MOODYS.COM

2 JULY 2015

NEWS & ANALYSIS Corporates 2 » IAC/InterActiveCorp's Plan for Dating Business IPO Is Credit

Negative

» Amphenol's Planned Acquisition of FCI Is Credit Positive

» Itochu's Exit from US Shale Gas Business Is Credit Positive

Infrastructure 5 » US Supreme Court MATS Ruling Is Positive for Coal-Dependent

Public Power, Negative for Unregulated Midwest Generators

Banks 7 » CorpBanca Shareholders Approve Merger with Banco Itau Chile,

a Credit Positive

» Italy's Faster Tax Deductibility of Loan-Loss Charges Is Credit Positive

» Kazkommertsbank Secures $1.35 Billion Loan from Kazakhstan’s Distressed Assets Fund, a Credit Positive

» Korean Banks' Asset Quality Threatened by Rising Number of Marginal Companies

Insurers 12 » Reinsurance Group of America's Longevity Transaction with

Delta Lloyds Hedges Its Mortality Risk, a Credit Positive

Sovereigns 14 » In Tunisia, Second Deadly Attack on Tourists in Four Months Is

Credit Negative

Securitization 16 » New Italian Law Would Improve Recoveries, a Credit Positive

for RMBS and SME ABS

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Monday’s Credit Outlook 18 » Go to Last Monday’s Credit Outlook

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NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 2 JULY 2015

Corporates

IAC/InterActiveCorp’s Plan for Dating Business IPO Is Credit Negative Last Thursday, IAC/InterActiveCorp (Ba1 stable) said that it would pursue an initial public offering (IPO) of its subsidiary The Match Group, which operates its online dating websites (Match.com, Tinder and OkCupid). IAC said it would offer less than 20% of The Match Group’s (Match) common shares in the IPO.

The planned IPO is credit negative for IAC because it heightens the risk of an eventual Match spinoff, which we see as the next logical step. A Match spinoff would decrease IAC’s scale and earnings, resulting in the loss of the 30% of revenue and nearly 50% of adjusted EBITDA that Match provided for the 12 months that ended 31 March. Also, because Match is chiefly a subscription-based revenue model, a spinoff would leave IAC more exposed to cyclical advertising revenues.

If IAC were to spin off Match into a standalone company without substituting its revenue and EBITDA, IAC’s debt/EBITDA ratio on a Moody’s-adjusted basis would rise to about 4.5x from 2.6x as of March 2015, presuming IAC keeps all of the $1 billion of its existing debt on its balance sheet, which we expect. Covenants on IAC’s senior notes due in 2018 and 2022 limit the company’s ability to pay dividends or buy back shares if its leverage ratio exceeds 3x.

We rate IAC speculative grade because of the risk of a spinoff or sale of its businesses, despite its solid credit metrics. Although IAC did not announce a plan to spin off Match, the company’s press release mentioned several past spinoffs of fast-growth businesses to its shareholders, including in 2008, when it spun off four companies simultaneously. For now, IAC will retain a controlling interest in Match, permitting it to continue to include 100% of the subsidiary’s revenue, EBITDA and cash flow in its results.

The IPO allows IAC, controlled by investor Barry Diller, to unlock asset value while social-media companies are commanding high enterprise value to EBITDA multiples of 20x-23x in the public equity markets as a result of growth expectations. For the 12 months through March 2015, Match’s revenue rose 12% and it generated adjusted EBITDA of $243 million.

We believe Match could realize an enterprise value of $5.0-$5.5 billion, which means IAC could reap $500 million to $1 billion in IPO proceeds based on a sale of 10%-19% of Match. That would further boost IAC’s already substantial liquidity (SGL-1), which consisted of $877 million of cash and marketable securities as of March 2015.

Although proceeds could be used to retire debt, we expect that IAC will ultimately uncouple Match, and so it is likely that the company will use the proceeds to pursue acquisitions that complement its content and video-streaming assets and could help replace the high-margin EBITDA, stable cash flows and diversification that Match provided.

The Match Group was created in December 2013 when IAC combined Match.com with several of its subscriber-based businesses. In addition to its online-dating business, IAC owns more than 150 Internet-based brands and products, including the Ask.com search engine; online reference sites such as About.com, Dictionary.com and Investopedia.com; e-commerce sites such as HomeAdvisor and Shoebuy; and video-sharing site Vimeo. Its revenue totaled $3.1 billion for the 12 months ended 31 March.

