MOODYS.COM

23 APRIL 2015

NEWS & ANALYSIS Corporates 2 » Raytheon's $2.3 Billion Commercial Cyber Joint Venture Makes

(Web)sense » Bunge Expands Reach in Western Canada with Ownership

Stake in Canadian Wheat Board » Grupo Antolin Acquires Magna Interior Operations, a

Credit Negative

Infrastructure 5 » Grupo Aeroportuario del Pacifico Acquires DCA, a

Credit Negative

Banks 7 » Mexico's New Derivatives Clearing Rules Will Benefit Asigna

and the Financial System » Cypriot Banks Will Benefit from Foreclosure Law » Capital Injections Will Benefit Ukraine's OTP and Raiffeisen

Aval Banks » Kazakhstan Allocates Funds to Help Banks Refinance Legacy

Problem Loans, a Credit Positive

Insurers 15 » Final GSE Rules Are Credit Positive for US Mortgage Insurers,

Especially Legacy Insurers

Sovereigns 18 » US Legislation Granting Fast-Track Trade Authority Brightens

Prospects for Asia-Pacific Trade Treaty

Sub-sovereigns 19 » Guanajuato, Mexico, Gains New Ford and Toyota Investment, a

Credit Positive for the State

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Monday’s Credit Outlook 21 » Go to Last Monday’s Credit Outlook

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NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 23 APRIL 2015

Corporates

Raytheon’s $2.3 Billion Commercial Cyber Joint Venture Makes (Web)sense On Monday, Raytheon Company (A3 stable) announced a joint venture agreement with Vista Equity Partners to combine its own Cyber Products business with Vista’s Websense Inc. (B3 stable), a provider of commercial cyber security solutions with more than $350 million in revenue. Vista will hold a 19.7% stake in exchange for its $335 million contribution to the new venture, while Raytheon will contribute $1 billion of equity, a $600 million intercompany loan and assets valued at $400 million. The transaction is credit positive for Raytheon because it is effectively equity-financed and provides a launching pad for further end-market diversification in a rapidly growing area.

The joint venture’s structure is credit positive, despite what we believe is a very lofty purchase price. Even so, we expect the acquired assets to yield only a very modest 0.1x improvement in what notably remains an elevated leverage level of 3x on a Moody’s-adjusted debt/EBITDA basis for Raytheon at its A3 rating. More noteworthy is that Raytheon is deploying deemed excess cash balances in a manner that we believe inures to the benefit of creditors, in contrast to many of its industry and broader corporate rating peers that are mostly using any excess liquidity and/or debt capital to fund elevated dividends and share buybacks.

This acquisition advances the company’s stated objective of pursuing growth through acquisition and follows its fourth-quarter 2014 purchase of cybersecurity firm Blackbird Technologies for $427 million. We expect that Raytheon will use the Websense business as a platform to support incremental bolt-on commercial cyber-related acquisitions, leveraging the company’s existing cyber capabilities in defense and capitalizing on Vista’s industry and transactional expertise in the broader commercial cyber market.

Provided that forward acquisition activity remains both strategically consistent and financially prudent, we would view this strategy as creditor friendly. These commercial acquisitions would enhance Raytheon’s adjacent (if not core) competencies while reducing revenue sensitivity to US Department of Defense outlays, which we expect to remain under pressure for the next few years despite recent budgetary momentum (see March Sector Comment).

Our overall credit-positive view of the acquisition notwithstanding, the transaction will reduce liquidity and does impose incremental execution risk for Raytheon. We expect that the company will maintain robust liquidity as supported by approximately $1 billion of annual Moody’s-adjusted free cash flow, the absence of fixed maturities until 2018, and its $1.4 billion revolving credit facility. However, the $1.6 billion net cash outflow consumes about one third of Raytheon’s year-end cash and short-term investments of $4.7 billion.

Recent revenue and margin pressures at Websense, driven largely by restructuring activities and an unfavorable product mix shift, will constrain the joint venture’s free cash flow generating capacity. However, we deem execution risk to be relatively limited given the dramatic difference in scale of the two businesses. Moreover, we do not expect any outsize cash contributions from Raytheon to fund ongoing weakness at Websense and believe the joint venture will have sufficient liquidity to satisfy its future working capital needs. We will monitor how quickly and aggressively the joint venture grows as a potential launching pad for something much bigger (and potentially more leveraged), and the expected effect of presumed take-out provisions related to Raytheon’s new minority partner at some point in the future.

The defense industry’s mixed track record of commercial cyber M&A – with both The Boeing Company (A2 stable) and General Dynamics Corporation (A2 stable) each divesting commercial cyber businesses in recent months – is a tempering consideration.

Russell Solomon Senior Vice President +1.212.553.4301 russell.solomon@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 Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 23 APRIL 2015

Bunge Expands Reach in Western Canada with Ownership Stake in Canadian Wheat Board On Monday, Bunge Limited, parent of Bunge Limited Finance Corp. (Baa2 stable), and Saudi Arabia’s state-owned Saudi Agricultural and Livestock Investment Company (SALIC, unrated) said that their joint venture, the G3 Global Grain Group (unrated), had acquired a 50.1% majority equity stake in the Canadian Wheat Board (CWB, Aaa stable) for CAD250 million ($200 million).

