MOODYS.COM

26 MAY 2016

NEWS & ANALYSIS Corporates 2 » Boeing Snags VietJet Order, a Credit Positive » Bayer’s Offer to Acquire Monsanto Is Credit Negative » Midea Group’s Takeover Bid for KUKA Is Credit Negative

Infrastructure 6 » Comisión Federal de Electricidad’s New Labor Contract

Reduces Pension Liability

Banks 7 » Argentina’s Grupo Supervielle’s IPO Is Credit Positive » UK Measures to Stoke Bank Competition Would Be

Credit Negative » BSI Ordered to Shut Down Singapore Operations, a Credit

Negative » Chinese Banks’ Resumption of Nonperforming Loan

Securitizations Is Credit Positive » Vietnamese Banks’ Exposure to HAGL Restructuring Is Credit

Negative

Insurers 14 » Anthem and Cigna’s Reported Discord During Merger Process Is

Credit Negative for Both

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Monday’s Credit Outlook 15 » Go to Last Monday’s Credit Outlook

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NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 26 MAY 2016

Corporates

Boeing Snags VietJet Order, a Credit Positive On Monday, The Boeing Company (A2 stable) announced that it had finalized an $11.3 billion order from VietJet Aviation Joint Stock Company (unrated) for 100 Boeing 737 MAX 200 airplanes. The order closely followed US President Barack Obama’s announcement that the US had lifted its arms embargo against Vietnam. The order is credit positive for Boeing and credit negative for archrival Airbus Group SE (A2 stable) because VietJet is a fast-growing carrier that currently operates an all-Airbus fleet.

The rivalry that defines Boeing and Airbus in their global aviation duopoly continues to heat up, with price considerations taking on added importance to win deals with airline customers that seem to have the negotiating leverage. Although orders have been a little more volatile than deliveries, Boeing’s and Airbus’ respective market shares have generally remained between 40% and 60% in any given year over much of the past decade (see Exhibit 1).

EXHIBIT 1

Airbus’ and Boeing’s Market Shares in Net Orders and Deliveries

Sources: The companies and Moody’s Investors Service estimates

Both companies delivered a similar number of single-aisle planes in 2015, although Boeing remains much larger in widebodies, giving it a higher overall share of deliveries for a few more years. But Airbus has been growing its share of new orders, especially in the all-important, high-volume narrowbody segment, as its A320neo captures more orders than Boeing’s newly re-engined counterpart, the 737 MAX (see Exhibit 2).

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Boeing Share in Net Orders Airbus Share in Net Orders Boeing Share in Deliveries Airbus Share in Deliveries

Russell Solomon Senior Vice President +1.212.553.4301 russell.solomon@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 26 MAY 2016

EXHIBIT 2

Net Orders of Boeing’s 737 MAX versus Airbus’ A320neo

Sources: The companies

Boeing is currently in the unenviable position of fending off competition from an increasingly dominant Airbus at the larger end of the market, where Boeing’s 737 MAX 9 competes against Airbus’ A321, and emerging competition from Bombardier Inc. (B2 negative) and Embraer S.A. (Ba1 negative) at the lower end, with more rivals coming before the end of the decade.

For several years, we have cited growing competitive intensity between Boeing and Airbus. To preserve their market dominance, both Boeing and Airbus admit to winning deals with significant pricing concessions, and ensuing acceptance of reduced profitability on their longstanding and highly profitable programs. They are better able to leverage their low manufacturing costs and much larger scale of production to compete against each other and ward off new market entrants.

Customers seem to have more leverage now than they did a few years ago, when oil prices were much higher and deals for big orders were sought and signed by all types of airlines. We expect new orders to slow sharply owing to lower oil prices, already-large order backlogs, no new model announcements and regional economic pressures. About the only leverage airframers might have left is production slot availability, and even that is limited.

Certain high-profile contract signings have suggested that pricing considerations have taken on added importance, particularly when customers defect from one large airframer to another. We believe Boeing offered particularly large pricing concessions to United Continental Holdings Inc. (Ba3 positive) for the 65 smaller-size, last-off-the-line 737-700s it ordered in two separate transactions earlier this year. For its part, Airbus also recently angled out Boeing for a large, 82-aircraft order from Delta Air Lines, Inc. (Baa1 stable), entailing similarly last-off-the-line A321ceos.

