MOODYS.COM

20 AUGUST 2012

NEWS & ANALYSIS Corporates 2 » Cisco’s Whopping 75% Dividend Increase Won’t Harm Its Credit » Tesoro’s Reliance on Debt to Purchase Refining Facility Is

Credit Negative » Caesars’ Proposed $750 Million Senior Secured Offering Is

Credit Positive » Kinetic Concepts’ Sale of Bed Unit Is Credit Positive; Litigation

Development Is Negative

Banks 8 » GM's Acquisition of Ally’s International Operations Would Be a

Credit Challenge » Cruzeiro do Sul’s Haircut on Uninsured Deposits and Bonds Implies

Severe Losses to Creditors » Korean Banks Lengthen Their Debt Maturities, a Credit Positive » India’s Draft Exposure Limits Are Positive for Banks, Negative for Non-

Bank Affiliates

Insurers 14 » Record US Drought Is Credit Negative for Crop Insurers

Sovereigns 16 » Persistent Economic Weakness Is Credit Negative for Euro

Area Sovereigns

Securitization 18 » Tax Amnesty Is Credit Negative for Tax-Exempt Student

Loan Securitizations

RATINGS & RESEARCH Rating Changes 20

Last week we downgraded Affinion Group Holdings, Marfrig Alimentos, Julius Baer Group, Bank Julius Baer, Banco Cruzeiro do Sul, and the Metropolitan Atlanta Rapid Transit Authority, and upgraded El Paso Holdco, UNUM Group, and Municipality of Lima Peru, among other rating actions.

Research Highlights 26

Last week we published on chemicals, US apparel, oilfield services and drilling, US meat and poultry, US building products, North American solid waste, US spec grade liquidity, media and entertainment, Australian mutual financial institutions, US public finance liquidity, Missouri cities, California cities, US not-for-profit healthcare, US public finance variable-rate demand obligations, CLOs, and RMBS servicers, among other reports.

RECENTLY IN CREDIT OUTLOOK

» Articles in last Thursday’s Credit Outlook 29 » Go to last Thursday’s Credit Outlook

Discover Weekly Market Outlook, our sister publication containing Moody’s Analytics’ review of market activity, financial predictions, and calendar of economic releases.

NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

Corporates

Cisco’s Whopping 75% Dividend Increase Won’t Harm Its Credit

Last Wednesday, Cisco Systems, Inc. (A1 stable) announced a whopping 75% increase in its common dividend. Although shareholder friendly actions such as dividend increases can be detrimental to bondholders, we project Cisco’s dividend payout will approximate just 27% of discretionary cash flow (cash flow from operations less capital expenditures), leaving Cisco with ample financial flexibility to accommodate the dividend increase and preserve solid domestic liquidity. The dividend increase is a fraction of the company’s $49 billion of global cash balances. We also view Cisco’s dividend as a signal of management’s strong confidence in the company’s cash flow generation, despite the cautionary macro environment.

Cisco’s capital allocation strategy is to return a minimum of 50% of discretionary cash flow through dividends and share repurchases while maintaining sufficient financial flexibility to invest in the business and exploit strategic opportunities, such as the recently closed acquisition of UK-based NDS Group Ltd. for $5 billion.

After initiating its common dividend in early 2011 and increasing it by 31% in early 2012, Cisco’s new 75% common dividend increase raises annual payments by approximately $1.3 billion to $3.0 billion over the next year, based on average shares outstanding at the end of July. We project Cisco will have the fourth-largest annual common dividend among US-based technology firms next year, with Apple Inc. (unrated) leading the pack at $10 billion (see exhibit).

Projected 2013 Annual Dividends for US-Based Technology Firms Company Senior Unsecured Rating Projected Annual Common Dividend $ billion

Apple Inc. Unrated $10.0

Microsoft Corp. Aaa $6.7

Intel Corp. A1 $4.2

IBM Corp. Aa3 $3.9

Cisco Systems Inc. A1 $3.0

Source: Securities and Exchange Commission filings and Moody’s estimates.

As we have noted previously, more technology companies are paying dividends and increasing dividend payments. However, we do not expect those increases to affect company ratings because we expect the percentage of discretionary cash flow that these companies are paying as dividends to leave ample room to accommodate periods of weaker business conditions and domestic acquisition opportunities. Overall, we expect the US-based technology sector dividend payout to remain in the 20%-25% range, compared with 40%-50% for many non-technology sectors.

Despite the relatively low payout ratio among US-based technology firms, the amount of cash generated and maintained offshore can constrain dividend payments (and share buyback activity) because domestic cash must support those cash outflows. Our research shows that, on average, US-based technology firms maintain approximately 70% of cash balances overseas. Unless US authorities previously taxed these funds, they are not available to pay US-based common dividends (unless the companies also desire to pay repatriation taxes). We estimate that Cisco maintained 87%, or $42.3 billion, of its $48.7 billion of cash and liquid investments overseas as of July.

Richard Lane Senior Vice President +1.212.553.7863 richard.lane@moodys.com

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

In addition to Cisco’s $6.4 billion of domestic cash balances, other factors that support the company’s ability to comfortably cover its new $3 billion annual dividend payment include our expectation that Cisco will 1) continue to generate $4 billion or more of discretionary cash flow domestically, 2) receive, on average, $1.5 billion of domestic cash inflows from employee stock option exercises, and 3) continue to periodically make distributions of overseas cash from foreign subsidiary earnings that the US has previously taxed.

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

Tesoro’s Reliance on Debt to Purchase Refining Facility Is Credit Negative

Last Monday, Tesoro Corporation (Ba1 negative) said it would acquire BP p.l.c.’s (A2 stable) Carson, California, refinery and related marketing and logistics assets for about $1.2 billion, plus working capital that Tesoro estimates to be roughly $1.3 billion. The financing risk associated with the asset purchase is credit negative for Tesoro, as we expect the company to initially finance the deal with a significant amount of debt, including secured debt. Although Tesoro’s purchase of the Carson facility provides significant scale and strategic benefits, the attendant increase in debt puts negative pressure on Tesoro’s ratings. Indeed, we changed Tesoro’s outlook to negative from stable after the deal became public.

The reasonably priced acquisition brings Tesoro distinct strategic benefits. The Carson facility would improve its operational efficiencies and synergies by combining with Tesoro’s Wilmington, California, refining and marketing business to create the largest refinery on the US West Coast, with a 363,000 barrel-per-day crude distillation capacity. The acquisition also includes significant retail and logistics assets that provide relatively stable cash flows. Those factors would ease Tesoro’s increased exposure to the California refining market, which faces a challenging regulatory burden.1 The deal would increase the company’s California exposure to 62% of its total crude distillation capacity, up from 45% currently (after accounting for the pending sale of Tesoro’s facility in Hawaii).

However, in financing the transaction, Tesoro will incur an uncertain amount of debt, including secured debt. Initially, we expect that the company will use either its revolving credit facility or another form of secured debt to provide most of the interim financing of about $1.0-$1.5 billion. Tesoro would then use some inventory financing, about $500-$750 million, plus another $500-$750 million of cash on its balance sheet. At the low end of this cash range, the deal could be roughly 80%-financed by debt, including a large amount of secured debt.

The credit pressure from the deal would begin to ease sometime during the first year after the transaction goes through. Tesoro plans to drop down about $1 billion of the logistics assets it purchases from BP to Tesoro Logistics LP (unrated), Tesoro’s master limited partnership (MLP), and to sell certain non-core assets for $225-$300 million. We expect that the MLP would finance the drop-downs using a combination of debt and equity. These transactions would be the permanent financing for the acquisition, and the company would use those proceeds to repay the interim debt the company incurred.

