MOODYS.COM

20 AUGUST 2015

NEWS & ANALYSIS Corporates 2 » Airbus Receives Record Aircraft Order from IndiGo,

a Credit Positive » Liberty’s $2.4 Billion Acquisition of Zulily Will Push Leverage

Higher, a Credit Negative » Alibaba’s Strategic Investment in Suning Is Credit Positive

Infrastructure 5 » TECO Terminates Agreement to Sell Coal Business to

Cambrian, a Credit Negative » Light Breaches Financial Covenants, a Credit Negative

Banks 7 » Banco Ciudad de Buenos Aires to Resume Receiving Judicial

Deposits, a Credit Positive » South African Banks’ Wholesale Funders Risk Loss Participation

from Proposed Bank Resolution Framework

Insurers 11 » Berkshire Hathaway’s Cash Purchase of Precision Castparts Is

Credit Negative

Sovereigns 13 » Finland’s Second-Quarter Real GDP Contraction Reduces Full-

Year Growth Outlook, a Credit Negative » Indonesia Will Face Difficulties Executing Its

Credit-Positive Budget

Sub-sovereigns 17 » Czech Government’s Decision Not to Support Regional Roads Is

Credit Negative for Regions

US Public Finance 19 » US Mortgage Loan Delinquencies Decline, a Credit Positive for

State Housing Finance Agencies » Northwestern University’s Football Players Fail to Unionize, a

Credit Positive for the Sector

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Monday’s Credit Outlook 23 » Go to Last Monday’s Credit Outlook

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NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 20 AUGUST 2015

Corporates

Airbus Receives Record Aircraft Order from IndiGo, a Credit Positive On Monday, Airbus Group SE (A2 stable) announced that India airline IndiGo (unrated) had firmed up an October 2014 commitment to purchase 250 A320neos. The $27 billion order (at list prices), Airbus’ largest ever by number of planes, is credit positive because it augments the airframer’s leading position in the critical re-engined narrowbody market and enhances its competitive position in a key emerging market.

As of August 2015, Airbus had a 6,400-aircraft backlog, or about nine years of production with a list value approaching $900 billion. The IndiGo deal materially elevates Airbus’ already sizable order book by around 4% and Airbus’ Asia-Pacific regional backlog by more than 15% to 1,903. The order raises Airbus’ Asia-Pacific backlog as a percentage of total backlog for which regional information is disclosed to around 42% from about 39%.

Amid lower oil prices, Airbus’ robust emerging market orders reflect fleet expansion requirements driven by growth in those markets’ GDP, discretionary income and demand for air travel. These factors contrast with the principal drivers behind order activity from carriers in developed economies: average fleet age and the operating cost differential between current and next-generation equipment. Given that oil prices are a key factor in evaluating airframe/engine replacement economics, we believe orders from carriers in developed countries are more susceptible to deferrals or cancellations related to lower fuel prices than are emerging market carrier orders.

Even so, there is a speculative element in some emerging market carrier growth expectations and related order activity. IndiGo, for example, was founded relatively recently (in 2006) and has a current fleet of fewer than 100 aircraft, a fairly modest size considering the 430 aircraft that are now on order with Airbus, including Monday’s announcement. Large orders such as these are at risk of deferral or cancellation if growth fails to materialize in line with the airline expectations.

Nevertheless, the historic order highlights Airbus’ massive, well-diversified narrowbody order book and its leading position in the narrowbody market relative to rival The Boeing Company (A2 stable). Pro forma for the order, Airbus’ narrowbody backlog exceeds 5,400 aircraft and constitutes more than 80% of the company’s total large commercial airplane backlog.

Although Airbus’ narrowbody backlog is more than one fourth larger than the 4,264 narrowbodies in Boeing’s order book, the IndiGo order accentuates the competitive need for Airbus to further increase forward production rates beyond the 50-per-month rate currently planned for 2017, particularly since Boeing’s backlog (along with customer wait times) is now significantly shorter and its forward production guidance is higher (52 per month in 2018). Further exacerbating these considerations is that Boeing produces airplanes almost a full 12 months per year, but Airbus shutdowns are longer and hence its production cycle is shorter at just 11 months per year for the widebodies and only slightly longer for its narrowbodies.

At currently planned forward production rates for both companies, Airbus’ backlog reflects more than two years of additional production, which could negatively affect its marketing in a financially detrimental way, given comparatively longer customer lead times.

Heightened competitive pressures notwithstanding, we expect Airbus to prudently manage any incremental rate increase, in line with historical production rate breaks, and that the cash consumption related to these program ramp-ups will ultimately improve profitability and cash flows later in the decade.

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 20 AUGUST 2015

Liberty’s $2.4 Billion Acquisition of Zulily Will Push Leverage Higher, a Credit Negative On Monday, Liberty Interactive LLC (Ba3 stable), the parent of home shopping network QVC, Inc. (Ba2 stable), said it was paying $2.4 billion for flash sales online retailer zulily Inc. The purchase is credit negative because the deal will increase Liberty’s debt/EBITDA to about 5.25x from 5.00x.

We expect that QVC’s debt/EBITDA will moderately exceed the company’s 2.5x stated leverage target, although we expect that the company will hold back on further increases in debt until leverage returns closer to the target. We also expect leverage to gradually moderate as the combined company grows earnings over the next few years.

The deal is fully priced, with a purchase price equal to 54x zulily’s EBITDA (as defined by zulily) of $44 million for the fiscal year that ended 28 December 2014. The funding strategy for the acquisition partly mitigates the high multiple: about 50% of the purchase price will be funded from newly issued Liberty shares and around $300 million from zulily’s existing cash balances. The company expects to fund around $900 million of the purchase price from QVC’s $2.25 billion revolving credit facility.

