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4 SEPTEMBER 2017

NEWS & ANALYSIS Hurricane Harvey Credit Effects 2 » Credit Negative for Gulf Coast Refiners » TPC's Two Plants Are Down, Negatively Affecting Third-

Quarter Results » Lake Charles, Louisiana Casinos Are Negatively Affected » Roads’, Ports’ and Airports’ Strong Liquidity and Cost Recovery

Mitigate Credit-Negative Disruptions » Utilities’ Liquidity and Cost-Recovery Provisions Mitigate

Harvey’s Effect » Utility Cost-Recovery Securitizations Exposed to Harvey Will

Likely Draw on Reserves » Auto ABS Cash Flows Will Decline for Next Few Months

Corporates 15 » Freeport-McMoRan's Deal on Indonesia Mine Is Credit Positive » Evergrande's Deleveraging Plans Are Credit Positive

Banks 17 » Wells Fargo's Reputational Woes Continue with New Finding of

Potentially Unauthorized Accounts » US G-SIBs' First-Time Liquidity Coverage Ratio Disclosure Is

Credit Positive » Bank of Nova Scotia's Acquisition of BBVA Chile Would Be

Credit Negative » Dominican Republic’s Economic Slowdown Is Credit Negative

for Banks » Brazil Approves Covered Bond Regulation, a Credit Positive

for Banks » HSH Nordbank's Improved Solvency Raises Prospects for Its

Privatisation, a Credit Positive » Nigerian Banks Will Benefit from Moderating Foreign-

Currency Lending

Insurers 29 » UnitedHealth’s Acquisition of The Advisory Board Company’s

Health Care Business Is Credit Positive

Sovereigns 30 » Poland's Stronger-than-Expected Growth and Fiscal

Performance Are Credit Positive

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» Articles in Last Monday’s Credit Outlook 32 » Go to Last Thurday’s Credit Outlook

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NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017 8

Hurricane Harvey Credit Effects Hurricane Harvey on 25 August, made landfall in Corpus Christi, Texas, as a Category 4 storm with destructive wind, rain and storm surge. Lingering for days over southern Texas as a tropical storm, it dumped 50 inches of rain in Houston, and by Wednesday moved to Louisiana with more drenching rain. Harvey caused tragic loss of life and property and displaced tens of thousands from their homes. Here we add the following sectors and names to our previous analysis of the hurricane’s credit effects:

» Gulf Coast refiners

» Specialty-chemical producer TPC Group

» Casino operators Golden Nugget, Pinnacle Entertainment and Boyd Gaming

» Toll road, port and airport operators

» Texas electric utilities

» Utility cost-recovery securitizations

» Auto floorplan, loan and lease asset-backed securities

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

Credit Negative for Gulf Coast Refiners The widespread shutdown of Gulf Coast refining capacity is credit-negative for the area’s petroleum refining industry. The Texas/Louisiana Gulf Coast is home to about 45% of the US’ 18.55 million barrels per day (bpd) of refining capacity. Companies risk property damage, disrupted logistics, and a lack of power because of significant flooding. Flooding – in particular – caused many companies to shut down or curtail operations, and can delay the restart of production for several weeks or even longer. However, the diversified nature of most companies’ operations and widening refining margins in response to reduced product output will largely offset the credit-negative effects.

Most refining companies operate in multiple regions or are part of large integrated energy companies, which limits their exposure to a single event like Harvey and leaves their ratings and outlooks unaffected. Independent refiners with no Gulf Coast exposure will see positive credit effects. The severity of Harvey’s credit effect on refiners is uncertain, and while flood conditions persist, refined product shortages will propel prices upwards, widening refining margins and benefitting fuel producers overall. In the interim, as increased product imports from Asia and Europe weigh on the price of benchmark Brent crude, the widening price differential between Brent and West Texas Intermediate (WTI), the main US crude benchmark, will enhance refining margins, especially for US mid-continent refiners. However, sizable refined product inventories will restrain the upward movement in product prices and margin enhancement.

Almost 3.0 million bpd of the US’ 18.55 million bpd refining capacity shut down because of Harvey, with another 1.5 million bpd likely operating at reduced rates, removing some 20%-25% of US refining capacity. Refiners used controlled shutdowns to limit more permanent damage and ease their eventual return to production, but workers’ ability to return to these locations will be seriously challenged by the region’s massive dislocation of infrastructure. Flooding and other hurricane damage could significantly delay restarting facilities, and the condition of area-wide storage facilities vulnerable to flood waters poses another problem of unknown scale for refiners.

Motiva Enterprises LLC (Baa1 stable), a unit of Saudi Aramco, is a geographically concentrated operator of a single refinery in Port Arthur, Texas. Motiva operates the largest refinery in the US, with a refining capacity of 603,000 bpd, and managed a controlled shutdown of its refinery in response to severe flooding. Its strong ownership support should help insulate Motiva from any negative credit effect of a temporary shutdown of its single-site US refinery.

Among other companies that shut-down or reduced operations in the Houston area, Exxon Mobil Corporation (Aaa stable) reported 922,000 bpd of capacity affected at two locations, equivalent to half its US refining capacity and 19% of its world-wide total. Valero Energy Corporation (Baa2 stable), the largest independent US refiner with 3.1 million bpd of capacity, reported no substantial refinery effects to its two Corpus Christi locations, although its Houston area refineries are operating at reduced rates. Valero operates about 25% of its total refining capacity in the region. Phillips 66’s (A3 negative) 260,000 bpd Sweeny, Texas facility was shut down; Sweeny’s capacity is about 12% of its total. Flint Hills Resources, LLC (A1 negative), a Koch Resources, LLC (Aa3 negative) company, operates about half of its refining capacity in Corpus Christi, which took a glancing blow from Harvey. Shell Oil Company (Aa3 stable) also shut down its 340,000 bpd Deer Park, Texas refinery.

Andrew Brooks Vice President - Senior Credit Officer +1.212.553.1065 andrew.brooks@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

The closure of the Houston Ship Channel also slowed production at other sites, including Marathon Petroleum Corporation’s (Baa2 negative) 545,000 bpd of capacity located on Galveston Bay, about 30% of its total refining capacity. Magellan Midstream Partners, L.P. (Baa1 stable) announced it had curtailed certain operations on its crude and refined product pipelines and terminals in the Houston area, which could indicate additional refinery closures in the near future. The Colonial Pipeline Company (A3 stable), one of the nation’s principal product pipelines, also took some capacity out of service given the extent of refinery outages. The US Strategic Petroleum Reserve announced that it will release crude oil to certain refiners in an emergency exchange to offset Harvey-related interruptions of tanker and pipeline supplies of crude oil.

Although refiners extensively reduced Texas/Louisiana refining capacity because of Harvey, strong ownership support, wide geographic diversification and integrated oil and gas operations will shield regional refineries from most of the negative credit effects of downtime, notwithstanding the duration of outages, lost revenues, and the cost of repair and start-up of these Gulf Coast facilities. Even knowing which facilities Harvey sidelined, however, it is hard to assess the duration of the supply loss as a proportion of global refining capacity and inventories. Much of the world’s refining capacity is controlled by large energy companies that have refining units as part of their integrated operations, including national oil companies, complicating the effort to measure the effects on the global refining sector.

Those independent refining companies without operations in the Texas/Louisiana Gulf Coast region will benefit from widening refining margins – and from not having outage and repair expenses. Principal among these companies are Andeavor (Baa3 stable) and HollyFrontier Corp. (Baa3 negative).

In other US energy segments, the storm and flooding led oil and gas producers so far to shut in about 18% of oil production in the Gulf of Mexico, or about 331,000 bpd, as well as 19% of the Gulf’s natural gas production. Although offshore production will likely recover quickly, several onshore operators have reported temporarily halting operations in the Eagle Ford Shale, in southern Texas.

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

TPC’s Two Plants Are Down, Negatively Affecting Third-Quarter Results We expect specialty-chemical producer TPC Group Inc.’s (B3 negative) third-quarter results to be negatively affected by lower production volumes, higher unit cost and potential expenses related to cleanup and restart of production at its Houston and Port Neches, Texas facilities. TPC is somewhat unique relative to other Moody’s-rated chemicals companies because all of its manufacturing production is in Houston and Port Neches, which are about 100 miles apart on the Texas Gulf Coast, and both have been affected by Harvey.

The company believes that it will have both plants back up and running within 10 days, providing no additional damage is discovered over the next several days or during the restart. Although the extent of the effect on TPC’s financial performance is still uncertain, a 10-day to two-week outage should not have a material effect on its credit metrics. However, a more extended outage from unforeseen operational issues would keep leverage elevated at over 7x into 2018.

