MOODYS.COM

28 AUGUST 2017

NEWS & ANALYSIS Corporates 2 » Beacon Roofing’s Allied Building Products Purchase Is

Credit Negative » US Travel Warning Is Credit Negative for Mexican Lodging

Companies and Airport Operators » Total’s Purchase of Maersk Oil & Gas Will Likely Accelerate Its

Return to Cash Dividend, a Credit Negative » CRH’s Disposal of US Distribution Business Is Credit Negative » WPP Lowers Net Sales Guidance for 2017

Infrastructure 7 » A Privatization of Eletrobras Will Be Credit Negative for

the Utility

Banks 9 » Santander Holdings USA Receives Positive Signal from

Federal Reserve » Colombia’s Bank Supervisor’s Expanded Oversight of Financial

Conglomerates Will Benefit Banks » Sberbank Wins Court Appeal in Dispute with Transneft, a

Credit Positive » India Moves Toward Consolidating Public-Sector Banks, a

Credit Positive » Vietnamese Banks Will Benefit from Improved Collateral

Repossession Rules

Insurers 18 » Hurricane Harvey Threatens Significant Losses for P&C Insurers

and Reinsurers » Bupa’s Sale of a Portfolio of UK Care Homes Is Credit Positive » China’s Regulations on Financial Guarantors Are Credit Positive

US Public Finance 23 » Connecticut Executive Order for Government Spending Is

Credit Negative for Local Governments » Northwell’s Decision to Exit Insurance Products Is

Credit Positive

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Thursday’s Credit Outlook 26 » Go to Last Thursday’s Credit Outlook

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NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017 8

Corporates

Beacon Roofing’s Allied Building Products Purchase Is Credit Negative On Thursday, Beacon Roofing Supply, Inc. (B1 review for downgrade) announced that it would buy Allied Building Products Corp. from CRH plc (Baa1 stable) for $2.63 billion in cash. Although the combined company will be able to reap even more of the benefits from the strength of the domestic repair and remodeling industry, the large amount of debt being used for the acquisition is a substantial credit risk. As a result, we put the company’s ratings on review for downgrade.

Cash for the transaction will come from $2.2 billion of new debt and $500 million of convertible preferred equity purchased by an affiliate of private-equity firm Clayton, Dubilier & Rice. Balance sheet debt will increase about $2 billion to $3.2 billion, and we estimate that the company’s pro forma adjusted debt/EBITDA ratio will exceed 6.0x, far worse than the 3.9x ratio at 30 June and beyond our guidance for the B1 rating.

Beacon’s pro forma capital structure at 30 September will consist of a $1.3 billion senior secured asset-based revolving credit facility, of which about $670 million will be outstanding and up to $382 million may be used for the acquisition; a $970 million senior secured term loan, of which $440 million will be used to repay the company’s existing term loan; and $1.6 billion of senior unsecured notes, increased from the current $300 million.

Allied expands Beacon’s geographic presence, particularly in New York, New Jersey and the upper Midwest, and gives the company new products, including wallboard and suspended ceiling systems. Beacon will now have 593 branches, up from 385 currently. The Northeast total is increasing to 199 branches from 120, while the Midwest is almost doubling in number to 61 branches from 33.

Upon the acquisition’s close, Herndon, Virginia-based Beacon will be one of the largest North American distributors of roofing supplies and other exterior products, in addition to interior products such as wallboard and ceiling systems. Interior products, which are new to Beacon’s product offerings, will account for approximately 15% of total pro forma revenue. Roofing products remain core and account for 71% of pro forma revenue, down from 85% for 2016.

Although debt is increasing, revenue is as well. Allied’s revenue is about $2.6 billion a year, bringing the combined company’s pro forma revenue for the 12 months through 30 June to approximately $6.8 billion. We are still assessing adjustments, including combined lease burdens and cost synergies. We also are reviewing integration risks that could delay anticipated cost synergies.

Adjusted debt/EBITDA remaining above 5.0x over the next 12-18 months could prompt a downgrade, but if the company can generate sufficient earnings and free cash flow to bring adjusted leverage close to 4.5x during that period, we could confirm the existing rating.

Peter Doyle Vice President - Senior Analyst +1.212.553.4475 peter.doyle@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 28 AUGUST 2017

US Travel Warning Is Credit Negative for Mexican Lodging Companies and Airport Operators Last Tuesday, the US Department of State issued a new travel warning for US citizens who plan to visit the Mexican states of Baja California Sur and Quintana Roo, both of which contain numerous resort cities and towns popular with US tourists. The travel warning replaces a December 2016 warning and cites areas not included in that warning. In all, last week’s warning brings the number of Mexican states with a US travel warning to 23.

The new warning is credit negative for Mexican lodging companies Grupo Posadas S.A.B. de C.V. (B2 positive) and Playa Resorts Holding B.V. (B3 stable), and for airport operators Grupo Aeroportuario del Pacifico SAB de CV, (GAP, Baa1 positive) and Grupo Aeroportuario del Sureste (ASUR, unrated), which all draw considerable revenue from US tourists visiting cities such as Los Cabos in Baja California Sur, and Cancún and Tulum in Quintana Roo.

The updated warning follows increased homicide rates in both states. Baja California Sur had escaped much of the violence in recent years, but homicides there rose by 357% in the first half of 2017, and in Quintana Roo by 117%. The State Department said that the homicides appear related to organized crime, but US citizens risk being collateral damage. Nationally, Mexico’s homicide rate rose 24% over the prior year to more than 20,000 in 2016, and by another 27% in the first six months of 2017 from the year-earlier period.

Despite the increased violence, Mexico welcomed 35 million foreign tourists in 2016, making it the eighth most popular destination worldwide for overseas visitors, up from 10th place in 2014, according to the United Nations. Based on year-to-date performance as of mid-2017, we estimate that Mexico will host 38 million foreign tourists in 2018 and 42 million in 2020. Nearly 83 million people, including more than 16 million tourists, traveled through Mexican airports in 2016. Mexican State Ministry (Secretaría de Gobernación) data show that 60% of foreigners arrived from the US and 11% from Canada, with more than half of foreign visitors flying into Baja California Sur or Quintana Roo. A recent bilateral agreement with the US will help increase air traffic by about 11% in 2017 amid stiffer competition among airlines. However, the increased violence threatens the positive momentum in Mexico’s tourism sector.

Domestic passengers would partly offset any drop in US visitors. GAP’s airport in Los Cabos served 4.2 million passengers in 2016 (13% of the group’s total traffic), including 3 million international travelers. ASUR’s airports, which include the tourist hotspots Cancún and Cozumel, served 21.9 million passengers in 2016, 68% of them from overseas. ASUR’s domestic passenger numbers grew 12% annually from 2012-16, and foreign passengers by only 9%. GAP’s domestic passenger traffic grew 11% annually during 2012-16 to a record 21.5% in 2016, compared with 9% annually for foreigner passengers during the same period, and by 11% in 2016 alone.

