MOODYS.COM

10 OCTOBER 2013

NEWS & ANALYSIS Corporates 2

» Japan Airlines’ Airbus Order Is Credit Positive for EADS, Credit Negative for Boeing

» Finmeccanica’s Planned Sale of Ansaldo Energia Is Credit Positive

» Fifth & Pacific Sheds Underperforming Juicy Couture, a Credit Positive

» Abengoa’s Equity Offering Is Credit Positive » Norske Skog’s Sale of Thai Mill Is Credit Positive

Infrastructure 7

» Public Service Enterprise Is Poised to Take Over Long Island’s Electric Utility Operations, a Credit Positive

Banks 8 » UK Regulators’ Proposal to Make Bank Stress Test Results

Public Will Benefit Bank Bondholders » UK Restrictions on Payday Lenders Are Credit Negative » Société Générale Expansion in Russia and Eastern Europe

Would Be Credit Negative

US Public Finance 13 » Federal Government Shutdown Hurts District of Columbia’s

Tax Revenues

CREDIT IN DEPTH US Local Government Pension Liabilities 15

Several large local governments have pension burdens large enough to cause material financial strain with annual pension costs that account for a growing portion of their total cost. Pension burdens of overlapping entities strain the tax bases of some local governments and perennial underfunding of actuarial contribution requirements amplifies pension burdens.

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» Articles in Last Monday’s Credit Outlook 23 » Go to Last Monday’s Credit Outlook

NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 10 OCTOBER 2013

Corporates

Japan Airlines’ Airbus Order Is Credit Positive for EADS, Credit Negative for Boeing On Monday, European Aeronautic Defence & Space Co. EADS’ (A2 stable) Airbus subsidiary announced definitive orders from Japan Airlines International Co. Ltd. (JAL, unrated) for 31 of its forthcoming A350 XWB widebody jets, which are valued at a total of about $10 billion at list prices. Although the airframer is likely selling the planes at a substantial discount, the order is credit positive for EADS and credit negative for The Boeing Company (A2 stable). It is JAL’s first Airbus order and the largest Airbus order to date by any airline in Japan – the second largest Asian air traffic market and one that Boeing has dominated by a wide margin up to this point.

The deal includes a firm order for 18 A350-900s and 13 A350-1000s, as well as options for 25 additional planes, with deliveries scheduled to begin in 2019. The new A350s will replace existing Boeing 777s currently in service at JAL, which operates an all-Boeing large commercial aircraft fleet and smaller, non-Boeing aircraft, but no Airbus planes.

Before this order, Airbus had failed to penetrate the Japanese market in any meaningful way. The JAL order likely gives Airbus some added momentum in its discussions with All Nippon Airways Co. Ltd. (ANA, unrated), JAL’s main competitor. ANA also flies a predominately Boeing fleet and is currently contemplating a sizable order for widebody aircraft.

However, the significant pricing concessions that we believe JAL received may weigh on the contract’s profitability (if not the A350 XWB program more broadly). Given JAL’s status as a longtime Boeing customer, and Boeing’s extensive partnerships with Japanese parts suppliers, we believe Airbus provided the airline with steeper-than-usual discounts to make its switch.

With this latest commitment, Airbus has recorded more than 750 firm orders for its new A350 XWB airframe from 38 customers worldwide. The airplane still requires more than 2,000 hours of flight certification testing before its first delivery, which the company expects will be at the end of next year. The A350 XWB made its important first flight just before the Paris Air Show earlier this summer.

The A350 competes with two important Boeing programs; the 787 Dreamliner and the 777. Boeing’s 777 aircraft has arguably enjoyed a virtual monopoly position in the 300-to-400-plus seat sub-segment of the large commercial airframe market in recent years, and is likely to undergo a significant redesign to remain competitive with the new Airbus offering, particularly the largest A350-1000 variant.

After some extensive initial delays, the 787 program has been mostly well received, although it is still undergoing some well-documented growing pains. As one of the launch customers on the 787 program, JAL was hurt by extensive development delays and the subsequent grounding of the aircraft because of battery-related fire risks. Lenders are also increasingly pushing airlines to diversify their fleets and JAL and ANA each continue to operate two of the least diversified global fleets.

Although still lagging the nearly 1,000 orders to date for the 787, A350 orders have accelerated this year. And notwithstanding our expectation that Boeing will finally definitively launch its long-awaited 777X next month at the Dubai Air Show, the scheduled 2017 entry into service of the A350-1000 XWB – the widely popular 777-300ER’s principal competitor – would still likely precede it by at least a full year.

Russell Solomon Senior Vice President +1.212.553.4301 russell.solomon@moodys.com

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 10 OCTOBER 2013

Finmeccanica’s Planned Sale of Ansaldo Energia Is Credit Positive Last Friday, Finmeccanica SpA (Ba1 negative) said it had agreed to sell its Ansaldo Energia subsidiary to Italian state lender Cassa Depositi & Prestiti SpA’s Fondo Strategico Italiano (FSI) fund for a total transaction value of €777 million. The planned disposition is credit positive for Finmeccanica, which has been trying to divest this and other non-strategic assets to strengthen its balance sheet and better focus on its core aerospace and defense businesses. But given lingering operating inefficiencies and a very difficult operating environment, the asset sales alone will not be enough to fully stabilize Finmeccanica’s credit quality or affect the company’s Ba1 senior unsecured debt rating.

When combined with the company’s sale in August of most of its 15% stake in Avio SpA’s aviation business, the Ansaldo Energia transaction will enable Finmeccanica to achieve its target of €1 billion in asset sales, although only a portion of those proceeds will go to the company.

Under the planned sale, which the company expects to complete in December, Finmeccanica will monetize a 40% stake in Ansaldo Energia. The company will receive an upfront payment of €273 million; a put option on its remaining 15% stake valued at €117 million, plus 6% interest; and an earnout of up to €130 million, depending on the performance of Ansaldo Energia in 2015, 2016 and 2017. The company will also deconsolidate debt of Ansaldo Energia equal to about €220 million on a net basis.

On 19 September, we lowered Finmeccanica’s baseline credit assessment to ba2 and its senior unsecured debt rating to Ba1. The rating action incorporated our expectation that the company would sell Ansaldo Energia, among other assets. But we had expected Finmeccanica to realize net proceeds north of €600 million at closing for a more pronounced reduction in leverage.

Even so, we continue to view the company’s restructuring program as being more germane to the company’s fundamental credit quality. Although Finmeccanica has made some progress on this front, we expect that operational improvements will continue to come at a slow pace. Much of the gains were to have come from Finmeccanica’s sale of its problematic Ansaldo Breda rolling stock assets, which are losing €250 million a year and remain a drag on Finmeccanica’s consolidated credit profile.

