MOODYS.COM

29 JUNE 2015

NEWS & ANALYSIS Corporates 2 » Darden’s Planned Use of Real Estate Proceeds to Pay Down

Debt Is Credit Positive » Marfrig’s Planned Sale of Moy Park Unit Is Credit Positive » Petrofac’s $500 Million Increase in Net Debt Is Credit Negative » Ardagh’s Metal Can Packaging Business IPO Would Provide

Funds to Reduce Debt

Infrastructure 6 » Brazil’s Higher Appeals Court Rules Against CEMIG on

Generation Concessions, a Credit Negative

Banks 8 » Finalized Basel III Stable Funding Disclosure Standards Will

Improve Bank Transparency » Brazil’s Sharply Weakening Labor Market Is Credit Negative for

Retail Banks » Italy’s Measures to Reduce Nonperforming Loans Are

Credit Positive » PKO Bank Polski’s Full Profit Retention Will Boost Tier 1

Capital, a Credit Positive » China’s Removal of Loan-to-Deposit Cap Is Credit Positive for

Chinese Banks » Singapore Proposes Limited Bank Resolution and Bail-in

Regime, a Positive for Banks’ Senior Creditors » Japan Post Bank, Sumitomo Mitsui Trust and Nomura Asset

Management Joint Venture Would Be Credit Positive

Asset Managers 21 » IOSCO Steps Back from Bank-Like Oversight of Asset

Managers, a Credit Positive for Large Asset Managers

Sub-sovereigns 22 » Czech Municipalities Would Benefit from Larger Share of

Country’s Value Added Tax

US Public Finance 24 » Puerto Rico’s General Obligation Bonds Face Threat from Bill

Allowing Suspension of Monthly Debt-Service Deposits » Jacksonville, Florida, Approves Credit-Positive Pension Reforms

RATINGS & RESEARCH Rating Changes 28

Last week we downgraded Sumitomo Corporation, CEZ, Banco PSA Finance Brasil, Burgan Bank, HSBC Bank A.S. (Turkey) and Civitavecchia (Italy), and upgraded Delta Air Lines, SABMiller, SGSP (Australia) Asset, Jemena, China Merchants Holdings International, PICC Life Insurance, PICC P&C Insurance, Radian Group, Socram Banque, Volkswagen Bank, Volkswagen Leasing and multiple tranches of US subprime RMBS, among other rating actions. Additionally, we took rating actions on the various obligations of banks in the Netherlands, France, Italy and Luxembourg as a result of implementing our updated rating methodology for banks.

Research Highlights 38

Last week we published on North American building materials, global consumer packaged goods, Russian steelmakers, German mobile telecom, Japanese shipping, China property developers, US engineering and construction companies, US food distributors, US retailers, Australian food and grocery, US chemical, Perusahaan Listrik Negara, European banks, US health insurers, US mortgage servicers, Canadian banks and insurers, German banks, French banks, Italian banks, Singaporean banks, Tunisia, Greece, China, Costa Rica, Lebanon, the European Stability Mechanism, Mexico City, US hospitals, US states, US structured finance, US RMBS, Japanese RMBS, Australian RMBS, US GSEs, US single-family rental securitizations, Japanese REITs and Japanese installment sales loan securitizations, among other reports.

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Thursday’s Credit Outlook 46 » Go to Last Thursday’s Credit Outlook

NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Corporates

Darden’s Planned Use of Real Estate Proceeds to Pay Down Debt Is Credit Positive Last Tuesday, Darden Restaurants, Inc. (Ba1 positive) said that it had planned to transfer around 430 of its restaurant properties to a real estate investment trust and enter into separate sale-leaseback transactions on 75 other properties. The plan is credit positive because it reflects a balanced financial policy approach to the use of proceeds, which the company will use to pay down $1 billion of its approximately $1.46 billion of debt outstanding as of 31 May.

In response to this announcement, as well as our expectation that Darden’s operating performance, earnings and credit metrics will gradually improve, we changed our outlook on Darden’s ratings to positive from stable.

The real estate plan is the outcome of a review of strategic alternatives by Darden’s board of directors after activist investor Starboard Value succeeded in replacing the previous board with its own slate of nominees last October1. Although Darden’s planned real estate transactions will increase lease-adjusted debt of just over $800 million, the increase will be smaller than the planned $1 billion reduction in funded debt by the end of 2015. However, the transaction will hurt the company’s earnings because the resulting decline in depreciation expense of about $40 million and interest savings of around $45 million will not offset higher GAAP rent costs of about $135 million.

Operating performance, earnings and credit metrics should gradually improve as management continues to focus on driving profitable same-store sales growth, reducing costs and lowering adjusted debt levels. We expect Darden’s liquidity to remain good. Persistently soft consumer spending, a high level of promotions and discounting by competitors and leadership changes will remain key impediments to a sustained turnaround at Darden’s Olive Garden restaurant chain. We also believe that management’s financial policy toward shareholders will remain very aggressive.

1 See Shareholders Replace Darden’s Entire Board, Adding Risk to Already Difficult Turnaround, 16 October 2014.

William V. Fahy Vice President - Senior Credit Officer +1.212.553.1687 william.fahy@moodys.com

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

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Marfrig’s Planned Sale of Moy Park Unit Is Credit Positive On 21 June, Marfrig Global Foods S.A. (B2 stable) said that it had agreed to sell its Moy Park Holdings (Europe) Limited (B1 stable) unit to JBS S.A. (Ba2 stable) for $1.5 billion (BRL4.65 billion), including the assumption of Moy Park’s net debt of £200 million. The sale is credit positive for Marfrig because it intends to use the proceeds to reduce debt.

The companies expect to complete the transaction in the second half of 2015. The Moy Park sale will accelerate Marfrig’s deleveraging efforts. If the company were to use all of the sale proceeds to pay down existing debt, adjusted gross leverage would decline to 5.7x from 7.9x for the 12 months ended 31 March 2015 (assuming an exchange rate of BRL3.10 to the US dollar).

Moy Park generated annual EBITDA of BRL431.1 million for the 12 months ended 31 March, or about 23% of Marfrig’s consolidated EBITDA. After the sale, Marfrig will focus on organic growth in its two remaining business segments, Marfrig Beef, a Brazilian beef operation, and Keystone, a food service supplier that operates in the US and Asia.

As for JBS, the acquisition is credit neutral given the company’s sizable cash position. At the end of the first quarter of 2015, JBS had BRL14.1 billion in cash and an adjusted debt/EBITDA of 3.9x.

Although the funding structure for the Moy Park transaction was not disclosed, we expect that JBS will fund at least a portion of the transaction with debt. Even if JBS were to fund the entire purchase with debt, adjusted leverage would rise relatively modestly to 4.4x, and decline to 4.2x after the full integration of Moy Park, considering the latter’s EBITDA margin of 7.5% for the 12 months ended 31 March.

Erick Rodrigues Assistant Vice President - Analyst +55.11.3043.7345 erick.rodrigues@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Petrofac’s $500 Million Increase in Net Debt Is Credit Negative Last Tuesday, oil- and gas-focussed construction company Petrofac Limited (Baa2 review for downgrade) announced that its net debt had increased by approximately $500 million to $1.2 billion as of 31 May. The company attributed the increase to capital expenditures on its Greater Stella Area project and offshore installation vessel, payment of its final 2014 dividend and incremental costs on its loss-making Laggan-Tormore project.

The increase is credit negative because it increases our adjusted net debt/EBITDA and reduces headroom under the company’s bank covenants. We estimate that adjusted net debt/EBITDA will rise by approximately 0.7x to 2.7x, based on 2014 adjusted EBITDA of $652 million.

As of 31 December 2014, the company’s net debt/non-adjusted EBITDA was just over 1.0x, leaving Petrofac substantial headroom on its 3.0x covenant. The approximately $500 million increase in net debt increases that by 0.5x and worsens our previous expectation that Petrofac would have weaker covenant headroom over the next 12 months following substantial losses affecting EBITDA in 2015.

The approximately $430 million cumulative loss on the Laggan-Tormore project marks the first time that Petrofac has had a loss on any project in its core Onshore Engineering & Construction (OEC) division. The company now estimates that pre-tax costs are approximately $250 million, ignoring the recognition of a deferred tax asset and compared with an April estimate of $195 million.

TOTAL S.A. ((P)Aa1 stable) at the end of 2010 awarded the Laggan-Tormore project to Petrofac to build a gas plant on the Shetland Islands for a contract price of £800 million. However, the project has suffered a number of delays and cost overruns as a result of weather, labour issues, requirements to rectify work and problems with sub-contractors. We put Petrofac’s ratings on review for downgrade in April following its announcement of losses on major projects in its portfolio. The review will focus mainly, but not exclusively, on the timely and successful execution of the Laggan-Tormore project.

Between February and April, the company’s estimates of costs on the project increased by £130 million, with the company in April stating that challenges in the Laggan-Tormore project continue to be the main risk to earnings and cash-flow generation in 2015. Among those challenges is an expensive unionised labour force with low productivity, a much larger exposure of the contract to construction (80% versus approximately 20% in most other contracts) and challenging operating conditions in the Shetlands. In this context, last week’s announcement of a £30 million additional loss is significantly better than our downside scenario.

The Laggan-Tormore project is now substantially complete, with final completion and pre-commissioning-related activities remaining before the company can deliver its first gas in the third quarter of this year.

Despite the challenges with Laggan-Tormore, Petrofac’s backlog as of 31 May was near an all-time high of $20.5 billion after another successful year of new awards, which provides substantial earnings visibility. The company at the start of 2015 identified approximately $25 billion of prospective work on which its OEC division planned to bid this year. This year, we expect a combination of a healthier market in the Middle East and North Africa, relative to the rest of the world, and the company’s strong position the region to result in more contract wins.

Douglas Crawford Vice President - Senior Analyst +44.20.7772.5215 douglas.crawford@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Ardagh’s Metal Can Packaging Business IPO Would Provide Funds to Reduce Debt Last Tuesday, Luxembourg-based glass and metal container producer Ardagh Packaging Group Ltd. (B3 stable) announced that Oressa Limited, a wholly owned subsidiary that the company formed to acquire its metal can packaging business, had filed a registration statement with the US Securities and Exchange Commission for an initial public offering (IPO). Ardagh indicated that its objective is to raise approximately €2 billion via Oressa’s IPO of around €500 million and a concurrent debt issuance of around €1.5 billion, or 5x EBITDA. Although Ardagh has not yet specified how it will allocate the IPO and debt proceeds, we expect that it will use at least 75%, if not all of the funds, to repay existing debt, a credit positive.

Because of an announcement earlier this month that private-equity firm Apollo Global Management will acquire Compagnie de Saint-Gobain SA’s (Baa2 stable) glass packaging unit Verallia, which we regarded as a potential acquisition target for Ardagh, we do not believe the IPO is linked to any further acquisitions.

