PBC 176664

MOODYS.
COM

27 OCTOBER 2014

NEWS & ANALYSIS
Corporates 2
Retailers Data Security Breaches Will Delay NCRs
De-Leveraging
Infrastructure 3
Exelons Nuclear Reactor Operating Extension Is Credit Positive
Banks 4
U.S. Bancorps Commercial Loan Pricing Strategy Is Squeezing
Its Profitability
Colombias Creation of Deposit-Taking and Transfer Companies
Is Credit Positive for Banks
European Resolution Funds Will Weigh on Bank Profitability, a
Credit Negative
Russias Large Private Banks Would Benefit from Central Bank
Capital Injections
Kazakhstan Plan to Recapitalize Two Large Banks Is
Credit Positive
Bank Permatas Issuance of Basel III-Compliant Subordinated
Debt Is Credit Positive
Insurers 15
Health Insurers Gain Little with Affordable Care Act Opt-
Out Clause
US Mortgage Insurers Will Benefit from Housing
Finance Reforms
US Public Finance 19
Low Oil Prices Will Pressure States Reliant on Extraction Taxes
PLUS Loan Eligibility Expansion Benefits Universities Serving
Low-Income Students
Colorado Supreme Court Upholds State and Local Government
Pension Reforms, a Credit Positive
Securitization 24
New York Probe into Ocwen Is Credit Negative for Company
and the RMBS It Services
Spanish Covered Bond Law Would Reduce Collateral, a
Credit Negative

RATINGS & RESEARCH
Rating Changes 27
Last week we downgraded PETROBRAS, Russian Railways, Tesco,
Ocwen Financial, Altisource Solutions, Home Loan Servicing
Solutions, Sberbank, Bank VTB, Gazprombank, Russian Agricultural
Bank, Agency for Housing Mortgage Lending, Vnesheconombank,
Alfa-Bank, Moscow, St. Petersburg, SUE Vodokanal of St.
Petersburg, OOO Vodokanal Finance, OJSC Western High-Speed
Diameter, Detroit and Omaha, and upgraded Catalent Pharma
Solutions and Industrial Bank of Korea, among other rating actions.
Research Highlights 41
Last week we published on European transport infrastructure,
global oil and gas, US corporate defaults, Russian corporates, loss
given default assessments, ESPN, Turner Broadcasting, Chinese
corporates, US apparel and footwear, global infrastructure, frac
sand, European cable operators, Canadian banks, German life
insurers, UAE takaful, CITIC Securities, People's United Financial,
Canada, Belgium, Russia, US RMBS, US ABS and the Mexican
mortgage market, among other reports.
RECENTLY IN CREDIT OUTLOOK

Articles in Last Thursdays Credit Outlook 46
Go to Last Thursdays Credit Outlook

NEWS & ANALYSIS
Credit implications of current events

2 MOODYS CREDIT OUTLOOK 27 OCTOBER 2014

Corporates
Retailers Data Security Breaches Will Delay NCRs De-Leveraging
Last Monday, NCR Corporation (Ba2 negative) cut its earnings guidance for full-year 2014, citing
challenges in its retail segment and driven in part by the fallout from customer-data security breaches at
major retailers. The company said it now expects full-year earnings of $2.60-$2.70 a share and revenue of
$6.58-$6.63 billion, down from its previous earnings guidance of $3.00-$3.10 a share and revenues of
$6.75-$6.85 billion.
The revised forecast is credit negative for NCR because lower-than-expected orders in its retail sector will
delay the pace of its de-leveraging throughout 2014 and 2015 by as much as half a turn. We now expect
NCR to de-leverage to 5.0x adjusted debt/EBITDA by year-end 2014, versus our earlier expectation of 4.6x
adjusted debt/EBITDA.
The announcement could also portend a shift in capex spending by retailers as they evaluate data security
and their hardware spending decisions in the wake of well-publicized customer data breaches. This could
result in a shift in their capex spending to more secure credit card readers and to enable the technology to
accept mobile payments and away from other possible IT upgrades. This would benefit companies such as
VeriFone, Inc. (Ba3 stable) and Ingenico Group (unrated), which provide payment terminals, and further
delay upgrade orders for the registers, self-checkout consoles and other hardware that NCR sells.
Still, we expect NCR to continue growing its revenue and cash flow, aided by the strengthening
performance of its largest division, financial services, and by operating margin improvements. The company
has demonstrated its ability to contain costs and slightly improve profitability in the wake of its January
2014 Digital Insight acquisition. NCR reported an adjusted operating margin of 10.3% for the 12 months
ended 30 June 2014, compared with an adjusted operating margin of 10.0% a year earlier.
Duluth, Georgia-based NCR had more than $6.3 billion in revenue for the 12 months ended June 2014. It
has leading market positions in the automatic teller machine, retail point-of-sale equipment, hospitality and
related supplies and services markets.

Gerald Granovsky
Senior Vice President
+1.212.553.4198
gerald.granovsky@moodys.com
This publication does not announce
a credit rating action. For any
credit ratings referenced in this
publication, please see the ratings
tab on the issuer/entity page on
www.moodys.com for the most
updated credit rating action
information and rating history.

NEWS & ANALYSIS


Infrastructure
Exelons Nuclear Reactor Operating Extension Is Credit Positive
On Monday, the US Nuclear Regulatory Commission (NRC) renewed the operating licenses of the
Limerick Generating Station Units 1 and 2 (2,311 megawatts of capacity) for another 20 years. These are
the first NRC license extensions after a two-year licensing suspension following the 2011 Fukushima reactor
disaster in Japan. The renewed licenses, which now expire in 2044 for Unit 1 and 2049 for Unit 2, are
credit positive for Exelon Generation Company, LLC (Baa2 stable) because they open the door for an
additional 400,000 gigawatt-hours of electricity sales and $20 billion in revenues over the
20-year extension.
The exhibit below illustrates the estimated revenue streams from Limerick Units 1 and 2 before and after
the license extension. As a simplifying assumption, revenues are based on a power price of $50 per
megawatt-hour and a capacity factor of 90% until the original expiration (2024 for Unit 1 and 2029 for
Unit 2). Thereafter, we assumed a step-up in power prices to $70 per megawatt-hour. Because the nuclear
reactors were originally designed to run for 40 years, not 60, we lowered the capacity factor to 70% for the
remaining 20 years to account for potential plant repairs and increased outage times. Based on our
assumptions, the company will receive an additional $20 billion of revenue, or $5 billion in present value,
assuming a 6.5% discount rate.
Present Value of Limericks Units 1 and 2 Forecasted Revenues

Source: Moodys Investors Service

Limericks license extension also benefits local and state governments, including Limerick, Pennsylvania
(unrated), Montgomery County, Pennsylvania (general obligation Aa1 negative), and the Spring-Ford Area
School District (general obligation Aa2). The school district receives approximately 2% of its operating
revenues from the Limerick reactors. Limerick also employs about 860 people between the two reactors,
with a roughly $75 million payroll, and paid about $2.7 million in property taxes in 2013. Approximately
85% of the property taxes are allocated to the school district, 10% to the county and 5% to the township,
making the Limerick reactors a significant contributor to the states local economy.

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M
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2024 & 2029 Shutdown 2044 & 2049 Shutdown
Susan Lam
Associate Analyst
+1.212.553.4351
susan.lam@moodys.com
Jim Hempstead
Associate Managing Director
+1.212.553.4318
james.hempstead@moodys.com

NEWS & ANALYSIS


Banks
U.S. Bancorps Commercial Loan Pricing Strategy Is Squeezing Its Profitability
Last Wednesday, during U.S. Bancorps (A1 stable) quarterly investor call, Chief Executive Officer Richard
Davis stated that his bank was part of the problem with respect to intense pricing competition on
commercial loans. By reducing the rate it charges borrowers on commercial loans, U.S. Bancorp is
expanding more rapidly than its peers and gaining market share. However, the strategy also puts pressure on
U.S. Bancorps profitability, which is credit negative. In addition, its growth strategy in commercial lending
raises questions about whether it is undermining its credit underwriting.
In making his remark, Mr. Davis also advertised the competitive strengths that have allowed U.S. Bancorp
to more easily withstand the resultant profitability pressure, specifically its lower cost structure, including
low funding costs, as well as its capital advantage.
Exhibit 1 shows that U.S. Bancorps commercial loan growth has been the highest among its major US
banking peers over the past year. Specifically, the chart shows the rate of growth in average commercial loan
balances from the third quarter of 2013 to the third quarter of 2014, when U.S. Bancorps balances
grew 12%.
EXHIBIT 1
Large US Banks Commercial Loan Balance Growth, Third-Quarter 2013 to Third-Quarter 2014
All large banks are growing their commercial loans, but U.S. Bancorp leads the pack

Note: USB = U.S. Bancorp (A1 stable); STI = SunTrust Banks, Inc. (Baa1 stable); WFC = Wells Fargo & Company (A2 stable); KEY = KeyCorp (Baa1
stable); HBAN = Huntington Bancshares Incorporated (Baa1 stable); CMA = Comerica Incorporated (A3 stable); FITB = Fifth Third Bancorp
(Baa1 stable); PNC = PNC Financial Services Group Inc. (A3 stable); RF = Regions Financial Corporation (Ba1 positive); MTB = M&T Bank
Corporation (A3 negative); BAC = Bank of America Corporation (Baa2 stable); BBT = BB&T Corporation (A2 stable).
Source: The banks quarterly earnings releases

Exhibit 2 verifies U.S. Bancorps aggressive commercial loan pricing. Among the large US banks that
disclosed the data, U.S. Bancorp had the second-lowest commercial loan yield (the rate of interest that U.S.
Bancorp earns on its portfolio of commercial loans) in both the third quarters of 2013 and 2014.
Furthermore, the gap between its commercial loan yield and that of Bank of America Corporation (Baa2
stable) narrowed to four basis points from 12 basis points. The narrower gap speaks to one of U.S.
Bancorps competitive advantages: as the largest US bank not deemed to be systemically important on a
global basis, U.S. Bancorp has lower capital requirements than its larger peers, which translates into a higher
return on capital relative to those bigger banks for a similarly priced loan.
12.0%
11.4%
10.5%
9.8%
8.3%
8.0%
7.5%
6.6%
6.2%
5.8%
4.0%
3.7%
0%
2%
4%
6%
8%
10%
12%
14%
USB STI WFC KEY HBAN CMA FITB PNC RF MTB BAC BBT
Allen Tischler
+1.212.553.4541
allen.tischler@moodys.com

NEWS & ANALYSIS


EXHIBIT 2
Large US Banks Commercial Loan Yields, Third-Quarter 2013 to Third-Quarter 2014
Commercial loan yields of large US banks continue to compress


