MOODYS.COM

29 OCTOBER 2015

NEWS & ANALYSIS Corporates 2 » Royal Caribbean’s $500 Million Share Repurchase Program Is

Credit Negative » Oi Would Benefit from Offer of $4 Billion Investment to Merge

with Rival » Naspers’ Investment in Avito Will Initially Increase Leverage

Banks 5 » Intercontinental Exchange Acquisition of Interactive Data

Corporation Is Credit Negative » Banco de Costa Rica’s Staff Reductions Will Help Relieve

Earnings Pressure, a Credit Positive » Belgium Requires Large Domestic Banks to Hold More Capital,

a Credit Positive » Sparebanken Vest’s Rights Issue Will Strengthen Its Capital

Base, a Credit Positive » China’s Rates and Reserve-Requirement Cuts Are Credit

Positive for Banks » Malaysia’s Hong Leong Bank Will Boost Its Capital, a

Credit Positive

Sovereigns 15 » Oman’s Successful First Sovereign Sukuk Offering Is

Credit Positive » Mongolia’s Deeper Ties with Japan Will Counterbalance Its

Dependence on China, a Credit Positive

US Public Finance 19 » Delayed State Budgets Hurt Local Governments in

Pennsylvania More than in Illinois

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Monday’s Credit Outlook 21 » Go to Last Monday’s Credit Outlook

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 29 OCTOBER 2015

Corporates

Royal Caribbean’s $500 Million Share Repurchase Program Is Credit Negative Last Friday, Royal Caribbean Cruises Ltd. (RCL, Ba1 stable) announced plans to buy back $500 million of the company’s common stock in 2016, of which $200 million will be repurchased by the end of January. The planned repurchase is credit negative because it will delay deleveraging at the company.

The accelerated repurchase of the initial $200 million in shares is sooner than we had expected RCL to buy back shares. The buyback plan comes on the heels of a 25% increase in its dividend in September.

We expect that RCL will need to borrow under its revolving credit facility in order to finance a sizable portion of this share repurchase program, given its current cash balances, expected cash flow generation and capital expenditure requirements. The expected incremental borrowing will offset a portion of RCL’s continued earnings growth and we expect it to slow the pace of reduction in debt/EBITDA, which we view as credit negative.

For the 12 months that ended 30 September 2015, RCL’s debt/EBITDA fell to 4.3x from 5.0x at the end of 2014. Given the new share repurchase program, we now expect debt/EBITDA to fall to between 3.8x and 4.0x over the next 12-18 months. This level of debt/EBITDA is moderately weaker than our guidance for an upgrade of debt/EBITDA sustained below 3.75x.

RCL’s Ba1 corporate family rating reflects its solid market position as the second-largest global cruise operator based on capacity and revenue. The company is well diversified by geography, brand and market segment. The rating also reflects our expectation that RCL’s profitability, leverage, and coverage metrics will improve toward historic levels over the next 12-18 months as the company expands capacity with the April 2015 delivery of the Anthem of the Sea cruise ship and controls cost increases.

However, we expect a strong US dollar and RCL’s change in promotion strategy to negatively pressure reported yield growth in 2015. The company’s ratings incorporate our favorable medium-term growth outlook for global leisure travel and the likelihood that the cruise industry will capture its share of this growth. We expect that RCL will continue to benefit from favorable demographics, strong customer satisfaction scores, a wide range of departure points and the value proposition of a cruise vacation, which supports continued penetration of the vacation market by cruise operators.

Margaret Taylor Senior Vice President +1.212.553.0424 margaret.taylor@moodys.com

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2015

Oi Would Benefit from Offer of $4 Billion Investment to Merge with Rival On Monday, Oi S.A. (Ba3 negative) said that it had received an offer of up to $4 billion from investment group LetterOne (unrated) if Oi successfully pursues a merger with TIM Participações S.A. (unrated), the Brazilian subsidiary of Telecom Italia S.p.A. (Ba1 negative). The proposed merger and the capital injection would be credit positive for Oi’s bondholders and creditors.

TIM has a stronger balance sheet than Oi, and a merger would offer synergies, especially in cost savings and capital-spending plans, and the larger scale would help Oi compete with its stronger, well-financed competitors Vivo, the Brazilian subsidiary of Spain’s Telefonica S.A. (Baa2 stable), and Claro, the Brazilian unit of Mexico’s America Movil S.A.B. de C.V. (A2 stable). Oi’s main competitors are investing heavily in Brazil for growth, both organically by spending capital on spectrum and through M&A activity. Vivo finalized the acquisition of GVT earlier this year and America Movil merged its subsidiaries into Claro to create Brazil’s second-largest integrated telecom company.

The LetterOne investment appears to be a long shot for the near future, since it would also require the approval of Brazil’s federal regulators and the shareholders of both companies. Still, LetterOne’s offer improves the merger’s appeal to shareholders. It also significantly reduces Oi’s need to seek financing for a multi-billion-dollar deal, which would be unlikely without the funding given Oi’s high leverage, tight maturity schedule and annual cash needs.

Oi, Brazil’s largest incumbent local exchange carrier, serves nearly 48 million mobile customers and nearly 17 million fixed-line customers, generating about BRL28.1 billion (about $7.4 billion) in revenues for the 12 months through June 2015 pro forma for the sale of Portugal Telecom’s assets. TIM had 74.6 million wireless customers and generated almost BRL19 billion in net revenues for the 12 months through June 2015.

