Embed Size (px)
Citation preview
MOODYS.COM
4 APRIL 2013
NEWS & ANALYSIS Corporates 2 » EPA's Proposed Sulfur Standards Are Credit Negative for US
Refiners » Satmex's Successful Satellite Launch Offers Significant Revenue
Boost » India's Supreme Court Rejects Glivec Patent, a Credit Negative for
Branded Drug Companies » Evraz's Sale of South African Subsidiary Is Credit Positive » Russian Railways' Declining Cargo Volumes Are Credit Negative
Infrastructure 8 » RWE Sells Czech Gas Transmission Network, Reducing Debt
Banks 9 » Banks in LIBOR-Fixing Case Get Credit-Positive Decision in US
Federal Court » Norway Proposes Stricter Capital Requirements, a Credit Positive
for Norwegian Banks and Covered Bonds » China's Banks and Insurers Will Benefit from Tighter Regulation on
Wealth Management Product » Korean Government Plans to Maintain Its Stakes in KDB and IBK, a
Credit Positive for Both » Reduction in Deposit Insurance Premium Is Credit Positive for
Japan's Regional Banks » New Zealand Requirement that Banks Hold More Capital Against
High-LVR Home Loans Is Credit Positive
Insurers 19 » Final Medicare Rates for 2014 Are Credit Positive for Health
Insurers
Sub-sovereigns 21 » Czech Region of Usti Balks at Reimbursing EU Regional Funds, a
Credit Negative
US Public Finance 22 » Kentucky Legislature's 11th Hour Pension Reform Is Credit Positive
for State
Click here for Weekly Market Outlook, our sister publication containing Moody’s Analytics’ review of market activity, financial predictions, and the dates of upcoming economic releases.
NEWS & ANALYSIS Credit implications of current events
2 MOODY’S CREDIT OUTLOOK 4 APRIL 2013
Corporates
EPA’s Proposed Sulfur Standards Are Credit Negative for US Refiners Last Friday, the US Environmental Protection Agency (EPA) introduced its proposed Tier 3 Motor Vehicle Emission and Fuel Standards, which aim to reduce vehicle tailpipe emissions and lower sulfur in gasoline starting in 2017. The proposed rule is credit negative for virtually all independent US refiners, because it would reduce the industry’s cash flows and returns, requiring modifications to three quarters of US refineries. It would also inflate the cost of producing a gallon of fuel in the face of weak gasoline demand.
Still, the estimated compliance costs for Tier 3 appear more manageable than for the Tier 2 standards established in 2000, and should not affect any US refiners’ ratings. Tier 3 would lower sulfur content in gasoline, both domestic and imported, to 10 parts per million (ppm) by 1 January 2017 — a two-thirds reduction from Tier 2 levels. Regulators in Europe and Japan already impose gasoline sulfur caps of 10 ppm.
Refiners can produce gasoline with a range of sulfur levels, as long as their refinery and production averages stay within specified amounts. The EPA expects refiners to either keep the sulfur production cap at 80 ppm at the refinery gate or lower it to 50 ppm. The agency is also evaluating a 20 ppm cap.
Tier 3, like Tier 2 before it, would allow some flexibility for small refiners and those experiencing economic hardship, including a three-year delay for refineries with crude-processing capacity of 75,000 barrels per day or less. The new proposed standards would also include an averaging, banking and trading program to help spread out any necessary investments. Tier 3 does not lower sulfur levels for diesel fuels — one of Tier 2’s costlier components.
Yet Tier 3 would still raise US refiners’ capital spending and operating costs. The EPA estimates that the new sulfur standards, once established, would cost US refiners $2.2 billion, or 0.89 cents per gallon of gasoline. A study by Baker and O’Brien on behalf of the American Petroleum Institute trade association puts the price at about 1.58 cents per gallon (on a basis comparable to the EPA’s analysis).
We expect Tier 3 spending to fall significantly short of the roughly $6.1 billion in capital that US refiners have spent complying with Tier 2, but new sulfur compliance efforts would add to the refiners’ existing costs for renewable fuel standards, such as renewable identification numbers purchases,1 and other potential regulatory compliance costs.
Ultimately, we expect refiners to pass the higher costs on to consumers through higher fuel prices, but higher prices at the pump could further weaken already declining US gasoline demand.
The EPA estimates that 66 of the 111 affected US refineries would have to revamp their existing hydrotreating units to comply with Tier 3. Another 16 would need to add grassroots hydrotreating capacity. The capital costs of that modification could threaten some of the smallest refineries with closure.
1 See US Refiners’ Biofuel Compliance Costs Spike But Longer-Term Effects Appear Manageable, 27 March 2013.
Gretchen French Vice President - Senior Credit Officer +1.212.553.3798 [email protected]
NEWS & ANALYSIS Credit implications of current events
3 MOODY’S CREDIT OUTLOOK 4 APRIL 2013
Capital and operating costs will vary based on each refinery’s configuration and feedstock flexibility. For example, Western Refining Inc. (B1 stable), Alon USA Partners LP (B2 stable) and Calumet Specialty Products Partners, L.P. (B2 positive) have access to, and can process, low-sulfur crude feedstocks.
Complying with Tier 3 rules would disadvantage refiners such as Valero Energy Corporation (Baa2 stable) and Motiva Enterprises LLC (A2 stable), which rely more on heavier, sour crudes. But both companies would benefit from their large-scale refineries’ economies of scale, and their ability to average sulfur reductions across their sizable refining systems.
NEWS & ANALYSIS Credit implications of current events
4 MOODY’S CREDIT OUTLOOK 4 APRIL 2013
Satmex’s Successful Satellite Launch Offers Significant Revenue Boost On 26 March, Satélites Mexicanos, S.A. de C.V. (Satmex, Caa1 negative) said it had successfully launched its new Satmex 8 satellite, a transmitter with 45% more capacity than the earlier Satmex 5. Satmex 8 allows the private communications company to now retire Satmex 5 without compromising cash flow, and can attract new revenue with its higher capacity services to its commercial and government video, data and voice customers, a credit positive for the company.
The launch also gets Satmex over a critical hurdle and appears to end a precarious period for the company. The older satellite’s useful life will expire in October. The company had planned to launch Satmex 8, which had been under construction since mid-2010, in August 2012, but delayed it because of a problem with the launch vehicle.