Bunge’s acquisition of a stake in CWB through G3 is credit positive for Bunge. The move vastly expands Bunge’s now-limited Canadian grain-handling operations, giving the US company access to existing and future export terminals and facilities owned by CWB, which markets western Canadian wheat and barley to domestic and foreign buyers.

The deal privatizes CWB and creates “New CWB,” with 49.9% of the company held in trust on behalf of Canadian farmers. The agreement contains provisions that allow G3 to buy out the trust in seven years. New CWB will include the existing CWB assets plus Bunge’s Canadian grain-handling assets.

Bunge today has modest Canadian assets, including an export terminal in Quebec City and four grain elevators in Quebec. The G3 deal effectively expands Bunge with CWB’s three export terminals, 11 grain elevators, two lake freight ships and four grain elevators under construction in Manitoba and Saskatchewan.

Bunge has sought to expand in Canada, Australia and Eastern Europe, and the G3 stake in New CWB satisfies some of that strategy. New CWB plans to continue investing in logistical assets and acquisitions in Canada over the next decade. But Bunge’s involvement in G3 will require significant additional investment over the next decade to solidify its market share against its three main competitors: Viterra Inc., owned by Glencore International AG (Baa2 stable); Cargill, Incorporated (A2 stable); and Richardson International (unrated).

CWB has been in the process of privatizing since Canada approved the Freedom for Grain Farmers Act in December 2011, abolishing the government’s monopoly on sales of western Canadian wheat and barley. Grain companies such as Bunge have been working with CWB to receive deliveries.

This month’s ownership announcement satisfies CWB’s privatization obligations and allows it to continue operating as a private company. Although G3 will be New CWB’s majority owner, New CWB will hold all the physical assets, including those now belonging to Bunge and those now in planning.

Currently, CWB’s Aaa rating is supported by the Canadian government’s statutory guarantee of certain CWB rated debt obligations. The guarantee will remain in place until the transaction closes and the new owners refinance the debt. At that time, the ratings will be withdrawn.

Lori Harris Assistant Vice President - Analyst +1.212.553.4146 lori.harris@moodys.com

John Rogers Senior Vice President +1.212.553.4481 john.rogers@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 23 APRIL 2015

Grupo Antolin Acquires Magna Interior Operations, a Credit Negative Last Thursday, Spanish auto supplier Grupo Antolin-Irausa S.A. (Ba3 review for downgrade) announced that it had agreed to purchase substantially all of the interiors operations of Magna International Inc. (Baa1 stable). The $525 million acquisition is credit negative for Antolin.

Overwhelming the apparent benefits of the acquisition are the weakening of Antolin’s balance sheet owing to its full debt financing, challenges with integrating such a significant target and the margin-dilutive effect of Magna’s interior operations’ weaker operating profitability.

Antolin has secured a €600 million bridge facility to fund the acquisition and plans to refinance the bridge via a bond issuance at a later date. Upon completion of the transaction, pending regulatory approvals, Antolin’s pro forma 2014 debt will increase to €1.4 billion from €855 million, while pro forma 2014 leverage will increase to 4.7x debt/EBITDA from 3.7x. Magna’s EBITDA margin of 5.7%, normalized for non-recurring items reported in 2014, will dilute Antolin’s 12% margin.

The deal has a solid strategic rationale because it diversifies the company’s product and customer base and provides it with scope in a consolidating industry. With total sales of $2.4 billion in 2014, the acquired interiors operations of Magna will double Antolin’s sales of €2.2 billion in 2014. Magna’s activities in the areas of door panels, cockpits, instrument panels/floor consoles, carpets and acoustics, garnish/hard trim, package trays/load floors and overhead systems complement Antolin’s product offering of car interior products: the design, development, manufacturing and supply of components for vehicle interiors, which includes overheads (headliners), door trims, seating and interior lighting components.

Based in Burgos, Spain, Antolin is a family owned top-tier supplier to the automotive industry. The company is the 59th largest automotive supplier globally, employs more than 13,500 people and operates more than 125 production manufacturing plants and just-in-time facilities in 24 countries.

Oliver Giani Vice President - Senior Analyst +49.69.70730.722 oliver.giani@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 23 APRIL 2015

Infrastructure

Grupo Aeroportuario del Pacifico Acquires DCA, a Credit Negative On Monday, Grupo Aeroportuario del Pacifico, SAB de CV (GAP, Baa1/Aaa.mx stable) closed the acquisition, announced Friday, of Desarrollo de Concesiones Aeroportuarias, S.L. (DCA, unrated) from Spain’s Albertis Airports, S.A. (unrated). DCA holds 74.5% of MBJ Airports Limited, the Sangster International Airport (MBJ, unrated) in Montego Bay, Jamaica, and 14.77% of SCL Terminal Aéreo Santiago, S.A. (unrated) in Chile’s Santiago Airport. The acquisition will be financed with debt and we estimate that it will increase GAP’s projected total debt to nearly $420 million by year end from GAP’s previously budgeted debt of $230 million, a credit negative.

As a result of the acquisition, we adjusted our projected metrics for 2015 downward, with cash interest coverage now estimated at 8x from 14x and funds from operations to debt estimated at 40% from 62%. We expect that GAP’s average metrics for the next five years will remain strong, with cash interest coverage at around 7.0x and funds from operations to debt at around 35%.

