MOODYS.COM

6 MARCH 2014

NEWS & ANALYSIS Corporates 2

» Caesars Sale of Four Casinos to Affiliate Does Little to Fix Its Balance Sheet

» Acron Sale of Stake in Its Potash Project to Sberbank Is Credit Positive

Banks 5

» Factoring Losses at Citigroup’s Banamex Unit Hit Earnings and Capital

» Brazil’s Accelerating Agriculture Sector Is Credit Positive for Rural Lenders

» Russian Bank Asset Quality and Profitability Face Pressure from Ukraine Crisis

» Swiss Raiffeisen Group’s Rapid Mortgage Loan Growth Is Credit Negative

» China’s Liquidity Rules for Securities Companies Are Credit Positive

Insurers 14 » Regulator Review of Prudential’s Treatment of Captives in Its

Variable Annuity Reserves Is Credit Positive » CNO Sale of Runoff Subsidiary to Wilton Re Is Credit Positive

Sovereigns 18

» Russia’s Action in Ukraine Exacerbates Its Weak Economic Outlook

Sub-sovereigns 20

» Italy Confirms Support for Rome, a Credit Positive for the City » Hungarian Government’s Takeover of Budapest’s Debt Is Credit

Positive for the City

US Public Finance 22 » Philadelphia Reaches $1.86 Billion Deal to Sell Gas Utility, a

Credit Positive

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Monday’s Credit Outlook 24 » Go to Last Monday’s Credit Outlook

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NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 6 MARCH 2014

Corporates

Caesars Sale of Four Casinos to Affiliate Does Little to Fix Its Balance Sheet On Monday, Caesars Entertainment Corp., the parent of Caesars Entertainment Operating Company, Inc. (CEOC, Caa2 review for downgrade), said it will sell four casinos to a company affiliate for $2.2 billion, including debt assumption of $185 million and project capex of $223 million. The transaction is credit negative for CEOC, which has nearly $21 billion of debt outstanding, because it does little to improve its unsustainable capital structure. Following the announcement, we placed CEOC’s rating on review for downgrade.

Caesars will realize about $1.8 billion in cash proceeds from the asset sale to its Caesars Growth Partners, LLC (unrated) affiliate, which will help fund operating losses and possibly repay a portion of its approximately $1 billion of debt due in 2015. But the company has not indicated what portion would be applied to debt reduction.

CEOC will also lose the contribution to EBITDA from the four casinos, which we estimate at $200 million, or 15% of the company’s total EBITDA upon completion of capital projects in 2015. This will limit any reduction of its 17.2x debt/EBITDA leverage. Assuming a 7x-8x multiple on EBITDA of $200 million, CEOC’s debtholders will lose $1.4-$1.6 billion of value.

Created last April, Caesars Growth Partners is controlled by publicly traded Caesars Acquisition Company (unrated), which also owns Caesars’ online-gaming business and the Planet Hollywood casino in Las Vegas.

The sale includes three Las Vegas casinos: Bally’s Las Vegas; The Cromwell, which is the former Bill’s Gamblin’ Hall & Saloon; and The Quad. The Las Vegas market has seen a strong rebound in visitation since the depths of the recession, but that momentum will not improve Caesars bondholders’ recovery prospects because the casinos will no longer be a part of the Caesars entity that holds its debt. The fourth casino is Harrah’s New Orleans, which we estimate is one of CEOC’s largest outside of Las Vegas based on revenue.

Caesars continues to operate under a heavy debt burden assumed in the 2008 buyout of what was then Harrah’s by private-equity firms Apollo Global Management LLC and TPG Capital. The global financial crisis took a significant toll on all US casino operators as consumers retreated from casino gaming and travel. Las Vegas was hit particularly hard as many gamblers opted to visit regional casinos closer to home.

The transaction buys Caesars time and is likely the first in a series of steps to address CEOC’s unsustainable capital structure. These steps could include a repurchase of existing debt at a discount, which we would likely deem a distressed-exchange default. Given CEOC’s total debt load of nearly $21 billion, any avenue that the company pursues would need to reduce debt materially to offset the loss of EBITDA from the casino sales and simultaneously reduce its high leverage and operating losses.

Peggy Holloway Vice President - Senior Credit Officer +1.212.553.4542 margaret.holloway@moodys.com

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 6 MARCH 2014

Acron Sale of Stake in Its Potash Project to Sberbank Is Credit Positive Last Thursday, JSC Acron (B1 stable), Europe’s sixth-largest fertiliser producer by revenue, announced that it had sold to ZAO Sberbank Investments (unrated) a 19.9% stake in a subsidiary involved in a $2 billion potash project for RUB6.7 billion (approximately $186 million). The transaction is credit positive for Acron because it reduces the risk that Acron will have to repurchase investors’ stake in the subsidiary before the project begins generating cash flow. The deal also increases Acron’s flexibility in terms of timing of the project’s capex, thereby helping Acron to maintain an adjusted leverage of less than 3.0x during the next 12-18 months.

The deal with ZAO Sberbank Investments, a subsidiary of Sberbank (Baa1 stable, D+/baa3 stable1), completes a replacement of the investors involved in the potash project following Acron’s repurchase of a 10.95% stake in its subsidiary CJSC Verkhnekamsk Potash Company (VPC, unrated) from its previous partner, ZAO Raiffeisenbank (Baa3 stable, D+/baa3 stable), for RUB4.17 billion (see exhibit). These changes are part Acron’s effort to attract investors in the project with better terms.

Capital Split of Acron’s Potash Project Before the Raiffeisenbank Exit

Source: Acron

After the Sberbank Deal

The agreement with ZAO Sberbank includes more flexible terms for investors participating in the project than the agreement with Raiffeisebank and allows Acron to extend the project timeline and address a risk that Acron would have had to buy back the partners’ stake before the project ramped up. Resolving this challenge became more important after Acron reached an agreement late last year with the Russian Federal Subsurface Resources Agency to extend its license deadlines for the potash project. According to the new agreement, Acron must put the project into operation no later than in the fourth quarter of 2021, instead of 2016, and bring the project’s annual potash production capacity to 2 million tonnes by 2023, instead of by 2018.