Even so, the ultimate degree of debt financing will largely depend on Tesoro’s cash balances at the Carson deal’s closing, the asset sale proceeds, and the level of equity financing from the MLP, all of which are vulnerable to some execution risk.

Over the next two to three years, Tesoro’s credit quality could benefit from lower debt, improved product yields and lower unit costs, which would help position the company to face the challenge of upcoming regulations in California. But in the next 12-18 months, Tesoro’s Ba1 Corporate Family Rating could face a downgrade if the company does not permanently finance the Carson acquisition with a meaningful portion of equity, or reduce secured debt balances six to 12 months after acquiring Carson. We could also notch Tesoro’s Ba1-rated senior unsecured notes below the Corporate Family Rating.

1 See California’s Greenhouse Gas Regulations Pressure Refiners in Golden State, 13 March 2012.

Gretchen French Vice President - Senior Credit Officer +1.212.553.3798 gretchen.french@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

Caesars’ Proposed $750 Million Senior Secured Offering Is Credit Positive

Last Wednesday, Caesars Entertainment Corporation (Caa1 stable) announced that it would pursue an amend and extend of a portion of its $8 billion of total debt that matures in 2015, the latest credit positive move in a series of major steps designed to chip away at the company’s overwhelming debt burden.

Caesars’ amend and extend proposal includes the planned issuance of $750 million of senior secured notes due in 2020, the proceeds of which the company would use to repay and extend some of its $2 billion of term loans that mature in 2015. The proposed bond offering, which we consider credit positive, comes on the heels of the company’s agreement in May to sell its Harrah’s St. Louis, Missouri, casino to Penn National Gaming Inc.

The proposed amend and extend gives the company’s existing lenders several options, including the option not to participate in the proposed extension. Whether or not existing lenders choose to participate, the action will contribute favorably to the company’s already very good liquidity. Caesars has an SGL-1 Speculative Grade Liquidity rating. The proposed amend and extend can reduce Caesars’ 2015 maturities by up to $750 million. If no lender agrees to extend its debt to 2018, the proceeds of the $750 million add-on will be added to Caesars’ approximate $985 cash balance as of 30 June.

(Ba2 positive) for $610 million in cash.

Lenders can agree to extend to 2018 from 2015 the maturity date of the existing tranche B-1, B-2 and B-3 term loans and receive a 50% principal pay down of the extended loan amount. Lenders also have the option to convert existing revolver commitments that expire in 2014 into term loans due in 2018, or extend to 2017 from 2014 revolving credit commitments and reduce the committed amount by 50%. Consenting lenders will also receive fees and higher loan pricing. Caesars used this feature in its $1.25 billion first-lien note offering and amend and extend that closed earlier this year.

The good news for Caesars is that through a combination of distressed exchanges, bank amendments and asset sales, the company has been able to push out its nearest material scheduled debt maturity to 2015, which, in theory, gives it breathing room to deal with its significant debt burden. However, these actions will not solve Caesars’ fundamental problems. Caesars’ high leverage -- debt/EBITDA of 12.1x for the latest 12-month period ended 30 June -- lack of full interest coverage, and negative free cash flow raise the risk that the company may again pursue transactions that we would consider distressed exchanges, particularly in light of the large 2015 debt maturities that remain.

Unlike this proposed amend and extend, we didn’t consider the company’s agreement to sell its Harrah’s St. Louis casino to Penn National Gaming Inc. for $610 million credit positive. Caesars will lose about $78 million of annual EBITDA from the St. Louis property, or less than 5% of its total EBITDA. As a result, if it does not use the proceeds of the sale to reduce debt, its debt/EBITDA leverage will rise to 12.8x. Caesars said it might use the proceeds of the deal to repurchase debt, but it would have to apply all of the proceeds to debt repayment at a discount of 30% or more to avoid higher leverage.

Keith Foley Senior Vice President +1.212.553.7185 keith.foley@moodys.com

Margaret Holloway Vice President - Senior Credit Officer +1.212.553.4542 margaret.holloway@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

Kinetic Concepts’ Sale of Bed Unit Is Credit Positive; Litigation Development Is Negative

Last Wednesday, medical-technology company Kinetic Concepts Inc. (B2 stable) said it had signed an agreement to sell its Therapeutic Support Systems (TSS) medical-bed business to Getinge Group (unrated) for $275 million. In a separate development, a US appeals court judge on 13 August ruled that a lower court erred when it invalidated patents at the center of a patent-infringement lawsuit between Wake Forest University (Aa3 stable) and UK-based medical-products company Smith & Nephew (unrated).

The divestiture of the underperforming TSS unit is credit positive for Kinetic Concepts as it frees up management and capital resources to focus on the company’s larger and more profitable businesses. The appeals court ruling is credit negative for Kinetic Concepts because if it revives the patents, which the company had licensed from Wake Forest, it increases the probability that Kinetic Concepts will owe Wake Forest the royalties it stopped paying in early 2011.

The TSS sale. TSS’ business includes beds and support surfaces for acute- and post-acute-care facilities. It contributed roughly 12% of Kinetic Concepts’ total revenue of $2 billion for the 12 months ended 30 June. However, the unit’s revenue has been declining since 2008, including a 13% drop in the first half of 2012. The business has been a drag on the company’s overall financial performance, and we believe turning the business around would have required a significant investment in resources and management focus.

Given the increasing competition and pricing headwinds in Kinetic Concepts’ core negative-pressure-wound therapy (NPWT) business, which contributes nearly 70% of the company’s revenue, the TSS divestiture will allow management to focus on launching new products, expanding into new geographic markets and reducing the company’s overall cost structure. Success on these fronts is critical to the company’s credit quality.

We estimate that Kinetic Concepts’ total leverage will increase to approximately 7.0x, given the loss of earnings from TSS. However, if Kinetic Concepts uses the proceeds from the divestiture to repay debt, leverage will return to current levels of near 6.7x. Under its credit agreement, the company has 12 months to use the proceeds of the TSS sale to repay debt or reinvest them in assets that are useful for its business. We could downgrade the ratings if we do not believe that financial leverage will decline below 6.5x.

Wake Forest litigation. Last Monday’s ruling in favor of Wake Forest is credit negative for Kinetic Concepts because it strengthens Wake Forest’s case over the validity of its intellectual property, potentially increasing the likelihood that Kinetic Concepts will eventually owe back royalties to Wake Forest.

Kinetic Concepts had licensed Wake Forest’s technologies in its NPWT products, but stopped paying royalties to the university in March 2011, after the Federal District Court for the Western District of Texas ruled in October 2010 that the patents in question were invalid. Wake Forest and Kinetic Concepts are currently in litigation about those royalties.

Last week’s appeals court ruling essentially says the judge in the October 2010 decision erred in invalidating the patents. The ruling remands the case back to the lower court, which now must rule on the original case and on a number of unresolved motions filed by the parties during the case.

To be sure, it will be several years before there is a resolution of the litigation between Kinetic Concepts and Wake Forest and there is considerable uncertainty around the potential liability. Prior

Jessica Gladstone Vice President - Senior Analyst +1.212.553.2988 jessica.gladstone@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

royalties the company paid on worldwide exclusive licensing rights for the technology were between $80-$90 million per year, thus the amount that Kinetic Concepts ultimately could owe may be significant. However, the patents in question expire internationally in late 2012 and in the US in mid-2014. Therefore, we do not believe Kinetic Concepts would owe any ongoing royalties.

