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The interview book for finance related jobs
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评价文档：请问“普通股”数目,number of ordinary shares在财务报表中怎么找?我看到EARNING PER SHARE=EARNIG AVAILABLE TOORDIANRY SHAREHOLDERS/NUMBER OF ORDINARY SHARES但我不知道这个普通股的数目在哪里可以看到啊、、、他会直接出现在财务报表中吗?
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一般来说,在资产负债表（statement of financial position)中,有个股本（share capital)项目,右边显示的是股本金额,左边在share capital旁边会标注每股多少钱,如$1,或者of 50c each 等等.你用右边的金额除以该标明的面值,就是普通股股数.
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10 JULY 2014
NEWS & ANALYSIS
Corporates
» Archer Daniels Midland Increases Debt Burden with Purchase
Sovereigns 2
» A China-Korea Free Trade Agreement Is Credit Positive for Both
US Public Finance
» Illinois Supreme Court Casts Doubt on Recent State and Local
» TeliaSonera's Acquisition of Tele2 Norway Is Credit Positive and
Reduces Competition
» Philips Expects Its Healthcare Division's Second-Quarter EBITA
Pension Reform Efforts, a Credit Negative
to Decline, a Credit Negative Infrastructure
» Tata Power's Partial Divestment of PT Kaltim Prima Coal Is
RECENTLY IN CREDIT OUTLOOK
» Articles in Last Monday’s Credit Outlook » Go to Last Monday’s Credit Outlook
Credit Positive Banks
» Hungary's Law on Retail Loans Increases Loss Expectations for
Click here for Weekly Market Outlook, our sister publication containing Moody’s Analytics’ review of market activity, financial predictions, and the dates of upcoming economic releases.
Banks, a Credit Negative
» Philippine Banks' New Real Estate Stress Test Is Credit Positive
» ACE Limited's Purchase of Itaú Seguros' Corporate Insurance
Division Is Credit Positive for Itaú Seguros Companies
» German Life Insurance Reform Is Credit Negative for Holding » Dai-ichi Life Will Fund Acquisition of Protective Life with Share
Issuance, a Credit Positive
NEWS & ANALYSIS
Credit implications of current events
Corporates
Lori Harris Analyst +1.212.553.4146 lori. John Rogers Senior Vice President +1.1 john.
Archer Daniels Midland Increases Debt Burden with Purchase of WILD
Archer Daniels Midland Company (ADM, A2 stable) on Monday said it would buy Germany’s WILD Flavors GmbH (unrated), a producer of natural flavors, for 2.3 billion (about $3.1 billion), including about 100 million in debt. We expect ADM to fund the transaction with debt and cash on hand. The deal is credit negative for ADM, the US agribusiness giant, because it will force the company to increase its balance-sheet debt and reduce its cash on hand, even though buying WILD will bring ADM higher margins, better diversification and more stable earnings. Although ADM did not disclose the amount of debt it will raise for financing, it did indicate that it would raise debt. A deal of this size will either increase the company’s debt/EBITDA ratio or cut its cash holdings enough to weaken its credit profile before earnings can catch up. However, we affirmed ADM’s ratings after the deal was announced. ADM will create a new business unit based on the WILD assets, and estimates 2014 combined revenue of $2.5 billion, including WILD’s projected sales of about $1.4 billion in 2014. The increase in ADM’s debt will be temporary, and ADM will continue to generate EBITDA in excess of $3 billion. Still, ADM will strain to return its net debt/EBITDA ratio to current levels, 1.5x as of 31 March. The purchase of WILD also hints that ADM could soon attempt additional acquisitions ― if smaller ones ― that expand its product portfolio. ADM would not likely raise new debt to fund any such acquisitions, but each would diminish its cash balance before the new operations began contributing to cash flow. Buying WILD will expand ADM’s existing portfolio of specialty ingredients with natural, fruit-based ingredients that ADM can leverage to access beverages and other markets. WILD also helps ADM expand its product offering into higher-margin processed ingredients, add customers and end-markets, and widen its geographic reach. ADM owns more than 270 processing plants to process commodities into a wide variety of value-added products for food, industrial and energy uses. Population growth and a rising standard of living keep demand fairly stable for ADM’s agribusiness products. Moreover, ADM’s growth strategy does not rely on expanding its merchandising activities into other unrelated commodities. The company’s commodity grain merchandising and processing business keep its margins low, however, with weak returns on invested capital, and a high exposure to volatile commodity prices, relatively thin industry margins, and excessive volatility in free cash flow. To buy WILD, ADM must now dedicate cash and raise debt that it could have used for other purposes, including improving its credit profile. Another purchase of a similar scale would likely place ADM’s credit profile under noticeably more strain.
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
for the most updated credit rating action information and rating history.
MOODY’S CREDIT OUTLOOK
10 JULY 2014
NEWS & ANALYSIS
Credit implications of current events
Iván Palacios Vice President - Senior Credit Officer +34.91.768.8229 ivan.
