27 AUGUST 2012

NEWS & ANALYSIS
Corporates » PayPal Deal with Discover Will Boost Payment Volume for Both, a Credit Positive » Dex One and SuperMedia Combine in a Not-So-Super Deal for Creditors » Inmet Enters Credit Positive Precious Metals Stream Financing Deal » Church & Dwight's Expansion into Vitamins Is Credit Negative » Alpha and Other Appalachian Coal Producers Benefit from Blockage of EPA Rule » US Pension Funding Interest Rates Exceed Industry Estimates and Increase Savings » Atlas Copco's Disposal of Customer Financing Assets Is Credit Positive » Russia's WTO Entry Is Credit Positive for Russian Steel Companies Infrastructure » US Court NOX the SOX off EPA’s Air Pollution Rule, a Credit Positive for Coal-Fired Power Plants » Portugal Cuts Payments to Electricity Generators, Credit Negative for EDP and Endesa Banks » Bolivia's New Foreign Exchange Tax Is Credit Negative for Banks » Higher Allowance on Tax-Free Saving Accounts Is Credit Negative for French Banks Insurers » AIG Marks Credit Positive Milestone as New York Fed Auctions Last of Maiden Lane III » Insurers' Ability to Prune Variable Annuity Features and Maintain Sales Is Credit Positive Money Market Funds » SEC’s Cancellation of Money Fund Reform Vote Is Credit Positive for Fund Managers Sovereigns » Developing Southeast Asia's Accelerating Economic Growth Is Credit Positive Sub-sovereigns » Brazil Increases 17 States' Borrowing Capacity, a Credit Positive » Decelerating Corporate Income Tax Is Credit Negative for Russian Regions 18 12   2  

US Public Finance » Court Rules New York MTA Payroll Tax Unconstitutional, Jeopardizing $1.3 Billion of Annual Revenues Covered Bonds » Proposed Changes to the German Pfandbrief Act Will Improve Transparency, a Credit Positive

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RATINGS & RESEARCH
Rating Changes Last week we upgraded Crown Holdings, MeadWestvaco, and downgraded Education Management, Revel Atlantic City, Big Rivers Electric Corporation, Affirmative Insurance Holdings, Man Group, Coacalco, Mexico; and US RMBS, among other rating actions. Research Highlights Last week we published on North American capital goods, Indonesian coal producers, US coal, US health insurers, US property & casualty insurers, US crop insurance, money market funds, Buenos Aires, US states, New Jersey public medical education, US single-family rental securitizations, and Swedish covered bonds, among other reports. 37 32

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Discover Weekly Market Outlook, our sister publication containing Moody’s Analytics’ review of market activity, financial predictions, and calendar of economic releases. 21  

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MOODYS.COM

NEWS & ANALYSIS
Credit implications of current events

Corporates
Stephen Sohn Vice President - Senior Credit Officer +1.212.553.2965 stephen.sohn@moodys.com Curt Beaudouin Vice President - Senior Credit Officer +1.212.553.1474 john.beaudouin@moodys.com

PayPal Deal with Discover Will Boost Payment Volume for Both, a Credit Positive
On 22 August, eBay Inc.’s (A2 stable) PayPal announced a partnership with Discover Financial Services (Ba1stable) that will allow consumers to use PayPal at more than 7 million merchant locations in the US and potentially more locations internationally. The deal is credit positive for both eBay and Discover because it will increase payment volumes for both companies beginning in the second quarter of 2013. EBay, a market leader in e-commerce payments, will expand its presence in brick-and-mortar stores. Before the Discover deal, it had agreements with just a handful of US retailers, including Home Depot Inc. (A3 stable) and Abercrombie & Fitch (unrated), that allowed customers to use PayPal at the cash register. The alliance follows Starbucks Corporation’s (Baa3 positive) announcement a week earlier of a partnership with San Francisco-based startup Square, under which the coffee retailer will invest $25 million in the electronic payment service and use Square to process credit-card and debit-card transactions in its US stores starting this fall. Square’s alliance with a large merchant intensifies the battle against its direct competitor PayPal. For Discover, the alliance with a leading online commerce player will generate incremental payment volumes through its Discover network, potentially expanding its currently modest card payment market share against Visa Inc. (A1 stable), MasterCard Incorporated (A3 stable), and American Express Company (A3 stable), as shown in the exhibit. Total US Credit & Debit Dollar Volume, First-Quarter 2012 in $ billions
Discover Financial $31.06 Mastercard $283.41 Visa $614.25

American Express $139.60

Source: The Nilson Report

It is also consistent with Discover’s payments strategy to drive increased acceptance and volume by aggressively pursuing alternative payments and new network/acquirer/issuer partnerships. EBay estimates that it processes roughly 20% of online transactions globally on a dollar basis through about 110 million active registered accounts. Equipping PayPal customers with the ability to use their account at the point of sale may prove popular with consumers as the lines between online and offline purchases become blurred.

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Still, for both eBay and Discover, it will likely take several years for the alliance to gain traction. It faces the challenges of adoption by both consumers and merchants. It must also outmaneuver a stampede of competitors trying to gain first-mover advantage in the fledgling “mobile wallet” market, including Google Wallet, Visa and MasterCard, Isis, Square, and the new Merchant Customer Exchange initiative, a collaboration of more than a dozen leading retailers. EBay’s margins on these point-of-sale transactions are likely to be lower than those from online transactions. It will have to pay incremental fees to merchant acquirers, which are payment processors responsible for handling a merchant’s sales transactions. It will also need to spend on sales and marketing to prompt consumers to choose their PayPal card over their existing Visa, MasterCard, or American Express card, or competing wallets, at the point of sale. It will also have to secure merchant acceptance of its card, although it will be helped by the fact that retailers won’t have to buy new equipment because payments will run through the existing Discover network. The increased payment volume could also increase the risk that eBay bears in its burgeoning Bill Me Later loan receivables portfolio, which we estimate could triple or quadruple to $5-$7 billion over the next several years, even excluding additional volume from the Discover alliance. Bill Me Later, which will also be available for physical purchases, enables qualified US consumers to obtain credit at the point of sale when they make an online purchase. With volumes arising from the penetration of offline merchants, the Bill Me Later portfolio could grow at an even faster clip than we anticipated, which will likely expose eBay to greater credit risk.

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Credit implications of current events

Dennis Saputo Senior Vice President +1.212.553.1675 dennis.saputo@moodys.com

Dex One and SuperMedia Combine in a Not-So-Super Deal for Creditors
Last Tuesday, telephone directory publishers Dex One Corp. (Caa3 negative) and SuperMedia Inc. (Caa3 negative) said that they would merge in a stock-for-stock deal. Theoretically, such a merger would be credit positive for lenders because we would expect the combined company to cut costs, thereby improving debt coverage. However, because the yellow-pages business is in such a steep decline, we doubt the combined company will be able to transform the business to digital advertising from print publishing fast enough to preclude another reduction in debt principal (i.e., another distressed exchange). Indeed, we expect another double-digit percentage decline in ad sales and net revenues for directory publishers this year and next, and forecast operating cash flow falling by similar percentages for a few years before the combined company realizes the full synergies from the deal in 2015. The companies estimate annual expense savings of $150-$175 million by 2015, as well as preserved tax attributes tied to Dex One’s bankruptcy of as much as $1.8 billion to improve cash flow. The synergies are largely related to consolidation of functions and elimination of duplicative activities, such as the need for only one tax department. Preserving Dex One’s tax attributes will allow the new company to reduce its tax liability. Management expects the consolidated entity’s tax payments to be nominal for several years after the deal closes. In 2011, SuperMedia paid $143 million in cash taxes; Dex One’s tax liability was $11 million. More important, it remains to be seen whether the business model is viable. Although the merger may enhance digital and mobile-product development, the growth of the digital business will not be fast enough to offset the steep decline in print directories. Additionally, search-engine marketing offers few barriers to entry and little differentiation among providers. One of the conditions to closing the deal is obtaining approvals of credit amendments from Dex One’s and SuperMedia’s lenders. We believe lenders to both companies will be asked to reduce the principal amount of the debt they are owed and expect the lenders will accept. We also expect the combined company to obtain the necessary approvals.

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Credit implications of current events

Darren Kirk, CFA Vice President - Senior Credit Officer +1.416.214.3845 darren.kirk@moodys.com

Inmet Enters Credit Positive Precious Metals Stream Financing Deal
Last Monday, Inmet Mining Corporation (B1 stable) said it reached a deal with Franco-Nevada Corporation (unrated) under which Inmet will receive $1 billion toward development of the massive Cobre Panama copper mine in Panama. The credit-positive deal will bridge the funding gap for Inmet’s 80% share of the project, which we expect will cost the company $4.9 billion. The $1 billion, to be received over approximately three years, combined with Inmet’s $3.3 billion of cash on hand and more than $600 million of expected free cash flow from its existing mines over the next three years, will be enough to develop the mine in Panama. In exchange for the $1 billion funding, Inmet, which is focused primarily on copper and zinc, will sell 86% of its share of the gold and silver extracted from the mine to Franco-Nevada for up to $400 an ounce and $6 an ounce, respectively, far below current market prices. The selling prices are subject to annual inflation adjustments. Inmet and its 20% partner, Korea Panama Mining Corp. (unrated), began construction of the Cobre Panama project in May. The 31-year project has proven and probable reserves of 9.3 million tonnes of copper, 5.2 million ounces of gold, 104 million ounces of silver and 169 thousand tonnes of molybdenum, according to Inmet. Cobre Panama is scheduled to begin commercial production in 2016. Franco-Nevada will begin to remit the $1 billion once Inmet has already invested $1 billion in the Panama project, a milestone it expects to reach in the first quarter of 2013. After that and through 2015, Franco-Nevada will pay Inmet $1 for every $3 Inmet invests in the project until Franco-Nevada has paid the full $1 billion. Inmet will then receive ongoing payments as it delivers gold and silver to Franco-Nevada under the agreement, which extends over the life of the mine. Although the deal provides credit-positive funding, it exposes Inmet to risk. Inmet’s obligation to deliver gold and silver to Franco-Nevada will be secured by Inmet’s interest in the Cobre Panama project, and the amount of gold and silver to be delivered is linked to the amount of copper concentrate that the mine produces. Therefore, Inmet will be exposed to production risk if the mine’s ratio of copper-to-precious metals differs meaningfully from the expectations underlying the deal between the two companies. Nonetheless, Inmet has a buffer in the 14% share of precious metals production that it will retain and an option it has to reduce the production obligation by returning up to 10% of the $1 billion investment. Additionally, the long duration and non-recourse nature of the transaction, which has been contracted by a subsidiary and is not guaranteed by Inmet, are positive credit attributes.