Apart from the initial effect on Liberty’s leverage, the deal offers a number of strategic advantages. Liberty will be tapping into zulily’s younger and fast-growing customer base and harnessing zulily’s strong e-commerce marketing and data analytics, which will enhance QVC’s offering. Combined, 50% of the company’s revenue will come from e-commerce, up from around 40% currently. QVC is also larger, with more than 7x zulily’s revenues, and has deeper vendor relationships, which can also help zulily, which is more concentrated in small boutique vendors primarily in the apparel and accessories product categories.

QVC offers through both its TV networks and its website exclusive celebrity brands and a wider product range, including kitchen and health products, to which zulily has less exposure. Moving these QVC products through zulily’s platform can broaden the relationship with zulily clients, who may be less familiar with QVC’s offerings, and drive incremental revenue. As for zulily, it was one of the three retailers (Amazon and Old Navy are the others) to hit $1 billion in revenue in fewer than five years, doing so in 2014.

There is very little customer overlap between the two companies – just 6% of zulily’s customers bought products from QVC last year – which diminishes the risk of cannibalization. There are also some positive, if modest, cost synergies that Liberty can extract in areas such as logistics, technology and duplicate public company costs, although the real driver for the acquisition is generating revenue growth, not cost savings. For example, zulily drove revenue growth of 72% in fiscal 2014, compared with just 2% for QVC during the same period.

Scott Tuhy Vice President - Senior Credit Officer +1.212.553.3703 scott.tuhy@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 20 AUGUST 2015

Alibaba’s Strategic Investment in Suning Is Credit Positive On 12 August, Alibaba Group Holding Company (A1 stable) said that it will invest $4.63 billion in consumer electronics retail chain Suning Commerce Group Limited (unrated) for a 19.99% stake. At the same time, Suning will invest $2.28 billion in new Alibaba shares. These investments are credit positive for Alibaba because the transaction structure and operating synergies will allow the Chinese e-commerce giant to increase revenue without incurring incremental debt.

The minority stake and cross-investment structure reduce Alibaba’s net cash outflow for the transaction. Net of the $2.28 billion that Suning will invest by subscribing to approximately 1.1% of Alibaba’s enlarged share base, Alibaba’s net cash outflow will be $2.3-$2.4 billion, which we expect the company to fund with operating cash flow. We estimate that Alibaba will generate $6.5-$7.0 billion in cash flow from operations in the year ending 31 March 2016.

Alibaba will gain access to Suning’s extensive physical store and logistical network throughout China, which will complement Alibaba’s own third-party fulfillment system and reduce the investments that Alibaba will need to make to expand its own delivery platform. These factors will help preserve Alibaba’s cash flow and prevent its debt from rising. The company’s adjusted debt/EBITDA will be stable at around 1.5x over the next 12-18 months (see exhibit).

Alibaba’s Revenue and Leverage

Note: Fiscal years end 31 March. Sources: Alibaba and Moody’s Investors Service estimate

We also expect a positive revenue effect from this transaction over the next 18-24 months. Suning’s logistical network covers more than 90% of China’s more than 300 counties. Suning’s ability to deliver products to consumers throughout China will likely encourage more consumers to purchase goods and services through Alibaba’s platform, which, in turn, will drive further revenue and cash flow growth. This supports our 20%-25% revenue growth forecasts for Alibaba in fiscal 2016 and 2017.

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Lina Choi, CFA Vice President - Senior Analyst +852.3758.1369 lina.choi@moodys.com

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

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 20 AUGUST 2015

Infrastructure

TECO Terminates Agreement to Sell Coal Business to Cambrian, a Credit Negative On Monday, TECO Energy, Inc. (Baa1 stable) announced that it had terminated its sale agreement (effective 21 August) to sell its wholly owned coal mining subsidiary, TECO Coal (unrated), to Cambrian Coal Corporation (unrated). The original sale agreement, signed in October 2014, included a price of up to $170 million, but was never finalized despite a price reduction and several extensions of the deal deadline. The termination of the sale agreement is credit negative because it will further delay TECO’s exit from its poor performing non-regulated coal business, and comes after TECO in July announced that it was exploring strategic alternatives for the entire company.

TECO’s management has indicated that the company remains committed to selling the coal business. However, the coal market’s continued deterioration has resulted in a declining sale price and increased difficulty executing a transaction. In the second quarter, TECO took another impairment charge of $50.8 million on its coal assets, resulting in an aggregate impairment charges of more than $150.0 million since it first announced its plan to sell TECO Coal to Cambrian.

TECO has retained Morgan Stanley & Co. to advise the company on exploring strategic alternatives, including a sale of the entire company. A sale of the entire company could be hindered as TECO continues to deal with the sale of its coal business. Given management’s commitment to sell the coal business and the strategic review, management will have competing priorities in its day-to-day operations, including regulated utilities in Florida and New Mexico.

Since TECO Coal is listed as a discontinued operation, TECO generates all of its consolidated earnings from its regulated utilities. If TECO sells the coal business, it will have transformed itself into a fully regulated utility holding company with a more stable and predictable revenue base and cash flow stream. As a result, we expect TECO’s ratio of cash flow pre-working capital to debt to remain at around 20% over the next few years.

Jeffrey Cassella Vice President - Senior Analyst +1.212.553.1665 jeffrey.cassella@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 20 AUGUST 2015

Light Breaches Financial Covenants, a Credit Negative On 13 August, Light S.A. (Ba2/Aa3.br stable) reported that in the second quarter it did not meet the financial covenants in the indentures of the outstanding debentures issued by its wholly owned electricity distribution and generation subsidiaries Light Serviços de Eletricidade S.A. (Light SESA, Ba2/Aa3.br stable) and Light Energia S.A. (Ba2/Aa3.br, stable). Light’s failure to maintain the covenant’s minimum credit metrics is credit negative.