The recent investment agreement, coupled with the license extension, increases the project’s flexibility in terms of capex timing. According to the new plan, Acron will increase its investments in the potash project once it completes its construction of an ammonia plant with an annual capacity of 700,000 tonnes. We estimate the company’s capex in 2014 will decrease to around $400 million from our previous estimate of 1 The bank ratings shown in this report are the bank’s deposit rating, its standalone bank financial strength rating/baseline credit

assessment and the corresponding rating outlooks.

Acron 60%

Raiffeisen-bank 11%

Eurasian Develop-ment Bank 9%

Vnesheconombank 20%

Vnesheconombank 20%

Acron 51%

Sberbank 20%

Eurasian Develop-ment Bank 9%

Vnesheconombank 20%

Vnesheconombank 20%

Sergei Grishunin Assistant Vice President - Analyst +7.495.228.6168 sergei.grishunin@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 6 MARCH 2014

$800 million, resulting in a reduction in the need for new debt. We estimate that Acron’s gross debt as of the end of 2014 will total around $1.4 billion, down from around $1.5 billion at the end of 2013, which translates into adjusted leverage of below 3.0x and below our March 2013 forecast of 3.2x.

The RUB6.7 billion of proceeds will significantly improve Acron’s liquidity over the next 12-18 months, although we already considered Acron’s liquidity adequate. Additional support to the company’s liquidity position comes from a cash balance of more than $350 million as of the end of 2013, available committed facilities of around $200 million and flexible capex. The company has used just $95 million of its $400 million capex programme. Further support to liquidity will also come from planned sales of a 1.77% stake in OJSC Uralkali (Baa3 negative), which at the end of January had a market value of $265 million.

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 6 MARCH 2014

Banks

Factoring Losses at Citigroup’s Banamex Unit Hit Earnings and Capital Last Friday, Citigroup subsidiary Banco Nacional de México, S.A. (Banamex, A3 stable, C-/baa1 stable2) announced a $235 million cut to 2013 earnings after an alleged fraud in its largest supply chain finance operation. The unexpected loss is credit negative for Banamex because it reduces the Tier 1 capital ratio by a substantial 40 basis points to 13.7%, with a charge to the bank’s net income equal to 19% of last year’s net profits. The loss caused by one of its largest clients also points to a breakdown of Banamex’s controls and auditing functions.

For Citigroup (Baa2 stable), the effect of the loss shaved only two basis points off its year-end Tier 1 capital ratios. Nonetheless, it highlights the challenge of controlling risk that can spring up in far-flung locations within a global universal bank.

Banamex’s losses relate to problematic loans totaling $585 million to Mexican oil services company Oceanografía, S.A. de C.V. (OSA, unrated), which are backed by accounts receivables due to OSA from Mexico’s state-owned oil producer Petroleos Mexicanos (Pemex, Baa1 review for upgrade).

OSA, one of Pemex’s key suppliers, was suspended on 11 February from being awarded new Mexican government contracts through 2016 because of serious violations related to contracts with Pemex. Shortly thereafter, Banamex and Pemex began a review of contracts granted to OSA, which revealed that Pemex was unable to validate about $400 million, or 68%, of the accounts receivables claimed by OSA. Banamex, therefore, charged that amount, which net of taxes and operating costs equals $235 million, to operating expenses, prompting the bank to restate its 2013 earnings.

Additional charges to earnings could pressure the bank’s ability to maintain sound capitalization and limit its ability to expand business volumes and benefit from the improving Mexican operating environment.

2 The bank ratings shown in this report are the bank’s deposit rating, its standalone bank financial strength rating/baseline credit

assessment and the corresponding rating outlooks.

David Olivares-Villagomez Vice President - Senior Credit Officer +52.55.1253.5705 david.olivares@moodys.com

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

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 6 MARCH 2014

Brazil’s Accelerating Agriculture Sector Is Credit Positive for Rural Lenders Last Thursday, the Instituto Brasileiro de Geografia e Estatística (IBGE), Brazil’s government statistics office, reported that the country’s agricultural production grew 7% in 2013, the sector’s strongest annual growth rate since 1996 and three times faster than the country’s GDP growth of 2.3% last year (see Exhibit 1). The agriculture sector’s growth, which outpaced 2.0% growth in the services sector and 1.3% growth in the industrial sector, is credit positive for rural lenders because it spurs demand for loans and improves borrowers’ creditworthiness.

EXHIBIT 1

Brazil’s Strong Agricultural GDP Growth Boosted Total Brazil GDP Growth in 2013

Note: Exhibit shows rolling four-quarter GDP. Source: Instituto Brasileiro de Geografia e Estatística

Banco do Brasil S.A. (BB, Baa2 stable, C-/baa2 negative3) is the main beneficiary of the agricultural sector’s significant growth. As a government bank involved in implementing agriculture policies, BB controls two thirds of the rural lending market in Brazil. Nearly one fifth of its loans are agribusiness related, the highest among large banks in Brazil, which means the strong performance of the bank’s agriculture portfolio has a significant effect on the overall quality of the bank’s assets. Indeed, BB reported a nonperforming loan (NPL) ratio of 2% at year-end 2013, versus 3% for Brazil’s overall banking system.

