Weekly Credit Outlook - June 25, 2012

7/31/2019 Weekly Credit Outlook - June 25, 2012

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MOODYS.CO

25 JUNE 2012

NEWS & ANALYSISCorporates 2 P&G Cuts Sales and Earnings View as Economic Slowdown Hits Home Walgreens Stake in Alliance Boots Cuts into its Credit Profile Acquisition of Norit Would Weaken Cabots Credit Profile Hammerson Sells a Majority of its Office Properties to Focus on

Retail, a Credit Positive

Indian Competition Commission Fines Cement Cartel, a CreditNegative for Holcim and Lafarge

Russias New Guarantee Programme Is Credit Positive for ChelPipeand Other Domestic Corporates

Chinas New Foreign-Exchange Policy Will Help Chinese Firms withOverseas Investment or Offshore Debt

GS E&Cs Resumption of ERC Project in Egypt Is Credit Positive MNC SKY Visions Planned IPO Is Credit PositiveInfrastructure 12 BNDESPARs Investment in Renova Energia Is Credit Positive for

Light Energia

Banks 13

Changes in Canadian Mortgage Insurance Are Positive, but May BeToo Late

JPMorgans Investment in Mexican Subsidiary Is Credit Negativefor Other Foreign Wholesale Banks in Mexico

Report on Brazils Exchanges Encourages Competition but IsNegative for BM&FBovespa

Bank of Englands Decision to Post Collateral in OTC DerivativesTransactions Is Credit Positive for Dealers

WestLBs Costly Break-Up Is Credit Positive for Senior Bondholders Russian Central Bank Will Scrutinise Use of Emergency Liquidity

Facilities, a Credit Positive

Mizuhos Brazilian Acquisition Creates a Credit Positive Beachhead Tighter Lending Rules on Luxury Houses Are Credit Positive for

Taiwanese BanksInsurers 25

Tokio Marine to Front-Load Domestic Stock Sales, a Credit PositiveAsset Managers 27 Eaton Vances Acquisition of Minority Stake in Hexavest Is Credit Positive Chinas Opening of High-Yield Bond Market Is Credit Positive for

International Asset Managers

Sovereigns

Japans Tri-Partisan Consumption Tax Deal Is Credit Positive Icelands Prepayments on IMF and Nordic Government Loans Are

Credit Positive

Hidroelectricas Insolvency Filing Is Credit Negative for RomaniaUS Public Finance

New York State Denies Deficit Financing to FiscallyTroubled Municipalities

Rhode Islands Budget Is Credit Positive for Central Falls andSchools, but Leaves Woonsocket and Pensions Unaddressed

Contraction in Municipal Variable Rate Demand Debt Is CreditPositive for Weaker Issuer

CREDIT IN DEPTHUS Banks, Card Networks, Merchant Acquirers and Retailers

New debit rules hurt banks and reshape the payment processor market.

RATINGS & RESEARCHRating Changes

Last week we downgraded Choice Hotels International, Codere, 15

global banks and securities firms, various entities in Lloyds Banking

Group, Ceskoslovenska Obchodni Banka (Czech Republic and Slovakia),

ING Bank Slaski, ING Bank Eurasia, Bank Gospodarki Zywnosciowej,

Natixis Bank (ZAO), and 91 structured finance transactions with

exposure to the downgraded 15 global banks and securities firms, and

upgraded Flowserve, RBS Global, Turkey, and the Turkish sub-

sovereigns of Istanbul, Ismir, and Toplu Konut Idaresi Baskanligi, among

other rating actions.

Research Highlights

Last week we published on European telecoms, Canadian broadband,

leveraged loan covenants, oil and natural gas, EMEA corporate liquidity,

US manufacturing, debit card rules, reinsurance, asset managers,Venezuela, Brazil, the Caribbean Development Bank, Pakistan, Russian

regions, California, CLOs and US auto ABS, among other reports.

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NEWS & ANALYSISCredit implications of recent worldwide news events

2 MOODYS WEEKLY CREDIT OUTLOOK 25 JUNE 20

Corporates

P&G Cuts Sales and Earnings View as Economic Slowdown Hits HomeLast Wednesday,The Procter & Gamble Company(Aa3 stable) cut its organic revenue and coreearnings per share forecasts for the fourth quarter ending 30 June and introduced modest growth

expectations for fiscal 2013. The credit negative development shows that economic weakness in Euro

and the US is beginning to pinch, and it suggests that P&Gs focus on emerging-markets expansion

has cost it a step in defending existing brands and introducing new ones at home.

The company said net sales will decline 1%-2% in the current quarter, including foreign-exchange

effects, compared with prior guidance of a 1%-2% increase. It expects core earnings of $0.75-$0.79 p

share, down from a prior range of $0.79-$0.85. For fiscal 2013, P&G expects organic sales (excludin

foreign exchange and M&A) to increase 2%-4% and core earnings per share to be flat to up in the m

single digits from fiscal 2012 results. These estimates are well below its mid-single-digit revenue grow

and high-single-digit earnings growth in recent years.

The consumer products giant is feeling the effects of economic weakness, market share losses, higher

commodity costs and foreign exchange volatility in Europe and the US. Owing to rising fuel costs an

lower disposable incomes, consumers in the advanced economies are becoming more price sensitive

despite the highly consumable, low-priced nature of the types of everyday necessities P&G makes.

P&G is the first US-based multinational consumer products company to disclose that problems in

Europe and a slow recovery in the US are affecting its sales and earnings. But recent market share los

suggest that P&Gs pricing is too high in categories such as diapers and laundry, and that its lack of

meaningful innovation and slow productivity improvements are beginning to take a toll.

Part of the problem may be that P&G has spent heavily to expand in emerging markets, which has c

into its $2 billion product innovation budget while diverting human resources to achieving its goal oreaching an additional 1 billion consumers over the next few years. This strategy has reduced its

capacity to defend its market share and create innovative new products in the developed markets.

Consequently, US-focused competitors such asChurch & Dwight Co. Inc.(Baa2 stable) andSun

Products Corporation(B2 negative) in the US laundry segment, andUnilever N.V.(A1 stable) in

European personal care and home care, have gained ground against P&G brands. These competitors

have also gained a cost advantage through their limited foreign exchange exposure to the euro.

P&G could falter in emerging markets, too. After a decade-long overseas push, P&G generates 40% its sales in emerging markets and an even lower percentage of its profits. In contrast,Kimberly-Clark

Corporation(A2 stable) gets 45% of its sales in emerging markets, andColgate-Palmolive Company

(Aa3 stable) gets about 55%. Nevertheless, P&G has been booking emerging-markets organic sales

growth of about 12% a year. But with concerns of slowing growth in China, where P&G is the large

consumer products purveyor, emerging-markets sales may weaken.

To be sure, P&G is not alone in its problems.Danone(A3 stable) last Tuesday scaled back its 2012

operating margin forecast, citing weakness in Spain and elsewhere in the European Union periphery,

and others may follow suit. Companies that are more at risk include battery makerEnergizer HoldinInc.(Baa3 stable), with nearly 50% sales exposure to Europe, and skin-care and cosmetics makerEst

Lauder Companies(A2 stable), with over 50% of its sales coming from its large and growing Asian

business and substantial European business.

anice Hofferber, CFAenior Vice President1.212.553.4493

[email protected]
http://www.moodys.com/credit-ratings/Procter-Gamble-Company-The-credit-rating-621000http://www.moodys.com/credit-ratings/Procter-Gamble-Company-The-credit-rating-621000http://www.moodys.com/credit-ratings/Procter-Gamble-Company-The-credit-rating-621000http://www.moodys.com/credit-ratings/Church-Dwight-Company-Inc-credit-rating-171895http://www.moodys.com/credit-ratings/Church-Dwight-Company-Inc-credit-rating-171895http://www.moodys.com/credit-ratings/Church-Dwight-Company-Inc-credit-rating-171895http://www.moodys.com/credit-ratings/Sun-Products-Corporation-credit-rating-820141282http://www.moodys.com/credit-ratings/Sun-Products-Corporation-credit-rating-820141282http://www.moodys.com/credit-ratings/Sun-Products-Corporation-credit-rating-820141282http://www.moodys.com/credit-ratings/Sun-Products-Corporation-credit-rating-820141282http://www.moodys.com/credit-ratings/Unilever-NV-credit-rating-776500http://www.moodys.com/credit-ratings/Unilever-NV-credit-rating-776500http://www.moodys.com/credit-ratings/Unilever-NV-credit-rating-776500http://www.moodys.com/credit-ratings/Kimberly-Clark-Corporation-credit-rating-439000http://www.moodys.com/credit-ratings/Kimberly-Clark-Corporation-credit-rating-439000http://www.moodys.com/credit-ratings/Kimberly-Clark-Corporation-credit-rating-439000http://www.moodys.com/credit-ratings/Kimberly-Clark-Corporation-credit-rating-439000http://www.moodys.com/credit-ratings/Colgate-Palmolive-Company-credit-rating-185750http://www.moodys.com/credit-ratings/Colgate-Palmolive-Company-credit-rating-185750http://www.moodys.com/credit-ratings/Danone-credit-rating-2108http://www.moodys.com/credit-ratings/Danone-credit-rating-2108http://www.moodys.com/credit-ratings/Danone-credit-rating-2108http://www.moodys.com/credit-ratings/Energizer-Holdings-Inc-credit-rating-822474417http://www.moodys.com/credit-ratings/Energizer-Holdings-Inc-credit-rating-822474417http://www.moodys.com/credit-ratings/Energizer-Holdings-Inc-credit-rating-822474417http://www.moodys.com/credit-ratings/Energizer-Holdings-Inc-credit-rating-822474417http://www.moodys.com/credit-ratings/Estee-Lauder-Companies-Inc-The-credit-rating-600047834http://www.moodys.com/credit-ratings/Estee-Lauder-Companies-Inc-The-credit-rating-600047834http://www.moodys.com/credit-ratings/Estee-Lauder-Companies-Inc-The-credit-rating-600047834http://www.moodys.com/credit-ratings/Estee-Lauder-Companies-Inc-The-credit-rating-600047834http://www.moodys.com/credit-ratings/Estee-Lauder-Companies-Inc-The-credit-rating-600047834http://www.moodys.com/credit-ratings/Estee-Lauder-Companies-Inc-The-credit-rating-600047834http://www.moodys.com/credit-ratings/Energizer-Holdings-Inc-credit-rating-822474417http://www.moodys.com/credit-ratings/Energizer-Holdings-Inc-credit-rating-822474417http://www.moodys.com/credit-ratings/Danone-credit-rating-2108http://www.moodys.com/credit-ratings/Colgate-Palmolive-Company-credit-rating-185750http://www.moodys.com/credit-ratings/Kimberly-Clark-Corporation-credit-rating-439000http://www.moodys.com/credit-ratings/Kimberly-Clark-Corporation-credit-rating-439000http://www.moodys.com/credit-ratings/Unilever-NV-credit-rating-776500http://www.moodys.com/credit-ratings/Sun-Products-Corporation-credit-rating-820141282http://www.moodys.com/credit-ratings/Sun-Products-Corporation-credit-rating-820141282http://www.moodys.com/credit-ratings/Church-Dwight-Company-Inc-credit-rating-171895http://www.moodys.com/credit-ratings/Procter-Gamble-Company-The-credit-rating-621000