Any company interested in the consolidation of Brazil’s telecom sector today would benefit from the renewal of the operators’ existing fixed-line concessions. Brazil’s telecom operators are waiting for the federal telecom regulator to disclose its policy on the value and reversibility of assets at the end of the concession periods. Once the new policy on assets becomes clear, we would expect more moves toward asset sales and exchanges or consolidation.

Meanwhile, the merger’s appeal for shareholders of both Oi and TIM will depend on the terms of the transaction, especially on what role a capital injection of up to $4 billion would play. After Oi revealed LetterOne’s offer, TIM insisted that it has no ongoing negotiations with Oi or LetterOne regarding a merger or takeover.

But a merger would help the combined company compete in Brazil against Vivo and Claro, and the prospect of a capital injection would make the prospect of a merger more attractive to shareholders at both companies. The capital injection would also benefit Oi’s credit quality by significantly reducing its need to raise financing.

Marcos Schmidt Vice President - Senior Analyst +55.11.3043.7310 marcos.schmidt@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2015

Naspers’ Investment in Avito Will Initially Increase Leverage Last Friday, Naspers Limited (Baa3 stable) announced that it will pay $1.2 billion to increase its stake in Russian online classifieds platform operator Avito (unrated) to 67.9% from 17.4%. This investment is credit negative because Naspers is likely to initially fund the purchase mostly with debt, which will increase its already-high adjusted debt/EBITDA of 6.7x.

Naspers has committed to putting long-term funding alternatives in place that the company does not expect will increase its existing debt and deleveraging trajectory. Until such funding is in place, the temporary funding for the Avito investment will weaken Naspers’ credit quality, and any delays or a weakening of leverage as a result of the long-term funding alternative will have negative rating consequences.

The $1.2 billion investment, in the absence of a long-term funding solution at the close of the transaction, will be funded through a combination of cash and drawings under its revolving credit facility. Given that the majority of Naspers’ ZAR14 billion cash holdings are held at various operating subsidiaries and are not readily available, we expect that the majority of the purchase price will initially be funded by drawing down its available revolving credit facility of $2 billion. This will not negatively affect Naspers’ liquidity over the next 12 months given the company’s back-loaded debt maturity profile and material value in Tencent Holdings Limited (A2 stable) of around ZAR810 billion ($60 billion), which offers a significant liquidity buffer against approaching debt maturities.

Assuming 100% of the $1.2 billion is debt funded, Naspers’ pro forma adjusted debt/EBITDA as of 31 March 2015 would increase to more than 8.0x from 6.7x. This deviates from our expectation for the Baa3 rating, which factors a deleveraging trajectory toward 5.0x over the next 18 months. However, we recognise that the use of debt is a short-term funding solution that Naspers will replace with a leverage-neutral or better funding position once the company completes the transaction. Alternative sources of funding include accessing cash balances, proceeds from non-core asset disposals or an equity rights issue. But these options carry execution risks that could lead to higher leverage metrics for a longer period of time.

Since its initial 17.4% investment in Avito in 2013, Naspers has developed an in-depth understanding of the Russian online classified marketplace and gained insight into Avito’s internal operations. Avito’s revenues rose by 79% to RUB4.3 billion as of 31 December 2014 from RUB2.4 billion a year earlier, while its EBITDA margin increased to 50% from 28% over the same period, resulting in EBITDA growth of 220% to RUB2.2 billion from RUB700 million. Moreover, Avito is cash flow positive, which will help offset the sizable trading loss of ZAR6.1 billion reported in 31 March 2015 from its e-commerce operations.

Following various regulatory approvals and the transaction’s closing, which will come in the next few months, we will review Naspers’ long-term funding solution and its effect on the company’s deleveraging trajectory toward our stated expectations.

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

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2015

Banks

Intercontinental Exchange Acquisition of Interactive Data Corporation Is Credit Negative On Monday, Intercontinental Exchange Inc. (ICE, A2 review for downgrade) announced that it had agreed to acquire Interactive Data Corporation (IDCO, Caa2 stable) for approximately $5.2 billion. Although the acquisition will help diversify ICE’s revenues, it is credit negative for the company because it will cause a sharp deterioration of ICE’s debt-service metrics. Following the announcement, we placed ICE’s ratings on review for downgrade.

ICE plans to fund the acquisition by raising $3.65 billion in cash through a combination of short-term and long-term debt, with the remainder funded by $1.55 billion of ICE common stock. This will increase pro forma adjusted debt/EBITDA to more than 2.9x from 1.8x for the 12 months that ended 30 June 2015.

There is a sound strategic logic to ICE’s acquisition of IDCO, whose end-of-day evaluated pricing data is an important service for asset managers, particularly those holding thinly traded securities, and will complement ICE’s existing data services business. Additionally, the revenues gained from IDCO would reduce ICE’s reliance on its more cyclical transaction and clearing revenues, as shown in Exhibit 1. Once ICE reduces acquisition-related debt, the combined company’s more diversified and less cyclical business mix would benefit ICE bondholders.

EXHIBIT 1

ICE’s Acquisition of IDCO Helps Diversify Revenue

Note: * TTM = Trailing twelve months Sources: Company filings and Moody’s Investors Service estimates

ICE’s entrepreneurial management team has opportunistically built a diversified and profitable market infrastructure platform. At the same time, management has shown an appetite for financing large acquisitions with a significant amount of debt, as the IDCO acquisition demonstrates. However, as Exhibit 2 shows, the company has historically proved willing and able to pay back such debt. When ICE significantly increased leverage to acquire NYSE Euronext in 2013, the company successfully decreased leverage through a combination of free cash flow generation, the cash divestiture of the Euronext business and restricting share repurchases.

