Embed Size (px)
Citation preview
MOODYS.COM
21 APRIL 2016
NEWS & ANALYSIS Corporates 2 » Yuexiu Property’s Sale of an Equity Stake in Development
Project Will Reduce Leverage » Telstra’s Sale of Autohome Stake Is Credit Positive » Aldi’s Market Share Gains Are Set to Accelerate, a Credit
Negative for Woolworths, Wesfarmers and IGA
Infrastructure 5 » State Grid International Development’s New Transmission
Project in Brazil Is Credit Negative
Banks 6 » Basel Committee’s Attempt to Classify Problem Assets Would
Aid Bank Analysis » Greek Banks Would Benefit from ECB’s Decision to Purchase
EFSF Bonds
Sovereigns 9 » Suriname Would Benefit from IMF’s Stand-By Arrangement » Zambia Proposes More Changes to Its Mining Tax Regime, a
Credit Negative
RECENTLY IN CREDIT OUTLOOK
» Articles in Last Monday’s Credit Outlook 12 » Go to Last Monday’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 21 APRIL 2016
Corporates
Yuexiu Property’s Sale of an Equity Stake in Development Project Will Reduce Leverage On 13 April, Yuexiu Property Company Limited (Baa3 negative) announced that its indirect wholly owned subsidiary Prime Profit International Holdings Limited Project Company (unrated) had agreed to sell a 49% stake in a property development project in Guangzhou, China, to Guangzhou Lianheng Real Estate Co., Ltd. (Guangzhou Lianheng, unrated) for RMB2.3 billion. Additionally, Yuexiu Property, through another subsidiary, Guangzhou City Construction & Development Co. Ltd. (unrated), said that it will transfer an inter-company loan to Guangzhou Lianheng for an estimated RMB1.6 billion.
These transactions are credit positive for Yuexiu Property because they will help the company reduce its debt leverage. Yuexiu Property said that it would use the proceeds to refinance its existing debt and for further potential investments and general working capital purposes. The transactions are subject to approval from Yuexiu Property’s shareholders and other relevant parties.
We expect that Yuexiu Property’s need for debt funding over the next 12-18 months will be lower as a result of the proposed transactions. Accordingly, we revised downward our forecast for the company’s debt leverage, as measured by debt/capitalization, to 50%-53% for the next 12-18 months from a previous forecast of 53%-55%. Yuexiu Property’s debt leverage was 53.6% at the end of 2015.
We estimate that Yuexiu Property’s adjusted EBIT coverage of interest will be around 2.3x over the next 12-18 months, largely unchanged from the 2.3x reported in 2015, despite our expectation that its gross profit margin will improve only slightly from the 21.1% reported for 2015, a level that is low relative to what the company has reported in the past.
The proposed transactions will boost Yuexiu Property’s liquidity immediately after they close because the net disposal proceeds of RMB3.82 billion will constitute about 25% of the company’s reported cash balance of RMB15.2 billion at the end of 2015. Yuexiu Property will retain a 51% stake in the Guangzhou project upon completion of the sale, and will continue to consolidate the project into its financials.
The project, which is currently under construction and scheduled to be completed after 2022, is a large-scale mixed-use residential and commercial development located in the downtown area of Guangzhou and has a total estimated gross floor area of 460,765 square meters.
Hong Kong Stock Exchange-listed Yuexiu Property, formerly known as Guangzhou Investment Company Limited, is a property development and investment company operating mainly in China’s Guangzhou, Guangdong Province. Its parent, Guangzhou Yuexiu Holdings Limited (unrated), is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal People’s Government.
Franco Leung Vice President - Senior Credit Officer +852.3758.1521 [email protected]
Betsy Guo Associate Analyst +852.3758.1346 [email protected]
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.
