MOODYS.COM

3 FEBRUARY 2014

NEWS & ANALYSIS Emerging Market Interest Rate Hikes & Currency Devalutions 2

» Credit Implication of Emerging Market Volatility Depends on the Credibility of Policy Choices

» Argentine Bank Funding Costs Increase with Rate Hike, a Credit Negative

» Turkey's Monetary Tightening Is Credit Negative for Banks » Argentine Provinces' and Municipalities' Debt-Service Costs

Climb with Peso Devaluation » Weaker Turkish Lira Is Credit Negative for Istanbul and Izmir » South Africa's Interest Rate Hike Is Credit Negative for RMBS

and ABS

Corporates 17

» Google's Credit-Positive Motorola Mobility Sale Dials Up Lenovo's Hardware Exposure

» Caterpillar's Share Repurchase Plans Are Credit Negative » DuPont's Share Repurchase Is Credit Negative » Martin Marietta's Credit Quality Will Weaken with Texas

Industries Merger » YRC Worldwide Makes Significant Progress in Debt Refinancing,

a Credit Positive » Rayonier's Planned Pulp Spin-off Is Credit Negative » Hudson's Bay Sale-Leaseback Deal Will Reduce Debt, a Credit

Positive » South Africa Mobile Charge Changes Will Hurt Larger Players,

but Help Smaller Ones » Shimao Property's Financial Risks Will Increase with Securities

Firm Investment

Infrastructure 28 » Brayton Point Shutdown Is Credit Positive for New England

Power Producers

Banks 30

» Regulatory Action Against PHH Over Alleged Mortgage Insurance Kickbacks Is Credit Negative

» Bank of Montreal's F&C Asset Management Acquisition Is Credit Positive

» Brazil's Itaú Unibanco Acquires Control of Chile's CorpBanca, a Credit Positive

» Unicaja's Acquisition of Banco CEISS Advances, a Negative for Unicaja

» Ban on Proprietary Trading for Systemically Important European Banks Would Be Credit Positive

» BPM's Main Shareholder Sells Its Stake, Destabilizing Its Capital Raise

» Banco Popolare Increases Capital Following a Net Loss, a Credit Positive

» State Bank of India's Equity Raise Is Credit Positive, but Negative for Other Public-Sector Banks

» BDO Unibank Alters Preferred Shares to Comply with Basel III, a Credit Positive for Senior Bondholders

Insurers 42 » UK Flood Losses Are Credit Negative for Property and Casualty

Insurers

Money Market Funds 44 » US Treasury's New Floating-Rate Note Offers Supply Benefits

to Money Market Funds

Sub-sovereigns 46 » Grant to the Mexican State of Nuevo Leon Is Credit Positive

RATINGS & RESEARCH Rating Changes 47

Last week, we downgraded Sony, Bank of Ireland UK, and City National and upgraded nine US utilities, 12 Bolivian insurers, three Slovenian banks, AXA Insurance, Iccrea BancaImpresa, 73 US subprime RMBS tranches and 11 Irish RMBS tranches, among other rating actions.

Research Highlights 56

Last week we published on the Argentine currency devaluation, European paper & forest, South African platinum mines, US technology, Chinese corporates, US oil & gas, US utilities, US ports, Luxembourg banks, Asia Pacific banks, Brazilian banks, global asset managers, Brazil, European sub-sovereigns, New Zealand, sovereign defaults and restructuring, Namibia, Turkey, Affinity Sutton and Bromford Housing Groups, US higher education, US public finance rating changes, and France’s specialized lenders and covered bond issuers, among other reports.

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Thursday’s Credit Outlook 60 » Go to Last Thursday’s Credit Outlook

NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Emerging Market Interest Rate Hikes & Currency Devaluations

Credit Implication of Emerging Market Volatility Depends on the Credibility of Policy Choices Over the past few weeks, there has been renewed volatility in emerging markets, with steep declines in some exchange rates and stock markets. This article makes the following observations about this latest bout of emerging market volatility:

» So far, we are not witnessing a uniform emerging market crisis, and although there are common vulnerabilities, each country faces its own unique challenges

» There is a risk, however, that investors treat emerging markets as a homogeneous group, causing a vicious cycle of risk aversion

» Policymakers have a variety of tools available to respond to these developments and stave off further destabilising market shocks

» The credit implications of emerging market volatility will depend on the credibility of policymakers’ choices with investors

The article explores policy choices and the determinates of their credibility with investors.

SO FAR, EMERGING MARKET PROBLEMS ARE COUNTRY-SPECIFIC The Fed has now begun to taper its quantitative easing, with monthly bond purchases falling first to $75 billion and, beginning in February, to $65 billion. The rise in borrowing costs and developed economy yields associated with tapering is causing investors to reassess the risk-reward trade off associated with investing in emerging markets. This has resulted in reversals of the capital inflows (or reduced inflows) which benefitted many emerging markets in recent years, and prompted fears that more outflows may be forthcoming.

Exhibit 1 shows that recent exchange rate and stock market declines are less widespread, and in most cases smaller, than those following US Federal Reserve Chairman Benjamin Bernanke’s announcement last May about the US central bank’s intention to begin to unwind its quantitative easing program. Nevertheless, the declines have put a number of governments under pressure to respond in ways that convince investors that the authorities are committed to addressing underlying concerns.

Marie Diron Senior Vice President +44.20.7772.1059 marie.diron@moodys.com

Alastair Wilson Managing Director - Chief Credit Officer, EMEA +44.20.7772.1372 alastair.wilson@moodys.com

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

EXHIBIT 1

Change in Exchange Rates and Stock Indices Exchange Rates to the US Dollar

Stock Price Indices

Source: Haver Analytics

A closer look at recent events shows that neither the causes nor the effects of instability are uniform across emerging markets. There is a range of country-specific challenges, with emerging market countries differing significantly in their vulnerability to capital outflows.

» In China, concern about the growth outlook and the People’s Bank of China continued interbank market liquidity squeeze have contributed to recent instability. In addition, the partial default on a wealth management product in the last week of January raised worries about the soundness of China’s shadow banking sector. Weaker growth in China could significantly dampen trade and financial flows globally. But direct exposure to China varies greatly: around 25% of South Africa’s goods exports go to China, but for Turkey it is only 2% and for Argentina it is just 6%.

» In Argentina, the central bank has intervened in foreign exchange markets over the past year in an attempt to stem the currency depreciation that has fuelled very high inflation (private estimates suggest inflation is at least double the official rate of around 11%). But these interventions have reduced the country’s foreign exchange reserves by one third over the year, meaning that continued intervention along earlier lines is no longer sustainable. As soon as the central bank stopped intervening, the peso depreciated sharply.

-22% -20% -18% -16% -14% -12% -10% -8% -6% -4% -2% 0% 2%

ArgentinaTurkey

South AfricaRussiaBrazil

ColombiaChina

MexicoKorea

PhilippinesThailandMalaysia

PeruPoland

ChileIndia

CzechIndonesia

Change in 30 Days from May 2013 Tapering Speech Change in 30 Days to 29 Jan 2014

-22% -20% -18% -16% -14% -12% -10% -8% -6% -4% -2% 0% 2%

TurkeyRussia

ColombiaChileBrazil

ThailandChina

MexicoMalaysia

PeruKoreaIndia

HungaryCzech

PhilippinesSouth Africa

IndonesiaArgentina

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

» In Turkey, political tensions have added to investors’ concerns that the country’s economic model, with growth fuelled by capital inflows to finance a very large current account deficit (around 7.5% of GDP in 2013), is not sustainable.

» In India, although the third-quarter 2013 current account deficit narrowed to 1.2% of GDP from 5% a year earlier, concerns persist regarding domestic inflation and the structural reforms needed to address poor governance and infrastructure. As a result, doubts about the country’s medium- to long-term growth potential have risen over the past year.

» In South Africa, concerns reflect the sizable current account deficit (around 6% of GDP in 2013), high reliance on capital inflows and nervousness about politics, offset by lower exposure to short-term foreign currency debt. South Africa’s dependence on commodities as a source of export revenues has exposed the country to external changes in prices and demand.

THE RISK OF A GLOBAL DISRUPTION Even if there are common risk factors, investor concern has focused most closely on countries that are most reliant on foreign lending to finance current account and domestic deficits (those mentioned above, and -- less recently -- Brazil, Indonesia, Chile and the Philippines). However, there is a risk that investors’ desire to reduce their exposure to unpredictable currency movements could prompt them to treat emerging markets as a homogeneous group, ignoring the very different risks each country presents.

Although this is not our central scenario, if that were to happen, a vicious cycle of risk aversion could emerge. Some combination of events, such as unexpectedly rapid US tapering or a slowdown of growth in China or further domestic problems in at-risk emerging market countries, could encourage further withdrawals of capital and currency depreciation. This would fuel inflationary pressures and trigger policy responses that undermine growth across the emerging markets, which, in turn, would further heighten investor worries.

Despite the vicious cycle not being our central scenario, we need to factor the risk into our credit analysis. The actions authorities take in response, along with the underlying strength of public finances, will be key to either preventing a group of countries falling into such a vicious cycle or helping them break out of it quickly.

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

EXHIBIT 2

The Un-Virtuous Circle of Emerging Market Risk

Source: Moody’s Investors Service

A RANGE OF POLICY OPTIONS In the current climate, one generally shared feature is that authorities in countries under pressure need to respond to external developments and target external risk drivers as well as, or instead of, domestic inflation concerns. To that end, the authorities – and specifically central banks – have a range of policy instruments available, and have taken a number of actions recently:

» On Tuesday, the Turkish central bank raised a range of policy rates, increasing the effective interest rate by 250 basis points to counter a sharp reduction in capital inflows and the associated sharp depreciation in the Turkish lira

» Also on Tuesday, the Reserve Bank of India took less drastic action, raising policy rates by 25 basis points to 8%, primarily to counter domestic inflationary pressures rather than to contain exchange rate volatility

» On Wednesday, the South African Reserve Bank raised its policy rate by 50 basis points to 5.5% to combat inflation pressures fuelled in part by the fall in the rand

» In late January, Argentina effectively relinquished control of the peso exchange rate, triggering a sharp depreciation

If a country’s underlying priority is to halt the withdrawal of foreign funding (capital outflows), one option is to impose capital controls. Although focused capital controls can be effective, broad-based controls are a

Sense of policy inertia or failure, growth fears, risk

aversion

Further capital flight, exchange rate

depreciation, rising inflation

expectations

Lower growth, higher inflation,

political dysfunction

China slowdown or bank default, worsening of

domestic conditions, disrupted trade,

pervasive inflationary pressures

Shock

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

blunt instrument that tends to be a last resort when options such as foreign exchange intervention are no longer available. Controls on outflows typically must be accompanied by controls on inflows, which can seriously impair growth. Central banks have at times implemented measures to encourage capital inflows, but the effectiveness of such policies in times of high risk aversion is generally limited.

Central banks may also opt for benign neglect and let financial markets set asset and currency prices without any intervention. The associated exchange rate depreciation exacerbates near-term inflation pressures, but can stimulate medium-term growth for countries with a significant export sector. As such, it is most effective used by countries with open economies and central banks that have a history of successfully controlling inflation.

When countries exhibiting economic or financial weakness do not have the trust of investors to contain inflation, as is the case with Argentina, rapid exchange rate depreciation may simply exacerbate inflationary risks, encourage further outflows and depreciation and require more painful action later. Moreover, in situations where many currencies are devaluing at the same time, as is happening now, the stimulatory effects are dampened.

Between these two extremes, the range of tools includes countering market pressure by using reserves to support the exchange rate. Ultimately, however, no central bank has enough reserves to counter a mass of investors wanting to sell the currency, and most avoid intervention in the face of sustained market pressure as a matter of principle. As reserves are depleted, pressure on the exchange rate increases, requiring ever larger intervention. The depletion of reserves exacerbates investor risk aversion, which dampens inflows and domestic spending. If the exchange rate is allowed to depreciate sharply, inflationary pressures can intensify. Inflation will rise faster, the higher the import intensity of the country and the smaller the spare capacity in the economy.

Another option favoured recently is to raise interest rates to make investing in the country’s real and financial assets more attractive and perhaps discourage investors from borrowing domestic currency to sell it and buy it back at a cheaper rate (shorting the currency). However, while a rate hike can help limit capital outflows, exchange rate depreciation and inflation, it also dampens economic activity. The adverse effect on growth is larger for countries with higher dependence on foreign currency financing as a source of funds for investment and consumption. If investors believe the impact on growth would be so severe that the central bank will soon reverse its action, capital outflows may not be halted in the first place.

CREDIT IMPLICATIONS DEPEND ON THE CREDIBILITY OF THE POLICY CHOICES MADE The probability of widespread disruption affecting all emerging markets will be partly determined by the timeliness and firmness of individual policymakers’ responses and investors’ confidence in their commitment to continuous policy action – in a word, by policymakers’ credibility. If actions are to succeed, investors must believe that they are sufficient to address underlying concerns, and that if not, further action will be taken even in the light of follow-on effects on inflation and economic growth. Responses that fail to convince foreign investors of the authorities’ commitment or ability to preserve the value of the currency or to take longer-term corrective measures can simply exacerbate risk aversion and intensify capital outflows. Where that happens, the credit implications for domestic issuers are generally strongly negative, with rising inflation damaging real incomes and consumption and the withdrawal of capital damaging investment.

There is no perfect policy mix: the choice will depend on the circumstances of the country in question, its policy credibility and the external environment. However, pre-emptive, decisive action is likely to be more successful than action that is too late, too little. The earlier the authorities act, the more in control they are perceived to be, the smaller the magnitude of the measures, the smaller the economic effect and the more

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

likely they are to be successful. So early and credible intervention is credit positive. Late, defensive intervention is credit negative.

Moreover, any policy action must be accompanied by further actions to address the underlying cause of fragility, whether that be the need for domestic structural reforms or a reorientation of the economy to reduce its reliance on foreign capital, perhaps through action to improve trade competitiveness. One risk is that many such developments will take considerable will, and time, to accomplish. In the meantime, the more exposed emerging market nations will remain vulnerable to further bouts of risk aversion as the developed world recovers.

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Argentine Bank Funding Costs Increase with Rate Hike, a Credit Negative On Tuesday, the central bank of Argentina raised the interest rates it pays on short-term peso-denominated bills by 600 basis points (bp) compared with the prior 21 January auction. The Argentine monetary authority also issued dollar-denominated bills for the first time in almost seven years in an attempt to capture dollar-denominated deposits in the banking system after easing foreign exchange controls on 19 January.

