MOODYS.COM

19 NOVEMBER 2015

NEWS & ANALYSIS Corporates 2 » Marriott to Buy Starwood for $13.4 Billion, a Credit Positive » Mylan Ends Hostile Pursuit of Perrigo, a Credit Positive for Both » Constellation Adds Debt to Join Crowded Craft Beer Shelf, a

Credit Negative

Banks 5 » Greek Banks' Debt Swaps Crystallise Bond Losses and Reduce

Capital Needs by €3 Billion » Final Proposal to Promote Securitization in Israel Is Credit

Positive for Banks

Insurers 8 » Brazilian Insurers Gain Flexibility to Diversify Investments, a

Credit Positive

Sovereigns 10 » Finland's Healthcare, Social Welfare and Public Administration

Reform Is Credit Positive » Ghana's Prudent Fiscal and Monetary Policy Stance Is

Credit Positive

Sub-sovereigns 12 » Mexico's 2016 Budget Is Credit Negative for Mexican States

and Positive for Roads and Airport Industries

US Public Finance 14 » For 75 Ohio School Districts, Partially Restored Funding Is

Credit Positive

RECENTLY IN CREDIT OUTLOOK

Articles in Last Monday’s Credit Outlook 16

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NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 19 NOVEMBER 2015

Corporates

Marriott to Buy Starwood for $13.4 Billion, a Credit Positive On Monday, Marriott International Inc. (Baa2 stable) said that it is buying Starwood Hotels & Resorts Worldwide, Inc. (Baa2 stable) for $13.4 billion, including the assumption of debt. The transaction excludes Starwood’s timeshare business, which Starwood said in October it was selling to Interval Leisure Group for $1.5 billion. The Starwood purchase, which is credit positive, will create the world’s largest hotel system, with a broad range of well-recognized brand names. After the announcement, we affirmed Marriott’s ratings.

Marriott will add the well-known Westin, W and St. Regis brand names to its portfolio. The acquisition also ends uncertainty surrounding Starwood’s exploration of strategic and financial alternatives to increase shareholder value. In April this year, Starwood said it was exploring options to increase shareholder value following the resignation of its CEO in February.

Marriott is paying for the transaction with equity and excess cash, which will allow it to maintain credit metrics appropriate for its Baa2 rating after the acquisition closes. The company’s financial policy will also remain unchanged, including its 3.0x-3.25x lease-adjusted debt to EBITDAR target. We estimate that Marriott’s pro forma debt/EBITDA would be 2.8x (versus 3.0x for Marriott alone), EBITA/interest expense would be 7.0x (versus 7.1x), and retained cash flow/net debt would be 23.7% (versus 26.7%) for the 12 months that ended 30 September 2015. We expect that Starwood’s existing debt will become pari passu with Marriott’s existing debt.

We estimate that Marriott is paying about a 12.2x EBITDA multiple for Starwood’s lodging business, which we consider high given that Starwood’s largest brand, Sheraton, is weakly positioned. The acquisition includes the assumption of $2.2 billion of Starwood existing debt. Starwood shareholders will receive 0.92 shares of Marriott stock in exchange for each Starwood share and $2 per share in cash. We estimate that the sales to Marriott and Interval Leisure equal a 6.5% premium over Starwood’s closing share price on 13 November 2015 and a 16.5% premium over its closing share price on 26 October 2015 (the day before recent acquisition rumors).

The combined Marriott and Starwood would have 1.1 million hotel rooms, compared with Hilton’s more than 731,000 rooms and InterContinental Hotels Group’s approximately 727,000 rooms. The combined brand portfolio would increase to roughly 30 brands and would dilute Starwood’s reliance on the Sheraton brand. After the acquisition, Sheraton will be the second-largest brand behind the Marriott brand, and about 14% of Marriott’s pro forma hotel system by number of rooms. The Sheraton brand’s weak position is exemplified by its weak revenue per available room (RevPAR) performance relative to the Marriott brand. For the nine months that ended 30 September 2015, Sheraton’s North American RevPAR was $114.44 compared with the Marriot brand’s North American RevPAR of $149.84.

Marriott, which operates one of the world's largest hotel systems, owns, leases, manages or franchises more than 737,000 hotel rooms under 18 brands in more than 79 countries. The Marriott family currently owns about 24% of the company’s voting stock and has two family members on the board of directors. We estimate that the Starwood transaction would dilute the Marriott family ownership to about 15%. Annual net revenues are about $2.9 billion. Starwood owns, leases, manages or franchises nearly 355,000 hotel rooms under 10 brand names. Annual net revenues pro forma for the timeshare spinoff are about $2.2 billion.

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

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

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 19 NOVEMBER 2015

Mylan Ends Hostile Pursuit of Perrigo, a Credit Positive for Both Last Friday, Mylan NV, parent company of Mylan Inc. (Baa3 stable), said that it lost its hostile bid for Perrigo Company plc (Baa3 stable) after only 40% of Perrigo’s shareholders tendered for Mylan’s offer, which was valued at about $40 billon. In order to move forward with the deal, Mylan needed at least 50% of Perrigo’s shareholders to tender their shares.