At the time of the delay, it wasn’t clear when Satmex could launch its new satellite, and losing Satmex 5 without a replacement would have halted about 40% of the company’s consolidated revenues. The delay increased Satmex’s operational and liquidity risk, and threatened to significantly reduce cash flow based on Satmex 5’s short remaining useful life. The delay prompted our one-notch downgrade to Caa1 in December 2012, when we also changed our outlook to negative.
Launching Satmex 8, however, was just the company’s first, albeit most difficult, step toward regaining its credit footing. Satmex must still pass a couple of key tests before it can transfer its Satmex 5 customers to Satmex 8. To achieve full operating capacity, Satmex 8 still needs roughly another month to achieve its proper orbital altitude, complete in-orbit testing and move to the exact longitude that Satmex 5 occupies.
This shift poses some execution risk. For the longer term, Satmex must maintain current strong operating performance, and for a rating upgrade, Satmex 8 must not only operate as expected, but also provide meaningful additional revenues and EBITDA to keep its margins at or above current levels.
The company’s ongoing plans for Satmex 7 and its 2015 launch increase its execution and credit risk. Satmex plans to use Satmex 7 mainly to serve increasing data and video demand in the Americas. Satmex began to build Satmex 7 in early 2012, projecting revenue capacity in line with that of Satmex 8, but at half the cost. Satmex is developing Satmex 7 jointly with Asia Broadcast Satellite (unrated), which will split Satmex’s total program cost roughly in half. Meanwhile, technological improvements after Satmex’s initial construction in mid-2010 will also cut the newer satellite’s costs significantly.
The Satmex 7 project increases Satmex’s debt load at a time when the cash-flow generation capacity of Satmex 8 remains uncertain. But Satmex would enhance its credit position if it can finance its share of Satmex 7 using revenue from Satmex 8, or using third-party credit.
Sandra Beltrán Associate Analyst +52.55.1253.5718 [email protected]
Nymia Almeida Vice President - Senior Analyst +52.55.1253.5707 [email protected]
NEWS & ANALYSIS Credit implications of current events
5 MOODY’S CREDIT OUTLOOK 4 APRIL 2013
India’s Supreme Court Rejects Glivec Patent, a Credit Negative for Branded Drug Companies On 1 April, India’s Supreme Court rejected a patent application from Novartis AG (Aa3 stable) for its cancer drug Glivec on the grounds that the new drug was not sufficiently distinct from an earlier version to warrant patent protection. The landmark ruling by India’s highest court will not have a significant financial effect on Novartis, but it is credit negative for international branded pharmaceutical companies because it indicates that obtaining patent protection in India is likely to be more difficult than in other countries, which will increase the risk of generic competition. However, the decision is unlikely to deter international branded drug companies from further developing in the Indian market, given its growth prospects.
Because more than 95% of patients taking Glivec in India already get the drug for free under Novartis’ patient assistance programme, the financial effects on the company are minimal. In addition, the new patent law India adopted in 2005 contains a grandfathering clause that allows generic copies of drugs launched before 1995, which includes Glivec, to continue to be sold on the market.
However, the court ruling sets a negative precedent for the branded pharmaceutical industry because Glivec has been granted patent protection rights elsewhere in the world, indicating that other branded drug companies may find it challenging to secure patents in India owing to the country’s apparently narrower legal definition of what constitutes a novel, or innovative, product. (The patent on Glivec has been approved in more than 40 countries, including the US, Europe, Japan, Brazil and China). Not securing a patent is likely to lead to a significant reduction in the sales of branded drugs, especially if no generic versions of them are already available in India. Sales in India and other emerging markets are important offsets to the sales declines that pharmaceutical companies face in developed markets from pricing pressure and patent expirations.
The court ruling, which concludes a legal battle that began in 2006, is the latest in a series of setbacks for international branded pharmaceutical companies seeking patent protection in India. Last month, India’s Intellectual Property Appellate board rejected an appeal from Bayer AG (A3 stable), which was fighting a compulsory license2 granted in March 2012 to Natco Pharma (unrated), an Indian generic manufacturer, to sell generic copies of Bayer’s cancer drug Nexavar. The appellate board said Nexavar was not accessible to most Indians because it was too expensive. In November 2012, the appellate board revoked the Roche Holding AG (A1 stable) patent on hepatitis C drug Pegasys, and rejected the AstraZeneca Plc (A1 negative) patent claim on Iressa (gefitinib), citing lack of invention. Pfizer Inc’s (A1 stable) patent on Sutent was also revoked in India during 2012 for similar reasons.
We expect large international pharmaceutical companies to be more cautious about launching their newest drugs in India before obtaining a patent. Currently, India accounts for only a small proportion of large rated pharmaceutical companies’ total sales. For example, Bayer generated sales in the range of €20 million ($25 million) in India in 2012, which is less than 0.5% of its global pharmaceutical sales. However, the country remains an attractive market for drug companies. IMS Health, a provider of health-care information, forecasts that India’s healthcare spending will grow at a compound annual growth rate of 14%-17% during 2012-16, one of the highest growth rates among large emerging markets.
2 The granting of a compulsory license occurs when a government permits another party to produce the patented product or process
without the consent of the patent owner.
Marie Fischer-Sabatie Vice President - Senior Credit Officer +33.1.5330.1056 [email protected]
NEWS & ANALYSIS Credit implications of current events
6 MOODY’S CREDIT OUTLOOK 4 APRIL 2013
Evraz’s Sale of South African Subsidiary Is Credit Positive On 27 March, Russian integrated steel producer Evraz plc (unrated), the parent company of Evraz Group S.A. (Ba3 stable), said it had signed a non-binding term sheet for the proposed sale of its 85% stake in EVRAZ Highveld Steel and Vanadium Limited (EVRAZ Highveld, unrated) to South African black economic empowerment consortium Nemascore (Pty) Ltd. (unrated), for an indicative cash consideration of approximately $320 million.
The planned sale is credit positive for Evraz Group S.A. because it will dispose of margin-dilutive, loss-making operations. Evraz Highveld reported a full-year 2012 pre-tax loss of ZAR898 million (approximately $97 million). In comparison, Evraz Russia and Evraz North America reported first-half 2012 EBITDA of $1.0 billion and $216 million, respectively.
The sale proceeds of around $320 million will also benefit Evraz’s solid cash cushion of around $1.8 billion (at 30 June 2012) and could be used for debt reduction. We estimated Evraz’s adjusted gross debt/EBITDA stood at 3.47x at 30 June 2012.
