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2 FEBRUARY 2017

NEWS & ANALYSIS Corporates 2 » Walgreens Boots Alliance to Pay Lower Merger Price for Rite

Aid, a Credit Positive » IHS Markit Accelerates Share Buybacks, a Credit Negative » CMPC's Settlement in Paper-Products Price-Fixing Case

Weakens Its Liquidity » Ericsson's 2016 Results Confirm Credit-Negative Trends,

Despite Strong Fourth-Quarter Cash Flow and Dividend Cut

Infrastructure 6 » CCR’s Equity Offering Is Credit Positive for It, but Negative for

Andrade Gutierrez Participaçoes

Banks 8 » E*TRADE's Jump over $50 Billion in Assets Is Credit Positive » Citigroup Exits Mortgage Servicing at a Manageable Cost, a

Credit Positive » German Banks Would Benefit from a Leverage Cap on

Mortgage Loans » Russian Construction Industry's Protracted Slowdown Is Credit

Negative for Banks » Saudi Banks’ Liquidity Squeeze Eases, a Credit Positive » Increased Crop Planting Is Credit Positive for South African

Agricultural Banks » Cypriot Banks Will Benefit from Rising Deposits » Singapore Banks' Problem Loans Increase

Sub-sovereigns 23 » Ontario's Doubling of Gas Tax Transfers Benefits

Its Municipalities » Rio's Bailout Plan Is Credit Positive for It and Other

Cash-Strapped Brazilian States

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Monday’s Credit Outlook 26 » Go to Last Monday’s Credit Outlook

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NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 2 FEBRUARY 2017

Corporates

Walgreens Boots Alliance to Pay Lower Merger Price for Rite Aid, a Credit Positive On Monday, Walgreens Boots Alliance, Inc. (WBA, Baa2 review for downgrade) and Rite Aid Corporation (B2 review for upgrade) said that WBA is reducing what it will pay for Rite Aid by 13%-15%, from the $17.2 billion the two had originally agreed to in October 2015. We estimate that the new purchase price, which will reduce WBA’s price per share for Rite Aid common stock to a minimum of $6.50 per share and a maximum of $7 per share, will be roughly $14.5-$15.0 billion, a credit positive for WBA. The reduction resulted from a renegotiation following the expiration of the original agreement and we believe is due largely to a reduced number of Rite Aid stores WBA plans to buy as well as a decline in Rite Aid earnings.

Because there is no equity component to the transaction, the reduced purchase price provides WBA an opportunity to reduce the debt incurred to finance the transaction. However, WBA’s Baa2 senior unsecured rating remains on review for downgrade. The reduction in purchase price comes at a time when Rite Aid’s earnings have begun again to modestly decline, a trend that started in the first quarter of 2016 and that we believe will continue. Rite Aid remains in the weakest position among the US drugstore chains to combat ongoing reimbursement pressures from insurance companies, government agencies and programs, and other third-party payers. Therefore, we believe a portion of the purchase price reduction offsets a lower level of expected earnings from Rite Aid.

Among other factors, WBA’s ongoing review for downgrade is supported by its agreement to divest a higher number of Rite Aid stores, which will pressure the amount of earnings it can generate from the Rite Aid stores it purchases. At the time the merger was initially announced in October 2015, WBA expected to only divest 500 Rite Aid stores in order to obtain US Federal Trade Commission (FTC) approval.

As a part of the 30 January amendment, WBA increased the number of store divestitures that it is willing to complete in order to obtain FTC approval. WBA has agreed to divest up to 1,200 Rite Aid stores, which is as many as 200 stores more than the 1,000 stores identified in the original agreement (which provided a cushion over WBA’s original expectations). WBA and Rite Aid currently have an agreement to sell 865 Rite Aid stores to Fred’s Inc. Therefore, the revised merger agreement could result in 335 additional stores, or 34% more than the 1,000 stores that the original agreement considered. We continue to expect that WBA may then choose to voluntarily close additional Rite Aid stores that do not meet WBA’s return hurdles given that Rite Aid’s operating margins remain well below WBA’s.

At the same time, both parties extended the end date of the merger agreement to 31 July 2017. Given that the new agreement requires a shareholder vote and that the FTC review continues, we believe the merger is unlikely to close in the next 90 days.

We could downgrade WBA’s ratings if it is unable to reduce debt/EBITDA below 3.75x from a current pro forma Rite Aid level of 4.4x, and maintain EBITA/interest expense above 4.75x within a reasonable timeframe following the pending merger.

Maggie 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.

IHS Markit Accelerates Share Buybacks, a Credit Negative On Monday, IHS Markit Ltd. (Ba1 stable) accelerated its share repurchase plan, a credit negative because it will likely lead to an increase in IHS Markit’s debt and reduce its financial flexibility to pursue acquisitions, which historically have helped to fuel the company’s revenue growth.

The amended share repurchase plan authorizes IHS Markit to buy up to $2.25 billion of its common shares through May 2018. When IHS Inc. and Markit Limited announced their merger in March 2016 (becoming IHS Markit), they had targeted $1 billion in share repurchases a year in both 2017 and 2018. As a result, we had expected that IHS Market would buy back shares at an even pace through fiscal 2017 (ending 30 November) and 2018.

If IHS Markit were to execute $2.25 billion of share buybacks by May 2018, its debt, which was $3.4 billion in November 2016, would increase by $900 million-$1 billion. Adjusted debt/EBITDA would approach 3x, which is at the high end of management’s target range. For the full year that ended in November, the company reported leverage of 2.5x, pro forma for its acquisition of Markit Ltd.

The large share repurchases will limit IHS Markit’s ability to use debt to fund acquisitions while maintaining leverage in its target range. Our leverage estimates do not incorporate any increase in debt related to acquisitions because we expect management to remain focused on integrating IHS with Markit over the next 12-18 months. However, both IHS and Markit Limited have made large acquisitions in the past to drive growth and expand their products and addressable markets.

The share repurchases will also limit any upside to IHS Markit’s credit metrics in the next 12-18 months. Organic revenue declined modestly in the second half of fiscal 2016 because of declines in the company’s Resources segment, which has been affected by declining capital spending in the energy industry. Although the outlook for the energy industry has improved, the sector’s weak capital spending is likely to persist for the next 12-18 months.

We expect cost synergies from the merger of IHS and Markit to be the primary driver of the company’s EBITDA growth, along with operating efficiencies at legacy IHS and high operating leverage in its businesses. IHS Markit’s low cash taxes and average cost of debt support high EBITDA/free cash flow conversion, which we expect will improve from the high 50% range in the current fiscal year to more than 60% in fiscal 2018. We estimate that IHS Markit will generate annual free cash flow of approximately $800 million in fiscal 2017 and $900 million in fiscal 2018.

