MOODYS.COM

3 DECEMBER 2012

NEWS & ANALYSIS Corporates 2 » NCR Corp.'s Planned Retalix Acquisition Is Credit Negative » Dividend Announcements Since US Election Leave Creditors

Empty-Handed » AVG's Renewal of Advertising and Search Contract with Google

Is Credit Positive

Infrastructure 6 » Argentina Raises Utility Rates, a Credit Positive for

Distribution Utilities

Banks 7

» Iceland's Housing Financing Fund Wins Initial Approval for Capital Injection

» France's Proposals on Bank Resolution and Speculative Activities Are Credit Positive

» European Commission Okays Credit Positive Restructuring Plans for Four Spanish Banks

» China Lowers Merchant Fees for Bankcards, a Credit Negative for Banks

» Basel III Capital Rules for Taiwanese Banks Are Credit Positive » Indonesia's Higher Capital Requirements and Multi-Licensing

for Banks Would Be Credit Positive

Asset Managers 18

» Short Duration ETFs Are Credit Positive for Money Market Managers

» Banorte's Acquisition of Afore Bancomer Is Credit Positive

Sovereigns 22 » El Salvador's $800 Million Bond Issuance Is Credit Positive » Belize's Revised Debt Restructuring Offer Is Credit Positive

US Public Finance 25

» New York Transit Authority’s Hurricane Sandy Debt Issuance Would Be Credit Negative

Accounting 27

» Revised IASB Proposal on Financial Instruments Is Positive for Investors

RATINGS & RESEARCH Rating Changes 29

Last week we downgraded Alere, Hewlett-Packard, inVentiv Health, Western Union, Caja Laboral, Commerce Bank of Missouri, Hypo Tirol, Siena Italy, 56 tranches of four US prime jumbo RMBS deals, and upgraded Consort Healthcare, among other rating actions.

Research Highlights 38

Last week we published on EMEA telecom service providers, Asia steel, global drilling and oilfield service, US retail, US healthcare, US gaming, US packaging, North American auto parts, North American capital goods, China property, Sweden banking system, Cyprus banking system, US banks, asset managers, Lebanon, India, Botswana, El Salvador, US public finance housing, US auto ABS, Spanish RMBS, and Asia securitization, among other reports.

RECENTLY IN CREDIT OUTLOOK

» Articles in last Thursday’s Credit Outlook 43 » 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 3 DECEMBER 2012

Corporates

NCR Corp.’s Planned Retalix Acquisition Is Credit Negative

Last Wednesday, NCR Corp. (Ba1 review for downgrade) said it agreed to acquire Retalix Inc. for a net cash consideration of $650 million. The planned acquisition will increase NCR's debt and likely delay its deleveraging, making it credit negative. The Retalix acquisition, which NCR expects to complete in the first quarter of 2013, would also add execution risk while the management team is still integrating its 2011 acquisition of Radiant Systems, a manufacturer of point-of-sale software for hospitality and specialty retail clients.

The Radiant deal and the agreement to acquire Retalix, which makes software for retailers, are in line with NCR’s strategy of expanding its offerings of higher-margin software and services. The company’s financial services segment is the leading provider of automated teller machines (ATMs), payment processing hardware and related software, and its retail solutions segment is the number-two supplier of point-of-sale checkout terminals. But increasing competition, displacement risk from low-end ATM rivals and the emergence of cloud-based payment systems are driving the company to expand into new industry verticals.

A near-term consequence of NCR’s strategy is elevated leverage. The company’s adjusted debt/EBITDA of around 4.5x is high for its rating category, the result of borrowings used to execute the Radiant acquisition and its decision in 2012 to offer a lump-sum buyout to roughly 19,000 eligible US pension plan participants.

The company’s debt is poised to increase with the pending completion of the Retalix acquisition. In response, we placed NCR’s ratings under review for downgrade on Thursday. Our review will focus on various aspects of the planned acquisition, including the ultimate debt financing for the deal, the company’s updated timeframe to reduce adjusted debt/EBITDA leverage and its longer-term strategies to address its pension underfunding.

Gerald Granovsky Senior Vice President +1.212.553.4198 gerald.granovsky@moodys.com

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

Dividend Announcements Since US Election Leave Creditors Empty-Handed

Last Thursday, Regal Entertainment Group (B1 stable) announced a special $155 million dividend, joining a growing list of US companies since the 6 November presidential election that have announced plans to pay $10 billion in one-time dividends to shareholders before year end, putting creditors at a disadvantage. Almost all dividends hurt debtholders, regardless of how they are funded. Cash-funded dividends deplete a company’s cash balances, leaving less liquidity to service outstanding debt. Debt-financed dividends increase leverage.

Many companies believe this year may be their best chance to distribute value to shareholders at the nominal tax rate of 15%. Beginning next year, when Bush-era tax cuts expire, the tax rate on dividends could spike to as high as 39.6% (the top-end of taxpayers’ ordinary tax rate) unless Congress is successful in avoiding this aspect of the so-called fiscal cliff.

Dividends have an immediate negative financial effect, but can also have longer-range implications to credit, especially when funded with incremental leverage. A weaker balance sheet creates an immediate deterioration in the company’s financial condition. However, the damage can be more than temporary when the dividend is relatively large, requiring significant cash or incremental leverage. It may take several quarters, or even years, to rebuild cash balances or pay down dividend-related debt, which can lead to negative outlooks, or even downgrades. Indeed, we downgraded the corporate family ratings of 27% of the 35 (mostly private-equity sponsored) companies that announced dividend recapitalizations in the third quarter,1 and almost half the companies financed the dividend with additional leverage, a key ratings driver.

Beyond the direct financial effect, these special dividends can have negative implications for qualitative factors we consider in our ratings methodologies. Specifically, we will reconsider our scoring of a company’s financial policy when a company’s distribution was unexpected or misaligned with its stated policy.

After the election, nearly 20 rated public and private non-financial companies announced their intention to pay special dividends totaling approximately $10 billion, and we expect many others to follow in the coming days. Companies both large and small in a variety of industries and across the ratings spectrum have committed funds. The exhibit below lists (only) the rated public companies that have announced more than $7 billion in dividends since 6 November.

1 See Debt-Funded Dividends Continue At a Strong Pace, 16 October 2012.

Jason Cuomo Vice President - Senior Accounting Analyst +1.212.553.7795 jason.cuomo@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

US Rated Public Corporates that Announced Special Dividends After 6 November

Special Dividend Divided By:

Issuer Rating Industry

Special Dividend

$ millions

Cash & Short Term

Investments Total

Equity Retained Earnings

Cash Flow From Operations (last

12 months)

Net Income (last 12

months)

Costco Wholesale Corp. [1] A1 Stable Retail $3,070 63% 25% 39% 100% 180%

Las Vegas Sands Corp. Ba2 Positive Gaming $2,270 61% 25% 87% 78% 149%

Brown-Forman Corp. A1 Stable Alcoholic Beverage $853 236% 40% 28% 158% 157%

Carnival Corp. (P) Baa2 Stable Lodging $388 68% 2% 2% 12% 27%

Westlake Chemical Corp. Baa3 Stable Chemical $250 21% 12% 16% 40% 79%

Dillard's Inc. Ba3 Stable Retail $236 189% 11% 7% 40% 75%

Regal Entertainment Group B1 Stable Miscellaneous Industries $155 62% -28% 464% 49% 139%

Boise Paper Holdings, LLC Ba2 Stable Paper & Forest Products $72 70% 9% 44% 78% 2000%

$7,294 65% 14% 19% 64% 123%

Note: The exhibit excludes firms with regularly scheduled dividends for December rather than early 2013. We generally do not consider marginal changes in the timing of regular dividends to have a credit effect. Financial metrics were calculated from the latest balance sheet dates, which vary by company primarily because of different fiscal year-ends. 1 Costco is issuing up to $3.5 billion in debt to fund its tax-driven dividend.

Source: Moody’s, Edgar

Dividends announced for this public company subset amount to an average distribution from equity of 14% and retained earnings of 19%. The standard payout ratio (dividends/ last-12-months net income) averaged 123%.

In total, announced dividends averaged 65% of cash and short-term investments and 64% of cash flows from operations (for the last 12 months) for this subset. The less cash available to fund dividends, the more likely companies are to use leverage.

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

AVG’s Renewal of Advertising and Search Contract with Google Is Credit Positive

Last Wednesday, security software company AVG Technologies N.V. (B1 stable) announced that it had signed a new internet search and advertising services agreement with Google. A key highlight of the new agreement is its non-exclusive nature, a credit positive.

AVG has grown a large user base of around 143 million, some 15 million of whom are paying subscribers while the rest use AVG’s free software products. The company has successfully grown its user base through its so-called “freemium” business model, in which it offers a product for free but charges a premium for advanced features or functionality. However, significant challenges remain to monetise this user base.

AVG’s internet search and advertising services agreement with Google, and previously with Yahoo!, has allowed it to indirectly monetise its user base and has been the dominating factor behind revenue growth. The large volume of AVG users is attractive to search providers such as Google. The relationship works with AVG’s safe search technology, which Google currently powers. This drives traffic to Google, which in turn leads to some users accessing sponsored links, or hyperlinks that advertisers pay Google to prominently display in web search results. Google receives a fee from the sponsored link and then shares this revenue with AVG if a user accessed the link via AVG’s safe search technology.

We have previously viewed these commercial partnerships as credit positive because they help drive brand awareness, user penetration, improve customer stickiness and generate recurring revenue outside of traditional subscription software. However, these platform-derived revenues have become a significant proportion of AVG’s total revenues, approximately 45% for the nine months ended 30 September. This concentration of revenues from a single source brings its own risks, such as the loss of a large proportion of revenues if the contract were not renewed, and so the non-exclusive nature of the new Google contract is beneficial to AVG because it will allow the company to pursue additional opportunities with other search providers and aggregators.

