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9 March 2020

NEWS AND ANALYSIS » Israel's third consecutive inconclusive election will 30
Coronavirus prolong policy inertia
» Coronavirus will hurt economic growth in many countries 2 Sub-Sovereigns
through first half of 2020 » Brazilian State of Sao Paulo approves public-employee 32
» Global passenger airlines' outlook revised to negative as 5 pension reform, a credit positive
coronavirus stresses demand US Public Finance
» Global aircraft lessors' outlook revised to stable from 7 » Pension changes will lower liabilities for New Mexico and 34
positive on coronavirus-driven business disruption its municipalities, a credit positive
» Coronavirus outbreak is credit negative for Russian 9 Securitization
aircraft lessors » European court's ruling on IRPH risks tapering excess 36
» Ciena tempers its revenue growth guidance on 11 spread on some Spanish RMBS is credit negative
coronavirus disruption
» Coronavirus will hit betting and gaming revenue in 12
northern Italy, a credit negative CREDIT IN DEPTH
Corporates » Board-level gender diversity at European companies 38
» Tesco’s new Aldi price-matching campaign will likely 14 shows positive correlation with higher ratings
spark price wars, a credit negative for UK grocers Our examination of corporate boards at companies in the European
Banks Union, UK and Norway shows a positive relationship between gender
» Fed’s final stress capital buffer is credit negative for US 15 diversity and higher credit ratings.
» United Arab Emirates' rate cut is credit negative for 17
banks' profitability RECENTLY IN CREDIT OUTLOOK
» Restrained foreign-currency lending at United Bank for 19 » Articles in last Thursday's Credit Outlook 40
Africa's Nigerian unit is credit positive
» Green funding will benefit Standard Bank of South Africa 21 » Go to last Thursday's Credit Outlook
» Korean bank regulator penalizes Woori and Keb Hana for 23
» Working group formed to resolve HNA Group's financial 25 Click here for the coronavirus topics page on Moody's website.
problems is credit positive
» Homeowner and commercial property insurers face 27
losses from Tennessee tornadoes


Coronavirus will hurt economic growth in many countries through first

half of 2020
Originally published on 06 March 2020

» The global spread of the coronavirus is resulting in simultaneous supply and demand shocks. We expect these shocks to
materially slow economic activity, particularly in the first half of this year. We have therefore revised our 2020 baseline growth
forecasts for all G-20 economies. We expect these countries, as a group, to grow by 2.1% in 2020, 0.3 percentage point lower than
our previous forecast. We have lowered our 2020 forecast for China's growth to 4.8% from our previous estimate of 5.2%. For the
US, we now expect real GDP to grow by 1.5% in 2020, down from our previous estimate of 1.7%.

» The full extent of the economic costs will be unclear for some time. Fear of contagion will dampen consumer and business
activity. The longer it takes for households and businesses to resume normal activity, the greater the economic impact.

» Global recession risks have risen. The longer the outbreak affects economic activity, the demand shock will dominate and lead
to recessionary dynamics. In particular, a sustained pullback in consumption, coupled with extended closures of businesses, would
hurt earnings, drive layoffs and weigh on sentiment. Such conditions could ultimately feed self-sustaining recessionary dynamics.
Heightened asset price volatility would magnify the shock.

» Fiscal and monetary policy measures will likely help limit the damage in individual economies. Policy announcements from
fiscal authorities, central banks and international organizations so far suggest that policy response is likely to be strong in affected
countries. The US Federal Reserve’s decision to cut the federal funds rate by 50 basis points and the announcements from the
European Central Bank and the Bank of Japan assuring policy support will limit global financial market volatility and partly counter
the tightening of financial conditions.

Exhibit 1
G-20 economic growth
Annual % change

Share of global growth

8% 8%
Rest 16%
Emerging G-20
6% 6%
(% change)

Advanced G-20 55% 4.6%

Economic growth 4% 4%
2.6% 2.8%
2% 2%
G-20 All
G-20 Emerging 1.7% 1.6%
G-20 Advanced 0% 1.0% 0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020F 2021F

Source: Moody's Investors Service

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history.

2 Credit Outlook: 9 March 2020

Exhibit 2
Global macroeconomic outlook for the G-20 countries, 2020-21

Economies Real GDP Growth 1 Inflation 2 Unemployment Monetary Policy

G-20 18 19E -3 -2 -1 0 1 2 3 4 5 6 7 8 20F 21F Target 19E 20F 21F 19E 20F 21F 19E 20F 21F
Advanced 2.2 1.7 1.0 1.6
US 2.9 2.3 1.5 1.9 2.0% 2.0 2.0 2.3 3.7 3.7 4.0 ▼ ▼ ⬛
Euro area 1.9 1.2 0.7 1.5 2.0% ▼ ▼ ⬛
Japan 0.3 0.7 0.0 0.6 2.0% 0.8 0.7 1.0 2.3 2.5 2.5 ⬛ ▼ ⬛
Germany 1.5 0.6 0.3 1.5 2.0% 1.5 1.1 1.6 3.2 3.2 3.4
UK 1.4 1.2 0.9 1.0 2.0% 1.3 1.9 2.0 3.8 4.1 4.4 ⬛ ▼ ⬛
France 1.7 1.3 1.1 1.5 2.0% 1.6 1.4 1.6 8.5 8.2 8.0
Italy 0.8 0.3 -0.5 1.2 2.0% 0.5 0.3 1.6 10.0 10.3 10.0
Canada 2.0 1.5 1.4 1.6 2.0% (+/-1.0%) 2.2 1.9 2.0 5.7 6.1 6.1 ⬛ ▼ ⬛
Australia 2.7 2.0 1.6 2.6 2.0%- 3.0% 1.8 2.2 2.5 5.2 5.2 4.9 ▼ ▼ ⬛
South Korea 2.7 2.0 1.4 2.6 2.0% 0.7 1.1 1.8 3.8 4.2 4.2 ▼ ▼ ⬛
Emerging 5.0 4.2 3.8 4.6
China 6.6 6.1 4.8 5.5 3.0% 4.5 2.4 2.5 -- -- -- ▼ ▼ ⬛
India 7.4 5.0 5.3 5.8 4% (+/-2.0%) 7.3 4.2 4.5 -- -- -- ▼ ▼ ⬛
Brazil 1.3 0.9 1.8 2.5 4.5% (+/-1.5%) 4.3 3.6 3.8 -- -- -- ▼ ▼ ⬛
Russia 2.3 1.2 1.3 1.8 4.0% 3.1 3.2 3.8 -- -- -- ▼ ▼ ⬛
Mexico 2.1 -0.1 0.9 2.1 3.0% (+/-1.0%) 2.8 2.9 3.0 -- -- -- ▼ ▼ ⬛
Indonesia 5.2 5.0 4.8 4.9 3% (+/-1.0%) 2.6 2.3 2.2 -- -- -- ▼ ▼ ⬛
Turkey 2.8 0.2 2.5 3.0 5.0% (+/-2.0%) 11.8 11.0 11.0 -- -- -- ▼ ▼ ⬛
Saudi Arabia 2.4 0.1 0.2 4.1 USD Peg 3 0.3 1.5 1.9 -- -- -- ▼ ▼ ⬛
Argentina -2.5 -2.5 -2.5 1.5 Monetary Base 55.0 40.0 30.0 -- -- -- ▲ ▲ ⬛
South Africa 0.8 0.3 0.4 0.9 3.0% - 6.0% 4.0 4.7 5.0 -- -- -- ▼ ▼ ⬛
-3 -2 -1 0 1 2 3 4 5 6 7 8
Growth forecast adjustment from the previous outlook Monetary policy directions
All 3.2 2.6 2.1 2.8 X.X Adjustment < 0.3 pp Maintain current policy
X.X An upward adjustment ≥ 0.3 pp Accommodative
X.X A downward adjustment ≥ 0.3 pp Tightening

1. See2.our
See our previous
previous Global Global Macroeconomic
Macro Outlook, FebruaryOutlook,
2020. 2."Global growth
Dec-to-Dec to decelerate
% change. amid tightening
3. Exchange global liquidity
rate arrangement and elevated
is conventional peg totrade tensions,"
the US dollar. 8 November 2018. 3. Dec-to-
Source: Moody's Investors Service

We have made downward revisions to our global growth projections

Since the publication of our last Global Macro Outlook update in mid-February, the coronavirus outbreak has spread rapidly outside
China (A1 stable) to a number of major economies including Korea (Aa2 stable), Iran, Italy (Baa3 stable), Japan (A1 stable), Germany
(Aaa stable), France (Aa2 stable) and the US (Aaa stable). Previously, we assessed the effects of the virus mainly on aggregate demand
in China, global travel and global factory output resulting from disruptions in supply chains through East Asia. It is now clear that the
shock will additionally dampen domestic demand globally, which will affect a wide range of non-traded activities across countries and
regions simultaneously.

We have therefore revised our 2020 baseline growth forecasts down for all G-20 economies (see Exhibit 3). With these revisions,
we now expect the global economy to grow by 2.1% in 2020, 0.3 percentage point lower than our previous forecast. We expect that
disruptions to a broad range of economic activities will slow economic growth in a large number of countries, particularly in the first
half of this year.

3 Credit Outlook: 9 March 2020

Exhibit 3
Forecast adjustments

Economies February baseline Baseline scenario Downside scenario

G-20 2020F 2020F 2021F 2020F 2021F

(Date of publication) February 16 March 6 March 6 March 6 March 6

Advanced 1.3 1.0 1.6 0.5 1.5

US 1.7 1.5 1.9 0.9 1.8
Euro area 1.2 0.7 1.5 0.4 1.4
Japan 0.3 0.0 0.6 -0.6 0.6
Germany 1.0 0.3 1.5 -0.3 1.4
UK 1.0 0.9 1.0 0.4 0.8
France 1.3 1.1 1.5 0.8 1.4
Italy 0.5 -0.5 1.2 -0.7 1.0
Canada 1.5 1.4 1.6 0.9 1.5
Australia 1.8 1.6 2.6 1.3 2.4
South Korea 1.9 1.4 2.6 0.8 2.3

Emerging 4.2 3.8 4.6 3.0 4.6

China 5.2 4.8 5.5 3.7 5.5
India 5.4 5.3 5.8 5.0 5.8
Brazil 2.0 1.8 2.5 1.5 2.4
Russia 1.5 1.3 1.8 1.1 1.9
Mexico 1.0 0.9 2.1 0.6 2.2
Indonesia 4.9 4.8 4.9 4.5 4.5
Turkey 3.0 2.5 3.0 2.0 2.7
Saudi Arabia 2.5 0.2 4.1 -1.0 3.2
Argentina -2.5 -2.5 1.5 -3.0 1.5
South Africa 0.7 0.4 0.9 0.0 0.8

All 2.4 2.1 2.8 1.4 2.7

Source: Moody's Investors Service

Click here for the full report.

