9.9 billion Tier 2 subordinated debt securities will be de-recognised starting 1 January 2016.

7 The ratings shown are the bank’s deposit rating, its standalone bank financial strength rating/baseline credit assessment and the

corresponding rating outlooks.

Simon Chen, CFA Assistant Vice President - Analyst +65.6398.8305 simon.chen@moodys.com

Alka Anbarasu Assistant Vice President - Analyst +65.6398.3712 alka.anbarasu@moodys.com

Shaoyong Beh Associate Analyst +65.6398.8309 shaoyong.beh@moodys.com

NEWS & ANALYSIS Credit implications of current events

23 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Insurers

US Farm Bill Is Credit Positive for Crop Insurers On Friday, US President Barack Obama signed into law the Agriculture Act of 2014 (also known as the Federal Farm Bill), which directs agriculture-related spending of nearly $1 trillion over the next 10 years. The law’s enactment is credit positive for US crop insurers because it further cements their pivotal role in the US government’s support of the agricultural sector, expands existing crop insurance programs and restricts the ability of the US Department of Agriculture (USDA) to renegotiate lower payments to crop insurers during the term of the law.

Agricultural producers, including farmers and ranchers, purchase crop insurance to protect against either the loss of their crops because of natural disasters such as hail, drought and floods, or the loss of revenue owing to declines in agricultural commodities prices. The US government currently pays nearly two thirds of total premiums for crop insurance, which is effectively a subsidy to the agricultural sector, albeit one that has allowed the government to avoid running afoul of global trade agreements.

The law continues a longstanding trend of expanding the use of the federal multi-peril crop insurance (MPCI) program, in this case by approximately $7 billion of added crop insurance protection spread over the coming decade. It is available to farmers only if they record actual losses. The law also eliminated a much-criticized $5 billion annual subsidy to farmers (handled outside of the crop insurance program) who received the payments whether they grew crops or not. This trend has resulted in steady growth of the MPCI program, whose leading market participants are shown in the exhibit below, and signals that the federal MPCI program should remain the primary vehicle for the federal government’s financial support for the US agricultural sector.

Top US Crop Insurers by Direct Written Premiums, 2012

Company/Group Holding Company

Insurance Financial

Strength Rating of Lead US Company

Crop Direct Written

Premiums 2012

$ Millions

Crop Market

Share

Crop as Percent of

Total US Written

Premiums

ACE USA Group ACE Limited A1 stable $2,136 19% 23%

Rural Community Ins. Co. Wells Fargo & Company Unrated 1,716 15% 99%

QBE North America QBE Insurance Group Limited Unrated* 1,502 13% 27%

Great American P&C Group American Financial Group, Inc. A1 negative 958 8% 24%

Fireman's Fund Companies Allianz SE A2 negative 859 8% 25%

Endurance USA Endurance Specialty Holdings Ltd. A3 stable 825 7% 68%

Producers Agriculture Ins. Co. CUNA Mutual Unrated 503 4% 91%

Farmers Mutual Hail Ins. Co. NA Unrated 490 4% 74%

Austin Mutual Ins. Co. NA Unrated 440 4% 80%

John Deere Ins. Co. Deere & Company Unrated 370 3% 91%

Note: Direct premiums written are before cessions to private reinsurers and to the US government under standard reinsurance agreements.

* QBE Insurance Group Limited senior unsecured debt rated Baa2 stable.

Sources: Moody’s Investors Service and SNL Financial LC (Contains copyrighted and trade secret materials distributed under license from SNL, for recipient’s internal use only.)

Alan G. Murray Senior Vice President +1.212.553.7787 alan.murray@moodys.com

NEWS & ANALYSIS Credit implications of current events

24 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Twenty years ago, federal crop insurance, which the USDA’s Risk Management Agency administers via the Federal Crop Insurance Corporation, was a very small industry, but it has expanded dramatically with the extension of coverage to more than 100 crops today from an initial five or so staple crops. However, while supporting growth of the program, the USDA over time has steadily tightened crop insurers’ permitted margins and expense reimbursements, which has contributed to substantial consolidation in the sector. Indeed, the three leading insurers today control nearly half of the market, and the top six control approximately 75%.