In the first nine months of 2012, platform-derived revenues (specifically the Google contract) contributed $118 million of revenues, up from $68 million, or 34% of total revenues, a year earlier.

AVG has continued to outperform its earnings guidance through 2012, prompting the company to increase its year-end 2012 revenue guidance to $354-$358 million versus $272 million in 2011.

Based in the Netherlands, AVG is the world's fourth-largest internet security company in terms of installed user base, providing security software to individuals and small and medium-sized businesses. It has approximately 140 million active users.

Robert Syms Associate Analyst +44.20.7772.1947 robert.syms@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

Infrastructure

Argentina Raises Utility Rates, a Credit Positive for Distribution Utilities

Last week, Argentine regulatory authorities for electric and gas distribution utilities announced a new fixed charge for electric and gas consumers that will increase utilities’ depressed revenues and increase cash flows. The new charge is credit positive for the utilities because it will help them meet their capital expenditure needs.

On 27 November, Ente Nacional Regulador de la Electricidad (ENRE), the electricity regulator in Resolution 347/2012 authorized the introduction of a new, higher fixed charge. The charge will vary, ranging from ARS4 ($0.82) for low residential consumption to ARS300 ($62.00) for commercial consumers. ENRE also increased the monthly charge for industrial users by 22%-37%, depending on their power usage.

On 29 November, Ente Nacional Regulador del Gas, the gas regulator (Enargas), released a similar new fixed charge authorization in Resolution 2407/2017. It too will vary according to consumption levels and the category of users from ARS4-ARS2000.

Resolution ENRE 347 applies to Empresa Distribuidora Norte S.A. (EDENOR, Caa1 negative) while Resolution ENARGAS 2407 applies to MetroGas S.A. (Caa3 negative), Gas Natural Ban S.A. (B3 negative) and Camuzzi Gas Pampeana S.A. (B3 negative).

For these companies, the new charges will result in additional cash flow. Although the companies are required to use those additional funds for capex – mainly network maintenance and expansion – it will translate into more financial flexibility for all of the companies, given the pressure their cash flows and liquidity have had as a result of frozen tariffs and high inflation.

We also think this announcement re-introduces the issue of the tariff renegotiation process among the federal authorities, regulators and the distribution companies, which has been sidelined for more than five years. These companies’ fundamental position, however, remains unchanged as they still lack a clear mechanism or a tariff process that allows them to recover their increasing costs in a timely and effective manner.

Daniela Cuan Vice President - Senior Analyst +54.11.5129.2617 daniela.cuan@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

Banks

Iceland’s Housing Financing Fund Wins Initial Approval for Capital Injection

Last Tuesday, the Icelandic government (Baa3 negative) announced its intention to recapitalise the Housing Financing Fund (HFF, Baa3 negative), the government-owned mortgage lender. The government intends to increase HFF’s capital by up to ISK13 billion (€79.3 million), increasing the fund’s capital ratio to above 3% as of early 2013, from 1.4% at end-June 2012. Although the capital ratio remains poor compared to that of commercial banks, the planned recapitalisation is credit positive for HFF because it demonstrates the government’s commitment to the mortgage lender.

HFF has historically enjoyed an important role in the Icelandic economy, providing long-term stable lending for housing on manageable terms, but it’s been struggling financially for many years. Insufficient interest margins, increased competition from Iceland’s commercial banks following their recovery since their predecessors failed in 2008, and higher non-performing loans in tandem with the weakened economy and the government’s debt mitigation scheme have made profitability poor. The Icelandic government’s previous ISK33 billion recapitalisation of HFF in December 2010 was offset by ISK34.8 billion in provisions during fourth-quarter 2010.

HFF reported a capital ratio of 1.4% at end-June 2012, making it increasingly difficult for the fund to absorb further losses; the government has estimated that HFF’s capital will be exhausted by year end without recapitalisation.

HFF’s capital ratio is substantially below those of Iceland’s commercial banks, which averaged 20.8% at end-June 2012. The fund’s low capital reflects its government ownership and the government guarantee on its liabilities. HFF’s challenges include a nearly 40% decrease in new lending during the first six months of 2012 versus the year-ago period, as well as increased loan prepayments, and its own inability to prepay its historically higher-cost funding.2 HFF must also deal with more problem loans, which account for 15.1% of gross loans at end-June 2012, compared to 14.7% at the beginning of the year.

The government is reconsidering HFF’s role following last week’s recommendations from the government working group that included the capital increase.

The working group recommended transferring HFF’s stock of repossessed properties, which are only partly rented out, to a separate government company to minimise any losses or additional costs. This would remove the additional administration and maintenance costs, and risk for further asset decline from HFF and is credit positive for the mortgage lender. The stock of repossessed properties on HFF's balance sheet increased by 28% to 2,049 since the beginning of 2012. Of these properties, 41% are rented out, and the remainder are at different stages of the sale process. However, in our opinion, there is a low probability that the properties can be sold in the near future. According to the government’s working group, 80% of the repossessed properties are located outside the Reykjavik area. The commercial banks’ lending is concentrated within the greater Reykjavik area, so that alternatives to HFF funding outside the capital are more limited.

2 See Iceland’s Housing Financing Fund Loses Share to Commercial Banks, a Credit Negative, 16 July 2012.

Jessica Svantesson Associate Analyst +44.20.7772.1564 jessica.svantesson@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

France’s Proposals on Bank Resolution and Speculative Activities Are Credit Positive

Last Tuesday, the French Ministry of Finance presented a proposal on reforming the regulatory framework on bank supervision/resolution and certain speculative activities to the government advisory committee for regulatory affairs. While the draft law is not yet public and will not be submitted to the government until 19 December, Reuters and other news services obtained the proposal.

Based on our read of the documents, the reform proposal is credit positive for senior creditors because it would increase bank oversight and resolution powers while leaving senior debt out of the resolution scope. More modestly, it also demands ringfencing deposit-taking institutions’ riskiest speculative activities, although the scope of concerned activities is likely to be very limited.

A positive credit development for senior creditors is the fact that the new law would result in a more intrusive bank oversight (e.g., closer monitoring of boards of directors) and in far-reaching resolution powers being granted to the Autorité de Contrôle Prudentiel (ACP). The draft law seeks to address numerous obstacles confronting supervisory authorities dealing with distressed banks, including the sense that they lack powers to take swift and decisive action towards ailing institutions. The ACP will be empowered notably to impose and amend a bank’s “living will,” name temporary administrators, lay off top managers, sell branches of activity, create bridge banks, make use of the deposit guarantee fund for resolution purposes and force losses on subordinated creditors in a going concern scenario.

This new resolution framework is credit positive for senior unsecured creditors because they will not be included in the resolution (i.e., the ACP will not be able to impose losses on senior debt in a going concern scenario), and will benefit from stricter oversight. In this respect, the French proposal is more specific and less harmful for senior creditors than some of the already existing resolution frameworks, in particular the Danish or German resolution frameworks. The thrust of the new framework is in keeping with the European Union (EU) proposal on bank resolution; while the EU proposal is still under discussion, it already provides detailed proposals that the French Ministry of Finance has taken on board (e.g., the ability to set up a bridge bank).

Also under the proposed law, banks will have to ringfence activities considered speculative, including proprietary trading and financial operations creating non-collateralised counterparty risks with leveraged investment trusts (i.e., hedge funds) and other similar investment vehicles, when these activities are more than a specific level set by the Ministry of Economic Affairs. In addition to being banned from taking retail deposits, the separate subsidiaries will be forbidden from doing high-frequency trading and financial operations with agricultural raw materials underlying them. These entities will remain subject to banking regulation and supervision on both a solo and consolidated basis.

We believe this ringfencing is credit positive for senior creditors because it seeks to limit the riskiest and purely speculative activities. However, many activities are excluded from ringfencing and will stay in the deposit-taking institution, minimizing the protections ringfencing affords. The excluded activities relate to providing investment services to clients, hedging the bank’s risks, market-making (unlike what the EU-commissioned report recommended), prudent treasury management, and investment activities.

The proposed law will not cause a major overhaul of French banks’ activities and therefore any franchise damage will be minimal. The transfer of activities, which is to be completed by July 2015, should be limited. It is also likely that banks will choose to stop the concerned activities rather than create dedicated subsidiaries, in our opinion.

Guillaume Lucien-Baugas Analyst +33.1.5330.3350 guillaume.lucien-baugas@moodys.com

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

European Commission Okays Credit Positive Restructuring Plans for Four Spanish Banks

Last Thursday, the European Commission (EC) approved the restructuring/resolution plans for the four Spanish banks in which the state-owned FROB (Fondo de Restructuracion Ordenada Bancaria) has a majority stake. The approval allows the banks' timely recapitalization and protects depositors and senior debtholders of the four banks and is also credit positive for the Spanish financial system as a whole. The EC’s approval followed the Bank of Spain’s approval on Wednesday.

The plan’s approval is a key milestone in the memorandum of understanding (MoU) signed by Spanish and European authorities on 20 July that set the framework of the financial assistance programme and recapitalization of Spain’s (Baa3 negative) banking sector. The EC approval was a prerequisite for the banks to receive capital support before year-end 2012. This milestone, together with the strict compliance with the MoU’s restructuring schedule, is a positive step that will benefit all Spanish banks by giving some momentum to progress in the system’s restructuring.

The strict compliance of the restructuring measures imposed by the EC paves the way for ensuring the long-term viability of Banco Financiero y de Ahorros (BFA, B2 review direction uncertain)/Bankia (Ba2 review uncertain; E+/b2 review uncertain),3 NCG Banco SA (B1 review for downgrade; E+/b2 review for downgrade), and Catalunya Banc (B1 review for downgrade; E+/b2 review for downgrade.

The recapitalization of the four banks addresses their combined €37 billion of estimated capital shortfalls. These banks hold close to 20% of financial system assets and account for the bulk of the €54 billion in capital needs identified by management consulting firm Oliver Wyman under its adverse scenario for the entire banking system.