Madhavi Bokil, VP-Sr Credit Officer/CSR Elena H Duggar, Associate Managing Director
Moody’s Investors Service Moody’s Investors Service
+1.212.553.0062 +1.212.553.1911
Atsi Sheth, MD-Credit Strategy Anne Van Praagh, MD-Gbl Strategy & Research
Moody’s Investors Service Moody’s Investors Service
+1.212.553.7825 +1.212.553.3744

4 Credit Outlook: 9 March 2020


Global passenger airlines' outlook revised to negative as coronavirus

stresses demand
Originally published on 06 March 2020

The coronavirus outbreak's uncertain duration and spread will pressure passenger airlines’ operating profits and cash
generation – materially in some cases – for at least the first half of 2020. As a result, we have changed the outlook for the
passenger airline industry to negative from stable. The outlook change reflects the increasing risk to demand for passenger air travel
as the presence and incidence of coronavirus expands globally. Capacity reductions have already occurred – with considerable regional
variability – and we expect further reductions as the number of infected people and affected countries grows.

We now roughly estimate an operating margin of less than 5% for 2020 for the aggregate of the airlines we rate, down
from our pre-coronavirus expectation of about 9%. For modeling purposes, we assume that the adverse effect from coronavirus
will persist through June, and a recovery of demand and capacity will not begin until at least the third quarter. While our updated
margin projections may still fall within the articulated “4% to 10%” band for a stable outlook, our expected more than 20% decline
in operating profits supports the outlook revision to negative, especially in light of the uncertain duration and effect of the virus on
economic activity. We have revised our 2020 baseline growth forecasts for all G-20 economies and now expect these countries, as a
group, to grow by 2.1% in 2020, 0.3 percentage points lower than our previous forecast.

Major unknowns – including uncertainty about the virus’ active period, its eventual geographic spread and the scale of
infections in a given country or region – complicate our efforts to project operational and financial effect for the industry.
We expect a sharp decline in passenger demand through at least the second quarter of 2020, with significant uncertainty about how
a recovery would take shape until the still expanding infectious period subsides. Airline bookings are slowing with each passing day as
more information emerges on more cases in more places.

However, our base case assumption is that the virus will be mostly a first-half 2020 problem, and that traffic should be close to pre-
coronavirus levels by the end of 2020. This assumption is based in part on the recovery following the 2003 Severe Acute Respiratory
Syndrome (SARS) pandemic – centered in Hong Kong. SARS weighed on air travel (albeit primarily in Asia) for about three months,
with demand recovering in the ensuing three to six months accompanied by a concurrent recovery of airlines’ operations and financial
results. However, if the outbreak persists beyond the first half and/or the eventual recovery in the second half of the year is weaker than
expected, the financial effect and credit risk for the airline sector would be greater.

Capacity cuts, earnings and cash flow pressures will vary by region and business model. Quarantines, government and
corporate travel restrictions and a lower propensity for leisure travel are driving airline capacity cuts as coronavirus spreads.
International long-haul carriers eliminated or significantly reduced service to Chinese cities in late January as news of the outbreak
became public; domestic and international passenger numbers in China were down about 60% in February, according to the
International Air Transport Association. However, there are reports that some service to and within China is now being reinstated.

We expect carriers to cut service to regions where new widespread outbreaks emerge, but some carriers are proactively cutting capacity
in light of the stressed operating environment. United Airlines Holdings Inc. (Ba2 positive) announced on 4 March that it is cutting
capacity – 20% of its international network and 10% of its domestic network – for April, and possibly May. JetBlue Airways Corp.
(Ba1 stable) followed with a reported capacity cut of 5%. Other US airlines will likely follow shortly; European carriers are also cutting

Carriers that reduce capacity in one part of their network will look to deploy aircraft on other routes to places not yet reporting
infections. For example, we believe the big three US carriers are planning to redeploy their wide-body aircraft no longer serving Asia
routes to hub-to-hub domestic routes and other international destinations. However, these shifts in the domestic market could further
pressure unit revenues if the airlines, in the aggregate, do not sustain capacity discipline on affected routes, particularly if the spread of
the virus persists and demand declines further.

5 Credit Outlook: 9 March 2020

While there is a significant level of variable cost in the industry, it will not be sufficient to offset the revenue decline and
mitigate pressure on operating margins. During normal operations – and with the price of Brent ranging from $55 to $75 per barrel
– airlines' fuel and labor expenses account for the largest shares of total revenue. Brent crude prices have fallen markedly since the
outbreak began in mid-January, from about $57 a barrel to under $50.

We expect fuel costs to decline based on our expectation that oil prices will remain pressured as the virus spreads. Labor expense will
also decline, but not in full step with the decline in flights as capacity is cut because of union pay arrangements. In the US, pilot and
flight attendant labor costs become mostly fixed every two months as schedules are set and crews are assigned. Work rules are likely to
make labor expense less flexible and further compound earnings and cash flow pressure for carriers based in Europe. Variability of other
costs will help offset earnings pressure, though to varying degrees.

Fuel hedging strategies will determine to what extent airlines can benefit from lower prices. Jet fuel currently represents about
20% to 45% of an airline's revenue at Brent prices near $60 per barrel. The wide range reflects different business models, lower for
large legacy carriers, higher for younger low-cost carriers. As a commodity, fuel costs will be almost entirely variable, particularly for
operators that do not hedge their jet fuel exposure, or those that hedge primarily with long-call options.

Most US airlines do not hedge or hedge very little. Southwest Airlines Co. (A3 stable) still hedges more than 50% of its next 12
months of fuel, but uses mostly call options. Using a long-call strategy results in incurring only the option premium, and subsequently
retaining the ability to realize the full amount of declines in fuel prices. However, airlines such as Deutsche Lufthansa Aktiengesellschaft
(Lufthansa, Baa3 stable) that hedge using forward supply contracts will have locked in their fuel costs, which will prevent them from
realizing lower fuel expenses when oil prices decline, exacerbating earnings and cash flow pressures.

Global carriers with a diverse mix of international and domestic routes may be less affected than airlines with more
concentrated networks. For example, the Australian and New Zealand carriers may suffer less than European airlines, assuming that
residents choose to holiday domestically, helping to offset lower traffic from reduced foreign visitors. Asian and European operators
will likely not realize a similar offsetting benefit. Instead, pressure will grow as short-haul capacity cuts compound reduced long-haul
capacity. US airlines will likely suffer the fate of the European and Asian airlines. More widespread incidence of coronavirus to other
European cities and Latin America would further compound pressure for legacy airlines from all continents, as more capacity reductions
would likely ensue.

What could change the outlook. We would consider changing the outlook to stable when the active period of virus contagion wanes
and we expect a recovery in passenger demand. We consider aggregate reported operating profit for the rated airlines of 4% and 10%
indicative of stable industry fundamentals. However, if we expect a change in reported operating profit dollars in excess of 20% when
operating margins are within this band, we consider the outlook to be negative or positive in line with the direction of the expected

Jonathan Root, CFA, Senior Vice President Russell Solomon, Associate Managing Director
Moody’s Investors Service Moody’s Investors Service
+1.212.553.1672 +1.212.553.4301
Ian Chitterer, VP-Sr Credit Officer Nidhi Dhruv, CFA, VP-Senior Analyst
Moody’s Investors Service Moody’s Investors Service
+61.2.9270.1420 +65.6398.8315

6 Credit Outlook: 9 March 2020


Global aircraft lessors' outlook revised to stable from positive on

coronavirus-driven business disruption
Originally published on 06 March 2020

The disruption of global airline operations attending the spread of coronavirus has led us to change our outlook on the aircraft leasing
sector to stable from positive. Our baseline scenario is that lessors will suffer moderate revenue losses over the next two quarters from
coronavirus-related disruption of air travel.

Lessors are managing the situation through selective rental deferrals, and recent aircraft delivery delays have fortuitously lowered
the immediate risk of mass overcapacity. However, there is potential for far greater operational disruption and severe, credit negative
revenue losses and aircraft impairments if coronavirus-related illnesses become significantly more pervasive in coming months and
prompt government or industry action to more broadly curtail flights.

Immediate financial losses from coronavirus-related disruption should be moderate and manageable
Leading into 2020, before the coronavirus outbreak, we cited steady global travel growth and sustained demand for leased aircraft as
key drivers of a positive outlook on the aircraft leasing sector. The change in outlook to stable reflects our revised baseline scenario, in
which air travel volumes will be subdued through at least the first half of 2020 before recovering over the ensuing two quarters.

Consistent with the revised baseline scenario, lessors are selectively agreeing to rental deferral requests from lessees trying to manage
through temporarily weakened cash flow from what we expect will be short-term operational disruptions. We understand that so far
these rent deferrals for lessors with geographically diverse operations are limited in scope and modest compared with total revenue,
but we expect deferrals will have greater impact on lessors with lease concentrations in China and Asia more broadly.

The criteria for granting rent deferrals to date have been fairly strict. The lessors require evidence that the spread of coronavirus
has directly disrupted the operations of specific leased aircraft and caused significant financial stress to the airline. Lessors also take
into account the comparative importance and strength of customer relationships, as well as the underlying financial strength of the
customer. If a lessor judges that an already financially strapped airline will be unlikely to meet rescheduled lease payments, it may be
less inclined to defer rentals, and could instead decide to repossess the aircraft. Lessors may also seek concessions such as extension of
lease terms, promise of additional business, and payment of interest on deferred rents.

The larger, more established lessors have strengthened their capital and liquidity in recent years, enhancing their ability to manage
temporary declines in cash flow and elevated airline credit risks in their businesses. Fleet risk characteristics have also improved,
reflecting lessors' sales of higher risk aircraft to eager investors and new entrants. Nevertheless, investor interest in the sector is highly
confidence-sensitive, and a contraction in access to capital could cause significant funding and fleet management challenges for
smaller, weaker lessors, possibly leading to some M&A consolidation in the sector.
Aircraft delivery delays and low fuel prices provide some relief to airlines, as travel volumes in China begin to recover
Several concurrent business developments are helping airlines and lessors to ride out the coronavirus disruption. Delivery delays of the
Boeing 737 MAX, and to a lesser extent the Airbus A321neo, over the past twelve months have created a shortage of aircraft, which will
lower the severity of aircraft overcapacity from flight cutbacks so long as the downturn in air travel volume is temporary. Airlines are
also benefitting from a decline in fuel prices, which offsets some of the pressure on operating margins from lower passenger volumes
and lower airfares. Meanwhile, air travel volume in China has begun to recover over the past week, with the government encouraging
airlines to resume some service, though airfares are below the norm.

Looking further ahead, some affected airlines in China are state-owned enterprises (SOEs) and will be supported by governmental
entities, if needed, which will moderate the credit risk of lessors. The Civil Aviation Administration of China is already implementing
policies to help alleviate the financial stress of air carriers in China because air travel is viewed as essential to maintaining the long-term
health of regional commerce and social exchange.

7 Credit Outlook: 9 March 2020

With respect to fleet planning, airlines and lessors are taking the long view, expecting that air travel volumes will substantially recover
once the spread of the disease is contained. Lessors have arranged lease commitments for nearly all deliveries of new aircraft they are
scheduled to receive through 2020 and a high percentage of deliveries scheduled for 2021. We expect that most leases maturing over
the next few quarters have either been renewed or alternate leases secured. We do not expect material cancellations of orders and
lease commitments, though some could be rescheduled.

A highly protracted downturn in air travel from coronavirus disruption would have severe and
concatenating credit negative repercussions for lessors
If coronavirus becomes significantly more pervasive, and authorities and airlines respond by substantially curtailing flights globally, the
risks to aircraft lessors will quickly concatenate with severe and prolonged credit negative implications.