TeliaSonera’s Acquisition of Tele2 Norway Is Credit Positive and Reduces Competition
Last Monday, TeliaSonera AB (A3 stable) announced its acquisition of Tele2’s Norwegian operations at an enterprise value of SEK5.1 billion (548 million) on a cash and debt-free basis. The company expects that the acquisition, which is subject to approval by the Norwegian Competition Authorities, will be finalised in the first quarter of 2015 at the latest. TeliaSonera is the second-largest operator in the Norwegian mobile market, and Tele2 is the third-largest. If the deal is approved, the merger would leave only two remaining players in the market, which would be the first time such in-market consolidation has occurred in Europe. The proposed acquisition will enhance TeliaSonera's business profile in Norway and will have only a marginal effect on its credit metrics. Following the acquisition, TeliaSonera's market share in the Norwegian mobile market will increase to 40%, up from 23%. The increased scale will allow TeliaSonera to achieve substantial cost synergies, which the company estimates to be at least SEK800 million annually beginning in 2016. In addition, the acquisition of Tele2 reduces the number of players, and the risk of a disruptive pricing environment, while remaining in compliance with the regulatory structure. However, such benefits may only be temporary because a new market entrant, TelcoData (unrated), secured spectrum (2x10 MHz in the 800MHz band, 2x5 MHz of 900MHz, and 2x20 MHz of 1800MHz) in the December 2013 auction. The regulator may impose material remedies as part of the proposed merger, given that this is the first such in-market consolidation from three-to-two players in Europe. However, the consolidation and potential remedies are mitigated by the expected entry of TelcoData as a new player in the Nor the fact that this deal is likely to be reviewed only by the Norwegian regulator and not by the European Competition Commission, which has so far demonstrated a tough approach in dealing with three-to- and TeliaSonera's commitment to accelerate nationwide 4G rollout, which would translate to a better quality of service for Norwegian customers and would potentially offset the reduced price competition resulting from the consolidation. The transaction is fully priced with an estimated enterprise value (EV)/EBITDA multiple of 42x (based on Tele2 Norway's 2013 EBITDA of SEK121 million) because the target generates little positive EBITDA and is generating negative free cash flows. However, in light of expected synergies, which are mostly related to moving Tele2’s traffic to TeliaSonera’s network, the underlying EV/EBITDA multiple looks more reasonable at around 5.5x. The effect of this transaction on TeliaSonera's liquidity is manageable, given that the company will fund the purchase with existing cash (as of March 2014, the company had SEK31.9 billion of cash) and available credit facilities. As a result, TeliaSonera's credit metrics will weaken only marginally (i.e., an increase in the company's net adjusted debt/EBITDA ratio of around 0.2x to 2.4x and a drop in its retained cash flow/net adjusted debt ratio of around 2 percentage points to 24%. Although TeliaSonera's credit metrics were already weak prior to this transaction, the company's large cash balance, which it may use to reduce debt, and the value of its 25% equity stake in MegaFon OJSC (Baa3 stable) and its 38% equity stake in Turkcell Iletisim Hizmetleri A.S. (Ba1 stable), which could be monetised if needed, offset the weakness. These stakes have substantial value that is not fully reflected in the credit metrics that we monitor.
MOODY’S CREDIT OUTLOOK
10 JULY 2014
NEWS & ANALYSIS
Credit implications of current events
Roberto Pozzi Vice President - Senior Credit Officer +49.173.659.1713 roberto.
Philips Expects Its Healthcare Division’s Second-Quarter EBITA to Decline, a Credit Negative
On Tuesday, Royal Philips N.V. (A3 stable) announced that it expects its healthcare division to report second-quarter EBITA of approximately 220 million, compared to 420 million reported in the same period of 2013. Excluding 82 million of one-off gains in the prior period, the decline in healthcare EBITA was 34.9%. The credit-negative decline in profits at Philips’s healthcare is worse than we expected, even after factoring in its previously flagged issues of negative currency effects, a temporary plant shutdown in the US and weaker demand resulting in declining orders. Philips does expect the results of its healthcare business to improve in the second half of 2014 compared to the same period of 2013, partly compensating for the weaker first half. Despite the weaker performance the company anticipates for the second quarter, the company expects that the healthcare division will generate profit margins at the upper end of our expected 12%-14% range this year, although they will remain well below the company’s target of 16%-17%. The division’s underperformance is likely to negatively affect the group’s overall EBITA margins, which we expect to remain around 9% compared to the company’s medium-term target of 11%-12% and our similar expectations for its current A3 rating. Although marginally weaker operating performance in 2014 is factored in the company’s current rating, negative rating pressure is likely if the company’s Moody'sadjusted EBITA margins remain below double-digit territory for more than 12-18 months. We now expect that Philips’ EBITA coverage of interest expense and its debt to EBITDA ratio (both ratios calculated on a Moody’s adjusted basis) will be at the lower end of our anticipated ranges of 4x-5x and 2.0x2.5x, respectively. Negative rating pressure is likely if Philips’ leverage deteriorates and the debt/EBITDA ratio increases toward 3.0x. The company also announced that it is implementing a new management structure to improve performance and allow it to respond better to evolving customer demands in a changing healthcare landscape, potentially providing some performance upside from 2014 levels.
MOODY’S CREDIT OUTLOOK
10 JULY 2014
NEWS & ANALYSIS
Credit implications of current events
Infrastructure
George Teng Associate Analyst +65. george. Ray Tay Vice President - Senior Analyst +65. ray.
