8 August 2019

Funds
NEWS AND ANALYSIS » Icahn Enterprises' sale of mining segment is credit 29
Corporates positive
» Refinitiv’s deal to be acquired by London Stock Exchange 2 Sovereigns
Group for $27 billion is credit positive » New US sanctions on Russian sovereign debt will mainly 30
» US tariffs spell trouble for toy companies as they head 3 weigh on long-term economic prospects, a credit
into holiday selling season negative
» TransDigm's special dividend is credit negative 4 » Mozambique's peace agreement reduces political risk and 32
» Mastercard's planned acquisition of most of Nets' 5 will support the country’s operating environment
corporate services businesses is credit positive » Sustained escalation in Kashmir tensions would weigh 34
» International Flavors & Fragrances' compliance breach is 6 on India's and Pakistan's economies, hampering fiscal
credit negative consolidation
» ArcelorMittal's impairment and weak second-quarter 7
results reflect challenging industry conditions CREDIT IN DEPTH
» Data breach highlights Pearson's increased exposure to 9
cyber risks as it accelerates digitalization » Credit card standards tighten, while auto and mortgages 36
are stable and consumer loan demand increases
» Vivendi's proposed sale of an equity stake in Universal 10
Music Group to Tencent would be modestly credit The latest senior loan officer survey shows net tightening for cards,
negative modest tightening for auto and mortgages unchanged. Demand
» Diageo’s environmental investments in Africa will help 12 increased considerably for cards, mortgages and auto loans.
cut greenhouse gas emission and water usage
» Paper packaging sector will remain under pressure as 13
first-half results reveal mixed picture
RECENTLY IN CREDIT OUTLOOK
» Smurfit Kappa's anti-competition fine is credit negative 16 » Articles in last Monday's Credit Outlook 41
» Bayer's disposal of chemical park operator Currenta is 17
credit positive » Go to last Monday's Credit Outlook
» Economic uncertainty and protests are credit negative for 18
Hong Kong's retail property operators
Click here for Weekly Market outlook, our sister publication,
» Seven & i's shutdown of new 7pay mobile app soon after 21
launch thwarts company's growth strategy containing Moody's Analytics' review of market activity,
Banks financial predictions, and dates of upcoming economic
» Federal Reserve will enable faster payments, a credit 23
positive for US banks releases.
» Central Bank of Russia's proposed requirements on 25
collateral reporting are credit positive
» Interest rate drop’s positive effect on Jordanian banks' 27
asset quality outweighs reduction in lending margins

MOODYS.COM
 NEWS AND ANALYSIS CORPORATES

Refinitiv’s deal to be acquired by London Stock Exchange Group for

$27 billion is credit positive
On 1 August, Refinitiv Holdings Ltd., an affiliate of financial information and risk-management company Refinitiv US Holdings Inc. (B3
review for upgrade) reached a deal for the Refinitiv business to be acquired by London Stock Exchange Group plc (LSEG, A3 review for
downgrade) in an all-share transaction. The deal is credit positive for Refinitiv because the company has a better chance to build an
improved product offering and achieve 4%-6% organic revenue growth as a strategic asset of LSEG than it does as a standalone entity
operating with high leverage. In light of LSEG's greater financial resources and stronger credit profile that should enable funding for
necessary growth investments to transform the combined group into a global financial market infrastructure and data provider at scale,
we put Refinitiv's ratings on review for upgrade.

LSEG has arranged underwritten bridge financing of approximately $13.5 billion to refinance Refinitiv's existing notes and term loans
in full, which we expect will occur following completion of the acquisition. The outcome of our review will depend on how much debt
is repaid, the nature of LSEG's support for any remaining Refinitiv debt, and where that debt sits within LSEG's capital structure. About
$1.1 billion of Refinitiv's outstanding payment-in-kind preferred equity securities will be converted to LSEG common shares under the
terms of the agreement.

Scrutiny of the combination of LSEG's extensive capital markets activities with Refinitiv's over-the-counter trading platforms as well as
the consolidation of financial market data providers is likely to produce a lengthy and in-depth antitrust review from US and European
regulators.