In its announcement of the Ansaldo Energia transaction, Finmeccanica also said it had signed an agreement governing prospective investment by FSI in Finmeccanica’s “railway subsidiaries,” albeit at a minority-interest level and with an industrial partner. We suspect that Finmeccanica will have to keep some of the “bad” assets associated with underperforming contracts that it has been trying to unload, and sell “good” assets, such as its 40% investment in the profitable rail-signaling business of Ansaldo STS, as part of a package to extricate itself from these non-core railway assets. This will likely also occur over time, rather than all at once.

As the company moves forward with its restructuring, asset sales and ensuing debt paydowns will yield only a temporary deleveraging boost. For instance, the loss of Ansaldo Energia’s earnings stream – which at high single-digit margins on about €700 million of annual revenue, is not insignificant – will temper the degree to which the company will be able to reduce leverage after the sale.

The restructuring program will be a longer-term undertaking, with profitability and cash flow generation improving gradually over many years. We expect more difficult market conditions – characterized by increasing pressure on defense budgets, heightened competition and macroeconomic weakness in the company’s core markets – to persist, further exacerbating company-specific challenges.

Russell Solomon Senior Vice President +1.212.553.4301 russell.solomon@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 10 OCTOBER 2013

Fifth & Pacific Sheds Underperforming Juicy Couture, a Credit Positive On Monday, Fifth & Pacific Companies, Inc. (FNP, B2 stable) said it would sell its unprofitable Juicy Couture brand to Authentic Brands Group for $195 million. The sale is credit positive because it will reduce debt and free FNP to focus on its fastest-growing and most profitable brand, Kate Spade, which markets women’s handbags, accessories and apparel.

Juicy Couture, which accounted for one third of FNP’s $1.5 billion in sales for the fiscal year ended June 2013, reported a 6% decline in 2012 sales and another 11% drop in this year’s first half. It also reported an operating loss of more than $10 million for the most recent 12-month period ended 29 June, and we expect the loss to increase in the second half of this year. Kate Spade and FNP’s other major brand, Lucky Brand, each make up another third of the parent’s sales.

The company will use an as-yet unspecified amount of sale proceeds to reduce debt, which was a relatively high $490 million as of 29 June, with debt/EBITDA of 5.4x. Leverage will therefore improve as absolute debt levels fall and the company no longer needs to fund Juicy Couture’s operating losses. It is unclear how much of the $195 million in proceeds FNP will use to reduce debt, because the company said it faces unspecified costs from the sale, including severance payments, lease termination costs and other transition activities.

Importantly, the sale will free FNP from funding Juicy Couture’s operating losses and provide it with greater capacity to invest in Kate Spade’s growth opportunities, which include expanding into new international markets and smaller related brands such as Jack Spade, its brand for men. Kate Spade continues to show rapid growth, with revenues rising 64% in the first half of 2013, following a 48% increase in 2012. Kate Spade is also highly profitable, with EBITDA margins in the high teens over the past couple of years.

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

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 10 OCTOBER 2013

Abengoa’s Equity Offering Is Credit Positive On Monday, Abengoa S.A. (B2 stable) announced an equity offer of Class B shares in the form of American depositary shares (ADS) that the company expects will generate proceeds of €385 million, or up to €443 million if the underwriters exercise the overallotment option in full. The new equity offering is credit positive because it provides Abengoa, a vertically integrated environmental and energy group, with fresh capital to repay corporate debt maturities and will strengthen the company’s capital base and liquidity. It will also give Abengoa more visibility in the US financial markets, which should lead to a broader investor base.

Pro forma for the equity offering and the expected proceeds from Liberty Interactive LLC’s (Ba3 stable) recent investment in Abengoa’s Solana solar power plant, Abengoa’s reported net corporate leverage (excluding concession-type infrastructure activities, which include the operation of solar power plants, power transmission networks, water desalination and co-generation plants) would likely decline to around 2.5x net debt/EBITDA from 3.2x in June. Reported gross corporate debt/EBITDA would fall to around 6.0x from 6.8x in June. Adjusted consolidated net debt/EBITDA (including the concession activities) would drop to around 7.0x from 8.0x in June. All figures are based on last-12-month corporate EBITDA of €753 million and our adjusted consolidated EBITDA of €1.2 billion for June.

Such credit metrics would be close to our guidelines for a B1 rating. However, an upgrade in Abengoa’s ratings would require that the company maintain these leverage levels for an extended period of time and that it does not use most of the proceeds to fund future growth of its concession portfolio. Moreover, the company would have to reach its target of balanced corporate free cash flow generation in 2013, which we define as corporate EBITDA minus corporate capex (around negative €526 million in 2012), and generate positive corporate free cash flow in 2014.

Pro forma consolidated credit metrics do not consider debt related to projects that were accounted for by the equity method in June 2013 following the adoption of IFRS 10, such as Solana. These projects, including related non-recourse debt, will likely be re-consolidated as they become operational over the next couple of quarters.

Abengoa’s principal shareholder, Inversión Corporate IC, S.A., intends to support the offering. Inversión Corporativa directly and indirectly owns 59.97% of the outstanding Class A shares, which equals 59.20% of the combined voting power.

Kathrin Heitmann Assistant Vice President - Analyst +49.69.70730.789 kathrin.heitmann@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 10 OCTOBER 2013

Norske Skog’s Sale of Thai Mill Is Credit Positive Last Monday, Norske Skogindustrier ASA (Norske Skog, Caa2 negative), a global producer of newsprint and magazine paper, said it had agreed to sell its Singburi mill in Thailand to a Thai industrial group for a total consideration of $33 million. The transaction is credit positive for Norske Skog because it intends to use the disposal proceeds to strengthen its liquidity and reduce its high net debt leverage, factors that outweigh the reduction in the scale and diversity of its operations. Considering that the Thai mill is Norske Skog’s smallest mill in terms of production capacity, we estimate that the negative effect on profitability will be immaterial.

The sale of Norske Skog’s Thai operations is in line with its strategy to secure additional asset disposal proceeds to cover upcoming debt maturities in 2014 and follows a string of similar deals over the past years, most recently the partial sale of its Brazilian mill in June 2013. Asset disposals have focused on Norske Skog’s operations in Latin America and Asia and on high-cost mills in Europe and since 2008 have enabled Norske Skog to generate cash proceeds of NOK6.8 billion ($1.1 billion) that it applies to net debt reduction.

The proceeds from the Thai transaction, together with NOK1.6 billion ($270 million) of cash that Norske Skog had on its balance sheet as of June 2013, should help the group meet debt maturities of NOK1.5 billion ($251 million) over the next 12 months (assuming at least break-even free cash flow generation). Nonetheless, Norske Skog’s liquidity buffer will remain very tight given that it needs some of the cash to run its operations.