Based on our EBITDA forecast of around €950 million for 2015, Ardagh’s Moody’s-adjusted leverage would decline by around 0.5x to a little below 6.0x. Ardagh’s debt of €5.5 billion as of March 2015 includes a portion of relatively expensive older bonds, more than €1 billion of which become callable in September. Refinancing this €1 billion of older debt would reduce Ardagh’s annual cash interest burden by at least €32.5 million annually, assuming an average coupon on existing bonds of 6.5%, and increase free cash flow as a percentage of debt by around 0.5%.

Ardagh’s metal can packaging business operates 54 production facilities in 20 countries, serves approximately 1,300 customers and employs more than 7,000 people. After the IPO, Ardagh will continue to hold a controlling stake in Oressa.

The IPO, which the company expects to take place before year end, is likely to lead to positive pressure on Ardagh’s ratings.

Simon West Associate Analyst +44.20.7772.5479 simon.west@moodys.com

Martin Chamberlain Vice President - Senior Analyst +44.20.7772.5213 martin.chamberlain@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Infrastructure

Brazil’s Higher Appeals Court Rules Against CEMIG on Generation Concessions, a Credit Negative Last Wednesday, Supremo Tribunal de Justiça, Brazil’s higher appeals court, ruled against CEMIG Geração e Transmissão (CEMIG-GT, Ba1 negative), the generation and transmission arm of Companhia Energetica de Minas Gerais - CEMIG S.A. (Ba1 negative), on the automatic renewal of a concession to operate the Jaguara hydroelectric power plant (HPP). This is credit negative for one of Brazil’s largest electricity generation groups.

CEMIG claims that it has the right of automatic renewal for an additional 20 years to continue operating the Jaguara hydroelectric concession, which expired in August 2013, the Sao Simao concession, which expired in January 2015, and the Miranda concession, which will expire in December 2016. CEMIG currently has total installed capacity of 7,717 megawatts (4,470 average megawatts of physical energy2).

With this court ruling, which is subject to an appeal by CEMIG, the company could lose approximately 41% of its generation capacity in the next 12-18 months (Jaguara accounts for an average of 336 megawatts, while Sao Simao accounts for 1,281 and Miranda accounts for 202). This would likely put significant negative pressure on CEMIG-GT’s liquidity, which is further exacerbated by the return of 18 other HPPs between July 2015 and February 2017. These concessions total 642 average megawatts and are not eligible for additional renewals because they were renewed once already.

CEMIG in August 2013 won an injunction from the higher appeals court that has allowed the company to keep operating the Jaguara concession, and has significantly benefitted the company amid extraordinarily high energy spot prices in the second half of 2013 and 2014 as a result of Brazil’s drought. By selling surplus (i.e., non-contracted) energy at an average price of BRL689 per megawatt-hour (MWh), the company had windfall revenues of approximately BRL2.3 billion just in 2014. Notwithstanding a lower electricity spot price ceiling in 2015 of BRL388 per MWh, CEMIG-GT still managed to generate revenues of BRL1.0 billion in the first quarter of 2015, versus BRL1.3 billion in the same period in 2014.

To fulfill its strategic objectives once the aforementioned concessions are returned, CEMIG must contract electricity to meet existing power purchase commitments with consumers in the free market (composed of industrial consumers) to replace the potential loss of 2,461 average megawatts by 2017, which will significantly expose it to the volatility of the spot market.

Based on CEMIG’s energy balance guidance, which we use as our base case, and assuming that all 21 concessions will be returned to the Brazilian government (the granting authority) by February 2017, we expect that the effects of the ongoing drought conditions and high spot prices on CEMIG-GT will result in 2015-17 cash flow from operations (CFO) pre-working capital (WC) of BRL871.5 million; a CFO pre-WC minus dividends-to-debt ratio of 4.9%; CFO pre-WC interest coverage of 2.0x; CFO pre-WC-to-debt of 12.6%; and debt/EBITDA of 4.0x (see exhibit). In contrast, if CEMIG-GT manages to maintain the three HPPs via a new court injunction, approximately 1,620 average megawatts would be available for sale at spot prices over the next three years, according to company. We estimate that this would add approximately BRL3 billion of operating revenues. However, we expect that another legal process would be lengthy, with an uncertain outcome.

2 Physical energy is the maximum electricity output of a hydroelectric power plant that can be maintained during a

continuous period.

Alexandre de Almeida Leite Vice President - Senior Credit Officer +55.11.3043.7353 alexandre.leite@moodys.com

Daniel Lima Associate Analyst +55.11.3043.6079 daniel.lima@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Moody’s Estimates of CEMIG Geração e Transmissão’s Three-Year Average Metrics, 2015-17 Cash Flow from Operations (CFO) Pre Working Capital (WC)

BRL872 million CFO Pre WC BRL1,552 million

CFO Pre WC - Dividends / Debt 4.9% CFO Pre WC - Dividends / Debt 11.6%

CFO Pre WC Interest Coverage 2.01x CFO Pre WC Interest Coverage 2.91x

CFO Pre-WC / Debt 12.6% CFO Pre-WC / Debt 26.1%

Debt / EBITDA 4.00x Debt / EBITDA 2.19x

Source: Moody’s Investors Service estimates

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Banks

Finalized Basel III Stable Funding Disclosure Standards Will Improve Bank Transparency Last Tuesday, the Basel Committee on Banking Supervision finalized standards for bank disclosure of its net stable funding ratio (NSFR) calculations. The disclosure standards are positive for creditors of internationally active banks because they will improve transparency into bank funding, allowing investors to assess the adequacy and reliability of funding for a bank’s least-liquid assets, including loans.

The disclosure template provides detailed information on available stable funding and required stable funding, including residual maturity of assets and liabilities, and it is aligned with disclosure standards for the complementary and shorter-term liquidity coverage ratio (LCR). NSFR disclosure standards will be required beginning with a bank’s first reporting period after 1 January 2018.

The NSFR disclosure requirements will form part of the Basel capital and liquidity framework required Pillar 3 disclosures. These disclosures provide additional financial transparency along with periodic financial statements and are an important contributor to market discipline. Many large, internationally active banks already disclose NSFR-related data, so many banks will likely adopt this disclosure template before 2018.

In addition to providing transparency on the stability and duration of bank funding, NSFR disclosures will improve the funding comparability of international banks across jurisdictions. Comparisons can be challenging, owing to differences in accounting standards or national implementation of global standards such as the Basel framework. Also, the NSFR template will improve existing funding disclosures by banks of asset and liability maturities by showing maturities in a standardized manner across the balance sheet and on a weighted-amount basis.

Detailed NSFR disclosure is positive for bank investors evaluating a bank’s liquidity and stable funding position since the ratio is distinct from the LCR, measuring a different type of funding risk. The LCR measures whether banks hold enough high-quality liquid assets (HQLA) that could be liquidated to cover stressed cash outflows (e.g., deposit outflows and maturing liabilities that cannot be rolled over) over a 30-day period. The NSFR measures whether funding of longer duration adequately supports less liquid longer-term assets such as loans.

The NSFR template aligns with the LCR disclosure template, which for investors provides some consistency in evaluating short- and long-term liquidity risks. Both, for example, require disclosure of stable and less stable retail deposits, and wholesale deposits used for operational purposes. These disclosures are used to calculate stressed cash outflows in the LCR, and in the NSFR are categories of available stable funding.

The Basel Committee noted that in formulating the template, it balanced usability of disclosure with “undesirable dynamics during stress.” Although the Basel Committee did not specify exactly how it achieved the trade-off in the disclosure framework, this has likely restricted funding transparency to some degree.

In addition to a standardized reporting template, the NSFR disclosure standards require qualitative disclosures that are important in evaluating a bank’s stable funding position. The disclosure of interdependent assets and liabilities, which are assigned 0% required stable funding and available stable funding factors in the NSFR calculation, is key because the interdependency is judged by national discretion and could drive significant differences in ratios across banks. The disclosures also will describe drivers of changes in the NSFR categories across reporting periods, which should help investors understand how a bank’s NSFR has changed over time.

Meredith Roscoe Vice President - Senior Research Analyst +1.212.553.7258 meredith.roscoe@moodys.com

Laurie Mayers Associate Managing Director +44.20.7772.5582 laurie.mayers@moodys.com

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Below, we show a shortened version of the NSFR template, highlighting major categories of assets and liabilities.

Condensed Version of Basel’s Net Stable Funding Ratio Disclosure Template

Unweighted Value by Residual Maturity

No Maturity

Less than Six Months

Six Months to Less than One Year

Equal to or Greater than One Year

Weighted Value

Available Stable Funding Item

Capital

Retail deposits and deposits from small business customers

Wholesale funding

Liabilities with matching interdependent assets

Other liabilities

Total Available Stable Funding

Required Stable Funding Item

Total NSFR high-quality liquid assets

Deposits held at other financial institutions for operating purposes

Performing loans and securities

Assets with matching interdependent liabilities

Other assets

Off-balance sheet items

Total Required Stable Funding

Net Stable Funding Ratio (Percent)

Source: Basel Committee on Banking Supervision, Net Stable Funding Ratio Disclosure Standards, June 2015

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Brazil’s Sharply Weakening Labor Market Is Credit Negative for Retail Banks Last Thursday, the Instituto Brasileiro de Geografia e Estatística, Brazil’s statistics bureau, reported that May unemployment rose to 6.7% from 4.3% in December and that inflation-adjusted average wages had fallen 7.9% since November, with both trends accelerating in the past month (see Exhibit 1). The deterioration in the labor market since late 2014, which ends a decade of cumulative gains in employment, will lead to an increase in bad loans at Brazilian retail lenders, a credit negative.

EXHIBIT 1

Brazil’s Unemployment Rate and Average Wages

Source: Instituto Brasileiro de Geografia e Estatística:

Among the banks that will be most negatively affected are retail lenders such as Banco Pan S.A. (Ba2/Ba2 negative, b13), Banco Votorantim S.A. (Baa3/Baa3 negative, ba1) and Banco Mercantil do Brasil S.A. (B2 negative, b2), which have 60%-75% of their lending portfolios tied up in household credit. These banks already have poor profitability, which has weakened their capacity to generate capital and leaves them more vulnerable to a rise in loan delinquencies. For Banco Votorantim and Banco Mercantil, the negative outlook on their ratings incorporates our assessment that the operating environment will challenge their asset quality, while Banco Pan’s negative outlook reflects the outlook on the parent, Banco BTG Pactual S.A. (Baa3 negative, baa3).

Some less diversified regional lenders such as Banco do Estado de Sergipe S.A. (Ba2 stable, ba2), BRB-Banco de Brasilia S.A. (Ba3 stable, ba3) and Banco do Estado do Para S.A. (Ba3 stable, ba3) will also experience an increase in nonperforming loan ratios from currently low levels. These banks historically have focused on stable payroll lending, but all three have recently built up their exposure to unsecured consumer credit such as credit cards that will lead to an increase in provisioning expenses in the current adverse environment.