The law has also created new benefits for rice and peanut growers that would go into effect when prices drop, as well as new soil conservation measures, both of which support the risk management processes central to insurers’ underwriting operations. There is also a provision in the law that bars the USDA from renegotiating lesser payments to companies for the first five years. In previous years, the USDA’s renegotiations with insurance companies have resulted in steadily lower expense reimbursements for insurers as the government sought to promote operational efficiency. This has pressured insurers’ margins and led to increased consolidation, especially among smaller carriers.

All crop insurers should benefit from the enactment of the farm bill, particularly the market leaders, which have steadily consolidated their leadership in the sector over time. These include ACE USA Group, Rural Community Insurance Co., QBE North America, Great American P&C and Fireman’s Fund Companies, as well as those smaller insurers whose business is concentrated predominantly in the crop insurance sector.

NEWS & ANALYSIS Credit implications of current events

25 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Genworth’s $400 Million Capital Contribution to Mortgage Units Is Credit Positive Last Wednesday, Genworth Financial (unrated8) announced that it had contributed $400 million of capital to Genworth Mortgage Holdings, LLC (unrated), and Genworth Mortgage Holdings had, in turn, contributed $100 million to its directly owned operating company, Genworth Mortgage Insurance Corporation (GMICO, financial strength Ba1 positive). Both capital contributions are credit positive for GMICO, because they enhance GMICO’s ability to satisfy part or all of the higher capital requirements that Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) are likely to impose in their forthcoming new eligibility standards for qualifying mortgage insurers. Following the capital contribution, we upgraded Genworth’s US mortgage insurance subsidiaries.

We expect the GSEs’ eligibility revisions, which may be released this year, to include higher capital requirements for mortgage insurers, such as a lower risk-to-capital threshold than the 25-to-1 threshold that many state insurance regulators currently require. The GSEs are also likely to discount insurers’ affiliated holdings more than insurance regulators do.

GMICO’s assets and capital include approximately $1.2 billion of statutory value from affiliated investments, such as common shares of affiliates and stacked mortgage insurance operations. A portion of these could be meaningfully discounted under the new GSE criteria. As a partial offset to the haircut on affiliate investments, the GSEs’ capital requirements will likely factor in future premiums and deferred tax assets. The earned premium from Genworth’s US mortgage insurance segment was $554 million in 2013, while its ordinary deferred tax asset was $795 million as of year-end 2012, reflecting years of operating losses.

The $300 million currently parked at GMICO’s direct holding company Genworth Mortgage Holdings could be deployed to support GMICO, and that would reduce its regulatory risk-to-capital ratio by approximately four points from the estimated ratio of 19.3-to-1 as of 31 December 2013. Although an immediate outright contribution of the $300 million to GMICO would be more credit positive for the mortgage insurer, the company has made it clear that it will use the $300 million as needed to meet the forthcoming new tighter GSE eligibility criteria. Should the combined $400 million prove insufficient to meet the new GSE risk-to-capital standards, Genworth could utilize reinsurance to meet the standard or contribute additional capital through a proposed partial initial public offering of its Australian mortgage business.

Genworth’s contribution to GMICO demonstrates meaningful parental support for its mortgage insurance business. It also reflects the improving profit outlook of the mortgage insurance business as legacy losses decline and new business contributes to earnings. GMICO’s capital position and profitability prospects have strengthened and improving housing market conditions have reduced the downside risks of its insured portfolio.

Although they have been steadily improving during 2013, Genworth’s US mortgage insurers’ earnings came under significant pressure following the 2008 downturn in the US housing market. For 2013, the mortgage insurance subsidiaries reported net operating income of $37 million, the first full-year positive result since the global financial crisis. Excluding the income from the mortgage insurance subsidiaries, Genworth reported operating income for the same period of $579 million, as shown in the exhibit below.

8 Genworth Financial is the holding company of Genworth Holdings, Inc. (Baa3 stable).

Scott Robinson Senior Vice President +1.212.553.3746 scott.robinson@moodys.com

Helen Remeza Vice President - Senior Analyst +1.212.553.2724 helen.remeza@moodys.com

NEWS & ANALYSIS Credit implications of current events

26 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Genworth US Mortgage Insurance Net Operating Income

Source: Genworth Financial

-$150

-$100

-$50

$0

$50

$100

$150

$200

$250

Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13

$Mill

ions

Genworth Excluding US Mortgage Insurers US Mortgage Insurers

RATING CHANGES Significant rating actions taken the week ending 7 February 2014

27 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Corporates Delphi Corporation

Upgrade

4 Mar ‘13 5 Feb ‘14

Senior Unsecured Rating Ba1 Baa3

Outlook Stable Positive

The upgrade reflects our expectation that Delphi will embrace financial disciplines that support an investment-grade rating level as it executes its share repurchase program and contemplates acquisitions that will expand its position in related businesses.