The US government advisory also poses a risk for lodging company revenue. Grupo Posadas has a much more balanced portfolio of hotels than Playa, serving many categories of business and leisure travelers with hotel properties including luxury, mid-price and affordable. Still, Cancún and Los Cabos are important destinations for Posadas, accounting for around 15% of its rooms in these two metropolitan areas, and big investments in both cities about to begin service. Playa Resorts, meanwhile, owns only beachfront all-inclusive resort properties. Nine of its 13 resorts are in Mexico, including seven in Quintana Roo and one in Los Cabos.

Sandra Beltrán Assistant Vice President - Analyst +52.1.55.1253.5718 sandra.beltran@moodys.com

Adrián Garza Vice President - Senior Analyst +52.1.55.1253.5709 adrianjavier.garza@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017

Total’s Purchase of Maersk Oil & Gas Will Likely Accelerate Its Return to Cash Dividend, a Credit Negative Last Monday, French oil company Total S.A. (Aa3 stable) announced a $4.95 billion equity-funded acquisition of exploration and production company Maersk Oil & Gas A/S, a subsidiary of Danish shipping group A.P. Møller-Mærsk A/S (Baa2 negative). The boards of Total and Maersk have agreed to the deal, under which Total will pay Maersk $4.95 billion in new shares (3.75% dilution) and assume $2.5 billion of Maersk Oil’s debt. Total also will assume $2.9 billion of Maersk Oil’s contingent regeneration liabilities, which we do not include in our calculation of adjusted debt.

The transaction is credit negative for Total. We see the equity-funded acquisition as a catalyst for Total to increase its cash dividend payments in 2018, in spite of the company’s prior guidance to return to full cash dividend payments only after the price of oil sustainably reaches $60 per barrel. Reinstatement of the large cash dividend, which would add cash outflow equal to up to 17% of Total’s projected funds from operation (FFO) in 2018, would delay Total’s return to positive free cash flow (FCF) generation, weaken its debt coverage metrics and reduce credit metric headroom under its Aa3 rating.

Acquiring Maersk Oil will not materially change Total’s already-strong business profile and will only marginally add to its operating cash flows. It will add 6%, or 160 thousand barrel of oil equivalent per day (kboed), in 2018, mainly in countries that make up the Organisation for Economic Co-operation and Development and will be cash accretive. Taking into account Maersk Oil’s guidance of $12.5 per barrel of oil equivalent (boe) operating costs per barrel (OPEX) for 2017, we estimate a moderate FFO addition of around $1.7 billion, or around 7% of Total’s expected FFO in 2018.

The acquisition will add about 1 billion boe, or 9%, to Total’s 2016 total proved reserves, at around $7.50 per boe. A large portion of these reserves are undeveloped and will require additional capital investment. We factor about $1 billion additional capital investment per year in 2019-20 to fund Maersk’s two major new projects scheduled to deliver 60-70 kboed of additional net production beginning in 2020. Total said that these additional investments will be accommodated within its prior capital investment guidance of $15-$17 billion per year.

To balance the dilution the Maersk acquisition causes, Total CEO Patrick Pouyanné said that the board will consider removing the share discount on the scrip dividend payment programme after closing the transaction. We expect that this will lead to an earlier reinstatement of a full cash dividend next year and will increase Total’s dividend payments to up to $7 billion from $3 billion projected for 2017. Assuming a $50 per barrel oil price and a successful closing of the transaction in first-quarter 2018, we estimate that Total will generate FFO of around $24 billion in 2018, keep capex at around $18 billion ($17 billion before our adjustments) and an FCF breakeven after a $5-$7 billion cash dividend in 2018-19. We previously expected Total to generate strong FCF in 2018 and 2019.

Increasing the cash dividend at the lower oil price of around $50 per barrel will weaken debt coverage metrics, with the retained cash flow (RCF)/net debt ratio declining to the mid-30% range in 2018 and 2019, from the 37%-42% we projected earlier on the scrip dividend. The reinstatement of the dividends will slow the pace of recovery in Total’s leverage metrics, compared with RCF/net debt of 27% in 2016. However, we expect that Total’s financial metrics will remain within our guidance for its Aa3 rating, which includes cash flow coverage of 30%-40% RCF/net debt. To support its Aa3 rating, Total must continue to balance returns to shareholders and reinvestment into growth projects.

Elena Nadtotchi Vice President - Senior Credit Officer +44.20.7772.5380 elena.nadtotchi@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017

CRH’s Disposal of US Distribution Business Is Credit Negative Last Thursday, CRH plc (Baa1 stable) announced that it had agreed to sell its Americas Distribution business to Beacon Roofing Supply, Inc. (B1 review for downgrade) for $2.63 billion (€2.2 billion), valuing the business at 16x 2016 EBITDA. The proposed transaction is credit negative because it will reduce the depth and breadth of CRH’s business in North America. Creditors also are exposed to the reinvestment risk of the disposal proceeds given that CRH has publicly stated that it will not use the funds to repay debt.

CRH’s high level of vertical integration and its balanced mix between new construction and repair, maintenance and improvement (RMI) have long been key credit strengths relative to more concentrated building materials companies such as LafargeHolcim Ltd. (Baa2 negative), HeidelbergCement AG (Baa3 stable), Vulcan Materials Company (Baa3 stable) and Martin Marietta Materials, Inc. (Baa3 negative). As such, the proposed disposal will reduce the breadth of CRH’s activities in the US. As the exhibit below shows, CRH’s building distribution activities in the Americas accounted for 9% of group revenue in 2016 and was split evenly between new construction and RMI. The large contribution of RMI makes building distribution activities more resilient through cyclical downturns.

CRH’s Revenue Contribution by Segment The company’s distribution activities are highly exposed to renovation.

Segment (Percent of Group Revenue) New Build Repair, Maintenance and Improvement

Europe Heavyside (27%) 70% 30%

Europe Lightside (3%) 70% 30%

Europe Distribution (15%) 35% 65%

Americas Materials (28%) 40% 60%

Americas Products (16%) 60% 40%

Americas Distribution (9%) 50% 50%

Total Group 55% 45%

Source: CRH plc

The disposal will not affect CRH’s end-use split of revenues given that its distribution activities in the Americas are evenly split between new build and RMI. How that changes in the future will depend on CRH’s reinvestment strategy. The exhibit shows that CRH’s revenue is split among different end uses that are more or less cyclical. Reinvesting the proceeds into segments with a high exposure to new construction would result in a more cyclical business, a potential negative for creditors. However, increased cyclicality would be somewhat offset by higher profitability because distribution activities tend to carry lower operating margins.

Last Thursday, CRH also announced that it had acquired German lime and aggregates company Fels, a division of LSF 10 XL Investments S.a.r.l. (B2 stable), for around €600 million, or 8.6x 2016 EBITDA. Fels has nine production locations in Germany and one location each in the Czech Republic and Russia. The acquisition will offer CRH access to 1 billion tons of high quality limestone reserves and a strong market position in Germany. Post-acquisition, CRH will become the second-largest player in the European lime business behind Lhoist (unrated). Fels’ operating performance has been steady in recent years, albeit with low revenue growth. However, it is a profitable business with an EBITDA margin of around 27% in 2016.

Dublin, Ireland-based CRH is one of the world’s largest building materials companies, with operations at more than 3,800 locations in 31 countries. In 2016, CRH’s revenue was €27.1 billion and EBITDA was €3.1 billion.