Refinitiv's revenue was about $6.2 billion for the 12 months that ended 30 June. The $27 billion purchase price reflects an equity value/
EBITDA multiple of 13x Refinitiv's as-reported adjusted EBITDA, excluding run-rate cost synergies, for the 12 months that ended 30
June, based on our calculations. Following the acquisition, Refinitiv's current shareholders – including investment firm Blackstone Group
and Refinitiv's former parent data and news provider Thomson Reuters Corp. (Baa2 negative) – will hold about 37% of LSEG's shares
and just under 30% of the total voting rights. The shareholders will be subject to a two- to four-year share lock-up (excluding a small
amount that will be free to trade at closing).

Refinitiv has leading global market positions across financial information, data management, analytics and risk management,
meaningful recurring revenue, relatively high customer retention and minimal execution risk to the cost savings plan. However, it
also has elevated financial leverage, competitive challenges that historically produced low-single-digit organic revenue growth, and
substantial onetime costs during the next 12 to 18 months to achieve future cost savings.

Gregory A. Fraser, CFA, VP-Senior Analyst Stephen Sohn, Associate Managing Director
Moody’s Investors Service Moody’s Investors Service
gregory.fraser@moodys.com stephen.sohn@moodys.com
+1.212.553.4385 +1.212.553.2965

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
www.moodys.com for the most updated credit rating action information and rating history.

2 Credit Outlook: 8 August 2019

 NEWS AND ANALYSIS CORPORATES

US tariffs spell trouble for toy companies as they head into holiday
selling season
Originally published on 05 August 2019

On 1 August, US President Donald Trump announced plans for a 10% tariff on an additional $300 billion worth of Chinese imports
beginning 1 September. The new tariffs on imports from China will be credit negative for toy companies Hasbro Inc. (Baa1 stable) and
Mattel Inc. (B1 stable). The levy will apply to all of the remaining goods that the US excluded from its previously imposed 25% tariffs
on Chinese imports, including toys. The toy industry sources a substantial amount of its products from manufacturers in China.

The new tariff will hit at a particulary sensitive time for toy companies, just ahead of building inventories for the peak holiday selling
season. The toy companies generate approximately two-thirds of their total revenue in the back half of the year, and much of that in
the September through December period. Still recovering from the liquidation of Toys R Us last year, the toy companies in particular
need strong holiday performance this year to reinstate profitable growth.

With many key retailers managing with just-in-time inventory and only expanding shelf space for toys in November to accommodate
holiday sales, a significant share of the manufacturers' annual toy sales will be exposed to the new tariffs. We estimate that the US
accounts for between 40% and 50% of total sales for US-based Hasbro and Mattel. Hasbro stated in its last earnings call that about
67% of its toys sold in the US were manufactured in China in 2018. This leads us to conclude that absent taking any action, the tariffs
could add tens of millions of dollars to the company's costs, although less than if the previously rumored 25% tariffs were to be
implemented.

We expect both companies to take certain measures to compensate for the higher costs, and thus limit the financial effect. We believe
that both companies will pass on much of the additional cost to their retailer-customers and ultimately to consumers. Hasbro has said
that it has already discussed such pricing actions with retailers. Given that many core toy products are priced in the $10-$20 range, the
price increase needed to cover a 10% tariff would likely be manageable for most consumers. However, some high-ticket items could
experience sales reductions because of price increases.

Other possible actions by the toy companies include getting price reductions from some of their suppliers, and building inventories in
the US ahead of the 1 September implementation. This would accelerate short-term borrowings by a month or so, and raise financing
costs for the year, since inventory will liquidate closer to year end. But this would likely still represent a savings over paying the tariff.
Finally, the steep devaluation in China's currency makes it cheaper to buy products from China, which will also alleviate pressure in the
short run.

While the 10% tariff is likely manageable, further increases would represent a more substantial cost to the industry and could dampen
sales if passed on to consumers. We expect the companies to shift more production away from China over time, which would reduce
the impact in future years, although we believe that China will remain an important manufacturing partner for the toy industry for the
foreseeable future. Ultimately, any effect on toy companies' ratings will depend on their ability to pass higher costs on to consumers
without damaging sales.

