MOODYS.COM

3 SEPTEMBER 2012

NEWS & ANALYSIS Corporates 2 » IBM’s $1.3 Billion Acquisition of Kenexa Is Credit Positive » Novatek’s Natural Gas Supply Contracts Are Credit Positive » Daikin, Japan’s Top Air Conditioner Maker, to Buy Goodman in

Credit Negative Deal

Infrastructure 6 » German Law to Share Wind Farm Connection Costs Is Credit

Positive for Transmission Operators

Banks 7 » Delay in Stress Testing for Smaller US Banks Is Credit Negative » US Loan Maturities Create Major Refinancing Risk for 2016 » Brazil Injects Capital in Caixa, but Quality and Quantity

Are Wanting » Colombia’s Deduction of Goodwill from Capital Is Credit Positive

for Banks » Guatemalan Banking Reform Is Credit Positive for Banks

and Depositors » Rising Loan-Loss Provisions Are Credit Negative for Italian Banks

Insurers 16 » State-Owned Brazilian Surety Insurer Would Be Credit Negative

for Private Competitors

Closed-End Funds 18 » Invesco’s US Municipal Fund Merger Is Credit Positive for

Leverage Providers

Sovereigns 20 » Censure and Political Stalemate in Japan Are Credit Negative

US Public Finance 21 » US Budget Cuts Would Hurt the Credit Quality of School Districts

Receiving Federal Aid

RATINGS & RESEARCH Rating Changes 23

Last week we downgraded Maritimes & Northeast Pipeline, 3CIF, and 3i Group, and upgraded Jaguar Land Rover, CNO Financial Group, Export-Import Bank of Korea, Industrial Bank of Korea, Korea Finance Corporation, Korea Housing Finance Corporation, Korea Development Bank and Korea Student Aid Foundation, The Republic of Korea, Daejeon Metropolitan City (Korea), and the Gwinnett County Hospital Authority in Georgia, among other rating actions.

Research Highlights 29

Last week we published on US coal producers, Russian steel companies, Korean government-related issuers, China's property market, iron ore, US manufacturers, Central and Eastern European automakers, US life insurers, money market funds, CEE sovereigns, Denmark, and US credit cards ABS, among other reports.

RECENTLY IN CREDIT OUTLOOK

» Articles in last Thursday’s Credit Outlook 32 » Go to last Thursday’s Credit Outlook

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

NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

Corporates

IBM’s $1.3 Billion Acquisition of Kenexa Is Credit Positive

Last Monday, International Business Machines Corporation (Aa3 stable) announced that it had agreed to buy human resource software firm Kenexa, Inc. (unrated) for $1.3 billion. The acquisition is credit positive because it complements IBM’s strategy to create cloud-based software technology and consulting services that help customers gain business intelligence through social networks to create a more connected and smarter workforce.

Despite the purchase price equating to a lofty 34x forward earnings multiple, it is a much more reasonable 3.5x sales multiple compared with the 4x-6x sales multiples typically accorded software acquisitions. Subject to customary closing conditions, the companies expect the transaction to close in the fourth quarter.

IBM has ample financial flexibility to complete the transaction. As a result of continued strong cash generation and conservative financial practices, IBM’s cash and marketable securities at June 2012 were a strong $11.2 billion. We expect IBM to generate over $10 billion of free cash flow over the next year, with free cash flow to adjusted debt measuring 35%, while debt to EBITDA approximates 1x.

Kenexa, based in Wayne, Pennsylvania, provides software solutions that help customers recruit, retain and deploy employees. Kenexa serves over 8,900 customers, including more than half of the Fortune 500, with operations in 21 countries across a variety of industries.

The announcement is consistent with IBM’s strategy to build out its software and services capability through internal research and development efforts as well as through acquisitions, which IBM said would total $20 billion as part of its five-year, 2015 roadmap. The proposed Kenexa transaction is IBM’s eighth acquisition this year. Although we expect IBM’s acquisition activity to remain active, the company’s well-honed, bolt-on acquisition strategy results in a low risk of IBM pursuing large, expensive, or disruptive acquisitions.

An IBM study revealed 57% of CEOs identified social business as a top priority and nearly 75% are ramping up investments to better analyze data. This opportunity underscores the growing competition among enterprise software makers, which are aggressively acquiring firms that provide business analytics software-as-a-service over the Internet as opposed to more traditional on-premise software licensing.

Traditionally, IBM has stayed out of the applications business, opting to focus on infrastructure software such as databases and middleware software that ties together operating systems and application software. Over the past four years, however, IBM has delved into the business intelligence software and data analytics markets through more than 23 acquisitions totaling over $12 billion.

These acquisitions sometimes put IBM into direct competition with key application software partners such as Oracle Corporation (A1 stable) and SAP AG (unrated), whose software IBM helps to sell and install. Earlier this year, Oracle acquired talent management software firm Taleo for $1.9 billion and SAP bought SuccessFactors Inc. (unrated) for $3.4 billion. In June, Microsoft Corporation (Aaa stable) entered the social software space with the $1.2 billion purchase of Yammer (unrated), while Salesforce.com Inc. (unrated) bought Buddy Media (unrated) for $689 million.

Similar to the complexity of human behavior, we expect the development of social software to continue creating situations where friends and enemies (“frenemies”) cooperate and compete (“coopetition”) in a delicate dance of the cloud-based Internet age.

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

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

Novatek’s Natural Gas Supply Contracts Are Credit Positive

Last Tuesday, OAO Novatek (Baa3 stable), the world’s largest independent natural gas producer, announced it had signed 15-year gas supply agreements with OAO E.ON Russia (unrated), a subsidiary of German utility E.ON AG (A3 stable), and OAO Fortum (unrated), a subsidiary of Finnish utility Fortum Oyj (A2 stable). The agreements involve Novatek supplying more than 180 billion cubic metres (bcm) of gas to Russia-based power plants owned by the two European companies starting 1 January 2013 and are credit positive for Novatek because they lock in sales in the domestic gas market.

Novatek’s E.ON Russia contract, which E.ON Russia said is worth around RUB702 billion (approximately $22 billion), will support its goal to increase natural gas production by nearly one third to 68.1 bcm a year by 2015. The E.ON Russia contract is the latest in a series of domestic gas deals that Novatek has sealed with large industrial customers that previously bought gas from state-controlled gas giant OJSC Gazprom (Baa1 stable), among them a 2009 gas-supply contract with OGK-1, part of Inter RAO UES (unrated), one of the Russia’s largest electricity utilities. Inter RAO sources more than half of the 26 bcm of gas it consumes each year from Novatek and plans to increase that to 70% by 2013,1 mainly by scaling back purchases from Gazprom.

In 2011, Novatek reported revenues of RUB176 billion (approximately $5.5 billion), up from RUB117 billion in 2010, driven by both higher production volumes and prices. The company said its share of the domestic market reached 8% in 2011, making it the second-largest supplier behind Gazprom, whose market share is over 70%. The exhibit provides an overview of Novatek’s and Gazprom’s domestic gas sales in Russia.

Gazprom’s Domestic and Novatek’s Total Gas Sales

Source: Company data

Although the loss of the contract with E.ON Russia is credit negative for Gazprom, we do not expect the company’s loss of domestic market share to have an immediate negative effect on its financial performance. Gazprom’s domestic gas sales, which totaled 307 bcm in 20112 (including 265 bcm of its own production), will continue to receive support from supply contracts with its own energy generating subsidiaries, which, according to the company, account for 17% of total power generation capacity in Russia. Also driving Gazprom’s sales are its ownership of Russia’s gas transportation and

1 Source: Vedomosti, 24 August 2012. 2 Source: Gazprom Mezhregiongaz.

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Julia Pribytkova Vice President - Senior Analyst +7.495.228.6071 julia.pribytkova@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

storage system (UGSS) and gas distribution networks and the company’s presence in the regions where there are no alternative suppliers.