Tata Power’s Partial Divestment of PT Kaltim Prima Coal Is Credit Positive
On Friday, The Tata Power Company Limited (TPC, B1 negative) said it will sell a 5% stake in PT Kaltim Prima Coal (KPC, unrated) and its entire 30% stake in KPC’s associated power infrastructure companies to a Bakrie Group (unrated) entity for approximately $250 million. KPC, majority owned by PT Bumi Resources (Ca stable), operates coal mines in Kalimantan, Indonesia. The sale is subject to certain undisclosed conditions and we expect completion before the second quarter of 2015. TPC will continue to hold a 25% stake in KPC after the sale. The planned sale is credit positive for TPC because it will use the proceeds to reduce its consolidated debt, which TPC reported at INR401.7 billion ($6.7 billion) at 31 March, the end of fiscal 2014. We view execution as a key risk. This divestiture announcement comes seven months after TPC announced in January that it would sell its entire 30% stake in PT Arutmin Indonesia (unrated), another Indonesian coal miner, to a Bakrie Group entity for a total consideration of around $500 million. We had expected TPC to complete that divestment by June, but the company now expects to close the deal by the fourth quarter of fiscal 2015. The delayed divestiture suggests that the KPC stake divestiture will also be delayed, which will postpone improvement in TPC’s credit metrics. The sale of both investments will result in an estimated $750 million cash inflow. Assuming that TPC uses the entire post-tax proceeds to pay down debt, we project TPC’s reported debt/book capitalization will improve to just below 70% in fiscal 2015 from 72% in fiscal 2014. Exhibit 1 shows TPC’s group structure following the completion of the transaction.
MOODY’S CREDIT OUTLOOK
10 JULY 2014
NEWS & ANALYSIS
Credit implications of current events
Tata Power Company’s Group Legal Entity Structure Post-sale of Stakes in Arutmin, KPC and KPCRelated Power Infrastructure Companies
Tata Power Company Ltd (B1 negative)
Coastal Gujarat Power Ltd
Tata Power Delhi Distribution Ltd
Maithon Power
Industrial Energy Limited
Powerlinks Transmission Ltd
Tata Power Renewable Energy Ltd
Assets to be fully/partially disposed to a Bakrie Group entity 25% 5%
Bakrie Group
KPC Associated Companies
Bumi (Ca stable)
Arutmin and Associated Companies
Source: Tata Power Company
Although TPC benefits from its share of the Indonesian coal mines’ earnings, including earnings from KPC, declining coal prices and margins have eroded their cash contributions to TPC. Therefore, the loss in cash contributions following the sale will be outweighed by debt-reduction benefits. We estimate free cash flow to interest coverage will rise above 1.7x in fiscal 2016 from the 1.6x we expect when TPC releases its full-year results for fiscal 2014. Furthermore, KPC will continue to supply coal to TPC per its existing agreement, which ensures the availability of coal for TPC.
MOODY’S CREDIT OUTLOOK
10 JULY 2014
NEWS & ANALYSIS
Credit implications of current events
Simone Zampa Vice President - Senior Credit Officer +44.20. simone. Carlo Giovale Associate Analyst +44.20. carlo.
Hungary’s Law on Retail Loans Increases Loss Expectations for Banks, a Credit Negative
Last Friday, the Parliament of Hungary approved a law that aims to clarify and expand the June 2014 Hungarian Supreme Court decision on the legitimacy of some key terms of foreign currency retail loans. The bill extends its scope to all retail loans, denominated both in local and foreign currency, and includes claims by borrowers for the past ten years. If signed by the head of the state in its current form, which we consider likely, the bill retroactively voids banks’ exchange rate margins by requiring the use of the central bank’s mid rate in all foreign exchange calculations for retail loans. The bill also requires that banks demonstrate that unilateral changes of interest rates and their effect on a borrower’s payment obligations were clearly stated in the loan contracts. The new legislation is credit negative for Hungarian banks because it more than doubles our initial loss expectations for the country’s banking system. If the banks are not able to demonstrate in court that their contracts were sufficiently transparent about the unilateral changes of interest rates, we estimate that this measure, together with the losses associated with voiding the exchange rate margin, would result in compensation payments to retail borrowers of up to 2.6 billion, or 28.3% of the banking system’s total capital. According to our estimate, the payments would reduce the banking sector’s capital adequacy ratio to 12.5% from 17.4% year-end 2013. The country’s biggest lender, OTP Bank NyRt (Ba2 negative, D/ba2 negative 1), announced on 4 July that its 20.2% capital adequacy ratio as of end-March could fall as low as 18.5% as a consequence of this law. Based on the share of retail loans in the loan books of commercial banks we rate, the following banks risks paying the largest amounts in compensation: FHB Mortgage Bank Co. Plc. (B2 negative, E+/b3 negative), Erste Bank Hungary Rt (B2 negative, E/caa1 stable), Kereskedelmi & Hitel Bank Rt. (Ba3 negative, E+/b2 stable) and OTP Bank NyRt, mostly through its wholly owned OTP Jelzalogbank Rt (OTP Mtge Bk) (Ba2 negative, D/ba2 negative). As Exhibit 1 shows, retail loans comprise 48% of the banking system’s total loan book.
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.