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

Banks

GM’s Acquisition of Ally’s International Operations Would Be a Credit Challenge

Last Monday, General Motors Company (GM, Ba1 positive) announced that its General Motors Financial Company, Inc. (GMF, Ba3 stable) subsidiary had submitted an indicative bid for Ally Financial Inc.

GM and a number of other third parties submitted indicative bids in July for Ally’s international operations in Canada, Mexico, Europe, and Latin America, all of which are primarily related to auto finance. The process is in its early stages; the buyer(s) probably won’t be identified until the fourth quarter.

’s (B1 stable) international operations. If consummated, the acquisition would pose significant and credit negative financial and operational challenges for GMF.

GMF would more than double its size and materially increase its funding needs and overall complexity if it acquires Ally’s business. The challenges and risks of funding far-flung international operations are substantial; this was borne out during the 2007-09 financial and economic crisis, as General Motors Acceptance Corporation (GMAC, re-named Ally in 2010) and Ford Motor Credit Company LLC (Baa3 stable) cut back on their international commitments. The acquisition also stands to significantly increase GMF’s leverage (GM reported that GMF’s leverage, as represented by its ratio of adjusted assets to adjusted equity excluding goodwill, also could potentially more than double), and challenge its management and integration capabilities. GMF has relatively limited international experience, although the experienced management team in place at Ally’s international operations, which might remain in place post-acquisition, would mitigate GMF’s challenges, as would the increased level of integration with GM and the predominantly prime nature of the assets that it would acquire.

GM’s strategic attraction to Ally’s international operations is clear enough. Since divesting in 2006 a majority stake of its former finance unit, GMAC, GM has been rebuilding the comprehensive customer servicing capabilities it had with GMAC. In essence, GM has gradually adopted a hybrid approach: while maintaining a significant relationship with Ally (which among other activities provides retail, lease and dealer financing to GM dealers), GM also moved to diversify its financial services providers. It acquired GMF (the former Americredit Corp.) in 2010 to provide subprime-focused retail financing, lease financing and dealer financing in the US and Canada. GM has also entered into ventures with Wells Fargo & Company (Aa3 stable; C+/a2 stable)2 for dealer financing in the US west and south central marketing regions and US Bancorp (Aa2 negative; B+/aa2 negative) for US lease financing. GM now has its eye on Ally’s non-US auto financing operations, which would allow it to gain control of customer servicing activities in the international sphere.

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

the corresponding rating outlooks.

Curt Beaudouin Vice President - Senior Credit Officer +1.212.553.1474 curt.beaudouin@moodys.com

Bruce Clark Senior Vice President +1.212.553.4814 bruce.clark@moodys.com

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

Cruzeiro do Sul’s Haircut on Uninsured Deposits and Bonds Implies Severe Losses to Creditors

Last Wednesday, the Fundo Garantidor de Credito (FGC), Brazil’s deposit insurance corporation and administrator of Banco Cruzeiro do Sul S.A.

A minimum of 90% of debtholders must accept the FGC’s tender offer by 12 September for it to proceed. By launching the tender offer, the FGC is sharing the burden of recapitalizing the bank with institutional uninsured depositors and investors. BCSul’s balance sheet for 4 June5 presents a negative equity position of BRL2.237 billion after adjustments of BRL3.11 billion largely related to accounting irregularities discovered by regulators in April 2012.

(BCSul, Ca negative; E/ca stable)3 announced that it would launch a tender offer to purchase all of BCSul’s outstanding debt securities and uninsured deposits at 39%-74% of their nominal value. The credit negative deal terms entail significant credit losses to both bondholders and uninsured depositors,4 and raise questions about BCSul’s eventual future and recapitalization. Assuming the FGC carries out the tender offer, the application of haircuts on outstanding debt instruments would constitute a distressed exchange per our default methodology.

According to the Material Fact filed with BM&FBovespa (A3 stable) on 15 August, if the tender offer fails and no eligible buyer is identified, the bank would be liquidated, which would likely further depress the securities’ and deposits’ final recovery value.

The FGC has offered to purchase a total of BRL5.66 billion of BCSul’s obligations, of which BRL3.3 billion are notes issued in the international capital markets. The haircuts applied to international debt obligations depend on the maturity of each series of outstanding debt, their size relative to BCSul’s total liabilities, and their seniority, as illustrated in the exhibit.

Proposed Haircut on Banco Cruzeiro do Sul’s Tendered Notes

Security Principal

Outstanding

Tender Consideration

Per $1000 Par*

Tender Proposed

Haircut

Early Tender Consideration

Per $1000 Par**

Early Tender Proposed

Haircut

8.000% notes due 2012 $175 million $560 44% $610 39%

7.000% notes due 2013 $200 million $510 49% $560 44%

7.625% notes due 2014 $150 million $510 49% $560 44%

8.500% notes due 2015 $250 million $510 49% $560 44%

8.250% notes due 2016 $400 million $510 49% $560 44%

8.875% subordinated notes due 2020 $400 million $260 74% $310 69%

Notes:

* Amount to be paid for each $1,000 principal amount of notes tendered before 12 September 2012.

** Amount to be paid for each $1,000 principal amount of notes tendered by 28 August 2012.

Source: FGC’s Offer to Purchase and Consent Solicitation Statement.

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

the corresponding rating outlooks. 4 See Moody’s downgrades Banco Cruzeiro do Sul’s debt and deposits to Ca following tender offer announcement, 16 August

2012. 5 On 15 August 2012, the FGC also published a Special Opening Balance Sheet for BCSul.

Alexandre Albuquerque Assistant Vice President - Analyst +55.11.3043.7356 alexandre.albuquerque@moodys.com

Jeanne del Casino Vice President - Senior Credit Officer +1.212.553.4078 jeanne.delcasino@moodys.com

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

The FGC’s lack of flexibility in allowing bondholders to present counteroffers as well as the rigid minimum threshold of 90% are factors that weigh on the possibility that the tender offer could fail. If the tender offer fails, this would cause even higher losses to investors, particularly holders of subordinated debt, since claims in liquidation prioritize employee salaries, taxes, and administrative expenses related to the liquidation process over payment to bondholders.

Once the bank’s debt is restructured, the FGC expects to sell the bank to an eligible buyer (i.e., with operations in Brazil and minimum equity capital of BRL2.5 billion), contingent upon an initial capitalization that allows BCSul to meet minimum capital requirements. The FGC also requires that the buyer provide a cash guarantee for the capital infusion, which narrows the field of prospective acquirors to the largest privately owned banks engaged in payroll lending, including Banco Bradesco S.A. (A3 positive; C-/baa1 positive), Itaú Unibanco S.A. (A3 positive; C-/baa1 positive), and Banco Santander (Brasil) S.A.

(Baa1 stable; C-/baa2 stable). Although the value of BCSul’s assets are still being determined, such banks might look to benefit from the bank’s specialized origination platform.

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

Korean Banks Lengthen Their Debt Maturities, a Credit Positive

Last Tuesday, Korea’s bank regulator, the Financial Supervisory Service (FSS), released data that showed Korean banks rolled over more of their long-term foreign currency debt than their short-term debt. This development is credit positive for Korean banks, as an increased proportion of long-term debt reduces refinancing risk.