At the same time, compared with regional banks that also benefit from lower capital requirements, U.S.
Bancorps main competitive advantage is its efficiency, as illustrated in Exhibit 3, which shows banks
overhead ratios. The ratio relates non-interest expenses to net revenue for the first nine months of 2014. At
52%, U.S. Bancorp holds an eight-percentage-point advantage over its nearest regional bank competitor,
M&T Bank Corporation (A3 negative). Being a low-cost producer gives U.S. Bancorp a larger buffer to
absorb net-interest margin compression. U.S. Bancorp also has lower market funding costs than its peers,
which will take on greater importance if loan growth outstrips deposit growth in a rising interest
rate environment.
EXHIBIT 3
Large U.S. Banks Non-Interest Expense as a Percentage of Net Revenue as of Third-Quarter 2014
U.S. Bancorps low-cost structure is its greatest competitive advantage

0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
BAC USB CMA PNC FITB KEY MTB WFC BBT HBAN STI RF
Q32013 Q32014
20bps
28bps 14bps
45bps
24bps
26bps
21bps
34bps
23bps
23bps 35bps
23bps
52%
58%
60% 61%
62%
63%
64% 66%
67% 67%
71%
92%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
USB WFC MTB PNC FITB CMA RF STI HBAN BBT KEY BAC

NEWS & ANALYSIS


U.S. Bancorps diversified business mix also provides additional advantages. Compared with regional peers,
it is less reliant on net interest income since fee revenue accounts for more than 45% of its total revenue.
All these advantages explain why U.S. Bancorp consistently generates the highest return on assets and equity
among the major US banks. Nevertheless, because of lower loan yields, its returns like the rest of the peer
group slipped in the latest quarter compared with a year earlier.
Yet, despite the immediate profitability pressure, U.S. Bancorps grab for commercial loan market share has
the potential to become credit positive once short-term interest rates increase. In that scenario, the yield on
these largely floating-rate loans will rise, resulting in more profitable relationships, assuming the customers
that U.S. Bancorp is currently attracting prove to be both sticky and of sound credit quality.

NEWS & ANALYSIS


Colombias Creation of Deposit-Taking and Transfer Companies Is Credit Positive
for Banks
Last Tuesday, Colombia President Juan Manuel Santos signed the Law for Financial Inclusion, which
permits the creation of Sociedades Especializadas en Depsitos y Pagos Electrnicos (SEDPEs), or lightly
regulated specialized financial entities that will provide payment services and take deposits. The new law is
credit positive for Colombian banks because it will generate a new source of deposit funding and expand the
pool of eligible borrowers.
SEDPEs target customers will be individuals in remote areas without bank branches and individuals
currently using money transfer services. SEDPEs will provide individuals with secure and economical
savings products. These entities will be guaranteed by the Fondo de Garantas de Instituciones Financieras,
the governments deposit insurance fund, and deposits will be exempt from Colombias 0.4% tax
on withdrawals.
The banks that will benefit the most are those that have been most focused on capturing the transactions of
new entrants into formal employment, including Banco Davivienda S.A. (Baa3 stable, D+/ba1 stable
1
) and
the governments Banco Agrario de Colombia (unrated), both of which already handle the governments
direct subsidy payments to lower-income individuals. Davivienda has actively sought to establish itself in
this market segment by creating the DaviPlata mobile phone system to handle money orders, through
which it recently began to offer microinsurance as well.
Because they will be subject to fewer regulatory requirements than banks, SEDPEs will have lower operating
costs. However, SEDPEs will not directly compete with banks because they will not be allowed to offer
loans and will have to place deposited funds either at the central bank or at commercial banks. Banks would
use SEDPE deposits to finance their lending operations. Commercial banks will be allowed to invest in and
own SEDPEs, so the new law will allow them to establish less expensive operations in remote areas and
extend their reach to currently unbanked segments of the population.
Notwithstanding a relatively high level of credit/GDP for the region, Colombia continues to exhibit a low
level of bank penetration, with retail deposits accounting for just 24% of total deposits system-wide as of
June 2014. We expect that the new law will capture and bring into the regulated financial system a large
share of the money orders that today are outside of the banking system, and which the Commission for
Regulation of Communications estimated totaled around $3 billion in 2011. In turn, we expect a large
portion of those flows to remain in the banking system as deposits.
The creation of SEDPEs complements a recent proposal by the Ministry of Finance and Public Credits
Unit for Financial Regulation to provide banks with greater flexibility in how they assess the credit strength
of applicants for short-term small-loans.
2
We expect that the information that the SEDPEs will gather will
contribute to these new credit policies.

1
The bank ratings shown in this report are the banks deposit ratings, their standalone bank financial strength ratings/baseline credit
assessments and the corresponding rating outlooks.
2
For up to two current legal minimum monthly salaries, or about $600.
Felipe Carvallo
Vice President - Senior Analyst
+52.55.1253.5738
felipe.carvallo@moodys.com

NEWS & ANALYSIS


European Resolution Funds Will Weigh on Bank Profitability, a Credit Negative
Last Tuesday, the European Commission published a delegated act on contributions to national resolution
funds that European banks would pay annually through December 2024. This legislation follows Article
102 of the Capital Requirement Regulation (CRR), which directs European member states to set up
national resolution funds. The funds will total as much as 55 billion, which will weigh on banks
profitability and is credit negative.
The resolution funds aim to facilitate bank resolution via the Bank Recovery and Resolution Directive
(BRDD) and, in the euro area, the Single Resolution Mechanism (SRM). Under the new framework, the
resolution of banks should first involve private money, including through the bail-in of senior creditors, if
needed. Contributions from the resolution funds would be a last resort and conditional on the involvement
of a minimum amount of private money equal to 8% of a banks total liabilities. The national resolution
funds will progressively merge into a single European Union-wide resolution fund that the Single
Resolution Board would activate based on need. The board plans to be operational in 2015.
Resolution funds can greatly help resolve weak banks in an orderly manner insofar as they maintain
distressed yet viable banks as going concerns. However, this mechanism has negative implications for banks
creditors because it makes it easier to resolve a bank through means that will trigger burden-sharing.
The size of the national resolution funds must reach at least 1% of the amount of covered deposits. Once
the fund has been fully loaded in 2024, it will fall on national resolution authorities to determine how
banks will contribute to the fund in accordance with the delegated acts provisions. In the interim, the exact
contribution of each member country and individual banks will be finalized by the end of the year.
Banks contributions will be calibrated based on two factors. The first is the size of a banks balance sheet,
which, because the resolution targets large banks rather than small ones, is a proxy for the likelihood of the
bank needing the funds support. The second factor is the banks risk profile, which will be based on a range
of regulatory metrics such as core equity Tier 1 capital, leverage and liquidity coverage ratios and
assessments that include the importance of trading activities and complexity. These metrics will be
combined in a formula described in the delegated act. A scale ranging from 80% to 150% will apply to the
contribution estimate based on the banks balance sheet size so as to account for banks relative risk profile.
The application of a risk-based system will not apply to small banks because it is unlikely to meaningfully
differentiate the risks they pose to banking systems owing to their size. Therefore, lump sums of 1,000 to
50,000 will be applied to most, if not all, banks with total balance sheets of less than 1 billion.
Because large banks will pay most of the levies, the bulk of the costs involved with the funds will be
concentrated on a rather small number of banks. Based on preliminary estimates, banks constituting 85% of
banking assets could pay up to 90% of all contributions. Yet, it is too soon to assess the effect on individual
banks, given the importance of the risk-adjustment factor. Furthermore, the cost borne by banks could be
materially higher if national authorities do not recognize the tax deductibility of this expense.

Alain Laurin
Associate Managing Director
+33.1.5330.1059
alain.laurin@moodys.com

NEWS & ANALYSIS


Russias Large Private Banks Would Benefit from Central Bank Capital Injections
Last Tuesday, Russian Deputy Minister of Finance Alexey Moiseev said that the government is considering
a law that would allow the Central Bank of Russia (CBR) to inject capital into banks, subject to a limit of
15% of the CBRs reported profits.
3
These capital injections would be credit positive for the banks receiving
them, although they would not significantly boost the capital ratios of the largest state-owned Russian
banks, given the proposed limit on the total amount of capital injection available via this measure.
However, if capital injections focussed on private-sector banks, which tend to be much smaller than state-
owned institutions, this initiative could prove an effective tool for banks in need of capital.
Many details of the proposal are unclear. Aspects yet to be clarified include the process for determining
bank eligibility for capital support; how much capital an individual bank might receive within the total
15% limit; whether the capital injection would qualify as Tier 1 or Tier 2 capital; and whether the CBR or
other government bodies would directly inject the funds.
We believe systemically important banks (SIBs) would receive capital, and that foreign bank subsidiaries
would not, given that their parents have the financial resources to support them if necessary. We estimate
that 15% of the CBR profit will total RUB30-RUB50 billion for 2014. This is less than 1% of total
banking-sector capital of RUB7.5 trillion at 1 September 2014, and a small portion of the governments
RUB780 billion capital assistance to its largest state-owned banks so far this year.
4

In contrast, the RUB30-RUB50 billion additional capital injection would amount to a material 4%-7% of
privately owned SIBs aggregate capital. Although the list of SIBs is not public (the regulator has only stated
that it has classified 19 banks as SIBs), based on the criteria the regulator disclosed earlier this year, we think
these privately owned institutions qualify as SIBs: Alfa-Bank (Ba1 negative, D/ba2 stable
5
), Bank Otkritie
Financial Corporation OJSC (Ba3 stable, D-/ba3 stable), Promsvyazbank (Ba3 review for downgrade, D-
/ba3 review for downgrade), Credit Bank of Moscow (B1 stable, E+/b1 stable) and Russian Standard Bank
(B2 negative, E+/b2 stable).
Russian banks ability to generate capital internally has diminished recently owing to increased loan-loss
provisioning charges and funding costs. These reflect stagnant economic growth and a tighter liquidity
situation following European Union and US sanctions on Russias state-owned banks in connection with
the political crisis in Ukraine. In the first nine months of 2014, 191 banks (of the 859 banks in Russia)
were loss-making, compared with 55 loss-making banks in 2013. As a result of banks reduced profitability,

3
The CBR is required by law to pay 75% of its reported profit to the government, leaving 25% of profits available for other
purposes.
4
See Russias Capital Injection into Two Banks Subject to US and EU Sanctions Is Credit Positive, 1 September 2014.
5
The bank ratings shown in this report are the banks deposit rating, its standalone bank financial strength rating/baseline credit
assessment and the corresponding rating outlooks.
Olga Ulyanova
+7.495.228.6078
olga.ulyanova@moodys.com
Polina Krivitskaya
Associate Analyst
+7.495.228.6062
polina.krivitskaya@moodys.com