EVRAZ Highveld has had an indirect and rather limited effect on the company’s ferrovanadium operations because it produced only vanadium slag, which was further processed (mostly by third parties) into ferrovanadium products. Steelmakers consume almost all the ferrovanadium produced, and Russia, China and South Africa account for more than 90% of global production. Evraz will continue to produce ferrovanadium through its subsidiaries in Russia, South Africa and the Czech Republic, which are profitable and almost fully utilised: ferrovanadium production in 2012 rose 15% from a year earlier. Evraz will continue its operations in South Africa through its Vametco plant, which processes vanadium slag and vanadium-rich ore into final products.
Exiting South Africa will reduce Evraz’s exposure to recently heightened event risk, which is also credit positive. Last year, a strike over scheduling changes disrupted operations for several weeks in July and August and contributed to an 18% output decline in Evraz Highveld’s steel products and a 21% decline in vanadium slag output. Mining companies are particularly vulnerable to wage increases because wage costs can, in some cases, be more than 50% of total costs in their South African operations.3
Finally, this transaction shows the company’s commitment to continue disposing of non-core or non-performing assets to focus on its major steel markets in Russia and North America. Steel sales in Africa only generated about 3% of Evraz’s total revenues in the first half of 2012. At the end of last year, Evraz sold its cargo transportation railway operator Evraztrans to Russian private rail operator NefteTransService (unrated) for about $300 million, which also built up the company’s liquidity position.
3 See Lonmin Wage Increase Is Likely to Reduce Profits at South African Mines, 24 September 2012.
Denis Perevezentsev Vice president - Senior Analyst +7.495.228.6064 [email protected]
NEWS & ANALYSIS Credit implications of current events
7 MOODY’S CREDIT OUTLOOK 4 APRIL 2013
Russian Railways’ Declining Cargo Volumes Are Credit Negative Last Monday, Russian Railways Joint Stock Company (Baa1 stable), the Russian rail monopoly, reported a 2.9% year-on-year decline in cargo transportation volumes for March, the fourth consecutive month that freight volumes declined.4 The continuing decline is credit negative for Russian Railways because it will constrain revenue and earnings growth, which, as rising capex increases debt, is likely to increase its leverage in 2013.
Given Russian Railways’ plan to raise RUB200 billion ($6.7 billion) of debt this year, half of which we expect the company to use to refinance existing debt and the rest mainly to finance capex, its leverage and interest coverage metrics will weaken. The company plans to raise RUB100 billion ($3.3 billion) of the new debt in the form of CPI-linked domestic infrastructure bonds with maturities as long as 30 years, to be purchased by Russia’s State Pension Fund through Vnesheconombank (Baa1 stable).
Against this backdrop, even with the market downturn we expect Russian Railways’ adjusted debt/EBITDA to remain below 2.5x and EBIT interest coverage to be above 3.0x this year (compared with 1.3x and 5.0x, respectively, as of June 2012), which are the thresholds for its baseline credit assessment of baa3. However, any decrease in earnings will raise leverage and weaken interest coverage metrics.
Russian Railways derives 75% of its revenues from freight transportation. Two key factors drive revenue and earnings growth: rises in cargo transportation volumes and freight transportation tariffs. The tariffs are composed of infrastructure operating services, locomotive traction and railcar operating services. The first two components, which generate two thirds of the group’s consolidated revenue, are regulated and were increased by 7% for 2013. Consequently, cargo volumes are the main variable that affects the group’s revenue growth.
In response to deteriorating market conditions, Russian Railways intends to implement a RUB127 billion ($4.2 billion) three-year cost-cutting programme that should support its earnings. We expect this programme to be able to offset, or at least mitigate, the market downturn’s negative effects. However, we think the group’s ability to increase earnings is constrained by its aging assets and social mandate, which are suppressing margins.
4 Year-on-year volumes fell 3.7% in December 2012, 6.2% in January 2013 and 3.2% in February 2013 (although in February the
decline was a result of high base, because in 2012 the month included 29 rather than 28 days).
Artem Frolov Assistant Vice President - Analyst +7.495.228.6110 [email protected]
NEWS & ANALYSIS Credit implications of current events
8 MOODY’S CREDIT OUTLOOK 4 APRIL 2013
Infrastructure
RWE Sells Czech Gas Transmission Network, Reducing Debt Last Thursday, RWE AG (A3 negative), the giant European power group, agreed to sell its Czech gas transmission company, NET4GAS s.r.o. (unrated), to a consortium of infrastructure investors for €1.6 billion. The deal will reduce RWE’s net financial debt, which was approximately €13.1 billion at the end of December 2012, by roughly 12%, a credit positive.
The high realized enterprise value of around 9x EBITDA implies that RWE achieved a good price on the sale of NET4GAS. The deal, which the company expects to close in the second half of 2013, follows aggregate asset disposals of €2.1 billion by RWE in 2012,5 and is an important part of the company’s efforts to reinforce its capital base. The sale will reduce RWE’s leverage ratio by approximately 0.2x, a positive step towards its target of cutting the ratio to 3.0x from 3.5x.
RWE’s progress on asset disposals is credit positive because it reduces its leverage as the company faces negative earnings pressure. Like other European utilities, lower electricity prices and narrower margins on gas-fired generation will likely reduce RWE’s cash flows from power generation in 2013 versus 2012. In addition, RWE, like other nuclear power producers in Germany, is required to pay a nuclear fuel rod tax that we estimate costs RWE €400 million a year.
The acquiring consortium comprises German insurer Allianz SE (Aa3 stable) and Canadian infrastructure fund Borealis Infrastructure (unrated). The transaction illustrates the ongoing appeal of European regulated assets to specialist infrastructure investors, and follows Total S.A.’s (Aa1 negative) sale in February of TIGF SA (A3 review for downgrade), the French gas transmission and storage company, for €2.4 billion.
5 See E.ON and RWE Sell UK Nuclear Joint Venture and Reduce Debt, a Credit Positive, Credit Outlook, 1 November 2012.
Niel Bisset Senior Vice President +44.20.7772.5344 [email protected]
NEWS & ANALYSIS Credit implications of current events
9 MOODY’S CREDIT OUTLOOK 4 APRIL 2013
Banks
Banks in LIBOR-Fixing Case Get Credit-Positive Decision in US Federal Court Last Friday, Judge Naomi Reice Buchwald of the US District Court for the Southern District of New York dismissed most of the claims filed by private plaintiffs against a number of large US and foreign banks accused of colluding to depress the London Interbank Offered Rates (LIBOR). This ruling is credit positive for the 18 banks that submitted interest rate estimates to the British Bankers Association (BBA) for its US dollar LIBOR rate setting, because the dismissed claims include those based on US antitrust and Racketeer Influenced and Corrupt Organizations (RICO) laws, both of which could have resulted in awards of treble damages and attorneys’ fees.
