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Credit Outlook Summary - April 9, 2015

Core Content

This document provides an analysis of credit implications of recent events across various sectors, including Corporates, Infrastructure, Banks, and Insurers. It highlights how these events affect financial stability, leverage, liquidity, and growth potential for the respective entities.

Main Points by Sector

Corporates

• Go Daddy's IPO:
  • GoDaddy Inc. completed an IPO on April 1, 2015, raising $520 million.
  • Proceeds will be used to pay off $300 million in debt and increase cash balances by ~$125 million.
  • The IPO is credit positive, leading to a rating upgrade from B1 to Ba3 with a stable outlook.
  • Leverage is expected to decline to ~3.5x by mid-2016.
  • Free cash flow of ~$180 million is projected for the 12 months ending June 30, 2016.
  • Tax Receivable Agreements (TRAs) may reduce free cash flow as taxable income rises.
  • The company has a strong market position in domain name registration, with ~21% global market share.
  • Recent brand realignment and product expansion should support ARPU growth.

Teva's Acquisition of Auspex

• Teva Pharmaceutical Industries Ltd. announced the acquisition of Auspex Pharmaceuticals Inc. for $3.2 billion.
• The deal is credit positive as it enhances the product pipeline without significantly increasing leverage.
• Auspex's drug SD-809 is in Phase III trials for Huntington's disease and tardive dyskinesia.
• Teva is expected to maintain leverage around 2.0x.
• The acquisition may help Teva position for growth in 2017 and beyond, despite potential revenue declines in 2016 from Copaxone and Azilect.

Royal Philips' Sale of Stake in Lumileds

• Royal Philips N.V. sold an 80.1% stake in Lumileds to a consortium for $3.3 billion.
• The sale is credit positive, improving Philips' debt-to-EBITDA ratio and reducing exposure to volatile operations.
• Lumileds is a leading player in LED components and automotive lighting.
• Philips retains 19.9% interest, including 34% in US operations.
• The sale will not affect reported EBITDA but will improve Moody's-adjusted metrics.

Country Garden's Equity Issuance

• Country Garden Holdings Company Limited plans to issue 2.24 million shares to Ping An Insurance for ~HKD6.3 billion.
• The issuance is credit positive, lowering debt leverage and improving liquidity.
• Adjusted debt/total capitalization is expected to decline from 57.5% to 55.4%.
• Cash to short-term debt is projected to increase from ~182% to ~216%.
• The move reflects proactive capital structure management and a reduced reliance on debt financing.

Chinese Property Developers

• Relaxation of mortgage lending terms and housing tax rules is credit positive for Chinese property developers.
• Developers with high exposure in first- and second-tier cities and a focus on home upgraders will benefit most.
• The policy change is expected to support sales volume but not significantly improve pricing power due to high inventory levels.
• The 2014 September policy helped narrow the full-year sales decline from 10.8% to 7.8%.

Infrastructure

• US West Coast Ports:
  • DP World's purchase of the Fairview Terminal in Prince Rupert, Canada, poses negative credit pressure on US West Coast ports.
  • Prince Rupert's expansion will increase its capacity to ~1.3 million TEUs annually, making it more competitive with US ports.
  • The port's proximity to Asia and lower HMT exposure make it attractive for cargo.
  • The expansion is expected to be completed by mid-2017.
  • The sale is credit positive for Duke Energy, as it removes a volatile, non-regulated business from its operations.

Banks

• Russia's Bank Recapitalisation Plan:
  • Russia's government introduced Tier 1 capital instruments to enhance loss-absorption capacity.
  • The plan includes capital injections of up to RUB1 trillion, with Tier 1 instruments providing better capital support than Tier 2.
  • However, the amount is insufficient to fully offset the economic downturn's impact.
  • Banks must increase lending to key sectors by at least 12% over three years, increasing exposure and concentration risks.
  • State-controlled banks may be more likely to receive Tier 1 capital, which could help mitigate credit challenges.
  • Private banks are expected to opt for Tier 2 instruments due to dilution concerns and government preferences.

Key Information

• Go Daddy: Improved leverage and free cash flow post-IPO, rating upgraded to Ba3.
• Teva: Credit positive acquisition of Auspex without significant leverage increase.
• Royal Philips: Credit positive divestiture of Lumileds stake, improving capital structure.
• Country Garden: Credit positive equity issuance, improving liquidity and leverage.
• Chinese Property Developers: Policy changes support demand, but pricing power remains limited.
• Prince Rupert Port: Increased capacity and competitiveness could divert cargo from US ports.
• Duke Energy: Credit positive sale of non-regulated generation assets, reducing risk.
• Russian Banks: Tier 1 capital instruments are credit positive but come with increased lending requirements and risks.

Recent Updates

• Articles from the 30 March Credit Outlook are referenced.
• The document is part of Moody's Analytics' broader market and credit analysis offerings.

Summary

The document outlines a range of credit implications across corporate, infrastructure, and banking sectors, emphasizing how strategic financial moves and policy changes can affect leverage, liquidity, and growth potential. It provides a detailed analysis of each event, highlighting both positive and negative impacts, and offers projections and insights into future financial performance.