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MOODYS.COM
22 AUGUST 2016
NEWS & ANALYSIS Corporates 2 » Concho Acquisition Boosts Texas Oil Production without
Adding Leverage » Mexico Lightens PEMEX's Pension Burden with $10 Billion
Grant, a Credit Positive » Galapagos Holding's Disposal of DencoHappel Is Credit Positive » HeidelbergCement's US Asset Sale to Cementos Argos Is Credit
Positive » Shanghai Electric Will Benefit from Broetje Acquisition
Infrastructure 8 » Chilean Electricity Generators Get Low Power Prices in Auction » Eletrobrás Recognizes a BRL17 Billion Extraordinary Gain in
2016 » Argentine Court Decision Limiting Gas Tariff Increase Is Credit
Negative for Gas Distributors
Banks 12 » United Bankshares' Acquisition of Cardinal Financial Is Credit
Positive » Canada Post Gains Credit-Positive Pension Concessions » Russian Bank Investments in Unquoted Shares Will Require
Central Bank Authorisation, a Credit Positive
Exchanges 16 » Intercontinental Exchange Divestiture of Trayport Would Be
Credit Negative
Insurers 17 » Aetna's Plan to Downsize Its Affordable Care Act Public
Exchange Business Is Credit Positive » Protective's Acquisition of USWC Holding Company Is Credit
Positive » Arch Capital's Acquisition of United Guaranty Is Credit
Negative for Buyer, Credit Positive for Target
Sovereigns 21 » Argentina's Declining Inflation Supports Economic Growth
US Public Finance 23 » Pennsylvania Plugs Holes in General Fund with State Treasury
Loan, a Credit Negative
RECENTLY IN CREDIT OUTLOOK
» Articles in Last Thursday’s Credit Outlook 25 » Go to Last Thursday’s Credit Outlook
Click here for Weekly Market Outlook, our sister publication containing Moody’s Analytics’ review of market activity, financial predictions, and the dates of upcoming economic releases.
NEWS & ANALYSIS Credit implications of current events
2 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
Corporates
Concho Acquisition Boosts Texas Oil Production without Adding Leverage Last Monday, Concho Resources Inc. (Ba1 stable) said it would buy from Reliance Energy (unrated) 40,000 net acres of oil-producing reserves in the west Texas Midland basin for $1.625 billion.
The purchase will be credit positive for Concho, whose new property will help diversify its assets while enhancing its oil-drilling inventory. The exploration and production company plans to make the acquisition without increasing its debt or leverage, funding the sale with about $1.1 billion in cash plus 3.96 million shares of Concho’s common stock, worth about $500 million.
Concho also announced on Monday that it would issue 9 million shares of common stock, which will bring in roughly $1.17 billion in total gross proceeds. The underwriters of the equity issuance will have an option to buy an additional 1.35 million shares, which would bring Concho’s total proceeds to $1.35 billion.
Meanwhile, Concho also plans to redeem its $600 million 7.0% senior notes due 2021, primarily with cash on hand, which was about $481 million as of 30 June 2016, and proceeds from the equity issuance.
Buying the 40,000 contiguous net acres in the Midland basin, which is part of the broader Permian Basin in west Texas, will allow Concho to increase production by its 20% growth target while keeping its spending within cash flow. The acquisition is low risk, involving stable producing assets, and it complements Concho’s existing core assets.
The new 40,000 acres will bring Concho’s total Midland holdings to 150,000 acres, and will boost Concho’s production by 10,000 barrels of oil equivalent (boe) per day, with two-thirds of that oil. Of the estimated 43 million boe in new reserves, 69% is proved developed reserves, which would allow Concho to allocate its capital toward developing a broader set of assets.
The increase in production and decline in debt will strengthen Concho’s credit metrics amid difficult market conditions. The new acreage diversifies Concho’s production assets and inventory in line with its strategic growth plans. The acquisition will improve Concho’s total production immediately, and will give the company some flexibility to allocate capital more efficiently among a wider range of assets.
The effort to reduce its debt load will also strengthen Concho’s cash flow and credit metrics. Its ratio of retained cash flow to debt will rise to 30%-36% by late 2017 or early 2018, well above its 20.8% ratio for the 12 months through 30 June 2016.
Viktoriya Rutkovskaya Associate Analyst +1.212.553.0593 [email protected]
Arvinder Saluja Vice President - Senior Analyst +1.212.553.1639 [email protected]
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.
NEWS & ANALYSIS Credit implications of current events
3 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
Mexico Lightens PEMEX’s Pension Burden with $10 Billion Grant, a Credit Positive Last Monday, the government of Mexico (A3 negative) said it will grant MXN184.2 billion ($10 billion) to Petroleos Mexicanos (PEMEX, Baa3 negative) to help the state-owned oil company finance its roughly $73 billion in pension liabilities as of December 2015.
The government grant, in the form of an equity injection, strengthens PEMEX’s balance sheet, a credit positive. It also reinforces our assumption of a very high probability of government support in case of need, an intrinsic element of the company’s credit quality.
The $10 billion grant comes essentially with no strings attached for PEMEX, a company whose tax revenues make up the largest single annual contribution to Mexico’s federal budget. Under Mexico’s recent energy-reform law (which opened the country’s oil production to foreign companies for the first time since the 1930s), the government will match 100% of the amount that an official actuary confirms the company has saved in pension costs from negotiations with its labor unions. The government’s promised grant to PEMEX has now been approved.
The new equity-injection grant will have a net amount of MXN134.2 billion, accounting for the government’s late-2015 MXN50 billion advance equity injection, a grant to help the integrated oil company manage its pension liabilities. For the advance MXN50 billion equity injection, Mexico’s federal finance ministry issued MXN50 billion in promissory notes due 2050, payable to PEMEX. Just recently, the government exchanged MXN47 billion of these promissory notes for tradable government bonds, which the company then sold to government development banks; proceeds from the sale will go toward PEMEX’s pension expenses in 2016. The government may choose the same mechanism this time around.
In 2015, PEMEX reported a MXN196.8 billion reduction in its pension liability from 2014. In aggregate, PEMEX’s pension savings and the government’s equity injection would reduce the company’s total pension liability by MXN381 billion, or 26%, from 2014 levels.
Last year, PEMEX registered the first MXN50 billion in promissory notes from the federal government as long-term account receivables. Although it is unclear how the new MXN134.2 billion equity injection will be registered, the injection will at least strengthen PEMEX’s balance sheet by that amount.