Stanislas Duquesnoy Vice President - Senior Credit Officer +49.69.70730.781 stanislas.duquesnoy@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017

WPP Lowers Net Sales Guidance for 2017 Last Wednesday, WPP Plc (Baa2 stable) reported first-half 2017 results that were weaker than the company had expected. Reported net sales grew 13.3%, driven mostly by favourable foreign exchange rates, but net sales had decreased 0.5% on a like-for-like basis. The company revised its full-year 2017 net-sales guidance for the second time this year to 0%-1% from 2%. The weaker-than-expected results and reduced net-sales guidance for 2017 are credit negative and raise doubts about WPP’s capacity to grow revenue organically in a weak advertising sector and sustain margins in a highly competitive market.

The main driver of the first half’s lower growth was weaker media spend mainly in the US, Continental Europe and Greater China. Leading the cuts in advertising spend are packaged goods and fast-moving consumer goods (FMCG) companies. These companies’ reduced marketing spend in the US has also adversely affected rated advertising agencies Omnicom Group Inc. (Baa1 stable), Publicis Groupe S.A. (Baa2 stable) and The Interpublic Group of Companies, Inc. (Baa2 stable).

WPP’s net debt increased by £421 million in first-half 2017 versus year-end 2016, although its Moody’s-adjusted gross debt/EBITDA was stable at around 3.8x (slightly above our 3.75x forecast) because the increase in net debt was offset by a £127 million increase in EBITDA. Additionally, WPP reported a 0.1% increase in operating margins and the company reiterated its target of a 0.3% improvement in operating margins to 19.7% for 2017.

WPP’s Moody’s-adjusted leverage has been at the higher end of our 3.75x guidance for a Baa2 rating and additional pressure on revenue and margins might put downward pressure on the rating. However, at this time we expect WPP’s metrics to remain broadly in line with our expectations for its Baa2 rating and stable outlook by year-end 2017.

WPP’s Baa2 rating and outlook continue to reflect its worldwide leadership in advertising, communications and marketing services, its strong position in digital advertising and our expectation that WPP will continue to manage its discretionary cash flows in a way that is commensurate with its Baa2 rating. WPP won £4.2 billion of net new business in first-half 2017, up from £3 billion a year earlier, which, along with the company’s strategy to increase its revenue exposure to high-growth markets, should lead to better growth in 2018.

WPP is a large, globally operating advertising, communications and marketing group. In 2016, it recorded consolidated revenue of £14.4 billion (including commissions fees earned), net sales of £12.4 billion and EBITDA of £2.4 billion.

Christian Azzi Assistant Vice President - Analyst +44.20.7772.5470 christian.azzi@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017

Infrastructure

A Privatization of Eletrobras Will Be Credit Negative for the Utility Last Wednesday, Brazil’s Council of the Investment and Partnership Program, led by Brazilian President Michel Temer, approved the privatization of Centrais Eletricas Brasileiras SA (Eletrobras, Ba3 negative). Although there are no details about how the privatization will occur, our initial take is that the plan would be credit negative for the utility because it reduces implicit support from the Brazilian government (Ba2 negative) at a time when the company faces large cash needs.

Additionally, a privatization risks distracting management, the government and regulators at the expense of other initiatives aimed at improving the company’s performance. Eletrobras last November initiated a turnaround strategy that includes privatizing unprofitable distribution companies, cost-cutting measures that will likely improve EBITDA by BRL1.7 billion per year, and asset sales that could generate around BRL4 billion in cash. Eletrobras’ ratings are unaffected at this time, pending further details about the privatization plan.

On a standalone basis, Eletrobras’ credit quality is constrained by operating performance that lags the industry average, high leverage and tight liquidity. As of June 2017, the company reported BRL47.3 billion in consolidated debt maturities and BRL22.1 billion in provisions to address probable losses associated with civil lawsuits, mostly related to overbillings. The company has another BRL64.5 billion in off-balance-sheet contingent liabilities related to numerous lawsuits and regulatory disputes.

However, Eletrobras has the support of the federal government, which last year advanced BRL2.9 billion for equity increases to cover losses in previous years. This month, Eletrobras received another BRL1.4 billion through the amortization of past-due government receivables that will support its cash needs in the second half of 2017. The government also guarantees approximately 20% of Eletrobras’ reported debt. If private, the magnitude of government support would likely diminish.

The successful completion of Eletrobras’ turnaround plan will support a gradual reduction of its reliance on government financial support. But those improvements will be more visible only after 2018, pending the completion of the restructuring. As such, the company remains exposed to several risks from litigation, unfavorable regulatory decisions and large capital expenditure requirements.

To be sure, privatization would have some benefits. Less political interference has the potential to improve management’s ability to make business decisions, and corporate governance could improve. Other privatizations in Brazil have resulted in companies strengthening their capital structures to pursue technology developments. But the ultimate effect of Eletrobras going private will depend on specifics about whether the government would fully divest from the company or keep a large minority stake, its future business strategies and governance under new ownership, and the specific time frame for the privatization’s completion.

A privatization would require other governmental authorizations, amendments to the legal and regulatory framework, evaluations of the proposed privatization plan and compliance with specific procedures at the stock exchanges where Eletrobras shares trade. A change in control also would entail renegotiating a significant portion of the company’s outstanding debt owing to provisions of debt acceleration embedded in some of its financing arrangements. The exhibit below describes Eletrobras’ debt amortization schedule.

Cristiane Spercel Vice President - Senior Analyst +55.11.3043.7333 cristiane.spercel@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017

Eletrobras’ Unrestricted Cash and Debt Amortization Schedule as of 30 June 2017

Source: The company’s audited financials

Eletrobras is Brazil’s largest electricity utility, accounting for 31% of the country’s generation capacity and 47% of installed transmission lines. It has annual revenue of about $11 billion. The Brazilian government is Eletrobras’ largest shareholder, holding 51% of the voting shares and 41% of total share capital.

7.7

9.4

8.4

4.3

9.5

2.7

13.1

0

2

4

6

8

10

12

14

Unrestricted Cash 2H17 - 2018 2019 2020 2021 2022 2023 and Later

BRL

Billi

ons

Unrestricted Cash Debt Amortization

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017

Banks

Santander Holdings USA Receives Positive Signal from Federal Reserve On Thursday, the US Federal Reserve (Fed) terminated its 2014 written agreement with Santander Holdings USA, Inc. (SHUSA, Baa3 stable), a credit positive because it demonstrates SHUSA’s progress in adequately addressing some deficiencies regarding capital action planning and oversight. Although the termination of the agreement gives SHUSA more flexibility to leverage its balance sheet, we believe that its high capital ratios, its major credit strength, will not deteriorate meaningfully. The maintenance of two additional written agreements with the Fed related to risk management and governance should dissuade SHUSA from taking aggressive capital actions.

In 2014, SHUSA entered into a written agreement with the Fed because its auto finance subsidiary, Santander Consumer USA, Inc. (unrated), declared an unauthorized dividend to its third-party shareholders. The dividend declaration came after the Fed in March 2014 objected to SHUSA’s Comprehensive Capital Analysis and Review (CCAR) plan based on qualitative concerns and indicated that any capital distribution would need regulatory approval. The Fed also objected to SHUSA’s 2015 and 2016 CCAR submissions on qualitative grounds. In 2016, the last year that SHUSA was subject to the qualitative assessment, the Fed cited weaknesses in its capital planning process and risk management framework.