MOODY’S CREDIT OUTLOOK
10 JULY 2014
NEWS & ANALYSIS
Credit implications of current events
Hungarian Banks’ Loan Books’ Composition, First-Quarter 2014
Foreign Currency Retail 28% Corporate & SME 46%
Local Currency Retail 20% Government (central, regional and municipal) 6%
Source: National Bank of Hungary
Our estimate indicates that the potential losses from this law are significantly higher than the 1 billion losses that the banking system faced in 2011 when the government imposed the early repayment scheme for foreign-currency mortgages (at below-market exchange rates). However, the banking system’s current capital position is also stronger compared with the total capital adequacy ratio of 12.7% at 30 September 2011. The potential losses we estimate could therefore return capital adequacy to this level. We expect the bill passed last Friday will be followed by another law in the autumn, which will define the way financial settlements between banks and borrowers will be made. This latest measure adds to a series of measures taken by the government over the past four years aimed mainly at tackling the burden of Hungarian households’ foreign currency debt. The measures have so far resulted in losses for the banking system and have proven unsuccessful in containing the deterioration of banks’ retail portfolios. As Exhibit 2 shows, as of 31 March, nonperforming retail loans in the banking system were almost 24% in the foreign currency segment and 12% in the local-currency segment. However, borrowers’ debt repayment capacity and discipline could be gradually restored with this latest measure if the debt service is significantly reduced and confidence in the banking sector improves.
Hungarian Banks’ Retail Mortgage Portfolios’ Asset Quality
Nonperforming FX Mortgages 25% 20% 15% 10% 5% 0% Nonperforming HUF Mortgages
Note: Nonperforming loans are overdue more than 90 days. Source: National Bank of Hungary
MOODY’S CREDIT OUTLOOK
10 JULY 2014
NEWS & ANALYSIS
Credit implications of current events
Simon Chen, CFA Assistant Vice President-Analyst +65. simon. Shaoyong Beh Associate Analyst +65. shaoyong.
Philippine Banks’ New Real Estate Stress Test Is Credit Positive
Last Friday, the Philippine central bank, Bangko Sentral ng Pilipinas, published new stress test requirements for the real estate exposures of Philippine banks. These new requirements are credit positive for Philippine banks because they will impose higher minimum capital requirements on banks that lend more heavily to the real estate sector, and will serve as a proactive measure to regulate banks’ lending to the sector. The new stress test requires banks to assume a write-off of 25% of their property exposures, 2 and impose minimum capital thresholds of a 6% common equity Tier 1 (CET1) ratio and a 10% total capital ratio after incorporating the effect of the stressed losses on the banks’ capital. The requirements become effective 19 July. Real estate loans in the Philippines have grown rapidly over the past five years, fuelled by robust economic growth and strong domestic demand. The compound average growth rate of banks’ real estate loans over 2009-13 was 22%, doubling the overall banking system loan growth of 11%. As shown in Exhibit 1, the growth rate of real estate loans for some of our rated Philippine banks also exceeded that of the industry. As of the end of 2013, Philippine National Bank (PNB, Ba2 positive, D-/ba3 positive 3) and Metropolitan Bank & Trust Company (MBT, Baa3 positive, D+/baa3 positive) had higherthan-industry-average real estate exposures as a percentage of gross loans and “real and other properties acquired” (so-called ROPA, the term commonly used for foreclosed properties).
Real Estate Exposures of Rated Philippine Banks
Real Estate Loans to Gross Loans and ROPAs - left axis ROPAs to Gross Loans and ROPAs - left axis 5-Year to 2013 Cumulative Average Growth Rate-Real Estate Loans - right axis 25% 20% 15% 10% 5% 0% PNB MBT BDO RCBC BPI Philippine Industry 35% 30% 25% 20% 15% 10% 5% 0%
Note: BDO = BDO U BPI = Bank of the Philippine I MBT = Metropolitan Bank & Trust C PNB = Philippine National B RCBC = Rizal Commercial Banking Corporation. Source: Banks’ disclosures, Bangko Sentral ng Pilipinas, Moody’s Investors Service
As a result of the banks’ high exposure to real estate sector, we estimate that MBT and PNB would need to maintain the highest amount of additional capital buffer among our rated Philippine banks at 400-430 basis points above the minimum CET1 ratio of 6% (see Exhibit 2).
This includes real estate loans, real and other properties acquired (ROPA), non-current assets held for sale, and other real estate related exposure. The ratings shown are the bank’s deposit rating, its standalone bank financial strength rating/baseline credit assessment and the corresponding rating outlooks.
MOODY’S CREDIT OUTLOOK
10 JULY 2014
NEWS & ANALYSIS
Credit implications of current events
CET1 Ratios of Rated Philippine Banks Exceed Minimum Capital Requirements
Minimum CET1 Ratio 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Additional CET1 Needed CET1 Ratio at March 2014
Note: BDO = BDO U BPI = Bank of the Philippine I MBT = Metropolitan Bank & Trust C PNB = Philippine National B RCBC = Rizal Commercial Banking Corporation. Source: Banks’ disclosures, Moody’s Investors Service
However, our results show that the CET1 ratios of the Philippine banks are well positioned to meet the stress test requirements. The banks’ CET1 ratios as of the end of March 2014 are well in excess of the minimum capital requirements, including the additional capital required under the new stress test requirements. We expect the stress test requirements will force the banks to be more disciplined in their real estate lending, and will act as a measure to regulate the credit extended to the real estate sector and prevent imbalances created by over-supply or property prices from reaching unsustainable levels. Property prices in the Philippines have so far generally risen in tandem with per capita GDP, by about an average of 8% per year since 2009, according to property consultant, Colliers International.