Although credit positive, the transaction will not trigger any change in the group’s ratings. This is because of its high leverage, with debt/EBITDA as of June 2013 of more than 10x. Despite a significant reduction in gross debt over the past years, leverage increased as a result of weakening profitability, although part of that is the result of Norske Skog’s smaller size following asset disposals and capacity closures. Most recently, its reported EBITDA declined by about 50% in the first half of 2013 versus last year owing to weak trading conditions for the group’s paper products in its two most important markets of Europe and Australasia. Declining demand, weak pricing power and high input costs make it difficult for Norske Skog and the entire industry to generate positive operating profit, and that lower profit contribution has resulted in weakened cash flow generation.

Norway’s Norske Skog is among the world’s leading newsprint producers with production in Europe, South America, Asia and Australasia. The company also produces magazine paper in Europe. In the last 12 months ended in June, Norske Skog recorded sales of around NOK14.3 billion (approximately $2.4 billion).

Anke Rindermann Vice President - Senior Analyst +49.69.70730.788 anke.rindermann@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 10 OCTOBER 2013

Infrastructure

Public Service Enterprise Is Poised to Take Over Long Island’s Electric Utility Operations, a Credit Positive On 3 October, the Long Island Power Authority’s (LIPA, Baa1 negative) board of trustees approved an amended contract for a subsidiary of Public Service Enterprise Group Incorporated (PSEG, Baa2 stable) to take over utility operations from National Grid USA (Baa1 stable) beginning January 2014.

The agreement is credit positive for both PSEG and LIPA. For PSEG, the agreement provides a stream of stable and predictable revenues and margins, and helps diversify the company’s earnings. For LIPA, we expect the agreement with PSEG to result in improved customer service and satisfaction, which should ultimately enhance its ability to raise rates as needed to support necessary infrastructure investments and maintain or improve financial credit metrics.

The service agreement, which amends the contract that LIPA and PSEG entered into in December 2011, allows PSEG to provide operating, maintenance, budgeting and other services for LIPA’s electric transmission and distribution system. The pact essentially moves management of the daily operations of the system out of the hands of LIPA into those of a highly reputable investor-owned utility, consistent with legislation signed by New York Governor Andrew Cuomo in July 2013. The amended service agreement still needs approval from the US Internal Revenue Service, in part to assure LIPA’s tax-exempt status.

PSEG will execute its service agreement through a newly formed entity, PSEG Long Island, currently under PSEG Energy Holdings L.L.C. (unrated), an intermediate holding company wholly owned by PSEG. In the structure, only a handful of PSEG executives will be associated with PSEG Long Island. Roughly 2,000 employees who currently manage LIPA operations under a contract with National Grid USA will be rehired on 1 January as PSEG Long Island employees. The agreement is effectively structured as a pure servicing structure, so there is little contagion risk, beyond some reputation risks, for PSEG.

LIPA, which is essentially a holding company that relies on contracts to provide services, is likely to see its customer service and satisfaction improve after both were tarnished by Hurricane Irene in 2011 and Superstorm Sandy in 2012. Improved customer satisfaction should help LIPA’s ability to raise rates as needed to support necessary infrastructure investments and maintain or improve financial credit metrics. However, we expect this will only happen over time. More immediately, LIPA’s credit metrics, which reflect among other things its rate-setting practices, are likely to remain weak for its rating category.

Currently, LIPA is working to reduce costs by implementing a refinancing strategy also outlined in the July legislation and in which LIPA will attempt to securitize its debt. The legislation gives LIPA the right to charge customers for any related financing charges, and any interest cost savings should help create headroom for customer bills and moderate any near-term rate increases.

Jim Hempstead Associate Managing Director +1.212.553.4318 james.hempstead@moodys.com

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

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 10 OCTOBER 2013

Banks

UK Regulators’ Proposal to Make Bank Stress Test Results Public Will Benefit Bank Bondholders On 30 September, the Bank of England and the UK Prudential Regulation Authority (PRA), as part of their discussion paper on the proposed framework for stress testing UK banks, proposed to publicly release PRA bank stress test results starting in 2014. Making stress test results public will benefit banks’ bondholders because it will allow them to better assess individual firms’ capital adequacy, compare results against peers and gain insight into the resilience of the UK banking system.

Publicly releasing stress test results would mark a significant shift because currently regulators only discuss stress test results with the banks. This has left investors in the dark about the adequacy of banks’ capital and the extent to which that capital exceeds regulatory requirements. Public disclosure will increase transparency into firms’ sensitivities to various macroeconomic scenarios and the adequacy of their capital to support growth and discretionary bonus and dividend plans.

Public disclosure regarding the regulator’s view of the adequacy and robustness of firms’ capital plans will provide greater transparency about which business and capital plans the PRA will accept or will require to be revised in order to leave the firms adequately capitalised. When such revisions are deemed insufficient, the PRA would likely require banks to take other capital accretive actions, including de-leveraging via asset sales, for example, or a going-concern “bail-in” in extreme cases.

As part of its current Basel II Pillar 2 framework, the PRA conducts stress tests of large UK banks on a firm-by-firm basis as an input to determine each bank’s capital planning buffer. The capital planning buffer reflects the amount of additional capital firms must hold to be able to withstand a severe but plausible stress scenario while remaining above their individual minimum capital guidance. The proposed framework involves the introduction of annual concurrent stress tests of banks, building societies and PRA-designated investment firms. Concurrent stress tests of the systemically important banks will provide investors insight into the resilience and adequacy of capital at the individual bank and system level.

The use of the stress test outputs to determine whether firm-specific PRA buffer assessments are required in excess of their standardised combined buffer requirements under CRD IV will also enable the market to gain greater confidence that, where necessary, idiosyncratic risks will be adequately capitalised.

The PRA proposes beginning the new stress testing process in mid-2014, focusing initially on the largest UK banks and building societies, and expanding to other financial institutions by 2015. Similar to the US Federal Reserve Bank’s stress tests, the PRA will use its results as an input to determine the adequacy of an institutions’ capital against both Financial Policy Committee-designed common scenarios applied across all banks and bespoke scenarios designed by individual banks and approved by the PRA board. The results will also help determine whether a firm’s capital trajectory would support its desired growth as well as dividend and bonus payments under these adverse scenarios. In addition, regulators will review firms’ data submissions and their stress testing outputs to assess the adequacy of firms’ stress testing frameworks, including the extent to which stressed capital planning is integrated with business planning processes.