This will be GAP’s first operation outside Mexico, providing passenger and geographic diversification to the company. Nevertheless, we consider Jamaica (Caa3 positive) to be a significantly weaker operating environment than Mexico (A3 stable). MBJ operates under a concession that expires in 2033 and is the largest of two international airports in Jamaica, handling 3.6 million passengers in 2014.

Located in the primary tourism destination region, 99% of MBJ’s passengers are international travelers. The purchase will increase by 15% the 24.7 million passengers that GAP handled in 2014 (Exhibit 1). As a result of incorporating MBJ, GAP’s international travelers will increase to 42% from 34% of its total passengers.

Grupo Aeroportuario del Pacifico Airports and Passengers as of 2014, Including Montego Bay

City Code Passengers 2014

Millions 2014 Share

Guadalajara, Mexico GDL 8.7 31%

Tijuana, Mexico TIJ 4.4 16%

Montego Bay, Jamaica MBJ 3.6 13%

Los Cabos, Mexico SJD 3.3 12%

Puerto Vallarta, Mexico PVR 3.1 11%

Hermosillo, Mexico HMO 1.3 5%

Guanajuato, Mexico BJX 1.2 4%

La Paz, Mexico LAP 0.7 2%

Mexicali, Mexico MXL 0.5 2%

Aguascalientes, Mexico AGU 0.5 2%

Morelia, Mexico MLM 0.5 2%

Los Mochis, Mexico LMM 0.2 1%

Manzanillo, Mexico ZLO 0.2 1%

Total 28.3 100%

Source: Grupo Aeroportuario del Pacifico

Adrián Garza Assistant Vice President - Analyst +52.55.1253.5709 adrianjavier.garza@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 23 APRIL 2015

Santiago Airport operates under a concession that ends in September 2015, making its value to the company minimal. In 2014, it handled a total of 16 million passengers, almost half of them international travelers.

GAP is a Mexican public company that trades on the Mexican Stock Exchange and the New York Stock Exchange. It operates 12 airports in Mexico under 50-year concessions granted by the Mexican government in 1998. Its issuer ratings reflects its solid market position in Mexico, where it operates five of the country’s top 10 airports and serves nearly 25% of Mexico’s total air passengers. The airports in the large metropolitan cities of Guadalajara and Tijuana, along with the tourism destination airports of Puerto Vallarta and Los Cabos contribute more than 80% of GAP’s revenues. In 2014, DCA generated EBITDA of $24.5 million, which GAP expects to increase through operational and financial efficiencies.

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 23 APRIL 2015

Banks

Mexico’s New Derivatives Clearing Rules Will Benefit Asigna and the Financial System Last Monday, Mexico’s central bank, Banco de México, published new norms requiring that standardized derivatives trade on exchanges or electronic platforms and clear with central counterparties sanctioned by the regulator.

The new rules will be especially beneficial for Asigna, Compensación y Liquidación (A3 stable), the sole derivatives central counterparty in Mexico. Asigna has traditionally cleared all derivatives trades on Mexico’s only derivatives exchange, the Mercado Mexicano de Derivados, S.A. de C.V. (MexDer, unrated). Both Asigna and MexDer are owned by the Bolsa Mexicana de Valores, S.A.B. de C.V. (unrated).

The norms will also benefit Mexico’s financial system because they will increase transparency and liquidity in the derivatives market and allow enhanced supervision, in line with International Organization of Securities Commissions’ best market practices.

Although we expect the new norms to boost Asigna’s clearing volumes only beginning in 2016, the increased activity will help the central counterparty gradually recover the business volume lost since 2008. Between 2008 and 2014, the number of derivatives contracts fell by 61%, and fees from futures and options dropped by 40% (see exhibit). A migration toward over-the-counter (OTC) clearing in the aftermath of the global financial crisis and a series of scandals in the industry caused the decline in business.

Asigna’s Derivatives Contracts and Commissions Income, 2008-14

Notes: *Includes M3, M5, M10, M20 and M30 bonds. **Income from services includes fees from futures and options and fees from custody of initial margins. Source: Asigna, Compensación y Liquidación

By 2014, 92% of derivatives were cleared in the OTC market, up from 88% in 2013, according to a March 2015 report by Mexico’s Council for Financial System Stability. We expect changes in the country’s regulatory environment to lead to a reversal in this trend. In addition to the central bank’s new clearing requirements, the banking regulator established higher capital requirements beginning in September 2015 for banks that trade standardized derivatives in the OTC market.

The effect on Asigna will be gradual because the new rules narrowly define standardized derivatives as those related to the 28-day interbank (TIIE) swap. These will take effect in April 2016 for derivatives contracted between local financial institutions, and in November 2016 for those contracted between local and foreign financial institutions.

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TIIE 28 Futures - left axis Dollar Futures - left axisFixed Income Gov't Secs Futures* - left axis CETES 91 Futures - left axisIPC Futures - left axis Other - left axisIncome from Services** - right axis Fees from Futures & Options - right axisFees from Custody of Initial Margins - right axis

Felipe Carvallo Vice President - Senior Analyst +52.55.1253.5738 felipe.carvallo@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 23 APRIL 2015

Asigna will also face more competition because the norms include a framework that the central bank will use to sanction foreign central counterparties, including those domiciled in jurisdictions with equivalent levels of supervision that meet most Basel and International Organization of Securities Commissions principles.