Captive lenders such as Banco Psa Finance Brasil S.A. (Ba2 stable, ba3) and Banco GMAC S.A. (Ba2 stable, ba3) and finance company Companhia de Cr., Financ. e Invest. RCI BR (Ba1 stable) are also exposed and will likely increase loan-loss provisions. However, these banks are in a better position to face the deterioration in the labor market because they focus on new car financing to wealthier individuals, which entails more conservative loan-to-value ratios, and they maintain strong collateral-recovery policies.

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

credit assessments.

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Unemployment Rate - left axis Average Workers Wages, Inflation-Adjusted - right axis

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

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

EXHIBIT 2

Key Indicators for Selected Brazilian Consumer Lenders

Share of Household

Loans in the Portfolio

Share of Corporate

Loans in the Portfolio

Problem Loans/ Gross Loans

Net Income/ Tangible

Assets

Loan Portfolio

BRL Millions

Total assets

BRL Millions

Shareholders’ Equity

BRL Millions

Banco Pan1 75% 25% 2.4% -1.1% 17,843 26,033 3,559

Banco Votorantim1 66% 34% 6.7% 0.5% 54,310 105,511 7,679

Banco Mercantil do Brasil1 60% 40% 8.9% 0.1% 8,717 13,270 716

Banco do Estado de Sergipe1 75% 25% 0.6% 0.6% 1,831 4,130 252

BRB-Banco de Brasilia1 80% 20% 1.6% 0.6% 9,256 13,415 1,296

Banco do Estado do Para2 97% 3% 2.6% 2.9% 3,036 5,032 569

Banco GMAC S.A. 2 88% 12% 0.8% 0.8% 12,550 15,366 1,518

Banco Psa Finance Brasil2 72% 28% 2.6% 2.0% 2,526 2,909 454

RCI2 71% 29% 1.0% 2.2% 7,959 9,317 1,267

Notes: 1 Data as of first-quarter 2015. 2 Data as of fourth-quarter 2014.

Sources: Brazilian Central Bank and Moody’s Financial Metrics

Despite also being exposed to retail lending, Brazil’s largest private banks have more product diversification and are prepared to manage an uptick in nonperforming consumer loans. These banks have maintained a conservative pace of loan growth since the end of 2012 in response to the weak economy, and have large capital buffers and reserve coverage. The average common equity Tier 1 ratio in the banking system is around 11.5%, and provisions are 1.65x the current level of problem loans.

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Italy’s Measures to Reduce Nonperforming Loans Are Credit Positive Last Wednesday, the Italian government passed a law decree containing measures to shorten bankruptcy procedures, recover collateral and deduct write-offs over a shorter period. These measures are credit positive for Italian banks because they shorten Italy’s lengthy foreclosure process and will lead to a faster recovery of nonperforming loans (NPLs) and full tax deductibility of write-offs.

The measures encompass significant changes to bankruptcy law, civil law, civil court proceedings, judicial organisation and administration and fiscal law. Among the most noteworthy developments is that bankruptcy administrators will need to conclude the procedure within a pre-set time period. If they fail to do so, they will be replaced in their role, which should incentivise a faster conclusion of the procedure. Additionally, banks can take full tax deductibility of loan-loss charges in the year they book them, rather than over a five-year period, which is the case currently.

The reforms will also encourage an NPL market in Italy. Although NPLs increased to €197 billion in 2014 from €75 billion in 2008, a significant market for NPLs has not yet developed. Just €7 billion of NPLs were sold in 2013 and 2014 combined. Given that Italian banks’ have an NPL stock equal to 10% of loans (see exhibit), Italy is ripe for the development of an NPL market where banks can sell their NPLs and reduce NPL management time and cost. Lengthy foreclosure and collateral recovery times have so far been two of the main obstacles to the development of Italy’s NPL market. With fewer NPLs on their books, banks would free up part of their capital and be more able to grant new loans, which would benefit economic growth.

Italian Banks’ Nonperforming Loans and Coverage

Source: Bank of Italy

A major constraint to the development of an NPL market in Italy has been the wide price gap between buyers that are offering low prices and banks whose NPLs have high carrying values. Buyers must account for significant uncertainty and discount for time value, given that Italy’s slow judicial and insolvency framework often requires a period of more than five years to complete NPL workouts, versus just over one year elsewhere in Europe. Shortening workout times would raise the prices that buyers offer. Banks will be more willing to write down the carrying value of loans if doing so is immediately fully tax deductible, further narrowing the price gap between buyers and the banks.

The decree, which is subject to Parliamentary approval within 60 days to become law, falls short of creating a “bad bank” in Italy, which would be the key step to considerably reducing NPLs. The Italian government is discussing with the European Commission a bad bank that would be compatible with state aid rules. Developing a framework that meets this requirement has proven challenging.

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NPLs as Percent of Gross Loans - left axis NPL Coverage - right axis

London +44.20.7772.5454

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Additionally, although we expect a credit positive shortening of workout times, we do not expect Italy to reach the European average any time soon because reforming the country’s inefficient legal system is a complex multi-year task.

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

PKO Bank Polski’s Full Profit Retention Will Boost Tier 1 Capital, a Credit Positive On Thursday, shareholders of Powszechna Kasa Oszczednosci Bank Polski S.A. (PKO BP, A2/A3 stable, baa24) approved full retention of the bank’s 2014 PLN3.1 billion unconsolidated profit. The profit retention is credit positive for PKO BP because it adds more than PLN1.7 billion (€410 million) to regulatory capital, supplementing the PLN1.4 billion of 2014 annual profit already included in regulatory capital. Consequently, we expect PKO BP’s common equity Tier 1 (CET1) capital to increase by about 8% during the second quarter of 2015.

Following the shareholders’ decision, PKO BP, Poland’s largest bank, will not distribute any dividends for the first time in 10 years. The decision to retain all profits and not distribute dividends was recommended by the Polish regulator, and will ensure that the bank maintains a good capital buffer, particularly in light of its exposure to the riskier Swiss franc mortgages that comprised 17% of total loans as of the first quarter of 2015.

This higher level of profit retention (more than in any other year) will also allow PKO BP to better pursue opportunities in Poland’s growing economy, where we forecast that GDP will grow 3.5% in 2015 and 3.4% in 2016. These growth rates are likely to benefit the bank’s profitability.

We estimate that PKO BP’s CET1 ratio will improve by approximately 75 basis points to around 12.6% for the second quarter from the 11.8% the bank reported for the first quarter (see Exhibit 1).

EXHIBIT 1

Powszechna Kasa Oszczednosci Bank Polski’s Tier 1 Capital Ratio

Sources: Powszechna Kasa Oszczednosci Bank Polski and Moody’s Investors Service calculations

The profit retention also improves PKO BP’s positioning among its domestic peer group in terms of capital. PKO BP’s ratio of tangible common equity to risk-weighted assets (our proxy for the CET1 ratio, also accounting for the annual profits) is somewhat lower than those of ING Bank Slaski S.A. (A3 stable, baa3) and mBank S.A. (Baa2 stable, ba2). However, PKO BP has a better leverage ratio (tangible common equity to total assets), mostly driven by the use of the standardised approach for estimating risk-weighted assets, versus the internal rating-based approach of the other two banks (see Exhibit 2).

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

credit assessments.

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Tier 1 Ratio Estimated Effect of Retained Profits

Simone Zampa Vice President - Senior Credit Officer +44.20.7772.1425 simone.zampa@moodys.com

Aleksandar Hristov Associate Analyst +44.20.7772.1071 aleksandar.hristov@moodys.com

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

EXHIBIT 2

Powszechna Kasa Oszczednosci Bank Polski’s and Polish Peer Banks’ Capital and Leverage Ratios, Year-End 2014

Note: Tangible common equity for Bank Polska Kasa Opieki and ING Bank Slaski is adjusted to exclude the proportion of 2014 profits paid as dividend. Sources: The banks and Moody’s Investors Service

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Bank Polska Kasa OpiekiS.A. (A2 stable, baa1)

PKO BP S.A.(A2/A3 stable, baa2)

Bank Zachodni WBK S.A.(A3 stable, baa3)

ING Bank Slaski S.A.(A3 stable, baa3)

mBank S.A.(Baa2 stable, ba2)

Tangible Common Equity/Risk Weighted Assets Tangible Common Equity/Total Assets

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

China’s Removal of Loan-to-Deposit Cap Is Credit Positive for Chinese Banks Last Wednesday, China’s State Council approved a draft amendment to scrap its 75% cap on banks’ loan-to-deposit ratio (LDR), and instead make the ratio a reference rather than an operating target. The change, which requires approval of the Standing Committee of the National People’s Congress, is credit positive for banks because it removes a regulation that had become obsolete as a measure of bank funding conditions and introduced significant distortions to bank funding behavior.

Removing the cap paves the way for the introduction of more risk-based requirements that are less likely to create distortions in bank behavior and will result in stronger liquidity management. Banks will no longer need to manage their deposits before quarter-end to meet monitoring requirements. Although most Chinese banks are not constrained by the 75% cap, some midsize joint-stock commercial banks are constrained because they have strong lending ability but weak deposit bases (see exhibit). At the end of March 2015, system LDR was 65.7%, far below the 75% cap.

Chinese Bank Average Loan-to-Deposit Ratios at the End of 2014

Note: ICBC = Industrial and Commercial Bank of China Ltd.; CCB = China Construction Bank Corporation; BOC = Bank of China Limited; ABC = Agricultural Bank of China Limited; BoCom = Bank of Communications Co., Ltd.; CMB = China Merchants Bank Co., Ltd; CITICB = China CITIC Bank Corporation Limited; SPDB = Shanghai Pudong Development Bank Co. Ltd.; CEB = China Everbright Bank Company Limited; PAB = Ping An Bank Co., Ltd.; CMBC = China Minsheng Banking Corp.; CIB = Industrial Bank Co. Ltd.; HXB = Hua Xia Bank Co. Ltd.; BoNB = Bank of Ningbo Co., Ltd.; BoNJ = Bank of Nanjing Co. Ltd.; HRBCB = Harbin Bank; and CQRCB = Chongqing Rural Commercial Bank. Sources: The banks and the China Banking Regulatory Commission

Banks’ risk profiles would also improve because banks would be less inclined to tap shadow banking channels to source funds and work their way around loan classification rules. This is in line with current regulatory trends toward broader, risk-based surveillance as standard monitoring tools, with banks becoming more diversified in their business lines and balance sheets. Chinese regulators since last year have required banks with assets of more than RMB200 billion to meet a minimum liquidity coverage ratio, which requires that a bank’s highly liquid assets equal at least 60% of total net cash outflows over the next 30 calendar days. The threshold will rise to 100% by the end of 2018, the same as Basel III’s suggested timetable.

Scrapping the cap will also benefit banks’ profitability by lowering and stabilizing their funding costs at quarter-end because there would be less deposit competition. This could also allow banks to lower their loan rates, which would benefit borrowers’ repayment capacity and reduce delinquencies.