The just-announced order from VietJet Air for 100 of Boeing’s high-density layout 737 MAX 200 airframes is another example of a price-driven win, and the quick-moving, evolving competitive dynamic now present in the sector.

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NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 26 MAY 2016

Bayer’s Offer to Acquire Monsanto Is Credit Negative Last Monday, German life science company Bayer AG (A3 review for downgrade) announced an all-cash offer of $122 per share to acquire Monsanto Company (A3 negative) for an aggregate price of $62 billion. The potential acquisition is credit negative for Bayer because it would result in a significant increase in financial leverage. On Tuesday, we placed Bayer’s ratings on review for downgrade. Additionally, Monsanto on Tuesday rejected Bayer’s bid as too low.

Although Bayer intends to finance approximately 25% of the transaction with equity through a rights offering, we estimate that its Moody’s-adjusted total debt/EBITDA would likely rise close to 4.5x from 2.4x as of 31 December 2015. The offer appears to signal a steep change in Bayer’s financial policy and a greater tolerance for financial leverage.

The transaction would give rise to significant execution, reputational and integration risks given its size, both in terms of its monetary value and the scale of the acquired operations. In particular, financing for the acquisition would include a very large rights issue relative to the size of equity raises undertaken by European corporates in the past.

Furthermore, Bayer would pay a multiple close to 16x Monsanto’s EBITDA for the last 12 months to 28 February 2016 at a time when Monsanto’s profitability has eroded owing to more challenging market conditions following a period of strong growth driven by the market penetration of its genetically modified organism seeds and new-product commercialisation. Bayer’s ability to achieve the synergies of approximately $1.5 billion (equivalent to approximately 6% of combined sales) that it targets after year three will depend on the smooth integration of Monsanto with Bayer’s crop science business.

That said, the deal makes strategic sense, and comes at a time when the agrochemical sector has been negatively affected by declining commodity prices and farming income, and heightened emerging market volatility. Against this backdrop, there has been mounting pressure in the industry to consolidate following the December 2015 announcement of the merger of The Dow Chemical Company (Baa2 stable) with E.I. du Pont de Nemours and Company (A3 negative), which would create the largest global agriculture business, and ChemChina’s (unrated) February 2016 agreement to purchase Syngenta AG (A2 review for downgrade).

The combination of Bayer’s crop science business and Monsanto would create the world’s largest player in the agricultural chemical and seeds sector, with 2015 pro forma sales of around €23 billion. Monsanto’s top position in global seeds would fit well with Bayer’s stronger focus on crop protection chemicals, leading to the creation of a well-balanced portfolio in terms of products and geographies, which would allow Bayer to deliver a strong integrated offering to farmers.

Francois Lauras Vice President - Senior Credit Officer +44.20.7772.5397 francois.lauras@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 26 MAY 2016

Midea Group’s Takeover Bid for KUKA Is Credit Negative On 18 May, MECCA International (BVI) Limited, a wholly owned subsidiary of Midea Group Co., Ltd. (A3 stable), confirmed that it would increase its stake in KUKA AG (Ba2 positive) to at least 30% from the 13.5% it held at the end of April 2016. Increasing its stake in KUKA would be credit negative for Midea because the investment will likely raise Midea’s leverage from the adjusted debt/EBITDA of 0.7x reported for 2015 and leave less room for further debt increases within our quantitative guidance of 2.0x-2.2x for its rating.

Under German securities regulations, any stake greater than 30% would trigger a general offer for all the outstanding shares of KUKA. The bid price of €115 per share indicates a potential acquisition price of $1.0-$4.5 billion, depending on the amount of shares tendered.

Midea has maintained a very strong financial profile and excellent liquidity. The company held cash and cash-like investments of RMB47.6 billion ($7.4 billion) at 31 December 2015, while total adjusted debt was RMB11.2 billion. This would support Midea’s future growth plans and help the company navigate market volatility. As seen in the exhibit below, the company has generated significant free cash flow over the past few years as a result of its large operating scale, highly efficient manufacturing process and superior working capital management. These advantages helped keep leverage low despite competition in China’s white goods manufacturing industry and the resultant thin adjusted EBITDA margin of around 12%.