The Houston facility processes crude C4 into butadiene and produces polyisobutylene, diisobutylene, high-purity iso-butylene and methyl tertiary-butyl ether; it contributes the majority of the company’s revenue and earnings. TPC announced that severe rain and flooding affected its Houston facility, which is currently stable but not operating. Flooding has hampered delivery of key raw materials, such as crude C4 to the plant and compromised electrical equipment such as pumps critical to production. The Port Neches plant was also operating at reduced rates owing to limited feedstock availability. Since then, a number of facilities in that area have shut down because of power outages and flooding. The company should get both facilities back on line within its 10-day estimated time frame.

TPC improved its adjusted EBITDA to $96 million in the first half of 2017, up from $60.6 million a year ago, thanks to the renegotiation of a substantial portion of crude C4 supply contracts with higher processing fees, as well as incremental crude C4 processing volume amid strong demand and outages by other domestic butadiene producers. However, TPC’s B3 rating is pressured by its exposure to commodity price volatility, its resulting inability to control performance and elevated Moody’s-adjusted debt/EBITDA at about 7.1x for the 12 months that ended 30 June 2017.

An extended production outage and increased start-up expenses would likely delay the improvement we expect in its credit metrics. We had expected a faster improvement in financial metrics from strong first-quarter performance and improved production volumes, as well as an increase in crude C4 volumes available on the Gulf Coast from the start-up of new ethylene capacity. The storm and its aftermath will likely delay the startup of Dow’s and Chevron Phillips’ new crackers by at least a month, pushing the availability of new C4 volumes into the fourth quarter. TPC’s liquidity should be adequate since it has access to the remaining unrestricted $35 million equity commitment by its private equity owners (after $15 million drawn on 1 April 2016) and the $25 million delayed-draw term loan. The latter’s availability can be limited in the event of operational outages and/or increases in leverage. As of 30 June, TPC also had the ability to access an additional $99.0 million under the amended asset-based lending facility while still maintaining compliance with the covenants.

Jiming Zou Vice President - Senior Analyst +1.212.553.1675 jiming.zou@moodys.com

Brian Oak Managing Director +1.212.553.2956 brian.oak@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

Lake Charles, Louisiana Casinos Are Negatively Affected The hurricane is credit negative for Golden Nugget, Inc. (B2 stable), Pinnacle Entertainment, Inc. (Ba3 stable), and Boyd Gaming Corporation (B2 positive), which each own and operate casinos in Lake Charles, Louisiana, the closest gaming market to Houston, which is 140 miles away. Although Lake Charles was not physically affected by Harvey, its four casinos -- Delta Downs Racetrack and Casino Hotel/Vinton owned by Boyd; Golden Nugget Lake Charles owned by Golden Nugget; L’Auberge Casino Resort owned by Pinnacle; and Isle of Capri Lake Charles, owned by Eldorado Resorts, Inc. (B1 stable) -- all rely heavily on customers from Houston.

Golden Nugget will be most affected. Golden Nugget owns and operates five casinos, but the company generates nearly 70% of its consolidated revenue and a majority of its earnings from its Golden Nugget Lake Charles casino, according to the Louisiana Gaming Control Board and our estimates. In May this year, Golden Nugget opened its Rush Tower expansion at Lake Charles, which added about 350 luxury hotel rooms and three private Villa Suites.

Pinnacle and Boyd will be affected to a lesser degree. Pinnacle and Boyd, two of the largest and most diversified US regional gaming companies, will also be adversely affected. Pinnacle derives about 15% of its consolidated revenue from L’Auberge Lake Charles, according to its public filings. Boyd’s Delta Downs Racetrack Casino and Hotel is located approximately 25 miles closer to Houston than the next closest gaming properties in Lake Charles. Delta Downs’ monthly gaming revenue for the 12-month period that ended 31 July 2017, according to the Louisiana Gaming Control Board, was about $177 million, or 9.3% of Boyd’s $1.9 billion total casino revenue for the 12 months that ended 30 June 2017. Late last year, Boyd completed a $45 million new hotel tower featuring 167 additional guest rooms and suites, along with a redesign of all 200 existing rooms and of its food and beverage facilities. The company’s events center was also expanded.

Eldorado Resorts will likely be unaffected. Eldorado recently sold its Isle of Capri Casino Hotel in Lake Charles to a private unrated entity. The sale is due to close toward the end of this year. The casino’s results are currently classified in Eldorado’s financial statements as discontinued operations. At this time, we are not aware of anything from Hurricane Henry that would affect the terms and timing of the sale.

Keith Foley Senior Vice President +1.212.553.7185 keith.foley@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

Roads’, Ports’ and Airports’ Strong Liquidity and Cost Recovery Mitigate Credit- Negative Disruptions The airports and toll roads in Houston have ample liquidity to manage short-term revenue losses and required repairs. They also have strong cost-recovery frameworks through a residual airline agreement for airfield operations at the airport (through which the airlines ensure the airport receives a prescribed level of revenue for airfield operations) or the independent toll-setting authority of the government-owned toll roads. Blueridge Transportation Group LLC (Baa3 stable), the concessionaire building the new State Highway 288 managed-lane toll road in south central Harris County, is supported by contractual provisions under its concession agreement with Texas Department of Transportation.

In contrast, the ports of Corpus Christi, Galveston, Beaumont and Port Arthur have low levels of fixed or minimum revenue guarantees from customers and are more exposed to reductions in throughput and customer activity. The issuers we believe will be most affected, based on their proximity to the storm’s path are shown in Exhibit 1.

EXHIBIT 1

Transportation Infrastructure Issuers Likely to Be Affected by Hurricane Harvey

Issuer Rating Debt Outstanding

$ Millions

Fort Bend County Toll Road Authority A2 $252

Harris County Toll Road Authority Aa2 $2,127

Blueridge Transportation Group, LLC Baa3 $656

Houston (City of) Texas Airport Enterprise A1 $2,172

Port of Corpus Christi Authority (Neuces) A1 $111

Port of Port Arthur Navigation District Aa3 $27

Port of Houston Authority Aaa $678

Lake Charles Harbor and Terminal District A3 $38

Port of Beaumont Navigation District A3 $20

Galveston Wharves Board of Trustees Baa1 $47

Source: Moody’s Investors Service

Toll road revenue will show the most immediate negative effect. Major tolling segments in the Houston area have been shut down for revenue operation since Friday, 25 August, when Harvey first made landfall. When toll collection/revenue operation will resume is uncertain. Road closures throughout the region will also reduce mobility for travelers, freight providers and for employees of issuers in these areas.

The Fort Bend County Toll Road Authority and Harris County Toll Road Authority suspended tolling on Friday, and portions of their systems remained flooded and closed to traffic as of Friday. The extent of damage is unknown. Both are multi-asset systems and operate essential roadways for commercial and passenger traffic in the Houston area. Therefore, if tolls increased, which would support the systems’ recovery, traffic would not decline much. Both also have strong liquidity, with unrestricted cash on hand to cover all operating and debt-service expenses for more than two years.

Blueridge Transportation Group had flooding, but we expect the concessionaire to file for relief under its concession agreement. Flooding is a force majeure event and the concession allows the concessionaire to ask for additional time and compensation in named-storm events. Also, the project is in early construction so damage to existing assets may be more limited. For the broader construction industry, Harvey could increase material and labor costs as the project moves forward, but here too, relief may also be available under the concession contract.

Moses Kopmar Analyst +1.212.553.2846 moses.kopmar@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

Although the airports are open, schedules are quite limited and land access to the airports remains impaired as major highways in the Houston area remain impassable at key points. Moreover, the storm’s financial legacy on Houston residents and the regional economy will likely reduce discretionary travel demand, leading to decreased originating passenger volume at the airports for at least six months. (New Orleans airport’s passenger volume declined 20% in each of the two years following Hurricane Katrina, but Houston serves a far higher percentage of connecting passengers, which will temper the volume decline.) A loss in originating passenger demand will diminish parking revenue, which accounts for 21% of the system’s revenue. However, the City of Houston, Texas Airport Enterprise has accumulated significant liquidity (see Exhibit 2) in advance of a planned construction program, providing flexibility to mitigate storm- related effects.

EXHIBIT 2

Transportation Infrastructure Issuers’ Days of Cash on Hand

Source: Issuers’ audited financial statements

The ports of Corpus Christi, Houston, Beaumont, Port Arthur, Galveston and Lake Charles were all closed to vessel traffic. Corpus Christi sustained moderate to minor damage, but Houston, Beaumont and Port Arthur were more severely flooded and damaged in areas around their facilities. They will likely see more significant effects to their cargo volume because vessel access is limited, surface transportation is damaged and there is a shortage of truck capacity. The storm may similarly blunt Galveston’s cruise ship travel demand, which accounts for more than 40% of the port’s revenues.