First, the number of rental deferral requests would rise, and the spate of lease restructurings would more significantly erode lessor cash
flow and earnings.

More significantly, if the decline in travel volume extends past a few quarters, airline defaults could rise, resulting in early termination of
leases and the return of leased aircraft. And at the same time, alternate lease placement opportunities would be declining because of
weaker demand. Lower demand for aircraft would impair values and drive down lease rates, weakening lessors’ earnings, capital buffers
and access to funding.

Mark L. Wasden, Senior Vice President Ana Arsov, MD-Financial Institutions

Moody’s Investors Service Moody’s Investors Service
+1.212.553.4866 +1.212.553.3763
Andrea Usai, Associate Managing Director
Moody’s Investors Service

8 Credit Outlook: 9 March 2020


Coronavirus outbreak is credit negative for Russian aircraft lessors

Originally published on 06 March 2020

On 5 March, Vitaly Saveliev, CEO of Aeroflot, the largest Russian state-owned airline said that he anticipated substantial coronavirus-
related losses for the company. Other major Russian airlines also confirmed negative effects on their earnings amid reduced
international flights related to measures to stop the virus' spread. A prolonged coronavirus outbreak that reduces passenger demand
for business and leisure air travel in addition to government-imposed travel restrictions would be credit negative for aircraft lessors
because of lower lease revenue, lower aircraft values and reduced new business volume.

The Russian aircraft leasing market is dominated by a few large leasing companies (see exhibit) directly or indirectly controlled by the
government. They benefit from government or affiliate support, and good access to capital and cheaper funding. The companies are
VTB Leasing, which is owned by Bank VTB, PJSC (Baa3/Baa3 stable, b11), Sberbank Leasing, owned by Sberbank (Baa3/Baa3 stable, ba1),
State Transport Leasing Company PJSC (STLC, Ba1 stable), VEB Leasing, owned by VEB.RF (Baa3 stable, b3).

Exhibit 1
Top four Russian largest lessors account for over 90% of total aircraft leasing portfolio

VEB Leasing

Sberbank Leasing
23% VTB Leasing

Sources: State Transport Leasing Company and Raex

In February, the government began implementing travel restrictions, after advising citizens not to travel to China, Italy, South Korea
and Iran. The Russian tourism ministry (RosTourism) advised Russian travel operators to suspend sales of tours to Italy, South Korea and

By now, all major Russian airlines have stopped or significantly reduced flights to mainland China, Hong Kong, and South Korea and
canceled dozen other flights as demand for travel drops amid fears about the spread of coronavirus. In an effort to maintain customer
loyalty and stimulate demand, airlines have started to offer ticket refunds without cancelation fees.

According to Aeroflot Group, which controls over 40% of Russian airline market, international routes are material for Russian airlines
and account for roughly 50% of all passenger traffic at the end of 2019. In addition to reduced international flights, we expect reduced
domestic traffic amid cancellations of some public events and organizations restricting travel.

A lengthy disruption of the airline industry will reduce airlines’ repayment capacity, adversely affecting performance of lessors'
lease portfolios. In a scenario of a prolonged market weakness or disruption, we anticipate an increased volume of lease contract
restructuring, despite the fact that airlines are locked into long-term leases. Smaller privately owned airlines will face more pressure
from deteriorating operating conditions.

9 Credit Outlook: 9 March 2020

Leasing companies will be more willing to restructure terms of their lease contracts to accommodate client needs, allowing them to
temporarily defer lease payments and maintain business volume rather than terminate contracts. The prolonged global weaknesses
will create a surplus capacity, making it difficult for aircraft lessors to redeploy aircraft to other regions if airlines refuse new aircraft
deliveries or if aircrafts are repossessed from lessees.

However, if air travel is suspended for a prolonged period of time, the Russian government may implement support measures for
domestic airlines to mitigate their losses.

1 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating (where available) and Baseline Credit Assessment.

Lev Dorf, AVP-Analyst

Moody’s Investors Service

10 Credit Outlook: 9 March 2020


Ciena tempers its revenue growth guidance on coronavirus disruption

Originally published on 05 March 2020

On 5 March, Ciena Corporation (Ba1 stable) reported revenue of $833 million in the fiscal 2020 first quarter, which ended January
2020, up 7% year over year, consistent with the company’s long term growth target of 6%-8%. Reflecting some supply constraints and
logistical challenges in certain countries because of coronavirus, the company guided to April 2020 quarterly revenue of $890 million
at the midpoint, about $30 million or 3.5% lower than it otherwise would have expected.

Although the update is credit negative, at this point Ciena’s fiscal 2020 (ending October) expectations are unchanged with respect to
revenue, cash flow, adjusted operating margin of 15%, as well as the company’s long-term financial targets.

A leader in the $15 billion fiber optic networking sector, Ciena derives zero revenue from China and, by design, has among the lowest
exposure in the fiber optics industry to the China market and the Chinese supply chain. As a result, while not immune to potential
broader business implications of the virus, Ciena is better positioned than most of the industry players to manage through the current
set of coronavirus related challenges.

Despite lower revenue growth in the April quarter, we expect Ciena will continue to generate solid profitability, with gross margins
between 42% and 45% and Moody’s-adjusted EBITDA margins of about 15%. We expect adjusted gross debt to EBITDA to
approximate 1.3x in fiscal 2020, free cash flow to gross adjusted debt over 40% and cash to exceed $1 billion relative to $808 million
of adjusted debt. Now, Ciena expects a $30 million shortfall from what had been expected. So, on a year-over-year basis, instead of
growing 6%, revenue is now expected to grow 3% next quarter (see exhibit).

Ciena's quarterly revenue

$ millions
Mgmt proj Mgmt proj
incl coronavirus ex oronavirus
Ciena Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Apr-20
Revenue $ 779 $ 865 $ 961 $ 968 $ 833 $ 890 $ 920
Growth y/y 20% 18% 17% 8% 7% 3% 6%
Growth -13% 11% 11% 1% -14% 7% 10%
Sources: Company reports and Moody's estimates

Richard J. Lane, Senior Vice President Lenny J. Ajzenman, Associate Managing Director
Moody’s Investors Service Moody’s Investors Service
+1.212.553.7863 +1.212.553.7735

11 Credit Outlook: 9 March 2020


Coronavirus will hit betting and gaming revenue in northern Italy, a

credit negative
Originally published on 06 March 2020

On 3 March, International Game Technology Plc (IGT, Ba2 stable) said that, out of all gaming segments operated by IGT in Italy,
lotteries and gaming machines were adversely affected by the global coronavirus outbreak in northern Italy, especially in the Lombardy
region, but the company had seen very little change in player behavior outside the northern regions. IGT's announcement follows the
27 February warning from gaming technology company Playtech Plc (Ba2 stable) that it had started to see a material negative effect on
its Italian business from the global coronavirus outbreak. The company said it had seen a change in customer playing patterns in both
its Italian and Asian jurisdictions over the previous two weeks as the number of cases of the virus increased.

The coronavirus outbreak is credit negative for Italian gaming operators with a large exposure to retail activities. Measures that
authorities have taken to prevent the virus spreading are likely to reduce revenue from points of sale as a result of limited opening
hours or lower footfall, mostly in northern Italy where most cases of the virus in that country have been reported so far. However, some
measures in Lombardy were relaxed earlier this week.

Sisal Group SpA (B1 stable) and Gamenet Group SpA (B1 stable) are the most exposed of the gaming companies that we rate (see
exhibit). They generate all of their revenue and EBITDA in Italy and have large retail distribution networks of dedicated venues, betting
shops and betting corners in tobacconists and bars. According to their respective 2018 annual reports, Sisal offered its gaming products
through 39,515 points of sale across Italy and Gamenet through 9,457 points of sale. However, their exposure to northern Italy is
limited to a third of points of sale, a mitigating factor. In contrast, Codere SA (B3 stable) and Cirsa Enterprises, Sociedad Limitada (B1
stable) have a limited exposure to Italy.

Sisal and Gamenet are most exposed to Italy

Proportion of EBITDA generated in Italy






Sisal Gamenet Playtech IGT Codere Cirsa

Playtech and Codere figures are based on fiscal 2019 EBITDA; Cirsa figure is based on the first nine month of 2019 EBITDA; In the absence of EBITDA breakdown, IGT figure is based on fiscal
2019 revenue.
Sources: Company reports

Although very difficult to predict, we assume that the financial impact of coronavirus on Italian gaming operators will be directly linked
to their exposure to retail because there is little they can do to offset a drop in footfall to their land-based points of sale. Sisal and
Gamenet generate most of their EBITDA from land-based products, which means that a lengthy outbreak could have an impact on
their performance.

In the first nine months of 2019, Sisal generated 24% of EBITDA from online gaming, and Gamenet 19%. A prolonged disruption to
daily life caused by the outbreak will likely spur the transfer of customers to online from retail, underpinning the double-digit growth in

12 Credit Outlook: 9 March 2020

the online segment and somewhat offsetting the decline in the retail one. In addition, the higher online EBITDA margin (approximately
18 percentage points above group level in both cases) will further mitigate the lower retail revenues.

The postponement and cancellation of sporting events, especially in the year that the Euro 2020 football championship and Olympic
games are scheduled to take place, is an indirect factor that could exacerbate the negative effect of the coronavirus on gaming
operators. The volume of wagers will decrease because players will not have as many matches to bet on as before. So far, most affected
sports events have been postponed rather than canceled.

While limited at this stage, we expect the extent of the effect from the outbreak to increase with its length and scope. We think the
decline in revenue is not structural because we expect players to return to gaming venues as soon as the crisis is over.

Florent Egonneau, AVP-Analyst Kristin Yeatman, VP-Senior Analyst

Moody’s Investors Service Moody’s Investors Service
+33.1.5330.1025 +44.207.772.5213
Jeanine Arnold, Associate Managing Director Adam McLaren, VP-Senior Analyst
Moody’s Investors Service Moody’s Investors Service
+33.1.5330.1062 +1.212.553.2753

13 Credit Outlook: 9 March 2020


Tesco’s new Aldi price-matching campaign will likely spark price wars, a
credit negative for UK grocers
Originally published on 06 March 2020

On 5 March Tesco Plc (Baa3 stable) announced that it will sell hundreds of its own as well as branded products at the same price as
Aldi. The news follows other measures taken by the largest UK food retailer in the last 12-18 months to stem the decline in market
share and the advance of the discounters. But it also marks the first clear attack to the newcomers to regain share from them,
potentially signalling the beginning a new price war in the sector, a credit negative for UK grocers.

Tesco will lower prices of important products such as ripe bananas (five pack), whole cucumbers, broccoli, beef mince, sliced white
bread and many other own-label and branded products, also online. The price-matched products will carry a distinctive red “Aldi Price
Match” bubble displayed on the shelves, making sure that customers can easily spot these products. The new campaign follows the
company's significant investments over the last two years, such as revamping its loyalty Clubcard by introducing a subscription element
offering large discounts providing shoppers with incentives to shop as much as possible at Tesco and not split their spending at two

Although it is clearly early stage to be able to evaluate the effect of the lower prices in terms of Tesco’s and other rated grocers’ profits
and debt metrics, we expect Aldi to respond in its traditional fashion, namely by lowering prices even further in order to maintain the
competitive advantage upon which it has built its strategy. Our view seems to be confirmed in a Financial Times report mentioning
Aldi’s response to the announcement made by Tesco: “Our promise to our customers is they will always pay the lowest prices on every
product we sell.” That said, Tesco's price reductions in the last few years on many own-label items have not prompted a strong reaction
by the discounters, whose market shares have recently stabilised, according to Kantarworldpanel.

