moody's credit outlook - 30 july 2015

MOODYS.COM

30 JULY 2015

NEWS & ANALYSIS Corporates 2 Teva Will Triple Debt to Buy Allergan's Generics Business Pearson's Sale of FT Group to Nikkei Is Credit Positive UK Bookmaker Ladbrokes' Merger with Gala Coral Is

Credit Positive

Infrastructure 6 Energy Future Holdings Bankruptcy Disclosure Statement Is

Credit Negative for Oncor Korea's Nuclear Reactor Commissioning Is Credit Positive for

KHNP and KEPCO

Banks 9 Higher Deposit Rates for Argentine Banks Will Narrow Interest

Margins, a Credit Negative Australian Major Banks Repricing of Residential Investor Loans

Is Credit Positive

Insurers 14 Meiji Yasuda's Acquisition of US-Based StanCorp

Benefits StanCorp

Sovereigns 16 Korea's Supplementary Budget Aims to Bolster Growth and

Maintain Fiscal Prudence, a Credit Positive The Unfolding Collapse in Macao's Economy Is a Credit

Negative

RECENTLY IN CREDIT OUTLOOK

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NEWS & ANALYSIS Credit implications of current events

2 MOODYS CREDIT OUTLOOK 30 JULY 2015

Corporates

Teva Will Triple Debt to Buy Allergans Generics Business Teva Pharmaceutical Industries Ltd. (Baa1 review for downgrade) on Monday announced plans to buy the North American generic and international businesses of Allergan Plc (unrated1) for $40.5 billion in cash and equity. The deal, which Teva will fund with $27 billion of new debt, is credit negative for Teva because it will significantly increase its financial leverage. For Allergan, the deal will reduce its scale and diversity, which we typically view as credit negative, but this will be mitigated by the receipt of $36 billion of net proceeds, which will significantly strengthen Allergans balance sheet.

Following the deals announcement, we downgraded Tevas A3 rating to Baa1, and its ratings remain on review for downgrade. We also affirmed Allergan subsidiaries Baa3 ratings and stable outlooks.

To pursue Allergan, Teva abandoned its hostile effort to buy another generics company, Mylan Inc. (Baa3 developing), for $46.5 billion, including the assumption of $6.5 billion of Mylans debt. Although the Allergan deal carries less execution risk, it carries a higher purchase multiple and offers fewer operating synergies. Teva is paying 17x trailing 12-month EBITDA for Allergans generics business before accounting for synergies (10.8x including Tevas expectation of $1.4 billion of synergies). This compares with Tevas bid of 15.5x EBITDA for Mylan (9.3x including $2 billion of expected synergies).

The Allergan deal will raise Tevas total debt to about $38 billion from $11 billion and its debt/EBITDA to 4.6x (or 4.0x including synergies) from about 2.0x (based on trailing 12-month EBITDA). The Mylan deal would have resulted in pro forma leverage of about 4.4x (or 3.6x with synergies).

However, the Allergan deal will be less disruptive to Teva than a hostile bid for Mylan, which would have been a protracted distraction and would result in a difficult integration. Both Tevas and Allergans boards already approved the transaction and Sigurder Olafsson, head of Tevas generics business, is the former head of Allergans generic business. Furthermore, Teva-Allergan has fewer significant overlapping assets than Teva-Mylan, so antitrust regulators are likely to require fewer significant divestitures.

The Allergan deal solidifies Tevas leadership position in the generics industry. With pro forma generic drug revenue of about $16.7 billion, Teva will be almost twice as large as its closest competitor, Novartis AGs (Aa3 stable) Sandoz unit. Allergan will also provide Teva with economies of scale and improve its manufacturing capacity. Scale is increasingly critical for generic drug makers as their customers, drug wholesalers and retailers, consolidate their purchasing power in order to gain negotiating leverage and put pricing pressure on generic manufacturers.

The Allergan assets will reduce Tevas reliance on Copaxone, an injectable drug for multiple sclerosis, which in 2014 contributed approximately 21% of total revenue and nearly half of operating profits. Sandoz and its partner Momenta (unrated) launched a generic version of Copaxone in June. As a result, Tevas standalone growth prospects for the next two years are relatively modest, because declines in Copaxone will be a drag on overall profits. Following the close of the deal, we estimate that Copaxone will contribute less than 15% of pro forma revenues and less than one third of operating profits.

1 Allergan subsidiaries, including Actavis Funding SCS, Actavis Inc., and Allegan Inc. are rated Baa3 stable.

Jessica Gladstone, CFA Senior Vice President +1.212.553.2988 [email protected]

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.



For Allergan, the divestiture is a complete about-face because the company repeatedly had said that it would not sell the business. The generic business has lower profit margins than Allergans branded business, but it affords the company scale and diversity, which it will now forego, along with about $2.4 billion of annual EBITDA.

However, the $36 billion of net after-tax cash proceeds from the sale will strengthen the companys balance sheet and give the company the opportunity to reduce its leverage through debt repayment or acquisitions that grow EBITDA. How much debt Allergan will repay with the proceeds is uncertain, but Allergan has stated that it is committed to maintaining an investment-grade rating. We estimate around $8 billion of pro forma EBITDA following the divestiture. The company in the past has stated a goal of reducing leverage to around 3.5x, which would translate to debt repayment of roughly $16 billion (current debt is around $44 billion). That said, Allergan very well may pursue additional acquisitions, deleveraging through enhancing its earnings instead, and therefore may end up repaying significantly less debt than that estimate.