PEMEX posted revenues of $61.4 billion for the 12 months through 30 June 2016, with total assets of $111 billion. The company’s capital investment plans and its interest-payment obligations far exceed its cash on hand today, straining its balance sheet at a time of persistently weak oil prices.
Nymia Almeida Vice President - Senior Credit Officer +52.55.1253.5707 [email protected]
NEWS & ANALYSIS Credit implications of current events
4 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
Galapagos Holding’s Disposal of DencoHappel Is Credit Positive Last Thursday, German manufacturing company Galapagos Holding S.A. (B2 negative) announced that it would merge its DencoHappel division with Fläkt Woods Group (unrated), a Switzerland-based maker of heating, ventilation and air conditioning products. Although Galapagos did not disclose financial terms, the transaction will be structured as an asset disposal for Galapagos, which would be credit positive for Galapagos because it will likely use the bulk of the cash proceeds to retire debt, thereby lowering leverage.
The proposed merger follows private-equity investment firm and Galapagos owner Triton Partners’ acquisition of Fläkt Woods in June 2016 at an enterprise value/EBITDA multiple of 9x-10x. Assuming the DencoHappel transaction used a similar multiple, and based on our financial forecast for DencoHappel’s 2016 EBITDA of around €24 million (excluding certain one-off costs), we estimate the transaction value at €200-€250 million. If Galapagos uses sale proceeds to reduce debt, we estimate that the company’s Moody’s-adjusted debt/EBITDA would fall to 5.3x from our 2016 forecast of 5.8x in 2016.
Although DencoHappel in 2015 generated around 20% of Galapagos’ revenue, its EBITDA contribution was only 13% because DencoHappel’s margins were 5%-10%, compared with Galapagos’ larger businesses, Kelvion and Enexio, which had margins of 10%-15% (see Exhibits 1 and 2). Because of the transaction, we expect Galapagos’ margins to rise by around 100 basis points. Additionally, we expect that the sale will reduce the propensity for restructuring costs to drag on Galapagos’ overall profitability and cash flow. In 2015, around 50% of Galapagos’ restructuring costs related to DencoHappel, significantly greater than its contribution to profitability, and a reflection of the division’s competitive challenges in its core European markets. This trend continued in first-quarter 2016, with restructuring charges reducing DencoHappel’s underlying profitability to almost nil.
EXHIBIT 1
Galapagos’ Revenues by Division, 12 Months to March 2016
Source: Galapagos and Moody’s Investors Service
Kelvion65%
Enexio16%
DencoHappel19%
Scott Phillips Vice President - Senior Analyst +49.69.70730.718 [email protected]
NEWS & ANALYSIS Credit implications of current events
5 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
EXHIBIT 2
Galapagos’ Company-Adjusted EBITDA Contribution by Division, 12 Months to March 2016.
Source: Galapagos and Moody’s Investors Service
Selling DencoHappel would have some negative implications for Galapagos because it would reduce the company’s size, geographic diversification, customers and end markets. Nevertheless, we believe that the improvement to the company’s profitability margins and the reduction in leverage would more than offset these factors.
Kelvion76%
Enexio12%
DencoHappel12%
NEWS & ANALYSIS Credit implications of current events
6 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
HeidelbergCement’s US Asset Sale to Cementos Argos Is Credit Positive Last Thursday, Germany-based HeidelbergCement AG (Ba1 positive) said that it had entered a definitive agreement to sell its Martinsburg, West Virginia cement plant and eight related terminals to Cementos Argos SA (unrated), a Colombia-based producer of concrete mixtures, lime and clay products, for $660 million (approximately €583 million) on a cash and debt-free basis.
The transaction is credit positive and was one of several regulatory requirements for HeidelbergCement to acquire the remaining 55% of outstanding Italcementi S.p.A. (Ba1 positive) shares. On a pro forma basis for the Italcementi acquisition, we expect that HeidelbergCement’s 2015 net leverage would improve to below 4.0x from more than 4.1x because of the asset disposals (assuming that the profitability of the sold assets is broadly in line with the combined group).
In July 2016, HeidelbergCement agreed to divest its Belgian operations to Cementir Holding (unrated) for an enterprise value of €312 million (cash and debt-free) and to sell its non-core real estate assets to Italmobiliare for a total of €237 million. The US and Belgian transactions meet the requirements of the Federal Trade Commission (FTC) and European Commission in connection with the acquisition of Italcementi to avoid antitrust and competition issues in the respective regions. Furthermore, HeidelbergCement over-delivered on its planned €1 billion asset disposal target by more than €100 million.
We expect the proceeds to partially fund the acquisition of Italcementi for an enterprise value of €3.7 billion, which will reduce the need for debt financing; a development captured in the positive outlook on HeidelbergCement AG’s Ba1 ratings. The positive outlook reflects the prudent funding of the acquisition with an expected combined debt/EBITDA of below 4.0x in 2017 and the successful realization of the targeted annual run-rate synergies of €400 million by 2018.
HeidelbergCement AG is one of the world’s largest heavy building material producers and has strong market positions in mature Western European countries, such as Germany, Scandinavia, Benelux, and the UK, as well as in the emerging markets of Eastern Europe, Africa, and Asia. On a standalone basis, HeidelbergCement generated revenues of €13.4 billion in the last 12 months ended June 2016.
Stanislas Duquesnoy Vice President - Senior Credit Officer +49.69.70730.781 [email protected]
Florian Zimmermann Associate Analyst +49.69.70730.971 [email protected]
NEWS & ANALYSIS Credit implications of current events
7 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
Shanghai Electric Will Benefit from Broetje Acquisition On 14 August, Shanghai Electric Group Company Limited (A2 negative) announced that it would acquire TECH4AERO GmbH (unrated), whose major assets include Broetje Automation GmbH, for €174 million. Broetje, a leading supplier of assembly lines and fastening machines for the aerospace industry, will strengthen Shanghai Electric’s industrial automation business and expand its international presence without materially affecting its financial profile, a credit positive.
Paying €174 million cash to acquire Broetje will have a limited effect on Shanghai Electric’s strong financial profile. At 31 March 2016, Shanghai Electric had RMB34 billion (about €4.6 billion) in cash and RMB14 billion (about €1.9 billion) in gross debt.