3/56



Walgreens Stake in Alliance Boots Cuts into its Credit Profile

Last Monday,Walgreen Co.(A3 review for downgrade) said it had agreed to purchase 45% of the

equity of European pharmacy-led health and beauty company Alliance Boots (unrated) for $6.7

billion, a decision that will weaken the US drug-store chains capital structure. Walgreen intends tofinance this transaction with a combination of additional debt, equity and cash.

Alliance Boots, which is also owned by private-equity firm Kohlberg Kravis Roberts (KKR) and othe

investors, is highly leveraged, and Walgreen will also significantly increase its debt to finance the

investment, leading us to put Walgreens A3 rating on review for downgrade. Walgreen will more th

double its current $2.3 billion of debt by adding an additional $3.5 billion to finance the transaction

This debt will increase Walgreens debt-to-EBITDA ratio to 3.8x by 1 September, from 3.3x current

Moreover, Alliance Bootss debt-to-EBITDA ratio was about 6.2x on 31 March, as a result of theremaining 7.8 billion of debt KKR used to finance its leveraged buyout of the company. We believe

there is a risk that the two companies might not deleverage as rapidly as Walgreen expects.

To be sure, we expect the combination will drive substantial cost savings for both companies. We

believe the combined companies will have sizable purchasing scale for generic drugs and front-endmerchandise, which will be a large driver of the potential cost savings. But overall, the increase in

leverage makes this deal credit negative.

The transaction has other risks. In particular, Alliance Boots derives about 58% of its total annual

revenue of 23 billion from continental Europe, where worries about the economy are mounting.

Maggie TaylorVice President - Senior Credit Officer

[email protected]
http://www.moodys.com/credit-ratings/Walgreen-Co-credit-rating-806000http://www.moodys.com/credit-ratings/Walgreen-Co-credit-rating-806000http://www.moodys.com/credit-ratings/Walgreen-Co-credit-rating-806000http://www.moodys.com/credit-ratings/Walgreen-Co-credit-rating-806000


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Acquisition of Norit Would Weaken Cabots Credit Profile

Last Thursday,Cabot Corporation(Baa1 review for downgrade) said it had entered into an agreemen

to buy Dutch chemicals company Norit N.V., an indirect parent ofNorit Holdings BV(B1 review f

upgrade), for $1.1 billion, a move that marks Cabots effort to become a leading higher-marginspecialty chemicals company. The planned acquisition is credit negative for Cabot and we placed its

ratings on review for downgrade. Cabot has offered an acquisition price nearly 12x Norits 2011

EBITDA, a high multiple, even for Norit, a relatively stable business with strong margins. Cabot pla

to finance $900 million of the deal with debt, instantly doubling its debt burden and raising its

leverage to about 3x from less than 2x today.

Strategically, the deal would give Cabot, a global supplier of commodity and specialty materials, mor

than 150 types of activated carbon products for removing pollutants and other impurities from waterair, food, drugs, and industrial waste gases. Norit sells these products to a wide range of end users. Ye

the weakening of Cabots historic credit profile, along with the incremental debt to fund the Norit

purchase price, threatens to dilute the deals strategic benefits to debtholders.

For its part, Cabot has shown a seriousness about keeping its leverage under control. The recent sale its Supermetals business will give Cabot about $275 million as part of an earnout over the next 24

months to help reduce its new debt load of $900 million. The Supermetals sale, including sale of the

excess inventory, will total a minimum of $450 million in cash. Cabot received $175 million at the

initial closing, and expects to receive an additional $275 million over the next two years.

Still, the additional debt from the Norit deal would be a considerable burden for Cabot, which alread

had $894 million in debt, including $687 million on its balance sheet plus debt adjustments of $93

million for under-funded pension obligations and $114 million for an operating lease. Cabot believe

the Supermetals sale and the cash flows of Cabots ongoing businesses will help it lower its

debt/EBITDA ratio to about 2.4x by the end of 2013, but we expect its initial leverage to rise to abo

3x.

Much of the increased demand for Norits products ties directly to the tightening enforcement and

enactment of environmental, health and safety regulations and laws, especially those requiring that

industrial facilities reduce their emissions of air and water pollutants. Any slowing in the

implementation of such rules would reduce the cash flows that Norit anticipates.

Moreover, if the Norit deal does signal the start of a Cabot expansion effort, such a debt-funded

acquisition spree would compromise Cabots credit profile even further. Whether the companys risk

profile has changed, and whether the company can keep its leverage in check, will determine the cou

of a future rating action.

In a 21 June conference call with investors, Patrick Prevost, Cabots chief executive, characterized the

deal as a new growth platform for Cabot and the next step to becoming a higher margin, leading

specialty chemicals company. Mr. Prevosts comments may not imply that Cabot is ready to embarkon an acquisition spree, but any further debt-funded M&A deals would clearly stretch Cabots balan

sheet. Mr. Prevost said in his remarks that Cabot has looked at various industry spaces in terms of

potential acquisitions for several years now. It is not yet clear whether buying Norit puts an end to

Cabots hunt for assets.

William ReedVice President - Senior Credit Officer

[email protected]
http://www.moodys.com/credit-ratings/Cabot-Corporation-credit-rating-131175http://www.moodys.com/credit-ratings/Cabot-Corporation-credit-rating-131175http://www.moodys.com/credit-ratings/Cabot-Corporation-credit-rating-131175http://www.moodys.com/credit-ratings/Norit-Holdings-BV-credit-rating-822596862http://www.moodys.com/credit-ratings/Norit-Holdings-BV-credit-rating-822596862http://www.moodys.com/credit-ratings/Norit-Holdings-BV-credit-rating-822596862http://www.moodys.com/credit-ratings/Norit-Holdings-BV-credit-rating-822596862http://www.moodys.com/credit-ratings/Cabot-Corporation-credit-rating-131175


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Hammerson Sells a Majority of its Office Properties to Focus on Retail, aCredit Positive

Last Tuesday,Hammerson plc(Baa2 stable) said that it had exchanged contracts to sell to Brookfield

Office Properties the majority of its office property portfolio for a total cash sum of 518 million,above pro forma book value with an initial yield1 of 5.2%.

The sale, which is Hammersons first step toward focusing on developing and acquiring retail

properties, is credit positive as it will improve its profitability as operating costs decrease with its new

concentration on a single line of business. In addition, the sale, along with the companys proposed

expansion of its retail portfolio, will also enhance the companys franchise value, particularly with

respect to its tenant relationships.

Hammerson is a real estate investment trust (REIT) with a large portfolio of UK and French prime

commercial properties valued at 5.72 billion at 31 December 2011. Following this transaction, the

portfolio will be 97% retail, versus 89% before the sale, and 3% office, versus 11% before the sale.

Although Hammerson will lose some of the benefits of diversification as a result of the disposal of itsoffice properties, the companys income will be more stable. Rental income from Hammersons offic

in the City of London has been more volatile than that of its prime retail properties. For example, th

office portfolio was 8.9% over-rented2 at year-end 2011, while a more stable rental growth pattern h

led to a potential income increase at rent review3 of 3.8% for its shopping centres and 2.3% for its

retail parks.

In addition, Hammersons business risk will decline. The company has historically taken calculated,

but nevertheless speculative, development risk to optimize its returns on office developments. By

contrast, Hammersons retail developments have been partially pre-let, at a minimum by anchor

tenants, prior to starting construction. Furthermore, many of Hammersons retail developments are

lower-risk extensions and/or refurbishments of existing, successful retail properties.

Regarding the enhancement to Hammersons franchise value, office property owners find it difficult cultivate franchise value because office tenants seldom provide opportunities for repeat business in

other locations. National and international retailers prefer to rent from property owners specializing

retail so that they know in advance what kind of landlord/tenant relationship into which they will be

entering. For example, a landlords positioning of retailers within a well-designed shopping mall can

have a large effect on sales. Enhanced franchise value will translate into better demand for

Hammersons shopping centres, which translates into being able to ask and get higher rents from

tenants and preserve occupancy rates, particularly during cyclical downturns.