The UK industry has been characterised by a multi-year expansion, from a low base, of the German discounters Aldi and Lidl, which
have increased their store numbers significantly, and now have a combined market share of 13.7% as of February 2020, greater than
that of the number four grocer, Wm Morrison Supermarkets plc (Baa2 stable), which has 10.2%. Nevertheless, Tesco retains a strong
leadership position, with a share of 27.2%, well ahead of the numbers two and three J Sainsbury plc and Asda.

Other UK grocers will not stand still either and competition could increase further in the event of a sale of Asda. We believe that
Walmart Inc. (Aa2 stable) will still look to sell Asda and a new owner — unlikely to be an existing market participant — could adopt
aggressive strategies to boost market share.

In our opinion, Tesco will likely be able to afford investing in lower prices as it prepares to sell additional assets. In February, Tesco
reportedly was finalizing the sale of its Asian operations, including its operations in Thailand and Malaysia, with potential expected
proceeds in excess of $7 billion, according to Bloomberg. The company has made no public statements regards the use of the potential
sale proceeds but it may clearly be able to offset any decline in profits stemming from lowering selling prices to compete and win share
from the discounters.

Roberto Pozzi, Senior Vice President Diana Morejon, Associate Analyst

Moody’s Investors Service Moody’s Investors Service
+44.20.7772.1030 +44.20.7772.5312
Richard Etheridge, Associate Managing Director
Moody’s Investors Service

14 Credit Outlook: 9 March 2020


Fed’s final stress capital buffer is credit negative for US banks

Originally published on 08 March 2020

On 4 March, the Federal Reserve Board (Fed) finalized changes to its capital rules for US banks with assets greater than $100 billion.
The final version establishes a stress capital buffer (SCB) that incorporates the Fed’s stress test results into its regulatory Pillar 1 capital
requirements for these banks. Originally proposed in April 2018, the final rule includes a number of changes that weaken the original,
making it credit negative for all US banks covered by the rule.

The Fed's impact analysis of the final rule suggests that in aggregate the Common Equity Tier 1 (CET1) capital requirements at the
affected US banks could decline up to $59 billion: $6 billion at the eight US global systemically important banks (G-SIBs) and $35
billion at the rest. Since most banks currently hold a management buffer above existing requirements, the affected banks could actually
cut their CET1 capital by twice this amount and still comply with the final rule. The CET1 capital reduction could be $40 billion (a 5%
decline) at the G-SIBs, $50 billion (a 21% decline) at other banks with $250 billion or more in assets, and $35 billion (a 16% decline) at
banks with assets between $100 and $250 billion.

Consistent with the proposal, the final rule integrates stress testing into the Fed’s regulatory capital requirements by replacing the
capital conservation buffer, which is currently 2.5%, with the SCB. The SCB will be the higher of either 2.5%, or the difference between
the starting and minimum projected CET1 capital ratio under the severely adverse scenario of the Fed's Dodd-Frank Act Stress Test
(DFAST) plus four quarters of planned common stock dividends.

Starting in October 2020, if a bank’s risk-based capital ratios fall below the aggregate of the minimum capital requirement plus the
SCB, the relevant G-SIB surcharge, and the countercyclical capital buffer (if any), restrictions would apply to capital payouts and certain
discretionary bonus payments.

As in the proposal, the final rule changes the current annual Comprehensive Capital Analysis and Review (CCAR) and DFAST process.
The final rule eliminates the assumption that a bank’s balance sheet and risk-weighted assets will grow under the stress scenarios,
eliminates the Fed ability to object on quantitative grounds to a bank’s capital plan, and removes the 30% dividend payout ratio as a
threshold for heightened scrutiny of a bank’s capital plan. Both the flat balance sheet assumption and the requirement that banks hold
capital for only four quarters of dividends rather than for the full amount of planned payouts over the stress test horizon lower capital
requirements versus the current stress testing regime.

The decrease is only partially offset for G-SIBs by the first-time inclusion of the G-SIB surcharge within the Fed’s stress test.

The final rule is weaker than the original proposal for several reasons. Under the proposal, banks would not have been allowed to pay
out capital in excess of their approved capital plans without Fed prior approval. In the final rule, banks can in most cases make payouts
in excess of amounts in their capital plan, provided the payout is otherwise consistent with the payout limitations in the final rule.

Additionally, the final rule modifies payout limitations to allow firms with an SCB in excess of 2.5% to pay a greater portion of their
dividends and management bonuses and to repurchase shares for a period of time after capital ratios fall below the requirement. And
in the final rule, the SCB, unlike the DFAST capital requirements, will not incorporate material business plan changes, such as those
resulting from a merger or acquisition. As a result, such actions will only affect a bank’s capital ratio once the action has occurred.
Overall, these changes increase the flexibility banks have to payout capital more aggressively and will likely give bank management
greater leeway to reduce the size of their management buffers and operate with capital ratios closer to the minimum levels required.

The final rule also excludes the originally proposed stress leverage buffer requirement, which would not have been a binding constraint
for most banks. Its elimination from the final rule removes this requirement as a potential backstop. And without the stress leverage
buffer, the still pending proposal to modify the supplementary leverage ratio for the eight G-SIBs by tying it more closely to the G-SIB
surcharge could further weaken the ability of the leverage ratio to serve as a backstop requirement and would also be credit negative.

15 Credit Outlook: 9 March 2020

David Fanger, Senior Vice President Andrea Usai, Associate Managing Director
Moody’s Investors Service Moody’s Investors Service
+1.212.553.4342 +1.212.553.7857
Ana Arsov, MD-Financial Institutions
Moody’s Investors Service

16 Credit Outlook: 9 March 2020


United Arab Emirates' rate cut is credit negative for banks' profitability
On 4 March, the United Arab Emirates (UAE, Aa2 stable) central bank lowered the interest rate on its certificates of deposit and its repo
rate by 50 basis points (bp). The cut follows the US Federal Reserve's 50 bp cut in the fed funds rate to mute the economic effects of
the coronavirus. Given the currency peg between the local currency (the dirham) and the US dollar, US Federal Reserve's changes to its
target interest rate tend to be mirrored by the UAE central bank's similar changes to its own target interest rate.

The rate cut will reduce UAE banks' net interest margins (NIMs) because gross yields earned on loans will decline more than the funding
cost paid on deposits, and because the rate cut is unlikely to materially increase credit volumes. UAE banks' net interest income, which
depends on the NIM as well as on lending and borrowing volumes, comprised around 70% of their total revenue in 2018.

Lower interest rates will decrease UAE banks' gross yields as they gradually re-price their loan books, around 81% of which at year-end
2019 were corporate, government and public sector loans, that typically have floating rates that reset at intervals of around three to six
months. Banks with the highest proportion of corporate loans and highest proportion of current and savings (CASA) deposits will be the
most negatively affected (see exhibit).

Large UAE banks' loans and deposit composition

Data as of December 2019
Corporate Retail CASA Non-CASA Certificates of deposits
17% 20% 24% 26%
57% 61%
60% 67%

40% 83% 80% 76% 74%

20% 43% 39%

34% 33%

Gross Loans Deposits Gross Loans Deposits Gross Loans Deposits Gross Loans Deposits
First Abu Dhabi Bank PJSC Emirates NBD PJSC Abu Dhabi Commercial Bank Dubai Islamic Bank

Corporate loans include loans to the government and public sector entities. CASA deposits include current, savings, margin, demand, call and short notice deposits. Non-CASA deposits
include time, notice, murabaha, long term government deposits and other deposits. For Dubai Islamic Bank, non-CASA deposits include investment deposits.
Source: Banks' financial statements

The UAE's competitive market and subdued economic and private credit growth, combined with lenders' focus on high-quality
large corporate and government-related borrowers rather than the small and mid-corporate segments that are prone to higher
delinquencies, will also lower gross yields. Banks' overall credit growth was 6.2% in 2019 (4.4% excluding a large government-related
short-term facility) driven primarily by 23.2% growth in credit to the government and the public-sector (14.9% excluding the large
government-related short-term facility). Private-sector credit, which accounts for 65% of total credit in UAE, grew only 0.4% amid
limited wage growth and headcount rationalisation.

Although lower interest rates will reduce banks' funding costs, the reduction will be less than the decline in gross yields because
CASA deposit accounts comprised 51% of UAE banks’ deposit base (excluding government deposits, commercial prepayments and
borrowings under repurchase agreement) at year-end 2019 and these accounts already have a zero or negligible interest rate that
has limited room to move lower. The cost on term deposits will decline gradually and with a lag given the market power of large
government-related and private depositors that control a sizeable portion of the UAE's concentrated deposit pool.

We expect varying declines in banks' NIMs, which averaged 2.3% systemwide during first-half 2019. The extent of the NIM declines
also depends on the proportion of a bank's balance sheet that is dynamically hedged against interest rate fluctuations, the re-

17 Credit Outlook: 9 March 2020

deployment of excess liquidity, the steepness of the local currency yield curve, the evolution of the risk appetite towards high yielding
segments, and the evolution in the mix between time and CASA deposits.

Weaker profitability from lower interest rates and NIMs will compound existing pressure on profitability from this year's expected
higher cost of risk (loan loss provisions divided by gross loans) in the UAE's operating environment. OPEC oil production cuts constrain
the country's hydrocarbon economic growth, while slowing global trade, low oil prices, a strong currency and geopolitical tensions
weigh on the non-hydrocarbon economy. Also, we expect the coronavirus to negatively affect the UAE’s key non-oil economic
sectors of tourism, transportation, trade and real estate. The IHS Markit UAE Purchasing Managers Index, which indicates future non-
hydrocarbon economic activity in the country, fell to 49.1 in February 2020 (the lowest in nine years) from 49.3 in January, primarily
reflecting lower output, new orders and employment.

We expect the cost of risk to increase to around 100 bps during 2020. For the four largest banks in the country, which accounted for
73% of banking assets as of December 2019, provisioning charges increased materially to 83 bps during 2019, from 61 bps in 2018.

Mik Kabeya, AVP-Analyst Francesca Paolino, Associate Analyst

Moody’s Investors Service Moody’s Investors Service
+971.4.237.9590 +971.4.237.9568

18 Credit Outlook: 9 March 2020


Restrained foreign-currency lending at United Bank for Africa's Nigerian

unit is credit positive
Originally published on 05 March 2020

On 2 March, United Bank for Africa Plc (B2 negative, b21) filed its 2019 annual report with the Nigerian Stock Exchange which showed
that its Nigerian unit, the group’s largest asset and revenue contributor, reduced its ratio of foreign-currency loans to total loans to
41% in 2019 from 48% in 2018 and 51% in 2017 (see exhibit). Although still high, restrained foreign-currency lending in Nigeria's
challenging operating conditions is credit positive because it will reduce negative pressure on UBA’s asset quality and ease foreign-
currency funding pressure.