Starting in mid-2011, after UBS AG (A2 stable, C-/baa2 stable)6 disclosed that it had received subpoenas from the US Department of Justice, the US Securities and Exchange Commission (SEC) and the US Commodity Futures Trading Commission (CFTC), numerous class-action lawsuits seeking billions of dollars in damages were filed across the US by individuals and organizations who claimed that they had been harmed by the suppression of LIBOR. These lawsuits were consolidated for pre-trial proceedings in the Southern District of New York. Last Friday’s ruling came on a motion to dismiss that the banks had filed in June 2012.
The court dismissed the antitrust suits because it found that the plaintiffs did not plausibly allege that their injury was caused by decreased competition among the panel banks. The court concluded that the process of setting LIBOR was never intended to be competitive, so even if the panel banks colluded to submit artificially low estimates of their borrowing cost to the BBA, the plaintiffs’ injury was not caused by harm to competition in the market for LIBOR-based financial instruments.
The RICO claim was dismissed because the court determined that the Private Securities Litigation Reform Act (PSLRA) prohibits the application of RICO to conduct that could have been the subject of a securities fraud action by the SEC. The court determined that the misrepresentations made by the panel banks to the BBA could have been grounds for such an SEC action, thus prohibiting any RICO claim.
In addition to the antitrust and RICO claims, so-called exchange-based plaintiffs alleged manipulation of Eurodollar futures contracts in violation of the Commodity Exchange Act (CEA). The court found that some of these claims were time-barred by the two-year statute of limitations that starts to run “when the circumstances would suggest to an investor of ordinary intelligence the probability that she has been defrauded.” Here, the court pointed out numerous articles that appeared in The Wall Street Journal and elsewhere in April and May 2008 that should have put investors on “inquiry notice.” While the maximum penalty for market manipulation under the CEA is not as large as those possible under antitrust or RICO, they can be material (i.e., the higher of $1 million, or triple the defendant’s monetary gain).
Judge Buchwald’s ruling has no direct effect on other lawsuits pending outside the New York federal court’s jurisdiction, such as the antitrust suit filed recently by Freddie Mac
6 The bank ratings shown in this report are the bank’s deposit ratings, its standalone bank financial strength ratings/baseline credit
assessments and the corresponding rating outlooks.
(Aaa negative, E+/b2 stable) in Virginia. And while Judge Buchwald found that the plaintiffs’ injuries were not attributable to an antitrust violation,
Teresa Wyszomierski Vice President - Chief Legal Officer Financial Institutions Group +1.212.553.4129 [email protected]
Geoffrey S. Richards Senior Vice President +1.212.553.7802 [email protected]
NEWS & ANALYSIS Credit implications of current events
10 MOODY’S CREDIT OUTLOOK 4 APRIL 2013
she clearly indicated that claims based on fraud and misrepresentation were possible. Many of the panel banks also remain vulnerable to hefty regulatory fines, as only three – Barclays Plc (A3 negative), UBS and The Royal Bank of Scotland Group plc
(Baa1 negative) – have settled so far, with fines ranging between $450 million and $1.5 billion. In addition, plaintiffs may appeal Judge Buchwald’s ruling, although it is not yet clear that any intend to do so. Nevertheless, this ruling clearly improves the banks’ negotiating posture in settlement talks with current and prospective private litigants.
NEWS & ANALYSIS Credit implications of current events
11 MOODY’S CREDIT OUTLOOK 4 APRIL 2013
Norway Proposes Stricter Capital Requirements, a Credit Positive for Norwegian Banks and Covered Bonds On 22 March, the Norwegian Ministry of Finance proposed stricter capital requirements for Norway’s banks. Although Norwegian banks currently have sound credit quality, their loan books are particularly vulnerable to a deterioration in Norway’s export and real estate industries. Thus, the proposal, which comes ahead of the CRD IV framework, is credit positive for Norwegian banks because it would enhance capital buffers against unexpected losses in their loan books. The proposal would also be credit positive for Norwegian covered bonds because higher capital buffers would improve the creditworthiness of banks, which are typically obliged to provide some support to the covered bond issuing companies they own.
The proposal would require banks to maintain a common equity Tier 1 (CET1) ratio of more than 10% starting in July 2014. Systemically important financial institutions (SIFIs), which the Ministry of Finance has not yet identified, would have to comply with a CET1 ratio of more than 11% starting in July 2015 and rising to a minimum of 12% starting in July 2016 (i.e., the four bottom layers in the exhibit below). In addition, the proposal calls for the imposition of a countercyclical buffer of 0.0%-2.5% starting in July 2014.
Norway’s Current and Proposed Common Equity Tier 1 Capital Requirement
Note: Exhibit excludes any additional Pillar II capital add-ons that might be required. (1) Systemic risk buffer increased to 3% starting 1 July 2014. (2) SIFI buffer: 1% starting 1 July 2015, rising to 2% beginning 1 July 2016. (3) Countercyclical buffer of 0.0%-2.5% would be introduced 1 July 2013 and go into effect 1 July 2014. Source: Norwegian Ministry of Finance
These proposed levels are higher and would go into effect sooner than the minimums set by the CRD IV framework, which calls for the application of a 7% CET1 starting in 2019. The levels are similar to those required by Swedish authorities, which require CET1 ratios of 10% in 2013, and rise to 12% in 2015 for the country’s four largest banks.
Norwegian banks have already made good progress in meeting increased capital requirements by strengthening their capital bases with retained earnings and, in some cases, through rights issues. For example, Norway’s largest bank, DNB Bank ASA (A1 stable, C-/baa1 stable),7 announced in its recently
7 The bank ratings shown in this report are the bank’s deposit rating, its standalone bank financial strength rating/baseline credit
assessment and the corresponding rating outlooks.