MOODY’S CREDIT OUTLOOK
10 JULY 2014
NEWS & ANALYSIS
Credit implications of current events
Diego Kashiwakura, CFA Vice President-Senior Analyst +55.11. diego.
ACE Limited’s Purchase of Itaú Seguros’ Corporate Insurance Division Is Credit Positive for Itaú Seguros
On Friday, ACE Limited (unrated, parent of ACE INA Holdings Inc., A3 stable) announced that it had reached a definitive agreement to acquire the corporate property and casualty insurance business of Itaú Seguros S.A. (financial strength Baa1 stable) for nearly BRL1.5 billion ($685 million) in cash. The deal will have a limited effect on ACE given its relatively modest size, but is credit positive for Itaú Seguros because it will shed one of its riskier business lines. Itaú Unibanco is selling the business segment to reduce its cost of capital because insurance activities have higher capital requirements under the Basel III regulatory regime. Based on pro-forma financials as of 31 December 2013, the corporate insurance operation sold to ACE comprised assets of BRL5.8 billion ($2.6 billion), which was about 25% of Itaú Seguros’ total assets. The transaction will reduce Itaú Seguros’ product risk profile by reducing the insurer’s more volatile claims exposures, leaving it primarily with more granular and less volatile claim exposures such as extended warranty, life, and personal accident, for which losses are usually known and paid shortly after a loss occurs. Although the divestiture will reduce the company’s business footprint and product diversification, we believe Itaú Seguros will maintain a leading position in the Brazilian property and casualty insurance market, supported by the strong franchise of Itaú Unibanco and its diverse distribution channels. The transaction should also improve profitability by allowing Itaú Seguros to focus on products that are less volatile and provide a higher return on capital than corporate property and casualty lines. This dovetails with the company’s distribution and sales strategy, which is already focused on high-margin, stable retail products that are closely tied to its bancassurance model, in which the bank provides its insurance subsidiaries with direct access to its banking customers via its branch networks, calling centers, and direct mail and internet. For ACE, the acquisition is consistent with the company’s strategy of building general insurance franchises in faster-growing markets in Latin America and Asia, where the group already has an established footprint. In 2013, ACE made significant acquisitions in Mexico, the second-largest economy in Latin America behind Brazil. In this regard, ACE’s expertise in underwriting large P&C insurance coverage should allow it to capitalize on increased insurance demand in Brazil, which has grown at a 12% annual compound rate over the past five years. Upon completion of the deal, ACE will be one of the largest commercial P&C insurers in the country, where the group has a longstanding presence.
MOODY’S CREDIT OUTLOOK
10 JULY 2014
NEWS & ANALYSIS
Credit implications of current events
Benjamin Serra Vice President C Senior Credit Officer +33.1. benjamin.
German Life Insurance Reform Is Credit Negative for Holding Companies
On Friday, the German Parliament approved life insurance reform designed to help insurers withstand a low interest rate environment, notably by preventing life insurers from paying dividends if interest rates do not significantly rise from their current level. 4 The reform, which we expect will pass into law by month end, is credit negative for the holding companies of German life insurers because it reduces their ability to extract profits from these insurers. The reform is also credit negative for most German life insurers because it will disrupt the market and negatively affect sales and profits, but it will be positive for the weakest insurers. Holding companies owning German life insurers will not be able to use insurer profits to pay interest on holding company debts, or for other corporate purposes, which is credit negative. This will affect holdings of German groups, such as Allianz SE (Aa3 stable) and Munich Reinsurance Company (financial strength Aa3 stable), but also international groups headquartered abroad, including AXA (A2 stable), Assicurazioni Generali SpA (Baa2 stable) and Zurich Insurance Company Ltd (A1 stable). These companies, as shown in Exhibit 1, generate a material share of their profits from the German life business.
Contribution of German Life Companies to Selected Groups in 2013
Group German Life Profits as Percent of Group Profits
Allianz AXA Generali Munich Re Zurich
* Based on operating profits, ** Based on net income. Source: companies’ annual reports
9%* 3%** 8%* 4%** 4%*
The effect will be less important for those groups that have a profit transfer agreement in place between all German entities, such as the Allianz group, where profits are shared between Allianz SE, the group’s holding company, and Allianz Lebensversicherungs AG (financial strength Aa2 stable), the German life entity. In such cases, profits from the life subsidiaries already flow to the holding company, before any dividend payment. Assicurazioni Generali has also profit transfer agreements in place between its German entities. The reform will also negatively affect German life insurers’ reported profits. Currently, when insurers underwrite a new policy, they are allowed to defer selling expenses of up to 4% of the premiums and spread this charge over several years. The reform will limit the amortizable amount to 2.5% of the premiums. Because insurers and their distributors will not be able to immediately negotiate reduced commissions, which are the bulk of insurers’ policy acquisition costs, the insurers will record higher costs and lower profits initially. We expect that insurers will look to reduce distribution payments, but this will be disruptive given the strong role of agents and brokers in the German market and the reliance of these
Insurers will not be allowed to pay any dividend if the shortfall between assets and liabilities, valued on an economic basis, is higher than the net income.