Hammerson has identified several retail development projects in which to reinvest sale proceeds; thes

will produce superior returns on investment compared to acquiring comparable completed and let

properties. For example, Hammerson is developing a prime regional shopping centre in Marseille,

France, that it expects to open in the spring of 2014. The company estimates a return on the 400million overall cost of development at around 7.4% a year, with more than 64% of rental income

already contracted. Hammerson has also identified 320 million of extension and refurbishment wor

to its UK retail parks and smaller retail properties, and expects these schemes to produce an average

return on cost in excess of 7.5%.

1 Initial yield is measured by the ratio of rents generated by a property to its purchase price or valuation.2 Over-rented means that rent paid by the tenant is greater than the open market rent.3 UK landlords reserve the right to review rents, typically every five years, to raise them to open market rates.

ynn ValkenaarVice President - Senior Analyst

[email protected]
http://www.moodys.com/credit-ratings/Hammerson-Plc-credit-rating-2352http://www.moodys.com/credit-ratings/Hammerson-Plc-credit-rating-2352http://www.moodys.com/credit-ratings/Hammerson-Plc-credit-rating-2352http://www.moodys.com/credit-ratings/Hammerson-Plc-credit-rating-2352


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Indian Competition Commission Fines Cement Cartel, a Credit Negative forHolcim and Lafarge

On 21 June, the Indian Competition Commission concluded its review of alleged collusion in the

Indian cement industry and imposed material penalties on the 10 largest Indian cement producers.This long-awaited cartel investigation decision is credit negative for Switzerland-based cement

producerHolcim Ltd.(Baa2 negative), and to a lesser extent for France-basedLafarge SA(Ba1 stable

We believe that indirect credit consequences from the competition commissions decision will

outweigh the cash effect of the fines on both Holcim and Lafarge. Both issuers currently enjoy above

average operating margins in India compared with the rest of their international operations. But like

several other emerging markets, India is exposed to high energy, logistics and salary cost inflation.

Holcim and Lafarge have been able to compensate for some of the cost inflation through price

increases, but the Competition Commission ruling and increased scrutiny of cement prices are likely

make it much more difficult for these two players to increase prices and maintain their current

margins.

Holcim is Indias largest cement producer through its two majority stakes in the unrated ACC Ltd.(50.3%) and Ambuja Cements (50.13%). ACC controls 10.4% of the Indian cement market

according to the Indian Competition Commission, while Ambuja Cements controls 9.8%. Holcim

fully consolidates the two companies into its accounts. Lafarge is a much smaller player, with a 3.2%

market share.

The two entities controlled by Holcim will have to pay INR23.1 billion (CHF390 million or 324million) in penalties under the announced ruling, while Lafarge will have to pay INR4.8 billion (67

million). For Holcim, the fines are 2% of adjusted debt and 15% of the groups retained cash flow fo

the last 12 months ended 31 March, while for Lafarge the fines are 0.4% of its adjusted debt and 5%

of retained cash flow. We consider the fines to be exceptional one-off items and exclude them from o

retained cash flow calculation for credit metrics. The effect would not be material for either issuer.

However, the producers have 90 days from the date of the ruling to pay the fine but 60 days to appea

both the ruling and the size of the penalty. An appeal is likely to delay the payment of the penalty as

the case will be brought to the Indian High Court and could also lead to lower cash charges. We donot think that Holcim will need to recapitalize ACC and Ambuja because these two entities have ver

healthy balance sheets with very little debt, and equity capital covers respectively 6.3x and 6.9x the

amount of the penalty.

tanislas DuquesnoyVice President - Senior Analyst

[email protected]
http://www.moodys.com/credit-ratings/Holcim-Ltd-credit-rating-600064125http://www.moodys.com/credit-ratings/Holcim-Ltd-credit-rating-600064125http://www.moodys.com/credit-ratings/Holcim-Ltd-credit-rating-600064125http://www.moodys.com/credit-ratings/Lafarge-SA-credit-rating-600023620http://www.moodys.com/credit-ratings/Lafarge-SA-credit-rating-600023620http://www.moodys.com/credit-ratings/Lafarge-SA-credit-rating-600023620http://www.moodys.com/credit-ratings/Lafarge-SA-credit-rating-600023620http://www.moodys.com/credit-ratings/Holcim-Ltd-credit-rating-600064125http://www.moodys.com/credit-ratings/Holcim-Ltd-credit-rating-600064125


7/56



Russias New Guarantee Programme Is Credit Positive for ChelPipe and OtherDomestic Corporates

Last Wednesday, ChelPipe Group (unrated), Russias second-largest pipe producer, said it soon

expected to receive state guarantees of around RUB30 billion ($880 million) from a RUB107 billion($3.2 billion) state guarantee programme aimed at supporting domestic corporates if the euro area

crisis escalates and spreads. Disbursement of the guarantees would be credit positive for domestic

corporates, as they are likely to aid their debt restructuring efforts by making it easier to obtain cheap

and longer-term financing under challenging market conditions.

If it receives a disbursement, ChelPipe plans to use the state guarantees to refinance at a lower cost pa

of its RUB100 billion debt obligation, which will mature this year. The company incurred most of th

debt in 2008-09 to finance a large capex programme totaling around RUB44 billion to produce large

diameter pipes. In May 2012, ZAO OMK (unrated), another Russian large diameter pipes producer

received state guarantees totalling RUB21 billion to finance its RUB50 billion capex.

Under the programme, the government will provide loan guarantees to eligible corporates for terms o

up to five years for up to 50% of the total loan amount (or up to 70% in the case of corporates in thmilitary defense industry). To be eligible for the programme, corporates must not have filed for

bankruptcy or have any overdue liabilities to the state. In addition, corporates must provide addition

loan security so that the total security (including the state guarantee) covers 100% of loan principal.

Furthermore, corporates must reduce the amount of executive compensation to an amount agreed

upon with the government until the guarantee expires.

Unlike so-called state comfort letters, which represent an intention, rather than an obligation, by th

state to repay the debt of an insolvent company, state guarantees oblige the state to repay creditors

within 30 days of an issuers default, provided the borrower has adhered to the conditions of state

guarantee.

If rated corporates receive state guarantees under the programme, the degree of the credit enhancing

effect would depend on several factors. These include the underlying credit profile of the issuer, the

strength of its ties if any with the Russian state, the terms and conditions of the guarantees, the validi

of the guarantee and its enforceability, and the proportion of debt covered by guarantees.

At this stage, the government has yet to finalise the list of strategically important companies eligible

under the programme. However, under a similar RUB300 billion programme implemented in Russia

during the financial crisis in 2009, large industrial corporates operating in such industries as metals a

mining, agriculture, machinery, petrochemical and real estate were the main beneficiaries. This time,

we also would expect that similar industries would benefit the most, while oil and gas companies are

less likely to apply for state guarantees.

We view the proactive stance taken by the government in setting up the guarantee as positive because

the government can implement the measures quickly if economic conditions deteriorate, which recendevelopments suggest could happen. The Russian economy heavily relies on revenues from its oil and

gas exports, and oil prices have fallen substantially in the past three months to around $90 per barrel

Brent from $125 in March. In addition, the main domestic stock markets are down more than 20%

since reaching highs in March, and the ruble is down by around 13% against the US dollar.

ergei Grishuninssistant Vice Pres ident - [email protected]

Artem Frolovssistant Vice Pres ident - [email protected]


8/56



Chinas New Foreign-Exchange Policy Will Help Chinese Firms with OverseasInvestment or Offshore Debt

On 15 June, the Chinese State Administration of Foreign Exchange (SAFE) announced a new policy

to allow onshore entities of Chinese domestic companies to obtain foreign-currency loans withinChina for lending to their offshore entities. The new policy, which takes effect on 1 July, also relaxes

restrictions on individuals who provide guarantees to their offshore investments. The move by SAFE

credit positive for Chinese corporate issuers with overseas investments or offshore debt, particularly

non-property, high-yield issuers, as it provides a new foreign-currency funding channel for these

issuers, which often had limited offshore liquidity resources.Texhong Textile Group Limited(Ba3

negative) andWinsway Coking Coal Holding Limited(Ba3 negative), both of which have overseas

investments and offshore debt, are among our rated issuers that would benefit from the policy.

The permission to use domestic, foreign-currency loans for cross-border, inter-company borrowing

provides alternative liquidity to service these companies offshore debt, and we expect it to help them

better match the currencies in which they borrow with the funding currencies of their overseas

investments. SAFEs allowance of individual guarantees, usually by a firms major shareholders, also

facilitates the borrowing companys offshore financing.

It is usually difficult for Chinese high-yield issuers to obtain offshore bank loans because of issuers

limited overseas assets and lack of extensive, foreign banking relationships. They often have to rely on

offshore capital markets, which are volatile and subject to investors risk appetite for Chinese

companies. Whenever offshore debt and equity market investors enthusiasm for Chinese companies

wanes, as has occurred in recent months, Chinas high-yield issuers, in particular, face challenges

securing funds from offshore channels to fund their overseas investments or refinance their offshore

debt.

Chinese corporations usually have better onshore banking relationships but must cope with various

restrictions on transferring capital overseas. Previously, such companies had limited channels to inves

abroad owing to Chinas strict controls over the countrys capital account. Common channels includdividend distributions on foreign direct investment, repayment of registered, inter-company loans fro

offshore entities, borrowing from offshore banks under domestic bank guarantees, and inter-compan

advances using foreign currency they already own, but limited to 30% of the sending firms registered

capital. All these channels require cumbersome approval procedures, and some may even involve high

costs, such as withholding taxes for repatriation of dividends.