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Credit implications of current events

Janice Hofferber, CFA Senior Vice President +1.212.553.4493 janice.hofferber@moodys.com

Church & Dwight’s Expansion into Vitamins Is Credit Negative
Last Monday, Church & Dwight Co. Inc. (Baa2 positive) said it would acquire Avid Health Inc. (unrated), a maker of gummy-form vitamin supplements, for $650 million in cash. The acquisition, the company’s largest ever, is credit negative because Church & Dwight will be challenged to expand Avid Health’s brands beyond the core children’s market and core club-store and mass channels in the face of deep-pocketed and well-established competitors. The acquisition also involves debt financing, although it will not increase leverage enough to affect the company’s ratings. Church & Dwight is paying nearly 3x revenue and more than 11x EBITDA for Vancouver, Wash.based Avid, whose gummy vitamin brands include Vitafusion for adults and L’il Critters for children. This is a relatively high multiple for Church & Dwight to pay compared with multiples well below 2x sales on most of its major acquisitions since 2000. The price likely reflects strong 20%-plus revenue growth at Avid and possible competition from other bidders given Avid’s strong brands, in-house production and distribution capabilities. With this foray into nutritional supplements, Church & Dwight is entering a competitive and highly fragmented category in which it has no experience. There are also no synergies with its existing businesses, which are focused on laundry, cat litter and niche personal-care brands such as Orajel, Nair and Trojan. According to the company, Church & Dwight does have strong relationships with retailers, which it will need to leverage to expand Avid’s brands in a marketplace crowded by pharmaceutical companies, specialty supplement makers and private-label providers. Major competitors in the multivitamin category include Bayer AG (A3 stable), the maker of Flintstones vitamins and One A Day; Pfizer Inc. (A1 stable), the maker of Centrum vitamins; NBTY Inc. (B1 stable), which sells vitamins under Nature’s Bounty and other brands; and private-label offerings, including Walgreen Co.’s (Baa1 negative) Finest brand, Costco Wholesale Corp.’s (A1 stable) Kirkland brand and the Vitamin Shoppe brand. Church & Dwight will have to make substantial investments in production capacity, marketing and promotion, and distribution to expand Avid’s adult brand in grocery stores – investments that could pressure margins. At the same time, its children’s brand could face headwinds in coming years from a decline in childbearing in the US. The number of US births has declined every year since the all-time high of 4.32 million in 2007, falling to 3.96 million last year, according to the National Center for Health Statistics. The company will also use debt to fund the acquisition, but we do not expect an effect on its credit rating. Although the company has increased its dividend over the past year and has ramped up share repurchases, it will likely suspend buybacks in light of the Avid acquisition. It would take an acquisition of more than $1 billion to stress Church & Dwight’s strong credit metrics. At $650 million, the Avid acquisition is its largest ever, surpassing the $380 million acquisition of Orajel in 2008.

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Credit implications of current events

Anna Zubets-Anderson Vice President - Senior Analyst +1.212.553.4617 anna.zubets-anderson@moodys.com

Alpha and Other Appalachian Coal Producers Benefit from Blockage of EPA Rule
A US appeals court ruling on 21 August 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. The development is credit-positive for producers concentrated in Central Appalachia, such as Alpha Natural Resources (B1 stable). The ruling does not affect the industry’s longer-term fundamental challenges, such as competition from low-priced natural gas and other regulations that disadvantage coal. Still, it offers coal producers in Appalachia temporary reprieve from what was likely to be a material near-term negative. But for miners of low sulfur coal in the Powder River Basin (PRB), such as Cloud Peak Energy Resources (Ba3 stable), the ruling erases what might have been an opportunity to gain market share. The US Court of Appeals for the District of Columbia said the EPA overstepped its authority in creating the emissions rule. The court sent the rule back to the agency for revisions, which could take years. CSAPR would have required 28 states to reduce power-plant emissions that cross state lines. This rule would have forced roughly 1,000 smaller, older and less-efficient coal-fired power plants (mainly in the Midwest and mid-Atlantic regions) to install expensive technology to reduce emissions, switch to lowsulfur coal, or shut down prematurely. The court ruling means the older power plants can keep operating for now under the existing, less-stringent rules under the 2005 Clean Air Act. The rule would have aggravated competitive pressure on the US coal industry amid historically low natural gas prices and other regulations aimed at curbing emissions. Meanwhile, costs for Appalachian coal production are already rising amid tightening safety standards, reserve depletion, and difficulty obtaining permits. Companies with major operations in Appalachia, such as Alpha, Arch Coal (B2 stable) and James River Coal (B3 negative) will benefit most from the blocking of CSAPR, since most plants that would have been affected are in the Mid-Atlantic’s eastern states. Alpha in particular has a dominant presence in Central Appalachia with the region's most shipments (by volume) and the largest reserves. In 2011, eastern steam coal provided Alpha with nearly 40% of its revenue. Meanwhile, the ruling takes away the power industry’s incentive to switch to PRB coal from Montana and Wyoming. CSAPR would have increased the demand for coal with lower sulfur content, which could have benefited the major PRB producers, including Peabody Energy (Ba1 stable), Cloud Peak Energy Resources and Arch Coal. But overturning CSAPR benefits the US coal industry overall since it allows many coal-fired power plants to delay their retirement, even if the delay is short-lived. The EPA’s more stringent Mercury and Air Toxics Standards (MATS) requires power plants to install and operate “maximum achievable control technology” to limit emissions and is on track to take effect by 2015. The MATS rule will probably make many older coal-fired units uneconomical to operate, particularly on Appalachia’s doorstep in Mid-Atlantic states. We expect the economics of MATS compliance to drive more than half of the 50,000 megawatts of coal-fired power capacity retirements that we expect over the next decade. Also, EPA’s Carbon Pollution Standard for New Power Plants, proposed in March 2012, would require reductions in carbon dioxide emissions that necessitate carbon capture and storage technology that is not yet economically feasible. The standard would effectively prohibit investment in new coal plants. For all of this, the reprieve comes at a welcome time for an industry that faces an ongoing decline in coal consumption and prices.

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Credit implications of current events

Wesley Smyth Vice President - Senior Accounting Analyst +1.212.553.2733 wesley.smyth@moodys.com Jason Cuomo Vice President - Senior Accounting Analyst +1.212.553.7795 jason.cuomo@moodys.com

US Pension Funding Interest Rates Exceed Industry Estimates and Increase Savings
Last Monday, the US Internal Revenue Service (IRS) published the official interest rates that singleemployer defined-benefit plan sponsors may use when calculating funding requirements, setting the rate at 6.9% following congressional passage of the Moving Ahead For Progress in the 21st Century (MAP-21) law last month. The actual rate compares with the Society of Actuaries’ estimate of 6.7%. Although the 0.2-percentage-point difference between the actual rate and the Society of Actuaries’ estimate seems insignificant, the effect is not: we estimate companies will save another 5%-15% in their 2012 pension contributions as a result of the slightly higher rate, resulting in potentially billions of dollars in savings. The additional liquidity provided by pension relief will be credit positive, assuming companies use the incremental cash to fund activities that do not disadvantage creditors. In a sector comment in early July, we described an approach for identifying potential beneficiaries and provided a list of 32 companies whose potential cash savings from MAP-21 could be in excess of 20% of reported cash from operations. We estimated that these companies would save $7.6 billion in pension contributions. Using the IRS’ actual discount rate, we estimate the savings will be $8.7 billion (see exhibit below).

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Credit implications of current events

Potential Cash Flow Savings for Selected Companies ($000s Unless Otherwise Noted)  
Theoretical Contributions Cash from Operations Savings % of Cash from Operations

Company

Current Law

MAP -21

Savings

Levi Strauss & Co. United States Steel Corporation Meritor, Inc. Terex Corporation The New York Times Company The Manitowoc Company, Inc. Leucadia National Corporation Media General, Inc. OfficeMax, Incorporated Titan International, Inc. Unisys Corporation The Boeing Company USEC Inc. Ashland Inc. The Babcock & Wilcox Company Exelis, Inc. OMNOVA Solutions Inc. Ryerson Holding Corporation Brunswick Corporation Raytheon Company The Goodyear Tire & Rubber Company Lockheed Martin Corporation Visteon Corporation Cooper Tire & Rubber Company Snap-on Incorporated Commercial Vehicle Group, Inc. Motorola Solutions, Inc. Huntington Ingalls Industries, Inc. Textron Inc. Ferro Corporation Rock-Tenn Company Ford Motor Company Total

$1,848 168,000 41,000 19,100 73,927 15,600 9,084 16,696 53,679 4,426 317,200 3,913,000 56,300 243,000 173,591 334,000 15,700 54,500 89,100 2,107,000 773,000 4,253,000 175,000 125,517 128,500 7,794 848,000 528,000 756,000 53,233 461,700 9,368,000 $25,184,495

$71,921 456,286 86,571 56,643 127,858 14,743 9,010 25,908 49,625 6,387 302,186 3,777,429 53,586 214,714 153,375 297,000 14,786 54,286 189,458 1,336,857 515,429 2,877,429 74,857 61,716 65,329 3,930 389,571 251,429 316,429 27,715 223,500 2,989,286 $15,095,244

$37,016 138,828 33,476 39,352 63,680 2,309 2,273 13,742 12,438 3,323 93,030 1,595,376 22,827 90,928 69,981 138,598 7,398 30,598 153,884 633,955 263,112 1,532,936 19,898 25,108 28,982 1,743 155,770 108,018 113,069 13,690 102,246 800,307 $6,347,890

$34,906 317,458 53,096 17,291 64,178 12,434 6,738 12,165 37,187 3,064 209,156 2,182,052 30,758 123,786 83,393 158,402 7,388 23,687 35,574 702,903 252,317 1,344,493 54,959 36,608 36,346 2,187 233,802 143,411 203,359 14,025 121,254 2,188,979 $8,747,354

1889% 189% 130% 91% 87% 80% 74% 73% 69% 69% 66% 56% 55% 51% 48% 47% 47% 43% 40% 33% 33% 32% 31% 29% 28% 28% 28% 27% 27% 26% 26% 23% 35%

* List excludes cash flow negative companies and companies with funded ratios in excess of 80% ** Does not exclude foreign plans Moody’s contribution calculated as service cost + 1/7 of reported underfunding Pro forma contribution calculated as amended service cost + 1/7 amended underfunding Interest rate assumed to be 156 bps lower 17 year duration used to amend service cost 12 year duration used to amend PBO Source: Moody’s, the companies.