Linda Montag, Senior Vice President Peter H. Abdill, CFA, MD-Corporate Finance
Moody’s Investors Service Moody’s Investors Service
linda.montag@moodys.com peter.abdill@moodys.com
+1.212.553.1336 +1.212.553.4024

3 Credit Outlook: 8 August 2019

 NEWS AND ANALYSIS CORPORATES

TransDigm's special dividend is credit negative

Originally published on 06 August 2019

On 6 August, TransDigm Inc. (B1 negative) announced its intention to make a special dividend to shareholders. The transaction is credit
negative given that the large dividend – about $1.7 billion – is occurring while TransDigm’s financial leverage (Moody’s-adjusted debt/
EBITDA) is very elevated at around 7.3x currently. We expect the dividend to be funded entirely through cash on hand, however, with
pro forma cash being reduced to about $1 billion from the current level of approximately $2.7 billion.

The transaction is in keeping with TransDigm’s long-standing history of prioritizing shareholder returns over debt reduction and speaks
to the company’s high tolerance for financial risk even in the face of a highly leveraged balance sheet that constrains near-term
financial flexibility. It also occurs while the company is still digesting its large Esterline acquisition. The uncertainties related to the
company's cyclical commercial original equipment manufacturer aerospace markets (30% of sales) and their vulnerability to economic
downturns also remain a lingering risk.

Partially mitigating these concerns is the proprietary and sole-sourced nature of the majority of TransDigm’s products, coupled with
the company’s large installed base and associated aftermarket revenue stream that provide good earnings and cash flow stability. We
believe TransDigm's strong competitive standing is apparent in its industry leading margins, and we expect these margins to improve
over time as the company continues to pursue new profitable business and implement its aggressive pricing policy.

We expect that TransDigm’s liquidity profile (SGL-1) will remain strong and provide some of the necessary financial flexibility to
support its high leverage and aggressive financial policies. We estimate September 2019 cash balances of about $1.4 billion and note
the absence of any near-term principal repayment obligations. We anticipate substantial free cash generation during 2019, with a ratio
of free cash flow to debt comfortably in the mid single digits, and near full availability under the company's $760 million revolving
credit facility, which does not expire until December 2022.

Eoin Roche, VP-Senior Analyst Russell Solomon, Associate Managing Director

Moody’s Investors Service Moody’s Investors Service
eoin.roche@moodys.com russell.solomon@moodys.com
+1.212.553.2868 +1.212.553.4301

4 Credit Outlook: 8 August 2019

 NEWS AND ANALYSIS CORPORATES

Mastercard's planned acquisition of most of Nets' corporate services

businesses is credit positive
On 6 August, Mastercard Incorporated (A1 stable) said it had agreed to acquire most of the corporate services businesses of European
payments company Nets for €2.85 billion (about $3.19 billion). The planned acquisition, which Mastercard expects to close in the first
half of 2020, is credit positive because it reinforces Mastercard's direct payments capability suite and because it will be accretive to free
cash flow.

Mastercard will acquire the Nets’ corporate services business which consists of clearing and instant payment services and e-billing
solutions. The transaction will be financed with available cash balances. Management estimates that the transaction will be dilutive
to earnings per share for up to 24 months after closing because of purchase accounting and integration costs. We believe that the
transaction will be accretive to free cash flow, with near-term free cash flow accretion tempered by modest integration costs.

The acquisition builds upon Mastercard's consistent growth strategy in account-to-account real-time payments. The payments
infrastructure capabilities of the acquired business will reinforce Mastercard's leading Vocalink infrastructure business and add
incremental markets. Bill payment and open banking-focused solutions are complementary to Mastercard's recently acquired
Transactis bill payment digitization capabilities. As we highlighted in our recent industry research on consolidation and competitive
landscape evolution in the payments industry, we view strategic activity by leaders to reinforce capabilities in developing areas such as
push payments as beneficial to their credit positioning over time.1

In recent years, Mastercard has built a suite of capabilities to participate in business-to-business, business-to-consumer, person-to-
person, and consumer bill payment flows, which are incremental to its strong incumbent position in consumer-to-merchant payment
flows at the point of sale, and represent a significant growth opportunity for the company. Differentiated capabilities including
Mastercard Send global direct payment platform, Vocalink ACH infrastructure, Transactis bill payment digitization and Transfast cross-
border account-to-account money transfer position the company to lead in this growing and developing area, and the Nets corporate
services acquisition further builds on this suite of capabilities.