NEWS & ANALYSIS Credit implications of current events
3 MOODY’S CREDIT OUTLOOK 21 APRIL 2016
Telstra’s Sale of Autohome Stake Is Credit Positive Last Friday, Telstra Corporation Limited (A2 stable) announced that it had entered into an agreement to sell a 47.7% stake in Autohome Inc. (unrated), a China-based online automotive business for consumers, for around AUD2.1 billion. The transaction, which is subject to regulatory approval, is credit positive for Telstra because it will improve the company’s liquidity.
We do not expect the transaction to have much of an effect on Telstra’s gross debt/EBITDA because the proceeds will likely be held in cash until they are utilized, and we estimate that Autohome’s contribution to Telstra’s EBITDA was less than AUD300 million, or around 3% of its total EBITDA as of fiscal year that ended June 2015.
However, the sale proceeds will add to Telstra’s already-strong liquidity. As of the end of 2015, Telstra had cash of AUD2.2 billion. Additionally, we expect Telstra’s net debt/EBITDA in fiscal 2016 to improve to around 1.3x on a pro forma basis and before the utilization of the sale proceeds. Our previous forecast was 1.4x, although we recognize that the improvement will be temporary. The company has not specifically mentioned how it will use the proceeds from the transaction, but it has indicated that it will take a balanced approach.
Our base-case assumption is that a large portion of the proceeds will be returned to shareholders through share buybacks, as Telstra did when it returned AUD1 billion to investors during fiscal 2015 after its sales of CSL New World Mobile Limited (unrated) and Sensis Pty Ltd. for a total of AUD2.4 billion. If Telstra were to return to shareholders the full sale proceeds of AUD2.1 billion from the Autohome transaction, it would be credit neutral because it would be excess cash distributed to shareholders and the amount of lost EBITDA would be insignificant.
If in the unlikely event that Telstra were to apply the sale proceeds to debt reduction, we estimate that gross debt/EBITDA would improve to 1.4x-1.5x from our previous expectations of about 1.6x-1.7x, which would expand the cushion against our expectation of less than 2.0x specified for Telstra’s A2 rating.
Ian Chitterer Vice President - Senior Analyst +61.2.9270.1420 [email protected]
NEWS & ANALYSIS Credit implications of current events
4 MOODY’S CREDIT OUTLOOK 21 APRIL 2016
Aldi’s Market Share Gains Are Set to Accelerate, a Credit Negative for Woolworths, Wesfarmers and IGA Last Friday, consumer research company Roy Morgan released data for the Australian supermarket grocery market showing that Aldi (unrated) had increased its market share to 12.1% at December 2015 from 11.6% just nine months earlier. We believe that Aldi’s market share will continue to increase, driven by more rapid store expansion, greater marketing expenditure and a larger amount spent by shoppers per visit. An increase in market share would be credit negative for Australian supermarket operators Woolworths Limited (Baa2 negative), Wesfarmers Limited’s (A3 stable) Coles chain, Metcash Limited’s (unrated) IGA chain, and small independent supermarkets.
Aldi will expand its store base by around 16% per year over the next two years, up from around 9% in 2014, while we forecast that Woolworths will expand its store base by around 4% and that Coles will increase its store base by around 3%, albeit from much larger bases. Aldi started rolling out stores in South Australia in February and we expect it to start opening its first stores in Western Australia in June. Aldi’s advantage is that each new store can take market share without cannibalizing other Aldi stores, a dynamic from which Coles and Woolworths do not benefit owing to their existing nationwide footprints and high store densities.
We expect Aldi to increase its marketing budget. Aldi currently has fewer than 400 stores compared with Woolworths and Coles, which have a combined store base of approximately 1,760. But having reached what it considers to be critical mass, we expect Aldi to significantly raise its marketing budget because it now has the store base to leverage the incremental marketing investment.