KT Corporation Downgrade

9 Aug ‘13 4 Feb ‘14

Senior Unsecured Rating A3 Baa1

Outlook Negative Stable

The downgrade is based on our view that KT’s ability to restore profitability will be challenged over the near term, given intense competition in the mobile market, declines in fixed-line revenue, as well as its high cost structure. We expect KT's consolidated revenue to remain almost flat or even decrease slightly in the coming two years

Lennar Corporation Outlook Change

18 Oct ‘12 4 Feb ‘14

Corporate Family Rating Ba3 Ba3

Outlook Stable Positive

The outlook change reflects our expectation that Lennar's adjusted debt leverage will trend towards that of a Ba2-rated homebuilder within the next 12 to 18 months while its other key credit metrics continue to improve to and, in some cases exceed, Ba2 levels.

LG Electronics Inc. Downgrade

5 Apr ‘13 6 Feb ‘14

Long-Term Issuer Rating Baa2 Baa3

Outlook Negative Stable

The downgrade reflects our view that any improvement in the company's profitability at the operating level will remain below what is commensurate with a Baa2 level, owing to intense competition in the mobile handset segment, average selling price pressures in all segments, and the high marketing expenditures needed to protect and expand LG Electronics’ market share.

RATING CHANGES Significant rating actions taken the week ending 7 February 2014

28 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

ONEOK, Inc. Downgrade

25 Jun ‘13 3 Feb ‘14

Senior Unsecured Rating Baa2 Baa3

Outlook Review for Downgrade Stable

The downgrade was prompted by the separation of ONEOK’s natural gas distribution, creating a new standalone, publicly traded entity. ONEOK’s noteholders lose the high quality cash flow stream associated with its direct ownership of its three gas utilities, and are now creditors of a pure-play general partner.

Petroleos Mexicanos Review for Upgrade

6 Jan ‘05 6 Feb ‘14

Long-Term Issuer Rating Baa1 Baa1

Outlook Stable Review for Upgrade

The review for upgrade follows our upgrade of the government of Mexico's bond rating to A3 from Baa1. The review will focus on (1) the government’s higher rating, compared with that of Petroleos Mexicanos; (2) our views on government support and dependence; and (3) the impact of energy reform in Mexico on Petroleos Mexicanos’s fundamental operating and financial profile.

Thermo Fisher Scientific Inc. Downgrade

15 Apr ‘13 4 Feb ‘14

Senior Unsecured Rating Baa1 Baa3

Short Term Issuer Rating P-2 P-3

Outlook Review for Downgrade Stable

The downgrade follows the close of the acquisition of Life Technologies Corporation. The rating is constrained by the very high initial leverage (debt to EBITDA of approximately 4.8x), as well as the risks associated with the integration of Life Technologies.

RATING CHANGES Significant rating actions taken the week ending 7 February 2014

29 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Infrastructure Brooklyn Union Gas Company (KEDNY) KeySpan Gas East Corporation (KEDLI)

Upgrade

13 Dec ‘13 5 Feb ‘14

Brooklyn Union Gas Company (KEDNY) – Gas Facilities Revenue Bonds

A3 A2

KeySpan Gas East Corporation (KEDLI) – Senior Unsecured Rating

A3 A2

Outlook Stable Stable

The upgrades of the two National Grid subsidiaries reflect that the regulatory provisions under which each of these utilities operate are consistent with our view of a generally improving regulatory environment for US electric and gas utilities. Factors supporting this view include better cost recovery provisions, reduced regulatory lag, and generally fair and open relationships between utilities and regulators.

Transelectrica S.A. Outlook Change

20 Dec ‘12 4 Feb ‘14

Long-Term Corporate Family Rating Ba2 Ba2

Probability of Default Rating Ba2 Ba2

Outlook Negative Stable

The change to a stable outlook reflects progress made by the company to strengthen its liquidity position, notably bolstered by the RON200 million bond issued in December 2013 that helped to reduce a reliance on short-term bank debt. We view Transelectrica as still having some work to do in order to create a structurally stable liquidity base, such as signing material multi-year committed liquidity facilities, but it has now accessed the domestic bond market and is expected to do so again in the latter half of 2014. Transelectrica S.A. is the Romanian high-voltage transmission power grid operator.