Pearsons Sale of FT Group to Nikkei Is Credit Positive Last Thursday, Pearson plc (Baa1 negative) announced that it had agreed to sell the FT Group to Nikkei Inc. (unrated) for a gross consideration of 844 million. The FT Group sale, which includes the London-based Financial Times, is credit positive for Pearson because it helps boost cash amid a challenging operating environment that has contributed to a significant deterioration in Pearsons credit metrics. We view the sale as part of the transformation of Pearsons business away from traditional journalism, and expect sale proceeds to facilitate investment in education businesses that have higher return potential.

Our credit-positive view of the FT Group sale is based on the expectation that Pearson will apply the proceeds in a fashion that strengthens the company through business investments or actions to reduce financial risk, such as debt reduction. Using the proceeds for bolt-on acquisitions with stronger growth and operating margin potential in emerging markets or in the digital space in the education sector would likely reduce Pearsons business risk.

Pearson will be receiving 694 million of net disposal proceeds after deducting the 90 million contribution that Pearson will make to the group pension plan following the transactions close and a tax deduction on disposal of approximately 60 million.

The sale of FT Group comes at a strong valuation of around 35x 2014 earnings. Pearson will not lose much scale with the sale because the FT Group contributed only 334 million in sales in 2014 (around 7% of Pearsons total 2014 revenues) and 24 million in adjusted operating income (only 3% of Pearsons total 2014 adjusted operating profit, including Penguin Random House, which, using the equity method, is accounted for as 47%-owned by Pearson).

We regard the disposal of FT Group as part of a broad repositioning of Pearsons business toward education. Pearson has been disposing of other non-core assets, selling its PowerSchool business, a leading provider of K-12 student information systems in North America, for $350 million in June 2015. On 25 July, Pearson confirmed that it is in discussions with the Economist Groups board and trustees regarding the potential sale of its 50% stake in that company.

However, Pearson has struggled over the past two years because education textbook sales and university enrolments in North America have been declining. The company pursued a significant restructuring in 2013 and 2014 to boost investment in digital services and emerging markets. The cash proceeds from FT Groups disposal should help Pearson invest in growth initiatives such as bolt-on acquisitions with good growth potential and de-leveraging its balance sheet.

In its first-half 2015 results, Pearson confirmed that it expected the cyclical and policy-related factors that have hindered growth in its education businesses to stabilize during the rest of 2015.

The negative outlook on Pearsons Baa1 rating considers the need for further stabilisation in its key education markets and consistent execution of the companys operating plan to restore credit metrics to levels that are more supportive of the rating. To be adequately positioned within the Baa1 rating, we would expect Pearson to maintain a Moodys-adjusted retained cash flow/net debt ratio at least in the high teens, versus 14.3% in 2014, and an adjusted gross debt/EBITDA ratio of less than 3.0x, versus 3.5x at the end of 2014.

Gunjan Dixit Vice President - Senior Analyst +44.20.7772.8628 [email protected]



UK Bookmaker Ladbrokes Merger with Gala Coral Is Credit Positive Last Friday, UK bookmakers Ladbrokes Plc (Ba2 stable) and Gala Coral Group Limited, parent of Gala Electric Casinos Plc (B2 stable), agreed to merge Ladbrokes with Corals betting businesses, creating a group with a pro forma market capitalisation of 2.3 billion.

The merger, which is subject to approval by Ladbrokes shareholders and regulator, is credit positive because of the combined entitys increased size, its more balanced product offering and wider geographic reach. Ladbrokes Coral will become the UKs largest owner of betting shops and the third-largest operator in online gaming.

Ladbrokes Coral will issue new shares to Gala Coral at the completion of the merger, which includes Coral Retail, Eurobet Italy and Corals Online division.

The combined company will have revenues of 2.2 billion and EBITDA of 390 million before exceptional items, based on the 12 months ended 30 June 2015 for Ladbrokes and 11 April 2015 for Coral, compared with revenues of 1.2 billion and EBITDA of 187 million for Ladbrokes on its own. The merged company will strengthen its share of the UK market with 4,000 betting shops, compared with Ladbrokes approximately 2,200 shops before the merger. It will also overtake current market leader William Hill Plc (Ba1 positive), which has around 2,300 betting shops.

The merged company will also slightly reduce its share of overall revenues from the mature UK retail gaming segment and improve its presence online. Furthermore, Ladbrokes will gain access to the Italian market with Corals current land-base and online-operation presence.

The increased scale will result in greater marketing capabilities and economies of scale. The management team has estimated annual synergies of at least 65 million to be fully realised in the next three years by efficiency savings and renegotiating supplier contracts (e.g., with software supplier Playtech). However, the estimated cost savings are only a small fraction (4%-5%) of the combined cost base.

Ladbrokes also announced a three-year strategic plan, including the issuance of 92 million shares and dividend cuts to support investment in its retail and digital divisions and Australian operations and to strengthen its balance sheet. The credit-positive plan, which is independent of the Coral deal, addresses the divisions whose performance lags those of peers without compromising cash flow generation.

Notwithstanding the strategic benefits, the transaction will weaken Ladbrokes capital structure, increasing the companys net reported debt to approximately 1.3 billion from 414 million currently. Our Moodys-adjusted leverage, as measured by debt/EBITDA, will likely rise to more than 4x upon completion of the deal from 3.5x in 2014, which we expect in the first half of 2016. However, we expect the company to maintain a strict financial policy and to gradually reduce leverage, aided by the realisation of cost synergies.

Ladbrokes Coral also faces execution and regulatory risks. Combining the two companies could take longer and cost more than management expects owing to the size and complexity of the operations. Although the companies plan to keep both the Coral and Ladbrokes brands in the UK, we expect that there will be some customer loss, particularly in the digital division. Because of the merged companys market-leading position in UK retail gaming, the regulator, the Competition and Markets Authority, is likely to look closely at the deal and may require the sale of some betting shops.