Specifically, the FSS reported that in the first seven months of 2012, the rollover rate6 for foreign currency long-term debt, which it defines as having an original maturity of more than one year, was a strong 151.2%, compared with 150.8% in 2011 and 118% in 2010. Meanwhile, the rollover rate for short-term foreign currency debt, whose original maturity is less than a year, fell to 90.4% from 103.0% in 2011. These rollover rates suggest that banks are replacing their short-term debt with longer-term debt.

Foreign currency liquidity has been a structural weakness for Korea’s banks because of their heavy reliance on wholesale funding. Indeed, the system’s foreign currency loan-to-deposit ratio stood at 329% at March 2012. This weakness came to the fore in 2009, when the offshore funding markets shut down and domestic banks encountered significant difficulty in repaying their maturing debt with their own liquidity. This shift in their debt profiles towards long-term liabilities partly alleviates this weakness.

The FSS announcement is also in line with our analysis of data from eight banks,7 which show that their ratio of foreign currency short-term debt8 to total foreign currency debt dropped to 50% in June from 56% at the end of 2011 (see Exhibit 1). Among these banks, Hana Bank (A1 stable; C-/baa1 stable)9 showed the largest improvement, with the proportion of short-term foreign currency debt declining 19 percentage points, followed by Industrial Bank of Kore (A1 positive; D+/baa3 stable), which reported a decrease of 14 percentage points.

a

EXHIBIT 1

Korean Banks’ Proportion of Foreign Currency Short-Term Debt to Total Foreign Currency Debt

Source: Bank data.

6 The rollover rate is the ratio of the par of newly borrowed debt to the par of maturing debt, which indicates banks’

refinancing condition. 7 The eight banks are Hana Bank, Industrial Bank of Korea (IBK), Korea Development Bank (KDB), Korea Exchange Bank

(KEB), Export-Import Bank of Korea (KEXIM), Kookmin Bank, Shinhan Bank, and Woori Bank. Combined, they accounted for 85% of foreign currency debt at all Korean banks as of December 2011.

8 Foreign currency debt includes call loans, debentures, commercial paper, bank borrowings, and repos. 9 The ratings shown are the bank’s deposit rating, its standalone bank financial strength rating/baseline credit assessment and

the corresponding rating outlooks.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Hana IBK KDB KEB KEXIM Kookmin Shinhan Woori

December 2011 June 2012

Heejin Kwon Associate Analyst +852.3758.1515 heejin.kwon@moodys.com

NEWS & ANALYSIS Credit implications of current events

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The data on banks’ refinancing behavior is part of the regulator’s tightened oversight of banks’ liquidity management in recent years. The FSS has regularly conducted stress tests on the banks’ foreign currency liquidity positions since September 2011, and in June announced a plan to strengthen their foreign currency deposits.

These efforts have yielded demonstrable results: the foreign currency loan-to-deposit ratio at all 18 of Korea’s banks declined to 329% in March 2012 from 364% at the end of 2011. In addition, Korean banks’ foreign currency funding has become more diversified. Although the US dollar and Japanese yen remain the main sources for foreign currency funding for the eight largest banks, there has also been growing use of the Australian dollar, the Malaysian ringgit and the Thai baht, mainly at the expense of the euro (see Exhibit 2). However, we note that even with these improvements, Korean banks continue to rely more on wholesale funding than other Asian banking systems.

EXHIBIT 2

Korean Banks’ Foreign Currency Funding Structure by Currency

Note: Consolidated data from Korea’s eight largest banks by foreign currency assets. Source: Bank data.

64.9%

66.0%

62.7%

5.2%

6.4%

10.3%

15.0%

15.1%

15.3%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

June 2012

December 2011

December 2009

USD Euro JPY GBP HKD SGD CHF AUD MYR THB Others

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

India’s Draft Exposure Limits Are Positive for Banks, Negative for Non-Bank Affiliates

Last Tuesday, the Reserve Bank of India (RBI) released draft guidelines that would limit Indian banks’ exposure to their own group non-financial and financial affiliates. If the RBI adopts them, the new guidelines would be credit positive for India’s banks, but credit negative for group companies that rely on parent banks for capital and brand support.

Specifically, the guidelines would limit to 5% of paid-up capital and reserves a bank’s exposure to a single group non-financial entity, while the maximum exposure to regulated financial services companies would be 10%. Banks’ aggregate exposure to all non-financial and financial units and unregulated group finance would be 20%.

The rules would benefit India’s banks because they would reduce their concentration and contagion risks from group activities (both financial and non-financial). In addition, the guidelines would increase disclosure of related-party exposure for Indian banks, which would improve risk analysis and facilitate better comparisons with global peers. Moreover, the changes would clear doubts about how banks interpret group exposures rules and enable them to clearly know how much support they can provide to group entities.

The proposed rules would hurt companies that depend on parent banks for capital and brand support, particularly those with large international operations, or those that operate insurance (both life and non-life), securities or asset management businesses that need capital and liquidity support to meet their business needs. Under the new regime, parents would still provide full management support, but their financial support would be limited.

The affected banks include ICICI Bank Limited (Baa3 stable; D+/baa3 stable),10 State Bank of India (Baa3 stable; D+/baa3 stable), Bank of India (Baa3 stable; D/ba2 stable), Bank of Baroda (Baa3 stable; D+/ba1 stable) and Kotak Mahindra Bank (unrated). The guidelines would lead these banks to re-examine the financial support they provide to group businesses as anything exceeding the stipulated limits would be detrimental to their standalone capital calculations and thus their business growth.

These new guidelines are more stringent than the previous regime in the following ways:

» Their broad definition of exposure goes beyond existing prudential rules that restrict equity exposures to intra-group companies to include restrictions to non-equity exposures (loans, backstop facilities, guarantees, letters of comfort, etc).

» They require compliance on an ongoing basis, not merely at the end of a quarter or year.

» The penalties for offenders are heavy, and include deductions from core Tier 1 equity capital and financial penalties. In addition, banks must disclose these breaches and penalties in their financial results.

» The proposed guidelines come on top of Basel III guidelines that require Indian banks to hold more core Tier 1 equity capital starting on 1 January 2013.11

However, for the time being, these draft guidelines do not help the banks in any way cope with their immediate asset quality challenges owing to the difficult environment.

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

the corresponding rating outlooks. 11 Basel III rules for Indian banks are more conservative than those specified by the Bank for International Settlements (BIS).

Among the differences: capital ratio requirements are one percentage point higher than Basel III rules under BIS, and require a much higher Tier 1 content; the requirement of a capital conservation buffer; and compliance with these stricter requirements two years sooner than the Basel III schedule.

Vineet Gupta Vice President - Senior Analyst +65.6398.8336 vineet.gupta@moodys.com

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

Insurers

Record US Drought Is Credit Negative for Crop Insurers

On 10 August, US Department of Agriculture, in its “World Agricultural Supply and Demand Estimates” report, announced that because of extreme heat and the worst drought in 50 years in the Midwest, it had sharply reduced its forecast for corn and soybean production, two crops that together account for more than half of total annual US agricultural production. With more than 80% of cultivated farmland in the US currently covered by the federal multi-peril crop insurance (MPCI) program, the continuing severe drought conditions are credit negative for US crop insurers, which stand at the front line of indemnification to farmers for losses.

The insurers most directly exposed to the drought are those with the largest premium concentrations in the most affected states relative to their total business volume. The exhibit details the concentration of multi-peril crop premiums in the 12 most drought-affected states, as well as the significance of crop insurance overall to each insurer’s operations.