Midea’s Free Cash Flow and Adjusted Debt/EBITDA, 2012-15

Sources: The company and Moody’s Financial Metrics

However, if increasing its stake in KUKA results in a full takeover, Midea will need to pay up to $4.5 billion in total consideration. Assuming the company funds the transaction with a mix of cash and debt, we estimate that its adjusted debt/EBITDA will rise, albeit to a level below 2.0x. Additionally, Midea’s currently strong reported net cash position (including deposits) of RMB12.6 billion would erode materially. These metrics will leave less buffer for its business expansion needs.

An acquisition of KUKA would improve Midea’s business diversity and automated manufacturing capabilities. KUKA’s prominent market position globally and technology leadership in robotics would also complement Midea’s development of intelligent home systems. Midea has focused on upgrading its manufacturing capabilities and extending its automated processes over the past few years, because wage inflation in China has negatively affected the margins of manufacturers.

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Lina Choi Vice President - Senior Credit Officer +852.3758.1369 lina.choi@moodys.com

Anthony Lee Associate Analyst +852.3758.1305 anthony.lee2@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 26 MAY 2016

Infrastructure

Comisión Federal de Electricidad’s New Labor Contract Reduces Pension Liability Last Friday, Mexican electricity utility Comisión Federal de Electricidad (CFE, Baa1 negative) and its workers union signed a new contract covering 2016-18 that significantly reduces CFE’s pension liability, a credit positive.

CFE estimates that its pension liability will decline by MXN160 billion (approximately $8.9 billion), or 25% of its reported 2015 net pension liability of MXN625 billion ($34.7 billion), under the terms of the new contract with Sindicato Único de Trabajadores Electricistas de la República Mexicana, the workers’ union. Although the company has not yet disclosed details of the contract, we expect that one of the key changes is an increase in the workers’ retirement age.

According to legislation approved in 2014, the Mexican government will assume the same amount of liabilities that CFE manages to reduce via modifications of labor contracts. Thus, CFE’s reduction in pension liability will increase to MXN320 billion, or 50% of CFE’s reported net liability.

With these changes, CFE’s Moody’s-adjusted debt would decline to MXN545 billion from MXN704 billion at the end of 2015, while the company’s ratio of funds from operations to debt would increase to 6.1% from 4.7% (see exhibit).

Effect of CFE’s Pension Liability Reduction on Total Debt and Funds from Operations/Debt

Note: Debt = Moody’s-adjusted debt. Sources: Comisión Federal de Electricidad and Moody’s Investors Service

Government-owned CFE is Mexico’s dominant, vertically integrated electric utility and one of the largest electric utilities in Latin America, with installed generation capacity of 55.0 gigawatts, including a generation fleet of independent power producers that exclusively sells energy to CFE (and accounts for 12.9 gigawatts). Although the Mexican government does not guarantee CFE’s debt, we think there is a significant likelihood of government support given the company’s status as a wholly government-owned entity and its strategic importance to the country’s economy.

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Adrián Garza Patiño, CFA Vice President - Senior Analyst +52.55.1253.5709 adrianjavier.garza@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 26 MAY 2016

Banks

Argentina’s Grupo Supervielle’s IPO Is Credit Positive Last Thursday, Grupo Supervielle S.A. (Caa1 stable), the holding company of Banco Supervielle S.A. (B3/B3 stable, b31), announced that it had priced a $280 million initial public offering (IPO) of class B shares for both domestic and international investors. The IPO, the first by an Argentine issuer in two years, is credit positive for Grupo Supervielle because it will strengthen the holding company’s capital base and expand its capacity to meet its expectation of an increase in demand for credit in Argentina in the coming years.

The IPO will provide the bank the capital and liquidity it needs to take advantage of expected growth opportunities by expanding its base of customers in the household and small and midsize enterprise segments, its traditional target markets, now that Argentina’s operating environment has begun to improve. It will also improve Grupo Supervielle’s visibility with investors and lead to enhanced corporate governance and transparency, given that Grupo Supervielle will now be required to follow the US Securities and Exchange Commission’s more stringent reporting standards.