Donatella Maso Vice President - Senior Analyst +44.20.7772.5244 [email protected]



Infrastructure

Energy Future Holdings Bankruptcy Disclosure Statement Is Credit Negative for Oncor Last Thursday, Energy Future Holdings Corp. (EFH, unrated) filed an amended disclosure statement with the US Bankruptcy Court that spells out EFHs preferred path for emerging from bankruptcy. The preferred path is credit negative for EFHs 80%-owned regulated transmission and distribution utility, Oncor Electric Delivery Company LLC (Baa1 positive). We see three credit-negative risks in the disclosure statement: Oncors conversion to a real estate investment trust (REIT), dismantling of ring-fence provisions and higher leverage across the corporate family.

EFH plans to convert Oncor into a REIT, which will increase the risk of regulatory contentiousness during the Public Utility Commission of Texas (PUCT) approval process for the change-in-control and for future rate cases. A REIT structure would allow the new owner of the utility assets to reduce its tax obligations, potentially creating a disconnect between the reduced tax obligation at the corporate level as a REIT and the rate collected from the ratepayers to cover the higher tax obligation as an electric utility corporation.

Unless authorized rates are modified to reflect the tax efficiencies associated with REITs, we expect customers to become intolerant of rate increase requests, which would build pressure at both the political and regulatory levels to reduce rates. As a result, we believe that the PUCT, which regulates Texas electric rates, would likely address the disconnect through regulatory measures. For example, the PUCT might restrict upstream dividend payments or lower Oncors 10.25% authorized return on equity, which is already higher than its Texas electric transmission and distribution peers, to factor in the tax savings of the REIT structure.

We also see a material dismantling of the strong suite of ring-fence provisions that helped insulate Oncor from its financially distressed parent and affiliate. The disclosure plan contemplates removing Oncors minority investors, including the Canadian pension manager Borelias Infrastructure. Borelias presence at Oncor, combined with the special corporate governance rights provided to it, was a principal element in our analysis of how well Oncor would be insulated from its parents bankruptcy. The disclosure statement reminds us that minority investors can help reduce the probability of a default, but have very little influence with respect to expected losses. However, we see Borealis as a formidable minority investor that will vigorously defend its rights, which will help to keep Oncors existing ring-fence provisions in place.

The third principal risk is the leverage across the family. We estimate that $12 billion of capital will sit above Oncor at its parent holding company, in addition to its roughly $7.5 billion of debt. Regardless of whether it is legally liable or not, Oncor will need to service the financing costs associated with that capital since it is the only entity within the corporate family that generates any earnings or cash flow. EFH expects that the capital will be a mix of debt and equity, but it is difficult to see at this time what the split would be. We also see an added regulatory risk in the sense that the preferred path for bankruptcy, coupled with the $12 billion of capital, is designed to help facilitate recovery at Oncors affiliate, Texas Competitive Energy Holdings Company LLC, the unregulated generation segment of EFH.

The plot will thicken over the next few weeks as additional information comes to light with respect to the terms and conditions being sought by the debtors and creditors. We expect the bankruptcy court to review the disclosure statement on 18 August.

Jairo Chung Analyst +1.212.553.5123 [email protected]

Jim Hempstead Associate Managing Director +1.212.553.4318 [email protected]



Koreas Nuclear Reactor Commissioning Is Credit Positive for KHNP and KEPCO Last Friday, Korea Hydro and Nuclear Power Company Limited (KHNP, Aa3 positive), the wholly owned nuclear power generation subsidiary of Korea Electric Power Corporation (KEPCO, Aa3 positive), announced that it had commenced the commercial operations of the Shin-Wolseong 2 nuclear reactor following approval from Koreas Nuclear Safety and Security Commission.

The commissioning is credit positive for KHNP and KEPCO because it will strengthen the companies operating cash flow and debt metrics by boosting KHNPs electricity sales and by reducing KEPCOs reliance on relatively expensive liquefied natural gas (LNG) or oil-fueled power plants.

With 1,000 megawatts of capacity, the new reactor will generate 7,900 gigawatt-hours per year, according to KHNP. The gain will increase KHNPs funds from operations (FFO) by KRW300-KRW400 billion annually, and support its credit metrics against sizable capital expenditures to build new plants. With this already reflected in our base case, we expect KHNPs FFO/debt to be 23%-28% over the next 12-18 months, down slightly from 31% in 2014.

For KEPCO, the additional baseload generation will help reduce its overall generation costs, including the costs of purchasing electricity from independent power producers, which is mostly LNG-fueled and therefore costlier than electricity from nuclear or coal plants. We expect such incremental savings to boost the utilitys FFO by KRW500-KRW600 billion annually, which, together with a significant decline in fuel costs, will strengthen its credit metrics. We expect KEPCOs FFO/debt to improve to 20%-23% over the same period from 18% in 2014 (see Exhibit 1).

EXHIBIT 1

KEPCO Funds from Operations/Debt Lower costs of power purchase and fuel costs will support continued improvement of KEPCOs cash flow.

Sources: Moodys Financial Metrics and Moodys Investors Service forecast

Significantly, the commencement of Shin-Wolseong 2s operations marks the first commissioning of a new reactor in Korea since the discovery of substandard parts in some reactors in 2013, which led to lengthy inspections and temporary shutdowns of several reactors. As such, the start-up of Shin-Wolseong 2 demonstrates the Korean governments (Aa3 positive) continued support for nuclear energy and sets a positive precedent for start-up approvals over the next three years of KHNPs four other reactors that are currently under construction. These reactors, Shin-Kori 3 and 4 and Shin-Hanul 1 and 2, have a combined capacity of 5,600 megawatts and, if commissioned as scheduled, would augment the nations nuclear capacity by 26% by 2018 (see Exhibit 2).