In line with the principles of European rules on state aid, the approved plans seek to limit the effect on public sector debt. To this end, shareholders and holders of junior instruments will incur losses, which haven’t yet been defined, while senior creditors will be fully protected. Even in the case of Banco de Valencia S.A. (Caa1 developing; E/ca stable), protection for senior creditors has been granted despite its status as the only institution (so far) going through an orderly resolution process.

The European Stability Mechanism’s capital support for each bank is shown in the exhibit below. The difference between the European Stability Mechanism support and the capital needs the Oliver Wyman team identified is explained by the transfer of real estate assets to the so-called “bad bank” this month, and the burden sharing on junior instruments. The bidding process for Banco de Valencia explains the higher capital support received versus the Oliver Wyman calculation.

Breakdown of Capital Support vs. Oliver Wyman’s Estimated Capital Needs, € billions

Oliver Wyman's Stress Test Capital Support

BFA/Bankia €24.743 €17.959

Catalunya Banc 10.825 9.084

NCG Banco 7.176 5.425

Banco de Valencia 3.462 4.500

Total €46.206 €36.968

Source: Bank of Spain and Oliver Wyman

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

credit assessment and the corresponding rating outlooks.

Maria Cabanyes Senior Vice President +34.91.768.8214 maria.cabanyes@moodys.com

Maria Jose Mori Vice President Senior Analyst +34.91.768.8227 mariajose.mori@moodys.com

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

The approved restructuring measures for BFA/Bankia, NCG Banco and Catalunya Banc, also require a 60% reduction of these banks’ balance sheets by 2017 from 2010 levels. As a result, banks will be forced to divest non-core businesses outside their retail activity in home regions. Such drastic deleverage together with the upcoming capital injections will significantly improve banks’ liquidity, which is also a key goal of the restructuring plans.

Banco de Valencia has been acquired by CaixaBank through a competitive tender offer and will cease to exist as an independent legal entity.

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

China Lowers Merchant Fees for Bankcards, a Credit Negative for Banks

Last Tuesday, Xinhua News reported that the People’s Bank of China (PBoC) circulated a notice earlier in the month stating that the State Council had approved lower merchant fees for bankcard transactions, effective 25 February. Bankcard merchant fees would be 1.25% for entertainment-related purchases, 0.38% for purchases related to daily living, and 0.78% for other types of purchases (see Exhibit 1). Lower merchant fees are credit negative for Chinese banks because although the card business is a minor contributor to income and profits, lower merchant fees will undermine a promising channel for banks to grow their fee-based income.

EXHIBIT 1

Merchant Fee Schedule for Bank Cards

Business Category Service fee charged by card issuers Network service fee charged by clearing

institutions Benchmark rate for service fee charged by

acquiring banks*

New standard Existing standard New standard Existing standard New standard Existing standard

Catering & entertainment: catering, hotels, entertainment, jewelry, arts and crafts, real estate, automobile sales

0.9%; ceiling of RMB60 for real

estate and automobile sales

1.4%, ceiling of RMB40 for real

estate and automobile sales

0.13%; ceiling of RMB10 for real

estate and automobile sales

0.2%; ceiling of RMB5 for real estate

and automobile sales

0.22%; ceiling of RMB10 for real

estate and automobile sales

Negotiated between banks and the

merchants, usually 0.4%

General: department stores, wholesale, training, intermediaries, travel agencies, entrance tickets for scenic spots

0.55%; ceiling of RMB20 for wholesale

0.7%; ceiling of RMB16 for wholesale

0.08%; ceiling of RMB2.5 for wholesale

0.1%; ceiling of RMB2 for wholesale

0.15%; ceiling of RMB3.5 for wholesale

Negotiated between banks and the

merchants, usually 0.2%

Daily life-related: supermarkets, warehouse stores, utilities, gas stations, transport tickets

0.26% 0.35% 0.04% 0.05% 0.08% Negotiated between banks and the

merchants, usually 0.1%

Social welfare: public hospitals and schools

0% 0% 0% 0% Per service cost Negotiated between banks and the

merchants

*Actual service fee charged by acquiring banks has a floating range of ±10% from the benchmark rate.

Source: People’s Bank of China

We estimate that for the commercial banks we rate, the reduction in merchant fees would reduce their merchant fee income by nearly 30% and cause aggregate pre-tax profit to decline by 1.0%-1.5%. During the first-half of 2012, bankcard fee income4 surged 36% year over year for the Chinese banks we rate, while total fee and commission income grew 6%. Without the increase in bankcard fee income, these banks’ total fee and commission income would have risen only 0.4% because other fees, such as those related to consultancy and advisory services and lending, declined. Indeed, many banks have come to view their bankcard business as a key growth engine that will help offset the negative

4 The bankcard fees include merchant fees, fees charged on installation payments, annual fees, commission fees for deposits and

withdrawals using the cards, and penalties. The merchant fee includes fees charged by banks as a card issuer and as an acquiring bank.

Katie Chen Associate Analyst +86.10.6319.6569 katie.chen@moodys.com

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

pressure on their lending business owing to lower interest rates and deregulation and help stabilize their more cyclical advisory and consulting businesses.

Currently, the merchant fees that banks and merchants negotiate average 1%-2% depending on the type of purchases, including service fees charged by the banks issuing the cards (the card issuer), clearing institutions (such as UnionPay, VISA, or MasterCard) and the banks handling the payment for the merchants (the acquiring bank).

The fee reduction threatens to increase the risks within banks’ credit card loan portfolios in a number of ways. First, banks may try to accelerate volume growth to make up for the loss in fee income. Using the entertainment segment as an example, the reduction of merchant fee to 1.25% from 2% implies that banks would need a 60% jump in transaction volume just to maintain current income. This is far higher than the 36.6% growth recorded in the third quarter, and raises the risk that banks will adopt more aggressive competitive strategies, including lowering their underwriting and card issuance standards, to expand their volume.

Another risk is that banks may attempt to increase their bankcard fee income by promoting the usage of their cards for overdrafts or installment payments. Although credit card loans carry higher interest rates, the credit risk is also higher, given the customers who overdraft or borrow on the cards usually have weaker credit profiles.

The fee reduction will have a greater effect on joint stock commercial banks, whose revenue contribution from bankcards is higher (see Exhibit 2). Such banks include China Guangfa Bank (Ba2 stable; D-/ba3 stable),5 Ping An Bank (Ba1 stable; D/ba2 stable), China Everbright Bank (Baa3 stable; D-/ba3 stable), Bank of Communications (A3 stable; D+/ba1 stable) and China Merchants Bank (Baa3 stable; D+/ba1 stable).

5 The ratings shown are the banks deposit rating, its standalone bank financial strength rating/baseline credit assessment and

the corresponding rating outlooks.

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

EXHIBIT 2

Bankcard Fee Contribution for Rated Chinese Commercial Banks

Bankcard Fee as Percent of Net Fee and

Commission Income Bankcard Fee as Percent of Total

Operating Income Bankcard Fee as Percent of PTE

Bank and Rating 2011 1H2012 2011 1H2012 2011 1H2012

Industial and Commercial Bank of China 17.0% 19.2% 3.7% 4.0% 6.3% 6.6%

A1 stable; D+/ba1 stable

China Construction Bank 17.1% 18.5% 3.7% 4.0% 6.8% 6.6%

A1 stable; D+/ba1 stable

Bank of China 16.6% 19.7% 3.3% 3.8% 6.4% 7.0%

A1 stable; D/ba2 stable

Agricultural Bank of China 15.7% 17.9% 2.9% 3.3% 6.8% 6.7%

A1 stable; D/ba2 stable

Bank of Communications 36.2% 33.2% 5.6% 4.9% 10.8% 9.1%

A3 stable; D+/ba1 stable

China Merchants Bank 27.9% 26.9% 4.5% 4.6% 9.3% 8.5%

Baa3 stable; D+/ba1 stable

Shanghai Pudong Development Bank 14.3% 14.9% 1.4% 1.4% 2.7% 2.6%

Baa3 stable; D/ba2 stable

China CITIC Bank 25.8% 30.0% 3.0% 3.7% 5.5% 6.3%

Baa2 stable; D/ba2 stable

China Everbrigh Bank 25.9% 36.1% 3.9% 5.9% 7.5% 10.3%

Baa3 stable; D-/ba3 stable

Ping An Bank 32.0% 37.3% 3.9% 5.3% 8.8% 11.7%

Ba1 stable; D/ba2 stable

China Guangfa Bank 74.3% not available 11.0% not available 25.0% not available

Ba2 stable; D-/ba3 stable

Source: Banks’ interim and annual reports, Moody’s calculation

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

Basel III Capital Rules for Taiwanese Banks Are Credit Positive

Last Monday, Taiwan’s Financial Supervisory Commission (FSC) announced revised capital rules and a new leverage ratio for Taiwanese banks in accordance with Basel III. These Basel III-compliant capital rules are credit positive for Taiwanese banks because they set higher benchmarks for capital adequacy and quality, and require the buildup of additional capital as a countercyclical buffer to excess credit growth. This capital strengthening is important to most banks given their modest loan-loss reserve coverage and weak profitability with which to absorb losses.

These changes, which go into effect 1 January and are largely in line with Basel III rules, follow the FSC on 13 November indicating that eight related regulations would reflect these new capital adequacy ratio requirements. Those regulations include the setup of domestic branches and capital reduction for bank subsidiaries of financial holding companies. Exhibit 1 below lists the FSC’s new minimum capital requirements.