Grupo Supervielle’s ability to sell shares abroad reflects Argentine companies’ improved access to global capital markets since the government successfully sold cross-border bonds in April for the first time since its 2002 default. This new source of financing will allow Grupo Supervielle and other Argentine companies to raise more funds than they would otherwise be able to raise in Argentina’s underdeveloped capital markets.

The offering consisted of roughly 23 million in American depositary shares (ADS) offered in the US at $11 apiece, and 9 million shares in Argentina offered at $2.20 each. Each ADS equals five shares. Following the offering, Grupo Supervielle’s controlling Supervielle family will retain 62% of the total capital stock and 85% of the voting rights.

Grupo Supervielle is the holding company for several financial services companies, including Banco Supervielle, finance company Cordial Compañía Financiera (unrated), credit card company Tarjeta Automática S.A. (unrated), microfinance company Cordial Microfinanzas S.A. (unrated), Supervielle Asset Management S.A., (unrated), Supervielle Seguros (unrated) and Cordial Servicios (unrated). The holding company provides financial services to more than 2 million clients of different socioeconomic sectors, and has reported assets of $2.3 billion and earnings of nearly $47 million in 2015. Banco Supervielle, which had a market share of 2% by deposits as of February 2016, is Grupo Supervielle’s largest earnings generator, constituting 90% of total assets.

The IPO follows the implementation of a number of market-friendly policies aimed at boosting the economy and promoting investments by Argentina’s new government since it assumed power last December. In addition to ending the country’s 15-year battle with bondholders, the government has also removed foreign-exchange controls and export tariffs, reduced subsidies on utilities and removed interest-rate caps. Grupo Supervielle’s management expects that these changes will drive an increase in demand for credit.

1 The bank ratings shown in this report are Banco Supervielle’s local currency deposit rating, senior unsecured debt rating and baseline

credit assessment.

Valeria Azconegui Vice President - Senior Analyst +54.11.5129.2611 valeria.azconegui@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 26 MAY 2016

UK Measures to Stoke Bank Competition Would Be Credit Negative On 17 May, the UK Competition and Markets Authority (CMA) proposed changes to increase competition in the UK current account and small and midsize enterprise (SME) banking markets. The measures focus on simplifying customers’ ability to borrow from a wider range of banks, changes in personal current account overdraft charges and increasing transparency in SME lending. These changes would boost competition by easing customers’ ability to switch banks and would be credit negative for banks because the changes will increase banks’ costs and reduce revenues.

The proposals followed the CMA’s provisional findings that further divestitures beyond The Royal Bank of Scotland Group plc’s (Ba1 positive) sale of its Williams and Glyn (unrated) unit and Lloyds Banking Group plc’s (Baa1 positive) sale of TSB Bank plc (Baa2 stable, baa22) would not increase competition.

The CMA proposed allowing customers to access at little or no charge their transaction histories after closing an account. Doing so would make it easier for SMEs to share those histories and obtain a loan from banks with which the SMEs do not have a relationship, and heretofore had difficulty obtaining a business loan. Providing this access should encourage customers to switch banks, thereby fostering more competition in SME lending. Additionally, the regulator proposes using digital applications that would allow both retail and business customers to directly compare different banks’ products. Implementing these measures will hurt bank margins owing to increased competition and operating costs.

The regulator has also recommended that banks set monthly maximum charges for unarranged overdrafts, which will then be published for comparison purposes. Additionally, banks would be required to alert customers when their accounts near a zero balance, so that customers can replenish their account before their balance becomes negative. Banks also would have to introduce grace periods that give customers the opportunity to take action to avoid or mitigate potential charges that may arise from inaction. These measures would cut bank revenues and negatively affect margins, which are already being negatively affected by increased competition and low interest rates.

For SMEs, the CMA has proposed measures to improve loan rate transparency, comparison tools and sharing SME information – all with the goal of making SME lending more competitive. We expect that these new measures will increase competition in the SME lending market and lead to lower lending rates, which would reduce banks’ margins and revenues.