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

2010 2011 2012 2013 2014 TTM* 2Q15 Pro Forma TTM*2Q15

$ Bi

llion

s

Net Transaction and Clearing Fees Other Revenues Listing Fees Data Services Fees Additional IDC Revenues

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

Peter Nerby Senior Vice President +1.212.553.3782 peter.nerby@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2015

EXHIBIT 2

ICE Has Demonstrated a Willingness and Capacity to Reduce Spikes in Leverage

Note: * TTM = Trailing twelve months Sources: Company filings and Moody’s Investors Service estimates

ICE intends to take a similar approach in deleveraging the IDCO acquisition: it has shut off share repurchases and hopes to realize significant cost savings from the integration. The company intends to reduce balance sheet leverage to 1.5x debt/EBITDA within 24 months, and our review will focus on the feasibility of this target.

0.9x 1.0x 1.3x

6.9x

2.4x

1.8x

2.9x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

$0

$1

$2

$3

$4

$5

$6

$7

$8

2010 2011 2012 2013 2014 TTM* 2Q15 Pro Forma TTM* 2Q15

$ Bi

llion

s

Moody's Adjusted Total Debt - left axis Additional Debt - left axis Adjusted Debt/EBITDA-right axis

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2015

Banco de Costa Rica’s Staff Reductions Will Help Relieve Earnings Pressure, a Credit Positive Last Thursday, Banco de Costa Rica (Ba1/Ba1 stable, ba21) announced that it had successfully reduced its workforce by about 7%, after 280 employees entered a voluntary retirement plan that ended the day before. The measure is credit positive for Banco de Costa Rica because it will help improve the bank’s weak operating efficiency, which has been a significant drag on its profitability.

The bank expects to achieve annual cost savings of CRC11.2 billion ($20 million), or about 10% of annual consolidated payroll outlays and approximately a quarter of its consolidated pre-tax income as of December 2014. We estimate that the bank’s cost/income ratio will decline by about five percentage points with this measure. The bank last Thursday also announced other cost-saving measures, including improving operating processes and enhancing its business model, although it has not fully disclosed the details of these initiatives.

Notwithstanding these efforts, operating expenditures will remain comparatively high, with a cost/income ratio of approximately 70%, still above the system average of 65% as of June 2015. Consequently, we expect Banco de Costa Rica’s earnings, which have declined sharply in the past year and a half, to remain subdued. The bank’s return on average assets slid to a low 0.5% in June 2015 from an already modest 0.6% at year-end 2014 and 0.8% in 2013 (see exhibit below).

Banco de Costa Rica’s Cost/Income Ratio, Net Interest Margin and Return on Average Assets Have Deteriorated

Notes: NIM = Net interest margin; ROAA = Return on average assets Source: Moody’s Investors Service

In addition to high operating expenses, earnings have also been hurt by rising loan-loss provisions. During the first six months of 2015, net credit costs soared to 42% of pre-provision income from about 10% a year earlier, driving a 30% contraction in the bank’s consolidated net income from comparable 2014 levels. In part, this is the result of a deterioration in the risk classification of some borrowers. We expect loan-loss provisions to remain high given Costa Rica’s below-trend economic growth.

1 The bank ratings shown in this report are Banco de Costa Rica’s local deposit ratings, senior unsecured debt ratings and baseline

credit assessment.

75%

0.5%

3.7%

0%

1%

2%

3%

4%

5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2012 2013 2014 2Q 2015

Cost/Income Ratio - left axis ROAA - right axis NIM - right axis

Georges Hatcherian Analyst +52.55.1555.5301 georges.hatcherian@moodys.com

Vicente Gomez Associate Analyst +52.55.1555.5304 vicente.gomez@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2015

Annual net income fell 23% in 2014 largely because of $20 million in provisions that were set aside to prepare for the voluntary retirement plan. The actual cost could end up higher. In addition, the bank’s net interest margin narrowed to 3.7% as of June 2015 from 4.0% at year-end 2013. Net interest margins will likely remain under pressure as the central bank continues to ease monetary policy in response to the economy’s soft performance. On 21 October, Banco Central de Costa Rica, the central bank, cut the monetary policy rate by 75 basis points to a record low 2.25%. Profitability remains a key credit challenge for Banco de Costa Rica, along with its low core capitalization. Should these cost-saving measures prove insufficient to reverse the decline in the bank’s earnings, its intrinsic creditworthiness will be negatively affected and loan growth potential will be curtailed.

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2015

Belgium Requires Large Domestic Banks to Hold More Capital, a Credit Positive Last Monday, the National Bank of Belgium (NBB) announced two measures aimed at bolstering the capital of Belgium’s largest banks. The credit-positive measures are an extension of a five-percentage-point add-on to the risk-weight applied to domestic mortgages and a capital surcharge on so-called other systemically important institutions (O-SIIs).

The NBB is extending for one year the application of a five-percentage-point add-on to the risk-weight applied to domestic mortgages. The NBB introduced the add-on in 2013 to reduce the benefits that banks received from their reliance on the internal risk-based (IRB) approach, which produced very low risk-weights based on historical data. Belgian banks’ mortgage portfolios have performed well, but the central bank was eager to avoid the creation a credit bubble, and thus took this step. Under this add-on rule, the risk-weight derived from a bank’s internal model, for example 7%, would be augmented by an additional five percentage points to arrive at a final 12% risk-weight applied to a bank’s mortgage portfolio.