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ICBC CCB BOC ABC BoCom CMB CITICB SPDB CEB PAB CMBC CIB HXB BoNB BoNJ HRBCB CQRCB

75% Loan-to-Deposit Cap

Yulia Wan Assistant Vice President - Analyst +86.21.2057.4017 yulia.wan@moodys.com

Winnie Tang Associate Analyst +852.3758.1326 winnie.tang@moodys.com

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

LDR has been a regulatory requirement since the 1990s and sought to control the volume of loans and facilitate banks’ liquidity management. However, it has become increasingly obsolete as a measurement of bank liquidity because banks’ balance sheets have become more diverse. The LDR cap incentivized banks to engage in various “window dressing5” practices, including offering extra deposit premiums before reporting periods and using alternative lending arrangements that exist outside the definition of loans (including those that have formed part of the shadow banking system). The LDR cap directly contributed to multiple episodes of money market volatility, significant changes in deposit flows and banks’ increasing involvement in shadow banking activities, all of which are negatives to their credit profile.

Removing the cap increases the risk of banks increasing their loans more rapidly than they would have done if the cap had remained in effect. However, subdued economic growth and other regulatory constraints will continue to limit banks’ asset growth, notwithstanding the Chinese government’s policy aim of increasing lending. Additionally, banks remain subject to multiple regulatory constraints, including implicit loan quotas and capital ratio requirements.

Although the removal of the LDR cap will release some lending capacity among midsize joint-stock banks, their current low capitalization, as reflected in their capital adequacy ratio of 11.21% at the end of March 2015, versus the overall average of 13.13%, will likely remain a constraint on loan growth.

5 See China Moves to Reduce Window Dressing of Deposit Balances, a Credit Positive to Banks, 22 September 2014.

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Singapore Proposes Limited Bank Resolution and Bail-in Regime, a Positive for Banks’ Senior Creditors Last Tuesday, the Monetary Authority of Singapore (MAS) published a request for comment on proposed enhancements to the resolution regime for financial institutions in Singapore. The enhancements aim to strengthen the regulator’s powers to resolve failed banks, while maintaining bank functions critical to the financial system. If implemented, Singapore’s regime would be credit positive for senior unsecured bondholders because they will not be subject to bail-in outside of bank liquidation.

MAS’ proposals are largely in line with the Financial Stability Board’s (FSB) “Key Attributes of Effective Resolution Regimes for Financial Institutions,” with the exception that MAS proposes a limited scope of liabilities subject to bail-in. Indeed, MAS suggests bailing in only subordinated liabilities issued after implementation of the relevant statutory regime in Singapore. These liabilities will complement already-issued Basel III-compliant securities with contractual loss-absorption.

In contrast to existing and proposed bank resolution regimes around the world, MAS proposed to exclude from the scope of bail-in all senior debt, both existing and prospective. Additionally, deposits and interbank liabilities would be excluded. This makes MAS’ proposed bail-in regime one of the most investor-friendly in the world for non-subordinated debtholders.

The FSB’s key attributes call for a framework that forces banks to create additional buffers of bailed-in liabilities that would minimize costs to taxpayers of bank failures, something that MAS’ proposal can only achieve through subordinated liabilities, which are in short supply in Singapore. To date, Singapore’s three largest banks have issued around $5 billion of Basel III-compliant securities, which constitutes only 0.6% of their consolidated assets.

MAS’ resolution regime, if and when coupled with the total loss-absorbing capacity requirement – and which is currently only applicable, with some exceptions, to a handful of global systemically important banks – would create an incentive for the Singapore banks to issue more subordinated debt.

We think MAS proposed a more investor-friendly approach because of its worries about systemic contagion if losses were to be imposed on senior bondholders. Indeed, Singapore’s banking system is highly concentrated, with the three domestic banking groups accounting for more than one half of system assets. Moreover, Singapore’s minimum capital requirements are two percentage points higher than those recommended by the Basel Committee, meaning that the banks already maintain prudent capital buffers.

Eugene Tarzimanov Vice President - Senior Credit Officer +65.6398.8329 eugene.tarzimanov@moodys.com

Simon Chen Vice President - Senior Analyst +65.6398.8305 simon.chen@moodys.com

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Japan Post Bank, Sumitomo Mitsui Trust and Nomura Asset Management Joint Venture Would Be Credit Positive Last Tuesday, the Nikkei reported that Japan Post Bank (unrated), Sumitomo Mitsui Trust Holdings (SMTH, unrated) and Nomura Holdings, Inc. (Baa1 stable) will form a joint venture asset management company to focus on investment products for retail investors throughout Japan. Terms of the deal have not yet been announced.

The joint venture with Japan Post Bank will give Sumitomo Mitsui Trust Bank, Limited (SMTB, A1 stable, a36), SMTH’s main bank, and Nomura Securities Co. Ltd. (A3 stable), Nomura Holdings’ securities subsidiary, access to Japan Post Bank’s network. Japan Post Bank will gain access to Nomura Securities’ and SMTB’s product development, sales and marketing expertise.

Nomura Securities, Japan’s largest securities firm by assets, and SMTH, Japan’s fifth-largest bank by assets, will be able to grow their customer base through Japan Post Bank’s more than 24,000 post offices in all 47 prefectures in Japan, giving them more sales opportunities than the three Japanese megabanks (Mitsubishi, Sumitomo Mitsui Financial Group and Mizuho) combined.

Since late 2012, Japanese government policy has aimed to foster an inflationary environment that encourages individuals to shift their savings in deposits to risk assets, particularly equity investments, which has increased assets under management (AUM) in Japan. In particular, the Nippon Individual Savings Accounts (NISA) that were introduced in January 2014 and provide tax-exempt treatment on investment returns, have been growing.

Furthermore, as of 31 December 2014, Japanese households held about ¥1,700 trillion in financial assets. In Japan, investment trusts, shares, equities and bonds only accounted for 16.7% of financial assets, while currency and deposits comprised 52.5%. This is in sharp contrast to the US, where investment trusts, shares, equities and bonds made up 51.2% of financial assets, while currency and deposits accounted for 13.4%.

Although we do not expect Japan’s financial asset allocations to emulate those in the US, we do expect an increasing shift to investment from deposits. Investment trusts have been the fastest-growing asset class in Japan over the past two years, a trend we expect to continue to benefit those financial institutions that emphasize this business.

Both SMTH and Nomura Securities have been growing AUM in line with the rise in the TOPIX. We expect that further gains in the TOPIX will lead to higher AUM for both firms (see exhibit).

6 The bank ratings shown in this report are the bank’s deposit rating and baseline credit assessment.

Raymond Spencer Senior Vice President +81.3.5408.4051 raymond.spencer@moodys.com

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Assets Under Management at Sumitomo Mitsui Trust Holdings and Nomura Securities and the TOPIX

Sources: The companies and Japan Exchange Group

We expect that an increase in AUM, aided by the tie-up with Japan Post Bank, will contribute to higher fee income and lower overall earnings volatility, both which are credit positive for the companies. In particular, higher fee income will help improve SMTH’s profitability and capital position, while Nomura Securities will benefit mostly from lower earnings volatility.

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Nomura AUM - left axis SMTH AUM - left axis TOPIX Price - right axis

NEWS & ANALYSIS Credit implications of current events

21 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Asset Managers

IOSCO Steps Back from Bank-Like Oversight of Asset Managers, a Credit Positive for Large Asset Managers On 17 June, the International Organization of Securities Commissions (IOSCO) announced that it would perform a full review of asset management activities before conducting further work on methodologies for the identification of systemically important asset management entities. IOSCO’s decision increases the likelihood that a regulatory framework for asset managers will focus on the systemic implications of the firm’s activities rather than its scale. This change is credit positive for large asset managers such as BlackRock, Inc. (A1 stable), Vanguard (unrated) and FMR LLC (Fidelity, A2 stable) because bank-style regulations would have negative consequences on these companies’ market competitiveness and profitability.

Asset managers primarily act as fiduciary agents, managing assets on behalf of asset owners and passing on gains or losses to them. IOSCO has now refocused its efforts on assessing whether activities performed by asset managers, in their role as fiduciary agents, pose systemic risk to financial markets. Its analysis will focus on market structure, product risk and how the asset manager or investment fund can or cannot mitigate these risks.

For example, some investment funds use leverage that can amplify asset price movements and prompt forced asset sales to meet required margin calls. Another risk is the potential for large-scale redemptions from investment funds during times of market stress, which can lead to “fire sales.” Although these risks may lead to market instability, in and of themselves they do not necessarily pose solvency risk to an asset manager. Renewed regulatory focus on addressing industry-wide risks is likely to lead to new regulations that are less costly for large asset managers compared with our expectation of high cash costs and competitive restrictions associated with an individual global systemically important financial institution designation. Additionally, asset managers can more easily pass regulatory costs such as investment fund redemption management on to their fund investors.

At the same time, both alternative and traditional asset managers are increasingly undertaking principal investments directly in the form of co-investments and seed money, respectively. However, we do not believe that losses in asset managers’ investments will jeopardise the firms’ viability and ability to continue with their fiduciary duties because their stakes are relatively small.

Overall, the IOSCO’s decision to examine systemic risk posed by asset managers’ products and activities is better suited for the asset managers’ business model than bank-style regulation. This approach will not put large scale asset management companies at a disadvantage to smaller players by limiting their activities and development in certain business areas. In addition, this revised stance is in line with that of the US Securities and Exchange Commission and Financial Stability Oversight Council, so it should not distort competitiveness at a global level.

Soo Shin-Kobberstad Vice President - Senior Analyst +44.20.7772.5214 soo.kobberstad@moodys.com

Vanessa Robert Vice President - Senior Credit Officer +33.1.53.30.10.23 vanessa.robert@moodys.com

Rory Callagy Vice President - Senior Analyst +1.212.553.4374 robert.callagy@moodys.com

NEWS & ANALYSIS Credit implications of current events

22 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Sub-sovereigns

Czech Municipalities Would Benefit from Larger Share of Country’s Value Added Tax Last Wednesday, a proposal to increase Czech Republic municipalities’ share of the national value-added tax (VAT) to 21.83% from 20.83% entered the parliamentary procedure phase. If approved, the increase in VAT share would take effect in January 2017 and rise to 23.58% in January 2018. These increases are credit positive for Czech municipalities because they will boost municipal revenues and improve the municipalities’ budgetary flexibility.

This change will result in an increase of VAT proceeds to CZK76.2 billion in 2017 and CZK87.3 billion in 2018 from CZK67.6 billion in 2014 (see Exhibit 1). That kind of growth would significantly improve municipalities’ financial position because the proceeds would equal 4%-5% of the operating revenue municipalities collected in 2014.

EXHIBIT 1

Czech Municipalities’ Proceeds from Value-Added Tax, 2013-18

Note: Data for 2015 are budgeted; data for 2016-18 are estimates. Sources: Czech Ministry of Finance and Moody’s Investors Service

Growth in shared tax revenues as a result of the VAT share adjustment has the potential to further strengthen Czech municipalities’ sound operating surpluses. The gross operating balance of Czech municipalities totalled CZK61 billion in 2014, equal to 25% of sector operating revenues. We expect the sector’s gross operating balance to exceed 29% in 2017-18, a level that compares very favourably with international peers (municipal operating surpluses averaged 9% of operating revenues in Poland and 8% in Slovakia in 2014) (see Exhibit 2).