Endnotes
1 See “Payment processing - US: Consolidation is Credit Positive, 9 July 2019, and Consumer payment processing - US: Networks and processors to sustain
growth trajectory despite heightened competition, 19 June 2019.

Serge Krukovsky, VP-Senior Analyst Lenny J. Ajzenman, Associate Managing Director

Moody’s Investors Service Moody’s Investors Service
serge.krukovsky@moodys.com lenny.ajzenman@moodys.com
+1.212.553.3625 +1.212.553.7735

5 Credit Outlook: 8 August 2019

 NEWS AND ANALYSIS CORPORATES

International Flavors & Fragrances' compliance breach is credit

negative
Originally published on 06 August 2019

On 5 August, International Flavors & Fragrances, Inc. (Baa3 stable) announced that it had discovered a compliance breach during the
integration of Frutarom while conducting post-acquisition due diligence following allegations that two Frutarom businesses operating
principally in Russia and Ukraine had made illegal payments to a number of customers.

The announcement is credit negative because it introduces reputational risk, particularly because the preliminary results indicate that
key members of Frutarom’s senior management were aware of the payments, and may suggest that internal controls at Frutarom were
weak. However, the discovery does not currently affect the outlook or rating because we expect any potential financial effect to be
limited.

IFF commenced an internal investigation with the assistance of external legal and accounting firms and disclosed that based on
preliminary results, it believes the improper payments occurred, but are no longer being made. IFF estimates the affected sales related
to the illegal payments is less than 1% of IFF’s and Frutarom’s 2018 combined net sales and the company does not anticipate the effect
on IFF’s operations or financial condition to be material.

Additionally, IFF stated that the improper payments are contained and that no payments are connected to the US. Management also
revealed on its earnings conference call that authorities in the US and Israel have been notified.

IFF has responded by taking corrective action on those individuals that are involved. However, if the investigation expands in terms of
geographies, results in significant fines or customer losses, we would consider revising the outlook or rating.

IFF is a leading creator and manufacturer of flavors and fragrances used by other manufacturers to impart or improve the flavor or
fragrance in a wide variety of consumer products. Following the acquisition of Frutarom, IFF is the second-largest global competitor in
the food and flavors industry with over 90,000 products serving approximately 195 countries and pro forma revenue of $5.1 billion for
the 12 months that ended 31 March 2019.

Domenick R. Fumai, CMA, VP-Senior Analyst John Rogers, Senior Vice President
Moody’s Investors Service Moody’s Investors Service
domenick.fumai@moodys.com john.rogers@moodys.com
+1.212.553.3996 +1.212.553.4481
Glenn B. Eckert, CFA, Associate Managing Director
Moody’s Investors Service
glenn.eckert@moodys.com
+1.212.553.1618

6 Credit Outlook: 8 August 2019

 NEWS AND ANALYSIS CORPORATES

ArcelorMittal's impairment and weak second-quarter results reflect

challenging industry conditions
Originally published on 02 August 2019

On 1 August, global steel producer ArcelorMittal (Baa3 stable) announced its results for the second-quarter 2019, which were below
our expectations. The group also reported that it has taken a significant impairment charge in the US because of more difficult market
conditions and weaker prospects of a recovery in the near future. The announcements are credit negative because they suggest that the
currently challenging environment in the global steel industry will likely persist for longer than the group had previously anticipated.

As part of the disappointing second-quarter 2019 results, Arcelor slightly revised downward its forecast for apparent steel consumption
growth globally (0.5% to 1.5%), including in Europe (negative 2% to negative 1%), which also confirms our currently negative outlook
for the European steel sector. Given the more gloomy outlook, we now expect some of Arcelor's credit metrics to weaken to levels
outside of our quantitative guidance for its Baa3 rating during the second half of 2019.