Gregory A. Fraser, CFA Vice President - Senior Analyst +1.212.553.4385 gregory.fraser@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 2 JULY 2015

Amphenol’s Planned Acquisition of FCI Is Credit Positive On Monday, US-based Amphenol Corporation (Baa1 stable) said that it had made a binding offer to acquire Singapore-based FCI Asia Pte Ltd. (B1 stable) for $1.28 billion, or about 2x estimated revenue. The planned transaction is credit positive because it will diversify Amphenol’s geographic and end-market exposure and enhance product offerings in high-speed backplane and mezzanine connectors.

The acquisition, which Amphenol expects to complete later this year, will boost its expertise in high-speed backplanes and mezzanine connectors and enhance its power interconnect offerings. FCI will also improve Amphenol’s access to sales distribution channels in the IT data communications and telecom markets, particularly in the Asia-Pacific region. We expect these end markets to be robust as worldwide usage of data bandwidth and the build-out of cloud computing centers increase over time. Although the telecom sector’s long-term prospects are positive, wireless and wireline carriers’ capital spending is volatile and can contribute to revenue swings in the event of an economic downturn.

Amphenol has a strong track record of acquiring and successfully managing businesses through its decentralized organizational structure. Although management does not typically disclose anticipated cost savings from acquisitions, we expect the company to focus on increasing operating margins at FCI by sharing production techniques across the combined business.

We expect Amphenol to fund most of the purchase with overseas cash, which would efficiently use cash that would otherwise be subject to repatriation taxes. We also expect the company to finance a portion of the deal with debt. Although Amphenol has not disclosed its pro forma capital structure, we expect only a modest effect (if any) on leverage at closing. Adjusted debt/EBITDA was about 2.4x for the 12 months ended 31 March. FCI is owned by Bain Capital and the company expects its existing debt to be repaid at closing.

As a result of the reduction in cash balances and the potential for further debt increases under the company’s revolver or commercial paper program, the FCI acquisition outlay will weaken liquidity. Amphenol had about $750 million available under its $1.5 billion revolver as of 31 March 2015 (net of commercial paper usage) and about $1.35 billion of cash and equivalents, which is largely held overseas.

Matthew B. Jones Vice President - Senior Analyst +1.212.553.3779 matthew.b.jones@moodys.com

Stephen D. Morrison Associate Analyst +1.212.553.2806 stephen.morrison@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 2 JULY 2015

Itochu’s Exit from US Shale Gas Business Is Credit Positive On 24 June, the Nikkei reported that Japanese trading company Itochu Corporation (Baa1 stable) had exited its US shale gas operations. Itochu’s withdrawal from this market-sensitive business with uncertain visibility and three years of consecutive losses is credit positive because it will lower the company’s earnings volatility and help steadily increase its retained earnings, which will help stabilize leverage.

Itochu’s withdrawal from this business will put an end to losses and uncertainty. Itochu’s shale gas business, which is part of the company’s Energy & Chemicals segment, was conducted through its wholly owned subsidiary JD Rockies Resources Ltd. (unrated), which has held a 25% stake in Samson Investment Company (Caa3 negative) since December 2011. Samson’s rating reflects margins, cash flow and liquidity that have become increasingly stressed by low commodity prices and an overleveraged balance sheet, raising questions about the sustainability of the company’s capital structure. This situation factored into Itochu’s decision to exit this business.

Losses in the shale gas business have been large for Itochu, resulting in more than ¥100 billion in impairment losses from the shale gas business by 31 March 2015. The impairment losses – equal to its entire stake – reflect the challenges the company faced in competing against larger Japanese trade companies in this segment. We do not expect any further material effect on earnings from this business.

Itochu had a solid earnings track record during the four years that ended on 31 March 2015, reporting net income of ¥300.6 billion, in line with its earnings forecast despite the impairments on investments in shale gas and other resource-related businesses. The company forecast net income of about ¥330 billion for the fiscal year ended 31 March 2016, and expects the Energy & Chemicals segment to make the largest contribution to the increase in earnings. The company’s management plan through 31 March 2018 calls for concentrating on non-resources sectors to generate stable earnings.

Itochu’s scale, as defined by revenues and total assets, is average among the seven Japanese trading companies that we rate. The company is considerably smaller and had much less exposure to resource-related segments as well as less developed networks and access to market information than larger and higher-rated companies such as Mitsubishi Corporation (A1 negative) and Mitsui & Co. Ltd. (A2 stable). Itochu is unique in its decision to exit a business to which these and other Japanese trading companies remain committed. Therefore, Itochu’s shrinkage of its resource-related business is credit positive considering its lack of competitiveness relative to larger players, and the exit furthers its management plan.