The NBB is extending the add-on in anticipation of a new framework referred to as Basel IV (currently under discussion by the Basel Committee) that may include a materially greater capital requirement on mortgages than the IRB approach. Based on the Basel Committee’s current proposal, the risk-weight would be 25%-100%, depending on a mortgage’s loan-to-value ratio. We believe the NBB wants to continue its own framework, the premise of which is similar to the Basel framework, because both restrict the benefits of modelling on risk and capital computations.

The second component of the NBB’s action involves applying a capital buffer on Belgian banks designated as O-SIIs. BNP Paribas Fortis SA/NV (A1/A2 stable, baa12), KBC Group NV (Baa2 positive), ING Belgium SA/NV (A1 stable, baa1) and Belfius Bank SA/NV (Baa1/Baa1 positive, ba1) will be subject to a 1.50-percentage-point surcharge. Axa Bank Europe (A2 stable, baa3), Argenta (unrated), Euroclear (unrated) and The Bank of New York Mellon SA/NV (Aa1 stable, a1) will be subject to a 0.75-percentage-point surcharge. The O-SII designation follows Capital Requirement Directive – CRD IV, which instructs national authorities to designate banks that pose a systemic risk to their financial systems.

The calibration of capital buffers for domestic systemically important institutions is the responsibility of each national authority as set out in CRD IV. However, this has yet to be carried out in accordance with the European Banking Authority’s methodology while the calibration for the so-called global SIIs ranges from 1.0-2.5 percentage points as per CRD IV rules. The buffer applied to Belgian O-SIIs will be phased in over the next three years and monitored annually. Its enforcement starts on 1 January 2016.

The NBB’s decisions are based on the premise that Belgian banks must be more resistant to economic forces that could weaken their ability to generate earnings and accrue capital. We expect Belgium’s economic growth to be subdued over the years to come, which will have a bearing on banks’ revenues as interest rates will remain at their currently low levels for the foreseeable future. The central bank is also concerned about banks’ lending practices in the mortgage business, the high proportion of new loans with a high risk profile and rising household indebtedness.

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

credit assessment.

Alain Laurin Associate Managing Director +33.1.5330.1059 alain.laurin@moodys.com

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2015

Sparebanken Vest’s Rights Issue Will Strengthen Its Capital Base, a Credit Positive On Monday, Sparebanken Vest (A1/A1 stable, baa13) announced an NOK750 million ($89.6 million) rights issue to meet Norway’s bank regulator’s increased capital requirements. The transaction, which will help the bank meet its increased core equity Tier 1 ratio target of 14.5% by the end of December 2016 from a 13.5% target currently (see exhibit), is credit positive because it will strengthen Sparebanken Vest’s buffer against unexpected losses. The capital increase will also improve its ability to deal with the low interest rates and higher funding costs of Norway’s weak operating environment.

Sparebanken Vest’s Core Equity Tier 1 Ratio

Note: Data include a transitional floor, which sets minimum requirements for own funds. Sources: Company reports and analyst estimates

The capital increase would raise the bank’s capital adequacy to a level in line with the average of Norwegian peers we rate. Sparebanken Vest’s improved capital base will counterbalance its exposure to high-risk and historically volatile sectors, including commercial real estate and construction, which together accounted for 12% of gross loans at the end of December 2014, and the shipping sector, which constituted around 4% of gross loans.

Sparebanken Vest chose to approach the markets for additional capital because retained earnings alone would not have covered the one-percentage-point increase in the bank’s capital target. Nearly 95% of all mortgages in Norway carry floating interest rates, hurting banks’ retail margins as the central bank lowers the reference rate (Norges Bank’s key policy rate is 0.75%). Sparebanken Vest’s net income to tangible banking assets ratio was 0.7% at the end of September 2015, slightly below the 0.8% reported at the end of 2014.

In the meantime, Sparebanken Vest, similar to other Norwegian banks we rate, relies on market funding (equal to almost 45% of tangible assets at the end of December 2014), so that increases in market funding costs exert pressure on net interest margins.

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

assessment.

12.60%

11.2…12.20% 12.20%

13.50%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2012 2013 2014 Q3 2015 Q3 2015 Pro Forma RightsIssue

14.50% 2016 Target

Effie Tsotsani Analyst +44.20.7772.1712 effie.tsotsani@moodys.com

Maria del Mar Asensio Gimenez Associate Analyst +44.20.7772.1078 mariadelmar.asensiogimenez@moodys.com

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2015

The proposed equity issue is directed toward existing equity certificate holders, is fully underwritten and is scheduled to be completed by the end of December 2015. The rights issue is subject to approval from the bank’s supervisory board, and requires approval from the Norwegian Financial Supervisory Authority. We expect to see further details of the guarantee consortium in the coming weeks.

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2015

China’s Rates and Reserve-Requirement Cuts Are Credit Positive for Banks Last Saturday, the People’s Bank of China (PBOC) reduced both its benchmark lending and deposit rates by 25 basis points, and removed the rate cap on all categories of deposits. Effective on the same day, the PBOC also lowered by 50 basis points the reserve-requirement ratio, and lowered the ratio by an additional 50 basis points for qualified financial institutions that support the agriculture sector and small and midsize enterprises. This is the fifth round of base-rate cuts and the fourth round of broad reserve-requirement ratio cuts this year. The PBOC’s action is credit positive for Chinese banks because it will improve their liquidity. The simultaneous cuts will add to system liquidity and further drive down borrowing costs, mitigating the effects of the Chinese economy’s slowing growth.