SAFE promulgated the new policy as the Chinese government tries to encourage more domestic,

private-sector companies to invest abroad. The policy is yet another sign of Chinas gradual relaxatio

of its capital-account controls for outbound investments. We note that total foreign currency loans

available for lending are still small, with total foreign currency deposits of $378 billion, or 3% of tota

deposits in China, and loans of $566 billon, or 6% of all loans in China as of May 2012. However,

both figures have been increasing.

Among our rated Chinese companies, we believe non-property, high yield issuers would most benefit

from this new policy. The policy opens up a new funding avenue for them, as long as they have good

onshore banking relationships, available domestic credit facilities, or assets for collateral to secure new

bank loans. Chinese state-owned enterprises and other investment grade corporates usually have bette

offshore liquidity resources and therefore less need for such loans. Meanwhile, we expect Chinese

property issuers to continue facing a tightening credit market.

ing LuoVice President - Senior Analyst

[email protected]

Kai HuVice President - Senior Analyst

[email protected]
http://www.moodys.com/credit-ratings/Texhong-Textile-Group-Limited-credit-rating-822171495http://www.moodys.com/credit-ratings/Texhong-Textile-Group-Limited-credit-rating-822171495http://www.moodys.com/credit-ratings/Texhong-Textile-Group-Limited-credit-rating-822171495http://www.moodys.com/credit-ratings/Winsway-Coking-Coal-Holdings-Limited-credit-rating-822320082http://www.moodys.com/credit-ratings/Winsway-Coking-Coal-Holdings-Limited-credit-rating-822320082http://www.moodys.com/credit-ratings/Winsway-Coking-Coal-Holdings-Limited-credit-rating-822320082http://www.moodys.com/credit-ratings/Winsway-Coking-Coal-Holdings-Limited-credit-rating-822320082http://www.moodys.com/credit-ratings/Texhong-Textile-Group-Limited-credit-rating-822171495


9/56



High-yield issuers such as Texhong and Winsway both have offshore debt outstanding and overseas

investments, and their onshore operations have relatively healthy liquidity profiles. The new policy

from SAFE provides an additional alternative to the companies funding channels.


10/56



GS E&Cs Resumption of ERC Project in Egypt Is Credit Positive

Last Monday, Korean construction firmGS Engineering & Construction Co. Ltd.(GS E&C, Baa3

negative) said that it had resumed the engineering-procurement-construction work for the refinery

project of Egyptian Refining Co. (ERC, unrated), following the project finally receiving funding. Thresumption is credit positive for GS E&C, as its cash flow will benefit from an advance payment of

about $300 million. Revenue and earnings will also benefit considerably, as we estimate the progress

this project alone will increase the companys revenue by around 7% annually over the next four year

ERC originally awarded the project, worth $2.1 billion, to GS E&C in August 2007, and at the time

was the largest overseas project won by a Korean engineering and construction firm. However, the

financial crisis of 2008-09 and the political turmoil in Egypt triggered funding difficulties that delaye

the projects execution. The company aims to complete the project by August 2016.

Yet even with the funding in place, the persistent political uncertainty surrounding Egypt remains a

challenge, as renewed political unrest could threaten the timely execution and reimbursement from th

project.

We believe GS E&C will make progress in winning new orders in the Middle East and Asia given th

number of large projects it has in the pipeline. Therefore, we expect revenue and earnings growth in

the plant division, which accounted for 83% of adjusted operating income in 2011, will accelerate

starting in the second half of 2012. We expect consolidated revenue to grow by around 10% annuall

over the next couple of years, driven mainly by the robust growth in plant revenue. The exhibit below

shows GS E&Cs plant divisions performance since 2007.

GS E&Cs Plant Business Performance

Note: Figures include the performance of the environmental division, which is relatively small, compared with GS E&Cs plant business.Source: GS E&C

GS E&C has accumulated large-scale orders in its plant business over the past few years, owing to its

competitive position in the Middle East, where demand for petrochemical and refinery plants has be

robust. As of March, its order backlog for the segment, including orders for its environmental businestood at KRW15.7 trillion, or about 3.6 years of revenue.

New order wins for its plants business were sluggish in first-quarter 2012, down 75% from a year

earlier, owing to the postponement of large-scale projects in the Middle East. However, we expect ne

order wins for 2012 to exceed the KRW5.8 trillion ($5 billion) of orders in 2011 because a number o

large projects, which GS E&C is in a strong position to win, are due to be launched during the year.

These projects include LG Chems ethylene plant in Kazakhstan ($2 billion), the Petro Rabigh proje

in Saudi Arabia ($2 billion), and a gas plant in Venezuela ($1 billion).

0

4

8

12

16

2007 2008 2009 2010 2011 1Q12

KRWt

rillion

Plant Order Backlog Plant Revenue

Chris ParkVice President - Senior Credit Officer

[email protected]
http://www.moodys.com/credit-ratings/GS-Engineering-Construction-Co-Ltd-credit-rating-820110501http://www.moodys.com/credit-ratings/GS-Engineering-Construction-Co-Ltd-credit-rating-820110501http://www.moodys.com/credit-ratings/GS-Engineering-Construction-Co-Ltd-credit-rating-820110501http://www.moodys.com/credit-ratings/GS-Engineering-Construction-Co-Ltd-credit-rating-820110501


11/56



MNC SKY Visions Planned IPO Is Credit Positive

On 15 June,MNC Sky Vision (P.T.)(B2 stable), one of Indonesias largest pay-TV providers,

announced that it would launch an initial public offering (IPO) that could exceed $200 million, base

on current pricing estimates by Reuters. The planned IPO is credit positive as the increased liquiditythat would follow would provide more permanent funding for MNC Sky Visions capex and growth

strategy over the next one to two years. According to Finance Asia, Sky Visions IPO, if successful, w

be Indonesias biggest IPO this year.

Sky Vision is currently 75%-owned by Global Mediacom Tbk (P.T) (unrated) and 20%-owned by

Bhakti Investama Tbk (P.T.) (unrated). Its principal business is providing satellite-based, direct-to-

home pay-TV services throughout Indonesia. Through the companys two leading TV brands,

Indovision and Top TV, and the OkeVision brand, the company had 1.1 million subscribers in 201and a total market share of 69%, according to Media Partners Asia, a leading provider of information

services on the media industry in Asia.

At 1.6 million total subscribers in 2011, Indonesias pay-TV penetration rate of 4.8% of TV

households is among the lowest in Asia Pacific, providing significant scope for organic growth. As acomparison, Indias penetration rate is above 80%, Malaysias is above 50% and the Philippines and

Thailand are in the 7%-10% range. However, Indonesia also has 1.4 million illegal subscribers, so

piracy remains a key issue and will continue to dampen the rate at which Sky Vision and other pay-T

operators can monetize growing demand.

The IPO consists of up to 847 million newly issued shares and up to 565 million secondary shares

offered by Bhakti Investama, the selling shareholder. The company will only receive proceeds from th

newly issued shares.

According to the preliminary prospectus, 70% of these proceeds will be allocated to capex, which

includes the purchase of set-top boxes and other supporting broadcast equipment. Sky Vision provid

set-top boxes to subscribers free of charge and equipment upgrades are necessary to support more

channels and an expansion of high-definition TV. The company will use the remainder to repay

around $24 million of debt, including intercompany borrowings, as well as for working capital

purposes.

Although debt/EBITDA will improve moderately to 2.2x from 2.5x, the real benefit of this transacti

is the potential boost in the companys liquidity profile. We expect Sky Vision to generate negative f

cash flow through 2013, reflecting the significant capex required to support the expansion of its

subscriber base. Proceeds from this IPO will provide permanent funding for these cash shortfalls,

which we estimate could average $40-$50 million over the next two years.

In addition, competition is increasing, as telecom providers such asTelekomunikasi Indonesia (P.T.)

(Baa1 stable) boost their product offerings and presence in the pay-TV market by bundling voice,

broadband, TV and mobile to gain customers. We believe these factors will lead to increased pressureon average revenues per user (ARPUs) and lower operating margins over the next two years. As such,

stronger liquidity would provide additional flexibility to fund capex as these factors lower internal ca

flow generation.

The companys credit profile currently relies on Global Mediacom to fully support any and all of Sky

Visions financial requirements resulting from the expected negative free cash flow, as the company h

no long-term committed bank credit facilities. A successful IPO will likely replace the companys

reliance on Global Mediacom.

Annalisa Di ChiaraVice President - Senior Analyst

[email protected]
http://www.moodys.com/credit-ratings/MNC-Sky-Vision-PT-credit-rating-822176703http://www.moodys.com/credit-ratings/MNC-Sky-Vision-PT-credit-rating-822176703http://www.moodys.com/credit-ratings/MNC-Sky-Vision-PT-credit-rating-822176703http://www.moodys.com/credit-ratings/Telekomunikasi-Indonesia-PT-credit-rating-600039253http://www.moodys.com/credit-ratings/Telekomunikasi-Indonesia-PT-credit-rating-600039253http://www.moodys.com/credit-ratings/Telekomunikasi-Indonesia-PT-credit-rating-600039253http://www.moodys.com/credit-ratings/MNC-Sky-Vision-PT-credit-rating-822176703


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Infrastructure

BNDESPARs Investment in Renova Energia Is Credit Positive for Light EnergiaOn 15 June,Light S.A.(Ba1 stable) announced thatBNDES Participaes S.A. - BNDESPAR(A3stable), the equity investment arm of the Brazilian development bankBanco Nac. Desenv. Economic

e Social - BNDES(Baa2 stable), would make a BRL314.7 million (approximately $157 million) equ

investment in the Brazilian renewable energy company Renova Energia S.A. (unrated).