Among midsize banks, Banco do Estado do Rio Grande do Sul S.A. (Baa3 stable, D+/baa3 stable), Banco BBM S.A. (Ba1 stable, D+/ba1 stable), Banco Pine S.A. (Ba1 stable, D+/ba1 stable), Banco Indusval S.A. (BI&P) (Ba3 negative, D-/ba3 negative) and Banco Original S.A. (B1 stable, E+/b1 stable) have significant exposure to agribusiness. These lenders have increased their lending to finance production and trade in agricultural commodities, particularly grains and sugarcane, at a time when banks are more cautious about lending to the industrial and manufacturing segments, which face weaker growth prospects.

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

assessment and the corresponding rating outlooks.

2.3%

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Brazil GDP Brazil Agriculture GDP

Thiago Scarelli Associate Analyst +55.11.3043.7347 thiago.scarelli@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 6 MARCH 2014

High interest margins in the agricultural sector support profitability at these banks, and the well-collateralized structure of these loans help mitigate credit losses. Banco BBM, for example, focuses on loans backed by warehoused commodities, while Banco Pine, Banco Indusval and Banco Original generally originate and distribute agribusiness-related asset-backed securities, which investors are increasingly demanding. As Exhibit 2 shows, improved sector performance has led to overall better quality of rural loans despite recent spikes in 90-day delinquencies, which we attribute to specific leveraged companies.

EXHIBIT 2

Breakdown of Brazil Banks’ Rural Loan Portfolio by Arrears

Source: Banco Central do Brasil

Banco Central do Brasil, the country’s central bank, also reported Thursday that rural credit in January increased by 30% from a year earlier. This expansion incorporates record borrowings by farmers and large agribusinesses from July 2013 to January 2014 to finance 2013-14 crops. The IBGE forecasts a robust performance for agriculture in 2014, with around 11% growth in soybean production, a 14% increase in coffee and stable sugarcane production.

EXHIBIT 3

Year-over-Year Growth in Brazil’s Total Loans and Rural Loans

Source: Instituto Brasileiro de Geografia e Estatística

Although agribusiness constituted only a small fraction of Brazil’s national product at 5.7% in 2013, it is a major export engine for the country and a source of consistent productivity gains. Exports of soy, sugarcane and coffee together accounted for one fifth of total exports in 2013.

-1%

1%

3%

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7%

9%

11%

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180+ days 150-180 days 120-150 days 90-120 days 60-90 days

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Total Loans Rural Loans

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 6 MARCH 2014

Russian Bank Asset Quality and Profitability Face Pressure from Ukraine Crisis On Monday, the Central Bank of Russia (CBR) unexpectedly announced that it would raise its main interest rate to 7.0% from 5.5% to stem depreciation of the ruble, which has come under pressure owing to the Russia-Ukraine crisis. The CBR’s action will result in higher domestic funding costs and risks triggering a further slowdown of Russia’s economic growth, which would exert pressure on banks’ asset quality and profitability, a credit negative.

In addition to those vulnerabilities, some large Russian banks such as Vnesheconombank (Baa1 stable), Sberbank (Baa1 stable, D+/baa3 stable4) and Bank VTB, JSC (Baa2 stable, D-/ba3 stable) have direct and indirect exposures to Ukraine and we expect increased losses on these exposures to weaken these banks’ credit profiles. At the same time, we expect that the system-wide availability of funding and liquidity will remain broadly unchanged because Russian banks are self-funded, with loan-to-deposit ratios of 95% as of the first half of 2013.

Although the CBR’s aim in raising interest rates was to stabilize the currency and remove inflationary pressures, the hike also increases hurdle rates for businesses and refinancing risk for borrowers. The increase is also detrimental to Russia’s economic growth, which has already slowed below historic averages. We forecast GDP growth of up to 2% in 2014, down from the 3.5% average of the past four years, and the current volatility materially increases the downside risk to this forecast.

In light of the potential economic slowdown, we expect nonperforming loans (NPLs) in the system to increase. Our base-case forecast estimates a system-wide NPL ratio of 8.0%-8.5% this year, and could go higher if the current volatility persists.

In particular, there is a risk that the currency devaluation will exacerbate negative asset quality trends in foreign currency loans, which we estimate constitute around 17% of the total loan book and are mainly concentrated in corporates. Approximately 50% of these loans are to borrowers that do not have matching foreign currency cash flows and they would need to absorb the increased repayment burden caused by the ruble depreciation.

The interest rate hike will raise funding costs for Russian banks, which negatively affect their profitability at a time when profits have already been contracting since 2013. A further decline in profitability would hurt internal capital creation, which is one of the key rating drivers in our analysis. As Exhibit 1 shows, Russian banks lag behind banks in other emerging markets in generating internal capital.

4 The bank ratings shown in this report are the bank’s deposit rating, its standalone bank financial strength rating/baseline credit

assessment and the corresponding rating outlooks.

Irakli G. Pipia Vice President - Senior Analyst +44.20.7772.1690 irakli.pipia@moodys.com

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 6 MARCH 2014

EXHIBIT 1

Comparison of Returns on Average Shareholders’ Equity Among Moody’s-Rated Banks in Emerging Markets

Source: Moody’s Banking Financial Metrics

In addition to system-wide pressures, some large Russian banks are exposed to Ukrainian risk directly and via their subsidiaries. We estimate the total aggregate exposure of the Russian banks to assets bearing Ukrainian risk to be $30 billion. More than half of these exposures ($17.4 billion) are via subsidiaries of Russian banks. Although these exposures are a small portion in relation to the total assets of their Russian parents, which also provide a large portion of funding to their subsidiaries, these exposures are significant in the context of their equity amounts (see Exhibit 2).