NEWS & ANALYSIS


Basel III statutory total capital adequacy ratio (the so-called N1.0 ratio) for the sector declined to 12.6% at
1 September 2014, from 12.9% at 1 February 2014 (see exhibit below).
Russian Banks Aggregate Capital Ratios and Year-to-Date Profitability, 2014 versus 2013

Note: 1 February 2014 is the starting point for capital ratio dynamics because this was the first date under which banks reported their capital ratios
under the CBRs implementation of Basel III rules that year.
Source: Central Bank of Russia

0
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1 Feb 1 Apr 1 Jul 1 Aug 1 Sept
R
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B

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Profits 2013 - right axis Profits 2014 - right axis
Total CAR (N1.0) - left axis Tier 1 Ratio (N1.2) - left axis

NEWS & ANALYSIS


Kazakhstan Plan to Recapitalize Two Large Banks Is Credit Positive
Last Wednesday, the National Bank of Kazakhstan announced that it will buy a minimum of $1.4 billion
of problem assets from Kazkommertsbank (KKB, B2 stable, E/caa1 stable
6
) and its recently acquired
subsidiary BTA Bank (B3 positive, E/caa2 stable), effectively recapitalizing the two banks. The purchase is
credit positive for KKB and BTA, and for other banks in Kazakhstan because it signals the Kazakh
authorities increased willingness to support banks. In the resolution of several failed Kazakh banks in 2009-
13, the governments support was limited to protecting depositors, and did not include any significant
recapitalizations, resulting in foreign creditors taking large losses.
BTA had the highest proportion of problem loans among rated Kazakh banks at 92% as of the end of June
2014.
7
KKB, the countrys largest bank, acquired BTA earlier this year from national welfare fund JSC
Samruk-Kazyna. Although KKB and BTA together account for around 60% of total problem loans in the
Kazakh banking system as of the end of June 2014, asset-quality problems in the country, to a large extent a
legacy of pre-2008 real estate lending, are not limited to these two banks. For the system as a whole, we
estimate that problem loans accounted for 47% of total loans as of year-end 2013 (see exhibit).
Kazakhstans Largest Banks Problem Loans as Percent of Gross Loans at Year-End 2013

Source: Moodys Banking Financial Metrics

The central bank is not ruling out extending similar support to other Kazakh banks that report high levels
of problem loans, although it did not provided additional details. The central bank has made improving
banks asset quality a top priority and aims to bring the proportion of nonperforming loans to below 10%
by the end of 2015.
Under the proposed recapitalization scheme, the National Distressed Fund, 100%-owned by the central
bank, will buy problem assets from the banks under a repurchase agreement that is secured by a pledge of
the banks shares and obligates the banks to buy back the assets after 10 years. The scheme will improve
banks asset quality immediately, while simultaneously incentivising them to make recoveries on the assets.
Unlike problem loans that are not generating cash flow for the bank, the additional capital can be invested

6
The bank ratings shown in this report are the banks deposit rating, its standalone bank financial strength rating/baseline credit
assessment and the corresponding rating outlooks.
7
BTA over the past five years has twice undergone restructurings after defaulting on its debt. It has had almost no new loan
origination, which has left the bank with a loan portfolio predominantly composed of problem loans as the performing portion of
its portfolio amortized. Loan-loss reserves at the end of June 2014 were 81% of gross loans and covered 88% of these problem
loans.
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100%
Semyon Isakov
Assistant Vice President - Analyst
+7.495.228.6061
semyon.isakov@moodys.com

NEWS & ANALYSIS


in yielding assets, thereby improving the banks revenues. Also, removing the problem assets from the
banks balance sheet reduces the banks need for additional loan-loss reserves beyond what they have
already provisioned.
It is not yet clear how the $1.4 billion will be allocated between the two banks. We expect that the effect on
the banks reported capital could be somewhat less than $1.4 billion, depending on the banks already-
provisioned loan-loss reserves on loans to be transferred to the National Distressed Fund. Nonetheless, we
expect the positive effect to be substantial, considering that the combined shareholders equity base of the
two banks totaled $2.5 billion at the end of June 2014.

NEWS & ANALYSIS


Bank Permatas Issuance of Basel III-Compliant Subordinated Debt Is Credit Positive
Last Thursday, Bank Permata TBK (P.T.) (Baa3 stable, D/ba2 stable
8
) raised IDR700 billion ($58 million)
through the issuance of Basel III-compliant Tier 2 subordinated debt in the onshore market. This capital
raise is credit positive because it will boost Permatas loss-absorbing buffer ahead of further loan expansion.
After taking into account the newly raised subordinated debt, and assuming Permata achieves its targeted
14%
9
loan and risk-weighted asset growth in 2014, while keeping its profitability metrics and earnings
retention in line with last year, we estimate that Permatas capital adequacy ratio will increase to 14.5% by
the end of 2014 from 13.9% reported as of June 2014, as shown in the exhibit. Our estimated capital
adequacy ratio for Permata is much higher than the 9.5% minimum required for Indonesian banks under
Basel III rules. The 9.5% capital includes a common equity Tier 1 capital ratio of 4.5%, a 2.5% capital
conservation buffer and a 2.5% countercyclical buffer.
Permatas Capital Ratios Exceed the Required Minimum under Basel III Rules

Sources: Bank Permatas financial reports and Moodys Investors Service

This capital raise is also positive because it is only the third issuance of a Basel III-compliant security in
Indonesia, and will help create a market for these instruments and open up new channels for Indonesian
banks to maintain high capital adequacy ratios. At the end of August 2014, Indonesian banks reported an
average 19.7% capital adequacy ratio. The banks will start reporting Basel III capital starting with first-
quarter 2015 reporting. The new capital will also better shield senior creditors in a stress scenario.
The Basel III instrument requires the debt to be written down at the point of non-viability (PONV), which
is determined at the discretion of Otoritas Jasa Keuangan (OJK), the Indonesian financial services authority.
Under the terms and conditions of the debt, the PONV occurs if OJK notifies the bank that without such
write-downs, the bank would become non-viable. The security can be written down by an amount deemed
necessary by the OJK to restore viability to the bank. The write-down is permanent and does not allow the
bank to return the debt to the original face amount and interest payment if it recovers.
In a stress situation, the PONV debt will benefit senior creditors. PONV debt will increase in size over
time, driven by the need to issue more PONV debt to replace old-style subordinated debt. A thick layer of

8
The ratings shown are the banks deposit rating, its standalone bank financial strength rating/baseline credit assessment and the
corresponding rating outlooks.
9
The banks loan target for this year is between 12%-14%.
9.4% 9.3% 9.3%
4.5% 4.4% 4.4%
New PONV = 0.7%
0%
2%
4%
6%
8%
10%
12%
14%
16%
Reported as of June 2014 Estimated Capital at End-2014,
Without Subdebt
Estimated Capital at End-2014, After
Issuing Subdebt
Tier 1 Ratio Tier 2 Ratio New PONV Tier 2 Securities
CAR = 13.9% CAR = 13.8%
CAR = 14.5%
Falemri Rumondang
Associate Analyst
+65.6398.8330
falemri.rumondang@moodys.com
Alka Anbarasu
+65.6398.3712
alka.anbarasu@moodys.com

NEWS & ANALYSIS


PONV is credit positive because it will increase the banks loss buffer and can better shield creditors from
losses in the event the bank reaches the PONV.
Permata is the first Indonesian bank we rate to issue PONV subordinated debt and the third bank in the
market to do so. Bank UOB Indonesia (unrated) and Bank Internasional Indonesia (unrated), a subsidiary
of Malayan Banking Berhad (A3 stable, C/a3 stable), have also issued PONV subordinated debt.
Permatas capital raise follows the implementation of Basel III rules in Indonesia. Starting 1 January 2014,
the OJK required Tier 2 subordinated debt to have the PONV language to receive a capital credit.

NEWS & ANALYSIS


Insurers
Health Insurers Gain Little with Affordable Care Act Opt-Out Clause
On Wednesday, CNBC reported

that an added provision in the 2015 contract between health insurers that
are selling policies on the federal exchange and the Centers for Medicare and Medicaid Services (CMS)
would allow insurers to terminate their health plans if the subsidies being provided to enrollees are no
longer permitted. The termination provision seemingly allows insurers to limit their risk if at some point
during 2015 federal subsidies are no longer available. However, because the provision is subject to
applicable state and federal laws, the benefit to the insurers is limited because it is unlikely that insurers
would be allowed to cancel polices already sold.
According to the report, the wording of the clause is as follows:
CMS acknowledges that [a health plan issuer] has developed its products for [HealthCare.gov]
based on the assumption that [subsidies for premiums and out-of-pocket expenses] will be
available to qualifying enrollees. In the event that this assumption ceases to be valid during the
term of this agreement, CMS acknowledges that an issuer could have cause to terminate this
agreement subject to applicable state and federal law.
The added contract provision is clearly the result of several ongoing court cases, one of which has been
appealed to the US Supreme Court. At question in all these cases is the legality of subsidies for polices
purchased on the federal exchange based on the wording in the Affordable Care Act (ACA), which states
that federal premium tax credits (subsidies) are available to individuals who purchase insurance policies on a
state-operated exchange. If the Supreme Court decides to hear the case, its decision would likely be
announced in mid-2015, well after the open enrollment period that begins 15 November 2014 and ends 15
February 2015.
At stake for health insurers are approximately 5 million polices that were sold on the federal exchange with a
federal subsidy and a projected 3 million of new polices for 2015. Assuming that the percentage of renewing
individuals and new purchasers that qualify for subsidies remains in the 80%-90% range, the loss of this
financial assistance in the middle of the year would likely result in a majority of these policies lapsing.
Under this scenario, we would expect the unlapsed policies and any future exchange sales to comprise a less
healthy population because only those who most need insurance coverage would continue paying for an
unsubsidized health plan. In this event, the added contract wording would appear to protect insurers from
the small percentage of individuals who qualify to purchase an exchange policy after the open enrollment
period as a result of a qualifying event. However, insurers would still bear the risk for those polices already
sold where the individual continues to pay the full premium.
The exhibit below shows six Moodys-rated large health insurance companies that have reported sizable
enrolled membership. Although the enrollment for these six insurers accounts for more than 30% of total
ACA enrollment, this business segment comprises a relatively small portion of their total
medical membership.