Although the company faces revenue growth challenges, it benefits from a high proportion of recurring revenues. Approximately 83% of the company’s revenues were derived from subscriptions or long-term contracts in fiscal 2016.

Raj Joshi Vice President - Senior Analyst +1.212.553.2883 raj.joshi@moodys.com

CMPC’s Settlement in Paper-Products Price-Fixing Case Weakens Its Liquidity Last Friday, CMPC Tissue (unrated), a subsidiary of Chilean pulp/paper company Empresas CMPC (unrated), signed a CLP98 billion ($150 million) agreement to settle a class-action consumer lawsuit alleging price collusion in the domestic tissue market with SCA Chile S.A. (unrated), a subsidiary of Sweden’s Svenska Cellulosa Aktiebolaget (SCA, P-2 stable). The agreement is credit negative for Inversiones CMPC S.A. (Baa3 stable), the rated entity within the CMPC structure, because it will worsen the company’s liquidity despite its $596 million in cash as of 30 September.

Empresas CMPC, the parent company, has not yet made any provisions to pay a fine or consumer compensation. It will set aside provisions for the full amount of consumer compensation in its fourth-quarter 2016 financial statements and will likely make the payment during the first half of 2017.

The class-action suit originally targeted around $510 million, based on what consumer groups claim CMPC and SCA overcharged supermarkets, pharmacies and other wholesalers in Chile for toilet paper, paper towels, napkins and facial tissues from 2000 through at least December 2011. CMPC and SCA together hold about 90% of Chile’s market for those products.

As part of the mediation process, the consumer groups agreed not to demand compensation beyond the two companies’ profits during the collusion period – about $192 million in CMPC’s case. Empresas CMPC generated about $4.8 billion in revenues during the 12 months through September 2016.

The settlement removes uncertainties in the investigation process that Fiscalía Nacional Económica (FNE), Chile’s national economic prosecutor’s office, launched in December 2014, filing a complaint with the country’s competition tribunal in October 2015. CMPC has pleaded guilty to the charges, cooperating with Chilean authorities and making clear that it would willingly reimburse all affected consumers for damages from its anticompetitive practices. The FNE has recommended waiving government fines over collusion, a recommendation likely to be ratified in March 2017. Besides the legal process, CMPC participated in a volunteer collective mediation process led by SERNAC, Chile’s national consumer service, resulting in the $150 million settlement.

FNE since late 2015 also briefly investigated CMPC and various other competitors for alleged collusion on prices for sanitary products in Chile during 2002-09. Although authorities dropped the case, CMPC has agreed to discuss possible compensation with consumer associations. But since CMPC has only a 36% market share in sanitary products in Chile, far less than its share of tissue sales, claims in that case, if any, would be far lower.

Meanwhile, CMPC also faces accusations of price-fixing from Indecopi, Peru’s antitrust and intellectual-property agency, for collusion in the tissue market there. Indecopi charges that CMPC’s subsidiary Protisa fixed tissue prices in Peru with Kimberly-Clark Corporation’s (A2 stable) local subsidiary Kimberly-Clark del Peru SA. No verdict over sanctions has been announced yet, but CMPC’s small market share over the alleged timeline of collusion would mean small fines at most.

Barbara Mattos Vice President - Senior Credit Officer +55.11.3043.7357 barbara.mattos@moodys.com

Ericsson’s 2016 Results Confirm Credit-Negative Trends, Despite Strong Fourth-Quarter Cash Flow and Dividend Cut Last Thursday, Telefonaktiebolaget LM Ericsson (Baa3 negative), reported fourth-quarter and full-year 2016 results that continue to indicate the challenging industry and operating trends that plagued Ericsson earlier in 2016. Ericsson posted relatively strong fourth-quarter cash flow, supported by a material working capital inflow that a significant dividend cut this year will buttress. However, declining revenues as well as gross and operating margins further eroded Ericsson’s cash balance and overall credit quality in 2016, which is a trend that we expect will continue in 2017.

Ericsson reported a 10% year-on-year revenue decline in 2016 (at comparable units and currency) and a drop in its 2016 gross margin to 29.8% from 34.8%, including restructuring charges (or to 31.4% from 35.7%, excluding restructuring charges). Revenue declined despite the fourth-quarter delivery and booking of network hardware valued at around SEK2.5 billion of revenues that was previously planned for delivery in the first-quarter of 2017, and an approximately SEK2.5 billion benefit from a foreign-exchange tailwind in fourth-quarter 2016.

The revenue and margin results largely reflect weaker demand for mobile broadband, which decreased Network sales 12.4% year on year, and a SEK4.4 billion year-on-year decline in intellectual property royalties (IPR) licensing revenues to SEK10 billion, a higher share of lower-margin Global Services sales and higher restructuring charges.

Given the acceleration of the efficiencies program and its 2017 targets, Ericsson posted restructuring charges in 2016 of SEK7.6 billion, higher than the company previously anticipated. Restructuring charges should taper in 2017 to below the company’s forecast level of around SEK3 billion. The decline in the company’s 2016 IPR revenue base was lower than in 2010, despite growing smartphone volumes and revenue levels in the intervening period. The company guided IPR revenue at an annual run rate baseline of SEK7 billion, which reflects the lowest estimated 2017 revenues with the current contract portfolio excluding potential IPR revenues from new contracts.

A tighter than typically seasonal control of working capital (reduced inventories because of lower operating assets, reduced receivables and higher sequential payables) contributed to solid operating cash flow in the fourth quarter. Still, the company’s operating and free cash flow results on an annual basis were significantly below 2015 levels because of sales and earnings declines between the first and third quarter of 2015. Last year was the second consecutive year of negative free cash flow for Ericsson and we project this trend will continue this year and next.

We consider the company’s announced plan to cut its 2017 dividend payments by 73% to SEK1.00/share from SEK3.70/share as credit positive. Not only should this result in cash savings of nearly SEK9 billion in 2017, but it also tangibly shows the company’s commitment to its financial targets and its willingness to take actions to support its liquidity. Despite Ericsson’s current liquidity (SEK57.9 billion of cash and equivalents at year-end 2016, including non-current securities), as operating earnings continue to decline in the current industry down-cycle, liquidity will become an increasingly important consideration in assessing the company’s credit quality.

Although a stronger-than-expected fourth quarter and the announced dividend cut mitigate the negative free cash flow generation we project for this year, we expect the cash burn to continue through 2017. The measures effected and announced in the fourth quarter of 2016 (i.e., tightening working capital, a dividend cut and accelerating restructuring) cannot necessarily be repeatedly sustained over the coming year. That will emphasize a need to improve the company’s underlying operating growth and profitability during the cyclical trough and until the next network equipment upgrade cycle (5G) ramps up materially.