Short-term peso bill auctions set benchmarks for other interest rates in the financial system, and therefore this sizable rate increase will result in higher deposit rates. By raising rates, the central bank intends to make local currency deposits more attractive, stem the demand for US dollars and reduce ARS money supply. We expect that the increase in rates, which will raise the banks’ funding costs, combined with elevated inflation and declining purchasing power, will harm the banks’ asset quality, business prospects and profitability at a time of growing uncertainty and diminishing business confidence. The uncertainty has intensified with the sharp devaluation of the peso and the lack of clarity on the future of fiscal and monetary policy.

Exhibit 1 shows the four most recent bill auctions, the initial gradual interest rate changes, and last week’s 600 bp change. Overall, the short-term tranche of the yield curve increased to 25.52% from 16% between 7 January and 28 January.

EXHIBIT 1

Yields on Argentina Central Bank Bills at Latest Four Auctions

Source: Central Bank of Argentina

Argentine banks’ assets and liabilities are predominantly short term, and therefore, banks should be able to reprice their loans. However, we expect higher rates to discourage loan demand, particularly in the 40% of the banks’ loans directed to consumers. Moreover, we anticipate an increase in delinquencies in that segment in light of high refinancing costs and inflation. We also expect margin compression in about 15% of banks’ fixed-rate loans, including mortgages and loans to small and medium-sized companies that fall under the central bank’s mandatory lending program. Combined, these measures will hurt bank’s profitability and asset quality.

Even though higher rates will help the economy decelerate, deposit rates at 25.5% are still negative in real terms if, as we expect, inflation does rise to 30% in 2014. Moreover, we believe that higher rates on local currency deposits will not curtail demand for dollars, which is highly inelastic in the current environment.

0%

4%

8%

12%

16%

20%

24%

28%

50 100 150 200 250 300 350 400

Yiel

d

Tenor in Days

7-Jan 14-Jan 21-Jan 28-Jan

Fernando Albano, CFA Assistant Vice President - Analyst +54.11.5129.2624 fernando.albano@moodys.com

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

The central bank’s decision to resume issuing dollar-denominated securities is meant to help banks absorb new dollar deposits that may result from the relaxation of foreign exchange controls. This is likely to be credit neutral for banks and have little effect on their funding structure if, as we expect, there is little significant growth in dollar deposits. The move aims to motivate banks to offer attractive rates to increase Argentine households’ deposits in dollars, while banks make a small spread by investing the deposit proceeds in central bank bills. Only banks that obtain new dollar-denominated deposits will be able to bid in the auction, and they will get a spread over their deposit rates of between 0.25% and 0.60%, depending on the tenor of the deposit.

Exhibit 2 shows the Argentine banking system’s 44% decline in dollar deposits since the inception of currency controls in November 2011.

EXHIBIT 2

US Dollar Deposits in Argentine Banking System

Source: Central Bank of Argentina

$0

$2

$4

$6

$8

$10

$12

$14

Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13

$ Bi

llion

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Turkey’s Monetary Tightening Is Credit Negative for Banks Last Tuesday, the Turkish Central bank (CBRT) significantly raised interest rates across the board to dampen rising inflation pressures as a result of the sharply depreciating lira. We expect the interest rate increase to result in higher domestic funding costs and a slowdown in Turkey’s (Baa3 stable) economic growth, which will pressure banks’ profitability and asset quality during 2014, a credit negative.

Among last Tuesday’s measures, the CBRT announced that all lira funding for the banking system will be undertaken at a higher weekly repo rate of 10%, a new benchmark rate for Turkish monetary policy. The CBRT increased five of its interest rates (see Exhibit 1), including raising the overnight lending rate to 12.00% from 7.75% and more than doubling the weekly repo rate to 10.0 % from 4.5%.

EXHIBIT 1

Turkey’s Recent Interest Rate Changes 31 December 2012 30 June 2013 31 December 2013 29 January 2014

Overnight Borrowing 5.00% 3.50% 3.50% 8.00%

Overnight Lending 9.00% 6.50% 7.75% 12.00%

One Week Repo 5.50% 4.50% 4.50% 10.00%

Overnight Primary Dealers 8.50% 6.00% 6.75% 11.50%

Late Liquidity Window (Borrowing/Lending)

0%/12.00% 0%/9.5% 0%/10.25% 0%/15%

Source: CBRT and Moody's Investors Service

These measures were aimed at alleviating the Turkish currency’s and capital markets’ financial stress and may stem some of the extreme volatility, which was causing significant stress for corporate borrowers and importers.

However, the CBRT’s measures will constrain banks’ revenue generation and profitability. System funding is primarily short-term deposits: more than two thirds of all deposits mature within three months. However, system assets tend to have longer-term maturities and repricing schedules. Because of the structural maturity mismatch, banks’ margins will contract from the sudden increase in funding costs.

The sharp increase in borrowers’ refinancing risk owing to the sudden increase in rates will also negatively affect banks’ asset quality. Unsecured consumer loans and loans to small and medium-sized enterprises are most at risk because of their short terms and floating interest rates. In general, the systemwide loan portfolio is fairly unseasoned and has almost doubled in the past three years – and this is its first test by interest rate shocks of such magnitude. Furthermore, tighter monetary policy increases the downside risks to our 3% economic growth forecast for 2014 and, hence, the operating environment for Turkish banks.

In addition, approximately 50% of corporate lending is denominated in foreign currency: these FX loans and the corporate borrowers’ repayment capacity will be adversely affected by ongoing lira depreciation, which will contribute to increased delinquencies.

We expect that downside risks to Turkey’s economic growth from the sharp monetary tightening will harm the credit quality of existing loans and limit opportunities for lending growth. However, since 2008, Turkish banks’ profitability indicators (net income over risk-weighted assets) have been among the strongest versus selected regional and global peers (see Exhibit 2).

Irakli Pipia Vice President - Senior Analyst +44.20.7772.1690 irakli.pipia@moodys.com

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

EXHIBIT 2

Net Income over Risk-Weighted Assets for Selected Banking Systems

Source: Moody’s Investors Service Bank Financial Metrics

-3%

-2%

-1%

0%

1%

2%

3%

4%

Czech Republic China Turkey Slovak Republic Poland Russia Brazil Hungary

2008 YE 2009 YE 2010 YE 2011 YE 2012 YE 2013 H1

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Argentine Provinces’ and Municipalities’ Debt-Service Costs Climb with Peso Devaluation Argentina’s currency devaluation late last month is credit negative for most provinces and municipalities because it will drive up debt-service costs. We also expect these local governments to face a more cautious investor base, which will increase their refinancing risk and make the weakest sub-sovereigns much more dependent on the federal government’s financial assistance.

Local Argentine governments have increasingly issued debt linked to the US dollar exchange rate, especially during the past year. As a result, half the outstanding debt of the Argentine municipalities and provinces we rate consists of debt either issued in foreign currency or linked to the US dollar. Debt service costs have risen sharply over the past weeks to reach our estimated 10% of total revenues, versus 7% last year for the most affected sub-sovereigns. For the smallest and less leveraged jurisdictions, those costs rose to 2.0% of total revenues from 1.5%.

Exhibit 1 shows select Argentine sub-sovereigns’ exposure to foreign exchange fluctuations.

EXHIBIT 1

Argentine Sub-sovereigns’ Exposure to Foreign-Exchange Fluctuations, as of 30 September 2013

Foreign Currency Debt as Percent of Total Debt

Foreign Currency Debt as Percent of Fiscal 2013

Projected Revenues*

Global Scale Ratings

Outlook Local

Currency Foreign

Currency

City of Buenos Aires 98% 21% B3 Caa1 Negative

Province of Córdoba 57% 21% B3 Caa1 Negative

Province of Buenos Aires 49% 27% B3 Caa1 Negative

Province of Mendoza 46% 15% B3 Caa1 Negative

Province of Chubut 30% 3% B3 n/a Negative

Province of Entre Ríos 29% 7% B3 n/a Negative

City of Córdoba** 19% 1% B3 n/a Negative

Province of Chaco** 13% 5% Caa3 n/a Negative

Province of Formosa 12% 4% Caa2 n/a Negative

City of Rio Cuarto 0% 0% B3 n/a Negative

* Linear projection based on third-quarter 2013 revenues

** Own estimates

Source: Moody’s Investors Service, based on information provided by the sub-sovereigns

Heightened uncertainty about the future of the exchange rate and its effect on domestic inflation will exert renewed pressure on expenditures as public employees demand increases to their salaries to catch up with inflation. This could further erode the already tight operating surpluses (within 3%-4% of revenues) recorded by Argentine sub-sovereigns in 2013, limiting their ability to cover growing debt servicing costs.

Another factor to monitor is the evolution of the domestic benchmark interest rate, which also jumped in January (see Exhibit 2). This rate is the basis cost promised to sub-sovereign short-term note investors, which, together with other short-term financing, we estimate equals 10%-20% of their total debt.

Alejandro Pavlov Vice President - Senior Analyst +54.11.5129.2629 alejandro.pavlov@moodys.com

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

EXHIBIT 2

Argentina’s Benchmark Peso Deposit Rate (BADLAR)

Source: Central Bank of Argentina

0%

5%

10%

15%

20%

25%

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Weaker Turkish Lira Is Credit Negative for Istanbul and Izmir A weakened Turkish Lira, down 10.9% in the last two months ended Friday, will lead to growing debt service costs for sub-sovereign governments with foreign currency debt, a credit negative. In particular, we expect the metropolitan municipality of Istanbul (Baa3 stable) to face the highest pressure from growing debt servicing costs, while Izmir (Baa3 stable), with a more modest exposure to exchange rate fluctuations, will also be adversely affected.

Istanbul metropolitan municipality had 93% of its $2.4 billion of direct municipal debt stock at year-end 2013 denominated in US dollars. Annual debt service requirements on foreign debt in 2013 absorbed a high 9% of the city’s latest realized operating revenue, which is lower than the prior few years owing to a more conservative borrowing strategy. Although Istanbul’s debt is composed of long-term debentures, the amortising debt’s average life is relatively short, at approximately five years. This, combined with the fact that national legislation does not allow the use of hedging instruments like derivatives, leads us to expect that the Turkish lira depreciation will substantially increase debt service costs. The city currently estimates that 2014 external debt service costs could increase by as much as 20% from 2013.

Izmir has less exposure to the lira depreciation, thanks to a substantially lower proportion of foreign currency debt (46% at year-end 2013). Also, we note that the city made provisions to protect against foreign currency risk on the bulk of its foreign currency borrowings: in particular, Izmir set aside funds in a risk account to protect debt service payments on a €108 million loan with the European Investment Bank (EIB). The current size of this fund abundantly covers annual debt service payments to EIB. Izmir’s only other foreign currency debt is a €27 million loan from the French Development Agency. The lack of hedging on this loan is mitigated by its small size. The majority of Izmir’s debt is composed of local currency amortizing loans from domestic banks.

Partially mitigating the pressures associated with growing debt servicing costs, we note that Istanbul’s and Izmir’s local currency debts are entirely fixed-rate and neither city anticipates incurring additional local currency debt in 2014. These features protect municipal budgets from the Turkish central bank’s significant increase in interest rates last week, a move to dampen rising inflation pressures as a result of the sharply depreciating lira.

Francesco Soldi Vice President - Senior Analyst +39.02.9148.1149 francesco.soldi@moodys.com

Giuliana Cirrincione Associate Analyst +39.02.9148.1126 giuliana.cirrincione@moodys.com

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

South Africa’s Interest Rate Hike Is Credit Negative for RMBS and ABS Last Wednesday, South Africa’s Reserve Bank raised its key repurchase rate 50 basis points to 5.5% to stem inflation and the rand’s depreciation in response to the US Fed’s cutback in quantitative easing. The rate hike is credit negative for South African RMBS and ABS because it will reduce borrowers’ disposable incomes and further constrain over-indebted households’ ability to make timely payments on their loans.

Interest payments will increase for all borrowers and reduce their capacity to repay their loans. Interest rates on loans in most South African ABS and RMBS transactions are linked to the three-month Johannesburg Interbank Agreed Rate or prime rate index and have a periodic interest rate reset, which makes them sensitive to changes in leading interest rates. An increase in interest rates will increase the monthly periodic debt payments and decrease borrowers’ disposable income, making them more likely to get behind in payments.

Borrowers will be all the more affected because their leverage is high by historical standards and the number of loans in arrears has increased since 2003. The level of household indebtedness increased to 76% of disposable income in June 2013, compared with 50% in 2003, as shown below. The higher the leverage, the lower the disposable income of borrowers relative to their debt payment obligations. Household indebtedness, particularly high for lower- and middle-income households, has become a political issue, prompting recent government measures to assist over-indebted households and prevent over-indebtedness in the future.1

The number of customers already in arrears for more than three months or more is 4.2 million, out of 20 million credit-active customers, according to the Ministry of Finance, Trade and Industry.

South African Household Debt to Disposable Income Has Increased Significantly Since 2003

Source: South African Reserve Bank

Borrowers who recently bought homes and took out loans will be the most affected because they will not have the benefits of house price appreciation unless rates go down again. Stable interest rates over the past decade have stimulated the housing market and supported recoveries on defaulted loans in RMBS transactions, consequently reducing the severity of losses in securitisations.

1 See Measures to Minimise Risk of Over-Indebtedness Are Credit Positive for South African RMBS and ABS, 9 January 2014.

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Alberto Barbáchano Becerril Vice President - Senior Analyst +34.91.768.8212 alberto.barbachano@moodys.com

Ariel Weil Vice President - Senior Analyst +33.1.5330.1020 ariel.weil@moodys.com

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

As South Africa continues to face difficult macroeconomic conditions and money outflows, if interest rates increase further, not only will borrowers face higher debt payments, but those with mortgages will also face a potential turn of the house price market. Higher interest rates will affect debt affordability and the demand for houses. Potential buyers will reconsider the decision to take on monthly mortgage payments for the next 20-25 years. As a result, borrowers with difficulties will not be able to sell the properties as quickly as before and obtain enough money to repay their outstanding debt, which will result in higher severities on defaulted mortgage loans and losses for the South African RMBS notes. Higher interest rates will also extend the recovery process and compound losses to investors in securitizations backed by mortgage securities, because interest will accrue at a higher rate during longer foreclosure periods.

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Corporates

Google’s Credit-Positive Motorola Mobility Sale Dials Up Lenovo’s Hardware Exposure Last Wednesday, Google Inc. (Aa2 stable) announced an agreement under which China’s Lenovo (unrated) will acquire Google’s Motorola Mobility smartphone business for $2.91 billion. The largest-ever tech deal by a Chinese firm allows Lenovo to buy its way into a heavily competitive US handset market dominated by Apple Inc. (Aa1 stable) and Samsung Electronics Co., Ltd. (A1 positive).