Minimum common equity Tier 1, 4.5%
Minimum common equity Tier 1, 4.5%
Capital conservation buffer, 2.5%
Capital conservation buffer, 2.5%
Systemic risk buffer (1), 2.0%
Systemic risk buffer (1), 3.0%
SIFI buffer (2), 2.0%
Maximum countercyclical buffer (3), 2.5%
0%
2%
4%
6%
8%
10%
12%
14%
16%
EBA's Minimum - Required by Finanstilsynet since 1 July 2012 Proposed Requirement
Soline Poulain Analyst +44.20.7772.1628 [email protected]
Alexander Zeidler Vice President - Senior Analyst +44.20.7772.8713 [email protected]
NEWS & ANALYSIS Credit implications of current events
12 MOODY’S CREDIT OUTLOOK 4 APRIL 2013
published annual report that it would reduce its dividend payout ratio to 25%-50% of annual profits during 2012-14, versus its long-term target of around 50%, in order to strengthen its capital adequacy. In aggregate, Norwegian banks reported a CET1 ratio of just over 11% at year-end 2012, an improvement of one percentage point over 2011 levels and well above the global average of 8.5%.8
The ministry’s draft plans to increase risk weights that the banks use to determine the capital requirements for residential mortgages complement the legislative proposal on capital requirements. We expect implementation of these draft plans to be credit positive for senior unsecured and covered bonds because it will require banks to hold more capital for residential mortgages.9
8 See European Banks Lag Rest of World in Meeting Basel III Capital Rules, 25 March 2013. 9 See Increased Capital Requirement for Mortgages Is Credit Positive for Norwegian Banks, 11 March 2013.
NEWS & ANALYSIS Credit implications of current events
13 MOODY’S CREDIT OUTLOOK 4 APRIL 2013
China’s Banks and Insurers Will Benefit from Tighter Regulation on Wealth Management Product On 25 March, the China Banking Regulatory Commission tightened regulation of commercial banks’ wealth management product (WMP) business. This new guidance is credit positive for the Chinese banks as it will help to reduce the systemic risk WMPs pose to the banking system and improve the quality of WMPs the banks offer.
Key measures of the new regulation include the following:
» A requirement that banks set up separate accounting books for individual products to provide more transparency. Banks will have to include non-principal guaranteed WMPs that are still outstanding at year-end 2013 and that cannot meet this requirement in their risk-weighted asset calculation. Banks will have to set aside capital for such exposures using the same weight as regular bank loans. (Currently, principal guaranteed WMPs must be recorded on balance sheet regardless of whether banks can set up separate accounting books for them.)
» Caps on WMPs that invest in “non-standardized debt assets,” which, according to the notice, include credit loans, trust loans, acceptance bills, letters of credit, accounts receivables and equity financing with repurchase agreements. The cap is set at the lower of 35% of a bank’s total WMP balance or 4% of its total assets. The notice also requires banks to apply the same underwriting standard for non-standardized debt assets as that applied to regular bank loans.
» A ban on banks’ practice of offering guarantees or repurchase agreements on their WMPs that invest in non-standardized debt assets or equity assets.
» The cap on WMPs investing in non-standardized assets will limit banks’ exposure to the most opaque area in these activities. The prohibition on guarantees or repurchase agreements will shield banks from contingent liabilities arising from investment losses on these products.
The requirement on separate bookkeeping will strengthen banks’ management of these products by reducing potential maturity mismatches and improving the clarity in fund appropriation. Currently, banks sometimes manage funds from different WMPs in a funding pool and do not disclose where the fund for a specific WMP is invested, causing the concerns over misallocation of assets and returns.
These new rules will put the greatest pressure on banks with substantial WMPs invested in non-standardized debts. While most banks do not disclose this breakdown, we believe that banks with loan-to-deposit ratios that are close to the regulatory maximum of 75% have more incentive to offer clients WMPs backed by non-standardized assets as an alternative funding source. One example is China CITIC Bank (Baa2 stable, D/ba2 stable),10 which reported a relatively high loan-to-deposit ratio of 73.6% at year-end 2012 and reported that WMPs invested in loans (non-standardized WMPs) had exceeded 35% of its total WMP balance.
This development is also credit positive for Chinese life insurers, which have seen banks’ higher yielding WMPs undercut their own savings-type life insurance products in recent years. The new rules, by restricting WMPs with risky underlying assets, will generally lower yields banks can offer on their WMPs, thus making insurers’ savings-type life insurance products more competitive. We believe that
10 The ratings shown are China CITIC Bank’s deposit rating, its standalone bank financial strength rating/baseline credit assessment
and the corresponding rating outlooks.
China Life Insurance Co
Katie Chen Analyst +86.10.6319.6569 [email protected]
Sally Yim Vice President - Senior Credit Officer +852.3758.1450 [email protected]
NEWS & ANALYSIS Credit implications of current events
14 MOODY’S CREDIT OUTLOOK 4 APRIL 2013
Ltd
We recognize that these policy actions may reduce banks’ fee income and raise rollover risks for some current WMP users, especially those that rely on non-standardized debt assets. However, we believe these risks are outweighed by the improved transparency and discipline that will come with these new rules.
(financial strength A1 positive), China Pacific Life Insurance Co Ltd (unrated) and New China Life Insurance Co Ltd (unrated) will benefit most given their reliance on bancassurance channels.
NEWS & ANALYSIS Credit implications of current events
15 MOODY’S CREDIT OUTLOOK 4 APRIL 2013
Korean Government Plans to Maintain Its Stakes in KDB and IBK, a Credit Positive for Both Last Friday, Korea’s Ministry of Strategy and Finance (MoSF) announced that the government, in its 2013 supplementary budget proposal, would drop its plan to privatize Korea Development Bank (KDB, Aa3 negative, D/ba2 stable).11 The MoSF also said the government would now maintain at least a 50% stake in Industrial Bank of Korea (IBK, Aa3 stable, D+/baa3 stable).
These announcements are credit positive for KDB and IBK, both public policy banks, because they confirm the new government’s support of the two banks. They also reverse the previous government’s effort to privatize KDB and reduce its ownership in IBK to less than 50%, which, if it had been implemented, would have pointed to a decline in government support.
As a result of these plans, the government now expects 2013 fiscal revenue to drop by KRW6 trillion, the amount it originally forecast the sales of the government-owned shares in KDB and IBK would generate.
KDB’s depositors will especially benefit from the now-cancelled privatization plan because it means that their deposits will continue to receive pari passu treatment relative to KDB’s debt in terms of government guarantees. This is because the government, under Article 18-2 of the KDB Act,12 would have had to extend explicit guarantees to KDB’s debt in a privatization scenario, thus subordinating KDB’s deposits.