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

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 2 JULY 2015

Infrastructure

US Supreme Court MATS Ruling Is Positive for Coal-Dependent Public Power, Negative for Unregulated Midwest Generators On Monday, the US Supreme Court reversed a District of Columbia Circuit Court’s decision on the US Environmental Protection Agency’s (EPA) Mercury and Air Toxics Standards (MATS), stating that the EPA did not properly consider the cost of MATS compliance. The Supreme Court remanded the decision back to the lower court and the timing of the next step is uncertain.

Coal-dependent cooperatives and municipalities such as Nebraska Public Power District (A1 stable) and South Carolina Public Service Authority (A1 stable) will benefit from the ruling. Investor-owned coal-dependent utilities such as American Electric Power Company, Inc. (Baa1 stable) and FirstEnergy Corp. (Baa3 stable) will benefit to a lesser extent. Their coal-fired power plants can potentially operate longer than they expected because the scheduled retirements of smaller, less-efficient coal-fired power plants and capital investment to meet environmental standards could be delayed. For most regulated utilities, the ruling is credit neutral because regulated utilities are largely in compliance already.

For unregulated merchant generators, particularly those located in the Midwest, where coal-fired generation is the dominant fuel source, as well as owners of cleaner, environmentally friendly generation, the ruling is credit negative. Many coal plants currently serving the midcontinent independent system operator (MISO) power market were scheduled to retire on 31 May 2016. With the MATS now in question, these plants may choose not to retire, at least not immediately. As a result, the power supply in this region is likely to fall by a smaller amount than the companies expected.

Unregulated power companies with capacity in MISO power market, such as Dynegy Inc. (B2 stable), fall into this category and face negative credit effects because surplus supply in this specific market will continue to impede an increase in power prices. Furthermore, this ruling is also credit negative for the electric utilities with a cleaner power portfolio, such as Exelon Corporation (Baa2 stable), which owns significant capacity in MISO, because its cleaner generating fleet will continue to compete with coal-fired power plants, further pressuring power prices to remain low.

However, for most utilities and power companies, the decision is a non-event because many coal-fired generation owners have already invested capital to meet the MATS. Also, other coal plants have closed because they were unable to recover operating cost amid sustained low natural gas prices.

As a result of the potential implementation of the MATS and the Cross-State Air Pollution Rule (CSAPR), both regulated and unregulated power generators have reduced sulfur dioxide, nitrogen oxide and mercury emissions. The CSAPR went through similar legal challenges as the MATS and the Supreme Court upheld it and the EPA’s ability to regulate air pollution that crosses the state lines. The deadline for the first phase of the CSAPR was in May 2015 and the second phase begins in 2017. Consequently, we believe most power generators are already in compliance with the MATS; they had three years to decide whether to retrofit their coal-fired generation fleet or to retire the assets.

Jairo Chung Analyst +1.212.553.5123 jairo.chung@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 2 JULY 2015

Exhibit 1 shows the environmental capital expenditures of 30 electric utilities representing the sector. These utilities were chosen because they represent diverse parts of the US power markets. As the exhibit shows, their environmental capital expenditures peaked in 2013 as the 30 utilities made environmental investments to reduce emissions and meet the first phase of CSAPR. Environmental capital expenditures should decline significantly after 2016 because we expect that the utilities have already met the emission reduction level and no further environmental investments are needed. Electric utilities believe the second phase of CSAPR will be met with the environmental investments already made to meet first-phase emission reduction.

EXHIBIT 1

Thirty Select US Electric Utilities’ Environmental Capital Expenditures

Note: E = Estimate. Source: SNL Financial LC

As Exhibit 2 shows, the electric power sector was already planning to reduce mercury emissions in 2012, before the MATS were fully considered. The implementation of emission reduction compliance is a long-term strategy and the electric power sector has been executing plans to reduce emissions over the past three years.