Societe des Autoroutes Paris-Rhin-Rhone (APRR) Outlook Change

5 March ‘10 3 Feb ‘14

Senior Unsecured Rating Baa3 Baa3

Outlook Stable Positive

The outlook change recognizes the positive traffic trends in APRR's 2,282 km network, which we expect to lead to improved credit metrics on a consolidated basis, including debt at its holding company Eiffarie. Recent traffic trends have been supportive of the deleveraging of APRR on a consolidated basis.

RATING CHANGES Significant rating actions taken the week ending 7 February 2014

30 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Financial Institutions Actions on 12 Ukrainian Banks and One Leasing Company

5 Feb ‘14

The action follows our downgrade of Ukraine’s government bond rating to Caa2 on 31 January. In our action we:

» lowered the baseline credit assessments of 10 Ukrainian banks

» downgraded the local-currency deposit ratings and local and foreign-currency debt ratings of six Ukrainian banks

» confirmed the local-currency deposit ratings and local and foreign-currency debt ratings of five banks and one leasing company in Ukraine

» downgraded the National Scale Ratings (NSR) of five banks and confirmed the NSRs of four banks and one leasing company in Ukraine,

We also downgraded the foreign-currency deposit rating of 12 Ukrainian banks due to the lowering of the country ceiling on foreign-currency deposit ratings.

BTA Bank Upgrade

21 Feb ‘13 4 Feb ‘14

Long-term Local- and Foreign-Currency Deposit Ratings

Caa1 B3

Standalone Financial Strength/ Baseline Credit Assessment

E/caa3 E/caa2

Outlook Developing Positive

The upgrade is driven by restored capitalisation, improved pre-provision earnings, and diminished refinancing risks following the bank's recent restructuring, and its better loss absorption cushion compared to low rated peers in its domicile (Kazakhstan).

CNO Financial Group Review for Upgrade

5 Sep ‘12 6 Feb ‘14

Senior Secured Debt Rating Ba3 Ba3 (Review for Upgrade)

Insurance Financial Strength Rating Ba1 Ba1 (Review for Upgrade)

The review is driven by improvements in CNO's ability to sustain and improve revenue and earnings growth in its core business segments as well as improving trends in the economy. There have been improvements in asset quality, profitability and financial flexibility.

RATING CHANGES Significant rating actions taken the week ending 7 February 2014

31 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Genworth Mortgage Insurance Corporation Upgrade

5 Dec ‘13 5 Feb ‘14

Insurance Financial Strength Rating Ba2 Ba1

Genworth Residential Mortgage Insurance Corporation of North Carolina

Upgrade

5 Dec ‘13 5 Feb ‘14

Insurance Financial Strength Rating Ba2 Ba1

The upgrade of Genworth's US mortgage insurance subsidiaries reflects the improving capital profile of these operations following a $400 million capital contribution. It also reflects improving business fundamentals, a return to profitability in 2013, and a continued reduction in legacy losses.

RATING CHANGES Significant rating actions taken the week ending 7 February 2014

32 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Sovereigns Mexico

Upgrade

21 Dec ‘13 4 Feb ‘14

Government Currency Rating Baa1 A3

Foreign Currency Deposit Ceiling Baa1 A3

Foreign Currency Bond Ceiling A1 A1

Local Currency Deposit Ceiling A1 Aa3

Local Currency Bond Ceiling A1 Aa3

Outlook Stable Stable

Our upgrade is driven by the structural reforms approved last year, which we expect will strength Mexico’s growth prospects and fiscal fundamentals. They should lead to a firm but gradual improvement in credit metrics, reinforcing an already robust credit profile.

Paraguay Upgrade

8 Jan ‘14 4 Feb ‘14

Government Currency Rating Ba3 Ba2

Foreign Currency Deposit Ceiling B1 Ba3

Foreign Currency Bond Ceiling Ba1 Ba1

Local Currency Deposit Ceiling Ba1 Baa3

Local Currency Bond Ceiling Ba1 Baa3

Outlook Stable Positive

The factors driving the upgrade are:

» The improving standing of Paraguay's key fiscal metrics relative to Ba peer medians

» A strengthened institutional framework as a result of the legislation package that was approved last year

» A smooth political transition since the impeachment of former president Fernando Lugo in 2012.

