Weekly Credit Outlook - April 2, 2012

2 APRIL 2012
NEWS & ANALYSIS

European Sovereign and Bank Crisis Diverging Central Bank Collateral Rules Are Credit Negative for Euro Area Sovereigns and Banks Ireland's Promissory Note Transaction Is Credit Positive Spains Guarantee of Regions Debt Would Be Credit Positive Drop in Spanish Mortgage Lending Erodes Covered Bond Protection UK Committee Urges More Capital at Banks, a Credit Positive Corporates 9 US Supreme Court's Wrongful Death Decision Is Credit Negative for Tobacco Companies Lantheus's New Contract with Ben Venue Laboratories Is Credit Positive Bausch's Plan to Acquire ISTA Pharmaceuticals Is Credit Negative Gala's Failure to Sell Casinos Is Credit Negative US Law Providing Private Companies Easier Access to Equity Is Credit Positive France Telecom's Handset Subsidies Are Credit Negative for Spain's Mobile Operators Sharp's Alliance with Hon Hai Will Be Credit Positive Jetstar's Toehold in China Is Credit Positive for Qantas Infrastructure E.ON & RWE's Decision to Withdraw from UK New Nuclear Is Credit Positive 21 2
US Public Finance New York State Budget Is a Boon for High-Need School Districts Jefferson County to Miss General Obligation Payment, Putting Future Payments at Greater Risk Securitization Michigan Nonrecourse Mortgage Loan Act Is Net Credit Positive for CMBS
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CREDIT IN DEPTH
Lower Growth Target Reflects Chinas New Realities Recent measures support economic rebalancing ahead of a new phase of reform and development. Policy headroom will allow China to avoid a hard landing while the country prepares for a fundamental realignment in the political economy over the next decade. 40
RATINGS & RESEARCH

Rating Changes Last week we upgraded Anheuser-Busch InBev; and downgraded Banca del Mezzogiorno - MedioCredito Centrale; Unin de Crdito Progreso, BES Investimento do Brasil; the senior debt & deposit ratings of Caixa Geral de Depositos, Banco Comercial Portugues, Banco Espirito Santo and Banco BPI; the debt & deposit ratings of Banco Santander Totta; Banco Cruzeiro do Sul; San Jose, California; and Providence, Rhode Island; among other rating actions. Research Highlights Last week we published research on Australias resource tax, Indonesias corporates, US media, global refining and marketing, global paper and forest products, North American railroads, US apparel, global exploration and production, US healthcare, US gaming, North American midstream, US airport-based rental car facilities, US, Canadian, and Russian banks, Oklahoma school districts, CLOs, Asian structured finance, and US REITS, among other reports. There will be no WCO next week Monday because of Easter. Publication will resume Monday 16 April. 51 46
Banks 22 US Private Student Loan Dischargeability Would Be Credit Negative for Student Lenders Increase in Foreign Debt Limit Is Credit Positive for Foreign Banks in China Inspection of Korean Banks Household and SME Loans Is Credit Positive Sovereigns Canadian Budget Shows Improving Deficit, Debt Trends Doubling of Foreign Direct Investment Inflows to Nicaragua Is Credit Positive Sub-sovereigns Transfer of Metro System Is Credit Negative for Buenos Aires 28
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MOODYS.COM
NEWS & ANALYSIS

Credit implications of recent worldwide news events
European Sovereign and Bank Crisis

Alain Laurin Senior Vice President - Credit Policy 33.1.5330.1059 alain.laurin@moodys.com Alastair Wilson Chief Credit Officer - EMEA 44.20.7772.1372 alastair.wilson@moodys.com Tobias Moerschen Vice President - Senior Research Analyst 1.212.553.2891 tobias.moerschen@moodys.com
Diverging Central Bank Collateral Rules Are Credit Negative for Euro Area Sovereigns and Banks
Last Friday, Germanys central bank, the Bundesbank, stated that it will no longer accept as collateral bank bonds guaranteed by the governments of Ireland (Ba1 negative), Greece (C no outlook) and Portugal (Ba3 negative). Once this new policy is implemented in several weeks, banks will no longer be able to post such bonds as collateral with the Bundesbank. The announcement marks a step towards divergent collateral rules and raises questions about policy cohesiveness among euro area national central banks (NCBs), a credit negative for euro area sovereigns and banking systems overall, but particularly for those of Greece, Ireland and Portugal. The Bundesbanks decision followed a 21 March announcement by the European Central Bank (ECB) giving euro area NCBs increased flexibility. Specifically, in the European System of Central Banks (Eurosystem), which comprises the ECB and NCBs, NCBs are not obliged to accept as collateral in credit operations bank bonds that are guaranteed by
A euro area government that is currently under a European Union/International Monetary Fund programme (which currently applies to Greece, Ireland and Portugal) A euro area government whose credit rating does not meet the Eurosystem minimum threshold 1
The immediate effect of the ECB and Bundesbank decisions is very limited. The Bundesbank has only limited exposure to the collateral it will stop accepting once the new policy is implemented. But diverging collateral rules signal differences among euro area central bankers about the risks involved in the ongoing strong liquidity support for European banking systems provided by the Eurosystem. If other central banks follow the Bundesbank, then the central banks of Greece, Ireland and Portugal (which will very likely continue to accept bank bonds guaranteed by their own governments) may increasingly fund such bank bonds guaranteed by their governments. Any losses on these loans will be borne by the NCB that made them instead of being shared among Eurosystem members, as was the case so far. Divergent collateral rules undermine the Eurosystems mutualisation of risks and collective responsibility. This in turn raises questions as to what would happen if losses on such loans overwhelmed the resources of one NCB. This increased uncertainty is credit-negative for the sovereigns and banking systems of Greece, Ireland and Portugal. The decrease in risk mutualisation occurs at a time when strong cohesion among policymakers, including central banks, is important for still-fragile European sovereign and bank debt markets. This is why we consider the divergence credit negative for euro area governments and banks overall. However, we still fully expect that the ECB and the entire Eurosystem will continue to support banks as needed, which sharply reduces the risk of euro area banks failing owing to illiquidity. The ECB and Bundesbank decisions reflect the delicate balance the Eurosystem is seeking to strike between two important goals:
Protecting the balance sheets of the Eurosystem as a whole and that of each NCB against undue credit risks
1
See Decision of the European Central Bank, 21 March 2012.
MOODYS WEEKLY CREDIT OUTLOOK
2 APRIL 2012
NEWS & ANALYSIS

Fully maintaining liquidity support as needed to European banking systems in order to support financial stability
In one way, the ECBs 21 March decision to allow NCBs to tighten their collateral rules can be viewed as a complement to its 8 December 2011 decision to allow NCBs to accept as collateral for Eurosystem monetary operations claims that were not previously eligible, contingent upon the ECB governing councils approval. 2 Seven NCBs were subsequently authorized to do so. Broader collateral requirements contributed to 800 banks participating in the ECBs auction of 529 billion in three-year funds on 29 February. Last weeks Bundesbank decision indicates that at least one NCBs willingness to take on more credit risk by accepting a broadening range of collateral is wearing thin, which raises questions about how the Eurosystem will continue to strike a balance between protecting against undue credit risks and providing liquidity in the coming months.
See ECB announces measures to support bank lending and money market activity, 8 Dec 2011.
2 APRIL 2012
NEWS & ANALYSIS

Dietmar Hornung Vice President - Senior Credit Officer 49.69.70730.790 dietmar.hornung@moodys.com Ross Abercromby Vice President - Senior Analyst 44.20.7772.1520 ross.abercromby@moodys.com
Irelands Promissory Note Transaction Is Credit Positive

Irelands Finance Minister announced last Thursday that the governments 3.06 billion ($4.09 billion) promissory note principal payment to the Irish Bank Resolution Corporation (IBRC, Caa1 negative; E/caa1 negative)3 due on 31 March will be paid by delivery of Irelands new March 2025 long-term government bond. IBRC will immediately use the bond to obtain collateralised funding from the National Asset Management Agency (NAMA, Ba1 negative), but then, we expect IBRC to eventually repo this bond for one year with Bank of Ireland (Ba1 negative; D/ba2 negative) on standard commercial terms, and use the cash it receives to redeem a portion of its emergency liquidity assistance. Bank of Ireland requires stockholder approval to proceed with the transaction. The transaction is credit positive for the Government of Ireland (Ba1 negative) as it reduces Irelands gross borrowing requirements in 2012. Moreover, given Irelands goodwill among European institutions because of its compliance with fiscal targets, we expect a more comprehensive restructuring of the promissory notes (with a total face value of 30.6 billion ($40.9 billion)) later this year, potentially improving Irelands funding profile for coming years and lowering the related interest burden. The transaction is credit negative for IBRC because it will not directly receive the 3.06 billion of cash and if the promissory notes are not restructured, IBRC will need to repurchase the bond. In 2010, the Irish government injected 30.6 billion ($40.9 billion) into Anglo Irish Bank and Irish Nationwide Building Society with promissory notes, spreading out the payment of these notes to 2031. In 2011, the IBRC was formed by merging these two institutions. The 2010 recapitalisation of Anglo Irish Bank and Irish Nationwide Building Society increased Irelands gross general government debt stock by around 20% of GDP. Utilising the note payment to acquire a long-term government bond is likely to be a temporary solution while the government continues to negotiate a more comprehensive restructuring of the promissory notes with the troika (i.e., the European Union (EU), the International Monetary Fund (IMF) and the European Central Bank (ECB)), aiming to reduce Irelands burden of bailing out the banks. The ECBs approval is key because a promissory note restructuring would imply a slower wind down of Irelands emergency liquidity assistance. One considered restructuring option is to refinance the notes with a loan from the European Financial Stability Facility (EFSF, Aaa stable), which would remove the need for funding the principal. Furthermore, depending on its terms, an EFSF loan could reduce Irelands interest burden related to the promissory notes. Although this would lower Irelands headline deficit, it would not affect its primary deficit. However, a more comprehensive promissory note restructuring would offer budget deficit reductions given that the interest payments on the promissory notes become substantial starting in 2013. Despite a good track record of complying with fiscal targets, Ireland still faces formidable challenges that will constrain its ability to re-access markets when the current EU/IMF financial support programme expires in mid 2013. Among these challenges are Irelands high debt-to-GDP (107% at the end of 2011), an economy back in recession in the second half of 2011, weak export demand owing to regional economic turmoil, and falling house prices undermining consumption. Amid these conditions, a comprehensive refinancing of the promissory notes would alleviate some of the pressure we expect the Irish government to face when it re-accesses private capital markets.
The bank ratings shown in this report are the banks deposit rating, its standalone bank financial strength rating mapped to the long-term scale and the corresponding rating outlooks.
2 APRIL 2012
NEWS & ANALYSIS

Sebastien Hay Vice President - Senior Credit Officer 34.91.768.8222 sebastien.hay@moodys.com Kathrin Muehlbronner Vice President - Senior Analyst 44.20.7772.1383 kathrin.muehlbronner@moodys.com
Spains Guarantee of Regions Debt Would Be Credit Positive

On 27 March, Spains Minister of Economy Luis de Guindos announced that an entity would be created in the near future to enable regions to jointly issue debt in the capital markets with the governments explicit guarantee. The shift in government policy toward establishing a stable mechanism to fix liquidity problems and market-access issues is credit positive for the 17 regions. It will facilitate the regions access to credit, ease their liquidity problems and reduce their high interest payments, significantly reducing the risk of a regional default, which would have serious reputational repercussions for the central government. Consequently, it is an improvement on the previous state of affairs also for the sovereign's credit profile. However, the credit implication for the Government of Spain (A3 negative) will ultimately depend on whether this step and other recent measures propel the regions to fulfil their side of the commitment and reduce their fiscal deficits according to centrally imposed targets. Regional debt is already included in the general government debt figures, so the guarantee of regional debt will not add to that figure. Given the regions fiscal track record, these measures will have to be complemented by stricter and more effective central government control over the regions fiscal actions. The central government has outlined several principles in this direction, including sanctions in case of a regions continued deviation from deficit targets. However, these principles will still need to be put into practice, and it remains to be seen whether the regions will indeed deliver the fiscal consolidation to which they have committed. Since the end of 2010, the regions have had to rely on very costly short-term funding because of difficult access to capital markets, which significantly expanded their credit risk profiles. One- and twoyear retail bonds at a cost of 6.5%-7.5% including fees and commissions, corresponded to approximately 40% of regional borrowings in 2011. As a result, interest payments rose to 4.6 billion for all regions from 3.0 billion in 2010 and absorbed 3.8% of the regions operating revenues, up from 2.4% in 2010. Also, because of difficult market conditions, debt funding met only around 60% of the regions 2011 cumulative deficit. The resulting increase in commercial debt to fund the remaining deficit continued to weigh on the regions credit profile, as these commercial obligations will have to be funded through new borrowings in the future, further deteriorating regional debt metrics. In December 2011, the region of Valencias financial distress (Ba3 review for downgrade) confirmed that the regions liquidity position was no longer bearable and that the central government would have to provide sustainable funding mechanisms to its regions. Since then, despite the relative improvement in market conditions for euro area sovereigns, there has been no commensurate improvement for the Spanish regions, which was illustrated by investors lack of appetite for Castilla y Leons (A3 negative) downsized debt issuance two weeks ago: about one fourth of the initial target of 200 million issued. This year, assuming 35 billion of funding needs for the regions, we estimate that joint regional debt issuance guaranteed by the government would provide interest savings of 0.7-1.0billion. In the past two months, the government has taken several important steps to promote a more stable funding framework (as opposed to providing only extraordinary support for regions on the verge of default). One measure established a 35 billion funding mechanism to refinance regional and local governments pending commercial debt. More recently, the government removed the no bail-out clause for regional debt from the former budget stability law, thereby laying the groundwork for last weeks announcement.
2 APRIL 2012
NEWS & ANALYSIS