EXHIBIT 2

MATS Compliance Strategies in the Electric Power Sector at Year-end 2012

Notes: FGD = flue gas desulfurization. DSI = dry sorbent injection. Source: US Energy Information Administration

$4.0

$4.5

$3.6

$2.8

$1.8

$0.7 $0.6

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

$5.0

2012 2013 2014 2015E 2016E 2017E 2018E

$ Bi

llion

s

Already Complies Using FGD64%

Undecided (May Retrofit or Retire)20%

Planned Retirements9%

Planned DSI1%

Planned FGD5% Already Complies Using DSI

1%

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 2 JULY 2015

Banks

CorpBanca Shareholders Approve Merger with Banco Itau Chile, a Credit Positive Last Friday, shareholders of Chilean bank CorpBanca (Baa3/Baa3 review for upgrade, ba11) approved a merger with Banco Itau Chile (A2 stable, baa2), removing the last major obstacle to completing a merger that the banks had originally announced in January 2014.

Shareholders’ approval is credit positive for CorpBanca because it ends a long period of negotiations with the bank’s minority shareholders and clears the way for completion of the deal, which the companies expect will occur between January and May 2016, pending approval from Chile’s Superintendency of Banks. Authorities in Colombia and Panama, where the combined bank will have operations, and in Brazil have already approved the change of the new controlling-shareholder to Itau Unibanco Holding S.A. (IUH, Baa3 negative).

The merger will consolidate the combined bank’s position as the fourth-largest lender in Chile, and strengthen its competitiveness in Colombia, where Banco CorpBanca Colombia S.A. (unrated) and Itau BBA Colombia S.A. Corporacion Financiera (unrated) will also merge. Once the transaction is complete, IUH will retain 33.58% of the combined Banco Itau CorpBanca S.A., while CorpGroup will hold 33.13% and minority shareholders will retain the remaining 33.29%.

CorpBanca’s relatively weak capitalization will be strengthened through the merger because it will become part of Brazil’s largest banking group, increasing its earnings potential and creating cost synergies that will enhance its capacity to generate capital internally. Following years of acquisitions, CorpBanca has accumulated large amounts of goodwill and intangibles, which we discount from our preferred measure of core capital because these components provide little or no loss absorption. The bank’s adjusted tangible common equity to risk-weighted assets (TCE/RWA) was a low 3.9% in March 2015. IUH is committed by the transaction agreement to inject an additional $552 million of fresh capital into Banco Itau Chile before the merger, which will bring the combined bank’s TCE/RWA to approximately 7%, using added March 2015 figures.

Although both Itau Chile and CorpBanca are largely wholesale funded, together they will be able to raise more low-cost funding by gathering increased retail deposits, which will allow them to expand profitable lending.

For IUH, the acquisition aligns with the Brazilian bank’s strategic expansion in Latin America, giving it a larger geographic footprint and business diversification in the growing Andean region. Upon finalization of the merger, IUH’s assets in Latin America outside Brazil will constitute roughly 14% of its consolidated assets, based on 31 March 2015 financial statements, up from the current 6%. With a market capitalization of $60 billion, IUH has the capacity to invest in CorpBanca without significantly reducing its core capitalization. The capital injection that IUH announced equals just 2% of its consolidated Tier 1 equity.

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

credit assessments.

Ceres Lisboa Senior Vice President +55.11.3043.7317 ceres.lisboa@moodys.com

Georges Hatcherian Analyst +52.55.1555.5301 georges.hatcherian@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 2 JULY 2015

Italy’s Faster Tax Deductibility of Loan-Loss Charges Is Credit Positive On 24 June, the Italian government passed a decree, pending Parliamentary approval, that would allow banks full tax deductibility of loan-loss charges in the year in which they are booked rather than over five years as currently required. The change is credit positive for Italian banks because speeding up the tax deduction will reduce the banks’ taxes and increase after tax cash flow that can build cash capital.

The decree will reduce the generation of new deferred tax assets for at least the next two years, when we expect loan-loss charges to remain high. Since 2010, loan-loss charges have constituted an average of nearly 80% of the system’s pre-provision profit, reaching a peak of 101% in 2013 (see exhibit). The decree will also improve Italy’s comparability with other European banking systems.

Main Components of Italian Banks’ Profitability, € Millions

Simplified Income Statement 2010 2011 2012 2013 2014

Pre-provision Profit €25,487 €23,117 €27,716 €31,003 €30,165

Loan-Loss Charges -12,618 -13,778 -24,240 -31,431 -30,152

Other Provisions and Impairments -2,726 -20,582 -6,085 -13,471 -6,256

Extraordinary Profits/Losses 1,880 -13,010 -2,232 -11,130 -3,579

Pre-tax Profit/Loss 12,023 -24,253 -4,841 -25,029 -9,822

Tax -3,067 1,531 2,339 3,024 1,259

Net Profit/Loss €8,956 €-22,722 €-2,503 €-22,005 €-8,563

Loan-Loss Charges as a Percent of Pre-Provision Profit

50% 60% 87% 101% 100%

Cost of Credit (Loan-Loss Charges as a Percent of Loans)

67 bp 73 bp 120 bp 168 bp 172 bp

Source: Bank of Italy

The limited deductibility of loan-loss charges has generated a substantial amount of deferred tax assets; as of December 2014, the stock of deferred tax assets generated by the limited tax deductibility of loan-loss charges was €43 billion.