Despite the negative stigma of a written agreement, we viewed the agreement as credit positive for SHUSA and its US bank subsidiary Santander Bank, N.A. (SBNA, A2/Baa2 stable, baa2/baa11) because it committed SHUSA to maintaining financial soundness to serve as a source of strength to SBNA. The written agreement also mandated SHUSA and its subsidiaries not to make any capital distributions without the Fed’s prior written approval, and to strengthen board oversight of planned capital distributions. The termination of the agreement indicates the Fed’s satisfaction that SHUSA has met these requirements, which is positive.

Two additional written agreements with the Fed, one entered into in 2015 and another in March 2017, remain in effect. The 2015 written agreement requires SHUSA to address identified deficiencies in governance, risk management, capital planning and liquidity risk management. The 2017 written agreement details necessary steps that SHUSA and Santander Consumer must take to enhance their risk management and governance. The maintenance of the 2015 and 2017 agreements should dissuade SHUSA from materially leveraging its balance sheet. Thus, its high capital ratios should remain in place, preserving a major credit strength.

As the exhibit below shows, SHUSA’s and SBNA’s tangible common equity as a percentage of risk-weighted assets are substantially higher than their peers. Furthermore, our current ratings factor in the expectation that these high ratios could decline.

1 The bank ratings shown in this report are SBNA’s deposit rating, senior unsecured debt rating, baseline credit assessment and

adjusted baseline credit assessment.

Megan Fox Analyst +1.212.553.4986 megan.snyder@moodys.com

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017

SHUSA’s and SBNA’s Tangible Common Equity as a Percent of Risk-Weighted Assets versus Peer Median, 2014 to First-Quarter 2017

Source: Bank filings

14%

17%

12%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2014 2015 2016 Q1 2017

Santander Holdings USA, Inc. Santander Bank, N.A. baa2 median

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017

Colombia’s Bank Supervisor’s Expanded Oversight of Financial Conglomerates Will Benefit Banks Last Wednesday, Colombia’s House of Representatives approved a law that gives the Superintendencia Financiera de Colombia (Superfinanciera), the bank supervisor, oversight of all companies within a financial conglomerate, as well as the controlling shareholders. Previously, Superfinanciera had authority over only domestic banking operations. The measure, which has already been approved by the Senate, requires President Juan Manuel Santos’ final approval to take effect.

The new law is credit positive for Colombian banks because expanded jurisdiction will allow regulators to better identify linkages and contagion risks among entities in the same conglomerate, which will bring Colombian supervision more in line with international and regional standards. Superfinanciera is already responsible for overseeing insurance companies, pension funds and brokerage houses, in addition to banks’ domestic operations. However, until now, these entities’ have all been supervised on a standalone basis, even when they were part of the same conglomerate as a bank. Superfinanciera now will have oversight over banks’ foreign subsidiaries and holding companies, which will allow it to assess conglomerate members’ risks, including any non-financial businesses, on a consolidated basis.

The law will be particularly important for the supervision of Colombian banks’ significant holdings in various Central America countries that tend to have weaker and more volatile operating environments than Colombia. Colombian banks have acquired local operations in the region in recent years to diversify their revenue. Currently, approximately 30% of Colombian banks’ loan exposures is allocated to Central America (see exhibit). Although the supervisor can request information regarding these foreign subsidiaries, it currently has no direct authority over them, and therefore is unable to set and enforce rules and requirements regarding their operations.

CColombian Banks’ Loan Exposures in Central America, COP Billions

Bank Colombia Panama El Salvador Guatemala Costa Rica Honduras Other

Countries

Bancolombia 102,012 31,216 8,880 8,266

1,374

Banco de Bogota 49,297 12,140 4,331 7,603 11,815 4,520 9,837

Davivienda 57,471 2,927 5,044

5,199 2,290

BBVA Colombia 36,805

Occidente 26,405

Popular 16,541

AV Villas 9,410

Banco GNB Sudameris 6,996 449

5,255

Total 304,935 46,731 18,254 15,868 17,013 6,810 16,466

Sources: Banks’ financial statements

Superfinanciera also will supervise banks’ controlling shareholders, including holding companies. The supervisor’s new oversight authority will help ensure that the country’s banks are not threatened by risks related to their parents’ other interests, which could arise from loans to related parties and excessive leverage at the holding company, among other things. This is an important development because in many instances controlling shareholders of Colombian banks have significant business interests in the financial services industry, as well as in unrelated sectors of the economy.

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

Vicente Gómez Associate Analyst +52.55.1555.5304 vicente.gomez@moodys.com

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017

For example, holding company Grupo de Inversiones Suramericana S.A. (unrated) is the largest shareholder of Colombia’s biggest bank, Bancolombia S.A. (Baa2/Baa2 stable, ba12); Suramericana S.A. (unrated), which operates in the life, property and casualty insurance sectors through Seguros de Vida Suramericana S.A. (financial strength Baa2 stable) and Seguros Generales Suramericana (financial strength Baa2 stable); Inversiones Argos S.A. unrated), which specializes in cement and energy transmission; and Grupo Nutresa S.A. (unrated), whose business is processed foods.

The other five largest domestically owned banks in Colombia also are owned by holding companies with interests in other companies that are not currently under Superfinanciera oversight. These are Grupo Aval Acciones y Valores S.A. (Ba2 stable), a financial holding company that controls Banco de Bogotá S.A. (Baa2/Baa2 stable, ba1), Banco de Occidente S.A. (Unrated), Banco Popular S.A. (unrated) and Banco AV Villas S.A. (unrated), as well as merchant bank Corporación Financiera Colombiana S.A. (unrated). Grupo Empresarial Bolívar (unrated) owns Banco Davivienda S.A. (Baa3/Baa3 stable, ba1); Seguros Bolivar (unrated), Colombia's second-largest insurer; Bolivar Propiedades (unrated), a real estate firm; and Seguridad Compañía Administradora (unrated), a pension fund manager.

The information at the conglomerate level also will allow supervisors to aggregate exposures per borrower for all banking subsidiaries controlled by a single parent, and to establish consolidated maximums for each, helping to reduce high loan concentrations at Colombian banks. Despite these improvements in risk measurement, banks will not be required to aggregate exposures to companies in different economic segments, but which belong to the same widely diversified conglomerates. This will remain a shortcoming of the system.

2 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating and baseline credit assessment.

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017

Sberbank Wins Court Appeal in Dispute with Transneft, a Credit Positive Last Wednesday, Sberbank (Ba2/Ba1 stable, ba13) successfully appealed an earlier decision by Russia’s court of first instance to compensate Transneft, PJSC (Ba1 stable) for RUB66 billion ($1.1 billion) of losses on an already-settled derivative transaction with Sberbank. The court ruling is credit positive for Sberbank and other banks operating in Russia’s over-the-counter (OTC) derivative market because it substantially reduces the risk of customers challenging the legality of trades on which they lost money.