UBA's Nigerian unit reduced the proportion of its foreign-currency loans in 2019
Foreign-currency loans - rights axis Local-currency loans - left axis Foreign-currency loans/total loans - left axis
60% 1,000



NGN billions

30% 500



0% 0
2017 2018 2019

Source: United Bank for Africa Plc and Moody's Investors Service

UBA's foreign-currency loans increased 6% in 2019, in naira (the local currency) terms, compared to a 40% jump for naira-
denominated loans. Gross loans increased 22% to NGN1.567 trillion. We believe the high loan growth reflects UBA's efforts to comply
with Nigeria's required minimum loan-to-deposit ratio of 65%. The loan-to-deposit ratio for UBA's Nigerian unit was 54%, up from
50% in 2018.

The low volume of foreign-currency loans will ease UBA’s asset risk pressures because the bank is not growing its exposure to borrowers
that would be negatively affected by a naira depreciation or devaluation. Some foreign-currency borrowers likely have no foreign-
currency earnings and a weaker naira would require higher naira cash flow to repay the foreign-currency loans, increasing the risk of
corporate defaults in case of a sharp depreciation.

UBA’s nonperforming loans ratio was 5.3% in 2019, down from 6.5% in 2018. In Nigeria, stage 3 loans2 declined 27% to NGN39.7
billion in 2019, following a reclassification of some of nonperforming loans to stage 23, which increased by 96% to NGN298.6 billion.
Stage 3 loans were 2.5% of gross loans, while stage 2 loans were high at 19.2%. UBA's Nigerian loan book is more diverse relative to
the other Nigerian banks. The cyclical oil and gas sector contributed about 18% of total loans in 2019 (the lowest among the banks
we rate) compared to about 30% for the system. However, high loan growth in Nigeria (loans to individuals increased 75% in 2019
although it remains less than 5% of total gross loans) will likely limit further significant improvements in asset quality.

Fewer foreign-currency loans will also lower the bank’s foreign-currency funding gap – the difference between its foreign-currency loans
and foreign-currency deposits. Despite a reduction in foreign-currency loan contributions, the ratio of foreign-currency loans to foreign-
currency deposits was high at 114%, requiring the bank to tap institutional markets for debt funding. In 2019, UBA's foreign-currency
debt funding in Nigeria increased by 16.3%, while foreign-currency customer deposits declined by 11.3%.

19 Credit Outlook: 9 March 2020

UBA attracts bilateral loans from international lenders, which enables it to lengthen the duration of its liabilities. At end of 2019, the
NGN577.7 billion stock of borrowing (excluding euro bonds) was spread across 13 lenders. In addition, UBA’s Nigerian unit holds a good
foreign-currency liquidity buffer, with a ratio of liquid foreign-currency assets4 to foreign-currency customer deposits at 71% in 2019.
This provides solid ability to cover possible outflows.

Limited foreign-currency funding pressure will also give the bank some pricing power on its deposits, supporting its margins. Nigerian
banks must protect their high interest margins in order to mitigate profitability pressures from regulatory and operating costs as well
as likely high credit costs. We estimate UBA's yields on loans in Nigeria declined by 100 basis points to 11% in 2019, while interest
expense, which increased by 21% in Nigeria, rose to 3.8% of customer deposits from 3.4% in 2018. We expect the trend to continue
this year, straining margins.

Possible disruptions to trade finance business resulting from the ongoing coronavirus epidemic and evolving regulations will likely
reduce the growth in fee and commission income, as investment in technology and regulatory costs continue to weigh on operating
costs. Credit costs, which in 2019 increased almost threefold in Nigeria from a year ago to 1.1% of gross loans, are unlikely to improve
significantly given the difficult operating environment. We expect the group’s return on assets, which was 1.5% in 2019, to remain
below 2% this year.

1 The bank ratings shown in this report are the bank's domestic deposit rating and Baseline Credit Assessment.
2 Impaired loans with rebuttable presumption of more than 90 days past due.
3 Loans with significant deterioration in credit risk.
4 The liquid assets included in this calculation are cash and cash balances, loans and advances to banks and investment securities

Peter Mushangwe, CFA, Analyst Malika Takhtayeva, Associate Analyst

Moody’s Investors Service Moody’s Investors Service
+44.20.7772.5224 +44.20.7772.8662
Antonello Aquino, Associate Managing Director Sean Marion, MD-Financial Institutions
Moody’s Investors Service Moody’s Investors Service
+44.20.7772.1582 +44.20.7772.1056

20 Credit Outlook: 9 March 2020


Green funding will benefit Standard Bank of South Africa

On 2 March, the International Finance Corporation (IFC, Aaa stable) announced that it invested $200 million in a 10-year private green
bond placement by The Standard Bank of South Africa Limited (SBSA, Baa3 negative, baa31) a credit positive for SBSA. The private
placement was SBSA's first green bond, Africa’s largest green bond and South Africa’s first offshore green bond issuance.

The bond issuance and subsequent on-lending will diversify SBSA's balance sheet and revenue sources, extend the duration of its
liabilities and diversify the bank’s funding and investor profile. Investments from multilateral development banks are less confidence-
sensitive and are therefore a more stable source of funding than other market funds. In addition, SBSA will benefit from its association
with the IFC, which has expertise in environmental and social risk management in the private sector and devising business solutions
that benefit the environment and local communities.

The bond issuance proceeds will fund climate-smart projects in South Africa such as renewable energy, energy efficiency, water
efficiency and green buildings. According to IFC estimates, South African projects funded by the green bond have the potential to
reduce greenhouse gas emissions by 742,000 tons per year, or nearly 3.7 million tons over five year.

The issuance will increase the financing available for green projects in South Africa, which will help the country gradually address its
vulnerability to environmental risks. Increased green financing will likely spur new environmentally friendly projects for banks to finance,
creating opportunities for banks to grow and diversify their loan books. The IFC estimates that South Africa has about $588 billion of
climate-smart investment potential between now and 2030.

Moving toward a diversified energy mix through greater investment in renewable energy is particularly important to South Africa.
Energy inefficiency and frequent power cuts by the state electricity company, Eskom Holdings SOC Limited (B3 negative), which
generates power mostly from coal plants, have made domestic operating conditions difficult and contributed to low GDP growth of
0.2% for 2019. Financing water efficiency projects is also important in South Africa because it is subject to frequent climate-change-
related shocks such as droughts that have weighed on the agricultural sector’s performance and economic growth in recent years.

Increased green financing through green bonds will allow South African banks to diversify their funding and investor profiles, and
raise funding with maturities beyond five years. SBSA is mainly deposit funded (around 75% of non-equity funding), but as with other
South African banks, is heavily reliant on deposits from nonfinancial corporates and institutional investors such as pension funds, asset
management companies and insurance companies (see exhibit). The reliance is a structural risk for banks because such deposits are
shorter term, and corporate deposits tend to be more confidence-sensitive and more concentrated than retail/household deposits.

SBSA's funding profile is reliant on confidence-sensitive non-household deposits

Non-equity liability structure of SBSA, December 2019

Other funding
3% Debt securities
Other deposits 11%
FX funding/ deposits

Interbank and FI deposits

Corporate deposits 6%

Govt & public sector deposits


Institutional investor deposits

Household deposits

Source: South Africa Reserve Bank, BA900

21 Credit Outlook: 9 March 2020

Dependence on deposits with shorter tenors also creates a mismatch with longer-term loans such as mortgages that can lead to
liquidity risks. In April 2019 Nedbank Limited (Baa3 negative, baa3) was the first bank to issue green bonds in the Johannesburg Stock
Exchange and raised ZAR1.7 billion, followed by ZAR1.0 billion later in the year to fund solar and wind renewable-energy projects.

1 The bank ratings shown in this report are the bank’s deposit rating and Baseline Credit Assessment.

Elena Ioannou, CFA, Associate Analyst Akin Majekodunmi, CFA, VP-Sr Credit Officer
Moody’s Investors Service Moody’s Investors Service
+44.20.7772.1716 +44.20.7772.8614

22 Credit Outlook: 9 March 2020


Korean bank regulator penalizes Woori and Keb Hana for mis-selling
Originally published on 06 March 2020

On 4 March, Korea’s Financial Services Commission (FSC) announced penalties on numerous violations, including mis-selling, on Woori
Bank (A1/A1 stable, baa1)1 and KEB Hana Bank (A1/A1 stable, baa1). Regulatory penalties were KRW19.7 billion for Woori Bank, and
KRW16.7 billion for KEB Hana Bank, equivalent to around 1% of the banks' net profit in 2019. The regulator also imposed a six-month
suspension on the two banks' private equity fund sales operation.

The violations are credit negative for the two banks because they will likely lead the regulator to strengthen customer protection
measures, which would push up the banks' compliance costs and slow their commission income growth. The findings are also credit
negative because of the likely damage to the two banks' reputations.

The penalties FSC imposed are in response to multiple violations Financial Supervisory Service's (FSS) revealed in its investigation into
the two banks' sale practice of derivative-linked funds (DLF) to customers. The violations include weak internal controls and insufficient
customer protection. The FSS cited failure to issue prospectuses to clients, inadequate approval processes and the lack of a product
selection committee to oversee the launch of risky financial products as examples of the two banks' weak internal controls and their
prioritizing profit over customer protection.

The FSS in particular highlighted a specific type of DLF product that is linked to German government bond rates, and US dollar and
pound constant maturity swap (CMS) rates. These products have resulted in significant losses for some retail investors, which the
regulator estimated at 33% based on market rates as of 14 February 2020. The regulator reported that the two banks had sold a total
of KRW795 billion ($660 million) of these DLFs to 3,243 investors, mostly individual customers. Both banks are pursuing voluntary
compensations following regulators' guideline of 40-80% of losses for cases identified as misselling.

The regulator also found that the two banks' employee performance indicators focused on profit rather than their customers'
investment performance. The FSS said that around 20% of investment contracts were incomplete, missing customers' signatures,
information on customers' surveyed risk appetites, and additional documentation required for elderly customers.

Direct financial effects of the announced penalties and compensation to customers will be moderate for the two banks. While
compensation will continue to be paid until all relevant products mature, we estimate that total penalties and compensation for Woori
Bank and KEB Hana Bank will be between 4%-7% of the banks' combined net profit for 2019 – assuming the expected loss rates as of
14 February – and at a 40%-80% compensation rate. Loss rates could rise if the underlying market rates of the funds fall. Expected loss
rate was higher at 52% on 25 September 2019 when the rates were lower.

However, the FSC's penalties and follow-up policy measures will add to regulatory momentum to introduce additional customer
protection measures and tighten guidelines on banks' financial product sales. Regulators announced in 2019 restrictions on bank sales
of high risk investment products. This could weaken banks' noninterest income and increase their compliance costs. Among Korea's
four largest commercial banks, the share of net fees and commission income in net revenue declined to 13% in the first nine months of
2019 from 15% in 2015 (see exhibit) despite their efforts to reduce dependence on net interest income in this period.

23 Credit Outlook: 9 March 2020

Korean banks' revenue contribution from fees and commission income below targets
Aggregate net fees and commission income of Korea's four largest commercial banks

Korea's largest four commercial banks are Shinhan Bank (Aa3/Aa3 stable, a3), Kookmin Bank (Aa3/Aa3 stable, a3), KEB Hana Bank and Woori Bank.
Sources: The banks and Moody's Investors Service

1 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating (where available) and Baseline Credit Assessment.