The MoSF’s announcement is also credit positive for other Korean commercial banks because it means there is less risk that KDB will become an aggressive competitor in the commercial banking space. As a wholly owned government policy bank armed with a sizable balance sheet, KDB enjoys low funding costs in the wholesale funding markets, and now has less incentive to gather retail deposits than it would if it were private. KDB in recent years has made an aggressive push to attract retail deposits with products such as KDB Direct accounts, which offer higher deposit rates, in anticipation of going private. This push has put funding and margin pressure on other banks.13
The announcement illustrates that the two policy banks remain important components of the new government’s agenda, particularly as it relates to supporting troubled small and midsize enterprises (SMEs). KDB is a public policy bank whose objective is to supply financing to expedite the development and expansion of the national economy in the country’s major industries, such as manufacturing, electric power, shipping, shipbuilding, iron and steel production. IBK specializes in financing SMEs.
11 The bank ratings shown in this report are the bank’s deposit rating, its standalone bank financial strength rating/baseline credit
assessment and the corresponding rating outlooks. 12 Article 18-2 (1) and (2) of the KDB Act state that the government, at the point of its initial ownership disposal, will provide a
guarantee within a limit approved by the National Assembly for any outstanding eligible debt, including foreign currency bonds and borrowings with original maturities of one year or more at issue.
13 See KDB’s Higher Deposit Rate Is Credit Negative for Other Korean Banks, 16 July 2012.
Hyun Hee Park Analyst +852.3758.1514 [email protected]
NEWS & ANALYSIS Credit implications of current events
16 MOODY’S CREDIT OUTLOOK 4 APRIL 2013
Reduction in Deposit Insurance Premium Is Credit Positive for Japan’s Regional Banks On 1 April, the Deposit Insurance Corporation of Japan (DICJ) lowered deposit insurance premium rates to 0.070% from 0.084%, and refunded ¥120 billion of excess premiums that Japanese banks paid in fiscal 2012. The refund amount equals 4.8% of Japanese banks’ aggregate net income of fiscal 2011, according to the Japanese Bankers Association. This is credit positive for Japanese banks, particularly regional banks, because it will reduce their marginal cost of taking deposits and support their deposit franchises.
Regional banks generally suffer from very narrow, or even negative, lending margins and lack of lending opportunities. The average funding costs as of the end of September 2012 for top-tier regional banks was 1.11%, while for second-tier regional banks it was 1.31%. That compares with 0.81% for city banks, according to the Japanese Bankers Association. Consequently, the 1.4-basis-point uniform reduction on deposit costs will have a proportionately greater effect on regional banks, particularly the smaller ones. The DICJ decided in fiscal 2012 to reduce the premium because there were no bank failures, the sector appears to have stabilized and its reserve fund most recently reported a surplus of ¥420.5 billion.
This is the first reduction in deposit insurance premium rate since the DICJ increased it to 0.084% from 0.012% in 1996. In the era of financial institution resolutions that followed, the DICJ’s reserve fund once reported a deficit of ¥4 trillion in 2002. However, since 2012 there has been no incident that required the fund’s assistance.
Ayumi Ashizawa Associate Analyst +81.3.5408.4015 [email protected]
NEWS & ANALYSIS Credit implications of current events
17 MOODY’S CREDIT OUTLOOK 4 APRIL 2013
New Zealand Requirement that Banks Hold More Capital Against High-LVR Home Loans Is Credit Positive On 26 March, the Reserve Bank of New Zealand (RBNZ) released a consultation paper proposing to raise banks’ capital requirements for housing loans with high loan-to-value ratios (LVRs), using the “internal models” approach to calculate regulatory capital. The proposal is credit positive for New Zealand’s four major banks because it will strengthen their capital buffers to high-LVR lending and improve their underwriting of mortgage loans.
New Zealand’s four major banks, which make up approximately 84% of total system loans, would be the only ones affected by this proposal. The banks are ASB Bank Limited (Aa3 stable, C+/a2 stable),14 ANZ Bank New Zealand Limited (Aa3 stable, C/a3 stable), Bank of New Zealand (Aa3 stable, C/a3 stable) and Westpac New Zealand Limited (Aa3 stable, C/a3 stable).
The proposal, on which the RBNZ will be accepting market comments until 16 April before finalizing it, would add to these banks’ already strong capital buffers. The RBNZ estimates that the regulatory capital these banks hold for all housing loans will, on average, increase by 14% to 23%, based on a range of scenarios with differing correlation assumptions. Tier 1 capital ratios among these banks already averaged a high 11.6% at the end of December 2012 and will likely improve further as a result, thereby strengthening banks’ ability to absorb asset quality shocks.
Among the major banks, Bank of New Zealand will be least affected by the proposals because it has the lowest proportion of residential mortgage with LVRs of more than 80%, as shown in Exhibit 1 below. In contrast, ANZ Bank New Zealand, ASB Bank and Westpac New Zealand will need to raise proportionately more capital to maintain their current capital ratios. The more stringent capital requirements will tighten the banks’ underwriting criteria because the higher capital requirements discourage banks from lending at higher LVRs. On average, 20% of the major banks’ residential mortgages have a LVR of greater than 80% (see Exhibit 1).
EXHIBIT 1
Major New Zealand Banks’ Residential Mortgage Loan-to-Value Ratios
0% - 59% 60% - 69% 70% - 79% 80% - 89% > 90%
ANZ Bank New Zealand 39% 15% 23% 14% 9%
ASB Bank 31% 19% 30% 13% 8%
Bank of New Zealand 34% 17% 34% 7% 8%
Westpac New Zealand 42% 16% 21% 14% 7%
Average 37% 17% 26% 12% 8%
Source: Bank general disclosure statements, data at 31 December 2012.
14 The bank ratings shown in this report are the bank’s deposit rating, its standalone bank financial strength rating/baseline credit
assessment and the corresponding rating outlooks.