The foreign-currency derivative transaction between Sberbank and Transneft preceded the 50% ruble depreciation in 2014 and created a RUB66 billion loss for Transneft, a Russian monopoly pipeline operator. Transneft filed a claim with the Russian arbitrage court asking to void the transaction, arguing that Sberbank had acted unfairly at the inception of the transaction. Two months ago, the court of first instance ruled in favor of Transneft, whose claim equaled more than one quarter of Sberbank’s second-quarter 2017 pre-tax income of RUB231 billion. With Sberbank having won the appeal, the threat to Sberbank’s earnings has materially decreased.

Beyond benefitting Sberbank directly, the ruling also will benefit all Russian banks operating in the OTC derivative market. According to Russia’s National Financial Association, more than 50% of all local foreign-currency derivative transactions in Russia took place in the OTC market in 2016. Had Sberbank been forced to reimburse Transneft for its losses, the ruling risked triggering a wave of similar claims against Russian banks from their counterparties. Such claims would threaten the sector’s earnings and the future of the Russian OTC derivative market.

Other Russian banks that indirectly benefit from the appeal include Alfa-Bank (Ba2/Ba2 stable, ba2), Bank VTB, JSC (Ba2/Ba1 stable, b1) and Bank Otkritie Financial Corporation PJSC (Ba3/Ba3 review for downgrade, b1 review for downgrade), all of which are major operators of Russia’s OTC derivative market. Although these banks do not provide details on their counterparty derivative exposures, the total contractual amount of their derivative business appears to be the largest in Russia, as seen in the exhibit below.

Largest Russian Banks’ Exposure to Derivatives as of 31 December 2016

Bank Total Assets RUB Billions

Notional Amount of Foreign Currency Derivatives

RUB Billions

Total Positive Fair Value of Derivative Financial

Instruments RUB Billions

Sberbank 25,369 2,121 207

VTB Group 12,586 Not disclosed 181

Gazprombank 4,879 195 46

Bank Otkritie Financial Corporation

2,703 997 30

Russian Agricultural Bank 2,463 299 120

Alfa Bank 2,320 1,331 4

Credit Bank of Moscow 1,568 167 3

Promsvyazbank 1,224 340 17

Unicreditbank 1,173 339 52

B&N Bank 1,103 185 0

Source: Banks’ IFRS reports

3 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating and baseline credit assessment.

Semyon Isakov Vice President - Senior Analyst +7.495.228.6061 semyon.isakov@moodys.com

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017

India Moves Toward Consolidating Public-Sector Banks, a Credit Positive Last Wednesday, the Union Cabinet of India announced that a ministerial panel led by Finance Minister Arun Jaitley would be set up to consider and oversee mergers among the country’s 21 public-sector banks. This is credit positive because mergers would provide scale efficiencies and improve the quality of corporate governance. However, absent fresh capital infusions from the government, such mergers would not improve public-sector banks’ weak capitalization.

Poor corporate governance has been a structural credit weakness at public-sector banks, and managing all 21 has proven to be unwieldy for the government, which has been unable to pay sufficient attention to key issues such as long-term strategies and human resources. Consolidation would address some of these issues.

Consolidating public-sector banks also would help from a scale perspective. Public-sector banks are the dominant segment of India’s banking system, holding around 74% of all deposits. However, with the exception of State Bank of India (Baa3 positive, ba14), none of the other public-sector banks is large enough to have a competitive advantage (see Exhibit 1). This may change with consolidation, given the potential for some of these banks to grow to levels that exceed even large private-sector banks.

EXHIBIT 1

Indian Public-Sector Banks’ Market Share by Deposits as of March 2017

Key: SBI = State Bank of India; PNB = Punjab National Bank; BOB = Bank of Baroda; BOI = Bank of India; CAN = Canara Bank; UNION = Union Bank of India; CBI = Central Bank of India; IDBI = IDBI Bank Limited; SYN = Syndicate Bank; CORP = Corporation Bank; OBC = Oriental Bank of Commerce; IOB = Indian Overseas Bank; ALLBank = Allahabad Bank; UCO = UCO Bank; ANDHRA = Andhra Bank; INDIANBK = Indian Bank; BOM = Bank of Maharashtra; VIJAYA = Vijaya Bank; UBI = United Bank of India; DENA = Dena Bank; PSB = Punjab & Sind Bank; HDFC = HDFC Bank; ICICI = ICICI Bank; AXIS = Axis Bank; KOTAKM = Kotak Mahindra Bank; YES = Yes Bank. Sources: The banks and Reserve Bank of India

Notwithstanding the positive effect on corporate governance and scale efficiencies, any proposed mergers would not improve public-sector banks’ weak capitalization. As Exhibit 2 shows, most public-sector banks have weak capital levels, so merging two or more entities with weak capital levels will create a larger entity with weak capital. Until there is clear visibility on the merger process, including which entities would merge with and the terms of such a merger, public-sector banks will continue to have difficulty accessing the equity capital markets as investors demand clarity on these details. As a result, we continue to believe that capital infusions from the government remain key to improving these banks’ capital levels.

4 The bank ratings shown in this report are State Bank of India’s deposit rating and baseline credit assessment.

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(5)

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ION

(6)

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(7)

IDBI

(8)

SYN

(9)

CO

RP

(10)

OBC

(11)

IOB

(12)

ALLB

ank

(13)

UC

O (1

4)

AND

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A (1

5)

IND

IAN

BK

(16)

BOM

(17)

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8)

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(19)

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A (2

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PSB

(21)

HD

FC

ICIC

I

AXIS

KOTA

K M

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YES

All Public-Sector Banks and Rank Top Five Private-SectorBanks

Srikanth Vadlamani Vice President - Senior Credit Officer +65.6398.8336 srikanth.vadlamani@moodys.com

Jason Sin Associate Analyst +65.6311.2603 jason.sin@moodys.com

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017

EXHIBIT 2

Indian Public-Sector Banks’ Common Equity Tier 1 Ratios as of March 2017

Key: INDIANBK = Indian Bank; SBI = State Bank of India; PSB = Punjab & Sind Bank; BOB = Bank of Baroda; CAN = Canara Bank; CBI = Central Bank of India; UBI = United Bank of India; VIJAYA = Vijaya Bank; ALLBank = Allahabad Bank; CORP = Corporation Bank; PNB = Punjab National Bank; UNION = Union Bank of India; ANDHRA = Andhra Bank; UCO = UCO Bank; OBC = Oriental Bank of Commerce; IOB = Indian Overseas Bank; SYN = Syndicate Bank; DENA = Dena Bank; BOI = Bank of India; BOM = Bank of Maharashtra; IDBI = IDBI Bank Limited. Sources: The banks

We note that the approval by the cabinet is only the first step in what will be a complex process. However, we believe that there is a high probability that the mergers will take place given the government’s apparent willingness to see this through.

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NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017

Vietnamese Banks Will Benefit from Improved Collateral Repossession Rules Last Monday, the state-owned Vietnam Asset Management Company (VAMC, unrated) completed its first repossession of collateral for a nonperforming loan (NPL) using the country’s new Resolution 42, which allows banks and the VAMC to rapidly repossess collateral in the event of a borrower default. The speedy repossession of collateral is a credit-positive step for Vietnamese banks, which continue to grapple with legacy asset-quality issues caused by rapid credit growth and loose underwriting standards of the past decade (see exhibit). Under previous rules, we understand that it took the banks a number of years to repossess collateral.