The sale is credit positive for Google because it offloads a loss-making handset business to Lenovo, which has better operational scale and core capabilities in building hardware devices, to expand the Android-based ecosystem from which Google derives the vast majority of its profits. Additionally, Google retains most of the $5.5 billion worth of patents it acquired as part of the $12.5 billion Motorola acquisition in 2012. That purchase significantly bolstered Google’s patent portfolio and gave smartphone makers greater confidence to build on Google’s Android operating system without fear of being sued by the likes of Apple or Microsoft Corporation (Aaa stable).

The transaction is also positive for Lenovo because it gains a market presence in North America, Latin America, and Western Europe with an existing brand to complement its stronger namesake smartphone base in China. With a combined 6% global share of smartphone devices in 2013, Lenovo and Motorola would still be only a distant third to Samsung, with 31%, and Apple, with 15%, according to International Data Corporation.

But Lenovo is counting on replicating the success it had with its purchase in 2005 of IBM’s personal computer division for $1.25 billion. That purchase catapulted Lenovo to be the third-largest PC maker in the world at the time. Using the established IBM brand, Lenovo scaled the PC division to become the largest shipper of PCs in the world in the last three months of 2013 with an 18% market share, overtaking Hewlett-Packard, which garnered just over 16%. In a similar move on 23 January, 2014 targeting the server market, Lenovo spent $2.3 billion to purchase IBM’s x86 server business.

For Google, with $48 billion of cash and our expectation that the company will generate more than $14 billion of free cash flow this year, Google is not wanting for liquidity. But the deal will rid Google of what would likely be ongoing operating losses (about $1.4 billion through 2013) and allow the company to focus on expanding its highly profitable online advertising services. Of the $2.91 billion purchase price, Google will receive $660 million in cash at closing, with $750 million in Lenovo common stock and a $1.5 billion three-year note from Lenovo.

Since buying Motorola for $12.5 billion, the accounting is effectively a wash. Google will have received $8.2 billion in value, including $2.9 billion of Motorola’s cash, $2.9 billion from the Lenovo sale and $2.4 billion from the sale of the set-top box and cable modems to Arris Group Inc. (Ba3 stable). But Google will maintain ownership of the vast majority of the Motorola Mobility patent portfolio, one part of the handset acquisition that Google will not hang up on.

Richard J. Lane Senior Vice President +1.212.553.7863 richard.lane@moodys.com

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Caterpillar’s Share Repurchase Plans Are Credit Negative Last Monday, Caterpillar Inc. (A2 stable) said it would complete its current $7.5 billion share repurchase authorization by buying back $1.7 billion in stock during the first quarter of this year. The company also said that its board had approved a new $10 billion share repurchase program that will expire at the end of 2018. The planned buyback and new authorization are credit negative because they will reduce liquidity, although the company’s balance sheet and liquidity position will remain strong.

During 2013, Caterpillar generated free cash flow of $5 billion, part of which it used to fund $2 billion in share repurchases. Although we expect 2014 revenue and earnings to be similar to their levels last year, we also expect free cash generation will decline because of the much lower amount of cash generated from working capital. While we expect Caterpillar’s 2014 cash generation to exceed the $1.7 billion it plans to spend on share repurchases in the first quarter, the company will fund the first-quarter buyback with cash on hand, which stands at about $6.1 billion.

An improvement in Caterpillar’s balance sheet during 2013 will also support the company’s capacity to complete the $1.7 billion share repurchase. Machinery and power systems’ long-term debt declined by about $1 billion to $8.8 billion and its unfunded pension liability improved significantly. This balance sheet strength is further reflected in the decline of the company’s post-employment benefits obligation to $7 billion in 2013, from $11.1 billion in the prior year.

In addition, the company's consolidated liquidity position remains sound. Following the completion of the first-quarter share repurchase, Caterpillar’s remaining cash will total about $4.4 billion. The company also has $10 billion in undrawn committed credit facilities. These liquidity sources, combined with free cash flow that the company will generate during the year, will provide ample coverage for the $11 billion in debt coming due during the next 12 months.

Operationally, Caterpillar remains one of the most formidable players in all three of its industrial market segments; energy and power systems, construction industries and resource industries. During 2014, modest growth in the first two segments will partially offset continued weakness in resource industries.

We believe that Caterpillar’s key priorities for future capital deployment will be reinvesting in its business and making tactical acquisitions. However, if the company does not find sufficient reinvestment opportunities, it could undertake additional share repurchases that might exceed free cash generation.

Given its historical cash flow characteristics, we believe that $10 billion in additional share repurchases over the next five years would not pose a significant burden for the company. The pace at which the company completes the buybacks will determine the level of stress on liquidity and cash flow. But given the importance of its A2 and Prime-1 ratings to its funding strategies, we believe that Caterpillar will not allow share repurchases to materially compromise its strong liquidity position and balance sheet strength.

Bruce Clark Senior Vice President +1.212.553.4814 bruce.clark@moodys.com

NEWS & ANALYSIS Credit implications of current events

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DuPont’s Share Repurchase Is Credit Negative Last Tuesday, E.I. du Pont de Nemours and Company (A2 stable) said it had authorized a new $5 billion share repurchase program, including $2 billion in buybacks slated for 2014, with the remainder completed at an unspecified time in the future. The share repurchase program is credit negative for DuPont, despite its $9 billion cash balance, because it will greatly reduce the company’s ability to bring its leverage and cash flow credit metrics back to levels expected for the A2 rating (net debt/EBITDA below 2.0x and retained cash flow/net debt above 30%) unless it can consistently generate annual free cash flow of at least $1 billion.

The new share repurchase program replaces the $1.7 billion still available under a previous buyback program, and the latest program authorization does not expire. DuPont, one of the world’s largest chemical companies, has ample cash to fund its share repurchases this year and still meet its planned debt repayments of $1.7 billion. DuPont will get additional cash from selling its Glass Laminating Solutions/Vinyls business in the first half of this year, which will generate $543 million in gross proceeds, plus the value of inventory. In addition, DuPont plans to spin off its Performance Chemicals business in the second quarter of 2015.

But divesting these businesses will also reduce DuPont’s earnings and cash flow, so DuPont will need to reduce total debt to improve metrics. As of year-end 2013, DuPont had a debt/EBITDA ratio of 2.8x, while net debt/EBITDA was 1.6x, retained cash flow/debt was 14% and retained cash flow/net debt was 25%. Our A2 rating is based on DuPont’s earnings and cash flow continuing to improve this year and the company reducing total debt by repaying $1.7 billion of maturing debt this year with existing cash.

However, if the company accelerates its share repurchases above $2 billion this year, while failing to increase its free cash flow generation, credit metrics would remain weak for the A2 rating and it could result in a change in the outlook or a review of the rating.

DuPont did not generate positive free cash flow in 2013, but still increased its cash balances because of the $4 billion sale of its Performance Coatings business on 1 February 2013. The company later spent $1 billion of this money to buy back shares, stating publicly that it would use the rest of the proceeds to strengthen its balance sheet.

James Wilkins Vice President - Senior Analyst +1.212.553.0528 james.wilkins@moodys.com

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Martin Marietta’s Credit Quality Will Weaken with Texas Industries Merger Last Tuesday, Martin Marietta Materials Inc. (Ba1 review for downgrade) said it had agreed to merge with Texas Industries, Inc. (Caa1 review for upgrade) in an all-stock deal valued at $2.7 billion, with Martin Marietta assuming about $650 million of Texas Industries’ debt.

The merger is credit negative for Martin Marietta because it will increase its leverage considerably. The move also dilutes Martin Marietta’s aggregates business, which today accounts for about 88% of its entire business based on net sales of about $2.1 billion. We placed Martin Marietta’s ratings on review for downgrade after the announcement. The merger is credit positive for Texas Industries because it folds its cement, aggregates and ready-mixed concrete company into a larger, more diversified and more financially conservative entity. We put Texas Industries’ ratings on review for upgrade following the announcement.

Merging with Texas Industries will expose Martin Marietta to the capital-intensive cement business and the ready-mixed concrete business, the latter of which has less pricing power and lower profitability than aggregates. These factors historically have made cement and ready-mixed concrete companies more volatile performers.

The deal, which we expect will close in the second quarter of 2014, will give Martin Marietta roughly 69% ownership of the combined company, and Texas Industries shareholders the remaining 31%. The merged company will operate under the Martin Marietta name and management. The stock-for-stock transaction will give Texas Industries shareholders 0.7 shares of Martin Marietta stock for each share of Texas Industries – a 13% premium over the average exchange ratio for both companies over the past 90 days.

Martin Marietta has sound business motives for buying Texas Industries. The merged company solidifies Martin Marietta as a leading US aggregates producer with an expanded geographic footprint and distribution network, a wider product offering and enhanced vertical integration and efficiencies in certain markets. A strong cement business serving the Texas market will benefit Martin Marietta because the regional construction industry there continues growing rapidly. Texas will now account for 34% of the merged company’s sales – a positive shift based on our expectations for growth in the state.

The effect on Martin Marietta’s leverage will be noticeable, offsetting some of the strategic benefits. The company’s debt/EBITDA leverage, including our standard adjustments, was around 3.7x as of the 12 months ended 30 September 2013, and the addition of Texas Industries’ debt will raise the merged entity’s ratio to about 4.5x before projected cost synergies. Martin Marietta plans to refinance the Texas Industries debt around the deal’s closing, expecting significant interest savings. A risk is that the merger with Texas Industries signals Martin Marietta’s appetite for leveraged acquisitions.

Texas Industries has leading positions in cement capacity in Texas and California. The recent capital improvements in the company’s cement facilities increase its cement capacity and ensure compliance with environmental regulators. These improvements uniquely position the combined company to benefit from designated and forecasted facility closures in the industry. Texas Industries had about $800 million in net sales for the 12 months ended 30 November 2013.

Karen Nickerson Vice President - Senior Credit Officer +1.212.553.4924 karen.nickerson@moodys.com

NEWS & ANALYSIS Credit implications of current events

21 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

YRC Worldwide Makes Significant Progress in Debt Refinancing, a Credit Positive Last Friday, YRC Worldwide Inc. (Caa3 positive) announced that it had successfully issued $250 million of common and preferred stock and that approximately $50 million in principal amount of convertible notes were exchanged for or converted to common stock. This follows the company’s announcement last Monday that employees represented by the International Brotherhood of Teamsters had ratified an amendment and extension of its collective bargaining agreement to March 2019.

The $300 million of new equity, as well as the Teamsters agreement are credit positive for YRC because they demonstrate significant progress in the execution of the company’s plans to refinance more than $1 billion of debt maturing in the next 15 months. Following the union vote, we revised our outlook to positive from negative and assigned a (P)Ba3 rating to a $700 million first-lien term loan that the company plans to arrange as part of the refinancing.

The Teamsters said on 9 January that its members had rejected the original version of the proposed contract extension. Following negotiations between the Teamsters and YRC, the two sides revised some of the terms of the deal related to wages and vacation days and put the amended contract to a vote on 25-26 January. YRC said that the ratified contract satisfies a key condition of the agreement that the company reached in December with certain holders of its Series A and Series B convertible notes and other institutional investors to raise the equivalent of $300 million of new equity. On 30 January, the company said that it had obtained approval from its pension funds to amend and extend its pension note to December 2019. This cleared the second condition in its December agreement and enabled the closing of the $300 million of new equity last Friday.

YRC is refinancing its capital structure primarily through the new equity, the $700 million first-lien term loan and a new $450 million first-lien asset-based lending credit facility. The refinancing will reduce the company’s total (adjusted) debt by $250 million to about $3 billion and push back debt maturities to 2019.

Upon completion of the refinancing, we expect to upgrade YRC’s corporate family rating to B3 from Caa3 in recognition of the company’s improved capital structure and the potential cost savings from the new Teamsters contract.

Rene Lipsch Vice President - Senior Analyst +1.212.553.1908 renier.lipsch@moodys.com

NEWS & ANALYSIS Credit implications of current events

22 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Rayonier’s Planned Pulp Spin-off Is Credit Negative Last Monday, forest-products company Rayonier Inc. (Baa1 review for downgrade) announced plans to spin-off its dissolving-pulp business into a separate, publicly traded company. The separation is credit negative and we placed Rayonier and its subsidiaries’ ratings on review for downgrade because Rayonier will become a significantly smaller, less-diversified company.

The dissolving-pulp business, also known as the performance-fiber business, generated about 60% of Rayonier’s $1.7 billion of sales in 2013 and 60% of its $641 million EBITDA. Rayonier’s two dissolving-pulp mills, which produce high-value specialty cellulose fibers used in disparate products such as cigarette filters, pharmaceuticals and LCD screens, also helped diversify the company away from timberland and real estate. Over the past several years, the dissolving-pulp business mitigated much of the financial effect of the soft US housing and declining paper markets on Rayonier, which also harvests logs that are used to produce lumber and other wood products used in home construction and in the production of pulp used to manufacture paper products.

Still, the tax-free spinoff, which the company expects to complete by mid-2014, will have some benefits for Rayonier, which after the split will be composed solely of its existing forest resources and real estate businesses. The dissolving-pulp spin-off will raise $1 billion of cash, which will be used to pay down Rayonier’s debt, leaving the company with strong pro forma net debt to EBITDA of 1.2x, down from 2.2x. Rayonier’s net debt will decrease by 79%.

In addition, while Rayonier’s dissolving-pulp unit is a market leader in its niche, pulp-related businesses are both volatile and capital intensive. Rayonier’s dissolving-pulp unit also has significant customer concentration, with three customers making up about half of its business.

The dissolving-pulp sector is also becoming more crowded, as several specialty dissolving-pulp producers are ramping up new capacity and as commodity dissolving pulp producers are trying to enter the higher-value specialty market, which is depressing prices. A potential import tax levied by the Chinese government on commodity dissolving-pulp could also affect profitability.

Based in Jacksonville, Florida, Rayonier is a real estate investment trust. It owns, leases or manages 2.6 million acres of timber and land in the US and New Zealand.

Ed Sustar Vice President - Senior Credit Officer +1.416.328.3628 ed.sustar@moodys.com

NEWS & ANALYSIS Credit implications of current events

23 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Hudson’s Bay Sale-Leaseback Deal Will Reduce Debt, a Credit Positive Last Monday, Hudson’s Bay Company (HBC, B1 stable) said it had agreed to execute a sale-leaseback of its downtown Toronto, Ontario, flagship retail complex and the Simpson’s Tower to an affiliate of The Cadillac Fairview Corporation (unrated) for CAD650 million. The transaction is credit positive because the company has said it will use at least some of the proceeds to reduce debt and invest in growth initiatives, including opening a full-line Saks store in the leased-back space.