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2011 2012 2013 2014 2015-2016(F) Average

Sean Hwang Associate Analyst +852.3758.1587 [email protected]



EXHIBIT 2

KHNP Aims to Add 5,600 Megawatts of Nuclear Capacity by 2018

Source: Korea Ministry of Trade, Infrastructure and Energy

In the Seventh Basic Plan for Long-Term Electricity Supply and Demand, approved by the National Assembly on 21 July, the government outlined its goal to nearly double KHNPs nuclear capacity to 38,329 megawatts by 2029 from 20,716 at year-end 2014. To achieve this target, KHNP plans to add 12 more reactors, including the four Shin-Kori and Shin-Hanul units, over the next 15 years.

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Existing Nuclear Capacity at Year-End 2014 Shin-Wolseong 2 Shin-Kori 3 Shin-Kori 4 Shin-Hanul 1 Shin-Hanul 2



Banks

Higher Deposit Rates for Argentine Banks Will Narrow Interest Margins, a Credit Negative Last Thursday, the Argentine central bank expanded existing regulations that require banks to pay minimum rates for deposits, which will drive further increases in funding costs. The new rules raise the minimum rates set in October 2014, and apply them to a greater share of bank deposits.

The minimum deposit rates will now be applied to the first ARS1 million ($109,000) of deposits in each account, significantly higher than the previous ARS350,000 threshold. These higher funding costs will further narrow banks interest margins, which are already negatively pressured by Argentinas weak economy.

The regulation aims to encourage Argentine peso savings, while simultaneously reducing pressure on the exchange rate in the unofficial market, where Argentines go when they are unable to obtain foreign currencies at the more favorable government official exchange rate. Market participants have been buying dollars to protect their savings against Argentinas high inflation rate, which is officially calculated at an annualized rate of 13.9% and unofficially at 25%-30%, and to guard against a further devaluation of the currency. Recently, uncertainty about the outcome of presidential election primaries scheduled for 9 August has increased demand for dollars in the unofficial market.

The minimum interest rates first set in October 2014 were 400 basis points higher than market rates at that time. The latest regulation published last Thursday will require banks to increase their deposit rates by an additional 100-300 basis points depending on the tenor and the amount of the term deposit. Consequently, banks will now have to pay up to 26.1% on deposits that are subject to the government-mandated interest rate floors (see Exhibit 1).

EXHIBIT 1

Argentine Government-Mandated Interest Rates Tenor of Deposit New Minimum Rates Previous Minimum Rates

30-44 days 23.6% 22.6%

45-59 days 24.1% 23.1%

60-89 days 25.1% 24.1%

90-119 days 25.6% 24.1%

120-179 days 25.9% 24.1%

180 days and longer 26.1% 24.1%

Note: These rates apply to deposit amounts of up to ARS1 million. Source: Banco Central de la Repblica Argentina

Banks will continue to benefit from access to current accounts, which do not pay interest and account for 30% of total funding, and saving accounts, which account for 22% of total funding, and have a relatively low average cost of 0.20%. However, the minimum deposit rates will now apply to almost 20% of total deposits in the system, up from 13% currently (see Exhibit 2). We expect that the new rates will require banks to spend about ARS2 billion more on deposits a year, roughly a 2% increase in funding costs across the banking system.

Fernando Albano, CFA Assistant Vice President - Analyst +54.11.5129.2624 [email protected]



EXHIBIT 2

Argentine Bank Deposits by Type and Amount New minimum interest rates on term deposits will apply to 20% of total deposits.

Source: Banco Central de la Repblica Argentina

In addition to deposit rate floors, banks interest margins have also narrowed because of lending rate caps on pledge loans, personal loans and credit card loans in place since 2014, as well as the central bank mandate in place since 2012 that banks every six months lend an amount equal to a percentage of their total private sector peso-denominated deposits. The central bank increased the percentage of deposits to 7.5% in June 2015 from 6.5%. The lending must be made at a capped rate that has been 300-500 basis points lower than the average rate banks have to pay for term deposits, and up to 810 basis points below the government-mandated minimum rate for deposits of less than ARS1 million with tenors greater than 180 days, creating a significant drag on earnings.

Argentine private banks earned a 28% average annualized return on equity in nominal terms in the first quarter of this year, despite these rate floors and caps and lending mandates. However, when adjusted for inflation, which private-sector estimates peg at 25%-30% over the same period, profitability was around zero. Moreover, profitability will face further pressure as banks continue to increase their holdings of liquid assets such as central bank bills, which yield negative real interest rates, and slow their loan growth in response to concerns about the effect of the countrys weakening economy on borrowers creditworthiness.

Term Deposits Lower than ARS350K (Minimum Rates Since October 2014)13%

Term Deposits Between ARS350K and ARS1M (New Minimum Rates)7%

Term Deposits Higher than ARS1M (Rate Not Regulated)28%

Current Accounts (No Cost)30%

Savings Accounts (Average Cost 0.2%)22%



Australian Major Banks Repricing of Residential Investor Loans Is Credit Positive Over the past week, three major Australian banks increased their lending rates for residential property investment loans and interest-only (IO) loans. Australia and New Zealand Banking Group Limited (ANZ, Aa2/Aa2 stable, a12) and Commonwealth Bank of Australia (CBA, Aa2/Aa2 stable, a1) each lifted the standard variable investor rate by 0.27%. National Australia Bank Limited (NAB, Aa2/Aa2 stable, a1) increased the rate it charges for IO loans and line of credit facilities by 0.29% (investors, rather than owner-occupiers, primarily take out IO loans).

Increased lending rates are credit positive for the banks because they rebalance their portfolios away from the higher-risk investor and IO lending toward safer owner-occupied and principal amortizing loans. They also help to preserve net interest margins (NIM) and profitability amid higher capital requirements and increased competition from smaller lenders.