However, Gazprom is subject to domestic gas price regulations, while independent gas producers are not, enabling them to offer more flexible contracts in terms of length and pricing. Consequently, we expect these independent companies, particularly Novatek, to further strengthen their position in the domestic market as they ramp up production and diversify their customer base. A number of Gazprom’s five-year contracts with domestic electricity utilities, signed prior to the energy sector’s privatization in 2008, are about to expire, creating an opportunity for independent gas producers to bid for these contracts.

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

Daikin, Japan’s Top Air Conditioner Maker, to Buy Goodman in Credit Negative Deal

Last Thursday, Daikin Industries Ltd. (A3 review for downgrade), Japan’s leading global manufacturer of air conditioners, agreed to buy Goodman Global Inc. (B1 stable), one of the largest US manufacturers of residential and light commercial heating, ventilation, and air conditioning (HVAC) units and related products, for $3.7 billion. To fund the transaction, Daikin’s intends to use cash, loans, and bonds, rather than issue more shares, which is credit negative because we estimate it will increase Daikin’s pro forma leverage to around 4x of its adjusted debt to EBITDA from 3x in fiscal 2011.

The deal between Daikin and Hellman & Friedman, Goodman’s private-equity owner, is the third-largest acquisition this year by a Japanese company. It culminates several years of discussions that were stymied by Japan’s March 2011 earthquake, tsunami, and nuclear accident, and a weak US housing market, into which Goodman sells its ducted air units and where Daikin has struggled to gain market share.

Although Daikin’s EBIT margin was 7.3% in the fiscal year ended 31 March, Goodman’s EBIT margin was 12.7% for the 12 months ended 31 March, which supports this purchase price and should improve Daikin’s overall profitability.

Daikin’s move makes strategic sense. Goodman is strong in ducted HVAC systems, which are widely used in US residential central HVAC systems, but are not readily compatible with Daikin’s ductless technology. Furthermore, while Goodman generates most of its sales from business and home customers in the US, Daikin derives less than 10% of its global revenue from the US. In addition to a network of more than 900 distributors in North America, Goodman will give Daikin low-cost distribution channels.

In 2011, Goodman had sales of $2.1 billion. We expect Goodman’s strong sales to help Daikin reach its mid-term business plan goal of $25.0 billion of sales in fiscal 2015, versus $14.5 billion in fiscal 2010.

Like other major Japanese firms, the shrinking demographics of Japan’s home market and a strong currency propelled a search for relatively cheap, higher-potential assets abroad. To encourage this movement, Japan’s Ministry of Finance in August 2011 launched the “Emergency Facility to Counter a Strong Yen,” which the Japan Bank for International Cooperation administered through private banks to offer low-interest loans for overseas purchases like Daikin’s of Goodman.

Daikin’s funding plan to use low-interest loans would mitigate the burden of the acquisition on its balance sheet. Daikin’s EBITA/interest expense was 11.5x in fiscal 2011, and the company will continue to have access to low-cost sources of funding as a result of an accommodative monetary policy that has kept interest rates near record lows in Japan.

Noriko Kosaka Vice President - Senior Analyst +81.3.5408.4028 noriko.kosaka@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

Infrastructure

German Law to Share Wind Farm Connection Costs Is Credit Positive for Transmission Operators

Last Wednesday, the German government released a draft law that includes a liability-sharing mechanism for delays in connecting offshore wind farms to the national electricity transmission network. The draft law is credit positive for Germany’s transmission system operators (TSOs) that already have significant investment requirements to connect planned offshore wind capacity, in particular TenneT Holding B.V. (A3 stable) and Eurogrid GmbH (Baa1 stable).

The draft law establishes a mechanism to pass through to electricity end consumers the costs of delays and damages not caused by the network operator. The draft law requires the four German TSOs, which also include Amprion GmbH (A3 stable) and TransnetBW (unrated), to submit an offshore network development plan to the German network regulator annually, including proposed connections and targeted completion dates over the next 10 years. Such plans allow the TSOs to manage their capital investments more actively and consistently than they do now.

In the event of a connection delay or disruption, the offshore wind farm operator is entitled to receive compensation from the TSO. If the TSO can prove it took reasonable steps to avoid the delay or operational fault, it will be able to share the cost of the compensation payment prorated with the other three national TSOs in the same year, passing that cost to customers based on their consumption. If the TSO caused the damage through negligence, it will not be able to pass through all of the costs, retaining a maximum annual liability of €100 million per incident. If the TSO willfully caused the delay or fault, its liability is uncapped.

The government estimates that future compensation payments for existing projects, most of which are in TenneT’s service area and on which the government expects delays, may amount to as much as €1 billion. It remains unclear at this stage whether these payments will materialise and whether the related TSOs will become liable to make any compensation payments.

To avoid an excessive burden on customers, the damage levy that is passed through to the end consumers based on their annual consumption is capped at 0.25 euro cents per kilowatt-hour (kWh), which would have yielded a total of around €1.3 billion if the maximum levy was applied to all of Germany’s electricity consumption of 530 terawatt hours in 2010. However, for the heaviest users, the levy on usage in excess of 1 million kWh in a single year is capped at 0.05 euro cents per kWh. This cap may therefore prevent all costs from passing through in a single year. Depending on the time lag, TSOs may face significant additional liquidity pressures. However, the additional costs of liquidity facilities necessary to cover any time lag can also be passed through to end consumers.

Although the government expects that the TSOs may be able to insure against certain failures and faults, the current insurance market does not offer the products required to fully cover all the related risks.

The new regulations have been through a number of parliamentary sessions to achieve the current draft law, but further parliamentary readings are scheduled over the coming months. Given the critical role renewable energy, particularly offshore wind, plays under the new German energy policy, the government intends to enact the law before the end of the year.

Stefanie Voelz Assistant Vice President - Analyst +44.20.7772.5555 stefanie.voelz@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

Banks

Delay in Stress Testing for Smaller US Banks Is Credit Negative

Last Monday, US banking regulators indicated that they would probably delay Dodd-Frank mandated annual stress tests for banks, thrifts and holding companies with assets of $10-$50 billion until September 2013. The test is presently scheduled for January 2013. Regulators noted that the delay reflects banks’ concerns about their resources and readiness to run the tests in a timely fashion, particularly since the regulators have not yet published any final rules outlining the tests.

Delayed stress testing is credit negative because capital distributions that regulators might otherwise disallow will occur while the tests are postponed. Also, some banks’ concern about conducting the stress test likely reflects shortcomings in the robustness of their systems and processes.

We rate bank subsidiaries of 22 US bank holding companies with consolidated assets of $10-$50 billion. For the first half of 2012, Federal Reserve data indicated that nine of our 22 rated US bank holding companies with consolidated assets of $10-$50 billion, or 41%, had a payout ratio, defined as common dividends plus net share buybacks, of more than 50% of earnings, a level that we consider aggressive. This includes two companies that were unprofitable, but nonetheless paid a common dividend: First Horizon National Corporation (lead bank rated Baa1 negative; C-/baa1 negative)3 and TCF Financial Corporation (lead bank rated A3 negative; C/a3 negative).

In contrast, only 23% of our rated US bank holding companies with assets of more than $50 billion had a payout ratio of more than 50%, according to Federal Reserve data. This is at least partly because regulators oversee their stress tests and can use those tests to prohibit higher dividends and share buybacks, which occurred earlier this year following the release of stress test results for the largest US banks.4

Smaller regional banks with assets of $10-$50 billion have not yet been included in stress tests. These entities, by virtue of their smaller size, tend to be more concentrated geographically and are often more concentrated in commercial real estate, a more volatile asset. As such, a vigorous stress test for those institutions would enhance their risk management, better protect creditors, and bolster market confidence in them.