Laurie Mayers Associate Managing Director +44.20.7772.5582 laurie.mayers@moodys.com

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 10 OCTOBER 2013

UK Restrictions on Payday Lenders Are Credit Negative Last Thursday, the UK’s Financial Conduct Authority (FCA) announced it will increase payday lender requirements effective April 2014, when the FCA assumes responsibility for regulating the sector. The increased restrictions will be credit negative for payday lenders operating in the UK, including Dollar Financial Group, Inc. (B2 positive), CNG Holdings, Inc. (B3 stable), Speedy Group Holdings Corp. (Caa1 stable) and The Cash Store Financial Services Inc. (Caa1 negative), because negative pressure on revenues, asset quality and profits is likely.

The FCA’s payday lender measures will include limiting to two the number of loan rollovers and the number of times that lenders can access a borrower’s bank account for payment, both of which have an implementation date of 1 July 2014. The regulator will also require a borrower affordability assessment before payday lenders can extend a loan and will require that lenders include clear risk warnings on advertisements. In addition, the FCA plans to put in place dedicated supervision and enforcement teams. Firms that break the rules may face significant fines. The FCA opened its proposed rules for comment and will publish final guidance in February 2014.1

As the exhibit below shows, Dollar and CNG have the largest UK exposures and thus will be most affected by the regulatory actions. Although CNG is private and does not disclose UK revenue, publicly held Dollar reported that it generated 37% of its consolidated revenue from UK store-based and Internet consumer lending during the quarter ended in June 2013.

Rated Payday Lenders’ UK Exposure

Company Name Number of UK Stores Total Stores

UK Stores as a Percent of Total

Stores UK Internet

Payday Loans Offered

Dollar Financial Group, Inc. 601 1,507 39% Yes

CNG Holdings, Inc. 641 1,857 34% Yes

Speedy Group Holdings Corp. 25 336 8% Yes

Cash Store Financial 27 535 5% No

Source: Company data as of 30 June 2013

Loan rollover restrictions affect lenders’ ability to charge fees for each subsequent rollover, which negatively affects revenues. According to the UK Office of Fair Trade’s (OFT) March 2013 survey, 50% of payday lenders’ revenues come from loans that are rolled over at least once and 20% of revenues come from loans rolled over four or more times. Thus, rollover restrictions would negatively affect a substantial portion of UK payday lenders’ revenues.

1 See the FCA Press Release, 3 October 2013.

Olga Khodosh Analyst +1.212.553.4468 olga.khodosh@moodys.com

Curt Beaudouin, CFA Vice President - Senior Credit Officer +1.212.553.1474 john.beaudouin@moodys.com

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 10 OCTOBER 2013

Furthermore, limits on rollovers and on the number of times a lender can access a borrower’s bank account for payment would result in increased defaults from borrowers who cannot afford to repay their loans, which negatively affects lenders’ asset quality and profitability. In response to pressure from the OFT, which earlier this year instituted a crackdown on UK payday lending practices targeting the top 50 payday lenders,2 Dollar shifted to a three-rollover limit and as a result reported lower originations and higher loan defaults during the first half of calendar 2013.

Borrower affordability assessment requirements seek to ensure that only customers who can afford a loan receive one. This requirement, along with advertising restrictions, will further limit origination volumes. Borrower affordability assessment guidelines also require additional infrastructure and staff investments from payday lenders operating in the UK. Dollar recently reported that to support regulatory activities, including advisory, audit and compliance costs, it expects to incur additional costs of $10-$15 million, or a 9%-14% increase in corporate expenses, in the fiscal year ending 30 June 2014.

2 See UK Report on Payday Lenders Is Credit Negative for Companies with UK Operations, 11 March 2013.

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 10 OCTOBER 2013

Société Générale Expansion in Russia and Eastern Europe Would Be Credit Negative Last Monday, Société Générale (SG, A2 stable, C-/baa2 stable)3 agreed to buy a 10% stake in JSB Rosbank (Baa3 stable, D/ba2 stable) from Russia’s Bank VTB, JSC (Baa2 stable, D-/ba3 stable), raising its stake to 92.4%, in exchange for SG selling several Russian assets to VTB. The transaction is consistent with comments made by SG CEO Frédéric Oudéa over the past few weeks that the bank was eyeing less developed markets as a source of strategic growth. Although this acquisition will not change SG’s credit exposure to Russia, the potential for similar developments is credit negative for SG because it dilutes the credit strength of the bank’s core French business.

In Eastern Europe and the Commonwealth of Independent States, SG already has significant exposures to the Czech, Romanian and Russian markets, and asset quality in Romania and Russia (which are included in the International Retail division in Exhibit 1) is worse than in SG’s home country of France. In particular, SG’s Romanian business’ poor asset quality resulted in an annualised loan-loss charge of around 430 basis points of loans in the first half of this year. Further, we expect that the credit quality of the Russian4 loan book will deteriorate in coming quarters owing to weakening economic conditions.

EXHIBIT 1

Société Générale’s Cost of Risk by Division Shows Higher Charges in International Retail Banking

Source: Société Générale

In France, SG benefits from a good position in domestic retail banking, as reflected by its 8% market share in lending at the end of 2012. Domestic asset quality remains resilient and we expect that it will stabilize, given the current macroeconomic trends and that the cost of risk has been stable for the past three quarters (see Exhibit 1). Western European exposures are mainly to large corporates that have relatively benign risk profiles.

Anaemic lending growth in SG’s domestic retail market (see Exhibit 2) has forced the bank to look for growth in the group’s international retail activities, which are based in three main regions: Central and Eastern Europe, Russia and, to a lesser extent, Africa. In recent months, management has restated its willingness to target growth in Russia and Eastern Europe. Although SG’s management dismissed

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

and the corresponding rating outlooks. 4 See Russian Banking System Outlook, 7 October 2013.

0

50

100

150

200

250

Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13

Basis

Poi

nts

Société Générale Average French Network International Retail Specialised Financial Services Corporate Investment Banking

Alessandro Roccati Senior Vice President +44.20.7772.1603 alessandro.roccati@moodys.com

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 10 OCTOBER 2013

suggestions that any tie-up would be a precursor to a merger or an acquisition deal with a rival, future growth in the Russian and Eastern European regions will dilute the group’s asset quality.

EXHIBIT 2

Growth Rate of Loans by Credit Institutions to Households and Non-financial Corporates in France

Source: Banque de France

SG’s current lending mix is well-balanced, with France constituting around half the group’s exposures at default, while Western Europe and Eastern European part of the European Union (EU) account for around one quarter, as shown in Exhibit 3. The portion of Central and Eastern Europe that is not part of the EU accounts for about 5% of SG’s exposures.