Tae Jong Ok, Analyst Sophia Lee, CFA, VP-Sr Credit Officer
Moody’s Investors Service Moody’s Investors Service
+852.3758.1659 +852.3758.1357
David Shin, Associate Analyst Minyan Liu, CFA, Associate Managing Director
Moody’s Investors Service Moody’s Investors Service
+852.3758.1392 +852.3758.1553

24 Credit Outlook: 9 March 2020


Working group formed to resolve HNA Group's financial problems is

credit positive
Originally published on 05 March 2020

On 29 February, HNA Group Co., Ltd., a Chinese conglomerate based in Hainan province, announced that a working group led by the
Hainan Provincial Government has been set up to resolve the group's increasing financial difficulties mainly caused by the additional
pressure on its key businesses as a result of the coronavirus outbreak. The working group includes provincial government officials,
the Civil Aviation Administration of China and the China Development Bank (A1 stable), which is a policy bank and one of HNA
Group’s biggest creditors. The working group will also have two seats on the group’s board of directors but will not interfere with daily
operations or change the Group's shareholding structure.

The development is credit positive for China’s financial institutions, including banks, leasing companies and aircraft lessors, because it
will help support an orderly resolution and restructuring of HNA Group and reduce the risk of contagion from its potential default.

The current coronavirus outbreak exacerbates HNA Group’s financial distress. It owns multiple businesses including airlines, hospitality
and tourism, all of whose volume has sharply declined on tightened travel restrictions as a result of the coronavirus outbreak. The
group had liquidity issues in 2017 and large losses in 2018 and first-half 2019 (see exhibit), well before the coronavirus outbreak. One of
the group’s key airlines, Hong Kong Airlines, announced that it would slash 400 jobs and cut operations in early February 2020 because
of weak travel demand.

HNA Group grew rapidly starting in 2015, but has had financial difficulties in past two years
Total assets Equity attributable to equity holders Net profit/(loss) (RHS)
1,400,000 10,000

1,200,000 8,000

RMB millions

RMB millions

200,000 -4,000

0 -6,000
2015 2016 2017 2018 H1 2019

Source: The company

HNA Group's scale makes it a contagion risk. The company grew total assets to RMB1.23 trillion at the end of 2017 from RMB469
billion at the end of 2015 through a series of onshore and offshore acquisitions. Many large financial institutions in China have
significant exposure to the group and its subsidiaries, including large state-owned banks and leasing companies.

The Hainan government's inclusion in the working group does not necessarily imply unconditional government support of HNA Group's
debts. HNA Group has a complicated corporate structure and diverse creditor exposures across multiple entities within the group,
asset class and jurisdictions. Therefore, its creditors are likely to receive different treatment in the group's debt restructuring, with some
potentially incurring credit losses.

However, the working group will help preserve HNA Group’s asset value and facilitate a more orderly disposal of assets, which will in
turn enhance asset recovery for its creditors.

We expect that the working group will improve HNA Group’s financial standing through the following actions:

25 Credit Outlook: 9 March 2020

» Restructuring to accelerate HNA Group’s divestment of some of its equity and noncore assets. This will improve HNA Group’s
financial position for debt repayment and support its effort to attract strategic investors after the cleanup. HNA Group is currently
an indirect shareholder of Ingram Micro Inc. (Ba1 stable) and an indirect majority shareholder of Avolon Holdings Limited (Baa3
stable). If these stakes are sold to entities with better credit profiles, we believe the change in ownership will reduce uncertainties in
operations and financial policies of these two companies, and improve their access to capital.

» The broad representation of the working group members will help preempt market panic and disorderly sales of the group’s assets.
The participation of the Hainan government in the working group will facilitate HNA Group's negotiation with state-owned financial
institutions and investors, and improve its access to contingency funding during debt restructuring. This will help preserve HNA
Group's assets value and in some cases it could allow it to maintain control or ownership of some of its strategic assets, such as

» Securing further support from Chinese financial institutions, including banks, leasing companies and aircraft lessors through the
working group providing a platform for authorities to guide and coordinate financial support to HNA Group in refinancing, rental
payment deferral and loan maturity extensions.

The working group's coordination role reflects the authorities' aim to resolve any contagion risks and possible distress from other
companies and financial institutions. While the working group will assist HNA Group in containing risks, it will not interfere in HNA
Group’s daily operations or shareholding structure.

Sean Hung, CFA, VP-Senior Analyst Sally Yim, CFA, Associate Managing Director
Moody’s Investors Service Moody’s Investors Service
+852.3758.1503 +852.3758.1450
Ivan Chung, Associate Managing Director
Moody’s Investors Service

26 Credit Outlook: 9 March 2020


Homeowner and commercial property insurers face losses from

Tennessee tornadoes
On 3 March, a series of tornadoes touched down in Tennessee, resulting in a tragic loss of lives and injuries, and inflicting widespread
catastrophic damage to residential and commercial buildings, including the John C. Tune Airport. The largest tornado hit several
neighborhoods in northern and eastern Nashville, with wind speeds of more than 165 miles per hour. The tornadoes will increase
catastrophe losses in the first quarter for US property insurers, a credit negative, particularly for insurers with exposure to homeowners,
commercial property, and aircraft in Tennessee.

Catastrophe modeling firm Corelogic estimates that property damage could exceed $1 billion. The firm estimates that the largest
tornado affected an area about 250 square miles in size, with 22,389 structures in the affected area having a 30% or greater probability
of damage. It could take weeks or months to assess the full extent of insured losses.

Nashville's mayor announced that the largest tornado caused major damage or destruction to 395 homes and 184 commercial
buildings in the city, and we expect additional damage in surrounding areas. Given the intensity of the tornado, which reached an
EF4 on the Enhanced Fujita Scale (the second most severe on the scale, indicating winds of 165-200 mph), and its track through both
residential and commercial areas of the city, we expect that insurance companies are at risk of facing significant losses to both their
personal (primarily homeowners) and commercial property lines, depending on their business concentration within the affected area.
However, the limited footprint of tornadoes – even very large ones such as the Nashville tornado – make it difficult to determine which
insurers will bear the brunt of insured losses.

The tornado damage was particularly severe given its intensity and close proximity to a metro area, coupled with a longer, 53-mile
path through the northern Nashville area. As a result, in addition to residential damage, we expect greater-than-normal damage to
commercial structures (which are usually built with stronger materials). Exhibit 1 shows the top 10 homeowners’ insurance companies
in Tennessee, while Exhibit 2 shows the top 10 commercial property insurers in the state.

Exhibit 1
Top 10 largest Tennessee homeowners insurers
Tennessee direct US direct premiums
premiums written written Premium concentration Surplus
($ millions) ($ millions) in Tennessee ($ millions)
State Farm 500 65,862 0.8% 100,886
Tennessee Farmers 410 1,353 30.3% 2,793
Liberty Mutual 161 34,605 0.5% 19,766
Allstate 158 33,055 0.5% 17,679
USAA 136 21,985 0.6% 27,606
Erie 89 7,120 1.2% 8,603
Farmers 84 20,310 0.4% 5,699
Nationwide 77 18,417 0.4% 14,478
Travelers 72 26,244 0.3% 20,185
Auto-Owners 44 7,918 0.6% 11,343
Top 10 1,730 236,869 0.7% 229,038
Industry 2,101 678,183 0.3% 758,932

Source: SNL Financial L.C. (contains copyrighted and trade secret materials distributed under license from SNL, for recipient's internal use only) and Moody's Investors Service

27 Credit Outlook: 9 March 2020

Exhibit 2
Top 10 largest Tennessee commercial property insurers
Tennessee direct US direct premiums
premiums written written Premium concentration in Surplus
($ millions) ($ millions) Tennessee ($ millions)
Liberty Mutual 115 34,605 0.3% 19,766
Travelers 87 26,244 0.3% 20,185
CNA 82 10,279 0.8% 10,411
Tennessee Farmers 76 1,353 5.6% 2,793
Factory Mutual 65 3,929 1.6% 11,241
Cincinnati 51 5,021 1.0% 4,919
Auto-Owners 51 7,918 0.6% 11,343
Nationwide 48 18,417 0.3% 14,478
Chubb 46 22,125 0.2% 18,647
AIG 44 14,815 0.3% 17,465
Top 10 665 144,707 0.5% 131,249
Industry 1,436 678,183 0.2% 758,932

Note: includes fire, allied lines, inland marine, and commercial multiple peril – non-liability
A large portion of CNA's commercial property business is inland marine, which mainly comprises a cellphone warranty fronting arrangement, and is not considered catastrophe-exposed
Source: SNL Financial L.C. (contains copyrighted and trade secret materials distributed under license from SNL, for recipient's internal use only) and Moody's Investors Service

The largest tornado also caused significant damage to the John C. Tune Airport, which is the largest general aviation airport in
Tennessee. The Metropolitan Nashville Airport Authority (Baa3 stable) estimates tornado-related damage at about $93 million. In
addition, the tornado destroyed more than 90 personal and small commercial aircraft. The losses are credit negative for Tennessee
aircraft insurers, particularly those with exposure to smaller aircraft. Exhibit 3 shows the top 10 Tennessee aircraft insurers.

Exhibit 3
Top 10 largest Tennessee aircraft insurers
Tennessee direct US direct premiums
premiums written written Premium concentration Surplus
($ millions) ($ millions) in Tennessee ($ millions)
AIG 6.9 14,815 0.05% 17,465
Starr 4.2 2,729 0.16% 2,024
Sompo 2.3 2,914 0.08% 1,938
NICO/Berkshire Hathaway 1.8 43,870 0.00% 162,206
QBE 1.6 4,449 0.03% 1,770
XL Re 1.5 4,811 0.03% 2,088
Old Republic 1.4 4,213 0.03% 3,594
Allianz 1.3 3,582 0.03% 1,929
HCC 1.2 1,912 0.06% 2,317
Munich Re 1.1 2,481 0.05% 5,015
Top 10 23.3 85,777 0.03% 200,346
Industry 27.7 678,183 0.00% 758,932

Source: SNL Financial L.C. (contains copyrighted and trade secret materials distributed under license from SNL, for recipient's internal use only) and Moody's Investors Service

Over the past five years, the US has averaged almost 1,200 tornadoes per year, with convective storms including tornadoes, hail,
thunderstorms, and winter storms collectively totaling about $72 billion of insured losses between 2014 and 2018 (see Exhibit 4).
The two most destructive tornado outbreaks were in April 2011, which cost the industry $8.2 billion (in 2018 dollars), and in May
2011, which included the Joplin tornado and cost the industry $7.8 billion, according to the ISO Property Claim Service and Insurance
Information Institute.

28 Credit Outlook: 9 March 2020

Exhibit 4
Insured and non-insured convective storm losses, and number of tornadoes by year
Insured losses Uninsured losses Number of tornadoes
$30 1600

Losses, $ billions (in 2018 US dollars)


$15 800


$0 0
2013 2014 2015 2016 2017 2018

Sources: MunichRe NatCatService, National Oceanic and Atmospheric Administration and Moody's Investors Service

Although earnings will be negatively affected by the tornadoes, we also expect that homeowners and commercial property insurers
will continue to raise rates across the industry, with higher rates in loss affected geographies. Tornado losses typically do not trigger
catastrophe reinsurance losses, although if tornado and other convective storm losses are elevated throughout 2020, there is a risk the
losses trigger reinsurance coverage under aggregate reinsurance policies.