In response to the more challenging market environment, including depressed steel prices and materially higher feedstock
costs, Arcelor adjusted its assumptions for future cash flow at its US operations, which resulted in a $600 million impairment
for ArcelorMittal USA in second-quarter 2019. While we understand that management has taken measures to avoid additional
impairments, visibility on improving operating conditions and sustainably recovering steel prices is very limited, not only in the US.

In more detail, Arcelor's second-quarter 2019 results showed a further erosion in its profitability, driven by a further contraction in
steel spreads, with falling steel prices and rising raw material costs, especially for iron ore, across almost all regions. This adversely
affected the group's steel-only EBITDA/tonne, which fell to $43 in second-quarter 2019 from already weak $56 in first-quarter 2019
and significantly down versus $127 in second-quarter 2018. The sharpest margin deterioration was in the group's core regions of North
America and Europe, where EBITDA in second-quarter 2019 plummeted to $198 million (down 75% year on year) and $359 million
(down 69%), respectively.

Earnings in Brazil and Arcelor's ACIS segment remained below last year's levels, but the decline was less pronounced, while EBITDA of
€570 million in the mining business was up 87% year on year because of a surge in iron ore prices as global supply has tightened since
the beginning of the year. With first-half 2019 Moody's-adjusted EBITDA at $3.2 billion (down 42.6% year on year), we project that
Arcelor's consolidated Moody's-adjusted EBITDA for full-year 2019 will fall below $6.5 billion. This implies a Moody's-adjusted leverage
ratio of around 3.5x gross debt/EBITDA at year-end 2019, which would exceed our 3x maximum quantitative guidance for the assigned
Baa3 rating (see exhibit).

Arcelor's leverage will exceed our 3x maximum quantitative guidance for its rating by year-end 2019, but free cash flow should strengthen
Free Cash Flow (LHS) Gross Debt/ EBITDA (RHS)
3,000 5.0x

4.0x

2,000
3.0x
$ million

2.0x
1,000

1.0x

0 0.0x
2016 2017 2018 LTM (06/19) prelim. 2019e

Sources: Moody's Financial Metrics and Moody's Investors Service estimates

7 Credit Outlook: 8 August 2019

 Although we would only temporarily tolerate such leverage at the current rating level, we still recognize Arcelor's healthy cash flow
generation and liquidity profile. In particular, considering a sizable $1.2 billion working capital release expected by management for
the second half of 2019, we forecast Arcelor's free cash flow to be strongly positive this year and its Moody's-adjusted ratio of cash
flow from operations less dividends to debt to remain well within our defined range for the Baa3 rating of 20%-30%. Likewise, we
regard the group's current $9.2 billion liquidity position as adequate, including $3.7 billion of cash on the balance sheet and $5.5 billion
available under committed credit lines as of the end of June 2019. We further understand that Arcelor has identified non-core assets for
disposal valued at up to $2 billion, which it aims to sell over the next two years and could use to support its targeted reported net debt
reduction to $7 billion ($10.2 billion as of 30 June 2019).

Nevertheless, given the recent swift deterioration in profitability and the currently high level of uncertainty as to a potential
stabilization in market conditions over the next 12-18 months, the group's rating positioning became more fragile during the first half
of 2019.

Goetz Grossmann, CFA, AVP-Analyst Christian Hendker, CFA, Associate Managing Director
Moody’s Investors Service Moody’s Investors Service
goetz.grossmann@moodys.com christian.hendker@moodys.com
+49.69.70730.728 +49.69.70730.735

8 Credit Outlook: 8 August 2019

 NEWS AND ANALYSIS CORPORATES

Data breach highlights Pearson's increased exposure to cyber risks as it

accelerates digitalization
Originally published on 05 August 2019

On 31 July, Pearson Clinical Assessments, a business segment of leading education publisher, Pearson plc (Baa2 stable) issued a
notification to customers of a data breach that resulted in unauthorized access to about 13,000 school and university web accounts,
mainly in the US. Pearson said that it had strict data protections in place and have reviewed this incident and fixed the vulnerability.