Black Sea Trade and Development Bank (BSTDB) Upgrade

16 Dec ‘13 4 Feb ‘14

Long-Term Issuer Rating A3 A2

Outlook Review for Upgrade Stable

Adoption of our rating for multilateral development banks and other supranationals on 16 December drove the upgrade. We have changed our assessment of the concentration in BSTDB’s loan portfolio. We have also changed our assessment of the contractual support provided by its members.

RATING CHANGES Significant rating actions taken the week ending 7 February 2014

33 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Sub-sovereigns City of Athens, Greece

Upgrade

5 Dec ‘13 6 Feb ‘14

Debt rating C Caa3

Outlook Review for Upgrade Stable

The main driver of the upgrade is the fact that Athens has cured a default on its debt obligations. In December, Athens paid the remaining €675,000 interest on arrears requested by the Agricultural Bank of Greece's (ATEbank) liquidation commission in order to fully settle the €29.5 million loan it incurred in 2003. We note that the default on the ATEbank loan was an isolated incident and that Athens has regularly made interest and principal payments on other borrowings.

Cities of Kyiv and Kharkiv, Ukraine Downgrade

25 Sep ‘13 4 Feb ‘14

Issuer Rating Caa1 Caa2

Outlook Review for Downgrade Negative

The main driver of the downgrade is the deterioration of the Ukrainian government's credit profile, as reflected in our downgrade of the sovereign's Caa1 bond rating to Caa2 with negative outlook on 31 January. The deterioration in Ukraine's credit profile has direct implications for the ratings of Kyiv and Kharkiv, given their institutional, financial and macroeconomic links to the central government.

US Public Finance Puerto Rico

Downgrade

12 Dec ‘13 7 Jan ‘14

General Obligation Rating Baa3 Ba2

Outlook Review for Downgrade Negative

Our downgrade has its origins in longstanding problems, such as years of deficit financing, pension underfunding, budgetary imbalances, and seven years of recession. We acknowledge the aggressive actions taken to address these problems and see signs of stabilization, but not the kind of growth necessary to reverse the negative financial trends.

RATING CHANGES Significant rating actions taken the week ending 7 February 2014

34 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Structured Finance Reviews of Seven SLM Student Loan Trusts Completed On 31 January, we downgraded 13 classes, confirmed five classes and affirmed nineteen classes of notes issued by seven SLM Student Loan trusts, affecting approximately $9.6 billion in asset-backed securities. Sallie Mae, Inc., a wholly owned subsidiary of SLM Corporation, is the sponsor, administrator and servicer of the trust. The underlying collateral consists of student loans that are guaranteed under the Federal Family Education Loan Program (FFELP). All trusts have exposure to cross currency swaps with the counterparty ratings ranging between Aa3 and Baa1. The downgrades reflect the impact of exposure to weaker swap counterparties, following the introduction of our updated approach to assessing swap counterparty linkage in structured finance transactions.

Synthetic Collateralized Debt Obligations Issued by LaCrosse Financial Products Downgraded On 3 February, we downgraded $1.2 billion of synthetic collateralized debt obligations referencing a portfolio of corporate senior unsecured bonds originally rated in 2006; the bonds were issued by LaCrosse Financial Products. The rating action reflects changes to our modeling assumptions, which include removing the 30% macro default probability stress for corporate credits and lowering the average recovery rate assumptions for most types of debt. The action also reflects deterioration in the transaction's performance.

RESEARCH HIGHLIGHTS Notable research published the week ending 7 February 2014

35 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Corporates

South Africa Mobile Charge Changes Will Hit MTN, Vodacom Revenues But Boost Smaller Players

South Africa’s recent cuts to its mobile termination rates are credit negative for the country’s two largest mobile players, MTN Group Ltd and Vodacom Ltd. We expect the charge changes will curb both companies’ future capital expenditure plans in South Africa, which could erode their competitive advantage in terms of service quality and result in a slower rollout of better technologies.

SGL Monitor Flash: Speculative-Grade Liquidity Weakens Slightly in January

US speculative-grade corporate liquidity weakened slightly in January, reflecting difficulties at a handful of companies amid otherwise solid market conditions. Our Liquidity-Stress Index rose to 4.5% from 4.2% a month ago, but remains far below its long-term average of 7.1% since 2002. The index is consistent with our forecast that the US speculative-grade default rate will decline to 1.7% in June before rising to a benign 2.3% at year-end.