Although it is unclear how much debt HBC will cut, we think rent-adjusted leverage could modestly improve from 6.4x at the closing of this transaction if HBC primarily uses the funds for debt repayment. However, we note that doing so would still leave HBC’s leverage well above 5x, our trigger for an upgrade. The company had a total of $2.8 billion of funded debt following its $2.9 billion acquisition of Saks Inc., which closed in November, so the cash proceeds from the current transaction are meaningful in the context of HBC’s debt burden.

HBC’s growth initiatives include opening full-line Saks stores in Canada, one of its rationales for buying Saks last year. As part of HBC’s sale of its Toronto flagship, it will be co-locating a 150,000 square-foot, multi-level Saks in the current Hudson’s Bay flagship and a second Saks location in Toronto’s Sherway Gardens. In addition, the company has plans to renovate a number of its Hudson’s Bay stores in Canada. We think these investments will generate good returns and drive profitable growth.

These two stores are the first Saks stores slated to open in Canada. Over the next couple years, HBC expects to open up to seven full-line Saks stores in Canada and more than 20 outlets under the “Saks Off-Fifth” brand. With Saks’ current sales base exceeding $3 billion in the US, we think HBC has a solid opportunity to drive up to $300 million in sales in Canada over the next few years. Delivering on this growth opportunity is one of the key motivations for the Saks acquisition, given that HBC paid a lofty multiple of 10.4x EBITDA.

Scott Tuhy Vice President - Senior Credit Officer +1.212.553.3703 scott.tuhy@moodys.com

NEWS & ANALYSIS Credit implications of current events

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South Africa Mobile Charge Changes Will Hurt Larger Players, but Help Smaller Ones Last Wednesday, the Independent Communications Authority of South Africa (ICASA), the country’s communications regulator, halved mobile termination rates (MTRs), the amount mobile phone companies have to pay each other to terminate calls on another network, effective 1 March, with further cuts in the next three years. ICASA also introduced revised asymmetric termination rates that will allow mobile operators with less than 20% market share (expected to be based on revenue) to charge higher fees to other operators that terminate calls on their network.

The changes are credit negative for South Africa’s two largest mobile players, MTN Group Limited (Baa2 stable) and Vodacom Pty Ltd (unrated), which is 65%-owned by Vodafone Group Plc (A3 stable), because they are net receivers of interconnect (i.e., the difference between MTR fees received and paid).

Starting in March, MTRs will fall to 20 cents per minute from 40 cents, and will gradually decline over the next three years to 10 cents per minute. The overall effect on MTN’s group EBITDA will be small because its South African operations account for just under one quarter of its total group EBITDA. We also expect only a limited effect on margins because although revenues will fall, costs will also decline owing to the lower termination rates it pays to Vodacom.

MTN’s credit metrics are strong for its rating, with a consolidated adjusted debt/EBITDA ratio of 0.8x, which gives it room to accommodate a decline in cash flow. However, reduced cash flows from its South African operations will increase MTN’s reliance on cash distributions (management fees and dividends) from its other operations in the rest of Africa, and in particular Nigeria: MTN Nigeria contributes approximately 50% of group EBITDA, but it has a worse risk profile than South Africa.

Vodacom will be harder hit than MTN because it has the largest market share of the South African mobile telecoms market at around 47% (by revenue), versus MTN’s 37%. Moreover, the bulk of its cash flow comes from South Africa.

We also expect the charge changes to curb both companies’ future capital expenditure plans in South Africa, which could erode their competitive advantage in terms of service quality and result in a slower rollout of better technologies.

However, ICASA’s changes are credit positive for smaller South African mobile operators Cell C (Pty) Ltd (B3 stable) and Telkom Mobile, a department of Telkom SA SOC Limited (Baa3 stable), both of which have less than 20% revenue market share. They are net payers of interconnect and will benefit from the lower costs to terminate their subscribers on the networks of MTN and Vodacom.

We expect Cell C will benefit the most given its broader network coverage and mobile market share by revenue of approximately 10%, versus Telkom’s share of circa 1.0%. The biggest benefit to Cell C’s mobile operations and Telkom’s mobile and fixed-line operations will be from the cost savings they will get from 50% lower charges they pay to the larger mobile operators. Telkom is positioned to benefit the most given it paid fees of ZAR1.1 billion ($87 million) to other operators in the six months to 30 September 2013, or 9% of its total operating costs. Although this will improve EBITDA margins for both Telkom and Cell C, we expect the companies to pass on most of the savings to consumers through more aggressive pricing to increase market share.

Over the next three years, it will be difficult for larger operators to maintain or increase their market share and compete more aggressively on price without reducing their margins and return on investments. In markets such as those in Europe, we have observed that MTR cuts, combined with the macroeconomic

Dion Bate Vice President - Senior Analyst +27.11.217.5472 dion.bate@moodys.com

NEWS & ANALYSIS Credit implications of current events

25 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

slowdown and heightened competition, have been negative for larger mobile operators, lowering margins and reducing investments in infrastructure, which can erode service quality.

NEWS & ANALYSIS Credit implications of current events

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Shimao Property’s Financial Risks Will Increase with Securities Firm Investment Last Tuesday, Shanghai Shimao Co., Ltd. (unrated), a 64.22%-owned subsidiary of Shimao Property Holdings Limited (Ba2 stable), announced that it had entered into an agreement with China Everbright Group (unrated) to acquire a 7.74% equity interest in Shenyin & Wanguo Securities (SWS, unrated) for around RMB2.2 billion. The proposed acquisition is credit negative because it will raise Shimao Property’s financial risks, including weakening its liquidity buffer and increasing its investment risk.

The purchase is subject to approval by the China Securities Regulatory Commission. Shanghai Shimao will become SWS’s third-largest shareholder upon completion of the transaction.

This transaction will weaken Shimao Property’s liquidity buffer because it will consume about 11.5% of Shimao Property’s reported cash balance of RMB18.9 billion at the end of June 2013. We estimate that its cash balance at the end of December 2013 would be at similar levels and that the company should have sufficient resources to fund this investment, particularly after it raised $600 million from a bond offering earlier this month.

However, Shimao Property’s liquidity buffer will decline because of the funds needed to settle the SWS investment once regulators approve the transaction and because of its material increase in land payment requirements. Shimao Property stepped up its land acquisitions in 2013. We estimate that its land premium payments will total RMB28-RMB30 billion in 2013, significantly higher than RMB9 billion in 2012, RMB11.0 billion in 2011 and RMB15.0 billion in 2010 (see exhibit).

Shimao Property’s Land Payments and Those Payments’ Percent of Contracted Sales

Source: Shimao Property Holdings Limited and Moody’s Investors Service estimates

Shimao Property in its early years purchased stakes in securities firms through Shanghai Shimao for small considerations, including Haitong Securities Co., Ltd. (unrated), of which Shanghai Shimao held 36 million shares worth RMB338 million at the end of June. Its most recent investment in SWS is a significant rise in its accumulation of financial assets, which increases its investment risk. However, we believe the risk is manageable given the small scale of financial asset holdings. The SWS investment equals only about 1.4% of Shimao Property’s total assets of RMB153 billion as of the end of June 2013.

Shanghai Shimao believes that SWS will benefit from reform in China’s capital markets following the Third Plenum of the 18th Communist Party of China Central Committee in late 2013. We expect Shanghai Shimao to hold the stakes as medium- to long-term investments to capture the possible upside benefits arising from the Chinese government’s liberalization of China’s capital markets.

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Lisa Tao Associate Analyst +852.3758.1307 lisa.tao@moodys.com

Franco Leung Assistant Vice President - Analyst +852.3758.1521 franco.leung@moodys.com

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27 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Shimao Property’s transaction follows recent investments by Chinese property companies in the financial industry, including Evergrande Real Estate Group Limited’s (B1 stable) purchase of a stake in a bank late last month. However, Shimao Property’s investment is different in that it is less likely to generate business synergies.

NEWS & ANALYSIS Credit implications of current events

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Infrastructure

Brayton Point Shutdown Is Credit Positive for New England Power Producers Last Monday, Brayton Point Energy, LLC (unrated) rejected attempts by New England Independent System Operator (ISONE), New England’s grid operator, to keep open the 1.5-gigawatt Brayton Point coal and oil fired plant after May 2017. Brayton Point’s planned closure is credit positive for New England wholesale power producers because its retirement will contribute to a power generation capacity shortfall around 2017 if all planned retirements occur, which would put upward pressure on New England’s forward capacity prices.

Because greater megawatt capacity results in a greater share of capacity payments, the biggest beneficiaries will be the largest New England power producers, including Exelon Corporation (Baa2 stable), NRG Energy, Inc. (Ba3 stable), NextEra Energy, Inc. (Baa2 stable) and Dominion Resources Inc. (Baa2 review for upgrade). Power projects such as EquiPower Resource Holdings (B1 stable), FirstLight Hydro Generating Company (Ba2 stable) and Essential Power, LLC (Ba3 review for downgrade) are also noteworthy beneficiaries given their asset concentration in New England. For example, all of FirstLight’s plants are in New England. Exhibit 1 lists New England’s major power producers in order of capacity.

EXHIBIT 1

New England’s Electric Power Producers Issuer Rating Generation in Net Megawatts

Exelon Corporation Baa2 stable 2,845

Dominion Resources Inc. Baa2 review for upgrade 2,449

NRG Energy, Inc. Ba3 stable 2,070

NextEra Energy, Inc. Baa1 stable 2,046

Entergy Corporation Baa3 stable 1,876

EquiPower Resource Holdings, LLC* B1 stable 1,874

GenOn Energy, Inc B2 review for downgrade 1,385

FirstLight Hydro Generating Company Ba2 stable 1,318

TransCanada PipeLines Limited A3 stable 1,275

Public Service Enterprise Group Incorporated Baa2 stable 972

Essential Power, LLC Ba3 review for downgrade 821

Calpine Corporation B1 stable 552

Dynegy, Inc. B2 stable 540

Note: EquiPower Resource Holdings is a legally separate entity from EquiPower Resource Corporation, which owns Brayton Point.

Source: Companies and Moody’s Investors Service

The ISONE sets prices three years in advance based on a Dutch auction style process with bids submitted by power producers. The price is set at the lowest level that provides the total generation capacity necessary to meet New England’s electricity reliability requirements. Ever since the first forward capacity price auction for the 2010-11, prices have cleared at the minimum price floor owing to the amount of excess capacity in the region (see Exhibit 2). The upcoming 2017-18 period will be the first time an auction has no price floor, and power producers’ worries about a major price decline, in addition to lower power prices owing to low natural gas prices, have contributed to plant retirements.

Clifford Kim, CFA Vice President - Senior Analyst +1.212.553.7880 clifford.kim@moodys.com

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EXHIBIT 2

New England Power Generation Excess Capacity and Shortfall

Source: New England Independent System Operator

For the upcoming capacity auction, we expect up to a 1.1-gigawatt shortfall, versus excess capacity of 3 gigawatts in the previous auction, owing to Brayton Point’s retirement and other power plant retirements in the region such as Entergy Corporation’s (Baa3 stable) planned shutdown of its 620-megawatt Vermont Yankee nuclear plant.

Given the region’s possible shift to a capacity shortfall from excess capacity, we understand the ISONE is looking at solutions such as transmission system improvements, new generation and demand response to ensure power system reliability. These measures will ensure that the lights will stay on in New England, but will not prevent upward capacity price pressures.

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Banks

Regulatory Action Against PHH Over Alleged Mortgage Insurance Kickbacks Is Credit Negative Last Wednesday, the US Consumer Financial Protection Bureau (CFPB) announced that it had entered into an administrative proceeding2 with PHH Corporation (Ba2 stable) because of alleged kickbacks from mortgage insurers. The regulator is seeking civil fines, a permanent injunction to prevent future violations, and restitution to mortgage borrowers from PHH. The action is credit negative for PHH because it strains its relationship with a regulator, the CFPB, and because it will have an uncertain financial effect.

For several years, the Department of Housing and Urban Development (HUD) and the later- established CFPB have investigated the insurance arrangements between mortgage lenders and mortgage insurers. The regulators believe that some of these arrangements are unfair to consumers, as they may unnecessarily increase the cost of the insurance to consumers. As far as we are aware, until this action against PHH, the CFPB had neither settled nor filed any administrative actions with any non-bank mortgage lenders.

Primary mortgage insurance protects lenders like PHH against the risk of default. Primary mortgage insurance is frequently required by the lender when the mortgage loan-to-value is greater than 80%. From the mid-1990s through 2009, many mortgage lenders established insurance and reinsurance subsidiaries. PHH established its wholly owned subsidiaries, Atrium Insurance Corporation (unrated) and Atrium Reinsurance Corporation (unrated). Through these entities, PHH would share part of the risk as well as the premiums.

Last year, the CFPB reached settlements without filing any administrative proceedings with five mortgage-insurance companies for a total of $15.5 million. If the settlement amounts with the mortgage insurers set precedence, the financial effect from the proceedings will be minimal and the risk to PHH is primarily reputational.

PHH’s stance suggests that either the CFPB is seeking a far greater settlement or PHH’s management is simply taking a more aggressive position defending itself. PHH stated in a press release that management firmly believes that the company complied with all regulations and laws applicable to their mortgage insurance activities. But, as seen numerous times over the last several years, financial institutions typically reach settlements without an actual regulatory complaint being filed. The fact that PHH did not settle marks a soured relationship with the CFPB as well as distracting management from operating the business.

2 An administrative proceeding is similar to a complaint filed in federal court. The case will be tried by an administrative law judge

from the CFPB’s Office Of Administrative Adjudication, an independent adjudicatory office with the CFPB. The judge will hold hearings and make a recommended decision regarding the charges, which may be appealed to the director of the CFPB for a final decision. CFPB administrative proceedings are similar to the administrative proceedings of other federal regulators, such as the Securities and Exchange Commission, the Office of the Comptroller of the Currency and The Federal Deposit Insurance Corporation.

Warren Kornfeld Senior Vice President +1.212.553.1932 warren.kornfeld@moodys.com

Jason Chung Associate Analyst +1.212.553.3825 jason.chung@moodys.com

NEWS & ANALYSIS Credit implications of current events

31 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Bank of Montreal’s F&C Asset Management Acquisition Is Credit Positive Last Tuesday, the Bank of Montreal (BMO, Aa3 stable, C+/a2 stable3) announced it had agreed to acquire all of the outstanding shares of F&C Asset Management (unrated) in an all-cash transaction for CAD1.3 billion. The acquisition is credit positive because asset management businesses generate stable, recurring earnings with low losses and low capital requirements.

The purchase will double BMO Global Asset Management’s position as measured by assets under management (AUM) to $269 billion from $133 billion, adding scale to its asset management business, significantly enhancing its European asset management capabilities, which supports profitability and attracts new institutional mandates.