MOODY’S CREDIT OUTLOOK
10 JULY 2014
NEWS & ANALYSIS
Credit implications of current events intermediaries on commissions. Recent examples from the UK and the Dutch markets, 5 where similar transitions are happening, show that this will most likely result in reduced sales and in lower profitability. In addition, the reform will increase the percentage of risk results (premiums received to cover mortality, disability and other insurance risks minus the amount of claims related to these risks) that insurers are required to share with policyholders to 90% from 75% (see Exhibit 2). The reform also includes creditpositive measures, such as a reduction in the maximum guaranteed rate on new business (to 1.25% from 1.75%), and confirmation that insurers have no obligation to share unrealised gains on fixed-income securities when the insurer’s ability to meet its guarantees is at risk (see Exhibit 2). Overall, the reform will be credit positive for life insurers that are the most vulnerable to a prolonged low interest rate environment. Hence, the Bundesbank indicated that the reform would reduce the number of companies that would fail its severe stress test to 12 from 32 (over a total of 85). However, for the strongest companies, we believe that the reduction in profits and the disruption in the market that insurers will face in the near term overwhelm the positive credit implications.
Main Measures of German Life Insurance Reform and Their Credit Implications
Measure Credit Implication for German Life Insurers Credit Implication for German Life Insurance Holding Companies
Ban on dividend if the insurer’s ability to meet its guarantees is at risk Insurers’ deferral of acquisition costs declines to 2.5% of premiums from 4% of premiums
Credit positive because it will strengthen life insurers’ capitalisation
Credit negative because it blocks holding company access to insurer’s profits Credit negative because of reduced profits
Credit negative. Although it does not change the insurers’ economics and only accelerates the recognition of expenses, life insurers’ profits will initially decline if they are not able to lower acquisition costs. We estimate the market effect in 2015 at around 1 billion in the worst case, 6 which is two thirds of the net income reported by the industry in 2012. We expect this will incentivise insurers to lower commissions, which will affect distributors and reduce sales of traditional products Credit negative because it will reduce insurers’ profits. Based on 2012 figures, this would create an obligation to share 0.9 billion more with policyholders. However, in practice, the effect on insurers’ net profits will be smaller, because insurers were distributing more than the required minimum to policyholders Credit positive as it will gradually help lower the 3.2% average guaranteed rate. However, in the short term, it will make traditional life products less attractive Credit positive. Currently, insurers have to share 50% of their unrealised gains on investments, including fixed-income investments, with policyholders who decide to lapse or whose policy expires. When interest rates decrease, and unrealised gains on fixed-income securities increase, this rule becomes increasingly costly for insurers and reduces their capital resources. The reform will ease these pressures
Increase to 90% the percentage of underwriting risk results that insurers are required to share with policyholders from 75%. Reduction of the maximum guaranteed rate on new business to 1.25% from 1.75% No obligation to share unrealised gains on fixed-income securities when the insurer’s ability to meet its guarantees is at risk
Credit negative because of reduced profits
Credit positive through improvement in the risk profile of the subsidiary Credit positive
Sources: German Ministry of Finance, Moody’s Investors Service
In the UK and the Netherlands, insurers cannot collect commissions and customers must pay intermediaries for their advice. Although this situation is not similar to what is envisaged in Germany, we believe this has comparable effects on intermediaries. 6 On average, between 2007 and 2012, German life insurers sold 140 billion of regular premium policies per year (including future regular premiums for business underwritten during the year). In the worst case, 4% of these premiums were deferred before the reform. After the reform, insurers will be allowed to defer 2.5% of the premiums only. This is an additional amount of 2.1 billion to account for as acquisition cost. After tax and policyholders’ participation, we estimate the net additional cost at around 1 billion.
MOODY’S CREDIT OUTLOOK
10 JULY 2014
NEWS & ANALYSIS
Credit implications of current events
Kenji Kawada Vice President C Senior Analyst +81.3. kenji.
Dai-ichi Life Will Fund Acquisition of Protective Life with Share Issuance, a Credit Positive
On 3 July, Dai-ichi Life Insurance Company, Limited (financial strength A1 stable) announced that it will issue around ¥250 billion in new shares and use the proceeds to partially fund its ¥582 billion acquisition of Protective Life Corporation (Baa2 review for upgrade), the holding company of Protective Life Insurance Company (financial strength A2 stable), announced in early June. Dai-ichi Life will utilize its cash or other liquid assets to pay the remaining amount. It plans to purchase all of Protective's shares by January 2015 if the deal is approved by Protective’s shareholders and Japanese and US regulators. The share issuance is credit positive for Dai-ichi Life because the new issuance mitigates the financial burden from the acquisition. We estimate that the current issuance plan will bring the company’s total leverage ([financial debt + other debt and Moody’s adjustments] divided by [financial debt + other debt and Moody’s adjustments + adjusted shareholders’ equity]) to 17% on pro-forma consolidated base, much lower than the 26% if Dai-ichi opts to finance the deal completely with debt. Dai-ichi Life’s use of a public offering ― the first public offering since it demutualized and went public in April 2010 ― to fund this acquisition indicates its stronger ability to raise equity as a stock company compared with its peers that remain mutuals. As shown in the exhibit below, Dai-ichi Life has focused on a growth strategy (under its mid-term business plan) that aims to diversify its business portfolio in terms of geography and life cycle through overseas expansion. While Japan’s other major life insurers also have similar global expansion plans in response to their shrinking domestic market, this latest development demonstrates how Dai-ichi’s access to the stock market will give it a lead in this transformation.