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Gjorgji Josifov Assistant Vice President - Analyst +42.0221.666.340 gjorgji.josifov@moodys.com

Katerina Hanzlova Analyst +42.0221.666.321 katerina.hanzlova@moodys.com

NEWS & ANALYSIS Credit implications of current events

23 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

EXHIBIT 2

Czech Municipalities’ Operating Performance, 2013-18

Note: Data for 2015 are budgeted; data for 2016-18 are estimates. Sources: Czech Ministry of Finance and Moody’s Investors Service

We expect that the increase in shared tax revenues will also boost Czech municipalities’ self-funding capacity, creating a solid financial cushion and supporting capex funding without putting their budgets under additional pressure.

In the Czech Republic, the revenue from VAT collections is a key revenue source for municipalities, and has accounted for around 28% of their operating revenue over the past three years. Because the VAT collections are not earmarked for specific spending purposes, the share adjustment confers the municipalities’ greater budgetary flexibility.

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Operating Revenue - left axis Value Added Tax - left axisGross Operating Balance / Operating Revenue - right axis

NEWS & ANALYSIS Credit implications of current events

24 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

US Public Finance

Puerto Rico’s General Obligation Bonds Face Threat from Bill Allowing Suspension of Monthly Debt-Service Deposits On Tuesday, the Commonwealth of Puerto Rico’s (Caa2 negative) house of representatives passed legislation that would allow the US territory to suspend its practice of making monthly set-asides for debt service on general obligation (GO) bonds. The legislation, which the commonwealth’s senate approved on Thursday, is credit negative for bondholders because it indicates that a growing liquidity crisis is threatening Puerto Rico’s ability to repay bonds with the strongest legal protections.

Puerto Rico is less likely to default on its GO bonds than most of its other obligations because of the GO bonds’ special legal protections. Article VI, Section 8 of the commonwealth’s constitution gives GO bondholders a first claim on available resources. The constitution also provides for a mechanism if needed to “claw back” funds from other purposes to satisfy GO debt service requirements. Another legal protection, Act 39, requires monthly GO redemption fund deposits of one twelfth of the next annual principal payment and one sixth of the next semi-annual interest payment. Because of Act 39, Puerto Rico by the end of last month had set aside 89% of the $646 million it must pay GO bondholders on 1 July.

Under the new legislation (HB 2542), Act 39 will be suspended next fiscal year unless the government can restore its cash by raising at least $1.2 billion through the issuance of tax and revenue anticipation notes (TRANs) or other borrowings. If signed by Puerto Rico Governor Alejandro Garcia Padilla, this legislation could help the government to conserve cash for the island’s public services.

Plunging liquidity at the Government Development Bank for Puerto Rico (GDB, Ca negative), the central government’s fiscal agent and fund repository, in the coming weeks may force difficult choices between providing public services and meeting debt obligations. The GDB’s net liquidity fell 50% during the six months ended in May and could be fully depleted this summer (see Exhibit 1) without the TRANs or a long-planned issuance of bonds backed by petroleum products tax revenues. By law, the GDB is required to maintain liquid assets equal to 20% of its demand deposits, or about $500 million. The GDB expects liquidity to fall below this level sometime next month in the absence of a financing to raise cash.

EXHIBIT 1

Government Development Bank for Puerto Rico’s Net Liquidity

Sources: Government Development for Puerto Rico and Moody’s Investors Service estimates

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Ted Hampton Vice President - Senior Credit Officer +1.212.553.2741 ted.hampton@moodys.com

NEWS & ANALYSIS Credit implications of current events

25 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Making monthly GO set-asides will become more onerous in fiscal 2016, which begins 1 July, given a 32% increase in GO debt service payable and the likely lack of available cash in coming weeks. GO debt service will require $1.16 billion in fiscal 2016, up from $881 million this year, helping drive up overall debt service of the central government and its public corporations – except the Puerto Rico Electric Power Authority (Caa3 negative) – by 28% to $4.7 billion (see Exhibit 2).

EXHIBIT 2

Puerto Rico’s 2016 Debt-Service Increase

Source: Commonwealth of Puerto Rico disclosure documents

Completion of the sale of bonds backed by petroleum tax revenue to restore cash at the GDB would alleviate immediate liquidity challenges. Failure to execute the sale by now suggests that Puerto Rico’s officials and politicians are unwilling to accept the terms that the speculative investors able to buy its bonds have proposed. The government is moving to borrow from remaining sources of cash, including insurance funds that it controls: the State Insurance Fund Corporation, the Automobile Accidents Compensation Administration and the Insurance Fund for Temporary Non-occupational Incapacity. We expect these entities to provide about one third of the $1.2 billion of TRANs financing that the commonwealth seeks.

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NEWS & ANALYSIS Credit implications of current events

26 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Jacksonville, Florida, Approves Credit-Positive Pension Reforms On 19 June, the Jacksonville, Florida (Aa2 stable), public safety pension board approved the city’s pension reform package. The legislation is credit positive because it will substantially curtail growing unfunded liabilities and save an estimated $1.5 billion over the next 30 years by increasing employee and city contributions into the plan and reducing future benefit accruals for current and new public safety workers.

The reform approval is particularly significant for Florida’s largest city because public safety pension costs have increasingly pressured Jacksonville’s budget, and pension reform proposals over the past seven years have failed to win passage.

Jacksonville’s public safety pension costs have grown to $154 million, or approximately 13% of the city’s 2015 operating budget, from $9.7 million in 2003. Without the reforms, public safety pension costs would have further crowded out other budget priorities because city actuaries projected its contribution requirements would have grown at an average annual rate of nearly 5% over the next 20 years. In comparison, the city’s operating revenues grew at a compound annual average rate of less than 2% between 2001 and 2014.

The city’s pension reform ends political gridlock among different branches of the city government, public safety labor unions and the police and fire pension board. However, one key political hurdle remains for the city: it has not identified a funding source within its budget with which to finance its promised supplemental payments to the pension fund.

The city’s historical contributions to the Police and Fire Pension Fund (PFPF) have been at or near the annual required contribution (ARC) required by state law. Nonetheless, the plan’s unfunded liabilities have grown substantially owing to worse-than-expected investment performance, benefit increases and actuarial factors such as the deferred recognition of asset losses when calculating funding requirements. In its 2014 actuarial study, the plan’s reported net liability was approximately $1.6 billion, up from $400 million in 2003. In comparison, our 2014 adjusted net pension liability (ANPL) for the plan was $3.1 billion. Our ANPL reflects certain adjustments we make to improve comparability of reported pension liabilities.

The city estimates the changes will substantially decrease its public safety normal costs (i.e., the cost of ongoing benefit accruals) to 9% of payroll from 29%. Driving a significant portion of the cost reduction are increases in the number of years considered in final average formulas and decreases in cost-of-living adjustments for future years of work.

The reforms also immediately augment current employees’ contributions to 8% of salary from 7%. This amount will increase to 10% of pay upon the eventual restoration of previous salary reductions. New public safety employees will contribute 10% of salaries immediately.

The reform agreement will bolster plan assets from two additional sources: the city will remit a cumulative $350 million in supplemental contributions on top of its ARC payments over the next 13 years, and the PFPF will contribute a cumulative $110 million from special reserve accounts over the same time period. These reserve accounts are excluded from the pension fund’s reported assets, and the city expects them to be completely exhausted by the $110 million in payments. We project that combining the increased contributions with the cost reductions from reforms will allow the city to substantially avoid a long-term cost spike, as shown in the exhibit below.

Tom Aaron Assistant Vice President - Analyst +1.312.706.9967 thomas.aaron@moodys.com

Ted Damutz Vice President - Senior Credit Officer +1.212.553.6990 edward.damutz@moodys.com

NEWS & ANALYSIS Credit implications of current events

27 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Projected Police and Fire Pension Contributions With and Without Reform Jacksonville’s public safety pension reforms will stabilize costs.

Notes: Cost projections under the reforms scenario are our estimates based on Jacksonville’s actuarial estimates of a similar reform package, updated to incorporate city and pension fund reserve account payments over time, rather than upfront, and the associated interest cost at 7% compounded, the plan’s assumed discount rate. Sources: City of Jacksonville, Florida, January 2015 projected reform estimates by Milliman, the city’s actuarial consultants, and Moody’s Investors Service

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RATING CHANGES Significant rating actions taken the week ending 26 June 2015

28 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Corporates

Delta Air Lines, Inc. Upgrade 2 Jul ‘14 23 Jun ‘15

Corporate Family Rating Ba3 Ba2

Outlook Positive Positive

The upgrade reflects our expectation of noticeably stronger credit metrics through 2015, owing to the company’s long-running focus on reducing funded debt, effective capacity management and significantly lower fuel expenses.

SABMiller Plc Upgrade 1 Oct ‘14 24 Jun ‘15

Senior Unsecured Rating Baa1 A3

Short-Term Issuer Rating P-2 P-2

Outlook Positive Stable

The upgrade reflects strong improvements in its credit metrics during the financial year ended March 2015 and our view that this improvement will be sustainable over the medium-to-long term, despite the company’s ongoing appetite for potential medium to large acquisitions.

SS&C Technologies Holdings, Inc. Outlook Change 18 Jun ‘15 22 Jun ‘15

Corporate Family Rating B1 B1

Outlook Stable Positive

The outlook change reflects the company’s robust liquidity and our view that SS&C will have ample flexibility to reduce debt at an accelerated pace and maintain capacity to fund moderately sized acquisitions.

Sumitomo Corporation Downgrade 26 Mar ‘15 25 Jun ‘15

Senior Unsecured Rating A2 A3

Short-Term Issuer Rating P-1 P-2

Outlook Review for Downgrade Stable

The downgrade reflects the company’s high leverage and heightened earnings volatility. It also reflects our heightened concerns over Sumitomo’s risk management, including investment selection, timing and monitoring, especially given its material impairment losses in 2014.

RATING CHANGES Significant rating actions taken the week ending 26 June 2015

29 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Williams Partners L.P. Outlook Change 13 May ‘15 22 Jun ‘15

Senior Unsecured Rating Baa2 Baa2

Outlook Stable Negative

We also changed the outlook on The Williams Companies, Inc.’s Baa3 senior unsecured rating to on review direction uncertain from review for upgrade. The outlook change follows The Williams Companies’ announcement that its board of directors has authorized the exploration of a range of strategic alternatives following receipt of an offer to acquire Williams Partners. Thus, the outlook change reflects the uncertainty raised by the strategic review for the company’s future ownership, financial policies and the proposed acquisition.