Alejandro Núñez Vice President - Senior Analyst +44.20.7772.1389 alejandro.nunez@moodys.com

Infrastructure

CCR’s Equity Offering Is Credit Positive for It, but Negative for Andrade Gutierrez Participaçoes Last Thursday, Brazilian toll road operator CCR S.A. (Ba3 negative) announced that it had issued 221 million shares through a restricted offering that may grow by 15% to cover over-allotments, if any. As of last Friday’s close of BRL15.82 per share, the issuance should total BRL3.5 billion and rise to up to BRL 4.0 billion if the greenshoe is exercised. The book-building process will conclude on 9 February.

The capital increase is credit positive for CCR because the company will use the proceeds to support infrastructure investments without incurring higher leverage, which would allow the company to participate in different investment opportunities. Conversely, CCR’s capital increase is credit negative for Andrade Gutierrez Participações S.A. (AG Par, B3 stable) because cutting its equity interest in CCR to 15% (if the greenshoe is exercised) from 17% will reduce its dividend cash inflows. We expect that the additional cash inflows generated by the new investments will mitigate this negative effect after 2019-20.

We estimate that CCR’s equity will increase to BRL8.7 billion from BRL4.7 billion. Therefore, leverage measured by net debt/EBITDA should fall to around 2.1x versus 3.0x as of September 2016 (excluding the one-off sale of its 34.24% stake in Serviços e Tecnologia de Pagamentos S.A. for BRL 1.4 billion in March 2016). The 2.1x leverage compares with the 3.5x leverage ceiling financial covenant embedded in some of CCR’s financing agreements, which will allow it to take on more debt. We see room for the company to gradually return to 3.0x leverage after the capital increase to further grow its portfolio, which is the main objective of the equity issuance

We expect that the liquidity improvement will position CCR to expand its portfolio: the 2017 pipeline of anticipated toll road auctions include two federal roads and four concessions in the State of Sao Paulo, or BRL18-BRL20 billion of investments. The first auction scheduled on 22 February is the “Lote D” from the State of Sao Paulo, with 570 kilometers and estimated investments of BRL3.97 billion, half of it in the first eight years of the 30-year concession period.

CCR’s current portfolio requires investments of around BRL11 billion in the next five years, according to company announcements. There are also several investment opportunities within the existing portfolio of concessions, but CCR would have to successfully negotiate with the regulator amendments to its original contracts (e.g., compensation) for any additional investment. For example, CCR is currently discussing BRL3.5 billion of capex not in the original contract for the Concessionaria Rodovia Pres. Dutra S.A. (Ba2 negative) toll road concession.

Additionally, the secondary market offers investment opportunities. This is because some toll road, urban mobility and airport operators want to divest assets after difficulty delivering on their original capex plan, securing long-term financing and/or dealing with frustrating traffic performance because of Brazil’s severe economic crisis in the past two years.

CCR is one of Brazil’s largest toll road concession groups, with 3,265 kilometers of toll road concessions. CCR is ultimately controlled by AG Par, the Camargo Correa Group and the Soares Penido Group, which own a combined 51.22%; the remaining 48.78% shares are currently free floating. A priority right will be given to existing shareholders pro rata to their stakes, but the main shareholders will likely be diluted as the market absorbs the offer to increase free float. In the 12 months to 30 September 2016, CCR reported Moody’s-adjusted consolidated net operating revenues of BRL6.7 billion and EBITDA of BRL4.9 billion.

Aneliza Crnugelj Analyst +55.11.3043.6063 aneliza.crnugelj@moodys.com

Belo Horizonte, Brazil-based AG Par is an investment holding company with minority equity participations in infrastructure and utilities assets operating in Brazil. AG Par’s main participations are CCR through a 17% equity ownership and Companhia Energetica de Minas Gerais - CEMIG (B1 negative) through 6.7% stake.

E*TRADE’s Jump over $50 Billion in Assets Is Credit Positive Last Thursday, E*TRADE Financial Corp. (Baa3 stable) said that it now has more than $50 billion in consolidated assets, which, if maintained for four consecutive quarters, makes it a domestically systemically important financial institution (D-SIFI) under US banking law. The development is credit positive for E*TRADE because bondholders would benefit from the enhanced regulatory supervision and prudential risk standards that the firm is subject to as a D-SIFI. Regulation of US bank holding companies generally becomes more stringent as their size increases.

As of 31 December 2016, E*TRADE had around $17 billion of its brokerage account customer cash deposited with third parties and money market funds. This allocation has been part of the firm’s intentional strategy of managing its size just below the $50 billion threshold by keeping those funds off E*TRADE’s own balance sheet and instead sweeping them into deposits at third-party financial institutions (see exhibit).

E*TRADE’s Projected 2017 Balance Sheet Growth - Total Consolidated Assets, $ Billions

Source: E*TRADE

E*TRADE customers retain the option of having their uninvested cash swept from their brokerage accounts to money market funds or to Federal Deposit Insurance Corp.-insured deposits held at another bank where they earn interest and dividends. E*TRADE in turn collects around 45 basis points in fees on the transferred customer cash balances from the participating institutions receiving the funds. This is a significantly smaller return than E*TRADE Bank’s current net interest margin of 245 basis points earned from on-balance- sheet assets.

The recent rise in interest rates increases the opportunity cost associated with sweeping these cash balances to third parties rather than sweeping them into a deposit account at E*TRADE Bank in order to maintain E*TRADE’s total assets under $50 billion. Consequently, management has chosen to expand its balance sheet by redirecting these sweeps into deposits at E*TRADE Bank and investing the cash in fixed-income US agency securities. According to the company, about $13.5 billion of those customer balances are readily available to move onto the firm’s balance sheet, allowing E*TRADE to increase its potential assets size to more than $57 billion by the first half of 2017 and to $62.5 billion by year-end 2017.

$49.0$57.0

$8.0$5.5

-$16.8-$3.3

Q4 2016 Planned Growth Q2 2017 Planned Size Additional DepositsAvailable

Pro Forma Size

Consolidated Assets Customer Assets Held by Third Parties

Fadi Abdel Massih Analyst +1.212.553.0441 fadi.massih@moodys.com

The balance sheet growth would improve E*TRADE’s earnings via the net interest margin earned from the relatively low-cost deposits being invested in higher-yielding securities. The rise in profitability will be slightly offset by higher implementation costs of around $20 million in combined operating and capital spending over two years, with the majority starting in the first half of 2017, followed by a recurring $15 million of incremental costs per year. However, a rapidly expanding balance sheet can cause numerous risks, including operational risks and the need to effectively manage and oversee the securities portfolio. The additional investments in agency securities, although liquid, increases the risk of a duration mismatch that could be detrimental under an unfavorable market movement such as a sharp increase in short-term interest rates.