EXHIBIT 1

Minimum Capital Adequacy Requirement Complies With Basel III Recommendations

2013 2014 2015 2016 2017 2018 2019

Total Capital Adequacy Ratio 8.0% 8.0% 8.0% 8.6% 9.3% 9.9% 10.5%

Tier-1 Capital Ratio 4.5% 5.5% 6.0% 6.6% 7.3% 7.9% 8.5%

Common Equity Capital Ratio 3.5% 4.0% 4.5% 5.1% 5.8% 6.4% 7.0%

Source: Financial Supervisory Commission

Although Taiwan’s banking system reported an average Tier 1 capital ratio of 9.38% as of September, Land Bank of Taiwan (Aa3 stable; D/ba2 stable)6 and Sunny Bank (unrated) would have a challenge meeting the new 8.5% threshold given their Tier 1 capital ratios are below 7%. Others, such as Taiwan Cooperative Bank (unrated), Taiwan Business Bank (unrated), and Shin Kong Bank (unrated), whose Tier 1 capital ratios are between 7% and 8% (see Exhibit 2), would also be challenged.

6 The ratings shown are the banks deposit rating, its standalone bank financial strength rating/baseline credit assessment and

the corresponding rating outlooks.

Ginger Kao Associate Analyst +852.3758.1317 ginger.kao@moodys.com

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

EXHIBIT 2

Tier-1 Capital Ratio for 38 Domestic Banks at September 2012

Tier-1 Capital Ratio Bank Name

< 7% Land Bank of Taiwan, Sunny Bank

7% - 8% Taiwan Cooperative Bank, Taiwan Business Bank, Shin Kong Bank, Bank of Panhsin,

COTA Commercial Bank, Bank of Kaohsiung,

8% - 8.5% First Commercial Bank, Taishin International Commercial Bank, HwaiTai Bank

> 8.5%

The Export-Import Bank of the Republic of China, Bank of Taiwan, Taipei Fubon Commercial Bank,

Huanan Commercial Bank, Changhwa Commercial Bank, Mega International Commercial Bank,

Cathay United Bank, Citibank Taiwan, The Shanghai Commerical & Savings Bank Ltd.,

Bank Sinopac, E.Sun Commercial Bank Ltd., Ta Chong Bank, Jih Sun International Commercial Bank,

EnTie Commercial Bank, Chinatrust Commercial Bank, HSBC Bank (Taiwan), Union Bank of Taiwan,

Standard Chartered Bank (Taiwan), Taichung Commercial Bank, King's Town Bank,

Far Eastern International Bank, Yuanta Commercial Bank, Cosmos Bank,

China Development Industrial Bank, Industrial Bank of Taiwan, Bank of Taipei, DBS Bank (Taiwan)

Source: Central Bank of Republic of China (Taiwan)

Many banks began reducing their cash dividend payouts to retain more internally generated capital. However, given their thin margins, some banks such as Land Bank of Taiwan will require fresh capital or will have to manage risk-weighted asset growth to meet the new capital requirements.

On top of the capital requirements that follow Basel III, the FSC in certain cases is imposing capital adequacy rules that are higher than those specified by the Basel Committee. Among them is a higher requirement for setting up of domestic branches, which, starting 1 January, will be at least two percentage points higher than the Basel-specified minimum ratios. Another will require a banking subsidiary of a financial holding company that plans to reduce capital to maintain a 12.5% capital adequacy ratio, a 10.5% Tier 1 capital ratio and a 9% common equity ratio.

The only major inconsistency between the FSC’s new rules and the Basel Committee’s rules regards the regulatory capital adjustment for banks’ significant investments in capital instruments of other financial institutions that are outside the scope of consolidation. Although Basel III requires a complete deduction from common equity Tier 1 capital for common stock investments, the FSC requires that banks deduct 25% of such investments from common equity Tier 1 capital, 25% from other Tier 1 capital and the rest from Tier 2 capital.

Among our rated banks, Bank of Taiwan (Aa3 stable; D+/baa3 stable) would be the most affected by adhering to the Basel Committee’s adjustment rule owing to its significant common stock investments in other financial institutions such as Hua Nan Financial Holding Company (in which it owns a 21.23% stake), Taiwan Business Bank (19.27%), Taiwan Life Insurance (18.94%) and Taiwan First & Marine Insurance Co., Ltd (17.76%).

The new leverage ratio would also benefit Taiwanese banks because it would help constrain banks’ leverage, although most banks we rate reported leverage ratios of 4%-7% as of June, above the FSC’s minimum of 3%.

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

Indonesia’s Higher Capital Requirements and Multi-Licensing for Banks Would Be Credit Positive

On 23 November, Darmin Nasution, the governor of Bank Indonesia, Indonesia’s central bank, announced that the central bank would soon tighten capital requirements and introduce a multi-licensing system on banks. The proposals are credit positive for Indonesian banks because an increase in minimum capital requirements would strengthen their loss-absorption cushions. Although Indonesia’s banking system’s core Tier 1 ratio was 15.5% as of September,7 we still see added benefits from the new rule because it would ensure that Indonesian banks permanently maintain their currently high capital levels.

Specifically, the central bank plans to revise its minimum capital adequacy requirements and its calculation based on more comprehensive risk-based capital. According to Mr. Nasution, the new regime would require banks, including foreign bank branches, “to provide the minimum capital in compliance with their risk profile ranging from 8% to 14%,” from the current 8%. In addition, he said a framework to regulate bank activities based on capital would be forthcoming, within which Bank Indonesia would classify banks into four categories depending on their Tier 1 capital size, and allow banks in the higher categories broader business scope and wider geographic reach.

We expect the proposed categorization by Tier 1 capital size to lead to more efficient banks by shifting market power towards the larger banks and promoting consolidation. Specifically, the explicit link between the new capital threshold and risk profiling would likely mean that larger banks would enjoy lower capital requirements than smaller banks owing to their lower risk credit profiles.

Larger banks, by virtue of their size, parentage and public listing, already enjoy high capital levels and have greater access to capital. Consequently, we expect them to fall into the highest license category, which would allow them the broadest range of activities and network outreach at the expense of smaller players. The exhibit below details the assets, market shares and capital ratios for the 10 largest Indonesian banks.

Indonesia’s 10 Largest Banks

Name Ratings Total Assets

IDR trillion Domestic Market

Share, Loans1 Domestic Market Share, Deposits1

Capital Adequacy Ratio

Tier 1 Capital Ratio

Bank Mandiri Baa3 stable; D/ba2 stable 558.4 12.4% 12.7% 15.7% 10.3%

Bank Rakyat Indonesia Baa3 stable; D+/ba1 stable 482.8 12.3% 12.6% 15.9% 10.2%

Bank Central Asia Baa3 stable; D+/ba1 stable 427.0 9.1% 11.5% 15.2% 9.8%

Bank Negara Indonesia Baa3 stable; D/ba2 stable 310.4 7.0% 8.0% 17.9% 11.9%

Bank CIMB-Niaga Baa3 stable; D/ba2 stable 190.6 5.3% 4.5% 15.6% 9.9%

Bank Danamon Indonesia Baa3 stable; D/ba2 positive 150.1 3.7% 3.1% 18.7% 15.7%

Pan Indonesia Bank Baa3 stable; D/ba2 stable 141.9 3.4% 3.1% 17.2% 10.4%

Bank Permata Baa3 stable; D-/ba3 positive 114.8 3.2% 2.8% 14.0% 7.3%

Bank internasional Indonesia Not rated 105.6 2.8% 2.6% 12.3% 7.3%

Bank Tabungan Negara Baa3 stable; D/ba2 stable 98.8 2.7% 2.1% 18.2% 8.8%

61.9% 63.0% 16.0% 14.0%

1 As of June 2012.

Note: The bank ratings shown in this exhibit are the bank’s deposit rating, its standalone bank financial strength rating/baseline credit assessment and the corresponding rating outlooks.

Source: Banks’ financial reports, Bank Indonesia, Moody’s

7 As of September 2012, the banking system reported a capital adequacy ratio of 17.4% and Tier 1 capital ratio of 15.5%. We

calculated that the 10 largest banks had an average capital adequacy ratio of 16.0% and Tier 1 capital ratio of 14.0.%.

Beatrice Woo Vice President - Senior Credit Officer +65.6398.8332 beatrice.woo@moodys.com

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

We have long believed that Indonesia’s large number of banks harmed overall bank credit quality. Of its 120 banks, the 10 largest banks control 63% of system deposits, leaving the smaller banks with difficulties achieving economies of scale.

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

Asset Managers

Short Duration ETFs Are Credit Positive for Money Market Managers

On 21 November, Charles Schwab Corp. (A2/P-1 stable) filed an offering document with the Securities and Exchange Commission (SEC) to launch the Schwab Active Short Duration Income ETF, a short duration, actively managed money market fund-like, exchange traded fund (ETF). These funds are credit positive for Schwab and other money fund managers, bolstering their fee income and potentially reducing their reliance on constant net asset value (CNAV) money market funds that could face capital set asides to establish fund level capital buffers under new regulations for CNAV funds that seem now more likely to be adopted in some form.

Investor demand for cash-like fluctuating net asset value products with higher fee rates than currently charged by traditional money market funds is credit positive for money fund managers such as Schwab, Legg Mason Inc. (Baa1 negative), BlackRock Inc. (A1 stable), Federated Investors (unrated) and Northern Trust Corp. (A1 stable), which currently offer or are planning to offer similar products. These products appeal to short-term investors with varying risk appetites, who may move to them from traditional money market funds as well as other investments.

Taxable short-duration ETF products are now offered by at least five investment managers that have accumulated about $6 billion in inflows to date. The most seasoned of these offerings is the PIMCO Enhanced Short Maturity Exchange-Traded Fund (MINT), which invests in corporate securities and has attracted $2 billion in assets under management. Schwab’s venture into the actively managed cash sphere with an ETF offering is noteworthy given its position as the sixth largest money market fund manager in the US with net assets of about $155 billion.

ETFs are priced and traded throughout the day and can be bought and sold like common stocks in the secondary market. Unlike mutual funds that settle trades either on the same day, as is the case with many institutionally oriented money market funds, or the next day, ETFs are subject to a three-day settlement period. Another distinguishing characteristic of ETFs is that they might trade at slight premiums or discounts to their net asset value (NAV), which means that investors realize upfront that their investment is at risk, unlike CNAV money funds.