Jose de Leon Senior Vice President 34.91.768.8218 jose.deleon@moodys.com Tomas Rodriguez-Vigil Associate Analyst 34.91.768.8231 tomas.rodriguez-vigil@moodys.com
Drop in Spanish Mortgage Lending Erodes Covered Bond Protection

Last Monday, the Spanish National Statistics Institute reported that Spanish residential mortgage lending fell 41.3% in January from a year earlier, principally because of real estate price declines, stricter underwriting criteria and persistently high unemployment. Such a drastic decline in mortgage lending will erode the over-collateralisation that protects covered bondholders, particularly those whose bonds are from issuers that are close to their statutory limits. Covered bond protection will decline as a result of high covered bond issuance and lack of mortgage pool replenishment. The drastic drop in the mortgage lending will reduce over-collateralisation levels because new mortgage lending will not be sufficient to replenish the loan redemptions and write-offs of defaulted loans within a cover pool. As opposed to securitizations, principal payments on cover assets go to the bank issuer and do not directly pay down covered bonds unless the issuer becomes insolvent. Issuers are supposed to replenish the cover pool with new mortgage loans to ensure minimum overcollateralisation levels. However, they might not be able to do so if they have not generated new eligible assets. Spanish mortgage covered bonds (cdulas hipotecarias, or CHs) are backed by an issuers entire mortgage book, excluding securitised assets. Issuers may issue a maximum of 80% against those assets that qualify as eligible, providing for 25% over-collateralisation of the eligible share of the cover pool. First-lien mortgages mainly constitute the pool, and those mortgages have loan-to-value ratios of up to 80% for residential properties and 60% for commercial properties. Banks tend to issue CHs up to the legal limit, to minimise their overall funding costs, given that CHs receive lower haircuts than other European Central Bank-eligible debt. Furthermore, CHs have been the cheapest funding instrument that banks have been able to place with investors in recent years because investors perceive CHs as safer than unsecured debt. Major Spanish banks such as BBVA, Santander, and CaixaBank have issued near the legal limit, meaning their eligible overcollateralisation is close to 25% (see last column in Exhibit 1).
EXHIBIT 1
Top 10 Spanish Mortgage Lenders (Fourth Quarter 2011)

Rank Issuer Mortgage Portfolio billion Eligible Portfolio billion Outstanding Cdulas billion Total OC % Eligible OC %
1 2 3 4 5 6 7 8 9 10
Bankia CaixaBank BBVA Banco Santander Banco Popular Banca Civica Banco Mare Nostrum Banesto Banco CAM Banco Sabadell
111.6 100.2 75.5 54.9 44.8 38.0 36.6 31.9 31.9 28.6
74.9 51.6 56.0 35.4 28.5 25.9 26.1 25.7 18.7 18.7
54.2 39.7 44.7 27.7 21.8 11.9 14.3 18.4 12.8 12.7
106.0% 152.2% 68.8% 98.0% 105.3% 220.4% 155.8% 74.0% 148.5% 124.5%
38.3% 29.9% 25.4% 27.7% 30.6% 118.6% 82.2% 40.3% 45.4% 46.5%
(1) Data as of third-quarter 2011. Source: Moodys
2 APRIL 2012
NEWS & ANALYSIS

Exhibit 2 shows the decline in over-collateralisation in recent years, while the dotted line is our projection considering a 35% drop in mortgage lending, 4 scheduled repayments, annualised prepayments of 3.5%, annual write-offs of 1.75% and maintenance of the current level of outstanding CHs. Based on these projections, the weighted-average over-collateralisation over the total pool would drop to nearly 100% from the current level of 132% in 18 months. If banks issue CHs up to the statutory limit, over-collateralisation would drop further, to 94%. Furthermore, the weighted-average over-collateralisation based on the eligible pool would drop to nearly 30%, which would mean that many issuers would reach the statutory issuance limit.
EXHIBIT 2
Weighted Average Over-Collateralisation of Spanish Issuers

Weighted Average Total OC 200% 175% Weighted Average Eligible OC
Over-Collateralisation
4
150% 125% 100% 75% 50% 25%
Source: Moodys
Banks have options to expand issuance capacity. Issuers can increase over-collateralisation levels by cancelling retained CHs or securitisations held on balance sheet for European Central Bank-liquidity purposes. However, the cancellation of retained CHs is more unlikely given that issuers current incentive is to hold sufficient cheap liquidity buffers and not to increase investors protection over and above minimum legal requirements. The cancellation of retained securitisations would enable issuers to expand their CHs issuance limits by making those securitised assets available for the cover pool. In addition, mergers between banks will enable some issuers with limited over-collateralisation to benefit from linking up with those banks with excess over-collateralisation. Despite these measures, we believe over-collateralisation will decline as CHs issuance increases, but cover pools will shrink or not increase at the same pace.
According to Spanish National Statistics Institute, the drop in overall mortgage lending, both residential and commercial, in January 2012 was 34% from a year earlier.
2 APRIL 2012
NEWS & ANALYSIS

Elisabeth Rudman Senior Vice President 44.20.7772.1684 elisabeth.rudman@moodys.com Alain Laurin Senior Vice President 33.1.5330.1059 alain.laurin@moodys.com
UK Committee Urges More Capital at Banks, a Credit Positive

On 23 March, the UKs Financial Policy Committee5 (FPC) urged banks to continue to increase their capital buffers as capital is not yet at levels that would ensure resilience in the face of upcoming risks. This recommendation is credit positive to the extent that UK banks are able to shore up their capital base despite relatively weak profitability at some of them, which results in limited options to generate capital internally. The FPC, which is composed of a large number of Bank of England (BOE) and Financial Services Authority (FSA) representatives, cannot legally enforce its recommendation. Rather, because of its BOE and FSA ties, its recommendation converts quite effectively into moral suasion that UK banks can ill afford to disregard or ignore. The FPC recommends that UK banks should do the following: 1. 2. 3. Restrain cash distributions and/or share buybacks Not strengthen capital by reducing lending to the real economy Raise external capital as early as possible
Given the strengthened core Tier 1 that many UK banks achieved over the past couple of years and the currently limited opportunity for raising external capital currently, this recommendation may come as a surprise, yet it appears to encourage to banks to think about the next steps. In all likelihood, the UK prudential authorities (BOE and FSA) will pressure banks to increase their capital base. They would certainly not be satisfied with UK banks embarking on the course of action taken by numerous banks across in Europe, which have optimized risk-weighted assets as a means to of inflating core Tier 1 with no (or limited) additional capital per s. The UK authorities are not only concerned about banks soundness, but also about ensuring that the economy will not be deprived of financing, which would result from banks excessively restraining lending. However, UK banks are facing a complicated challenge in meeting this request in view of meager profitability and a limited ability to issue equity. UK banks are left with the option of being much more aggressive in trimming costs and in their compensation practices, which might not suffice for rapidly meeting supervisors expectations. This call comes at a time when investors concerns about banks funding have become less acute in the aftermath of following the decisive actions taken by the European Central Bank (three-year Long Term Refinancing Operations LTRO ) in December 2011 and February. As noted in its last Financial Stability Report, the Bank of England asserts that if short term risks to financial stability, [which] have risen sharply over the past six months [were to] persist, stressed funding conditions could make it difficult for banks with weaker balance sheets to meet their refinancing needs. In fact, even if stressed funding conditions have significantly abated recently in Europe, the UKs banks face a weakening outlook for economic growth at home and in the EU that will result in further losses down the line. Against a backdrop of still-high uncertainty about asset quality going forward, banks will continue to be required to protect themselves by all means.
5
The FPC is expected to contribute to the Bank of Englands financial stability objective by identifying, monitoring, and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system
2 APRIL 2012
NEWS & ANALYSIS

Corporates
Janice Hofferber, CFA Senior Vice President 1.212.553.4493 janice.hofferber@moodys.com
US Supreme Courts Wrongful Death Decision Is Credit Negative for Tobacco Companies
Last Monday, the US Supreme Court declined to review four wrongful death verdicts against Reynolds American Inc. (Baa3 positive) carrying jury-awarded damages totaling $53.3 million. The high courts move is credit negative for Reynolds, Altria Group Inc. (Baa1 stable), Lorillard Tobacco Inc. (Baa2 stable) and Vector Group Ltd. (B2 stable) because it prolongs their exposure to other so-called Engle progeny lawsuits. The lawsuits stem from a 2006 Florida Supreme Court ruling in Engle v. Liggett Group Inc., which decertified a landmark class-action suit against tobacco companies by smokers or their surviving relatives. The decision allows plaintiffs to sue individually without having to prove the ill effects of smoking every time they file suit, prompting the tobacco companies to counter that they are being denied due process. Since then, thousands of Engle progeny suits have been filed at state and federal courts in Florida. Tobacco companies have prevailed in the two Engle cases to go to trial in federal court, but plaintiffs have won most of the verdicts in state court. One of the winning plaintiffs was Mathilde Martin, who in 2009 was awarded $28.3 million in punitive and compensatory damages by a Florida state appeals court. The Martin verdict was the largest of four that Reynolds appealed to the US Supreme Court. The high courts decision wont affect the 2012 earnings of Reynolds, which recorded $64 million in charges against last years earnings to account for the impact of the four Engle suits. But the courts action could hurt the tobacco companies due-process arguments in other Engle cases, thereby leaving them vulnerable to the payment of further damage awards. Total legal defense costs for the four tobacco issuers reached $579.8 million in 2011, up 29.7% from 2009. After the Supreme Courts decision on the Engle cases, we expect these costs to remain at least this high and possibly trend higher over the next couple of years, resulting in either lower operating margins or higher retail prices for cigarettes, which would pressure sales volumes. Of the four tobacco issuers, Vector is least exposed because of its low single-digit market share. Although Florida law requires tobacco companies appealing damage awards to post a bond equal to the award plus interest, a 2009 amendment to the law capped the total value of Engle-related bonds at $200 million. Plaintiffs attorneys are challenging the cap. But even if they succeed this year in getting it overturned, a lengthy appeals process will protect tobacco companies from any financial impact over the next 12-18 months.
2 APRIL 2012
NEWS & ANALYSIS

Diana Lee Vice President - Senior Credit Officer 1.212.553.4747 diana.lee@moodys.com
Lantheuss New Contract with Ben Venue Laboratories Is Credit Positive

On 23 March, Lantheus Medical Imaging (Caa1 review for downgrade) said it had entered into a new contract with Ben Venue Laboratories (BVL), a unit of Boehringer Ingelheim (unrated), which manufactures medical imaging products for Lantheus. The contract is credit positive for Lantheus because it requires BVL to make payments to Lantheus, which will increase the companys liquidity. BVL is either the primary or sole manufacturer of several of Lantheuss key diagnostic imaging agents, including Cardiolite (which accounted for 18% of Lantheuss sales for fiscal year 2011) and DEFINITY (19% of sales), both of which are used for cardiac imaging, and Neurolite (which we estimate were 5% of sales), which is used in brain imaging following a stroke. Following a planned plant shutdown in July 2010, BVL remains in remediation and is in discussions with the US Food and Drug Administration, most recently voluntarily suspending production in November 2011. As part of the new contract terms, BVL has paid Lantheus $30 million. This amount is large relative to Lantheuss current annual debt amortization requirements of about $40 million. The contract also allows for weekly payments to Lantheus, up to a total of $5 million, based on whether BVL is able to provide an initial supply of Cardiolite, DEFINITY and Neurolite to Lantheus. Until BVLs plant is back up and running, we remain concerned that Lantheuss operating needs will exceed its cash flow, resulting in a reduction of cash balances, which were about $40.6 million at 31 December 2011. We placed Lantheuss ratings under review for downgrade in December 2011 based on concerns regarding BVLs protracted shutdown. While the new contract will boost Lantheuss liquidity, other concerns remain. Our ongoing ratings review will consider the operating cash needs of Lantheus, covenant cushions, when BVLs plant will be back in operation and progress on alternative manufacturing sources. We will also consider trends for Lantheuss other core products, including TechneLite (a generator used by radiopharmacists to radiolabel Cardiolite and other Technetium-based pharmaceuticals), which generated about 37% of sales for the company during fiscal year 2011. Lastly, as the Chalk River nuclear reactor, which supplies molybdenum-99, a radioactive isotope used in TechneLite generators, nears its scheduled maintenance shutdown in April 2012, we have questions about the potential for a prolonged closure, which could further affect sales of molybdenum-based products. Lantheus had sufficient excess inventory in place during BVLs planned remediation period, but the company has completely depleted its inventory of Neurolite, and, according to the companys public filings, it has sufficient DEFINITY inventory until early in the second quarter of 2012. Lantheus has relied on an alternate source manufacturer (Bristol Myers Squibbs Manati, Puerto Rico, facility) to help produce some Cardiolite lots. Lantheus said in February that it had entered into a new manufacturing relationship with Jubilant HollisterStier to manufacture DEFINITY. Lantheus is attempting to expedite the technology transfer for all of its BVL-manufactured products as soon as possible.
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2 APRIL 2012
NEWS & ANALYSIS

Diana Lee Vice President - Senior Credit Officer 1.212.553.4747 diana.lee@moodys.com
Bauschs Plan to Acquire ISTA Pharmaceuticals Is Credit Negative