The elevated prudential standards to which E*TRADE will be subject include enhanced requirements pertaining to risk-based and leverage capital, enterprise-wide risk management, liquidity standards and buffers, stress testing (company-run and supervisory) and resolution planning. The firm expects that it will be required to comply with the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) beginning in 2019. Through CCAR, the Fed evaluates a firm’s capital adequacy, capital planning process and planned capital distributions, such as any dividend payments and common stock repurchases. Liquidity risk management requirements will include conducting internal liquidity stress tests and maintaining a buffer of highly liquid assets to cover cash flow needs under a stress scenario. For banks newly crossing the $50 billion threshold, the Fed had previously announced a one-year liquidity coverage ratio compliance phase- in period.

Citigroup Exits Mortgage Servicing at a Manageable Cost, a Credit Positive On Monday, Citigroup Inc. (Baa1 stable) announced plans to exit mortgage servicing operations through the sale of $97 billion of mortgage servicing rights to New Residential Investment Corp. (B1 stable) and entry into a sub-servicing agreement for remaining Citi-owned loans and servicing rights with Cenlar FSB (unrated). These actions will reduce pretax earnings by approximately $400 million in the first quarter of 2017.

The decision to exit mortgage servicing is credit positive for Citigroup, despite the earnings hit. It is another example of a new strategic discipline that Citigroup management has displayed since 2012, recalibrating and simplifying its global consumer operations and exiting businesses where it has no clear competitive advantage of expertise or scale. Within the global consumer franchise, management has exited 19 countries with plans to exit three more and is focused instead on faster growing urban areas, including six US cities.

As Exhibit 1 shows, Citigroup’s US retail operations are smaller than its closest peers, Bank of America Corporation (Baa1 positive), JP Morgan Chase & Co. (A3 stable) and Wells Fargo & Company (A2 stable). Also, Citigroup is more dependent on credit card earnings (see Exhibit 2) than its peers. Exiting a sub-scale operation such as mortgage servicing should allow management to focus on improving returns on capital within its US consumer franchise and maintaining investment spending on the streamlined US branch footprint and enhancing digital and mobile banking capabilities.

EXHIBIT 1

Average US Deposits, Third-Party Mortgage Servicing Portfolio and Number of US Branches as of Fourth-Quarter 2016 Beyond credit cards, Citigroup has a smaller US retail footprint than its peers.

Key: C = Citigroup Inc.; JPM = JP Morgan Chase & Co.; BAC = Bank of America Corporation; WFC = Wells Fargo & Company Sources: The companies

C JPM BAC WFC C JPM BAC C JPM BAC

Average US Deposits - left axis Third Party Mortgage Servicing Portfolio - left axis Number of US Branches - right axis

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

Lan Wang, CFA Associate Analyst +1.212.553.7761 lan.wang@moodys.com

EXHIBIT 2

North American Consumer Banking Net Income and Average Return on Assets Citigroup is more dependent on credit card earnings than Bank of America or JP Morgan.

Key: C = Citigroup Inc.; JPM = JP Morgan Chase & Co.; BAC = Bank of America Corporation; WFC = Wells Fargo & Company Notes: Net income generated in credit cards at JPM and BAC is calculated by applying Citi’s ratio of net income in credit cards over average credit card balance to JPM and BAC. The breakdown for North American consumer banking is not available for WFC. Sources: The banks and Moody’s Investors Service calculations

Although the exit makes sound financial sense, it may also bring with it some risks of weakening customer relationships compared with peers that retain servicing in-house. To mitigate these risks, Citigroup has chosen a specialized servicer, with which it does not compete directly in the retail banking arena. Furthermore, the transition to Cenlar will not commence until 2018 to ensure sufficient time to build a robust platform connection. Nonetheless, although Cenlar will indemnify Citi for any servicing errors, Citi remains ultimately responsible as the named servicer and is exposed to the counterparty risk of a much smaller, specialized financial institution.

Citi’s North American retail banking operations earned roughly $900 million pretax in 2016, so the first-quarter earnings hit is meaningful for the line of business. However, Citigroup can easily absorb that amount in the context of its overall pretax earnings, which exceeded $21 billion in 2016.

C JPM BAC WFC

Net Income Excluding Credit Cards - left axis Credit Cards Net Income - left axis Return on Average Assets - right axis

German Banks Would Benefit from a Leverage Cap on Mortgage Loans On 25 January, the German Parliament debated an amendment to local supervisory legislation that aims to reduce the destabilising effect on banks from property bubbles. If the motion passes, Germany’s banking supervisor, BaFin, will be entrusted to take proactive measures against excessive lending by forcing banks to tighten lending criteria when real estate markets show signs of overheating.

If implemented, this amendment would be credit positive for German mortgage lenders, which will benefit from the stabilising effect of prudently adjusting underwriting standards to boom and bust cycles. Considering that mortgage loans accounted for half of all German banks’ domestic customer loans as of 30 September 2016, the new regulation will reduce systemic risks, also benefitting bank creditors.

The draft legislation aims to allow BaFin to flexibly introduce stricter limits on the portion of debt, or leverage, in real estate lending. This implies that the German regulator can effectively rein in mortgage lending through restrictions on the portion of debt financing relative to property values and to borrowers’ financial capacity. In addition, BaFin will be able to regulate how fast mortgages must amortise.

Such measures will reduce the risk of excessive leverage on banks’ balance sheets if they are applied proactively ahead of cycle peaks in property markets. In addition, the measures could even reduce the risk of property markets overheating because less lending would diminish the fuel for a cyclical boom. By addressing risks flexibly during the cycle rather than setting static underwriting standards, the regulator ensures broad accessibility to loans when markets are healthy, while containing systemic risk when they are not.

As the exhibit below shows, German property prices have increased steadily since 2010, after a long period of stagnation, mainly driven by strong demand.

German House Price Index and New Housing Loans

Note: * 2016 new housing loan data are annualised based on the first three quarters of 2016. Sources: European Central Bank and the Bundesbank

Although residential housing prices in Germany have increased since 2010 by around 28% on aggregate and up to 40% in the largest seven cities, we do not see signs of an immediate threat of widespread overheating in Germany’s property market. However, we do see a reason to monitor these developments. Relatively strong salary growth during the same period and Germany’s low unemployment have supported affordability, as measured by loan size in relation to available income. German households’ overall indebtedness has even declined since 2010. Moreover, forecasts of sustained high demand suggest that current price levels will remain stable in the near future.