We estimate that the reserve-requirement ratio reduction will free up RMB600-RMB700 billion of banks’ mandatory reserves placed with the PBOC. This will alleviate banks’ liquidity pressure as a result of the tax payment peak in October and the PBOC’s recent operation in the foreign exchange market to support the renminbi. The PBOC has reported declines in its foreign-exchange purchase positions since August, which suggests a net withdrawal of renminbi liquidity from the market. The multiple reserve-requirement ratio cuts, along with the PBOC’s liquidity injections through open market operations and a medium-term lending facility, have helped keep China’s interbank rates at a very low level since 2015.

Exhibit 1 shows the PBOC’s benchmark rates since June 2012, while Exhibit 2 shows China’s interbank rates since January 2013.

EXHIBIT 1

People’s Bank of China Benchmark Rates Since June 2012

Jun 2012 Jul 2012 Nov 2014 Mar 2015 May 2015 Jun 2015 Aug 2015 Oct 2015

Changes in Benchmark Rates

(1) One-Year Loans 6.31% 6.00% 5.60% 5.35% 5.10% 4.85% 4.60% 4.35%

(2) One-Year Deposits 3.25% 3.00% 2.75% 2.50% 2.25% 2.00% 1.75% 1.50%

Interest Rate Deregulation

Loan Floor 0.8x 0.7x NA1 NA1 NA1 NA1 NA1 NA1

Deposit Cap 1.1x 1.1x 1.2x 1.3x 1.5x 1.5x 1.5x2 NA3

Cap on One-Year Deposit 3.58% 3.30% 3.30% 3.25% 3.38% 3.00% 2.63% NA3

Notes: 1 With the exception of housing loans, lending rates have been fully liberalized since 20 July 2013. 2 Deposit rate cap for term deposits with tenors of more than one year has been lifted. 3 Deposit rate cap for all categories of deposits has been lifted.

Source: People’s Bank of China

David Yin Assistant Vice President - Analyst +852.3758.1517 david.yin@moodys.com

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2015

EXHIBIT 2

China’s Interbank Rates

Note: Data are as of 26 October 2015. Source: Shanghai Interbank Offered Rate

The removal of the rate cap for all categories of deposits marks the completion of China’s interest rate liberalization, which has been a multi-year process to lift the controls on lending and deposit rates. As a result of the PBOC’s gradual approach, we expect that the final removal of deposit rate cap will have a limited immediate effect on banks’ borrowing costs. Before this most recent action, banks’ deposit rates were already floating over a wide range, and available data suggested that most banks had not fully utilized their pricing flexibility to compete for deposits.

Having said that, the interest rate cuts, in conjunction with the rate liberalization, will squeeze banks’ profitability. Chinese banks’ deposits usually re-price more slowly than loans, and banks have reduced their offered deposit rate by a lower percentage than the change of the benchmark deposit rate.

The latest policy move will have a mixed effect on asset quality. The lower lending rates will lighten the repayment burden of high-leverage borrowers, such as government-related investment vehicles. However, the rate cut’s effect will not immediately counteract macroeconomic headwinds: sectors such as manufacturing, wholesale and retail, which are the major source of banks’ incremental nonperforming loans, will remain under pressure from slower economic growth. The potential for an additional increase in leverage in a low interest rate environment will also increase systematic risk.

Additionally, declining margins may prompt some banks to seek higher loan yields by increasing their exposure to higher-risk clients, thereby jeopardizing their risk-control capability. However, it may also facilitate a shift of banks’ financing toward small and midsize enterprises and sectors that have had poor access to credit, thereby benefitting China’s economic rebalancing.

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SHIBOR Overnight SHIBOR 1 Week SHIBOR 1 Month SHIBOR 3 Month

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2015

Malaysia’s Hong Leong Bank Will Boost Its Capital, a Credit Positive Last Friday, Hong Leong Bank Berhad (A3/A3 positive, baa14) announced the pricing for its upcoming rights issue, in which the bank plans to raise MYR3 billion (around $700 million) in new capital. The capital raise is credit positive for the bank because it will significantly strengthen its transitional and fully loaded common equity Tier 1 (CET1) ratios.

We estimate that Hong Leong Bank’s pro forma consolidated transitional post-dividend CET1 ratio will improve to around 13.3% after the rights issue from 10.8% as of June 2015. As shown in the exhibit below, Hong Leong Bank’s post-rights-issue CET1 ratio will exceed the capital buffers of all banks that we rate in Malaysia, including RHB Bank Berhad (A3/A3 stable, baa3), Malayan Banking Berhad (A3/A3 positive, a3), HSBC Bank Malaysia Berhad (A3 positive, baa1) and AmBank (M) Berhad (Baa1/Baa1 positive, baa3).

Hong Leong Bank’s Transitional CET1 Ratio Will Exceed Those of Other Moody’s-Rated Banks in Malaysia

Notes: Data for all banks are as of June 2015, except for Standard Chartered Bank Malaysia, which are as of March 2015. Sources: The banks and Moody’s Investors Service

The new rights issue will also significantly improve Hong Leong Bank’s fully loaded post-dividend CET1 ratio to 11.7% from 9.1% in June 2015. This ratio includes the full deductions from CET1 capital required under Basel III rules. We estimate that Hong Leong Bank’s fully loaded CET1 ratio was one of the lowest ratios of the Malaysian banks we rate, which we attribute to Hong Leong Bank’s 20% stake in China’s Bank of Chengdu (unrated) and its investments into Hong Leong Islamic Bank Berhad (unrated).