Moody’s-Rated Vietnamese Banks’ Stock of Nonperforming and Special-Mention Loans and VAMC Bonds as a Percent of Adjusted Gross Loans Banks’ stock of impaired assets remains high.

Key: Maritime = Vietnam Maritime Commercial Joint Stock Bank; Sacom = Saigon Thuong Tin Commercial Joint-Stock Bank; VPB = Vietnam Prosperity Jt. Stock Commercial Bank; BIDV = Bank for Investment and Development of Vietnam; ABB = An Binh Bank; SHB = Saigon Hanoi Commercial Joint Stock Bank; VIB = Vietnam International Commercial Joint Stock Bank; HD Bank = Ho Chi Minh City Development JSC Bank; OCB = Orient Commercial Joint Stock Bank; TP Bank = Tien Phong Bank Commercial Joint Stock Bank; MB = Military Commercial Joint Stock Commercial Bank; Techcom = Vietnam Technological and Commercial Joint Stock Bank; Vietcom = JSC Bank for Foreign Trade of Vietnam; ACB = Asia Commercial Bank; and Vietin = Vietnam Joint Stock Commercial Bank for Industry and Trade. Sources: The banks and Moody’s Investors Service

The Vietnamese government remains committed to addressing banks’ asset-quality challenges, but measures implemented so far have been ineffective in cleaning up bank balance sheets. The government established the VAMC in 2013, and the State Bank of Vietnam required all banks to transfer NPLs in excess of 3% of total loans to the VAMC in exchange for zero-yielding VAMC bonds that had to amortize over five to 10 years.

However, the cumulative NPL recovery rate by the VAMC has been low at approximately 20%, in part because of a lack of clarity on collateral repossession in Vietnam’s civil code, which has undermined efforts to recover collateral owing to a cumbersome legal process that can last around three years. On 15 August 2017, the government enacted Resolution 42 to allow banks and state-owned organizations to handle NPLs by rapidly repossessing collateral.

The ability to repossess collateral is a critical next step in resolving NPLs and we expect Resolution 42, which removes previous legal impediments, to help improve the rate of collateral repossession by banks and the VAMC. The effectiveness of the new regulation was apparent in VAMC’s first repossession of collateral for an NPL, which it completed the same month that Resolution 42 was enacted. The new regulation also rebalances the bargaining power of banks and the VAMC vis-à-vis borrowers.

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Maritime Sacom VPB BIDV ABB SHB VIB HD Bank OCB TP Bank MB Techcom Vietcom ACB Vietin

NPL SML VAMC

Rebaca Tan Associate Analyst +65.6311.2610 rebaca.tan@moodys.com

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

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017

However, a tangible effect on banks’ asset quality and profitability will materialize only after the sale of the repossessed collateral. Although banks can reduce their reported NPLs by offloading problem loans to the VAMC, asset quality and profitability can only improve if and when the VAMC successfully sells the repossessed assets.

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017

Insurers

Hurricane Harvey Threatens Significant Losses for P&C Insurers and Reinsurers On Friday, Hurricane Harvey developed into a Category 4 and made landfall near Rockport, Texas. In addition to direct losses, the storm is causing heavy rainfall and storm surge-related losses along coastal Texas. It will take some time to determine the magnitude of insured damages and the degree to which the hurricane affects various industry participants.

Primary insurers will face the largest effect from Harvey, with regionally focused carriers most vulnerable given their geographic concentrations. The Southeast is a peak catastrophe zone in the US for reinsurers, and those with exposure to Texas are at risk of incurring meaningful losses, although we expect those losses to be manageable relative to earnings.

Exhibits 1 and 2 detail the primary insurers likely to be affected by Harvey, based on their market share in Texas. State Farm Mutual Automobile Insurance Company (unrated), The Allstate Corporation (A3 stable) and Farmers Exchange Capital (Baa2 stable) all have high homeowners market shares in Texas (see Exhibit 1). CNA Financial Corporation (Baa2 stable), Liberty Mutual Group Inc. (Baa2 stable) and American International Group, Inc. (Baa1 stable) lead the commercial property market (see Exhibit 2). We expect that these large national carriers will have the capacity to withstand a significant event based on careful monitoring of their coastal exposure, geographic diversification, high quality reinsurance protection and strong capital bases owing to a decade free of severe catastrophes.

EXHIBIT 1

Top 10 Homeowners’ Insurers in Texas

Rank Company

Direct Premiums Written in Texas

$ Millions Premium Concentration in Texas1

1 State Farm $1,859 10%

2 Allstate $1,074 14%

3 Farmers $925 17%

4 United Services Automobile Association $853 16%

5 Liberty Mutual $698 11%

6 Travelers $333 9%

7 Nationwide Mutual $270 7%

8 Texas Farm Bureau Underwriters $239 100%

9 Chubb Limited $186 7%

10 Progressive $186 20%

Note: 1 Data calculated as 2016 homeowners and farm-owners direct written premiums in the state as a percent of countrywide homeowners and farm-owners premiums. Sources: SNL Financial L.C. (Contains copyrighted and trade secret materials distributed under license from SNL, for recipient’s internal use only) and Moody’s Investors Service

Jasper Cooper Vice President - Senior Analyst +1.212.553.1366 jasper.cooper@moodys.com

Estella Tu Associate Analyst +1.212.553.1334 estella.tu@moodys.com

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017

EXHIBIT 2

Top 10 Commercial Property Insurers in Texas

Rank Company Direct Premiums Written in Texas

$ Millions Premium Concentration

in Texas1

1 CNA $523 12%

2 Liberty Mutual $405 7%

3 American International Group $330 9%

4 Travelers $323 8%

5 Germania Mutual $289 100%

6 Chubb Limited $268 8%

7 Farmers $231 11%

8 Zurich Insurance2 $229 11%

9 Nationwide Mutual $207 8%

10 Assurant $192 10%

Notes: Data include allied lines, commercial multi-period (non-liability), fire and inland marine. 1 Data calculated as 2016 commercial property direct written premiums in the state as a percent of countrywide commercial property premiums. 2 Business written by Zurich’s US subsidiary, Zurich American Insurance Company.

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

As Harvey weakens to a slow-moving storm, the middle and upper Texas coast could receive two to three feet of rain or more in certain areas. Parts of the southeast greater Houston metropolitan region (6.5 million population) received more than 20 inches of rainfall by early Sunday morning. Isolated tornados have also been reported. We expect that a significant share of insured losses will derive from wind and rain for areas that were not directly hit by the hurricane.

Significant losses along the Texas coast will be absorbed by the Texas Windstorm Insurance Association (TWIA), the insurer of last resort. In total, TWIA provided about $67.6 billion of coverage as of 30 June 2017. TWIA’s total payment capacity is about $4.9 billion, which TWIA estimates will cover more than a 1-in-100-year hurricane. If TWIA’s total losses were to exceed its payment capacity, it would have the option to charge assessments or surcharges on TWIA policyholders.