Corpus Christi and Lake Charles are energy ports, with customers and markets that are not directly exposed to the risks of reduced consumer demand and freight mobility in the region. Both ports also have strong liquidity and financial margins. Houston, Galveston, Beaumont and Port Arthur are more reliant on regional economic activity and truck freight mobility, which will be negatively affected by the storm. Supply chain operations across the region remain closed, and US Customs and Border Protection has advised exporters to divert cargo if possible.

Like Corpus Christi and Lake Charles, Houston and Port Arthur have strong liquidity to manage short-term revenue losses, but Galveston and Beaumont have weaker liquidity and operating margins. Beaumont and Port Arthur both rely on property taxes to support their operations and debt service, and the effect to these tax bases is unknown. However, over the next two to four years, the rebuilding effort in the area will stimulate demand for building supplies, vehicles and a range of consumer products, and we expect the regional ports will handle a share of this cargo, their facilities and regional mobility permitting.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Fort BendCounty Toll

Road Authority

Harris CountyToll RoadAuthority

Houston (Cityof) TX Airport

Enterprise

Port of CorpusChristi Authority

(Neuces)

Port of PortArthur

NavigationDistrict

Port of HoustonAuthority

Lake CharlesHarbor andTerminalDistrict

Port ofBeaumontNavigation

District

GalvestonWharves Board

of Trustees

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

The port of Lake Charles, an energy port in southwest Louisiana, was less severely affected and is less financially exposed. It receives approximately 50% of its revenue from fixed land rentals and property tax collections. More importantly, its main refineries remain active and Colonial Pipeline Company’s Lines 1 and 2 continue to operate from Lake Charles east. The pipeline is a critical artery connecting Gulf Coast refineries to East Coast markets, providing close to 40% of the South’s gasoline and serving major airports in Georgia, Tennessee and North Carolina. Colonial’s fuel supply points in Houston and Hebert, Texas remain shut, affecting 13 refineries in Houston and south Texas, but its Lake Charles station remains open, allowing the port’s refineries to move fuel to markets.

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

Utilities’ Liquidity and Cost-Recovery Provisions Mitigate Harvey’s Effect Hurricane Harvey’s immediate effect on regulated electric utilities in the region appears to be manageable, and we expect these companies to fully recover their restoration costs. Additionally, we expect the credit quality of the regulated electric utilities serving this region to remain intact.

During the storm, all four major Texas electric utilities in the region -- AEP Texas, Inc. (Baa1 stable), CenterPoint Energy Houston Electric, LLC (CEHE, A3 stable), Entergy Texas, Inc. (Baa3 stable) and Texas-New Mexico Power Company (TNMP, A3 stable) -- experienced power outages, but by 31 August power for the majority of customers had been restored. Together, these utilities serve approximately 4.3 million customers, and we estimate that approximately 23% of the customers these utilities serve lost power during peak outages.

For CEHE, the region’s largest utility, more than 800,000 of its 2.4 million customers were without power during the peak outages; as of last Thursday, approximately 98% of its customers had power restored. For Entergy Corporation (Baa2 stable), whose service territory includes counties surrounding Galveston, Texas, and all of southern Louisiana, around 90,000 customers lost power during peak outages; as of last Thursday, roughly 56,000 customers remained without power, about 6,000 of which are unable to take power because of flooding. About 8% of TNMP’s 245,000 total customers lost power; as of last Thursday that number had fallen to 2,000.

For AEP Texas, whose service territory includes Rockport, Corpus Christi and surrounding areas, outages peaked at 220,000 (20% of its customers) on Tuesday, 26 August, and were down to 94,000 as of Thursday morning. Among the two public power utilities in the region, 35,000 City of San Antonio’s Combined Util. Ent. (Aa1 stable) customers and 25,000 City of Austin Electric Enterprise (Aa3 stable) customers lost power, but both utilities have largely restored power to those affected.

In addition to costs related to infrastructure damages, the utilities’ revenue is at risk of declining because of the power outages. It is too early for estimates of the total cost of damages related to the storm, but Texas provides a transparent storm-cost recovery for regulated utilities, a credit positive. The cost recovery includes a catastrophe reserve to which customers contribute through rates. Texas utilities also maintain flood insurance, which will mitigate some costs.

It is too early to estimate total Harvey-related costs while flooding continues. However, the electric utilities are allowed to accrue a reserve toward future storm costs. According to CEHE’s most recent rate case, the company is allowed to reserve $4.15 million annually for storms, and can build toward $13.38 million of accrual in total. If the storm cost exceeds $100 million, electric utilities can issue a securitization bond backed by future rate increases to recover the system’s restoration costs from customers.

Additionally, regulated Texas utilities have adequate liquidity to handle immediate storm costs with a combination of cash on hand and available credit facilities. For example, CenterPoint Energy, Inc. (Baa1 stable) CEHE’s parent company, had consolidated available liquidity of $1.1 billion as of 27 July. Similarly, Entergy Texas has a $200 million short-term borrowing limit, which can include money-pool borrowings and $150 million of its standalone credit facility (about $137 million is currently available). Entergy Louisiana LLC (Baa1 stable) currently has around $200 million of cash on hand and the full availability of its $350 million revolver. Entergy New Orleans, Inc. (Ba1 stable) has $85 million of cash and its entire $25 million revolver available. AEP Texas had approximately $200 million available under the American Electric Power Company, Inc. (Baa1 positive) utility money pool, and had net liquidity of approximately $2.2 billion. TNMP has substantially all of its $75 million revolver available.

Jairo Chung Assistant Vice President - Analyst +1.212.553.5123 jairo.chung@moodys.com

Ryan Wobbrock Vice President - Senior Analyst +1.212.553.7104 ryan.wobbrock@moodys.com

Laura Schumacher Vice President - Senior Credit Officer +1.212.553.3853 laura.schumacher@moodys.com

Jeffrey Cassella Vice President - Senior Analyst +1.212.553.1665 jeffrey.cassella@moodys.com

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

Utility Cost-Recovery Securitizations Exposed to Harvey Will Likely Draw on Reserves Servicers of utility cost-recovery charge (UCRC) securitizations with exposure to Texas and Louisiana will likely need to draw upon reserve accounts to cover interest and scheduled principal payments in the transactions. However, structural features such as reserve accounts and “true-up” mechanisms will likely offset Hurricane Harvey’s negative credit effect on the 17 transactions we rate that have exposures to these two states (see Exhibit 1). The draws on reserve accounts will occur as lower electricity consumption reduces the securitization charges (called transition charges in the transactions) that servicers can collect from customers, which will subsequently reduce the cash flows to the transactions.

EXHIBIT 1

Utility Cost-Recovery Charge Securitizations with Exposure to Texas and Louisiana Deal Name Servicer Service Area

AEP Texas Central Transition Funding II LLC, Series A AEP Texas Inc. South Texas

CenterPoint Energy Restoration Bond Company, LLC CenterPoint Energy Houston Electric, LLC Houston and Galveston

CenterPoint Energy Transition Bond Company II, LLC Series A CenterPoint Energy Houston Electric, LLC Houston and Galveston

CenterPoint Energy Transition Bond Company III, LLC CenterPoint Energy Houston Electric, LLC Houston and Galveston

Entergy Texas Restoration Funding, LLC Senior Secured Transition Bonds Entergy Texas, Inc. Houston and Galveston

CenterPoint Energy Transition Bond Company IV, LLC, Series 2012 Senior Secured Transition Bonds

CenterPoint Energy Houston Electric, LLC Houston and Galveston

AEP Texas Central Transition Funding III LLC, Senior Secured Transition Bonds AEP Texas Inc. South Texas

Cleco Katrina/Rita Hurricane Recovery Funding LLC Cleco Power LLC Louisiana

Entergy Gulf States Reconstruction Funding I, LLC Senior Secured Transition Bonds, Series A

Entergy Louisiana, LLC Southeastern Texas and Southwest Louisiana

Entergy Louisiana Investment Recovery Funding I, LLC - Senior Secured Investment Recovery Bonds

Entergy Louisiana, LLC Louisiana

Louisiana Local Government Environmental Facilities and Community Development Authority - System Restoration Bonds (Louisiana Utilities Restoration Corporation Project/EGSL), Series 2010 (Federally Taxable)

Entergy Louisiana, LLC Louisiana

Louisiana Local Government Environmental Facilities and Community Development Authority - System Restoration Bonds (Louisiana Utilities Restoration Corporation Project/ELL), Series 2010 (Federally Taxable)

Entergy Louisiana, LLC Louisiana

Louisiana Public Facilities Authority - System Restoration Bonds (Louisiana Utilities Restoration Corp Proj/EGSL), Series 2008

Entergy Louisiana, LLC South Louisiana

Louisiana Public Facilities Authority - System Restoration Bonds (Louisiana Utilities Restoration Corp Proj/ELL), Series 2008

Entergy Louisiana, LLC Louisiana

Louisiana Local Government Environmental Facilities and Community Development Authority - System Restoration Bonds (Louisiana Utilities Restoration Corporation Project/EGSL), Series 2014 (Federally Taxable)

Entergy Louisiana, LLC Louisiana

Louisiana Local Government Environmental Facilities and Community Development Authority - System Restoration Bonds (Louisiana Utilities Restoration Corporation Project/ELL), Series 2014 (Federal Taxable)

Entergy Louisiana, LLC Louisiana

Entergy New Orleans Storm Recovery Funding I, L.L.C. Entergy New Orleans, Inc. New Orleans

Source: Moody’s Investors Service

Jayesh Joseph Assistant Vice President - Analyst +1.212.553.7412 jayesh.joseph@moodys.com

Peter Li Assistant Vice President - Analyst +1.212.553.4631 peter.li@moodys.com

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

Electricity consumption will likely decline in Texas and Louisiana given that it will take time for houses, offices and factories to resume normal consumption owing to disrupted logistics, a lack of power and significant flooding brought on by the storm. However, UCRC transactions have structural features to offset any reduction in cash flows resulting from disruptions. Servicers can draw upon reserve accounts to cover interest and scheduled principal payments.