Bausch & Lomb Inc. (B2 stable) said on 26 March that it planned to acquire ISTA Pharmaceuticals (unrated) in a cash deal valued at around $500 million. The deal is credit negative for Bausch because it will increase the eye-care companys leverage and suggests that the companys acquisition appetite is increasing. We believe the deal, which the companies expect will close in the second quarter, will increase Bauschs previously declining though still relatively high leverage ratio by around half a turn. The company said it planned to fund the purchase with cash on hand and committed financing, which it said could include the proceeds of a $350 million incremental term loan facility to be provided under its existing credit facility or an alternative financing vehicle. We are concerned that Bauschs acquisition appetite is growing. The ISTA deal follows several other transactions, including the December 2011 announced acquisition of Waicon, a leading manufacturer of contact lenses and lens care solutions in Argentina. In September 2011, Bausch also gained the option to buy outstanding and unowned shares of Technolas Perfect Vision (TPV) for a total company value of up to 450 million based on TPV achieving various milestones. TPV, a deal where regulatory and development risk is mitigated by payments tied to milestones, will provide Bausch with femtosecond laser technology that will be used primarily in the cataract surgery arena. While the ISTA transaction does not have an impact on Bauschs ratings, additional debt-financed acquisitions could negatively affect ratings. We are also concerned about the potential for generic competition for ISTA's key product, BROMDAY (which is a once-daily non-steroidal anti-inflammatory used after cataract surgery), in advance of the approval of its follow-on product, PROLENSA, and limited historical cash flow at ISTA. ISTA is a branded prescription eye-care business that markets several products, including treatments for glaucoma and pain after cataract surgery. The company generated revenue of $160 million in 2011. Bauschs revenue growth has increased across its business segments, particularly for its pharmaceutical products. Overall revenue growth has risen to the mid- to high single-digit range from the low singledigit range. As a result, cash flow from operations has improved, which provides some cushion for this incremental debt. We believe that Bausch will benefit from ISTA's existing eye-care pharmaceuticals over the near term and potentially will see sales gains from ISTA's pipeline products, including two nasal sprays for allergic rhinitis, which will complement Bausch's current portfolio.
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2 APRIL 2012
NEWS & ANALYSIS

Douglas Crawford Vice President - Senior Analyst 44.20.7772.5215 douglas.crawford@moodys.com
Galas Failure to Sell Casinos Is Credit Negative

Last Thursday, Gala Electric Casinos Ltd. (GEC, Caa1 stable) announced the collapse of talks to sell its casino business to The Rank Group plc (B1 stable) after several months of discussions and press reports indicating the business would fetch around 250 million. The failure to complete the disposal is credit negative for GEC, which operates a diversified gaming company with operations mainly in the UK, as the transactions proceeds would have reduced leverage, might have been used to repay debt at par, and would provide increased headroom under bank facility covenants. The collapse of the talks also now leaves the company with a division that hasnt performed as strongly as other parts of GECs business and faces tough competition despite its strong position. GECs current rating and outlook do not assume the disposal of the casino business. With the Rank negotiations terminated, GECs management is still left with a highly leveraged company that faces intense competition in all of its disparate divisions: Coral, Gala Bingo, Gala Casinos, Remote and Italy. However, the company is increasing investment capex for all its divisions and there are early signs of a turnaround. Moreover, we believe the ending of casino discussions shows that management does not feel pressured to dispose of the assets at any price and that the company can now focus its attention on turning around the entire company. The casino division accounted for around 10% of GECs EBITDA for the fiscal year ended in September 2011, and the divisions EBITDA fell approximately 13% from a year earlier. GECs results for the 16 weeks ended January 2012 showed flat reported EBITDA, versus a year earlier, owing to gains in the Bingo (31%) and Italy (308%) divisions, which offset weakness in Coral (which contracted 5%) primarily because of football results. Those results exceeded our expectations because of the strong performance of the Bingo division, better-than-expected results in the Remote division and unseasonably hot weather, which benefited the entire company. In the casino division, the companys strategy of focusing on higher value players pushed admissions 10% lower from a year earlier, but the drop per head rose 15% and helped the division record 6% growth in EBITDA from a year earlier, which was below our projections. Gala currently has very high leverage, with adjusted debt/EBITDA at around 7.0x. Had the sale come to fruition, we envisioned leverage falling to around 6.5x by the end of September 2012, which we had previously indicated might trigger a ratings upgrade if the companys EBIT/interest coverage ratio remained above 1.0x. Liquidity is currently adequate, with 118 million of cash (before excluding 33 million of cash in hand/floats and restricted cash). In addition, GEC benefits from an undrawn 100 million revolving credit facility, of which 18 million is used for guarantees. Headroom under the bank facilities covenants is currently adequate, although we expected the disposal to improve it further.
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2 APRIL 2012
NEWS & ANALYSIS

Jason Cuomo Vice President - Senior Accounting Analyst 1.212.553.7795 jason.cuomo@moodys.com Kevyn Dillow Vice President - Senior Accounting Analyst 1.212.553.0596 kevyn.dillow@moodys.com Raj Joshi Analyst 1.212.553.2883 raj.joshi@moodys.com
US Law Providing Private Companies Easier Access to Equity Is Credit Positive

Last Tuesday, the US House of Representatives passed the Jumpstart Our Business Startups Act (JOBS Act), a bill that seeks to help early-stage companies gain greater access to equity capital and temporarily relaxes certain regulatory requirements. The bill, which the US Senate approved earlier, now awaits President Barack Obamas signature. Most interesting for our rated universe is a provision to increase the maximum number of shareholders in a private company to 2,000 from 500. Expanding this threshold is credit positive as it improves the financial flexibility of private companies by increasing their potential investor base. Since the passage of a 1964 amendment to the Securities Exchange Act of 1934, a private company has been limited to 500 shareholders. If the investor base exceeded this threshold, a company was required to periodically file detailed financial information with the Securities and Exchange Commission (SEC), and was subject to greater costs, regulatory oversight and public scrutiny. The JOBS Act allows the shareholder base to increase to 2,000 before triggering SEC reporting requirements. The JOBS Act will benefit companies that are both willing and able to attract equity capital. Companies that attract equity offer investors the highest risk-adjusted return. These are typically companies that grow rapidly and have a very low risk of default. In the exhibit below, we plotted 280 non-financial private companies by industry, according to our peer-group categorization, using the estimated pre-tax cost of debt6 (vertical axis), the cumulative revenue growth during 2006-10 (horizontal axis) and leverage 7 (represented by the bubble size (see legend for values). Industries positioned in the upper right quadrant (high cumulative revenue growth and borrowing costs), such as telecommunications (labeled #4), would be a likely beneficiary, while industries in the lower left quadrant (low cumulative revenue growth and borrowing costs), such as restaurants (labeled #16), would be less likely to benefit.
6 7
We calculate the cost of debt was as the four year average (fiscal years 2006-10) ratio of cash interest paid divided by average total debt. We calculate leverage as total debt divided EBITDA at fiscal year-end 2010.
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Cost of Debt, Cumulative Revenue Growth and Leverage for High-Yield Companies (By Industry)
9.0% 8.5% 8.0% 15 14 11 10 4 8 12 7 5 16 13 6 3 2 1 9
Cost of Debt
7.5% 7.0% 6.5% 6.0% 5.5%
Cumulative Revenue Growth (2006-2010)
LEGEND
Graph Reference Sample Size Industry (aggregate average leverage) Graph Reference Sample Size Industry (aggregate average leverage)
1 2 3 4 5 6 7 8
52 22 5 9 18 12 30 7
Services (5.7x) Energy (3.4x) Defense (5.7x) Telecommunications (6.5x) Healthcare (5.8x) Technology services (4.2x) Consumer products (4.3x) Transportation services (6.8x)
9 10 11 12 13 14 15 16
11 18 19 28 12 24 5 7
Chemicals (5.5x) Technology (6.4x) Manufacturing (4.3x) Media and publishing (5.8x) Gaming (3.9x) Retail (4.0x) Packaging (5.8x) Restaurants (4.3x)
Note: Industries shown include private high-yield issuers that reported information for years 2006-10. We excluded industries with fewer than five representative companies and companies with leverage of less than zero or greater than 15, as well as companies that reported greater than 1,000% in cumulative revenue growth. Source: Moodys Financial Metrics
Other provisions of the JOBS Act include ending the prohibition on the broad solicitation of private placements, the acceptance of crowd-funding, and the creation of a new issuer category called emerging growth companies (EGCs) 8 that will be temporarily relieved of having to adhere to certain regulatory requirements. Qualifying companies may elect EGC status for no longer than five years. The loosened reporting requirements for EGCs include relief from an independent audit of internal controls required by the Sarbanes-Oxley Act and from providing a third year of audited financial statements in an initial public offering registration; only two will be necessary. In addition, EGCs would be relieved of following rules that would subject them to auditor rotation or supplemental auditor reporting, public company timeframes for adopting new or revised accounting standards, and certain executive compensation-related disclosures required by Dodd Frank. Although the relief to EGCs is temporary and will affect only a small population of our issuers, less regulatory oversight and disclosure is credit negative and will be a factor in our credit analysis.
8
The JOBS Act defines an Emerging Growth Company as a company that files for an IPO subsequent to December 8, 2011, has less than $1 billion in gross revenue, a public float of less than $700 million, and issues less than $1 billion in nonconvertible debt in a three-year period. EGC status is permitted for five years after completing an IPO or until the other requirements are no longer met.
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Juan A. Laiseca Segura Associate Analyst 34.91.768.8243 juan.laiseca@moodys.com
France Telecoms Handset Subsidies Are Credit Negative for Spains Mobile Operators
Last Tuesday, France Telecom (FT, A3 stable) said it would continue subsidising mobile phone handsets in Spain, unlike its peers Telefnica S.A. (Baa1 negative) and Vodafone Group plc (A3 stable), which have announced that they were ending subsidies for new subscribers. FTs move is credit negative for all three players in Spains mobile market, as it will intensify an already highly competitive environment that we do not expect to calm down anytime soon. FT will continue to suffer weak margins in Spain compared with its peers (a 21% EBITDA margin for fiscal 2011 ended in December, versus an average of 36% for its rivals) and suffer from strong subscriber acquisition costs as subsidies for new handsets bleed its P&L. At the same time, Telefnica and Vodafone will have to defend themselves against FTs continuation of its subsidy by offering more attractive tariffs to their existing customers. Mobile network operators have traditionally attracted customers by subsidising the latest phones and then locking consumers into long-term contracts. However, the costs of subsidising the latest smartphones has eaten into margins. In Spain, where operators offered substantial handset subsidies, mobile companies have been further hurt by price wars in a highly competitive market that has hurt the telecom operators EBITDA and cash flow generation. Although the operators have been able to reduce operating expenses to contain EBITDA margin erosion, we have seen EBITDA margins for Vodafone in Spain drop to 27% as of last twelve months ended in September 2011 from 32% in the year ended in December 2010, while Telefnicas margins fell to 44% in 2011 from 46% in 2010 (see Exhibit 1).
EXHIBIT 1
Historical EBITDA Margin Evolution

Telefonica 60% 50% 40% 30% 20% 10% 0% 2008 2009 2010 2011 Vodafone FT
Note: Adjusted margin for Telefnica for 2011, last 12 months ended September 2011 for Vodafone Source: Moodys, Company data
Figures for 2011 show that subscriber acquisition costs totaled 1.5 billion, or around 9% of total mobile sector revenues. Eliminating handset subsidies will initially reduce pressure on EBITDA for Telefnica and Vodafone. However, both are likely to incur heavy marketing expenses and offer reduced tariffs, as both companies have signaled they will focus on customer retention rather than customer acquisition. By comparison, the FT announcement suggests it will continue growing its subscriber base, which means Spain will continue to be a highly competitive market.
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Although we expect FT will improve market share by holding on to their handset subsidy model, its strategy will narrow EBITDA, EBITDA margins and future cash-flow generation. FT being the only operator among the big three players in Spain to offer subsidized handsets will prove particularly attractive to higher value customers, who have higher average revenues per user (ARPU) and thereby will contribute positively to the companys financials. However, operators have been struggling to generate cash-flow growth given the high costs they incur for subsidizing the price of the phone and for keeping service plan prices competitive. FTs business in Spain was a bright spot in 2011, with 5.0% subscriber growth, 4.5% revenue growth and steadily improving EBITDA margins to 21% from 15% in 2008. Spain was FTs only major European market where revenues grew.
EXHIBIT 2
Historical Market Share

Telefonica 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2008 2009 2010 2011 45% 44% 42% 40% 31% 30% 30% 28% Vodafone 4% 21% FT Others 5% 8% 20% 20% 12% 20%
Source: Spanish Telecom Regulator
Starting on 1 June, telcos must allow customers to be able to switch providers in one day, versus the current five-day rule, which allows the companies to make counteroffers in a bid to retain customers. FT may be the winner after the rule goes into effect, owing to its handset subsidies. That, in turn, will further increase customer defections, known in the industry as churn.
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Yoshio Takahashi Assistant Vice President - Analyst 81.3.5408.4217 yoshio.takahashi@moodys.com Shinya Dejima Associate Analyst 81.3.5408.4209 shinya.dejima@moodys.com
Sharps Alliance with Hon Hai Will Be Credit Positive