Development of a dynamic stress test is a significant undertaking that requires resources, including advanced systems, that some smaller banks lack. Therefore, a delay between the regulators’ publication of the final rules for conducting stress tests and the banks’ implementation of those rules is sensible. Nonetheless, current shortcomings in the banks’ ability to run the tests reflect a less robust risk infrastructure.

Many US banks entered the 2007-08 economic downturn with sizable credit concentrations, too little capital, and large dividend payout ratios that they were slow to cut. Indeed, as the crisis began to unfold in the second half of 2007 and 2008, the 19 largest US bank holding companies paid out $62 billion in common dividends only to have to raise $170 billion in capital in 2009. A robust stress testing regime, had it been in place, would have minimized this capital outflow.

3 The ratings shown in this article are the firms’ bank subsidiaries’ deposit rating, its standalone bank financial strength

rating/baseline credit assessment and the corresponding rating outlooks. 4 See US Fed Rejects Citi’s and SunTrust’s Capital Plans, Dealing a Public Rebuke, Weekly Credit Outlook, 19 March 2012.

Allen Tischler Senior Vice President +1.212.553.4541 allen.tischler@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

Recognizing this, US bank regulators, beginning with the 2009 Supervisory Capital Assessment Program (SCAP), have implemented and enhanced their stress testing requirements. However, the SCAP process only affected the 19 largest US bank holding companies. The 2010 Dodd-Frank Act expanded the pool of banks subject to mandatory stress testing and, to date, all institutions with more than $50 billion in assets have participated. We expect that regulators will publish their final stress testing guidelines for banks with assets of $10-$50 billion in time for the banks to comply with what is the likely new timeframe – September 2013.

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

US Loan Maturities Create Major Refinancing Risk for 2016

Last Monday, US banking regulators released their annual report on the credit quality of US shared national credits (SNCs), which are loans or loan commitments of at least $20 million that are shared by three or more supervised institutions, including US banks, foreign banking organizations (FBOs) and nonbanks. The report’s most startling development is the credit negative bunching of an extraordinarily large amount of maturities of these loans in 2016.

As Exhibit 1 shows, the SNC market at this time last year faced refinancing risk in 2012 and 2013, as depicted by the left-hand bar associated with each year. Loan modifications deferred that risk to 2016, but the amount of refinancing borrowers will need at that time has grown to nearly $1 trillion. Such a large amount needing to be refinanced presents a concentration risk not only for the banks, but also for borrowers seeking funds and loan commitments.

EXHIBIT 1

Shared National Credits Portfolio Maturity Schedule

Source: Shared National Credits Program 2012 Review

The regulators’ report on SNCs focuses on their asset-quality trends, which are similar to the broader asset-quality trends among US bank loans. Specifically, the level of problem commitments has fallen from a peak in 2009, but the absolute level of problem assets remains high. The decline since 2009 in SNC classified assets, which regulators define as the total of commitments that are substandard, doubtful or should be charged-off, is shown in Exhibit 2. In absolute dollars (the left axis) the dollar amount of classified commitments is the lowest since 2008, but still appreciably higher than in previous years. As a percentage of commitments (the right axis) the 2012 level is the lowest since 2008, and below past peaks in 1993 and 2002-03, but remains high by historical standards.

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Sean Jones Senior Vice President +1.212.553.0845 sean.jones@moodys.com

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

EXHIBIT 2

Overall Criticized Loan Volume and Percentage Trends

Source: Shared National Credits Program 2012 Review

The asset-quality improvements notwithstanding, we view the risk/reward equation of the SNC market for banks as unfavorable because, for most banks, the SNC commitment does not help the bank deepen its business relationship with the underlying client beyond providing the loan commitment. A positive attribute of the market is that US banks can sell some of their exposure to FBOs and nonbanks.

US banks’ holdings of classified SNC assets are less than those of FBOs and nonbanks, and proportionately less when compared with the commitments (see Exhibit 3). What stands out in Exhibit 3 are the appreciably higher levels of classified assets held by nonbanks. The main reason nonbanks hold more classified SNC assets is that they disproportionately hold more non-investment grade, but higher-yielding, funded assets. By contrast, banks hold mostly investment-grade loan commitments, most of which borrowers have not drawn down and, as a result, banks get only a relatively modest commitment fee. We suspect some of the nonbanks’ holdings of classified commitments are faulty credits purchased from banks at a discount, although regulators have not disclosed the level of such transactions.

EXHIBIT 3

Classifieds as Percentage of Shared National Credit Commitments

Source: Shared National Credits Program 2012 Review

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NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

Brazil Injects Capital in Caixa, but Quality and Quantity Are Wanting

Last Thursday, Brazil’s government announced it would inject BRL1.5 billion (approximately $735 million) into state-owned bank Caixa Economica Federal (Baa2 stable; D+/baa3 stable),5 giving as its capital contribution the shares of two other government-owned companies. This new capitalization, which the government expects to conclude by the end of September, is credit positive for Caixa because it increases its leverage capacity, thereby allowing it to continue expanding its loan book in line with the government’s effort to use the bank to boost economic development via consumption and investments.

However, the quality and quantity of the capital injection will not be enough to fully address Caixa’s stretched leverage and capital amid the robust loan growth the bank has experienced since 2009. Furthermore, because Caixa’s capital injection does not involve cash, it is of lesser quality because it limits the bank’s ability to absorb losses in situations of stress. The proposed new capital would also raise only slightly Caixa’s capital ratio to 13.06%, from 12.91% as of June, although this does not account for its upcoming minimum dividend payment of approximately BRL600 million on income from first-half 2012. The additional capitalization translates into a potential increase in Caixa’s loan book of less than 5% of the loan amount outstanding in June.

The bank will receive shares of government-controlled Petroleo Brasileiro S.A. - Petrobras (A3 stable) and Telecomunicacoes Brasileiras S.A. - Telebras (unrated) that Brazil’s sovereign wealth fund, FFIE - Fundo Fiscal de Investimento e Estabilização, is currently holding as its shareholder’s capital disbursement, instead of free cash. Because the capitalization is being made using minority shareholdings in Petrobras and Telebras, any sale of the holdings will be contingent on the national treasury’s approval, a process that reduces Caixa’s flexibility in monetizing the assets. The Brazilian government used a similar scheme in early 2011 when Caixa received a capital injection in the form of shares that remain in its investment securities portfolio.

Caixa’s loan growth of 45% over the past 12 months has stretched its capitalization ratio, which declined to 13.35% in December 2011 from 17.50% in December 2009, and fell further to 12.91% in June. As a government-owned bank, Caixa has played a key role in maintaining Brazil’s credit supply as the economy decelerated and private-sector banks retracted because of higher risks, a trend first seen in 2009 and 2010 and repeated in 2012.

Caixa accounted for 33% of all of Brazil’s new lending in the first half of 2012, as it focused on consumer and mortgage financing and infrastructure and corporate lending, two programs that are central to the Brazilian government’s economic stimulus measures. Caixa’s loan expansion occurred against the backdrop of lower credit spreads, another area where the government is applying pressure6 on the banking system. With much leaner capital ratios and lower profitability, Caixa will increasingly depend on the government to help it replenish its capital if it seeks to maintain its current pace of loan originations, as the government expects. Such a scenario raises the threat of asset quality deterioration, which will further challenge the bank’s limited loss-absorption capacity.

5 The ratings shown are Caixa’s foreign-currency deposit ratings, its standalone bank financial strength rating/baseline credit

assessment and the corresponding rating outlooks. 6 See Brazil’s Government-Owned Banks Reduce Loan Rates, a Credit Negative, Weekly Credit Outlook, 16 April 2012.