RATING CHANGES Significant rating actions taken the week ending 26 June 2015

30 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Infrastructure

SGSP (Australia) Asset Pty Ltd. Upgrade 23 Dec ‘13 25 Jun ‘15

Issuer Rating/Senior Unsecured Bond Rating Baa1 A3

Outlook Stable Stable

Jemena Limited Upgrade 23 Dec ‘13 25 Jun ‘15

Senior Unsecured Bond Rating Baa1 A3

MTN Program (P)Baa1 (P)A3

Outlook Stable Stable

SGSPAA is 60%-owned by State Grid International Development Limited (SGID, A1 stable). The rating upgrade reflects our view of an increased likelihood of SGID providing financial support to SGSPAA in the event of the latter encountering financial distress. Jemena’s rating reflects SGSPAA’s rating given the close integration between the two entities, specifically Jemena’s control of around 75% of SGSPAA’s asset base and SGSPAA’s provision of a large majority of Jemena’s funding requirements.

China Merchants Holdings International Co. Ltd.

Upgrade 12 Jun ‘14 24 Jun ‘15

Issuer/Senior Unsecured Debt Ratings Baa2 Baa1

Outlook Stable Stable

The upgrade of CMHI’s issuer and senior unsecured debt ratings is based on our expectation that the company will receive extraordinary financial support from its parent, China Merchants Group Limited. CMHI receives one-notch of uplift based on this expectation of support. CMHI’s fundamental credit profile reflects its leading position as China’s largest port operator in terms of container throughput. It is also underpinned by the company’s well-diversified portfolio, the strategic locations and strong market share of its key ports, and its well-established operating track record.

CEZ a.s.

Downgrade 4 Feb ‘14 23 Jun ‘15

Senior Unsecured Ratings A2 A3

Medium-Term Note (EMTN) Programme (P)A2 (P)A3

Outlook Negative Stable

The downgrade reflects the ongoing weak power price environment and our expectation that the company’s credit metrics will not strengthen materially from current levels over the next two to three years.

RATING CHANGES Significant rating actions taken the week ending 26 June 2015

31 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

RWE AG / RWE Finance B.V. Outlook Change 23 Jun ‘13 23 Jun ‘14

Senior Unsecured Ratings Baa1/(P)Baa1 Baa1/(P)Baa1

Subordinated Debt Ratings Baa3 Baa3

Outlook Stable Negative

The change in outlook reflects a number of political uncertainties and operating challenges facing RWE. These include the German government reforms to address energy market design and reduce greenhouse gas emissions, which are expected shortly, ongoing government debate as to the creation of a public fund for nuclear decommissioning, which may lead to the externalisation of related provisions and persistently low wholesale power prices in Germany, which have weakened since 2014.

Powercor Australia LLC

Outlook Change 17 Jun ‘13 23 Jun ‘15

Senior Unsecured Rating Baa1 Baa1

Senior Unsecured MTN Rating (P)Baa1 (P)Baa1

Outlook Negative Stable

The change to a stable outlook reflects our expectation that Powercor’s financial profile will fall within the rating tolerance level following the Heads of Agreement with the Australian Tax Office settling most outstanding tax matters. The settlement provides greater visibility and clarity in relation to the tax-related issues, which have previously clouded Powercor’s credit profile.

Shenzhen International Holdings Limited

Outlook Change 5 Apr ‘12 22 Jun ‘15

Issuer/Senior Unsecured Ratings Baa3 Baa3

Outlook Stable Positive

The change to a positive outlook reflects SZIH’s strengthened credit profile, underpinned by a steady improvement in the performance of its toll road assets. The improvement in the toll roads’ underlying performance, which we expect to continue over the next 12-18 months, is assisting SZIH’s efforts to gradually deleverage its balance sheet.

RATING CHANGES Significant rating actions taken the week ending 26 June 2015

32 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Financial Institutions

Review Concluded on Four Dutch Banks

24 Jun ‘15

The rating actions on Amsterdam Trade Bank, Demir-Halk Bank (Nederland), GarantiBank International, and NIBC Bank reflect the “Strong +” Macro Profile of the Netherlands; the banks’ generally moderate core financial metrics; and the protection offered to senior creditors by the volume and subordination of bail-in-able securities, as captured by our Advanced Loss Given Failure liability analysis.

Reviews Concluded on French Banks

23 Jun ‘15

The actions on Agence France Locale, Banque PSA Finance, BPCE, Caisse Centrale du Credit Immobilier de France, Caisse de Refinancement de l’Habitat, Credit Agricole, Dexia Credit Local, RCI Banque, Societe de Financement Local reflect the “Very Strong -” Macro Profile of France; French banks’ generally solid core financial metrics; the protection offered to senior creditors by substantial volumes and subordination of bail-in-able securities, as captured by our Advanced Loss Given Failure liability analysis; and the reduced likelihood of government support being forthcoming in the event of need for these institutions.

Reviews Concluded on 17 Italian Banks

22 Jun ‘15

The rating actions reflect the “Moderate +” Macro Profile of Italy; the banks’ modest core financial ratios; the protection offered to senior creditors by substantial volumes of deposits and senior debt, as captured by our Advanced Loss Given Failure (LGF) liability analysis; and our view of a decline in the likelihood of government support, in case of need.

Reviews Concluded on Three Luxembourg banks

24 Jun ‘15

The rating actions on Banque et Caisse d’Epargne de l’Etat, BGL BNP Paribas, and Banque Internationale a Luxembourg reflect the “Very Strong -” Macro Profile of Luxembourg; Luxembourg banks’ strong core financial metrics; the protection offered to senior creditors by substantial volumes and subordination of bail-in-able securities, as captured by our Advanced Loss Given Failure liability analysis; and the diminished likelihood of government support being forthcoming for these institutions in the event of need.

RATING CHANGES Significant rating actions taken the week ending 26 June 2015

33 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Banco PSA Finance Brasil S.A. Downgrade 5 Mar ‘15 25 Jun ‘15

Long-Term Bank Deposit Rating Ba1 Ba2

Baseline Credit Assessment baa3 baa3

Adjusted Baseline Credit Assessment baa3 baa2

Outlook Stable Stable

The downgrade was due to the downgrade of the baseline credit assessment of its parent Banque PSA Finance (France) to ba2, from ba1. The Brazilian subsidiary’s Ba2 long-term deposit rating now incorporates one notch of uplift from its standalone ba3 credit assessment reflecting our view of a high probability of parental support in the event of stress, based on the shared strategic focus of the subsidiary and its parent.

Burgan Bank A. S. Downgrade 30 Mar ‘15 24 Jun ‘15

Long-Term Deposit Rating Ba2 Ba3

Outlook Review for Downgrade Stable

The downgrade is due to the downgrade to ba2 from ba1 of the baseline credit assessment (BCA) of Burgan’s Kuwait based parent, Burgan Bank S.A.K.P (deposits A3 STA/P-2; /BCA ba2). We also lowered the bank’s counterparty risk assessment to Ba2(cr) from Ba1(cr) and the adjusted BCA to ba3 from ba2.

Fly Leasing Limited Outlook Change 22 Sep ‘14 22 Jun ‘15

Senior Unsecured Rating B2 B2

Long-Term Corporate Family Rating B1 B1

Outlook Stable Positive

The company’s aircraft sales will reduce aircraft remarketing and residual risks and lead to more predictable profitability, as the company shifts capital toward the acquisition of newer aircraft placed into longer leases. The sales will diminish Fly’s revenue concentration to certain airline customers and will generate $425 million in net cash proceeds after repayment of $495 million of secured debt and associated expenses. The company will use sale proceeds to invest in newer aircraft, primarily acquired through sale-leaseback transactions with airlines, that should further improve the residual risk characteristics of the fleet.

RATING CHANGES Significant rating actions taken the week ending 26 June 2015

34 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

HSBC Bank A. S. (Turkey) Downgrade 11 Apr ‘15 24 Jun ‘15

Long-Term Bank Deposit Rating (Domestic) Baa2 Ba1

Long-Term Bank Deposit Rating (Foreign) Baa3 Ba1

Baseline Credit Assessment ba3 ba3

Adjusted Baseline Credit Assessment baa2 ba1

Outlook Negative Negative

The downgrade is due to the decline in the probability of affiliate support we incorporate into the bank’s rating, following the announcement by HSBC, as part of its group investor presentation in June 2015, that it planned to divest its Turkish operations. However, we expect the group to continue to support the subsidiary until the divestiture. The negative outlook is due to the pressure on the bank’s standalone BCA as well as uncertainty about the bank’s future ownership.

PICC Life Insurance Company Upgrade 1 Aug ‘13 23 Jun ‘15

Insurance Financial Strength Rating A3 A2

Outlook Stable Positive

The upgrade reflects our assessment of a strong government support, given that PICC Life has become an increasingly important contributor to PICC Group’s profit since the former’s establishment in 2005. In addition, the insurance industry has become of increasing importance to the government, following initiatives to grow the industry and develop its role in enhancing social protection.

PICC P&C Insurance Company Upgrade 16 Apr ‘13 23 Jun ‘15

Insurance Financial Strength Rating A1 Aa3

Outlook Stable Stable

PICC P&C’s capitalization and profitability have improved significantly in the past two years, and we assume a strong level of government support for PICC P&C in the event of stress. PICC P&C’s capitalization improved owing to strong earnings and two rights issues.

Radian Group Inc. Upgrade 15 Jun ‘15 25 Jun ‘15

Senior Unsecured (Domestic) B2 B1

Outlook Review for Upgrade Stable

The upgrade was prompted by the announcement by Radian Group that it had completed its offering of $350 million of 5.25% Senior Notes due in 2020 and entered into agreements to purchase an aggregate of $389 million principal amount of its Convertible Senior Notes due in 2017. The issuance will improve the holding company’s debt maturity profile and better align it with the expected timing of dividend capacity from its subsidiaries.

RATING CHANGES Significant rating actions taken the week ending 26 June 2015

35 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Socram Banque Upgrade 17 Mar ‘15 24 Jun ‘15

Long-Term Deposit Rating Baa1 A3

Baseline Credit Assessment baa3 baa3

Adjusted Baseline Credit Assessment baa3 baa2

Outlook Review for Upgrade Stable

Socram’s baa3 BCA reflects the bank’s moderate risk profile, owing to its exclusively retail focus. The baa2 adjusted BCA is two notches below the A3 senior unsecured rating of the insurer parent MACIF (ISFR A2 stable), which one notch below the insurance financial strength rating. The one-notch uplift from the BCA better reflects the decline in the probability of failure derived from Socram’s shareholders than under our previous banking methodology.

Volkswagen Bank, S.A. & Volkswagen Leasing , S. A de C. V. Upgraded

22 Jun ‘15

The upgrades follow a similar action taken on the senior debt ratings of Germany-based parent Volkswagen Financial Services AG (VWFS), which we upgraded to Aa3 with a stable outlook on 19 June 2015, following the implementation of our new banking rating methodology.

Outlook for Zions Bancorporation & Subsidiaries Changed

24 Jun ‘15

We changed to positive from stable the rating outlook on the bank subsidiaries of Zions Bancorporation and affirmed all of the Zions entities’ ratings. Zions’ bank subsidiaries, including its lead bank, Zions First National Bank, have long-term deposit ratings of Baa1, short-term deposit ratings of Prime-2, issuer ratings of Ba1 and baseline credit assessments of baa3. The subordinated debt of the holding company is rated Ba1. The change in outlook is based on our view that improvements to Zions’ centralized risk management have enhanced the bank’s ability to maintain a solid balance sheet.