Steve Zaharuk
+1.212.553.1634
stephen.zaharuk@moodys.com

NEWS & ANALYSIS


Affordable Care Act Enrollment by Insurer
Insurer
Senior Unsecured Rating
and Outlook
ACA Individual Membership at
30 June 2014
Percent of Total
Medical Membership
WellPoint, Inc Baa2 stable 769,000 2.4%
Humana Inc. Baa3 stable 615,000 6.3%
Aetna Inc. Baa2 stable 600,000 2.6%
Health Net, Inc. Ba3 positive 313,000 5.4%
Cigna Corporation Baa2 positive 150,000 1.1%
Centene Corporation Ba2 stable 75,700 2.4%
Source: Company filings and disclosures

Although WellPoint sold the most policies of the companies in our exhibit, almost half of their policies
were sold through state-operated exchanges in New York and California, where the status of the premium
subsidies is not in question. Similarly, Health Nets exchange policies are not affected since almost all were
sold on the California exchange.

NEWS & ANALYSIS


US Mortgage Insurers Will Benefit from Housing Finance Reforms
Last Monday, Federal Housing Finance Agency (FHFA) Director Mel Watt announced concrete steps
toward reducing the uncertainty that lenders face regarding government-sponsored enterprises (GSEs)
Fannie Maes and Freddie Macs representation and warranty framework. Mr. Watt also announced plans
to develop GSE guidelines for mortgages with loan-to-value ratios (LTVs) of 95% to 97%. Until now,
lenders have been unable to accurately gauge the risk of breaching representations and warranties, and thus
have been reluctant to lend to borrowers with less-than-pristine credit. Although it remains to be seen to
what degree the measures Mr. Watt outlined will persuade lenders to loosen underwriting standards, these
incremental housing reforms are credit positive for US private mortgage insurers (PMIs) because they will
increase the flow of new business to PMIs.
The US housing market has gradually recovered since the 2008 financial crisis. However, the recovery has
not been broad-based, and certain segments of the market are languishing. We believe this is due in part to
mortgage underwriting standards that remain very tight relative to historical norms. Current underwriting
standards exclude a segment of creditworthy borrowers from the mortgage market, including those with
less-than-pristine, complex credit profiles or limited financial resources. As Exhibit 1 shows, post-2008
mortgage originations are concentrated in the super-prime, high-FICO cohort of borrowers that accounted
for approximately 74% of Freddie Mac-guaranteed originations post-2008, versus an average of
approximately 39% from 1999 to 2004. Mortgages to borrowers with credit scores lower than 680
accounted for less than 4% of post-2008 originations, versus an average of approximately 26% from 1999
to 2004.
EXHIBIT 1
FICO Distribution of Freddie Mac Mortgages by Vintage, 1999-2013
Source: Freddie Mac single-family loan-level sample dataset
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
T
h
o
u
s
a
n
d
s
P
e
r
c
e
n
t

O
r
i
g
i
n
a
t
i
o
n
s

b
y

F
I
C
O

C
a
t
e
g
o
r
y
<620 621 - 680
681 - 740 741 - 780
781 - 850 Freddie Mac Loan Count - right axis
Brandan Holmes
+1.212.553.6897
brandan.holmes@moodys.com

NEWS & ANALYSIS


A key reason for this shift toward the highest quality segment of the market is that lenders have imposed
more stringent underwriting standards, or overlays, than the GSEs require, because of uncertainty about the
risks they face under the GSEs current representation and warranty framework. Lenders paid tens of
billions to settle putback claims from the GSEs. Although we consider the FHFAs actions to be a positive
step, we expect that it will take some time for lenders to digest the updated framework and begin making
meaningful changes to underwriting standards.
However, the lenders broader underwriting standards will allow PMIs to insure some currently underserved
but profitable segments of the market, because risk-based premiums compensate insurers for taking on
additional risk. The mortgage industry has made significant strides in improving upfront quality controls
and other risk management practices that should prevent the more egregious pre-crisis practices. In the
current environment, we do not expect a loosening of credit quality from a very tight starting point to result
in a spike in defaults. According to the Urban Institute,
10
the average cumulative default rate on certain
Freddie Mac loans originated in 1999-2004 is 2%.This compares favorably with PMI premiums,
11
and we
expect PMIs to remain profitable, even at more normalized default rates.
Mr. Watt also announced steps to allow the GSEs to purchase mortgages with LTVs of up to 97%.
Although lower down payments naturally imply incremental risk, risk-based premiums, and borrower credit
quality are important risk-mitigation factors. As Exhibit 2 shows, the average post-2008 credit scores of
95% LTV borrowers are within 10 points of borrowers with 80%-85% LTV loans. These expanded
underwriting parameters are occurring at a time when the GSEs are finalizing their private mortgage
insurance eligibility requirements,
12
which will impose additional pricing and underwriting discipline on
the PMIs with granular risk-based capital requirements.
EXHIBIT 2
Average FICO Score by Loan to Value and Vintage, 1999-2013
Source: Freddie Mac single-family loan-level sample dataset

10
Per calculations by the Urban Institute and Freddie Mac, the average cumulative default rate on 30-year fixed, full-documentation,
amortizing loans originated in 1999-2004 is 2%.
11
PMI (Radian BPMI) single-premiums, which are lower than the more common monthly-premiums, for loans to borrowers with
680-719 FICOs range from 141 basis points for loans with LTVs of no more than 85% to 392 basis points for loans with LTVs of
90%-95%. Assuming a 25% severity on default, a 2% default rate implies an expected loss of 50 basis points.
12
See Stringent GSE Mortgage Insurer Eligibility Requirements Would Be Credit Positive for Policyholders, 21 July 2014.
690
700
710
720
730
740
750
760
770
780
1999 2001 2003 2005 2007 2009 2011 2013
<80 LTV 80 - 85 LTV 85 - 90 LTV 90-95 LTV 95+ LTV

NEWS & ANALYSIS


US Public Finance
Low Oil Prices Will Pressure States Reliant on Extraction Taxes
As of Friday, oil prices have been below $83 per barrel for almost two weeks, signaling weaker tax revenues
for oil-producing states. A significant drop in oil prices from Fridays $81.01 per barrel of West Texas
Intermediate would be credit negative for some of the top oil-producing US states, especially Alaska
(general obligation Aaa stable), which depends on oil tax revenues to fund virtually all of its
operating budget.
Alaska is by far the state most reliant on oil-production tax revenues, which account for 89% of its
operating budget well ahead of next most-reliant state, New Mexico (general obligation Aaa stable), at
19%. In the other major oil-producing states (those whose production is more than 300,000 barrels per
day), production-related taxes account for less than 10% of revenue, as shown in the exhibit.
State Reliance on Oil Revenue and Budgetary Price Assumptions
State
July 2014 Oil
Production
Barrels per Day
Fiscal 2014
General Fund
Revenues
Reliance on Oil
Taxes
Fiscal 2014
Oil Price
Forecast
Fiscal 2015
Oil Price
Forecast Oil Price Forecast Benchmark
Texas 3,102 8% $82.18* $80.33* West Texas Intermediate
North Dakota 1,111 6% $75.00 $80.00 West Texas Intermediate
Alaska 422 89% $106.61 $105.06 Alaska North Slope
Oklahoma 353 4% NA NA NA
New Mexico 332 19% $95.75 $92.00 New Mexico
Notes: Forecast prices are averages for the fiscal year.
* The Texas price reflects the taxable price per barrel, which is lower than the anticipated market price.
Sources: US Energy Information Administration and State Budget Information

Alaska and New Mexico both forecasted higher oil prices for their fiscal years ended 30 June 2014 and may
need to make budgetary adjustments.
13
Lower oil prices over an extended period could derail efforts to
explore and drill new wells in Alaska, which enacted tax incentives that took effect in January 2014 to spur
output. The low prices also risk decreasing the allure of tight oil deposits, which require more costly
extraction, in states such as North Dakota and Oklahoma.
Many oil-producing states built large fiscal reserves in recent years as elevated oil prices (and growing
production in some states) stoked tax collections. Their reserves mitigate a near-term oil revenue decline.
For instance, even though Alaska is the most reliant on oil tax revenues, its reserves ($26 billion) exceed
three years worth of fiscal 2013 operating revenues. Other states with large reserves include North Dakota,
with $2.5 billion, or 78% of revenues, and Texas, with $8 billion, or 16% of revenues. New Mexicos
reserve levels are slightly lower at $671 million, or 12% of revenues.

13
Alaska is scheduled to update its most-recent (April) price forecast by year-end.
John Lombardi
Associate Analyst
+1.212.553.2829
john.lombardi@moodys.com
Ted Hampton
Vice President - Senior Credit Officer
+1.212.553.2741
ted.hampton@moodys.com

NEWS & ANALYSIS


PLUS Loan Eligibility Expansion Benefits Universities Serving Low-Income Students
Last Wednesday, the US Department of Education (DOE) implemented a rule relaxing underwriting
requirements for federal parent and graduate student loans (PLUS loans). The relaxation, which takes effect
next spring, is credit positive for US universities that serve a large number of low-income students because it
expands PLUS loan eligibility to what the DOE estimates is another 370,000 parents and
graduate students.
This is an approximate 35% increase over PLUS recipients for the 2013-14 award year, assuming all newly
eligible borrowers take out loans, and that figure is approximately 200,000 more than the recent peak of
recipients for the 2011-12 year (see Exhibit 1). It is likely that a large portion of the newly eligible
borrowers will take out PLUS loans because they have less strict credit standards and more generous
repayment options than private student loan alternatives. The increase in recipients will provide an
important stabilizing factor for these universities, many of which have declining enrollment. Some may
even record moderate enrollment increases in the 1%-2% range as a result of the relaxation.
EXHIBIT 1
PLUS Loan Recipients Will Grow Substantially with New Eligibility Criteria

Note: Financial aid award years affect the fall enrollment of the next academic year (i.e., the 2014-15 award year will affect financial aid in fall
2015). Projections are based on US Department of Education overall estimates for increased eligibility, based on 2013-14 distributions.
Sources: US Department of Education Title IV Program Volume Reports and Moodys Investors Service projections

The new rule loosens the standards around the adverse credit history criteria by which a loan could be
denied. It also outlines alternate approval methods for borrowers who are denied a loan based on adverse
credit history. Loans provided by the program accounted for only 10% of federal student loan
disbursements in the 2013 academic year, but reliance on the program varies widely by university. Of
approximately 550 rated four-year colleges and universities, only 10 institutions with ratings ranging from
Aa3 to B1 drew more than 10% of operating revenue from PLUS loans (see Exhibit 2).