Ricardo Kovacs Vice President - Senior Analyst +55.11.3043.7308 ricardo.kovacs@moodys.com

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

Colombia’s Deduction of Goodwill from Capital Is Credit Positive for Banks

On 24 August, Colombian authorities decreed that it would require that banks deduct goodwill from their Tier 1 capital, thus enabling capitalization ratios to more accurately reflect loss-absorption capacity. This measure is credit positive for Colombia’s banks, and is part of the country’s adoption of capitalization rules that are broadly based on Basel III guidelines and more closely align Colombian banks’ capitalization ratios to international best practices. The regulations also establish a minimum Tier 1 capital ratio of 4.5% and define core Tier 1 Capital.

Nevertheless, the new rule will only affect goodwill registered after the decree’s enactment and will not be applied retroactively, minimizing its immediate effect on current capitalization ratios. Goodwill deduction has been a major part of Basel agreements since the inception of the Basel guidelines.

Colombian banks have built a sizable stock of goodwill over the past years, which is, on a weighted average, about one third of their Tier 1 capital ratios, as seen in the exhibit below. Banco de Bogotá S.A. (Baa3 stable; C-/baa2 stable),7 Bancolombia S.A. (Baa3 stable; D+/baa3 stable), Banco Davivienda S.A. (Baa3 negative; D+/ba1 negative) and BBVA Colombia S.A. (Baa3 stable; D+/ba1 stable) will not have to deduct the goodwill created by large acquisitions between 2010 and 2006, despite being a substantial portion of Tier 1. Adjusted Tier 1 ratios in the exhibit exclude goodwill, and more accurately reflect the capitalization cushion available to absorb losses of each bank as of year-end 2011 and presents capital more in line with international standards.

Tier 1 Capital versus Goodwill for Rated Colombian Banks at Year-End 2011

Source: Moody’s Financial Metrics, audited financials

We note that the capitalization ratios of two banks with pending acquisitions will not be greatly affected by this measure. The goodwill that both Davivienda and Banco GNB Sudameris S.A. (Ba1 stable; D-/ba3 stable) will generate from their not-yet-finalized acquisitions of HSBC subsidiaries in Central and South America, respectively, will amount to, on average, about 10% of the Tier 1 capital the banks expect to have by year-end.

7 The bank ratings shown in this report are the bank’s deposit rating, its standalone bank financial strength rating/baseline

credit assessment and the corresponding rating outlooks.

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

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

Guatemalan Banking Reform Is Credit Positive for Banks and Depositors

Last Tuesday, the Guatemalan Congress passed a reform to the 2002 Banking Law (Ley de Bancos y Grupos Financieros)8 that bolsters the deposit guarantee fund and reinforces the limits for borrower and related-party concentrations. The reform law also tightens the regulations for the seven offshore entities of Guatemalan banks, which still comprise a significant 10% of total banking system assets.9 Such offshore banks include Banco Industrial S.A.’s (Baa3 stable; D+/ba1 stable)10 Westrust Bank (International) Limited, whose current risk management practices are in line with the approach addressed under the law.

The reform is credit positive for Guatemalan banks because it increases depositor protection in the event of a bank failure and enhances individual banks’ solvency by limiting excessive risk-taking through improved prudential measures. The reform also extends those risk-taking limits to banks’ offshore entities by making them subject to higher minimum capital requirements, risk concentration limits, and more stringent regulations regarding money laundering and financing terrorism. The broadened and fortified regulatory framework will improve financial solvency, risk governance and consumer protection, which we expect to improve the country’s banking and investment climate.

We expect the new law to boost the capitalization of the deposit guarantee fund to GTQ8 billion ($1 billion) in about seven years, from around GTQ1.6 billion ($200 million) currently. In addition, we expect the new law to enhance individual deposit insurance coverage from the current guarantee of up to GTQ20,000 ($2,500). That coverage, which equals 1.7x the size of Guatemala’s average deposit, lags that of other countries in the region, such as Peru, which is 7.5x, and Colombia, which is 5.0x. The banks will pay for the higher deposit guarantee by raising their contribution to the fund to 0.20% of outstanding deposits from 0.15%, and, depending on a bank’s risk profile, make an additional contribution of up to 0.20% of outstanding deposits, pending an independent bank rating.

By extending risk concentration limits to offshore entities, the new law will improve overall risk governance. Banks and their offshore subsidiaries will not be able lend more than 15% of their equity to a single individual, corporation or related company. Moreover, they will be banned from lending more than 30% of their equity to two or more related parties.

The new law also empowers the Guatemalan central bank to close offshore banks engaged in money laundering or the financing of terrorism, and to revoke the licenses of offshore banks that report capital deficiencies. It also imposes a new minimum deposit of $10,000, thereby restricting offshore deposits, which are not covered by the deposit insurance fund, to more sophisticated depositors.

8 Reform to the Decree N. 19-2002, approved by the Congress of the Republic of Guatemala. 9 Financial Stability Report, Superintendency of Banks of Guatemala, December 2011. 10 The ratings shown are the banks domestic deposit rating, its standalone bank financial strength rating/baseline credit

assessment and the corresponding rating outlooks.

Georges Hatcherian Associate Analyst +1.212.553.2862 georges.hatcherian@moodys.com

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

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

Rising Loan-Loss Provisions Are Credit Negative for Italian Banks

Last Tuesday, three Italian banks reported first-half results showing a year-over-year increase in loan-loss provisions. These increases are credit negative for Italian banks and provide evidence that banks’ asset quality is deteriorating in Italy’s renewed recession, thereby negatively affecting banks’ already weak profitability.

Italy’s third-largest bank, Monte dei Paschi di Siena SpA (Baa3 negative; D/ba2 negative),11 the fifth-largest bank, Unione di Banche Italiane S.c.p.A. (Baa2 negative; D+/baa3 negative) and midsize bank Banca Popolare di Milano S.C.a r.l. (Baa3 negative; D+/ba1 negative) reported that first-half credit costs rose 19%-49% from a year earlier. In addition, earlier in August, Intesa Sanpaolo Spa (Baa2 negative; C-/baa2 negative) and UniCredit SpA (Baa2 negative; C-/baa2 negative), Italy’s largest domestic banks, reported loan-loss expenditure increases of 37% and 24%, respectively, in their half-year results.

Only Italy’s fourth-largest bank, Banco Popolare Società Cooperativa (Baa3 negative; D+/ba1 negative), which reported results last Tuesday, deviated from the trend with essentially flat provisions of minus-0.4%.

The exhibit below shows the increasing cost of credit in loan-loss provisions as a percent of net loans. It annualizes and compares the provisions taken during January-June 2011 and 2012 for six Italian banks.

Loan-Loss Provisions as Percent of Net Loans

Source: Banks’ interim reports

A limited portion of the loan-loss provision increase reflects the 90-day threshold (down from 180 days) for identifying past due loans, which the central bank introduced in May and imposed retroactively to 1 January 2012.

We expect economic conditions to remain challenging, characterised by a 2.0% decline in 2012 real GDP and a 0.5% decline in 2013.12 The unemployment rate, at 10.7% in July, up from 8.2% a year ago,13 will likely continue climbing. For the banks noted above, net loans decreased 2% year on year on

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

the corresponding rating outlooks. 12 See Update to the Global Macro-Risk Outlook 2012-2013: Euro Area Debt Crisis Continues to Pose the Greatest Risk, 30

August 2012. 13 Source: ISTAT, Occupati e Disoccupati, July 2012.