The initial earnings contribution and operational synergies from Broetje will be limited given its relatively small scale versus Shanghai Electric. Broetje had €144 million in revenues and €1.8 million in net profit in the fiscal year that ended September 2015, while Shanghai Electric had RMB78.0 billion (€10.5 billion) in sales and RMB4.8 billion (€0.6 billion) net profit in 2015.
However, the acquisition will allow Shanghai Electric to expand into the aviation market with Broetje as a major supplier to large aircraft manufacturers including the Boeing Company (A2 stable) and Airbus Group SE (A2 stable). Shanghai Electric will be able to capture the fast-growing business in the domestic aviation market by improving Broetje’s sales in China. Moreover, Broetje’s automation business will enhance Shanghai Electric’s competitiveness in industrial automation, which is aligned with China's “Made in China 2025” plan to upgrade the domestic manufacturing industry.
The acquisition will strengthen Shanghai Electric’s international presence by slightly increasing its overseas sales to about 13% of its total revenues from 11% in 2015. Against China’s slowing domestic economy, business expansion and internationalization are important for Shanghai Electric to counterbalance the domestic operating environment. To that end, Shanghai Electric accelerated acquisitions in Europe in the past three years, including making equity investments in Manz AG (unrated) this year and Ansaldo Energia (unrated) in 2014.
Slowing domestic demand and pricing pressure have affected many of the company’s businesses, including power generation, transmission and distribution equipment, as well as elevators and machinery equipment. In particular, demand for conventional coal-fired power equipment, which accounts for about one third of Shanghai Electric’s revenues, has diminished and led to a 6.5% year-over-year drop in the company’s revenue in the first quarter of 2016, because of the slowing economy and stricter environmental regulations.
Shanghai Electric Group Company Limited manufactures thermal, nuclear and wind power equipment, power transmission and distribution equipment, elevators, printing machines, and machine tools. The company is one of the three major power equipment suppliers in China. The company is majority-owned by the Shanghai municipal government.
Jiming Zou Vice President - Senior Analyst +86.21.2057.4018 [email protected]
Danny Chan Associate Analyst +86.21.2057.4033 [email protected]
NEWS & ANALYSIS Credit implications of current events
8 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
Infrastructure
Chilean Electricity Generators Get Low Power Prices in Auction Last Thursday, Chile’s energy commission released the results of electricity auction 2015-01, which allocated 12,430 gigawatt hours of annual utilities’ load at generation companies at historically low prices. These low contract prices are credit negative for Chile’s conventional power generation companies, although the immediate cash flow effect will be muted because the contracts take effect in 2021 and 2022. Still, the results, which point to aggressive competition during the auction, indicate persistently low power prices in Chile going forward.
Prices ranged from $29.10 per megawatt hour for the load won by Sun Edison’s Santa Elena solar project (involving nearly 300 gigawatt hours per year) to approximately $70 per megawatt hour for the load won by several wind-farms (around 1 terawatt hours per year). The weighted average contracted price was $47.60 per megawatt hour, which is well below the already-low weighted average price of $79.30 embedded in contracts that were part of the 2015-02 auction that took place in October 2015 and involved a 1.2 terawatt hour load.
The winning parties in the 2015-01 auction will supply electricity for 20 years to utilities under the awarded contracts starting in 2021 and 2022. Half the load was awarded to wind and solar assets including approximately 4 terawatt hours of around-the-clock-annual supply. The low contracted prices of these intermittent renewable resources create some long-term reliability uncertainty.
We expect that the low contractual power prices in auction 2015-01 will also affect bilateral agreements with unregulated customers because of the importance of the auctioned load. The 12,430 gigawatt hours equals almost 30% of the utilities’ and 15% of the country’s total demand expected in 2021, assuming the successful interconnection of the country’s two main systems as scheduled in 2018.
The only large incumbent power generation company to win a portion of the load was Empresa Nacional de Electricidad S.A. (Chile) (Endesa Chile, Baa2 stable), at nearly 6 terawatt hours. This is credit positive for Endesa Chile because it enhances the long-term visibility of its cash flows. These new contracts, along with new 10-year bilateral agreements executed with Anglo American (effective in January 2021 and involving more than 2 terawatt hours per year), replace a significant portion of contracts that begin expiring in 2019. We calculate that Endesa Chile has agreements involving 4.8 terawatt hours that will expire in 2019 and 2020, at least one year before the new contracts take effect. The company also has an additional 4.6 terawatt hours that will expire in December 2021. Thus, the cash flows are still exposed to some re-contracting risk and the volatile spot power markets, a credit negative.
Chilean incumbent large power generation companies that did not win any load include AES Gener S.A. (Baa3 stable) and its 50.1%-owned subsidiary Guacolda S.A. (unrated); Colbun S.A. (unrated) and Engie Energia Chile S.A. (unrated). Their inability to allocate load reduces the visibility of their cash flows, a credit negative.
Guacolda’s cash flow predictability will be significantly affected because so far it has only re-contracted 300 gigawatt hours annually of its current non-contracted load of around 1.2 terawatt hour annually.1 The company has a contract for another 810 terawatt hour annual load (almost 20% of its output) with another utility that will expire in December 2020. In contrast, Gener’s re-contracting risk will become more material
1 This amount reflects Guacolda’s termination of a contract with the delayed Pascual Lama mine, which would have replaced a
contract with a Chilean utility that involved a 1.2 terawatt hour annual load and expired last year.
Natividad Martel, CFA Vice President - Senior Analyst +1.212.553.4561 [email protected]
NEWS & ANALYSIS Credit implications of current events
9 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
after December 2022. The company has a contract involving 300 gigawatt hours annually that will expire in December 2020, and more sizable contracts involving annual loads of more than 5.2 terawatt hours that will expire between December 2022 and December 2024.
Therefore, the result of the next auctions will be particularly important for Gener’s cash flows. One is scheduled to take place later this year and involve an annual load of 3.8 terawatt hours. Another is scheduled for 2017 and involve an annual load of 7.2 terawatt hours in 2017, and a third is to take place in 2018 and involve an annual load of 8.9 terawatt hours. These new contracts, which will become effective in January 2023, 2024, and 2025, respectively, are also key to assessing whether the contracted power prices will remain low in Chile over the next several decades.
NEWS & ANALYSIS Credit implications of current events
10 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
Eletrobrás Recognizes a BRL17 Billion Extraordinary Gain in 2016 Last Monday, Centrais Elétricas Brasileiras SA – Eletrobrás (Ba3 negative) announced that it will recognize a BRL17 billion extraordinary gain in the second quarter of 2016, related to compensation that four of its transmission subsidiaries will receive from the federal government, a credit positive.