While the effect of this incident on Pearson’s business is only marginally disruptive, it exposes Pearson to some reputational risk among
customers and also highlights its increased exposure to cyber risks as the company’s business is being increasingly digitalized. Digital or
digitally enabled products and services comprise 62% of Pearson's revenue.

The exposed data was isolated to first name, last name, and in some instances could have included date of birth and/or email address.
While Pearson has found no evidence that this information has been misused, it has notified affected customers as a precautionary
measure and is offering complimentary credit monitoring services to the affected students.

Earlier in July, Pearson had announced its plans of scaling back printing text books and invest in expanding ebooks combined with
digital testing to improve students’ learning. All future releases of Pearson’s 1,500 active US titles will be “digital first” and updated
electronically on an ongoing basis. The company also plans to increase its use of artificial intelligence by offering more students services
such as allowing them to write exercises by hand, scan their responses and receive quick feedback electronically. This implies increased
exposure of Pearson to potential cyber risks in future, although the company will aim to ensure that strict data protections are in place
to mitigate such risks.

Pearson is a global education company. The group reported £4.1 billion in sales and £546 million in adjusted operating profit in 2018.

Gunjan Dixit, VP-Sr Credit Officer Danilo Ruocco, Associate Analyst

Moody’s Investors Service Moody’s Investors Service
gunjan.dixit@moodys.com danilo.ruocco@moodys.com
+44.20.7772.8628 +44.20.7772.1966
Peter Firth, Associate Managing Director
Moody’s Investors Service
peter.firth@moodys.com
+44.20.7772.5222

9 Credit Outlook: 8 August 2019

 NEWS AND ANALYSIS CORPORATES

Vivendi's proposed sale of an equity stake in Universal Music Group to

Tencent would be modestly credit negative
Originally published on 07 August 2019

On 6 August, Vivendi SA (Baa2 stable) announced that it had entered preliminary negotiations with Tencent Holdings Limited (A1
stable) to sell a 10% stake in Universal Music Group (UMG) to Tencent at a preliminary equity valuation of €30 billion for 100% of
UMG. In addition, Tencent would have a one-year call option to acquire an additional 10% at the same terms. The transaction is
subject to due diligence and finalisation of legal documentation. Vivendi also plans to continue the process for the sale of an additional
minority stake in UMG to other potential partners.

The proposed sale, if completed, would crystallise the large value embedded in UMG for Vivendi and would bring some strategic
benefits to UMG. However, the sale would be modestly credit negative for Vivendi because the company has indicated in the past
that it expects to return to shareholders half of the proceeds from any sale of UMG, with the other half invested in M&A. Therefore,
the company would be selling a stake in its highest-growth asset and use only half the proceeds to acquire more stable and cash flow
generative businesses with lower growth profiles and global reach than UMG, although at lower expected valuation multiples than
UMG.

If completed, the transaction would not have significant effect on reported credit metrics because Vivendi would continue to
consolidate 100% of the asset. However, going forward we would also assess Vivendi's financial profile by estimating its pro rata
consolidated metrics, and we may tighten the leverage triggers required for Vivendi at the Baa2 rating level if the difference between
the fully consolidated and the pro rata consolidated metrics is material.

While the proposed sale is modestly credit negative, the Baa2 rating with a stable outlook remains unchanged because we expect that
the company will remain well within the leverage boundaries for the current rating (see Exhibit 1).

Exhibit 1
We expected that Vivendi's leverage would fall steadily before the sale of the UMG stake and potential use of proceeds
Moody's-adjusted leverage ratios
Debt / EBITDA Net Debt / EBITDA What could change the rating up What could change the rating down
4.5x

4.0x

3.5x

3.0x

2.5x

2.0x

1.5x

1.0x
2016 2017 2018 2019E 2020E 2021E

All figures and ratios are calculated using our estimates and standard adjustments.
Sources: Moody's Financial Metrics and Moody's Investors Service estimates

We acknowledge that the agreement with Tencent can bring strategic benefits to Vivendi because it could help UMG capture growth
opportunities offered by digitalization and the opening of new markets, and would seek to improve the promotion of UMG's artists.