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

Maxwell Price Associate Analyst +44.20.7772.1778 maxwell.price@moodys.com

Dany Castiglione, CFA, FRM Vice President - Senior Analyst +44.20.7772.1070 dany.castiglione@moodys.com

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 26 MAY 2016

BSI Ordered to Shut Down Singapore Operations, a Credit Negative On Tuesday, the Monetary Authority of Singapore (MAS) announced that it will withdraw BSI Bank Limited’s (unrated) merchant bank license in Singapore and impose a fine of SGD13.3 million (approximately CHF9 million), a consequence of MAS’ investigation into allegations of money laundering and related risk-control issues. Singapore-based BSI Bank Limited is a subsidiary of BSI SA (unrated), which itself is a subsidiary of BSI AG (A3 review for upgrade, baa2 review for upgrade3), whose ultimate parent is BSI Group (unrated).

The withdrawal of the banking license in Singapore is credit negative for BSI Group and its subsidiaries because it will cut BSI Bank Limited’s access to the fast-growing and highly profitable Asian private banking and wealth management markets and negatively affect BSI Bank Limited’s reputation among remaining customers. This will lead to outflows in assets under management (AUM) that may be significant relative to BSI Group’s total AUM base of CHF84.3 billion as of 31 December 2015. Problems at BSI are also credit negative for EFG International AG (EFGI, A2 review for downgrade), which plans to take over BSI.

The license withdrawal came on the same day that the Swiss Financial Market Authority (FINMA) determined that BSI AG had been in serious breach of Swiss money laundering regulations, and ordered BSI AG to disgorge CHF95 million of profits, an amount equal to 84% of BSI Group’s 2015 net profits.

These announcements followed several investigations that began in 2015 amid indications that BSI Bank Limited and BSI AG had potentially breached money laundering regulations, largely in connection with corruption scandals involving Malaysia’s sovereign wealth fund 1MDB. Both MAS and FINMA found that BSI Bank Limited and BSI AG had, among other things, executed large transactions with an unclear purpose over a multi-year period and had not addressed earlier findings of weaknesses in their control systems, including a failure to properly document riskier transactions. As a result of the announcements, BSI Group CEO Stefano Coduri stepped down immediately, while BSI Bank Limited effected other senior management changes.

Amid these developments, FINMA approved EFGI’s planned takeover of BSI Group, conditional upon an accelerated integration of BSI Group into EFGI within the next 12 months. FINMA further ordered that BSI Group must be dissolved immediately thereafter.

The transformative nature of the takeover transaction poses considerable integration and execution challenges that threaten to negatively affect EFGI’s credit quality. Additionally, the combination faces significant business uncertainties, including the development of AUM, particularly at BSI Group’s high-growth and highly profitable Asian franchise. A large outflow of funds would hurt the combined entity’s earnings generation and capital generation capacity.

In addition to the integration risks tied to the proposed acquisition of BSI, EFGI remains challenged by contracting revenues in a difficult operating environment for private banks in Switzerland and globally as a result of low interest rates, subdued gross margins from increased client conservatism and a necessary recalibration of private banking models. Additionally, EFGI’s earnings partly depend on capital market activity, and a strengthening of the Swiss franc relative to other major currencies such as the US dollar and the euro in an adverse environment that threatens to hurt earnings and capital.

3 The bank ratings shown in this report are BSI AG’s deposit rating and baseline credit assessment.

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

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 26 MAY 2016

Chinese Banks’ Resumption of Nonperforming Loan Securitizations Is Credit Positive Last Thursday, China Merchants Bank Co. Ltd. (CMB, Baa1 negative, baa34) and Bank of China Limited (BOC, A1 negative, baa2) announced their proposed first-ever securitizations of nonperforming loans (NPLs), which would be issued by the end of May and would be China’s first NPL securitisations since 2008. The development of an NPL securitization market is credit positive because it will provide an additional means for the banks to dispose their NPLs.

Securitization allows banks to divest a wide range of NPLs, ranging from granular consumer finance portfolios to concentrated corporate loan portfolios. The CMB asset portfolio is very granular with 60,007 borrowers’ unsecured credit card receivables, while the BOC portfolio has just 42 corporate borrowers and mostly secured loans.

Securitization provides flexibility and liquidity for banks to remove their NPLs, especially retail NPLs. Existing regulations ban financial institutions from selling their retail NPLs to distressed asset management companies, but there are no such restrictions on securitizing these NPLs.