Consolidated annual cash from operations (CFO) before changes in working capital will increase BRL3.1 billion for the next eight years assuming a 34% income tax rate. The improvement in cash flow is material because it compares with the company’s consolidated CFO pre-working capital of BRL2.6 billion in 2015.
The company’s consolidated EBITDA will reach BRL21.3 billion in the first half of 2016, boosted by the recognition of a one-off compensation gain of BRL25.8 billion before BRL8.8 billion of income tax, which compares with just BRL907 million in the same period of 2015.
Total compensation will be BRL33.8 billion and stems from the undepreciated portion of concession-related assets that the transmission companies agreed to renew ahead of their expiration date in December 2012.
The BRL17 billion extraordinary gain derives from the BRL33.8 billion of gross compensation less the existing BRL7.9 billion accounting book value of the assets net of BRL8.8 billion income tax.
As per the determination of the Brazilian electricity regulator ANEEL, Eletrobrás will receive the compensation through an increase in transmission tariffs starting in July 2017 that will last for eight years. ANEEL has already approved the compensation request for three Eletrobrás transmission subsidiaries.
The only pending decision relates to Eletrobrás subsidiary Centrais Elétricas do Norte do Brasil-ELETRONORTE (unrated), which requested compensation of BRL2.9 billion. In line with ANEEL’s recent decisions on the subject, we understand that the final amount will not materially differ from the company’s original request, which we expect will be finalized within the next two months.
Eletrobrás’ transmission lines comprise 69,146 kilometers, or around 50% of the country’s total high-voltage transmission lines. ELETROBRAS’ electricity generation has installed capacity of 46 gigawatts, which equals 32% of Brazil’s total generation installed capacity. The distribution business, largely composed of small distribution companies in the north and center west portions of Brazil, sold 17,100 gigawatt-hours in 2015, or around 4% of the total energy distributed in the country.
Jose Soares Vice President - Senior Credit Officer +55.11.3043.7339 [email protected]
NEWS & ANALYSIS Credit implications of current events
11 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
Argentine Court Decision Limiting Gas Tariff Increase Is Credit Negative for Gas Distributors Last Thursday, Argentina’s (B3 stable) Supreme Court ratified a lower court’s earlier decision to suspend a provisional tariff increase on gas supply that was approved last April by the administration of President Mauricio Macri in order to increase the sector’s operating margins. The court’s ruling is credit negative for gas distribution companies because it will significantly delay their earnings recovery. Over the past decade under the previous Kirchner administration (2003-15), gas distributors in Argentina operated with weak margins affected by heavily constrained gas prices.
Under the Macri administration’s provisional tariff increase, companies would see a margin increase of around 250%. The Court’s decision will reduce the planned margin recovery by around half because it restricted the tariff suspension to residential consumers, who account for 50%-60% of the gas distribution companies’ margin base, but excluded industrial and commercial clients as well as compressed gas for vehicles that will continue paying the increased tariff.
Negatively affected companies include Camuzzi Gas Pampeana S.A. (B3 stable), Distribuidora de Gas Cuyana S.A. (B3 stable), Gas Natural BAN S.A. (B3 stable), MetroGas S.A. (B3 stable) and Transportadora de Gas del Sur S.A. (TGS, B3 stable).
The Supreme Court ruling required the government to re-set the gas tariff for residential consumers to its previous April value and to hold public hearings as required by the gas regulations before trying to reintroduce any further tariff increase.
In response to the ruling and showing its strong commitment to increase gas tariffs, on the day after the ruling, the government called a public hearing, scheduled for September 12. After that and within a 30-day period, the suspended tariff increase could be reinstated.
In the worst-case scenario, if an agreement on the temporary increase is not reached, we expect that the ongoing process to implement a definitive tariff regime, the integral tariff review, will continue on track. The target completion date for the integral tariff review of March 2017 has not changed as a result of the Supreme Court ruling.
Daniela Cuan Vice President - Senior Analyst +54.11.5129.2617 [email protected]
NEWS & ANALYSIS Credit implications of current events
12 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
Banks
United Bankshares’ Acquisition of Cardinal Financial Is Credit Positive Last Thursday, United Bankshares, Inc. (UBSI, unrated), the holding company of United Bank (A1 stable, a32) and United Bank, Inc. (A1 stable, a3), announced that it will acquire the Tysons Corner, Virginia-based Cardinal Financial Corporation (unrated) in an all-stock transaction valued at $912 million, or 2.24x Cardinal’s tangible book value. The acquisition is credit positive for United Bankshares and raises its capital ratios because it will be funded entirely through common equity. The acquisition will also enhance United’s market share in its key growth market, metro Washington DC.
Following the common equity raise, we expect the acquisition to add about 30 basis points to United’s tangible capital levels. The bank will also take a relatively low, but reasonable, credit mark of 1% as an additional reserve on the acquired assets, given Cardinal’s good asset quality track record.
Pro forma the Cardinal acquisition, United’s market share of 3.1% of deposits in the metro DC area as of June 2016 will improve to approximately 4.8%. Both banks are largely core funded through deposits, so the acquisition would further underpin United’s liquidity. United and Cardinal have a comparable business mix and good profit margins and efficiency metrics.
Despite the capital benefits, the Cardinal acquisition does not reduce United’s already-high exposure to commercial real estate, which will remain at 4.3x tangible common equity. Historically, United’s losses in real estate lending have been minimal. Nevertheless, its commercial real estate (CRE) concentration remains a credit focus because CRE lending has been a source of sizable losses for US banks in economic downturns. The exhibit below shows our estimate of United’s CRE concentration after the Cardinal acquisition. United’s CRE is among the highest of our rated US banks, which have a median concentration of 1.1x.
Rated US Banks with High Commercial Real Estate Concentration Relative to Tangible Common Equity as of 31 March 2016
Key: UBSI - Pro Forma = United Bankshares, Inc. following Cardinal Financial Corporation acquisition; PBCT - Pro Forma = People’s United Financial Inc. following Suffolk Bancorp acquisition. Notes: UBSI pro forma data is as of 30 June 2016. Sources: Company Reports
2 The bank ratings shown in this report are the banks’ long-term deposit ratings and baseline credit assessment.
9.7x
4.3X
3.7X 3.6X 3.5X
0x
1x
2x
3x
4x
5x
New York CommunityBancorp, Inc.