0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 Projection
P
L
U
S

L
o
a
n

R
e
c
i
p
i
e
n
t
s
Award Year
Public Private For-Profit
Eva Bogaty
+1.415.274.1765
eva.bogaty@moodys.com

NEWS & ANALYSIS


EXHIBIT 2
PLUS Loans Constitute a Meaningful Portion of Operating Revenue for 10 Rated Universities
(Fiscal 2013)
University and Senior
Unsecured Rating and
Outlook
Enrollment
Fall 2013
Plus Loans as Percent
of Operating Revenue
Tuition and Auxiliaries
as a Percent of Total
Operating Revenue
Total Operating
Revenue,
$ Thousands
Spelman College, Georgia
(A1 stable)
1

2,088 22% 59.7% $86,162
Morehouse College, Georgia
(Baa3 negative)
1

2,099 22% 59.0% $85,552
Clark Atlanta University,
Georgia (Ba1 stable)
1

3,266 19% 71.7% $83,610
Marymount Manhattan
College, New York (Baa2
stable)
2

1,714 19% 90.7% $50,652
St. John's University, New
York (A3 positive)
2

16,696 14% 88.6% $472,141
Citadel, the Military College
of South Carolina (Aa3
stable)
3

3,150 12% 64.8% $101,451
Alma College, Michigan
(Baa1 stable)
2

1,397 12% 70.7% $44,349
Wittenberg University, Ohio
(B1 negative)
2

1,796 12% 80.8% $52,249
Longwood University,
Virginia (A1 stable)
3

4,602 11% 64.8% $104,008
Central Washington
University (A1 stable)
3

10,504 10% 59.7% $191,092
1 Private historically black college or university
2 Private institution
3 Public institution

Historically black colleges and universities, regional public universities, small local colleges and for-profit
universities will benefit most from the expanded PLUS loan eligibility because they all serve a relatively large
proportion of low-income students. Most universities that depend on PLUS loans draw the large majority
of their annual operating revenues from net tuition and typically lack the wealth to easily absorb operating
deficits or to increase scholarship aid to replace the loans. The median operating margin in the fiscal year
ended 30 June 2013 for PLUS-dependent universities was negative 1.6%, versus a median of 2.2% for
public universities and 3.7% for private universities. Although a 1%-2% increase in enrollment translates
into only approximately $1 million of additional net tuition revenue for these universities (median net
tuition revenue of $55.7 million), it would be enough to bring operations closer to break even for many.
Expanded eligibility will help stabilize enrollment for PLUS loan eligible students, thereby making net
tuition revenue more predictable. Many of these universities recorded steep enrollment declines in fall 2012
because students whose parents were declined loans based on tightened loan requirements in October 2011
were unable to enroll in fall 2012. Those enrollment declines contributed to net tuition revenue shortfalls
and ultimately operating deficits for the fiscal year ended 30 June 2013.

NEWS & ANALYSIS


Colorado Supreme Court Upholds State and Local Government Pension Reforms, a
Credit Positive
Last Monday, the Colorado Supreme Court upheld statewide public pension reforms implemented in 2010,
reversing a state appellate court decision. The ruling is credit positive for the State of Colorado (issuer rating
Aa1 stable) and its local governments because it upholds nearly $9 billion of pension liability reductions and
solidifies the states legal ability to enact changes to cost of living adjustment (COLA) benefits. At nearly
$22 billion, Colorado had the 12th-highest Moodys-adjusted net pension liability among the 50 US states
as of fiscal 2012.
Then-Colorado Governor Bill Ritter in February 2010 signed into law Senate Bill 10-001, which changed
state and local government contribution rates to the Public Employees Retirement Association (PERA),
while altering certain pension benefits and retirement eligibility requirements. The changes applied to most
public employees and retirees throughout the state because the state and most local governments in
Colorado participate in PERA.
The most significant and contentious component of the states reforms were changes to COLA benefits,
which at the time provided a 3.5% annual compound increase. The legislation generally capped pension
COLA benefits at 2%, or alternatively, the lesser of 2% and the change in the Consumer Price Index (CPI)
following years where PERAs investment returns are negative.
As a result of the legislation, PERAs unfunded actuarial accrued liabilities (UAALs) fell substantially. The
systems UAAL at the end of 2009 was $16.9 billion, reflecting a 34%, or $8.9 billion, reduction as a result
of the reforms (see Exhibit 1). Of the $8.9 billion in unfunded liability reductions, $3.2 billion was
attributable to the state, nearly $5 billion to local school districts and the remainder to other miscellaneous
local governments. Despite the increase to employer contribution rates as part of the reforms, PERAs
unfunded liabilities have since grown. This partly is due to contribution rates remaining below actuarial
requirements, particularly for the state and local school district divisions.
EXHIBIT 1
Colorados Public Employees Retirement Association Unfunded Actuarial Accrued Liabilities

Note: Because of the publication timing of actuarial studies, the reforms passed in 2010 were first reflected in PERAs 2009 valuation figures.
Sources: Colorado Public Employees Retirement Association actuarial valuations and plan comprehensive annual financial reports

In September 2010, a lower court ruled in favor of the states ability to implement the COLA changes
following a legal challenge by a group of retirees that had asserted that the COLA amounts at the time of
$0
$5
$10
$15
$20
$25
$30
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
$

B
i
l
l
i
o
n
s
UAAL Additional UAAL Without Reforms
Thomas Aaron
+1.312.706.9967
thomas.aaron@moodys.com

NEWS & ANALYSIS


retirement merited contractual protections, thus preventing the state from lowering the benefits. The state
Court of Appeals agreed with the retirees in October 2012, overturning the lower court decision and ruling
the previous COLA amounts were contractually protected.
The state Supreme Court overturned the appellate ruling on the grounds that the states reform legislation
did not violate a contractual protection. The court ruled that public employees in Colorados PERA system
do not enjoy a contractual protection of the COLA benefits in place when they become eligible to retire, or
actually do so. The court drew a clear distinction between vested rights to base pension benefits, and a lack
thereof related to COLAs.
Colorados high court is the latest to rule on public pension reforms since 2013, although the results vary
and consider highly nuanced issues. For example, the state supreme court in New Mexico (general
obligation Aaa stable) ruled that reductions to COLAs and increases to employee pension contributions
were legally allowable, while the Arizona (issuer rated Aa3 positive) state supreme court ruled that the states
reduction of COLA benefits violated that states constitution (see Exhibit 2).
EXHIBIT 2
State Supreme Court Rulings on Public Pension Reform Challenges in Recent Years
State Reform Description State Supreme Court Decision
Arizona 2011 reforms reduced COLA benefits Reforms violated the state constitution (2014)
Colorado 2010 reforms altered certain benefit provisions and
retirement eligibility criteria, and reduced COLA
benefits
Reforms upheld (2014)
Florida 2011 reforms lowered future benefit accruals,
increased employee contributions and eliminated
COLAs associated with future years of work
New Mexico 2013 reforms reduced COLAs and increased
employee contribution rates
Reform upheld (2013)
Washington In 2007 and 2011, the state repealed certain COLA
and other contingent benefits that included state
termination options when enacted
Wisconsin 2011 reforms related to collective bargaining and
employee shares of pension costs, including those
of a local pension system
Sources: Moody's Investors Service and state supreme court opinions

NEWS & ANALYSIS


Securitization
New York Probe into Ocwen Is Credit Negative for Company and the RMBS It Services
Last Tuesday, the New York State Department of Financial Services (DFS) accused mortgage servicer
Ocwen Financial Corporation (B2 review for downgrade) of material deficiencies in its systems and
processes. Specifically, DFS alleged that Ocwen was backdating loss mitigation and foreclosure letters to an
unknown number of borrowers. The allegations, which expand an existing probe into the company by the
New York regulator, are credit negative for Ocwen and private-label residential mortgage-backed securities
(RMBS) that contain loans it services.
Following the regulatory accusations, we downgraded Ocwens rating to B2 from B1, with the rating on
review for further downgrade. On 22 October, we also downgraded the servicer quality assessment of
Ocwens mortgage servicer unit Ocwen Loan Servicing LLC as a primary servicer of subprime residential
mortgage loans to SQ3 from SQ3+, and as a special servicer of residential mortgage loans to SQ3 from
SQ3+. Both assessments remain on review for further downgrade.
The extent of the negative effect on Ocwen and RMBS containing Ocwen-serviced loans will largely
depend on the results of the ongoing regulatory investigation. Ocwen is the largest non-bank, residential
mortgage servicer in the US, servicing roughly 25% of the loans, with more than $180 billion in unpaid
principal balance, in US private-label RMBS. The companys business focuses mainly on the subprime
mortgage market.
Depending on the outcome of the investigation, the probe could result in monetary fines against Ocwen,
regulatory restrictions on Ocwen Loan Servicing LLC and higher compliance and monitoring costs for the
company. It will also likely result in a decrease in loans transferred to Ocwen from other servicers. The
increased likelihood that other regulators, such as the US Consumer Financial Protection Bureau and
various state attorneys general, will also begin or expand investigations into Ocwens servicing practices is
also credit negative for the company.
If regulatory action results in additional foreclosure delays or increased loan modifications, trust losses will
increase and cash flow disruptions will occur in RMBS containing Ocwen-serviced loans, with the highest
aggregate exposure in subprime, particularly transactions involving loans from Residential Funding
Company, Option One Mortgage Corp. and Ameriquest. Foreclosure delays harm bondholders because
servicers must make additional advances of delinquent principal and interest and will accrue legal and
property-related expenses that will reduce overall cash to the RMBS trusts. Mortgage modifications to
distressed borrowers increase the odds of RMBS cash flow disruptions, including missed bondholder
interest payments.
The regulatory scrutiny also slightly increases the risk of losses for Ocwen-issued servicer advance facilities,
securitizations that are backed by a mortgage servicers right to be reimbursed for advances made on behalf
of delinquent accounts to RMBS trusts. These facilities would face a higher likelihood of losses in the event
that foreclosure timelines increase or advances made by Ocwen are deemed not recoverable as a result of
regulatory scrutiny over borrower charges and fees. However, we deem this risk to be minimal because
servicer advances have very high seniority.
Gene Berman
+1.212.553.4139
gene.berman@moodys.com
Warren Kornfeld
+1.212.553.1932
warren.kornfeld@moodys.com
Mark Branton
+1.212.553.4175
mark.branton@moodys.com