€ 25

€ 50

€ 75

€ 100

€ 125

€ 150

€ 175

€ 200

€ 225

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*

New Housing Loans to Households - right axis House Price Index = 100 at Q4 2007 - left axis

Mark C. Jenkinson Associate Analyst +49.69.70730.756 mark.jenkinson@moodys.com

Katharina Barten Senior Vice President +49.69.70730.765 katharina.barten@moodys.com

Although Germany never experienced the extreme boom and bust cycles that other European countries such as Ireland and Spain faced, risks persist from inherently cyclical property markets. Several developments could exert pressure on the German real estate market. For instance, the high level of new construction in Germany may continue even when the economy slows materially. Additionally, a return to higher interest rates could trigger a house price correction as rental returns start to look unattractive compared with other investments. The enlarged scope for regulatory action remains important. If applied effectively, BaFin’s flexible tightening of underwriting standards will take out the cyclicality in the German real estate market, making banks safer.

Russian Construction Industry’s Protracted Slowdown Is Credit Negative for Banks On Monday, the Russia’s Rating Agency of Building Complex reported the second consecutive annual increase in construction firm bankruptcies. This trend is credit negative for Russian banks exposed to the construction industry because construction sector loans composed a material 5% of banks’ total gross loans as of 1 December 2016, and the separate real estate sector composed 10%. Weakened borrowers’ creditworthiness reduces banks’ asset quality and drives up loan provisioning needs, which negatively affects profitability and capitalization.

Among the most affected Moody’s-rated banks are CB Kuban Credit Ltd. (B3 stable, b31), Bank ZENIT PJSC (B1/B1 negative, b1), Interprombank, JSCB (B3 stable, b3), Bank Saint-Petersburg PJSC (B1/B1 stable, b1), Rosenergobank (B3 review for downgrade, b3), Locko-bank (B2 stable, b2) and Metkombank (B3 positive, b3), as shown in Exhibit 1.

EXHIBIT 1

Russian Banks with the Largest Shares of Construction Loans

Notes: Data are as of mid-year 2016, except for CB Kuban Credit Ltd., whose data is based on year-end 2015 figures. Data is based on consolidated international financial reporting standards data, except for Rosenergobank, whose data are calculated from local generally accepted accounting principles financials. Sources: The banks and Moody’s Investors Service

In total, around 3,300 construction firms went bankrupt in 2016 (see Exhibit 2) as a result of weak consumer demand amid declines in households’ real disposable income, limited access to credit, increased prices on construction materials, or in some cases an inability to comply with stricter regulatory requirements.

1 The bank ratings shown in this report are the bank’s foreign currency deposit rating, senior unsecured rating (where available) and

baseline credit assessment

CB Kuban CreditLtd

Bank ZENIT PJSC Interprombank,JSCB

Bank Saint-Petersburg PJSC

Rosenergobank Locko-bank Metkombank

Construction Loans to Gross Loans - left axis Real Estate Loans to Gross Loans - left axisConstruction Loans to Shareholders' Equity - right axis

Svetlana Pavlova Assistant Vice President - Analyst +7.495.228.60.52 svetlana.pavlova@moodys.com

Victoria Voronina Associate Analyst +7.495.228.61.13 victoria.voronina@moodys.com

EXHIBIT 2

Number of Russian Construction Firm Bankruptcies, 2014-16

Source: Russia’s Rating Agency of Building Complex

The key driver behind the construction firms’ weakness is slowing demand from governments, corporates and households. Russia’s reduced economic activity has led to an oversupply of available office space and industrial buildings. Household construction, which had been the main driver of sector growth in the past, decreased by 5.5% in January-September 2016 from a year earlier, according to Agency for Housing Mortgage Lending data. The contraction mirrors a protracted decline in households’ real disposable income, which fell by 6.5% in the third quarter of 2016 from a year earlier.

Additionally, increased prices for construction materials and reduced access to bank credit (see Exhibit 3) have suppressed construction companies’ financial standing and led many firms to liquidate. Smaller firms focusing on housing construction, in particular, were additionally pressured by the need to comply with stricter regulatory requirements, which were imposed last year to improve consumer protection.

EXHIBIT 3

Bank Loans to Construction and Real Estate Sectors January-November 2013-16, RUB Trillions

Source: Central Bank of Russia

The recovery in the construction sector will depend on Russia’s overall economic stabilisation. We forecast 1.0% growth of Russian GDP in 2017, but expect that banks will remain cautious in their lending to construction companies this year and keep their borrowing costs high.

37 100

2014 2015 2016

Housing Developers Sub-contractors & Other Firms

2.21.9

1.2 1.2

2.12.1

1.91.5

2013 2014 2015 2016

Construction Real estate

Saudi Banks’ Liquidity Squeeze Eases, a Credit Positive On Monday, the three-month Saudi Interbank Offered Rate (SAIBOR) fell below the central bank repo rate of 2.0%, its lowest level since April 2016. This is credit positive for Saudi banks’ funding costs and confirms that liquidity conditions in Saudi Arabia have eased since the third quarter of 2016 after significant tightening last year because of falling oil prices. We expect liquidity pressures to moderate in 2017 compared with 2016, primarily as a result of subdued credit growth, which will, however, reduce banks’ profits.

In October 2016, the SAIBOR reached its highest level since January 2009 at 2.4%, reflecting tougher funding conditions for banks because of Saudi government spending cuts and payment delays, which in turn put pressure on corporate cash flows and profits. This translated into a 2% year-on-year decline in customer deposits as of September 2016, which, combined with sustained credit growth of a 7% year-on-year increase as of September 2016, pushed up banks’ net loan/deposit ratio to 86% as of September 2016 from 77% at year-end 2014.

However, this trend has reversed since the third quarter of 2016 with large liquidity injections into banks following a $17.5 billion international sovereign bond issuance in October 2016 and the payment of $28 billion of overdue bills to Saudi contractors settled in the fourth quarter of 2016, which led to significant loan repayments to banks.

According to the Saudi Arabian Monetary Agency (SAMA), banks’ liquidity conditions improved in the last months of 2016. In the last quarter of 2016, the M3 indicator for money supply increased 2% quarter on quarter, after relatively flat to negative growth since the second quarter of 2015. Likewise, total customer deposits grew by around 2% quarter on quarter, fuelled by a 4% rise in deposits from the private sector and reversing a declining trend since the start of 2016. At the same time, loan volumes contracted by 3% in the second half of 2016 after the government resumed settling its bills, which allowed contractors to repay banks loans (see exhibit). The loan repayments to banks were partly reflected in SAMA’s balance sheet as a reduction in government deposits allocated for public projects (down 34% in the fourth quarter of 2016).