Additionally, if some customers consume less electricity because of the storm, the true-up mechanisms in the transactions will allow servicers to charge higher utility fees to all the customers to ensure timely payments of interest and principal on bonds, and replenish any draws on reserve accounts. The bulk of the higher fees will be on customers in areas not affected by the storm because they are likely to consume more electricity than customers in the affected areas. However, transition charges are only a small portion of utility bills (typically less than 10%), so any hike in transition charges will not significantly increase bills and unduly burden customers in unaffected areas. Although true-ups are mandatory, usually on an annual basis, servicers can implement interim true-ups if necessary.

UCRC transaction servicers have successfully used true-ups to offset past declines in electricity consumption, including after Hurricane Sandy in 2012. Exhibit 2 shows the cumulative draws on reserve accounts on all UCRC transactions that we rate. The exhibit also shows the average length of time it took for servicers to replenish reserve accounts using true-ups. For example, eight UCRC deals had total cumulative draws of $7.5 million in 2012 and these draws took an average of 12 months to replenish. The larger the transaction servicer’s service area relative to the disaster area, the less time it takes to replenish the reserve accounts.

EXHIBIT 2

Historical Draws on Reserve Accounts in Utility Cost-Recovery Charge Securitizations

Source: Moody’s Investors Service

0

18

1413

5

6

12

5

1012

6

0

2

4

6

8

10

12

14

16

18

20

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

$ M

illio

ns

Amount of Draws by Year - left axis Months to Replenish Capital Sub-accounts - right axis

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

Auto ABS Cash Flows Will Decline for Next Few Months US auto dealer floorplan, loan and lease asset-backed securities (ABS) will have lower cash flows into the securitization trusts as transaction servicers work through compensation arrangements with dealers and customers whose vehicles were damaged or destroyed in the storm. Although the cash flow decline is credit negative, we expect the effects to last several months, in part because of the mitigating effect of proceeds from insurance claims for damaged vehicles. Also, although Texas is the second-largest auto market in the country, and a top-five collateral concentration state, in most US auto ABS that we rate, the securitizations’ collateral has sufficient geographical diversification.

Auto floorplan ABS payment rates are likely to decline in the next few months because of the time lag associated with processing insurance claims, rebuilding areas that flooded and moving damaged vehicles out of dealers’ lots. According to Cox Automotive, the hurricane may have destroyed as many as 500,000 vehicles, double the number that were damaged by Hurricane Sandy in 2012. Payment rates for affected securitizations will rebound in 2018 as dealers receive new inventory and buyers replace lost vehicles. Floorplan ABS that we rate have, on average, 10% exposure to Texas, with the highest concentration among the transactions at 14%.

For auto loan ABS, the credit-negative effects will likely begin to materialize in the securitizations’ October servicer reports. However, the full effects will not become visible until the November and December reports because consumer-relief efforts will initially mask the magnitude of the credit effects. Based on practices that servicers implemented in the aftermath of Hurricane Sandy, we expect most servicers to suspend or significantly reduce their collection and repossession efforts in the affected area in the weeks following the storm, which will increase loss severities for the ABS in the following several months. Disaster relief efforts will lead to increased payment extensions, deferrals and waived charges for customers affected by the hurricane. After previous severe storms, borrowers received payment extensions of up to three months.

We expect that Hurricane Harvey consumer relief efforts will mask any immediate uptick in auto loan delinquencies, which will likely materialize by the end of the year. The increased losses will be partially offset by insurance compensation, which will start flowing through the securitization trusts as insurers work through the claims. On average, 14% of collateral backing US auto loan ABS we rate is concentrated in Texas. The highest concentration was about 21% for subprime auto loan ABS transactions and 19% for prime ABS transactions at closing.

Auto lease ABS will incur higher residual value losses because vehicle remarketing will halt or slow as a result of damage to vehicles, dealerships or both. Insurance claims are likely to cover a substantial portion of the value of the damaged vehicles; however, a small portion of the residual value not covered by insurance will flow through to the securitizations as residual value losses in the coming months, a credit negative for outstanding transactions. An increase in vehicle turn-in rates will partially offset the credit-negative effect of the higher residual value losses because lessees will start to replace damaged vehicles. The higher turn-in rates will boost the paydown speed of the lease pools and increase the transactions’ credit enhancement as the securitizations delever. Average auto lease ABS exposure to Texas in the auto lease ABS transactions we rate was roughly 5% at closing, with 7% the highest exposure.

Anna Burns Associate Analyst +1.212.553.7813 anna.burns@moodys.com

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

Corporates

Freeport-McMoRan’s Deal on Indonesia Mine Is Credit Positive Last Tuesday, Freeport-McMoRan Inc. (B1 positive) said that it had reached a framework agreement with the government of Indonesia (Baa3 positive) regarding operations by its PT Freeport Indonesia (PT-FI) subsidiary through 2041. The agreement is credit positive, offering better clarity as to how Freeport will conduct operations in Indonesia and about the opportunity for increased production.

The framework deal, subject to documentation and board and partner approval, provides the company a license to operate its Grasberg mine, one of the world’s largest gold and copper mines. In exchange, Freeport will build a new smelter within five years and give up majority ownership in PT-FI by selling shares to Indonesian interests at fair-market value. Lowering its ownership in PT-FI over time to 49% from 90.64% does not hinder Freeport’s ability to improve its credit quality.

Although PT-FI accounted for roughly 25% of Freeport’s copper production in 2016, and 20% for the first six months of 2017, expansions of the low-cost Cerro Verde mine in Peru and the Morenci mine in Arizona allowed those operations to become stronger contributors to earnings and cash flow than was previously the case. Freeport’s EBITDA for the six months that ended 30 June was $2.1 billion, more than double a year ago, on higher copper prices and lower cash operating costs. This was despite operating challenges at PT-FI from labor issues, Indonesian government-imposed export restrictions and lower production volumes at US and South American operations. Copper prices averaged $2.68 per pound in the first half of 2017, versus $2.31 a year earlier, indicating the company’s strong earnings momentum in a rising price environment. We expect copper prices this year to remain above 2016 levels.

The company’s financial condition has also benefitted from its ongoing focus on debt reduction, with adjusted debt of roughly $16.6 billion at 30 June, down from $21.8 billion at 31 March 2016. Pro forma for a planned September redemption of $543 million of notes, we estimate that leverage, as measured by debt/EBITDA, has improved to 3.3x from 4.7x at year-end 2016.

Freeport’s revenue for the 12 months that ended 30 June was $15.3 billion. With the completion of the sales of its Gulf of Mexico and California oil and gas properties, Freeport’s copper mining operations and their related by-products, which include gold and molybdenum, will comprise most of the company’s business.

Carol Cowan Senior Vice President +1.212.553.4999 carol.cowan@moodys.com

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

Evergrande’s Deleveraging Plans Are Credit Positive On 28 August, China Evergrande Group (B2 positive) announced plans to reduce its debt leverage in 2017-20, with target gearing ratios (i.e., net debt/equity) of around 140% by June 2018, around 100% by June 2019 and around 70% by June 2020 from around 240% at 30 June 2017. The deleveraging plan is credit positive because it demonstrates the company’s commitment to control its high debt leverage and will improve its credit metrics in the next 12-18 months.

We revised Evergrande’s B2 rating outlook to positive from stable on 1 September 2017 following its announced deleveraging plans. At the same time, we affirmed the company’s B2 corporate family rating and the B3 senior unsecured rating on its existing notes.