The indentures’ financial covenants, which have cross-default provisions, require that Light on a consolidated basis have total net debt/EBITDA of less than 3.75x and EBITDA/interest expense of more than 2.50x. As of 30 June, Light’s net debt/EBITDA was 4.54x and its EBITDA/interest expense was 2.37x. The indentures of Light Energia’s second and third debenture issuances and Light SESA’s eighth, ninth and tenth debenture issuances are subject to these covenants. As of 30 June, the combined outstanding amount of these issuances totaled BRL3.37 billion, equal to about 49% of Light’s total outstanding net financial debt of BRL6.87 billion.

Breaching the covenants is directly related to the drought that has affected southeast Brazil over the past two years, and which has hurt both electricity generation and distribution. Despite the extraordinary tariff adjustment granted to Light SESA in March 2015, and the implementation of a tariff flag mechanism in January 2015 by the Agencia Nacional de Energia Eletrica, Brazil’s electricity sector regulator, abnormally higher electricity acquisition costs in the second quarter led Light to raise an additional BRL1.50 billion in debt (BRL1.29 billion of which Light SESA raised) and has increased Light’s consolidated debt nearly 30% over June 2014 levels.

Light SESA accounts for about 86% of Light’s consolidated operating revenues, while Light Energia accounts for about 5%. Light SESA contributed 65% of Light’s consolidated EBITDA, while Light Energia contributed 35%. Light is the guarantor of Light Energia’s and Light SESA’s rated debt.

Light SESA expects to pass on to customers the higher electricity acquisition costs in the next scheduled tariff adjustment, which occurs in November.

Although this one breach does not by itself allow creditors to immediately accelerate outstanding debt, a breach in two consecutive quarters, or on a non-consecutive basis over four quarters, gives creditors the right to enforce the acceleration clauses of the respective debentures, and potentially cross-accelerate the outstanding debt. Light is currently negotiating with creditors a waiver to prevent debt acceleration if the company breaches the covenants again. Given the meteorological forecasts that Brazil’s drought conditions will not improve over the next three months, Light is at higher risk of breaching those covenants if it fails to get a waiver on a timely basis, thus triggering debt acceleration.

Alexandre de Almeida Leite Vice President - Senior Credit Officer +55.11.3043.7353 alexandre.leite@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 20 AUGUST 2015

Banks

Banco Ciudad de Buenos Aires to Resume Receiving Judicial Deposits, a Credit Positive Last Friday, Argentina’s Civil and Commercial Court of Appeals ruled in favor of Banco de la Ciudad de Buenos Aires (Banco Ciudad, Caa1/Caa1 negative, caa11) in a dispute over the placement of judicial deposits in Buenos Aires. The ruling means that all new judicial deposits related to cases being tried in national and federal courts in Argentina’s capital will be deposited at Banco Ciudad.

The court decision is credit positive for Banco Ciudad because it will restore the bank’s access to a stable base of inexpensive deposits. Judicial deposits are escrow funds set aside during legal proceedings that are pending resolution, and for decades these funds were held at Banco Ciudad. In 2012, a law shifted the flow of these deposits to Banco de la Nacion Argentina (unrated), which Banco Ciudad immediately challenged on constitutional grounds. The appeals court ruling will restore a key competitive advantage for Banco Ciudad, reducing its need to rely on more expensive market funding sources (see exhibit).

Banco Ciudad’s Funding Costs after Losing Judicial Deposits

Sources: Banco de la Ciudad de Buenos Aires and Moody’s Investors Service

Since the passage of the law shifting judicial deposits away from Banco Ciudad, the bank has been forced to issue more senior unsecured debt and offer higher rates on its term deposits. The average cost of these funds is more than 20%, which has significantly hurt Banco Ciudad’s profitability.

Banco Ciudad estimates that it will gain access to low-cost judicial deposits totaling ARS1.0-ARS1.5 billion a year because of the appeals court ruling, which compares to an outstanding balance of senior unsecured debt of ARS600 million as of March 2015. This may result in approximately ARS100 million in annual savings on interest expenses, which would equal 30% of the bank’s first-quarter 2015 net income, and will allow the bank to lower its lending rates to fulfill its mission as a public bank that focuses on fostering economic development.

Before the 2012 law, Banco Ciudad had leveraged its access to judicial deposits to become a leader in the country’s mortgage market. However, the bank over the past three years has been forced to slow the pace of mortgage lending. Home loans still accounted for 28.3% of loans granted to the private sector as of March 2015, but that is down from 29.5% as of September 2012.

1 The ratings shown are Banco Ciudad’s deposit rating, senior unsecured debt rating and baseline credit assessment.

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Fernando Albano, CFA Assistant Vice President - Analyst +54.11.5129.2624 fernando.albano@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 20 AUGUST 2015

Banco Ciudad’s profitability has also been affected by Argentina’s low economic growth and high inflation. The government has increased pressure on financial institutions to provide more credit to support the economy by implementing lending rate caps, lending quotas, restrictions on non-interest income and limits on net foreign currency holdings, all of which have negatively affected bank earnings.

Banco Ciudad’s access to these judicial deposits, which are long term, gives it a significant advantage over its private-sector competitors because most banks in Argentina must rely on short-term funding sources given low depositor confidence.