UMG is the world's leading recorded music and publishing group by market share (see Exhibit 2). It is also Vivendi's largest and fastest-
growing business, accounting for 42% of revenue and 60% of EBITA in 2018 (see Exhibits 3 and 4). The company has posted strong

10 Credit Outlook: 8 August 2019

 revenue and EBITDA growth at average annual rates of 7% and 9%, respectively, over the past four years, mainly driven by strong
growth of subscription and streaming revenue that have more than compensated for the decline in physical and download revenue.
Exhibit 2 Exhibit 3
UMG is the leading global music company UMG's relevance for Vivendi is set to increase amid strong growth
Recorded music market share EBITA 2018 by division

Havas
Other Universal Music 14%
27% Group
32%

Universal Music
Canal+ Group
Group
26%
60%

Warner Music
19%
Sony Music
22%

Source: Company filings Source: Company filings

Exhibit 4
UMG is Vivendi's largest and fastest-growing division
Revenue and EBITA margin 2014-21E

Revenues EBITA EBITA Margin

10,000 022%
19.0%
9,000 18.0%
17.0% 8,339
8,000 15.0% 7,311 017%
13.4% 6,554
7,000 12.4% 12.2%
11.6% 6,023
5,673
6,000 5,267 012%
5,108
€ million

5,000 4,557

4,000 007%

3,000

2,000 1,584 002%

1,114 1,316
761 902
565 593 644
1,000

0 -003%
2014 2015 2016 2017 2018 2019E 2020E 2021E

Sources: Company filings and Moody's Investors Service estimates

UMG is well positioned to benefit from strong growth prospects for the music industry. Future growth will come from an increase of
paid subscription services, which at the end of 2018 accounted for 255 million users, or around 3% of the global population, compared
with 176 million at the end of 2017. UMG's extensive catalogue, including top artists such as Ariana Grande, Lady Gaga and Queen,
makes it a “must have” option for retail music platforms such as Spotify, Apple Inc. (Aa1 stable) and Amazon.com, Inc. (A3 positive).

Agustin Alberti, VP-Senior Analyst Danilo Ruocco, Associate Analyst

Moody’s Investors Service Moody’s Investors Service
agustin.alberti@moodys.com danilo.ruocco@moodys.com
+34.91.768.8309 +44.20.7772.1966
Ivan Palacios, Associate Managing Director
Moody’s Investors Service
ivan.palacios@moodys.com
+34.91.768.8229

11 Credit Outlook: 8 August 2019

 NEWS AND ANALYSIS CORPORATES

Diageo’s environmental investments in Africa will help cut greenhouse

gas emission and water usage
Originally published on 06 August 2019

On 5 August, Diageo PLC (A3 stable) announced that it had agreed to invest £50 million to purchase solar, water treatment and
biomass equipment at its breweries in Africa to increase their carbon and water efficiency. The company will also be signing £130
million worth of long-term supply and maintenance contracts with local suppliers to increase the percentage of materials it sources
locally. Although the investments will slightly dent Diageo’s cash flows, they constitute a significant 7%-8% of our estimated Diageo
capital spending in fiscal 2020 (which ends 30 June 2020), support the company’s commitment to halve its greenhouse gas emissions
and water usage by 2020 and will help increase the efficiency of its operations, with a positive longer term impact on its cash flows.

The investments will be made at 11 company sites in seven countries including Kenya, Uganda, Tanzania, South Africa, Seychelles,
Nigeria and Ghana. Biomass boilers will be installed at two breweries in Kenya and Uganda to replace heavy fuel-oil systems used to
produce steam power for the breweries. The new biomass boilers will burn organic waste materials such as woodchips, bamboo and
rice husks supplied by local farmers, reducing carbon emissions by an estimated 42,000 tons, or the equivalent of removing 20,000
cars from the road, according to Diageo management. The new solar panels will produce up to 20% of the electricity needed for the
company’s 11 brewing sites involved.

Diageo management expects new water recovery, purification and reuse facilities across five sites in Africa to save more than 2 billion
cubic litres of water a year. The growing scarcity of fresh water sources is a challenge for manufacturers such as Diageo and a major risk
to the sustainability of economic, social and environmental systems in vast areas in Africa.