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Credit implications of current events

Wen Li Associate Analyst +49.69.70730.742 wen.li@moodys.com Oliver Giani Vice President - Senior Analyst +49.69.70730.722 oliver.giani@moodys.com

Atlas Copco’s Disposal of Customer Financing Assets Is Credit Positive
Last Monday, Swedish engineering group Atlas Copco AB (A3 positive) announced it had sold a portfolio of financing and leasing contracts related to its customer finance activities to an undisclosed independent bank for approximately SEK1.4 billion (€170 million). The transaction, which involves around 43% of all assets related to customer financing as of the end of 2011, is credit positive as it unfreezes capital that Atlas Copco had invested to provide financing for customers and reduces the counterparty risk from customer finance operations. The company will book a profit of around SEK100 million in the third quarter of 2012 from the sale of the portfolio. The SEK1.4 billion proceeds from the disposal will notably strengthen the group’s cash position, resulting in a reduction of net debt (as adjusted by us) by around 6% to around SEK21.2 billion pro forma as of the end of June 2012. Retained cash flow coverage will slightly improve to 43.9% from 41.2% for the 12 months ended in June. In addition, the transaction increases Atlas Copco’s headroom for new customer financing , providing more room for the company to continue to grow organically. Atlas Copco is an international manufacturer of compressed air and gas equipment, generators, industrial tools, assembly systems, and construction and mining equipment. The group generated sales of SEK88.7 billion (€10 billion) in the 12 months ended 30 June 2012. The company a few years ago established an in-house customer finance operation with a credit portfolio totaling approximately SEK3.3 billion as of December 2011.

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Credit implications of current events

Denis Perevezentsev, CFA, ACCA Vice President - Senior Analyst +7.495.228.6064 denis.perevezentsev@moodys.com

Russia’s WTO Entry Is Credit Positive for Russian Steel Companies
Last Wednesday, when Russia joined the World Trade Organization, the European Union terminated Russia’s steel quota agreement, which is credit positive for Russian steel companies Magnitogorsk Iron & Steel Works (MMK, Ba3 stable), Severstal OAO (Ba1 stable), Novolipetsk Steel OJSC (NLMK, 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, mainly hot rolled steel, to the EU, which is credit positive. The EU’s terminated quota had capped Russian steel products imports at 3.4 million tonnes for 2012. Eurostat estimated total 2011 imports from all countries to the EU at 23.3 million tonnes. The EU’s quotas covered finished products, mainly hot and cold rolled coil, and some long products and didn’t cover semi-finished products (slabs and billets), which Russian steelmakers freely export to the EU. WCO membership lays a foundation for the gradual increase of Russia’s steel exports to the EU once end markets recover from the current economic slowdown. Harmonized trade rules will relieve Russian steelmakers of administrative procedures such as quota sharing, reporting, and receipt of export licenses. Potential anti-dumping investigations will be streamlined within the framework of WTO rules. Russian steelmakers have a high degree of vertical integration into iron ore, coking coal, and scrap operations and enjoy the benefits of regulated domestic gas prices (i.e., currently estimated at about $100/thousand cubic meter as opposed to about $350-$500/thousand cubic meter in Europe) and cheap non-unionized local labor costs (of about $7-$8/hour). Even when adjusted for lower productivity, low domestic slab cash costs prevail. The ruble exchange rate, freely set, and mainly ruble-denominated costs also help Russian steel producers stay very competitive versus their European peers. Although Russian steel producers have widely diversified operations globally, the profitability of their overall businesses is by and large driven by their low-cost Russian steel plants and local mining facilities located in close proximity to each other. Finally, some of the Russian low-cost steel plants are close to the European countries. Severstal’s Cherepovets and NLMK’s Lipetsk plants are in the European part of Russia, which positions them to benefit when European end markets recover from recession. We believe the cancellation of quotas will take at least two to three years to affect steelmakers’ financial results. We expect Russia’s steelmakers to limit their exports to the EU, not only because of Europe’s recession-dulled demand, but also because of WTO members’ anti-dumping and protective measures. A special working group will be created with monitoring and conflict resolution functions with representatives from the Commission of European communities, Eurofer, Russia’s Ministry of Economic Development, Russia’s Ministry of Industry and Trade, and the Russian Steel Association. This group will impose volume restrictions and provide a forum for open discussion of trade issues.

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Infrastructure
Rick Donner Vice President - Senior Credit Officer +1.212.553.7226 richard.donner@moodys.com

US Court NO X the SO X off EPA’s Air Pollution Rule, a Credit Positive for CoalFired Power Plants
On 21 August, the US Court of Appeals (DC Circuit) vacated the US Environmental Protection Agency’s (EPA) air transport rule, known as the Cross State Air Pollution Rule (CSAPR), after initially staying its implementation in December. The decision is credit positive for coal-fired power plants, which would have had to invest in environmental safeguards. In the meantime, the court ordered the Clean Air Interstate Rule (CAIR) to stay in place while the EPA reconsiders its approach to sulfur dioxide (SO2, or SOx) and nitrogen oxide (NOx) emissions that cross state lines and affect down-wind state’s abilities to meet National Ambient Air Quality Standards. But because the EPA’s more stringent and recently finalized Mercury and Air Toxics Standards (MATS) take effect in 2015, future regulations covering SO2 and NOX will have only a limited effect. Nevertheless, the decision is still credit positive for Energy Future Holdings Corp. (EFH, Caa3 negative) because it can push off expensive environmental capital investments. In addition, EFH will see a much-needed boost to cash flow, because its less-compliant coal-fired generation can continue burning its lignite coal, instead of more costly Powder River Basin coal, for now. CSAPR would have affected roughly 1,000 coal-fired power plants across 28 states, primarily in the Midwest and Mid-Atlantic regions. Consequently, the decision is also credit positive for other large, less-compliant coal generators, such as Edison Mission Energy (Ca negative) and its Homer City Funding LLC plant (Caa1 negative). But for companies that have already invested heavily in their environmental compliance equipment, the action is credit negative because increased competition from the less compliant generators will create more electricity volume than originally expected, which should help keep power prices low, thereby reducing margins. For example, Sandy Creek Energy Associates, L.P. (B1 negative) is a coal-fired power project under construction in Texas. Although Sandy Creek has locked up much of its expected volumes with contractual power-purchase agreements, a portion of its capacity remains exposed to the wholesale merchant market. Sandy Creek has already made the substantial investment in scrubbers to reduce its emissions of SO2 and NOX, and in a bag house to help capture particulate matter that contributes to smog. These investments, which will position Sandy Creek as one of the cleanest and most efficient coal-generating plants in the US, would have met the CSAPR compliance mandates. However, if un-scrubbed coal plants can stay in the market longer than previously expected, then this will have a depressing effect on wholesale energy markets in Texas, and the financial benefits of investing in environmental compliance equipment will be delayed. Lower market prices for power will squeeze Sandy Creek’s merchant margin, which is factored into its rating.

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Credit implications of current events

Helen Francis Vice President - Senior Credit Officer +44.20.7772.5422 helen.francis@moodys.com

Portugal Cuts Payments to Electricity Generators, Credit Negative for EDP and Endesa
On 20 August, the Republic of Portugal (Ba3 negative) published a ministerial order (by the Minister of Economy and Employment) that enacts part of a wider package of measures announced in May 2012 by reducing capacity payments to electricity generators. The news confirms the credit negative effect for the country’s biggest owner of generation capacity, Energias de Portugal S.A. (EDP, Ba1 negative), and also for Spanish utility Endesa S.A. (P-2 review for downgrade), owned by Italy’s Enel S.p.A. (Baa1 review for downgrade), which also owns generation capacity in Portugal. Capacity payments are fees that generators collect in exchange for having electric power generation assets, such as coal-fired and natural gas-fired electric generating plants, ready to serve a region’s electric demand. In Portugal, such capacity payments were introduced in 2011 and were therefore only in existence for one and a half years. The new measures will see the government pay reduced capacity payments starting in January 2014 but also make no capacity payments while Portugal’s austerity programme (agreed to by the ‘troika’ of the IMF, the European Union and the European Central Bank) is in place: it’s currently slated to end in December 2013. The government says the measures will cut the total amount it pays in capacity payments to €252 million between now and 2020, saving €441 million over the eight years compared with the €693 million it would otherwise have paid. EDP expects the measures to hit its 2014 revenues to the tune of €37 million, which is roughly 2% of expected net profit, as already included in EDP’s 2012-2015 Business Plan announced to the market in May 2012. The Portuguese government will cut capacity payments made to thermal generators by 70%, reducing the payments to €6,000 per megawatt (MW) of capacity per year from today’s level of €20,000. Cuts will also extend to incentives to hydro generation development in the country, which will be hit by varied levels of cuts. The government says the payment cuts will reduce the amount paid by consumers for electricity by approximately €105 million by 2013. The measures are part of a wider package announced in May, aimed at saving Portugal around €1.8 billion in payments to the electricity sector by 2020.