Forecasters expect Harvey to stall over the area, causing torrential rain and widespread, severe flooding. There will be significant economic losses, but flood damage is typically not covered by homeowners’ policies. This often becomes a point of dispute when the immediate cause of loss (wind versus flood) is unclear. Commercial lines insurers could face losses from flooding, which is typically an optional commercial coverage. Business interruption losses could also be significant, especially if there are extended power outages.

Harvey highlights the significant exposure that Texas and the Southeast face to hurricanes. According to Property Claims Services, a unit of VerRisk Analytics, the effect in today’s dollars of historical Texas storms would be significant for primary insurers and reinsurers. For example, insured losses from Hurricane Ike in 2008 would be about $14 billion, while Hurricane Rita in 2005 would be almost $7 billion.

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017

Bupa’s Sale of a Portfolio of UK Care Homes Is Credit Positive Last Wednesday, the British United Provident Association Ltd. (Bupa), which issues debt via Bupa Finance Plc (Baa2 stable), announced that it had agreed to sell 122 of its UK care homes to HC-One (unrated) for approximately £300 million, pending customary regulatory approvals. The disposal is credit positive for Bupa because it will use the sale proceeds to repay a portion of its outstanding bank loan, which will reduce financial leverage and lead to an uptick in its Solvency II ratio from the 160% reported at first-half 2017. This sale follows the July disposal of Bupa Thailand to Aetna Inc. (Baa2 stable).

During the first six months of this year, Bupa’s financial leverage (i.e., debt, including our adjustments for operating leases, divided by debt plus shareholders’ equity) increased to around 36% from 29% at year-end 2016. This increase was driven by the debt-funded acquisition of Oasis Dental Care in February and an 8% stake increase in Bupa Arabia in June, which brought its total ownership to 34.25%. Since Bupa will use the UK Care Home sale proceeds to repay part of its outstanding bank loan, pro forma financial leverage will decline 1.9 percentage points to 33.9%, which is within our expectations for its Baa2 rating.

In the first half, Bupa’s acquisition of Oasis Dental Care and the increased stake in Bupa Arabia reduced Bupa’s regulatory Solvency II coverage to 160% from 204% at year-end 2016, as own funds fell 19% to £3.4 billion. The partial sale of Bupa’s UK care homes business and Bupa Thailand will modestly increase capital coverage. We also expect Bupa to continue growing profitability and realising expected revenue synergies from recent acquisitions, which would drive up its Solvency II capital ratio in the absence of further material acquisitions.

We estimate that the care homes being sold contributed less than 3% to total group revenue for the first six months of 2017, only modestly affecting Bupa’s top line, business mix and earnings. We expect growth in dental from the Oasis acquisition to more than offset any lost earnings. Bupa also remains committed to the UK care home market and will retain more than 150 care homes and six retirement villages. This year, Bupa also is investing more than £120 million, in addition to the £100 million it invested last year, into refurbishing and maintaining existing care homes and building four new retirement villages, ensuring it remains a leading provider of health and social care in the UK.

Our Baa2 rating incorporates our assumption that Bupa will continue to optimise its portfolio through disposals and acquisitions. For example, the UK dental market remains highly fragmented and we expect Bupa to participate in further market consolidation as well as seek out acquisitions in emerging markets. Mergers and acquisitions elevate business risk, as reflected in Bupa’s relatively high financial leverage and the material level of goodwill/intangibles on the balance sheet, which increased to 64% of shareholders’ equity as of 30 June 2017, from 53% at year-end 2016. Therefore, we will continue to watch the development of Bupa’s regulatory ratio and its ability to realise expected synergies from acquisitions.

Helena Kingsley-Tomkins Assistant Vice President - Analyst +44.20.7772.1397 helena.kingsley-tomkins@moodys.com

NEWS & ANALYSIS Credit implications of current events

21 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017

China’s Regulations on Financial Guarantors Are Credit Positive Last Monday, the State Council of the People’s Republic of China announced official regulations on financial guarantors, finalizing a request for comment issued in 2015. Compared with the temporary rules, the new regulations tighten the eligibility criteria for setting up a financial guarantee company. They also introduce risk-management guidance, including a risk-based calculation for single-obligor concentration, maximum guarantee portfolio leverage, and limits on related-party transactions. The new framework, which takes effect 1 October, is credit positive for Chinese financial guarantors.

The regulations (see Exhibit 1) lay out clearly specific requirements for setting up a financial guarantor and opening new branches. Specifically, the significantly higher minimum capital requirement will ensure that companies have the capital to withstand reasonably stressful losses, and to remain solvent as they build their scale. By imposing requirements on minimum operating history and profitability for companies expanding their geographic footprint, the regulations will limit overly aggressive growth.

EXHIBIT 1

China’s Key Eligibility Criteria for New Financial Guarantors and Branches

New Regulations Previous Temporary Regulations

Establishing a Financial Guarantor

» Shareholders’ must have a positive reputation and no major violations for the past three years

» Minimum registered capital of RMB20 million

» Shareholders must provide proof of capital contribution and, if holding 5% or more of the registered capital, proof of good financial standing

» Minimum registered capital of RMB5 million

Opening Cross-Region Branches

» Minimum registered capital of RMB1 billion

» Three years of operating history in the financial guarantee industry and profitability in the past two consecutive years

» No major violations for the past two years

» Local regulatory approval where the branch is located

Sources: State Council of the People’s Republic of China and China Banking Regulatory Commission

A key credit positive is that the new regulations show a clear emphasis on risk-oriented measurement, which should improve insurers’ ability to gauge, differentiate and manage risk in their portfolios. The regulations will apply universally the concept of risk-weighted net par outstanding (NPO)5 on the guarantee portfolio, which is a better measure of true risk exposure compared with the nominal guarantee amount traditionally used. This will also encourage the use of reinsurance, helping guarantors diversify their risk. The new regulations will apply these new metrics to existing limits for portfolio leverage and single-obligor concentration, adding constraints on the guarantors’ ability to take on excessive risks and providing a more effective risk warning mechanism (see Exhibit 2). Until now, only some local regulators applied risk-weighted NPO to guarantors under their supervision.

5 Net par outstanding refers to the aggregate outstanding principal amount of the insured obligations, net of reinsurance. Risk-

weighted NPO = ∑(risk factor x NPO), risk factors have not yet been defined in the current announcement.

Qian Zhu Vice President - Senior Credit Officer +86.21.2057.4014 qian.zhu@moodys.com

NEWS & ANALYSIS Credit implications of current events

22 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017

EXHIBIT 2

China’s Maximum Guarantee Portfolio Leverage and Single-Obligor Concentration Limits New Regulations Previous Temporary Regulations

Maximum Guarantee Portfolio Leverage

» Risk-weighted NPO/guarantor’s shareholders’ equity < 10

» NPO/shareholders’ equity < 10

Single-Obligor Concentration Limits

» Risk-weighted NPO of single obligor/shareholders’ equity < 10%

» Risk-weighted NPO of single obligor and its related parties/shareholders’ equity < 15%

» NPO of single obligor/shareholders’ equity < 10%

» NPO of single obligor and its related parties/shareholders’ equity < 15%

» NPO of single bond issuance/shareholders’ equity < 30%

Sources: State Council of the People’s Republic of China and China Banking Regulatory Commission

The new regulations also will significantly reduce related-party transactions, improving the overall credit quality of the guarantee portfolio. Financial guarantors will be prohibited from providing financial guarantees to their controlling shareholders or controlling parties and from offering more favorable terms to their related parties. In contrast, the temporary regulations only prohibit guarantors from providing financial guarantee to their parents or subsidiaries.