The transaction, which BMO expects to close after May this year, will decrease BMO’s fully loaded Basel III Common Equity Tier 1 (CET1) ratio by approximately 75 basis points. We calculate that BMO’s fourth-quarter 2013 CET1 ratio will decline to 9.2% from its current industry-leading 9.9%.

Nonetheless, we view the acquisition as a bondholder-friendly allocation of capital compared to more volatile investment alternatives. Moreover, the acquisition will generate stable and recurring earnings by creating cross-sell opportunities to distribute more “in-house product” to North American retail wealth clients while opening up new distribution opportunities in Europe for BMO’s existing wealth products. BMO expects the transaction to be modestly accretive in the first year with an internal rate of return in the area of 15%.

The transaction is consistent with BMO’s stated intent of growing the wealth management business faster than the rest of the bank. London, UK-based F&C is a diversified asset manager with a stronghold in the UK market but a far-reaching franchise and a strong brand. F&C offers a diversified range of products and strategies, but is known primarily as a fixed-income house. However, the franchise has struggled in recent years to retain legacy strategic partners assets, which are £42 billion or 51% of AUM.

The valuation of investment managers is dependent upon a number of forward-looking assumptions, including the retention of existing AUM and the ability to attract new asset inflows, both of which are largely dependent on past results relative to benchmarks as well as on expectations of future investment performance. BMO is paying 9.4x of F&C’s EBITDA or 86 basis points of F&C’s AUM, which compares favorably to recent M&A transactions in the asset management sector. In our view, BMO has paid a full price for the business, particularly given its recent issues. Ultimately, the acquisition is not without execution risk, and profitability will depend upon successful execution against leveraging the combined distribution channels to achieve revenue synergies.

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

assessment and the corresponding rating outlooks.

Andriy Stepanyants CA, CPA Associate Analyst +1.416.214.3853 andriy.stepnayants@moodys.com

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

NEWS & ANALYSIS Credit implications of current events

32 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Brazil’s Itaú Unibanco Acquires Control of Chile’s CorpBanca, a Credit Positive Last Wednesday, Brazil’s Itaú Unibanco Holding S.A. (Itaú Brazil, Baa2 stable) announced its purchase of control of CorpBanca (Baa3 review for downgrade, D+/ba1 review for downgrade 4) from CorpGroup and the merger of its Chilean subsidiary Banco Itaú Chile (A3 stable, C-/baa2 stable) with CorpBanca through a non-cash stock transaction. Itaú Brazil will control the bank with a 33.58% stake, as permitted under Chilean law, while CorpGroup Banking S.A. (B1 review for upgrade) and its affiliates will have a 32.92% ownership interest.

This stake acquisition is credit positive for both: it supports Itaú Brazil’s regional diversification strategy and enhances CorpBanca’s market presence and funding capabilities in its target markets. It prompted us on Friday to change the direction of CorpBanca’s and CorpGroup Banking’s rating reviews to review for upgrade from review for downgrade.

Itaú Unibanco will also make a $652 million capital injection into the new bank, which will be named Banco Itaú CorpBanca S.A. and will operate under the Itaú brand. The acquisition will create the fourth-largest bank in Chile and the fifth-largest in Colombia.

The new bank will in turn control Banco CorpBanca Colombia S.A. (unrated), which will also be merged with Itaú BBA Colombia S.A. Corporación Financiera (unrated). The transaction is subject to final approvals by shareholders and regulatory authorities in Chile, Colombia, Panama and Brazil.

The new bank will remain listed on the Chilean stock exchange with minority shareholders accounting for 33.5% of total capital. We estimate that the implied acquisition cost from Itaú’s perspective was 1.1x book value or approximately $1.8 billion for the 33.5% total equity in the new bank, assuming Itaú Chile’s current $1.1 billion book value plus the cash injection into the new bank, and CorpBanca’s $3.2 billion book value.

For Itaú Unibanco, Latin America’s largest financial conglomerate, the deal adds a larger banking platform to leverage its scale and business capacity in two important growth markets in Latin America. Itaú is the Brazilian bank with the most relevant international presence, with foreign operations accounting for 22% of the group’s consolidated asset base and 13% of recurring net earnings in third-quarter 2013. Enhancing its footprint in the growing Andean region adds strong earnings potential, particularly against a backdrop of Brazil’s slowing economic growth. Itaú plans to further expand its business in the region, and include Peru and Central America in the mix.

The transaction is small relative to Itaú Group’s size and $60 billion market capitalization. The capital injection of $652 million accounts for roughly 2% of Itaú’s consolidated tangible common equity and 0.8% of the bank’s consolidated capital position. Based on third-quarter 2013 financials, the combined bank will have total assets of $43.4 billion and $33.1 billion in loans, accounting for less than 10% and 17%, respectively, of Itaú’s consolidated position. After the acquisition, Itaú will have approximately $60 billion in assets outside Brazil, 28% of the Brazilian bank’s total assets.

For CorpBanca, the transaction will enhance the bank’s market presence and competitiveness in Chile and Colombia, backed by the management and financial resources of a strong international partner. It will also improve its earnings potential, through revenue and cost synergies and improved funding cost and access.

4 The bank ratings shown in this article are the bank’s foreign currency deposit rating, its standalone financial strength rating/baseline

credit assessment, and the corresponding rating outlooks.

Jeanne Del Casino Vice President - Senior Credit Officer +1.212.553.4078 jeanne.delcasino@moodys.com

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

NEWS & ANALYSIS Credit implications of current events

33 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

The transfer of control to Itaú will also insulate CorpBanca from potential contagion risks related to its association with troubled food and grocery retailer SMU S.A. (Caa1 negative) through a common controlling shareholder, risks that led us in December 2013 to downgrade CorpBanca’s ratings in and put them on review for downgrade.

NEWS & ANALYSIS Credit implications of current events

34 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Unicaja’s Acquisition of Banco CEISS Advances, a Negative for Unicaja Last Wednesday, Unicaja Banco (Ba3 review for downgrade, E+/b1 review for downgrade 5) announced that it had waived the conditions it had initially stipulated to acquire Banco CEISS (B3 review uncertain, E/caa3 review uncertain) after not reaching the minimum 75% approval of Banco CEISS’s shareholders and convertible bondholders. Waiving those conditions paves the way for the banks to move forward with their merger, which has been pending since April 2011.

The announcement is credit negative for Unicaja because it increases the likelihood of the acquisition occurring before the end of March, with Unicaja absorbing a significantly weaker entity without receiving any type of public-sector support. The acquisition is credit positive for Banco CEISS because without the sale, it likely would have been resolved or liquidated, potentially imposing losses on creditors.

Unicaja had imposed the minimum approval stipulation to limit the risk of potential claims of mis-selling by bondholders who were previously holders of junior debt instruments issued by Banco CEISS and had been asked in May 2013 to exchange that debt for convertible bonds at below par. If the bondholders file claims, and the courts accept those claims, Banco CEISS will be asked to repurchase the junior debt securities in cash at par, weakening its capital ratios. Unicaja waived its stipulation following an agreement between Banco CEISS and Spain’s Fund for the Orderly Restructuring of the Banking Sector (FROB), whereby the FROB commits to cover up to €241 million of the potential losses arising from customers claims.

Waiving its stipulation allows Unicaja to conclude a drawn-out process that began in April 2011 and was postponed because Unicaja had sought some protection against Banco CEISS’s weak credit profile. The last step was the approval of holders of bonds that are mandatorily convertible into shares. Because Unicaja failed to achieve the minimum approval rates, its waiver eliminates this last hurdle, and all pending approvals for the merger should be obtained before 31 March.

The acquisition will be very relevant for Unicaja in terms of size because Banco CEISS had €37.5 billion in total assets as of the end of June 2013, versus €41.1 billion for Unicaja. Moreover, Unicaja will absorb a weaker entity without receiving any public-sector support.

Banco CEISS undertook a substantial restructuring in the first half of 2013 that included a transfer of its assets related to real estate for a net amount of €3.1 billion to Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria (SAREB), the Spanish government’s “bad bank.” It also received a €604 million capital injection in the form of convertible securities subscribed by the FROB and imposed burden-sharing on its junior debtholders. However, the bank is not in compliance with Bank of Spain’s minimum capital requirements, reporting a core Tier 1 capital ratio of less than 7% at the end of June 2013, versus the regulatory minimum of 9%.

Moreover, although Banco CEISS’s has a leading market position in the region of Castilla y León, the bank has weak profitability metrics (the bank reported net income of only €13 million at the end of June 2013 which includes an extraordinary capital gain of around €249 million) that will be difficult to restore amid banks’ deleveraging efforts, a low interest–rate environment and high provisioning requirements. And although Banco CEISS improved its asset quality indicators significantly when it transferred all its real estate assets to SAREB, those indicators remain weak compared with Unicaja’s. At the end of June 2013, Banco CEISS reported a nonperforming loan ratio of 12.1%, versus Unicaja’s ratio of 7.6%.

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

assessment and the corresponding rating outlooks.

Pepa Mori Vice President - Senior Analyst +34.91.768.8227 mariajose.mori@moodys.com

Alberto Postigo Vice President - Senior Analyst +34.91.768.8230 alberto.postigo@moodys.com

NEWS & ANALYSIS Credit implications of current events

35 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Ban on Proprietary Trading for Systemically Important European Banks Would Be Credit Positive Last Wednesday, the European Commission (EC) published a draft regulation related to structural reforms for banks deemed of global systemic importance. This latest draft includes a prohibition on proprietary trading the EC considers higher risk and a requirement for a supervisory review of, and potentially limits on, other trading activities. Although many facets of the latest reforms are significantly watered down relative to those first proposed in the October 2012 Liikanen report,6 the increased focus and potential limits on all facets of banks’ risk taking are positive for bank creditors.

The proposed regulation requires the endorsement by the European Parliament and the Council, which is unlikely before Parliamentary elections scheduled for May. Also, as bank reform laws were passed in France and Germany last year, reconciling the EU regulation with these national laws is likely to be a prominent issue during upcoming negotiations and a drag on the legislative process. Once the regulation is adopted, the EC recommends a phase-in period of 18 months for the ban on proprietary trading activities and three years for the supervisory review and potential separation of other trading activities.7

The proposed outright ban on proprietary trading activities is broadly similar to the Volcker rule in the US and is credit positive for bank creditors. The EC defines these activities as “taking positions for making a profit for own account, without any connection to client activities or hedging the entity’s risk,” and includes investments in hedge funds. Although most of the banks that would be subject to these regulations have already reduced the size of their proprietary trading positions, the prohibition will prevent excessive risk-taking via proprietary trading. However, the EC has proposed a fairly narrow definition of proprietary trading activities, carving out, in particular, exposures to private-equity funds from the prohibition. This limits somewhat the credit-positive aspect of the proposal.

For other trading activities, which the EC defines broadly and which include market-making operations, investing and sponsoring activities in securitizations and derivatives trading, the EC has not followed the Liikanen recommendation to separate these activities from a deposit-taking entity. Instead, it requires national supervisors to periodically review the size and riskiness of these activities relative to thresholds that the European Banking Authority is still developing. Where a bank exceeds these thresholds (e.g., trading-related assets or earnings relative to total) it would be required to place these activities into a separate subsidiary, with strict intra-group exposure limits to ensure a proper ring-fencing of the deposit-taking entity. If the bank does not exceed these thresholds, its supervisor could still force the separation if it considers that these trading activities pose a threat to financial stability.

By replacing the a priori separation recommended by the Liikanen group with an “obligation to review and power to separate” for supervisors, the EC has significantly weakened the reform. However, this proposal remains credit positive for EU bank creditors because it ensures that important market-making activities are not disrupted. This is particularly relevant for banks with market-leading positions in these activities,

6 The High Level Expert group on Bank Structural Reform, chaired by the Bank of Finland Governor Erkki Liikanen, published a

set of recommendations in October 2012. 7 The European Commission estimates that the regulation could be adopted by July 2015, in which case the ban on proprietary

trading activities would apply starting in January 2017, and the review and potential separation of other trading activities would apply starting in July 2018.

Nicolas Charnay, CFA Associate Analyst +1.212.553.1382 nicolas.charnay@moodys.com

NEWS & ANALYSIS Credit implications of current events

36 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

including Deutsche Bank AG (A2 negative, C-/baa2 negative8), Barclays Bank PLC (A2 negative, C-/baa2 stable), BNP Paribas (A2 stable, C-/baa2 stable) and Société Générale (A2 stable, C-/baa2 stable).

We expect that the banks, faced with a possible relocation of trading activities into separately capitalized subsidiaries, will keep their trading positions within the limits that the EC imposes. This would be credit positive for EU bank creditors, although technical details, including thresholds, have yet to be determined.

The exhibit below compares the EC’s draft regulation with the Liikanen recommendations.

Comparison of the European Commission Draft Regulation and Liikanen Recommendations Liikanen Recommendations European Commission Draft Regulation

Principle Proprietary trading and all assets or derivative positions incurred in the process of market-making should be assigned to a trading entity separated from the deposit-taking entity

- Prohibit deposit-taking entities from undertaking proprietary trading activities

- Give national supervisors “duty to review and power to separate” other trading activities into a trading entity

Scope Applies when separated activities are a significant share of a bank’s business or are considered significant from the viewpoint of financial stability

Applies to banks identified as global systemically important institutions

Proprietary Trading Separated in a trading entity subsidiary Prohibited for deposit-taking entities

Exposures to Hedge Funds Separated in a trading entity subsidiary Prohibited for deposit-taking entities

Private-Equity Investments Separated in a trading entity subsidiary Allowed in deposit-taking entities

Other Trading Activities, including market-making, securitizations and derivatives trading

Separated in a trading entity subsidiary National supervisors have a duty to review and power to separate into trading entities, if certain thresholds are exceeded

Trading of EU Sovereign Bonds

Not mentioned Not subject to the “duty to review and power to separate” principle

Hedging Services to Clients Permissible in deposit-taking entities Permissible in deposit-taking entities

Use of Derivatives for Management of Own Risk

Permissible in deposit-taking entities Permissible in deposit-taking entities

Sources: Liikanen report and the European Commission

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

assessment and the corresponding rating outlooks.

NEWS & ANALYSIS Credit implications of current events

37 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

BPM’s Main Shareholder Sells Its Stake, Destabilizing Its Capital Raise On 25 January, Investindustrial (unrated) informed Banca Popolare di Milano S.C.a.r.l. (BPM, B1 negative, E+/b2 negative9) and Consob, the Italian financial authority, that it had sold its entire 8.6% stake in BPM.