While Schwab’s pricing structure has not yet been disclosed, PIMCO’s MINT ETF is illustrative of the higher fees short duration funds may be able to levy. MINT’s expense ratio at 35 basis points is 10 basis points higher than the average expense ratios applicable to retail and institutional prime money funds after fee waivers and reimbursements, or an additional $1 million in revenues per $1 billion in assets under management (see exhibit). Given the compressed interest rate environment amid the Federal Reserve’s accommodative monetary policy, which has been deemed by the Federal Open Market Committee likely to be warranted at least through mid-2015, it seems unlikely that CNAV managers will be able to lift current waivers and raise fees to the level of those charged by corporate short duration ETFs. Therefore, their money fund revenues will likely remain constrained for the next three years.

Henry Shilling Senior Vice President +1.212.553.1948 henry.shilling@moodys.com

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

Money Market Fund Average Charged Expense Ratios vs. Short-Duration ETFs

Note: Charged expense ratios for the month of October 2012. Source: iMoneynet and fund financial statements.

Actively managed short duration ETFs are an opportunity to manage assets for investors who have more predictable timing of cash flows and who are not constrained by gain or loss accounting practices. Furthermore, since ETFs are not money market funds subject to Rule 2a-7 of the Investment Company Act, the vehicles are less susceptible to calls on management company capital and will not be subject to any capital buffers that might be imposed on CNAV funds by future regulatory changes.

0

5

10

15

20

25

30

35

40

PIMCO MINT ETF Retail Prime Institutional Prime Retail Government Institutional Government

US Treasury ETFs

Basis

Poi

nts

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

Banorte’s Acquisition of Afore Bancomer Is Credit Positive

Last Tuesday, Mexico’s Grupo Financiero Banorte, S.A.B. de C.V. (GFNorte, unrated) and Mexico’s social security institute, Instituto Mexicano del Seguro Social (IMSS, unrated) announced that they would buy Banco Bilbao Vizcaya Argentaria, S.A.’s (BBVA, Baa3 negative; D+/baa3 negative)8 pension operation in Mexico, BBVA Bancomer Afore (Afore Bancomer, unrated). The $1.6 billion acquisition, which will occur through the purchaser’s pension business unit (afore) Afore XXI Banorte (unrated), is credit positive for Afore XXI Banorte because it will provide cost synergies and add volume to a scalable business.

Afore XXI Banorte will also have the potential to attract and retain more customers owing to its lower management fees. Mexico’s pension industry regulator, Comisión Nacional de Ahorro para el Retiro (CONSAR), stipulates that when two afores combine, the lower of the two management fees prevail, and in this case Afore XXI Banorte (including Afore Bancomer) will charge its customers a 1.16% management fee in 2013 versus its current fee of 1.24%.

Afore XXI Banorte’s ownership is evenly split between GFNorte, the holding company of Banco Mercantil del Norte, S.A. (Banorte, A3 stable; C-/baa2 stable), and IMSS. GFNorte and IMSS will each contribute 50% towards the purchase price. The parties expect to complete the transaction in first-quarter 2013, pending CONSAR’s approval.9

By incorporating Afore Bancomer, Afore XXI Banorte will become Mexico’s largest pension fund manager by number of clients, with about 11.8 million accounts, and assets under management (AUM), at over MXN500 billion. This more than doubles Afore XXI Banorte’s market share to 28% (see Exhibit 1) and cements GFNorte’s non-organic expansion strategy. Last week’s merger follows the fourth-quarter 2011 combination of the afores of Banorte and IMSS (XXI).

EXHIBIT 1

Afore Market Shares by Assets Under Management as of October 2012 Asset Manager Total AUM MXN million Market Share

Banamex 318,978 17%

Bancomer 279,290 15%

SURA 250,945 14%

XXI Banorte 237,252 13%

Profuturo GNP 214,937 12%

Principal 123,339 7%

PensionISSSTE 99,547 5%

Inbursa 98,226 5%

Invercap 93,888 5%

Coppel 60,790 3%

Metlife 52,223 3%

Azteca 9,247 1%

Afirme Bajío 5,751 0.30%

Total 1,844,413 100%

Source: Comisión Nacional del Sistema de Ahorro para el Retiro (CONSAR)

8 The ratings shown are the bank’s local currency deposit rating, its standalone bank financial strength rating/baseline credit

assessment and the corresponding rating outlooks. 9 According to Mexican regulation, a single afore should not manage over 20% of the system’s AUM unless ex-ante regulatory

approval is obtained.

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

Jose Angel Montano Assistant Vice President - Analyst +52.55.1253.5705 joseangel.montano@moodys.com

NEWS & ANALYSIS Credit implications of current events

21 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

Afore AUMs have posted strong growth rates since 2002, with a compound annual growth rate of 20% (Exhibit 2). Nevertheless, GFNorte’s acquisition of Afore Bancomer reflects the growing challenges faced by Mexican afores to maintain profitability in a volume-driven business in which CONSAR caps management fees and stipulates that fee hikes not exceed the average fee increase authorized in the prior year. CONSAR’s rule makes the afore business highly dependent on scale, account balances and pension fund performance rather than on the number of open accounts.

EXHIBIT 2

Afore Assets Under Managements 1998-October 2012

Source: Comisión Nacional del Sistema de Ahorro para el Retiro (CONSAR)

Afore XXI Banorte will increase competitive pressure on Afore Banamex (unrated), a subsidiary of Citigroup’s Banco Nacional de Mexico, S.A. (Banamex, A2 stable; C-/baa1 stable), which will become the second-largest afore. Afore XXI Banorte will also increase the competitive pressure on Colombian Afore Sura (unrated), the third-largest afore and a newcomer to Mexico’s pension industry, and on small bank afores such as Banco Azteca, S.A. (unrated) or BanCoppel, S.A. (withdrawn).

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Oct

-12

MXN

bill

ions

NEWS & ANALYSIS Credit implications of current events

22 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

Sovereigns

El Salvador’s $800 Million Bond Issuance Is Credit Positive

Last Wednesday, the government of El Salvador (Ba3 stable) issued an $800 million bond maturing in 2025 with a yield of 5.875%, the lowest yield since the country first accessed international capital markets in 1999. The bond was 6.4x oversubscribed. The bond issue is credit positive because it shields government finances from a put option on El Salvador’s 2023 bond that is exercisable in January. If the put option is not exercised, the government can use up to $400 million of the bond issue to retire debt, which is also credit positive.

Since the put option amounts to $800 million, last week’s issuance provides financial cover to the government. Investors will decide by 24 December whether to exercise the put option. They are allowed to do so if the bond falls below the strike price of $118; on 30 November, it was between $117 and $118.

If, as we expect, the option is not exercised, the government can use up to $400 million from the bond proceeds to retire short-term government debt (LETES), which amounted to $770 million in October. That would significantly lower the outstanding stock of LETES, as shown below, and lower roll-over risk. The remaining $400 million would be set aside to pre-finance the 2013 budget.

El Salvador’s Outstanding Short-Term Government Debt (LETES) $ millions

Note: LETES stock after $400 million retired is based upon stock as of October 2012. Source: Banco Central de Reserva de El Salvador and Moody's

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$ m

illio

ns

LETES LETES After $400 million Retirement

Sarah Glendon Assistant Vice President - Analyst +1.212.553.4534 sarah.glendon@moodys.com

NEWS & ANALYSIS Credit implications of current events

23 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

Belize’s Revised Debt Restructuring Offer Is Credit Positive

Last Thursday, the government of Belize (Ca negative) offered a revised set of indicative restructuring scenarios to holders of its $547 million bond due in 2029. Although the government has yet to finalize a formal debt exchange offer, the revised scenarios, which softened relative to the initial restructuring scenarios released in August (see exhibit), inflict smaller losses on investors and increase the odds of a successful debt exchange, a credit positive development that would provide Belize with much-needed liquidity relief.

Belize Restructuring Scenarios: August vs. November

August November August November

Type Par Par Discount Discount

Principal Haircut 0% 0% 45% 33%

Grace Period on Principal Repayment

15 years 10 years 5 years 5 years

Maturity 50 40 30 30

Coupon 2% 2.75% for first 5 years; 4.5% after

3.5% 4.5% for first 5 years; 6.75% after

Source: Government of Belize

We estimate that losses associated with the new scenarios would be in the range of 55%-65% in net present value terms, compared with implied losses of 70%-80% in the August scenarios. However, we expect the government to make further concessions to bondholders before the terms for the bond exchange crystallize.

The bond is Belize’s sole outstanding commercial foreign currency debt instrument and has been in default since the government failed to make a full coupon payment in August, citing significant financing shortfalls. Belize and its creditors remain in fundamental disagreement about the severity of Belize’s financial distress, evidenced by the drawn-out nature of the negotiations. However, we continue to expect the parties to reach a comprehensive agreement. The presence of a collective action clause and the relatively concentrated nature of the investor base should minimize the prospect of holdouts.

From our perspective, the following dynamics have combined to weaken the government’s negotiating position vis-à-vis bondholders:

» Continuing uncertainty about the size of the government’s liabilities in the form of compensation to the owners of two utilities nationalized between 2009 and 2011. Compensation estimates range from 6% to 30% of GDP. An ultimate judgment against the government that effectively reverses the nationalizations will reduce short-term financing needs and weaken the government’s case for an aggressive restructuring to reduce the face value of external debt.

» Positive economic fundamentals. We have revised our growth projections for 2012 to 3.5%, up from 2% at the beginning of the year. In addition, the government’s fiscal consolidation efforts have resulted in primary fiscal surpluses of around 2%, and there are no signs of distress in the external balance or the banking system – typical precursors to a sovereign default. These credit positive developments undermine the government’s case that the debt burden poses a clear and present danger.

