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Credit Outlook Summary

Core Content

This document provides an analysis of credit implications from various current events across different sectors, including Corporates, Infrastructure, and Banks. It highlights how these events affect the credit profiles of the involved entities, with a focus on financial metrics, legal risks, and market conditions.

Main Points

Corporates

• Johnson & Johnson (J&J): A $417 million jury award for talcum powder-related claims is credit negative due to potential legal liabilities and reduced liquidity. Despite the company's strong cash reserves and low debt/EBITDA ratio (1.6x), the number of lawsuits and the possibility of similar rulings in other states pose a risk.
• Herbalife Ltd.: The planned share repurchase of up to $600 million is credit negative as it will reduce retained cash flow to net debt from 69.8% to 41.9%. The company is also facing potential risks from a go-private transaction and regulatory scrutiny in China.
• Kellermeyer Bergensons Services (KBS): The acquisition of Varsity Facility Services is credit positive, increasing revenue, geographic footprint, and end-market diversification. The transaction slightly improves the company's debt/EBITDA ratio and is expected to support future growth.

Infrastructure

• Sempra Energy: The acquisition of Oncor Electric Delivery Company LLC is credit negative due to increased holding company debt and the challenges of the Cameron LNG project. While the acquisition offers diversification and growth opportunities, the credit risks outweigh the benefits.

Banks

• Bank of Cyprus (BoC): Increased provisions and reduced capital are credit negative, as the bank faces significant losses from nonperforming loans (NPLs). The CET1 ratio dropped to 12.3%, and the total capital ratio decreased to 13.7%, signaling financial stress.
• Omani Banks: Rising interest rates are credit positive for Omani banks, as they support profitability and net interest margins. The Central Bank of Oman raised its policy rate, leading to higher lending rates and improved gross yields. Banks with a high proportion of corporate loans and CASA deposits are expected to benefit the most.

Key Information

Johnson & Johnson

• Jury Award: $417 million in damages for talcum powder-related claims.
• Liquidity: $12.9 billion in cash and investments as of 2 July 2017.
• Debt/EBITDA: 1.6x, expected to decline to 1.4x by 2018.
• Legal Strategy: J&J plans to appeal the ruling based on scientific evidence.
• Litigation Risk: The number of lawsuits is expected to grow, increasing financial liability.

Herbalife Ltd.

• Share Buyback: Up to $600 million in common shares.
• Financial Impact: Retained cash flow to net debt will drop to 41.9% by the end of 2017.
• Go-Private Transaction: Previously discussed but terminated.
• China Regulations: Potential impact on sales and debt-to-EBITDA ratio.

Kellermeyer Bergensons Services (KBS)

• Acquisition: Purchased Varsity Facility Services for an undisclosed amount.
• Revenue Growth: Pro forma revenue increases to $600 million from $465 million.
• Leverage: Debt/EBITDA declines from 6.1x to 5.9x.
• Liquidity: Improved by amending credit agreements and reducing leverage covenants.
• End-Market Diversification: Increased exposure to healthcare and education sectors.

Sempra Energy

• Acquisition: $9.45 billion purchase of Energy Future Holdings Corp.
• Holding Company Debt: Expected to increase, weakening credit metrics.
• Cameron LNG Delay: Commissioning expected in 2019, delaying dividends.
• Geographic Diversification: Adding Oncor's regulated utility subsidiaries in Texas.
• Regulatory Environment: Beneficial for Sempra due to Texas's credit-supportive policies.

Bank of Cyprus

• Provisions Increase: €500 million in additional loan-loss provisions.
• Capital Ratios: CET1 drops to 12.3% and total capital to 13.7%.
• NPLs: Ratio increases from 40% to 48% of gross loans.
• Regulatory Alignment: Modifications in provisioning assumptions due to ECB requirements.
• Net Interest Margins: Stabilized at 2.4% due to higher gross yields.

Omani Banks

• Interest Rate Rise: Policy rate increased to 1.638% in June 2017.
• Lending Rates: Increased to 5.123% in June 2017.
• Corporate Loans: Comprised 60% of banks' loan books, with floating rates.
• CASA Deposits: Current and savings account deposits are less sensitive to interest rate changes.
• Net Interest Margins: Stabilized at 2.4% for Omani banks in first-quarter 2017.

Recent Analysis Highlights

• J&J's Litigation: Continued legal challenges and potential liability from talcum powder cases.
• Herbalife's Financial Strategy: Share buybacks and potential go-private transaction affect liquidity and leverage.
• KBS' Diversification: Acquisition supports growth and reduces reliance on retail markets.
• Sempra's Diversification: Despite risks, the acquisition offers geographic and regulatory benefits.
• BoC's Capital Stress: Capital ratios fall below previous levels, increasing credit risk.
• Omani Banks' Profitability: Improved net interest margins and gross yields due to rising interest rates.

Conclusion

The document outlines the credit implications of various corporate and banking activities, emphasizing how legal rulings, financial strategies, and regulatory changes impact credit quality. While some transactions like KBS' acquisition and Omani banks' interest rate gains are viewed positively, others such as J&J's lawsuits and Herbalife's share buybacks are seen as credit negative. Sempra's acquisition is deemed credit negative due to increased debt and project delays. The overall analysis provides a detailed view of credit risk factors across different sectors.