The transaction’s collapse is credit positive for both Mylan and Perrigo. Following Friday’s announcement, we affirmed Perrigo’s Baa3 rating and stable outlook. We also affirmed Mylan’s Baa3 rating and revised the outlook to stable from negative.

If the deal had moved forward, Mylan’s financial leverage would have significantly increased. The acquisition would likely have caused significant management distraction and disrupted operations at both companies, which already spent seven months locked in a hostile takeover battle. Had Mylan received at least 50% of Perrigo’s shares, the tender would have been extended automatically for another 14 days, and potentially 46 days beyond that. Furthermore, Mylan potentially would have had to call an extraordinary shareholder meeting to replace Perrigo’s board with its own nominees, prolonging an already protracted process.

We estimate that Mylan’s leverage will be around 2.2x debt/EBITDA as of 31 December 2015. If the Perrigo deal had proceeded, we estimate that Mylan’s leverage would have increased to around 4.7x, assuming 100% ownership of Perrigo.

With Mylan’s bid for Perrigo now moot, we expect that Mylan will pursue other large acquisitions or share repurchases that will increase leverage. On 16 November, Mylan announced a $1 billion share repurchase through August 2016. Although credit negative, even if fully debt funded, the repurchase would only modestly raise leverage to approximately 2.5x. Despite risk of leveraging acquisitions, Mylan has consistently communicated a target leverage ratio of 3.0x (not including Moody's adjustments) as well as its commitment to maintaining an investment grade credit profile. Its business is also fundamentally strong, with the outlook for one its main products, the EpiPen epinephrine auto-injector, materially improved after a similar product from its main competitor, Auvi-Q, was recalled by its manufacturer last month. Further, Teva Pharmaceutical Industries Ltd (Baa1 review for downgrade) said its launch of a generic competitor to EpiPen will be delayed to the second half of 2016 rather than launching in 2015.

We estimate that Perrigo’s debt/EBITDA will be around 3.4x as of 31 December 2015. Leverage is unlikely to decline significantly given its $2 billion share repurchase plan announced on 22 October 2015. Perrigo will repurchase $500 million of its shares by the end of 2015 with the remaining shares to be repurchased over the next two or three years. We expect that the share repurchases will be funded largely with internally generated cash. We also expect that Perrigo will remain acquisitive, which will likely raise leverage and increase business and integration risk. Despite good revenue diversification, a meaningful portion of Perrigo’s cash is generated from the royalties it receives from Biogen Inc. (Baa1 negative) on global revenues of Tysabri (a multiple sclerosis drug). However, we believe that Perrigo will maintain financial policies consistent with an investment-grade profile. In the past, the company has increased debt/EBITDA to around 4.0x, but has generally been able to reduce it rapidly through EBITDA growth and debt repayment.

Jessica Gladstone, CFA Senior Vice President +1.212.553.2988 jessica.gladstone@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 19 NOVEMBER 2015

Constellation Adds Debt to Join Crowded Craft Beer Shelf, a Credit Negative On Monday, Constellation Brands (Ba1 stable) announced that it had reached an agreement to acquire San Diego-based craft brewer Ballast Point Brewing & Spirits (unrated) for approximately $1 billion. The deal is credit negative for Constellation because it is taking on debt to buy a richly priced asset in order to enter the highly competitive craft beer market.

We expect that in order to fund the deal, Constellation will increase its adjusted financial leverage to 4.3x debt/EBITDA at the end of the company’s fiscal year ending February 2016, up from 3.9x for the 12 months that ended 31 August 2015. Although this level is within our quantitative guidance for its rating, it sets the company back by at least a year relative to our previous deleveraging expectations. The large debt-financed acquisition also comes on the heels of Constellation’s initiation of a quarterly dividend and repeated increases to capex in order to shore up production capacity to meet demand for the company’s Mexican beers, including Corona and Modelo.

Constellation is paying an extremely rich multiple – in the high 20x range based on our estimate of 2015 expected EBITDA – for Ballast Point. Ballast Point has had superior growth in the past several years from a small base, with an 87% 2012-14 compound annual growth rate, and we expect more than 100% sales growth in calendar year 2015. In addition, Ballast Point has high margins that will complement Constellation’s healthy margin profile.

But Ballast Point’s craft beers will need to continue to post strong growth to justify the company’s lofty purchase price. Although the craft category has had strong double-digit growth overall, that pace of growth may not be sustainable. The craft beer sector is highly competitive and very fragmented. Shelf space is becoming harder to get given the proliferation of craft brands on the market. And although some retailers may be delighted to have Corona or Modelo in stock, they may be less excited to add yet another craft name to their already crowded shelves.