Aldi has good potential to increase its “basket size,” or the amount customers spend per visit. Roy Morgan reports that in an average four-week period, 5.3 million consumers shop at Aldi, compared with 10.5 million at Woolworths, 10 million at Coles, just over 4 million at IGA and almost 4 million at other supermarkets. As seen in the UK and Australia to date, new Aldi customers often start out purchasing just the basics, including items such as pasta, rice and sugar and where the risk of disappointment is low. They then migrate to other dry grocery items and finally to fresh food. Herein lies the risk for Woolworths and Coles: as Aldi expands and its customer base matures, we expect its basket size to increase.
Aldi’s lower prices have led Australian supermarket operators to reduce prices, resulting in food price deflation of 1.0%-1.5% annually. With fixed costs such as store leases and labor rising annually, we expect the continued pressure on shelf prices over the next few years to keep negatively affecting margins.
The supermarket industry in Australia has been under increasing pressure from the structural changes driven by Aldi’s discount format over the past few years. Industry margins are also being driven lower, something that took place in the UK when discounters such as Aldi began gaining market share.
Ian Chitterer Vice President - Senior Analyst +61.2.9270.1420 [email protected]
Kirsten Lee Associate Analyst +61.2.9270.8192 [email protected]
NEWS & ANALYSIS Credit implications of current events
5 MOODY’S CREDIT OUTLOOK 21 APRIL 2016
Infrastructure
State Grid International Development’s New Transmission Project in Brazil Is Credit Negative Last Thursday, State Grid International Development Limited (SGID, A1 negative) said that it had won the bid for Teles Pires Hydro Power Transmission Project Phase II in Brazil. The new project is credit negative because it will increase SGID’s risk exposure to an emerging market with higher regulatory and business risks than SGID’s investments in developed markets such as Australia and Europe.
Teles Pires Hydro Power Transmission Project Phase II consists of a 30-year concession to build and operate a second transmission line to connect Teles Pires Hydro Power to Brazil’s national grid. It will include 1,280 kilometers of transmission lines and a number of substations. SGID expects operation to begin in 2020. The company estimates the total construction cost at around $660 million.
The new project will increase SGID’s exposure to Brazil, whose regulatory regime track record is shorter than those of the developed countries where SGID has done business. In particular, Brazil suffers from an ongoing deterioration owing to macroeconomic shocks, a lack of progress by the government in achieving fiscal and economic reforms and challenging political dynamics. The country’s power sector also faces a power oversupply owing to lower demand and high power costs. The Brazilian regulator is considering postponing some new power generation projects to ease the problem.
Although the concession agreement insulates SGID’s transmission project from volume risk, a delay in the related power project would delay the transmission project’s operation. Indeed, SGID’s Teles Pires Hydro Power Transmission Project Phase I has been delayed by a longer-than-expected development of related hydro power plants.
That said, SGID will benefit from a higher investment return from Teles Pires Hydro Power Transmission Project Phase II compared with its other projects in Brazil. The local regulator increased the project’s investment return during the bidding process to attract foreign investors because limited local financing resources had discouraged local investors from participating in the auction.
The new project is the second major greenfield project that SGID has undertaken in Brazil without a partner. Nevertheless, the execution risk is somewhat mitigated by the company’s construction and operating experience in the country. Also, we expect that the company will aim to minimize its currency risk by arranging matched funding to meet its capital expenditure requirements.
At the end of 2015, SGID’s assets totaled RMB106 billion, of which its Brazilian operations constituted nearly 15%. We estimate that emerging markets, mainly Brazil, account for 20%-25% of SGID’s total assets, while developed countries, mainly Australia, account for 75%-80%.
We do not expect that the new project will materially increase the company’s leverage, because its parent company, State Grid Corporation of China (Aa3 negative), is committed to fund at least 40% of its overseas investments. The capex is also in line with our expectations for SGID’s capex requirement. We had expected SGID to incur uncommitted capex of HKD10 billion annually during 2015-18, with 40%-50% funding from State Grid.
Moreover, SGID’s engineering, procurement and construction project has set the stage for China to export construction services and power equipment to Brazil. This reinforces SGID’s strategic importance to both its parent and the Chinese government, given that China is encouraging its state-owned enterprises to go abroad.