EXHIBIT 2

Major Subsidiaries of Russian Banks in Ukraine

Subsidiary Bank Parent Subsidiary's Rating

Subsidiary Banks' Total Assets, Third-

Quarter 2013, $ Millions

Subsidiary Banks' Assets as Percent of

Group Assets

Subsidiary Banks' Assets as Percent of

Group Equity

Prominvestbank Vnesheconombank Caa3 negative, E/caa2 stable

$4,849 4.88% 25.45%

Subsidiary Bank Seberbank of Russia

Sberbank Caa3 negative, E/caa2 stable

$4,046 0.79% 7.30%

VTB Bank PJSC Bank VTB Unrated $3,506 1.34% 12.71%

Source: National Bank of Ukraine, OANDA and the banks

There is a high likelihood of Ukrainian subsidiaries’ capital eroding because the currently high level of problem loans (35% on average) is likely to grow and risk mitigation measures will be ineffective given the legal and political uncertainty in the country. This may require Ukrainian banks’ Russian parents to prop up their subsidiaries with additional capital injections or realise losses and fully write off their investments with a more material effect on their capital position.

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Russia Brazil India South Africa Turkey

2008 2009 2010 2011 2012 First-Half 2013

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 6 MARCH 2014

Swiss Raiffeisen Group’s Rapid Mortgage Loan Growth Is Credit Negative Last Friday, Swiss Raiffeisen Group (unrated), parent of Raiffeisen Schweiz (Aa3 stable, C/a3 stable5) reported that its mortgage loan book grew by a compound annual growth rate of 7.3% to CHF143.7 billion during 2007-13, versus 4.7% for the overall market (see exhibit). Raiffeisen Group’s above-average residential mortgage-loan growth is credit negative because its unseasoned loan book risks triggering significantly higher loan-loss charges, which would dampen profitability, and potentially its capital position, if the Swiss residential real estate market weakens.

Raiffeisen Group’s Mortgage Loan Book Growth Outpaces the Swiss Banking Industry Average

Source: Raiffeisen Group annual reports 2003-13 and the Swiss National Bank

Although Raiffeisen Group’s growth has resulted in its national market share rising to 16.3% from 14.1% during 2007-13, it has also led to the company originating an unseasoned mortgage loan portfolio during the current housing boom. A growing share of these loans are on properties in Switzerland’s larger metropolitan regions, where above-average real estate price inflation is prominent. This exposes the group to price corrections if the boom in the Swiss housing market falters. Although we currently consider such a scenario unlikely, it would lead to higher loan-to-value ratios and result in higher asset risk weights. Such increases would exert pressure on Raiffeisen Group’s generally sound capital and asset-quality metrics.

Moreover, the Swiss National Bank reports real estate inflation of 54% in the Lake Geneva area and 32% in Western Switzerland during 2007-13, versus 27% in other regions, which adds to the risk of a sharper correction in house prices. Adding to this risk is Switzerland’s prolonged period of adverse macroeconomic conditions and persistently low interest rates, which are likely to compound the negative pressure on the group’s asset quality and earnings.

The group’s solid capitalisation and sound profitability provide significant loss-absorption capacity and underpin the group’s creditworthiness. Both Raiffeisen Schweiz and its parent compare favourably with global banking peers in terms of capitalisation, with a Basel III total capital ratio of 14.9% as of the end of 2013. In addition, the group’s capital base contains a limited amount of hybrid instruments to be phased out under the Basel III regulatory regime, and the group’s ability to generate capital internally, as reflected by a 2013 net profit of CHF717 million, complements its strong capital base.

5 The ratings shown are Raiffeisen Schweiz’s deposit rating, its standalone bank financial strength rating/baseline credit assessment

and the corresponding rating outlooks.

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 H1 2013 2013e

Raiffeisen Group All Swiss Mortgage Lenders

Michael Rohr Vice President - Senior Analyst +49.69.70730.901 michael.rohr@moodys.com

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 6 MARCH 2014

We thus regard the group’s profitability and capital base as large enough to cover its risk-provisioning needs during expected downturns in the credit cycle and to absorb some degree of unexpected losses without unduly compromising its stability.

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 6 MARCH 2014

China’s Liquidity Rules for Securities Companies Are Credit Positive On 25 February, the Securities Association of China (SAC), after obtaining consent from the China Securities Regulatory Commission (CSRC), released guidelines aimed at strengthening domestic securities firms’ risk and liquidity management. This development is credit positive for Chinese securities companies because it establishes a comprehensive framework for them to manage risks and puts in place clear regulatory liquidity indicators to measure their liquidity risk profile.

The guidelines mandate that brokers maintain their liquidity coverage ratios (LCR) and net stable funding ratios (NSFR), two key measures of liquidity, at above 80% by the end of 2014 and 100% by 30 June 2015.6 The new risk management and liquidity rules took effect 1 March and broaden the current capital-centered regulatory regime. The rules require Chinese securities firms to make their risk management framework more comprehensive by covering all risk types and considering more liquidity risk management techniques such as stress tests and cash flow gaps analysis. The latest new rules also complement existing regulations by adding liquidity parameters to current regulatory metrics that Chinese securities companies must report (see Exhibit 1), and which largely focus on capital position and concentration risk. Exhibit 2 lists the details of the new guideline.

EXHIBIT 1

Chinese Securities Firms’ Current Main Regulatory Indicators

Risk Control Indicators Regulatory Requirement

Net capital/risk capital reserves > 100%

Net capital/net assets > 40%

Net capital/liabilities > 8%

Net assets/liabilities > 20%

Liquid assets/liabilities > 100%

Proprietary equity and derivatives trading/net capital < 100%

Proprietary fixed income trading/net capital < 500%

Cost of single stock exposure/net capital < 30%

Market value of single stock exposure/its total market value < 5%

Securities lending to single customer/net capital < 5%

Margin financing to single customer/net capital < 5%

Single stock as collateral/its total market capitalization < 20%

Note: Net capital = net assets-risk reserves for financial assets - risk reserves for other assets - risk reserves for contingent liabilities - other adjustments by the China Securities Regulatory Commission. Source: China Securities Regulatory Commission

6 Liquidity coverage ratios (LCRs) measure short-term liquidity, while net stable funding ratios (NFSRs) measure long-term

liquidity. LCR measures the amount of highly-liquid assets (cash, government bonds, central bank bills and highly-rated bonds) relative to short-term net cash outflow over a 30-day period. NSFR measures the amount of long-term funding sources (tangible common equity and borrowings with a tenor longer than a year) relative to funding needs to support long term assets and high risk investments.