Constellation plans to boost the availability of Ballast Point, which is currently sold in 30 states and some international markets, by using its own distribution network and retail clout. This is likely to sustain growth rates for a period of time. But at the same time, the company has a full plate just managing the growth of its Modelo brands, which it acquired in 2013. The entry into craft, while providing a chance to diversify away from its exclusive reliance on Mexican brews, could also be a distraction from managing its large and very important core beer business.MOOY'SINVESTORS SERVICE CORPORATES

Constellation’s recent solid performance and significantly increased scale allows it to digest a $1 billion acquisition at a high multiple without pressuring its rating. But the deal also illustrates management’s desire to remain an aggressive acquirer, even as the company steps up shareholder returns and makes significant capital expenditures. These moves are indicative of a risk appetite that is likely to keep Constellation a speculative grade credit in the near term, despite a franchise and profitability profile that could support an investment grade rating.

Linda Montag Senior Vice President +1.212.553.1336 linda.montag@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 19 NOVEMBER 2015

Banks

Greek Banks’ Debt Swaps Crystallise Bond Losses and Reduce Capital Needs by €3 Billion Last week, Greece’s four largest banks, National Bank of Greece S.A. (Caa3 negative, ca1), Piraeus Bank S.A. (Caa3/C negative, ca), Eurobank Ergasias S.A. (Caa3/C negative, ca) and Alpha Bank AE (Caa3/C negative, ca), announced the results of their exchange offers to bondholders. The results indicated that the banks’ cumulative capital needs have declined by around €3 billion from the €14.4 billion that the European Central Bank (ECB) estimated under the adverse scenario of its comprehensive assessment for these banks on 31 October.

Faced with potentially higher losses under resolution given Greek banks’ large capital requirements, the vast majority of bondholders accepted the voluntary swap (see Exhibit 1). We consider this swap a distressed exchange that crystallises creditors’ losses and will likely significantly diminish Greek banks’ ability to re-access the international debt markets in the near term. However, a successful recapitalisation of Greek banks would likely help stabilise the troubled banking system and accelerate the easing of current capital controls. Recapitalisation by year end would also exclude depositors from any bail-in, as the Eurogroup’s statement in August 2015 outlines.

EXHIBIT 1

Greek Banks’ Exchange Offers

Alpha Bank Eurobank

National Bank of Greece Piraeus Bank

Offer in

Shares Offer in

Shares Offer in

Shares Option 1:

Offer in Cash

Option 2: Offer in

Shares

Senior Unsecured 100% 100% 100% 43% 100%

Subordinated - Tier 2 85% 80% 75% 9% 100%

Hybrid Perpetual Securities - Tier 1 50% 50% 30% 9% 50%

Total Capital Benefit from the Exchange Offer (€ Millions)

€ 1,011 € 720 € 692 € 602

Sources: The banks’ exchange offers to bondholders

Last week’s exchange offers to bondholders mainly involved swapping almost 100% of senior bonds’ face value into common shares, generating significant credit losses. The distressed exchange produced around €3 billion of capital benefit for the banks, mostly through the conversion of senior bonds, Tier 2 and Tier 1 instruments into common shares (see Exhibit 2).

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

assessment.

Nondas Nicolaides Vice President - Senior Credit Officer +357.25.693.006 nondas.nicolaides@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 19 NOVEMBER 2015

EXHIBIT 2

Greek Banks’ Capital Raising Plans, € Millions

Alpha Bank Eurobank National Bank

of Greece Piraeus Bank Total

Liability Management Exercise € 1,011 € 720 € 692 € 602 € 3,025

Capital Relief Approved by the SSM* € 180 € 83 € 120 € 271 € 654

Share Capital Increase Target € 1,552 € 1,319 € 1,480 € 1,340 € 5,691

Total Capital Benefit € 2,743 € 2,122 € 2,292 € 2,213 € 9,370

Capital Needs under Adverse Scenario € 2,743 € 2,122 € 4,602 € 4,933 € 14,400

Capital Shortfall € 0 € 0 -€ 2,310 -€ 2,720 -€ 5,030

Potential Bail-in Contribution € 300

Likely HFSF** Contribution € 0 € 0 € 2,010 € 2,720 € 4,730

Notes: * SSM = Single Supervisory Mechanism, ** HFSF = Hellenic Financial Stability Fund. Sources: The banks’ capital raising presentations and announcements

In addition, we note that the ECB’s Single Supervisory Mechanism has approved an aggregate €654 million of capital relief for Greek banks based on their restructuring, sale of non-core assets and better-than-expected operating performance in the third quarter of 2015, further reducing their capital needs. The next and most important step of Greek banks’ efforts to cover their capital needs would be the completion of the book-building process of their common share capital raising, with various investors already indicating their willingness to subscribe. Alpha Bank announced on Tuesday that institutional investors have requested more than €1.5 billion of its equity capital raise. Eurobank announced that its existing core shareholders have already committed to buy €453 million of its new shares.