We expect Evergrande’s Moody’s-adjusted debt leverage (i.e., revenue/adjusted debt) will improve to 55%-60% over the next 12-18 months, from around 46% for the 12 months that ended 30 June and around 32% in 2016. The company began deleveraging over the past six months by slowing debt growth and redeeming in the first half of this year all of its RMB113 billion of perpetual securities, which we treated as debt- like instruments.

In addition, Evergrande has indicated that it will reduce land reserves by approximately 5%-10% a year between July 2017 and June 2020, which will reduce its capital expenditure requirements and facilitate debt deleveraging.

Despite its plan, we expect the company’s contracted sales to grow modestly in the next one to two years, given its sizable land reserves of 276 million square meters in gross floor area as of 30 June. Evergrande’s contracted sales grew a strong 56% year on year to RMB288.3 billion in the first seven months of this year, after robust 85% year-on-year growth to RMB373 billion for all of 2016. We expect the company will have contracted sales of around RMB500-RMB550 billion this year and next, which will support its liquidity and ability to manage its annual debt repayments.

We also expect Evergrande’s profitability to improve as the company develops the portion of its existing land bank that has a low cost relative to current market sales prices. The company reported a gross profit margin of 35.8% in the first half of 2017, up from 28.3% in the first half of 2016. Consequently, the company’s interest coverage ratio (i.e., Moody’s-adjusted EBIT/interest) will likely improve to 2.5x-2.8x over the next 12-18 months from around 2.0x for the 12 months that ended 30 June 2017.

China Evergrande Group is a major residential developer in China. It uses a standardized operating model. Founded in 1996 in Guangzhou, the company has rapidly expanded its business across China over the past few years. The company listed on the Hong Kong Stock Exchange in 2009.

Franco Leung Vice President - Senior Credit Officer +852.3758.1521 franco.leung@moodys.com

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

Banks

Wells Fargo’s Reputational Woes Continue with New Finding of Potentially Unauthorized Accounts Last Thursday, Wells Fargo & Company (A2 stable) announced the results of an expanded review of its retail deposit, credit card and online bill pay accounts, the bank’s latest effort to shed full light on the extent to which its retail banking incentive structure led to inappropriate sales practices. The review covered a much broader time frame than an investigation by the board of directors in April, and revealed extensive additional potentially unauthorized accounts.

The likely costs of remediating claims related to this latest large batch of accounts will have only a moderate financial effect on the bank. However, the new findings strike another credit-negative blow against Wells Fargo’s mission to rebuild trust with its key stakeholders and restore the reputation of its core retail franchise.

The initial review of Wells Fargo’s sales practices by the board of directors covered only deposit and credit card accounts opened from 2011 through mid-2015. Under a consent order, Wells was required to expand this review to cover 2011 through September 2016, as well as add online bill pay accounts to the scope. Wells voluntarily extended this period back to the beginning of 2009 (just after its merger with Wachovia closed at year-end 2008). The expanded review of deposit and credit card accounts uncovered another 1.4 million potentially unauthorized accounts, bringing the total to 3.5 million. The added review of online bill pay accounts revealed 528,000 potentially unauthorized accounts. In addition, the new findings confirm that the peak of potentially unauthorized account activity still occurred during 2012-13 and declined steadily thereafter through 2016.

Wells Fargo now estimates that around 190,000 of potentially unauthorized accounts incurred fees or charges for the bank’s customers. Management expects the incremental remediation costs for this improper sales activity to be around $6 million, bringing the total to $11 million. This is a 120% increase, but a manageable incremental expense in dollar terms for the bank, which generated $8.1 billion of pre-provision, pre-tax income in the second quarter.

Nonetheless, the findings underscore our view that Wells Fargo’s sales practice abuses will affect it for some time, despite the positive steps that management and the board have taken and the stabilization of the retail banking franchise in 2017. Management is not aware of any regulatory fines or actions related to the new findings, but further sanctions cannot be ruled out. And the negative credit implications of Wells’ continual sales practices revelations remain evident in the bank’s elevated litigation risk at a time when most other banks’ litigation risks are declining.

Rita Sahu, CFA Vice President - Senior Credit Officer +1.212.553.1648 rita.sahu@moodys.com

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

US G-SIBs’ First-Time Liquidity Coverage Ratio Disclosure Is Credit Positive On 29 August, the eight US global systemically important banks (G-SIBs) disclosed their Basel III-mandated liquidity coverage ratios (LCRs) for the first time. All eight G-SIBs -- The Goldman Sachs Group, Inc. (A3 stable), Morgan Stanley (A3 stable), Bank of America Corporation (Baa1 positive), Citigroup Inc. (Baa1 stable), Wells Fargo & Company (A2 stable), The Bank of New York Mellon (Aa2 stable), JPMorgan Chase & Co. (A3 stable), and State Street Corporation (A1 stable) -- easily surpassed the minimum regulatory requirements (see exhibit) that became effective on 1 January 2017, a credit positive. Additionally, the disclosures’ standardized format and significantly enhanced content provide better insight about the banks’ liquidity and peer comparisons. These features should help instill market discipline and encourage the banks to maintain stronger liquidity profiles.

US G-SIBs’ Liquidity Coverage Ratios as of 30 June 2017

Source: Companies’ LCR Disclosure documents

The LCR was introduced to ensure that these systemically important banks carry enough unencumbered high-quality liquid assets (HQLA), defined as assets that can be easily and quickly converted into cash, to survive short-term stress. The ratio measures these high-quality liquid assets versus a bank’s net cash outflows under stress conditions over 30 days. The LCR applies to all banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in on-balance-sheet foreign exposures. A less stringent, modified LCR applies to bank holding companies and savings and loan holding companies that do not meet these thresholds, but have $50 billion or more in total assets.

The G-SIBs’ public disclosure is expansive and standardized, reflecting the Federal Reserve’s regulations, which implement the Basel III framework and require detailed quarterly disclosures as of the second quarter of this year. Together, they provide a wealth of information on each company’s liquidity risk management. The standardized nature of the information and its presentation in the disclosure enhance comparability across companies, an important factor given that existing liquidity disclosures are often not uniform.

This enhanced comparability and transparency will make it easier to identify the institutions that have the greatest resilience to liquidity stress and should, in turn, instill greater market discipline on the G-SIBs. Banks will have the incentive to consistently disclose strong liquidity metrics in order to lower their perceived credit risk to obtain lower funding costs. In addition, consistently strong LCRs may assuage creditor concerns about an institution in an adverse market environment, thereby reducing the institution’s confidence sensitivity. We also believe that the public availability of this information reduces uncertainty in the market as a whole and increases investor confidence, reducing the probability of an adverse market environment.

128% 127% 126% 125% 124%116% 115%

109%

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Goldman Sachs Morgan Stanley Bank of America Citigroup Wells Fargo BNY Mellon JPMorgan State Street

Minimum Requirement

David Fanger Senior Vice President +1.212.553.4342 david.fanger@moodys.com

Conrad Kirejczyk Associate Analyst +1.212.553.4523 conrad.kirejczyk@moodys.com

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

Bank of Nova Scotia’s Acquisition of BBVA Chile Would Be Credit Negative Last Thursday, Banco Bilbao Vizcaya Argentaria, S.A. (BBVA, A3/Baa1 stable, baa21) filed a statement with securities officials in Spain indicating that The Bank of Nova Scotia (BNS, A1/A1 negative, a3) had expressed its non-binding interest in acquiring up to 100% of the share capital of Banco Bilbao Vizcaya Argentaria Chile (BBVA Chile, A3 stable, baa3). Due diligence has commenced, but there is no certainty of a deal at this time. Financial terms were not disclosed.

Should a deal occur, it would be credit negative for BNS because the bank would allocate more capital to international markets, where it has less market presence and pricing power than in its home market, where its franchise is strong. However, BBVA Chile as of March 2017 had total assets of approximately $21 billion, or around 3% of BNS’ assets, so such an acquisition would not be financially material to BNS, depending on the deal’s financial terms.

BBVA Chile has an established franchise and brand as Chile’s sixth-largest bank. It also has a conservative loan mix, which results in strong asset quality. Nevertheless, profitability is low, reflecting a low-risk, low-yield loan book largely composed of corporate loans, residential mortgages, a relatively high-cost funding base and operating expenses. Merging with BNS’ existing operations in Chile would create a stronger competitor than either has on a standalone basis. BBVA Chile’s credit strengths include asset quality and an established franchise, while its challenges are weak capitalization, modest profit margins reflecting a conservative loan mix and high costs, and a heavy reliance on wholesale funding.

The deal also would increase competition for Chile’s fourth-largest bank, Banco de Crédito e Inversiones (A1/A1 negative, baa1), which had a 13.2% market share by loans as of June 2017, and fifth-ranked Itaú CorpBanca (A3/A3 stable, baa3), which had an 11.1% market share. The combination of BNS’ operation in Chile and BBVA Chile would become Chile’s fourth-largest bank, with a pro forma market share of 13.3% (see exhibit).