95

119

72

98

116

83 87

51

7063

77

0

20

40

60

80

100

120

140

Six Months to June 2011, Annualized Six Months to June 2012, Annualized

Basis

Poi

nts

UniCredit Intesa Sanpaolo Banca Monte dei Paschi di Siena

Banco Popolare Unione di Banche Italiane Banca Popolare di Milano

LONDON +44.20.7772.5454

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

an aggregate basis, versus June 2011, indicating that they have begun to deleverage, are more risk averse and that demand for loans is decreasing.

However, Italy’s asset-quality indicators are declining gradually – as expected in an economic downturn – rather than surging as is currently the case in Spain, for example. Furthermore, rising loan-loss provisions are still covered by pre-provision profit, benefitting from the very low cost Long-Term Refinancing Operation funding from the European Central Bank and the carry trade that many banks have engaged in and which underpin the banking system’s profitability. In 2011, 65% of pre-provision profits were absorbed by loan-loss provisions, compared with 58% in 2010 and 59% in 2009, according to Bank of Italy data.

Italian banks had anticipated the economic downturn and in the past year increased their capital positions amid regulatory pressure to do so. Italian banks’ aggregate Tier 1 capital ratio increased by 110 basis points (€19.6 billion) to 10% at December 2011, from 8.9% in December 2009, according to Bank of Italy data. A similar amount (€19.3 billion) equaled the overall loan-loss provisions of the Italian banking system in 2011. The banks boosted their Tier 1 capital ratios mainly through capital increases, asset disposals, and earnings retention, as opposed to an optimisation in risk-weighted assets. This additional capital serves as a buffer against credit losses.

We expect that the challenges of the Italian economy will drive banks’ weakening asset quality and profitability trends throughout 2012-13. In addition, the banks’ deleveraging processes, which have now started, will likely continue as long as they face funding challenges, adding further pressure on the economy.

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

Insurers

State-Owned Brazilian Surety Insurer Would Be Credit Negative for Private Competitors

Last Thursday, Brazilian President Dilma Rousseff sanctioned a law that creates the first state-owned insurance company, dubbed Segurobras, to compete with private insurers in the surety segment for large infrastructure projects in the country. The creation of a new government-owned competitor is credit negative for Brazil’s private market insurers because it will increase price competition and create uncertainty related to the new insurer’s competitive advantage as a government-controlled entity.

The state-owned company’s main objective will be to provide sureties for large infrastructure projects in the country. Brazil has multiple infrastructure development projects in the pipeline related to the 2014 World Cup and the 2016 Summer Olympics. These projects will likely require extensive use of surety bonds to guarantee the fulfillment of construction contracts, among other insurance coverage, as these are generally required for large commercial projects and enterprises.

The surety, credit and engineering segments are likely to drive most of the Brazilian insurance industry’s growth owing to the major infrastructure projects underway. Those projects and their related insurance needs have helped make the Brazilian insurance market increasingly attractive to large foreign insurance and reinsurance companies and institutional and private-equity investors.

The participation of a state-owned insurer raises the threat that its government ties will give it a favorable position over private companies when bidding on insurance coverage for projects in the government’s interest, such as infrastructure projects. While the government hasn’t clearly laid out the state-owned insurer’s role yet, we believe that the insurer will be less of a threat if its aim is simply to provide more capacity to Brazil’s massive infrastructure demands and development projects, and if it acts as a co-insurer with the private sector, rather than a direct competitor.

The state-owned insurer will need to develop the capabilities to effectively compete with experienced, profit-driven, and underwriting savvy players. There is a risk that the company’s business strategy – at least initially – will rely primarily on offering more attractive rates, backed by the government. Such a strategy would threaten the stability and attractiveness of the market structure for private surety insurers and could result in the government taking meaningful market share in this niche. That could have detrimental consequences on the profitability and growth of local Brazilian insurers with the greatest exposure to those particular insurance segments. The exhibit below shows the top 10 surety insurers in Brazil in 201

Diego Kashiwakura Assistant Vice President - Analyst +55.11.3043.7316 diego.kashiwakura@moodys.com

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

Top 10 Surety Insurers in Brazil as of December 2011

Rank Company (Insurance Financial Strength Rating) 2011 Gross Premium Written

(BRL millions) Market Share

Percent

1 J. Malucelli Seguradora (unrated) 256.6 31%

2 Fator Seguradora (unrated) 112.6 14%

3 Swiss Re Corporate Solutions Brasil (Baa2 stable) 78.6 10%

4 Cescebrasil Seguros de Garantias e Credito (unrated) 51.5 6%

5 Austral Seguradora (unrated) 44.0 5%

6 Berkley International do Brasil Seguros (unrated) 32.9 4%

7 Itau Seguros (Baa1 positive) 30.8 4%

8 Allianz Seguros (unrated) 29.4 4%

9 Zurich Minas Brasil Seguros (unrated) 29.4 4%

10 Fairfax Brasil Seguros Corporativos (unrated) 26.1 3%

Total Market 817.5 100%

Source: Superintendência de Seguros Privados (SUSEP)

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

Closed-End Funds

Invesco’s US Municipal Fund Merger Is Credit Positive for Leverage Providers

Last Monday, Invesco Advisors, Inc., a unit of Invesco Holding Company Limited (A3 stable), announced that it had completed the merger of 11 leveraged closed-end funds that invest in municipal bonds into four surviving funds with a combined market capitalization of about $1.6 billion. Municipal fund mergers are credit positive for debt and preferred stock securities issued by closed-end municipal funds because the larger size of the surviving funds allows for greater asset diversity, investing in larger more liquid lot sizes, and economies of scale with respect to fixed expenses.

There were approximately 234 leveraged and unleveraged closed-end funds investing in municipal bonds as of 31 July 2012, and they had a combined market capitalization of $65.3 billion.14 Including Invesco’s most recent mergers, 28 single-state and five national funds have merged over the past four months, versus zero mergers in 2011, and both Invesco and Nuveen Investments, a unit of Nuveen Investments Inc. (B3 positive), have announced plans to merge another 37 single-state and national funds (see Exhibit 1).

EXHIBIT 1

Number of Announced and Concluded Closed-End Municipal Fund Mergers in 2012

Source: Moody’s, based on company announcements.

Municipal fund mergers benefit common shareholders because fixed operating expenses are spread over a larger asset base. For leveraged municipal closed-end funds that have issued preferred securities, a combined funds’ larger size offers the opportunity to invest in a more diverse pool of securities and in larger securities lot sizes that often are more liquid as dealers, which facilitate market-making in the municipal market, are more likely to provide better offers on decent-size positions.

Exhibit 2 shows that the size of acquiring funds range from 2x to 4x the size of the previously merged funds.

14 Source: Thomson Reuters Closed End & Exchange Traded Funds Weekly Report, 10 August 2012.

0

5

10

15

20

25

30

Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Rest of 2012 Beyond 2012

Num

ber o

f Fun

ds

Henry Shilling Senior Vice President +1.212.553.1948 henry.shilling@moodys.com

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

EXHIBIT 2

Comparison of Closed-End Funds Before and After Their Mergers

Merger Date and Investment Advisor

Geographic Focus of Funds

Number of Merging Funds

Average Fund Capitalization Before Merger

($ millions)

Average Fund Capitalization After Merger

($ millions)

27 August 2012 Invesco Advisors

California 4 $168.7 $674.7

National 5 91.4 151.6

314.8 274.2

New York 2 157.4 314.8

6 August 2012 Nuveen Investments

Maryland 4 95.2 380.9

Virginia 3 100.2 300.7

9 July 2012 Nuveen Investments

Georgia 3 52.8 211.2

North Carolina 4 53.0 158.9

Connecticut 4 65.4 261.6

7 May 2012 Nuveen Investments

California 4 152.8 611.3

Note: Market capitalization = number of common shares outstanding multiplied by the share price.