EXHIBIT 3

Breakdown of Société Générale’s €560 billion of On-Balance-Sheet Exposure at Default at June 2013

Source: Société Générale

0%

2%

4%

6%

8%

10%

12%

14%

2007 2008 2009 2010 2011 2012 Jun-13

France48%

Western Europe18%

EU Eastern Europe8%

Non-EU Eastern Europe5%

North America12%

APAC3%

Latam, Caribbean2%

Africa, Middle East4%

NEWS & ANALYSIS Credit implications of current events

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US Public Finance

Federal Government Shutdown Hurts District of Columbia’s Tax Revenues Since the federal government shut down on 1 October, most federal employees who work in the District of Columbia (DC, Aa2 stable) have been furloughed, federal contract work has subsided and many tourist attractions in DC have closed. The shutdown is credit negative for DC because of the negative effect it has on local sales taxes and to some extent income taxes. In addition, DC does not have the legal authority to pay debt service on certificates of participation (COP) because the shutdown prevented the federal government from approving its fiscal 2014 budget. We do not expect the shutdown to last long enough to jeopardize the COP debt service payment due 1 January 2014.

DC officials expect tax revenues to decline by up to $6 million per week, which is about 0.001% of its annual general fund budget. Sales tax revenues will be most affected by the 208,000 furloughed federal employees, and closure of scores of federal attractions, such as monuments and the Smithsonian museums. Tourism adds more than $6 billion annually to the local economy and sales taxes account for 21% of DC’s revenues, which is less than the 34% coming from income taxes and from property taxes (see Exhibit 1). However, sales tax revenues tend to be very sensitive to swings in economic activity. Sales taxes for the fiscal year that ended 30 September were greater than the prior year, but were lower in the three months before the shutdown, primarily because of federal sequestration.

EXHIBIT 1

District of Columbia’s Sales Tax Revenues Are Most Affected by the Federal Government Shutdown

Source: Office of the District of Columbia Chief Financial Officer

The US House of Representatives last Saturday agreed to pay federal workers for furloughed time, which will mitigate the shutdown’s negative effect on DC’s income tax revenues. However, the reduction in federal contract work and other private-sector employment will affect overall income tax revenues.

Property tax revenues will not be materially affected by the shutdown because they are not sensitive to short economic disruptions. We do not expect the local real estate market to be materially impaired by a brief shutdown.

During the shutdown, DC continues to collect local taxes, which are the sole source of debt service payment on its bonds except for Federal Highway Grant Anticipation Revenue Bonds (GARVEEs).

Income Taxes34%

Sales Taxes21%

Property Taxes34%

Other11%

Nick Samuels Vice President - Senior Credit Officer +1.212.553.7121 nicholas.samuels@moodys.com

NEWS & ANALYSIS Credit implications of current events

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Further, the shutdown does not threaten debt service payments on DC’s general obligation and revenue-secured debt because payment of debt service does not require an enacted budget or federal appropriation (see Exhibit 2). Debt service on the GARVEE bonds will continue be paid because the Federal Highway Administration is open and continues to make grant payments from the Highway Trust Fund.

EXHIBIT 2

District of Columbia Outstanding Debt Most Debt Does Not Require Federal Appropriation

Federal Appropriation

Required to Pay Debt Service? Amount Outstanding

$ Millions Rating

District of Columbia General Obligation and Revenue Bonds

Income Tax Secured Bonds No $3,800 Aa1

General Obligation No $2,295 Aa2

Washington Convention & Sports Authority Revenue Bonds No $653 A1

Ballpark Revenue Bonds No $508 A2,A3

TIF & PILOT bonds No $241 A1

Certificates of Particpation Yes $219 Aa3

Deed Tax Revenue Bonds No $83 A1

Federal Highway Grant Anticipation Revenue Bonds No $79 Aa2

Total $7,878

District of Columbia Water & Sewer Authority

Subordinate Lien Public Utility Revenue Bonds No $1,254 Aa3

Senior Lien Public Utility Revenue Bonds No $514 Aa2

Total $1,768

Note: Data as of 30 September 2012.

Sources: District of Columbia Fiscal 2012 Comprehensive Annual Financial Report and District of Columbia Water and Sewer Authority Fiscal 2012 Comprehensive Annual Financial Report

However, in the unlikely case that the shutdown is not resolved by January, DC would not be authorized to make its 1 January debt service payment on $219 million of COPs. The shutdown prevented the federal government from approving DC’s budget for fiscal 2014, which began 1 October. Budget enactment or a special congressional measure is necessary before DC can pay COP debt service.

DC is using reserves to fund operations during the shutdown, but those funds are dwindling. Since it cannot spend its local tax revenue without congressional budget enactment, DC is trying to preserves those reserves as long as possible. To that end, DC already has delayed $89 million in healthcare provider reimbursements and suspended tax refunds until a congressional appropriation is passed. It has contingency plans to further curtail services if the federal budget stalemate persists. Eleanor Holmes Norton, DC’s delegate in Congress, has petitioned to institute a measure allowing DC to sustain spending on certain services and to pay COP debt service. Similarly, DC’s Mayor Vincent Gray on Tuesday wrote to President Barack Obama, House Speaker John Boehner and Senate Majority Leader Harry Reid to request that DC be exempt from the shutdown. We believe there’s a good chance that such a deal would come to fruition because Congress passed a similar measure during the last federal shutdown in 1995-96.

CREDIT IN DEPTH Detailed analysis of an important topic

15 MOODY’S CREDIT OUTLOOK 10 OCTOBER 2013

Adjusted Pension Liability Measures for 50 Large US Local Governments

Several Local Governments Face Challenging Pension Risks

SUMMARY » Several large local governments have pension burdens large enough to cause material financial strain.

The adjusted net pension liability (ANPL) of Chicago (A3 negative) is 678% of its annual revenue, while Cook County, Illinois’ (A1 negative) is 382%. Twenty-eight other local governments in our top 50 (the 50 local governments with a general obligation rating from us and the largest amount of debt outstanding) have an ANPL that is greater than annual revenue.

» Several top 50 local governments have annual pension costs that account for a formidable and growing portion of their total costs. Four of the top 50 local governments have actuarial contribution requirements in excess of 15% of operating revenues, including Philadelphia (A2 stable), while 17 of the top 50 have actuarial costs that exceed 10% of the operating revenues when we consider cost-sharing plan allocations.

» Pension burdens of overlapping entities strain the tax bases of some local governments. Detroit, Michigan’s (Caa3 review for downgrade) tax base is burdened by high pension and debt liabilities from overlapping entities. Chicago’s tax base also faces pressure from the unfunded pension liabilities of the city and overlapping local governments.

» Perennial underfunding of actuarial contribution requirements amplifies pension burdens. Underfunding pensions can be a deliberate strategy for local governments to temporarily manage budget strains. In fiscal 2011, 33 of the top 50 local governments contributed less than what was actuarially required, taking into account not only single-employer and agent plans, but also exposure to cost-sharing plans where the annual required contribution (ARC) was not fully funded.