To acquire the new shares issued by Hong Leong Bank, its holding company, Hong Leong Financial Group Berhad (unrated), will issue MYR1.1 billion of new shares and new debt of around MYR800 million. The additional debt will moderately increase the holding company’s double leverage ratio, albeit to a still-comfortable level. We expect that the rights issues for the bank and the holding company will be finalized in November.

4 The bank ratings shown are the bank’s deposit rating, senior unsecured debt rating (where available) and baseline credit assessment.

0%

2%

4%

6%

8%

10%

12%

14%

Hong LeongBank - BeforeRights Issue

Hong LeongBank - AfterRights Issue

RHB BankGroup

Maybank HSBC BankMalaysia

AmBank Hong LeongBank

StandardChartered

BankMalaysia

Public Bank CIMB Bank

Eugene Tarzimanov Vice President - Senior Credit Officer +65.9652.8122 eugene.tarzimanov@moodys.com

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2015

Sovereigns

Oman’s Successful First Sovereign Sukuk Offering Is Credit Positive On Tuesday, the government of Oman (A1 negative) successfully priced its first-ever sovereign sukuk offering, a domestic issuance of OMR250 million (about $650 million) of investment certificates with a five-year tenor. The transaction is credit positive because it is an important financing tool for the government with which to meet the challenges brought on by low oil prices. Additionally, the successful inaugural sovereign sukuk will support the development of Oman’s domestic capital market, particularly its nascent Islamic banking segment, which new regulations established in December 2012.

According to the Oman Ministry of Finance, the offering received orders totalling OMR336 million, well ahead of the original target of OMR200 million before the offering’s amount rose to OMR250 million. Strong investor demand also helped keep the interest cost of the issuance at reasonably low levels: the profit rate of the certificates was set at 3.5% per year, payable semi-annually, which compares with a slightly lower coupon rate of 3% for an issuance of five-year Oman government development bonds (GDBs) issued in August.

Aside from being Oman’s first-ever sovereign sukuk, the offering is significant because of its size relative to GDB issuances. In 2014, there was only OMR200 million of gross issuance of conventional GDBs, and while issuance volume rose to OMR500 million so far in 2015 (see exhibit), the largest single issue was a five-year GDB totalling OMR300 million.

Gross Issuance of Oman Government Securities

Sources: Central Bank of Oman, Oman Ministry of Finance and Moody’s Investors Service calculations

The sukuk and GDB offerings have resulted in the Omani government exceeding its original net borrowing goal of OMR600 million. At the beginning of the year, the government had budgeted for a deficit of OMR2.5 billion, financed by OMR200 million in foreign borrowing, OMR400 million in domestic borrowing, and the remainder predominately from previous surpluses and reserves. However, we project a larger-than-budgeted deficit of around OMR3 billion, which will require additional financing.

Oman’s first sovereign sukuk is an important step toward developing Oman’s Islamic finance industry. Oman was the last Gulf Cooperation Council country to permit Islamic banking services. The sukuk offering and prospects for future issuances will likely provide a benchmark for pricing Islamic banks’ financing and potential private-sector issuance of Islamic instruments. Additionally, sovereign Shari’ah-compliant issuances will provide Islamic banks with much needed high-quality liquidity given the scarcity of non-

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2008 2009 2010 2011 2012 2013 2014 2015 to date

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Government Development Bonds Sukuk

Steffen Dyck Vice President - Senior Analyst +49.69.7073.0942 steffen.dyck@moodys.com

Malgorzata Glowacka Associate Analyst +49.69.7073.0938 malgorzata.glowacka@moodys.com

Khalid Howladar Global Head - Islamic Finance +971.4.237.9542 khalid.howladar@moodys.com

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2015

interest-bearing money market instruments. This will support banks’ profitability and give them the opportunity to convert their excess, low-yielding cash into higher-yielding instruments.

As of September 2015, there were two full-fledged, locally incorporated Islamic banks, and six of the seven locally incorporated conventional banks offer Islamic finance services through dedicated windows. At the end of 2014, Islamic banking assets constituted about 5% of total assets, but grew by 68% from 2013, versus 11% asset growth for the more established conventional banks. As of August, Islamic banking assets had risen by another 36% to OMR1.9 billion, while deposits were up by almost 80% from the end of 2014 to OMR1.2 billion.

We expect Islamic banking assets in Oman to capture 10%-12% of total banking system assets in the next two years, doubling from current levels, both through the conversion of customers from conventional to Islamic banking services and through extending new financing. Given the prospects for continued fiscal deficits over the coming years – we expect oil prices to increase only very gradually from 2017 – which increases the likelihood of follow-up sovereign sukuk issuances.

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2015

Mongolia’s Deeper Ties with Japan Will Counterbalance Its Dependence on China, a Credit Positive Last Thursday, the prime ministers of Mongolia (B2 negative) and Japan (A1 stable) inked deals on infrastructure development in Mongolia, and discussed the possibility of budgetary support from Japan. Deeper economic and diplomatic relations with Japan are credit positive for Mongolia. Besides the longer-term benefits that will accrue from improved bilateral trade flows and funding assistance, tighter relations will support Mongolia’s efforts to counterbalance its reliance on China (Aa3 stable) and Russia (Ba1 negative) for financial assistance and trade – the goal of Mongolia’s so-called third-neighbor policy.

Japan Prime Minister Shinzo Abe’s visit to Mongolia, which kicked off a week-long tour across Central Asia, was his second since 2013 and follows an economic partnership agreement that the two countries signed in early February. The agreement, ratified by the Japanese Diet in May, will remove tariffs on 96% of imports to Mongolia within 10 years from coming into force, up from less than 1% currently. All exports to Japan will become tariff-free. Total bilateral trade totaled $392 billion in 2014, or 4% of Mongolia’s total trade, and is skewed toward imports from Japan. Trade with Japan is significantly dwarfed by that with China, which constituted 62% of overall trade flows, and primarily comprised exports from Mongolia.