Ivy Poon Assistant Vice President - Analyst +852.3758.1336 [email protected]
NEWS & ANALYSIS Credit implications of current events
6 MOODY’S CREDIT OUTLOOK 21 APRIL 2016
Banks
Basel Committee’s Attempt to Classify Problem Bank Assets Would Aid Bank Analysis Last Thursday, the Basel Committee on Banking Supervision (BCBS) published a consultative document on the classification of problem assets, including definitions of nonperforming exposures (NPEs) and forbearance. The lack of a consistent definition of these terms among countries and banks makes bank analysis complex and fuels scepticism of banks’ disclosures. Consistent definitions would aid investors and risk managers in their analysis of banks’ soundness.
The BCBS’ proposed definition of NPE incorporates the following characteristics:
» NPE status applies to all credit exposures, including debt securities
» All exposures to a given counterparty, including uncancellable off-balance-sheet exposures, are classified as an NPE if one transaction is classified as an NPE
» Complementing 90-day past-due criteria with a qualitative assessment of debtors
» Not considering the value of collateral when identifying an NPE
» The ability to upgrade an exposure to performing, contingent on objective criteria
For forbearance, which has no formal international definition, the BCBS recommended a scope identical to the one used with NPEs, with clear identification of forbearance exposures concessionally granted to counterparties facing financial difficulties. The proposal also states that forborne exposures can be either performing or nonperforming, depending on the exposure’s status when the forbearance is extended. Exit from the forborne category would be based on objective criteria, and forbearance status should not result in a reduction in provision requirements.
The need for a single set of guidelines is the result of the BCBS’ assessment of the regulatory frameworks and supervisory practices of 28 jurisdictions. The analysis identified numerous variations, including loan categories based on an accounting layer in eight jurisdictions, on a regulatory layer in 10 countries, and on an ad hoc basis in the remainder. Meanwhile, banks in Asia and the Americas require that exposures classified as nonperforming have six to 12 months of performance before their classification is restored to performing, while in Europe banks are bound by a 12-month time frame. There are also differences in the treatment of collateral and the criteria for income recognition.
An internationally accepted definition of NPE would help improve the identification of such exposures and forbearance and result in more harmonization of banks’ supervisory reporting and public disclosures. A more precise identification of problem loans should force banks to shore up their capital base and reserves. We also expect that specific disclosure requirements in Pillar 3 reports that the BCBS intends to develop will strengthen market discipline. We note that the European Banking Authority’s definition of NPEs and forbearance, published in 2014 before the European Central Bank’s asset quality reviews, prompted some banks in the European Union to significantly increase their provision levels.
The global financial crisis provided evidence that proper categorisation of loans, or lack thereof, has material implications on banks’ provisioning and thus their capital. But for this guidance to be effective, BCBS members would need to fully embrace what would be a voluntary framework. It also remains to be seen whether the BCBS will set a timetable for its implementation and whether the Financial Stability Board would press G-20 members to adopt the framework. Absent these conditions being met, the likelihood of achieving material progress in this area would be slim.
Alain Laurin Associate Managing Director +33.1.5330.1059 [email protected]
NEWS & ANALYSIS Credit implications of current events
7 MOODY’S CREDIT OUTLOOK 21 APRIL 2016
Greek Banks Would Benefit from ECB’s Decision to Purchase EFSF Bonds Last Friday, the European Central Bank (ECB) informed Greek banks that it is including in its list of eligible securities for purchasing under its public-sector purchasing programme the European Financial Stability Facility (EFSF, Aa1 stable) notes currently held by the banks. The ECB’s decision to include these EFSF bonds in its so-called quantitative easing programme is credit positive for Greek banks because they can reduce their dependence on ECB funding, and book significant capital gains that will enhance their tangible capital position.