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Credit implications of current events

Banks
Luis Ruvira Associate Analyst +54.11.5129.2622 luis.ruvira@moodys.com

Bolivia’s New Foreign Exchange Tax Is Credit Negative for Banks
Last Tuesday, the Bolivian House of Representatives passed a bill to tax all foreign exchange transactions with a 0.7% levy for 36-months. The new bill, which we expect the Senate will pass and enact into law, aims to enforce de-dollarization policies. Its passage would be credit negative for Bolivian banks because it will reduce income in foreign exchange operations as the tax reduces net spreads. The measure excludes foreign exchange transactions carried out by the Central Bank of Bolivia. Bolivian banks’ derive their gains in foreign exchange transactions from bid-offer spreads, instead of fees and commissions. For 2011, Autoridad de Supervisión del Sistema Financiero data showed gains from spreads in foreign exchange operations reached BOB575.3 million, which is equivalent to 11.6% of the system´s aggregate gross operating income (see exhibit below). Therefore, the measure will diminish an important earnings source, adding pressure to banks’ profitability. For the past two years, financial entities have been limited to a maximum regulated bid/offer spread of BOB12 cents, however, most entities operate within a narrower spread. The new bill forces banks to widen their spreads in order to compensate for this additional tax, which will affect trading volumes. Because of their activity in the foreign exchange market, we expect Banco Ganadero S.A. (B1 stable, E+/b1 stable),1 Banco Bisa S.A. (B1 stable, D-/ba3 stable), and Banco Nacional de Bolivia S.A. (B1 stable, D-/ba3 stable) will be the most affected by this new tax. Banco Ganadero gets 20.3% of its revenue from foreign exchange, Banco Bisa, 22.4%, and Banco Nacional 17.2%. Banks’ foreign exchange transactions are largely related to export/imports operations and to a lesser extent, remittances. Bolivia Banks’ Income from Foreign Exchange Spread Operations
Income from FX Spread Operations - left axis Income from FX Spread Operations / Aggregate Gross Operating Income - right axis 600 580 560 13.9% 13.4% 16% 12.3% 575.3 11.6% 14% 12% 10% 509.6 486.5 512.3 8% 6% 4% 2% 0% 2008 2009 2010 2011

BOB millions
1

540 520 500 480 460 440

Source: Autoridad de Supervisión del Sistema Financiero

Financial institutions have been the target of increasing taxation by Bolivia’s government (Ba3 stable). A bill passed late last year established an additional 12.5% tax on those financial entities whose return on equity surpasses 13%. Additionally, the regulatory agency has introduced measures to direct bank

The ratings shown are the banks foreign deposit ratings, their standalone bank financial strength rating/baseline credit assessment and their corresponding rating outlooks.

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lending to specific economic sectors named by the government as “productive,” including mining, industrial and agriculture sectors that may not necessarily be aligned to the banks’ strategy. The proposed bill increases uncertainty in a still-partially dollarized economy, and might work against the government’s express intention to de-dollarize. The level of financial dollarization in Bolivia, measured as the percentage of dollar deposits in the financial system, declined to 32% as of July 2012 from over 90% in the early 2000s2 as a result of overall growing economic stability as well as several measures that included higher legal reserves for foreign-currency deposits. However, while we do not expect the new tax to disrupt Bolivia’s foreign exchange market, depositors have proven to be sensitive to government measures and there have been deposit outflows from the banking system. Bolivian banks have performed well, benefiting from a supportive operating environment of growth and stability. Although we expect the financial system to be able to absorb the effects of this tax, we are concerned that the proposed tax of FX trading, the higher taxes on banks’ profits and the additional restrictions on asset allocation will hurt the system´s profitability.

2

Source: Autoridad de Supervisión del Sistema Financiero (ASFI).

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Andrea Usai Vice President - Senior Analyst +44.20.7772.1058 andrea.usai@moodys.com

Higher Allowance on Tax-Free Saving Accounts Is Credit Negative for French Banks
Last Wednesday, the French government announced an increased allowance on popular tax-free saving accounts and indicated that further increases will be forthcoming.3 Banks have to transfer large portions of this type of deposits to the Caisse de Dépôts et Consignation (CDC, Aaa negative), a government agency that funds social housing and infrastructure investments. French tax-free savings accounts are guaranteed by the French state and banks receive a commission on the funds collected from the CDC. The credit-negative higher tax-free allowance makes it more difficult for major French banks to increase their deposit funding at a time when they are striving to reduce their reliance on wholesale funding. It will also be marginally credit negative for French insurers, reducing life insurance inflows in the near term. We believe that the most affected rated banking groups will be Groupe BPCE (BPCE, A2 stable; D/ba2 stable),4 Groupe Crédit Mutuel (Banque Fédérative du Crédit Mutuel, Aa3 stable; C-/baa2 stable) and Groupe Crédit Agricole (CASA, A2/ negative; D/ba2 negative) because they have the larger stocks of tax-free deposits. Other large French banks, namely BNP Paribas (A2 stable; C-/baa2 stable) and Société Générale (A2 stable; C-/baa2 stable) will be affected less by the increased allowances on tax-free deposits because they have smaller stocks of these deposits, reflecting their more limited share of the domestic retail banking market. The distribution of “Livret A,” whose ceiling has been increased by 25% to €19,1255 and of the “Livret de Développement Durable” (LDD), whose allowance has been doubled to €12,000, was opened to all domestic banks in January 2009. Prior to 2009, tax-free deposits were collected only by Groupe Caisse d’Epargne, now part of Groupe BPCE, La Banque Postale (unrated) and Groupe Crédit Mutuel. These savings have become increasingly popular among retail customers in recent years because returns on a post-tax basis have been more attractive than those on ordinary bank deposits and money market funds. In addition, they are more liquid than other retail savings products, such as life insurance. The total outstanding amount of these deposits was €202 billion6 at 30 June 2012, as shown in the exhibit below. However, the stocks of these deposits held by individual banks vary considerably, with the greater proportions being held by the three historical players and/or those banks with the larger domestic retail market shares. In addition, the proportions of tax-free deposits transferred to the CDC relative to the tax-free deposit stock varies across banks because new entrants are gradually moving towards the unified centralisation rate of 65%. To ensure a level playing field, a convergence mechanism has been introduced to align banks’ centralisation rates by 2022.

3 4 5 6

The French government has indicated that the relevant decree will be published in September and that the increased allowances will be effective as soon as practicable. The ratings shown are bank’s deposit rating, their standalone bank financial strength rating/baseline credit assessments and the corresponding outlooks. The French government has also indicated that the allowance on the Livret A will be increased by a further 25% by the end this year and that an additional 50% increase would be considered depending on the actual needs for social housing funding. According to the Banque de France, this amount also includes the outstanding stock of Livret Bleu, which were distributed by Credit Mutuel until 2009, when they were replaced by Livret A. However, the outstanding deposits remained classified as Livret Bleu.

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Outstanding Balances of French Tax-Free Savings Accounts versus Remuneration
Livret A - left axis €350 €300 €250 Livret Bleu left axis LDD left axis Interest Rate - right axis 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5%

€ billion

€200 €150 €100 €50 €0

Source: Banque de France statistics

French banks are large users of wholesale funding, but they are trying to reduce their reliance through asset reduction, business disposals and higher customer deposits. The increases in tax-free allowances will encourage depositors to convert ordinary bank deposits into tax-free savings. This, in combination with gradually rising centralisation rates, will reduce the amount of deposits available for bank funding. However, we believe that this loss of deposit funding will be partly offset by the retained portions of Livrets that are not transferred to the CDC, which reflect the conversions of non-balance sheet deposits, such as life insurance policies and investment funds. Banks have been actively promoting the re-intermediation of such funds over the past years to reduce their wholesale funding reliance.

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Insurers
Bruce Ballentine Vice President - Senior Credit Officer +1.212.553.7212 bruce.ballentine@moodys.com

AIG Marks Credit Positive Milestone as New York Fed Auctions Last of Maiden Lane III
On 23 August, the Federal Reserve Bank of New York (FRBNY) announced the sale of all remaining assets in Maiden Lane III (ML III), a special purpose vehicle established in 2008 to relieve American International Group, Inc. (AIG, Baa1 stable) of certain volatile exposures to the US housing market. The ML III asset sales are credit positive for AIG, allowing ML III to fully redeem the subordinated interest held by AIG. The unwinding of ML III also marks the end of FRBNY support extended to AIG during the financial crisis of 2008-09. The only remaining government support for AIG is the US Treasury’s ownership of AIG common stock. The Treasury has completed three registered public offerings of AIG shares in 2012, reducing its ownership stake to about 53% from about 77% at the start of the year. We expect the Treasury to sell more AIG shares as market conditions permit. The ongoing reduction/termination of government support for AIG reflects improving trends at the company and growing investor appetite for its debt and equity securities. AIG is taking steps to enhance the performance of core operations as it continues to exit noncore businesses. An eventual separation from the government would further strengthen AIG’s brand and its ability to fund itself in the capital markets. The FRBNY created ML III in late 2008 to assume certain volatile exposures from AIG. Specifically, ML III purchased $62 billion par amount of multi-sector collateralized debt obligations (CDOs) insured by AIG Financial Products Corp. through credit default swaps. The CDOs included significant exposure to subprime residential mortgages. The aggregate purchase price of the ML III assets was approximately 48% of par and was funded by a ~$24 billion senior loan from the FRBNY and a $5 billion subordinated loan from AIG. Gradual improvement in the US housing market and economy boosted the values and liquidity of ML III assets over the past year. The FRBNY announced its intent to sell ML III assets in April 2012 and completed those sales last week. Cash proceeds were applied first to repay the FRBNY senior loan, and then to repay the AIG subordinated loan, with residual amounts allocated two-thirds to the FRBNY and one third to AIG. The FRBNY received full repayment of its senior loan along with a net gain of $6.6 billion (including accrued interest). AIG’s total cash proceeds on its subordinated ML III interest will exceed $8 billion, including $77 million received in June, $6.0 billion in July, approximately $1.9 billion in August and the remainder due in the weeks ahead. This monetization has enhanced AIG’s liquidity while freeing up capital that was supporting its ML III position. Earlier this month, AIG used a portion of the ML III proceeds to repurchase $3 billion of its common stock from the Treasury, whose total offering was $5.75 billion; public investors purchased the remaining $2.75 billion. AIG's ratings reflect the strong market presence and diversification of its core insurance operations, Chartis (financial strength A1 stable) and SunAmerica Financial Group (financial strength A2 stable); the continuing monetization of noncore holdings; and the liquidity buffer held by the parent to support subsidiaries as needed. Offsetting these strengths are the relatively weak profitability of the core operations (on a combined basis), the remaining exposure to certain noncore holdings with weaker credit profiles, and the complexity of risk management across numerous business lines and regions.