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 23 APRIL 2015

Cypriot Banks Will Benefit from Foreclosure Law Last Saturday, the Cypriot parliament narrowly passed five bills affecting personal and corporate insolvency that implement the foreclosure bill passed last October. Implementation of the foreclosure bill is credit positive for Cypriot banks because it lays the groundwork for large-scale loan restructurings and improves the banks’ recovery prospects.

The laws’ passage and implementation of the foreclosure bill also allows the European Commission, the International Monetary Fund, and the European Central Bank (ECB) (known as the Troika) to conclude their fifth review of the country’s support programme. The review had been delayed by the wait to modernise the insolvency framework and implement the foreclosure law. If positive, the review’s conclusion paves the way for the next tranche disbursement. Concluding the review will also allow the country to access the ECB’s quantitative easing plan. Under the plan, Cyprus’ government bonds will become eligible for direct purchases by the ECB, which will improve bank liquidity and support modest lending.

The bills amend the corporate bankruptcy framework by introducing creditor protection for 120 days to allow for a company reorganization. They also legislate the licensing of insolvency practitioners in Cyprus and introduce a social safety net by providing protection against foreclosure on primary residences. This will allow courts to impose loan restructurings in case the negotiations between the concerned parties fail,1 and allow the write-off of individuals’ unsecured debt under certain conditions.

The new foreclosure framework mainly aims to shorten the time needed to foreclose and auction real estate collateral to 18 months from more than 10 years previously. Although nearly six months have passed since the new foreclosure framework was voted into law, parliament delayed its implementation until the enactment of Saturday’s bills.

The enactment will provide incentives to individuals to seek restructuring of their loans and discourages strategic defaults. This will help banks tackle the volume of nonperforming loans (NPLs), which were 50% of gross loans as of 30 November 2014, as shown in the exhibit below.

Cypriot Banks’ Nonperforming Loans

Source: Central Bank of Cyprus

1 As per the law, the settlement imposed by the court must ensure that the creditors are not worse off than they would be in the

event the borrower’s assets are sold to repay his/her debt while also making sure the borrower is left with sufficient income to meet minimum living expenses.

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NPLs - right axisNPLs as Percent of Gross Loans - left axisRestructured NPLs as Percent of Gross Loans - left axis

Melina Skouridou, CFA Analyst +357.2569.3021 melina.skouridou@moodys.com

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 23 APRIL 2015

All principal domestic banks, the Bank of Cyprus Public Company Limited, (Caa3/Caa3 stable, caa32), Hellenic Bank Public Company Ltd. (Caa3 review for upgrade, caa3) and the cooperatives (unrated), have long-established restructuring units dedicated to NPL work-outs. However, progress has been slow because individuals and companies adopted a wait-and-see attitude given the open political debate surrounding the implementation of the foreclosure law and the uncertainty regarding the level of protection the new bills would offer to borrowers. Since December 2013, only 22% of systemwide NPLs have been restructured.

2 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating (where available) and baseline

credit assessment.

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 23 APRIL 2015

Capital Injections Will Benefit Ukraine’s OTP and Raiffeisen Aval Banks On 15 April, Anton Usov, European Bank of Reconstruction and Development’s (EBRD) senior advisor for external affairs, said that the EBRD is actively negotiating to inject capital into OTP Bank (Ukraine) (Ca negative, ca3) and Raiffeisen Bank Aval (Ca negative, caa3). The EBRD’s capital injections are credit positive for the two banks because they will help OTP and Raiffeisen Bank Aval restore their capital bases and achieve capital adequacy ratio (CAR) targets by established deadlines.

The CARs of all Ukrainian banks are under significant pressure. The National Bank of Ukraine (NBU) recently reported that the CAR for the whole banking system fell to 7.4% in February, as shown in Exhibit 1. The CAR fell below the NBU’s 10% minimum as the hryvnia depreciated more than 40% against the US dollar between 1 January and 1 March, and the banking system, which is highly dollarized, experienced heavy losses.

EXHIBIT 1

Ukrainian Banks’ Aggregate Regulatory Capital and Capital Adequacy Ratio, 2011-15

Source: National Bank of Ukraine

According to the EBRD, OTP will receive $65 million as a seven-year subordinated loan that qualifies as Tier 2 capital. The parameters for the EBRD’s capital injection for Raiffeisen Bank Aval will be finalized in May and may be either Tier 2 or Tier 1 capital.

OTP had one of the highest exposures to foreign-currency loans and the lowest CAR among rated Ukrainian banks as of the end of 2014 (see Exhibit 2), making a capital injection especially critical.

3 The bank ratings shown in this report are the banks’ foreign currency deposit rating, senior unsecured debt rating (where available)

and baseline credit assessment.