Frank Wu Associate Analyst +86.10.6319.6576 frank.wu@moodys.com

Yulia Wan Analyst +86.21.6101.0380 yulia.wan@moodys.com

Bin Hu Vice President - Senior Analyst +852.3758.1503 bin.hu@moodys.com

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 6 MARCH 2014

EXHIBIT 2

Details of China’s Latest Risk Management Rules for Securities Companies

New Focus on Comprehensive Risk Management Securities companies must implement comprehensive risk management that involves both senior management and various levels of employees, and covers all types of risks including liquidity risk, market risk, credit risk and operational risk.

Appointment of Chief Risk Officer Securities companies must appoint designated senior management personnel responsible for the overall risk management. The chief risk officer shall not take any responsibilities in conflict with risk management responsibilities.

Greater Focus on Liquidity Management Securities companies must establish a liquidity risk management framework. They are required to develop a liquidity contingency plan and employ techniques such as liquidity risk limits and stress tests.

Introduction of Minimum Liquidity Coverage Ratio Liquidity coverage ratio for all securities firms should reach 80% by the end of 2014 and 100% by 30 June 2015.

Introduction of Minimum Net Stable Funding Ratio Net stable funding ratios for all securities firms should reach 80% by the end of 2014 and 100% by 30 June 2015.

Source: Moody’s Investors Service, based on documents published by the Securities Association of China

This regulatory development is also timely because Chinese securities firms are reaching out to develop new businesses with higher risk profiles, such as proprietary trading, wealth management, equities-pledged repurchase agreements, securities lending and margin financing. Although they have benefited from increasing revenue contributions from these businesses, both in absolute terms and as a proportion of total revenue (see Exhibit 3), these new activities add risk because, in addition to consuming more capital and liquidity, they expose these firms to liquidity shocks, such as the liquidity crunch of June 2013.7

EXHIBIT 3

Chinese Brokers’ Operating Income by Business Segment

Note: 2009 and 2010 data not disclosed by the Securities Association of China Source: Securities Association of China

7 See China’s Liquidity Contraction Has Credit Positive Intent but Entails Risks, 24 June 2013.

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Brokerage Investment Banking Investment AdvisoryAsset Management Proprietary Trading Margin Financing & Securities LendingOthers

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 6 MARCH 2014

Insurers

Regulator Review of Prudential’s Treatment of Captives in Its Variable Annuity Reserves Is Credit Positive Last Thursday, Prudential Financial, Inc. (Baa1 stable) in its annual 10-K filing with the US Securities and Exchange Commission, indicated that the New York State Insurance Department of Financial Services (NY DFS) had disagreed with its calculation of statutory reserves for certain variable annuity products. The company disclosed that it is currently in discussions with the NY DFS regarding the appropriate amount of reserves, including the applicable credit for reinsurance with a captive reinsurer. Prudential subsidiaries have ceded a material amount of variable annuity guarantees to Pruco Re (unrated), an Arizona-domiciled captive. Although New York’s focus on Prudential’s captives is unlikely to lead to a material increase in capital and reserves on this business, the pressure should ultimately result in increased transparency, a credit positive.

With the approval of Arizona insurance regulators, Pruco Re utilizes a less conservative method to calculate reserves and capital for variable annuity guarantees than non-captive insurers. Because Prudential’s subsidiaries Pruco Life Insurance Company (A1 stable) and Prudential Annuities Life Assurance Corp. (PALAC, unrated) are also domiciled in Arizona, they are able to claim reserve credit for business ceded to Pruco Re without Pruco Re having to post collateral into statutory reserve credit trusts. Largely as a result of the re-domestication of PALAC to Arizona from Connecticut in 2013, the statutory reserve credit trusts required collateral of just $7 million at year-end 2013, compared with $2.2 billion at year-end 2012.

Prudential disclosed that the NY DFS disagreed with its calculation of statutory reserves for certain variable annuity products, but the company did not disclose the amount of the disagreement. However, if the New York regulator requires Prudential to establish additional collateral for variable annuities and other products, the company indicated that its ability to deploy capital held within its US domestic subsidiaries could be affected.

New York has been vocal on the weaknesses of captives. In June 2013, the NY DFS published a report detailing the results of its investigation into life insurance companies’ use of reinsurance captives.8 The agency concluded that by shifting business to affiliated entities that are subject to looser reserve and regulatory standards, insurers are putting “insurance policyholders and taxpayers at greater risk.”

Over the past decade, US life insurers have materially increased their use of captives, largely in response to perceived burdensome reserve requirements. Based on our analysis, reserves ceded to unauthorized affiliates (which would include captives) increased 28% to $172 billion in 2012 from $134 billion in 2007. Moreover, although this is a significant volume of business, it likely understates the size of the issue, because certain types of transactions identified by the NY DFS are not captured within this activity.

8 Captives are wholly owned entities that provide reinsurance to affiliates.

Scott Robinson Senior Vice President +1.212.553.3746 scott.robinson@moodys.com

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 6 MARCH 2014

Life insurers use captives to reduce regulatory capital requirements associated with life and health insurance products subject to what they perceive to be conservative reserve and/or capital requirements. They also use captives to manage the volatility of reserve and capital requirements associated with variable annuity guarantees. Both practices undermine the conservatism that regulators have embedded in the reserving and capital regimes.