RATING CHANGES Significant rating actions taken the week ending 26 June 2015

36 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Sub-sovereigns

Civitavecchia, Italy Downgrade 18 Feb ‘14 19 Jun ‘15

Senior Unsecured (Domestic) Baa3 Ba1

LT Issuer Rating (Domestic) Baa3 Ba1

Outlook Stable Negative

The downgrade reflects rising pressure on the city’s budgetary balance resulting from the termination of extraordinary contributions paid by Enel SpA to the city, as well as its reduced fiscal flexibility and a weak liquidity position. In 2014, the city faced the termination of special payments made by Enel, the main Italian energy producer, which were compensation for the environmental damage caused by a coal plant. In the last years, these payments represented an important revenue source to the city, accounting for €12 million in 2013 (about 15% of operating revenues).

US Public Finance

Successor Agency to the San Jose RDA, California Review for Upgrade 25 Jul ‘13 24 Jun ‘15

Tax Allocation Bonds Ba2 Ba2

Outlook Stable Review for Upgrade

We placed under review for possible upgrade the ratings on the tax allocation bonds (TABs) of 45 successor agencies to the former California redevelopment agencies (RDAs). The review is in conjunction with the publication of a new, updated methodology for rating tax increment debt. In the methodology, we have introduced a scorecard that outlines our approach to rating tax increment debt nationally with special considerations for the unique credit attributes of California tax allocation bonds. For California tax allocation bonds, we include an important consideration regarding the post-RDA dissolution governing legal structure and framework.

RATING CHANGES Significant rating actions taken the week ending 26 June 2015

37 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Structured Finance

Upgrades Taken on $1 Billion of Subprime RMBS Issues in 2005-06 On 22 June we upgraded the ratings on 53 tranches from 14 transactions issued by RFC, backed by subprime mortgage loans. The upgrades reflect the improving performance of the related pools and/or build-up in credit enhancement of the tranches.

Upgrades Taken on $1 Billion of Subprime RMBS Issued from 2004-06 On 22 June we upgraded the ratings on 39 tranches from 13 subprime RMBS transactions backed by subprime mortgage loans. The upgrades reflect improving performance of the related pools and/or build-up in credit enhancement of the tranches.

Actions Taken on $1.2 Billion of Subprime RMBS Issued from 2005 to 2006 On 25 June we upgraded the ratings on 40 tranches, and downgraded the rating on one tranche, from 22 transactions issued by various issuers and backed by subprime mortgage loans. The upgrades reflect the improving performance of the related pools and build-up in credit enhancement of the tranches. The rating downgrade results from structural features that led to higher-than-expected losses for the bonds. The actions also reflect recent performance of the underlying pools and our updated loss expectations on the pools.

$1.4 Billion of RFC Subprime RMBS Issued from 2003 to 2007 Upgraded On 25 June we upgraded the ratings on 40 tranches from 13 transactions issued by Residential Funding Corporation, backed by subprime mortgage loans. The upgrades reflect the improving performance of the related pools and the build-up in credit enhancement of the tranches. The actions also reflect recent performance of the underlying pools and our updated loss expectations on the pools.

Upgrades Taken on $1.7 Billion of Subprime RMBS Issued by Various Issuers On 25 June we upgraded the ratings on 66 tranches from 27 transactions issued by various issuers and backed by subprime mortgage loans. The actions reflect the recent performance of the underlying pools and our updated loss expectations on the pools. The upgrades also reflect the improving performance of the related pools and the increase in the credit enhancement available to the bonds.

RESEARCH HIGHLIGHTS Notable research published the week ending 26 June 2015

38 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Corporates

North American Building Materials: Volume, Price Momentum Supported by Improving Construction Markets Building materials companies, including aggregates, cement and ready-mixed concrete, are reporting increases in volume and pricing. Construction end markets are improving, economic indicators are favorable and underlying demand is strong. We forecast that organic operating income for the US building materials industry will grow more than 10% over the next 12-18 months.

Global Consumer Packaged Goods: Steady Profit Growth as Pricing, Cost Efficiencies Help Offset FX Headwinds Our outlook for the global consumer packaged goods industry is stable. We expect organic operating income to grow 3%-4% over the next 12 to 18 months, owing to price increases and improved cost efficiencies. Profit growth will also be supported by a fairly benign commodity environment and healthy growth in emerging markets, particularly in India.

Russian Steelmakers Are Well Placed to Withstand Recession Steelmakers have substantially improved their profitability and generated sizable free cash flows, which they have used to reduce debt. Their liquidity is strong with future debt repayments comfortably covered by cash balances, committed credit facilities and solid operating cash flows. This puts them in a strong position to withstand a drop in domestic demand for steel, which we estimate will fall by about 10% in 2015 and will remain weak into 2016.

German Mobile Spectrum Result Boosts Capacity for Growth and Levels Competitive Playing Field On 19 June, the spectrum auction for mobile broadband in Germany ended after 16 days of bidding. Deutsche Telekom AG (Baa1 stable), Vodafone Group Plc (Baa1 stable) and Telefonica Deutschland GmbH & Co (unrated) paid a combined €5.1 billion. The overall outcome of the auction is credit positive for the sector. The amount each company paid does not imply a material deterioration in financial metrics and therefore will not affect their financial strength nor any of their current ratings.

Japanese Shipping Companies’ Leverage Declines with Lease Treatment Update The update reduces the three Moody’s-rated Japanese shipping companies’ adjusted debt amounts. It reflects our view that our analysis of the credit impact of leases should recognize that companies have greater legal and financial flexibility when employing operating leases than would be the case if they had issued debt to finance the purchase of the same assets.

China Property Focus - June 2015 In the first five months of 2015, national sales grew by 5.1% year over year, while contracted sales for the 20 developers that we rate and track grew by 1.3% year over year. Looking ahead, we expect that our rated property developers will outperform the sector in the rest of 2015, as industry consolidation continues and developers launch more projects for sale.

RESEARCH HIGHLIGHTS Notable research published the week ending 26 June 2015

39 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Most US Engineering and Construction Companies Will Hold Up Well Despite Weak Oil, Natural Gas Engineering and construction companies exposed to the midstream and downstream sectors of the oil and gas industry will benefit from increased investments in 2015, while those serving the upstream sectors will suffer from a pullback. Robust oil and gas production from existing North American wells will support demand for new gathering, processing and storage facilities and investments in pipelines.

US Food Distribution: Sysco/US Foods: What’s Next? On 23 June, a US District Court judge issued a preliminary injunction blocking Sysco Corp.’s (A2 negative) proposed acquisition of US Foods Inc. (B3 review for upgrade), voicing support for the Federal Trade Commission’s contention that the deal would impair competition, particularly in the area of “national accounts.” We believe US Foods needs this deal far more than Sysco. The company continues to struggle with the effects of the significant debt incurred by Kohlberg Kravis Roberts & Co. and Clayton, Dubilier & Rice Inc. to finance their 2007 buyout of the company.

US Retail: Does Staples/Office Depot Merger Face Same Fate as Sysco/US Foods? Office Depot needs this merger far more than Staples. Unlike Sysco, Staples has not received funding for the acquisition, so there is nothing to repay. If the deal does not happen, Staples will continue its march towards becoming a true multi-channel retailer and will remain a powerful company. Office Depot will then continue to play catch-up on multiple fronts from a much weaker position.

China Property Developers: Relative Performance and Credit Metrics of 12 Ba/B- rated Developers Excluding Road King (B1 positive), contracted sales for 12 selected Ba and B-rated Chinese developers declined 2.8% in the first five months of 2015, compared with 5.1% growth nationwide. But new launches in the second half of 2015 should lift sales momentum, and we expect that most of the 12 issuers will achieve their full-year targets. Nevertheless, the overall conservative sales growth will likely also moderate revenue growth.

Australia Food & Grocery: David Jones Entry into Food Retail Is Credit Negative for Woolworths and Coles According to a 25 June report in the Australian Financial Review, Woolworths Holdings Ltd (unrated), the South African retailer that bought Australian department store operator David Jones (unrated) in mid-2014, will improve the David Jones food retail offering as well as open standalone upmarket food stores in Australia. With supermarket operator Aldi (unrated) competing aggressively for the lower-to-middle income consumers, having David Jones targeting the higher-income consumers would lead to further market share losses for Woolworths Limited and Coles as the competition increases at both ends of the socioeconomic spectrum.

US Chemicals: New Issuer Formation Continues as Companies Shed Non-Core Assets The number of rated chemical companies has climbed to above 100 from about 80 at the start of 2013, including five new issuers in 2015, and will continue to grow. Shareholder activists are pressuring publicly traded chemicals to improve shareholder returns by selling underperforming or non-core businesses, some of which have become newly rated companies.

RESEARCH HIGHLIGHTS Notable research published the week ending 26 June 2015

40 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Infrastructure

Indonesian Power Sector: Indonesian’s Plan to Expand Power Capacity will Challenge PLN’s Credit Profile PT Perusahaan Listrik Negara’s (PLN, Baa3 stable) credit metrics will be weak over the next five to eight years because of Indonesia’s (Baa3 stable) plans to add 36.6 gigawatts of power generation capacity to the country’s total during 2015-19. The state-owned electricity company will be responsible for developing the transmission and distribution networks to support the larger capacity. Most of PLN’s capex during the next five to eight years will be debt-funded. Nevertheless, PLN’s credit profile over the long term will benefit from incremental cash flow generation and an enhanced business profile, as the added capacity comes online.

RESEARCH HIGHLIGHTS Notable research published the week ending 26 June 2015

41 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Financial Institutions

European Banks Are Better Prepared for Grexit; Periphery Banks Are Vulnerable European banks are better prepared to manage a Greek exit than at the height of the euro area crisis, with substantially lower direct exposures to the country. The risk of restricted market liquidity, or ‘contagion’, is also lower. A Greek exit from the euro area is not our base case scenario. Nonetheless, the confidence shock accompanying a Grexit would disrupt government debt markets and have negative credit implications for some banks on the euro periphery.

US Health Insurers: Supreme Court Ruling has Positive Credit Implications The US Supreme Court ruling on the Affordable Care Act validates the availability of premium subsidies for individuals who purchased insurance policies on the federal health care exchange, removes uncertainty about policies sold in 2015, and serves to stabilize the individual health insurance market for future years. However, the act will still pose challenges to insurers and regulators as a result of recent experience and of provisions of the act not yet implemented.

US Restrictions on Six Large Bank Servicers Are Credit Negative; Non-Bank Servicers Will Benefit The US placed restrictions on six large banks because of their continued deficiencies in servicing delinquent mortgage loans. The restrictions demonstrate, after four years of trying, the banks’ difficulty in improving their controls and processes to current regulatory standards, thereby exposing the banks to additional restrictions and fines along with further damage to their reputations and franchise values.