Daniel Yu Analyst +61.2.9270.8198 [email protected]
NEWS & ANALYSIS Credit implications of current events
18 MOODY’S CREDIT OUTLOOK 4 APRIL 2013
We also expect the higher capital requirements to drive up the cost of mortgage lending and push up new mortgage rates. This will help reduce the threat of New Zealand’s property market overheating (see Exhibit 2). Current record house prices underpin the RBNZ’s call for higher risk weights because it supports the argument that that banks should assume in their internal models a higher correlation to New Zealand’s housing loan losses, particularly among high-LVR loans, than the Basel framework. The proposal echoes another consultation paper that the RBNZ released on 4 March, which outlined a number of macro-prudential tools to be used during times of excessive credit growth, to curb rapid asset price growth.15
EXHIBIT 2
New Zealand’s Monthly Housing Price Index
Source e: Real Estate Institute of New Zealand
15 See New Zealand Proposals to Curb Credit Growth Are Credit Positive for Banks, 4 March 2013.
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Jan-
1992
Jun-
1992
Nov
-199
2Ap
r-19
93Se
p-19
93Fe
b-19
94Ju
l-199
4D
ec-1
994
May
-199
5O
ct-1
995
Mar
-199
6Au
g-19
96Ja
n-19
97Ju
n-19
97N
ov-1
997
Apr-
1998
Sep-
1998
Feb-
1999
Jul-1
999
Dec
-199
9M
ay-2
000
Oct
-200
0M
ar-2
001
Aug-
2001
Jan-
2002
Jun-
2002
Nov
-200
2Ap
r-20
03Se
p-20
03Fe
b-20
04Ju
l-200
4D
ec-2
004
May
-200
5O
ct-2
005
Mar
-200
6Au
g-20
06Ja
n-20
07Ju
n-20
07N
ov-2
007
Apr-
2008
Sep-
2008
Feb-
2009
Jul-2
009
Dec
-200
9M
ay-2
010
Oct
-201
0M
ar-2
011
Aug-
2011
Jan-
2012
Jun-
2012
Nov
-201
2
Inde
x (J
anua
ry 1
992
= 10
00)
NEWS & ANALYSIS Credit implications of current events
19 MOODY’S CREDIT OUTLOOK 4 APRIL 2013
Insurers
Final Medicare Rates for 2014 Are Credit Positive for Health Insurers Last Monday, the Centers for Medicare and Medicaid Services (CMS) issued its final payment and policy guidelines for 2014 Medicare Advantage (MA) plans. The announcement revised and reversed the agency’s 15 February preliminary assessment, which indicated that there would be a sizable reimbursement reduction for health insurers in 2014.
From a financial and business perspective, the development is an obvious credit positive for insurers that now expect to be able to offer Medicare Advantage plans to seniors in 2014 without sizable reductions in benefits or premium increases (see exhibit for Medicare Advantage membership by insurer). In addition, the sector’s ability to successfully lobby for these revisions with bipartisan congressional support is an additional credit positive development, especially for the future of the Medicare Advantage product.
While CMS does not include an official estimate for the overall percentage change in reimbursement rates for insurers, the document noted that two key drivers in the formula used to develop reimbursement rates had been revised from their preliminary announcement.
Specifically, the CMS estimated the national per capita MA reimbursement growth percentage for 2014 had been revised to reflect a 2.96% increase, versus an earlier estimate of a 2.3% decline. In addition, CMS reported that the percent increase in the national Fee for Service (FFS) growth percentage for 2014 will be 3.53%, compared with a preliminary estimate of a 2.1% decrease.
Under the Affordable Care Act (ACA), Medicare Advantage rates are determined by a formula that involves blending two key rates that rise or fall by these growth percentages. Other factors and changes from year to year further complicate the final result, which differs for each county in the US. Our previous assessment of the factors contained in the preliminary announcement was for a decline in reimbursement rates of approximately 5%. Based on the revised growth percentages and comments by Humana Inc. (Baa3 stable), and recognizing that there will be variation in rates by geographic area, we expect overall 2014 reimbursement rates to be on par with 2013 rates. Although this result still presents challenges for insurers, as they must continue to contend with increasing medical costs while still providing an attractive and affordable product to seniors with little or no change in the amount received from the federal government, the improvement from the preliminary CMS announcement is significant.
The events that led to the revision by CMS are also noteworthy. Since the February preliminary announcement, the health insurance sector has lobbied the agency to change a key assumption in its determination of the growth percentages involving what has become to be known as the “doc fix.” This refers to Congress’ annual practice of overriding the Sustainable Growth Rate (SGR) formula and not implementing significant reductions (25% for 2014) to Medicare physician payment rates. The preliminary rates from CMS had assumed that Congress would implement the cuts in 2014.
It appears that the lobbying effort, which included signed letters from members of Congress from both parties, was successful. In the final announcement letter, CMS states that it acknowledged and accepted the comments it received and changed its methodology to incorporate “a best estimate of what CMS believes actually will occur to the physician fee schedule,” revising its assumption to a 0% change for 2014. The significant positive credit development we see from this effort is the success of the sector to influence a major change in policy and the bipartisan acknowledgement by members of Congress of the importance of
Steve Zaharuk Senior Vice President +1.212.553.1634 [email protected]
NEWS & ANALYSIS Credit implications of current events
20 MOODY’S CREDIT OUTLOOK 4 APRIL 2013
maintaining Medicare Advantage as a viable product. The exhibit below provides MA enrollment for the health insurers we rate, as well as total national MA enrollment.
Medicare Advantage Enrollment - January 2013
Company Insurance Financial Strength Rating of Lead
Insurance Operating Subsidiary Medicare Advantage Membership as
of 11 January 2013
UnitedHealth Group Inc. A1 negative 3,037,459
Humana Inc. A3 stable 2,422,871
Aetna Inc. A1 review for downgrade 627,715
WellPoint Inc. (incl. Amerigroup) A2 stable 611,100
CIGNA Corporation A2 stable 442,334
Highmark Inc. Baa1 review for downgrade 344,271
Coventry Health Care, Inc. A3 review for upgrade 306,989
Wellcare Health Plans, Inc. Baa3 stable 250,983
Health Net, Inc. Baa3 stable 231,389
MMM Holdings, Inc. Ba2 stable 228,080
EmbelmHealth, Inc. Baa3 stable 180,926
Medical Card System, Inc. B3 review for downgrade 120,140
Group Health Cooperative Baa2 stable 83,331
Centene Corporation Baa2 negative 5,077
Health Care Service Corporation A1 stable 4,931
Others
5,811,500
All Insurers Nationally
14,709,096
Source: Centers for Medicare and Medicaid Services
NEWS & ANALYSIS Credit implications of current events
21 MOODY’S CREDIT OUTLOOK 4 APRIL 2013
Sub-sovereigns
Czech Region of Usti Balks at Reimbursing EU Regional Funds, a Credit Negative On 25 March, the Czech Region of Usti (Aa1.cz stable) voted against reimbursing CZK1.8 billion (€70 million, or 15% of region’s operating revenue) to the European Union Regional Cohesion Council (RCC). The European Commission (EC) requested reimbursement after it identified numerous flaws and revisions in investment projects that the RCC financed. The refusal to reimburse the RCC is credit negative for Usti. Failure to comply with the European Union (EU) resolution will compel the EU to freeze all capital funding coming from the RCC’s budget, which curbs Usti’s capital spending, exerts more pressure on the region’s indebtedness and ties up its budget.