US Crop Insurance Market – Leading Insurers and Drought-State Concentrations

Rank Company Name (US Operations)

Financial Strength Rating & Outlook

(Lead US Company)

Total Crop DPW 2011

($ millions)

DPW Top 12** Drought States

($ millions)

Drought States Percent Crop

DPW Crop as Percent

Total DPW

1 ACE USA A1 stable 2,338 996 43% 26.0%

2 QBE North America A3 negative* 1,822 840 46% 34.8%

3 Rural Community (Wells Fargo)

A2 stable* 1,793 887 49% 99.4%

4 American Financial A2 positive 1,046 678 65% 27.5%

5 Fireman’s Fund (Allianz) A2 stable 961 $192 20% 26.7%

6 Endurance A2 negative 845 275 32% 67.8%

7 Producers Agricultural unrated 626 226 36% 93.2%

8 Farmers Mutual Hail of Iowa

unrated 549 411 75% 76.7%

9 John Deere Ins. Co. A2 stable* 398 206 52% 93.3%

10 Austin Mutual Ins. Co. unrated 344 186 54% 79.6%

11 XL Reinsurance America A2 stable 289 148 51% 11.7%

12 Munich Re America Aa3 stable 251 165 66% 10.6%

13 Farm Bureau P&C Ins. Co. unrated 203 187 92% 16.5%

14 Occidental Fire & Casualty North Carolina

unrated 181 112 62% 40.8%

15 TIG Ins. (Fairfax Financial)

Baa3 stable* 146 NA NA 21.7%

Industry Total: Crop -- $12,359 $5,798 47% Top 15: 34.6%

Notes:

DPW: Direct premiums written.

* Senior unsecured debt ratings of QBE Insurance Group Limited, Wells Fargo & Company, Deere & Company, Fairfax Financial Holdings Limited.

** Arkansas, Georgia, Illinois, Indiana, Iowa, Kansas, Mississippi, Nebraska, Oklahoma, South Dakota, Tennessee, and Wyoming.

Source: SNL Financial LC. Contains copyrighted and trade secret materials distributed under license from SNL, for recipient’s internal use only.

Alan Murray Senior Vice President +1.212.553.7787 alan.murray@moodys.com

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

The leading crop insurers, including US subsidiaries of ACE, QBE, American Financial, Wells Fargo, Allianz, Endurance Specialty (see exhibit for ratings and outlooks), in addition to a number of international reinsurers (e.g., PartnerRe, XL Re, Munich Re), average almost half of their national crop direct premiums, and about one fourth of their total US-based premiums, in the 12 most severely drought-affected states (i.e., Arkansas, Georgia, Illinois, Indiana, Iowa, Kansas, Mississippi, Nebraska, Oklahoma, South Dakota, Tennessee, and Wyoming). Several insurers indicated in their second-quarter earnings calls that second-half results (following major harvests mainly in late September through November, when insured losses are tallied) will be adversely affected. One of them noted a “modeled worst-case loss,” which it currently does not expect to occur, for the company’s crop segment in the hundreds of millions of dollars range if the drought worsens and persists until the harvest.

The more agriculturally focused and/or geographically concentrated insurers, such as Rural Community, Farmers Mutual, John Deere, Austin Mutual, and two insurers not appearing in the exhibit – American Agricultural and ADM – appear considerably more vulnerable on a direct basis than their more diversified industry peers, which tend to be part of larger national and international insurance and financial groups.

Crop insurers are exposed to losses arising from a variety of natural perils, including freezes, hail, flood, wind, drought and insects. But droughts are the most severe because, as the 2012 drought has shown, they tend to have a super-regional rather than localized span. Tempering concerns for many primary crop insurers is their substantial risk-sharing with the US government through the Federal Crop Insurance Corporation and private reinsurance protection purchased in the domestic and international markets, and the substantial capital bases and broad business, geographic and risk diversification of the market leaders.

A key consideration for crop insurers’ susceptibility to net drought-related losses is their allocation of policies underwritten to one of two risk “funds”: the “commercial” fund (risk retained by the insurer) or the “assigned-risk” fund (most of the risk ceded to the government). Historically, crop insurers have been able to distinguish their underwriting performance on the basis of risk selection, based largely on statistical analysis. However, largely offsetting the benefit of this risk-selection strategy in 2012 is the fact that in the Midwest states most affected by the current drought, insurers tend to place most policies in the commercial fund, thereby retaining, together with their private reinsurers, a majority of the risk.

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

Sovereigns

Persistent Economic Weakness Is Credit Negative for Euro Area Sovereigns

Last Tuesday, the European Union (EU) statistics agency, Eurostat, released GDP estimates showing the euro area’s economy contracted 0.2% in the second quarter compared with the first quarter,12 and that the southern periphery again performed worse than northern member states. Ongoing weakness across the common currency bloc and continued divergence in economic performance between northern and southern members are credit negative as they undermine economic and government financial strength and increase the potential for further shocks as the European sovereign and bank crisis persists.

The second-quarter results confirm that the economies of countries accounting for 60% of total euro area output are either contracting or stagnant, with southern nations among the worst performers. During the second quarter, Portugal (Ba2 negative) contracted by 1.2%, Italy (Baa2 negative) by 0.7% and Spain (Baa3 review for downgrade) by 0.4%. Although the Hellenic Statistics Agency does not release seasonally adjusted quarterly GDP figures, Greece’s (C) economy shrank by 6.2% relative to the same period a year earlier. Meanwhile, northern member states generally reported growth in the second quarter, although for most it was lower than in the first quarter. Germany’s (Aaa negative) growth was 0.3%, while Austria (Aaa negative) was 0.2%.

The weak economic performance complicates policymakers’ efforts to resolve the sovereign debt crisis and restore investor confidence through fiscal adjustments and structural reforms. Increasing tax revenues will become more difficult, as will implementing austerity policies without further undermining growth, thereby compounding the challenge of reducing fiscal deficits and reversing the deterioration in debt metrics. Indeed, Vittorio Grilli, Italy’s finance minister, indicated in a 12 August interview with Italian newspaper La Repubblica that the government would not meet its 2012 fiscal targets as a result of lower-than-expected revenues and difficulties in implementing spending reductions.

The contrast between the northern member states and the southern periphery highlights the difficulties that policymakers in Greece, Italy, Portugal and Spain face as they seek to improve their countries’ competitiveness and restore growth in an environment of subdued domestic demand, weakened business and consumer confidence, and ongoing private-sector deleveraging. We expect the divergence in economic performance between the northern and southern countries to persist in 2012 and 2013. Germany and Austria will register modest growth rates, while Greece, Italy, Portugal and Spain will remain in recession (see exhibit), thereby hampering policymakers’ efforts in those economies to deliver fiscal and structural reforms, restore growth and improve creditworthiness.

12 European Commission: Euro area and EU27 GDP down by 0.2%, 14 August 2012.

Matt Robinson Director of Sovereign Research +44.20.7772.5635 matt.robinson@moodys.com

Aukse Montvilaite Associate Analyst +44.20.7772.1085 aukse.montvilaite@moodys.com

Pamela Reyes Herrera Associate Analyst +44.20.7772.1068 pamela.reyesherrera@moodys.com

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

Growth Forecasts for Northern and Southern Euro Area Countries (Real GDP Change) 2011 2012 Forecast 2013 Forecast

France 1.7% 0.0% to 0.5% 0.5% to 1.0%

Germany 3.0% 0.5% to 1.0% 1.0% to 1.5%

Austria 3.1% 0.5% to 1.0% 1.0% to 1.5%

Greece -6.9% -7.0% to -8.0% -2.0% to -3.0%

Italy 0.4% -1.5% to -2.5% -0.5% to 0.0%

Portugal -1.6% -3.0% to -4.0% -0.5% to -1.5%

Spain 0.7% -1.5% to -2.0% -0.5% to -1.5%

Euro Area 17 Country Average 1.5%

Source: 2011 actuals from Eurostat; forecasts from Moody’s.