Jasper Cooper, CFA, VP-Sr Credit Officer Erica Reynolds, Associate Analyst
Moody’s Investors Service Moody’s Investors Service
+1.212.553.1366 +1.212.553.7998
Sarah Hibler, Associate Managing Director
Moody’s Investors Service

29 Credit Outlook: 9 March 2020


Israel's third consecutive inconclusive election will prolong policy

Originally published on 05 March 2020

On 4 March, preliminary results for Israel's (A1 positive) 2 March general election, the country's third since April 2019, indicate that
Prime Minister Benjamin Netanyahu’s right-leaning bloc is on course to win 58 seats in the 120-seat Knesset, leaving it three seats
short of a majority. The opposition centre and centre-left parties 1 won 55 seats, down from 57 in September 2019 (see Exhibit 1).

Exhibit 1
A path to a majority remains unclear
Knesset composition by party and number of seats (provisional)

Labor-Gesher-Meretz, 7 United Torah Judaism, 7

Blue and White, 33 Joint List, 15 Shas, 9 Likud, 36

Yisrael Beiteinu, 7 Yamina, 6

0 20 40 60 80 100 120
Note: A majority requires 61 seats.
Sources: Knesset and Moody's Investors Service

After earlier votes both failed to produce a governing coalition, talks are more likely to be successful this time round. Most parties
have little to gain from an unprecedented fourth election later in the year given historically high voter turnout (71%). That said, we
expect coalition talks to be protracted 2 given that the ability for either bloc to garner enough support to form a governing majority is
unclear at this stage, further prolonging policy inertia. A fourth election which materially delays steps to address the challenging fiscal
trajectory remains a distinct risk.

The risk of a major change in policy direction from a new coalition government is low given the broad consensus among the
mainstream political parties on the basic tenets of economic and fiscal policy. That said, any governing coalition is likely to rely on a
small majority which may constrain its ability to pass legislation.

Furthermore, Netanyahu’s indictment in three corruption cases on suspicion of accepting bribes, fraud and breach of trust — the first
time such charges have been brought against a sitting prime minister — would also add uncertainty to the stability of a coalition led
by him. While the trial is due to start on 17 March, the full legal process is likely to take years to complete and could ultimately weaken
our assessment of the strength of Israel’s institutions, particularly if it posed a challenge to the independence of the country’s judicial
system including the ability for the courts to act as a check on the exercise of government power.

Assuming that a government is formed, the 2020 budget will be the first important indication of the new government's fiscal strategy
and capacity to address Israel’s fiscal deterioration. The extended election season has delayed more comprehensive efforts to address
the widening budget deficit (Exhibit 2), which reached 3.7% of GDP at the central government level in 2019 – missing the target
of 2.9% of GDP by a wide margin. Fiscal challenges increased markedly last year, amid weaker revenue growth and above-budget
expenditure. The caretaker governments in place since December 2018 have lacked the authority to pass a budget or adopt fiscal

30 Credit Outlook: 9 March 2020

adjustment measures (beyond several moderate steps adopted in June 2019), as the extended political deadlock has weakened the
country’s fiscal policy effectiveness.

Exhibit 2
Israel's fiscal position has deteriorated
Central government budget balance and annual revenue growth (12-month rolling basis)
Budget balance, % of GDP (LHS) Revenue growth, % (RHS)
0 10

-0.5 8
-1.5 2
-2 0

-2.5 -2
-3.5 -8
-4 -10

Sources: Ministry of Finance and Moody's Investors Service

In the absence of a 2020 budget, government expenditure is currently limited each month to one-twelfth of the 2019 budget spending
envelope. This will cap spending over the coming months, albeit at the likely cost of a fiscal drag on the economy. Expenditure fell by
10.3% in annual terms in January, with defence spending contracting particularly heavily (21.5%) – allowing the central government
deficit to narrow to 3.2% of GDP on a 12-month rolling basis. Importantly, Israel’s general government debt ratio also continued to fall
in 2019 to around 60% of GDP despite the weak fiscal performance given strong nominal GDP growth and shekel appreciation.

Nevertheless, a more sustainable correction to Israel’s challenging fiscal trajectory beyond the expenditure limits imposed by the
interim budget is unlikely without new structural consolidation measures including on the revenue side, particularly given pent-up
spending pressures in areas including health and defence and the possibility for increased spending as a result of coalition agreements.
Rising risks to growth, stemming from the negative impact of the coronavirus at the domestic and global levels, are also likely to
weigh on tax revenue this year. The existing deficit target of 2.5% of GDP for this year will be challenging to achieve, and is likely to be
adjusted upward.

Against that backdrop, the failure to form a new government, or the formation of a coalition unable to command the internal
consensus needed to advance new fiscal measures, would present a risk to Israel's credit profile. Therefore, the ability and willingness of
the next government to address the difficult fiscal trajectory in a timely manner, such that the material debt reduction gains of the past
decade are broadly preserved, will be an important driver of our assessment of the sovereign credit profile.

1 Including Blue and White, Labor-Gesher-Meretz and the Joint List.
2 The next step is for President Reuven Rivlin, once the final results are confirmed next week, to consult with party leaders to decide who is better placed to
form a workable coalition; each prime minister-designate then has a maximum of 42 days to try to form a government.

Evan Wohlmann, VP-Sr Credit Officer Mickaël Gondrand, Associate Analyst

Moody’s Investors Service Moody’s Investors Service
+44.20.7772.5567 +44.20.7772.1085
Dietmar Hornung, Associate Managing Director Yves Lemay, MD-Sovereign Risk
Moody’s Investors Service Moody’s Investors Service
+49.69.70730.790 +44.20.7772.5512

31 Credit Outlook: 9 March 2020


Brazilian State of Sao Paulo approves public-employee pension reform,

a credit positive
Originally published on 05 March 2020

On 3 March, the Brazilian State of Sao Paulo's (Ba2 stable) legislative assembly approved pension reforms for its public workers. The
reforms are credit positive for Sao Paulo because it will help address the state's rising pension expenses and improve its fiscal position.

The reform will implement changes to the state's unfunded pension system and includes raising the minimum retirement age to 65
years from 62 years for men and to 60 years from 55 years for women, a rise to 14% of wages of the contribution of active and inactive
workers from 11%, and limits on pension benefits. The state government estimates that the reform will result in total savings of BRL32
billion for the state over the next 10 years.

Despite efforts to continuously adjust its current expenditures, Sao Paulo's personnel expenses have risen over the years, driven
mainly by growth in pension-related costs, and in 2018 equaled 43% of the state's operating revenue. Rising pension costs reflects the
imbalances in the pension system of the state, which is common to all Brazilian states and caused by a low ratio of active-to-inactive
workers and low contributions (see Exhibit 1). The state's active-to-inactive workers ratio is 1.12x, with inactive workers representing

Exhibit 1
Brazil's pension plans are structurally imbalanced
Ratio of active to inactive workers by state
Active workers Inactive workers

Source: Relatorio Resumido da Execucao Orcamentaria

We expect a moderate economic recovery for Brazil (Ba2 stable) over the next 12-18 months (we expect 2.0% GDP growth in 2020),
which would increase tax revenue and federal transfers. However, the improvement in Sao Paulo's operating balance and fiscal position
(see Exhibit 2) would be limited absent structural reforms because personnel costs continue to absorb an increasing portion of the
state's budgetary resources and reduce the state's expenditure flexibility. The reform aims to rebalance the pension system and help
address rising costs.

32 Credit Outlook: 9 March 2020

Exhibit 2
Sao Paulo's gross operating, cash financing balances and debt levels
Direct and indirect debt/operating revenue - left axis Gross operating balance/operating revenue - right axis
Cash financing surplus (requirement)/total revenue - right axis


130% -1%

125% -3%

120% -5%
2014 2015 2016 2017 2018 2019E

Sources: State of Sao Paulo and Relatorio Resumido da Execucao Orcamentaria

Sao Paulo has a well-established record of operating surpluses, underpinned by prudent financial practices and sustained revenue
growth. That said, the state has less room to continue absorbing rising pension costs, given its already-high level of indebtedness and a
200% limit for the ratio of total debt to revenue established by Brazil's Fiscal Responsibility Law. In 2018, the state's indebtedness was

In October 2019, the Brazilian federal government approved a social security reform to address the pension systems of the private
sector and of federal government employees. Initially, the reform included public employees from the states and municipalities, under
which states would have had to follow the same rules established for national pension plans. However, during the voting process, states
and municipalities' employees were excluded from the reform. After the exclusion each state will have to approve individual reforms in
their respective legislative assemblies to address public employees' pension plans.

Nicole Salum, Analyst Alejandro Olivo, Associate Managing Director

Moody’s Investors Service Moody’s Investors Service
+55.11.3043.7350 +1.212.553.3837

33 Credit Outlook: 9 March 2020


Pension changes will lower liabilities for New Mexico and its
municipalities, a credit positive
Originally published on 06 March 2020

On 2 March, New Mexico (Aa2 stable) Governor Michelle Lujan Grisham signed Senate Bill (SB) 72, which primarily reduces Public
Employees Retirement Association (PERA) fund cost-of-living adjustments (COLAs) and mandates increased contributions by
employees and participating governments. The legislation is credit positive because it will reduce state and participating local
governments' unfunded pension liabilities and susceptibility to investment return volatility.

PERA is the state's largest public pension system and the sole source of pension exposure for its cities and counties. PERA accounts for
the majority of the state government’s adjusted net pension liability (ANPL) that we assign directly to its balance sheet. As of our most
recent survey on state pension liabilities, which incorporates the state's June 2018 financial reporting, New Mexico's $7.4 billion ANPL
was 70% of its own-source revenue, the 32nd-highest among the 50 states we surveyed.

SB 72 does not affect the Educational Retirement Board (ERB) pension fund, which mostly covers school district employees and was
also heavily underfunded with an ANPL of $19.4 billion as of June 2019. Since the state provides the vast majority of school district
funding, its finances are indirectly exposed to costs from the ERB's unfunded liabilities, even though those liabilities do not appear
directly on its balance sheet.

SB 72 will suspend compounded COLAs for most retirees for three years and replace them with 2% simple (non-compounding) COLAs.
According to PERA's actuaries, the COLA changes will lower the system's reported unfunded liabilities to about $6.0 billion from $6.7
billion, as of June 2019, roughly a 9% reduction. Based on limited currently available detail, we estimate that the legislation will reduce
the aggregate ANPL for the PERA system about 6% to $17.7 billion from $18.8 billion as of June 2019.