We expect that retail loan-oriented banks such as CMB will benefit more from the re-opening of this channel since there have been few tools for banks to dispose of retail NPLs until now. On the other hand, the application of NPL securitization in resolving large, lumpy corporate sector NPLs, which are currently the major component of Chinese banks’ problem assets, will be limited and secondary to other channels such as sales to asset management companies.

In CMB’s transaction, the outstanding principal balance of the securitised pool is about 35.1% of its credit card NPLs and 3.2% of total NPLs as of year-end 2015. In BOC’s transaction, the outstanding principal balance of the securitised pool is about 1.2% of the bank’s corporate NPLs and 0.9% of total NPLs as of year-end 2015.

Chinese Banks’ Nonperforming Loan Amounts and Ratios

Source: China Banking Regulatory Commission

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

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Sean Hung Assistant Vice President - Analyst +852.3758.1503 sean.hung@moodys.com

Elaine Ng Vice President - Senior Analyst +852.3758.1302 elaine.ng@moodys.com

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 26 MAY 2016

As a percentage of total underlying receivables or the estimated recoverable amount, the expected size of the senior notes in these two NPL securitisations is much smaller than those in a typical collateralized loan obligation (CLO) or consumer finance securitisation in China. The small proportional issuance size reflects a higher risk and volatility in NPL recoveries and higher expected asset portfolio losses for both transactions than securitisations backed by performing loans. The CMB deal pool estimates the total recoverable amount at about 19.7% of the outstanding principal balance of the pool, versus 34.2% for the BOC pool.

The proposed size of the senior notes in the CMB securitization is about RMB188 million, or about 63.3% of the estimated recoverable amount or about 12.5% of the outstanding principal balance for the deal portfolio. For the BOC securitization, the proposed size is RMB235 million, or about 55.7% of the deal’s estimated recoverable amount or about 19.1% of the outstanding principal balance for the deal portfolio. This compares with a recent CMB securitization backed by consumer loans (Hexiang 2016-15), in which the total size of the senior class A notes was about 85% of the initial pool balance, and a recent BOC collateralized loan obligation transaction (Zhongying 2015-16), in which the total size of the senior class A notes was about 76% of the initial pool size.

5 Hexiang 2016-1 is the pinyin of the Chinese deal named 和享 2016 年第一期个人消费贷款资产支持证券. The deal has no

official English name. 6 Zhongying 2015-1 is the pinyin of the Chinese deal named 中盈 2015 年第一期信贷资产支持证券. The deal has no official

English name.

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 26 MAY 2016

Vietnamese Banks’ Exposure to HAGL Restructuring Is Credit Negative On 17 May, Vietnamese news outlet The Saigon Times reported that the State Bank of Vietnam had submitted a plan to the prime minister’s office to restructure the debt of Hoang Anh Gia Lai Joint Stock Company (HAGL, unrated). The debt restructuring, which has the potential to be the largest in Vietnam since Vinalines (unrated) in 2013, is credit negative for Vietnamese banks exposed to HAGL because it will reduce and extend the cash flows of HAGL’s debt obligations and lower loss-absorption buffers.

HAGL is a large privately owned agriculture and real estate company with debt obligations that totaled $1.25 billion at the end of March 2016, or the equivalent of 0.6% of the country’s GDP in 2015. On 11 April, HAGL announced that it was working with its creditors to restructure its debt obligations. The announcement followed the publication of HAGL’s financial report for 2015, which revealed the company’s non-compliance with some debt covenants and prompted its independent auditor, Ernst & Young, to express doubts about HAGL’s ability to continue as a going concern.

According to HAGL’s first-quarter 2016 financial report, its large creditors include Bank for Investment and Development of Vietnam (BIDV, B2 stable, caa17), Vietnam Prosperity Jt. Stk. Commercial Bank (VPB, B3 stable, caa1), Saigon-Hanoi Commercial Joint Stock Bank (SHB, B3 stable, caa1), Saigon Thuong Tin Commercial Joint-Stock Bank (Sacombank, B3 stable, caa1) and Military Commercial Joint Stock Bank (MB, B3 positive, caa1). Exhibit 1 shows that BIDV has the largest exposure to HAGL among Vietnam’s banks, with loans and bonds comprising a high 27% of the bank’s tangible common equity (TCE) at the end of March 2016. Meanwhile, VPB’s exposure was 12% of TCE at the end of December 2015 and SHB’s was 6% at the end of March 2016.