Source: Moody’s analysis, based on company announcements, and Thomson Reuters Closed End & Exchange Traded Funds Weekly Reports.

NEWS & ANALYSIS Credit implications of current events

20 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

Sovereigns

Censure and Political Stalemate in Japan Are Credit Negative

Last Wednesday, the upper house of Japan’s Parliament, the Diet, passed a motion censuring Prime Minister Yoshihiko Noda. Although a censure does not require the dissolution of the Diet, the opposition Liberal Democratic Party and its allies that make up the majority in the upper house have also indicated that they will stop cooperating with the governing Democratic Party of Japan (DPJ) to pass bills in the current session of parliament. Stalled legislation will likely include an important bill permitting the government to issue new bonds to cover budget deficits, making the censure and consequential political deadlock credit negative for Japan (Aa3 stable).

With the current session of parliament scheduled to adjourn 8 September, the bill allowing the government to issue bonds to cover current fiscal budget deficits is unlikely to pass in the upper house. The bill permits the government to issue a total of ¥38.3 trillion in new bonds to help finance the ¥90.3 trillion main, general account budget during the current fiscal year, which ends 31 March.15 Without this bill’s passage, the national government will likely be unable to finance budgeted expenses beyond October or November.

The Minister of Finance, Jun Azumi, announced on Friday that if the Diet does not pass the bond issuance bill in the current session, the government will start deferring non-vital spending to maintain flexibility for as long as possible. The government guarantees that debt service will not be affected, but subsidies and tax transfers to local governments will be reduced or suspended. Although local governments have some funding flexibility, including Rinzai-sai bond issuance, reduced transfers will crimp government spending and ultimately economic growth if the political impasse persists.

The censure motion marks the final collapse of the short-lived cooperation between the governing DPJ and the two largest opposition parties that enabled passage of an increased consumption tax earlier this year.16 In one of Japan’s first serious efforts in many years to tackle the government’s high debt and deficit, the new law doubles the country’s consumption tax to 10% from 5% by October 2015, with an intermediate step to 8% in April 2014. To gain the opposition’s consent to pass the bill in the upper house in August, Prime Minister Noda agreed to hold new elections in the near future, well in advance of the constitutionally required date of 30 August 2013.

This recent episode of deadlock between the political parties underscores the persistent policy inertia that has made it difficult for the Diet to forge and implement comprehensive fiscal and supply-side measures to rein in Japan’s large budget deficits and very large and rising government debt. For sovereign credit quality to improve following the elections, resolute political leadership is essential to overcome the gridlock that has characterized Japan’s politics since the Koizumi administration (2001-06) succeeded in reining in the fiscal deficit before the onset of the global financial crisis. Without such progress, Japan risks a market demand for a risk premium on Japanese government bonds, making deficit financing and debt refinancing very costly.

15 For details, see Ministry of Finance presentation here. 16 See Higher Consumption Tax Is Credit Positive for Japan, Moody’s Credit Outlook, 13 August 2012.

David Erickson Associate Analyst +65.6398.8334 david.erickson@moodys.com

Thomas Byrne Senior Vice President - Regional Credit Officer +65.6398.8310 thomas.byrne@moodys.com

NEWS & ANALYSIS Credit implications of current events

21 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

US Public Finance

US Budget Cuts Would Hurt the Credit Quality of School Districts Receiving Federal Aid

School districts that receive substantial aid from the US Department of Education begin the 2012-13 school year with the threat that their revenues will fall significantly midway through the year. These schools receive so-called federal “impact aid” because many of their students live in areas with a high concentration of tax-exempt properties.

The Budget Control Act of 2011 dictated that many parts of the federal budget must be cut by 8% across the board in January, including the US Department of Education’s impact aid to school districts. Although around the end of 2012 lawmakers in Washington may take action to alleviate the effects of the Budget Control Act, there is no guarantee it will happen, as it will depend, in part, on the outcome of the November national elections.

Through its impact aid program, the Department of Education assists districts such as Indian reservations (concentrated in Alaska, Arizona, and New Mexico) or military bases. These districts face a perennial challenge of adopting annual budgets without full knowledge of their revenues. They typically develop their budgets in the late spring or early summer, while Congress votes on its appropriations several months later, well into the school year, when much of the district’s spending has already occurred.

Districts have different strategies to manage this uncertainty. The Copperas Cove, Texas, Independent School District (A1), where 54% of the students are children of personnel at the Fort Hood Army base, does not budget for any impact aid. As a result, the district budgets for a deficit each year and makes up the difference by tapping a large reserve that equaled 59% of General Fund revenues at the end of fiscal 2011. Similarly, the Indian River Central School District (A1) in New York, near the Fort Drum Army base, places current-year impact aid in reserve and appropriates it to the subsequent year’s budget, essentially creating its own forward funding for the aid.

Contingency planning by highly rated districts such as Indian River and Copperas Cove will gird them for a midyear cut in aid, in keeping with their standard budgeting process. However, many of the approximately 1,280 school districts that receive impact aid are small and rely heavily on those funds. Those districts’ financial operations would be heavily challenged by abrupt cuts to impact aid under the sequestration rules.

We rate 15 school districts in eight states that rely on impact aid for more than 5% of their budgets (see exhibit). The district most dependent on impact aid is the Dulce Independent School District (A2) in New Mexico, which educates students on the Jicarilla Apache Indian Reservation and in 2011 received impact aid equal to 54% of its General Fund revenues.

Dan Seymour, CFA Associate Analyst +1.212.553.4871 dan.seymour@moodys.com

NEWS & ANALYSIS Credit implications of current events

22 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

EXHIBIT 1

Moody’s-Rated School Districts Where Impact Aid Is More than 5% of Their Budgets

Issuer Rating Federal Presence 2011 General

Fund Revenues 2011 Impact

Aid

Aid as Percent of

Revenue

Dulce Independent School District (NM)

A2 Jicarilla Apache Indian Reservation

6,589,822 3,560,029 54%

Gallup-McKinley County School District (NM)

A1 Navajo Nation/Zuni pueblo

91,290,733 42,664,987 47%

Lac Du Flambeau School District (WI)

Aa3 Lac du Flambeau Indian Reservation

10,168,350 2,777,921 27%

Indian River Central School District (NY)

A1 Fort Drum 57,860,224 14,348,268 25%

Bernalillo Municipal S.D. 1 (NM)

A1 Cochiti, Sandia, San Felipe, Santo Domingo, and Santa Ana Indian Pueblos

27,381,068 6,376,106 23%

Copperas Cove Independent School District (TX)

A1 Fort Hood 69,242,941 15,930,741 23%

Pojoaque Valley I.S.D. 1 (NM) A1 Pojoaque Pueblo 15,069,137 3,006,568 20%

Killeen Independent School District (TX)

Aa2 Fort Hood 322,040,436 61,126,234 19%

Grants-Cibola County School District 1 (NM)

A1 Laguna and Acoma pueblos

30,590,248 5,361,052 18%

Muroc Joint Unified School District (CA)

Baa1 Edwards Air Force Base 18,569,803 2,934,112 16%

Carthage Central School District (NY)

A1 Fort Drum 48,700,829 6,597,246 14%

Oak Harbor School District No. 201 (WA)

Aa3 Naval Air Station Whidbey Island

49,499,444 6,082,463 12%

Mason County S.D. 404 (WA) A1 Skokomish Indian Reservation

4,383,310 527,439 12%

Navajo County U.S.D. 1 (AZ) A2 Navajo Indian Reservation 13,913,586 1,041,718 7%

Lake County C.U.S.D. (IL) A3 Great Lakes Naval Station 42,502,814 2,540,986 6%

Source: Moody’s and issuer financial statements.