If all Greek banks are able to raise their target aggregate €5.7 billion of capital from private investors by 20 November, we expect that the National Bank of Greece and Piraeus Bank will ask the Hellenic Financial Stability Fund (HFSF) to plug any capital shortfall not raised in the market. Based on local legislation, the HFSF will cover this by subscribing to a mix of new shares (25%) and contingent convertible securities (75%) that the banks will issue. The HFSF’s contribution to National Bank of Greece’s capital increase will also activate the bail-in tool for approximately €300 million of hybrid securities, mainly preferred stock subscribed by US investors that were not included in the bank’s exchange offer.

Because bondholders contributed to Greek banks’ share capital increases, we expect that the swaps will also impair the banks’ ability to access the international debt markets over the next two years. The implied losses that creditors sustain from these debt-equity swaps will likely reduce investors’ appetite for Greek bank debt. Nonetheless, a successful completion of Greek banks’ third recapitalisation in the past three years will be an important milestone in stabilising the country’s ailing banking sector and depositors’ confidence.

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 19 NOVEMBER 2015

Final Proposal to Promote Securitization in Israel Is Credit Positive for Banks Last Sunday, the Bank of Israel, the central bank, published its final report on promoting securitization in Israel. The report’s recommendations – as detailed in a draft law that we expect will come into force in the months ahead – are credit positive for banks because they will be allowed to securitize a variety of loans and other type of assets. Securitization will diversify and lengthen banks’ funding profiles, likely reduce funding costs and potentially free up capital.

All rated Israeli banks – Bank Leumi (A2 stable, baa22), Bank Hapoalim B.M. (A2 stable, baa2), Mizrahi Tefahot Bank (A2 stable, baa2), Israel Discount Bank (Baa1 stable, ba1) and First International Bank of Israel (A3 stable, baa3) – stand to benefit from securitization.

The central bank’s main recommendations include a series of legislative amendments to remove regulatory, accounting and tax obstacles that have so far stymied the development of securitization in Israel. None of the rated banks has issued any securitized transactions to date.

Importantly, the recommendations call for the initiator of a securitization to retain at least 10% of the credit risk of the securitized portfolio, and prohibit more complex securitization structures, such as collateralized debt obligations-squared, which are backed primarily by other collateralized debt obligations’ tranches. The prohibition on complex structures for bank securitization will help limit potential systemic risks given that the Israeli authorities aim to better align the originator’s and investors’ interests and maintain transparency of the underlying assets.

Developing the securitization market will help banks diversify funding sources and lengthen their maturity profile, credit-positive features that will also help banks to meet Basel III liquidity requirements (the liquidity coverage ratio and upcoming net stable funding ratio). Securitization also is likely to lead to a reduction in the cost of funding since banks should be able to raise funding at lower interest rates than from the unsecured capital markets or wholesale funding sources.

Israeli banks’ average reported Tier 1 ratio of 9.8% as of June 2015 was only modestly higher than the minimum regulatory requirements. The ability to issue securitized transactions, a true sale, will give Israeli banks the option to sell assets that reduce their risk-weighted assets and free up capital that can be used to provide new loans, for example to small and midsize businesses.

Promoting securitization is part of the government’s wider initiative to increase competition in the financial services industry. The new securitization law will help remove entry barriers and non-bank financial institutions will also be able to tap the securitization market.

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

Constantinos Kypreos Vice President - Senior Credit Officer +357.25.693.009 constantinos.kypreos@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 19 NOVEMBER 2015

Insurers

Brazilian Insurers Gain Flexibility to Diversify Investments, a Credit Positive Last Friday, Brazil’s insurance regulatory body SUSEP published a new resolution (No. 4444) that will allow insurers a broader array of investments, which is credit positive for the industry. Under the new rules, effective May 2016, insurers will have more flexibility to reallocate investments supporting their reserve liabilities and capital funds, allowing for better diversification of their portfolios.

Among the companies that will benefit from the new rules are the well-established bank-affiliated life and pension insurers, such as Bradesco Vida e Previdência, Brasilprev Seguros e Previdência and Itaú Vida e Previdência (see Exhibit 1).

EXHIBIT 1

Brazil’s Top Five Life and Pension Insurers as of December 2014

Estimated Sovereign Exposure / Shareholders Equity Market Share

Bradesco Vida e Previdência 2,480% 24%

Itaú Vida e Previdência 1,871% 20%

Zurich Santander Brasil Seguros 1,191% 9%

Brasilprev Seguros e Previdência 5,865% 9%

Companhia de Seguros Aliança do Brasil 301% 7%

Sources: Brazil’s Superintendência de Seguros Privados and Moody’s Investors Service estimates

Brazil’s current regulatory guidelines require that insurers’ assets be invested primarily in Brazilian government (Baa3 stable) bonds. These securities account for approximately 75% of insurers’ total invested assets industry-wide and the concentration, while supporting liquidity, constrains insurers’ overall asset quality and diversification. As a result, any change in Brazil’s credit quality tends to directly affect insurers’ credit fundamentals, most notably their asset quality and risk-adjusted capital adequacy (see Exhibits 2 and 3). Changes in Brazil’s sovereign credit quality can also affect our assessment of the country’s operating environment, including our view of systemic risk, economic strength, institutional strength and susceptibility to event risk, further linking insurers’ credit profiles to the sovereign.