UBSI - Pro Forma PBCT - Pro Forma Astoria Corporation Synovus Financial Corp.
Jeanne Del Casino Vice President - Senior Credit Officer +1.212.553.4078 [email protected]
NEWS & ANALYSIS Credit implications of current events
13 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
Canada Post Gains Credit-Positive Pension Concessions On Monday, Canada Post Corporation (Aaa stable), Canada’s national postal carrier, announced that it had reached a new collective agreement with the Canadian Postmasters and Assistants Association, the union representing rural postal delivery workers, through binding arbitration. A key change in the collective agreement is to switch the pension plan for new hires to defined contribution from defined benefit. The credit-positive agreement will reduce Canada Post’s pension liability, a significant source of financial stress to the government-owned corporation as declining mail volume erodes revenue.
At 31 December 2015, Canada Post’s pension plan held CAD22 billion in assets and had a solvency deficit of CAD6.2 billion; a funding ratio of 78%. Canada Post’s pension plan solvency funded status has fallen over the past decade largely because of historically low interest rates (Exhibit 1).
EXHIBIT 1
Canada Post’s Pension Funded Ratio and Canada Government Long-Term Bond Yield Falling interest rates have reduced Canada Post’s pension funding.
Sources: Bank of Canada and Canada Post Financials and Moody’s Investors Service
At the same time, Canada Post is facing core revenue erosion from decreasing mail volumes. Domestic mail volume has fallen almost 38% in the past decade as customers continue to adopt electronic substitution such as email and online bill payments (Exhibit 2).
EXHIBIT 2
Canada’s Domestic Mail Volumes Volumes have dropped as customers increase electronic substitution.
Source: Canada Post and Moody’s Investors Service
92% 91%
80% 83%77% 74% 75% 75% 78%
4.18%
3.45%
4.08%
3.51%
2.42%2.27%
3.09%
2.22%2.04%
0%
1%
1%
2%
2%
3%
3%
4%
4%
5%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2007 2008 2009 2010 2011 2012 2013 2014 2015
Funded Ratio - left axis Long-Term Canada Government Bond Yield
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Billi
ons
Jason Mercer, CFA Assistant Vice President - Analyst +1.416.214.3632 [email protected]
NEWS & ANALYSIS Credit implications of current events
14 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
The combination of low interest rates and falling postal volume has left Canada Post with liquidity challenges from both high operating leverage and its pension plan. The crown corporation’s legislative mandate requires mail delivery service to every address in Canada, even as their numbers increase, and significant investment in delivery infrastructure. Under Canadian pension law, pension plan sponsors are required to make special contributions to eliminate a pension deficit within five years. Currently, Canada Post is operating under a temporary exemption from these regulations. Without the exemption, which expires in 2017, the postal carrier’s liquidity would be severely strained because it would be required to make significant additional contributions to the plan. However, as a crown corporation with agency status, Canada Post’s creditworthiness is directly tied to that of the Government of Canada.
The effects of this new collective agreement will accrue gradually as the proportion of participating employees grows; therefore the agreement will have little immediate benefit to the plan’s funded status. However, the benefits of the plan will increase as the proportion of workers in the defined benefit plan falls, reducing Canada Post’s pension liability.
NEWS & ANALYSIS Credit implications of current events
15 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
Russian Bank Investments in Unquoted Shares Will Require Central Bank Authorisation, a Credit Positive Last Monday, the Central Bank of Russia (CBR) disclosed details of enhanced regulatory controls over local banks’ new investments in unquoted shares, an initiative the Ministry of Finance first announced on 11 August. The credit-positive regulation will protect Russian banks from investing in illiquid and hard-to-value non-core assets and limit their risk taking.
Russian banks will need the central bank’s approval for investment in unquoted shares in excess of 0.1% of a bank’s total assets. In practical terms, this will mean that all transactions with unquoted shares will be at the regulator’s discretion.
The legislative initiative was mainly driven by recent failures and bail-outs of relatively large banks such as Bank Uralsib (Caa1 positive, caa23), Russia’s 23rd-largest bank by assets as of 1 July 2015, and European Trust Bank, the 190th-largest at year-end 2013. These banks were heavily exposed to the equities of closed mutual funds that received real estate, development and financial project assets from affiliates. The value of these investments was overstated.
Historically, Russian banks used investments in non-public companies (mainly private mutual funds) to park illiquid real estate, distressed projects or problem loans or to receive dividends from businesses on which the bank’s affiliates have political or administrative influence. The exhibit below shows rated banks with the largest exposures to non-public equities in relation to available capital.
Rated Russian Banks with Largest Exposures to Non-Public Shares as a Percent of Equity, as of 1 July 2016
Bank Deposit Rating and Baseline Credit
Assessment Shares of Non-Public Companies as a
Percent of Shareholders Equity
Baltinvestbank Caa3 positive, ca 112%
NK Bank B3 negative, b3 68%
Tatfondbank B3 negative, caa1 53%
Commercial Bank AK BARS, PJSC B2 negative, caa1 48%
RGS Bank B2 negative, b2 25%
Metkombank B3 stable, b3 21%
Commercial bank Agropromcredit (LLC) B2 negative, b2 20%
Russian Standard Bank Caa2 negative, caa2 14%
National Reserve Bank B3 negative, b3 11%
Sources: Central Bank of Russia and Moody’s Investors Service
3 The bank ratings shown in this report are the banks’ deposit ratings and senior unsecured debt ratings, and their baseline credit
assessments.
Elena Redko Assistant Vice President - Analyst +7.495.228.6074 [email protected]
NEWS & ANALYSIS Credit implications of current events
16 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
Exchanges
Intercontinental Exchange Divestiture of Trayport Would Be Credit Negative Last Tuesday, the UK’s Competition and Market Authority (CMA), an antitrust governing body, suggested that Intercontinental Exchange, Inc. (ICE, A2 stable), the largest operator of exchanges and clearinghouses trading in European utilities, might have to divest recently acquired Trayport to address its concerns about competition. Trayport licenses electronic execution technology to exchanges, brokers and traders, and the CMA estimates that it covers more than 85% of the European gas, power and coal derivatives trading markets. The CMA said that a “complete divestiture of Trayport by ICE” would likely be an effective remedy to the “substantial lessening of competition.” Such a divestiture, if required, would be credit negative for ICE because it may require the asset to be sold for less than its purchase price.