Greek banks hold around €37.6 billion of EFSF bonds, which they received in June 2013 from Greece’s state-owned Hellenic Financial Stability Fund. These bonds were subject to transfer restrictions, preventing Greek banks from selling them to third parties. The ECB now will be able to purchase up to 50% of these EFSF bond holdings, the limit applicable to securities issued by eligible issuers.
This development could significantly enhance Greek banks’ funding position, given that up to €18.8 billion of such EFSF bonds could be sold, which would reduce their ECB funding dependence by an equal amount from the €35.3 billion outstanding as of the end of March 2016 (see Exhibit 1). Greek banks have used the EFSF bonds as collateral for repo transactions with the ECB given the sizable deposit outflows the banks have experienced in the past few years. Sales of these EFSF bonds will also reduce the size of Greek banks’ balance sheets, which will rationalise and improve some banks’ performance ratios that incorporate total assets.
EXHIBIT 1
Greek Banks’ Funding Position
* March 2016 deposit figure is our estimate. Sources: Bank of Greece and Moody’s Investors Service
Given that other EFSF bonds in the market with similar maturity profiles currently trade 2%-3% above par, Greek banks would benefit from pre-tax capital gains of up to €500 million that would support their 2016 profitability and end the past few years of losses. Moreover, if the European Stability Mechanism (ESM) allows Greek banks to shift the remaining 50% of their EFSF bonds to their available-for-sale book from their loans-and-receivables book, they will also be able to report additional mark-to-market profits for the year. This, in turn, would enhance banks’ tangible capital position, which is currently relatively weak owing to the significant portion of deferred tax assets (DTAs) eligible for deferred tax credits that qualify as common equity Tier 1 (CET1) capital in their capital structure.
€ 0
€ 20
€ 40
€ 60
€ 80
€ 100
€ 120
€ 140
€ 160
€ 180
€Bi
llion
Domestic Private-Sector Deposits ECB Funding Emergency Liquidity Assistance
Nondas Nicolaides Vice President - Senior Credit Officer +357.25.693.006 [email protected]
Stelios Kyprou Associate Analyst +357.25.693.002 [email protected]
NEWS & ANALYSIS Credit implications of current events
8 MOODY’S CREDIT OUTLOOK 21 APRIL 2016
We estimate that Piraeus Bank S.A. (Caa3/Ca stable, caa31) will benefit the most among the four systemic banks given its higher exposure to EFSF bonds (see Exhibit 2). In addition, Eurobank Ergasias S.A.’s (Caa3/Ca stable, caa3) tangible CET1 capital, which is the lowest among Greek banks because of its high level of DTAs, is likely to benefit proportionally more than its peers. Greece’s other two banks, National Bank of Greece S.A. (Caa3 stable, caa3) and Alpha Bank AE (Caa3/Ca stable, caa3), will benefit to a lesser degree because of either their lower EFSF holdings or their stronger tangible capital position.
EXHIBIT 2
Greek Banks’ EFSF Holdings and Tangible Capital Position
* Note: Assumes the sale of Finansbank, Astir Palace and NBGI, and repayment of its €2 billion contingent capital instruments. Sources: The banks
Nonetheless, we note that these benefits would be meaningful if the current review process of the country’s support programme by its official lenders (the European Commission, ECB, ESM and International Monetary Fund) concludes successfully and in a timely manner. This would reduce the risk of a potential political and fiscal financing crisis that could have significant negative repercussions on the banks’ credit quality, effectively eliminating the benefits from the above transactions.
1 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured rating (where available) and baseline credit
assessment.