BNDESPARs investment is credit positive forLight Energia S.A.(Ba1 stable), of which Light S.A.

owns 100% and is one of Renovas controlling shareholders, as it will strengthen Renovas capital ba

and provide enough liquidity to develop its large pipeline of renewable energy projects. Those projec

include the development of several wind farms with total installed capacity of 774 megawatts (MW)

that the company expects will deliver electricity between 2013 and 2016. In addition, Renova has

identified a pipeline of wind and small hydropower projects with total installed capacity of up to nin

gigawatts in different geographic locations in Brazil.

Renova, a renewable energy company that develops and operates wind farms and small hydroelectric

power plants, plays a key role in Lights efforts to increase its exposure to the electricity generation

business, given that Lights core regulated distribution business will be materially affected by the thir

periodic tariff review in November 2013. By 2015, we expect that Light will derive about 30% of its

consolidated EBITDA from the generation business, which will require annual investments of BRL1

million between 2013 and 2015 that BNDES will primarily finance.

In 2009 and 2010, Renova won public auctions organized by the Brazilian government to supply

renewable energy. In 2011, the company successfully sold 103.6 average-MW of energy that nine of

wind farms currently under development will generate starting in March 2014. Five other wind farm

that the company has scheduled to go on line in July have already received long-term debt financing

totaling BRL297.4 million (approximately $149 million) from BNDES. BNDESPARs equity infusiwill help Light Energia strengthen its position in the Brazilian electricity generation market.

BNDES is wholly owned by the Brazilian government, and is the largest source of long-term debt an

equity financing in Brazil. As of December 2011, BNDES reported total assets of BRL624.8 billion,

13.8% increase over the previous year; disbursements in 2011 reached BRL139.7 billion. BNDES is

strategically important to the Brazilian government owing to its mission of promoting social and

economic development in the country.

Alexandre LeiteVice President - Senior Analyst

[email protected]
http://www.moodys.com/credit-ratings/Light-SA-credit-rating-821626429http://www.moodys.com/credit-ratings/Light-SA-credit-rating-821626429http://www.moodys.com/credit-ratings/Light-SA-credit-rating-821626429http://www.moodys.com/credit-ratings/BNDES-Participacoes-SA-BNDESPAR-credit-rating-600060773http://www.moodys.com/credit-ratings/BNDES-Participacoes-SA-BNDESPAR-credit-rating-600060773http://www.moodys.com/credit-ratings/BNDES-Participacoes-SA-BNDESPAR-credit-rating-600060773http://www.moodys.com/credit-ratings/Banco-Nac-Desenv-Economico-e-Social-BNDES-credit-rating-85600http://www.moodys.com/credit-ratings/Banco-Nac-Desenv-Economico-e-Social-BNDES-credit-rating-85600http://www.moodys.com/credit-ratings/Banco-Nac-Desenv-Economico-e-Social-BNDES-credit-rating-85600http://www.moodys.com/credit-ratings/Banco-Nac-Desenv-Economico-e-Social-BNDES-credit-rating-85600http://www.moodys.com/credit-ratings/Light-Energia-SA-credit-rating-822490636http://www.moodys.com/credit-ratings/Light-Energia-SA-credit-rating-822490636http://www.moodys.com/credit-ratings/Light-Energia-SA-credit-rating-822490636http://www.moodys.com/credit-ratings/Light-Energia-SA-credit-rating-822490636http://www.moodys.com/credit-ratings/Banco-Nac-Desenv-Economico-e-Social-BNDES-credit-rating-85600http://www.moodys.com/credit-ratings/Banco-Nac-Desenv-Economico-e-Social-BNDES-credit-rating-85600http://www.moodys.com/credit-ratings/BNDES-Participacoes-SA-BNDESPAR-credit-rating-600060773http://www.moodys.com/credit-ratings/Light-SA-credit-rating-821626429


13/56



Banks

Changes in Canadian Mortgage Insurance Are Positive, but May Be Too LateLast Thursday, Jim Flaherty, Canadas Minister of Finance, announced rule changes for governmentbacked insured mortgages that seek to reduce consumer mortgage indebtedness and cool the housing

market. The changes are the latest in a series that began in 2008, and come against a backdrop of risi

consumer leverage in Canada. On 15 June, Statistics Canada released data showing that debt to

household income increased to a record 152%. The new rules are credit positive for Canadian banks

but may be too late to avoid a housing correction.

By law, Canadian borrowers must buy insurance on all mortgages with loan-to-value (LTV) ratios of

more than 80%. The latest rule change marks the fourth revision since 2008 of the government

mortgage insurance program, and will apply to new loans when the rule comes into force in July. Th

changes are:

Further reduction in the maximum amortization period to 25 years from 30 years. It was 35 yearsbefore March 2011.

Reduction in the maximum refinancing amount to 80% LTV from 85%. It was 90% before Marc2011.

Limit on the maximum total debt service (all debt obligations and home-related expenses) to 44%gross household income from 45%.

Withdrawal of government-backed insurance for homes with a purchase price greater than CAD1million.

Shorter loan amortizations will immediately cool home sales by requiring increased monthly paymen

For a typical loan of CAD350,000, monthly payments will rise 11% (see Scenario 1 in the exhibit

below), which has approximately the same effect as a 1% increase in rates with a 30-year amortizationperiod. Alternatively, in Scenario 2, if monthly payments stay constant, the maximum purchase price

achievable by the borrower would fall around 9%. Notably, the government did not increase the

minimum 5% down payment requirement for new home purchases as it seeks to strike a balance

between a controlled slowdown and an abrupt dislocation.

Effect of Mortgage Insurance Rule Changes on a Borrower with CAD18,000 Down Payment

Scenario

LoanAmount

CAD 000s

LoanTerm in

YearsMonthlyPayment Rate LTV

House PriceCAD 000s

Monthly PaymentPercent Change

House PriPercent Chan

Base Case CAD 350 30 CAD 1,671 4% 95% CAD 368 na

1 CAD 350 25 CAD 1,847 4% 95% CAD 368 11%

2 CAD 317 25 CAD 1,671 4% 95% CAD 335 na -9

Scenario Descriptions

1 Amortization shortened to 25 years; loan amount unchanged

2 Amortization shortened to 25 years; loan amount reduced to maintain same payment

Source: Moodys calculations

William Burnnalyst1.416.214.3632

[email protected]

Andriy Stepanyantsssociate [email protected]


14/56


15/56



JPMorgans Investment in Mexican Subsidiary Is Credit Negative for Other ForeigWholesale Banks in Mexico

Last Monday,JPMorgan Chase & Co.(A2 negative) announced it would make a capital increase of

$250 million in its Mexican subsidiary Banco JPMorgan, S.A. (unrated), a sizable 80% boost tocurrent equity of about $310 million. The capital increase is credit positive because it strengthens

Banco JPMorgans balance sheet and enables it to lend and finance M&A activity, as well as enhance

its capabilities in the debt and equity capital markets at a time of increasing business opportunities in

Mexico.

At the same time, JPMorgans move adds competition to an already highly competitive market, with

negative credit implications for foreign wholesale bank peers operating in Mexico, particularlyBank

America Mxico, S.A.(BAMSA, Baa2 review for downgrade; D+/baa3 review for downgrade),6

Deutsche Bank Mxico, S.A.(Baa1 review for downgrade; D/ba2 stable), andBanco Credit Suisse

Mxico, S.A.(Baa1 stable; D+/baa3 stable). With the new capitalization, Banco JPMorgan will becom

the second most important foreign wholesale bank in Mexico in terms of capital (see exhibit below),

rising from a distant third. All these wholesale banks cater to large domestic corporations, a broaduniverse of subsidiaries of foreign companies, and a deep institutional investor market.

Foreign Wholesale Banks in MexicoAs of 31 March 2012

Banks Ratings

CapitalMXN

millions

LoansMXN

millions

AsseMX

millio

ING Bank, S.A. (Mexico) Baa3 review for downgrade;D-/ba3 review for downgrade

8,210 3,504 45,29

Bank of America Mxico, S.A. Baa2 review for downgrade;D+/baa3 review for downgrade

4,761 1,072 92,77

Banco JP Morgan, S.A. (Mexico) Unrated 4,271 340 39,6

Bank of Tokyo-Mitsubishi UFJ (Mxico), S.A. Aa1.mx stable; D/ba2 stable 3,480 2,292 12,05

Barclays Bank Mxico, S.A. Baa2 review for downgrade;D/ba2 stable

2,835 0 25,86

Deutsche Bank Mxico, S.A Baa1 review for downgrade;D/ba2 stable

2,502 737 172,0

Banco Credit Suisse Mxico, S.A. Baa1 stable; D+/baa3 stable 2,113 115 56,53

The Bank of New York Mellon, S.A. Unrated 719 0 78

Royal Bank of Scotland Mxico, S.A. Unrated 644 651 4,09

UBS Bank Mxico, S.A. Unrated 491 184 7,43

Source: Comisin Nacional Bancaria y de Valores, Moodys

Yet, how JPMorgan seeks to generate returns on the additional capital will be critical to its

performance and to the competitive landscape. Banco JPMorgans improved capacity to lend pesos

onshore to the subsidiaries of foreign corporations will pit it against market leaders BAMSA and

Deutsche Bank Mxico as they leverage their balance sheets for investment banking deals. An increas

in Banco JPMorgans ability to finance M&A will directly affect the strong leads that Banco Credit