In line with our forecasts of a moderate recovery in Italy’s economy (we expect GDP growth of less than 1% in both 2015 and 2016), we expect loan-loss charges to fall slightly. However, it is unlikely that they will return to pre-crisis lows, and we expect that they will remain a significant factor affecting Italian banks’ profitability. The other major European banking systems allow banks to deduct loan-loss charges in the year they are booked; this new approach will put Italian banks in line with most banking systems globally, levelling the playing field.

The new law will not change regulatory capital ratios for Italian banks. In past years, Italian banks have been allowed to account for the deferred tax assets generated by the deductibility over five years of loan-loss charges as a component of common equity Tier 1.

London +44.20.7772.5454

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 2 JULY 2015

Kazkommertsbank Secures $1.35 billion Loan from Kazakhstan’s Distressed Assets Fund, a Credit Positive On 24 June, Kazakhstan’s National Distressed Assets Fund agreed to extend a KZT250 billion ($1.35 billion) 10-year loan to Kazkommertsbank (B2/Caa1 stable, caa12) to allow the bank to lower interest rates on outstanding loans, which will help the bank deal with its huge overhang of problem loans, a credit positive.

Most of Kazkommertsbank’s problem loans are a legacy of rapid loan growth before Kazakhstan’s 2009 banking crisis. In early 2014, Kazkommertsbank also absorbed the troubled BTA Bank (previously the country’s third-largest bank by assets), which increased its nonperforming loans (NPLs) to 63% of gross loans by mid-2014 from 32% at year-end 2013. Because about half of all overdue loans in the entire Kazakh banking system (i.e., 29% of total gross loans as of 1 May 2015) are at Kazkommertsbank, a reduction in its legacy problems3 will also benefit the broader Kazakh banking sector (see exhibit).

Kazakhstan’s Overdue Loans as Percent of Gross Loans

Source: The National Bank of Kazakhstan

Although the KZT250 billion loan equals only about 6% of the Kazakh banking system’s total overdue loans of KZT4.0 trillion as of May 2015 (excluding restructured loans), it is equivalent to more than half of Kazkommertsbank’s and 10% of the banking system’s Tier 1 regulatory capital.

The fund’s loan to Kazkommertsbank indicates that the Kazakh authorities’ are willing to help the nation’s banks deal with their legacy asset-quality issues, and it follows KZT130 billion (about $700 million) in multiple loans of support to banks in June that was more narrowly focused on mortgages originated between 2004 and 2009.4

We expect that further government support will be needed to address the NPL overhang, especially as the slowing local economy puts pressure on performing loans originated more recently. We expect other similar loans to support other banks will be forthcoming later this year.

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

assessment. 3 By mid-2015 the bank began repossessing non-financial collateral it held as security on many of its overdue loans. 4 See Kazakhstan Lends Funds to Help Banks Refinance Legacy Problem Loans, a Credit Positive, 23 April 2015.

0%

5%

10%

15%

20%

25%

30%

35%

40%Loans Overdue Over 90 Days Loans Overdue 0-90 Days

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

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 2 JULY 2015

Korean Banks’ Asset Quality Is Threatened by Rising Number of Marginal Companies On Tuesday, the Bank of Korea in its Financial Stability Report stated that the number of companies whose operating income did not cover their interest expense for three consecutive years increased in 2014. The number of such so-called marginal companies rose to 3,295 of 25,452 corporations as of December 2014, a 15% increase from 2011, despite a 175-basis-point decline in the central bank’s benchmark rate during the period.

The increase of marginal companies is credit negative for Korean banks and we expect large corporate loan exposures in structurally declining sectors to pose a significant risk to asset quality. The greatest risk is from loans to the shipbuilding, steel and shipping sectors, where the number of marginal companies increased last year despite ongoing restructuring efforts led sometimes by policy banks. For example, as of December 2014, the Export-Import Bank of Korea (KEXIM, Aa3/Aa3 positive5) held a 70.71% stake in Sungdong Shipbuilding & Marine Engineering Co, Ltd. (unrated) and a 67.27% stake in Daesun Shipbuilding & Engineering Co, Ltd. (unrated), both of which have been under creditors’ joint management since 2010.