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 6 MARCH 2014

CNO Sale of Runoff Subsidiary to Wilton Re Is Credit Positive On Monday, CNO Financial Group, Inc. (senior unsecured B1 review for upgrade) announced that it had reached a definitive agreement to sell its runoff subsidiary, Conseco Life Insurance Company (CLIC, financial strength Ba1 stable), to Wilton Reassurance Company (Wilton Re, unrated) for approximately $237 million. Although this transaction, which the companies expect to close in mid-2014, will result in a GAAP after-tax loss of approximately $303 million, it is credit positive for CNO. The divestiture reduces CNO’s risk by eliminating approximately $3.4 billion of statutory reserves primarily related to interest-rate-sensitive life insurance that was at the center of recently settled class-action lawsuits, and it frees up regulatory capital and management time to focus on core products and activities.

CLIC’s closed blocks of business have historically experienced low returns and significant earnings volatility (see exhibit). Faced with losses from the ex-post underpriced and highly interest-rate-sensitive business, CNO announced price increases on certain non-guaranteed elements (policy features such as cost-of-insurance charges, expense loads or the crediting rate that may be adjusted at the company’s discretion) of these insurance policies in 2003. Cumulative losses and charges from various lawsuits totaled nearly $300 million in reserves. CNO settled the last of its various legacy lawsuits in 2013, and with higher non-guaranteed elements now in effect, CLIC’s margins have improved. However, because CLIC’s returns are still very low, the sale helps CNO improve its overall returns, and permanently removes a substantial amount of interest-rate risk.

Conseco Life Insurance Company’s Historical Statutory Net Income

Note: Graph shows consolidated group. Source: SNL Financial LC. Contains copyrighted and trade secret materials distributed under license from SNL. For recipient’s internal use only.

In connection with the transaction, Bankers Life and Casualty Company (financial strength Baa3 review for upgrade), one of CNO’s primary operating companies, will pay $28 million to recapture approximately $160 million of individual life insurance reserves that it had reinsured to Wilton Re in 2009. The recapture is also credit positive because it essentially deploys excess enterprise capital by re-acquiring a seasoned and profitable business.

CNO also announced that it will double its common stock dividend. However, this stockholder-friendly activity is somewhat offset by the company’s debt covenants, which require it to use a portion of the proceeds to repay debt. As a result, the approximately $447 million ($303 million of the GAAP after-tax loss on the transaction and $144 million reduction of net unrealized gains included in equity) reduction to shareholders’ equity should have little effect on financial leverage.

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Ann G. Perry Vice President - Senior Credit Officer +1.212.553.4607 ann.perry@moodys.com

Rokhaya Cissé Associate Analyst +1.212.553.3870 rokhaya.cisse@moodys.com

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 6 MARCH 2014

The Wilton Re transaction follows CNO’s announcement last month that it had, effective December 2013, reinsured approximately $550 million of the group’s long-term care (LTC) reserves to Beechwood Re (unrated). The Beechwood agreement is also credit positive because it effectively transfers risks related to volatile and low-return LTC business to Beechwood.

Together, the sale of CLIC and the LTC reinsurance help to remove the overhang from past CNO problems and provide management the time, focus and flexibility to concentrate on the company’s core products and services.

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 6 MARCH 2014

Sovereigns

Russia’s Action in Ukraine Exacerbates Its Weak Economic Outlook Russia’s actions in Ukraine (Caa2 negative) and uncertainty regarding its intentions there have negative credit repercussions for Russia (Baa1 stable) because it exacerbates the country’s already weak economic outlook via a more negative investor sentiment and increases the country’s susceptibility to geopolitical event risk.

A deterioration of investor sentiment is already surfacing in the financial markets. On 3 March alone, Bloomberg data showed that the Russian stock market had fallen by 12%, Russian sovereign bond yields (2030 Eurobond) increased by 11%, Russian five-year credit-default swap spreads had risen by nearly 4% and the Russian ruble had depreciated 2% versus the US dollar. The situation partly reversed itself on 4 March, when there was less negative news and following the Central Bank of Russia’s (CBR) interest-rate hike on 3 March and intervention in the foreign exchange market. Financial market volatility in Russia will likely remain high and driven by news events in the coming weeks.

This negative sentiment, which is likely to translate into increasing net private sector capital outflows that have already been a structural impediment to Russia’s economic development, will negatively affect Russia’s GDP growth. The threat of potential political and economic sanctions from the West could further undermine investor sentiment and affect the creditworthiness of Russian borrowers. The developments in Ukraine add to downside risk for the economy via Russian banks’ exposure to Ukraine and corporates with direct or indirect (e.g., gas transit) activities in Ukraine.

The situation in Ukraine might also hurt consumer sentiment, albeit to a more limited extent. The CBR’s decision to increase its key interest rate by 150 basis points to 7% on 3 March in response to inflationary pressures from the depreciating currency could further harm the economy via trouble in the banking sector.

In contrast to the war with Georgia in August 2008, the current threat of a military conflict with Ukraine comes as Russia’s GDP growth has declined since fourth-quarter 2011, reaching 1.2% in third-quarter 2013, as shown in the exhibit below. This is a significant reduction from a post-crisis high of 5.1% in fourth-quarter 2011, which itself was well below the 7% average of 2003-08. Slowing economic activity has been driven by sluggish consumption growth, stagnating investment and a weak external environment.

Thorsten Nestmann Vice President - Senior Analyst +49.69.70730943 thorsten.nestmann@moodys.com

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 6 MARCH 2014

Russia’s GDP Growth is Declining and Gross Fixed Capital Formation Contributes Only Marginally

Sources: Haver Analytics and Moody’s Investors Service

We had forecasted a slight increase in growth to around 2% this year versus last year, amid an improving global outlook and a pick-up in investment. However, given a weaker outlook for investment because of the conflict with Ukraine, we see increasing downside risks to this forecast.