Canadian Banks and Insurers Lead the Charge in Risk Governance Disclosures We examined the public disclosures of 28 large Canadian financial institutions and found that banks and insurance companies provided the highest level of disclosure on their risk governance practices, while credit unions, crown financial corporations, crown asset managers, and provincial pension funds provided less. But in almost every year since the crisis, just about all firms have added to their risk governance disclosures, and they will continue to do so.

German Banks: Key Analytic Considerations in Our Rating Actions on German Banks

French Banks: Key Analytic Considerations in Our Rating Actions on French Banks

Italian Banks: Key Analytic Considerations in Our Rating Actions on Italian Banks These reports summarise the key analytical considerations in our review of the ratings on 29 German banks, nine French banks and 23 Italian banks, following the update to our banking methodology.

Singapore Banks: Proposed Resolution and Bail-in Regime Are Limited in Scope, a Positive for Bank Senior Creditors Proposals from the Monetary Authority of Singapore (MAS) aim to strengthen its power to resolve failed banks, while maintaining bank functions that are critical to the financial system. MAS’s proposals are largely in line with the Financial Stability Board’s (FSB) Key Attributes of Effective Resolution Regimes for Financial Institutions, with the exception that the MAS proposes a limited scope of liabilities subject to bail-in.

RESEARCH HIGHLIGHTS Notable research published the week ending 26 June 2015

42 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Sovereigns

Tunisia Sovereign Analysis Tunisia’s successful democratic transition and improved funding environment underpin the sovereign’s Ba3 rating and stable outlook. Tunisia’s credit profile is also supported by the expected reduction in fiscal and external imbalances over the next two years.

Greece Sovereign: Political Impasse Continues to Damage Economy, Fiscal Situation and Banking System Negotiations between Greece and its international creditors ahead of the expiration of the country’s bailout programme on 30 June have achieved little progress. This political impasse has undermined investor confidence as well as economic and financial conditions in Greece, resulting in shortfalls in tax revenue collection and continued deposit outflows from banks. However, we believe that the European Central Bank’s decision on Friday 19 June to extend Emergency Liquidity Assistance (ELA) to Greece’s banking sector offers politicians further time to discuss matters again at upcoming meetings.

Renminbi Bonds Monitor - June 2015 Our quarterly report provides an update on China’s onshore and offshore RMB bond markets and our view on the market’s trends. In this issue we discuss our expectation that there will be moderate growth in offshore RMB bond issuance in 2015, among other topics.

Costa Rica Analysis Costa Rica’s Ba1 government bond rating and stable outlook balances the country’s comparatively strong national income and growth dynamics with high fiscal deficits and a rising debt burden. Costa Rica is richer and generally growing faster than its rating peers. Large fiscal deficits and a rising debt burden remain its main medium-term credit risks and ratings constraints.

Lebanon Sovereign Analysis Lebanon’s (B2 negative) public finances benefit from lower oil prices and higher revenues but remain vulnerable to domestic and external shocks. In Lebanon consensus on economic reforms often remains elusive amid a challenging political environment, hampering the country’s competitiveness. In this context, the country’s twin deficits and debt burden are likely to widen in 2015-16.

European Stability Mechanism The European Stability Mechanism’s (ESM) Aa1/Prime-1 ratings reflect the very strong political and financial support of its shareholders, the euro area member states. The ESM’s low leverage is a further credit strength.

RESEARCH HIGHLIGHTS Notable research published the week ending 26 June 2015

43 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Sub-sovereigns

Distrito Federal, Mexico: Risks from Political Reform on Mexico City’s Credit Quality The political reform initiative to modify the legal status of the Distrito Federal´s (Mexico City) and provide the capital with greater autonomy from the federal government could modify its debt framework. Under the current setting, the Government of Mexico (A3, stable) is the obligor for all debt (A3/Aaa.mx) issued by Mexico City. Should this framework change, new debt issued by the city could no longer rank equal to sovereign debt.

US Public Finance

Under Threat of Default, Distressed Hospitals Turn to Mergers and Acquisitions Merger and acquisition strategies will continue apace for the next one to two years as smaller, fiscally distressed not-for-profit hospitals turn to larger for-profit entities to tackle industry challenges. The strategy greatly reduces default or bankruptcy risk for smaller not-for-profit hospitals, and is a credit positive for its bondholders. Smaller providers face mounting regulatory and fiscal challenges which could lead to a negative credit event. Late State Budgets Pose Little Risk for Bondholders As the fiscal year end nears, 17 states have not passed budgets yet although we expect substantially all of them to meet the deadline. State government shutdowns are rare while late budgets are more common. Budget or no budget, states policies and procedures prioritize debt service payments.

Supreme Court Upholds Healthcare Subsidies; Credit Neutral for Not-for-Profit Hospitals and US States The ruling upholds the status quo whereby people can receive subsidies on both state run and federal government run healthcare exchanges. The Supreme Court’s ruling has no credit impact to US Not-for-Profit and Public Hospitals or state governments, although it does remove some uncertainty for budgeting.

Total US State Debt Falls for First Time in Almost 30 Years Our annual state debt medians show the first drop in absolute debt levels since we began compiling the data 28 years ago. Net tax-supported debt for US states declined by $900 million and 33 states experienced a decline in this metric. The 2014 drop follows three years of minimal growth in net tax-supported debt, as states remain cautious in issuing new debt.

RESEARCH HIGHLIGHTS Notable research published the week ending 26 June 2015

44 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Structured Finance

US Structured Finance: Rising US Rates Will Weaken Some Sectors Rising interest rates will be credit negative for new and existing commercial mortgage-backed securities and credit neutral for most consumer and commercial asset-backed securities sectors, depending largely on their exposure to variable-rate debt. The impact will also be largely credit neutral for residential mortgage-backed securities and collateralized loan obligations.

Decline in Voluntary Prepayments from Higher Interest Rates Would Not Tarnish US RMBS Credit Quality We expect voluntary mortgage prepayment activity in US private-label residential mortgage-backed securities (RMBS) to remain steady for the rest of 2015 absent a significant increase in long-term interest rates. However, even if prepayments decline as interest rates rise, it would only be slightly credit negative for private-label RMBS because credit enhancement in the transactions will build more slowly and the average lives of the bonds will lengthen. In addition, the high credit quality of the loans in post-crisis transactions and the structural features of the transactions will generally mitigate the credit weakening.

Japanese RMBS: Rising Condo Prices Are Credit Positive for Condo Investment Loans Higher condominium prices result in higher recovery rates when obligors default. They also prompt obligors to sell their properties and therefore prepay their loans, which accelerates credit enhancement through an increase in the subordinate ratio. Rising condominium prices will therefore cause RMBS recovery rates to increase.

Iron Ore Price Slump Poses No Significant Risks to Current Australian RMBS The severe iron ore price slump and the resulting layoffs of mining employees will not result in any significant losses in Australian residential mortgage backed securities (RMBS) because there is only a limited number of mortgaged residential properties in the main iron ore mining region. In addition, the region where the majority of the fly-in fly-out mining employees live is sufficiently diversified to absorb the stress from the layoffs. We expect that Australian RMBS will continue to perform well, supported by GDP growth of 1.5%-2.5% in 2015 and 2%-3% in 2016 and a broadly stable unemployment rate.

US Government-Sponsored Entity Transactions Display Strong Performance The government-sponsored entity (GSE) transactions issued between 2013 and Q1 2015 that we rate display high prepayments and low delinquency rates, indicators of strong collateral performance. The differences in performance among individual transactions can be attributed to the difference in the collateral make-up of the individual pools, particularly between the high-LTV and the non-high-LTV pools. As a result of the strong performance and structural features of the transactions, the percentage credit enhancement to the rated mezzanine bonds is building, especially for the senior mezzanine tranches, which benefit from the sequential payments to these tranches.

Invitation Homes Leads SFR Market with Strong Portfolio Performance Invitation Homes’ (IH) centralized property management has helped its securitized single-family rental (SFR) portfolios to perform more strongly than other sponsors’ portfolios, although all sponsors’ transactions are performing within our original expectations. Invitation Homes management’s control over tenant sourcing has helped it maintain industry-low vacant property rates, and its ability to maintain its underwriting standards has also helped its portfolios maintain low delinquency rates. Invitation Homes’ vacancy and delinquency performance, combined with better-than-average rental growth, has enabled it to maintain increasing revenues on its portfolios.

RESEARCH HIGHLIGHTS Notable research published the week ending 26 June 2015

45 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

Stronger Cash Liquidity Is Credit Positive for J-REITs The strengthened cash liquidity positions of Japanese real estate investment trust (REIT) issuers provides them with greater financial flexibility and leaves them better prepared to withstand periods of market disruption when they may have difficulty obtaining financing. A further credit positive is that J-REITs have lengthened the tenor of their debt and reduced their annual debt payments, owing to lenders’ positive attitude towards the sector against a backdrop of prolonged low interest rates in Japan.

Japanese Installment Sales Loan Index Default Rate Will Remain Low, Due to Changing Pool Composition The proportion of loans for housing-related products has increased to 42.7% of all loans in Moody’s-rated Japanese installment sales loan securitizations, from 7.5% in September 2012. Loans for housing-related products are associated with lower default rates than loans for other products such as clothing and leisure-related items that traditionally comprise a greater portion of these securitizations, and will therefore help to keep defaults in the Japanese Installment Sales Loan Index low.

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

46 MOODY’S CREDIT OUTLOOK 29 JUNE 2015

NEWS & ANALYSIS Corporates 2 » 3M’s Planned Acquisition of Capital Safety Is Credit Positive » Aldi Steps Up Its Supermarket Expansion, a Credit Negative

for Leaders Woolworths and Coles

Infrastructure 4 » Korean Government’s Small Tariff Reduction Relative to

Input Costs Is Credit Positive for KEPCO

Banks 6 » Costa Rica’s Monetary Policy Rate Reduction Is Credit

Negative for Banks » Credito Valtellinese Will Benefit from Sale of ICBPI » Cypriot Banks Will Benefit from New Code for Handling

Borrowers in Financial Difficulty » Regulatory Easing Is Credit Positive for Korean Financial

Holding Companies

Insurers 15 » Anthem’s Proposed Acquisition of Cigna Is Credit Negative

Sovereigns 16 » Egypt’s Draft Budget Hints at Slower Fiscal Consolidation, a

Credit Negative » Zambia’s Midyear Budget Deficit Is Double Original

Projection, a Credit Negative

US Public Finance 20 » California Forecasts Strong Revenue Growth, a Credit

Positive for the State and Local Governments » Philadelphia School District’s Property Tax Increase Is

Positive, but Not a Long-Term Fix

Structured Credit 24 » Structural Features Mitigate Risk of Anchorage CDO’s

Potentially High Bond Exposure

MOODYS.COM

Report: 182654

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For Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

EDITORS PRODUCTION ASSOCIATE News & Analysis: Jay Sherman and Elisa Herr Sol Vivero Ratings & Research: Robert Cox