We analyzed seven major banks: KEXIM, Hana Bank (A1/A1 stable, baa1), Kookmin Bank (A1/A1 stable, baa1), Korea Development Bank (KDB, Aa3/Aa3 positive, ba2), NongHyup Bank (A1/A1 stable, baa3), Shinhan Bank (Aa3/Aa3 stable, a3) and Woori Bank (A1/A1 negative, baa2). Among these banks, loans to the shipping, shipbuilding, construction and steel sectors were a high 12% of their loan books, with policy banks such as KEXIM and KDB having higher exposures. KDB disclosed that its credit exposure including loans, guarantees and equity investments to financially troubled companies such as STX Offshore & Shipbuilding (unrated), Dongbu Steel (unrated) and Daehan Shipbuilding Co., Ltd. (unrated) totaled 3.2% of its total assets or 27.8% of its equity as of December 2014.

Although the nonperforming loan ratios of the problem sectors were relatively stable in 2014, their delinquency ratios have been rising steadily. As of May 2015, the ratio of construction loans overdue by more than 30 days rose to 2.46%, versus 1.08% in December 2014, while shipping loans rose to 1.52% from 0.94%, and shipbuilding loans rose to 1.90% from 1.15%, according to the Financial Supervisory Service.

Although the policy rate continues to decline, with another 50-basis-point cut in the first half of 2015, we do not expect this to meaningfully improve the marginal companies’ interest-servicing ability because their revenues and profits have also been declining. Indeed, revenues of shipping companies declined by 8.2% and those of shipbuilders by 1.7% in 2014, according to Bank of Korea. Furthermore, although corporate leverage in general has been declining in Korea, the debt-to-equity ratio of marginal companies remains high at 239% as of December 2014, as shown in the exhibit below, which is substantially higher than the 82% for healthy corporates.

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

credit assessment (where available).

Sophia Lee, CFA Vice President - Senior Analyst +852.3758.1357 sophia.lee@moodys.com

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 2 JULY 2015

Number of Marginal Korean Companies and Their Debt-to-Equity Ratio

Source: The Bank of Korea

0%

50%

100%

150%

200%

250%

300%

0

300

600

900

1,200

1,500

1,800

2,100

2,400

2,700

3,000

3,300

2009 2010 2011 2012 2013 2014

Number of Marginal Companies - left axis Debt-to-Equity - right axis

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 2 JULY 2015

Insurers

Reinsurance Group of America’s Longevity Transaction with Delta Lloyds Hedges Its Mortality Risk, a Credit Positive Last Friday, Reinsurance Group of America, Inc. (RGA, Baa1 stable) announced that it had agreed to provide longevity risk protection and capital benefit to Delta Lloyd Levensverzekering N.V. (unrated), the Dutch life insurance arm of the Delta Lloyd Group (Delta Lloyd, unrated). The transaction, which covers €12 billion of reserves and is the second longevity transaction that RGA has entered into with Delta Lloyd, is credit positive for RGA because it further diversifies the company’s earnings away from mortality risk.

The current transaction, which has a duration of eight years, is designed to provide Delta Lloyd protection on its longevity business.6 Like the prior deal that RGA entered into with the Dutch insurer, rather than reinsure Delta Lloyd’s liability directly, RGA entered into a transaction meant to approximate longevity risk to which Delta Lloyd is exposed, basing payments on the longevity of the Dutch population as a whole.

Under the terms of the transaction, RGA and Delta Lloyd will exchange net payments, depending on the performance of Dutch population mortality results. If the Dutch population lives longer than priced into the longevity transaction, RGA will pay Delta Lloyd. Conversely, if the Dutch population does not live as long as expected, Delta Lloyd will pay RGA. By designing the transaction around a broad population index and not Delta Lloyd’s exact liability, RGA eliminates exposure to the asystematic tracking error associated with a subset of the population.

The key risk that RGA faces with Delta Lloyd is that the Dutch population experiences greater longevity than RGA’s pricing estimates. However, given RGA’s strong mortality expertise and the wealth of available population mortality data, we believe the company is well positioned to assess the risk.