» The government’s failure to secure a partial credit guarantee from the Inter-American Development Bank, an instrument effectively used as an incentive for investors to participate in several recent sovereign debt restructurings that involved large principal writedowns (St. Kitts and Nevis in 2012 and the Seychelles in 2009).

Edward Al-Hussainy Assistant Vice President - Analyst +1.212.553.4840 edward.al-hussainy@moodys.com

NEWS & ANALYSIS Credit implications of current events

24 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

» Government opposition to an International Monetary Fund (IMF) program. This stance, a repeat of Belize’s first restructuring in 2007, is in contrast to a majority of recent debt exchange exercises. IMF participation combines financial support with fiscal oversight and reforms post-restructuring. The absence of IMF oversight diminishes the likelihood that the government will stay on track with fiscal consolidation measures that are necessary to avoid another debt restructuring and will make it more difficult for the government to seek financial support from multilateral lenders post-restructuring.

Belize continues to face a combination of liquidity constraints and a significant debt overhang. Having committed to a comprehensive debt restructuring, the sovereign’s second since 2007, it is important for the government’s credit quality to achieve more than just temporary breathing room in the form of liquidity relief. Progress toward a comprehensive restructuring is credit positive, but ultimately Belize’s credit quality will hinge on reducing the face value of its external debt, which will drive post-restructuring debt sustainability and growth prospects.

NEWS & ANALYSIS Credit implications of current events

25 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

US Public Finance

New York Transit Authority’s Hurricane Sandy Debt Issuance Would Be Credit Negative

On 27 November, the Metropolitan Transportation Authority, NY (MTA, transportation revenue bonds A2 stable) said it may borrow up to $4.8 billion in short-term recovery notes during the next two years to help cover an estimated $5 billion in infrastructure damage and operating losses that Hurricane Sandy caused. The added debt is credit negative for the MTA, which currently has $32 billion of debt outstanding and plans for substantial capital borrowing over the next few years.

The MTA expects the Federal Emergency Management Agency (FEMA) and private insurance to reimburse about 75% of the note repayment costs. To cover the remaining 25%, the MTA plan would be to issue long term transportation revenue bonds or dedicated tax fund bonds (Aa3 stable).

Hurricane Sandy caused the worst damage in the combined transit, commuter rail, bridge, and tunnel system’s 108 year history. Preliminary cost estimates in the exhibit show $4.8 billion in infrastructure damage and $268 million of lost revenue and increased operating costs. The transit system suffered the majority of the infrastructure damage; capital repairs for flooded subway tunnels, and damage to stations and equipment account for about two thirds of storm-related costs.

MTA’s Projected Costs from Hurricane Sandy, $ millions Operating Capital Total

NYC Transit $148 $3,389 $3,537

Bridge and Tunnel Authority 59 778 837

Commuter Railroads [1] 48 455 503

MTA Bus 6 25 31

Other 7 60 67

MTA Capital Construction Co. 48 48

Total $268 $4,755 $5,023

Note: [1] Metro-North Railroad and Long Island Rail Road

Source: MTA November 2012 Financial Plan

Final settlement and distribution of FEMA and insurance reimbursements could take two to three years. Through different operating divisions and bond security pledges, the MTA plan would issue up to $2.9 billion of storm-recovery anticipation notes in 2013 and $1.9 billion in 2014. Depending on the final cost, the Tri-Borough Bridge and Tunnel Authority, NY (Aa3 stable) would sponsor about $800 million of these notes to finance repairs to bridges and tunnels. The remaining $4 billion of notes would be issued either as transportation revenue bonds or dedicated tax fund bonds.

The MTA’s latest financial plan released in November reflects modestly higher debt service costs for its short-term borrowings, adding $29 million to 2013 expenses and $48 million in 2014. Before the storm, new debt was scheduled to provide about half of the resources for the MTA’s $22.2 billion capital plan. The MTA estimates that storm-related long term borrowing would add $62 million of debt service annually beginning in 2016, which is manageable relative to the projected $2.8 billion of annual combined debt service expenses that year. However, delayed receipt of FEMA funds and insurance proceeds, or reduced FEMA funding because of potential 2013 budget sequestration (fiscal

Nicole Johnson Senior Vice - President +1.212.553.4573 nicole.johnson@moodys.com

NEWS & ANALYSIS Credit implications of current events

26 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

cliff) would challenge the affordability of additional debt service costs. The MTA’s finances would also be challenged by adverse resolution of ongoing labor negotiations, inability to achieve substantial cost reductions for recurring savings, and the outcome of litigation related to the payroll mobility tax (PMT).10

The MTA expects that its forecasted operating budget shortfalls through 2016 are manageable and were not significantly affected by the storm. The MTA’s recent focus on reducing operating costs has produced significant recurring savings, but additional savings will be challenging because a large portion of its costs are fixed for labor, benefits, and debt service. Failure to achieve further cost reductions or other savings would make it more difficult to absorb the planned increase in debt issuance.

10 See Court Rules New York MTA Payroll Tax Unconstitutional, Jeopardizing $1.3 Billion of Annual Revenues.

NEWS & ANALYSIS Credit implications of current events

27 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

Accounting

Revised IASB Proposal on Financial Instruments Is Positive for Investors

Last Tuesday, the International Accounting Standards Board (IASB) published a revised proposal on classification and measurement of financial instruments, one phase of the IASB’s broader project, IFRS 9 – Financial Instruments. The revised proposal improves on an earlier model that was part of IFRS 9 by reducing potential accounting mismatches arising from the interaction between accounting for financial instruments and proposed accounting for insurance liabilities under the IASB’s ongoing insurance contracts project. The revision also improves alignment with the US Financial Accounting Standards Board’s (FASB) published views on classification and measurement. Moreover, it accelerates filers’ ability to record gains and losses on fair valued liabilities resulting from changes in the reporting entity’s own credit standing in other comprehensive income (OCI) rather than through income.

Fair value of other comprehensive income category. The IASB’s initial IFRS 9 exposure draft, published in 2009, permitted two measurement bases for fixed-income investments or loans – fair value through profit and loss, and amortized cost. The IASB permitted amortized cost accounting only for instruments whose contractual cash flows consist solely of payments of principal and interest and when the business model of the entity was to hold the asset for collection of those cash flows.

The revised proposal introduces a “Fair Value Through Other Comprehensive Income” (FVOCI) category for qualifying assets held within a business model in which assets are managed both in order to collect contractual cash flows and for sale. In the FVOCI category, the balance sheet will reflect the fair value carrying amount, with changes in fair value (other than impairments of such assets) being recognized in OCI. Upon sale or impairment of such assets, the gain or loss attributable to that asset that has been accumulated in OCI will be recycled to profit or loss on the income statement.

Permitting a FVOCI category for fixed-income instruments accomplishes the following two investor friendly objectives:

» Reduces potential accounting mismatches that would result for insurance companies under the IASB’s anticipated exposure draft on accounting for insurance liabilities. The insurance model, currently under discussion, would require certain changes in the value of insurance contract liabilities resulting from changes in interest rates to be recorded in OCI. Permitting assets to be treated similarly leads to a better matching of accounting treatment on the asset and liability sides of the balance sheet.

» Aligns with the FASB’s current views on classification and measurement of fixed-income investments, which include an FVOCI category. There remains a difference between standard setters’ views on classification of equity securities, for which there is an FVOCI option under IFRS 9, but not under the FASB proposal. Furthermore, the boards are involved in concurrent financial asset (loans and fixed income) impairment projects, on which their views are split.

Own credit gains or losses. Existing rules require gains or losses on fair valued liabilities to be recorded in earnings. This has produced counterintuitive results in company financial statements, since the deterioration of their own credit standing, and therefore the value of their debt, causes gains to be recorded in income and equity. The IASB had previously amended IFRS 9 so that changes arising from a shift in a firm’s credit standing would not be recorded in income but rather in a separate component of OCI. However, to avail themselves of this change, companies were required to early adopt all of IFRS 9 ahead of the rule becoming mandatory in 2015.

Wallace Enman Vice President - Senior Credit Officer +1.212.553.4321 wallace.enman@moodys.com

NEWS & ANALYSIS Credit implications of current events

28 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

Under the revised rule, companies would be able to early adopt only the own-credit provision, eliminating a source of non-economic noise in net income. The FASB has made a similar tentative decision regarding gains and losses on fair valued liabilities resulting from changes in the entity’s own credit.

Possible effective date. We expect IFRS 9 to be mandatory 1 January 2015. Although early adoption remains an option, companies would not be able to adopt the revised amendments until the IASB finalizes and approves them sometime in the first half of 2013. Also, the European Union (EU) has not formally endorsed IFRS 9, which means entities domiciled in the EU would not be permitted to adopt the standard.

RATING CHANGES Significant rating actions taken the week ending 30 November 2012

29 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

Corporates

Alere, Inc. Downgrade

9 Aug ‘12 27 Nov ‘12

Corporate Family Rating B1 B2

Outlook Negative Stable

Alere is issuing $450 million of senior unsecured notes due 2018, with proceeds being used to tender for the company's existing 7.875% senior unsecured notes due 2016 and repay amounts outstanding under a revolving credit facility. Financial leverage will be sustained and well above levels appropriate for the previous rating.

Braskem Finance Ltd. Outlook Change

31 Mar ‘11 28 Nov ‘12

Senior Unsecured Rating Baa3 Baa3

Outlook Stable Negative

The outlook change reflects Braskem's weakening operational performance because of deterioration in global petrochemical industry's fundamentals. At the same time, the appreciation of the Brazilian Real during 2011 increased resin imports into Brazil, reducing the company's market share. Braskem is the largest producer of thermoplastic resins in the Americas.