Last Tuesday, Sharp Corporation ((P)A3 negative) announced a business and capital alliance with one of the largest original equipment manufacturers for electronics products, the Hon Hai Group (not rated) in Taiwan. The alliance, which is subject to government approval, will be credit positive for Sharp and will help it reduce operating losses in its core large liquid crystal display (LCD) panel business, but it is unlikely to dramatically improve Sharps overall profitability and leverage. Hon Hai will pay 66 billion ($796 million) for a 46.5% stake in Sharps wholly owned subsidiary, Sharp Display Products Corporation (not rated), which manufactures and sells large LCD panels to Sharp, which uses them to make TVs or sells them externally. Hon Hai will also purchase up to 50% of the large LCD panels and modules that Sharp Display Products produces at its Sakai City, Osaka plant. Hon Hai plans to use Sharps LCD panels and modules to manufacture LCD TVs and monitors for its major customers. 9 In addition, Sharp will issue 66.9 billion ($808 million) of new shares to Hon Hai through a third-party allotment. As a result, Hon Hai will become Sharps largest shareholder with a 9.9% share. Sharp expects the transactions to be completed by March 2013. 10 In addition to helping Sharp reduce operating losses in its core large LCD panel business (we estimate about 12% of consolidated sales, including inter-company sales in fiscal 2011 11), the alliance will enable Sharp to increase external LCD panel sales and improve the capacity utilization rate of the state-of-the-art Sakai plant. Amid weak demand for TVs and TV panels, Sharp cut capacity at the plant to 50%, significantly increasing operating losses in the large LCD panel business. Sharp will gain cash proceeds of approximately 133 billion ($1.6 billion), or more than 10% of its debt as of December 2011, through the two stock transactions, which will improve its financial flexibility. And, while Sharp has not said how it will use the 66 billion of proceeds from the sale of the 46.5% stake in Sharp Display Products, it has said that it intends to invest the 66.9 billion of proceeds from the new shares it issues to Hon Hai in its LCD panel business. Even if the company were to use all 133 billion of the cash proceeds to repay debt, that may not be enough to dramatically improve Sharps overall leverage. Sharp would still find it challenging to reduce adjusted debt/EBITDA owing largely to weak earnings. We expect this metric to exceed 4.0x in fiscal 2011 versus 2.9x in fiscal 2010, and to remain above 2.5x in fiscal 2012. Although the operating margin will improve in fiscal 2012 owing to the reduction of operating losses in the large LCD business, it will likely remain below 3% unless the company substantially improves earnings from its other core businesses, such as audio visual and communications equipment (about 37% of consolidated sales, including inter-company sales in fiscal 2011) and solar cells (about 7% of consolidated sales). In addition, earnings growth in small and medium-sized panels (we estimate about 15% of consolidated sales, including inter-company sales in fiscal 2011) has become less certain because of
10 11
According to Display Search (January 2012), Hon Hais major customers for TV manufacturing in 2011 were Sony Corporation (Baa1 negative) and VIZIO, Inc. (not rated), in addition to Sharp. Sony and Sharp are the third-and fifth-largest flat panel display TV makers in the world respectively, based on Display Searchs data for fourth-quarter 2011 (March 2012). VIZIO mainly sells LCD TVs in the US and maintains a strong market position there. 31 March 2013 is the end of fiscal 2012, which begins 1 April 2012. Sharps large LCD panel division sells its LCD panels to other divisions that produce end products (mainly TVs). The consolidated sales figure eliminates these internal transactions and represents external sales only.
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stronger competition with Korean makers, such as Samsung Electronics Co., Ltd. (A1 stable) and LG Electronics Inc. (Baa2 negative). And growth in the external sales of its large LCD panels may eventually hurt the sales and profitability of Sharps own large LCD TVs. Sales of cost-competitive large LCD panels of 60 inches and above to Sharps competitors will intensify competition in that segment of the TVs segment, one in which Sharp enjoys a strong market position.
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Arnon Musiker Vice President - Senior Analyst 612.9270.8161 arnon.musiker@moodys.com Ian Lewis Vice President - Senior Credit Officer 612.9270.8120 ian.lewis@moodys.com
Jetstars Toehold in China Is Credit Positive for Qantas

Last Monday, Jetstar (unrated), Qantas Airways Ltd.s (Baa3 stable) 100%-owned low-cost carrier (LCC) announced it would expand its franchise into Hong Kong through a new strategic alliance and joint venture with China Eastern Airlines (unrated). The new airline, Jetstar Hong Kong, would be the first LCC based in Hong Kong, and the second in greater China, and would focus on short-haul routes in China, Japan and South Korea. If approved by Hong Kong regulators, the joint venture would be credit positive for Qantas. The International Air Transport Association (IATA) expects China to be the fastest-growing market by 2014, and projects international traffic growth of approximately 10% and domestic traffic growth of 14%. Underlining Qantass move is that the company expects its number of passengers to grow to 450 million by 2015 from 300 million in 2012. Expanding Jetstars Asian footprint is a key element in Qantass effort to convert its overall international operation to profit after forecasting in June 2011 that Qantas International would generate losses before interest and tax of AUD200 million for fiscal 2011 (ended 30 June 2011). In addition, the rollout of the Jetstar franchise is an important development by Qantas/Jetstar in meeting the requirements of bilateral airspace agreements and rapidly expanding its regional footprint. Jetstar has extended its international franchise by forming joint ventures with local partners to facilitate regulatory approvals and sharing capital requirements, the most recent being in August 2011, when it announced a similar LCC agreement to launch Jetstar Japan. An expansion of Jetstar operations into Hong Kong would drive further growth in Jetstars business and increase incremental operating cash flows. The exhibit below shows our estimate of Qantass share of incremental funds from operations (FFO) from the new venture, based on the proposed rollout of the fleet, and assuming that Jetstar maintains its current yields and operating margins. Qantass Share of Projected Funds from Operations Generated by Jetstar Hong Kong
60 50 40
AUD millions
30 20 10 0 2013 2014 2015
Source: Qantas, Moodys
Possible challenges to the new venture include an aggressive competitive response by incumbent LCCs and the difficulty of maintaining passenger numbers amid fare hikes to cover rising jet fuel prices. In addition, other Asia Pacific LCCs, particularly Tiger Airways Holdings Limited (unrated) and AirAsia Berhad (unrated), may seek to emulate Jetstars franchise model through joint ventures in Hong Kong or in greater China with China-based airlines such as Air China (unrated) and China Southern (unrated).
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LCCs by their nature target price-sensitive customers, so any increases in airfares to cover rising fuel costs are likely to significantly reduce passenger numbers. Jet fuel is the largest single component of an LCCs cost base, and while Jetstar does not disclose its fuel costs, we estimate that fuel accounts for 40%-50% of an LCCs cash operating costs. IATA reported that jet fuel prices in Asia have risen 3.6% over the past month, and further increases will pressure LCCs to increase fares to preserve operating margins.
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Infrastructure
Scott Phillips Assistant Vice President - Analyst 44.20.7772.5206 scott.phillips@moodys.com Niel Bisset Senior Vice President 44.20.7772.5344 niel.bisset@moodys.com
E.ON & RWEs Decision to Withdraw from UK New Nuclear Is Credit Positive
Last Thursday, German utilities E.ON AG (A3 stable) and RWE AG (A3 negative) announced their decision not to proceed with plans to develop two new nuclear power plants in the UK with an expected combined capacity of 6GW. The companies decision to pull out of their UK nuclear joint venture, known as Horizon Nuclear Power, is credit positive for both German utilities, which can instead focus on investment in less risky projects. In the wake of the 2011 Fukushima accident in Japan, new safety measures and potential changes to reactor design have significantly increased the uncertainty around construction costs for new nuclear power facilities. Furthermore, the experience to date of current construction projects has highlighted the risk of cost overruns and delays. lectricit de Frances (EDF, Aa3 stable) Flamanville project in France is currently expected to start operations in 2016, four years behind schedule and at a cost almost twice the initial estimate (6 billion vs. 3.3 billion in 2006). Teollisuuden Voima Oy expects its Olkiluoto-3 plant in Finland to be completed in 2014, almost seven years behind schedule. The Fukushima accident also resulted in Germany accelerating its nuclear phase-out, the financial effects of which RWE cited as a factor in pulling out of the UK venture. In addition to these factors, the UK is still undecided on its level of support for new nuclear. As part of its electricity market reform consultation, new plants will receive a guaranteed price for electricity, but the actual level of support is yet to be set. Furthermore, it remains to be confirmed whether or not the proposed support mechanism is in breach of European Union rules regarding state aid. However, given the UK governments apparent determination to have a new generation of nuclear power plants, E.ON and RWEs withdrawal is credit positive for EDF, which intends to construct up to four new nuclear plants in the UK. With three major utilities now having withdrawn from new nuclear plant construction (SSE plc also withdrew in September 2011), the announcement deals a severe blow to the governments energy policy and thus strengthens EDFs bargaining position. However, given the ongoing reform process, it is still too early to judge whether this would result in a higher level of support from the government.
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Banks
Curt Beaudouin, CFA Vice President - Senior Analyst 1.212.553.1474 john.beaudouin@moodys.com
US Private Student Loan Dischargeability Would Be Credit Negative for Student Lenders
Last Wednesday, the US Senate Subcommittee on Financial Services and General Government, chaired by Senator Richard Durbin (D-Illinois), held its second hearing in the past 10 days on the subject of mounting student loan debt and the possibility of making private student loans dischargeable in bankruptcy. The renewed push to make private loans (i.e., non-federally guaranteed student loans) dischargeable in bankruptcy is credit negative for student lenders because it would subject them to higher charge-offs and lower recoveries. The reinstatement of dischargeability of private loans in bankruptcy would weigh most heavily on the industrys biggest players, particularly industry leader SLM Corp. (Ba1 stable) and to a lesser degree Wells Fargo & Company (Aa2 negative) and Discover Financial Services (Ba1 stable), which is a relatively recent market entrant primarily via acquisition. For SLM, we estimate that the reinstatement of dischargeability will increase the companys life of loan net charge-offs by approximately $150 million (see exhibit), though the incremental losses will likely be concentrated in the first couple of years as stressed borrowers accelerated their bankruptcy filings. The primary impact of this change would be on non-cosigned student loans, as we deem it unlikely that in the case of cosigned private loans both the obligor and the co-obligor would declare bankruptcy. SLMs Bankruptcy-Related Net Charge-offs ($ millions)
Before After Difference
Non-cosigned Loans in Repayment Bankruptcy Filing Rate Recovery Rate Charge-offs Recoveries Net Charge-offs
Assumptions:
$10,800 3.60% 20% $389 $78 $311
$10,800 4.30% 0% $464 $0 $464
0 0.70% -20% $75 -$78 $153
Dischargeability applicable to loans made both pre- and post- enactment of any new legislation. No minimum repayment period requirement prior to dischargeability. Loans in repayment @ 79% of total principal balance (per SLM 10-K). Only non-cosigned loans in repayment affected (for cosigned loans, cosigner assumed to pay). Bankruptcy filing rates per SLM Corp. securitization data; "After" rate of 4.3% based on pre-2005 experience. Recovery rate assumptions per Moody's estimates. Source: Moodys, SLM Corp.
As the exhibit shows, we expect an increase in bankruptcy filings if private student loans are dischargeable. Though credit negative, we think the approximately $150 million increase in net charge-offs is manageable relative to the companys 2011 core earnings pre-tax income of $1.491 million. The effect would be less significant for Wells and Discover given the relatively small proportion of their total operations engaged in private student lending. Private student loans were made non-dischargeable in a bankruptcy by The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Federally guaranteed student loans were
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dischargeable until 1976, when Congress passed legislation stating the loans were not eligible to be dischargeable until five years after the start of repayment. In 1990, Congress extended the blackout period to seven years. But by 1998, Congress amended the bankruptcy law so that federal loans could not be discharged in bankruptcy except in the case of undue hardship. Despite the fairly modest estimated life of loan impact, the industry is pushing back on the concept of making private loans immediately dischargeable in bankruptcy. SLM, for example, supports bankruptcy reforms that allow discharging of federal and private student loans if borrowers have made an effort to pay back their loans over five to seven years but still face financial difficulty. The introduction of a minimum repayment period would address the moral hazard issue inherent in allowing private student loans to be immediately dischargeable (i.e., borrowers take out a private loan, get their degrees and immediately declare bankruptcy to discharge the debt) and likely reduce the incremental life of loan net charge-offs associated with dischargeability. Immediate dischargeability in bankruptcy could also crimp future private loan origination volumes, as lenders would likely re-price the product upward to take account of the higher risk. Legislators have introduced private student loan dischargeability bills during each of the past three congressional sessions. Only once has it come up for a vote, in 2008, when it failed on the floor of the Democratic-controlled House as part of a larger higher education reauthorization. The current round of discussions on this subject are only at the hearings stage, leaving a long and uncertain political road ahead for the passage of any reforms. Nevertheless, this is an issue that seems to have legs from a political standpoint, given concerns regarding mounting levels of student debt.
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Katie Chen Associate Analyst 86.10.6319.6569 katie.chen@moodys.com
Increase in Foreign Debt Limit Is Credit Positive for Foreign Banks in China
On 29 March, National Development and Reform Commission (NDRC), China's top economic planning agency, announced that it would increase the annual limit for new long-term foreign debt for six foreign banks incorporated in China to $24 billion this year. This increase in the long-term foreign debt limit is credit positive for foreign banks and will increase their ability to source funding from overseas parents and affiliates to support their foreign currency loan growth in China and improve their foreign currency liquidity positions. Foreign debt includes overseas borrowings, deposits due from overseas banks, overseas non-resident deposits, and loans from overseas affiliates and subsidiaries. The announcement cites the potential foreign debt demands for investment projects that require imports as a main consideration for the increase. The six banks are HSBC Bank (China) Company Limited (HSBC CH., A3 review for downgrade; D/ba2 stable 12), Bank of East Asia (China) (BEA CH, unrated), Deutsche Bank (China) (DB CH, unrated) JPMorgan Chase Bank (China) (JPM CH, rating withdrawn), Citibank (China) (Citi CH, unrated), and Sumitomo Mitsui Banking Corporation (China) (SMBC CH, unrated). The potential increase in foreign exchange liquidity for the six banks is substantial. To put the larger $24 billion long-term debt limit into perspective, at year-end 2010 (latest available data), total deposits and borrowings from overseas financial institutions for four of the six banks, HSBC CH, JPM CH SMBC CH, and Citi CH, was approximately $7 billion (see exhibit), according to their annual reports. We estimate the total borrowings from overseas financial institutions for six banks totaled approximately $10 billion at year-end 2010, which we believe to be close to their current foreign debt limit. However, we dont expect these banks to increase leverage excessively, mainly because they still need to maintain their loan-to-deposit ratio (foreign and local currency combined) below the China Banking Regulatory Commissions 75% requirement and maintain single-borrower and top-10 borrower concentrations below 10% and 50%, respectively, of net regulatory capital. Therefore, this development will most benefit those foreign banks that still have room in their regulated ratios to expand lending, among them HSBC CH (see exhibit). Because this limit increase applies to long-term liabilities, it points to a potential shift in banks liabilities structure. As a reference, the short-term foreign debt limit is currently set and monitored by the State Administration of Foreign Exchange, while the approval authority for the long-term debt limit resides with NDRC. With the increase in the long-term foreign debt limit, its likely that the State Administration of Foreign Exchange will keep the short-term foreign debt limit stable to manage the overall foreign debt level of the country. In that case, banks may see their foreign debt maturity structure gradually lengthen, which is positive for their liquidity profile. Every February, banks submit to NDRC a list of loans in their pipelines, along with their use of the existing limit and financial performance in their debt limit applications. For this year, if banks exhaust their new limit within the year, they can make one more application for another increase. Priority will be given to applications related to the long-term investment projects that import high technology goods and services and export to overseas markets, which are in line with Chinas strategy to adjust its economic structure. However, the banks still need to file with NDRC when the limit is used.
12
The ratings shown are the HSBC (China) deposit rating, its standalone bank financial strength rating mapped to the longterm scale and the corresponding rating outlooks.
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Banks usually depend on inter-bank funding for their foreign currency liquidity, and foreign banks have the advantage over Chinese banks, because they can access their overseas affiliates and parents. With a higher foreign currency debts limit, the six banks will be able to get more liquidity from overseas to support their foreign currency loans. Financial Data of Foreign Banks in China at Year End 2010, $ billion
HSBC CH BEA CH DB CH JPM CH SMBC CH Citi CH Total
Loans Net Total Deposits and Borrowings Total Deposits and Borrowings from Overseas Financial Institutions Loan to Deposit Ratio
$14.3 $25.7 $3.6 65%
$13.9 $21.0 N.A. 78%
$2.2 $3.8 N.A. NA
$1.1 $2.2 $0.3 NA
$4.9 $8.3 $1.7 77%
$8.2 $16.1 $1.8 56%
$44.5 $77.1 $7.3
Source: Companies' 2010 annual reports (2011 annual reports are not yet available)
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Heejin Kwon Associate Analyst 852.3758.1515 heejin.kwon@moodys.com
Inspection of Korean Banks Household and SME Loans Is Credit Positive