Dai-ichi Life's Overseas Investment after Demutualization in April 2010
Year Announced Country Company Stake Amount ¥ Billion
Australia USA Indonesia USA
TAL Dai-ichi Life Australia Pty Ltd Janus Capital Group Inc. Panin Life and Panin Internasional Protective Life Corporation
71% 19.5% 40% 100%
¥103.5 NA ¥34.3 ¥582.2
*Dai-ichi Life originally purchased 29% of TAL's share in 2008 and raised its ownership to 100% in 2011. Source: Dai-ichi Life
MOODY’S CREDIT OUTLOOK
10 JULY 2014
NEWS & ANALYSIS
Credit implications of current events
Sovereigns
Tom Byrne Senior Vice President +65. thomas. David Erickson Associate Analyst +65. david.
A China-Korea Free Trade Agreement Is Credit Positive for Both Countries
Last Thursday, the leaders of China (Aa3 stable) and Korea (Aa3 stable) pledged to conclude a free trade agreement (FTA) by the end of this year. A deal would be credit positive for both countries because it would deepen investment flows and provide a boost to GDP. But it would especially benefit Korea, both from an economic and a geopolitical perspective. It would provide the country with an FTA with each of its three largest export destinations―the US, the European Union (EU) and China. China’s President Xi Jinping and South Korea’s President Park Geun-hye announced the goal at a press conference during Mr. Xi’s first state visit to Seoul. The pact, talks on which began in May 2012, would build on already strong economic ties: China is the largest trading partner for Korea, which in turn is one of China’s most important investors. Two-way trade rose 2.0% year over year in the first five months of 2014, and reached $229 billion in 2013, marking a 35-fold increase since the start of diplomatic ties 22 years ago. Korea’s bilateral trade with China, meanwhile, is worth more than that with its next two largest trading partners, the US and the EU. Although Korea has already forged FTAs with 46 countries, including major export markets such as with member countries of the Association of Southeast Asian Nations, the US and the EU, it would garner the most economic benefit from the proposed deal with China because it would gain increased access to its neighbor’s larger market. The direct effect of tariff liberalization alone would increase Korea’s real GDP, and substantially increase its services trade and investment. China has 11 FTAs, the first of which was the Closer Economic Partnership Arrangement with both Hong Kong (Aa1 stable) and Macao (Aa2 stable) in 2003. The 11 FTAs are with economies that receive more than 30% of all Chinese exports. The FTA between China and Korea would have a smaller effect on China’s economy than Korea’s because only about 4% of Chinese exports are destined for Korea, versus more than 25% of Korean exports that are delivered to China (see exhibit). 2013 Exports Covered by Current FTAs and Also a China-Korea FTA
A China-Korea FTA would boost FTA coverage for Korea to a very high level of more than 65% of all exports
70% 60% 50% 40% 30% 20% 10% 0% Korea -Current FTAs Korea - Current FTAs + China China - Current FTAs China - Current FTAs + Korea
Source: Bank of Korea, Statistics Korea, China Customs
MOODY’S CREDIT OUTLOOK
10 JULY 2014
NEWS & ANALYSIS
Credit implications of current events Concluding the pact will not be smooth sailing: negotiators will have to resolve contentious issues such as China’s access to Korea’s agricultural market, and Korea’s access to China’s automobile market. But a drive to seal a deal on a 12-nation Trans-Pacific Partnership (TPP) trade pact by the time of the Asia-Pacific Economic Cooperation summit in Beijing in November could provide impetus for China and Korea, which are not involved in TPP, to augment their free-trade zones within the same time frame. The pledge goes beyond trade, forming part of a broader push to strengthen economic and political ties between the two nations. This could benefit Korea geopolitically if a stronger relationship with Beijing helped contain Pyongyang’s hostile policies toward Seoul. To that end, the joint statement affirmed opposition to nuclear weapons on the Korean peninsula and promised to attempt to resume stalled six-party talks aimed at denuclearizing North Korea.
MOODY’S CREDIT OUTLOOK
10 JULY 2014
NEWS & ANALYSIS
Credit implications of current events
US Public Finance
Tom Aaron Assistant Vice President C Analyst +1.312.706.9967 thomas.