The banks moves follow increasing regulatory scrutiny of residential property lending. Investment and IO lending has grown rapidly in the recent past, reaching a record proportion of overall mortgage lending (see Exhibit 1) that has contributed to rapid house price appreciation, particularly in the Sydney and Melbourne markets.

EXHIBIT 1

Australian Major Banks Proportion of Higher-Risk Mortgage Lending as a Percentage of Housing Loans Written

Source: Australian Prudential Regulation Authority

In December 2014, the Australian Prudential Regulation Authority (APRA) announced a set of measures designed to ensure residential mortgage underwriting standards remain prudent and to curb growth in investment lending to 10% per year. The major Australian banks have since undertaken a number of initiatives to ensure compliance with APRAs guidelines (see Exhibit 2). Notably, these include the imposition of higher down payment requirements for investment lending and these most recent pricing changes.

2 The bank ratings shown in this report are the banks deposit rating, senior unsecured debt rating and baseline credit assessment.

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Investment Loans IO Loans

Ilya Serov Vice President - Senior Credit Officer +61.2.9270.8162 [email protected]



EXHIBIT 2

Australian Major Banks Initiatives to Curb Investment Lending

Changes to Loan-to-Value Caps

Changes to Mortgages Interest Rates Other

Australia and New Zealand Banking Group Limited

90% loan-to-value (LTV) caps for investor loans

Eliminated interest rate discount for new property investors Increased interest rates for investment loans, cut fixed owner occupier rates

Commonwealth Bank of Australia

80% LTV caps for investor loans (for the Bankwest brand)

Reduced interest rate discount for new investor borrowers Increased interest rates for investment loans

Removed AUD1,000 rebate for new investor borrowers

National Australia Bank Limited

90% LTV caps for investor loans

Increased interest rates for interest-only loans and line of credit facilities

Discontinued investor lending for self-managed superannuation funds

Westpac Banking Corporation 80% LTV caps for investor loans

Reduced interest rate discount for new investor borrowers

Stricter lending criteria for "non-resident" home lending, toughened serviceability test

Source: The companies and media reports

Although investment and IO loans performed well during the global financial crisis of 2007-10, they inherently carry higher default probabilities and severities, and a larger proportion of such loans risks higher delinquencies for Australian banks at times of stress.

Investment loans typically have higher loan-to-value ratios: our data indicates that the average loan-to-value ratio for investment loans is 60.2%, versus 57.8% for owner-occupier loans. In addition, since the underlying properties are not the primary residence, they are more sensitive to changes in house prices and borrower employment status and thus are more likely to default if the borrowers conditions change. IO loans are more exposed to rising interest rates than principal-and-interest loans.

We see APRAs and the banks efforts to slow the growth in investment lending as an important credit support for the system. We also expect that the remaining major Australian bank, Westpac Banking Corporation (Aa2/Aa2 stable, a1) will follow the other banks in repricing its investment mortgage book. Over time, these steps are likely to slow investment lending growth rates to below APRAs 10% cap from current annualized growth rates of 10.6% for ANZ, 9.9% for CBA, 14.1% for NAB and 10.0% for Westpac, according to APRA data.

Curbing investment lending is particularly positive for those banks with significant investment loan portfolios. As Exhibit 3 shows, NAB and Westpac, when it follows suit, are especially well-placed to derive benefits from pricing changes. Westpac has the highest proportion of investment lending in its portfolio (46% of total housing loans), exposing it to a higher-risk segment, and NAB has opted to reprice its IO loans and line of credit facilities (together they constitute 47% of its overall portfolio), allowing it to capture a greater NIM benefit.



EXHIBIT 3

Australian Major Banks Proportion of Investor Loans as a Percentage of Total Housing Portfolios

Source: The companies

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Investment Lending IO and Line of Credit Lending



Insurers

Meiji Yasudas Acquisition of US-Based StanCorp Benefits StanCorp Last Friday, Meiji Yasuda Life Insurance Company (financial strength A1 stable) announced that it had acquired all the outstanding shares of StanCorp Financial Group, Inc. (Baa2 review for upgrade) for about $5 billion in cash, pending regulatory and shareholder approval. After the deal announcement, we put StanCorps debt ratings on review for upgrade and affirmed Meiji Yasudas rating and the financial strength rating of StanCorps operating company, Standard Insurance Company (financial strength A2 stable).

StanCorp, a niche writer primarily of disability insurance and group insurance products, will benefit by becoming part of Meiji Yasuda, a group and individual life mutual insurer that is Japans third-largest insurer by premium revenue. Meiji Yasuda has greater financial resources and stronger credit quality than StanCorp, reflecting its robust capital and liquidity.

StanCorps credit quality will benefit from its improved access to capital because we believe that Meiji Yasuda would support StanCorp in a stressful scenario and StanCorp will have less pressure to pay dividends to satisfy shareholder demands than it did as an independent company.

StanCorp has a strong competitive position in US group life insurance and disability, businesses that have long-tail risk and earnings volatility. Additionally, StanCorp maintains retirement and asset management businesses, both of which diversify StanCorps credit profile. However, the companys profitability and investment returns are sensitive to economic cycles because of its concentration in disability insurance, whose performance is affected by employment trends, and its significant investment concentration in commercial mortgage loans.

We see more benefits to StanCorps creditors than to its policyholders because Meiji Yasuda would likely support StanCorps creditors to protect its $5 billion equity investment in the company. We affirmed Standards financial strength rating and did not place it on review for upgrade because Meiji Yasudas A1 financial strength rating is only one notch above Standards, and we typically do not raise the rating of a supported operating company to the same level as the entity providing support unless that support is both explicit and strong. In addition, the following factors limit the amount of ratings uplift given for parental support: relative size, ease of separation of subsidiary from parent, distinct regulatory regions in which the two companies operate and lack of a demonstrated track record of support at the outset of the transaction.