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 20 AUGUST 2015

South African Banks’ Wholesale Funders Risk Loss Participation from Proposed Bank Resolution Framework Last Thursday, the South African Reserve Bank (SARB), National Treasury and Financial Services Board published for public comment a document outlining a framework for bank resolutions. The framework is likely to evolve into a special resolution bill in the next few months. Such legislation would raise the risk of loss participation for wholesale funders of South African banks because marketable securities and wholesale funders or depositors would absorb losses before retail and small and midsize enterprise (SME) deposits that qualify for deposit guarantees.

The proposed bail-in process would permit SARB to, among other things, partially or fully divest shareholders of their shares, reduce or cancel the claims of certain creditors and convert the claims of certain creditors to equity or another form of capital. The proposal on the sequence of bail-in/loss absorption is (in this order) ordinary shares; preference shares; Tier 1 and Tier 2 instruments with contractual loss-absorbing features; other marketable securities and wholesale funding; trade creditors; guaranteed depositors for the amount of their deposits above the coverage limit; preferred creditors (bank employees and certain tax liabilities); and secured creditors.

The proposal is based on resolution regimes set out by the Financial Stability Board, which the G20 tasked with developing these principles in line with international standards. South Africa has committed to adopting these standards to make it easier to resolve troubled banks, and, through burden-sharing with all types of unsecured creditors, eliminate as much as possible any costs to taxpayers for bailouts.

The framework described in the document leaves institutional and corporate depositors, which form the bulk of South African banks’ funding profile (see exhibit below), exposed to a higher risk of burden-sharing because they would sustain losses before retail and SME depositors. Currently, there is no explicit deposit guarantee scheme in South Africa, but enactment of this law would likely introduce such a scheme.

South African Banks’ Funding as of May 2015

Note: Institutional deposits include deposits from pension funds, asset management companies, money market funds and insurance companies. Source: South African Reserve Bank

Institutional38.5%

Corporate21.1%

Retail17.8%

SMEs4.5%

Government and Parastatals7.3%

Foreign Currency9.8%

Other1.0%

Nondas Nicolaides Vice President - Senior Credit Officer +357.25.586.586 nondas.nicolaides@moodys.com

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 20 AUGUST 2015

The new framework, which will replace the existing Banks Act that envisages the appointment of a curator for troubled banks,2 authorizes the South African resolution and supervisory authorities to take action to promote financial stability, minimise contagion risk, safeguard public confidence in the banking system, protect guaranteed depositors and minimise or avoid costs to taxpayers and moral hazard. The SARB is designated as the national resolution authority, and has three stabilisation tools it can use in an open resolution to restore or maintain the critical functions of the bank. Those tools are the creation of a bridge institution, a transfer of assets and liabilities and a bail-in tool that allows applying losses to selected liability holders and shareholders to recapitalise a bank.

Once the resolution regime is operational with the approval of the special resolution bill, we will accordingly consider applying our loss-given-failure analysis to all rated South African banks as described in our bank rating methodology. Any rating actions will depend on the liability structure of a bank’s balance sheet, and the loss severity for each instrument class in the waterfall.

2 The provisions of the Banks Act allow a curator, subject to conditions and approvals, to transfer specific assets and liabilities, and

were put into effect in August 2014 for troubled African Bank Limited.

NEWS & ANALYSIS Credit implications of current events

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Insurers

Berkshire Hathaway’s Cash Purchase of Precision Castparts Is Credit Negative On 10 August, Berkshire Hathaway, Inc. (Aa2 stable) announced an agreement to acquire metal parts manufacturer Precision Castparts Corp. (PCP, A2 stable) for $37.2 billion, including about $32.0 billion of cash and more than $5.0 billion of assumed PCP debt. Berkshire CEO Warren Buffett said his company will likely borrow about $10.0 billion to help fund the cash portion of the deal and use cash on hand for the remainder. The funding plan is credit negative for Berkshire given the use of significant cash, which could involve dividends from insurance subsidiaries, along with the addition of newly issued and assumed debt. Berkshire and PCP expect to close the transaction in the first quarter of 2016, pending regulatory and PCP shareholder approvals.

On a consolidated basis, Berkshire held cash and equivalents totaling $67.0 billion at 30 June 2015, the majority of which was on the books of its insurance subsidiaries, with lesser amounts held by the parent company and other business units. Berkshire had total borrowings of $85.0 billion and a consolidated debt/capital ratio of about 28% (including pension and lease adjustments). On a pro forma basis as of 30 June, the PCP acquisition would reduce Berkshire’s cash and equivalents by about one third, and increase its consolidated leverage to about 31%, modestly exceeding our leverage expectations at the current rating level.

We expect Berkshire to reduce its consolidated leverage following the acquisition through equity growth and debt reduction. Over the past three years, the company has generated net income averaging $18.0 billion per year and net cash from operations averaging $27.0 billion per year. The company pays no shareholder dividends and rarely repurchases stock (its last share buyback was for $1.3 billion in 2012). Following the acquisition announcement, we affirmed Berkshire’s ratings with a stable outlook and said PCP’s ratings were not affected.

Berkshire reports its borrowings in three broad categories, which at 30 June included $57 billion in the railroad, utilities and energy segments; $13 billion in the finance and financial products segment; and $15 billion at the parent company and other business segments. Debts of the railroad, utilities and energy segments are not guaranteed by Berkshire and are largely serviced by regulated cash flows. Debts of the finance and financial products segment are guaranteed by Berkshire, but are mainly serviced by interest and principal payments on the related loans and finance receivables.

Historically, Berkshire maintained low debt levels at the parent company and in its remaining segments, which include its core insurance businesses and its diversified manufacturing, service and retailing segment. In 2010, the parent company issued approximately $8 billion of debt to help fund its acquisition of railroad company Burlington Northern Santa Fe, LLC (A3 stable). Parent company debt increased to about $10 billion as of 30 June, and funding for the PCP acquisition risks boosting this figure by another $10 billion. If the parent company does not reduce its debt following the acquisition, its ratings could be lowered.