€ 5.3€ 2.6
€ 5.9 € 5.4
€ 3.4
€ 4.1
€ 4.9€ 4.1
€ 4.3
€ 10.0 € 9.1
€ 14.2
16.7% 17.0% 17.5%17.8%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
€ 0
€ 2
€ 4
€ 6
€ 8
€ 10
€ 12
€ 14
€ 16
Alpha Bank EurobankErgasias
NationalBank ofGreece*
PiraeusBank
€bi
llion
Tangible CET1 Capital - excl. DTAs eligible for DTCs Remaining CET1 Capital EFSF Bonds Reported CET1 Ratio - right axis
NEWS & ANALYSIS Credit implications of current events
9 MOODY’S CREDIT OUTLOOK 21 APRIL 2016
Sovereigns
Suriname Would Benefit from IMF’s Stand-By Arrangement Last Friday, the International Monetary Fund (IMF) announced that it had reached a staff-level agreement with Suriname (Ba3 stable) on the key elements of an economic program that would involve a two-year, $478 million Stand-By Arrangement (SBA) that now awaits approval from the IMF’s executive board. We expect that the board will approve the SBA within the next two months. The fresh financing and program supervision would be credit positive for Suriname given the acute economic pressures that the country faces as a result of the collapse in commodity prices on which it depends. However, significant implementation risks remain.
Macroeconomic conditions in Suriname weakened considerably in 2015, driven in large part by the ongoing decline in gold, oil and alumina prices. These three commodities accounted for roughly 90%, on average, of Suriname’s annual merchandise exports in 2007-14. As a result, the current account deficit has widened to more than 15% of GDP in 2015 from a peak surplus of 15% in 2010 (see Exhibit 1). The record deficit is owed to a shift in the goods balance, which fell into a deficit for the first time in more than a decade.
EXHIBIT 1
Suriname’s Widening Current Account Deficits
Sources: Haver Analytics and the International Monetary Fund
The wider current account deficit has not been fully financed with financial inflows, leading to a significant loss of foreign-exchange reserves. Reserves in 2015 fell to critically low levels of approximately $220 million from a peak of $750 million in 2012. The loss in reserves forced the authorities to devalue the currency by more than 20% in November 2015.
Government finances have mirrored the deterioration of Suriname’s external accounts. The fiscal deficit widened to approximately 9% of GDP in 2015, with revenues falling to 19.1% of GDP from 21.8% in 2014, and expenditures rising to 28.1% from 27.4% over the same period. Debt increased by more than 13 percentage points in 2015 to 39.8% of GDP from 26.5% in 2014. Central bank financing, a further indication of fiscal pressures, underpinned the strong increase in debt (see Exhibit 2).
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
-$1,000
-$800
-$600
-$400
-$200
$0
$200
$400
$600
$800
$1,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E
Perc
ent o
f GD
P
$ M
illio
ns
Goods Balance Services Balance Net Income Net Current Transfers Current Account - right axis
Jaime Reusche Vice President - Senior Analyst +1.212.553.0358 [email protected]
Anna Snyder Associate Analyst +1.212.553.4037 [email protected]
NEWS & ANALYSIS Credit implications of current events
10 MOODY’S CREDIT OUTLOOK 21 APRIL 2016
EXHIBIT 2
Suriname’s Fiscal Deficits and Debt as a Percent of GDP
Source: Central Bank of Suriname
The economy will benefit from the IMF program in two ways. First, the program targets the adoption of broad-based measures and provides a large amount of financing. Elements of the program include economic diversification, enhancing sources of non-mineral revenues for the government, and a suite of other structural reforms to facilitate fiscal consolidation and improve fiscal and monetary policy frameworks. If the program is successful, the authorities will have access to close to half a billion dollars over the next two years, which will help to cushion government finances and the economy during the period of fiscal and economic adjustment.
Second, the technical assistance and IMF supervision will ensure some degree of progress, given that Suriname’s authorities on their own have been unable to achieve much progress in stabilizing the economy and fiscal accounts following the commodity shock. If the IMF were not involved, fiscal deficits would likely remain elevated and debt would likely surpass 60% of GDP by 2019.