An 8% across-the-board cut under the potential sequestration rules would result in a $100 million reduction to the $1.29 billion impact aid program. However, the National Association of Federally Impacted Schools recommends its members budget for 50%-55% of the formulaically determined impact aid to be conservative, or 65%-75% to be optimistic (districts have already been receiving less than 100% of the formulaic aid as the program is not fully funded).

Even without the sequestration, impact aid is declining. Districts have only received 85% of the appropriation for fiscal 2012, and President Barack Obama’s budget request cuts funding for the program by 5%.

RATING CHANGES Significant rating actions taken the week ending 31 August 2012

23 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

Corporates

Fortescue Metals Group Ltd Review for Downgrade

08 May ‘12 30 Aug ‘12

Corporate Family Rating Ba3 Ba3

Outlook Positive Review for Downgrade

The review for downgrade reflects the considerable constraints on Fortescue's liquidity profile due to the rapid and continuing decline in the iron ore price to levels that are below our base-case expectations. Fortescue is investing heavily in its significant capacity expansion project, whilst the depressed operating cash flow is increasing material challenges.

Jaguar Land Rover Plc Upgrade

09 May ‘11 27 Aug ‘12

Corporate Family Rating B1 Ba3

Outlook Stable Stable

The upgrade was triggered by the continuous improvement in JLR's financial metrics over the past several quarters, as reflected by its results for fiscal year 2011-12, which exceeded our expectations. JLR's better-than-expected results were driven by strong demand for the company's sport utility vehicles, and its successful broadening of its model range, especially the introduction of the Range Rover Evoque model. As a result, JLR's operating performance, cash flow generation and key credit metrics are currently commensurate with a higher rating category.

The New York Times Company Outlook Change

07 Nov ‘10 28 Aug ‘12

Corporate Family Rating B1 B1

Outlook Positive Stable

The outlook change reflects our view that NY Times' debt-to-EBITDA leverage will remain in line with the existing ratings over the next year, even assuming the company uses a portion of its sizable cash balance to reduce debt and for acquisitions. The stable rating outlook also reflects our opinion that revenue pressures will persist. NY Times' B1 corporate family rating and B1 senior unsecured note ratings were not affected.

RATING CHANGES Significant rating actions taken the week ending 31 August 2012

24 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

Infrastructure

Maritimes & Northeast Pipeline Limited Partnership Affirmation

14 Aug ‘09 28 Aug ’12

Senior Secured Rating 6.9% notes A2 A2

Senior Secured Rating 4.34% notes A3 A3

Outlook Stable Stable

Our affirmation of the A3 rating is driven primarily by a backstop agreement with ExxonMobil, which offsets concerns over a coming end to gas production offshore Nova Scotia and Marcellus gas competition coming into the Boston market. The A3 rating is additionally driven by first claim over a fully funded escrow account managed by the company in which A3 investments are permitted. We also note that MNE LP has strong financial metrics ((FFO + Interest)/Interest >5x; FFO/Debt approx. 22%) that offset deteriorating pipeline fundamentals.

Maritimes & Northeast Pipeline, LLC Downgrade

11 May ‘09 28 Aug ’12

Senior Unsecured Rating Baa3 Ba1

Outlook Stable Negative

The downgrade and negative outlook is primarily the result of the recent downgrade and negative outlook assigned to Repsol S.A., which guarantees 88% of Maritimes' capacity usage. The Ba1 corporate family rating primarily reflects (1) the Baa3 rating of Repsol (which guarantees 88% of Maritimes' capacity usage); (2) a likely end to gas production offshore Nova Scotia, which feeds Maritimes; and (3) contract risk associated with Repsol's guarantee.

RATING CHANGES Significant rating actions taken the week ending 31 August 2012

25 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

Financial Institutions

CNO Financial Group Inc. Upgrade

3 May ‘12 29 Aug ‘12

Senior Secured Rating B1 Ba3

Insurance Financial Strength Rating Ba1 Baa3

Outlook Review for Upgrade Stable

The upgrade reflects CNO’s substantial strengthening of its financial flexibility and the steps it has taken to reduce its debt and improve holding company liquidity; we note that the company has also enhanced its risk-management processes. Additionally, CNO's gradually increasing sales and stronger operating earnings, coupled with improved investment performance, have translated into sustainable, more robust profitability and stronger capital adequacy over recent quarters.

Korean Government Related Financial Entities Upgrade

On 27 August 2012, we upgraded the foreign-currency long-term senior unsecured ratings of six Korean government-related financial institutions to Aa3 from A1. The six entities are Export-Import Bank of Korea, Industrial Bank of Korea, Korea Finance Corporation, Korea Housing Finance Corporation, Korea Development Bank and Korea Student Aid Foundation.

M&T Bank Corporation Review for Downgrade

26 Mar ‘12 27 Aug ‘12

Senior Unsecured Debt A3 A3

Standalone Bank Financial Strength /Baseline Credit Assessment C+/a2 C+/a2

Long-Term Deposits A2 A2

Short-Term Deposits P-1 P-1

The rating review follows the announcement that M&T has entered into a definitive agreement to acquire Hudson City Bancorp, Inc. in a 60% stock/40% cash transaction valued at approximately $3.7 billion, which is expected to close in Q2 2013. The review will focus primarily on the credit profile of Hudson City, an unrated thrift holding company, and integration challenges.

RATING CHANGES Significant rating actions taken the week ending 31 August 2012

26 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

3CIF Downgrade

17 May ‘12 28 Aug’12

Long-Term Deposits A1 Baa1

Short-Term Deposits P-1 P-2

Outlook Review for Downgrade Ratings Under Review- Direction Uncertain

The downgrade is based on our assessment that the probability of a run-off scenario has increased. Nevertheless, we continue to believe that the French public sector will orchestrate an orderly resolution for CIF in the absence of a strategic transaction. A run-off scenario would likely involve the French authorities providing financial support to 3CIF. In the short term, given that CIF has no longer access to the capital markets, the repayment of debt maturing in early October will likely require liquidity assistance from the central bank, absent a long-term solution.

3i Group Downgrade

28 May ’12 29 Aug’ 12

Long-Term Rating Baa1 Baa2

Outlook Review for Downgrade Stable

The downgrade reflects the greater pressure on the firm’s core revenue source, greater uncertainty around and whether it will generate sufficient cash flows from management fees to cover operating expenses. The downgrade also reflects (1) 3i’s decreased granularity and diversification of the private equity and investment portfolios as the company focuses on fewer core assets; and (2) a rebalancing toward a more shareholder-oriented financial policy.

RATING CHANGES Significant rating actions taken the week ending 31 August 2012

27 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

Sovereigns

The Republic of Korea Upgrade

1 April ‘12 27 August ‘12

Gov Currency Rating A1 Aa3

Foreign Currency Deposit Ceiling A1 Aa3

Foreign Currency Bond Ceiling Aa2 Aa1

Local Currency Deposit Ceiling Aa1 Aa1

Local Currency Bond Ceiling Aa1 Aa1

Outlook Positive Stable

The upgrade to Aa3 reflects (1) strong fiscal fundamentals; (2) a high degree of economic resilience and competitiveness; (3) reduced external vulnerability of the banking sector; and (4) continuation of the status-quo in north-south geopolitics. In particular, Korea's strong fiscal fundamentals enable a relatively large degree of policy scope to cope with contingent domestic risks and external shocks, whilst the government's balance sheet has been relatively unscathed by the global financial crisis and, so far, by the euro area crisis.