EXHIBIT 2

Brazil’s Top Five Property and Casualty Insurers as of December 2014

Estimated Sovereign Exposure / Shareholders Equity Market Share

Porto Seguro Cia de Seguros Gerais 94% 10%

Bradesco Auto/Re Companhia de Seguros 233% 9%

Mapfre Seguros Gerais 115% 9%

Sul América Companhia Nacional de Seguros 116% 6%

Tokio Marine Seguradora 207% 5%

Sources: Brazil’s Superintendência de Seguros Privados and Moody’s Investors Service estimates

Diego Kashiwakura Vice President - Senior Analyst +55.11 3043.7316 diego.kashiwakura@moodys.com

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 19 NOVEMBER 2015

EXHIBIT 3

Brazil’s Top Five Reinsurers as of December 2014

Estimated Sovereign Exposure / Shareholders Equity Market Share

IRB Brasil Resseguros 162% 36%

Zurich Resseguradora Brasil 239% 8%

Allianz Global Corp. & Specialty Resseguros Brasil 159% 5%

Austral Resseguradora 127% 4%

Munich Re do Brasil 253% 4%

Sources: Brazil’s Superintendência de Seguros Privados and Moody’s Investors Service estimates

The new guidelines will allow insurers not only to reduce exposure to the sovereign through diversification, but also to improve their overall asset quality by reallocating assets to higher rated (e.g., corporate) securities. The attractiveness of investing in high-yielding asset classes, such as junk bonds and equities, would be countered by a corresponding weakening in the overall credit profile of insurers’ assets. Still, the benefits of the new resolution remain constrained by limitations on insurers’ ability to hold foreign investments and therefore access broader investment options and higher rated securities.

Also, the new rules will extend to 70% of total investments, from 49%, the limit that open private pension plans (known as Previdencia) can invest in equities, with most of the incremental market return and risk distributed to policyholders, rather than to insurers. With increased flexibility, the life and pensions insurance segment should experience smoother growth patterns and continue to gain competitiveness and penetration in the national economy.

Furthermore, insurers and local reinsurers (to the extent that they have operations conducted in foreign currencies) and export credit insurers will now be allowed to invest up to 100% of their assets in the applicable foreign currency. This will allow them to better hedge their exposures to exchange rate fluctuations, thereby reducing earnings volatility. Among insurers that will benefit from the increased limit are IRB Brasil Resseguros, Euler Hermes Seguros de Crédito and AIG Seguros Brasil.

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 19 NOVEMBER 2015

Sovereigns

Finland’s Healthcare, Social Welfare and Public Administration Reform Is Credit Positive On 9 November, the parties that make up Finland’s ruling coalition announced details on reforms to healthcare, social welfare and its autonomous regions. When implemented, the reform package will reduce Finland’s (Aaa negative) fiscal sustainability gap by around €3 billion (1.4% of GDP) from around €7.5 billion (3.5% of GDP) currently, according to government estimates. The Finnish policymakers’ ability to formulate significant structural reform to return public finances to sustainable footing is credit positive.

The reform package includes a number of measures, including the transfer of healthcare and social welfare services to 18 autonomous regions on 1 January 2019 from around 190 designated authorities currently. The 18 regions will be based geographically on the current 18 provincial districts. Of the 18 autonomous regions, 15 will organize their own services and three will provide their services with the support of one of the 15 regions. Apart from cost savings related to this reduction in organizational units, the reform aims to improve the units’ efficiency by changing operating practices and service structures. The reform also foresees the newly created autonomous regions taking on other still-unspecified tasks. Furthermore, direct elections will be held to elect a regional council, which will become the highest decision-making body in the 18 autonomous regions.

The reform package would also give citizens a choice of receiving basic healthcare services from public, private or the third sector (e.g., non-profit organizations), which should increase competition and lower costs. Where appropriate, freedom of choice will also be applied to special healthcare and social welfare services. The reform would reduce the number of hospitals that provide a broad range of 24-hour services to 12 from 20 currently. The reform also intends to increase digital service solutions in health and social care and improve information and communication systems across the different autonomous regions.

Although we consider the reforms’ financial savings sizable, they will only accumulate gradually beginning in 2019. The government expects the reforms to lower the annual costs of social and healthcare services by €3 billion by 2029. Hence, assuming a linear cost improvement and no inflation over the 11 years from 2019 to 2029, the forecast implies around €18 billion in cumulative savings.

The reforms face implementation risks: a version failed in 2014 when the Finnish constitutional court deemed the reforms unconstitutional. The question on conformity with the constitution arises because the autonomy of Finnish municipalities may be affected by transferring healthcare to a higher level of public administration such as the autonomous regions from the municipal level.