Nevertheless, the magnitude of deterioration in Suriname’s credit metrics has surpassed our expectations (balance-of-payments and economic data are prone to significant lags, hobbling our ability to monitor macroeconomic developments). The planned adjustments will be prone to significant implementation risks given the broad-based nature of the program and ambitious measures that the IMF hopes will be enacted. The extent to which this program is credit positive is tempered by the fact the adjustment comes after significant economic and fiscal deterioration that will continue to put downward pressure on Suriname’s credit metrics until the program achieves material progress.
0%
5%
10%
15%
20%
25%
30%
35%
40%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
2007 2008 2009 2010 2011 2012 2013 2014 2015E
Fisal Balance - left axis Government Debt - right axis
NEWS & ANALYSIS Credit implications of current events
11 MOODY’S CREDIT OUTLOOK 21 APRIL 2016
Zambia Proposes More Changes to Its Mining Tax Regime, a Credit Negative On 13 April, the government of Zambia (B3 negative) submitted a proposal to parliament that would reduce mining royalties paid to the state. If approved, the reduction would be the third shift in the tax regime since January 2015 and would continue a pattern of frequent changes to the country’s tax regime over the past 10 years. Such changes to Zambia’s mining royalty regime are credit negative for the sovereign because they illustrate the country’s unpredictable and unstable fiscal policy, which also lacks credibility and deters investment. If approved by the parliament before its dissolution on 13 May (general elections are set for August), the new regime would be retroactive to 1 April.
The exhibit below describes Zambia’s repeated changes to its mining royalty regime. Under the proposed rules, the tax rate on copper would equal 4% when the price is less than $4,500 per ton, 5% when the price is $4,500-$6,000 and 6% when the price is more than $6,000. Royalty rates would be set at 5% for other base metals and at 6% for precious metals.
Zambia’s Changing Mining Tax Regime, 2006-16
2006 2007 2008 2009 2012 2013
Jan. 2015
July 2015
Jan. 2016
April 2016
Corporate Income Tax Rate
25% 30% 30% 30% 30% 30% 0% 30% 30% 30%
Royalty Rate 0.3% 3% 3% 3% 6% 6% 20%/8%1 9%/6%2 9%/6%2 4%-6%3 Variable Income Tax Rate
No No Yes Yes Yes Yes No No No No
Windfall Tax No No Yes No No No No No No No Export Duty None None 15% for
unprocessed 10% for unprocessed None
Notes: 1 8% royalty rate for underground and 20% royalty rate for open cast mining operations. 2 6% royalty rate for underground and 9% royalty rate for open cast mining. 3 The tax rate increases with the price of copper. Sources: International Monetary Fund and the Ministry of Mines of Zambia
The proposal also includes the suspension of a 10% export duty on ores and concentrates for materials that were not processed in Zambia. This suggests that investors can export raw materials without having to pay a penalty tax. The measures diminish incentives for companies to undertake mineral processing and export higher value-added products, thus reinforcing country’s dependence on basic commodities and discouraging development of local manufacturing.
The changes to the mining tax are a response to mining companies that had warned that they would cut thousands of jobs or halt operations entirely if Zambia did not implement a more conducive taxation regime. However, the changes are occurring at a time when Zambia’s fiscal situation is under extreme pressure: the government already is facing liquidity shortages and a further reduction in revenues that is likely to result from these tax changes would make timely fiscal consolidation even less likely. Zambia’s 2015 deficit was 8.1% of GDP, and absent major expenditure cuts we expect it to be at least 7% this year.
It is highly likely that the proposed regime will not be Zambia’s last given that the country’s tax system is progressive and thus is susceptible to additional changes as a result of pressure from mining companies for reduced tax rates once prices start to rise. Zambia’s overall lack of effective fiscal policy and credibility is reflected in its institutional strength score of “very low +” based on our methodology. Frequent changes to the mining regime hamper transparency and challenge investors’ ability to stay current with the regime, while preventing them from making effective multi-year investment plans.