» State support for local pensions alleviates the pension burden for some local governments, particularly school districts. In fiscal 2011, the state provided 6%-81% of total pension contributions for 10 local governments in the top 50. Although this state support reduces pension burdens, there is a risk that states will reduce their level of assistance to local governments.

» Widespread pension reform is unlikely to provide municipalities and related entities immediate relief. Legal and political considerations make it difficult to alter benefits for retirees and current employees. Courts in multiple states have blocked efforts to cut accrued benefits. Some states may cut costs by shifting contribution requirements: Ohio has a framework that can shift the burden to retirees and employees.

Tom Aaron Analyst +1.312.706.9967 thomas.aaron@moodys.com

Timothy Blake Managing Director +1.212.553.0849 timothy.blake@moodys.com

Adjusted Net Pension Liability (ANPL) is the difference between the value of a pension plan’s assets and its adjusted liabilities. We adjust reported pension liabilities of US state and local governments by discounting future benefit payments by a bond index rate to calculate the present value of these obligations. We also distribute the liabilities of multiple-employer cost-sharing plans to participating governments based on their pro rata share of contributions.

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16 MOODY’S CREDIT OUTLOOK 10 OCTOBER 2013

Several of the largest local governments have outsize pension liabilities. The pension burden of current and future retirees is significant and growing for many local governments across the US. To assess a local government’s accrued and unfunded pension burden, we compare ANPLs to several different metrics that measure its capacity to pay pension liabilities, including revenues, the full value of its taxable real estate and outstanding debt. The degree of pension burden varies widely across the top 50 US local governments, but there are several outliers with challenging pension liabilities.

Notably, the city of Chicago has the largest pension burden among its peers,5 as measured by its ANPL/revenue ratio. By this measure, Cook County ranks second and the Denver County School District (Aa2 stable) ranks third (see Exhibit 1). Moreover, 30 of the top 50 local governments have ANPL/revenue ratios greater than 100% and seven are greater 300%.

Conversely, there are plenty of local governments in the top 50 with very low pension burdens. For example, the District of Columbia (Aa2 stable) ratio is only 11%, while Wake County, North Carolina’s (Aaa stable) ratio is only 15%.

EXHIBIT 1

Ten Largest and Smallest ANPL to Operating Revenue Ratios Among Top 50 Local Governments

Source: Issuer Comprehensive Annual Financial Reports (CAFRs), Pension Plan CAFRs and Moody’s pension database

5 All ANPL figures in this report cover fiscal 2011 financial reporting only. Our recent rating action for the city of Chicago also

incorporated fiscal 2012 reported and our adjusted pension information.

0% 100% 200% 300% 400% 500% 600% 700%

ChicagoCook County

Denver County School District 1 (Denver County)JacksonvilleLos Angeles

Metro. Water Reclamation District of ChicagoHouston

DallasClark County School District

PhoenixKing County

Westchester CountySuffolk CountyNassau County

Cypress-Fairbanks Independent School DistrictHouston Independent School District

Northside Independent School District (Bexar …Wake County

Mecklenburg CountyDistrict of Columbia

CREDIT IN DEPTH Detailed analysis of an important topic

17 MOODY’S CREDIT OUTLOOK 10 OCTOBER 2013

Comparing issuers’ ANPL to the full value of their taxable real estate (ANPL/full value) is useful for assessing pension burdens because for most local municipalities property taxes are the single largest source of revenue. Taxable value is also a useful proxy measure of total economic wealth. Local governments have limited revenue flexibility compared with states and often resort to raising property tax rates when they need to increase revenues.

Evaluating ANPL/revenue and ANPL/full value paints a more robust picture of pension burdens by measuring issuers’ immediate ability to fund accrued pension liabilities and the amount of taxable resources they could harness in the future. For example, the Metropolitan Water Reclamation District of Chicago (Aa1 negative) ranks among the 10 highest in ANPL/revenue, but compared with most of the top 50 local governments, its ANPL/full value is low (see Exhibit 2). Conversely, the cities of Chicago, Dallas, Texas (Aa1 stable); Houston, Texas (Aa2 stable); and Jacksonville, Florida (Aa1 negative), have among the top 10 highest ANPL/revenue and ANPL/full value ratios.

EXHIBIT 2

Ten Largest and Smallest ANPL to Full Value of Taxable Real Estate Ratios Among Top 50 Local Governments Fiscal 2011 Pension Burdens Exceed 8% of Full Value for Five of the Largest Local Governments

Sources: Issuer Comprehensive Annual Financial Reports (CAFRs), Pension Plan CAFRs, Moody’s pension database, Moody’s MFRA

Twenty-three local governments in the top 50 have ANPL/net direct debt ratios that exceed 100%, which indicates how large local government pension liabilities are and the degree to which they compound a government’s long-term obligations (see Exhibit 3).

0% 5% 10% 15%

ChicagoPhiladelphia

DetroitDetroit Public School District

New York CityDallas

Chicago Public Schools (Cook County)Houston

JacksonvilleColumbus

Westchester CountyNassau County

CharlotteWashington

Metro. Water Reclamation District of …Suffolk County

Mecklenburg CountyLos Angeles CCD

Wake CountyKing County

CREDIT IN DEPTH Detailed analysis of an important topic

18 MOODY’S CREDIT OUTLOOK 10 OCTOBER 2013

EXHIBIT 3

Adjusted Net Pension Liabilities and Net Direct Debt Relative to Full Value of Taxable Real Estate and Revenues for Top 50 Local Governments

Sources: Issuer Comprehensive Annual Financial Reports (CAFRs), Pension Plan CAFRs, Moody’s pension database, Moody’s MFRA

Pension burden of overlapping entities is a factor for some local governments. The level of debt and pension liabilities of overlapping jurisdictions relative to full taxable value indicates the extent that the entire tax base is leveraged. We have calculated the direct and overlapping debt and ANPL of the five largest US cities and the city of Detroit (see Exhibit 4). The data show that Detroit has the most combined debt and pension liabilities as a percentage of full value. Chicago has the largest overlapping pension liabilities, which includes the large unfunded pension liabilities of Cook County, Chicago Public Schools (A3 negative), the Metropolitan Water Reclamation District of Chicago, the Cook County Forest Preserve District (A1 negative) and the Chicago Park District (A1 negative). Chicago and these overlapping local governments have been downgraded recently because of their pension liabilities.