18.9% 18.1% 18.3%

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Lev Dorf Assistant Vice President - Analyst +7.495.228.6056 lev.dorf@moodys.com

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 23 APRIL 2015

EXHIBIT 2

Ukrainian Banks’ Regulatory Capital Adequacy Ratios at Year-End 2014 Bank Rating Regulatory Capital Ratio (N2)

OTP Bank (Ukraine) (Ca negative, ca ) 10.40%

Privatbank (Ca/Ca negative, ca ) 11.20%

Pivdennyi Bank, JSCB (Ca negative, caa3 ) 11.75%

Bank Finance and Credit JSC (Ca negative, ca) 11.88%

Raiffeisen Bank Aval (Ca negative, caa3 ) 13.05%

First Ukrainian International Bank, PJSC (Ca negative, ca ) 14.20%

Subsidiary Bank Sberbank of Russia (Ca negative, ca) 15.00%

Prominvestbank (Ca negative, ca) 22.00%

Ukreximbank (Ca/Ca negative, ca ) 22.55%

Savings Bank of Ukraine (Ca/Ca negative, ca ) 31.40%

Sources: National Bank of Ukraine and Moody’s Investors Service

The EBRD’s subordinated loan to OTP is about 50% of OTP’s 10.4% reported regulatory capital at year-end 2014. We estimate that since year-end 2014, OTP’s regulatory CAR has fallen below 10.4% from the effect of currency depreciation on its risk-weighted assets and likely losses.

Raiffeisen Bank Aval reported a total regulatory CAR of 13.05% at year-end 2014 and its exposure to foreign-currency loans was less than OTP’s. If EBRD opts for Tier 1 equity participation, it will be more beneficial for Raiffeisen Bank Aval than a Tier 2 contribution because it will have greater loss-absorption capacity.

The NBU on Monday launched a new stress-test exercise for Ukrainian banks as a part of the International Monetary Fund’s Extended Fund Facility program for Ukraine. The stress testing will start with the largest financial institutions. According to NBU’s instruction, if the outcome of the stress test shows that regulatory capital (N2) falls below 10%, banks will be required within one month to present capitalization plans such that stress test results reach 5% by end of January 2016, 7% by year-end 2017 and 10% by year-end 2018. The EBRD is the biggest financial investor in Ukraine. As of December 2014, it had invested nearly €10 billion in 342 projects in the country. It already owns 15% equity stakes in Ukraine’s Ukrsibbank (unrated) and Megabank (unrated).

OTP Bank (Ukraine) is a wholly owned subsidiary of Hungary’s OTP Bank NyRt (Ba2 negative, ba2). Raiffeisen Bank Aval is owned by Raiffeisen Bank International AG (Baa2/Baa2 review direction uncertain, ba3).

NEWS & ANALYSIS Credit implications of current events

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Kazakhstan Lends Funds to Help Banks Refinance Legacy Problem Loans, a Credit Positive On 15 April, the National Bank of Kazakhstan announced that it will lend banks KZT130 billion (about $700 million) at a 2.99% interest rate and 20-year maturity to refinance mortgages originated between 2004 and 2009. The funds for refinancing mortgage loans will reduce nonperforming loans (NPLs) and improve banks’ asset quality, a credit positive.

Relative to the total size of Kazakh banks’ legacy problem loans, KZT130 billion is a small amount. At the end of 2014, system NPLs more than 90 days overdue exceeded KZT3.3 trillion, or 24% of gross loans. Including restructured loans and loans overdue by less than 90 days, we estimate that problem loans total around 40% of gross loans. Nevertheless, the amount of the central bank loan is material at around 1% of gross loans and will help Kazakh banks address the NPL overhang from prior years as the slowing local economy pressures more recently originated and performing loans. The central bank’s KZT130 billion funding adds to the KZT250 billion it injected into the National Distressed Asset Fund last year to repurchase NPLs from the country’s largest banks.

Banks accepting the loans from the new program will be required to pass on the interest-rate savings to the underlying mortgage borrowers, making mortgage payments more affordable. Most overdue mortgages in Kazakhstan are 2004-09 vintage, reflecting rapid loan growth before the global financial crisis.

Among rated Kazakh banks, ForteBank JSC (Caa2/C review for upgrade, c review for upgrade4) and Bank CenterCredit (B2 stable, b3) have the largest ratios of mortgage NPLs to total loans and will thus stand to benefit most, as shown in the exhibit.

Largest Kazakhstan Banks’ Mortgage Exposures

Bank (Rating)

Gross Mortgages KZT

Billion

Mortgages as Percent of Gross

Loans

Mortgage NPLs as Percent of Gross

Loans

ForteBank (Caa2 review for upgrade, c review for upgrade) 106.3 21.9% 7.5%

Bank CenterCredit (B3 stable, b3) 173.1 18.1% NA

ATF Bank (Caa1/Caa2 negative, caa2) 65.2 7.1% 2.8%

Halyk Savings Bank (Ba2/Ba3 stable, ba3) 138.6 7.2% NA

BTA Bank (B3 positive, caa2) 121.4 3.7% NA

Kazkommertsbank (B2/Caa1 stable, caa1) NA NA NA

Nurbank (unrated) 9.1 3.9% 1.0%

Eurasian Bank (B1/B1 negative, b1) 16.2 2.6% 0.9%

TsesnaBank (unrated) 47.7 6.8% 0.3%

System’s Total or Average 935.0 6.6% 2.6%*

Notes: Amounts are as of year-end 2014, except for Bank CenterCredit, ATF Bank and BTA Bank, which are as of the first half of 2014, and Nurbank, which is as of year-end 2013. NA = the information is not available in the bank’s financial reports prepared under International Financial Reporting Standards (IFRS). *Average mortgage NPLs for the sector is our estimate based on information received from rated banks. Sources: Banks’ most recent IFRS reports and The National Bank of Kazakhstan

In addition to problem mortgage loans, banks can also use the funds to refinance mortgages from 2004-09 that are denominated in foreign currencies, including loans that are still performing. This, too, is positive for banks’ asset quality given the potential for a depreciation in the tenge, which has been roughly stable

4 The ratings shown are the bank’s deposit rating, senior unsecured debt rating (where available) and baseline credit assessment.