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Scott Robinson Senior Vice President +1.212.553.3746 scott.robinson@moodys.com

Insurers’ Ability to Prune Variable Annuity Features and Maintain Sales Is Credit Positive
Last Monday, LIMRA, a market researcher for the life insurance industry, released second-quarter data showing that MetLife, Inc. (A3 stable) was the third-largest provider of variable annuities (VAs), versus being the largest a year earlier. The drop in the rankings was the result of MetLife taking steps to curtail VA product features, including minimum income payout guarantees, and reduce sales as it seeks to lower the risk of a product that is highly popular with consumers, yet costly to insurers. Prudential Financial Inc. (Baa2 positive), currently the top writer of VAs, has indicated that it, too, intends to reduce product guarantees. Insurers’ ability to de-risk in the face of seemingly insatiable consumer demand for variable annuity guarantees is credit positive and allows them to sell products more on their own terms. As an example, almost all variable annuity writers have 1) lowered the guaranteed benefits by reducing roll-up rates (i.e., the compound annual growth rate of the minimum guaranteed income payout); 2) lowered the cost of providing guarantees by reducing the maximum allowable equity investment exposure; or 3) introduced features such as an automatic rebalancing of customers’ portfolios from equities to bonds to reduce investment risk as market volatility increases. Such moves are a welcome change in a market that historically has offered commodity-like, competitive products with ever-rising guarantees to drive sales. VAs can provide a company with solid growth and, in the case of newer VA products, the potential for high returns on equity. However, VA products also carry substantial risk owing to uncertainties related to policyholder behavior (such as exercising the right to annuitize or start taking periodic withdrawals), the heightened volatility of regulatory capital and earnings, and the risks associated with managing a hedging program. In particular, low interest rates drive up the cost of hedging since many of the most popular guarantee features provide a lifetime income, whose costs increase as rates fall. Moreover, many VA writers only partially (or not at all) hedge interest rate risk because of the high cost of hedging interest rates when rates are low and because the misalignment between the accounting for hedges and the accounting for liabilities produces income volatility. For those reasons, we consider the VA product line as having one of the higher risk profiles. The exhibit shows sales of VAs for full-year 2011, first-quarter 2012, second-quarter 2012, and year to date through second-quarter 2012.

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US Variable Annuity Sales, $ millions  
First Half 2012 Sales Rank Company Insurance Financial Strength Rating1 FY 2011 Q1 2012 Q2 2012

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Prudential Annuities Jackson National Life MetLife TIAA-CREF Lincoln Financial Group AXA Equitable AIG Companies RiverSource Life Insurance AEGON USA Nationwide Financial Allianz Life of North America Pacific Life New York Life Thrivent Financial for Lutherans Protective Life Fidelity Investments Life Guardian Life of America Northwestern Mutual Life John Hancock Hartford Life Top 20 Total Industry Top 20 share

A2 positive A1 stable Aa3 stable Aaa stable A2 positive Aa3 negative A2 stable Aa3 stable A1 stable A1 stable A2 stable A1 stable Aaa stable unrated A2 stable unrated Aa2 stable Aaa stable A1 stable A3 stable

$20,236 17,494 28,439 13,442 9,356 7,096 8,013 6,397 5,254 7,376 3,791 3,318 2,343 2,329 2,349 1,768 1,127 1,311 1,791 NA
2

$4,943 4,383 4,926 3,397 2,341 2,343 2,252 1,593 1,195 1,244 1,031 848 591 650 567 474 502 335 205 307 $34,126 $36,800 93%

$5,346 5,258 4,614 4,143 2,585 2,253 2,342 1,178 1,284 1,163 960 1,004 741 640 674 438 341 405 310 168 $35,848 $38,600 93%

$146,246 $159,300 92%

1. Insurance financial strength (IFS) rating and outlook for the lead life insurance company as of 24 August 2012. 2. Did not qualify in Top 20 for 2011 Source: US Individual Annuities Sales Survey, LIMRA

For several years, VA sales have remained concentrated among MetLife, Prudential and Jackson National Life Insurance Company (insurance financial strength A1 stable). MetLife’s second-quarter year-to-date sales of $9.5 billion, down from $12.6 billion a year ago, are a result of MetLife managing its sales (e.g., by reducing the roll-up rate of its popular GMIB Max product). We expect Prudential’s VA sales momentum to slow by year’s end, although it may experience robust sales during its transition to a less-risky product. Although insurers’ ability to modify VA product features and still attract customers has helped improve VAs’ risk/reward tradeoff, product diversity is still a credit benefit. Notwithstanding their ability to pull back on product features and raise prices, VAs still carry material risks such as uncertain policyholder behavior, low interest rates, and the potential for accounting volatility, all of which make managing overall exposure to VAs critical in managing tail risk exposure.

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Money Market Funds
Henry Shilling Senior Vice President +1.212.553.948 henry.shilling@moodys.com Dagmar H. Silva Vice President - Senior Analyst +1.212.553.3683 dagmar.silva@moodys.com

SEC’s Cancellation of Money Fund Reform Vote Is Credit Positive for Fund Managers
Last Thursday, the US Securities and Exchange Commission (SEC) announced the cancellation of a much anticipated vote on proposed changes to money market fund (MMF) regulations. The cancellation, and possible abandonment of the SEC initiative, is at least a temporary credit positive reprieve for money fund managers. Among firms benefiting are FMR LLC (A2 negative), JP Morgan Chase Bank, N.A. (Aa3 stable; C/a3 stable),7 Blackrock, Inc. (A1 stable) and, in particular, firms that have assets under management (AUM) concentrated in money funds, like Federated Investors (not rated) and firms with more limited capital, such as Vanguard (not rated). However, in our opinion, the SEC’s decision, unless reversed, may lead other regulatory bodies to pursue MMF reform. The broad outline of money fund reform options under consideration were set out for the first time in a statement released by SEC Chairman Mary L. Schapiro last week. Two options in particular were credit negative for money fund managers. The first would have required money market funds to float their net asset values, which would likely have led to losses in AUM. The statement did not make any distinctions between fund types. As of 15 August, MMF assets stood at $2.6 trillion, with prime funds accounting for 55% of money fund assets, followed by government funds and tax-exempt funds. (See Exhibit 1.)
EXHIBIT 1

Distribution of Money Market Fund Assets
$1,600 $1,400 $1,200

$ billions

$1,000 $800 $600 $400 $200 $0 Prime funds Government funds Tax-Exempt funds

Source: Investment Company Institute, 15 August 2012

Under the second option, funds could continue to target maintaining a $1.00 net asset value, provided they adopted a capital buffer “of less than 1% of fund assets,” adjusted to reflect the risk profile of funds. The capital buffer was intended to absorb the day-to-day fluctuation in share prices and would have been combined with a requirement to hold back 3% of a shareholder’s investment for a period of 30 days. That holdback would have taken a so-called "first-loss" position and provided extra capital to a money market fund that suffered losses greater than its capital buffer during that 30-day period.
7

The bank ratings shown are the banks foreign deposit ratings, their standalone bank financial strength rating/baseline credit assessment and their corresponding rating outlooks.

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Sustaining positive yields in an historic low-interest-rate environment led fund firms to waive fees they estimated at $5.2 billion in 2011,8 eroding profitability in a business with tight margins. The additional cost of providing a capital buffer would have further diminished the economic viability of money funds and also could have led to a reduction in AUM. According to our analysis, it would take from a few months to almost three years of management fees, assuming an average fee of 21 basis points (bp), to recoup the cost of the capital buffer limited to risk-adjusted prime funds, based on potential sizing of the required capital buffer (See Exhibits 2 and 3).
EXHIBIT 2

Amount of Required Capital for US Money Market Funds Based on Different Capital Scenarios
Potential Required Capital Percentages Assets in $ billions 1.0% Required Capital $ millions 0.50% Required Capital $ millions 0.20% Required Capital $ millions

Potential Application of Required Capital

All money market fund assets Prime fund assets Prime fund assets less treasuries and agencies Prime fund assets less treasuries, agencies and repurchase agreements
EXHIBIT 3

$2,600 $1,405 $1,199 $955

$26,000 $14,050 $11,990 $9,510

$13,000 $7,025 $5,995 $4,755

$5,200 $2,810 $2,398 $1,902

Years Required to Earn Back Required Capital
Potential Required Capital Percentages 1.0% Required Capital Years Required to Recoup Capital 0.50% Required Capital Years Required to Recoup Capital 0.20% Required Capital Years Required to Recoup Capital

Potential Application of Required Capital

Prime funds Prime fund assets less treasuries and agencies Prime fund assets less treasuries, agencies and repurchase agreements

2.6 years 0.2 years 0.1 years

1.3 years 0.1 years 0.1 years

0.5 years 0.04 years 0.03 years

Note: Repurchase agreements include transactions collateralized by securities other than Treasury and government agencies and may therefore be overstated. We assume money fund management fees are 21bp, based on the average reported by the ICI (refer to footnote 2), which likely overstates fees owing to the dominance of institutional funds subject to lower management fees. The amount of required capital buffers might also vary depending on levels of assets under management and extent of investments in treasury and government agency securities or potentially other risk-mitigating strategies. Financing costs are excluded from our estimates. Source: Moody’s

While the cancellation of a vote on these money fund reforms is positive for fund managers, the SEC’s decision does not mean that further reforms will be called off. To the contrary, unless reversed, other regulators and agencies, such as the Federal Reserve, US Treasury and Comptroller of the Currency are likely to advocate further reforms to address the susceptibility of money market funds to runs that increase systemic market risk. Such efforts could be pursued separately or through the Financial Stability Oversight Council which under the Dodd-Frank Act has the authority to designate individual non-bank financial companies as systemically important financial institutions. Entities designated as systemically important would be under the supervision and regulation of the Federal Reserve.

8

Investment Company Institute, “Trends in the Expenses and Fees of Mutual Funds, 2011,” 23 April 2012.

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Sovereigns
Christian de Guzman Vice President - Senior Analyst +65.6398.8327 christian.deguzman@moodys.com

Developing Southeast Asia’s Accelerating Economic Growth Is Credit Positive
Last Monday, Thailand (Baa1 stable) reported unexpectedly strong GDP results for the second quarter, mimicking similarly robust economic growth in other developing countries in the Association of Southeast Asian Nations (ASEAN). Economic resilience in these countries is credit positive because it supports government revenues and mitigates the need for stimulus spending to support growth. Developing Southeast Asia’s accelerating economic growth bucks the trend of lackluster growth in other parts of Asia, particularly in China (Aa3 positive) and Asia’s newly industrialized economies (NIEs) of Hong Kong (Aa1 positive), Singapore (Aaa stable), South Korea (A1 positive), and Taiwan (Aa3 stable). Thailand’s economy grew 4.2% year-on-year, up from 0.4% in the previous quarter. By comparison, Indonesia’s (Baa3 stable) real GDP growth accelerated to 6.4% in the second quarter from 6.3% in the first quarter, while Malaysia’s (A3 stable) rose to 5.4% from 4.9%. We expect the Philippines’ (Ba2 positive),economy, which grew by 6.4% in the first quarter, the fastest rate in ASEAN, to show similarly healthy second-quarter growth. By contrast, growth has decelerated or otherwise remained relatively stagnant in other countries in Asia (Exhibit 1). Weak final demand in the US and the euro area has created considerable headwinds for the NIEs given their reliance on international trade. In the second quarter, Taiwan recorded a small contraction, while real GDP growth in Hong Kong, Korea, and Singapore remain relatively low. Meanwhile, Chinese growth decelerated to 7.6% year-on-year in the same period, its lowest pace of growth since the first-quarter 2009, raising the threat of a negative spillover into the rest of Asia given China’s role in stimulating the region’s recovery following the global financial crisis.
EXHIBIT 1

Real GDP Growth in Asia
Indonesia Thailand China 15% Malaysia NIEs (Hong Kong, Singapore, South Korea and Taiwan)

Year-Over-Year Change

10% 5% 0% -5% -10% 2010 Q2 Q3 Q4 2011 Q2 Q3 Q4 2012 Q2

Note: NIEs weighted by 2011 nominal GDP at market exchange rates. Source: Haver Analytics and national statistical agencies.