Sub-sovereigns

Daejeon Metropolitan City (Korea) Upgrade

05 April ‘12 27 Aug ’12

Issuer rating A1 Aa3

Outlook Positive Stable

The upgrade and change of outlook reflects the concurrent upgrade in Korea's rating to Aa3, stable from A1. The city’s ratings reflect the very high level of support we believe would be forthcoming from the central government in the event of a fiscal crisis. It also reflects the very supportive institutional framework for Korean local governments, including strong central government controls and substantial transfers.

RATING CHANGES Significant rating actions taken the week ending 31 August 2012

28 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

US Public Finance

Gwinnett County Hospital Authority (GA) Upgrade

14 Aug ‘12 30 Aug ‘12

Revenue A3 A2

Outlook Rating Under Review Stable

The rating upgrade and stable outlook reflect GHS's sizable presence and leading and growing market share in the demographically favorable service area, northeast of metro Atlanta. GHS continues to benefit from strong volume growth, sustained favorable operating performance, and continued growth in absolute unrestricted cash and investments following completion of major capital projects and opening of the open-heart program.

RESEARCH HIGHLIGHTS Notable research published the week ending 31 August 2012

29 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

Corporates

Alpha and Other Appalachian Coal Producers Benefit from Blockage of EPA Rule

On 21 August, a US appeals court ruling struck down the US Environmental Protection Agency’s (EPA) Cross-State Air Pollution Rule (CSAPR), giving the beleaguered US coal industry a rare positive regulatory development. In our view, this development is credit-positive for producers concentrated in Central Appalachia, such as Alpha Natural Resources. Although the ruling does not affect the industry’s longer-term fundamental challenges, it offers coal producers in Appalachia temporary reprieve from what was likely to be a material near-term negative.

Russia's WTO Entry Is Credit Positive for Russian Steel Companies

Last Wednesday, when Russia joined the WTO, the European Union terminated Russia’s steel quota agreement, which is credit positive for several Russian steel companies: Magnitogorsk Iron & Steel Works (Ba3 stable), Severstal OAO (Ba1 stable), Novolipetsk Steel OJSC (Baa3 stable), Mechel OAO (B2 stable) and Evraz Group S.A. (Ba3 stable). The end of steel quotas enables Russian producers to gradually increase exports of crude-steel products.

Korean Government-Related Issuers: Answers to Frequently Asked Questions

Our FAQ answers key investor questions about our approach to rating Korean government-related issuers, particularly after the upgrade of the Korean government’s rating to Aa3 on 27 August. Despite the upgrade, most Korean corporate government-related issuers’ ratings remain unchanged.

China Property Focus

Our China Property Focus newsletter is intended to provide a regular update on China’s property market and the credit positions of the developers we rate. This inaugural edition notes that sales in China’s property market have weakened after the central government reaffirmed it would continue imposing restrictions on the property market in order to lower prices.

Weak Iron Ore Demand Is Credit Negative for Global Producers

On 22 August, iron ore prices fell to $109 per tonne, a 41% decline from the price a year ago, and the lowest since December 2009. This is credit negative for all global producers of iron ore and we expect continued soft demand to result in volatile prices during at least the next six months, with a greater chance of further price declines.

US Manufacturing: Operating Profits Hold Steady as Revenue Growth Slows

Many US manufacturers expect to sustain their profitability levels, despite an increasingly challenging economic environment, according to our survey of recent guidance from 30 US manufacturers. The survey found that 12 of the 16 companies that commented on segment or operating profit margins raised or maintained current growth projections, whilst only three companies lowered their guidance.

RESEARCH HIGHLIGHTS Notable research published the week ending 31 August 2012

30 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

Project & Infrastructure Finance

CEE: Impact of Automotive Production on Export Trends and Economic Performance Varies

Automobile production is a key industrial and economic sector in Central and Eastern Europe, especially the Czech Republic, Poland, Slovakia and Slovenia. It forms part of our assessment of each nation's economic strength and auto-industry dependence varies between countries based on the size, diversification and openness of the relevant economy. The industry's impact on export trends and economic performance can be very significant. Concentration risk stemming from dependence on the industry can also lead to vulnerabilities to external demand, as for example in the Czech Republic and Slovenia.

Financial Institutions

US Life Insurers' Q2 2012 Results: Operating Earnings Grew; Macroeconomic Factors Continue to Dampen Growth Prospects

In aggregate, our tracked life insurers reported higher operating earnings for Q2 2012 than for the same quarter last year. Reported net income rose sharply on the prior year period, reflecting non-economic gains at some companies. Capital generation was modest, as much of the industry redeployed net income in share buybacks and shareholder dividends.

Money Market Funds: Consolidation Credit Positive Overall for Managers and Investors

The global financial crisis and resulting regulatory turmoil have presented money market fund managers with multiple challenges, which has increased the pace of consolidation in the industry. On balance, we believe that in the near to intermediate term the consolidation trend is credit positive for money market fund investors and fund or asset managers.

Sovereigns

Despite Deficit Overshoot in 2012, Denmark Shows Commitment to Fiscal Sustainability

The Danish government’s (Aaa stable) updated budget outlook for 2012 and 2013 reaffirms its forecast that this year’s general government deficit would surpass the European Union’s 3% of GDP limit for the first time since 1994 because of a nearly 2% of GDP increase in spending to support the economy. The authorities still expect the deficit to drop well below the 3% of GDP mark in 2013. The revised outlook acknowledges the economy’s poor performance and reliance on public spending, making achievement of next year’s deficit target a challenge.

RESEARCH HIGHLIGHTS Notable research published the week ending 31 August 2012

31 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

Structured Finance

US Credit Card Charge-Offs Rise Slightly in July, Delinquencies Down to a New Low

Securitized credit card charge-offs in the US increased to 4.56% in July from 4.27% in June, according to our Credit Card Indices, but one-time technical factors explain the rise. Charge-offs will resume their downward slide next month and reach about 4% by the end of the year. Delinquencies fell to a new low of 2.36%.

Request for Comment: Approach to Assessing Impact of Rapid Country Credit Deterioration on Structured Finance Transactions

To account for the impact of rapid and significant country credit deterioration on structured finance transactions, we propose supplementing our primary asset methodologies by using a maximum achievable rating and minimum credit enhancement as key parameters in determining loss distribution.

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

32 MOODY’S CREDIT OUTLOOK 3 SEPTEMBER 2012

NEWS & ANALYSIS Corporates 2 » UPS’ Restructuring of Pension Obligations Is Credit Positive » Weak Iron Ore Demand Is Credit Negative for Global Producers » QR National’s Stock Buyback Plan Is Credit Negative

Infrastructure 8 » Black Hills’ Sale of Oil Shale Assets Is Credit Positive

Banks 9 » Chinese Banks’ Deteriorating Asset Quality and Slowing Profit

Growth Are Credit Negative » Philippine Central Bank Enhances Monitoring of Banks’ Real Estate

Exposures, a Credit Positive

Sub-sovereigns 14 » Mexican Municipal Governments’ Longer Terms in Office Are

Credit Positive

US Public Finance 16 » Dynegy’s Property Tax Appeal Is Credit Negative for Orange

County, New York

Securitization 18 » Regulatory Scrutiny of Credit Card Payment Protection Products

Will Have Minimal Effect on ABS Performance

CREDIT IN DEPTH US Public Finance 19

The credit risk of California cities has increased across the board owing to an economic, legal and policy environment that is helping to drive an increase in bankruptcy filings and defaults by cities. Factors include the state's boom-bust real estate economy, its hands-off policy with regard to the fiscal problems of local governments, and newly enacted legislation that effectively lays out a path to bankruptcy court for stressed municipalities.

MOODYS.COM

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EDITORS PRODUCTION ASSOCIATE News & Analysis: Elisa Herr, Jay Sherman and Joseph Cullen

David Dombrovskis

Ratings & Research: Neil Buckton Final Production: Barry Hing