Semyon Isakov Assistant Vice President - Analyst +7.495.228.6061 semyon.isakov@moodys.com

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 23 APRIL 2015

against the US dollar at 185 over the past year even as the currencies of Russia, Ukraine, Azerbaijan and Belarus depreciated significantly. Foreign currency-denominated mortgages accounted for KZT138 billion, or 15% of all mortgages at the end of 2014, and we forecast that the tenge will depreciate by more than 20% against the US dollar over the next 12 months.

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 23 APRIL 2015

Insurers

Final GSE Rules Are Credit Positive for US Mortgage Insurers, Especially Legacy Insurers On 17 April, the US Federal Housing Finance Agency (FHFA), the regulator for government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, released its final version of the private mortgage insurer eligibility requirements (PMIERs). The requirements apply to private mortgage insurers (PMIs) that insure mortgages purchased by the GSEs.

The final rules are credit positive for all PMI policyholders, beneficiaries and bondholders because they remove a significant policy overhang and ensure adequate capital cushions. Moreover, the final rules are less onerous than the draft rules published last July, reducing the chance that some PMIs would fail to comply. We believe all of our rated PMIs will achieve compliance by the effective date of 31 December 2015.

Since the 2008-09 financial crisis, all PMIs have been operating under forbearance or a remediation plan with the GSEs. The final rules provide a clear path to compliance and put the mortgage insurance industry on firmer footing.

We believe that by the PMIER effective date at year-end, all of our rated PMIs will have available assets that meet or exceed minimum required assets, as defined by the PMIERs. Essent Guaranty, Inc. (Baa2 stable5) and Arch Mortgage Insurance Company (Baa1 stable) have said that they are already in compliance. United Guaranty Residential Insurance Co. (Baa1 stable), Mortgage Guaranty Insurance Corp. (MGIC Ba3 stable), Radian Guaranty Inc. (Ba1 positive) and Genworth Mortgage Insurance Corporation (Ba1 positive) expect to be compliant by the PMIER effective date. MGIC and Radian will likely need to tap holding company liquidity or seek credit for existing or new external reinsurance to be compliant by the effective date. Genworth will likely need to access both holding company liquidity and external reinsurance to be compliant by the effective date (see exhibit below). Although National MI (unrated) has stated that it is in compliance with the risk-based requirements, it will likely need to raise additional capital to meet the PMIER minimum required assets of $400 million on the effective date.

5 All issuer ratings in this report are insurer financial strength ratings.

Kevin T. Lee, CFA, ACAS Vice President - Senior Credit Officer +1.212.553.2907 kevin.lee@moodys.com

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 23 APRIL 2015

Company Estimates of Projected Shortfalls in PMIER Required Assets, $ Millions

Genworth Mortgage Ins. Corp.

Radian Guaranty Inc.

Mortgage Guaranty Ins. Corp.

United Guaranty Res. Ins. Co.

Essent Guaranty, Inc.

Arch Mortgage Ins. Co.

National Mortgage Ins. Corp.

Moody’s Insurance Financial Strength Rating

Ba1 positive Ba1 positive Ba3 stable Baa1 stable Baa2 stable Baa1 stable Unrated

Projected shortfall as of 31 March 2015, excluding credit for external reinsurance and other available assets

($500) - ($700)

($605) ($230) N/R Compliant Compliant N/R

Expected credit for existing external reinsurance

N/R $145 N/R N/R N/R N/R N/R

Expected credit for other assets, including holding company contributions

N/R $460 $536 N/R N/R N/R N/R

Projected shortfall by 31 December 2015 effective date, including projected earnings and expected credit for reinsurance and other available assets

Compliant Compliant Compliant Compliant Compliant Compliant N/R

Note: N/R = Not Reported Source: The companies

The PMIERs define available assets narrowly to include only liquid assets and, importantly, exclude assets funding unearned premium reserves (a deferred revenue) and any future premiums from post-2008 policies. The rules define minimum required assets using tables of asset charge factors that vary by vintage, original loan-to-value ratio (LTV) and borrower FICO scores for performing loans and by length of delinquency for nonperforming loans.

The final PMIERs are less onerous than the draft version of the rules, particularly for legacy insurers that insured pre-2009 loans. As a result, we believe that the final rules will put legacy insurers at less of a disadvantage to newer insurers relative to the draft rules. Final asset charge factors came down by 10%-35% for pre-2005 performing loans that have greater than 90% original LTV and by 30%-50% for 2005-08 performing loans across all credit scores and LTVs, reflecting revised Comprehensive Capital Analysis and Review stress testing on similar risks for banks. Moreover, post-June 2012 loans will benefit from explicit seasoning factors that reduce required assets as loans age, but particularly for loans that season past 36 months.