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In Indonesia, Malaysia, and Thailand, net exports significantly weakened economic growth (Exhibit 2). The countries’ commodity exports, including petroleum, crude palm oil, rubber, and natural gas, have been hurt by softening prices. In addition, weaker external demand has dampened shipments of their manufactured goods, such as automobiles and electronic products. In contrast, the strong domestic demand has supported imports.
EXHIBIT 2

Growth Drivers in Developing ASEAN
Private Consumption 12 Public Consumption Gross investment Net exports Others Overall GDP

Percentage-Point Contribution to YearOver-Year Growth

10 8 6 4 2 0 -2 -4 -6 Indonesia Malaysia Thailand

Source: National statistical agencies.

Domestic demand, particularly private consumption and investment spending, has offset contracting net exports. In Thailand, the continued recovery following last year’s floods has driven construction activity and private capital spending. Historically high rates of gross fixed capital formation are partially attributed to Malaysia’s wide-reaching Economic Transformation Programme and, in Indonesia, strong inflows of foreign direct investment in recent quarters. In each of these countries, low inflation has sustained favorable consumer sentiment and private household spending. The relatively small contribution of public consumption to overall growth year-to-date suggests a degree of policy flexibility for governments to pursue stimulus spending. Benign inflation and relatively healthy external buffers contribute to stable financing conditions. The buoyancy of fiscal revenue thus far reflects healthy labor markets and the continued profitability of businesses, both of which are correlated to high economic growth. Nevertheless, commodity price volatility will have differing effects on fiscal revenue, while expenditures will likely be muted by smaller subsidy bills. Although developing ASEAN’s immunity to external headwinds may not last for long, central banks in these countries have the flexibility to cut rates to stimulate activity and relieve pressure on fiscal authorities to increase deficit spending, thereby raising debt ratios. Thailand has already cut its policy rate twice to aid flood reconstruction. However, in Indonesia, exchange rate concerns limit monetary policymakers’ range of options.

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Sub-sovereigns
Patricio Esnaola Analyst +54.11.5129.2619 patricio.esnaola@moodys.com

Brazil Increases 17 States’ Borrowing Capacity, a Credit Positive
On 16 August, the government of Brazil (Baa2 positive) authorized 17 states9 to borrow up to BRL42.2 billion in 2012, or 20% of the states’ debt at year-end 2011. In our view, this is credit positive and will promote investment in infrastructure, which is important to the states’ economic growth and development. Our expectations for economic growth in Brazil for the next couple of years and the high correlation between GDP and states’ revenue (Exhibit 1) indicate that the Brazilian states will be healthy enough to absorb new debt without jeopardizing the declining debt-to-revenue trend of the past 10 years (Exhibit 2).
EXHIBIT 1

Real GDP and States’ Revenue
Revenue Percent Change 20% 15% 10% 5% 0% -5% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013F Real GDP Percent Change

Source: Moody’s and Brazil’s Ministry of Finance.

EXHIBIT 2

Debt-to-Revenue Trend for Brazil’s States
Stock of Debt - left axis 450 400 350 300 2.0 1.5 1.0 0.5 0.0 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Revenue - left axis Debt/Revenue X Times - right axis 2.5

BRL billions
9

250 200 150 100 50 0

Source: Brazil’s Ministry of Finance.

The 17 states are Acre, Alagoas, Amazonas, Bahia, Ceará, Espírito Santo, Maranhão, Mato Grosso do Sul, Mato Grosso, Pará, Paraíba, Pernambuco, Rondônia, Roraima, Santa Catarina, Sergipe and São Paulo.

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The authorization calls for the states to borrow primarily from national financial institutions such as BNDES (Baa2 stable), Banco do Brasil S.A. (Baa2 positive; C-/baa2 positive)10 and Caixa Econômica Federal (Baa2 stable; D+/baa3 stable). The restriction ensures that the states direct the proceeds to specific projects that the federal government has vetted and approved in infrastructure, environmental sanitation, housing and urban transportation, and that they borrow at favorable funding costs. The measure aims to stimulate the Brazilian economy by providing financing that enables states to undertake an ambitious investment pipeline under the oversight of the Brazilian Federation, key for their economic development. Over the past three years, the Brazilian government has approved BRL120 billion of additional borrowing by the states in a similar fashion. The announcement, made by Brazilian Finance Minister Guido Mantega, is part of the annual review of the country’s Fiscal Adjustment Program, under which the federal government examines state and municipal finances and sets specific fiscal targets. The government’s approval of higher debt levels for 17 of 26 states is an acknowledgement of their improving debt metrics. Five more states are in the process of obtaining similar approvals. As the new borrowings average just 20% of each state’s debt at the end of 2011 (Exhibit 3), we don’t expect the new debt to hinder the states’ ongoing progress in reducing their debt-to-revenue ratios.
EXHIBIT 3

Stock of Debt and Approved Borrowing for the 17 Brazilian States
Approved Borrowing / 2011 Outstanding Debt 350% 300% 250% 200% 150% 100% 50% 0% SP BA ES SC PE CE MA SE AM MT AC PA MS PB AL RR RO Average

Note: AC = Acre; AL = Alagoas; AM = Amazonas; BA = Bahia; CE= Ceará; ES = Espírito Santo; MA = Maranhão; MS = Mato Grosso do Sul; MT = Mato Grosso; PA = Pará; PB = Paraíba; PE = Pernambuco; RO = Rondônia; RR = Roraima; SC = Santa Catarina; SE = Sergipe; and SP = São Paulo. Source: Brazil’s Ministry of Finance.

Although the federal government authorized some states to borrow more than 20% of their debt, debtto-revenue ratios are little changed: for example, Espírito Santo (unrated) is authorized to borrow 346% of its outstanding debt stock (Exhibit 3), but its debt-to-revenue will remain largely unchanged from the 0.14x reported in December 2011, as shown in Exhibit 4. By comparison, São Paulo’s (Baa3 stable) authorization will increase its debt capacity by BRL11.9 billion, equal to 7.6% of its outstanding debt in December 2011, while Mato Grosso’s (Baa3 stable) authorization will raise its debt capacity by BRL1.2 billion, or 38.5% of its outstanding debt.

10

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

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EXHIBIT 4

The 17 Brazilian States’ Debt-to-Revenue Ratio, 2002 versus 2011
Debt/Revenue 2011 3.5 3.0 2.5 2.0 Debt/Revenue 2002

X Times

1.5 1.0 0.5 0.0 -0.5 SP BA ES SC PE CE MA SE AM MT AC PA MS PB AL RR RO

Source: Brazil’s Ministry of Finance.

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NEWS & ANALYSIS
Credit implications of current events

Alexander Proklov Vice President - Senior Analyst +7.495.228.6072 alexander.proklov@moodys.com Massimo Visconti Vice President - Senior Credit Officer +39.02.91481.124 massimo.visconti@moodys.com

Decelerating Corporate Income Tax Is Credit Negative for Russian Regions
Last Tuesday, the Russian Federal Tax Service released tax revenue collection data for Russian regional governments from January through July. The first seven months show a 2% real decline in corporate income tax revenue, a rapid deceleration from the 20% real growth over the same period in 2011 (as shown below), when the nation’s economy was robust on the back of favourable commodity prices in a rebound from the 2009 recession. With corporate income tax revenue accounting for about a third of Russian regional budgets, the decline is credit negative for the regions. Russian Corporate Income Tax Growth in Real Terms, January to July (2006-12)
60% 40% 20% 0% -20% -40% -60% 2006 2007 2008 2009 2010 2011 2012

Source: Russian Ministry of Finance, Federal Tax Service, Moody’s calculation

This decline in regions’ largest own-source revenue component reflects deteriorating financial performance of Russian enterprises, a slowdown in the domestic economy and increased volatility in oil prices. We estimate Russian regions’ operating balances will fall as much as 3% below our initial 2012 forecasts. Regional effects will vary: Ba1-rated regions, many of which have double-digit operating surpluses, will absorb this tax revenue decline; Ba3-rated regions, which currently have negative operating margins, will be most negatively affected. When taking into account idiosyncratic features, namely high revenue concentration among a few large corporate taxpayers for Belgorod Oblast (Ba1 stable) and Vologda Oblast (Ba3 stable), or overoptimistic revenue plans for Nizhniy Novgorod Oblast (Ba2 stable), Omsk Oblast (Ba2 stable), and Saratov Oblast (Ba3 negative), these regions may require fiscal consolidation initiatives and/or new borrowing. Fiscal consolidation initiatives will particularly affect Vologda Oblast and Saratov Oblast considering their already high debt burdens. The Russian Ministry of Economy forecasts national real GDP growth at 3.4% in 2012 compared to 4.3% in 2011, and the last few months signal a more pronounced deceleration compared to the first part of the year. Given uncertainty over global economic conditions and because commodities prices are unlikely to increase strongly in next few months, Russian regional economies (and therefore income from corporate tax revenue) are likely to remain constrained until after year-end. Unfavourable corporate income tax dynamics are credit negative for regional budgets even though the losses are partially mitigated by growth in other regional taxes like personal income tax, which accounts for around 26% of regional budgets and grew 9.2% in real terms in the same period, thanks to salary increases of around 13%, particularly in the public sector, earlier this year, and property tax and excises.