RGA is one of the world’s largest reinsurers of mortality risk, with more than $2.9 trillion of life reinsurance in force as of 31 December 2014. The longevity risk associated with this transaction is a natural offset to mortality risk. Historically, most longevity-related deals by RGA or in the life industry have been in the UK, where there are substantial defined-benefit plans.

Providing longevity protection is a substantial growth opportunity for RGA. Insurers in Europe are seeking ways to provide protection against longevity risk and finance the high regulatory capital costs associated with assuming such risk. In an investor presentation on 19 May, the company indicated that for this business line it had a four-year pre-tax operating earnings compound annual growth rate of 46% through 2014 in Europe, the Middle East and Africa (EMEA) and Canada. Pre-tax operating income from longevity transactions in EMEA and Canada was just above $50 million in 2014, or 6% of the company’s total pre-tax operating income of $942 million that year (see exhibit). Although undisclosed, we expect that RGA has priced the new deal to make approximately 10-20 basis points of the notional amount of the deal (i.e., the €12 billion of reserves).

6 In the previous transaction with Delta Lloyd, announced in August 2014, RGA provided longevity risk protection and capital

benefit covering approximately €12 billion of reserves, for a period of six years.

Weigang Bo, CFA, CPA Associate Analyst +1.212.553.4331 weigang.bo@moodys.com

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

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 2 JULY 2015

Reinsurance Group of America’s EMEA and Canada Longevity Pre-Tax Operating Income

Source: Reinsurance Group of America

In an August 2013 report, the Bank for International Settlements indicated that globally, there were about $20 trillion of pension assets held by private pension plans as of year-end 2011. In the UK, the market that has experienced the most longevity-related deals, there are about £1 trillion of defined benefit plans, of which only 5% have entered into longevity transactions. There have also been some notable deals in the US market, namely two pension risk transfer transactions by Prudential Financial, Inc. (Baa1 stable) in 2012 for a total of about $30 billion in assets. In the wake of these deals, we expect that other companies will enter into similar transactions.

$0

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2010 2011 2012 2013 2014

$ M

illio

ns

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 2 JULY 2015

Sovereigns

In Tunisia, Second Deadly Attack on Tourists in Four Months Is Credit Negative Last Friday, a Tunisian student attacked foreign tourists at a beach resort in Sousse, Tunisia, killing at least 38. It was the second large-scale attack on foreign tourists in the country in just four months, following two Tunisian gunmen killing 22 people at a museum in Tunis in March. Although Tunisia’s (Ba3 stable) successful democratic transition between 2011 and 2014 and our outlook for its economic recovery prompted us in May to change the outlook to stable from negative, the terrorist attacks are credit negative. They threaten the nation’s economic outlook, investment activity and the travel and tourism industry, a key contributor to GDP.

The travel and tourism industry in Tunisia accounted for 7.4% of GDP and 6.8% of total employment in 2014. Including the travel and tourism sector’s indirect contributions of investment spending, government spending and the effect of purchases from the travel industry, the contributions to GDP are about double. The first-quarter 2015 balance of payments data show a downturn in tourism revenues in US dollar terms because tourism has yet to recover to pre-crisis levels of 2010 (see exhibit below). The number of overnight stays also dropped during the first five months of the year compared with 2014 and 2010 levels.

Tunisia’s Four-Quarter Moving Average of Tourism Export Revenues

Source: Haver Analytics

Our growth forecast of 2.8% reflects the effects of the museum attack, but the latest attack and weak 1.7% growth in the first quarter suggests our forecast is optimistic. Moreover, repercussions affect not only the growth outlook, but also the pace of fiscal consolidation and external adjustment as the services balance surplus mitigates the trade balance deficit.

Our base-case assumption is that the current account deficit reached its peak in 2014 and will narrow gradually to 7.3% of GDP at the end of 2015, falling further to 6.3% of GDP in 2016. This assumes a sustained turnaround in foreign direct investments, which languished over the past few years amid investors’ wait-and-see attitude. The attacks threaten to keep investors on the sidelines, introducing downside risks to our forecast. On the fiscal side, additional security-related expenditures and support measures for the tourism industry will weigh on the country’s fiscal consolidation path agreed with the International Monetary Fund.

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Elisa Parisi-Capone Assistant Vice President - Analyst +1.212.553.4133 elisa.parisi-capone@moodys.com

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 2 JULY 2015

Following the attack, the Tunisian government ordered the closure of mosques that are not under government supervision and effective 1 July, about 1,000 armed security officers will be deployed to guard tourist sites and hotels. Tunisia is also receiving important international assistance to enhance its security capabilities, especially from the US, which has singled out Tunisia as a key partner in regional counterterrorism efforts and intends to designate the country as a major non-NATO ally.