Thorsten Nestmann Vice President - Senior Analyst +49.69.7073.0943 thorsten.nestmann@moodys.com

Polina Gotmann Associate Analyst +49.69.7073.0725 polina.gotmann@moodys.com

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 19 NOVEMBER 2015

Ghana’s Prudent Fiscal and Monetary Policy Stance Is Credit Positive Last Friday, Ghana’s (B3 negative) Finance Minister Seth Terkper presented the 2016 budget, which aims to reduce the fiscal deficit to 5.3% of GDP in 2016 from the targeted 7.3% in 2015 and the 10.2% deficit in 2014. Then, on Monday, the central bank further tightened monetary policy to suppress inflation and anchor inflation expectations. Although downside risks persist, proactive policy adjustments should help to preserve macroeconomic stability and support sovereign credit quality, a credit positive.

The comparison of fiscal results over the first nine months of the year with the budget targets and with 2014 budget execution data over the same period shows outperformance in particular on the revenue side: revenues and grants to GDP were 17.0% of GDP as of September 2015 as compared to the 16.3% target in the revised budget and in contrast to 15.6% over the same period last year. Total expenditures and arrears clearance at 22.1% of GDP was broadly in line with the target and with last year’s performance, whereas the fiscal deficit registered 5.1% of GDP over the first nine months this year against a deficit target of 5.7% of GDP and the 6.4% of GDP deficit recorded over the same period last year. Ghana’s fiscal deficit targets of 7.3% of GDP and 5.3% for 2015 and 2016, respectively, compare to our expectation of a more muted fiscal deficit reduction of 8.0% in 2015 and 7.5% in 2016.

Despite the better-than-expected performance, risks to the fiscal consolidation path for the rest of this year and for 2016 remain. Some of the risks relate to the front-loaded investment expenditures required to address the power crisis in order to meet the 2016 growth target of 5.4% underlying the 2016 budget. Election-related expenditures in 2016 are also a risk because they have contributed to past expenditure overruns. However, we expect the constraints imposed by the three-year International Monetary Fund (IMF) program adopted in April 2015 to help prevent a renewed sharp increase in wage-related expenditures as occurred in 2012.

Ghana’s fiscal consolidation effort is accompanied by a tighter monetary policy stance with a view to anchoring inflation expectations and stabilizing the exchange rate. On 16 November, the Bank of Ghana further increased the policy rate to 26% – one of the highest policy rates in the world – from 25% in September, citing significant deferred utility tariff hikes expected later this year, in addition to worsening external financial conditions.

The monetary policy transmission mechanism is likely hampered at such high interest rates so that one percentage more may not significantly alter inflation expectations, especially in view of a significant utility tariff increase. Interest expenditures are already projected to exceed 30% of revenues in 2015 in the revised budget and are one of the major constraints on debt affordability and on Ghana’s credit profile. In our view, the reduction and eventual elimination in deficit monetization targeted under the IMF program is more significant for signaling purposes.

Higher Eurobond risk premiums and reduced foreign investor participation in the domestic debt market are manifestations of worsening external financial conditions. Higher domestic interest rates in Ghana counterbalance exchange rate depreciation pressures also stemming from deteriorating terms of trade and large external imbalances, which over the past two years have contributed significantly to increasing the government’s external debt to GDP ratio to 44% of GDP as of June 2015 from 39.3% at year-end 2014 and 27.2% at year-end 2013.

The risks to our revised growth outlook of 5.8% in 2016 are to the downside owing to the economic headwinds from credit constraints and declining purchasing power from utility tariff hikes. However, we expect GDP growth to receive a boost from the TEN oil field production, on schedule to start in the second half of 2016.

Elisa Parisi-Capone Assistant Vice President - Analyst +1.212.553.4133 elisa.parisi-capone@moodys.com

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 19 NOVEMBER 2015

Sub-sovereigns

Mexico’s 2016 Budget Is Credit Negative for Mexican States and Positive for Roads and Airport Industries Last Friday, the Mexico (A3 stable) Chamber of Deputies approved the 2016 budget. The budget does not require additional approvals and is credit negative for states, whose appropriations are below the rate of inflation, and credit positive for infrastructure construction companies specializing in roads and airports, where appropriations have increased versus the 2015 budget.

The states rely on three federal fund-transfer programs, participaciones, aportaciones and convenios y otras transferencias (COTs), for an average of around 90% of their total revenues. In aggregate, we estimate that federal transfers will increase by 1.93% versus the 2015 budget, which is less than government’s projected 3% inflation rate for 2016, and less than the previous growth rate of states’ expenditures. Between 2010 and 2014, among the Mexican states we rate, the median expenditure increase was an 8.8% compound annual growth rate.

The 2016 budget increases participaciones by 8.44% versus 2015 levels and above their 2004-14 average of 7.53%. Participaciones account for 30% of the states’ median revenue, are non-earmarked and serve as collateral for 90% of Mexico’s regional and local government total debt. Aportaciones, which account for 35% of states’ revenue and are earmarked transfers aimed at covering basic public services and primary infrastructure, increase by 4.21%, below their 2004-14 average of 6.54%.