Combination of BNS’ Chilean Operation and BBVA Chile Would Create Chile’s Fourth-Largest Bank by Loans Loan market share data as of June 2017.

Source: Chile’s Superintendencia de Bancos e Instituciones Financieras

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

credit assessment.

Banco Santander-Chile19%

Banco de Chile18%

Banco del Estado de Chile16%

Scotiabank Chile + BBVA Chile13%

Banco de Crédito e Inversiones13%

Itaú CorpBanca11%

Banco Security3%

Banco Bice3%

Others4%

David Beattie Senior Vice President +1.416.214.3867 david.beattie@moodys.com

Felipe Carvallo Vice President - Senior Analyst +52.55.1253.5738 felipe.carvallo@moodys.com

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

Chile has stable operating environment as indicated by its Strong + Macro Profile, but it is a highly competitive market. The country’s GDP has risen at a low 2% annual pace over the past two years, a significant slowdown from the 5.3% average rate of growth during 2010-13. Following the economic contraction in fourth-quarter 2016, we expect Chile’s growth to remain below 2% in 2017 and increase to 2.5% in 2018 because a slight recovery in copper prices will support investment in Chile’s vast mining sector.

Uncertainty about the Chilean government’s reform agenda and the upcoming 19 November presidential election will continue to weigh on business and consumer confidence. Although our expected pickup in 2017 GDP growth is modest following three years of slow economic growth, the country’s macroeconomic fundamentals remain strong.

The Chilean economy is well diversified and integrated with global markets, supporting its ability to deal with external shocks, notwithstanding rising external debt and the importance of copper exports to the economy. The country also has strong institutions, reflected in its high policy credibility and predictability and scores in the top quintile for rated sovereigns in measures such as rule of law and governance effectiveness.

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

Dominican Republic’s Economic Slowdown Is Credit Negative for Banks Last Wednesday, the Dominican Republic (Ba3 stable) central bank announced that the country’s gross domestic product (GDP) growth had decelerated to 4% in the first six months of 2017, well below the 7.4% in the same period last year. We expect GDP growth to average 5.5% in 2017-18, down from 6.6% in 2016.

The slowdown in economic activity is credit negative for Dominican banks because it will increase asset risks as household and corporate income growth weakens, which will make disposable income to service debt more sensitive to increases in operating and living costs amid rising inflation. Should the economy continue to decelerate, asset risks on consumer portfolios, which total around a quarter of the total systemwide loan portfolio, would also increase. GDP growth deceleration reflects softer private investment.

The deceleration’s most negatively affected economic sectors include local manufacturing and commerce, in addition to construction, which contracted 2.7%. These industries comprised a hefty third of the banking system’s credit portfolio as of June 2017 (see exhibit), with a relatively similar metric at the country’s three largest banks, Banco de Reservas de la Republica Dominicana (Banreservas, Ba3 stable, b32), Banco Popular Dominicano and Banco BHD-Leon (both unrated), which account for about 80% of total loans.

Variation in the Dominican Republic’s GDP Growth by Sector, with Banks’ Respective Exposures

1H 2016 1H 2017 Percent of Loans as of June 2017

Agribusiness 8.0% 6.2% 2.3%

Construction 16.8% -2.7% 9.4%

Manufacturing - Local 6.4% 2.3% 7.2%

Manufacturing - Free Trade Zones 2.2% 3.9%

Mining 25.3% 3.7% 0.3%

Services 6.2% 4.4% 42.7%

Commerce 5.5% 3.1% 14.9%

Hotels and Restaurants 5.0% 7.8% 5.4%

Public sector 4.1% -0.9% 4.7%

Property, Business and Renting 4.2% 3.7% 5.5%

Other services 12.2%

GDP Growth 7.4% 4.0%

Source: Central bank of the Dominican Republic

Asset risks were already rising because banks’ loan books grew rapidly in recent years, notwithstanding a recent slowdown. Expansion in private-sector credit averaged 15% between December 2014 and December 2016, or just below 2x nominal GDP growth, while it reached just 11% during the 12 months leading to June 2017. We expect credit growth to accelerate slightly given the country’s lack of financial depth, with private-sector credit at only 28% of GDP, below the 40% average for Latin America. In addition, effective 1 August, the central bank began requiring lenders to increase its exposures to manufacturing, commerce and consumption, among other segments, which may further compound asset risks.

We expect the system’s total nonperforming loans (NPLs) as a percent of gross loans to gradually converge toward the 3% Latin American average over the next two years, up from the current 1.8% of gross loans. NPLs have already increased from 1.5% at year-end 2016, largely driven by higher impairments at Banreservas and Banco BHD-Leon.

2 The bank ratings shown in this report are Banreservas’ local currency deposit rating and baseline credit assessment.

Georges Hatcherian, CFA Assistant Vice President - Analyst +52.55.1555.5301 georges.hatcherian@moodys.com

NEWS & ANALYSIS Credit implications of current events

21 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

A more rapid deterioration in asset quality would increase loan loss provisions, reducing Dominican banks’ profitability, albeit from high levels. Return on assets averaged a strong 1.7% over the past three years. Coupled with continued strong loan growth, higher provisions could also put pressure on banks’ already modest capitalization, reflected in the systemwide ratio of core capital to total average assets of just 8.3% as of June 2017, lower than the 9.9% posted by the Panamanian banking system, the largest in Central America.

NEWS & ANALYSIS Credit implications of current events

22 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

Brazil Approves Covered Bond Regulation, a Credit Positive for Banks Last Tuesday, the Brazilian Monetary Council (CMN) published a banking regulation (Resolution 4,598) defining and governing real estate covered bonds (letra imobiliária garantida or LIG), following the enactment Monday of Law 13,476. The regulatory framework is credit positive for Brazil’s banks because it creates a new longer-tenor funding alternative to finance the country’s growing mortgage business. Mortgage loans currently constitute 10% of Brazil’s GDP, and this regulation aligns Brazil’s covered bond framework with frameworks globally.

LIGs will have a minimum weighted average tenor of two years, except for those attached to the inflation index, which will have minimum tenors of three years. These bonds will improve banks’ liquidity compared with existing funding sources including savings deposits and banknotes linked to real estate financing (letras de crédito imobiliárias), which offer redemption to customers at any time. We expect LIG tenors to lengthen over time as Brazil’s economic growth proves sustainable, with LIG maturities lengthening gradually to the 11-year average duration of mortgages in Brazil.

The development of a covered bond market will not significantly reduce assets available for unsecured creditors because the proposed regulation caps the amount of assets linked to these bonds to 10% of the issuer’s total assets. The main issuers will be Brazil’s five-largest commercial banks, which together hold 97% of the country’s mortgages: Banco do Brasil S.A. ((P)Ba2/Ba2 negative, ba23), Itau Unibanco S.A. ((P)Ba2/Ba2 negative, ba2), Banco Bradesco S.A. ((P)Ba2/Ba2 negative, ba2), Banco Santander (Brasil) S.A. ((P)Ba1/Ba1 negative, ba2) and Caixa Economica Federal (Ba2/Ba2 negative, b1). Based on these banks’ latest available financial data, we estimate that the potential volume of LIGs could reach as much as BRL600 billion (see exhibit), which would allow banks almost to double the current size of Brazil’s housing segment. We expect loan volume to pick up after 2018, supported by a stronger economy in Brazil.

Brazil’s Five Largest Banks’ Real Estate Loans as a Percent of Total Loans as of June 2017

Real Estate Loans BRL Millions

Percent of Total Loans

Housing Market Share

Total Assets BRL Millions

LIG Total Cap per Bank BRL Millions

Itau Unibanco 47,797 8.0% 7.7% 1,448,335 144,834

Banco do Brasil 54,277 8.4% 8.7% 1,446,814 144,681

Bradesco 61,380 8.8% 9.9% 1,290,184 129,018

Santander 27,046 10.5% 4.4% 683,467 68,347

Caixa1 412,880 57.7% 66.5% 1,281,252 128,125

Note: 1 Latest available data is from March 2017.

Sources: The banks’ financial statements and Moody’s Investors Service

As Brazil pulls out of its recession, low inflation and single-digit policy interest rates will stimulate banks to increase lending activities, primarily focusing on less risky segments such as housing. At the same time, low benchmark interest rates will attract investors to seek investment alternatives as returns on government bonds decline, compressing portfolio targets. The LIG regulation provides a tax exemption for local and foreign investors, which will stimulate demand for these securities.

The new regulation will allow LIGs to receive higher ratings than those assigned to an issuer’s unsecured debt because the pool of underlying assets will be ring-fenced within the banks’ balance sheet. This will provide LIG investors with two layers of protection in the event that the issuer becomes insolvent: the creditworthiness of the bank and full recourse to the cover pool.