EXHIBIT 1

Rated Vietnamese Banks’ Loan and Bond Exposures to HAGL as a Percent of Tangible Common Equity

Key: BIDV= Bank for Investment and Development of Vietnam; VPB = Vietnam Prosperity Jt. Stk. Commercial Bank; SHB = Saigon-Hanoi Commercial Joint Stock Bank; SacomBank = Saigon Thuong Tin Commercial Joint-Stock Bank; MB = Military Commercial Joint Stock Commercial Bank. Notes: HAGL loan exposures are as of the end of March 2016. HAGL bond exposures are as of the end of December 2015. Tangible common equity for BIDV, SHB and MB are as of the end of March 2016; for VPB and SacomBank, the tangible common equity data are as of the end of December 2015. Sources: The banks

According to The Saigon Times, the restructuring plan for HAGL includes a decrease in interest rates, extension of debt maturities and regulatory forbearance allowing banks not to downgrade their HAGL

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

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Dan Pek Associate Analyst +65.6311.2601 dan.pek@moodys.com

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 26 MAY 2016

exposures or move the exposures into higher-risk categories. The latter, if implemented, would allow the banks to avoid having to create additional loan-loss provisions.

The restructuring plan for HAGL highlights the authorities’ willingness to continue the practice of regulatory forbearance for banks based on loan classifications that do not reflect economic reality. Because of likely regulatory forbearance, additional credit costs associated with HAGL exposure would be minimal. However, lower interest rates on HAGL’s borrowings will further hurt banks’ low profitability.

Lower commodity prices and the ongoing drought in Vietnam have weakened the debt repayment ability of firms such as HAGL. This may lead to further deterioration in asset quality metrics for banks with large exposures to agriculture and commodities. Exhibit 2 shows that banks such as SHB, SacomBank and BIDV had large exposure to agriculture at the end of 2015.

EXHIBIT 2

Rated Vietnamese Banks’ Agriculture Loan Exposures as a Percent of Gross Loans Data include banks’ exposure to HAGL.

Key: SHB = Saigon-Hanoi Commercial Joint Stock Bank; SacomBank = Saigon Thuong Tin Commercial Joint-Stock Bank; BIDV= Bank for Investment and Development of Vietnam; ABB = An Binh Commercial Joint Stock Bank; VPB = Vietnam Prosperity Jt. Stk. Commercial Bank; Vietin = Vietnam Bank for Industry and Trade; MB = Military Commercial Joint Stock Commercial Bank; ACB = Asia Commercial Bank; Teccom = Vietnam Technological and Comm’l JSB. Note: The ratios are based on data as of the end of June 2015 or the end of December 2015. Sources: The banks

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4.5% 3.9% 3.7% 3.1%1.6%

0.7% 0.2%0%

3%

6%

9%

12%

15%

18%

21%

31-Dec-15 30-Jun-15 31-Dec-15 31-Dec-15 31-Dec-15 31-Dec-15 31-Dec-15 31-Dec-15 31-Dec-15 31-Dec-15

SHB SacomBank BIDV ABB VPB Vietin VIB MB ACB Techcom

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 26 MAY 2016

Insurers

Anthem and Cigna’s Reported Discord During Merger Process Is Credit Negative for Both Last Monday, a Wall Street Journal article, citing non-public correspondence between Anthem, Inc. (Baa2 review for downgrade) and Cigna Corporation (Baa1 review for downgrade), added more doubt that the two companies will be able to obtain all the regulatory approvals to finalize their merger by the end of 2016. Adding to previous signs of problems, the article highlighted disagreements, reporting errors and missed deadlines for regulatory filings that could delay or lead to a disapproval of the merger. If the transaction is not completed by 31 January 2017, Anthem may owe Cigna a breakup fee of $1.85 billion.

In light of recent developments, our credit analysis of the merger is more negative. Although Anthem is responsible for the $1.85 billion break-up fee, we expect that in the event that the merger falls apart there will be litigation over the payment, thus delaying the effect on Anthem. However, both companies will be pressed to reverse course and develop and implement a new non-merger strategy in a difficult political and economic climate. If the companies are able to complete the merger, we have doubts that they will be able to make a smooth and efficient integration given their public disagreements.