An alternative behavioral remedy that CMA set forth is “fair, reasonable and non-discriminatory” terms of access, under which ICE would not need to divest Trayport, but rather ensure that all clients are granted access on this basis.
ICE will contest CMA’s preliminary findings, and will argue against a divestiture. The company stated that it did not agree with CMA’s provisional findings and that “ICE is committed to retaining ownership of Trayport and is willing to memorialize its intentions with regard to Trayport’s future operation with formal CMA remedies.” However, during the review period, Trayport’s future will be uncertain. CMA stated that it will publish its final decision as early as 18 October, although its review could be extended.
ICE acquired Trayport from BGC Partners in December 2015 for $620 million, a rich multiple. The CMA began reviewing the transaction in January 2016 because competing brokers, exchanges and clearinghouses depend on Trayport’s platform to assist with their energy trading activities.
In a forced divestiture, ICE would lose the benefit of the non-volume-related revenues gained from the acquisition, which reduce the company’s reliance on more cyclical transaction and clearing revenues, a positive for bondholders since it improves ICE’s earnings stability and diversification. Although a forced divestiture would divert management attention, it will not negatively affect ICE’s leverage metrics: the company has a highly diversified revenue stream and, considering Trayport’s relatively small size, we estimate that the loss in a divestiture would be only 2%of ICE’s total EBITDA.
Ram Sri-Saravanapavaan Associate Analyst +1.212.553.4927 [email protected]
Peter Nerby Senior Vice President +1.212.553.3782 [email protected]
NEWS & ANALYSIS Credit implications of current events
17 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
Insurers
Aetna’s Plan to Downsize Its Affordable Care Act Public Exchange Business Is Credit Positive Last Monday, Aetna Inc. (Baa2 stable) announced that it will significantly reduce its participation on the Affordable Care Act’s (ACA) public exchanges to four states in 2017, versus 15 states in 2016. The decision is credit positive for Aetna because it reduces an earnings drag from unprofitable products. The company has estimated that its combined pre-tax losses from this business since January 2014 now exceed $430 million and it projects a $300 million loss for full-year 2016.
Aetna, the third-largest health insurer in the US, is the latest major carrier to announce a significant withdrawal from ACA public exchanges. UnitedHealth Group Incorporated (A3 negative), the largest US health insurer, announced a similar move in April. In July, Humana Inc. (Baa3 review for upgrade) said that it would restrict its on-exchange presence to 11 states in 2017, from 19 states currently.
Aetna’s exit from these products in a large majority of its states reduces its exposure to what has become a poorly performing business for most health insurers. We estimate that the private health insurance sector’s losses from this business exceeded $3 billion in 2014 (based on submissions to the ACA’s risk corridor program), and the financial results of a majority of health insurers point to higher incurred losses for the industry in 2015.
The loss of membership enrolled through the public exchanges will not weigh heavily on Aetna’s business franchise or revenues. We estimate that Aetna has roughly 800,000 exchange-enrolled members, which is less than 4% of its total membership.
We do not believe that Aetna’s announcement will affect the judicial outcome of the Department of Justice’s (DOJ) lawsuit attempting to block the company’s proposed acquisition of Humana. In any case, we see a reasonable probability that the acquisition will ultimately be approved despite the DOJ lawsuit. We expect that if Aetna and Humana are successful in their legal challenge, the transaction will be delayed several months and may not close until 2017.
We said in April that UnitedHealth’s pullback from the public exchanges would prompt other health insurers to examine their strategies for 2017 and beyond. All told, Aetna and UnitedHealth command a meaningful combined share (about 1.6 million members) of the public exchanges’ approximate 12.7 million members.4 Aetna’s announcement increases the likelihood that other insurers will follow. We expect that smaller regional and other Blue Cross Blue Shield plans may decide to exit or limit their participation on the 2017 exchanges in the next few weeks, when they must make their final decisions.
4 Centers for Medicare and Medicaid Services reported ACA exchange enrollment as of February 2016.
Pano Karambelas Vice President - Senior Credit Officer +1.212.553.1635 [email protected]
NEWS & ANALYSIS Credit implications of current events
18 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
Protective’s Acquisition of USWC Holding Company Is Credit Positive Last Thursday, Protective Life Corporation (Protective, Baa1 stable) announced that it had reached an agreement through its wholly owned subsidiary Protective Life Insurance Company (Protective Life, financial strength A2 stable) to acquire USWC Holding Company (unrated) and its affiliated operating subsidiaries via a stock purchase agreement. The low-risk transaction is credit positive because it complements Protective’s current product suite, expands its market position in the asset protection business and diversifies the company’s overall earnings.
The acquisition, which the parties expect to close in fourth-quarter 2016, will be financed with excess capital at Protective Life. As of year-end 2015, Protective Life had a National Association of Insurance Commissioners company action level risk-based capital (RBC) ratio of 568%, which included more than $1 billion of excess capital (defined as capital in excess of a 400% RBC).
USWC’s primary operating subsidiary is United States Warranty Corp., which markets vehicle service contracts, guaranteed asset protection coverage and a suite of ancillary automotive maintenance and protection products nationwide. Protective’s asset protection segment markets extended service contracts and credit life and disability insurance to protect consumers’ investments in automobiles, recreational vehicles, watercraft and powersports. The segment also markets guaranteed asset protection, which covers the difference between the loan payoff amount and an asset’s actual cash value in the case of a total loss.
Although the purchase price was not disclosed, the size of this acquisition is much smaller than Protective’s recent history of acquiring large insurance companies or blocks of life and annuity businesses. This particular acquisition is a good fit for Protective because it provides Protective a stable source of cash flow and allows the company to achieve greater economies of scale in its asset protection business.
USWC provides asset protection products through dealer-owned warranty companies, which we view as low risk and whereby the dealer retains the underwriting profit/risk and investment income, but USWC provides contract administration for a management fee. Protective will also be able to expand nationally in states where it does not currently have a significant presence.
As the exhibit below shows, Protective’s asset protection business currently adds modest diversification to the company’s overall revenue and earnings profile. We expect USWC to slightly increase the asset protection segment’s share of overall revenue and earnings.
Protective’s Segments’ Distribution of Revenue and Pre-Tax Operating Income Data are year to date through 30 June 2016.