With regulatory and shareholder approval, the companies expect the transaction to close by end of the first quarter of 2016. We expect StanCorps business strategy and risk profile to remain essentially unchanged and the current management team and other key employees to remain in place.

The acquisition is the latest example of a Japanese company targeting a US niche player to foster its growth (see exhibit), given stronger market dynamics in the US than in Japan.

Neil Strauss Vice President - Senior Credit Officer +1.212.553.1934 [email protected]

Eiji Kubo Analyst +81.3.5408.4038 [email protected]

Weigang Bo Associate Analyst +1.212.553.4331 [email protected]



Recent Acquisitions of US Life Insurers by Japanese Acquirers

Buyer Rating* Seller Rating* Purchase

Price

Purchase Announcement

Date

Meiji Yasuda Life Insurance Company

A1 stable StanCorp Financial Group, Inc.

A2 stable $5.0 billion July 2015

Tokio Marine Holdings, Inc. Aa3 negative**

HCC Insurance Holdings, Inc. A1 stable $7.5 billion June 2015

Dai-ichi Life Insurance Company, Limited

A1 stable Protective Life Corporation

A2 stable $5.7 billion June 2014

Tokio Marine Holdings, Inc.

Aa2 negative Delphi Financial Group, Inc.

A3 stable $2.7 billion December 2011

* Insurance financial strength rating of lead insurance company at time of announcement. ** We changed the outlook to negative immediately subsequent to and owing to the announcement.

Source: Moodys Investors Service

We expect that the Japanese insurance market will shrink owing to unfavorable demographics, while the US market will continue to grow. These trends have been behind several acquisitions of US niche players by major publicly traded Japanese insurers such as Dai-ichi Life Insurance Company, Limited (financial strength A1 stable), which seek growth overseas to compensate for declining profits from the Japanese insurance market.

However, this is Meiji Yasudas first large acquisition. Until now, the company has been very conservative about its foreign expansion, reflecting its mutuality, its ownership by policyholders instead of shareholders. In addition, although Dai-ichi and Tokio Marine & Nichido Fire Insurance Co. (financial strength Aa3 negative) had experience managing small foreign insurers before their acquisitions of relatively large US insurers, Meiji Yasuda is less experienced. Despite the challenge of managing foreign operations, the acquisition gives Meiji Yasuda diversification in its geographical and product range, and an opportunity to enhance profits.



Sovereigns

Koreas Supplementary Budget Aims to Bolster Growth and Maintain Fiscal Prudence, a Credit Positive On Friday, Koreas National Assembly approved a KRW11.5 trillion supplementary budget, equal to about 0.7% of our estimated nominal GDP in 2015. The supplementary budget is credit positive for Korea (Aa3 positive) because it supports the governments effort to limit downside risks to economic growth and does not jeopardize Koreas strong fiscal position.

The supplementary budget is part of a wider set of measures, which include KRW3.1 trillion in additional Funds spending and around KRW6.8 trillion of accelerated public and private investment and government-backed loans. According to Koreas Ministry of Strategy and Finance (MOSF), the new measures will boost growth by 0.3 percentage points in 2015 and 0.4 percentage points in 2016.

Tepid economic activity over the past year and a half is the result of domestic and external factors. Both the Sewol ferry tragedy in April 2014 and the outbreak of Middle East respiratory syndrome (MERS) in May this year dented consumer and business sentiment and led the Bank of Korea (BoK) to cut its policy rate to a historic low of 1.50% in June. Economic growth has also suffered from the lack of a strong boost in exports, owing to lackluster external demand. In the second quarter, real GDP grew only 2.2% from the previous year, the slowest pace in two years.

The supplementary budget focuses on alleviating distress for domestic sectors, but also complements measures outlined in the regular budget, which focused on eliminating wasteful spending and investing in industries that will contribute to the countrys long-term economic dynamism and growth. For instance, MERS and drought-related support measures are predominantly aimed at alleviating the short-term effect on sectors such as medical services, tourism and agriculture. But the supplementary budget also includes around KRW17 billion for staffing daycare centers with more teachers, underlining the governments policy to boost female labor force participation, and adds KRW1.2 trillion in support for low-income groups (see Exhibit 1).

Steffen Dyck Vice President - Senior Analyst +49.69.7073.0942 [email protected]

Shirin Mohammadi Associate Analyst +1.212.553.3256 [email protected]



EXHIBIT 1

Koreas Supplementary Budget Details

2014 Budget 2015 Budget Change

Approved Approved

Including Supplementary

Budget

From 2015 Approved

Budget

From 2014

Budget

From 2014

Budget

KRW Trillion KRW Trillion KRW Trillion KRW Trillion KRW Trillion Percent

(A) (B) (C) (C B) (C A) (C/A - 1)

Total Expenditures 355.8 375.4 384.7 9.3 28.9 8.1%

Welfare, employment 106.4 115.7 116.9 1.2 10.5 9.9%

Education 50.7 52.9 52.9 -- 2.2 4.3%

(excluding support for local government) (9.8) (13.5) (13.5) -- (3.7) 37.8%

Culture, sports, tourism 5.4 6.1 6.1 -- 0.7 13.0%

Environment 6.5 6.8 6.8 -- 0.3 4.6%

Research & development 17.8 18.9 18.9 -- 1.1 6.2%

Industry, SMEs, energy 15.4 16.4 16.4 -- 1.0 6.5%

Social overhead capital investment 23.7 24.8 26.5 1.7 2.8 11.8%

Agriculture & forestry, fishery and food 18.7 19.3 20.1 0.8 1.4 7.5%

National defense 35.7 37.5 37.5 -- 1.8 5.0%

Diplomacy, reunification 4.2 4.5 4.5 -- 0.3 7.1%

Public order, safety 15.8 16.9 16.9 -- 1.1 7.0%

Public administration, local governments 57.2 58.0 58.0 -- 0.8 1.4%

(excluding transfers to local governments) (21.6) (23.1) (23.1) -- (1.5) 6.9%

MERS-related support -- -- 2.5 2.5 2.5 NA

Note: The total expenditure line includes funds spending not shown in the detail. Sources: Korea Ministry of Strategy and Finance and Moodys Investors Service calculations