NEWS & ANALYSIS


Spanish Covered Bond Law Would Reduce Collateral, a Credit Negative
Last Wednesday, the Spanish treasury proposed a new regime for Spanish covered bonds (cdulas) that
would align the countrys covered bond practices with those of the rest of Europe and improve recoveries
for unsecured bank creditors. If these changes take effect, covered bonds would be backed by much less
collateral, instead of the issuers entire mortgage book. As a result, over-collateralisation (collateralisation
above the amount of covered bonds) risks dropping to 25% or less from current levels of more than 100%.
The Spanish treasury is also contemplating features that would improve the credit quality of covered bonds,
such as asset quality requirements, property value updates and liquidity matching principles. Enhancements
also include improving the bankruptcy remoteness of the cover pool, an independent cover pool monitor
and transparent reporting. Nevertheless, the decline in collateral backing covered bonds makes the package
of legislative proposals credit negative for covered bonds. The Spanish treasury has requested feedback on its
proposals by 24 November.
Spanish mortgage covered bonds (cdulas hipotecarias) are now backed by the issuers entire mortgage book
and public sector covered bonds (cdulas territoriales) are backed by an issuers entire public-sector loan
book. This provides the highest over-collateralisation in Europe and compensates for weaknesses in Spains
cover bond structure. Exhibit 1 shows over-collateralisation beyond that necessary for the current rating of
covered bonds by country.
EXHIBIT 1
Weighted-Average Excess Over-Collateralisation by Country


The proposals state that the covered bonds shall be backed by an earmarked and limited cover pool to
improve the recovery of banks unsecured creditors. If an issuer becomes insolvent, unsecured creditors
would have recourse to a greater portion of the issuers assets, which otherwise would be encumbered to
covered bondholders. Although the proposal does not specify any maximum over-collateralisation, it argues
that the current recourse to the entire mortgage book is excessive and should be lower.
Other treasury proposals would improve cdulas credit quality by strengthening the quality of their
collateral, better matching assets and liabilities, enhancing cover pools bankruptcy remoteness and
endorsing most of the European Banking Authoritys (EBA) best practices. Cdulas hipotecarias and cdulas
territoriales currently have some legal weaknesses relative to their European peers and fall short of EBA best
practices, some of which will be necessary for preferential capital treatment of covered bonds in the near
future (see Exhibit 2).
27.6%
17.5%
18.6%
23.7%
55.1%
31.1%
17.1%
32.4%
95.0%
25.4%
37.1%
39.5%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Juan Pablo Soriano
Managing Director
+34.91.768.8233
juanpablo.soriano@moodys.com
Jose de Leon
+34.91.768.8218
jose.deleon@moodys.com

NEWS & ANALYSIS


EXHIBIT 2
Comparison of Spanish Covered Bond Laws and European Banking Authority Best Practices
European Banking Authority Best Practice Spanish Covered Bonds
Dual recourse to other issuers assets if cover pool is
insufficient
Compliant
Segregation of cover assets by identification in a cover
register or transfer to special entity
Compliant
Bankruptcy remoteness should avoid automatic
acceleration and independent manager of the cover pool
Fail: Although the law segregates cover assets and avoids
immediate acceleration, the administrator is not
independent from bankruptcy estate
Cover pool composition should remain homogenous
through the life of the bond to avoid issuers discretion
Fail: Cover pool consists of any type of mortgage loans
from the issuer
Cover assets should be located in the European economic
area, which ensures that liquidation of collateral in the case
of issuer default is legally enforceable
Compliant
Loan-to-value ratios must be updated at least yearly Fail: No obligation to update LTVs
Regulatory minimum over-collateralisation Compliant: Minimum 25% for cdulas hipotecarias and
43% for cdulas territoriales
Derivative instruments are allowed in covered bond
programmes exclusively for risk hedging purposes and
cannot be terminated upon issuer insolvency
Compliant, although there are technical issues in
implementation
Liquidity buffer to cover cumulative net outflows Fail
Stress testing of market risks, fire-sale risk and credit risk Fail

It is not clear whether investors holding some 310 billion of existing Spanish covered bonds would be
subject to new measures retroactively or if the treasury would implement a sufficiently long transition
period that would preserve their preferential claim over the whole mortgage cover pool. Ninety percent of
existing cdulas will amortise in 10 years, according to their scheduled maturity. Cdulas have bullet
maturities and do not follow a pass-through amortisation in line with the cover pool, which the issuer
replenishes continuously.

RATING CHANGES
Significant rating actions taken the week ending 24 October 2014


Corporates

Catalent Pharma Solutions, Inc.

Upgrade
31 Jul 14 20 Oct 14
Corporate Family Rating B2 B1
Outlook Review for Upgrade Positive

The upgrade reflects Catalents recent improvement in organic revenue growth and operating profit despite
ongoing industry challenges, and significant deleveraging following the debt repayment from its recent
initial public offering.
Lockheed Martin Corporation

Outlook Change
30 Oct 09 23 Oct 14
Senior Unsecured Rating Baa1 Baa1
Short Term Issuer Rating P-2 P-2
Outlook Stable Positive

We expect Lockheed Martins credit profile to improve as the company benefits from a comparatively
protected position as the prime contractor on one of the few growing defense programs the F-35
Lightning II and our view that the risk profile of that program has reduced, and a growing amount of
cash flow likely over time related to the recovery of previously funded pension expenses from its principal
government customer.
Petroleo Brasileiro S.A. - PETROBRAS

Downgrade
4 Oct 13 21 Oct 14
Long-Term Issuer Rating Baa1 Baa2
Outlook Negative Negative

The downgrade reflects our expectation that Petrobras high financial leverage will only decline significantly
well after 2016, contrary to our original expectations, given downward pressures on oil prices and the local
currency as well as high capex commitments.

14
RATING CHANGES


Russian Railways Joint Stock Company

Downgrade
1 Jul 14 21 Oct 14
Long-Term Issuer Rating Baa1 Baa2
Outlook Review for Downgrade Negative

The downgrade follows the weakening of Russias credit profile, as reflected by our downgrade of Russias
government bond rating to Baa2 from Baa1 on 17 October 2014. The downgrade thus incorporates our
view that Russian Railways has strong linkages with the government and continues to depend on the
governments willingness and capacity to maintain support in order to maintain financial metrics.
TeliaSonera AB

Outlook Change
25 Apr 12 22 Oct 14
Senior Unsecured Rating A3 A3
Short-Term Issuer Rating P-2 P-2
Outlook Stable Negative

The outlook change reflects our expectation that the company will incur negative free cash flow over the
next couple of years, as a result of its strategic decision to fund a major capex initiative while maintaining a
stable dividend. While the company plans to fund these investments from existing cash, its net debt
position will deteriorate, potentially putting further pressure on already weak credit metrics for the A3
rating category, if underlying business conditions do not improve.
Tesco Plc

Downgrade
23 Sep 14 23 Oct 14
Senior Unsecured Rating Baa2 Baa3
Short Term Issuer Rating P-2 P-3
Outlook Review for Downgrade Review for Downgrade

We downgraded Tescos ratings because of the materially reduced trading profit for the first half of fiscal
2015 that is affected by the rapid structural changes in the UK retail grocery market. The downgrade also
reflects the ongoing uncertainties related to the investigation by the FCA into Tescos accounting
irregularities. Even if the FCA concludes its investigation without material negative financial implications,
Tesco faces huge operational challenges, which continue to put its investment-grade rating at risk.

14
RATING CHANGES


Infrastructure

Ancora (RCH) Pty Limited

Outlook Change
20 Jun 12 21 Oct 14
Senior Secured Ratings Baa1 Baa1
Outlook Stable Positive

The positive outlook reflects the reduction in risk and the high likelihood of a successful transition to full
operations within the next 12 to 18 months following the early completion of the Stage 2 works, which
involved demolition of existing buildings, commercial precinct construction and site reinstatement. The
project is building a new Royal Childrens Hospital in inner Melbourne.
Ostregion Investmentgesellschaft Nr.1 S.A.

Outlook Change
22 Feb 13 21 Oct 14
Senior Unsecured B3 B3
Outlook Negative Stable

The outlook change is prompted by an improving trend in traffic volumes and shadow toll revenues,
which increases the likelihood that updated traffic projections will be achieved. The rating continues to
reflect the projects exposure to weak shadow toll revenues and high leverage.

Shanghai International Port (Group) Co., Ltd.

New Rating
20 Oct 14
Issuer Rating -- A1
Outlook -- Stable

The issuer rating is on par with our baseline credit assessment for the port; this is underpinned by its
strong market position, favorable industry prospects, solid financial metrics as well as strong operational
support from both the Shanghai municipal government and Chinese central government, While we
believe that the Shanghai municipal government will provide a high level of support to the company in the
event it encounters financial difficulties, the rating does not factor in any uplift from the Shanghai
municipal government. This is due to our assessment that on a standalone basis, SIPG already has a low
probability of default, which is close to that of the Shanghai municipal government.

14
RATING CHANGES


Financial Institutions

AHML Insurance Company

Outlook Change
13 Aug13 22 Oct 14
Insurance Financial Strength Ba1 Ba1

The outlook change reflects the weakening of Russias credit profile. The action follows our downgrade of
Russias government bond rating to Baa2 from Baa1 on 17 October and a similar single-notch downgrade
of the Agency for Housing Mortgage Lending OJSC to Baa2 on 20 October. AHML Insurance Company is
a subsidiary of the Agency for Housing Mortgage Lending OJSC, which is 100% owned by the Russian
federal government.
GFI Group Inc.

Review for Upgrade
18 Jan 13 23 Oct 14
Long-Term Issuer Rating B1 B1
Senior Unsecured Rating B1 B1
Outlook Stable Review for Upgrade

The review for upgrade follows the announcement that CME Group Inc. had agreed to acquire GFI Group
Inc. and reflects our view that the transaction would be positive for GFIs bondholders because they would
become creditors of higher-rated CME. However, on 22 October, BCG Partners announced a competing
fully financed tender offer to acquire all of the outstanding common shares of GFI it does not currently
own. The review will focus on the final structure of the winning acquisition bid.
Industrial Bank of Korea

Upgrade
5 May 07 21 Oct 14
Bank Financial Strength / Baseline
Credit Assessment
D+/baa3 C-/baa2
Outlook Stable Stable

The upgrade reflects our assessment that the banks asset quality is relatively good and in line with that of
major commercial Korean banks and ongoing government support, which offsets weak capital
and liquidity.