Saudi Commercial Banks’ Year-on-Year Change in Claims on Private Sector and Total Deposits versus Average Three-Month SAIBOR

Sources: Saudi Arabian Monetary Agency and Bloomberg

0.0%0.2%0.4%0.6%0.8%1.0%1.2%1.4%1.6%1.8%2.0%2.2%2.4%

-6%-4%-2%0%2%4%6%8%

10%12%14%16%

Claims on Private Sector - left axis Total Deposits - left axis Average 3-Month SAIBOR - right axis

Jonathan Parrod Associate Analyst +971.4.237.9546 jonathan.parrod@moodys.com

Olivier Panis Vice President - Senior Credit Officer +971.4.237.9533 olivier.panis@moodys.com

These combined effects led to an improvement in banks’ net loan/deposit ratio to 83% as of December 2016 from a peak of 87% as of June 2016. Also, the stock of core liquid assets (cash, deposits with SAMA and SAMA bills) rose to around SAR272 billion at year-end 2016 (12% of total banking assets) after seven quarters of consecutive declines from the highs of around SAR439 billion at year-end 2014 (21% of total banking assets).

Although we expect liquidity pressures to remain moderate over the next 12-18 months against the backdrop of low credit growth, which we expect at around 3%, deposit growth will remain challenging. Corporate profits and savings will remain constrained by subdued economic conditions, with our estimate for non-oil GDP growth at 2% in 2017. In the meantime, the government needs to fund its fiscal deficit either through its reserves and deposits with banks (deposits from the public sector declined by 10% in 2016), or via debt issuance. However, because domestic debt issuance can crowd out bank liquidity (SAR192 billion domestic issuance between 2015 and 2016), we view the government’s decision on 30 January to suspend domestic bond issues for the fourth consecutive month as positive.

Increased Crop Planting Is Credit Positive for South African Agricultural Banks Last Thursday, South Africa’s Crop Estimate Committee released the preliminary planted area estimate for 2017 summer crops. A 19% year-on-year increase in total planted area, driven by a 31% surge in hectares devoted to maize, signals improved agricultural conditions following recent rainfall. Increased crop estimates are credit positive for banks exposed to the agricultural sector, including Land and Agricultural Development Bank (Land Bank, Baa2 negative), a finance company that operates as a development bank for the agricultural sector, because farmers’ yields and income will increase and improve their repayment capacity.

Credit extended to the agriculture, forestry and fishing sector increased 17% over the 12 months to September 2016, according to the South African Reserve Bank, more than double the system’s aggregate credit expansion. The increase in agricultural exposures was also accompanied by asset quality pressures as a result of drought. Although aggregate data are not available, we estimate that problematic exposures to the sector are higher than the systemwide nonperforming loan ratio of 2.9% as of November 2016.

Land Bank stands to benefit the most from an agricultural rebound, which improves farmers’ repayment capacity and increases banks’ lending opportunities to farmers with the potential to expand output and increase yields. Among commercial banks, FirstRand Bank Limited (Baa2 negative, baa22), which holds around 19% of agricultural debt (see exhibit), should benefit the most given its 4% aggregate loan book exposure to the agricultural sector (against a system average of 2.2% of total credit extended) and given that it has reported a doubling of agriculture-related loan impairments for the fiscal year ending June 2016.

Estimated South African Agricultural Debt Market Shares at December 2015 Land Bank has a leading franchise in the agricultural sector.

Sources: South African Department of Agriculture, Forestry and Fisheries and banks’ financial statements

2 The ratings shown in this report are FirstRand Bank’s deposit rating and baseline credit assessment.

Land Bank29%

FirstRand20%Standard Bank

Nedbank4%

Investec2%

Other31%

Constantinos Kypreos Vice President - Senior Credit Officer +357.2569.3009 constantinos.kypreos@moodys.com

Antypas Asfour, CFA, PRM Associate Analyst +357.2569.3033 antypas.asfour@moodys.com

Cypriot Banks Will Benefit from Rising Deposits Last Friday, the Central Bank of Cyprus released data showing that the banking system’s total deposits for 2016 rose on an annual basis for the first time in four years. The increase in deposits was driven by more stable domestic deposits and is credit positive because it improves banks’ funding structures. It also points to households’ increased capacity to service their high levels of debt, a significant portion of which is distressed.

The €3 billion increase in deposits in 2016 (see Exhibit 1), with total deposits amounting to €49 billion, the highest level since July 2013, indicates improved funding conditions in a system where depositor confidence remains fragile following losses in the country’s March 2013 banking crisis. The improvement reflects Cyprus’ solid economic growth, which we forecast at 2.7% for 2017, lower unemployment and the conclusion of its Economic Adjustment Programme in March 2016. These factors have partly restored depositor confidence, leading to the gradual return of mattress money (i.e., deposits withdrawn from the Cypriot banking system). Record tourism revenues in 20163 also supported increased deposit inflows and we expect them to continue to do so this year as well.

EXHIBIT 1

Cypriot Bank Deposits Increased in 2016, the First Year-on-Year Increase in Four Years

Source: Central Bank of Cyprus

Deposits have grown year on year since October 2015 (see Exhibit 2), despite the abolition of deposit controls in April 2015. Deposits from Cypriot and other euro area residents, particularly corporates from Greece, are driving the growth, with their deposits rising to the highest levels since May 2013 (two months after the depositor bail-in and imposition of deposit controls).

3 See Cypriot Banks Benefit from Strong Tourism in 2016, 21 July 2016.

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Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Melina Skouridou, CFA Assistant Vice President - Analyst +357.2569.3021 melina.skouridou@moodys.com

Antypas Asfour, CFA, PRM Associate Analyst +357.2569.3033 antypas.asfour@moodys.com

EXHIBIT 2

Cypriot Banks’ Deposits by Depositors’ Residence 2010-16 Bank deposits this year have grown at the highest annual rate in more than five years.

Source: Central Bank of Cyprus

We expect households’ improved economic conditions to improve their capacity to service their high debt. Nevertheless, Cypriot banks’ balance sheet rehabilitation process will be lengthy because of the long cure periods for restructured loans before they are reclassified as performing, and substantial distressed debt that has not been restructured yet. Additionally, the limited recoveries from asset sales because of the low volumes the real estate market can currently support and the difficulty of changing Cypriot households’ poor borrowing culture, indicated by a relatively high percentage of restructured retail loans that present arrears, will also prolong banks’ balance sheet rehabilitation.

Creditor confidence has improved, as indicated by the Bank of Cyprus Public Company Limited (Caa2 positive, (P) Caa3, caa24) January Tier 2 notes issuance, the first debt issuance since the 2013 bank bail-in.5 However, depositor sentiment remains fragile, and although not our expectation, a weakening in the banks’ solvency would likely spark deposit outflows.