The EC will halt the remaining CZK4.6 billion (€179 million) of available funds already earmarked for the region for the years 2013-15, limiting the region’s major capex funding. Between 2010 and 2012, Usti received more than CZK2 billion (€78 million) in refunds covering approximately one third of its capital spending over the same period. Moreover, the region’s infrastructure lags EU standards and the need for investment is high. If the region wants to meet its investment plan without RCC’s funding, its indebtedness will almost double to 30% of operating revenue by 2015 from 17% in 2012.
The region currently utilizes, among others, a revolving facility of CZK800 million (€31 million, or 40% of its total debt in 2012) that assists in pre-funding its capital projects within the RCC’s scope. The principal repayment of this revolving facility relies on capital reimbursements coming from the RCC, without which the revolving facility will be converted into a medium- or long-term loan, which would be then repaid from region’s weakening operating surpluses.
Readjusting the region’s rigid budgetary structure to the new maturity profile of its loan portfolio is likely to be difficult. Czech regions have limited discretion over their revenues and expenditure. In the case of Usti, more than 96% of its operating revenues stem from transfers or shared taxes collected on the national level. The same rigidity applies to the region’s expenditures, where 73% of its operating expenditure was matched by central government subsidies in 2012.
If the region wants to avoid imminent budgetary pressures, the corrective reimbursement has to be paid. The current heated political debate between the Czech Ministry of Finance and Usti’s representatives does not point to a swift solution. The ministry offered a CZK1.8 billion low interest loan maturing in 2020 to the region. Although the loan would alleviate the pressures in Usti’s capital budget, the CZK225 million (€9 million) in annual repayments would double the region’s current regular debt repayments and likewise be a credit negative.
Ivan Kuvík Associate Analyst +420.22.166.6321 [email protected]
Massimo Visconti Vice President - Senior Credit Officer +39.02.9148.1124 [email protected]
NEWS & ANALYSIS Credit implications of current events
22 MOODY’S CREDIT OUTLOOK 4 APRIL 2013
US Public Finance
Kentucky Legislature’s 11th Hour Pension Reform Is Credit Positive for State On 26 March, the last day of its 2013 regular legislative session, the Kentucky General Assembly passed landmark pension reform to stabilize the state’s pension system after protracted debate. The measure is credit positive for the Commonwealth of Kentucky (Aa2 negative). The measure now goes for signature to Governor Steven Beshear, who sponsored the reform.
Kentucky currently has one of the lowest funded retirement systems in the country, with funded levels of 54.5% for the Kentucky Teachers’ Retirement System (KTRS) and 30.2% for the Kentucky Employees Retirement System (KERS) as of 30 June 2012. The combined unfunded liability is more than $18.7 billion and 11.4% of gross state product, the sixth highest of any state.
The extensive pension reform legislation uses a variety of methods to reduce long-term costs, including replacing Kentucky’s defined benefit plan with a defined contribution plan for all state and local employees hired after 2013. The new law also requires the General Assembly to fully fund the actuarially required annual pension contribution and creates an annual revenue stream of almost $100 million to do so.
Kentucky’s pension funding problems reflect decades of chronic underfunding, extensive early retirement incentives and lackluster investment returns exacerbated by poorly structured reforms enacted in 2008. The 2008 reforms gradually increased the state’s pension contribution levels, but adopted a schedule that fails to reach the actuarially required contribution until 2025. The 2008 reform proved insufficient to keep the liability from growing even though it reduced benefits for new hires, lengthened the service period to qualify for benefits, limited annual cost of living and sick leave adjustments and eliminated pension double-dipping for retirees who return to work.
The newly adopted bills, which only affect KERS, are based on recommendations of the bipartisan pension task force the legislature created in 2012. The legislation has two key components. First, it creates a defined contribution plan for new employees hired in 2014 and later. Dubbed the “hybrid cash balance plan” plan, it establishes employee accounts funded with employee and employer contributions. The accounts are guaranteed a 4% annual return, and 75% of returns above 4%. Upon retirement, employees can purchase an annuity based on the value of their accounts or receive a lump sum of the employee and employer contributions. Employees with fewer than five years of employment will receive only their own contributions. The hybrid plan for new employees will not be structured as an inviolable contract and the General Assembly reserves the right to amend, suspend or reduce benefits in the future.
The pension measure also requires the General Assembly to fully fund actuarially required contributions to the pension system beginning in fiscal 2015. The revenue stream to achieve this is largely created through measures such as a $10 reduction in the personal income tax credit, increased revenue derived from federal tax law changes and enhancements to tax collections, which the General Assembly expects to result in almost $100 million annually for pension funding. Other participants in the plan will also be required to increase contributions from their own budgets.
One compromise on the task force’s original recommendations permits annual cost of living adjustments of 1.5% for current participants, but only if the General Assembly is able to fund it in the year it is provided or there is a funding surplus.
The legislation also aims to improve transparency and governance in Kentucky’s pension system by establishing a pension oversight board.
Lisa Heller Vice President - Senior Analyst +1.212.553.7812 [email protected]
Andrew Nowicki Associate Analyst +1.212.553.2846 [email protected]
MOODYS.COM
Report: 151816
© 2013 Moody’s Investors Service, Inc. and/or its licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. (“MIS”) AND ITS AFFILIATES ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY’S (“MOODY’S PUBLICATIONS”) MAY INCLUDE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY’S OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND MOODY’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY’S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.
ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.
All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall MOODY’S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY’S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY’S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained herein must make its own study and evaluation of each security it may consider purchasing, holding or selling.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.
MIS, a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Shareholder Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”
For Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail clients. It would be dangerous for retail clients to make any investment decision based on MOODY’S credit rating. If in doubt you should contact your financial or other professional adviser.
EDITORS PRODUCTION ASSOCIATE News & Analysis: Elisa Herr and Jay Sherman Alisa Llorens