On 23 March, the Bank of Korea requested that it and the Financial Supervisory Service (FSS) jointly inspect banks loans to households and small and medium-sized enterprises (SMEs), the first since a revision of the Bank of Korea Act last August strengthened the Bank of Koreas ability to request such inspections. Because the FSS must accept and deploy the inspection within 30 days, the central bank expects the inspection to commence in mid-April. This joint inspection is credit positive for Korean banks, as we expect the central banks focus on weaknesses in household and SME obligors will pave the way for stronger measures addressing two major trouble spots in the Korean banking system. The exhibit below shows the percentage of credits that the two segments constitute at Koreas nine national banks. While currently there is no indication that banks that lend more in these segments suffer higher percentages of non-performing loans (NPLs), we expect the inspections will draw attention to such loans as they unearth potential shortfalls in the industrys credit process. Korean Banks Percentage of Household and SME Credits
Household Credit to Total Credit - left axis 80% 70% 60% 50% 40% 30% 20% 10% 0% Citi Hana IBK KEB Kookmin NongHyup SC Shinhan Woori Industry Average NPL 1.36% SME Credit to Total Credit - left axis Non Performing Loan Ratio - right axis 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%
Citi = Citibank Korea; Hana = Hana Bank; IBK = Industrial Bank of Korea; KEB= Korea Exchange Bank; Koomkin = Kookmin Bank; NongHyup = NongHyup Bank; SC = Standard Chartered Bank Korea; Shinhan = Shinhan Bank; Woori = Woori Bank Note: NPL ratio is the proportion of substandard and below categorized loans to total loans. Source: The banks, Korean Financial Supervisory Service
Rising household debt and loans to a fragile SME sector are major risk factors for the Korean banking system. According to the Bank of Korea, household loans accounted for 45% of banks total Korean won-denominated loan portfolio as of January 2012, while SME loans accounted for 44%. In 2011, household debt increased more rapidly than the countrys economic growth, with the ratio of household debt 13 to GDP rising to 74.5% at the end of 2011, from 72.2% a year earlier. Those gains make the banking sector vulnerable to an adverse economic shock. Adding to our concerns, the SME sector, which is generally more sensitive to economic conditions, has shown increasing signs of distress. Delinquency rates for SME loans have been gradually rising, hitting 1.68% in February 2012, from1.47% in January 2010. 14 The FSS has strengthened its policy on household debt since June 2011 by, among other things, imposing higher risk weights for the Bank for International Settlements (BIS) capital ratio calculation than previous years to high-risk mortgages starting in 2012 and bringing forward its adoption of 100%
13 14
Household debt includes debt from depository financial institutions, insurance, and credit card companies, according to Bank of Korea. Source: Financial Supervisory Service
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loan-to-deposit ratio limit to mid-2012. 15 However, several operational aspects have thwarted the authorities efforts, including that most domestic banks are more lenient in their credit assessments of household obligors and give more weight to collateral or guarantees instead of basing lending decisions on borrowers debt-servicing ability. In addition, some banks still lack sufficient information on household cash flows and borrowers financial obligations at other banks and non-banks. According to data from the Bank of Korea, households that borrowed from banks and non-banking financial institutions accounted for 33% of banks total household loans in June 2011. Therefore, the inability to comprehensively account for borrowers other obligations could result in banks being more liberal in their lending than they intended. While FSS inspections usually focus on banks compliance with regulations, we expect this joint inspection will focus more on operational factors that underpin the issues we have outlined above, namely whether individual banks have sufficient credit assessment and approval processes, and whether banks have made full use of available credit information to support these processes. We expect the inspection to eventually allow regulators to come up with appropriate measures to improve banks credit processes, which we see as an important step to address deficiencies at the banks.
15
In December 2009, the regulator announced adoption of 100% loan-to-deposit ratio regulation, which would have been effective from end-2013 but they decided to bring forward its implementation to June 2012.
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Sovereigns
Steven Hess Vice President - Senior Credit Officer 1.212.553.4741 steven.hess@moodys.com
Canadian Budget Shows Improving Deficit, Debt Trends

Last Thursday, Canadian Minister of Finance Jim Flaherty introduced the 201216 budget. Stronger economic conditions in 2011 and this year buoyed government revenues for the fiscal year just ended, producing a smaller deficit than the government had estimated as recently as last November. The smaller 2011 deficit means that the projected return to surplus in 2015 included in last weeks budget is one year earlier than previous projections, which is credit positive for the Canadian government (Aaa stable). Canadas federal government debt, which steadily declined between the mid-1990s and the onset of the recent financial crisis, rose as a result of the recession and the governments fiscal stimulus plan to mitigate the recessions effects. From a low of 28.9% of GDP at the end of the 2008 fiscal year, debt increased to its current 33.9% . 17 The budget document released last week projects a slight rise to 34.4% at the end of the 2012 fiscal year before a decline resumes. By the end of the 2016 fiscal year, the ratio of federal debt to GDP is projected at 28.5%, marginally lower than it was as the recession began. If this projection is realized, the ratio will be the lowest since 1979. While Canadian federal debt is low and the trend is favorable, for international comparison purposes it is useful to look at general government figures, which include all levels of government. Canada has a large sub-sovereign sector in comparison to most other countries. The ratio of general government debt to GDP, including the debt of provinces and local government entities, is about 70% of GDP, in the middle of the range for an advanced economy. For the US and the UK, this ratio is approaching 90%, while for France and Germany it exceeds 80%. Other advanced economies, including Australia at 23%, have considerably lower ratios than the G-7 economies (which include Canada). We also expect the aggregate provincial deficit to move toward a balanced position in the coming few years, meaning that, as with the federal government, provincial debt ratios will generally improve. Therefore, we expect that the general government debt ratio will show a trend broadly similar to that of the federal governments debt ratio. Furthermore, an important element of our analysis of the Canadian governments credit quality is that the provinces themselves are financially strong, indicating that the probability of them requiring extraordinary financial support from the federal government is quite low. This factor reinforces the federal governments credit quality. The strength of Canadas government finances has been reflected in the federal governments borrowing costs. Yields on Canadian government securities have moved in line with those of other major sovereign borrowers and in recent weeks have even been slightly lower than equivalent yields for US and UK government bonds, as seen in the exhibit. The improving deficit and debt trends projected in last weeks budget, if realized, are likely to keep the governments borrowing costs low, a further credit-positive feature.
16 17
The fiscal year begins 1 April. These ratios refer to the accumulated deficit, the figure used in the budget document.
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Ten-Year Government Bond Yields

Canada 3.5% 3.3% 3.1% 2.9% 2.7% 2.5% 2.3% 2.1% 1.9% 1.7% 1.5% Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 US Germany UK
Source: Bloomberg
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Sarah Glendon Assistant Vice President - Analyst 1.212.553.4534 sarah.glendon@moodys.com Renzo Merino Associate Analyst 1.212.553.0330 renzo.merino@moodys.com
Doubling of Foreign Direct Investment Inflows to Nicaragua Is Credit Positive

On 23 March, Nicaraguas (B3 stable) investment agency, ProNicaragua, announced that foreign direct investment had increased by 90.5% in 2011. The development is positive for Nicaraguas credit profile, as it reflects President Daniel Ortegas market-friendly policies, which have bolstered economic growth over the past two years. Nevertheless, Nicaragua remains highly exposed to external risks, as evidenced by its sizeable current account deficit and its dependence on foreign financing. Additionally, important challenges, such as the countrys weak institutional framework, which includes the rule of law, control of corruption, and government effectiveness, remain a drag on economic performance and the sovereigns creditworthiness. According to ProNicaragua, in 2011, investment inflows almost doubled, reaching $968 million, up from $508 million the previous year. The figure marks a record for the country that has seen foreign direct investment increase almost fivefold since 2002 (see exhibit). Of the total inflows, 52% were directed to energy and telecommunications (up 35% year-on-year), and the countrys free-trade zones. The rise in foreign direct investment also contributed to improved productive capacity and in turn contributed to 4.7% real GDP growth in 2011. Foreign Direct Investment Inflows to Nicaragua
1,000
800
$ millions
600
400
200
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Central Bank of Nicaragua
Nicaraguas success in attracting foreign investor interest is due to the pro-market agenda pursued by President Ortega and the countrys limited exposure to the drug trafficking-related crime afflicting its northern neighbors, Guatemala, El Salvador and Honduras. 18 In 2011, investors from 41 different countries invested in Nicaragua, with growing investment from Canada, Spain and Korea, although still behind Venezuela, the US and Mexico. Nicaraguas current account deficit has averaged 16.3% of GDP annually over the past decade, a key credit weakness. Exports (mainly agricultural products) largely depend on international commodities prices, and the country imports subsidized oil from Venezuela, whose aid currently accounts for close to 8% of GDP. The increase in foreign direct investment inflows last year (13.1% of GDP vs. 7.7% of GDP in 2010) provides relief and is positive for the countrys balance of payments. While Nicaragua continues to rely on foreign aid to offset its current account deficit, President Ortega has sought to improve relations with the International Monetary Fund (IMF), which helps mitigate external funding vulnerabilities as the IMF could become a new backstop for financing.
18
Nicaraguas murder rate in 2010 was 13.2 per 100,000, while the rates in Guatemala, El Salvador and Honduras were 41.4, 66.0 and 82.1 per 100,000, respectively.
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Nevertheless, the weak institutional framework present in the country will continue to act as a drag on investor confidence. The re-election of Mr. Ortega last November provides a certain level of policy continuity, 19 but allegations of fraud during the election exemplify the high degree of corruption in the country and the politicization of its institutions. The continuation of market-friendly policies is positive, and will likely continue to attract foreign investment. However, corruption remains a key obstacle to Nicaraguas governance and investor confidence in the country, and consequently, its economic performance and credit profile.
19
See Nicaraguan President Reelection Provides Policy Continuity, but Institutional Deficiencies Limit Creditworthiness.
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Sub-sovereigns
Patricio Esnaola Analyst 54.11.3752.2019 patricio.esnaola@moodys.com
Transfer of the Metro System Is Credit Negative for Buenos Aires

With 162 votes in favor and 54 against, on 28 March Argentinas Chamber of Deputies passed a law that transfers all responsibilities for the Buenos Aires metro system to the City of Buenos Aires (B1 stable) from the national government of Argentina (B3 stable). The law was approved by the Senate on 21 March. The transfer is credit negative for the city government because it will not include the subsidy that the national government has been providing the metro system. The Buenos Aires metro transports more than 300 million commuters per year. Since 1993, the metro has been operated by Metrovas, a private company with a 24-year concession contract from the national government. As shown in the exhibit, in 2011, the national governments monthly subsidy for the metro system was ARS69 million ($15.8 million), amounting to ARS830 million ($190 million) annually, according to Metrovas. The required subsidy to maintain the metros operation represents a low 3% of the citys 2011 total revenues. Once the transfer is completed, the city will have direct oversight responsibilities over the concession. National Governments Annual Subsidy to Metrovas
Annual Subsidy - left axis 900 800 700 600 Subsidy as a % of BA's Total Revenues - right axis 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2008 2009 2010 2011
ARS Million
500 400 300 200 100 0
Source: Metrovas Financial Statements
In January, the national government and the City of Buenos Aires signed a memorandum to formalize the transfer of the metro and agreed to conclude the transfer 90 days after the signing. A few days after signing the memorandum, the city imposed a 127% price increase on metro tickets. The city justified the increase as an urgent measure to sustain the metros operation amid Argentinas roughly 20% inflation rate. However, the City of Buenos Aires then tried to turn its back on the agreement when it confirmed that the assumption of the new responsibilities would not come with the national subsidy. In response, the national government moved to pass a law to force the city to accept the transfer. The law was swiftly approved by both the Senate and the Chamber of Deputies, where President Christina Fernandez de Kirchners government holds an ample majority. President Kirchner will sign the law in the coming days, making it effective immediately after. The approved law forcing the transfer does not provide any subsidy whatsoever from the national government. In addition, it is unlikely that the Kirchner government will be open to providing any type of support to the city. The city has enough financial resources of its own to assume the systems operation. The City of Buenos Aires is rated two notches above the sovereign and has a relatively strong financial position, as reflected by its gross operating surpluses in each of the past eight years.
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Additionally, the city has registered cash financing surpluses in the last two years and has considerably low debt levels (15.6% of total revenues in 2011). However, barring additional ticket-price increases, the citys new responsibilities will affect its financial flexibility and increase its financing requirements. The city still has the option (and we think it is likely) to take its claim for additional resources to the Supreme Court.
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US Public Finance
Patricia McGuigan Assistant Vice President - Analyst 1.212.553.4750 patricia.mcguigan@moodys.com
New York State Budget Is a Boon for High-Need School Districts