Compared with the draft rules, the final rules will reduce the need for holding companies to downstream assets to their operating insurance companies, particularly for MGIC and Radian, which is credit positive for bondholders.

The final PMIERs lay out specific requirements for reinsurance credit. Quota share reinsurance arrangements will generally get full reinsurance credit if they are uncapped, run longer than 10 years, cover loans similar to

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 23 APRIL 2015

the insurer’s overall portfolio and meet certain collateral requirements.6 Excess-of-loss reinsurance arrangements will also be permitted, but must get prior approval from the GSEs.

The GSEs may revise the PMIERs before 30 June 2015 to address differences between lender-paid mortgage insurance (LPMI) and borrower-paid mortgage insurance (BPMI). Unlike BPMI, LPMI must be maintained for the life of the loan, posing a longer risk exposure to PMIs. Any revisions will apply to new LPMI coverage written after the PMIERs effective date, which may reduce some of the current price competition for LPMI single premium policies.

Additionally, the final PMIERs seek a delegation of loss mitigation authority to the GSEs to allow them to implement foreclosure alternatives and streamline the process for servicers. Insurers have the option not to provide full delegation, but the GSEs may assess a fee that reflects the anticipated, higher loss management costs.

6 Risk ceded to a non-affiliated or non-exclusive affiliated reinsurer must be collateralized by the reinsurer with certain liquid, highly

rated assets in a trust account for which the insurer is the beneficiary. The amount of collateral required depends on the reinsurer’s financial strength rating and generally would be 20%-50% of the incremental risk-based required asset amount that would be required of the insurer if that risk were not ceded.

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 23 APRIL 2015

Sovereigns

US Legislation Granting Fast-Track Trade Authority Brightens Prospects for Asia-Pacific Trade Treaty Last Thursday, the US Senate introduced bipartisan legislation that would provide US President Barack Obama with fast-track trade promotion authority (TPA) to negotiate the Trans-Pacific Partnership (TPP) trade agreement with prospective member states. The TPA paves the way for member states to complete negotiations on the delayed treaty, which was originally set to conclude at the end of 2013. The enhancement of trade and growth that would follow from the Asia-Pacific trade treaty would be credit positive for its 12 members, most notably Japan (A1 stable), because it would strengthen Prime Minister Shinzo Abe’s economic revitalization agenda.

The fast-track authority increases the chances of finalizing the TPP, and its absence has hampered bilateral negotiations between member states and the US. Moreover, it assures other governments that the US Congress, which can only vote straight up or down on the negotiated treaty, will not unilaterally amend or undermine provisions agreed to in bilateral negotiations with the Obama administration. The US has not concluded any major trade agreement, including the North American Free Trade Agreement (NAFTA) and World Trade Organization accession, without such fast-track authority.

The TPP is a proposed free-trade agreement (FTA) under negotiation with 12 countries: Australia (Aaa stable), Brunei (unrated), Canada (Aaa stable), Chile (Aa3 stable), Japan, Malaysia (A3 positive), Mexico (A3 stable), New Zealand (Aaa stable), Peru (A3 stable), Singapore (Aaa stable), Vietnam (B1 stable), and the US (Aaa stable). At this point, neither Korea (Aa3 positive), which already has a free trade agreement with the US, nor China (Aa3 stable) are participating.

The office of the US Trade Representative estimates that the TPP agreement will increase global exports by $305 billion annually by 2025. The deal will provide greater market access and spur a higher level of efficiency and competition in Asia by reducing tariffs on imports and by supporting open markets and economic liberalization. In addition, the US is including environmental and labor standards in its negotiations, broadening the scope of the agreement to make it more politically acceptable to US domestic constituents.

More notably, the TPP will have significant benefits for Japan by greatly expanding free-trade market access. Less than 25% of Japan’s total exports are currently covered by trade agreements. With the TPP, slightly more than 41% of its total exports would be covered. The TPP offers Japanese manufacturers greater intellectual property protection, with knock-on effects that will strengthen economic growth and would mark the first significant reform in Mr. Abe’s growth revitalization strategy, the so-called “third arrow” of Abenomics.

By comparison, Korea, whose automobile and electronics exporters compete directly with Japanese exporters, has FTAs that cover more than 50 countries, including major export markets such as the US, European Union and China. Korea’s development of FTAs is something that Mr. Abe’s policy advisors have cited in overriding protectionist interests within the ruling Liberal Democratic Party and in entering Japan into TPP negotiations. In support of the TPP, the Japanese Cabinet Office released a report last year estimating the economic effect if all tariffs were immediately eliminated within the TPP countries. According to the government’s projections, Japan’s GDP would rise annually by approximately ¥3.2 trillion, or 0.66% of 2014 GDP.