The Russian authorities already lowered their medium-term GDP growth forecasts in autumn 2013 to 2.5% year on year from the spring 2013 forecast of more than 4% by 2020. We note that Russia’s growth outlook hinges on the success of its economic diversification efforts and the nurturing of the oil and gas sector’s existing comparative advantages. However, geopolitical uncertainties complicate the government’s efforts in this area given that they constrain Russia’s ability to attract sufficient levels of investment capital.

The threat of a military conflict in Ukraine also increases Russia’s susceptibility to event risk, one of our four rating drivers, which adds to credit negative trends from the economic sphere.

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NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 6 MARCH 2014

Sub-sovereigns

Italy Confirms Support for Rome, a Credit Positive for the City Last Friday, the government of Italy (Baa2 stable) approved a new decree that confirms €570 million of financial aid to help the capital city of Rome (unrated) cover its 2013 budget deficit. The aid is credit positive because it confirms the central government’s commitment to support the capital city’s troubled finances. The new decree also requires Rome to design a multi-year fiscal redressing plan to structurally rebalance its accounts.

The central government’s action will result in Budapest’s debt service falling to zero from 4.2% of operating revenue in 2013 (see exhibit). The elimination of debt service costs is likely to improve the city’s gross operating balance by three to five percentage points, bringing its gross operating margin toward a sound 17%-19% of operating revenues. In addition to regaining budgetary flexibility and improving self-funding capacity without debt service costs, the city will also benefit from an elimination of its foreign-currency risk owing to the fact that 89% of its outstanding debt was euro-denominated at year-end 2013.

In exchange for the aid, Rome must submit to Italy’s Ministry of Finance, Ministry of Interior and the Parliament a multi-year recovery plan that focuses on selling non-strategic companies and real estate assets, reducing internal functioning costs (goods and services and personnel) and streamlining core municipal public services such as local public transport and waste management.

We consider the third condition to be particularly important, given the negative track record of the cash-strapped transport company ATAC. With an annual average loss of more than €200 million in 2010-12, and a headcount of 12,000 versus Rome’s total employee headcount of 62,000, ATAC’s poor performance has exerted significant financial pressure on the city’s accounts. Meanwhile, waste management company AMA has historically been a source of contingent liability for Rome in terms of indirect debt. AMA and ATAC’s accumulated debt contributed 37% to Rome’s €2.7 billion net direct and indirect debt as of year-end 2012, net of the debt taken over by gestione commissariale.

The new conditions on the relief package for Rome signal the central government’s new approach with the capital city: although it benefits from privileged oversight, Rome is now closer to other underperforming Italian cities, such as the City of Naples (B1 negative), for which the state has linked the release of state aid with the achievement of specific recovery targets.

Giuliana Cirrincione Associate Analyst +39.02.9148.1126 giuliana.cirrincione@moodys.com

Francesco Soldi Vice President - Senior Analyst +39.02.9148.1149 francesco.soldi@moodys.com

NEWS & ANALYSIS Credit implications of current events

21 MOODY’S CREDIT OUTLOOK 6 MARCH 2014

Hungarian Government’s Takeover of Budapest’s Debt Is Credit Positive for the City On 27 February, the government of Hungary (Ba1 negative) announced it will assume the outstanding debt of the City of Budapest (Ba1 negative) totaling HUF100 billion (€330 million), making the city free of direct debt as of this month, a credit positive for Budapest’s remaining indirect debtholders.

The central government’s action will result in Budapest’s debt service falling to zero from 4.2% of operating revenue in 2013 (see exhibit). The elimination of debt service costs is likely to improve the city’s gross operating balance by three to five percentage points, bringing its gross operating margin toward a sound 17%-19% of operating revenues. In addition to regaining budgetary flexibility and improving self-funding capacity without debt service costs, the city will also benefit from an elimination of its foreign-currency risk owing to the fact that 89% of its outstanding debt was euro denominated at year-end 2013.

Budapest’s Debt Metrics

Note: 2013 figure is our estimate and 2014 figure is our projection Source: Moody’s Investors Service and City of Budapest, Hungary

With the city’s debt moving to the central government’s books, the city will have only indirect debt of the city-owned public transportation company, Budapesti Kozlekedesi Vallalat (BKV, unrated), which is not self-supporting. This debt equals 25% of the city’s 2013 expected operating revenues.

Debt elimination will help Budapest deal with the fiscal challenges posed by the national economy’s limited growth prospects and will free up resources for other expenditures, particularly those supporting the city’s substantial infrastructure investment needs, and thus diminish its reliance on debt financing.

With the implementation of this measure, the central government completes its process of taking over the debt of the country’s local governments. The latest government decision involves 509 municipalities and it is part of a debt relief programme worth HUF458 billion (€1.5 billion) that seeks to consolidate the municipal sector and help local governments become financially sustainable. The effort will also involve the central government having greater control and oversight of municipalities. With the conclusion of debt assumption agreements between the affected local governments and the central government, all local governments in Hungary are now debt free.

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Gjorgji Josifov Assistant Vice President - Analyst +420.22.166.6340 gjorgji.josifov@moodys.com

NEWS & ANALYSIS Credit implications of current events

22 MOODY’S CREDIT OUTLOOK 6 MARCH 2014

US Public Finance

Philadelphia Reaches $1.86 Billion Deal to Sell Gas Utility, a Credit Positive On Monday, the City of Philadelphia, Pennsylvania (A2 stable), signed a $1.86 billion agreement to sell Philadelphia Gas Works (PGW, Baa2 stable) to UIL Holdings Corporation (Baa2 negative), a private electric and gas utility. The city expects to net $424-$630 million from the deal and plans to use the proceeds to shore up its municipal pension fund, a credit positive because it would reduce pressure on city finances squeezed by rising pension contributions.