Suisse Mxico and BAMSA have traditionally held in this area. A larger capital base would help Banc

6 The bank ratings shown in this report are the banks deposit rating, its standalone bank financial strength rating/baselcredit assessment and the corresponding rating outlooks.

elipe Carvallossistant Vice Pres ident - [email protected]
http://www.moodys.com/credit-ratings/JPMorgan-Chase-Co-credit-rating-165000http://www.moodys.com/credit-ratings/JPMorgan-Chase-Co-credit-rating-165000http://www.moodys.com/credit-ratings/JPMorgan-Chase-Co-credit-rating-165000http://www.moodys.com/credit-ratings/Bank-of-America-Mexico-SA-credit-rating-600036345http://www.moodys.com/credit-ratings/Bank-of-America-Mexico-SA-credit-rating-600036345http://www.moodys.com/credit-ratings/Bank-of-America-Mexico-SA-credit-rating-600036345http://www.moodys.com/credit-ratings/Bank-of-America-Mexico-SA-credit-rating-600036345http://www.moodys.com/credit-ratings/Deutsche-Bank-Mexico-SA-credit-rating-600069090http://www.moodys.com/credit-ratings/Deutsche-Bank-Mexico-SA-credit-rating-600069090http://www.moodys.com/credit-ratings/Banco-Credit-Suisse-Mexico-SA-credit-rating-820539677http://www.moodys.com/credit-ratings/Banco-Credit-Suisse-Mexico-SA-credit-rating-820539677http://www.moodys.com/credit-ratings/Banco-Credit-Suisse-Mexico-SA-credit-rating-820539677http://www.moodys.com/credit-ratings/Banco-Credit-Suisse-Mexico-SA-credit-rating-820539677http://www.moodys.com/credit-ratings/Banco-Credit-Suisse-Mexico-SA-credit-rating-820539677http://www.moodys.com/credit-ratings/Banco-Credit-Suisse-Mexico-SA-credit-rating-820539677http://www.moodys.com/credit-ratings/Deutsche-Bank-Mexico-SA-credit-rating-600069090http://www.moodys.com/credit-ratings/Bank-of-America-Mexico-SA-credit-rating-600036345http://www.moodys.com/credit-ratings/Bank-of-America-Mexico-SA-credit-rating-600036345http://www.moodys.com/credit-ratings/JPMorgan-Chase-Co-credit-rating-165000http://www.moodys.com/credit-ratings/JPMorgan-Chase-Co-credit-rating-165000


16/56



JPMorgan challenge market share dynamics in a much more fragmented debt capital market, where

Deutsche Bank Mxico and BAMSA lead today.

A stronger balance sheet also comes at an auspicious time when Mexicos onetime most active foreign

wholesale bank,ING Bank, S.A. (Mexico)(Baa3 review for downgrade; D-/ba3 review for downgrad

has significantly contracted both its loan book and trading volumes as its parent bankING Bank N.V

(A2 negative; C-/baa1 negative) focuses on its European subsidiaries.

Increased capital for Banco JPMorgans brokerage house7 will increase its capabilities in Mexicos mu

smaller equity capital markets. Stock brokerage services, advisory services and bond underwriting are

activities that Mexican regulations state can only be performed by brokerage house vehicles, not by

banks.

JPMorgans investment also closely followsBank of Tokyo-Mitsubishi UFJ, Ltd.s (Aa3 stable; C/a3

stable) $200 million capital increase inBank of Tokyo-Mitsubishi UFJ (Mxico), S.A.(Aa1.mx stabl

D/ba2 stable) in the first quarter. That investment underscores general interest in Mexico, but does n

pose a threat to other foreign wholesale banks in Mexico given Bank of Tokyo-Mitsubishis primaryfocus on servicing Japanese corporations operating in Mexico.

7 JPMorgan Casa de Bolsa, S.A. de C.V. (unrated)
http://www.moodys.com/credit-ratings/ING-Bank-SA-Mexico-credit-rating-600036353http://www.moodys.com/credit-ratings/ING-Bank-SA-Mexico-credit-rating-600036353http://www.moodys.com/credit-ratings/ING-Bank-SA-Mexico-credit-rating-600036353http://www.moodys.com/credit-ratings/ING-Bank-NV-credit-rating-542100http://www.moodys.com/credit-ratings/ING-Bank-NV-credit-rating-542100http://www.moodys.com/credit-ratings/Bank-of-Tokyo-Mitsubishi-UFJ-Ltd-credit-rating-600019189http://www.moodys.com/credit-ratings/Bank-of-Tokyo-Mitsubishi-UFJ-Ltd-credit-rating-600019189http://www.moodys.com/credit-ratings/Bank-of-Tokyo-Mitsubishi-UFJ-Ltd-credit-rating-600019189http://www.moodys.com/credit-ratings/Bank-of-Tokyo-Mitsubishi-UFJ-Mexico-SA-credit-rating-600036336http://www.moodys.com/credit-ratings/Bank-of-Tokyo-Mitsubishi-UFJ-Mexico-SA-credit-rating-600036336http://www.moodys.com/credit-ratings/Bank-of-Tokyo-Mitsubishi-UFJ-Mexico-SA-credit-rating-600036336http://www.moodys.com/credit-ratings/Bank-of-Tokyo-Mitsubishi-UFJ-Mexico-SA-credit-rating-600036336http://www.moodys.com/credit-ratings/Bank-of-Tokyo-Mitsubishi-UFJ-Ltd-credit-rating-600019189http://www.moodys.com/credit-ratings/ING-Bank-NV-credit-rating-542100http://www.moodys.com/credit-ratings/ING-Bank-SA-Mexico-credit-rating-600036353


17/56



Report on Brazils Exchanges Encourages Competition but Is Negativefor BM&FBovespa

Last Monday, Brazils securities regulator Comisso de Valores Mobilirios (CVM), unveiled a study

commissioned from UK-based economic consultancy Oxera Consulting Ltd. on the organization andcompetitive landscape of the equities and derivatives exchanges in Brazil. The reports findings are

credit negative forBM&FBovespa S.A.(A1 review for downgrade),8 Brazils equity and commodities

exchange, because it recommends introducing competition to the exchanges monopoly in clearing

services.

The independent study concluded that increased competition would reduce the costs of trading and

post-trading services, benefiting investors and potentially boosting business and trading volumes. Th

report also advocates sharing clearinghouse services as a preferred means to increase competition by

new entrant exchanges, rather than duplicating clearing platforms, an option that would reduce gain

for infrastructure providers such as BM&FBovespa.

BM&FBovespa holds a near monopoly of equities and derivatives trading in Brazil, and it is improvi

its capabilities by integrating its clearinghouses for derivatives, equities, foreign exchange rates, andgovernment bonds into a single platform, a move that will strengthen its grip on the domestic marke

Under Brazilian securities regulations, trades must be matched in an exchange environment, while

settlement and clearing must be done through a central counterparty, and at the beneficial owner lev

as currently offered by BM&FBovespa. Potential competitors would therefore be required to provide

the same integrated solution as BM&FBovespa, unless they are allowed to use its existing platform.

However, to date, the exchange has shown little interest in sharing its clearing infrastructure with

competing exchanges: its position and the prohibitively high costs of establishing a new clearinghous

thwarted the planned Brazilian entry of two US-based exchanges, BATS Global Markets (unrated) an

Direct Edge (unrated), in 2011. The exchange, however, has reduced trading fees for home brokers

and high-frequency traders in a move that indicates it is bracing for competition, which is now certai

leaving only the question of when it will come.

Because the high growth potential of equities and derivatives transactions is a strong incentive for

international exchanges to enter Brazil, we expect the regulator to discuss the findings of the Oxerareport with market participants in the near future, although changes to the current competitive

landscape could be years away because of Brazils complex regulatory and infrastructure conditions.

In the meantime, in another indication that pressure on BM&FBovespa is growing, CETIP S.A.

Mercados Organizados (CETIP, unrated), the Brazilian group engaged in post-trade services, has also

requested authorization from the Central Bank of Brazil and CVM to act as central counterparty for

trading fixed-income securities and over-the-counter (OTC) derivatives. CETIP is a privately owned

company that provides registration, custody and settlement services for fixed income, derivatives, and

interbank transactions.

CETIPs request to act as a central counterparty will allow it to broaden the scope of its product mix

and earnings, and leverage its presence in two markets in which BM&FBovespa has limited presence

fixed-income securities lending, and OTC derivatives trading. CETIP now faces the task of building

robust risk management structure to comply with regulatory requirements, which we expect to be in

place by year-end 2013. Despite our expectations that this move will have a limited effect on

BM&FBovespas business, it is CETIPs first step in becoming a clearinghouse.

8 The rating shown is the local currency issuer rating.

Alexandre Albuquerquessistant Vice Pres ident - [email protected]

icardo KovacsVice President - Senior Analyst

[email protected]
http://www.moodys.com/credit-ratings/BMFBovespa-SA-credit-rating-822058343http://www.moodys.com/credit-ratings/BMFBovespa-SA-credit-rating-822058343http://www.moodys.com/credit-ratings/BMFBovespa-SA-credit-rating-822058343http://www.moodys.com/credit-ratings/BMFBovespa-SA-credit-rating-822058343


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Bank of Englands Decision to Post Collateral in OTC Derivatives Transactions IsCredit Positive for Dealers

Last Thursday, the Bank of England (BOE) announced that starting next year it would begin

providing collateral to its over-the-counter (OTC) derivatives counterparties when the value of theposition is in the counterparties favour. This effort will collateralise foreign exchange and interest rat

derivatives undertaken by the BOE for its own balance sheet and as an agent for the UK Treasury.