Last Friday, New York State (Aa2 stable) passed its fiscal 2013 budget, which materially increased aid for school districts, especially those the state considers to be high need. The budgets passage is credit positive for less affluent school districts struggling to overcome constraints caused by the states new 2% cap on annual increases in property tax levies, which take effect in fiscal 2013. The total fiscal 2013 school aid budget of $20.4 billion is 4% ($805 million) higher than in 2012 (see Exhibit 1). The burgeoning economic recovery improves prospects for future increases in school aid because, as part of the 2011-12 state budget, the total amount of aid the state provides to schools will factor changes in personal income levels. Moodys Analytics expects annual personal income growth in New York will exceed 4% over the next two years.
EXHIBIT 1
New York General Support for Public Schools

$25
$20
$ billions
$15 $10 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Sources: New York State Budget for 2012-13. New York State Education Departments Fiscal Analysis Research Unit, State Aid to Schools: A Primer, June 2003-June 2011.
Fifty-two percent of the increase in school aid in fiscal 2013 is for general operating aid, and 76% of that will go to high needs school districts, defined as those with high rates of poverty relative to the districts wealth. The state government deems approximately one-third of the states 676 school districts as high need, and these include the states five-largest cities: Buffalo (A2 positive), Rochester (Aa3), Syracuse (A1), Yonkers (Baa1 negative) and New York City (Aa2 stable) (Exhibit 2), which issue debt on behalf of their school systems. Collectively, the increase in aid to the five largest cities represents almost half the total increase in school aid.
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EXHIBIT 2
New Yorks Five-Largest Cities See Sizable Increases in State Aid, $ millions
Buffalo Rochester Syracuse Yonkers NYC
Total Aid Fiscal 2013 increase Year-over-Year % increase Increase Without Building Aid Year-over-Year % Increase
Source: NYS Division of the Budget.
$642.8 $33.40 5.5% $15.3 3.0%
$458.9 $14.0 3.2% $14.4 3.4%
$277.5 $18.0 6.9% $8.4 3.4%
$217.5 $9.7 4.7% $10.5 5.3%
$7,916.8 $292.1 3.8% $249.4 3.7%
The increase in aid will be a great benefit for weaker school districts such as Buffalo, Rochester and Syracuse, each of which has a per capita tax base equal to about a third of the median for school districts in the state, and poverty rates of more than 20%. These districts tend to have a narrow tax base relative to their population, and now face a 2% cap on annual increases in property tax levies that took effect on 1 January this year, affecting the districts in fiscal 2013. At almost 33%, categorical aid for specific programs is the second-largest area of state school aid growth. In 2007-08, the state consolidated many categorical programs into the general operating formula, reducing the number of such programs. Categorical aid is now largely composed of programs for pupil transportation, Boards of Cooperative Educational Services, high-cost special education services, pre-kindergarten programs, and building aid, which is the largest component and aimed at high need districts. Although the state adjusts aid formulas from year to year to redirect the distribution, the categorical aid formulas did not change in the fiscal 2013 budget. The final 16% of the school aid increase goes to performance grants to reward academic improvement and increase school district efficiency. Receipt of the additional state aid includes the requirement that school districts adopt a new teacher evaluation plan by 17 January 2013, which also requires union agreement and state approval. Some districts with open labor contracts have received union agreement to separate negotiations of the evaluation plan from contract negotiations, which we expect to reduce delays in receiving state aid.
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Chris Coviello Vice President - Senior Analyst 1.212.553.0575 christopher.coviello@moodys.com
Jefferson County to Miss General Obligation Payment, Putting Future Payments at Greater Risk
Last Wednesday, the Jefferson County, Alabama, Commission passed a resolution directing the county manager to skip debt service payments on its fixed and variable rate general obligation (GO) warrants scheduled for 1 April. The resolution indicates that because of its limited amount of cash, Jefferson County (general obligation Caa1 on review for downgrade) will forego debt service payments, to continue providing essential public safety services, such as police, fire and disaster response. The decision to default is credit negative because it increases the probability of material investor losses. Since 2008, the county has been in default on variable rate GO and sewer revenue warrants held by banks that provide liquidity facilities. However, last weeks action marks the first time that the county has not paid debt service on its fixed-rate GO warrants. Additionally, media reports said that the countys lease revenue payment due on 1 April would be paid from the bond reserve fund, resulting in a technical default. The county currently has $105 million in variable-rate GO bank bonds and $95.52 million in GO fixed-rate bonds. An Alabama Supreme court ruling in March 2011 that blocks Jefferson County from levying occupational and business taxes that accounted for 30% of its revenues has materially impaired the countys ability to generate revenues. 20 The countys ability to fund essential services and pay GO debt service largely depends on whether the state legislature provides a sustainable long-term general fund revenue source. The decision to skip the upcoming GO debt service payment could motivate the state legislature to provide a replacement revenue source. The risk of material losses for GO bondholders remains high given that federal municipal bankruptcy law treats GO debt as an unsecured obligation unless there is a statutory lien, which does not exist for GO debt in Alabama. As a result, its likely that other unsecured creditors will have equal claim to GO bondholders. The county filed for Chapter 9 bankruptcy protection on 9 November 2011, after county officials failed to reach a final agreement with creditors, the largest of which is JPMorgan Chase. On 4 March, a federal judge approved the countys petition for bankruptcy protection, permitting it to develop a plan to restructure more than $4.23 billion in debt, including $200 million general obligation bonds (see exhibit). Jefferson Countys Outstanding Debt
Debt Type Amount Outstanding Currently In Default Rating as of 30 March
General Obligation Limited Tax Lease Revenue Limited Obligation School Sewer Revenue Birmingham-Jefferson Civic Center Authority, Series 2005-A
$200.52 million $83.65 million $814.08 million $3.14 billion $32.92 million
Only variable rate bank bonds Caa1 review for downgrade No Caa2 review for downgrade No B3 review for downgrade
Yes Caa3 review for downgrade No B3 review for downgrade
Source: Moodys, Bloomberg, and Jefferson County Bankruptcy Filing
20
See Jefferson Countys Inability to Levy Taxes is Credit Negative for Issuers Within the County, Weekly Credit Outlook, 20 June 2011.
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Jefferson Countys bankruptcy and default is not an indication that bankruptcy filings or defaults by local governments in Alabama are likely to rise appreciably. The circumstances surrounding the countys financial crisis are unique, including a variable-rate debt and swap portfolio that is unusually complex, and the unusual event of the county losing a significant revenue source. None of the other Alabama governments that we rate has a debt structure similar to Jefferson Countys, and all carry investment grade ratings.
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Securitization
Daniel Rubock Senior Vice President 1.212.553.4683 dan.rubock@moodys.com
Michigan Nonrecourse Mortgage Loan Act Is Net Credit Positive for CMBS
Last Thursday, Michigan Governor Rick Snyder signed into law the Nonrecourse Mortgage Loan Act, overturning two court rulings (known as the Cherryland/Chesterfield cases) 21 that rocked the US commercial real estate (CRE) world last December. The two decisions converted many bad-boy nonrecourse carveout guaranties effectively into full credit recourse guaranties any time a special purpose entity (SPE) CRE borrower becomes insolvent, even if the guarantors were good boys and did not cause the insolvency. The Act is a net credit positive for commercial mortgage backed securities (CMBS). The legislation is credit negative for legacy commercial mortgage backed securities because it removes a newly created tool from the arsenal of CRE lenders remedies, reducing lenders leverage. However, it is credit positive because it lessens the threat of substantive consolidation that the Cherryland and Chesterfield cases wrought, and reduces the risk that SPE owners will throw their subsidiaries into bankruptcy because they have nothing to lose. 22 The law faces a probable challenge as violating the US constitutional prohibition against state Law[s] Impairing the Obligation of Contracts. In the interim, and as the cases are appealed, there will be substantial uncertainty and litigation for legacy CMBS borrowers and bad boy guarantors in Michigan and in other states. However, newly originated CMBS loans can easily navigate around the problem with a simple drafting fix to the language that caused the controversy. 23 The Act was a swift expression of legislative dissatisfaction with the two finely reasoned court decisions that each made myopic end-runs around fundamentals of CRE nonrecourse lending. 24 The Cherryland and Chesterfield courts both used strict tests of looking only at the four-corners of the contract between sophisticated, well-represented parties. But by declining literally to think outside the box, these cases hollowed out the essence of the capital markets nonrecourse CRE lending. The legislation achieved the result that the cases could have, had the judges applied principles of equity (such as reformation of contracts) reflecting the undisputed intentions of the parties. A key element in structured finance is the ring-fencing of assets and cash flows of a borrower from creditors of the borrowers owners, and reducing the risk of the SPE electing bankruptcy. To do this, a borrower promises through an array of covenants to be a separate SPE. That array is strengthened in CMBS by the borrowers owner guarantying the loan if any SPE promises are breached (hence, the bad-boy guaranty moniker). Otherwise, so long as the borrowers owner behaves, the loan is nonrecourse; that is the bargain. The Cherryland and Chesterfield SPE borrowers each made a problematic promise that they will remain solvent. The real estate market declined precipitously in Michigan, dragging the borrowers
21
22
23 24
Cherryland was decided by a Michigan intermediate-level appellate panel, and Chesterfield by a federal district court. Wells Fargo Bank, N.A., v. Cherryland Mall Limited Partnership, __ N.W. 2d __, 2011 WL 678593 (Mich. App. 2011, and 51382 Gratiot Avenue Holdings, Inc. vs. Chesterfield Development Company, 2011 US Dist. LEXIS(E.D. Mich. 2011). Bad-boy guarantors usually also guarantee that they wont cause the SPE to file for bankruptcy. If the guarantors are liable under the guaranty if the SPE is merely insolvent, the bad-boy guarantor will not be paying a greater price by simply choosing the bankruptcy alternative first. It is not known precisely what portion of CMBS loans have the solvency clause that fueled the decisions. Such clauses are common, but not universal. The Cherryland court stated that We recognize that our interpretation seems incongruent with the perceived nature of a non-recourse debt [but] it is not the job of this Court to save litigants from their bad bargains or their failure to read and understand the terms of a contract.
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properties down. When their loans defaulted, the borrowers put up no fight when their lenders foreclosed. But after the foreclosure sales, the lenders claimed that because the borrowers did not pay the loan, the SPEs were insolvent and thus in breach of the solvency covenant. Ergo, the lenders argued, the guaranties were triggered. The courts agreed. In CMBS at least, there is no need to promise that the borrower will remain solvent. It is probably sufficient to promise that the borrower intends to remain solvent, or that the owner through misdeeds will not cause the borrower to become insolvent. Under our current rating methodologies, we do not expect or need bad boy guaranties to be triggered by a borrowers insolvency caused by market factors. In fact, such guaranty triggers could possibly vitiate the conclusions of thousands of nonconsolidation opinions rendered by major law firms, because full credit guaranties of subsidiary debt may be such a substantial entanglement of the parent with the subsidiary that it could be a major element causing substantive consolidation. Bad-boy guaranties are a key part of CRE lending, and in the last few years almost every litigated bad boy case has been won by the lenders. The Cherryland and Chesterfield cases may prove to be a bit too much of a good thing.
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Detailed analysis of an important topic
Thomas J. Byrne Senior Vice President 65.6398.8310 thomas.byrne@moodys.com David Erickson Associate Analyst 65.6398.8308 david.erickson@moodys.com Matt Robinson Director of Sovereign Research 44.20.7772.5635 matt.robinson@moodys.com
Lower Growth Target Reflects Chinas New Realities

Recent measures support economic rebalancing ahead of a new phase of reform and development. Policy headroom will allow China to avoid a hard landing while the country prepares for a fundamental realignment in the political economy over the next decade.
Summary
Various indicators suggest that Chinas growth rate has slowed since the fourth quarter of 2011, a product of policy restraint and weak external demand. The new, lower annual GDP growth target of 7.5% -- as recently announced in the countrys draft budget -- underscores the governments desire to engineer a soft landing, consistent with its long-term goal of seeking more balanced growth, decreasing the economys reliance on investment and net exports, while increasing the share of consumption. It also reflects the economic and financial realities facing China. A lower, but sustainable growth rate would be credit positive for China (Aa3 positive), reducing its reliance on the public sector as the engine for rapid growth, and targeting growth that is balanced and that will not lead to an explosion in debt and contingent liabilities. The new target is a prelude to the need to implement a new phase of reform and development. China has successfully undergone past quantum leaps in reform strategy, with each phase successfully resuscitating growth, while regaining macroeconomic stability. Although the current agenda is in a nascent phase, we maintain a central scenario of continued rapid growth, which gradually convergences toward, but remains above trend growth for the world. Risks to the downside remain present: slower global growth constraining exports, an oil price shock, or the potential for social and political upheaval. These scenarios are only the known risks clouding the outlook. But we consider policymakers as having ample monetary and fiscal headroom to stimulate growth and protect against a hard landing. Meanwhile, we also believe that the authorities have time to prepare for what a rebalancing of the roles of the public and private sectors implies a fundamental realignment in Chinas political economy over the next decade.
Targeting lower, sustainable growth