The PCP purchase will also draw down Berkshire’s cash and equivalents by more than $20 billion, most of which we expect will come from insurance subsidiaries, whether in the form of dividends, loans or insurance company investments in PCP. Berkshire’s largest liquidity pool is in its flagship Berkshire Hathaway Reinsurance Group (BHRG), led by National Indemnity Company (financial strength Aa1 stable). BHRG accounts for a majority of the $17 billion of insurance company dividends available to Berkshire without prior regulatory approval as of the start of 2015. To the extent that BHRG funds a major portion of the PCP acquisition, it will reduce the reinsurer’s liquidity, and in the event of a dividend, its capital.

Bruce Ballentine Vice President - Senior Credit Officer +1.212.553.7212 bruce.ballentine@moodys.com

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BHRG’s and Berkshire’s ability to generate cash and capital quickly offset these risks. We expect Berkshire to reduce its financial leverage, as noted above, and to continue its practice of keeping at least $20 billion of cash and equivalents at, or readily available to, the parent.

The PCP transaction continues Berkshire’s practice of purchasing strong-performing businesses across a range of industries. PCP is a market leader in advanced metal forming and processing technologies with efficient, vertically integrated operations and healthy profit margins.

NEWS & ANALYSIS Credit implications of current events

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Sovereigns

Finland’s Second-Quarter Real GDP Contraction Reduces Full-Year Growth Outlook, a Credit Negative Last Friday, Eurostat released flash estimates showing that Finland’s (Aaa negative) second-quarter real GDP had contracted by 0.4% from the first quarter, the weakest showing among Aaa- and Aa1-rated countries in the EU (see Exhibit 1). These credit-negative results prompted us to revise downward our 2015 full-year real GDP forecast for Finland to a contraction of 0.5% from growth of 0.3%, which implies that Finland will experience a fourth consecutive year of GDP contraction (see Exhibit 2). Given the lower government revenues related to the revised outlook, we have also revised upward our estimate for the 2015 general government budget deficit to 3.5% of GDP from 2.9%. Our new real GDP estimate is below the 0.3% forecast by Finland’s Ministry of Finance and our deficit estimate exceeds the 3% of GDP threshold stipulated by European fiscal rules.

EXHIBIT 1

Finland’s Real GDP Growth in Second-Quarter 2015 versus Aaa- and Aa1-Rated EU Peers

Notes: *Percentage change compared with the same quarter of the previous year calculated from working-day adjusted data. Exhibit excludes Denmark and Luxembourg, for which data has not yet been published. EU28 = member countries of the European Union; EA19 = member countries of the euro area. Sources: Eurostat and Moody’s Investors Service

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Sweden UK Germany EU28 EA19 Netherlands* Austria France Finland

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

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

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EXHIBIT 2

Finland’s Real GDP Growth

Sources: Haver Analytics, Finland’s Statistical Office and Moody’s Investors Service

Our forecast of a 0.5% GDP contraction is based on the assumption that real GDP will stagnate on a quarter-to-quarter basis in the third and fourth quarters of this year. Contrary to our earlier expectation, consumers remain reluctant to increase spending, as indicated by the weak retail sales so far this year, and as the positive economic effects of low oil prices and a weak euro are counterbalanced by the negative effect of Russia’s recession.

Finland’s low GDP growth in recent years has been a consequence of structural and external factors. On the structural side, two of Finland’s key industries, electronics and forestry, have experienced declines in demand. In the electronics industry, demand declined in particular for mobile phones made by Nokia Oyj (Ba2 stable), which has been unable to compete with smartphones launched by competitors. In forest-related products such as paper, demand has suffered from increased digitalization.

On the external side, Finland has been negatively affected by Russia’s economic decline given that exports to Russia constituted a significant 9.4% of total exports in 2013, while tourists from the country accounted for 7.2% of all tourism that same year. Following the sharp devaluation of the Russian currency at the end of 2014, exports fell 46% in the first three months in 2015 from the year before. Although we do not have data for tourist arrivals, the depreciation has most likely decreased visits this year.

Owing to our forecast of a decline in GDP, we expect lower government revenues and spending to remain unchanged, resulting in a higher fiscal deficit of 3.5% of GDP versus our earlier forecast of 2.9%. In addition to the negative effect on revenues from lower economic growth, the new forecast takes into account recent fiscal projections by Finland’s Ministry of Finance, which show a 2015 deficit of 3.2% of GDP and GDP growth of 0.3%.

Whether the European Commission will re-open an excessive deficit procedure against Finland will largely depend on its assessment of GDP growth and public finances for 2016, which may change in light of a weaker growth performance in 2015.3 The 2015 fiscal deficit number is less of an issue because the European Commission in its latest assessment in June 2015 had already expected a GDP deficit higher than 3%, albeit on a temporary basis. In 2016, the European Commission expects a deficit below 3% of GDP following consolidation measures announced in the new government’s economic programme, which followed parliamentary elections in April 2015. Because the 2016 deficit is forecast to be below 3% of GDP, the European Commission decided not to open an excessive deficit procedure.

3 The last excessive deficit procedure by the European Commission against Finland closed in 2013, after launching in 2010.

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NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 20 AUGUST 2015

Indonesia Will Face Difficulties Executing Its Credit-Positive Budget On Friday, the government of Indonesia (Baa3 stable) published its draft 2016 budget, which proposed a fiscal deficit of 2.1% of GDP, greater infrastructure spending and some cuts to subsidy spending. The draft budget is credit positive because it maintains a policy focus on keeping fiscal deficits low and shifting government spending to capital investments and away from subsidies. Given the government’s reliance on external market financing, such fiscal prudence helps maintain market confidence, especially at a time when international capital volatility has had a negative effect on Indonesia’s capital account and exchange rate.