A number of events have called into question the companies’ ability to complete the merger by the deadline. Anthem is embroiled in a lawsuit with Express Scripts, Inc. (Baa2 stable), the company’s pharmacy benefit manager, which threatens to distract senior management. Anthem is suing Express Scripts for $15 billion in damages for savings that Anthem claims were not passed back to insurer, while Express Scripts has countersued seeking monetary damages from Anthem. Additionally, Anthem Chief Financial Officer Wayne DeVeydt unexpectedly resigned earlier this month, with Anthem saying that Mr. DeVeydt wanted to spend more time with his family and various philanthropies.

Adding to the uncertainty, a few weeks after Anthem CEO Joseph Swedish stated during his company’s earnings call that he expected the acquisition to close in the second half of 2016, Cigna stated in an 8-K that the merger might not be completed this year owing to the complexity of obtaining regulatory approvals for it.

Despite all these issues, Anthem stated that it has obtained state regulatory approval for the merger in 11 of the 26 states required. In comparison, Aetna Inc. (Baa1 review for downgrade) and Humana Inc. (Baa3 review for upgrade), which announced their merger plans just a few weeks before Anthem and Cigna did last July, have obtained and announced state approvals in 14 of the 20 states required for their merger. For both mergers, however, the critical approval required and the one that is most uncertain is that from the US Department of Justice (DOJ). Neither Aetna nor Anthem has reported on the progress of their discussions with the DOJ.

From the beginning, the Anthem-Cigna merger has not been an amicable business deal. The negotiations between the two companies that led to the merger agreement were contentious, with Cigna refusing multiple offers and Anthem making the details of its offers and Cigna’s rejections public. Following the merger announcement last July, we placed Anthem’s and Cigna’s ratings on review for downgrade. This reflected the negative effect of the transaction’s planned financing, which includes funding of approximately $6 billion in cash, $21 billion of equity and approximately $27 billion of debt, including approximately $5 billion of debt at Cigna. Another issue was the risks involved in integrating the two companies, which is complicated owing to the Blue Cross Blue Shield licenses held by Anthem.

Steve Zaharuk Senior Vice President +1.212.553.1634 stephen.zaharuk@moodys.com

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

15 MOODY’S CREDIT OUTLOOK 26 MAY 2016

NEWS & ANALYSIS Corporates 2 » Pfizer's Pricey Deal for Anacor Is Credit Negative » Bayer Takeover Offer Confirms Monsanto’s Elevated

Event Risk » NXP's Upsized Senior Notes Offering Is Credit Positive » Gerdau Will Benefit from Sale of Its Spanish Subsidiary » Midea's Offer to Buy Out KUKA's Shareholders Is Credit

Positive for KUKA

Infrastructure 7 » Public Service of New Mexico's Rate Case Delay Is

Credit Negative » GenOn Energy's Asset Sale Is Credit Positive » Emera Sells Ownership Interest in Algonquin Power &

Utilities for CAD544 Million

Banks 11 » Re-Proposed and Strengthened Pay Rules for US Banks Are

Credit Positive » Raymond James Is Fined for Anti-Money Laundering Failures » For TMX, Consumer Board's Focus on Single-Payment Auto

Title Loans Is Credit Negative » Weaker Related-Party Lending Limits for Russian Banks

Would Be Credit Negative » Vnesheconombank Benefits from Conversion of Central Bank

Loans to Subordinated Debt

Sovereigns 19 » Iraq's Stand-By Arrangement with the IMF Will Help Liquidity » For Nigeria, Niger Delta Oil Pipeline Sabotage Is Credit Negative

Sub-sovereigns 23 » Austrian Pact with HETA Creditors Is Credit Positive for State

of Carinthia

US Public Finance 24 » New York State Property Tax Cap Squeezes School Budgets » Arizona's Prop 123 Increases State Education Funding over 10

Years, a Credit Positive for School Districts » Arizona Voters Approve Public Safety Pension Changes, a

Credit Positive for State and Local Governments

Covered Bonds 30 » Hypothekenbank’s Pfandbrief Holders Benefit from Cover

Pool Merger

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