Shirin Mohammadi Associate Analyst +1.212.553.3256 shirin.mohammadi@moodys.com

Tom Byrne Senior Vice President +65.6398.8310 thomas.byrne@moodys.com

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 23 APRIL 2015

Sub-sovereigns

Guanajuato, Mexico, Gains New Ford and Toyota Investment, a Credit Positive for the State Last week, the Mexican State of Guanajuato (Baa1 stable) received billion-dollar investments from automakers Ford and Toyota. On 17 April, Ford Motor Company announced that it would invest $1.2 billion in a transmission plant with the capacity to produce up to 800,000 units per year. On 15 April, Toyota Motor Corporation announced that it would invest $1 billion in a new plant with production capacity of around 200,000 cars and will employ 2,000 workers.

The investments are credit positive for the state. In addition to employment creation, the investments will support Guanajuato’s GDP growth, which because of $8.1 billion of automotive sector investment between July 2006 and July 2014, has been higher than the national average (see Exhibit 1).

EXHIBIT 1

Real GDP Growth in Mexico and the State of Guanajuato

Source: Instituto Nacional de Estadística, Geografía e Informática

Guanajuato estimates that between 2014 and 2019, around 30,000 new jobs will have been created in the automotive sector. We estimate that the salary tax will increase by 6% over this period. Furthermore, the sustained GDP growth will boost non-earmarked federal transfers, which account for 35% of the state’s revenue. GDP growth is the most important factor in determining the allocation of the Federal General Participation Fund (FGP) among Mexican states. Guanajuato’s GDP growth led to the state receiving 4.2% of the total FGP in 2014, up from 3.9% in 2010 (see Exhibit 2). Moreover, the compound annual growth of the state’s participation revenue of 10.4% exceeded the average growth of 8.8% over the same period. Therefore, these investments will continue to support the state’s revenue growth under a scenario of very low revenue growth for other Mexican states in 2016 because of low oil prices.

-6%

-4%

-2%

0%

2%

4%

6%

8%

2009 2010 2011 2012 2013

Guanajuato Mexico

María del Carmen Martinez-Richa Assistant Vice President - Analyst +52.55.12.53.57.29 mariadelcarmen.martinez-richa@moodys.com

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 23 APRIL 2015

EXHIBIT 2

Mexico’s Federal Participation Fund Annual Growth

Source: Secretaría de Hacienda y Crédito Público

0%

5%

10%

15%

20%

25%

2010 2011 2012 2013 2014

All Mexican States Guanajuato

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

21 MOODY’S CREDIT OUTLOOK 23 APRIL 2015

NEWS & ANALYSIS Corporates 2

» Raytheon’s $2 Billion Patriot Defense System Order Is Credit Positive

» Emirates Engine Order Is Positive for Rolls-Royce, Negative for GE and United Technologies

» Grainger’s $3 Billion Share Repurchase Program Is Credit Negative

» Builders FirstSource’s $1.63 Billion ProBuild Purchase Is Credit Negative

» Colt Defense’s Proposed Debt Restructuring Is Credit Negative

» Smurfit Kappa Group’s Acquisition of Inspirepac Is Credit Positive

Infrastructure 8

» Empresas ICA Will Gain Nearly $200 Million from New Toll-Road Joint Venture

» Strong Performance of Transurban’s US and Australia Toll Roads Bodes Well for NorthConnex Project

» Perth Airport’s Decline in Passenger Traffic Is Credit Negative

Banks 14

» Russian Central Bank Continues to Shut Down Problematic Small Banks, a Credit Positive

» China Merchants Bank’s Employee Stock Incentive Plan Is Credit Positive

» China's Relaxation on Brokerage Account Rules Is Credit Negative for Securities Companies

» Taiwan Targets Banks’ Exposure to China, a Credit Positive

Insurers 22

» EXOR’s Bid for PartnerRe Is Credit Negative for PartnerRe and AXIS Capital

» Spain’s Motor Insurers’ Claims Will Increase with Third-Party Bodily Injury Reforms

Money Market Funds 27

» First Multi-Billion Euro Money Market Fund Survives Outflow from Negative Yield

Sub-sovereigns 29

» New Transparency Law is Credit Positive for Mexican Sub-sovereign Governments

» Legislative Changes Boost Istanbul’s and Izmir’s Tax Revenues, a Credit Positive

US Public Finance 34

» Limited Federal Disaster Aid Is Credit Negative for Massachusetts Local Governments

» Oregon’s Education Budget Is Credit Positive for School Districts

RATINGS & RESEARCH Rating Changes 38

Last week we downgraded Fortescue Metals, Electricite de France, EDF Trading, Lancer Finance Company, Schahin II Finance Company, Bahrain and New Jersey, and upgraded Weyerhaeuser, Catalyst Healthcare (Manchester) Financing and Panama Canal Railway, among other rating actions.

Research Highlights 44

Last week we published on Asian corporate covenants, US accounting rules, Canadian exploration and production, North American covenants, global iron ore and metallurgical coal, US tobacco industry, China pharmaceuticals, European hotels, global home prices, Latin American corporates, China capital markets, EMEA beer makers, US gaming, Chinese property developers, US consumer durables, US packaging companies, UK hospitals, French toll roads, UK water, EMEA infrastructure, global insurers, global banks, Korea, Ukraine, Fondo Latinoamericano de Reservas, Australia, European quantitative easing, US universities, US highway infrastructure, European RMBS and ABS, French covered bonds, US subprime auto ABS, global CLOs, US student loans, US ABS, Canadian ABCP, EMEA ABCP and Korean structured finance, among other reports.

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