The budget is based on relatively realistic macro-economic assumptions, with GDP growth forecast at 5.5% and inflation at 4.7%. Although we see some downside risk to the growth forecast, the greater risk to budget outcomes stems from the government’s own administrative capacity constraints, which have resulted in lower-than-expected infrastructure spending this year, and a smaller-than-expected increase in tax collections.

The year is more than halfway over and the government has not yet met its 2015 fiscal goal of diverting a significant portion of subsidy savings to infrastructure investments. This reflects the government’s difficulty in implementing budget plans. Lower-than-forecast infrastructure spending has led to smaller-than-expected growth in the first half of the year. Rather than accelerating, as the government had forecast at the beginning of the year, GDP growth slipped to 4.7% in the first half of 2015, from 5.0% in 2014.

Earlier this year, the government announced measures to improve tax administration and broaden the tax base through the use of electronic tax return submissions, improvements in tax audit and a waiver of interest and fines on tax arrears. If successful, these measures would help raise Indonesia’s tax revenue/GDP ratio, which is lower than those of similarly rated and regional peers (see Exhibit 1). However, actual tax collection has increased less than the government expected, totaling IDR531.1 trillion in July, or 41% of the total target, reflecting lower growth and the challenges of improving tax administration and collection capacity.

EXHIBIT 1

Indonesia’s Tax Revenues/GDP Compared with Peers

Sources: Kementerian Keuangan Republik Indonesia, Haver Analytics and Moody’s Investors Service

Indonesia’s proposed 2016 fiscal deficit is in line with the relatively modest fiscal deficits that it has maintained over several years (see Exhibit 2). The budget proposes an increase in infrastructure spending to IDR313.5 trillion in 2016 from IDR290.3 trillion this year and cuts total spending on subsidies by 5.1% to IDR201.4 trillion, incorporating a 31.6% drop in electricity subsidies offset by an increase in the allocation for oil and gas, and for non-energy (food, fertilizer and seed) subsidies.

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2013 2014 2015F

Indonesia, Baa3 Thailand, Baa1 Malaysia, A3 India, Baa3 Brazil, Baa3

Atsi Sheth Senior Vice President +65.6398.3727 atsi.sheth@moodys.com

Amelia Tan Associate Analyst +65.6398.8323 amelia.tan@moodys.com

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 20 AUGUST 2015

EXHIBIT 2

Indonesia’s General Government Fiscal Balance/GDP Compared with Peers

Sources: Kementerian Keuangan Republik Indonesia, Haver Analytics and Moody’s Investors Service

The 2016 budget continues the policy direction set in the 2015 budget of keeping fiscal deficits low, but shifting spending to capital investment to generate growth, while lowering subsidy spending so that market price signals, rather than government intervention, determine domestic demand.

The government cut its energy subsidy bill to IDR137.8 trillion in 2015 from IDR341.8 trillion in 2014, after eliminating the subsidy for premium fuel and setting a subsidy for diesel oil at IDR1,000 per litre.

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2011 2012 2013 2014 2015F

Brazil, Baa3 India, Baa3 Indonesia, Baa3 Malaysia, A3 Thailand, Baa1

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 20 AUGUST 2015

Sub-sovereigns

Czech Government’s Decision Not to Support Regional Roads Is Credit Negative for Regions Last Thursday, the Association of Regions of the Czech Republic announced that the central government will not provide funds to support reconstruction of regional roads in 2016. The government’s decision is credit negative because the regions will not receive the CZK3.0 billion (€111.0 million) they have estimated they need next year. The regions aim to negotiate a reversal of the central government’s decision.

Around 50% of the Czech Republic’s roads and bridges are in nonconforming condition, and without external funding their condition risks worsening. Czech regions assumed control of these roads and bridges 15 years ago, but this was not accompanied by an increase in regional revenues to cover maintenance and improvement. Because of the substantial investment requirements related to roads, Czech regions have repeatedly asked the central government for assistance, either by participating in the country’s excise tax, incorporating regional roads into the Czech toll system currently used on highways and motorways, or funding from the central budget.

The central government is aware that investing and maintaining regional roads is a challenge for the regions, and over the past 15 years it has provided the regions with subsidies. These funds were earmarked for individual projects, such as fixing roads damaged by floods or those in a state of disrepair. However, each region had to negotiate the assistance individually. In 2015, the central government decided to grant transfers to all regions, and appeared to signal a shift in the central government’s approach to supporting the regions’ transport needs with budget earmarks.

In 2015, the regions received CZK4.4 billion (€160 million) from the central government earmarked for the reconstruction of regional roads. The transfer was split between 13 regions, based on the length of roads. The City of Prague (A1 stable) was excluded despite its dual role as a region and city because it possesses only municipal roads. The largest transfer (CZK778.8 million) went to the Central Bohemian Region (unrated), where approximately 17% of the Czech Republic’s regional roads are located. Among rated regions, South-Moravian Region (Aa1.cz stable) received CZK349.8 million, followed by Usti Region (Aa1.cz stable) at CZK330 million, Liberec Region (Aa1.cz stable) at CZK187.4 million and Moravian-Silesian Region (A2 stable) at CZK247.3 million (see exhibit).