We consider financial guarantees extended by a company to its controlling shareholder as risky since the guarantor would be supporting the shareholder’s financing, which effectively means that the capital provided to the guarantor is recycled. In addition, the guarantor’s credit decision may be based on the relationship rather than its creditworthiness, raising governance issues.

The new regulations provide strong incentives to guarantors to provide financial guarantees to small and midsize enterprises and agriculture-related business. Although this directive will likely bring more credit risk to the guarantee portfolio given the weaker credit quality of these sectors, its negative effect is mitigated by the government’s proposed support measures, including direct capital injections from the local government and the establishment of a risk-sharing mechanism between the guarantor and the local government.

NEWS & ANALYSIS Credit implications of current events

23 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017

US Public Finance

Connecticut Executive Order for Government Spending Is Credit Negative for Local Governments On 18 August, Connecticut (A1 stable) Governor Dannel Malloy signed an executive order replacing a June proclamation that served as the state spending plan in the absence of an approved state budget for fiscal 2018 (which ends 30 June). The revised executive order is credit negative for Connecticut local governments because it reduces total aid to municipalities by $928 million, or 38%, from 2017 funding levels and approximately $244 million relative to the governor’s 26 June order.

The August executive order reduces the largest source of state municipal aid, the state’s Education Cost Sharing (ECS) grants, by $557 million relative to the fiscal 2017 disbursement. The largest reductions in ECS grants are to Stratford (A1 negative), whose ECS grants fell by $21.5 million; Southington (Aa2 no outlook), whose grants fell by $20.3 million; and Enfield (Aa2 no outlook), whose grants fell $20 million (see exhibit).

Three Largest Reductions in Connecticut’s Educational Cost Sharing Grants

Note: Data from 2016 are most currently available audited fund balances. Sources: State of Connecticut and municipalities’ audited financial statements

The order eliminates entirely ECS grant funding to 85 Connecticut towns and reduces funding to an additional 54 municipalities. However the order does restore full 2017-level funding to Connecticut’s 30 lowest-performing Alliance Districts, including Bridgeport (A2 negative), Hartford (B2 negative), Waterbury (A1 stable) and New Haven (Baa1 stable).

The latest decree also maintains the elimination of $182 million of payment in lieu of taxes (PILOT) disbursements to local governments that were in the June executive order. State-disbursed PILOT disbursements to local governments aim to offset a portion of lost property tax revenues to local governments attributed to tax-exempt state, college and hospital-owned properties. Additionally, the revised executive order reduces smaller municipal revenue-sharing grants by approximately $131 million.

Since the end of fiscal 2017, Connecticut has operated without a fiscal 2018 budget and has not distributed certain small-scale grants and other types of funding that it provided in prior years to local governments. The state’s larger local government disbursements are coming due shortly, with the state’s PILOT disbursements scheduled to be distributed at the end of September and the first installment of the education cost-sharing grant scheduled for October.

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Stratford Southington Enfield

Total 2016 General Fund Balance Lost Education Grant Lost Aid as Percentage of 2016 General Fund Balance

Joseph Manoleas Analyst +1.212.553.7106 joseph.manoleas@moodys.com

NEWS & ANALYSIS Credit implications of current events

24 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017

Barring passage of a state budget, the projected cuts will likely force municipalities to take emergency action through supplemental tax hikes or mid-year expenditure cuts. Use of reserves to address budgetary shortfalls is a challenge in Connecticut because the median fund balance in the state for towns and cities of 13% is already lower the national median of 31% of revenues. Although the executive order is currently effective, the ultimate passage of a 2018 budget will supersede the edict and will likely affect the amount of state aid disbursed to municipalities.

NEWS & ANALYSIS Credit implications of current events

25 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017

Northwell’s Decision to Exit Insurance Products Is Credit Positive Last Thursday, Northwell Health, NY (A3 stable) announced that it would exit the health insurance business in 2018, just four years after entering the sector. The exit is credit positive for Northwell because it will stop the losses that have occurred since entering the business.

The exact amount of benefit Northwell will achieve cannot be determined yet; it must provide a 180-day notice period before it can stop accepting new members and people can sign up for 12-month plans during that time. However, we believe that it is unlikely many individuals or businesses will want to sign up for a Northwell-sponsored insurance product knowing that the company intends to exit the insurance market.

Insurance losses totaled $26.5 million in first-quarter of 2017 (second quarter results have not been released yet), on top of $168 million in 2016 and $41 million in 2015. We believe full-year 2017 losses will be somewhat lower than in 2016, but still more than $100 million. The final amount will depend on the outcome of negotiations with various parties including state regulators and will not be known for several months.

Losses mainly reflect large payments made under the Affordable Care Act’s risk-adjustment pool methodology. Payments under this program totaled $132 million in 2016 and may reach $118 million in 2017. Startup costs with the new plans also contributed a share of losses over the past several years. To date, the losses have been manageable for Northwell overall: in 2016, the system posted $9.9 billion in revenue, and generated positive cash flow of approximately $620 million, versus $556 million in revenue at the insurance companies. Northwell made nearly $340 million in capital contributions to its insurance companies through the first quarter of 2017, which is manageable relative to the system’s overall unrestricted cash position of nearly $3 billion. Nevertheless, the insurance losses have been a drag on operations, lowering the system’s cash flow margin by approximately 1.5 percentage points in 2016, consuming cash and senior management’s time and effort.

Although the insurance plans were a core component of the system’s long-term population health strategies, we believe there are myriad other ways the organization can achieve population health goals, such as reducing unnecessary hospitalizations and improving the health of communities it serves, without owning a health insurance plan. Population health refers to a variety of efforts to manage total cost of care while improving health outcomes, including efforts to reduce unnecessary utilization or shift payment models toward value-based payments and away from pure fee for service.

Daniel Steingart, CFA Vice President - Senior Analyst +1.949.429.5355 daniel.steingart@moodys.com

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

26 MOODY’S CREDIT OUTLOOK 28 AUGUST 2017 8

NEWS & ANALYSIS Corporates 2 » Talcum Powder Jury Award Against Johnson & Johnson Is

Credit Negative » Herbalife’s Planned Share Repurchase Is Credit Negative » Kellermeyer Bergensons Services’ Purchase of Varsity Facility

Services Is Credit Positive » Korea’s Plan to Raise Mobile Tariff Discount Rate Is Credit

Negative for Carriers

Infrastructure 8 » Sempra’s Acquisition of Oncor Carries Credit Challenges that

Outweigh Diversification Benefits

Banks 9

» Bank of Cyprus’ Need for Increased Provisions and Reduced Capital Is Credit Negative

» Omani Banks Will Benefit from Rising Interest Rates

MOODYS.COM

Report: 196910

© 2017 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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

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

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

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

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

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

Additional terms 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 SENIOR PRODUCTION ASSOCIATE Jay Sherman and Elisa Herr Amanda Kissoon