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

assessment.

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

Ely Mizrahi Assistant Vice President - Analyst +55.11.3043.7305 ely.mizrahi@moodys.com

NEWS & ANALYSIS Credit implications of current events

23 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

Brazilian covered bond regulations generally align with international standards and the harmonization proposal published by authorities in the European Union, including a 180-day liquidity test, loan-to-value limits, minimum over-collateralization levels and a requirement of a post-default operational procedures plan. The final regulation removed the constraint on the use of over-the-counter derivatives, which will provide more flexibility to address potential exposures of convertibility and transferability risk, and thus enable issuances in foreign currencies. The approved framework had no major change from the draft submitted for comment in January and is part of the Brazilian central bank’s agenda of micro-measures announced last year that focus on stimulating credit markets.

NEWS & ANALYSIS Credit implications of current events

24 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

HSH Nordbank’s Improved Solvency Raises Prospects for Its Privatisation, a Credit Positive Last Thursday, German Landesbank and leading ship lender HSH Nordbank AG (Baa3/Baa3 developing, b34) published mid-year (30 June 2017) results that showed a credit-positive improvement in capital ratios, reduced nonperforming exposures and higher coverage of its underperforming assets with risk provisions.

HSH’s strong progress in de-risking its balance sheet is credit positive for the troubled ship lender, for two reasons:

» The combination of de-risking and more capital will make HSH more attractive to potential buyers in its ongoing privatisation process. Satisfactory investor interest is credit positive for the ship lender because HSH must successfully privatise by February 2018 to stay in business. If the privatisation fails, HSH will have to cease new underwriting and enter a potentially costly unwinding that would harm creditors if it is not supported by any of its key stakeholders.

» HSH’s higher loss-absorption buffers, as reflected in its improved 18.9% common equity Tier 1 ratio at 30 June, up from 14.1% at year-end 2016, will help it weather further downside risk from the persistently challenging global shipping market. This is positive for creditors whether HSH is divested or unwound.

The combination of lower asset risk and more capital increases the prospects for HSH’s successful privatisation because it raises the bank’s valuation, increasing the likelihood that an investor would pay a positive consideration, which the European Commission’s competition department requires to compensate for state aid to HSH in 2013.

As Exhibit 1 shows, HSH reduced its nonperforming exposures to €11.9 billion from €14.6 billion in the six months to June 2017, reducing underperforming assets across different assets classes. HSH achieved this reduction by foreclosing or selling distressed assets. In addition, the weaker USD/EUR exchange rate had a positive effect because the vast majority of the bank’s ship finance book is denominated in USD. The reduction lowered the nonperforming exposure ratio to 14.6%, down from 17.5% as of December 2016.

HSH’s coverage ratio, which indicates risk provisions relative to nonperforming exposures, has improved to 56%. Although this 56% ratio is temporary and will decrease during the second half of the year because HSH keeps working out or selling better-provisioned nonperforming loans, this is an adequate level and somewhat above the provisioning of other German banks with large exposures to ship finance. Coverage of its nonperforming shipping book remained stable at 61%.

4 The bank ratings shown in this report are HSH Nordbank’s deposit rating, senior unsecured debt rating, and baseline credit

assessment.

Katharina Barten Senior Vice President +49.69.7073.0765 katharina.barten@moodys.com

NEWS & ANALYSIS Credit implications of current events

25 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

EXHIBIT 1

HSH Nordbank’s Nonperforming Exposures and Loan Loss Reserves Problematic assets, although still high, have decreased at a good pace and provisioning is stronger.

Sources: HSH Nordbank

HSH’s capital ratios benefitted from the progress in de-risking the balance sheet, which is reflected in the reported 10% decrease in risk-weighted assets to €25.7 billion during the six months to June 2017 (see Exhibit 2). In addition, reduced market price risk and the sale of assets above book value, resulting in the realisation of €307 million in hidden reserves, had positive effects.

EXHIBIT 2

HSH Nordbank’s Transitional and Fully Phased-in Common Equity Tier 1 Ratio Regulatory capital ratios have improved despite the costly sell down of underperforming assets.

Source: HSH Nordbank

At €11.9 billion, HSH’s nonperforming exposures remain very high. We maintain that HSH’s large underperforming legacy assets must be sold separately to ensure that the entity can change hands because in its current shape the bank will not be able to compete successfully as a private bank. In light of the ongoing challenges for shipping loans, the improved coverage ratios on the bank’s nonperforming shipping assets increase HSH’s chances of selling its legacy assets.

€ 9.0 € 9.4 € 8.4

€ 2.9 € 2.3€ 1.7

€ 2.7 € 2.5

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€ 7.1 € 7.0 € 6.6

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Transitional CET1 Ratio Fully Phased CET1 Ratio

NEWS & ANALYSIS Credit implications of current events

26 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

Nigerian Banks Will Benefit from Moderating Foreign-Currency Lending Last Wednesday, Access Bank Plc’s (B1 stable, b25) half-year 2017 results showed that its foreign-currency loans had declined by 26% to $1.755 billion from $2.385 billion in June 2016, leading a broader trend among the Nigerian banks we rate. As a result, Access Bank’s ratio of foreign-currency loans to total loans declined to 40% from 47% over the same period. Other Nigerian banks we rate, including Guaranty Trust Bank Plc (B1 stable, b1), First Bank of Nigeria Limited (B2 negative, b3), Union Bank of Nigeria Plc (B2 stable, b3) and Sterling Bank Plc (B2 stable, b3), also reduced their foreign-currency loan exposures, albeit to a lesser extent. Although declining foreign-currency lending erodes revenue, it is credit positive for these banks because it will ease severe negative pressure on asset quality, capital adequacy and foreign-exchange funding at a time of high asset risks and foreign-exchange constraints in the system.

In the first half of 2017, Nigerian banks generally reported a reduction in their foreign-currency loans, driven by efforts to de-risk their balance sheets and preserve foreign currency. The banks achieved this through repayment of loans, non-renewal of expired facilities and converting some of their foreign-currency loans to naira, the local currency. However, banks’ ratios of foreign-currency loans to total loans still remain high (see Exhibit 1).

EXHIBIT 1

Rated Nigerian Banks’ Foreign-Currency Loan Growth (June 2016-June 2017) and Foreign-Currency Loans as a Percent of Total Loans as of June 2017

Key: UBA = United Bank for Africa Plc; GTB = Guaranty Trust Bank Plc; FBN = First Bank of Nigeria Limited. Sources: The banks

Reduced foreign-currency loan exposures will support banks’ efforts to contain asset risks. Foreign-currency loans expose borrowers to foreign-exchange volatility, especially those who earn naira revenues. A weaker naira would require higher naira cash flow from such borrowers, straining their repayment capacity.

Although we expect asset risks to remain high for all Nigerian banks, banks that reduce their foreign-currency lending will likely experience less asset-quality deterioration than those that do not. Access Bank, which made the deepest cuts to its foreign-currency lending, recorded a 60-basis-point increase in its nonperforming loan ratio between June 2016 and June 2017, versus an average increase of 125 basis points for other Nigerian Moody’s-rated banks over the same period.

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

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Foreign-Currency Loan Growth - left axis Foreign-Currency Loans/Total Loans - right axis

Peter Mushangwe, CFA Associate Analyst +44.20.7772.5224 peter.mushangwe@moodys.com

Akin Majekodunmi, CFA Vice President - Senior Analyst +44.20.7772.8614 akin.majekodunmi@moodys.com

NEWS & ANALYSIS Credit implications of current events

27 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

Banks’ capital adequacy ratios will benefit from falling foreign-currency loans because a weaker naira inflates risk-weighted assets as these loans convert to a higher local-currency amount. If the naira were to depreciate against the US dollar to NGN350 from NGN313 at the end of June 2017, our rated Nigerian banks’ average reported capital adequacy ratio would fall by about 100 basis points to 18%.

Fewer foreign-currency loans also will lessen banks foreign-currency liquidity pressures because banks’ need for foreign-exchange funding to support their lending will ease. Exhibit 2 shows that Access’ and Guaranty Trust’s ratios of foreign-currency loans to foreign-currency deposits improved in the first half of 2017, while UBA’s deteriorated. Zenith Bank Plc’s (B1 stable, b1) ratio improved despite growing its foreign-currency loan book because the bank benefited from an accretion of foreign-currency deposits. A smaller foreign-currency funding requirement reduces banks’ reliance on market funds and corporate deposits, which tend to be more expensive and volatile than retail deposits.