During the visit, Mr. Abe and Mongolia Prime Minister Chimediin Saikhanbileg signed agreements to collaborate on infrastructure development in Mongolia. These include the construction of a railroad connecting one of the country’s largest coal mines, Tavan Tolgoi, to the eastern border with China. The leaders also reached an agreement on the involvement of a Japanese consortium in the management of an international airport project that will be constructed using concessional funding from Japan. According to the Organisation for Economic Co-operation and Development, official development assistance from Japan constituted 36.6% of net assistance received by Mongolia as of 2013, making Japan Mongolia’s biggest donor.

The extension of support from Japan comes at a time when Mongolia’s economy is slowing. Real GDP growth was 3.0% during the first half of 2015, down from 6.7% in the first half of 2014. With the mining sector comprising 86% of its exports and 17.6% of GDP, the sovereign faces substantial economic challenges as commodity prices continue to fall and growth in China, the destination for nearly 90% of Mongolia’s exports (see exhibit below), slows.

Countries Comprising Mongolia’s Export Markets China accounts for nearly all of Mongolia’s exports.

Source: Mongolia National Statistics Office

China87.9%

UK6.9%

Russia1.1%

Europe2.1%

Japan0.4% Other

1.6%

Anushka Shah Assistant Vice President - Analyst +65.6398.3710 anushka.shah@moodys.com

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2015

In a joint press statement, Mr. Saikhanbileg also referred to ongoing negotiations between the two countries on possible budget support from Japan. Such support, if it materializes, would help limit Mongolia’s external vulnerabilities, which have spiked meaningfully over the past year. With a thin foreign reserve cover, the sovereign continues to rely on external support, including drawdowns on a bilateral swap facility between the Bank of Mongolia and the People’s Bank of China, to meet its financing needs. Looming debt repayments due in 2017, 2018 and 2022 have added to these external vulnerabilities. Our external vulnerability indicator, which measures maturing external debt payments relative to foreign reserves, is projected at 203.7%, significantly above the 100% threshold.

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2015

US Public Finance

Delayed State Budgets Hurt Local Governments in Pennsylvania More than in Illinois On 26 October, Illinois (Baa1 negative) Governor Bruce Rauner agreed to meet with senior state legislators to break the state’s budget impasse in response to an invitation by advocacy groups. Illinois, like Pennsylvania (Aa3 negative), has been without a budget since the 1 July start of the fiscal year.

The political gridlock is credit negative for local governments in both states, but more so in Pennsylvania (see exhibit), where school districts are experiencing the biggest effect. In Illinois, most state aid to local governments is flowing even without an enacted budget. In Pennsylvania, distributions are not being made, which is negatively affecting some local governments’ cash flows. Community colleges and four-year public universities in both states are adversely affected to varying degrees, while the effect on healthcare institutions is limited.

Comparison of the Effect of Illinois’ and Pennsylvania’s Budget Impasses on Various Sectors

Pennsylvania Illinois

Schools Significant effect given school districts’ dependence on state-sourced revenue. Districts are relying on cash reserves and short-term borrowing to finance operations.

No significant effect to date given passage of K-12 budget.

Cities Limited effect given the ability to increase property taxes and their low reliance on state funds.

Limited effect given the majority of state revenue-sharing distributions continue.

Counties Moderate effect given that some counties have opted to use their reserves to cover pass-through funding to social service agencies.

Limited effect given the majority of state revenue-sharing distributions continue.

Community Colleges Significant effect given that community colleges rely on the state both for operating support and debt service on approved projects. Lack of funding will force community colleges to draw on liquid financial resources.

Moderate effect given that colleges have become accustomed to delayed receipts of current-year state aid payments. However, some are negatively affected by delayed payment of the state’s Monetary Award Program.

Universities Minimal to significant effect depending on the relative reliance on state support and the institution’s liquidity position. No state appropriations have been dispersed during the impasse.

Moderate to significant effect depending on each institution’s liquidity position, budgetary flexibility and alternative revenue streams.

Healthcare Limited effect given that most rated hospitals have more than adequate cash reserves and cash flow to withstand delays in supplemental Medicaid payments and/or have modest reliance on Medicaid; regular Medicaid payments are being made.

Limited effect given that most rated hospitals have more than adequate cash reserves and cash flow to withstand common delays in Medicaid payments and/or have modest reliance on Medicaid.

Source: Moody’s Investors Service

The budget impasse is having the largest effect on Pennsylvania school districts where state aid constitutes 10%-83% of operating revenues. In addition to relying on state aid, many schools already face financial pressure from charter schools and rising pension costs. Although Pennsylvania schools received their property taxes in September, districts more dependent on state aid are now relying on cash reserves and short-term borrowing to keep the doors open and pay obligations.

David Levett Analyst +1.312.706.9990 david.levett@moodys.com

Jennifer Diercksen Assistant Vice President - Analyst +1.212.553.4346 jennifer.diercksen@moodys.com

Erin V. Ortiz Assistant Vice President - Analyst +1.212.553.4603 erin.ortiz@moodys.com

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2015

As of the end of September, 17 school districts and two intermediate units instructing 169,000 students in the state had borrowed more than $346 million and face a combined $11.2 million in interest fees on these loans. Philadelphia School District (Ba3 negative) comprises $275 million of the borrowing, according to the state auditor general.