0%

2%

4%

6%

8%

10%

12%

14%

0% 5% 10% 15%

AN

PL /

Full

Val

ue

Net Direct Debt / Full Value

0%

100%

200%

300%

400%

500%

600%

700%

-100% 100% 300% 500%

AN

PL /

Reve

nues

Net Direct Debt / Revenues

CREDIT IN DEPTH Detailed analysis of an important topic

19 MOODY’S CREDIT OUTLOOK 10 OCTOBER 2013

EXHIBIT 4

Overlapping Debt and Pension Liabilities for Six Cities, $ Billions New York Los Angeles Chicago Houston Philadelphia Detroit

General Obligation Rating Aa2 Aa2 A3 Aa2 A2 Caa3

Net Direct Debt $70.3 $3.5 $8.9 $3.3 $4.3 $2.2

Adjusted Net Pension Liability $69.0 $14.6 $28.5 $6.1 $7.3 $2.0

Direct Debt and Pension Sub-total $139.3 $18.1 $37.3 $9.4 $11.6 $4.3

2011 Full Value $793.7 $401.3 $225.6 $141.8 $63.0 $18.9

Direct Debt and Pensions as Percent of Full Value of Taxable Real Estate

18% 5% 17% 7% 18% 23%

Overlapping Debt $0.0 $14.1 $9.9 $6.4 $2.9 $1.9

Overlapping Adjusted Net Pension Liabilities

$0.0 $16.9 $17.4 $1.9 $1.7 $2.5

Overlapping Sub-Total $0.0 $31.0 $27.3 $8.4 $4.6 $4.4

Total Direct and Overlapping Debt and Pensions

$139.3 $49.1 $64.6 $17.8 $16.2 $8.6

Total Direct and Overlapping Debt and Pension as Percent of Full Value of Taxable Real Estate

18% 12% 29% 13% 26% 46%

Notes

1) Philadelphia has implemented a new property assessment system. As a result, the city’s full value is likely to increase considerably. The impact of the reassessment is not incorporated into this report.

2) Overlapping ANPL estimate for Los Angeles excludes a number of small special districts.

3) Overlapping ANPL estimate for Houston excludes a number of small special districts.

4) Overlapping ANPL for Chicago excludes city colleges.

Sources: Issuer Comprehensive Annual Financial Reports, Moody's Pension Database

Underfunding of actuarial requirements increases future burdens. Local governments’ annual pension costs vary considerably. On the high end, Chicago’s fiscal 2011 actuarial pension cost was 28% of its revenues, compared with 1% for the Northside Independent School District (Aa1 stable) in Texas. Exhibit 5 shows the 10 local governments with the highest actuarial pension costs relative to operating revenues, and the 10 with the lowest.

To measure how much a local government’s annual contributions fall short of actuarial standards, we include our estimate of its pro rata share of contribution shortfalls to cost-sharing plan(s) a local government participates in – a figure issuers typically do not disclose in financial statements and are not considered in the computation of the Governmental Accounting Standards Board (GASB) ARC.

For example, Clark County, Nevada (Aa1 stable), has a track record of making its full pension contributions as required by state statute, but these payments do not include what we estimate is its share of the contribution shortfall relative to ARC of the cost-sharing plan that it participates in. When we include this share, Clark County’s contributions fall short of actuarial requirements (see Exhibit 5).

CREDIT IN DEPTH Detailed analysis of an important topic

20 MOODY’S CREDIT OUTLOOK 10 OCTOBER 2013

EXHIBIT 5

Annual Pension Costs Range from Substantial Portions of Operations to Almost Zero

Note: Annual Required Contribution includes pro-rata shares of cost-sharing plan, actuarial requirements are allocated by Moody's Source: Issuer Comprehensive Annual Financial Reports (CAFRs), Pension Plan CAFRs, Moody’s pension database

The ARC can vary considerably among local governments because of different actuarial assumptions such as the cost method, discount rate and unfunded liability amortization. Although contribution shortfalls reduce near-term expenditures, they also increase the liability that must be amortized, raising future costs to levels that might become unsustainable. In fiscal 2011, more than half of the top 50 either underfunded their single-employer or agent plan(s), or contributed to a cost-sharing plan that did not meet its ARC. The size of contribution shortfalls relative to operating budgets varies considerably from nearly zero to a very severe 19%.

Of the eight top 50 local governments with ANPL/revenue ratios of more than 300%, only two contributed their full ARC in fiscal 2011. Jacksonville was the only one among the top 50 that paid its full ARC, didn’t have exposure to cost-sharing contribution shortfalls and didn’t report a net pension obligation (NPO)6 (see Exhibit 6).

6 The net pension obligation (NPO) reflects accumulated contribution shortfalls relative to actuarial requirements, accounting for

interest and amortization. Local governments are not required to report a NPO related to their contributions to cost-sharing plans if they make a full contractual contribution. Nonetheless, local governments could face higher future contribution rates to make up for funding shortfalls of cost-sharing plans caused by statutory or contractual contribution requirements that do not meet actuarial requirements, which adds risk and underscores their lack of control as participants in cost sharing plans.

0% 5% 10% 15% 20% 25% 30%

ChicagoCook County

Clark County School DistrictPhiladelphia City

HoustonLos Angeles

Clark CountySan Diego City Unified School District

Kansas CityFairfax County

Philadelphia School DistrictBaltimore County

King CountyWashington

Dallas Independent School DistrictCypress-Fairbanks Independent School District

Wake CountyHouston Independent School District

Mecklenburg CountyNorthside Independent School District

Actual Contribution as Percent of Revenues Contribution Shorfall Relative to ARC

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21 MOODY’S CREDIT OUTLOOK 10 OCTOBER 2013

Jacksonville has a high net pension liability not because of contribution underfunding, but because of other factors such as asset performance and benefit accruals.7 Also driving Jacksonville’s ANPL is a relatively low adjusted discount rate for its fiscal 2011 data (4.69%) tied to its actuarial valuation dates.

Los Angeles, California (Aa2 stable), is another example of a large local government with relatively high liabilities despite full ARC payments in fiscal 2011 and a relatively modest NPO compared with several of the issuers in Exhibit 6.

There is a positive correlation between ANPL and contribution shortfalls. In general, as contribution shortfalls relative to revenues increase, so do ANPL/revenue ratios. Chicago and Cook County are two clear outliers that have both high ANPL/revenue ratios and large contribution shortfalls; the majority of issuers’ contribution shortfalls are below 5% of revenues.

EXHIBIT 6

Most Large ANPL/Revenue Ratios Belong to Issuers with Contribution Shortfalls

ANPL / Revenues Under-Funded ARC(s) as

Percent of Revenues 2011 Net Pension

Obligations* $ Millions

Chicago 678% 19% $5,387

Cook County 382% 12% $1,830

Denver County School District 1 342% 6% $0

Jacksonville 327% 0% -$3

Los Angeles 324% 0% $59

Metro. Water Reclamation District of Chicago 322% 5% $108

Houston 312% 3% $757

*As reflected in government-wide financial statements. Does not incorporate any back out for enterprise support.