Note: Data exclude Corporate and Other segments. Source: Protective Life Corporation
Life Marketing39%
Acquisitions41%
Annuities11%
Stable Value Products3%
Asset Protection6%
Revenue
Life Marketing13%
Acquisitions38%
Annuities36%
Stable Value Products10%
Asset Protection3%
Pre-Tax Operating Income
Manoj Jethani Assistant Vice President - Analyst +1.212.553.1048 [email protected]
NEWS & ANALYSIS Credit implications of current events
19 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
Arch Capital’s Acquisition of United Guaranty Is Credit Negative for Buyer, Credit Positive for Target Last Monday, Arch Capital Group Ltd. (A3 review for downgrade) announced that it had reached an agreement to purchase mortgage insurer United Guaranty Corporation (UGC, unrated) from American International Group, Inc. (AIG, Baa1 stable) for $3.4 billion of cash and securities. The proposed transaction is credit negative for Arch because it will expand the company’s exposure to the commoditized mortgage insurance sector and increase its financial leverage. The transaction is credit positive for UGC and its operating subsidiaries, led by United Guaranty Residential Insurance Company (UGRIC, financial strength Baa1 review for downgrade), which will become a core component of a company with a sound credit profile that we expect will provide UGC with explicit support.
Following the announcement, we placed on review for downgrade Arch’s A3 senior debt rating and the A1 insurance financial strength ratings of its property and casualty (P&C) insurance and reinsurance subsidiaries, and affirmed the Baa1 stable insurance financial strength rating of Arch Mortgage Insurance Company, Arch’s main mortgage insurance unit. Assuming the purchase of UGC closes as planned, we will likely downgrade the ratings placed on review by one notch and assign a stable outlook.
We also announced that we would continue our review for downgrade of UGRIC’s insurance financial strength rating, which we initiated in January, when AIG announced plans for an initial public offering of up to 19.9% of UGC as a first step toward a full separation. Assuming the acquisition by Arch closes as planned, we will likely confirm UGRIC’s rating with a stable outlook.
The proposed purchase consideration consists of $2.2 billion in cash and the remainder in securities. For the cash portion, Arch plans to issue $1.375 billion of debt and/or perpetual preferred shares in the capital markets, draw $200 million on its existing revolving credit facility, and draw the remainder from internal sources. Securities issued by Arch to AIG will include $975 million of convertible non-voting common-equivalent preferred stock and $250 million of perpetual preferred stock, although the latter could be replaced by a pre-closing dividend paid by UGC to AIG. The parties expect to complete the transaction in late 2016 or early 2017, pending approvals of applicable regulators and government-sponsored enterprises (GSEs).
The acquisition would expand Arch’s mortgage operations to about 24% of its gross written premiums from about 8% today, and the related funding would increase its financial leverage (adjusted debt versus total capital) to the mid-20s from the high teens currently, although we expect the company to reduce leverage gradually after closing the transaction. US mortgage insurers’ credit profiles are constrained by the sector’s commoditized product offerings, its linkage to the cyclical housing sector, its dependence on major mortgage lenders and GSEs, particularly Fannie Mae and Freddie Mac, and its modest cross-cycle profitability.
Acquiring UGC will help Arch offset these sector challenges because Arch will achieve a leading market position among mortgage insurers. Additionally, Arch will enhance its diversification at a time when its sizable reinsurance business faces soft pricing and heightened competition from alternative capital sources. Current mortgage insurance conditions are more favorable, supported by a benign housing market and high-quality loan originations.
For UGC, the pending acquisition resolves questions about its ownership and strategic direction. UGRIC currently benefits from a capital maintenance agreement and reinsurance support from its AIG affiliates. AIG could have reduced or ultimately eliminated this support in the event of an initial public offering of UGC. Upon acquiring UGC, we expect that Arch will extend support to these operations, mainly reinsurance from higher-rated affiliates, similar to what Arch provides to its existing mortgage insurance unit.
Sid Ghosh Vice President - Senior Analyst +1.212.553.0456 [email protected]
Kevin Lee Vice President - Senior Credit Officer +1.212.553.2907 [email protected]
Bruce Ballentine Vice President - Senior Credit Officer +1.212.553.7212 [email protected]
NEWS & ANALYSIS Credit implications of current events
20 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
For AIG, the UGC sale advances a strategic plan announced in January. AIG is seeking to narrow its focus through selected divestitures, improve its financial performance and return at least $25 billion of capital to shareholders by the end of 2017. The sale will moderately reduce AIG’s business diversification and profitability, given that UGC has performed well in recent periods.
NEWS & ANALYSIS Credit implications of current events
21 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
Sovereigns
Argentina’s Declining Inflation Supports Economic Growth On 12 August, Argentina’s Central Bank, Banco Central de la República Argentina, reported July inflation, measured by the consumer price index, at 2.0%, down from 3.1% in June and at the lowest monthly rate since November 2015. Lower inflation will increase investment and savings, which will help jumpstart economic growth, a credit positive for the Government of Argentina (B3 stable).
The deceleration was mainly due to a sharp decline in core inflation, which dropped to 1.9% in July, from 3.0% in June and 2.7% in May. The decline suggests that the effect of devaluation and tariff increases, which led to inflation rising more than 4% in May, is beginning to wear off. With the ease in inflation, Argentine authorities are now aiming to reach a 1.5% monthly inflation rate or lower in the fourth quarter this year.
The latest Central Bank inflation expectation survey shows a decreasing path toward 1.8% inflation by December (see Exhibit 1). Even though inflation will end up higher than the government’s original target of 25% for 2016, inflation dynamics are steadily improving. The percentage of Argentinians that view inflation as the main problem for the country has sharply dropped to 22% in July from 32% in March, according to a recent public opinion poll.
EXHIBIT 1
Argentina’s Actual and Projected Inflation, as Measured by Monthly Consumer Price Index Inflation expectations are improving.
Sources: Instituto Nacional de Estadística y Censos (INDEC) and Banco Central de la República Argentina
Lower inflation should continue to boost consumer sentiment. In July, consumer confidence increased 6.8% to 45.6% in July, according to the Universidad Torcuato Di Tella, the highest rate in four months, although it is still below the 50% mark that denotes optimistic consumer confidence. Nonetheless, the improvement was widespread across sub-indices as well as regions. The subcomponent, macroeconomic situation, reached 64.6%, suggesting continued confidence in the ability of the current administration to steer the Argentine economy in the right direction.