The decision is credit positive for large derivatives dealers such asBarclays Bank plc(A2 negative; C-

/baa2 stable),9HSBC Bank plc(Aa3 negative; C/a3 stable) andRoyal Bank of Scotland plc(A3

negative; D+/baa3 stable), as it will reduce the costs generated by uncollateralised derivatives

transactions. The BOEs action also sets an important precedent for other governments and

supranational organisations that currently do not post collateral. The decision will also benefit the

BOE because its counterparties will cease to incorporate their expected funding costs into derivatives

prices.

Derivatives dealers continue to operate through unilateral credit support annexes with most sovereignand supranational counterparties. As a result, dealers do not receive collateral to fund their mark-to-

market gains, but have to post collateral when they experience mark-to-market losses. Hedging these

positions with sovereigns involves additional costs as financial counterparties always apply two-way

collateral agreements.

The BOEs announcement considers that posting collateral would help its counterparties provide

better prices driven by lower costs. Until now, just a handful of financially vulnerable countries such

Ireland and Portugal have posted collateral to their derivatives counterparty. Therefore, the BOE will

become the first central bank to post collateral for its derivatives operations for economic reasons rath

than to reassure counterparties on its credit.

The Basel III regulatory framework proposes higher credit valuation adjustment for uncollateralised

claims. As a result, derivatives dealers with sizable uncollateralised positions would face additionalcapital requirements, although the European Union draft legislation makes an exemption for sovereig

clients.

The BOEs decision is likely to improve derivatives dealers profitability since they will not have to

assume any additional capital charges or funding costs. Furthermore, dealers would potentially mitig

their counterparty exposure since the BOE will provide foreign currency securities to counterparties

instead of UK government bonds in pounds. We consider it unlikely that financial regulators will

require all sovereigns and supranational entities to follow the BOEs example. However, we expect th

decision to encourage some central banks to revisit their position regarding collateral posted for

derivatives transactions if they want dealers to provide better prices.

9 The ratings shown are the banks deposit rating, its standalone bank financial strength rating/baseline credit assessment athe corresponding rating outlooks.

Carlos Suarez Duartessistant Vice Pres ident - [email protected]
http://www.moodys.com/credit-ratings/Barclays-Bank-PLC-credit-rating-92500http://www.moodys.com/credit-ratings/Barclays-Bank-PLC-credit-rating-92500http://www.moodys.com/credit-ratings/Barclays-Bank-PLC-credit-rating-92500http://www.moodys.com/credit-ratings/HSBC-Bank-plc-credit-rating-494680http://www.moodys.com/credit-ratings/HSBC-Bank-plc-credit-rating-494680http://www.moodys.com/credit-ratings/HSBC-Bank-plc-credit-rating-494680http://www.moodys.com/credit-ratings/Royal-Bank-of-Scotland-plc-credit-rating-651920http://www.moodys.com/credit-ratings/Royal-Bank-of-Scotland-plc-credit-rating-651920http://www.moodys.com/credit-ratings/Royal-Bank-of-Scotland-plc-credit-rating-651920http://www.moodys.com/credit-ratings/Royal-Bank-of-Scotland-plc-credit-rating-651920http://www.moodys.com/credit-ratings/HSBC-Bank-plc-credit-rating-494680http://www.moodys.com/credit-ratings/Barclays-Bank-PLC-credit-rating-92500


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Russian Central Bank Will Scrutinise Use of Emergency Liquidity Facilities, aCredit Positive

On 17 June, Mikhail Sukhov, deputy chairman of the Central Bank of Russia (CBR), stated that ban

whose reliance on CBR funding exceeds 10% of liabilities will be subject to increased monitoring bythe regulator. We view this development as credit positive for Russian banks as it signifies CBRs

efforts to address at an early stage potential liquidity problems.

The CBRs emergency liquidity facilities were among the most important tools of systemic support in

Russia during the 2008-09 financial crisis. Banks borrowed from CBR during the entire crisis, with

their dependence on CBR funding peaking at 14% of liabilities in January 2009 (see Exhibit 1).

EXHIBIT 1

Russian Banks Reliance on Central Bank of Russia Funding Is Growing AgainCBR Funding as Percent of Total Banking Liabilities

Source: Central Bank of Russia

Currently, most Russian banks do not rely on CBR borrowings, which accounted for only 4.5% oftotal liabilities at the end of May 2012. However, a limited number of banks (Exhibit 2) increased

their CBR funding, mainly to finance opportunistic strategies in foreign exchange or securities

markets, or loan growth. In some cases, excessive reliance on CBR funding may also signal bank-

specific liquidity problems. Mr. Sukhov said as much, noting that excessive demand for CBR fundin

by certain banks may signal potential problems that their regulatory reporting does not show.

Therefore, these banks will be required to explain the need for CBR funding, and we expect that they

will have to revisit their funding strategies.

13.8%

4.5

0%

2%

4%

6%

8%

10%

12%

14%

16%

Maxim Bogdashkinssistant Vice Pres ident - Analyst7.495.228.6052

[email protected]

Anna Avdeevassociate [email protected]


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Mizuhos Brazilian Acquisition Creates a Credit Positive Beachhead

Last Wednesday,Mizuho Corporate Bank, Ltd.(A1 stable; C-/baa1 stable)12 announced that it had

reached an agreement with German bankWestLB AG(A3 review for downgrade; E/caa1 stable) to

acquire WestLBs Brazilian corporate banking subsidiary, Banco WestLB do Brasil S.A. (unrated) foran undisclosed sum. The acquisition is credit positive for Mizuho, as it gives the Japanese bank a bas

of operations in Brazil, where many of its large corporate customers are increasing their investment.

Banco WestLB do Brasil, based in Sao Paulo, is a medium-size bank established in 1911 with total

assets of approximately $1.5 billion as of the end of December 2011, and focuses mainly on wholesal

banking. We see the acquisition as a good strategic move for Mizuho to support its clients. Mizuho h

business relationships with approximately 70% of listed companies in Japan, many of which are

attracted to Brazils strong domestic demand and rich natural resources.

For the past 40 years, Mizuhos only presence in Brazil has been a representative office in Sao Paulo,

which placed Mizuho at a disadvantage vis--vis Mitsubishi UFJ Financial Group, Inc. (MUFG,

unrated) and Sumitomo Mitsui Financial Group, Inc. (SMFG, unrated),13 which already have

domestic Brazilian banking subsidiaries. Following the acquisition, Mizuho will be better placed tosupport the global financial needs of its large corporate customers for which Brazil is an increasingly

important market. With its acquisition of this local banking platform, Mizuho strengthens its ability

support the entrance and expansion of both Japanese and non-Japanese customers in Brazil, and will

able to offer its clients full banking services including loans and deposits, which it cannot do now.

Although the parties in the deal have not disclosed the price for Banco WestLB do Brasil, we expect

cost to be minimal compared with Mizuho Financial Group, Inc.s (MHFG)14 total assets of 165

trillion ($2.1 trillion) as of the end of March. This transaction gives Mizuho geographic diversificatio

in its core commercial banking businesses, with low financial risk at a time when Japans own growth

prospects are poor.

Mizuhos past forays into overseas markets in US were ill-timed and resulted in relatively high credit

costs. The small scale of this expansion reflects Mizuhos improved discipline regarding overseas

acquisitions.

Mizuho Corporate Bank, Ltd. is one of main operating banks of MHFG, one of three Japanese mega

bank groups. Completion of the transaction is subject to regulatory approvals.

12 The bank ratings shown in this article are the banks deposit rating, its standalone bank financial strength rating/baselcredit assessment and the corresponding rating outlooks.

13 The domestic subsidiary banks are theBank of Tokyo-Mitsubishi UFJ, Ltd. (Aa3 stable; C/a3 stable) andMitsubishi UTrust and Banking Corporation (Aa3 stable; C/a3 stable) for MUFG; and Sumitomo Mitsui Banking Corporation (Astable; C/a3 stable) for SMFG.

14 The domestic subsidiary banks areMizuho Bank, Ltd.(A1 stable; C-/baa1 stable),Mizuho Corporate Bank, Ltd.(A1 staC-/baa1 stable), andMizuho Trust & Banking Co., Ltd. (A1 stable; C-/baa1 stable).