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NEWS & ANALYSIS
Credit implications of current events

The pressure on regional budgets is exacerbated by substantial increases in their above-inflation-rate social spending, particularly for public-sector salaries and social benefits that were introduced earlier this year and/or anticipated before year-end 2012. Additionally, we expect building, road and equipment maintenance as well as utility costs to balloon toward double-digit growth this year owing to rising energy prices.

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NEWS & ANALYSIS
Credit implications of current events

US Public Finance
Nick Samuels Vice President - Senior Credit Officer +1.212.553.7121 nicholas.samuels@moodys.com Emily Raimes Vice President - Senior Credit Officer +1.212.553.7203 emily.raimes@moodys.com

Court Rules New York MTA Payroll Tax Unconstitutional, Jeopardizing $1.3 Billion of Annual Revenues
Last Wednesday, a New York state judge ruled that the state’s payroll mobility tax (PMT) is unconstitutional. The decision is credit negative for the New York Metropolitan Transportation Authority (MTA, A2 stable), which, if state appellate courts uphold the ruling, would lose $1.3 billion of revenues annually and increase pressure on the agency’s already-strained operations. The MTA operates public transit and commuter services across the New York City region, and has faced financial challenges over the past several years owing to the effects of the economic slowdown and its implementation of a large capital plan. The state enacted the PMT in 2009 to provide the MTA with recurring revenues to help close large budget gaps that it forecasted for fiscal 2010 and succeeding years. The PMT rate is 0.34% (34 cents per $100) levied on the payroll expenses of most public and private employers and self-employed persons in New York City and the seven surrounding counties of Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk, and Westchester. The tax raised $1.41 billion in fiscal 2011, according to the MTA’s July financial plan, and the MTA estimates the tax will raise an average of $1.35 billion annually through fiscal 2016. The PMT reflects about 13% of the MTA’s total estimated fiscal 2013 revenue. Changes that took effect in April 2012 exempted small employers and school districts from the PMT, which the State of New York (Aa2 stable) agreed to backfill by providing the MTA with $310 million annually. Plaintiffs in the case11 include Nassau, Putnam, Rockland, Suffolk and Westchester counties. The court’s ruling held that the legislature did not properly enact the PMT. The judge determined that the measure is a “special law” because it only applies to New York City and certain counties, rather than statewide. Enactment of special laws requires a two-thirds majority vote of both houses of the legislature or a home-rule process, and since neither happened in this instance, the law is unconstitutional, the judge said. A separate trial court involving four lawsuits brought by other plaintiffs ruled in favor of the MTA and the state. The MTA has said it will appeal last Wednesday’s ruling. The ruling does not prohibit the state from continuing to collect the PMT and remitting it to the MTA for now. The MTA believes the state will do so through the appeals process. The ruling also does not address whether the state would have to pay PMT refunds if the decision regarding unconstitutionality is ultimately upheld, and neither the MTA nor the state has said that it is setting aside any reserves to provide for a potential adverse judgment in the future. The threat to this revenue stream highlights the operational stress faced by the MTA. We expect spending, particularly fixed expenditures such as pensions and health care, to grow at a relatively rapid rate, while revenues such as its mortgage recording tax have lagged. The MTA has sought additional revenues as forecasts of operational deficits have increased, and it intended for the PMT to help fix those funding shortfalls.

11

Mangano and County of Nassau v. Silver.

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NEWS & ANALYSIS
Credit implications of current events

Covered Bonds
Martin Lenhard Vice President - Senior Analyst +49.69.70730.743 martin.lenhard@moodys.com Alexander Zeidler Vice President - Senior Analyst +44.20.7772.8713 alexander.zeidler@moodys.com

Proposed Changes to the German Pfandbrief Act Will Improve Transparency, a Credit Positive
On 22 August, the German Cabinet passed a draft law on the national implementation of Capital Requirements Directive IV (CRD IV) that will also amend the German Pfandbrief Act. The amendments improve mandatory public reporting by German Pfandbrief issuers,12 and increase the transparency of German Pfandbrief programmes. The proposal is credit positive because the change of the law, which, if passed, will become effective at the start of 2013, provides incentives for issuers to add higher-quality substitute assets to cover pools. Increased transparency will also support a liquid Pfandbrief market and reduce refinancing risk. Increased transparency for substitute assets means Pfandbrief issuers are more likely to add highquality assets to cover pools. When deciding on which substitute assets to add to the cover pool, Pfandbrief issuers are more likely to consider that for the first time, the type of issuer and the geographic distribution of substitute asset issuers will need to be publicly reported. Pfandbrief issuers have broad discretion to include a wide variety of substitute assets (including bonds issued by sovereigns, sub-sovereigns and banks) within specific eligibility criteria.13 In the case of mortgage Pfandbrief, substitute assets can comprise up to 20% of cover pool assets that are considered for the statutory collateral requirement. Existing reporting requirements are already prompting public-sector Pfandbrief issuers to include fewer cover assets originated in lower-rated euro area countries.14 Better transparency will allow investors to better assess the credit quality of cover pools in individual Pfandbrief programmes. The draft law includes additional transparency requirements regarding currency risks, interest rate risks, the remaining term of the loans and the amount of ECB-eligible assets in the cover pool, a more precise view of the specific risks included in Pfandbrief programmes. Increased transparency will support a liquid Pfandbrief market and reduce refinancing risk. Increased transparency and better-quality assets in cover pools will give investors greater confidence in the collateral and the credit strengths of the covered bond product, making them more likely to accept a tighter bid on covered bond issuances, which will reduce refinancing risk. Following an issuer default, cover pool assets are unlikely to generate sufficient cash flows to repay maturing covered bonds, so existing covered bond investors rely on refinancing cover assets, which often involves another bank taking over the failed issuer’s assets. And that’s more likely if the acquiring bank can fund the purchase by issuing covered bonds in a market with a tight bid.

12 13 14

According to §28 of the German Pfandbrief Act. See Moody’s Analysis of Legal Framework For German Pfandbriefe, 1 July 2010. See Public-Sector Pfandbriefe: Asset Selection Risk Increases (Periphery Exposures Down, But Exceptions Exist), 4 April 2012.

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RATING CHANGES
Significant rating actions taken the week ending 24 August 2012

Corporates
Crown Holdings, Inc.
20 Jan ‘11

Upgrade
23 Aug ‘12

Corporate Family Rating Outlook

Ba2 Positive

Ba1 Stable

The upgrade reflects our expectation of further improvement in credit metrics owing to Crown’s recent and pending expansion into developing markets. The Ba1 rating reflects the company’s position in an oligopolistic industry, relatively stable end-markets and improved profitability. The rating is also supported by the high percentage of business under contract with strong raw material cost passthrough provisions, higher margin growth projects in emerging markets and good liquidity. Crown's broad geographic exposure, including a high percentage of sales from faster growing emerging markets, is both a benefit and a source of some potential volatility. Education Management LLC
16 Mar ‘12

Downgrade
21 Aug ‘12

Corporate Family Rating Outlook

B2 Stable

B3 Review for Downgrade

The downgrade reflects Education Management’s prospects for weaker-than-expected operating performance for fiscal 2013. The B3 rating reflects declining enrollment and profitability levels, deteriorating credit metrics, substantial goodwill impairment charges that were recorded in recent periods, and approaching refinancing risk. The company faces heightened regulatory/legal risk given its reliance on Title IV student loans and there is the potential for increased competition from non-profit institutions in the wake of negative industry press. MeadWestvaco Corporation (MWV)
29 Aug ‘11

Upgrade
22 Aug ‘12

Senior Unsecured Rating Outlook

Ba1 Positive

Baa3 Stable

The upgrade recognizes MWV’s improved operating performance and reflects our expectations of stronger financial performance over the next few years as it completes its modernization and expansion projects. The Baa3 senior unsecured rating primarily reflects the company’s strong balance sheet and leading market positions in several global packaging markets.

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RATING CHANGES
Significant rating actions taken the week ending 24 August 2012

Revel Atlantic City, LLC
2 Feb ‘11

Downgrade
22 Aug ‘12

Corporate Family Rating Outlook

Caa1 Stable

Caa2 Review for Downgrade

We have downgraded Revel because of the significant shortfall in the company’s revenue and earnings relative to our expectations, which leads us to be concerned that the company will not be able to achieve the targeted business volumes and earnings necessary to cover its fixed charge burden. The downgrade review considers the ongoing difficult operating environment in Atlantic City. Total S.A.
30 Aug ‘05

Outlook Change
23 Aug ‘12

Senior Unsecured Rating Short-Term Issuer Rating Outlook

Aa1 P-1 Stable

Aa1 P-1 Negative

The outlook change to negative reflects our concern that the significant increase in investments — including the launch of major organic projects and recent acquisitions — made by Total in the past two years has constrained the recovery in its credit metrics relative to pre-2009 historical levels, despite the buoyant oil price environment. The investments were to give fresh impetus to its upstream growth strategy.

Infrastructure
Big Rivers Electric Corporation (BREC)
13 March ‘09

Downgrade
21 Aug ’12

Senior Secured Rating Outlook

Baa1 Stable

Baa2 Review for Downgrade

The downgrade primarily reflects increased financial and operating risks for BREC after the 20 August announcement that Century Aluminum of Kentucky had issued a 12-month notice to terminate its power contract with BREC for its Hawesville smelter.

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27 AUGUST 2012

RATING CHANGES
Significant rating actions taken the week ending 24 August 2012

Financial Institutions
Aetna Inc.
26 Mar ‘12

Review for Downgrade
20 Aug ‘12

Senior Unsecured Debt

Baa1

Baa1

Aetna Life Insurance Company
Issuer Rating Insurance Financial Strength Rating Outlook A2 A1 Stable A2 A1 Review for Downgrade

Coventry Health Care, Inc.
11 Aug ‘11

Review for Upgrade
20 Aug ‘12

Senior Unsecured Debt Corporate Family Rating Insurance Financial Strength Ratings Outlook

Baa3 Baa3 A3 Stable

Baa3 Baa3 A3 Review for Upgrade

The rating actions follow the announcement that Aetna had entered into a definitive agreement to acquire Coventry. The review for downgrade on Aetna reflects the adverse impact of the transaction terms that were announced, which includes funding of $1.2 billion in cash, $2.0 billion of equity, and approximately $2.5 billion of new debt and commercial paper. Somewhat offsetting these credit negatives will be an enhanced business and earnings profile for Aetna from the approximately 3.8 million medical members that we expect the acquisition to add as well as the increased product diversity. When the transaction closes, we expect that Coventry's insurance financial strength and debt ratings will be aligned with those of Aetna's operating and holding companies. Affirmative Insurance Holdings, Inc.
5 Mar ‘12

Downgrade
22 Aug ‘12

Corporate Family Rating Insurance Financial Strength Ratings Outlook

Caa2 B1 Negative

Ca B3 Review for Downgrade

The downgrades reflect the company's further weakened financial condition through the first six months of 2012 including poor profitability, a 16% decline in statutory surplus to $57.3 million, ongoing negative statutory operating cash flows, elevated potential to breach covenants in its bank credit facility, and substantial execution risks related to insurance operations.