RATING CHANGES Significant rating actions taken the week ending 30 November 2012

30 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

ConAgra Foods, Inc. Review for Downgrade

20 Sep ‘11 27 Nov ‘12

Long-Term Issuer Rating Baa2 Baa2

Short-Term Issuer Rating P-2 P-2

Outlook Stable Review for Downgrade

Ralcorp Holdings, Inc. Review for Upgrade

9 Aug ‘11 27 Nov ‘12

Senior Unsecured Rating Baa3 Baa3

Outlook Stable Review for Upgrade

These actions follow the announcement that ConAgra Foods had entered into an agreement to acquire Ralcorp Holdings in a $6.8 billion transaction. The review for downgrade on ConAgra reflects the material deterioration in ConAgra's credit profile that would result from the transaction, which involves at least $6.4 billion of incremental debt and the issuance of up to $350 million of equity. The review for upgrade on Ralcorp reflects the possibility that the resulting combined company will have a stronger credit profile than Ralcorp does currently.

Hewlett-Packard Compan y Downgrade

4 Oct ‘12 28 Nov ‘12

Senior Unsecured Rating A3 Baa1

Short-Term Issuer Rating P-2 P-2

Outlook Review for Downgrade Negative

Although HP will maintain strong to leading positions in a number of product areas, we expect the company's credit profile to remain weaker than we had previously expected over the intermediate term. Key drivers include company-specific execution challenges in services and software, secular shifts in PCs and printing, competitive pressures throughout its broad portfolio, as well as a cautious demand environment. The negative rating outlook reflects our concerns about HP's ability to contend with the significant competitive, secular and execution challenges facing the company.

RATING CHANGES Significant rating actions taken the week ending 30 November 2012

31 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

inVentiv Health, Inc. Downgrade

13 Apr ‘12 26 Nov ‘12

Corporate Family Rating B3 Caa1

Outlook Negative Negative

The downgrade reflects our concerns over inVentiv's very high leverage, which continues to increase because of declining year-over-year EBITDA and increased borrowings. The downgrade also incorporates our expectation for weak liquidity over the next 12 months, with negative free cash flow, minimal cushion under the company's covenants and substantial use of the company's revolving credit facility.

Western Union Company Downgrade

6 Jul ‘11 27 Nov ‘12

Senior Unsecured Rating A3 Baa1

Short-Term Issuer Rating P-2 P-2

Outlook Negative Negative

The downgrade and the negative ratings outlook reflect concerns over the sustainability of profits in Western Union's core money transfer business and continued shareholder friendly actions. The core money transfer business is in a state of flux given competitive pricing pressures and emerging payment technologies. We expect that pricing cuts in key corridors in the money transfer business will result in revenue declines of low-to-mid single digits in 2013.

RATING CHANGES Significant rating actions taken the week ending 30 November 2012

32 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

Infrastructure & Project Finance

Consort Healthcare (Salford) pl c Upgrade

24 Nov‘11 27 Nov ‘12

Senior Secured Bonds Baa3 Baa2

Outlook Positive Positive

The upgrade reflects the successful completion of construction work, the prompt resolution of construction problems and the satisfactory performance to date of the hard facilities’ management services. The issuer is a special purpose company created to redevelop the existing Hope Hospital site in Salford, Greater Manchester, and to provide certain hard facilities management services

RATING CHANGES Significant rating actions taken the week ending 30 November 2012

33 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

Financial Institutions

Banco Popolare Review for Downgrade

14 May ’12 27 Nov ‘12

Long Term Debt & Deposit Ratings Baa3 Baa3 Review for Downgrade

Standalone Bank Financial Strength/ Baseline Credit Assessment D+/ba1 D+/ba1 Review for Downgrade

Short Term Ratings P-3 P-3 Review for Downgrade

The review reflects our concern about (i) the deteriorating trend of BP's already weak asset quality, and (ii) the bank's low internal capital generation, against the background of the current recession in Italy. BP's asset quality is weak and likely to deteriorate well into 2013, given that the Italian economy is likely to remain in recession through much of 2013

Caja Laboral Downgrade

25 Jun ‘12 27 Nov ‘12

Long & Short Term Deposits Baa3/ P-3 Ba1/NP

Standalone Bank Financial Strength / Baseline Credit Assessment D+/baa3 D+/ba1

The downgrade reflects the increased vulnerability of Caja Laboral's risk-absorption capacity to scenarios of further economic stress. A declining internal capital generation capacity and its recent merger with Ipar Kutxa, SCC have both contributed to this reduced capacity.

Commerce Bank of Missouri

Downgrade

30 Sep ‘12 28 Nov ’12

Long Term Debt & Deposit Ratings Aa2 Aa3

Standalone Bank Financial Strength/ Baseline Credit Assessment B+/Aa2 B/Aa3

Commerce’s franchise is not sufficiently diverse to offset additional downward pressure on its net interest margin, leading to the downgrade. Specifically, in a scenario of protracted low interest rates, Commerce's asset yields will continue to fall. However, because Commerce already enjoys a very low cost of deposits and has only minimal exposure to market funding, its liability costs cannot meaningfully decline. As a result, additional margin pressure will negatively affect Commerce's overall earnings. Despite the downgrade, Commerce remains one of our highest-rated US banks.

RATING CHANGES Significant rating actions taken the week ending 30 November 2012

34 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

Hypo Tirol Downgrade

6 Jun ‘12 29 Nov ‘12

Long Term Debt & Deposit Ratings A2 Baa2

Standalone Bank Financial Strength/ Baseline Credit Assessment D/ba2 E+/b1

Short Term Ratings P-1 P-2

We lowered Hypo Tirol’s standalone credit assessment because the bank continues to display weak financial fundamentals and heightened vulnerability to an adverse economic environment despite a recent recapitalisation measure. Once executed, the EC's imposed restructuring plan will leave the bank with a much more constrained regional footprint and franchise, with little potential for sufficient future earnings generation capacity. The downgrade of Hypo Tirol's long-term debt and deposit ratings reflects the lower standalone credit assessment.

RATING CHANGES Significant rating actions taken the week ending 30 November 2012

35 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

Sovereigns

Albania Ceilings Lowered

29 June ‘07 26 Nov ‘12

Gov Currency Rating B1 B1

Foreign Currency Deposit Ceiling B2 B2

Foreign Currency Bond Ceiling Ba1 Ba2

Local Currency Deposit Ceiling Baa1 Ba1

Local Currency Bond Ceiling A3 Ba1

Outlook Stable Stable

Our lowering of the local currency ceilings and the one for foreign currency bonds accompanied our affirmation of Albania's B1 rating, which is based on the relative resiliency of Albania’s economic growth to the financial and euro area crises, despite the small size and lack of diversification of its economy. We note, however, that growth has decelerated more recently and will remain subdued over the medium term given the removal of government's fiscal stimulus and the re-balancing of the economy towards exports in the context of poor growth prospects in Europe.

RATING CHANGES Significant rating actions taken the week ending 30 November 2012

36 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

Sub-sovereigns

Formosa, Province of (Argentina) Confirmation

17 Oct ‘12 27 Nov ‘12

Issuer rating LC Caa2/B2.ar Caa2/B2.ar

Senior Secured FC Caa3/Caa2.ar Caa3/Caa2.ar

Outlook Review for Downgrade Negative

The confirmation of the Province of Formosa's ratings follows a majority of bondholders agreeing to receive future principal and interest payments in Argentinean pesos converted at the exchange rate published by Banco de la Nacion Argentina, a state-owned bank. In our view, the revised repayment terms qualify as a distressed exchange. We estimate losses in the 20%-30% range. The Caa3 debt rating incorporates our expectation that bondholders are likely to incur further losses under the revised repayment terms if the market exchange rate continues to increase relative to the benchmark rate.

Siena, City of (Italy) Downgrade

16 Jul ‘12 28 Nov ‘12

Issuer Rating Baa2 Baa3

Outlook Negative Negative

The downgrade primarily reflects the anticipated increase in Siena's debt-servicing costs and debt levels as funding from its local banking foundation, Fondazione Monte dei Paschi di Siena (FMPS) is phased-out. Financial support from FMPS has declined progressively over the last few years given FMPS’ need to retain cash in order to sustain its owned bank, Monte dei Paschi di Siena.

Queensland, State of (Australia) Outlook Change

20 May ‘09 26 Nov ‘12

Backed Issuer/Senior Unsecured Aa1 Aa1

Outlook Stable Negative

The change in the outlook reflects the deterioration in the state's financial performance, which has persisted since fiscal 2007/08, and the resulting high levels of indebtedness. Scheduled improvements will only take hold in a few years, and progress could be slowed by the potential emergence of less supportive conditions.

RATING CHANGES Significant rating actions taken the week ending 30 November 2012

37 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

Trencin Region (Slovak Republic) First time rating

29 Nov ‘12

Issuer rating Baa2

National Scale Rating Aa2.sk

The ratings primarily reflect the region’s responsive fiscal policy, which should prevent any sharp deterioration in financial metrics, and also its favourable amortising debt structure with long-term maturities. Although the region's indebtedness has been relatively stable over the last four years and is not likely to exceed 50% of operating revenue in the next two years, it remains comparatively high.

Structured Finance

US Prime Jumbo RMBS from 2005-07 Downgraded

On 27 November we downgraded 56 tranches issued by four issuers of RMBS securities in the period 2005 to 2007, in an action affecting approximately $1 billion. The downgrades are a result of deteriorating performance and structural features resulting in higher expected losses than previously anticipated. On the same day we also downgraded $1.1 billion of Prime Jumbo RMBS issued by Thornburg Mortgage Securities from 2005 and 2006 for similar reasons.

RESEARCH HIGHLIGHTS Notable research published the week ending 30 November 2012

38 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

Corporates

Moody's CFG 100 Research Archive - North America Edition

Our CFG 100 Research Archive is a portal to select credit research published by our Corporate Finance Group in North America. It contains the list of our most-viewed North American corporate research reports, as measured on Moodys.com.