Slowing inflation and improving confidence indicators will help economic activity pick up toward the end of this year, aided by increased private investment and consumption. As business sentiment continues to increase, we expect overall investment to pick up to around 20% of GDP by next year, up from 18.8% in 2014, the latest available data (see Exhibit 2), but down from the 2007 peak of 25.4% of GDP.
4.2%
3.1%
2.0% 2.0%1.8% 1.7% 1.7% 1.7% 1.8%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17
Actual Inflation
Inflation Expectation
Barbara Wennerholm Associate Analyst +1.212.553.4749 [email protected]
Gabriel Torres Vice President - Senior Credit Officer +1.212.553.3769 [email protected]
NEWS & ANALYSIS Credit implications of current events
22 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
EXHIBIT 2
Gross Investment as a Percent of Argentina’s GDP We expect increased investment with lower inflation.
Sources: World Bank and Moody’s Investors Service estimates
Although the Argentinian economy is currently in recession and GDP will likely contract 1.5% this year, we expect an investment-led push to start to improve economic activity towards the end of the year. While growth in private investment will initially be slow, increased consumption and public investment will help drive the turnaround. Going forward, we expect stronger economic growth for 2017 and beyond.
0%
3%
6%
9%
12%
15%
18%
21%
24%
27%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Historical
Forecast
NEWS & ANALYSIS Credit implications of current events
23 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
US Public Finance
Pennsylvania Plugs Holes in General Fund with State Treasury Loan, a Credit Negative Last Tuesday, Pennsylvania’s (Aa3 stable) treasurer authorized a $2.5 billion line of credit from its liquidity pool to the state’s general fund, the largest such borrowing in its history (see Exhibit 1). The line of credit is credit negative because it illustrates that Pennsylvania’s general fund position remains stressed amid growing expenditures (particularly Medicaid and pension contributions) and slower-growing revenues. Although the state’s access to the treasury’s ample liquidity ensures that the general fund will not run out of cash, reliance on such borrowings points to the challenges that Pennsylvania faces in achieving a sounder fiscal position.
EXHIBIT 1
Short-Term Borrowing by Pennsylvania’s General Fund from the State Treasury
Note: The $2.5 billion line of credit in 2017 is not yet a full borrowing; it is possible that the general fund draws less than this full amount. The treasurer granted a $2 billion line of credit in 2016, of which the state borrowed $1 billion (as shown in the exhibit). Source: Pennsylvania State Treasury
The state’s fiscal position is set to improve somewhat in fiscal 2017 (ending 30 June 2017) because of a package of new revenues approved in July. The reason that the general fund needs to borrow money despite these new revenues is that some of these new funds will not materialize until later in the fiscal year. According to the treasurer, the general fund cash balance is $500 million lower than it was at this time last year, and treasury projections show a negative net balance until March, when personal income taxes begin picking up.
Although we expect Pennsylvania to struggle to close budget gaps annually, we do not expect it to struggle with liquidity. The state treasury manages an ocean of cash for all types of government agencies; its 2015 annual report showed $105 billion in cash and investments. We do not expect the general fund to have access to all of this, since it includes pension funds and other money tied up in longer-term investments and special trust funds. However, the general fund does have access to two big investment pools – Pool 99, which is a short-term liquidity pool that acts like a money market fund, and Pool 198, which is a longer-term investment pool that acts like a mutual fund. The line of credit granted this week would come from Pool 99.
Pool 99, which consolidates cash across about 175 state funds, reported $8.6 billion of liquidity at the end of fiscal 2015 (see Exhibit 2). Considering that the treasury projects the general fund net cash balance to hit a trough at negative $2 billion this year, a $2.5 billion line of credit is more than sufficient to satisfy all general fund liquidity needs.
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$ Bi
llion
s
Fiscal Year
Dan Seymour, CFA Assistant Vice President - Analyst +1.212.553.4871 [email protected]
NEWS & ANALYSIS Credit implications of current events
24 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
EXHIBIT 2
Liquidity Held by Pennsylvania’s Treasury
Source: Pennsylvania State Treasury
By law, Pennsylvania must repay all internal borrowings within the fiscal year. A $2.5 billion borrowing equals around 7% of annual general fund revenues, a magnitude of borrowing that is not unusual by either state or local government standards. In the past few months, Oregon (Aa1 stable) issued a $600 million tax anticipation note (MIG 1) equal to 6.5% of receipts, and Idaho (Aa1 stable) issued a $500 million tax anticipation note (MIG 1) equal to 15% of receipts.
Pennsylvania has issued tax anticipation notes in the past, with a peak borrowing of $1 billion in 2011, equal to about 4% of receipts. Local governments commonly issue notes equal to more than 10% of revenues. We expect Pennsylvania to continue relying on the treasury to plug holes in intra-year cash flows until the state has fully restored its fiscal position. Meanwhile, the borrowings illustrate both a strength (significant liquidity) and a weakness (the need to access it).
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
2011 2012 2013 2014 2015
$ Bi
llion
s
Pool 99 Pool 198
RECENTLY IN CREDIT OUTLOOK Select any article below to go to last Thursday’s Credit Outlook on moodys.com
25 MOODY’S CREDIT OUTLOOK 22 AUGUST 2016
NEWS & ANALYSIS Corporates 2 » Ruby Tuesday Will Close Underperforming Restaurants in
Planned Turnaround, a Credit Positive » Cintas' Planned Acquisition of G&K Is Credit Negative » Xylem's Planned Acquisition of Sensus Is Credit Negative » Deutsche Wohnen's Acquisition of Nursing Facilities Is
Credit Negative » Korean Builders' Declining Overseas Orders Are Credit
Negative » Measures to Cool Rising Property Prices in Nanjing and
Suzhou, China, Are Credit Negative for Developers
Infrastructure 10 » Korean Government's Temporary Tariff Cut Is Credit
Negative for KEPCO
Banks 12 » Bulgarian Banks' Asset Quality Review and Stress Test
Results Are Credit Positive
Sovereigns 15 » Guatemala's Tax Reform Proposal Is Credit Positive » Botswana's Energy Regulatory Bill Supports Increased
Electricity Supply, a Credit Positive
US Public Finance 18 » Paterson, New Jersey, Passes Levy to Prevent Immediate
Cash Shortage, a Credit Positive » US State Highway Revenue Bonds Benefit from Record
Gasoline Consumption
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