Source: Issuer Comprehensive Annual Financial Reports (CAFRs), Pension Plan CAFRs, Moody’s pension database

State support significantly reduces pension burdens for some school districts. Twenty-three states subsidize part or all of school districts’ annual pension contributions. In 11 states, these “on-behalf” payments cover 40% or more of school districts’ total annual employer contributions.

On-behalf payments for school districts in the top 50 range from 6% of total annual contributions for Chicago Public Schools to 81% for Northside Independent School District. Chicago Public Schools differs significantly from other school districts in Illinois in that its employees participate in a single-employer plan, as opposed to the statewide teachers retirement system Most Illinois school districts receive on-behalf payments from the state that cover most of their pension costs, but the state only contributes a small proportion of Chicago Public Schools’ pension costs.

Across the country, the state subsidy of school teacher pensions can significantly ease the budget pressure for local school districts or governments. But that comes with a cost to the states, whether directly through appropriation or indirectly as an off-balance sheet unfunded pension liability.

7 Enterprises and various other funds supported approximately $9 million of Jacksonville’s fiscal 2011 pension contributions. This

support is not reflected in Jacksonville’s ANPL data. Although the enterprises contribute to pension contributions, city management has indicated that they are not self-supporting and receive operating subsidies from the city.

CREDIT IN DEPTH Detailed analysis of an important topic

22 MOODY’S CREDIT OUTLOOK 10 OCTOBER 2013

There is a risk to local governments if states facing underfunded pensions and other fiscal problems choose to reduce or eliminate on-behalf payments and shift a pension burden to them. This could significantly increase the budgetary burden on local entities. For example, without state subsidy of pension contributions, Pennsylvania school districts’ annual burden for pension funding contributions would more than triple to approximately 7%-10% based on recent ARCs.

Most pension reforms will have little immediate effect on accrued pension burdens. Lowering local government pension liabilities by enacting reforms that reduce benefits for retirees or current employees is extremely difficult politically in most jurisdictions in the US. As a result, pension reform efforts usually focus on paring benefits for new employees, or altering employees’ future contribution rates. Such reforms slow growth rate of pension liabilities, but tend to bring limited immediate benefit to local government budgets.

In addition, the legal framework of pension plans and protections governing public employee pension benefits in a given state play a key role in determining how and to what extent local governments can reform their pension systems.8 Court decisions in several states have barred reductions to accrued benefits of retirees and existing employees and in some cases going-forward benefit changes for existing employees. In other states, changes of this nature have been possible.

In some cases, states may rely on shifting costs instead of, or in addition to, changing retirement benefits. In addition to potential shifts to local governments, employees can be required to contribute more. For example, local governments in Ohio (Aa1 stable) participate in one or more statewide, multi-employer cost-sharing pension plans. The state legislature sets the level of employee pension benefits, the level that employers must contribute and a minimum pension funding target. Unlike most states, if the pension funding target is not met, the state legislature can shift more of the pension burden to current employees or retirees, as opposed to only shifting the burden to local governments.

(This piece is drawn from three recent reports: Adjusted Pension Liability Measures for 50 Largest US Local Governments; Moody’s on Pensions: Sub-sovereign Credit Risk; and The US Public Pension Landscape: Patterns of Funding, Correlation and Risk.)

8 See The US Public Pension Landscape: Patterns of Funding, Correlation and Risk, 9 September 2013.

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

23 MOODY’S CREDIT OUTLOOK 10 OCTOBER 2013

NEWS & ANALYSIS Corporates 2

» Merck's Research & Development-Focused Restructuring Is Credit Positive

» Abengoa Gains an Investor in Its Solar Power Plant, a Credit Positive

» Portugal Telecom and Oi Merger Will Reduce Leverage and Improve Cash Flow

» IOI’s Acquisition of Oil Palm Plantation Is Credit Negative

Infrastructure 8

» Dutch Regulator's Reduction to Energy Network Returns Is Credit Negative

» DONG Energy Will Get Credit Positive DKK11 Billion Equity Injection

» KEPCO Will Resume Transmission Tower Construction, a Credit Positive

Banks 13 » Wells Fargo Resolves Freddie Mac's Repurchase Demands, a

Well-Timed Credit Positive » Bank of America Merges Merrill Lynch Holding Company into

Its Own, a Credit Negative for Merrill Bondholders » US Banks Improve Efficiency by Growing Deposits While

Closing Branches » Iceland's Budget Includes Housing Financing Fund Capital

Injection » Vietnam Asset Management Company's First Asset Carve-

Out Is Credit Positive for Banks

Insurers 22 » Aviva Sells US Life and Annuities Business at Higher

Consideration than First Announced » China’s P&C Insurers Will Benefit from Shanghai Free Trade

Zone

Sovereigns 24

» Mongolian Parliament Approves New Investment Law, a Credit Positive

US Public Finance 25 » Maryland and Virginia Local Governments Are Exposed to

Federal Government Shutdown

CREDIT IN DEPTH United States Government 27

We answer frequently asked questions about the US government shutdown and debt limit: How does the government shutdown affect US creditworthiness? Will the government default after 17 October if the debt limit is not raised? What is the pattern of US interest payments after 17 October? Why are only interest payments potentially affected and not principal? Is the situation worse now than it was in 2011, the last time that the debt limit was an issue? Could the government take other steps to finance itself without increasing debt?

RATINGS & RESEARCH Rating Changes 32

Last week, we downgraded Petroleo Brasileiro, Endurance Specialty Holdings, MONY Life Insurance of America, Mony Life Insurance, Athens Greece, and Puerto Rico Sales Tax Financing Corp., and upgraded United Rental (North America), Power Sector Assets & Liabilities Management, Reliance Rail Finance, Sandy Creek Energy, BDO Unibank, Bank of the Philippine Islands, Land Bank of the Philippines, Metropolitan Bank & Trust, the Philippines, and Catholic Health East (Pennsylvania), among other rating actions.

Research Highlights 40

Last week, we published on BP, Japanese condominium developers, US healthcare, Peruvian fishing, US speculative-grade corporations, European chemical, European auto parts, US soft beverages, global technology hardware and software, Centrais Eletricas Brasileiras, the banking systems of Cyprus, Sweden and central Europe, Gulf Cooperative Council insurers, US monetary tightening, Asia-Pacific Economic Cooperation member sovereigns, the European Financial Stability Facility, a peer comparison of Nordic countries, African Development Bank, Azerbaijan, PTA Bank, Ireland, Kuwait, Egypt, US states, CLOs, Asian structured products, and Russian MBS, among other reports.

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EDITORS PRODUCTION ASSOCIATE News & Analysis: Jay Sherman and Elisa Herr Amanda Kissoon