14
RATING CHANGES


MTS Bank, Open Joint Stock Company

Review for Downgrade
3 Jul 13 21 Oct 14
Long-Term Bank Deposits (Domestic/
Foreign)
B1 B1
Subordinated Debt (Foreign) B2 B2
Outlook Negative Review for Downgrade

The review for downgrade reflects the recent rating action on the banks parent Sistema Joint Stock
Financial Corporation (Ba2 corporate family rating, review for downgrade), as well as the risks associated
with the potential weakening in the parents capacity and willingness to provide support to its subsidiary.
Ocwen Financial Corporation, Altisource Solutions S.a.r.l. and Home Loan Servicing Solutions Ltd

Downgrade
21 Oct 14

We downgraded the ratings on Ocwen Financial Corporation and two other companies with which it has
contractual relationships. We downgraded Ocwens corporate family rating to B2 from B1, senior secured
bank credit facility to B2 from B1 and senior unsecured debt rating to B3 from B2. We downgraded the
corporate family rating of Altisource Solutions S.a.r.l. (Altisource) to B2 from B1 and its senior secured
bank credit facility to B2 from B1. We downgraded the corporate family rating of Home Loan Servicing
Solutions Ltd (HLSS) to B2 from Ba3 and senior secured bank credit facility to B2 from Ba3.
The rating actions follow the New York Department of Financial Services allegations, set forth in a letter to
Ocwen, raising serious issues with Ocwens servicing systems and processes. These allegations raise the risk
of actions that restrict Ocwens activities, the levying of monetary fines against Ocwen, or additional actions
that negatively affect Ocwens credit strength. The rating actions on HLSS and Altisource are due mainly to
their reliance on Ocwen.
Outlook Revised to Stable from Negative on Five Egyptian Banks

21 Oct 14

We changed the outlooks for the long-term local currency deposit ratings of five Egyptian banks to stable
from negative. These five banks are National Bank of Egypt SAE (Caa1), Banque Misr SAE (Caa1), Banque
du Caire SAE (Caa1), Commercial International Bank (Egypt) SAE (Caa1) and Bank of Alexandria SAE
(B3). The outlook changes reflect the stabilization of the Egyptian governments credit risk profile, which is
a key driver of Egyptian banks creditworthiness given their substantial holdings of Egyptian government
bonds; the improvements in domestic operating conditions that will help stabilize the banks asset quality
and profitability; and the stabilization of the governments capacity to provide support.

14
RATING CHANGES


Outlook on Three Israeli Banks Revised to Negative

20 Oct 14

We revised the outlooks on the deposit ratings of Bank Hapoalim B.M., Bank Leumi and First
International Bank of Israel. The outlook changes reflect the Israeli authorities intention to develop a new
resolution framework, which could facilitate the resolution of financial institutions with the option of
burden-sharing with bank creditors; and insights gained from the 2008-09 global financial crisis and
regulatory trends, which illustrate how authorities are increasingly employing market solutions in the
provision of support to troubled banks in order to protect public finances.
Seven Russian Financial Institutions Downgraded

20 Oct 14

We downgraded the supported senior unsecured, subordinated debt, and deposit and issuer ratings of seven
government-owned Russian financial institutions following the downgrade of Russias government debt
rating to Baa2 from Baa1 on 17 October. These seven financial institutions are Sberbank, Bank VTB JSC,
Gazprombank, Russian Agricultural Bank, Agency for Housing Mortgage Lending OJSC,
Vnesheconombank and Alfa-Bank.
Three Subsidiaries of Russian Financial Institutions Downgraded

22 Oct 14

We downgraded some ratings of subsidiaries of three Russian financial institutions: Bank VTB, JSC,
Sberbank and Vnesheconombank. These actions followed the downgrade of Russias sovereign rating on 17
October and the downgrade of seven Russian financial institutions ratings on 20 October.

RATING CHANGES


Sovereigns

Egypt

Outlook Changed
24 Jul 13 20 Oct 14
Gov Currency Rating Caa1 Caa1
Foreign Currency Deposit Ceiling Caa2/NP Caa2/NP
Foreign Currency Bond Ceiling B3/NP B3/NP
Local Currency Deposit Ceiling Ba3 Ba3
Local Currency Bond Ceiling Ba3 Ba3

Key drivers of the change to a stable outlook are the stabilized political and security situation, the launch of
government initiatives toward fiscal consolidation, signs of a growth recovery and an improvement in
macroeconomic stability, and strong support from external donors. However, Egypts Caa1 government
bond rating remains primarily constrained by high fiscal deficits, high government debt, very large fiscal
borrowing needs and continued challenges hindering the recovery of economic growth in the post-
revolutionary political and economic environment.

RATING CHANGES


Sub-sovereigns

Herefordshire Housing Limited

New
-- 22 Oct 14
LT Issuer Rating (Domestic) -- A2
Outlook -- Stable

The rating reflects HHLs focus on social housing activities, balanced growth ambitions with clear tenure
and geographic focus, simple organisational structure and historically strong coverage ratios. The rating also
reflects the downward trend in operating margin and coverages in the medium term following the debt
restructure, increase in levels of sales activities, and scaling up of the development programme.

Moscow, City of

Downgrade
1 Jul 14 21 Oct 14
LT Issuer Rating (Domestic) Baa1 Baa2
LT Issuer Rating Baa1 Baa2
BACKED Senior Unsecured (Foreign) Baa1 Baa2
2 Jul 14 22 Oct 14
NSR LT Issuer Rating (Domestic) Aaa.ru Aaa.ru

St. Petersburg, City of

Downgrade
2 Jul 14 21 Oct 14
Senior Unsecured (Domestic) Baa1 Baa2
2 Jul 14 22 Oct 14
NSR Senior Unsecured Aaa.ru Aaa.ru

RATING CHANGES


SUE Vodokanal of St. Petersburg

Downgrade
1 Jul 14 21 Oct 14
LT Issuer Rating (Foreign) Baa2 Baa3
2 Jul 14 22 Oct 14

OOO Vodokanal Finance

Downgrade
1 Jul 14 21 Oct 14
BACKED Senior Unsecured (Domestic) Baa2 Baa3

OJSC Western High-Speed Diameter

Downgrade
1 Jul 14 21 Oct 14
BACKED Senior Unsecured (Domestic) Baa3 Ba1

These actions follow our downgrade of Russias sovereign bond rating to Baa2 from Baa1 with a negative
outlook on 17 October. The downgrades of the ratings on the cities of Moscow and St. Petersburg reflect
their strong institutional links with the federal government and their lack of special status, which prevents
them from being rated above the sovereign. Both cities are exposed to market risks and on-going
deterioration in the operating environment. The downgrade of the issuer ratings of SUE Vodokanal of St.
Petersburg, the senior unsecured rating of OOO Vodokanal Finance, and senior unsecured rating of OJSC
Western High-Speed Diameter reflects their status as government-related issuers that are fully owned by the
St. Petersburg government.
Bashkortostan, Republic of

Outlook Change
1 Jul 14 21 Oct 14

RATING CHANGES


Tatarstan, Republic of

Outlook Change
1 Jul 14 21 Oct 14

Khanty-Mansiysk, Autonomous-Okrug of

Outlook Change
1 Jul 14 21 Oct 14
LT Issuer Rating (Foreign) Baa3 Baa3

Samara, Oblast of

Outlook Change
1 Jul 14 21 Oct 14
LT Issuer Rating Ba1 Ba1
2 Jul 14 22Oct 14
NSR Senior Unsecured (Domestic) Aa1.ru Aa1.ru
NSR LT Issuer Rating (Domestic) Aa1.ru Aa1.ru

Chuvashia, Republic of

Outlook Change
1 Jul 14 21 Oct 14
LT Issuer Rating (Foreign) Ba2 Ba2
LT Issuer Rating (Domestic) Ba2 Ba2
Senior Unsecured (Domestic) Ba2 Ba2
2 Jul 14 22 Oct 14
NSR Senior Unsecured (Domestic) Aa2.ru Aa2.ru

Krasnoyarsk, Krai of

Outlook Change
1 Jul 14 21 Oct 14
2 Jul 14 22 Oct 14

RATING CHANGES


Komi, Republic of

Outlook Change
1 Jul 14 21 Oct 14
LT Issuer Rating Ba2 Ba2
2 Jul 14 22 Oct 14

Omsk, Oblast of

Outlook Change
1 Jul 14 21 Oct 14
02 Jul 14 22 Oct 14

Nizhniy Novgorod, Oblast of

Outlook Change
1 Jul 14 21 Oct 14
02 Jul 14 22 Oct 14

Krasnodar, City of

Outlook Change
1 Jul 14 21 Oct 14
2 Jul 14 22 Oct 14

RATING CHANGES


Omsk, City of

Outlook Change
1 Jul 14 21 Oct 14
2 Jul 14 22 Oct 14

Volgograd, City of

Outlook Change
1 Jul 14 21 Oct 14
2 Jul 14 22 Oct 14

Vologda, Oblast of

Outlook Change
1 Jul 14 21 Oct 14
2 Jul 14 22 Oct 14

RATING CHANGES


Moscow, Oblast of

Outlook Change
1 Jul 14 21 Oct 14
2 Jul 14 22 Oct 14

These actions follow our downgrade of Russias sovereign bond rating to Baa2 from Baa1 with a negative
outlook on 17 October. The change in outlook for the ratings of the Republic of Bashkortostan, the
Republic of Tatarstan, and the Autonomous-Okrug Khanty-Mansiysk reflects their exposure to rising
systemic pressures. The changed outlook to negative from stable on the ratings of another nine regional
local governments takes into account the inherent weaknesses in their performances, which undermine their
ability to resist a possible deterioration in the macroeconomic environment. Each region is vulnerable to this
systemic deterioration through one or a combination of the following factors: moderate or low operating
balances, translating into moderate or weak flexibility of financial performance; substantial refinancing risk
and/or usually a high or rapidly growing debt burden; modest liquidity; and in many cases substantial
vulnerability of local economies to domestic cycles, which implies earnings volatility.

RATING CHANGES


US Public Finance

Detroit, Michigan

Downgrade
8 Oct 14 20 Oct 14
Certificates of Participation Ca C
Outlook Ratings Under Review No Outlook

The downgrade follows the recent settlement announcements between the city and the two insurers of the
COPs debt, FGIC and Syncora. Reported terms of the FGIC settlement, along with the Syncora settlement
terms laid out in the citys Seventh Amended Plan of Adjustment, support our expectation of a recovery rate
falling well below the 35% - 65% recovery rate range that would be consistent with a Ca rating.
Omaha, Nebraska

Downgrade
12 Sep 13 23 Oct 14
General Obligation Unlimited Tax Bonds Aa1 Aa2
Lease Revenue Bonds Aa1 Aa2
General Obligation Limited Tax Bonds Aa2 Aa3

The downgrade reflects the citys high fixed costs for pensions, other post-employment benefits, debt-service
and other personnel expenses. These costs are not expected to moderate in the near future.