At the opening of the annual National Peoples Congress in early March, China released its 2012 economic targets and draft annual budget. In the new budget, the annual GDP growth target has been reduced to 7.5% from the 8.0% set in the last seven years. That the government lowered its growth target is not surprising as it follows the lower 7% annual target in Chinas Twelfth Five-Year Plan (2011-2015). By lowering the GDP growth target a step which implicitly seeks to rein in fixed-capital formation -Chinas central government is reducing the pressure on local governments to continue borrowing to finance rapid growth. Indeed, it already clamped down on local government lending in 2011 after it had surged in 2009 and 2010. It recently announced that local government debt was contained in
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201125, an outcome which is credit positive as fewer potential non-performing loans are now likely to crystallize on the sovereign balance sheet.
A new phase of structural policy reforms coming into focus

The lowering of the GDP growth target fits with the central governments long-term goal of seeking more balanced growth, decreasing the economys reliance on investment and net exports, while increasing the share of consumption. This rebalancing of the economy is especially important now as household consumption fell over the past decade to only 33.5% as a share of GDP by 2010, among the lowest of all countries. (This fact, however, does not tell the full story of rising living standards and economic security. Both urban and rural real incomes are rising steadily, household consumption has doubled over the past decade, and household savings have grown from 23% to 28% of disposable income between 2003 and 2009. ) Nonetheless, the authorities are signaling a greater focus on the quality of GDP growth, targeting growth which is balanced and which will not lead to an explosion in debt and contingent liabilities. The new growth target is a prelude to the need to implement a new phase of development. From a broad perspective, reforms would affect state enterprises, corporate governance, private sector development, the urban residential hukou system, and financial sector liberalization. Financial sector reform is crucial to Chinas ability to better allocate capital and enhance its sovereign credit profile. Such reform would include commercializing the banking system, allowing the market to set interest rates, deepening domestic financial markets -- including the establishment of a municipal bond market 26 -- and developing the sectors legal and supervisory framework. The Peoples Bank of China released a report in February calling for significant capital account liberalization steps over the next three to five years. We note that the governor of the PBOC, Zhou Xiaochuan, recently wrote in a new article 27 that conditions are basically ripe for interest rate liberalization. Although such an agenda for reform is in a nascent phase, China has successfully undergone past quantum leaps in its reform strategythe Reform and Opening Up Policy of 1978, the concerted reforms of 1994 affecting the state-owned enterprise, banking, exchange rate and taxation systems, and the countrys accession to the World Trade Organization in 2001 28. All developments were prompted by economic exigencies, and each phase successfully sustained the momentum of rapid growth.
Will China avoid a hard landing?

In view of Chinas past success in structural reform and scope for continued productivity/urbanization/economic frontier-driven growth for the next decade, we maintain a central scenario of ongoing rapid growth. Urbanization only breached the 50% mark last year. This will gradually converge toward, but remain above trend growth for the world (ex-China) and the advanced industrial countries (Exhibit1).
25 26 27 28
See Containment of Local Government Debt Is Credit Positive for China, March 2012. See Chinas First Step in Allowing Local Government Bond Issuance is Credit Positive for the Sovereign, October 2011. Zhou Xiaochuan, "Review of and Prospects for Large-scale Commercial Bank Reform (). China Finance (). 20 March 2012. The Third Plenum of the Fourteenth Party Congress in November 1993 adopted a comprehensive package of reforms to remedy stop-go growth and inflation spikes. These were mainly implemented in 1994. See Pieter Bottelier, China and The World Bank: How a Partnership Was Built. April 2006.
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In the near term, the greatest risk to a sharp slowdown in growth would be another collapse in exports, similar to what occurred during the 2008-2009 global financial crises (Exhibit 2). This outcome could occur if a more intense and prolonged storm were to emanate from Europe. Indeed, the IMF calculates that a constriction of the trade channel could shave four percentage points from Chinas GDP growth. However, ample policy headroom is available to cushion such a blow, and moderate the slump to around one percentage point of growth. 29 Over the short run, compared to a sharp fall in exports, an oil price shock would not have as severe consequences on Chinas GDP growth or balance of payments. Coal is the dominant source of domestic energy, and the country produces domestically sizable volumes of crude oil, although it has also become a net importer. Each rise of $10/barrel increases the cost of net imports of crude oil by about $18 billion, equivalent to 0.25% of 2011 GDP. An oil shock alone would not likely destabilize the current account balance, which we forecast to be in surplus and measure between 2.0% and 3.0% of GDP in 2012 and 2013. When we look back at Chinas growth history since the Reform and Opening Up policy initiated a revival in its economic fortunes in the 1980s, we note that the most severe risk is political. The political turmoil surrounding the protests in Tiananmen Square in 1989 coincided with a period of high inflation, and resulted in a brief hard landing with growth falling to the global trend (Exhibit 3). However, its strong upward trajectory was quickly restored and sustained in the following decade because of the quelling of inflation when Zhu Rongji became governor of the PBOC and also from the positive effects of the concerted reforms of 1994. At the same time, ongoing unrest between citizens and local government officials, especially over property rights, signals potential risks and political challenges for the central authorities. Economic shocks and policy blunders could also severely deflect downward Chinas growth prospects. Looking at East Asia, this was especially the case in Japan, when the bursting of its bubble economy reduced trend growth to between 0.6% and 1.5% in the 1990s and 2000s from 4.4% in the 1980s (Exhibit 4). In the previous decade, the oil shocks -- which bracketed the start and end of the 1970s -contributed to an even greater collapse in trend growth, from 10.2% in the 1960s to 5.4% in the 1970s. Similarly, but not as severely, Korean growth in the wake of the 1997-1998 Asian financial crisis fell from 6.7% in the 1990s to 4.4% in the 2000s (Exhibit 5). Before the sudden turn in fortunes in both Japan and Korea, academic observers had prophesized that a bright future was at hand, but did not foresee the build-up in imbalances which eventually led to severe crises in both countries 30. In the case of China, so far, the authorities have successfully implemented strategic reforms that have propelled forward economic advancement. But we see that the WTO-induced external trade reforms which extended Chinas 10% growth trend for more than another decadeuntil the global financial crisis and recessionare starting to dissipate. The resulting natural slowing of growth from diminishing export competitiveness and productivity gains from foreign direct investment provides the impetus for a new round of strategic reforms. We believe the authorities have time to prepare for a rebalancing of the economic structure.
29 30
IMF, China Economic Outlook. February 6, 2012. Ezra Vogel, Japan as Number One: Lessons for America, 1979, and Alice Amsden, Asias Next Giant, South Korea and Late Industrialization, 1989, are two examples.
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Such a rebalancing will entail a fundamental realignment in Chinas political economy based on greater commercialization and a wider scope for the private sector as sketched in the China 2030 study31. We also see growth as remaining relatively robust over the medium term, provided that the country is spared severe economic or political shocks.
EXHIBIT 1
Real GDP: Annual growth outlook

2009 2010 2011 2012 2013 2014 2015 2016
China World, ex-China Differential Advanced country

Source: IMF WEO and Moodys.
9.2 -1.6 10.8 -3.7
10.3 4.6 5.7 3.1
9.2 3.4 5.8 1.6
8.0 3.4 4.6 1.9
8.0 3.8 4.2 2.4
7.0 4.1 2.9 2.6
7.0 4.1 2.9 2.7
7.0 4.2 2.8 2.7
EXHIBIT 2
Chinas Trade Chanel Vulnerability Export Volume

Difference 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 World Export Growth (y-o-y) China Export Growth (y-o-y)
Source: IMF World Economic Outlook
31
China 2030Building a Modern, Harmonious, and Creative High-Income Society, The World Bank and Development Research Center of the State Council, the Peoples Republic of China, 2012.
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EXHIBIT 3
Chinas Historical Growth Trend

China GDP Growth 16 14 12 10
%
World GDP Growth Based on World Bank China 2030 Forecast
China joins WTO
8 6 4 2 0 -2 1980
2000s: 10.3% 1980s: 9.8% 1990s: 10.0%
Tiananmen 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
Source: IMF WEO, World Bank and Moodys.
EXHIBIT 4
15
Japans Historical Growth Trend

1960s: 10.2%
10 1970s: 5.4% 5 2000s: 0.6%
1980s: 4.4% 0 1990s: 1.5% -5 1973 Oil Shock -10 1960 1991 Bubble Bursts 1970 1975 1980 1985 1990 1995 2000 2005 2010
1965
Source: Bank of Japan, IMF World Economic Outlook, Moodys Investors Service
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2 APRIL 2012
CREDIT IN DEPTH
EXHIBIT 5
Koreas Historical Growth Trend

Korea GDP Growth 14 12 10 8 6 4 2 0 -2 -4 -6 -8 1980 1985 1997 Asian Financial Crisis 1990 1995 2000 2005 2010 2000s: 4.4% 1980s: 8.6% 1990s: 6.7% World GDP Growth
Source: IMF World Economic Outlook, Moodys Investors Service
45
2 APRIL 2012
RATING CHANGES
Significant rating actions taken the week ending 30 March 2012
Corporates
Anheuser-Busch InBev SA/NV
28 Sep 11 Long-Term Issuer Rating Short-Term Issuer Rating Outlook Baa1 P-2 Positive
Upgrade
27 Mar 12 A3 P-2 Positive
The upgrade reflects ABI's continued progress in reducing debt and improving credit metrics as a result of its good business momentum, successful cost reduction initiatives, expanding margins and balanced growth. We expect that management will remain committed to reducing leverage further while growing the scale and profitability of the business. We also expect further profitability growth. Manitowoc Company, Inc.
11 Apr 11 Corporate Family Rating Outlook B2 Stable
Outlook Change
29 Mar 12 B2 Positive
The change to a positive outlook reflects Manitowocs improved operating performance and our expectation for solid revenue and profitability growth over the next 12-18 months. We anticipate steady growth in the companys cranes and foodservice segments, which will lead to improved profitability and cash flow. The B2 rating continues to reflect Manitowocs still relatively high leverage and low interest coverage.
Financial Institutions
Banca del Mezzogiorno - MedioCredito Centrale SpA
23 December 10 Long and Short Term Deposits Standalone Bank Financial Strength / Mapping to Long-Term Scale Outlook A3 / Prime-2 C- / baa2 Review for Downgrade
Downgrade
26 March 12 Baa3 / Prime-3 D- / ba3 Negative
The downgrades reflect the substantial alteration in the banks risk profile because of a new strategy and business model and thus required reorganization, in addition to the new ownership structure. This action is independent of the current, comprehensive reviews for downgrade of many Italian banks' ratings, which are driven by other factors, such as growing challenges in the operating environment, and our recent downgrade of the Italian governments rating to A3.
46
2 APRIL 2012
RATING CHANGES
Unin de Crdito Progreso, S.A. de C.V.

23 December 08 Global Local Currency Deposits National Scale Ratings Standalone Bank Financial Strength / Mapping to Long-Term Scale Outlook B1 Baa3.mx / MX-3 E+ / b1 Stable
Downgrade
26 March 12 B3 Ba2.mx / MX-4 E+ / b3 Review for Downgrade
The downgrade reflects Progresos weakened risk profile, whose balance sheet carries a sizable amount of distressed assets that a previously undisclosed affiliated entity, Foprocap, had previously held. The downgrade also reflects our concerns about the limited disclosure and opacity of the banks financial information, in addition to implications stemming from Grupo Progreso's complex corporate structure and lack of transparency about intercompany transactions. Mongolian Banks
Review for Downgrade

26 March 12
The review is due to our revised assessment of the linkage between the credit profiles of sovereigns and financial institutions globally, which we discuss in How Sovereign Credit Quality May Affect Other Ratings, 13 February 2012. The banks under review are Golomt Bank, Khan Bank, the Trade and Development Bank of Mongolia (TDB), and XacBank. We expect the maximum downgrade for each will be one notch, which would bring the banks' ratings in line with Mongolia's sovereign rating. Mauritian Banks
Review for Upgrade

27 March 12
This rating action follows our decision to place on review for upgrade the Baa2 foreign-currency deposit ceiling for Mauritius. The banks under review are Mauritius Commercial Bank and the State Bank of Mauritius. At the same time, we have affirmed the two banks' other ratings, including their local currency deposit ratings of Baa1/Prime-2 and their Baa1 foreign-currency issuer ratings, all with stable outlook.
47
2 APRIL 2012
RATING CHANGES
Technikabank

17 September 09 27 March 12 B3 E+ / b3 Review for Downgrade B3 E+ / b3 Stable
Local & Foreign Currency Deposits Standalone Bank Financial Strength / Mapping to Long-Term Scale Outlook
The review for downgrade follows a news report that this Azerbaijanian bank's minority shareholder, Mr. Etibar Aliyev, who also acts as chairman of the banks supervisory board, was arrested over allegations of fraud. These developments could have negative implications for the bank's creditworthiness: Technikabank's liquidity could deteriorate as a result of weaker relationships between the bank and its key customers. BES Investimento do Brasil S.A.
24 February 12 Global Local & Foreign Currency Deposits National Scale Ratings Standalone Bank Financial Strength / Mapping to Long-Term Scale Outlook Ba2 Aa3.br / BR-1 D / ba2 Review for Downgrade
Downgrade
28 March 12 Ba3 A2.br / BR-2 D- / ba3 Negative
The downgrade reflects the bank's business model, which includes investment banking operations and which is susceptible to changes in investor confidence because of concerns about brand reputation -- in this particular case, the reputation of its parent, Banco Espirito Santo, of Portugal. The weakening of the parent's credit profile could challenge BESI Brasil's funding dynamics: A further rise in funding costs, in line with market trends for similarly sized banks, could pressure BESI Brasil's financial margins. Bank of Queensland Limited