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RATING CHANGES
Significant rating actions taken the week ending 24 August 2012

First-Citizens Bank & Trust Company
2 Feb ‘10

Review for Downgrade
22 Aug ‘12

Long-Term Deposits Short-Term Deposits Standalone Bank Financial Strength / Baseline Credit Assessment Outlook

A2 Prime-1 C+ / a2 Negative

A2 Prime-1 C+ / a2 Review for Downgrade

The review for downgrade reflects profitability challenges at First Citizen. Our review will focus on First Citizens' future possible strategic response to these challenges, which could increase risk in order to generate higher returns on capital. While First Citizens has boosted its profitability with FDICassisted bank acquisitions in the past three years, these earnings will diminish over the next few years. Without the replacement of this revenue, First Citizens' profitability will fall well below the level of similarly-rated banks. Man Group Plc
11 Apr ‘12

Downgrade
21 Aug ‘12

Senior Unsecured Debt Outlook

Baa2

Baa3

Review for downgrade Negative

The rating downgrade reflects continuing challenges in the company's core business. These include the persistent decline in funds under management, investment performance that remains below benchmark and historical rates of return, the ongoing decline in the aggregate gross management fee margin, falling revenues, and the fact that Man's financial condition that has not returned to pre-crisis strength.

Sub-sovereigns
Government of Nunavut, Canada
First Time Rating
21 Aug ’12

Issuer Rating Outlook

Aa1 Stable

The Aa1 rating places Nunavut in the mid range of ratings for Canadian provinces and territories, whose ratings remain within a narrow range of Aaa to Aa2. The high investment-grade rating reflects a low debt burden, a prudent budgetary policy framework that routinely produces surpluses and significant federal transfers from the Canadian federal government (Aaa stable), which provides a stable, predictable source of revenue. Fiscal policy in Nunavut is characterized by a commitment to balanced fiscal outcomes, as evidenced by both a record of consecutive consolidated surpluses since 2003 and the absence of general obligation debt.

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MOODY’S CREDIT OUTLOOK

27 AUGUST 2012

RATING CHANGES
Significant rating actions taken the week ending 24 August 2012

Coacalco, Mexico; Municipality of
20 Jun ‘11

Downgrade
23 Aug ’12

Issuer Rating NSR Outlook

B1 Baa2.mx Negative

B3 B1.mx RUR down

The downgrades reflect a significant deterioration in Coacalco's finances leading to substantial increases in short- and long-term debt and deterioration in its already tight liquidity. Following the recording of roughly balanced consolidated fiscal results in prior years, Coacalco registered sizable cash financing requirements in 2010 and 2011, equivalent to 19.2% and 26.4% of total revenues, respectively. Operating spending pressures and a limited own-source revenue growth primarily drove these results, which were among the weakest in our portfolio of rated sub-sovereign municipalities.

Structured Finance
Actions Taken on Prime Jumbo RMBS Issued by Wells Fargo from 2005 to 2007 We downgraded 126 tranches, upgraded 45 tranches and confirmed the ratings on three tranches from 20 RMBS transactions issued by Wells Fargo. The collateral backing these deals primarily consists of first-lien, fixed-rate prime Jumbo residential mortgages. The actions impact approximately $2.5 billion of RMBS issued from 2005 to 2007. The downgrades are a result of deteriorating performance and structural features resulting in higher expected losses for certain bonds than previously anticipated. The upgrades are due to significant improvement in collateral performance, and rapid build-up in credit enhancement from high prepayments.

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RESEARCH HIGHLIGHTS
Notable research published the week ending 24 August 2012

Corporates
North American Capital Goods - Demand Growth Expected to Slow in 2013
We changed our outlook to stable from positive for the North American capital goods sector amid the US drought that is hampering demand for farm equipment, and as falling commodity prices cut into mining profits.

Indonesian Coal Miners' Resilience Tested if Prices Remain Low
Rated Indonesian coal producers’ credit ratings have come under varying degrees of pressure as margins have been squeezed by weaker coal prices and higher production costs, ambitious capital expenditure plans and substantial debt burdens. We think cost control is crucial if Indonesian coal producers are to keep their status as the world’s lowest-cost thermal coal producers.

US Coal Industry Cheers Court's Rejection of EPA's Cross-State Air Pollution Rule
A recent US appeals court ruling struck down the US Environmental Protection Agency’s Cross-State Air Pollution Rule, giving the beleaguered US coal industry a rare positive regulatory development. The ruling does not affect the region’s longer-term fundamental challenges, such as competition from low-priced natural gas and other regulations that put coal at a disadvantage. Still, it offers coal producers in Appalachia a temporary reprieve from what was likely to be a material near-term negative.

Financial Institutions
US Health Insurers' Q2 2012 Results: Increase in Medical Trend Dampens Earnings
In aggregate, publicly traded US health insurers reported lower earnings for both Q2 2012 and year-todate compared to last year as the increasing medical trend began to erode some of the excess margins that were realized over the last two years. We anticipate lower overall margins during the second half of the year for the sector but anticipate that pricing will be able to catch up to limit the damage.

US P&C Insurers' Q2 2012 Earnings Improve; Pricing Momentum Continues
The US P&C insurance companies closed out the first half of 2012 with strong earnings growth, driven by lower catastrophe losses and increased premium growth. Investment income remained stable and we expected reserve releases, while higher this quarter, to continue their moderating trend through the second half of the year, prompting companies to turn up the dial on rate increases to meet return targets.

US Crop Insurance: Sector Profile
The US crop and agricultural insurance sector is anchored in the multi-peril crop insurance program – the core of insurance protection for farmers – which is jointly operated by the US government and private industry and insures farmers. Over time, the government has reduced expense reimbursements to crop insurers, which in turn has contributed to consolidation, offering competitive advantages to larger, diversified insurers.

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MOODY’S CREDIT OUTLOOK

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RESEARCH HIGHLIGHTS
Notable research published the week ending 24 August 2012

Managed Funds: New OTC Regulations Will Boost Demand for Eligible Collateral
New over-the-counter derivatives regulations will likely cause a surge in demand for liquid, highquality government securities that are eligible as collateral. But lower yields on government securities may lead to a shift in bond and money market fund allocations into riskier, lower credit-quality investments.

Sub-sovereigns
Recent Developments Highlight the Province of Buenos Aires' Structural Weaknesses
The dire liquidity pressures facing the Province of Buenos Aires are consistent with the B3/A3.ar assigned ratings, and are typical of speculative-grade issuers subject to high credit risk, says our report. The predicament of the province was made clear recently by a delay in paying the mid-year installment of its annual bonus to public employees, due 1 July.

US Public Finance
State Ratings Not Likely Affected by Decisions on Joining Medicaid Expansion
Medicaid is and will remain a major source of fiscal pressure on states, says our report, which identifies likely federal deficit reduction efforts as potentially the largest risk to states stemming from Medicaid. The extent of any effects on ratings will depend on how states respond to underlying cost drivers, including any new federal actions..

Credit Impacts Still Unfolding Related to Restructure of New Jersey Public Medical Education System
The sweeping overhaul of the state’s system of public health sciences education and research will affect Rutgers, The State University (Aa2 stable); Rowan University (A2 negative); and University of Medicine and Dentistry of New Jersey (Baa1 negative). More information is needed about which parties will be responsible for payment of debt service on outstanding bonds and the magnitude of other costs associated with the reform.

Structured Finance
Key Risks in Single-Family Rental Securitizations Will Be Operator’s Performance and Cash Flow Variability
As market interest increases in launching transactions backed by cash flows from single-family rental properties, we outline the main risks we would expect these securities to present. These are the risk of the operator failing to perform its duties, and the risk posed by the variability of cash flow from the rental and ultimate sale of the properties.

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MOODY’S CREDIT OUTLOOK

27 AUGUST 2012

RESEARCH HIGHLIGHTS
Notable research published the week ending 24 August 2012

Swedish Covered Bonds: Market Strength Leads to Rise in Timely Payment Indicators
On 20 August 2012, we raised the Timely Payment Indicators (TPIs) for Swedish covered bonds to "Probable-High" from "Probable". The revised TPIs of Probable-High reflect the strengths of Swedish covered bonds, which have become established as a core European market in recent years. Following the introduction of the Swedish covered bond law in 2004, both the domestic and international Swedish covered bond markets have grown in size and importance, backed by significant support from both issuers and investors.

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

NEWS & ANALYSIS
Corporates » Illinois Tool Works' Sale of Decorative Surfaces Stake Is Credit Negative » Hong Kong Developers Benefit from Record Property Prices Banks » US Treasury Amends Fannie Mae's and Freddie Mac's Capital Agreement, a Credit Positive » Danish Mortgage Lenders to Benefit from Higher Bar for Borrowers » First Commercial Bank’s Plan to Establish Rural Banks in Mainland China Is Credit Negative Insurers » Aetna's Coventry Acquisition Is Credit Negative for Aetna; Positive for Coventry Sovereigns » Curaçao and Sint Maarten Maintain Central Bank and Currency Union, Avoiding a Credit Negative US Public Finance » Illinois Fails to Enact Pension Reform, a Credit Negative for the State » Michigan Pension Reforms Reduce Expenses for School Districts 7 2

CREDIT IN DEPTH
Asset Managers Driven by market and regulatory pressures, banks have announced plans to reduce assets by almost €2.0 trillion over the course of 201113. The two main areas where this deleveraging will be achieved are through loan portfolio disposals and a reduction in the extension of credit. Asset managers have started capitalising on the opportunities in these two areas, with the objective of growing their own franchises. 14

4

8

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MOODY’S CREDIT OUTLOOK

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EDITORS
News & Analysis: Elisa Herr, Jay Sherman and Joseph Cullen Ratings & Research: Neil Buckton Final Production: Barry Hing

PRODUCTION ASSOCIATE
David Dombrovskis

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