EMEA Telecommunications Service Providers: Negative Pressure on Cash Flow to Persist; Low Visibility on When Revenue Will Stabilise

We continue to have a negative outlook mainly because of further negative pressure on revenues. A contraction in consumer spending will continue to make customers more price-sensitive, adding pressure on revenues. Greater demand for higher capital expenditure will persist.

Asian Steel Industry: Modestly Rising Demand Will Alleviate Challenging Conditions

Our outlook for the Asian steel industry is stable. We expect a glut in steel will stabilize as demand rises and the growth in capacity slows. The recovery in steel demand will be moderate.

Deepwater Push to Keep Oilfield Service Companies Afloat in 2013 as Sector's EBITDA Drops

Our outlook for the global oilfield services and drilling sector is stable. For most of the drilling and oilfield services (OFS) industry, we expect declining sales, margins and EBITDA for 2013. Offshore drilling will remain the strongest segment of the OFS industry.

US Retail: Thanksgiving Weekend: The Early Bird Gets the Worm

Our US retail analysts visited stores and major retail web sites throughout the Thanksgiving weekend to get a sense of trends and traffic patterns. They conclude that retailers that opened early on Thanksgiving evening gained an advantage and that promotional activity was about on par with last year.

Moody's Covenant Quality Database: North American Healthcare Bucks the Trend: Covenants Are Weaker at Lower Rating Levels

Covenant quality usually improves further down the rating scale, but bonds issued by North American healthcare companies do not follow this trend. Of the Caa-rated healthcare bonds reviewed, all but one had weaker covenant protection than the average for North American non-financial corporates.

US Gaming: Pinnacle, Ameristar Brace For Increased Competition

Pinnacle Entertainment and Ameristar Casinos are facing increased competition with each other and with their stronger and more geographically diverse rival, Penn National Gaming, as recent acquisitions and new projects bring more head-to-head competition in St. Louis and Louisiana. Both Pinnacle and Ameristar have significantly strengthened their financial positions through debt refinancing and cost cutting.

RESEARCH HIGHLIGHTS Notable research published the week ending 30 November 2012

39 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

US Packaging Industry: Continued Cost Cutting and Productivity Support US Packaging Industry

Our outlook for the US packaging industry is stable. Organic EBITA will increase modestly in 2013, rising by 1%-3% as continued cost controls and productivity initiatives offset limited volume growth. Consumer stress and the slow economy will constrain sales-volume growth.

North American Automotive Parts Suppliers: Improved Credit Metrics Likely to Be Sustained in 2013

With their post-recession recovery largely complete, auto parts suppliers’ credit metrics will see little further upside in the next year. We expect parts suppliers to sustain low-single-digit revenue growth.

North American Capital Goods: Slowing Demand to Weigh on Sales Growth

Our outlook for the North American capital goods industry is stable. Capital goods manufacturers will face cooling sales growth and growth in profits and private investment will slow. As US homebuilding rebounds, commercial construction will remain weak.

China Property Industry: Improving Sales and Access to Funding Support Stable Outlook

We have changed the outlook for China’s property sector to stable from negative. We expect property sales to improve despite a decline in prices.

China Property Focus - November 2012

China’s property market experienced a mild drop in nationwide sales in October, our newsletter says, but levels remained higher than they were in July and August. We expect mild downward pricing pressure in the coming months.

RESEARCH HIGHLIGHTS Notable research published the week ending 30 November 2012

40 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

Financial Institutions

Sweden Banking System Outlook

We changed Sweden’s banking system outlook to stable from negative because we expect asset quality to be strong. Low interest rates and households’ resilient financial profiles are likely to support loan-repayment capabilities. Other factors include strengthening capital levels and continued moderate lending growth. Low provisioning levels also support profitability.

Cyprus Banking System Outlook

The outlook for Cyprus’s banking system remains negative, as it has been since 2007. The negative outlook reflects our expectations of (1) severe capital shortfalls, as the highly adverse operating environments in Cyprus and Greece, the banks’ primary markets, continue to drive a sharp deterioration in asset quality; and (2) further weakening of the sector’s funding and liquidity, as evidenced by continued, significant deposit outflows in Greece and Cyprus.

US Banking Quarterly Credit Update - 3Q 2012

US banks’ 3Q 2012 results displayed two trends that we expect to continue over the next 12-18 months assuming the economy avoids a recession: profitability will decline while asset quality will continue to improve. Still, we estimate that rated US banks have recognized the great majority of their crisis-related loan losses, allowing them to easily absorb the remaining expected losses while still reporting profits. Banks’ capital ratios remained strong during the quarter, supporting their ability to also withstand a severe stress.

Asset Manager Quarterly Credit Update – 3Q 2012

Aggregate assets under management by the 14 asset managers that we follow decreased 2.8% in second-quarter 2012. Negative performance in equities and commodities drove the decline. Organic growth during the second quarter was slightly negative, with outflows for the group 0.20% of beginning period assets.

RESEARCH HIGHLIGHTS Notable research published the week ending 30 November 2012

41 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

Sovereigns

Lebanon Credit Analysis

Lebanon’s B1 government bond rating reflects the country’s reduced growth prospects, high – albeit declining – government indebtedness and persistent twin deficits. Abundant foreign-exchange liquidity in the banking system and the proven resilience of domestic banks, which reliably finance the government deficit, are supportive of the rating. Although fiscal metrics have improved since we upgraded Lebanon’s rating to B1 in April 2010, the economic landscape has deteriorated markedly since the civil conflict erupted in Syria.

India Credit Analysis

India’s Baa3 rating and stable outlook are supported by credit strengths that include a large, diverse economy, strong GDP growth and savings, and investment rates that exceed emerging market averages. The credit challenges posed by India’s poor social and physical infrastructure constrain the rating, as do India’s low per capita income, high government deficit and debt ratios, a complex regulatory environment, and a tendency towards inflation.

Botswana Credit Analysis

Our most recent action on Botswana A2 government bond ratings took place in November 2011, when we changed the ratings outlook to stable from negative. This decision primarily reflected the continuous improvement in the government’s fiscal position as a result of the faster-than-expected implementation of the country’s fiscal consolidation plan. Although Botswana’s credit fundamentals have deteriorated over the past four years, the authorities’ response to the global financial crisis has been consistently effective, as reflected by the likelihood of a 2012-13 fiscal surplus.

El Salvador Credit Analysis

We downgraded El Salvador’s rating to Ba3 from Ba2 in November, an action based on our assessment of the country’s low economic strength, medium institutional strength, medium government financial strength, and medium susceptibility to event risk. The outlook remains stable. There is a strong willingness to consolidate public finances, but we expect it will be difficult to actually accomplish this because of persistently weak growth and deterrents to investment.

RESEARCH HIGHLIGHTS Notable research published the week ending 30 November 2012

42 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

US Public Finance

Housing 101: US Public Finance Housing Key Credit Features

In the sixth in our series of articles focusing on US public finance housing bond programs, we discuss the principal categories of US public finance and summarize their key credit attributes.

Late Debt Service Payments Following Hurricane Sandy Do Not Reflect Fundamental Credit Weakness

After reviewing the circumstances around each event, we have concluded that the late payments in the wake of Sandy were the result of operational disruptions or, in one case, a bank error, and do not represent material additional weakness in the credit quality of the issuers. All four late payments were cured within two business days. In each case, the issuers either have a processes in place, or have taken corrective steps, to prevent a recurrence.

Structured Finance

Auto Navigator

Longer-term auto loans are riskier than shorter-term loans, but their performance in some situations is better, our newsletter says. Also discussed: Hyundai Motor and Kia’s fuel efficiency woes are credit negative, Ally Financial’s asset sales are credit positive, among other topics.

Spanish Eviction Moratorium Slightly Weakens the Creditor's Financial Position in the Spanish Mortgage Market But Will Have Limited Impact for Spanish RMBS

A new decree allows a two-year moratorium on evictions from properties being repossessed by the creditor, slightly weakening his position. The decree will reduce the level of recoveries expected through 2014. The impact on Spanish RMBS deals will be marginally negative as current recovery levels in Spanish deals are already very low.

Structured Thinking: Asia Pacific

In the November issue of our newsletter we discuss repackaged deals in Hong Kong, the steady rental cash flow from small condominiums in Japan, the fiscal countdown beginning in the US, among other topics.

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

43 MOODY’S CREDIT OUTLOOK 3 DECEMBER 2012

NEWS & ANALYSIS Corporates 2 » ConAgra's Ralcorp Acquisition Will Raise Leverage, a

Credit Negative » Haniel's Plan to Reduce Stakes in Celesio and Metro Is

Credit Positive » Stake in Kashagan Oil Field Is Credit Negative for ONGC and

Credit Positive for ConocoPhillips

Infrastructure 5 » Greater Toronto Airports Authority Lowers Aeronautical Rates, a

Credit Positive

Banks 6 » Mexico's New Brokerage Rules on Customer Investment Suitability

Are Credit Positive » Bank of Italy Lowers Minimum Size for ECB Repo Loan Collateral, a

Credit Positive » Proposed Finnish Bank Tax Is Credit Negative for Banks » Sweden's Higher Risk Weights on Mortgages Are Positive for

Bank Creditors

Asset Managers 13 » New Lower Mexican Pension Fund Fees Are Credit Negative for

Small Fund Managers

Sovereigns 15 » Greek Aid Deal Provides Liquidity Relief, but Doesn’t Resolve

Debt Sustainability

Securitization 17 » AvalonBay and Equity Residential Acquisition of Archstone

Portfolio Is Credit Negative

Accounting 18 » New SEC Chairman Is Unlikely to Jumpstart Incorporation of IFRS

into US Financial Reporting

MOODYS.COM

Report: 147836

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EDITORS PRODUCTION ASSOCIATE News & Analysis: Elisa Herr, Jay Sherman and Joe Cullen

David Dombrovskis

Ratings & Research: Robert Cox Final Production: Barry Hing