20 January 12 28 March 12 A3 Review for Downgrade Baa1 Review for Downgrade C- / baa1 Negative A3 Negative Baa1 Negative
Senior Unsecured Debt Subordinated Debt
Standalone Bank Financial Strength / Mapping to Long-Term Scale C- / baa1 Negative
The review follows the bank's announcement on 26 March that it had conducted a second review of its loan portfolio in just over a year and had adopted a more conservative approach to provisioning, resulting in a significant rise in impairment expenses and a net loss for first-half 2012.
48
2 APRIL 2012
RATING CHANGES
Portuguese Banks
Various Actions
28 March 12
We downgraded the senior debt and deposit ratings on four banks by one notch, aligning their ratings to the same level as, or one notch below, our ratings on the Portuguese government, which we downgraded to Ba3 from Ba2 on 13 February 2012. The four banks were Caixa Geral de Depositos, Banco Comercial Portugues, Banco Espirito Santo and Banco BPI. We also downgraded the debt and deposit ratings on Banco Santander Totta (a subsidiary of Banco Santander S.A.) by two notches to Ba1, but confirmed the debt and deposit ratings of Banco Comercial Portugus and of Caixa Econmica Montepio Geral at Ba3. All of the ratings have a negative outlook. Banco Cruzeiro do Sul S.A.
4 January 12 Global Local Currency Deposits Foreign Currency Deposits National Scale Ratings Standalone Bank Financial Strength / Mapping to Long-Term Scale Ba3 Review for Downgrade Ba3 Review for Downgrade A3.br / BR-2 Review for Downgrade D- / ba3 Review for Downgrade
Downgrade
29 March 12 B2 Negative B2 Negative Ba2.br / BR-4 Negative E+ / b2 Stable
The downgrades take into account the Brazilian banks growing reliance on guaranteed funding sources to finance its loan origination; its weakening core profitability metrics, which are challenging its internal capital generation; the complexity of BCSul's balance sheet structure; and the opacity of its financial reporting. Eurobank Tekfen AS

10 March 11 30 March 12 Ba3 Ba3 D- / ba3 Review for Downgrade Ba3 Ba3 Negative
Global Local Currency Deposits Foreign Currency Deposits Outlook
Standalone Bank Financial Strength / Mapping to Long-Term Scale D- / ba3
In the review, we will re-examine Eurobank Tekfen's standalone credit relative to its parent's standalone profile and the regulatory barriers in Turkey that restrict EFG Eurobank Ergasias from using Eurobank Tekfen's resources. Parent EFG Eurobank Ergasias announced on 14 July 2011 that it intended to dispose of its majority stake in Eurobank Tekfen.
49
2 APRIL 2012
RATING CHANGES
US Public Finance
San Jose, City of (CA)
15 Mar 11 General Obligation Lease Revenue Outlook Aaa Aa2 Stable
Downgrade
26 Mar 12 Aa1 Aa3 Stable
The downgrades affecting $1.1 billion of debt reflect the multi-year erosion of the city's general fund reserves, which is indicative of the difficulty the city has had managing costs versus weakened revenues because of the economic downturn and slow, tenuous recovery. The ratings and stable outlook incorporate our expectation that the city's fiscal position will remain stable, albeit at a lower level than in recent years. Retirement costs are proving difficult for the city manage. Providence, City of (RI)
18 Nov 11 General Obligation Lease Revenue Outlook A3 Baa1 Negative
Downgrade
26 Mar 12 Baa1 Baa2 Negative
The downgrade of the ratings for Rhode Islands capital city reflects its strained financial position with diminishing liquidity and a sizeable budget gap in the current fiscal year. The city faces a $20 million deficit in fiscal 2012, which ends on June 30. The primary strategy for closing the gap is to eliminate a cost of living adjustment for retirees, which reduces the city's appropriation to the locally funded pension system by $16 million but is likely to be challenged in court. Cash flow borrowing probably will be necessary to finance operations early in fiscal 2013
Structured Finance
Portuguese Covered Bond Ratings Confirmed after Bank Downgrades Our recent downgrade of five Portuguese banks did not affect the ratings of Portuguese consumer loan ABS transactions. The highest achievable rating remains Baa1.
50
2 APRIL 2012
RESEARCH HIGHLIGHTS
Notable research published the week ending 30 March 2012
Corporates
Australian Resources Tax Is Credit Negative for Major Miners
The Australian governments highly debated Minerals Resource Rent Tax (MRRT) will go into effect 1 July. While it is difficult to fully quantify the impact of the tax, our report notes that companies with the highest proportion of earnings derived from iron ore and coal produced in Australia will be most exposed.
Indonesian Corporate Issuers Will Benefit From Sovereign Upgrade - But Only Gradually
While immediate rating implications from the sovereign upgrade have been moderate, we expect business conditions for Indonesian corporates to gradually improve. Indonesian corporates will benefit from cheaper and more diverse funding opportunities, more foreign direct investment, and a more stable and predictable operating environment as the result of improved transparency, a more predictable legal framework and progressive policy initiatives.
US Media Industry: Rebounding Auto Sales to Fuel Advertising Windfall

Auto advertising accounts for 20%-25% of total advertising in certain media sectors including broadcast TV. The expected uptick in 2012 auto sales will boost advertising revenues as auto-makers seek to tap pent-up consumer demand. Revenues from advertising will also benefit from political campaign spending and the impact of the much anticipated London Summer Olympics.
Global Refining and Marketing Industry: High Oil Prices, European Weakness and Capacity Overhang Keep Pressure on R&M
Our outlook for the global refining and marketing sector remains negative as the rise in oil prices promises a difficult 12-18 months. Demand for refined product will face risks from these high prices, economic weakness in Europe and slowing growth in China. In addition, the sectors worldwide capacity overhand will increase, surpassing demand and pressuring refiners.
Global Paper and Forest Products: Weak Demand and Declining Pricing Will Reduce Operating Income
As demand and pricing weaken for paper products, we expect overall operating income to decrease over the next 12-18 months. In addition, we expect prices to be volatile and to decrease slightly for most grades, while input costs will remain flat and.
North American Railroads: Declining Shipping Volumes for High-Margin Coal Limit Revenue Growth
Our positive outlook reflects our expectation that North American freight railroads will see 4%-6% revenue growth, net of fuel, over the next 12 to 18 months. We note that the industry must address the decline in volume of coal being shipped, which accounts for 20%-30% of US railroad revenue. However freight volume will increase, and despite being less profitable than coal, the increase coupled with pricing increases and ongoing cost controls will offset the impact of lower coal volume.
51
2 APRIL 2012
RESEARCH HIGHLIGHTS
US Apparel Industry: Our Outlook Turns Positive as Cotton Prices Turn Lower
We revised our look to positive on our expectation that apparel companies will reap benefits from the 60% decline in cotton costs. We expect these benefits to become meaningful in the second half of 2012 and into early 2013 as managements capture cost improvements that will bolster gross margins.
Global Exploration and Production Industry E&Ps Set for Continued Strength as Modest Growth Trends Keep Oil on Upward March
Our outlook for the E&P industry remains positive over the next 12-18 months, since the global demand for oil that led to a strong price rally for crude and natural gas liquids (NGLs) shows little sign of abating. High crude and NGL prices have encouraged full-force production at North American shale and unconventional plays that had largely been out of economic reach until a few years ago.
Moody's Healthcare Quarterly Newsletter

Despite the distractions of an election year and the Supreme Court review of the Affordable Care Act, healthcare companies and providers are looking beyond immediate issues as they seek to offset resultant lower healthcare spending. Our new report examines how life sciences and pharmaceutical companies, insurers, for-profit and non-profit hospitals, medical device manufacturers and real estate investment trusts (REITS) are planning to deal with upcoming shifts in the industry.
US Gaming - Revenue and Profit to Rise Modestly Amid Cost Cuts and Slow Economic Growth
Despite a difficult gaming-demand environment characterized by increased gaming supply and continued high unemployment, we believe monthly gaming revenue and profit for the overall US gaming sector will increase modestly. Still, we note that high fuel prices could put substantial pressure on consumers discretionary spending and thus reduce sector revenue and profit at a time when casino operators have little room to cut costs.
North American Midstream Sector: Booming Demand for New Oil and NGL Infrastructure Trumps Weak Natural Gas Prices
Our outlook for the North American midstream sector is positive, as fundamental conditions for midstream companies will remain robust at least through mid-2013, Oil, gas and NGL production growth will keep driving demand for new midstream infrastructure. Ready capital market access is funding capital spending that we expect will grow by 60% in 2012.
Infrastructure
US Airport Rental Car Facilities Credit Update
We give updates on the 11 airport-based rental car facilities that we rate. The dynamics of the airline industry and overall macroeconomic conditions in the country heavily influence their performance. The stabilization of the general economy over the last two years has translated into slowly increasing enplanement levels at airports across the US, leading to improvements in rental car transactions and revenues.
52
2 APRIL 2012
RESEARCH HIGHLIGHTS
Financial Institutions
US Banking Quarterly Credit Update - 4Q11
The improving trend in US bank asset quality continued in the fourth quarter of 2011, as net chargeoffs, non-performing loans and early-stage delinquencies reached their lowest levels since 2008. Nonetheless, our outlook for the US banking system remains negative, reflecting ongoing challenges in the operating environment, including low interest rates, below-trend growth, high unemployment and depressed real estate markets, which will continue to negatively affect profitability.
Canadian Banks 1Q2012; Good Results Despite Tough Sledding

Prevailing themes for the Canadian banking sector in the first quarter of 2012 included solid consumer and commercial loan growth in personal and commercial businesses, margin pressure due to low interest rates, a benign credit environment and disciplined expense management. Additionally, the Office of the Superintendent of Financial Services draft guidance on residential mortgage underwriting is a positive development, since they set out OSFIs expectations for prudent residential mortgage underwriting, including enhanced disclosure requirements.
Russian Banks: 2012 CFO Survey Shows Cautious Optimism

Our 2012 survey of the CFOs of Russian banks showed broadly credit-positive expectations, with bankers cautiously optimistic about the Russian economy and expecting asset quality, profitability and capitalization to remain stable this year. Although we share CFOs expectations on certain topics, the adverse and prolonged euro area crisis could exacerbate volatility in banks performance and affect Russian GDP growth dynamics.
US Public Finance
Oklahoma School Districts Demonstrate Conservative G.O. Debt Profiles, with Limited Capacity to Service Non-G.O. Debt
Oklahoma school districts tend to exhibit conservative general obligation debt profiles compared to similarly rated credits in other states, but they also demonstrate narrow financial operations and fund balance cushions. The state constitution includes a strict cap on G.O. debt issuance and tightly limits the property tax levy for operations but does not restrict the property tax levy for debt service. We have observed a growing trend among districts to issue non-G.O. debt in the form of lease revenue bonds as a method of financing outside the G.O. cap.
53
2 APRIL 2012
RESEARCH HIGHLIGHTS
Structured Finance
CLO Interest Newsletter
The large amount of debt refinancing to take place over the next few years poses both opportunities and challenges for CLOs, our newsletter says. In this issue we also outline our expectations of rising defaults for SME transactions from Southern Europe, and summarize highlights from Information Management Network (IMN)s 1st Annual CLO and Leveraged Loan conference.
Structured Thinking Newsletter

In this issue of our newsletter focused on Asia Pacific, we discuss how the Euro crisis and Chinese economic slowdown affects Korean securitisations, Japan Prime Realty's acquisition of land with leasehold is credit negative for the J-REIT, Japanese consumer ABS is benefitting from stronger structures and better quality portfolios, and Asia tourists are helping the performance of three nonluxury hotels backing CMBS, but may not be sustainable if the Chinese economy slows.
On the Street Commercial Real Estate Comment

Commercial real estate fundamentals are recovering, with a strength and momentum that varies by sector, says our quarterly update on US REITs. Multifamily and self-storage REITs have started on their second year of robust performance. The office sector is generally weaker, with suburban office properties underperforming those in central business districts. In retail, occupancies are improving, and a key challenge is shoring up smaller in-line stores, which were hit hard during the recession. The industrial sector is experiencing some increased demand, although this is somewhat offset by pockets of new construction.
54
2 APRIL 2012
EDITORS
News & Analysis: Elisa Herr, Jay Sherman and Alexis Alvarez Rating Changes & Research Highlights: Robert Cox Final Production: Barry Hing
PRODUCTION ASSOCIATE
David Dombrovskis
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Weekly Credit Outlook - April 2, 2012

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Weekly Credit Outlook - April 2, 2012

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2 APRIL 2012

NEWS & ANALYSIS

RATINGS & RESEARCH

NEWS & ANALYSIS

European Sovereign and Bank Crisis

See Decision of the European Central Bank, 21 March 2012.

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

Irelands Promissory Note Transaction Is Credit Positive

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

Spains Guarantee of Regions Debt Would Be Credit Positive

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

Drop in Spanish Mortgage Lending Erodes Covered Bond Protection

Top 10 Spanish Mortgage Lenders (Fourth Quarter 2011)

(1) Data as of third-quarter 2011. Source: Moodys

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

Weighted Average Over-Collateralisation of Spanish Issuers

150% 125% 100% 75% 50% 25%

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

UK Committee Urges More Capital at Banks, a Credit Positive

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

Diana Lee Vice President - Senior Credit Officer 1.212.553.4747 diana.lee@moodys.com

Lantheuss New Contract with Ben Venue Laboratories Is Credit Positive

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

Diana Lee Vice President - Senior Credit Officer 1.212.553.4747 diana.lee@moodys.com

Bauschs Plan to Acquire ISTA Pharmaceuticals Is Credit Negative

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

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

Galas Failure to Sell Casinos Is Credit Negative

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

US Law Providing Private Companies Easier Access to Equity Is Credit Positive

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

7.5% 7.0% 6.5% 6.0% 5.5%

Cumulative Revenue Growth (2006-2010)

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

Juan A. Laiseca Segura Associate Analyst 34.91.768.8243 juan.laiseca@moodys.com

Historical EBITDA Margin Evolution

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

Historical Market Share

Source: Spanish Telecom Regulator

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

Sharps Alliance with Hon Hai Will Be Credit Positive

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

MOODYS WEEKLY CREDIT OUTLOOK

NEWS & ANALYSIS

Jetstars Toehold in China Is Credit Positive for Qantas