Although the supplementary budget is unlikely to produce much growth in 2015 (and we recently lowered our growth forecast for this year to 2.7% from 3.1%), it is important in shoring up domestic sentiment. As Exhibit 2 shows, consumer sentiment dropped below the neutral threshold of 100 in June as a result of the MERS outbreak in the second half of May. The exhibit also shows that government stimulus measures have a positive effect on sentiment: following a slowdown in consumption and investment in the wake of the Sewol ferry tragedy, the government announced a KRW41 trillion stimulus package in July last year, which led to improvements in consumer sentiment.



EXHIBIT 2

Korean Consumer Sentiment and Real GDP Growth

Source: Bank of Korea

At the same time, we do not think the supplementary budget and additional measures will negatively affect the sovereigns financial strength. Based on the supplementary budget, the budget balance would post a deficit of KRW7 trillion, or around 0.5% of our estimate for 2015 nominal GDP. However, judging from the experience with supplementary budgets in previous years, the budget balance will be closer to 0%. For instance, in 2013, the final budget surplus was 20% higher than under the supplementary budget projections. In addition, the Korean government maintains a very strong fiscal position, which is marked by comparatively low government debt levels of around 36% of GDP and allows for counter-cyclical policy measures.

2.1%2.7%

3.2% 3.5%3.9%

3.4% 3.3%2.7% 2.5% 2.2%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

94

96

98

100

102

104

106

108

110

Jan-

2013

Feb-

2013

Mar

-201

3

Apr-

2013

May

-201

3

Jun-

2013

Jul-

2013

Aug-

2013

Sep-

2013

Oct

-201

3

Nov

-201

3

Dec

-201

3

Jan-

2014

Feb-

2014

Mar

-201

4

Apr-

2014

May

-201

4

Jun-

2014

Jul-

2014

Aug-

2014

Sep-

2014

Oct

-201

4

Nov

-201

4

Dec

-201

4

Jan-

2015

Feb-

2015

Mar

-201

5

Apr-

2015

May

-201

5

Jun-

2015

Jul-

2015

Real Year-on-Year GDP Growth - right axis Composite Consumer Sentiment Index - left axis

Sewol Ferry Disaster

MERS Outbreak



The Unfolding Collapse in Macaos Economy Is a Credit Negative Last Thursday, the Monetary Authority of Macao stated that it expects Macaos (Aa2 stable) economy to contract by a mid-teens percentage this year, marking a steep deterioration in GDP from a 0.4% decline in 2014. The collapse in economic activity in Macao, a special administrative region of China, reflects a decline in tourist arrivals from mainland China, which led to a 37% contraction in gaming revenues during the first six months of 2015, according to data released in early July. These developments are credit negative for Macao because they will sharply erode its still exceptionally large fiscal and external current account surpluses.

Chinas anti-corruption campaign and its slowing economy have dented visitor arrivals from the mainland, which accounted for more than two thirds of total arrivals in 2014. Mainland tourist arrivals in the first half of 2015 fell by 4.2% after having risen by 14.6% during the same period in 2014. The decline in mainland visitor arrivals, who are primarily drawn to by Macaos casinos, has had a direct negative effect on gaming industry revenues, as seen in Exhibit 1. The gaming industry comprises nearly half of total GDP.

EXHIBIT 1

Macaos Year-over-Year Change in Tourist Arrivals and Gaming Revenue Tourist arrivals and gaming revenues have dropped sharply.

Sources: Gaming and Inspection Coordination Bureau, Macao Statistics and Census Service

In the first quarter of 2015, Macao posted a 25% year-on-year decline in GDP, extending a 0.4% decline in 2014 (see Exhibit 2). Factoring in the authorities guidance, we estimate that headline GDP will decline 15% in 2015, versus a 5.5% contraction we had estimated earlier, pushing back until 2017 the recovery we had originally expected would take place in 2016. If this GDP forecast were to be realized, Macao will most likely post the steepest GDP decline this year among our sovereign rating universe, marking a sharp deterioration from its strong GDP growth over the past decade, which has supported its credit quality. Macao clocked average growth of 13.8% over the past decade, more than triple the median average of 4.3% for sovereigns within the same rating category.

-50%-40%-30%-20%-10%

0%10%20%30%40%50%60%70%80%90%

100%Tourist Arrivals Gross Gaming Revenues

Anushka Shah Assistant Vice President - Analyst +65.6398.3710 [email protected]

Atsi Sheth Senior Vice President +65.6398.3727 [email protected]

Tom Byrne Senior Vice President +65.6398.8310 [email protected]



EXHIBIT 2

Macaos Year-over-Year Change in GDP

Source: Macao Statistics and Census Service

Macaos substantial financial assets, lack of general government debt and high foreign reserves provide it with sufficient buffer to withstand this deterioration in growth. However, the decline in gaming revenues will dent its fiscal buffers, a key credit support factor.

The government budgets a fiscal surplus of 4.3% of GDP in 2015, down from 21.4% of GDP in 2014, but its estimates rely on gaming revenues averaging MOP20 billion on a monthly basis. Although the average for the first half of the year is slightly over this mark, revenues in June fell to MOP17.4 billion, posing risks to the governments targets.