RESEARCH HIGHLIGHTS
Notable research published the week ending 24 October 2014


Corporates
2015 Outlook: European Transport Infrastructure Industry
We maintain a stable outlook on the European transport infrastructure sector as we expect positive growth
in traffic volumes on the European toll roads and at airports, driven by improved economic activity and
business sentiment. Whilst we expect tariffs to remain flat or even decrease because of the low inflation
environment and competitive pricing pressures, the positive traffic trends will underpin the credit quality of
the sector over the next 12-18 months.
Global Oil & Gas Industry: Drilling and Services Companies Are Most Vulnerable to
Tumbling Oil Prices
Dropping oil prices will hurt exploration and production companies revenues immediately, with most of
the drop falling straight to the bottom line because of their high operating leverage. If lower prices persist,
drilling and oilfield services companies will be pressured as exploration and production companies reduce
capital spending and their demand for services.
US Corporate Default Monitor, Third-Quarter 2014: Sparse Defaults Highlight Benign
Credit Picture
The US speculative-grade default rate dropped to 1.7% in the third quarter and remains near a six-year low.
The rate was down from an already lean 1.9% in the second quarter.Our forecasting model indicates the
US speculative-grade default rate will rise to 2.8% by September 2015 a level that remains comfortably
below the 4.4% long-term average since 1993.
Russian Non-Financial Corporates: Solid Liquidity Enables Most Russian Corporates to
Meet 2015 Debt Maturities
Despite expanded Western sanctions, the solid liquidity of most rated Russian non-financial corporates will
enable them to meet 2015 debt maturities. A large proportion of rated Russian companies have meaningful
cash balances and their debt maturity profiles are fairly well balanced. Therefore, we do not foresee any
liquidity pressure developing until 2016 and beyond.
Loss Given Default Assessments Provide Accurate Forecasts of Losses on Defaulted Debts
A review of Moodys Loss Given Default (LGD) assessments from 2006-14 shows that they provide
accurate forecasts of average losses on defaulted debt instruments. Actual realized losses on defaulted debt
were within a majority of the ranges represented by their LGD assessments. These assessments also proved
to be significantly more accurate than traditional forecasting methods, such as relying on average historical
LGD rates by debt type.
ESPN/Turners NBA Deal Locks in Valuable Long Term Rights, but at a Steep Cost
Disneys ABC and ESPN and Time Warners Turner Broadcasting extended and expanded their deals to
broadcast NBA basketball for another nine years, locking in high-value live sports content. However, top
content comes at a premium cost, with both media companies paying more than double the fees compared
to the current agreements.

RESEARCH HIGHLIGHTS


Inside China - October 2014
Chinas ongoing growth slowdown will extend into 2015, given the persistence weak property sales partly
due to significant oversupply in the real estate market and the governments ongoing pursuit of broader
macroeconomic rebalancing. Also discussed in our newsletter: Chinas non-property sector is showing some
signs of de-leveraging, re-balancing efforts in Chinas power generation industry, among other topics.
US Apparel & Footwear: Lower Input Costs, Direct-to-Consumer Strength Will Lift
2015 Results
We continue to expect operating income to grow 6%-8% for 2014. We are raising our operating income
growth forecast for 2015 to 7%-9%, versus our call in April for 4%-6%.
Global Infrastructure Focus Newsletter - October 2014
The credit profiles of Chinese city metro companies are closely linked to their governments, our feature
story says. China has massive investment targets in city metro systems, which are key in supporting the
countrys urbanization plans and air quality goals.
Sea Change for Frac Sand Demand in 2014; Outlook in 2015 Is Stable, Tempered by
Oil Prices
Advances in hydraulic fracturing technology have generated a sea change in frac sand demand during 2014.
We expect shipment volumes to continue to grow in 2015 albeit at a slower pace given the recent declines
in oil prices. The increase in sand used per well will continue to support volume growth even if well counts
begin to decline at the margin.
European Cable Operators: Margin Improvements Underpin Positive Outlook
We expect revenue of European cable TV operators to grow at the upper end of a 3%-4% range in 2015,
similar to the 3.0%-3.5% growth we anticipate for 2014. We expect faster EBITDA growth than revenue
growth in 2015. Transactions that combine companies from different realms of the broader
telecommunications industry, such as mobile and cable, will be the focus of M&A activity in the near
future as traditional dividing lines between operators in the broader telecoms space continue to blur.

RESEARCH HIGHLIGHTS


Financial Institutions
Canadian Banks Accelerated Auto Lending Drives Risk of Credit Crash in Downturn
The very strong growth in auto lending by Canadian banks increases the risk of losses on loans to highly
indebted consumers in the event of an economic downturn. In addition, low monthly payments facilitated
by low interest rates and longer amortization periods are encouraging consumers to purchase more
expensive vehicles, increasing consumers debt burden.
German Life Insurance Reform Is Credit Negative, but Effect Will Vary by Insurer
In July, the German Parliament introduced a reform designed to strengthen the insurance sector in a low
interest-rate environment. We expect that the reform will have a long-term positive impact on German life
insurers credit-risk profiles, but it will initially hurt insurers sales and profits.
UAE Takaful Market to Benefit from Credit Positive Regulatory Changes
Given the takaful markets current, strong growth and strong prospects for future growth, the Insurance
Authority of UAE has drafted regulations to help regulate the market. We expect that, when implemented,
these regulatory changes will improve the credit profile of the UAE takaful market and aid market stability
and transparency by strengthening several aspects, such as capital requirements, asset quality and reserve
adequacy.
CITIC Securities: Strong Capitalization and Improved Funding Will Support Growth
Of the 117 securities companies in China, CITIC Securities is the largest by both assets and net capital.
Over the next 12-18 months, we expect that CITICS will benefit from higher underwriting volumes
resulting from the gradual re-opening of the domestic IPO market, the growing asset management business
(from a low base), and the new Shanghai-Hong Kong Stock Connect.
Peoples United Financial, Inc.: High Loan Growth, Eroding Funding and Capital Weaken
Credit Profile
The rapid loan growth at Peoples United Financial threatens the banks comparatively strong asset quality
while its capital and funding ratios are declining, a credit negative for the banks bondholders. Furthermore,
during the 12 months ended 30 June 2014, the banks gross loans grew about 11%, nearly twice the
median loan growth for its similarly rated peers.

RESEARCH HIGHLIGHTS


Sovereigns

Canada Analysis
Canadas Aaa rating and stable outlook continue to be supported by the countrys relatively solid economic
performance, favorable trends in federal government finance and debt levels, and strong institutional and
regulatory framework. A further support for Canadas rating is the strength of the banking system. In
Canada, however, household debt is high and has continued to rise, as have house prices.
Belgium: Coalition Governments Policy Agenda Ensures Economic and Fiscal Continuity
We summarize the key aspects of Belgiums new medium-term federal and sub-sovereign policy agenda, and
the economic and political context within which it will be implemented. Our key finding is that the new
policy platform is likely to maintain Belgiums competitiveness and fiscal consolidation agenda, thereby
supporting policy predictability and credibility.
Russia: Key Drivers for Downgrade of Rating to Baa2; Outlook Negative
On 17 October, we downgraded Russias government bond rating to Baa2 from Baa1 and affirmed its
short-term rating at Prime-2, with the outlook remaining negative. The key drivers for the downgrade were
Russias increasingly subdued medium-term growth prospects, exacerbated by the prolongation of the
Ukraine crisis, including through the impact of expanded international sanctions, and the gradual but
ongoing erosion of Russias foreign-exchange buffers due to capital flight, Russian borrowers restricted
international market access and low oil prices.

US Public Finance

Rating Changes for the 50 States from 1970
This quarterly publication identifies changes in state general obligation and issuer ratings and outlooks.
Economic and fiscal conditions for most states continue to strengthen in 2014 while a few struggle with
stagnant job growth, revenue shortfalls, and the costs of pension and retiree healthcare.

RESEARCH HIGHLIGHTS


Structured Finance
ResiLandscape - October 2014
Default risk in non-QM will depend on how lenders compensate for a loans deviation from QM guidelines
and on the strength of their underwriting policies and controls, the lead story in our newsletter says. We
also discuss how the performance of pre-2005 loans with strong borrower characteristics points to lower risk
for some non-QM loans, among other topics.
ABS Spotlight - October 2014
In this edition, we provide a detailed rationale for why commingled cash collections are not a significant
risk in US Card deals, examine the credit implications of a rising proportion of used cars in prime auto loan
ABS, analyze the potential impact of minimum wage increases for restaurant deals, and dimension the
perennial issue of dischargeability in the private student loan sector.
Proposed Unemployment Law Will Change Infonavits Funding: Answers to Frequently
Asked Questions
Mexicos Congress is considering a bill that would reduce funding for the housing lender Instituto del
Fondo Nacional de la Vivienda para los Trabajadores (Infonavit), which plays a key role in supporting the
governments housing policy. The bill, which could be considered by the Senate this fall, would use a
portion of employer contributions to create a new mixed account that an Infonavit affiliate can draw
upon while unemployed or to complement a mortgage loan from Infonavit. The new mixed account, under
the unemployment insurance plan ,would reduce funding available for Infonavits housing program.

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


NEWS & ANALYSIS
India Energy Reforms 2
India Energy Reforms Are Credit Positive for the Sovereign,
Oil and Gas Companies and Natural Gas Producers
Corporates 6
Falling Oil Prices Are Credit Negative for E&P, Drilling and
Oil Field Services Companies
Infrastructure 7
TECO Energys Sale of Mining Subsidiary Is Credit Positive
Banks 8
Close Brothers Sells Its German Securities Business, a
Credit Positive
Insurers 9
RGA Acquisition of Aurora National Life Is Credit Positive
Aegons Sale of Canadian Operation and Ensuing Debt
Repayment Are Credit Positive
China Allows Insurers to Invest in Preference Shares, Credit
Positive for Banks, but Negative for Insurers
US Public Finance 15
State University of New Yorks Expansion of Online Learning
Is Credit Positive

MOODYS.COM

Report: 176664

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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, MOODYS is not an auditor
and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moodys Publications.
To the extent permitted by law, MOODYS 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 MOODYS 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
MOODYS.
To the extent permitted by law, MOODYS 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, MOODYS 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 MOODYS IN ANY FORM OR MANNER WHATSOEVER.
MIS, a wholly-owned credit rating agency subsidiary of Moodys Corporation (MCO), hereby discloses that most issuers of debt securities (including corporate and municipal bonds,
debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees
ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MISs ratings and rating processes. Information
regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an
ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading Shareholder Relations Corporate Governance Director and Shareholder
Affiliation Policy.
For Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODYS affiliate, Moodys Investors Service Pty Limited ABN 61
003 399 657AFSL 336969 and/or Moodys 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 MOODYS 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. MOODYS 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 clients. It would be dangerous for retail clients to make any investment decision based on MOODYS credit rating. If
in doubt you should contact your financial or other professional adviser.

EDITORS PRODUCTION ASSOCIATE
News & Analysis: Jay Sherman and Elisa Herr Sol Vivero
Ratings & Research: Robert Cox

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