The budget impasse has had a lesser effect on Pennsylvania counties that pass through state aid for social services providers. Without state funding, some counties are funding these services with their own reserves. The effect on Pennsylvania cities has been minimal because state aid is not a primary source of revenues and cities can increase their tax levy. Cities receive an average of 8.5% of general fund revenues from the state, with the remainder coming from local sources including property, sales and income taxes.

The absence of a state budget thus far has had a more limited effect on Illinois local governments. Although he vetoed other spending bills, Mr. Rauner did sign a preK-12th grade education budget that provides school districts with funding for operations. The majority of state payments to cities and counties are legislatively required transfer payments that do not need a budget, including income tax and sales tax distributions. Under Mr. Rauner’s fiscal 2016 budget proposal, which the legislature did not pass, local governments would have had their state-shared income tax distributions cut in half, but local governments are currently receiving full funding. However, the impasse affects sectors outside of local government, with the state again slowing payment to its many suppliers and vendors, and withholding payment of large lottery winnings.

Some revenue collected by Illinois state government that is shared with local governments, such as gambling revenues and motor fuels taxes, have been delayed. However, the effect on cities and counties is relatively contained. Revenues from motor fuels taxes primarily fund capital projects that often can be deferred. Gambling revenues are typically not a primary revenue source for municipalities.

Community colleges are not receiving distributions in either state. State support typically constitutes 20%-30% of Pennsylvania community colleges’ budgets, and an absence of this funding will force them to draw on liquid financial resources. Although Illinois community colleges were not included in the education budget, the effect has been somewhat muted because state aid payments have been delayed for some time and colleges received their last fiscal 2015 payment in September. However, some community colleges may be feeling the pinch as they covered fall tuition payments that are normally paid through state’s Monetary Award Program.

Public universities are also not receiving any distributions of state aid. The effect of delays in distributions to public universities is highly disparate in both states depending on each university’s relative reliance on support from the state, strength of other revenue streams, budgetary flexibility and available liquidity. There has been a limited effect on the healthcare sector given generally adequate cash reserves to withstand delays.

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

21 MOODY’S CREDIT OUTLOOK 29 OCTOBER 2015

NEWS & ANALYSIS Corporates 2 » Lam Research’s $10.6 Billion Acquisition of KLA-Tencor Is

Credit Positive » AmSurg's Unsolicited Bid for Team Health Is Credit Negative » GTel and Securus Profit Models Are Threatened by Rate Cap

on Intrastate Prison Calls » Amec Foster Wheeler Gets Credit-Negative Verdict in

Longview Arbitration

Infrastructure 7 » Win or Lose, World Series Berth Is a Home Run for Mets'

Stadium Bonds » Brazilian Regulator Proposes Credit-Positive 16.9% Tariff

Increase for Eletronuclear

Banks 11 » New US Swaps Margin Rule Reduces Dealer Banks' OTC

Derivatives Risk, a Credit Positive » CIT Group to Sell Non-Bank Businesses, Continuing Credit-

Positive Transition to a Commercial Bank » Credit Suisse and UBS Bondholders Will Benefit from Too-

Big-to-Fail Capital Requirements » European Commission's Approval of State Aid for HSH Is

Credit Positive » Julius Baer's Plan to Issue High-Trigger Additional Tier 1

Securities Is Credit Positive » Nigeria Raises the Bar for Bank Executives and Boards, a

Credit Positive

Insurers 21 » Hurricane Patricia Bites Mexican P&C Insurers' Fourth-

Quarter Profits

Sovereigns 23 » Africa Finance Corporation Gains Traction with New

Sovereign Member » Uganda's Interest Rate Hike Is Unlikely to Stem Severe

Inflation and Currency Depreciation

CREDIT IN DEPTH PREPA’s Planned Utility Charge Bonds Pose Unique Context for Familiar Risks 27

The Puerto Rico Electric Power Authority plans to issue utility cost recovery charge (UCRC) asset-backed securities as part of a distressed exchange with bondholders of its uninsured power revenue bonds. Full details of PREPA’s planned issuance are not yet available, but the issuance would pose a unique context to the risks present, to varying degrees, in every UCRC securitization.

RATINGS & RESEARCH Rating Changes 30

Last week, we downgraded Ensco, Seadrill Partners, Transocean, Yum! Brands, RWE AG, RWE Finance, Time Insurance, John Alden Life Insurance, CTBC Financial Holding and Illinois. We upgraded First Data, Ally Financial, Hastings Insurance Group, Advantage Insurance, 12 Ally Financial auto-loan ABS, five Toyota Motor Credit Corp auto ABS and five AmeriCredit subprime auto-loan ABS, among other rating actions.

Research Highlights 38

Last week, we published on global oil & natural gas, sovereigns and national oil companies, European business services, global green bonds, US speculative grade liquidity, Polish telecom, North American railroads, global asset prices, North American solid waste, US B3 negative and lower corporates, US healthcare and pharmaceuticals, Energias de Portugal, Electricite de France, European electricity generators, US asset managers, Gulf Cooperation Council insurers, Egyptian insurers, European issuers, Volkswagen Aktiengesellschaft, Gulf Cooperation Council sovereigns, emerging market Baa sovereigns, frontier market sovereigns, France’s regions, English local authorities, New Jersey school districts, New York state, US not-for-profit and public hospitals, US public pension plans, US credit card ABS, Canadian covered bonds, UK RMBS, US CMBS and US CLOs, among other reports.

MOODYS.COM

Report: 185443

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