Given the governments commitment to balance the budget, a slippage in revenues would have to be offset by reining in expenditures. Unless Macao were to have a budget deficit, which we do not expect in 2015, its deep pool of fiscal reserves, which totaled MOP246.3 billion ($30.8 billion) or 44 months of expenditures at the end of 2014, would remain unscathed.

Lower receipts from tourism will also whittle down Macaos current account surplus by about 10 percentage points of GDP in 2015, from 36.5% of GDP in 2014. Nonetheless, the current account remains in surplus and official foreign reserves have continued to climb, reaching $18 billion as of June 2015, from $17.4 billion in May 2015, providing ample cushion against external shocks.

Despite Macaos still exceptionally strong fiscal and external credit metrics, its lack of economic diversification and reliance on gaming revenue shows that it is highly vulnerable to event risks beyond the influence of its policymakers. Most likely, Macao, even more so than mainland China, has entered a new normal of much slower economic growth.

Macanese policymakers responded to these developments by reversing visa restrictions for tourists from the mainland last month. As a result of these measures, we expect the decline in tourist arrivals and gaming revenues to moderate somewhat in the second half of this year.

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

1Q20

11

2Q20

11

3Q20

11

4Q20

11

1Q20

12

2Q20

12

3Q20

12

4Q20

12

1Q20

13

2Q20

13

3Q20

13

4Q20

13

1Q20

14

2Q20

14

3Q20

14

4Q20

14

1Q20

15

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


NEWS & ANALYSIS Corporates 2 St. Judes Thoratec Deal Raises Leverage, but Adds

Minimal EBITDA Home Depot Buys Interline Brands, a Credit Positive Technicolors Acquisition of Ciscos Connected Devices Is

Credit Positive Gold Price Decline Is Credit Negative for South Africas Gold

Mining Companies Youngors Equity Investment in CITIC Limited Is Credit

Positive Marubenis Additional Investment in Gavilon Is Credit

Negative

Infrastructure 9 Delay of PJM Transition Capacity Auctions Is Credit Negative

for Merchant Generators

Banks 10 Greeces Bank Resolution Legislation Is Credit Negative for

Unsecured Creditors Approval of LME Clears Trade-Compression Service Is Credit

Positive for Parent Hong Kong Exchanges & Clearing French Banks See Credit Positive in Livret A Rate Cut Belarus Worse-than-Expected Economic Deterioration Is

Credit Negative for Its Banks Korean Policy Banks Rising Exposure to Shipbuilders Is Credit

Negative for All Banks Koreas Banks Will Benefit from New Measures to Strengthen

Mortgage Underwriting

Insurers 18 IASB Tentatively Approves a Temporary Accounting Fix for

Insurers, Benefiting Credit Analysis Genworths Sale of International Protection Division to AXA

Is Credit Positive for Buyer and Seller Brazils New Reinsurance Regulation Is Credit Positive for

Multinational Players, Negative for Domestic Reinsurers

Sovereigns 24 Ukraines 24 July Interest Payment Does Not Eliminate Risk

of Payment Moratorium Croatias Debt Metrics Continue Deteriorating Despite End of

Six-Year Recession Fuel Subsidy Reform Is Credit Positive for United Arab

Emirates and Abu Dhabi

Sub-sovereigns 30 Toluca, Mexico, Sees the Light to Credit-Positive

Electricity Savings

Structured Credit 32 SEC Will Not Enforce Risk-Retention on Most Pre-2015 CLOs,

a Credit Positive

RATINGS & RESEARCH Rating Changes 34

Last week we downgraded eBay, Bank Technique, Credins Bank, Asurion and Cunningham Lindsey, and upgraded Aramark Services, Michaels FinCo Holdings, Mapfre Global Risks, Mapfre Asistencia and nine Santander Drive Auto Receivables Trust 2014 ABS, among other rating actions.

Research Highlights 40

Last week we published on Thai carmakers, EMEA investment grade corporates, crossover companies, North American oil and gas, US multiemployer pension plans, Chinas regional integration, US capital goods manufacturers, US supermarkets, global private debt issuance, Chinese property developers, US electric utilities, French banks, Hong Kong banks, Chinese securities firms, Spanish banks, US private mortgage insurers, large US banks, China, Kazakhstan, Iceland, Vietnam, English housing associations, Chinese sub-sovereigns, Oaxaca Mexico, Pennsylvania schools, Hungarian covered bonds, US CMBS, Belgian covered bonds, Dutch covered bonds, French covered bonds, German covered bonds, US RMBS, US tobacco bonds, US ABS and US CLOs, among other reports.

MOODYS.COM

Report: 183421

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

CorporatesTeva Will Triple Debt to Buy Allergans Generics BusinessPearsons Sale of FT Group to Nikkei Is Credit PositiveUK Bookmaker Ladbrokes Merger with Gala Coral Is Credit Positive

InfrastructureEnergy Future Holdings Bankruptcy Disclosure Statement Is Credit Negative for OncorKoreas Nuclear Reactor Commissioning Is Credit Positive for KHNP and KEPCO

BanksHigher Deposit Rates for Argentine Banks Will Narrow Interest Margins, a Credit NegativeAustralian Major Banks Repricing of Residential Investor Loans Is Credit Positive

InsurersMeiji Yasudas Acquisition of US-Based StanCorp Benefits StanCorp

SovereignsKoreas Supplementary Budget Aims to Bolster Growth and Maintain Fiscal Prudence, a Credit PositiveThe Unfolding Collapse in Macaos Economy Is a Credit Negative

moody's credit outlook - 30 july 2015

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