4 The ratings shown are Bank of Cyprus’ deposit rating, provisional junior subordinated debt rating and baseline credit assessment. 5 See Bank of Cyprus’ Tier 2 Capital Issuance Is Credit Positive, 16 January 2017.

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Cyprus - left axis Other Euro Area - left axis Rest of World - left axis Annual Growth Rates - right axis

Singapore Banks’ Problem Loans Increase On Tuesday, the Monetary Authority of Singapore (MAS) released banking system statistics that showed a continued deterioration in banks’ asset quality in the fourth quarter of 2016. Deteriorating asset quality is credit negative for domestic lenders, and is in line with our expectation that problem loans will continue to rise in the next few quarters, before stabilizing in the second half of 2017.

As Exhibit 1 shows, Singapore banks’ classified exposures6 increased to 1.46% of total exposures at the end of 2016 from 1.38% at 30 September 2015 and 1.08% at the end of 2015. We expect a similar negative trend for Singapore’s largest lenders: DBS Bank Ltd. (Aa1/Aa1 stable, a17), Oversea-Chinese Banking Corp. Ltd. (OCBC, Aa1/Aa1 stable, a1) and United Overseas Bank Limited (UOB, Aa1/Aa1 stable, a1). These lenders will report annual results in the middle of February.

EXHIBIT 1

Singapore Banks’ Problem Loans as Percent of Gross Loans

Note: Bank data based on problem loans; system data based on classified exposures as a share of total exposures. Sources: Monetary Authority of Singapore and the banks

As we noted in January, we expect that new problem assets will rise mildly at Singapore banks in the coming quarters, driven by the oil and gas industry. We also expect that problem loans for this troubled sector will peak in the first half of 2017 because of a gradual recovery in global oil prices.

One positive development in the MAS data was revived loan growth, after decreasing for most of 2016 (Exhibit 2). Domestically, loan growth rose to 3% in December year on year, the highest growth rate in almost two years. Foreign loan growth was still negative in December, but the trend is turning positive as growth is flattening out.

6 On- and off-balance-sheet items that are classified as substandard, doubtful and loss, divided by banks’ total exposure. This includes

loans, securities, off-balance-sheet items and other assets. 7 The bank ratings shown in this report are the banks’ deposit rating, senior unsecured debt rating and baseline credit assessment.

1Q 2015 2Q 2015 3Q 2015 4Q 2015 1Q 2016 2Q 2016 3Q 2016 4Q 2016

DBS Bank Oversea-Chinese Banking Corp. United Overseas Bank System

Eugene Tarzimanov Vice President - Senior Credit Officer +65.6398.8329 eugene.tarzimanov@moodys.com

Simon Chen Vice President - Senior Analyst +65.6398.8305 simon.chen@moodys.com

Rebaca Tan Associate Analyst +65.6311.2610 rebaca.tan@moodys.com

EXHIBIT 2

Singapore Banks’ Year-on-Year Growth in Domestic and Foreign Loans

Note: Domestic loans are based on MAS’ Domestic Banking Unit classification, while foreign loans are based on Asia Currency Unit classification. Source: Monetary Authority of Singapore

As Exhibit 3 shows, domestic credit growth is fuelled by non-bank financial institutions, business services and housing mortgages. Depressed industries such as general commerce, manufacturing and transportation attract far fewer bank loans. The increase in domestic loans to non-bank financial institutions is partly driven by Singapore real estate investment trusts (S-REITs), in our view. This industry has seen a number of debt- funded investments, leading to higher leverage metrics for S-REITs.8 Nonetheless, we consider that Moody’s-rated S-REITs are insulated from rising interest rates over the next 12-18 months because more than half of their outstanding debt is tied to fixed interest rates and refinancing requirements are moderate.

EXHIBIT 3

Singapore 2016 Domestic Loan Growth by Industry

Source: Monetary Authority of Singapore

8 See Real Estate Investment Trusts – Singapore: High Leverage, Weak Operating Environment Will Pressure Singapore REITs, 1

December 2016.

2014Dec

2015Jan

2015Feb

2015Mar

2015Apr

2015May

2015Jun

2015Jul

2015Aug

2015Sep

2015Oct

2015Nov

2015Dec

2016Jan

2016Feb

2016Mar

2016Apr

2016May

2016Jun

2016Jul

2016Aug

2016Sep

2016Oct

2016Nov

2016Dec

Domestic Loans Foreign Loans

Non-Bank FinancialInstitutions

Business Services Housing Mortgages General Commerce Manufacturing

Highest Growth Lowest Growth

Transport, Storage

and Telecom

Sub-sovereigns

Ontario’s Doubling of Gas Tax Transfers Benefits Its Municipalities Last Friday, the Canadian Province of Ontario (Aa2 stable) announced that it will double the share of gas tax revenues it sends to municipalities with public transit networks starting in 2019, a credit positive for Ontario regional governments. At the same time, however, the province refused a request by the City of Toronto (Aa1 stable) to implement tolls on two city-operated highways. The province expects the increase in the gas tax to equal the lower end of the amount of expected revenue raised by the tolls.

Although the provincial tax on gasoline will not change, the province will double the share sent to municipalities to CAD0.04/litre from CAD0.02. The province estimates that this will increase the amount of gas tax revenue shared annually with Ontario municipalities to CAD642 million by 2021-22 from CAD335 million currently. The amount of gas tax funding a municipality receives is relative to the size of its population and total transit ridership.

Ontario municipalities face funding challenges to adequately address all of their infrastructure needs. With own-source revenues largely limited to property taxes and user fees, funds for infrastructure tend to come from allocations from the operating budget, provincial grants or external financing. For example, Waterloo (Aaa stable) and Ottawa (Aaa stable) are currently undertaking large light-rail transit projects and have increased their debt to finance them. The increase in gas tax revenue will help Ontario municipalities increase their funding pools for infrastructure projects.

Toronto, the largest city in Ontario with a vast network of public transit, will receive slightly more than half of the total increase in gas tax funding (CAD170 million). The new funding will help the city finance its estimated CAD33 billion 10-year capital plan.

At the same time, however, the province refused the city’s request to initiate tolls on two important city highways. Although the proposal to install tolls was approved by the city council under the City of Toronto Act, provincial approval is also necessary. The province indicated a current lack of alternative transit options to the highways’ use as one factor for the refusal. The gas tax increase, which was presented as a substitute for the tolling revenue, will also only amount to the lower end of the revenue range (CAD160-CAD300 million) the city forecasted it could have generated from the proposed tolls. The refusal to permit Toronto greater access to own-source revenues also means that the city will continue to rely on existing revenue sources to help fund infrastructure projects. This limits the city’s ability to raise the revenue it requires to adequately fund infrastructure projects.