Czech Regions’ 2015 Distribution of Transfers from State Budget and Required for 2016

Rating

Length of Regional Roads

(km) Share of Total

Regional Roads

Distribution of 2015 Transfer

CZK Millions

Transfer in 2016, if

Provided* CZK Millions

Central Bohemian Region Unrated 8,623 17.7% 779 531

South Bohemian Region Unrated 5,452 11.2% 492 336

Plzen Region Unrated 4,601 9.4% 416 283

Vysocina Region Unrated 4,566 9.4% 412 281

South-Moravian Region Aa1.cz stable

3,873 8.0% 350 239

Usti Region Aa1.cz stable

3,653 7.5% 330 225

Kralovehradecky Region Unrated 3,310 6.8% 299 204

Pardubice Region Unrated 3,131 6.4% 283 193

Dagmar Urbánková Analyst +420.221.666.352 dagmar.urbankova@moodys.com

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 20 AUGUST 2015

Czech Regions’ 2015 Distribution of Transfers from State Budget and Required for 2016

Rating

Length of Regional Roads

(km) Share of Total

Regional Roads

Distribution of 2015 Transfer

CZK Millions

Transfer in 2016, if

Provided* CZK Millions

Olomouc Region Unrated 3,096 6.4% 280 191

Moravian-Silesian Region A2 stable 2,735 5.6% 247 168

Liberec Region Aa1.cz stable

2,077 4.3% 187 128

Karlovy Vary Region Unrated 1,821 3.7% 165 112

Zlin Region Unrated 1,766 3.6% 160 109

Total 48,703 100.0% 4,400 3,000

* Per the Association of Regions of the Czech Republic. Sources: Czech Republic State Fund for Transport Infrastructure and Moody’s Investors Service

Aside from state support, Czech regions can also seek EU funds, but these require co-financing from the regions’ resources. Therefore, if the regions succeed and get subsidies from the state budget in 2016, the regions will be able to ask for more EU funds, thus accelerating total investment into transport.

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 20 AUGUST 2015

US Public Finance

US Mortgage Loan Delinquencies Decline, a Credit Positive for State Housing Finance Agencies Last Thursday, the Mortgage Bankers Association released its second-quarter National Delinquency Survey, which shows a decline in nationwide mortgage loan delinquencies to 5.3%, the lowest since second-quarter 2007, and foreclosures to 2.1%, the lowest since fourth-quarter 2007. The decline in delinquency rates is credit positive for US state housing finance agencies (HFAs) because it indicates a strengthening of the overall housing market, which will translate into improved loan performance and lower losses for their single-family whole loan programs.

HFA mortgage-backed securities (MBS) programs will also benefit from fewer prepayments from loan delinquencies, thereby retaining more full-spread MBS on their balance sheets and boosting income.

MBA data also show that loan delinquencies for Federal Housing Administration (FHA) fixed-rate mortgage loans, which share many characteristics with HFA loans and have followed similar trends since the global financial crisis in 2008, have fallen below second-quarter 2007 levels. These declines suggest continued improvement for HFA portfolios, and we project that 60-89-day and 90-day-plus loan delinquencies and foreclosures for the portfolios we rate will decline to 6.5%-6.9% by fourth-quarter 2015 from 7.2% in fourth-quarter 2014. In second-quarter 2015, 60-89-day delinquencies for FHA fixed-rate loans remained flat at 1.3% versus second-quarter 2014, while 90-day-plus delinquencies declined to 2.6% from 3.3% over the same period. Loan foreclosures declined year over year for the third straight year to a low of 2.3% from 2.6% (see exhibit below).

Delinquencies and Foreclosures for FHA Fixed-Rate Mortgages

Source: Mortgage Bankers Association National Delinquency Survey

Improved loan performance for HFA portfolios will increase mortgage loan income, reduce loan losses upon foreclosure and reduce prepayments from underperforming loans. In addition, fewer loan modifications will be required when performance is strong, lessening the drag that modified loans have on revenues. The combination of these positive credit factors will contribute to a boost in profitability and asset balances for HFAs in 2015.

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2007Q2 2008Q2 2009Q2 2010Q2 2011Q2 2012Q2 2013Q2 2014Q2 2015Q2

60-89 and 90+ Delinquency Rates - left axis In Foreclosure - right axis

Rachael McDonald Vice President - Senior Analyst +1.212.553.4456 rachael.mcdonald@moodys.com

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 20 AUGUST 2015

In states with judicial foreclosure processes, foreclosures remain high even as delinquencies decline. The judicial process involves a court proceeding and results in considerable backlogs because the process takes longer to complete than in non-judicial states. For example, all eight of the states with FHA fixed-rate foreclosure rates above 3% have judicial processes.4 However, HFA performance in some of these states, such as New York, is significantly better than statewide performance because of the strong loan underwriting and servicing at the HFAs.

4 Connecticut, Delaware, Florida, Illinois, Maine, New Jersey, New York and Ohio.

NEWS & ANALYSIS Credit implications of current events

21 MOODY’S CREDIT OUTLOOK 20 AUGUST 2015

Northwestern University’s Football Players Fail to Unionize, a Credit Positive for the Sector On Monday, The National Labor Relations Board (NLRB) declined to assert its jurisdiction in Northwestern University’s (Aaa stable) football players’ attempt to unionize. This decision is credit positive for Northwestern University and other universities because it limits the prospects for increased expenses associated with unionizing student athletes.

The NLRB overturned a regional office’s decision to allow Northwestern football players to unionize, but did not rule on the merits of the argument. The Northwestern football players sought collective bargaining to increase scholarships, raise coverage for sports-related medical expenses, minimize contact during practice and improve graduation rates. Without authority over public universities, the NLRB did not think it could fulfill its mission of promoting stability in labor relations by enforcing a decision that would initially apply to only one private university.