United States and Canadian Broadband Communications: Digital Communications Advances Are Accelerating Change For Broadband Communications Companies

The standardization of high-speed unified Internet Protocol is intensifying competition among companies. We expect broadband communications companies will invest in distributable content and other applications aimed at differentiating network offerings. The increased competition may also lead to consolidation pressures because business combinations can effectively increase scale.

Refunding Risk and Needs 2014-18: US Speculative-Grade Corporations: Maturity Wall Moves Out to 2018, Easing Risk of Higher Interest Rates

Record debt issuance and low interest rates have enabled even low-rated US companies to refinance and delay debt maturities, increasing risk over the medium term, since the majority of bonds and credit facilities now come due in 2017-18. While the refunding needs of US investment-grade companies continue to rise, maturing amounts are about evenly distributed across the next five years.

Refunding Risk and Needs: US Investment-Grade Corporations: Five-Year Debt Maturities Rise 13%, But Remain Manageable Amid Strong Issuance

Investment-grade US non-financial companies have $793 billion of bonds maturing in 2014-18, up from $701 billion in 2013-17. However, absent an extraordinary market shock, investment-grade companies should have solid market access and be able to successfully refinance their maturities.

Indian Oil and Gas Industry: More Subsidized Cooking Gas for Consumers Is Credit Negative for Indian Oil Companies

The amount of subsidized cooking gas available to each household in India will increase to one 14.4 kilogram cylinder per month, up from the current nine cylinders per fiscal year. This change is credit negative for India’s three state-owned oil marketing companies because they must sell more liquefied petroleum gas at mandated below-market prices, which increases the fuel subsidies they need to absorb until they receive a full or partial payment from the government.

RESEARCH HIGHLIGHTS Notable research published the week ending 7 February 2014

36 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

US Tobacco Industry: CVS Plan to End Tobacco Sales Is Modestly Credit Negative for Tobacco Companies

The expected revenue decline from CVS’s discontinued tobacco sales represents less than 1% of US tobacco sales. However, if other leading pharmacy retailers follow suit, we expect most tobacco consumers will switch to other retailers, such as gas stations and convenience stores, which make up anywhere from 60%-70% of tobacco sales.

Brazilian Airline Industry: Weak Demand Growth Suggests a Slower Ascent for Airlines in 2014

The expanding middle class in Brazil and the shift from ground to air transportation for long-distance travel have led flight demand to exceed GDP growth by around two to three times for about a decade. At the same time, since 2012, weakening economic growth has reduced passenger demand growth. After 2014, however, the domestic airline industry should continue to benefit from the enlarged middle class that is now more than 53% of the Brazilian population.

Moody's Asian Liquidity Stress Index Our Asian Liquidity Stress Index rose for a second month in January, to 22.4% from 20.0% in December. The index remains well below the record high of 37% reached during the fourth quarter of 2008 amid the global financial crisis and is just above the long-term rolling average of 20%.

UK Auto Retailers' Profitability To Rise In 2014 As High-Margin After-Sales Market Thaws

We expect strong low single-digit percentage growth in new UK car registrations in 2014 as the UK economy strengthens and supports rising consumer confidence. We expect similar growth in repair and maintenance segments, which will improve UK auto retailers’ credit metrics, especially debt coverage ratios, and provide them with an opportunity to deleverage.

North American Solid Waste Industry: Modest Acceleration in GDP Growth to Buoy Volume As Pricing Gains Remain Limited

We maintain a stable outlook on the North American solid waste industry based on our expectations for steady operating income growth. We expect waste volume to grow 1.5% in 2014 and 1.7% in 2015, owing to increasing industrial activity and business formation; an uptick in household formation; the continued recovery in new housing construction; and improving consumer confidence.

Japan Free Trade Commission's Investigations of Japanese Shippers Are Credit Negative But Will Not Immediately Impact Ratings or Outlooks

The Japan Fair Trade Commission’s charges that Japanese shippers have allegedly violated Japanese anti-monopoly regulations could lead to the payment of surcharges, which will reduce the companies’ earnings and liquidity. But the charges will not have an immediate rating impact, because operating performance improvements will help to soften the impact of the charges on net income.