Michael Yake Vice President - Senior Analyst +1.416.214.3865 michael.yake@moodys.com

Adam Hardi Assistant Vice President - Analyst +1.416.214.3636 adam.hardi@moodys.com

Rio’s Bailout Plan Is Credit Positive for It and Other Cash-Strapped Brazilian States Last Thursday, Brazil’s federal government and the state of Rio de Janeiro (unrated) announced an agreement to place the state on a fiscal recovery program under the federal government’s supervision. Rio projects its cumulative deficit at BRL62.4 billion for the next three years, including BRL26 billion for 2017 alone. The program aims to provide the state with extraordinary resources from additional revenue and expense reduction to cover its deficits for the next three years, a credit positive for the state of Rio de Janeiro, as well as other cash-strapped states.

Pending approvals, the agreement would provide the state with significant cash relief and a way to rebalance its fiscal position over the next three to five years. Rio reported a total deficit of BRL9.2 billion (22% of its revenues) in the first 10 months of 2016. In anticipation of a slow economic recovery in the coming years, the state now expects a deficit of BRL26 billion in 2017, declining to BRL19 billion in 2018 and BRL18 billion in 2019 (see Exhibit 1).

EXHIBIT 1

Rio de Janeiro’s Projected Deficits, 2017-19

Sources: State of Rio de Janeiro and Brazil’s Ministry of Finance

The agreement is subject to the state legislative assembly’s passage of fiscal measures, as well as a congressional amendment of Brazil’s Fiscal Responsibility Law at the federal level. Rio’s government has also requested that the Supreme Court rule in favor of anticipating the effects of the agreement ahead of the votes. Despite previous attempts, Rio’s government has not yet obtained the necessary state legislative votes to implement unpopular fiscal measures, including increasing state employees’ pension contributions. We think the federal government’s direct involvement in the agreement and the scale of its support increases the likelihood that the measures will be approved and implemented.

Brazil’s Fiscal Responsibility Law prohibition of using loans to pay personnel expenses must be amended to implement some of the measures in the agreement. Without the amendment, the agreement could be invalidated. Details of these changes are not yet available, but they could weaken the fiscal control mechanism for other states not directly under a similar federally sponsored recovery program.

According to the plan, Rio will receive a total of BRL19.6 million this year from an increase in revenues and expense reduction (see Exhibit 2). On the revenue side, the state will mainly benefit from an increase in employees’ pension contribution to 22% from 11%, BRL360 million in tax increases, and BRL430 million in contributions from companies benefiting from tax benefits.

2017 2018 2019

Paco Debonnaire Analyst +55.11.3043.7341 paco.debonnaire@moodys.com

On the spending side, the state pledges to reduce administrative headcount and extend the schedule of payment arrears to suppliers. The state will also suspend debt service of loans that are due to or guaranteed by the federal government over the next three years. In addition the federal government indicated that the state will have access to BRL6.5 billion for additional borrowing backed by future revenues from oil royalties and shares in the state-owed water utility company Companhia Estadual de Águas e Esgotos do Rio de Janeiro (unrated).

EXHIBIT 2

Main Measures of Rio’s Agreement with the Brazilian Government Revenues Increase BRL Billions Expenses Cut BRL Billions

Tax increase and 10% contribution from companies receiving tax benefits

BRL0.8 Cut in administrative expenses, postponement of arrears' payments, reduction in state departments and voluntary job dismissal plan

BRL9.0

Debt renegotiation between the state and companies

BRL0.4

Increase in employee pension contribution to 22% from 11%

BRL3.2 Suspension of debt service payment on debt due to or guaranteed by the federal government

BRL6.2

Total Effect Before New Debt in 2017

BRL19.6 Billion

Additional debt backed by the state-owned water utility company CEDAE's privatization and securitization of oil royalties

BRL6.5

Total Effect After New Debt in 2017

BRL26.1 Billion

Sources: Brazilian federal government and Brazil’s Ministry of Finance

The agreement is also positive for all Brazilian states because the scale and scope of the measures announced from the federal government confirms the federal government’s strong support for distressed states. States with material fiscal imbalances and large portions of debt either owed to or guaranteed by the federal government, including Rio Grande do Sul (unrated) and Minas Gerais (B1 negative), could benefit from a similar deal. In the case of Minas Gerais, 97% of the state’s debt is either owed to or guaranteed by the federal government. Therefore, Minas Gerais’ suspension of its debt service in 2017 would result in a gain of BRL4 billion, equivalent to its 2016 deficit.

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

NEWS & ANALYSIS Corporates 2 » Johnson & Johnson’s Credit-Negative Acquisition of Actelion

Involves a Rich Price and Large Portion of Its Cash » WestRock’s Acquisition of MPS Enhances Product and

Geographic Diversity » Plains All American’s Purchase of Concho Midstream Assets

Is Negative for Buyer, Positive for Seller » British Telecommunications’ Profit Warning Adds to Leverage » Tesco’s Proposed Merger with Booker Is Credit Positive » Morrison’s Debt Prepayment Further Improves Leverage, a

Credit Positive » Novartis’ Debt-Funded Share Buyback Programme Is

Credit Negative » Alibaba’s Stronger-than-Expected Quarterly Results Are

Credit Positive » PETRONAS and JX Holdings’ Ninth Liquefaction Train at

Malaysian Plant Is Credit Positive for Both

Infrastructure 12 » Keystone XL’s Revival Is Credit Negative for TransCanada

Banks 13 » Zions’ Credit-Positive Executive Pay Cut Allows Bank to Meet

Its Efficiency Target » Royal Bank of Scotland’s Provision for US RMBS Settlements

Is Credit Negative » Yorkshire Building Society’s Branch Closures and Rebranding

Are Credit Positive » Credit Agricole Records €491 Million Goodwill Impairment

Against LCL » Delays in Review of Greece’s Support Programme Threaten

to Jeopardise Banks’ Restructuring Plans » BDO Unibank’s Rights Issue Will Strengthen Its Capital Buffer

Insurers 23 » US Ruling to Block Aetna-Humana Merger Is Credit Negative

for Humana, Credit Positive for Aetna » Aetna’s Reinsurer Deal Provides Limited Risk Protection

US Public Finance 27 » Port of Long Beach Will Benefit from MSC and HMM’s

Purchase of Terminal Operator

Securitization 29 » Volkswagen Dealer Settlement Is Credit Positive for Its US

Floorplan ABS » Invitation Homes Will Pay Down Single-Family Rental

Securitizations with New Fannie Mae Loan, a Credit Positive

MOODYS.COM

Report: 194231

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