EXHIBIT 2

Select Nigerian Banks’ Ratios of Foreign-Currency Loans to Foreign-Currency Deposits

Sources: The banks

Nevertheless, we expect Nigerian banks to continue to face substantial asset and foreign-currency liquidity risks into 2018 because of their remaining high foreign-currency loan exposures, amid subdued economic growth. The system’s nonperforming loan ratio increased to 14.0% as of December 2016 from 5.3% in December 2015, and we expect asset quality deterioration to continue, although at a slower pace. Foreign-currency deposits declined by 23.8% in 2016, pressuring banks’ foreign-currency liquidity and funding metrics, but foreign-currency deposits should stabilize over 2017 and 2018.

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Access Bank Zenith Bank United Bank for Africa Guaranty Trust Bank

Dec-16 Jun-17

NEWS & ANALYSIS Credit implications of current events

28 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

Insurers

UnitedHealth’s Acquisition of The Advisory Board Company’s Health Care Business Is Credit Positive Last Tuesday, UnitedHealth Group, Incorporated’s (UNH, A3 stable) health services unit Optum announced that it would acquire the heath care business of The Advisory Board Company (ABCO, unrated) for $1.3 billion, including the assumption of ABCO’s debt. The transaction is credit positive for UNH because it will be able to leverage ABCO’s research and IT services to accelerate growth and earnings at Optum’s OptumInsight division. Optum expects the transaction to close late in the fourth quarter of 2017 or in the first quarter of 2018, subject to regulatory approvals.

ABCO provides research, technology, and consulting to healthcare organizations and educational institutions and had revenues of $803 million at year-end 2016. Prior to closing the merger of the healthcare business with Optum, affiliates of Vista Equity Partners will acquire ABCO’s education business for $1.55 billion.

UNH has not indicated how it will finance the $1.3 billion purchase price of ABCO; however, the transaction size is modest relative to our estimate of the parent company’s annual net cash flow of approximately $4 billion (net of shareholder dividends, capex and interest expense). We expect the transaction will not interfere with UNH’s stated goal of lowering financial leverage (debt to capital) to below 40% by the end of third-quarter 2017.

UnitedHealth Group’s Optum unit is an information and technology-enabled health services business serving the broad healthcare marketplace. In terms of revenue, cash flow and earnings, Optum will continue to be UNH’s fastest-growing division. Optum generated about 18% of the company’s revenue after intercompany eliminations and 43% of pre-tax earnings during the first half of 2017. The exhibit below summarizes the revenue and earnings-generation capacity of Optum and UNH’s benefits business, UnitedHealthcare. Optum plans to fold ABCO’s healthcare business into its OptumInsight division along with its research and data analytics.

UnitedHealth Revenue and Earnings by Segment, Year to 30 June 2017, $ Millions

UnitedHealthcare OptumHealth OptumInsight OptumRX Total Optum UNH Consolidated

Revenue $80,924 $9,855 $3,836 $30,787 $43,908 $98,776

Earnings Before Taxes $4,345 $754 $666 $1,379 $2,799 $6,560

Notes: UNH Consolidated and Total Optum include intercompany eliminations. Source: UnitedHealth Group filings

UnitedHealth, and in particular Optum, have actively acquired businesses in recent years, targeting companies that would further strengthen the group’s product and business strategy or offer geographic growth. Along with Surgical Care Associates, MedExpress and ProHealth, Optum’s recent acquisitions include pharmacy benefits managers Catamaran in 2015 (about $13 billion, largely debt-financed) and Helios (specializing in workers’ compensation claims) in January 2016 (deal terms were not disclosed).

Because of the Catamaran acquisition, UnitedHealth Group’s financial leverage remains slightly higher than our expectation for the rating. However, credit support for UNH’s holding company obligations reflects significant non-regulated cash flows, primarily from Optum, in addition to statutory dividends from the group’s regulated insurance operations. The group’s adjusted financial leverage (where debt includes operating leases) was 42.2% at 30 June 2017. We expect that the company will reduce adjusted leverage to about 40% by year-end 2017.

Ellen Fagin Associate Analyst +1.212.553.1650 ellen.fagin@moodys.com

Vincent Del Gatto Associate Analyst +1.212.553.7749 vincent.delgatto@moodys.com

NEWS & ANALYSIS Credit implications of current events

29 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

Sovereigns

Poland’s Stronger-than-Expected Growth and Fiscal Performance Are Credit Positive Last Thursday, Poland’s (A2 stable) Central Statistical Office reported that year-over-year real GDP grew 3.9% in the second quarter of 2017, exceeding both our expectations and the market’s. Earlier, central government fiscal results also beat expectations, with the actual execution of the central government budget showing a PLN2.4 billion surplus for January-July 2017, PLN28 billion (around 1.4% of GDP) more than the amount proposed in the 2017 Budget Act. These positive results prompted us to revise our 2017 GDP growth forecast to 4.3% from 3.2%, pushing the output gap into positive territory for the first time since 2012. Additionally, we expect Poland’s fiscal position to strengthen, with a fiscal deficit of less than 2.5% of GDP in 2017, versus our earlier forecast of 2.9% of GDP.

The main GDP growth driver was domestic demand, which contributed 5.4 percentage points and was the strongest since third-quarter 2014. In particular, private consumption contributed 2.9 percentage points to GDP growth, boosted by strong employment increases, accelerating wages, and the “500+ child benefit programme,” which took effect in April 2016 and provides families with more than one child a subsidy of PLN500 per child.

Gross capital formation, composed of gross fixed-capital formation and inventories, contributed 2.0 percentage points, mainly driven by inventories. Although small, the contribution of gross fixed-capital formation is noteworthy because it is the first time this measure has been positive after having been a significant drag on growth during four of the past five quarters (see Exhibit 1). Net exports were a drag on growth in the second quarter owing to robust domestic demand driving up the growth of imports.

EXHIBIT 1

Contributions to Poland’s GDP Growth

Sources: Poland’s Central Statistical Office and Moody’s Investors Service

On the fiscal side, Poland’s central government recorded a surplus of PLN2.4 billion for January-July 2017, versus a year-ago deficit of PLN14.4 billion (see Exhibit 2), mainly attributed to a 9.3% rise in revenue collection over year-ago levels that outpaced a 0.4% rise in expenditures. Tax revenue rose 16.2% year over year, reaching 61% of what has been budgeted for the whole year, and non-tax revenue has already surpassed the full-year target. Value-added tax receipts grew by 24.4% year over year, reflecting accelerating growth and measures combating tax evasion, corporate income tax receipts (13.4% year-over-year growth) and personal income tax revenue (7.8% year-over-year growth).

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Private Consumption Public Consumption Gross Fixed Capital FormationInventories Net Exports GDP

Heiko Peters Assistant Vice President – Analyst +49.69.70730.799 heiko.peters@moodys.com

Michail Michailopoulos Associate Analyst +49.69.70730.740 michail.michailopoulos@moodys.com

NEWS & ANALYSIS Credit implications of current events

30 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017

EXHIBIT 2

Poland’s Central Government Outperforms Fiscal Targets

Sources: Haver Analytics, Poland’s Ministry of Finance and Moody’s Investors Service

We expect positive economic momentum to continue for the rest of the year. We expect GDP growth to be driven by solid private consumption, as well as the slow, but steady, recovery in investment that reflects a favourable external environment and higher inflow of European Union funds. Higher economic growth and strong budget execution significantly increase the chance that Poland’s 2017 fiscal deficit will be well below the 3% Maastricht-threshold for a third consecutive year.

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Target Balance - left axis Actual Balance - left axisTarget Execution of the state budget - right axis Actual execution of the state budget - right axisTarget Execution of the State Budget - right axis Actual Execution of the State Budget - right axis

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

31 MOODY’S CREDIT OUTLOOK 4 SEPTEMBER 2017 8

NEWS & ANALYSIS Hurricane Harvey 2 » Credit Negative for Gulf Coast’s Chemical Producers » Credit Negative for For-Profit Hospitals » Credit Negative for Golf Operator ClubCorp » Mitigants Reduce Credit Effect on Banks » Local Governments Have Federal Aid and Other Means to

Maintain Credit Quality » Limited Credit-Negative Effect on CMBS and CRE CLOs » RMBS’ Small Exposures to Hurricane-Affected Regions

Mitigate Credit-Negative Effects

Corporates 15 » Gilead's Kite Pharmaceuticals Buy Raises Leverage

» US Energy Department Study on Grid Reliability Will Not Save Coal

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Credit Positive

Banks 22 » US Regulator Seeks $630 Million in Penalties from

Habib Bank » Intesa Sanpaolo’s Acquisition of Banque Morval Is

Credit Positive » Regulator’s Inquiry of Commonwealth Bank of Australia’s

Culture and Practices Is Credit Negative

Exchanges 26 » B3 Unites Its Clearinghouses, Reducing Capital Expenditures

Sovereigns 27 » Political Crisis in Guatemala Increases Risk of

Economic Slowdown

Sub-sovereigns 29 » Ontario Municipalities Will Benefit from Increased Social

Housing Funding

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