Illinois Supreme Court Casts Doubt on Recent State and Local Pension Reform Efforts, a Credit Negative
On 3 July, the Illinois Supreme Court found that state constitutional protections for pensions apply to retiree health care subsidies that were cut by the State of Illinois (A3 negative). The decision reversed a lower court’s March 2013 decision and remanded the case to the lower court for further proceedings. The court’s decision is credit negative for Illinois and local governments such as the City of Chicago (Baa1 negative). The majority of the justices expressed views that run counter to the rationale used in recent pension reform legislation for certain city and state plans. We therefore perceive increased risk that the Illinois Supreme Court will rule the pension reform legislation unconstitutional, which would jeopardize $32.7 billion of pension liability reduction. The ruling shows that most of the justices have an expansive view of how the pension clause (Article 13, Section 5 7) should apply to pensioners. The majority opinion states that, “Where there is any question as to legislative intent and the clarity of the language of a pension statute, it must be liberally construed in favor of the rights of the pensioner.” This and other sections of the ruling signal how the court could side with pensioners when it eventually addresses the constitutionality of recent state pension reforms, which have already been challenged, as well as Chicago’s pension reforms, which we expect will be challenged. The court still may be persuaded by arguments outside the scope of the current ruling, such as the idea that extreme pension funding pressure prevents the state or a local government from providing for public health and safety, a responsibility higher than adhering to pension promises. The ultimate outcome on the state’s pension reforms will remain uncertain until the court rules on their legality directly. In December 2013, the state passed sweeping legislation to address the severe underfunding of its pension systems. The legislation reduced cost-of-living adjustments (COLAs) for employees and retirees in four of the five state pension systems. The legislation also increased state contribution requirements and reduced employee contribution rates. The state’s actuaries estimated that these and other changes reduced accrued liabilities as reported by the three largest pension systems by approximately $21 billion as of 30 June, reducing Moody’s adjusted net pension liabilities (ANPLs) for the three largest systems ― the Teachers’ Retirement System (TRS), State Employees’ Retirement System (SERS) and State Universities Retirement System (SURS) ― by a combined $32.7 billion, or 17%. In May, a lower court judge barred the state from implementing its reforms until lawsuits challenging the changes were resolved. The matter will almost certainly be appealed to the state Supreme Court, no matter the outcome in the lower court. In June 2014, the Illinois governor signed pension reform legislation affecting two of the City of Chicago’s four troubled pension plans, which included similar reform measures such as COLA reductions. To date, no legal challenge to Chicago’s pension reforms has been formally launched, although labor groups have stated they intend to file a lawsuit.
Article 13, Section 5 states that, “[m]embership in any pension or retirement system of the State, any unit of local government or school district…, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”
MOODY’S CREDIT OUTLOOK
10 JULY 2014
NEWS & ANALYSIS
Credit implications of current events In 2012, the state enacted Public Act 97-695, which eliminated statutory requirements for the state to pay for a specified portion of retiree health insurance premiums. The state used this law to increase retiree payments toward premiums, including employees who retired prior to enactment of the law. The move provided annual savings of approximately $90 million, according to the state. In March 2013, a lower court dismissed challenges to the law, finding that the changes did not affect core pension annuities and thus were permissible. The state supreme court rejected this argument, ruling that state constitutional pension protections are not limited to only core pension annuities, but extend to other benefits provided under the retirement systems. The only remaining appellate option for the state on this matter may be the US Supreme Court.
MOODY’S CREDIT OUTLOOK
10 JULY 2014
RECENTLY IN CREDIT OUTLOOK
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RECENTLY IN CREDIT OUTLOOK
NEWS & ANALYSIS
Corporates
» China’s Home-Grown IT Approach Is Credit Negative for US
» California Plan to Increase CalSTRS’ Contribution Rates Is
Credit Positive Sovereigns
» Brazil’s Slowing Growth and Increasing Inflation Are
Technology Firms Credit Negative Credit Positive Credit Positive Credit Positive
» Kinetic Concepts’ Settlement with Wake Forest Is » Devon Energy Sale of Natural Gas Assets to Linn Energy Is » Ardagh’s Sale of Six Former Anchor Glass Plants Is » Wienerberger’s Acquisition of Tondach Group Is » KT’s Plan to Sell KT Rental and KT Capital Is Credit Positive
Credit Negative Credit Positive
» Egypt’s Commitment to Reducing Its Fiscal Deficit Is
US Public Finance
» New York State to Benefit from BNP Paribas Settlement
RATINGS & RESEARCH
Rating Changes Last week we downgraded Leidos Holdings, AES Puerto Rico, Banco Mercantil do Brasil, Cassa di Risp.di Bolzano-Sudtiroler Sparkasse, GCB Bank, NCG Banco, Municipality of Nogales (Mexico) and Puerto Rico, and upgraded Delta Air Lines, Forest Laboratories, Banco de Credito del Peru, Scotiabank Peru, Banco Internacional del Peru, Corporacion Financiera de Desarrollo, Peru and 10 Hyundai US auto ABS tranches, among other rating actions. Research Highlights Last week we published on global consumer products, US gaming, US oil and gas, Atlantic City casinos, US online retail, Indian oil companies, Australian public-private partnerships, Australian mining, US technology, European Union energy policy, Sri Lankan banks, Indonesian banks, Japanese insurers, Kuwaiti banks, Malaysian Islamic banks, aircraft leasing, US commercial auto insurers, US workers’ compensation, Latin American sovereigns, Mexican states, French local governments, the US Highway Trust Fund, US local governments, US public universities, US public pensions and US sewer utilities, among other reports.
Infrastructure
» Vectren’s Agreement to Sell Mining Subsidiary Is Credit
Positive for Its Utilities
» Norway’s Stricter Requirements on Capital Models Are Credit
Positive for Banks and Covered Bonds Issuers
» Lithuanian Central Bank Proposals to Strengthen Credit
Unions Are Credit Positive
» China’s Revision to Regulatory Liquidity Ratio Is Credit
Negative for Domestic Banks Insurers
» Puerto Rico’s New Debt Law Is Credit Negative for
Financial Guarantors for Life Insurers
» US Treasury Rules on Longevity Annuities Are Credit Positive » Old Republic’s Corrective Plan for Mortgage Insurers Gains
Regulatory Approval, a Credit Positive Credit Positive for Life Insurers
» Norwegian Rules to Convert Guaranteed Paid-Up Policies Are
MOODY’S CREDIT OUTLOOK
10 JULY 2014
News & Analysis: Elisa Herr and Jay Sherman
PRODUCTION ASSOCIATE
Alisa Llorens
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