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

Securitization

Tax Amnesty Is Credit Negative for Tax-Exempt Student Loan Securitizations

The investigation by the Internal Revenue Service (IRS) of sponsors of tax-exempt student loan securitizations and the agency’s establishment of a tax amnesty program, the Voluntary Closing Agreement Program (VCAP),13 is credit negative for tax-exempt student loan securitizations. VCAP provides amnesty to a sponsor from potential tax disputes if the sponsor pays a settlement to the IRS based on a specific formula. If the sponsor settles with the IRS and pays the settlement with funds from the securitization, the securitization suffers a loss of cash, a credit negative. The investigation and amnesty program are also credit negative if sponsors acting as servicers or administrators pay the settlement with their own funds because these entities will become financially weaker, leading to a higher risk of non-performance.

Whether the negative credit impact is severe enough to materially weaken the credit quality of tax-exempt student loan notes will depend on the size of the settlement, if any, for each individual sponsor of the notes.

The use by sponsors of securitization funds to pay the IRS hurts tax-exempt securitizations. Sponsors’ use of cash from their securitization’s funds to pay the IRS is credit negative because it reduces the cash available to pay interest and principal payments on the notes, potentially causing shortfalls and delays. After a recent IRS investigation, Pennsylvania Higher Education Assistance Authority (PHEAA), for example, used $5.4 million of funds from its 1997 indenture to pay the IRS.14 Although the payment was substantial, in this case the negative credit effect on the notes was de minimis because the $5.4 million payment was only 0.15% of the 1997 indenture’s total assets at the time of the settlement.15

The IRS is auditing the sponsors of securitizations to determine if they have properly complied with the rules regarding the tax-exempt nature of the securitizations. In particular, the IRS is concerned about sponsors selling, buying or substituting student loans from one tax-exempt securitization to another taxable or tax-exempt securitization and the resulting inability of the sponsor to calculate the tax liability on the initial loan pool.

The VCAP program, which applies to all sponsors of tax-exempt student loan securitizations, allows sponsors of tax-exempt student loan notes to settle with the IRS and avoid an investigation by making a one-time payment based on a formula. Sponsors that do not participate in the VCAP are subject to further audit by the IRS, which can lead to larger payments than under the program, or ultimately the IRS can declare the interest on the notes taxable.

If other sponsors follow PHEAA’s example, their securitizations are at risk to the extent of the securitization trust’s accrued tax liabilities, which was the measure PHEAA used to determine the amount of the securitizations funds it used to pay the settlement. This tax liability, known as “excess yield liability,” arises in the context of tax-exempt student loan notes because, in the early years of the securitization, net income after accounting for securitization expenses exceeds the allowable profit

13 See TEB Voluntary Closing Agreement Program: Relief From Allocation and Accounting Errors for Certain Issuers of Tax-

Exempt Student Loan Bonds, 2 April 2012. 14 Source: PHEAA Quarterly Financial Report, 31 December 2011. 15 The notes are currently on review for downgrade because we aligned the interest rate scenarios that we use in monitoring

FFELP securitizations with the scenarios that we use in assigning initial ratings to FFELP securitizations. See Moody’s places on review ratings of US student loan ABS backed by FFELP student loans following the revised rating methodology, 16 April 2012.

Barbara Lambotte Senior Vice President - Manager +1.212.553.1094 barbara.lambotte@moodys.com

Jingjing (Nicky) Dang Assistant Vice President - Analyst +1.212.553.4801 jingjing.dang@moodys.com

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

margin of 2% under IRS rules. If the IRS were not conducting its investigation, the tax liability would not be payable today and would in many cases gradually decline. Sponsors accrue the tax liability in early years, but in many cases, net losses and negative excess spread will reduce this liability over time.

Servicers or administrators that pay the IRS with their own funds risk becoming financially weaker. Not-for-profit sponsors that act as servicers or administrators for tax-exempt securitizations risk becoming financially weaker if they use their own funds to pay the IRS, leading to a higher risk of non-performance. Financially strapped servicers and administrators are likely to reduce staffing or exit the business, which can lead to higher net losses or payment delays. Not-for-profit institutions typically operate with little financial cushion, and settlements can be substantial in size, as was the case for PHEAA, which paid $6.9 million from its own funds, in addition to the $5.4 million payment from the trust established under the 1997 indenture. In this case, we do not think that the $6.9 million payment by PHEAA materially increases the operational risks in securitizations that PHEAA services or administers. PHEAA is a quasi-state agency and will likely benefit from its state’s support.

For the accrued tax liabilities and available cash balances of student loan tax-exempt securitizations that we rate, click here and see pages 3-4.

RATING CHANGES Significant rating actions taken the week ending 17 August 2012

20 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

Corporates

Affinion Group Holdings, Inc. Downgrade

23 Jan ‘07 16 Aug ‘12

Corporate Family Rating B2 B3

Outlook Stable Negative

The downgrade reflects weak demand in the North American membership segment stemming from ongoing changes in the regulatory environment and negative publicity surrounding consumer credit monitoring and identity theft protection programs offered by financial institutions. We expect double-digit revenue and earnings declines in this segment over the next six to 12 months, only partly offset by positive momentum in the loyalty and international segments. As such, we expect debt to EBITDA to remain above seven times.

CEVA Group plc Outlook Change

7 Feb ‘12 13 Aug ‘12

Corporate Family Rating B3 B3

Outlook Stable Negative

The outlook change reflects deterioration in market conditions, depressing CEVA's operating performance and leading to weak credit metrics for the current rating. The negative outlook reflects CEVA's high leverage and weak free cash flow for its rating but assumes that operating performance will not deteriorate further. CEVA's liquidity position, however, appears adequate for its near-term needs and headroom under its senior secured leverage ratio covenant is reasonable. We also expect that cash flow in second-half 2012 will benefit from seasonal swings in working capital.

El Paso Holdco LLC (EPH) Upgrade

17 Jul ‘12 17 Aug ‘12

Senior Secured Rating Ba3 Ba2

Outlook Review for Upgrade Negative

We also upgraded the senior unsecured debt rating for Tennessee Gas Pipeline Company (TGP) and El Paso Natural Gas Company (EPNG) to Baa1 from Baa3 to reflect the change in ownership for these two large natural gas pipeline companies. On 13 August, EPH completed the sale of TGP and 50% of EPNG to Kinder Morgan Energy Partners, L.P. (KMP), which has a much stronger credit profile than EPH. We initiated the review for upgrade on EPH’s rating shortly after Kinder Morgan Inc. (KMI) announced plans to guarantee the debt of EPH. KMI owns a portfolio of infrastructure assets that generate a relatively stable source of cash flow. It also has an aggressive financial policy.

RATING CHANGES Significant rating actions taken the week ending 17 August 2012

21 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

Laboratory Corporation of America Holdings Outlook Change

14 Sep ‘10 17 Aug ‘12

Senior Unsecured Rating Baa2 Baa2

Outlook Stable Positive

The change to a positive outlook as we affirm ratings reflects our expectation that leverage will remain moderate as the company sees modest growth and cash flows are stable, although the operating environment will remain challenging. However, the company should benefit from some longer-term trends such as the aging of the population and more use of medical testing.