We estimate3 that COTs, which equal 25% of states’ revenue and are aimed at funding specific projects, including infrastructure investment, decrease by 14.69% versus 2015 levels, a sharp decline compared with the 23.92% growth rate between 2004 and 2014 (see exhibit).

Growth Rates of Federal Transfers to Mexican States

2010-14 CAGR Change 2016 versus

2015 budget

Participaciones 7.53% 8.44%

Aportaciones 6.54% 4.21%

Convenios y Otras Transferencias 23.92% -14.69%

Total Federal Transfers 10.01% 1.93%

Sources: Secretaría de Hacienda y Crédito Público, Presupuesto de Egresos de la Federación, and Moody’s calculations for Convenios y Otras Transferencias

Moreover, the decrease in COTs will offset the positive growth rate of participaciones and aportaciones. Given that COTs are used for specific projects, including but not limited to infrastructure, they have been substitutes for debt issuance. As a result of this decline, states have the option to postpone planned infrastructure projects or proceed and either increase debt levels or reduce their liquidity. At the end of 2014, the median debt for our rated states was a moderate 19.9% of total revenues, while liquidity (measured as net working capital, or liquid assets minus liquid liabilities) was limited and averaged negative 0.6% of total expenditures.

3 Appropriations for COTs are not well defined in the budget and are estimated using the final appropriations of Ramo 25 and Ramo

23, which include most COTs in addition to other appropriations for federal expenditures. Our estimates, therefore, may overestimate the true level of COTs (i.e., the negative 14.69% change may tilt to the upside).

Francisco Vazquez-Ahued Assistant Vice President - Analyst +52.55.1253.5735 francisco.vazquez-ahued@moodys.com

Roxana Muñoz Assistant Vice President - Analyst +52.55.1253.5721 roxana.munoz@moodys.com

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 19 NOVEMBER 2015

Toll-roads and airport appropriations increase in the approved budget for 2016, a credit positive. Congress approved MXN12 billion for highways and rural roads, versus MXN3 billion approved in 2015. The Chamber of Deputies also approved MXN5.5 billion for the first phase of the new airport in Mexico City, which mainly involves the construction of the main terminal building, three parallel runways, and contact and remote stands. The main effect of this increase is credit positive for companies in the construction industry, including OHL Mexico (unrated), Empresas ICA, S.A.B. de C.V. (B3 negative), Abengoa Mexico, S.A. de C.V. (B2/Ba1.mx review for downgrade) and IDEAL (Baa3/Aa2.mx stable), whose 2016 financing needs declined.

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 19 NOVEMBER 2015

US Public Finance

For 75 Ohio School Districts, Partially Restored Funding Is Credit Positive On 15 November, Ohio (Aa1 stable) Governor John Kasich signed legislation into law that partially restores funding to the state’s school districts. Senate Bill 208 (SB 208) authorizes partial funding of the tangible personal-property supplement (TPP supplement), which had been set to expire at the beginning of the fiscal year ending 30 June 2017. The restored funding is credit positive for 75 school districts that faced 2017 budget reductions of more than 4% compared with fiscal 2015 budgets, particularly Strongsville (Aa3), Grandview Heights (Aa2), Brecksville-Broadview (Aa2) and Kenston (Aa1) school districts.

For the 14 districts most heavily affected, the TPP supplement accounts for 3.5%-5.2% of their 2015 operating revenue and up to 40% of their total state aid and reimbursements for fiscal 2016. The most affected districts could have had to apply between 4.8% and 25% of their 2015 reserves to fill that funding gap, absent other budget offsets from the lost revenue. Under SB 208, the funding gap now equals just 4.6% of reserves for Strongsville City Schools, which stood to lose the greatest amount of aid relative to its reserves (see exhibit).

Fourteen Ohio School Districts Avoid Large Reserve Reductions

County District

General Obligation

Rating

Original Budget TPP Supplement Reduction

as Percent of 2015 Reserves

SB 208 TPP Supplement Reduction as Percent of

2015 Reserves

Cuyahoga Strongsville City Aa3 24.50% 4.55%

Franklin Grandview Heights City Aa2 20.29% 2.85%

Cuyahoga Brecksville-Broadview Heights Aa2 17.54% 2.63%

Geauga Kenston Local Aa1 15.02% 2.43%

Wood Bowling Green City Aa2 12.30% 4.13%

Erie Huron City unrated 11.55% 2.56%

Warren Mason City Aa1 10.32% 4.34%

Cuyahoga Mayfield City Aa1 9.85% 0.97%

Summit Nordonia Hills City unrated 8.53% 1.37%

Holmes East Holmes Local Aa3 8.44% 2.82%

Ottawa Port Clinton City unrated 8.15% 1.66%

Cuyahoga Warrensville Heights City unrated 7.46% 2.87%

Cuyahoga Beachwood City Aaa 6.86% 0.76%

Logan Indian Lake Local Aa3 4.79% 2.87%

TPP = Tangible personal-property.