The exit of BPM’s largest institutional investor is credit negative because it risks undermining the bank’s ability to raise capital at a time when many Italian institutions are competing to raise fresh equity because of the upcoming Comprehensive Assessment (CA) to be conducted by the European Central Bank (ECB).10 The CA is the ECB’s assessment of bank’s balance sheet vulnerabilities ahead of its assumption of the regulatory responsibility for European banks.

As we have noted previously,11 many weak Italian banks will be challenged to close the capital shortfall needed to reach the ECB’s required 8% Common Equity Tier 1 minimum capital buffer. BPM had a core Tier 1 ratio of 7.25% at the end of third-quarter 2013 and is planning a €500 million rights issue to be completed by July 2014.

Investindustrial, which operates as an active investor and is usually involved in the management of the companies in which it invests, bought its stake in BPM in November 2011. Since its entry, it had a significant influence on the bank’s management and had a deep knowledge of the bank and its business because Investindustrial’s founder was BPM’s previous president of the board management. Investindustrial’s exit at this time risks being understood as a vote of no confidence, and its sale may give a negative signal to existing and prospective equity investors.

BPM’s previous pre-underwriting agreement (which expires by the end of April) was conditioned on reform of the bank’s corporate governance,12 which also is a key discussion topic between BPM and Italy’s banking regulator, the Bank of Italy. The Investindustrial’s exit while BPM has been engaged in a dispute with the Italian regulator on its corporate governance structure also suggests its reduced confidence in the successful outcome of the dispute, further raising the obstacles to a successful rights issue.

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

credit assessment and the corresponding rating outlooks. 10 See European Banks: ECB's Comprehensive Assessment is Credit Positive, But Crucial Questions Left Unanswered, 25 November

2013. 11 See ECB’s Capital Assessment Is Credit Negative for Weak Italian Banks, 28 October 2013. 12 BPM is a cooperative bank, whereby voting rights are limited to one vote per shareholder, irrespective of the number of shares held.

This particular structure has given significant influence to employees/shareholders, which have so far elected the majority of the surveillance board (BPM has a dual-system governance structure, with a surveillance board – elected by the shareholders – and a management board – elected by the surveillance board) and, in turn, exerted strong influence on the bank.

London +44.20.7772.5454

NEWS & ANALYSIS Credit implications of current events

38 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Banco Popolare Increases Capital Following a Net Loss, a Credit Positive On 24 January, Banco Popolare Società Cooperativa (Ba3 positive, E+/b3 positive13) approved a share issue up to €1.5 billion and announced a preliminary net loss of about €600 million in 2013. The net loss was largely attributable to an increase of loan loss provisions following an inspection by the Bank of Italy.

The share issuance and the recognition of credit losses in advance of the ECB’s comprehensive assessment are credit positive for the bank’s bondholders. Banco Popolare will be in a stronger position because its share issue, which will be underwritten by UBS and Mediobanca and is to be completed in the first half of this year, will strengthen its pro-forma fully loaded Basel III CET1 ratio to about 10%, and its asset quality has been closely reviewed following the regulatory inspection. Banco Popolare’s high problem loans relative to equity and loan loss reserves (98% in September 2013) made the bank vulnerable to even a small parameter adjustment by the ECB.

The net loss, well above our expectations, was primarily generated by an increase of net loan loss provisions to €1.7 billion (compared to €1.3 billion in 2012) and, to a lesser extent, by non-operating costs. The provisions increase largely follows an inspection by the Bank of Italy, which has now concluded. The regulator recommended provisions for nonperforming forborne exposures -- a new class of problem loans introduced by the European Banking Authority in October 2013 and not previously provisioned -- in addition to a stricter recognition of problem loans and higher reserve coverage.

By having the share issue fully underwritten, Banco Popolare has moved in advance of capital increases expected by other banks such as Banca Monte dei Paschi di Siena S.p.A. (B2 negative, E/caa3), Banca Popolare di Milano S.C.a.r.l. (B1 negative, E+/b2 stable) and Banca Carige S.p.A. (B3 negative, E/caa2 negative), which have instead delayed their required capital strengthening.

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

assessment and the corresponding rating outlooks.

London +44.20.7772.5454

NEWS & ANALYSIS Credit implications of current events

39 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

State Bank of India’s Equity Raise Is Credit Positive, but Negative for Other Public-Sector Banks Last Thursday, State Bank of India (SBI, Baa3 stable, D+/ba1 negative14) finalized its INR80.3 billion ($1.3 billion) equity sale via a qualified institutional placement of around 51.3 million shares to institutional investors. This latest round of equity capital raising is credit positive for SBI because it partly mitigates its weak capital position. However, it is credit negative for other public-sector banks, since SBI was unable to raise the INR95.0 billion ($1.5 billion) for which it received approval, which demonstrates investors’ limited appetite for public-sector bank equity.

The government of India (Baa3 stable) in October announced that it would inject INR20 billion ($318 million) via a preferential issue of equity shares before the fiscal year ending 31 March 2014. Hence, SBI will raise a total of INR103.2 billion ($1.6 billion) of fresh capital in fiscal 2014 and increase its Tier 1 ratio to 10.1% from 9.1% reported in September 2013, including year-to-date profits (see Exhibit 1).

EXHIBIT 1

Effect of State Bank of India’s Capital Raise on Its Tier 1 Capital Ratio

Source: SBI’s Final Placement Documents, National Stock Exchange of India

Before this issuance, SBI’s capital levels were weak compared to those of its Indian and global peers15 (see Exhibit 2). This capital raise allows SBI to narrow the capital gap. Under Basel III rules, SBI will most likely have to maintain its Tier 1 ratio above 7.8% by 1 April 2019, which is based on the 7% minimum Tier 1 capital requirement and up to 0.8% additional capital requirement for the most essential domestic systemically important banks in India.16

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

assessment and the corresponding rating outlooks. 15 See Deep Dive: Potential Weaknesses in State Bank of India’s Capitalization Levels, 26 September 2013. 16 See India Proposal to Classify Banks as Systemically Important Is Credit Positive, 9 December 2013.

9.1%10.1%

0.2% 0.8%

5%

6%

7%

8%

9%

10%

11%

Reported Tier 1 Ratio (Sep-13) Government Capital Injection Fresh Equity Capital Raise Tier 1 Ratio Post Deal

Nick Caes Associate Analyst +65.6398.8332 nick.caes@moodys.com

Gene Fang Vice President - Senior Analyst +65.6398.8311 gene.fang@moodys.com

NEWS & ANALYSIS Credit implications of current events

40 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

EXHIBIT 2

Latest Reported Tier 1 Capital Ratios for State Bank of India and Its Peers

Note: Global peers include BMI = Bank Mandiri (Indonesia); Sber = Sberbank (Russia); ICBC = Industrial & Commercial Bank of China; BdB = Banco do Brasil; and BOC = Bank of China; Indian private-sector bank include ICICI = ICICI Bank; HDFC = HDFC Bank; and Axis = Axis Bank; Indian public-sector bank include BOB = Bank of Baroda; PNB = Punjab National Bank; and CAN = Canara Bank Source: Moody’s Investors Service banking financial metrics

Following SBI’s capital infusion, the Indian government’s ownership will fall to 58.6% from 62.3% in December 2013 (Exhibit 3). However, we believe that the government will continue to support SBI and keep its ownership above the legally mandated 55%.

EXHIBIT 3

Evolution of India Government Ownership in State Band of India

Source: National Stock Exchange of India

We expect that the majority of Indian public-sector banks will need to raise additional capital because their capital requirements, driven by the growth in risk-weighted assets and the need to increase loan loss coverage, continue to outpace internal capital generation.

Over the past three years, the government has been the primary source of fresh capital for the public-sector banks because they found it difficult to access the equity markets. Although SBI was able to raise fresh capital from the equity markets through this deal, we do not see it as an indicator that the other public sector banks will follow. SBI’s inability to raise the full amount it had approval to raise reflects a weak market appetite for equity offerings from Indian public sector banks. Hence, we see the government as continuing to be their main source of fresh capital.

0%

2%

4%

6%

8%

10%

12%

14%

BMI ICICI HDFC Axis Sber ICBC BdB BOC BOB SBI PNB CAN

SBI's Tier 1 Ratio Post Transaction

58%

59%

60%

61%

62%

63%

Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Post Deal

NEWS & ANALYSIS Credit implications of current events

41 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

BDO Unibank Alters Preferred Shares to Comply with Basel III, a Credit Positive for Senior Bondholders Last Monday, BDO Unibank, Inc. (BDO, Baa3 positive, D+/ba1 stable17) announced that its board of directors had approved the amendment of all its outstanding preferred shares to include a loss-absorbency mechanism that converts the instrument to common shares if its regulator determines the bank is not viable. By adding this feature to the preferred shares, the shares qualify as Tier 1 capital under Basel III standards, which came into effect in the Philippines on 1 January.18

The conversion feature is credit positive for BDO’s senior debtholders (BDO’s senior debt was PHP26 billion [$600 million] as of 30 September 2013) because the preferred shares will provide an additional layer of loss-absorbing capital to reduce the risk of losses during financial distress for the senior debt securities, which rank higher in the capital hierarchy.

Assuming BDO maintains the 15% loan growth, and growth in core profitability and earnings retention it has had over the past five years, we estimate that its Tier 1 ratio would be 14.4% at the end of this year if the preferred shares no longer qualified as Tier 1 capital. By adding the loss-absorbency mechanism, we estimate the Tier 1 ratio under these assumptions will be 14.9% at year end and 14.7% at 2015 year-end, leaving BDO comfortably positioned above the minimum Tier 1 capital ratio of 10%, inclusive of capital conservation buffer that was put into effect in January for all Philippine banks.

This preferred share conversion feature follows moves by Metropolitan Bank & Trust Company19 (Baa3 positive, D+/baa3 stable) and Rizal Commercial Banking Corporation20 (Ba2 stable, D-/ba3 stable) in 2013 to dispose of non-core assets to free up capital. Unlike most other countries that have adopted a phased-in implementation of Basel III capital requirements, the Philippines fully implemented Basel III in one step on 1 January this year. We expect other Philippine banks to adopt similar initiatives, including disposal of non-core assets and capital raising exercises to boost their capital buffer to meet the Basel III requirements and pursue loan growth.

In contrast to converting existing Tier 1 securities to be Basel III compliant, BDO redeemed its Tier 2 subordinated debt securities that did not have a loss-absorption mechanism and thus would not qualify as regulatory capital under Basel III on its call dates in 2013. Had the debts not been redeemed, their financing costs would have increased owing to the coupon step-up after the call date, and the debts would have provided no regulatory capital benefit to the bank.

The early redemption feature in the Tier 2 subordinated debts allowed the bank to retire the non-compliant securities without consent from the debtholders.

Because the bank's subordinated debts are more widely held among institutional investors than its preferred shares, it would be more challenging to obtain unanimous agreement from the debtholders for amending the terms of the debt.

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

corresponding rating outlooks. 18 Under the Basel III rules in the Philippines, non-compliant Tier 1 and Tier 2 securities – those without loss-absorption

mechanisms – would be de-recognized beginning 1 January 2014, with the exception of securities issued after 2010, which would be de-recognized after 31 December 2015.

19 See Metropolitan Bank & Trust’s Sale of Non-Core Assets Is Credit Positive, 8 July 2013. 20 See RCBC’s Equity Issuance and Non-performing Asset Disposal Plans Are Credit Positive, 25 February 2013 and Rizal

Commercial’s Sale of Property Investments Is Credit Positive, 22 August 2013.

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

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

NEWS & ANALYSIS Credit implications of current events

42 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Insurers

UK Flood Losses Are Credit Negative for Property and Casualty Insurers On 28 January, the Association of British Insurers (ABI) announced that it had estimated the Christmas and New Year UK floods and storms would result in insured losses of approximately £426 million. The recent floods will negatively affect UK insurers’ earnings, particularly those more exposed to property lines of business.

The flood losses, which are likely to be earnings events rather than capital events for most UK property and casualty (P&C) insurers, are credit negative. The losses will further suppress 2013 profitability, coming shortly after the St Jude’s Day storm in October 2013.

Despite the effect on insurers’ earnings, we do not consider the flood-related losses sufficiently material to arrest the continued decline in property insurance premiums, which we expect will decline further in 2014 at broadly similar rates as in 2013. During 2013, average personal property rates fell by 3% in fourth-quarter 2013 and by 8.5% during full-year 2013, according to the UK’s Automobile Association.

As with the St Jude’s Day storm, given the size of the losses, we expect the burden to fall primarily on direct insurers, specifically those writing property insurance, with reinsurers ultimately bearing only small losses. The UK insurance industry collectively wrote £31.1 billion of net written premiums in 2012, according to the ABI. Assuming all of the insured losses arise in a single calendar year (i.e., 2013), the loss would equate to an increase in the UK Insurance industrywide combined ratio (the ratio of insurance claims and expenses to insurance premiums) by approximately 1.4 percentage points.

Given their significant personal and/or commercial property portfolios, as shown in Exhibit 1, we expect the most affected UK insurers include UK Insurance Limited (financial strength A2 stable), Lloyds Banking Group plc (insurance subsidiaries’ financial strength A2 stable), Aviva Plc (insurance subsidiaries’ financial strength A1 stable) and RSA Insurance Group plc (insurance subsidiaries’ financial strength A2 on review for downgrade).

EXHIBIT 1

Top 10 UK Personal and Commercial Property Insurers in 2012 by Net Premiums Written Personal Property Insurers Commercial Property Insurers

1 Direct Line Group 1 Aviva

2 Lloyds Banking Group 2 Allianz

3 Aviva 3 AXA

4 RSA Group 4 RSA Group

5 AXA 5 Zurich Insurance

6 Ageas 6 QBE Insurance

7 Legal & General Insurance 7 National Farmers Union Mutual Insurance

8 National Farmers Union Mutual Insurance 8 Travelers Insurance

9 Allianz 9 AIG

10 Co-operative Group 10 Ecclesiastical Insurance Group

Market Share of Five Largest Companies: 65.4% Market Share of Five Largest Companies: 70.5%

Market Share of 10 Largest Companies: 86.1% Market Share of 10 Largest Companies: 89.5%

Product share of total P&C Insurance market: 18.5% Product share of total P&C Insurance market: 7.4%

Source: Association of British Insurers

David Masters, ACA Vice President - Senior Analyst +44.20.7772.1605 david.masters@moodys.com

NEWS & ANALYSIS Credit implications of current events

43 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Property insurance premiums equalled 26% of UK P&C insurance premiums in 2012, according to the ABI. Given most of the flood losses are likely to fall on property lines of business, which in 2012 collectively reported an underwriting profit of £242 million, as shown in Exhibit 2, these losses, combined with the St Jude’s Day storm and ongoing premium rate reductions in 2013 are likely to result in an industrywide underwriting loss for property. Losses would be only the third time in the past 11 years that property, traditionally a profitable class of business for UK P&C insurers, will have reported underwriting losses across the industry.