Marfrig Alimentos S.A. Downgrade

30 Oct ‘11 17 Aug ‘12

Corporate Family Rating B1 B2

Outlook Negative Stable

The downgrade reflects the company's continued elevated leverage and the recent deterioration in its liquidity, mainly from a concentration of short-term debt payments in the second and third quarters of 2012. On the positive side, the company’s diversified portfolio of protein products from five different animals, ranging from turkey to beef, continue to support credit quality.

Telemar Participacoes S.A.

Review for Downgrade

14 Sep ‘11 17 Aug ‘12

Senior Unsecured Rating Baa3 Baa3

Outlook Stable Review for Downgrade

We placed ratings on downgrade review because the company has experienced some margin compression over the past several quarters from a combination of a challenging competitive environment, regulatory requirements to increase service quality and changes in its product mix. In our view, it is unclear whether we will see a recovery in the near term.

RATING CHANGES Significant rating actions taken the week ending 17 August 2012

22 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

Tesoro Corporation (TSO ) Outlook Change

4 Feb ‘08 14 Aug ‘12

Corporate Family Rating Ba1 Ba1

Outlook Stable Negative

The outlook change was prompted by TSO's announcement of its agreement to acquire BP p.l.c.'s Carson refinery and related marketing and logistics assets for $1.175 billion plus working capital (estimated at roughly $1.3 billion). While we expect the transaction to increase operational efficiencies and provide more stable cash flows, the negative rating outlook reflects the financing risk of the Carson acquisition and the uncertainty regarding the ultimate level of debt, including secured debt that will be incurred to finance the transaction

Infrastructure

American Water Works Outlook Change

12 Oct ‘07 14 Aug ’12

Senior Unsecured Issuer Rating Baa2 Baa2

Outlook Stable Positive

The change in outlook primarily reflects progress the company has made in improving its financial and regulatory profile since its spin-off by RWE AG (A3 negative) in 2008. There have been successful rate case outcomes in multiple regulatory jurisdictions as well as recent divestitures of assets located in more challenging regulatory jurisdictions. The company has reinvested proceeds from those asset sales into operations domiciled in more credit-supportive jurisdictions. Specifically, American Water's regulatory profile has benefitted from the divestiture of its Arizona, New Mexico, and Ohio subsidiaries. The company has recently acquired additional assets in New York, a more credit-supportive regulatory jurisdiction.

RATING CHANGES Significant rating actions taken the week ending 17 August 2012

23 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

Financial Institutions

Julius Baer Group Ltd.

Downgrade

9 Oct ‘09 15 Aug ‘12

Long-Term Issuer Rating A1 A2

Bank Julius Baer & Co. AG

Long-Term Deposits Aa3 A1

Short-Term Deposits Prime-1 Prime-1

Standalone Bank Financial Strength /Baseline Credit Assessment B- / a1 C+ / a2

Outlook Negative Review for Downgrade

The downgrade follows the group’s announcement of its intention to acquire Merrill Lynch's international wealth-management business outside the US from Bank of America, and reflects the increased franchise pressures on traditional Swiss private banking franchises stemming from the recalibration of private banking models toward on-shore from off-shore centers, declining gross margins, and operating expense pressures. It also takes into account the group’s increased risk appetite in pursuing a transformational deal that adds risks for bondholders.

Banco Cruzeiro do Sul S.A.

Downgrade

5 Jun ‘12 16 Aug ‘12

Long-Term Global Local and Foreign Currency Deposits Caa1 Ca

Short-Term Global Local and Foreign Currency Deposits Not Prime Not Prime

Long-Term Foreign Currency Senior Unsecured Debt Caa1 Ca

National Scale Rating Caa.br Ca.br

Standalone Bank Financial Strength /Baseline Credit Assessment E / caa1 E / ca Stable

Outlook Negative Negative (multiple)

These rating actions follow the announcement of a tender offer by the bank’s administrator to purchase all of BCSul’s outstanding debt securities subject to discounts on their nominal value. The downgrade reflects the proposed discount on all the bank’s uninsured deposits and unsecured debt obligations at an average of 49.3% of their nominal value. It also takes into account the bank's highly speculative standalone financial strength and negative equity, as well as uncertainties related to its recapitalization and potential liquidation should the tender offer not be successful.

RATING CHANGES Significant rating actions taken the week ending 17 August 2012

24 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

UNUM Group Upgrade

4 Aug ‘11 16 Aug ‘12

Senior Unsecured Debt Baa3 Baa2

Life Insurance Financial Strength Ratings A3 A2

Outlook Positive Stable

Unum’s credit profile has strengthened over the past couple of years and has proven sustainable, as demonstrated by its improved business diversification and financial flexibility, while core earnings have remained stable despite the continuing soft economy. In addition, because benefit ratios in the company's core long-term disability business have remained steady through the economic slowdown, we expect limited downside risk from an acceleration of claims under our base scenario of a continued sluggish economic recovery.

Sub-sovereigns

Municipality of Lima Upgrade

23 Dec ‘10 17 Aug ’12

Issuer rating Ba1 Baa3

Outlook Positive Positive

The action follows the recent upgrade of the Government of Peru's foreign and local currency long-term bond ratings to Baa2, positive outlook, from Baa3, positive outlook. The City of Lima has also made significant improvements in its own fiscal performance, and the upgrade to an investment-grade rating reflects a sustained trend of positive gross operating balances, a manageable debt burden, and a strong liquidity position.

RATING CHANGES Significant rating actions taken the week ending 17 August 2012

25 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

US Public Finance

City of Coralville’s (Iowa) Sewer Enterprise Outlook Change

18 Aug ‘11 13 Aug ’12

Issuer Rating A1 A1

Outlook Negative Review for Downgrade

The review is carried out in light of our credit action taken on the city's general obligation rating and the low liquidity in the sewer enterprise at the close of fiscal 2011. At this time, the city had limited liquidity across governmental funds because of cash flowing to capital and economic development projects. The sewer enterprise had $50,000 in cash, representing 3.7% of operating and maintenance expenditures, with the remainder of its cash tied up largely in interfund receivables.

RESEARCH HIGHLIGHTS Notable research published the week ending 17 August 2012

26 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

Corporates

North American and EMEA Chemicals - Industry Performance Hinges on North American Resilience, With Europe in Retreat

We maintain our stable outlook for the sector, but deteriorating economic conditions in Europe and a more resilient North American market confirm our earlier forecast that sector performance in the two regions is diverging. We expect the challenging conditions in Europe to persist, while weaker demand from Latin America and China will exacerbate the effects of the European slowdown.

JC Penney's Q2 Results Are a Credit Negative for the Apparel Industry

JC Penney Inc.’s (Ba3 stable) continued declines in sales and gross margins are an increasing negative for the US apparel industry, as it is a significant customer to the industry with LTM sales in excess of $15 billion. We expect that ongoing negative sales trends at JC Penney will continue to pressure top line for apparel vendors for the remainder of 2012.

Oilfield Services and Drilling: North American Onshore Still Vulnerable as International and Deepwater Work Booms

Although persistently high oil prices and significant capital spending will benefit the oilfield services and drilling sector, we expect continued vulnerability for OFS companies with exposure to onshore North America as the drilling boom fades, labor costs rise and natural gas prices stay low.

US Drought Hurts Meat and Poultry Companies, Commodity Merchandisers

The ongoing severe drought has cut corn volumes, sent corn prices soaring and will pressure profit margins of meat and poultry companies because of increased feed costs. Our report looks at the impact of higher corn prices on different segments of the food industry.