PERA is severely underfunded, with a 71% funded ratio based on a reported 7.25% discount rate, and a 45% funded ratio based on
our 3.51% adjusted discount rate as of June 2019. Government contributions have consistently been insufficient to prevent unfunded
liabilities from growing under reported assumptions, a level reflected by our so-called tread-water indicator. For example, the state and
participating governments contributed roughly $371 million in aggregate to PERA in fiscal 2019 (ended June 30, 2019), which equated
to roughly 15% of active employee payroll. By comparison, the governments’ collective tread-water indicator was $570 million in fiscal
2019, roughly 25% of payroll (see exhibit).
New Mexico state and local government contributions to the PERA pension system have consistently fallen below our tread water indicator
Contributions as a % of payroll Tread water indicator as a % of payroll






2014 2015 2016 2017 2018 2019

All years are fiscal years that end 30 June.

Sources: PERA financial reports and Moody's Investors Service

34 Credit Outlook: 9 March 2020

Beginning 1 July, SB 72 calls for the state and its participating employees to increase their contributions to PERA by 0.5% of payroll per
year for four years, producing a 2% cumulative increase relative to payroll for both the state and the employees. Local governments
that participate in PERA and many of their employees will similarly increase contributions relative to payroll, but not until 1 July 2022.
Cities and counties tend to carry healthy reserves, with a median fiscal 2018 operating fund balance of 61% of operating revenue for
cities, and 62% for counties, double the size of national medians. Given the moderate and gradual nature of the increases mandated by
SB 72, rising pension contribution requirements are unlikely to materially worsen municipalities' financial positions.

Higher contributions will help lower the growth rate of PERA's unfunded liabilities and improve the system's non-investment cash flow
(NICF), which are contributions to a pension system, less benefits and expenses out. The more negative NICF becomes relative to a
pension system's assets, the more investment return volatility can constrain asset accumulation. This is because a system with very
negative NICF must frequently liquidate a portion of its assets to pay benefits, reducing the base on which subsequent investment
returns are earned. Before SB 72, PERA's actuaries projected that the system's NICF would fall to negative 5.5% of assets by the
mid-2030s, compared with around negative 4.0% currently. As a result of SB 72, the system's actuaries project expect the system's
NICF will improve to between negative 3.0% and negative 4.0% of assets over the same period in a base case scenario.

Although the changes enacted by SB 72 will improve funding for New Mexico and many of its local governments, unfunded retirement
benefits will likely continue to weigh on credit quality for the foreseeable future. The PERA contribution hikes are gradual and may
not bring total contributions above the tread water indicator for several more years. Additionally, SB 72 creates automatic triggers to
reduce pension contributions as PERA's funding improves, a feature that will allow unfunded liabilities to remain higher for longer. And
since SB 72 does not address ERB's funding challenges, the state and its school districts remain exposed to financial risks stemming
from ERB's very large unfunded liabilities and government contributions that are well below our tread-water indicator for the system.

Thomas Aaron, VP-Senior Analyst Heather Correia, Analyst

Moody’s Investors Service Moody’s Investors Service
+1.312.706.9967 +1.214.979.6868

35 Credit Outlook: 9 March 2020


European court's ruling on IRPH risks tapering excess spread on some

Spanish RMBS is credit negative
Originally published on 05 March 2020

On 3 March, the European Union Court of Justice (ECJ) ruled that Spain’s Indice de Referencia de Préstamos Hipotecarios (IRPH),
a mortgage loan reference index applied to some floating-rate mortgage contracts, falls within the remit of the European Union's
directive on unfair terms in consumer contracts (Directive 93/13/EEC). As a result, Spanish courts can consider IRPH abusive. The ECJ
ruling is credit negative for some residential mortgage-backed (RMBS) transactions that have exposure to IRPH-linked loans and are
not fully protected by swaps because if a Spanish court deems the clauses as unfair, the court can replace the IRPH with a statutory
alternative such as Euribor, which on average has been 1.6 percentage points lower, resulting in lower excess spread.

The largely expected ECJ ruling, which is mostly in line with the EU advocate general opinion published in September 2019, challenges
the Spanish Supreme Court's November 2017 ruling that the IRPH, as an official reference index legally defined and regulated, was
out of the scope of Directive 93/13/EEC. According to the ECJ ruling, Spanish courts can rule against the use of the IRPH in mortgage
contracts on the basis of a lack of transparency.1 The ECJ said that if the term is deemed to be unfair, Spanish courts can replace the
index with an applicable statutory index.

Abusive IRPH clauses will result in a lower substitute index, reducing excess spread
In cases where Spanish courts consider IRPH clauses to be abusive, another applicable statutory index such as Euribor will be used.
Euribor has historically been around 1.6 percentage points lower than the IRPH over the past decade (see Exhibit 1). As a result, we
expect a progressive reduction in portfolio yields among affected transactions as consumer claims from abusive IRPH clauses get
resolved. The magnitude of this reduction will depend not only on the share of IRPH-linked loans but also on the number of claims and
negative rulings. A reduction in the available excess spread, will weaken available credit support to some junior tranches.

Exhibit 1
IRPH and Euribor evolution
























































Sources: Bank of Spain and European Central Bank

Negative rulings by Spanish courts will only weaken the credit quality on a small proportion of deals
Of the 136 Spanish RMBS that we rate, 29 have exposure to IRPH mortgages in excess of 10% of their portfolio balance. Most exposed
transactions are pre-crisis securitisations originated by former savings banks with IRPH-linked mortgages, which typically account for
15%-40% of outstanding portfolios. Of those 29 deals, 18 benefit from interest rate swaps where the issuer pays the interest received
on the assets, fully protecting the transactions from any reduction in portfolio yield. For the remaining 11 transactions, rulings against
the use of IRPH on the corresponding loans would have an overall credit-negative effect because they risk sustaining a reduction of
available excess spread (see Exhibit 2).

36 Credit Outlook: 9 March 2020

Exhibit 2
Less than 10% of all the RMBS transactions that we rate could see a reduction of excess spread
Split by number of transactions
Exposure to IRPH > 10% and not
protected by a swap

Exposure to IRPH > 10%, but protected

by a swap

No meaningful exposure to IRPH


Source: Moody's Investors Service

A lower index would improve borrowers' affordability

A switch to a lower index would help improve borrowers' ability to meet their payments because installments would decline, making
debt management easier. Although transactions would be more resilient in the event of a downturn, we do not expect a significant
short-term performance improvement. For those deals not fully protected by a swap, the reduction of excess spread would offset any
potential improvement on deal performance.

1 The ECJ stated that to fulfill the transparency requirement, the contractual term setting the variable interest rate in a mortgage loan agreement must
allow an average consumer to understand the specific functioning of the method used to calculate that rate and to evaluate its economic consequences on
their financial obligations.

Paula Couce Iglesias, Analyst Maria Turbica Manrique, VP-Senior Analyst

Moody’s Investors Service Moody’s Investors Service
+44.20.7772.1420 +34.91.768.8236

37 Credit Outlook: 9 March 2020


Board-level gender diversity at European companies shows positive

correlation with higher ratings
Originally published on 02 March 2020

» European companies with high ratings have the highest proportion of women on their boards. Our examination of
corporate boards at Moody's-rated companies in Europe shows a positive correlation between gender diversity and higher credit
ratings. Aaa-rated companies, all of them banks, have boards with an average of 28% gender diversity. Board gender diversity peaks
among A-rated companies at 34% and then gradually declines down the rating scale to the Caa rating category, where female
directors account for only 16% of corporate boards. Similarly, higher-rated companies also have more women occupying C-level
executive positions. While the data show that board gender diversity is correlated with higher ratings, they do not shed light on
whether one causes the other.

» EU-wide directive on gender diversity still on hold. Women comprise an average of 29% of corporate board members in
the cohort of European companies that we analyzed. This is well short of the minimum 40% board-level gender diversity that
the European Commission had proposed mandating in 2012. The European Council has yet to approve the proposal, although
it received renewed attention last year when the new commission president, Ursula von der Leyen, made gender equality a
cornerstone of her candidacy.

» Gender diversity and targets vary widely by country, with France leading the way. France has the most diverse boards in
Europe, with women accounting for an average of 42% of a company’s directors, followed by Norway at 40%. Many European
countries have implemented national mandates for board-level gender diversity. Eleven have implemented “soft” mandates with
minimal enforcement or minor penalties for noncompliance while six have adopted “hard” mandates with significant penalties
for noncompliance. Countries in the latter group have among the highest compliance rates with their local mandates. The two
countries with the highest percentage of companies with boards comprised of at least 40% women are France (71%) and Italy
(69%). Both have binding mandates with significant penalties for noncompliance.

» Companies in the construction/homebuilding and aerospace/defense sectors have the most diverse boards. An
examination of gender diversity by sector shows that the construction and homebuilding sector is the most diverse among sectors
with at least five companies in our European cohort. Of the 144 board members in the sector, 38% are female. Aerospace and
defense, insurance, media, and retail companies also boast high levels of gender diversity. At the other end of the scale, the paper,
packaging and forest products and hotel, gaming and leisure sectors have the lowest average diversity at only 14% and 15%,

38 Credit Outlook: 9 March 2020

To mark Women’s History Month, we are highlighting our research on the credit implications of gender disparities. View our Global Gender
Gaps topic page for more on the potential credit-enhancing social and economic benefits for companies and governments if gender gaps
narrow in areas including labor force participation, pay and boardroom representation.

Click here for the full report.

39 Credit Outlook: 9 March 2020


Articles in last Thursday's Credit Outlook


» Federal Reserve rate cut to counter coronavirus effects increases pressure on US bank profitability

» Coronavirus-related market volatility is credit positive for exchanges and market makers

» Russian banks' proprietary investments lose value as domestic markets tumble on coronavirus fears

» Guidance to UAE banks will soften coronavirus' economic effects, but diminish transparency

» Coronavirus measures increase screen time in China, a credit positive for internet companies

» Microchip Technology revises revenue forecast lower on coronavirus disruption


» Dell's $1 billion share repurchase program is credit negative while leverage remains high

» Lockheed Martin's new combat rescue helicopter contract supports outlook for Sikorsky

» W.R. Grace's share repurchase program is credit negative

» Greif's lower guidance and later return to leverage targets are credit negative

» China's new system for onshore bond issuance will enhance property developers' funding flexibility


» Evergy allocates capital to investment, away from stock repurchases, a credit positive

» KEPCO's losses reveal challenges from environmental and safety regulations, a credit negative


» goeasy’s distribution agreement with Mogo is credit positive


» American Express' deficient card sales practices are credit negative

» Wells Fargo's potentially lower litigation accruals are positive, but weaker net interest income will offset benefit

» Brazil's planned standard dividend policy would be credit positive for government-owned banks

» EU court ruling on Spain's IRPH-indexed mortgages heightens its banks' litigation risks

» US tax claims against Tinkoff Bank's controlling shareholder and board chairman raise governance risks

» Kazakhstan will guarantee four banks' capital replenishment plans, a credit positive

40 Credit Outlook: 9 March 2020


» Opposition victory in Slovakia's parliamentary elections will toughen stance on corruption


» Swiss cantons will benefit from National Bank's profit payout

Click here for Thursday's Credit Outlook.

41 Credit Outlook: 9 March 2020

Elisa Herr, Jay Sherman, Andrew Bullard, Julian Halliburton and Phil Macdonald

Production Specialist
Amanda Kissoon

42 Credit Outlook: 9 March 2020

© 2020 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well
as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it
uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However,
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agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $2,700,000. MCO and Moody’s
investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding
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Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an
entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered
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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred
stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services
rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.



43 Credit Outlook: 9 March 2020