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 2 JULY 2015

Securitization

New Italian Law Would Improve Loan Recoveries, a Credit Positive for RMBS and SME ABS On Saturday, a law7 took effect in Italy that speeds the sale of properties at executive auctions by reducing the time for completing certain procedural steps and introducing a legal framework that facilitates debt restructurings for insolvent companies. In addition, the law allows the tax deduction of credit losses in the year they were incurred instead of spread out over five years.

If the Italian economy and real estate market improve from their currently sluggish paces, these measures will considerably improve the recoveries of defaulted loans in both Italian residential mortgage-backed securities (RMBS) and small and midsize enterprise (SME) asset-backed securitizations, facilitate restructurings of SME companies and improve the prospect of new nonperforming loan transactions, all credit positive for RMBS and SME ABS.

Faster procedures for selling properties in executive auctions will speed recovery for RMBS and SME ABS. Italian tribunals average two to eight years to conclude a forced property sale, with longer times in the south and to some extent the centre of Italy (see Exhibit 1). If the Italian economy and, in particular, real estate prices recover (see Exhibit 2), a faster forced-sale process will benefit RMBS and SME ABS, typically collateralised at least partially by commercial real estate properties. A shortened legal process would mainly benefit older transactions where most of the properties are located in the south of Italy, such as 2011 Popolare Bari SPV S.R.L., Creso 2 S.r.l., Adriatico Finance SME S.r.l., Adriatico Finance RMBS S.r.l. and Adriatico Finance Series 2012-1, together with some transactions under the Berica program where defaults have already reached a certain level. Typically Italian securitisations contain few assets from the south of Italy.

EXHIBIT 1

Average Number of Years Required for Select Italian Tribunals to Close Forced Property Sales

Note: Length of time in years to close property sales for sales occurring in 2012. Source: Ministero della Giustizia

7 The decree’s full name is Misure urgenti in materia fallimentare, civile e processuale civile e di organizzazione e funzionamento

dell’amministrazione giudiziaria.

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David Bergman Vice President - Senior Analyst +39.02.9148.1101 david.bergman@moodys.com

Monica Curti Vice President - Senior Analyst +39.02.9148.1106 monica.curti@moodys.com

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 2 JULY 2015

EXHIBIT 2

Year-on-Year Change in Italian Residential and Commercial Real Estate Prices

Notes: For commercial real estate, we display the European Central Bank’s experimental commercial real estate indicator. For 2012 and 2013, only annual data are available. Sources: Istituto nazionale di statistica and European Central Bank

Faster recovery and tax deductibility support the sale of nonperforming loans and new lending. The difference in bid-ask8 is the main obstacle for selling nonperforming loans backed by property. A faster legal process for selling properties reduces the difference in value assigned to a defaulted loan by the bank and the investor because the difference in discount rate that the bank and the investor use is applied to a shorter period. The elimination of the delay in the tax deductibility will encourage loan write-offs.

Resolution of nonperforming loans may free up capital for banks that instead can be used to support new lending. In February 2015, the Bank of Italy reported a decline of 2.6% in the amount of loans outstanding to companies compared with a year earlier, and a decline of 4.7% in loans to smaller companies over the same period. A reversal of this trend will support SME ABS transactions because it will ease refinance risk.

More flexible rules for debt restructurings reduce the risk of SME bankruptcy. More companies will have the chance to go through a court-led debt restructuring and avoid bankruptcy because it will be easier for the court to approve interim financing and perform debt restructurings. To avoid the risk of a single creditor blocking a debt restructuring, it will be sufficient that creditors owning a majority of debt agree to the restructuring. In addition, recoveries on asset sales will improve as third parties will also be able to buy assets and a creditor-led recapitalisation of the company will be made possible as creditors can propose alternative debt arrangements in case the tribunal deems a debtor’s proposal insufficient.

8 Normally the banks use the contract rate as discount rate while investors use an IRR closer to 12-15%. Assuming a contract rate

of 4% for a residential mortgage loan and discounting for six years, the investor would only arrive at a value equal to around two thirds of the bank’s value.

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Residential Commercial

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

18 MOODY’S CREDIT OUTLOOK 2 JULY 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.

MOODYS.COM

Report: 182771

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