US Building Products: Basic Repairs and Higher Housing Starts Offer Some Relief for US Building Products Sector

Our report answers some of the most frequently asked questions about the industry, including likely areas of strength, companies that lag peers, and explains our choice of macroeconomic data we use to evaluate the sector.

North America Solid Waste Industry: Weak Economy Constrains Recovery in Volumes, Core Pricing

Our outlook for the North American solid waste industry is stable based on our view that the gradual economic recovery and still-soft construction markets will constrain growth in waste volumes and core pricing. Waste volumes are beginning to rise for the first time since 2006, although construction activity levels will remain below levels that would drive robust growth in waste volumes.

Moody's SGL Monitor: Liquidity-Stress Index Rises Slightly, Remains Historically Low

Our Liquidity-Stress Index (LSI) rose slightly to 3.3% by mid-August, up from the record-low 3.1% in July. The index remains at a historically low level, signaling that speculative-grade companies have adequate liquidity for the next year.

RESEARCH HIGHLIGHTS Notable research published the week ending 17 August 2012

27 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

Global Media and Entertainment Industry: Most Investment-Grade Ratings Would Be Resilient in a Recession

Global media and entertainment companies that are investment grade are well positioned to deal with fallout from sluggish US growth and an imminent recession in Europe. Our new report examines exposure to three determining factors of relative rating vulnerability; financial flexibility, cyclical revenue volatility, and secular concerns and event risk.

Financial Institutions

Australia's Mutual Financial Institutions: Balance Sheets Strong But Challenges Apparent

Strong balance sheets are the key strengths of Australian mutual financial institutions, and should continue to support their operations in their individual niche markets. At the same time, however, slower credit growth and strong competition for deposits is creating challenging operating conditions and will pressure the mutuals’ profitability in 2012 and 2013, as well as drive consolidation in the sector.

US Public Finance

Moody's Public Finance Self-Liquidity Quarterly Report: Second Quarter 2012

Our report provides a subset of asset and liability data for higher education and healthcare institutions, other not-for-profit organizations, state and local governments, and housing finance authorities with rated variable rate demand or VRDB bonds, and commercial paper for which the liquidity for the demand feature is provided by the borrower itself rather than a third-party provider.

Missouri Cities' Sustain Stable Credit Outlook by Mitigating Challenges

Despite challenges, we expect credit quality to remain stable for most rated cities in Missouri because of the economic diversification in the larger metropolitan areas. Missouri cities are likely to experience pressures on operating revenues from slow growth, weak consumer confidence, and above-average unemployment. Sales taxes, the primary source of revenue, have been under pressure since 2008. Cities cannot increase revenues without voter approval, which takes time, and are often forced to balance budgets by reducing expenditures. Historically strong reserve levels have provided a short-term cushion for revenue declines.

RESEARCH HIGHLIGHTS Notable research published the week ending 17 August 2012

28 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

Why Some California Cities Are Choosing Bankruptcy

The risk profile of California cities has increased across the board due to an economic, legal and policy environment that is helping to drive an increase in bankruptcy filings and defaults by cities. Factors include the state's boom-bust real estate economy, its hands-off policy with regard to the fiscal problems of local governments, and newly enacted legislation that effectively lays out a path to bankruptcy court for stressed municipalities. The risk of default on municipal bonds in California is rising, and across-the-board rating revisions are possible following a review of our ratings on California cities over the next month or two.

Not-for-Profit Healthcare Mid-Year 2012 Outlook: Strong Headwinds Continue

The sector continues to carry a negative outlook because of established risks and developing trends. The established risks are primarily from lower reimbursement levels, and are driven by the unsustainable federal deficit and rising federal spending for Medicare and Medicaid. Political uncertainty makes it harder for hospitals to perform adequate long-term planning. Other emerging trends are related to reimbursement change and include growing collaboration between hospitals and insurers and increasing hospital employment of physicians.

Low Interest Rates and Bank Credit Challenges Shape Smaller VRDO Market

The multi-year trend of contraction in the variable rate demand obligation or VRDO market continued through the first half of 2012, slipping to historical lows and extending a trend that began in 2009, according to our report on how the sector has performed so far this year and how it may fare in the future. Many issuers in all sectors of the municipal market are opting for less-complicated, low-interest rate, traditional fixed-rate debt. Issuers and investors are navigating a greater concentration among bank VRDO support providers. Market share by European bank facility providers has continued to erode.

Structured Finance

CLO Interest Newsletter

Leveraged loan issuers have recently stepped up their offerings of shorter term loans to meet demand from amortizing CLOs. The shorter terms will facilitate the extension of senior notes but ultimately benefit junior CLO noteholders. Also discussed: credit quality of European and US CLOs has been stable, rating actions in July.

Proposed CFPB Standards Pose Few Obstacles for Large RMBS Servicers, but Small- to Mid-Sized Servicers Face Challenges

The new rules recently proposed by the US’ Consumer Financial Protection Bureau (CFBP) for residential mortgage servicing would have minimal impact on the operations of larger servicers, as they have already been making many of the proposed changes. The rules would be more of a challenge to the small- to mid-sized servicers, and costly for them to implement.

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

29 MOODY’S CREDIT OUTLOOK 20 AUGUST 2012

NEWS & ANALYSIS US Drought 2 » Drought-Reduced Corn Crop Is Credit Negative for Meat and

Poultry Companies » Intensifying Drought Is Credit Negative for US Banks Exposed

to Agriculture

Infrastructure 6 » Exelon’s Sale of Maryland Coal-Fired Plants Is Credit Negative

Insurers 8 » Dai-ichi Life’s Strategic Investment in Janus Is Credit Positive for

Both Firms

Sovereigns 10 » Belize’s Sovereign Bond Restructuring Will Impose Severe Losses

on Investors » Slovakia’s Pension Changes Will Raise Revenue, but Increase

Contingent Liabilities

Sub-sovereigns 12 » Japan’s Welfare Reform Is Credit Positive for the Sovereign and

Local Governments

Securitization 14 » Australia’s Standardized Reporting of Modified Mortgages Is Credit

Positive for Covered Bonds, Banks and RMBS

CREDIT IN DEPTH Sovereigns 15

In our study of the modern history of sovereign bond defaults and the haircuts imposed on investors, we found that the risk of re-default is high after sovereign distressed exchanges. Thirty-seven percent of the 30 sovereign debt exchanges since 1997 were followed by further defaults, explaining why issuer ratings often remain low, in the Caa-C rating range, in the wake of distressed exchanges.

MOODYS.COM

Report: 144891

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CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. (MIS”) AND ITS AFFILIATES ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY’S (“MOODY’S PUBLICATIONS”) MAY INCLUDE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY’S OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND MOODY’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY’S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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MIS, a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Shareholder Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

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Notwithstanding the foregoing, credit ratings assigned on and after October 1, 2010 by Moody’s Japan K.K. (“MJKK”) are MJKK’s current opinions of the relative future credit risk of entities, credit commitments, or debt or debt-like securities. In such a case, “MIS” in the foregoing statements shall be deemed to be replaced with “MJKK”. MJKK is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO.

This credit rating is an opinion as to the creditworthiness or a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be dangerous for retail investors to make any investment decision based on this credit rating. If in doubt you should contact your financial or other professional adviser.

EDITORS PRODUCTION ASSOCIATE News & Analysis: Jay Sherman, Elisa Herr and Andre Varella

David Dombrovskis

Rating Changes & Research Highlights: Robert Cox Final Production: Barry Hing