etsuya YamamotoVice President - Senior Analyst

[email protected]
http://www.moodys.com/credit-ratings/Mizuho-Corporate-Bank-Ltd-credit-rating-600064244http://www.moodys.com/credit-ratings/Mizuho-Corporate-Bank-Ltd-credit-rating-600064244http://www.moodys.com/credit-ratings/Mizuho-Corporate-Bank-Ltd-credit-rating-600064244http://www.moodys.com/credit-ratings/WestLB-AG-credit-rating-815000http://www.moodys.com/credit-ratings/WestLB-AG-credit-rating-815000http://www.moodys.com/credit-ratings/WestLB-AG-credit-rating-815000http://www.moodys.com/credit-ratings/Bank-of-Tokyo-Mitsubishi-UFJ-Ltd-credit-rating-600019189http://www.moodys.com/credit-ratings/Bank-of-Tokyo-Mitsubishi-UFJ-Ltd-credit-rating-600019189http://www.moodys.com/credit-ratings/Bank-of-Tokyo-Mitsubishi-UFJ-Ltd-credit-rating-600019189http://www.moodys.com/credit-ratings/Mitsubishi-UFJ-Trust-and-Banking-Corporation-credit-rating-500850http://www.moodys.com/credit-ratings/Mitsubishi-UFJ-Trust-and-Banking-Corporation-credit-rating-500850http://www.moodys.com/credit-ratings/Mitsubishi-UFJ-Trust-and-Banking-Corporation-credit-rating-500850http://www.moodys.com/credit-ratings/Mitsubishi-UFJ-Trust-and-Banking-Corporation-credit-rating-500850http://www.moodys.com/credit-ratings/Sumitomo-Mitsui-Banking-Corporation-credit-rating-600058776http://www.moodys.com/credit-ratings/Sumitomo-Mitsui-Banking-Corporation-credit-rating-600058776http://www.moodys.com/credit-ratings/Sumitomo-Mitsui-Banking-Corporation-credit-rating-600058776http://www.moodys.com/credit-ratings/Mizuho-Bank-Ltd-credit-rating-600064245http://www.moodys.com/credit-ratings/Mizuho-Bank-Ltd-credit-rating-600064245http://www.moodys.com/credit-ratings/Mizuho-Bank-Ltd-credit-rating-600064245http://www.moodys.com/credit-ratings/Mizuho-Corporate-Bank-Ltd-credit-rating-600064244http://www.moodys.com/credit-ratings/Mizuho-Corporate-Bank-Ltd-credit-rating-600064244http://www.moodys.com/credit-ratings/Mizuho-Corporate-Bank-Ltd-credit-rating-600064244http://www.moodys.com/credit-ratings/Mizuho-Trust-Banking-Co-Ltd-credit-rating-834450http://www.moodys.com/credit-ratings/Mizuho-Trust-Banking-Co-Ltd-credit-rating-834450http://www.moodys.com/credit-ratings/Mizuho-Trust-Banking-Co-Ltd-credit-rating-834450http://www.moodys.com/credit-ratings/Mizuho-Trust-Banking-Co-Ltd-credit-rating-834450http://www.moodys.com/credit-ratings/Mizuho-Corporate-Bank-Ltd-credit-rating-600064244http://www.moodys.com/credit-ratings/Mizuho-Bank-Ltd-credit-rating-600064245http://www.moodys.com/credit-ratings/Sumitomo-Mitsui-Banking-Corporation-credit-rating-600058776http://www.moodys.com/credit-ratings/Mitsubishi-UFJ-Trust-and-Banking-Corporation-credit-rating-500850http://www.moodys.com/credit-ratings/Mitsubishi-UFJ-Trust-and-Banking-Corporation-credit-rating-500850http://www.moodys.com/credit-ratings/Bank-of-Tokyo-Mitsubishi-UFJ-Ltd-credit-rating-600019189http://www.moodys.com/credit-ratings/WestLB-AG-credit-rating-815000http://www.moodys.com/credit-ratings/Mizuho-Corporate-Bank-Ltd-credit-rating-600064244http://www.moodys.com/credit-ratings/Mizuho-Corporate-Bank-Ltd-credit-rating-600064244


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EXHIBIT 2

Percent Change in General Aid for Education 2012-13

Source:Rhode Island Department of Education

Although direct non-education aid for cities and towns is flat versus 2012 (Exhibit 3), the additional

school funding will benefit most Rhode Island cities and towns because these municipalities bear

responsibility for school financial operations and, on average, allocate more than half of their operati

budgets to school funding.

EXHIBIT 3

Rhode Island Non-Education State Aid to Cities and Towns

Source:Rhode Island Department of Revenue

Additionally, the Rhode Island budget appropriates $2.6 million for Central Falls retirees to mitigate

significant cuts to their pensions as a consequence of the citys Chapter 9 bankruptcy plan. The fund

are the result of negotiations between the state-appointed receiver for Central Falls and the retirees, a

the appropriation allows the city to continue with its plan to emerge from bankruptcy later this year.

The legislature adjourned without approving any additional financial assistance for the city of

Woonsocket, which is currently under the control of a state budget commission. The city is strugglin

with a $10 million accumulated deficit and an imminent cash shortage stemming from overspending

in school operations. The legislatures refusal to pass a supplemental tax levy prompted the school

board to vote last week for a takeover of the schools by the Rhode Island Department of Education,

which the department is currently reviewing.

-20% -10% 0% 10% 20% 30% 40% 50

CHARIHOPORTSMOUTH

BRISTOL WARRENSOUTH KINGSTOWN

CENTRAL FALLSJAMESTOWN

EXETER-W. GREENGLOCESTER

FOSTERRICHMOND

WESTERLYNORTH PROVIDENCE

NORTH SMITHFIELDSCITUATE

NARRAGANSETTNEW SHOREHAM

CRANSTONLINCOLN

EAST GREENWICHBARRINGTON

$0

$50

$100

$150

$200

$250

$300

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

$million

General Revenue Sharing MV Excise Tax Reimburse Distressed Community Relief PILOT
http://www.ride.ri.gov/http://www.ride.ri.gov/http://www.ride.ri.gov/http://www.dor.ri.gov/http://www.dor.ri.gov/http://www.dor.ri.gov/http://www.dor.ri.gov/http://www.ride.ri.gov/


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RATING CHANGESSignificant rating actions taken the week ending 22 June 2012


Lloyds Banking GroupDowngrades

21 June 12

We downgraded Lloyds TSB Bank plc's senior debt and deposit ratings by one notch, to A2 from A

We also lowered the banks baseline credit assessment to baa2 from baa1, within the C- standalone

bank financial strength rating range. The outlook on the C-/baa2 standalone bank financial strength

rating/baseline credit assessment is stable and that on the A2 debt and deposit ratings is negative,

reflecting our view that government support for large UK banks will be reduced over the medium

term. The Prime-1 short-term rating was confirmed.

The drivers of the downgrade and lower standalone credit profile were the bank's sensitivity to the

increasingly challenging operating environment in the UK and in Europe more widely and Lloyds'

still-high use of wholesale funding, which implies that it would be vulnerable to changes in investor

sentiment toward European banks.

The A2 senior debt rating of the holding company was downgraded to A3, in line with our views onthe structural subordination of holding companies. The senior debt ratings of Bank of Scotland plc

were downgraded to A2 from A1, and the senior debt ratings of HBOS plc were downgraded to A3

from A2.

The insurance financial strength ratings of Scottish Widows plc and Clerical Medical Investment

Group Ltd. were downgraded by one notch, to A2 from A1, and the subordinated debt ratings of bo

insurers were downgraded to Baa2 (hyb) from Baa1 (hyb). The outlook on all these ratings is stable.

Citigroup SubsidiariesDowngrades

22 June 12

Following our downgrade of its parents, Citigroup Inc. (Citibank) and Citibank N.A., on 21 June

2012 we downgraded the ratings of Citibanks three subsidiaries in Japan. We downgraded Japan

Ltd.s long-term deposit rating to Baa1 from A2, its baseline credit assessment to baa3 from baa1, an

its short-term deposit rating to Prime-2 from Prime-1. The ratings outlook is stable. We also

downgraded the long-term ratings of Citigroup Japan Holdings Inc. (CJH) and Citigroup Global

Markets Japan Ltd (CGMJ), to Baa3 from Baa1. The short-term rating of CGMJ was downgraded to

Prime-3 from Prime-2. The rating outlook for CJH and CGMJ is negative.

Outside of Japan, we also downgraded the long- and short-term senior unsecured ratings of Citigrou

Pty Ltd, to Baa1/Prime-2 from A2/Prime-1, and lowered its standalone bank financial strength

rating/baseline credit assessment to C-/baa1 from C+. At the same time, we affirmed the long- andshort-term deposit ratings of Citibank Korea at A2/Prime-1. All these ratings carry a stable outlook.

The rating action on Citigroup P/L concludes the review initiated on 21 February 2012. The ratings

on Citibank Korea were not on review.
http://www.moodys.com/research/Moodys-downgrades-Lloyds-TSB-Bank-to-A2-outlook-negative--PR_248718http://www.moodys.com/research/Moodys-lowers-ratings-of-Citigroups-Japan-subsidiaries--PR_248928http://www.moodys.com/research/Moodys-lowers-ratings-of-Citigroups-Japan-subsidiaries--PR_248928http://www.moodys.com/research/Moodys-lowers-ratings-of-Citigroups-Japan-subsidiaries--PR_248928http://www.moodys.com/research/Moodys-downgrades-Lloyds-TSB-Bank-to-A2-outlook-negative--PR_248718


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RATING CHANGESSignificant rating actions taken the week ending 22 June 2012


Ceskoslovenska Obchodni Banka (Czech Republic)Downgrades

21 Feb 12 20 June 12

Long-Term Local & Foreign Currency Deposits A1 Review for Downgrade A2 NegativeShort-Term Local & Foreign Currency Deposits Prime-1 Prime-1

Standalone Bank Financial Strength/Baseline Credit Assessment C/a3 Review for Downgr ade C- /baa1 Stable

Ceskoslovenska Obchodna Banka (Slovakia)

Long-Term Local & Foreign Currency Deposits Baa2 Review for Downgrade Baa3 Stable

Short-Term Local & Foreign Currency Deposits Prime-2 Prime-3

Standalone Bank Financial Strength/Baseline Credit Assessment D/ba2 Stable D/ba2 Stable

These downgrades were prompted by the weakened financial capacity of the Belgian parent group,KBC Bank, which we downgraded on 15 June 2012. The one-notch downgrade of CSOB Czech

Republic's long-term deposit ratings and standalone bank financial strength rating/baseline credit

assessment also reflects the more difficult operating environment in the Czech Republic, which we

believe will likely dampen earnings generation and pressure asset quality.

ING Bank Slaski S.A.Downgrades

21 Feb 12 18 June 12

Long-Term Deposits A2 Review for Downgrade Baa1 Negative

Short-Term Local & Foreign Currency Deposits

Documents

Weekly Credit Outlook - June 25, 2012