Established in 1836, PGW is the oldest and largest municipally owned gas utility in the US. Mayor Michael Nutter believes the benefits of strengthening the city pension system outweigh the loss of an $18 million payment that PGW transfers annually to the city’s general fund. The payment accounts for a negligible part of the city’s $3.9 billion general fund budget in the fiscal year ending 30 June 2014. Although the proposed deposit of sale proceeds would otherwise reduce future annual pension contributions, the Nutter administration proposes to maintain future contributions at the level they would otherwise be absent the deposit and net of PGW’s $18 million transfer. This would accelerate pension funding.

Philadelphia’s adjusted net pension liability (ANPL) is large at nearly $8.3 billion as of fiscal 2012.9 A deposit from the PGW sale in the $500 million range would shrink the ANPL to 2.1x operating revenues from 2.3x. In fiscal 2013, the city’s pension contribution accounted for 21% of operating expenses, the largest of the city’s fixed costs and greater than debt service (6.1%) and retiree healthcare (3.2%).

The city’s decision to sell PGW now is driven by officials’ belief that the utility’s recent strong results have increased its value. In addition, the Nutter administration believes historically low interest rates would allow for cheaper financing and further drive up the purchase price. The sale still requires approval by the Philadelphia city council and the Pennsylvania Public Utility Commission.

Of the $1.86 billion sale price, up to $1.25 billion will defease PGW’s outstanding revenue bonds and fully fund a separate pension plan for PGW employees. In addition to the sale price, $200 million of cash and reserve funds held by PGW will be transferred to an escrow account to redeem certain callable PGW bonds as they become exercisable and terminate the city’s swaps. The remainder would then be available for the city to deposit in its pension fund.

The PGW sale is the latest example of US local governments selling or leasing municipal enterprise assets to improve their financial positions. Notable examples include Allentown, Pennsylvania’s (A3 stable) long-term lease of its water and sewer enterprises in 2013 for a $220 million payment that largely eliminated the city’s unfunded pension liability. Harrisburg, Pennsylvania (unrated), recently leased its municipal parking system to raise $267 million to repay defaulted bonds guaranteed by the city to fund repairs to a waste-to-energy incinerator.

9 Adjusted net pension liability (ANPL) is our key metric for analyzing US local governments’ unfunded pension liabilities. For a

description of the formula for calculating ANPL, see US Local Government General Obligation Debt, 15 January 2014.

Michael D’Arcy Analyst +1.212.553.3830 michael.darcy@moodys.com

NEWS & ANALYSIS Credit implications of current events

23 MOODY’S CREDIT OUTLOOK 6 MARCH 2014

Municipal asset sales can come with significant political and financial risks. To forestall sudden rate hikes, the Philadelphia agreement with UIL stipulates no gas rate increases for three years; rates could increase significantly over time, however. Also, city leaders could watch the value of the profitable utility increase markedly after the sale and face a popular backlash. The City of Chicago, Illinois (Baa1 negative), for example, leased the Chicago Skyway in 2005 and a portion its parking system, Chicago Parking Meters LLC (Baa3 stable), in 2008 for sizable lease payments that successive political leaders and the public later considered not competitive.

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

24 MOODY’S CREDIT OUTLOOK 6 MARCH 2014

NEWS & ANALYSIS Corporates 2

» Mattel Builds up Construction Toys with Credit-Positive Mega Brands Acquisition

» CenturyLink's New $1 Billion Share Repurchase Authorization Is Credit Negative

» Repsol Compensation Agreement over YPF Is Credit Positive for Both Companies

» Ukraine's Currency Slide Helps Commodity Exporters, but Hurts Domestically Focused Companies

» Melco Crown's New Dividend Policy Is Credit Positive for Crown Resorts

Banks 9

» GE Settlement with Shinsei Bank Is Positive for GE Capital, Negative for Shinsei

» Investigations of SunTrust's Mortgage Activities Are Credit Negative

» Canada Mortgage and Housing's Premium Hike Is Credit Positive for Banks

» Turmoil in Ukraine Is Credit Negative for the Country's Banks » European Banks' Balance-Sheet Adjustments Undermine

Confidence in EU Stress Test » Korean Plan to Lower Household Loan-Payment Volatility Is

Credit Positive » Taiwan Proposal to Raise Business Tax Is Credit Negative for

Banks

Insurers 24 » US Supreme Court Ruling on Stanford Financial Case Is

Credit Negative for Willis

Asset Managers 25

» Europe's New Fund Directive Is Credit Positive for Investors

Sovereigns 26

» Romania's Stable Economic Policies Trump Political Volatility » South Africa's Budget Maintains Fiscal Consolidation, Despite

Subdued Growth Outlook » Taiwan's Proposed Fiscal Reforms Will Not Significantly

Improve Government Finances

US Public Finance 31 » Cuts in Housing Allowance and Troop Strength Would Be

Negative for Privatized Military Housing

RATINGS & RESEARCH Rating Changes 33

Last week we upgraded Access Midstream Partners, Macy’s, Oasis Petroleum, Rite Aid, Central American Bank for Economic Integration, Spanish sub-sovereigns and 34 SLM notes, and downgraded Brooklyn Navy Yard Cogeneration Partners, Honduras, North American Development Bank and two SLM notes, among other rating actions.

Research Highlights 42

Last week we published on Canadian corporate refunding risk, global pharmaceuticals, Chinese corporates, European paper and forest products, Dollarama, Canadian broadband, US beverage, European retailers, global automotive manufacturers, global defense contractors, US for-profit hospitals, global advertising, Comcast, Ukrainian corporates, Egyptian banks, Nordic banks, Russian banks, US life insurers, Canadian life insurers, US mortgage insurers, Honduras, Jamaica, Spain, Harrisburg Pennsylvania, Colorado River Municipal Water Enterprises, Highland Park Michigan, European CMBS, French covered bonds, EMEA auto lease ABS, US RMBS, Italian covered bonds, Asian structured credit and global CLOs, among other reports.

MOODYS.COM

Report: 165660

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