EXHIBIT 2

UK Property Revenues and Underwriting Results, 2007-12

Source: Association of British Insurers, Moody’s Investors Service

-£2.0

-£1.5

-£1.0

-£0.5

£0.0

£0.5

£1.0

£7.8

£8.0

£8.2

£8.4

£8.6

£8.8

£9.0

2007 2008 2009 2010 2011 2012

£ Bi

llion

s

£ Bi

llion

s

Property Net Premiums Written Property Underwriting Result

NEWS & ANALYSIS Credit implications of current events

44 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Money Market Funds

US Treasury’s New Floating-Rate Note Offers Supply Benefits to Money Market Funds Last Wednesday, the US Treasury Department launched a new floating-rate note (FRN) program with the auction of $15 billion of two-year FRNs. The FRNs are the first new debt security the US Treasury has introduced since Treasury Inflation Protected Securities in 1997. Because the new FRN has little chance of trading below par and contributing to a fund “breaking the buck,” it is credit positive for US money market funds and US Treasury money market funds in particular. It also adds a high credit quality instrument to the supply of money market securities, which has been shrinking since 2008.

The initial FRN issue was offered with a two-year legal final maturity with a floating interest rate that resets daily based on the discount rate of the most recent three-month US Treasury bill (T-bill). The FRN’s tie to a short-maturity index should limit the security’s price volatility and reduce its likelihood of trading below par. Strong demand in the inaugural auction, reflected by tighter-than-expected pricing (US T-bill + 4.5 basis points), suggests positive secondary market liquidity.

Rule 2a-7 of the Investment Company Act of 1940 requires that money market funds maintain a weighted average maturity (WAM) of 60 days or less but will not dampen funds’ FRN purchasing, because the security’s daily coupon reset allows it to be treated as a one-day exposure despite the security’s two-year term. However, money market funds’ FRN purchasing will be constrained by Rule 2a-7’s 120-day weighted average life (WAL) limit, which will treat the FRN as a two-year security. Initial allocations to FRNs in most US Treasury money market funds are not likely to exceed 10% of funds’ total net assets because most funds currently maintain WALs between 40-50 days, as shown in Exhibit 1; holding much above 10% (730 days x 10% = 73 days) of FRNs would push them up against the limit.

EXHIBIT 1

Weighted Average Lives of US Money Market Funds

Note: Treasury-only MMFs can invest only in direct US Treasury securities. Treasury and repo MMF can invest in direct Treasuries securities and repurchase agreements collateralized by US Treasury securities. Source: iMoneyNet

Liquidity and credit profiles of money market funds stand to benefit from the US Treasury’s FRN program at a time when high quality short-term assets are scarce because of a combination of high money market fund asset levels and lower levels of supply, as shown in Exhibit 2. US Treasury money market funds, which held approximately $260 billion of T-bills at year-end 2013, benefit most from the new FRN program

40

42

44

46

48

50

52

54

56

01/2013 02/2013 03/2013 04/2013 05/2013 06/2013 07/2013 08/2013 09/2013 10/2013 11/2013 12/2013

Wei

ghte

d Av

erag

e Li

fe in

Day

s

All Money Market Funds Treasury & Repo Treasury Only

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

NEWS & ANALYSIS Credit implications of current events

45 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

because this investment option reduces headwinds from the decline in T-bill supply, which is only going to decline more ahead of the looming US debt-limit deadline.

EXHIBIT 2

US Money Market Supply

Note: Money markets includes commercial paper, banker acceptances and large time deposits Source: SIFMA

$0

$1

$2

$3

$4

$5

$6

2007 2008 2009 2010 2011 2012 2013

$ Tr

illio

nsT-Bills Money Markets

NEWS & ANALYSIS Credit implications of current events

46 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Sub-sovereigns

Grant to the Mexican State of Nuevo Leon Is Credit Positive Last Tuesday, Mexico’s infrastructure development bank, Banco Nacional de Obras y Servicios Públicos (Banobras, Baa1 stable) announced a MXN2.1 billion ($161 million) grant to the state of Nuevo León (Ba2 negative) that ensures the state’s continued development of critical transportation infrastructure without derailing its austerity program, a credit positive.

The grant is 35% of budgeted capital expenditures for this year and will be allocated for public transportation projects in the state’s capital, the metropolitan area of Monterrey (Ba2 negative).

The Banobras grant will reduce the state’s borrowing needs to MXN3.4 billion ($261 million) from MXN5.5 billion ($423 million) in 2014, assuming distribution of funds during this year, as shown in the exhibit. The grant mitigates the state’s financial pressures, which include increasing deficits and very high debt levels (more than 50% of total revenues). The state’s total expenditures are constrained by a multiannual adjustment program (2013-15) recently announced by its governor, Rodrigo Medina. The adjustment includes reducing current and administrative expenses and includes 5%-15% salary reductions for high-level state officials. Therefore, the state has no ability to increase borrowing to fund the projects without breaking from the adjustment program, and doing so would further damage its finances.

Nuevo León’s Estimated Borrowing Needs Before and After Banobras Grant

Source: Moody’s Investors Service, data from Nuevo León’s financial statements

The infrastructure projects for which the grant is earmarked are the completion of an additional subway line costing MXN5.7 billion ($438 million), and a modern bus rapid transit system, costing MXN1.6 billion ($123 million). For the subway project, the grant will equal MXN1.5 billion ($115 million) or 26% of its total costs, while MXN605 million ($46.5 million) earmarked for the bus rapid transit system covers 37% of total costs. Without Banobras´ grant, Nuevo León would have would have stopped work on these projects.

-6

-5

-4

-3

-2

-1

0

2013 Estimate 2014 Estimate Without Grant 2014 Estimate With Grant

MXN

Bill

ions

Rafael Rodriguez Associate Analyst +52.55.1253.5743 rafael.rodriguez@moodys.com

RATING CHANGES Significant rating actions taken the week ending 31 January 2014

47 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Corporates Canadian Pacific Railway Company

Review for Upgrade

28 Nov ‘07 30 Jan ‘14

Senior Unsecured Rating Baa3 Baa3

Outlook Stable Review for Upgrade

The review for upgrade reflects the significant improvement in the company’s operating results and cash-flow generation since new management was installed in mid-2012. The review will focus on the company’s ability to sustain its strong operating momentum while minimizing associated execution risks. It will also focus on the company's willingness to maintain its strengthened balance sheet and excellent liquidity.

Par Pharmaceutical Companies, Inc. Confirmation

21 Jan ‘14 30 Jan ‘14

Corporate Family Rating B2 B2 confirmed

Outlook Review for Downgrade Negative

The confirmation reflects the fact that a meaningful portion of Par's acquisition of JHP Pharmaceuticals is being funded with new equity, which mitigates the negative impact of the transaction on credit ratios. It also reflects our expectation that the company will continue to generate solid free cash flow following the acquisition and maintain good liquidity over the next 12 months.

Sony Corporation Downgrade

1 Nov ‘13 27 Jan ‘14

Long-Term Issuer Rating Baa3 Ba1

Outlook Review for Downgrade Stable

The downgrade reflects Sony’s continued struggle to improve and stabilize its overall profitability and, in the near term, to achieve a profile that is consistent with an investment-grade rating. Specifically, Sony’s TV and PC businesses face intense global competition, rapid changes in technology and product obsolescence.

The stable outlook reflects our expectation that the company's overall credit profile will slowly improve. Operating margins will likely remain in the 0.5%-1.0% range for the next 12 months, while adjusted debt/EBITDA will decline but remain above 4.5x.

RATING CHANGES Significant rating actions taken the week ending 31 January 2014

48 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

The ServiceMaster Company, LLC Confirmation

15 Nov ‘13 29 Jan ‘14

Corporate Family Rating B3 B3 confirmed

Outlook Review for Downgrade Negative

The confirmation reflects our expectation that The ServiceMaster Company will remain profitable and generate at least $100 million of free cash flow as it continues to stabilize its business. We expect both a 3%-5% revenue growth rate, leading to revenues above $2.4 billion, and a 20% EBITDA margin in 2014.

Ziggo N.V. Review for Downgrade

21 Mar ‘13 28 Jan ‘14

Corporate Family Rating Ba1 Ba1

Outlook Stable Review for Downgrade

The rating action follows the announcement that Liberty Global plc will acquire Ziggo N.V. We expect Ziggo's post-transaction credit profile to weaken, along with its financial flexibility and free cash flow generation. The review will focus on whether Ziggo's leverage tolerance will be aligned with that of Liberty Global and whether leverage will remain at the upper end of the corridor for some time following the acquisition.

RATING CHANGES Significant rating actions taken the week ending 31 January 2014

49 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Infrastructure Alliant Energy Corporation

Upgrade

8 Nov 2013 30 Jan 2014

Issuer Baa1 A3

Outlook Ratings Under Review Stable

Arizona Public Service Company Upgrade

8 Nov 2013 30 Jan 2014

Issuer Baa1 A3

Outlook Ratings Under Review Stable

Black Hills Corporation Upgrade

8 Nov 2013 30 Jan 2014

Issuer Baa2 Baa1

Outlook Ratings Under Review Stable

Black Hills Power Upgrade

8 Nov 2013 30 Jan 2014

Issuer Baa2 Baa1

Outlook Ratings Under Review Stable

El Paso Electric Company Outlook Change

20 Jun ‘13 23 Jan ‘14

Long-Term Issuer Rating Baa3 Baa3

Short-Term Issuer Rating P-3 P-3

Florida Power & Light Company Upgrade

8 Nov 2013 30 Jan 2014

Issuer A2 A1

Outlook Ratings Under Review Stable

RATING CHANGES Significant rating actions taken the week ending 31 January 2014

50 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Pinnacle West Capital Corporation Upgrade

8 Nov 2013 30 Jan 2014

Issuer Baa2 Baa1

Outlook Ratings Under Review Stable

Virginia Electric and Power Company Upgrade

8 Nov 2013 30 Jan 2014

Issuer A3 A2

Outlook Ratings Under Review Stable

Wisconsin Power and Light Company Upgrade

8 Nov 2013 30 Jan 2014

Issuer A2 A1

Outlook Ratings Under Review Stable

The upgrades reflect that regulatory provisions under which each of these utilities operate are consistent with our view of a generally improving regulatory environment for US electric and gas utilities. Factors supporting the view the regulatory environment has improved include better cost recovery provisions, reduced regulatory lag, and generally fair and open relationships between utilities and regulators. The US utility sector's low number of defaults, high recovery rates, and generally strong financial metrics from a global perspective provide additional corroboration for these upgrades.

RATING CHANGES Significant rating actions taken the week ending 31 January 2014

51 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Financial Institutions Bolivian Insurers Upgraded on Improved Operating Environment We raised the ratings of 12 Bolivian insurers, following improvement in Bolivia's insurance operating environment, in particular because of the combined impact of the country's improved economic strength, institutional strength and lower susceptibility to event risk. The improvement in the insurance operating environment is particularly important because country-specific trends and developments can, over time, have as much of a bearing on insurers' long-term credit profile and viability as the intrinsic strength of their own operations.

Three Slovenian Banks' Long-Term Ratings Upgraded We upgraded the ratings of Nova Ljubjanska banka d.d. (NLB) and Nova Kreditna banka Maribor d.d.'s (NKBM) and Abanka Vipa d.d.'s (Abanka) following the Slovenian government’s (Ba1 stable) launch of a bank recapitalisation programme in December 2013. As part of this programme, NLB and NKBM completed the transfer of a large portion of their non-performing loans to a government-owned Bad Asset Management Company. For Abanka, this process is expected to be completed by the end of first-quarter 2014.

AXA Insurance Ltd Upgrade

16 Oct ‘13 29 Jan ‘14

Insurance Financial Strength Rating A3 A2

Our upgrade of AXA’s Irish subsidiary follows the upgrade of Ireland’s country ceilings. The rating of AXA Insurance Ltd reflects its leading positions in both the Republic of Ireland and the Northern Ireland motor insurance markets, its good profitability, a diversified investment portfolio limiting the exposure to Irish investments, as well as the implicit support coming from the AXA Group. AXA Insurance Ltd's credit profile is also intrinsically linked to the credit profile of Ireland.

Bank of Ireland UK plc Downgrade

11 Oct ‘11 30 Jan ‘14

Deposit Ratings Ba1 B1

Standalone Financial Strength/ Baseline Credit Assessment

D/ba2 E+/b1

The downgrade of the Bank of Ireland UK’s deposit ratings follows the downgrade of parent Bank of Ireland’s standalone rating. The action reflects the high level of integration between the subsidiary, a standalone legal entity with limited track record, and its parent. Moreover, the balance sheet of Bank of Ireland UK has continued to evolve, driven by intra-group transfers of UK based assets from Bank of Ireland to the UK subsidiary over the last four years.

RATING CHANGES Significant rating actions taken the week ending 31 January 2014

52 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

City National Corporation Downgrade

29 Oct ‘13 29 Jan ‘14

Senior Unsecured and Issuer Ratings A2 A3

Standalone Financial Strength/ Baseline Credit Assessment

B-/a1 C+/a2

Long-term Deposit Rating A1 A2

The downgrade reflects profitability pressures. Specifically, during this period of extended low interest rates, City National's pretax, pre-provision profitability has been challenged because of pressure on both its net interest margin and fee revenue. City National also has a higher reliance on net interest income than do peers. Its ability to offset this revenue pressure by cutting funding cost is limited because of its already very low cost deposit base and a small amount of market funding.

CorpGroup Banking S.A. Change in Review Direction

6 Dec ‘13 31 Jan ‘14

Long-Term Local Currency Issuer Rating

B1 Review for Downgrade B1 Review for Upgrade

Long-Term Foreign Currency Issuer Rating

B1 Review for Downgrade B1 Review for Upgrade

Long -Term Foreign Currency Senior Unsecured Debt Rating

B1 Review for Downgrade B1 Review for Upgrade

CorpBanca Change in Review Direction

6 Dec ‘13 31 Jan ‘14

Standalone- Financial Strength/ Baseline Credit Assessment

D+/ba1 Review for Downgrade D+/ba1 Review for Upgrade

Long- and Short-Term Local Currency Deposit Ratings

Baa3 and Prime-3 Review for Downgrade

Baa3 and Prime-3 Review for Upgrade

Long- and Short-Term Foreign Currency Deposit Ratings

Baa3 and Prime-3 Review for Downgrade

Baa3 and Prime-3 Review for Upgrade

Long-Term Foreign Currency Senior Unsecured Debt Rating

Baa3 Review for Downgrade Baa3 Review for Upgrade

We changed the directions of our reviews on the ratings of CorpBanca and its holding company CorpBanking S.A. following the 29 January announcement of an agreement to merge Chilean bank CorpBanca and Banco Itaú Chile S.A.. The actions acknowledge that a change of control from the merger could be positive for CorpBanca's funding flexibility, margins, and capital. These concerns led us to downgrade CorpBanca's ratings in December 2013 and keep them on review for further downgrade.