Public universities comprise a majority (111 of 128) of the Football Bowl Subdivision (FBS), the National Collegiate Athletic Association’s (NCAA) most lucrative and highest level of athletic competition. Any decision by the NLRB in this case would likely have resulted in most FBS schools providing added benefits to their athletes to remain competitive, thus adding to ongoing expense pressures. Although the NCAA limits FBS schools to 85 scholarships for football players, some universities have more than 400 total scholarship athletes who potentially would receive more remuneration.

A growing disparity between expenses and revenue generated by athletics requires additional infusions of institutional funds into athletic programs to break even. Only 20 of 128 FBS athletic departments generated revenues that exceeded expenses in fiscal 2013. We project that the median generated revenue for fiscal 2015 is $44.5 million, 14.8% higher than five years ago (see exhibit). Over the same period, expenses grew 46.0%.

College Athletic Programs’ Expenses

Sources: The National Collegiate Athletic Association’s Division Intercollegiate Athletics Programs Report and Moody’s Investors Service projections

With a vast majority of athletic programs failing to break even, incremental costs would have added negative pressure to budgets. However, athletic program deficits are generally a very modest share of a university’s total operating budget. Most universities continue to fund athletics because of the myriad indirect benefits, including recruiting and fundraising.

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Median Generated Revenue Median Expenses Median Expenses with Unionization

Michael Osborn Assistant Vice President - Analyst +1.212.553.7108 michael.osborn@moodys.com

NEWS & ANALYSIS Credit implications of current events

22 MOODY’S CREDIT OUTLOOK 20 AUGUST 2015

The NLRB’s decision pertains only to the players at Northwestern and does not prevent further consideration in the future. Other challenges to amateurism in college sports and related expense pressures remain. The Ed O’Bannon class-action antitrust lawsuit against the NCAA continues, with a federal appeals court in San Francisco currently reviewing the case.

Additionally, the direct and indirect costs associated with the NCAA’s decision to grant greater autonomy to the five power conferences are still being absorbed by the universities, which have yet to determine the total financial effect. Since this decision, many conferences and teams have begun expanding benefits to student athletes. As the competitive landscape intensifies, many universities will continue to opt to make these benefits available without being forced by a third party.

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

23 MOODY’S CREDIT OUTLOOK 20 AUGUST 2015

NEWS & ANALYSIS Corporates 2

» Devalued Yuan Is Credit Negative for Apple; Slightly Positive for Electronics Manufacturing Services Companies

» Rentech Merger with CVR Partners Improves Scale and Geographic Diversity for Both

» Pearson's Sale of Its 50% Stake in The Economist Is Credit Positive

» FIS Acquisition of SunGard Is Credit Negative for FIS, Positive for SunGard

» China Metallurgical Group's Sale of Property Companies Is Credit Positive

Infrastructure 7

» PNM Files Second Generating Station Settlement with Regulators, a Credit Positive

» Five Companies Exit ANGRA III Power Plant Construction Consortium, a Credit Negative

Banks 10

» Capital One's Acquisition of GE Capital's Healthcare Lending Business Is Credit Positive

» Branch-Based Payday Lenders Report Weak Second-Quarter Earnings, Reflecting New Regulations

» Commerzbank Would Feel Credit-Negative Pinch from Poland's Draft Foreign Currency Mortgage Bill

» BN Bank Commercial Mortgage Portfolio Wind Down Is Credit Positive for SpareBank 1 Alliance Banks

» Societe Tunisienne Recapitalization Would Pave the Way for Credit-Positive Restructuring

» Bank of Georgia Completes Legal Restructuring, a Credit Positive

Sovereigns 20

» Panama Lowers Capital Expenditures and Reduces Its Fiscal Deficit, a Credit Positive

» Greek Parliament Okays Third Bailout Agreement, a Credit Positive, but Implementation Risk Is High

» France's Stagnating Second-Quarter Growth Raises Likelihood of Missing 2015 Fiscal Targets

» New Currency and Oil Price Declines Exacerbate Russia's Recession

» Zambia's Worsening Power Crisis Is Credit Negative

» China Advances Exchange Rate Reform, a Credit Positive

» Sendai 1 Nuclear Reactor Powers Up, a Credit Positive for Japan

US Public Finance 32

» Wayne County, Michigan, Advances Its Fiscal Recovery with Consent Agreement, a Credit Positive

Securitization 34

» Shellpoint's Newest RMBS Deal Improves Rep & Warranty Effectiveness

RATINGS & RESEARCH Rating Changes 35

Last week, we downgraded Barrick Gold, ONEOK, AGL Capital, Itaipu Binacional, Origin Energy, Origin Energy Finance, Banco de Desenvolvimento de Minas Gerais, Agência de Fomento Paraná, BNDES Participações, Itaúsa - Itaú Investimentos, Dibens Leasing, ACE Seguradora, Chubb do Brasil Companhia de Seguros and Munich Re do Brasil Resseguradora. In Brazil, we downgraded the sovereign, 12 banks, the cities of Belo Horizonte and Rio de Janeiro, and the states of Minas Gerais, Maranhao, Parana and Sao Paulo. We upgraded Lafarge, Level 3 Communications and Vulcan Materials, among other rating actions.

Research Highlights 44

Last week, we reported on European pharmaceuticals, Argentina’s presidential election, North American covenant quality, Australian mining services, US hospitals, US technology and electronics manufacturing services in China, North American independent E&P, big US retailers, US apparel companies, Woolworths and Coles in Australia, global aluminum producers, global miners, Chilean retail, US unregulated power and project finance, Australian infrastructure, US merchant power, US coal, global bank risk governance, collective investment trusts, insurance company credit spreads, Mozambique, India, Argentina, German social housing, US local governments, US states, Australian RMBS and covered bonds, US CLOs, Chinese and Indian auto ABS, Japanese ABS & RMBS, Australian RMBS and US CMBS, among other reports.

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