Zuzana Brixiova Vice President - Senior Analyst +44.20.7772.1628 [email protected]
RECENTLY IN CREDIT OUTLOOK Select any article below to go to last Monday’s Credit Outlook on moodys.com
12 MOODY’S CREDIT OUTLOOK 21 APRIL 2016
NEWS & ANALYSIS Corporates 2 » Rice Energy’s Equity Issuance to Fund Acquisition Is
Credit Positive » Encana’s Debt Buyback Eases Balance-Sheet Debt Burden » PEMEX Gets Lift from Mexican Government’s $4.2
Billion Commitment » ArcelorMittal’s Rights Issue Will Reduce Debt » Link REIT’s Asset Disposals Will Help Curb Debt Growth » Wesfarmers’ Discovery of Accounting Breaches at Subsidiary
Is Credit Negative
Infrastructure 8 » Texas Regulators Suspend Investigation into Utility Tax
Collections, a Credit Positive for Select Utilities
Banks 9 » Italian Bank Rescue Fund Is Credit Positive for Weaker Banks,
but Not a Systemic Fix » Russia Increases Banks’ Deposit Insurance Fees, a
Credit Negative » Romanian Legislation Allowing Strategic Mortgage Defaults
Increases Banks’ Asset Risk » Nomura’s Restructuring of Overseas Business Is Credit
Positive
Asset Managers 15 » Activist’s Sale of Legg Mason Stake Is Credit Positive
for Debtholders
Sovereigns 17 » Mexico’s Central Bank Transfers Extraordinary Profits to
Sovereign, a Credit Positive » Sweden Reduces Budgeted Deficit Despite Refugee Influx;
Integration Policies Enhance Growth Potential » Ukraine’s Government Formation After Two-Month Delay Is
Credit Positive » Korea’s Ruling Party Fails to Gain Parliamentary Majority, a
Credit Negative
CREDIT IN DEPTH US Banks 25
Large US Banks Face a High Bar to Achieving Credible Living Wills. US regulators released their assessments of Dodd-Frank Resolution Plans, also known as “living wills,” submitted by the eight US global systemically important banks. The regulators deemed as “not credible” the plans of five banks, a credit negative. Those banks were Bank of America, Bank of New York Mellon, JPMorgan Chase, State Street and Wells Fargo. Ultimately, we expect that achieving a credible resolution plan will be positive for bondholders, strengthening these banks’ resilience to stress and potentially reducing the severity of loss for creditors in the event of a resolution.
RATINGS & RESEARCH Rating Changes 28
Last week we downgraded DJO Finance, Energy XXI Gulf Coast, Woori Bank, Hancock Holding, BOK Financial, Cullen/Frost Bankers, Binhai Investment Company and Eesti Energia, and upgraded Sabre Holdings, Bankia, BAWAG, Santander UK and 87 tranches of US subprime RMBS, among other rating actions.
Research Highlights 35
Last week we published on European pharmaceuticals, EMEA oil, gas, metals and mining companies, UK corporates, North American covenant quality, Allergan, global oil and gas, independent exploration and production, US restaurants, Indian power generators, global public-private partnerships, US regional banks, Brazilian banks, Italian banks, Russian banks, Central and Eastern European banks, Asia-Pacific sovereigns, climate risk disclosures, Czech regional and local governments, Puerto Rico, UK securitizations, Australian RMBS and US CMBS, among other reports.
MOODYS.COM
Report: 189181
© 2016 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES (“MIS”) 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. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. 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, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.
MOODY’S CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS OR MOODY’S PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.
ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.
All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moody’s Publications.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.
Moody’s Investors Service, Inc., 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 Moody’s Investors Service, Inc. have, prior to assignment of any rating, agreed to pay to Moody’s Investors Service, Inc. 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 “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”
Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of 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 reckless and inappropriate for retail investors to use MOODY’S credit ratings or publications when making an investment decision. If in doubt you should contact your financial or other professional adviser.
Additional terms for Japan only: Moody's Japan K.K. (“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. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.
EDITORS PRODUCTION ASSOCIATE News & Analysis: Jay Sherman Amanda Kissoon