RESEARCH HIGHLIGHTS Notable research published the week ending 7 February 2014

37 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

US Homebuilding Industry - Real Household Income Must Improve for Strong Profit Growth to Be Sustained

Our outlook for the US homebuilding industry remains positive, although less so than it was six months ago. We continue to believe that industry revenues will grow more than 10% and weighted industry gross margins will exceed 20% in the coming year, our benchmarks for staying positive. However, real household income, which has been stagnant since 1999, needs to begin growing considerably in order to propel homebuilders toward sustained growth.

Infrastructure

US Utilities Re-Focus on Rate-Regulated Business for Earnings Stability and Growth

Most utility and hybrid integrated power holding companies will invest more heavily in their regulated businesses over the next few years. We view this “back to basics” strategy positively, as it tends to reduce earnings and cash flow volatility through an increased reliance on less risky rate-regulated business activities.

US Utility Sector Upgrades Driven by Stable and Transparent Regulatory Frameworks

We recently upgraded most US investor-owned utilities and many of their holding companies due to our view that the US regulatory environment has improved over the past several years. Most of the companies we placed on review for upgrade in November 20131 were upgraded in late January 2014, and most by one notch. A more favorable regulatory environment allows US regulated utilities to generate relatively stable and predictable revenue and cash flow, which can support a material amount of leverage.

RESEARCH HIGHLIGHTS Notable research published the week ending 7 February 2014

38 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Financial Institutions

Modeling System-Wide Trends In Banks’ Asset Quality

We describe an approach for relating developments in asset quality to the broader economic and financial environment, using simple modeling techniques. Developments in asset quality are an integral part of our global bank rating methodology, as changes in asset quality can affect capital generation and its erosion. The output from these analyses can help uncover emerging trends and potential risks in banks’ credit portfolios.

Australia’s Mutual Financial Institutions: Competition Remains a Key Challenge Moderate credit growth and rising competition are pressuring the growth and profitability of Australia’s diverse mutual financial institutions. However, generally strong balance sheets, the conservative bias inherent in their business models, and an above-average degree of customer loyalty built on their niche franchises, will continue to support their credit quality.

New Rules for France’s Specialised Financial Institutions the Sociétés Financières: Frequently Asked Questions

Our FAQ addresses investor questions on the recent legal ruling that affects the regulation of France’s specialized lenders and covered bond issuers formerly classified as sociétés financiers. The ruling is overall credit positive for those institutions we rate.

Q4 2013 Insurance CDS Spreads Tighten: US Health Insurers in Focus

CDS spreads narrowed across all insurance sectors during the last quarter of 2013, as business confidence improved. The report reviews the performance of the Moody's Global Insurance Credit Default Swap Index during the fourth quarter of 2013, focusing on the performance of US health insurers.

RESEARCH HIGHLIGHTS Notable research published the week ending 7 February 2014

39 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

Sovereigns

Key Drivers for Upgrading Paraguay's Ratings to Ba2, Changing Outlook to Positive

The factors driving the upgrade are the improving standing of Paraguay's key fiscal metrics relative to those of its rating peers, a strengthened institutional framework as a result of the legislation package that was approved last year, and a smooth political transition since the impeachment of former president Fernando Lugo in 2012.

QE Tapering: Impact Differs Among Emerging Markets

The reduced global liquidity arising from the US Federal Reserve’s gradual tapering, or quantitative easing, of its stimulus measures is having a limited impact on the credit quality of emerging market countries. The degree of impact varies country by country, but those with external imbalances or a reliance on external funding have been most vulnerable.

Moody's Sovereign Monitor - Focus on Ukraine

We summarize our recent research focused on the intensifying credit challenges facing Ukraine. These include deteriorating government finances, rising external liquidity risks, political turmoil and escalating social unrest.

Sub-sovereigns

Sochi 2014 Winter Olympics: Uncertainty Over Long-term Legacy Overshadows Benefits

Although the host city of Sochi and the Krasnodar region have benefitted from government funding, the costs of maintaining Games-related facilities are likely to weigh on their credit profiles. For Russian corporates the credit impact will be mixed: whilst retailers are likely to report a boost in sales, the long-term prospects for Sochi's tourism industry are uncertain.