Sources: Ohio Senate, Ohio Legislative Service Commission, Ohio Department of Education and Moody’s Investors Service

The state assessed TPP local tax on machinery, inventory, furniture, fixtures and other equipment used in the course of conducting business. The state passed legislation in 2005 to fully phase out this tax by tax year 2009, while providing for state aid reimbursements to hold school districts harmless for the tax revenue loss. Counties and cities also lost TPP revenues, but with limited effect because TPP was generally not a significant revenue source. The state initiated the phase-out of the reimbursements in fiscal 2012, and scheduled the TPP replacement payment program to phase out completely by 2019. The TPP supplement included in the original state budget bill was to replenish TPP to 100%, countering the scheduled phase-out by fiscal 2017 to ensure that no district received less than 96% of the total state aid from fiscal 2015.

Tonya (Antonina) Peshkova Associate Analyst +1.312.706.9977 tonya.peshkova@moodys.com

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 19 NOVEMBER 2015

When Mr. Kasich vetoed the TPP supplement provision in the prior budget bill, 110 districts were exposed to cuts in total state aid for fiscal 2017 equal to roughly $90 million. Per SB 208, $44 million is now restored to the districts whose total state aid would have fallen below the 96% threshold. Seventy-five districts will receive the restored TPP supplement funding in fiscal 2017. Combined, they were at risk of losing 1.8% of their 2015 operating revenue. The magnitude of the loss is now approximately 0.9%. According to the state, TPP will not have a negative effect on the state’s general revenue fund during the current biennium.

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

16 MOODY’S CREDIT OUTLOOK 19 NOVEMBER 2015

NEWS & ANALYSIS Corporates 2 » Anheuser-Busch and Molson Coors Acquisitions Are Credit

Negative Despite Strategic Benefits » Gap Slips on Banana, a Credit Negative » Liberty Interactive LLC’s Latest Spinoff Plans Are

Credit Negative » HRG Group’s Insurance Sale Is Credit Positive » Board Seats for Activist Shareholder Are Credit Negative for

Advance Auto Parts » Petroleum Geo-Services’ Equity Raise Is Credit Positive » Evraz’s Tender Offer Is Credit Positive for Indirect

Subsidiary Raspadskaya » Fortescue’s $750 Million Debt Repayment Offer Is

Credit Positive

Infrastructure 11 » National Grid's Planned Asset Sales and Shareholder

Distributions Are Credit Negative

Banks 14 » UniCredit’s Business Realignment Is Credit Positive

» Julius Baer’s Placement of SGD450 Million of Additional Tier 1 Securities Is Credit Positive

» Citadele Banka IPO Plan Fails to Attract Sufficient Investor Interest, a Credit Negative

» China’s Proposed Disclosure on Bank Liquidity Is Credit Positive

Insurers 18 » Anbang’s Planned Acquisition of Fidelity & Guaranty Life Is

Credit Positive

Asset Managers 21 » Pemex’s Pension Reform Is Credit Positive for Mexico’s

Private Fund Managers

Sovereigns 22 » Defeat of Portugal’s Government Clouds Outlook for Fiscal

Consolidation and Structural Reform » Iraq’s Staff-Monitored Program with the IMF Is

Credit Positive

US Public Finance 26 » Connecticut Lowers Assumed Investment Return Rate for

Teachers Pensions, a Credit Positive

Securitization 28 » Freddie Mac’s First Rated Senior/Subordinate Cash RMBS

Features Structure that Benefits Mezzanine Bonds

US Accounting 30 » FASB’s Change to Operating Lease Accounting Will More

Accurately Report Companies’ Debt

RATINGS & RESEARCH Rating Changes 32

Last week we downgraded Accudyne Industries, Hovnanian Enterprises, McDonald's, Toshiba, Coventry and Rugby Hospital, Baltinvestbank and Generali Argentina Compania de Seguros, and upgraded Erste Bank Hungary, The Hiroshima Bank, New York City Municipal Water Finance Authority and certain classes of Trust Fontana 2, Dell equipment-backed ABS and CNH equipment ABS, among other rating actions.

Research Highlights 39

Last week we published on Asian technology, Chinese steel, the global economy, global automakers, North American and EMEA oil refiners and marketers, North American covenant quality, EMEA manufacturers, European auto parts suppliers, EMEA corporates, US retailers, Asian corporates, US airports, Korea Gas Corporation, Peruvian public-private partnerships, Asian infrastructure, global systemically important banks, Italian banks, Argentine banks, Danish banks, Swedish banks, Pakistani banks, global insurers, United Arab Emirates, African sovereigns, Malta, Mongolia, Southeast Asian sovereigns, sovereign wealth funds, Republic of Gabon, Pacific Rim sovereigns, French centres hospitaliers universitaires, Pennsylvania, US mass transit, privatized military housing, New Mexico school districts, US school districts, public employee pension funds, small US hospitals, US asset-backed commercial paper, US CLOs, US marketplace lending and US RMBS, among other reports.

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