RATING CHANGES Significant rating actions taken the week ending 31 January 2014

53 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Iccrea BancaImpresa S.p.a Upgrade

17 May ‘13 28 Jan ‘14

Long-Term Issuer and Deposit Ratings

Ba3 Ba2

Standalone Rating Caa1 B1

The upgrade IBI’s long-term issuer and deposit ratings reflects, first, the greater likelihood of systemic support for the entire Iccrea Holding S.p.A. Group, than for IBI on its own, combined with, second, our broadening of our analytical perimeter for IBI: from a credit perspective we now see IBI as an integrated part of Iccrea Group. The upgrade of the standalone rating in recognition of the high degree of integration of IBI into Iccrea Group.

Investcorp Bank B.S.C. Outlook Change

29 Sep ‘09 28 Jan ‘14

Outlook Negative Stable

Long-term Rating Ba2 Ba2

The rating action captures Investcorp's balance sheet deleveraging, reduced on-balance sheet risk, ongoing recovery in fee revenue. A licensed wholesale bank in Bahrain that provides access to (and manages) global alternative investments, Investcorp saw its debt levels decline to $1.2 billion as at June 2013, from $2.6 billion as at June 2009.

RATING CHANGES Significant rating actions taken the week ending 31 January 2014

54 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

US Public Finance Maryland CDA – Residential Revenue Bonds

Outlook Change

6 Aug ‘12 28 Jan ‘14

Issuer Rating Aa2 Aa2

Outlook Negative Stable

The outlook change reflects our expectation that the program’s fund balance will be able to absorb projected stress case loan losses in the near to medium term, owing to the program's current financial strength and projected cash flows, including high levels of overcollateralization.

University of Chicago Outlook Change

25 Apr ‘13 28 Jan ‘14

Issuer Rating Aa1 Aa1

Outlook Stable Negative

The negative outlook reflects declining consolidated operating performance in the face of a potentially large new debt issuance and rising debt service, as well as the negative outlook for University of Chicago Medical Center (Aa3), the university's academic medical center and partner. We expect a debt issuance within the calendar year to exacerbate demand on cash flow. An increasingly important factor in the University of Chicago's credit profile is the impact of UCMC's negative outlook, which reflects thinner operating margins. These in turn are driven by a significant increase in transfers to the university, which we expect to continue near term.

RATING CHANGES Significant rating actions taken the week ending 31 January 2014

55 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Structured Finance Action on $711 Million of Subprime RMBS Issued by Various Issuers On 30 January, we upgraded the ratings of 36 tranches and downgraded the ratings of two tranches from 20 transactions issued by various trusts, backed by subprime mortgage loans. The upgrades are a result of the improving performance of the pools, our updated loss expectations as well as in some cases faster pay-down of the bonds due to high prepayments/faster liquidations. The downgrades are a result of deteriorating performance and/or structural features resulting in higher expected losses for the bonds than previously anticipated.

Action on $1.2 Billion of Subprime RMBS Issued from 2005-2007 On 27 January, we upgraded the ratings of 37 tranches from 19 transactions and downgraded the rating of two tranches from two transactions, backed by subprime mortgage loans. The actions are a result of the recent performance of the underlying pools and reflect our updated loss expectations on the pools. The downgrades are a result of the change in principal priority.

Actions on Irish RMBS Transactions Following Upgrade of the Irish Country Ceiling On 24 January, we upgraded 11 senior notes in four Irish RMBS transactions to A2 and placed on review for upgrade 43 notes in 16 Irish RMBS transactions following the upgrade of the Irish sovereign rating to Baa3 from Ba1. The upgrade has been prompted by the increase in the maximum achievable rating in Ireland (the local-currency country ceiling) to A2 from A3 and sufficiency of credit enhancement to address sovereign risk. The reviews for upgrade reflects the increase in the maximum achievable rating and our expectation of improved key collateral assumptions.

RESEARCH HIGHLIGHTS Notable research published the week ending 31 January 2014

56 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Corporates

Argentine Devaluation Is Credit Negative for Banks, Corporates, Insurers and Securitizations, No Sovereign Panacea The Argentine peso plunged approximately 17% against the US dollar last week. Although the devaluation may temporarily stem the pressure on foreign currency reserves, it remains unclear what policies the government will pursue to address the underlying causes of capital flight, curb inflation and restore investor confidence.

European Paper & Forest Product Companies: Recent Capacity Closures Credit Positive In response to declining paper demand and the rise of electronic media, European paper producers have been forced to shut down unprofitable mills. These capacity closures have resulted in positive industry-wide effects by temporarily restoring market balance and contributing to improved capacity utilization and higher selling prices.

South African Platinum Mines Strike Raises Wage Pressure Risks, But Amplats Able to Weather Short-Term Disruption On 23 January, workers represented by South Africa’s Association of Mineworkers and Construction Union went on strike after failed wage negotiations. The strike is credit negative for platinum miners in South Africa, as it raises the risk of wage increases in an underperforming industry, which has already been affected recently by production stoppages and above-inflation wage increases.

US Technology: Overseas Cash Mounts, but if Debt Rises, Ratings Pressure Could Develop US technology companies’ growing overseas cash holdings represent an emerging credit challenge, with calls for more aggressive shareholder returns setting the stage for potential rating downgrades. While growing cash reserves reflect the strength of companies’ business models and the negative tax consequences of repatriating offshore cash, the more cash they accumulate, the more they come into the sights of activist investors.

Chinese Corporates: Further Relaxation of Capital Controls Increases Flexibility to Support Offshore Bonds With the Chinese State Administration of Foreign Exchange’s new policy to relax capital control, Chinese companies should be able to transfer funds in a more timely manner to offshore bond issuers or guarantors that run into financial trouble. The policy will be particularly beneficial for bonds that rely heavily on these companies’ onshore entities or cash flow for interest and principal repayment.

US Oil and Gas Industry: Promise of Stronger Valuations Expands MLP Model Beyond Traditional Midstream Home US energy companies will increasingly expand the master limited partnership (MLP) business model beyond the midstream sector in order to achieve higher valuations and fend off potential investor activists. The evolution will continue in 2014 even in the commodity price-exposed upstream and downstream segments, as oil and gas companies grow more confident about generating enough cash flow from cyclical businesses to support distributions from MLPs.

RESEARCH HIGHLIGHTS Notable research published the week ending 31 January 2014

57 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Infrastructure

Utility Pensions Post Massive Increase in 2013 Funded Ratios

Funding levels for US utilities in 2013 increased to 97% of pension obligations, which will lead to lower calls on cash, a credit positive. However, utility pension plans tend to provide more generous benefit packages and are exposed to higher contribution volatility than the plans of other non-financial corporates. We believe these factors will lead to more regulatory scrutiny in 2014, which may be either credit positive or negative, depending on the state.

2014 Outlook — US Ports

Our outlook for 2014 is negative because container volume growth will lag behind the historical norm, putting pressure on the industry's biggest customers. Fleets are growing in number and size, but demand isn't keeping pace, an imbalance that will put pressure on shipping lines and the rates they pay the ports.

Financial Institutions

Luxembourg Financial Sector: Answers to Frequently Asked Questions

We view the Luxembourg financial system as fundamentally healthy, despite increased regulatory pressure threatening private banking franchises. In terms of capitalization, asset quality, profitability and funding, the domestically-focused deposit-gathering retail banks compare well to other European financial institutions. However, tightening tax scrutiny and faltering revenues pose risks to Luxembourg’s private banking sector.

Leading Indicators of Asset Quality for Banks in Asia Pacific

This report presents the leading indicators for asset quality we track across banking systems in Asia Pacific. The first section of the report outlines the process by which we select the indicators, including our econometric testing of their strength, stability and predictive power, while the second section sets out the indicators we use for 12 countries and presents related asset quality implications.

Brazilian Banks: Lower Expected Losses Support Lower Reserves

Brazilian banks’ strategic shift toward lower-risk products, such as payroll lending and mortgages, as well as the tightening of underwriting standards will continue to allow banks to reduce reserves. Nevertheless, we expect continued asset quality pressures due to rising interest rates combined with still high household indebtedness, elevated inflation and low economic growth.

Asset Managers Stand to Benefit from Investor Shift to Alternative Investments

The structural shift among investors toward greater alternative investments is credit positive for skilled alternative asset managers. Compared to stocks and bonds, alternative asset classes offer asset managers higher returns to close their deficit gaps, as well as less price volatility to achieve their de-risking objectives amid high equity market volatility.

RESEARCH HIGHLIGHTS Notable research published the week ending 31 January 2014

58 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Sovereigns

Below-Trend Growth in Brazil Presents Limited Credit Risks to Rest of Latin America

The significance of below-trend growth in Brazil for other Latin American countries is small, as only a few Latin American economies have strong links to Brazil’s economy. These links are mainly via the trade channel. With the exception of Paraguay, Argentina, Uruguay and Bolivia, the rest of Latin America has low trade exposure, implying that the effect of a Brazilian slowdown will be small and country-specific.

Euro Sub-sovereigns: Core To Increasingly Tap Capital Markets, while Periphery Remains Reliant on Sovereign

Growing capital market opportunities are credit positive for core European sub-sovereigns as they diversify funding. However, the credit impact is more mixed for the periphery, as considerations regarding the availability of low-cost sovereign funding are balanced by exposure to changes in sovereign lending policies.

New Zealand Analysis

New Zealand’s economy and government finances are improving in the aftermath of a prolonged recession and a series of earthquakes that seriously affected both the economy and government finances. Economic growth is accelerating, due partly to earthquake reconstruction, with real GDP likely to increase by 3% in 2014.

The Aftermath of Sovereign Defaults This report scrutinizes the historical record of sovereign defaults and provides insight into the current debt crisis and crisis resolution. It combines empirical analysis of historical sovereign defaults and recovery rates with a “bottom-up” case study approach. The combination provides a unique perspective on the features and the aftermath of sovereign debt exchanges.

Sovereign Debt Restructurings: Historical Evidence and Implications

The IMF recommends action on several fronts, including increasing the rigor of debt sustainability and market access assessments; preventing the use of IMF resources to bail out private creditors; and alleviating the costs associated with sovereign restructurings. In this presentation, we explore the historical evidence of the resolution of sovereign bond restructurings and the role of holdout creditors. Additionally, we look at implications for future sovereign debt restructurings.

Namibia Analysis

Namibia’s creditworthiness is supported by the country’s small but diversified economy, which has recorded strong growth over the last few decades, underpinned by the development of the country’s abundant natural resources. Despite a projected increase in the fiscal deficit due to increased social and infrastructure spending, government debt and debt service will likely remain at manageable levels.

Turkey: Answers to Frequently Asked Questions About Credit Impact of Currency Weakness Over the past two months, the Turkish lira has depreciated by 11% vis-à-vis the US dollar due to weakened domestic and external investor confidence. This external vulnerability has been driven by domestic political turbulence, as well as reduced global liquidity in emerging markets due to the onset of the Federal Reserve’s QE tapering. This report answers five key questions about the impact of the currency depreciation on Turkey’s credit rating and the Turkish economy.

RESEARCH HIGHLIGHTS Notable research published the week ending 31 January 2014

59 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

Sub-sovereigns

Affinity Sutton Group Ltd and Bromford Housing Group: Answers to Frequently Asked Questions Affinity Sutton Group Ltd and Bromford Housing Group are the highest rated housing associations in our rated portfolio. This article outlines the key drivers behind the relatively high ratings for these two organizations, including outstanding historical performance, stellar social housing letting coverage, and high liquidity levels.

US Public Finance

Non-Degree Credentials Create Mixed Credit Effects for Colleges and Universities Relatively low-cost non-degree credentials are credit positive for higher education, expanding the potential pool of students and revenue opportunities. Universities able to attract additional students and revenue based on brand and price will maintain or enhance their financial position while others will be pressured by the increased competition. The ultimate effect on community colleges and for-profit providers will depend on price and the extent to which traditional not-for-profit providers encroach on more career-oriented credentials.

Downgrades Reign in 2013, But Par Value of Upgrades Reach Highest Level Since 2010 Rating change activity in US public finance remained decidedly negative in 2013, with downgrades accounting for 79% of all rating changes. Although credit conditions are stabilizing, we do not expect them to change materially over the next 12 to 18 months. Specifically, local governments in parts of the Midwest and Northeast and sectors as well as issuers in healthcare and higher education will likely continue to experience credit challenges.

Structured Finance

New Rules for France's Specialised Financial Institutions the Sociétés Financières: Frequently Asked Questions The legal ruling affecting the regulation of France’s specialised lenders and covered bond issuers formerly classified as sociétés financières is overall credit positive for those sociétés financiers that we rate. To avoid French sociétés financières falling outside of regulatory oversight, the French authorities have passed a legal ruling requiring that they become specialised credit institutions as per the EU-framework.

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

60 MOODY’S CREDIT OUTLOOK 3 FEBRUARY 2014

NEWS & ANALYSIS Corporates 2

» Ericsson and Samsung Cross-Licensing Deal Is Credit Positive for Ericsson

» Evergrande's Bank Investment Will Reduce Its Liquidity, a Credit Negative

Infrastructure 5

» Argentina's Utilities Will Take a Credit-Negative Hit from Peso Devaluation

Banks 6

» Panama Expects Asset Quality Deterioration in Banks' Loans to Colon Free Trade Zone

» Swiss Banks Are Closer to Resolving US Tax Evasion Issues » BayernLB Plans €1 Billion Reserve for Legal Risks Related to

Hypo-Alpe Adria, a Credit Negative » China Credit Trust Settlement Does Not Address Shadow

Banking Risks » Korea Development Bank and Industrial Bank of Korea Will

Again Be Public-Sector Banks, a Credit Positive

Insurers 15 » Japan's Approval of Kampo Life's New Product Is Negative for

Insurers

Sovereigns 16

» Portugal Comfortably Meets 2013 Budget Deficit Target, a Credit Positive

MOODYS.COM

Report: 163635

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EDITORS PRODUCTION ASSOCIATE News & Analysis: Elisa Herr, Jay Sherman and Alexis Alvarez

David Dombrovskis

Ratings & Research: Robert Cox Final Production: Jasmine Chia