RESEARCH HIGHLIGHTS Notable research published the week ending 7 February 2014

40 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

US Public Finance

Lower Liabilities, Higher Costs: Pensions Still Weigh on US Local Governments in 2014 Defined benefit pension costs will continue to weigh on US municipal budgets in 2014 despite some reductions in liabilities. Rising interest rates and strong investment performance have lowered liabilities going into 2014, but elevated funding costs will outweigh the benefit of these declines.

Contingent Liabilities and Enterprise Risk Continue to Weigh on US Local Governments

Guaranteeing the debt of non-essential, non-core enterprises can have a devastating impact on the credit quality of local governments. Although numbers remain small, more local governments assumed such enterprise risk during the economic downturn and slow recovery.

US Governors Signal Shift to Restore Core State Spending Cuts

Optimistic about their states’ economies and finances, far more US governors have been saying they will pursue additional spending, specifically for education and infrastructure, or tax reductions, in their state of the state addresses this year as compared to immediately preceding years.

Structured Finance

Spanish Public-Sector Covered Bonds: Liquidity Programmes Mitigate Risks of Regional and Municipal Debt in Cover Pools

Thirteen new Spanish municipalities recently joined another 88 in making use of the extraordinary financial support programme available to municipalities under financial strain. Designed to help regional and local governments (RLGs) improve their liquidity positions, the Spanish Liquidity support programmes are credit positive for public-sector covered bonds because of the prevalence of RLG debt in Spanish public-sector cover pools.

Post IPO, Santander Consumer’s Auto ABS Will Continue to Benefit from Banco Santander Spanish bank Banco Santander remains the majority owner of Santander Consumer USA (SCUSA), following the US auto lender’s initial public offering, a credit positive for SCUSA’s asset-backed securitizations. Because of its large ownership stake, we believe that Banco Santander will maintain its vested interest in the future of SCUSA and will likely continue to support the US company.

European ABCP: Suggested Amendments to Proposed Money Market Funds Regulation Are Less Restrictive for ABCP Asset Eligibility

Suggested amendments to proposed EC money market fund regulations would allow funds to invest in asset-backed commercial paper that is backed a wider variety of eligible assets beyond the solely trade-receivables currently contemplated. The credit implications are neutral.

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

41 MOODY’S CREDIT OUTLOOK 10 FEBRUARY 2014

NEWS & ANALYSIS Corporates 2

» Booz Allen Hamilton’s Special Dividend Is Credit Negative » Chilean Retailer SMU Extends Bank Debt Maturities, a Credit

Positive » Rexam Plan to Return Proceeds from Healthcare Division

Sale to Shareholders Is Credit Negative

Infrastructure 5

» United Airlines Cutback of Hub Operations at Cleveland Airport Is Credit Negative

» SABESP’s Plan to Reduce Water Consumption Will Hurt Cash Flow and Profitability

» Enagas’ $491 Million Acquisition of TgP Stake Is Credit Negative

Banks 8

» Court Approval of Bank of America Mortgage Settlement Is Credit Positive

» Improper Trading Charges Against Chilean Brokerages Are Credit Negative

» European Banking Authority Stress Test Details Are Credit Positive for Banks

» Lloyds’ Payment Protection Insurance Provisions Overshadow Improving Fundamentals

» Lithuania’s Participation in ECB Comprehensive Assessment Will Improve Bank Transparency

» Azerbaijan Tightens Consumer Lending Regulations, a Credit Positive

» India’s Framework to Resolve Distressed Assets Is Credit Positive for Banks

MOODYS.COM

Report: 164343

© 2014 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. (“MIS”) AND ITS AFFILIATES ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY’S (“MOODY’S PUBLICATIONS”) MAY INCLUDE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY’S OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. CREDIT RATINGS AND MOODY’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY’S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

MOODY’S CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS FOR RETAIL INVESTORS TO CONSIDER MOODY’S CREDIT RATINGS OR MOODY’S PUBLICATIONS IN MAKING ANY INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.

ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.

All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moody’s Publications.

To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.

To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.

NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.

MIS, a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Shareholder Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

For Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail clients. It would be dangerous for “retail clients” to make any investment decision based on MOODY’S credit rating. If in doubt you should contact your financial or other professional adviser.

EDITORS PRODUCTION ASSOCIATE News & Analysis: Jay Sherman, Elisa Herr and Neil Buckton

David Dombrovskis

Ratings & Research: Robert Cox Final Production: Barry Hing