Diageo has also signed contracts with local farmers to supply white sorghum, a species native to Africa and an important crop
worldwide used to brew a local brand of beer. Diageo, via its majority-owned subsidiary East African Breweries, currently works with
around 60,000 sorghum farmers in Kenya, and sources 80% of its raw materials locally.

In fiscal 2019, which ended 30 June, the company spent £671 million on property, plant and equipment. As we expect that Diageo will
spend between £675-725 million in fiscal 2020 on physical equipment this year, the £50 million investment in new environmental
equipment equals around 7.1% of the group’s total capital spending and 4.2% of the £1.2 billion Moody’s-adjusted free cash flow we
expect it to continue generate this year. The company does publicly disclose the breakdown of capex between environmental and other
investments.

The investments should help Diageo improve the efficiency of its East African breweries and ultimately generate cost savings that will
actually improve its free cash flow generation capacity.

Roberto Pozzi, Senior Vice President Ilaria Borino, Associate Analyst

Moody’s Investors Service Moody’s Investors Service
roberto.pozzi@moodys.com ilaria.borino@moodys.com
+44.20.7772.1030 +44.20.7772.8633
Richard Etheridge, Associate Managing Director
Moody’s Investors Service
richard.etheridge@moodys.com
+44.20.7772.1035

12 Credit Outlook: 8 August 2019

 NEWS AND ANALYSIS CORPORATES

Paper packaging sector will remain under pressure as first-half results

reveal mixed picture
Originally published on 06 August 2019

On 1 August, European fiber based packaging producers Metsa Board Corporation (Baa3 stable) and Mondi Plc (Baa1 stable) and paper
and pulp producer Sappi Limited (Ba1 stable) reported their results for the first six months of this year. The announcements add to the
mixed picture for performance across the sector by rated peers including UPM-Kymmene (Baa2 positive), Stora Enso Oyj (Baa3 stable)
and The Navigator Company (Ba2 stable), which like Sappi produce graphic paper and have already reported their results.

Despite the continued decline in demand for paper during this period (see Exhibit 1), most rated graphic paper companies managed
to keep EBITDA broadly flat because of higher selling prices for most paper grades. This is credit positive for the sector and follows
substantial production capacity closures and conversions across all the graphic paper grades over the past decade. We also expect
prices for coated woodfree paper (CWF), which is primarily used for higher quality magazines and catalogues, to receive support in the
second half of 2020 following Stora Enso's planned closure of almost 1.1 million tonnes of CWF production capacity at its Oulu mill by
the end of September 2020. We expect Sappi, UPM and Lecta S.A. (B2 negative) to benefit the most from this development.

Exhibit 1
Graphic paper demand in Europe continued to decline during the first half of 2019
YTD May-15 YTD May-16 YTD May-17 YTD May-18 YTD May-19
6.0%
4.0%

2.0%

0.0%

-2.0%

-4.0%

-6.0%

-8.0%

-10.0%

-12.0%

-14.0%
Newsprint SC-Magazine Coated Mechanical Reels Uncoated Mechanical Coated Woodfree Uncoated Woodfree

Source: EUROGRAPH

As Exhibit 2 shows, in terms of the companies' graphic paper businesses, revenue developments were mixed. The Navigator and
UPM increased their paper revenue by 4.6% and 2.8%, respectively, while Sappi, Stora Enso, and Mondi reported revenue declines of
3%-6%. Sappi recorded the largest drop in revenue because it cut volumes to safeguard pricing. Significantly higher average pricing
levels in graphic paper clearly helped support revenue because the overall decline in market demand was mostly offset.

13 Credit Outlook: 8 August 2019

 Exhibit 2
Most companies' EBITDA remained solid as higher selling prices helped offset declining demand
Revenue 1st Half 2018 Revenue 1st Half 2019
3000 300
EBITDA Q1
- Q3 2019
EBITDA
EBITDA Q1 - H1 2019
2500 250
EBITDA Q3 2019
EBITDA EBITDA
H1 2018
H1 2019 H1 2018
2000 EBITDA 200
H1 2019 EBITDA
EBITDA H1 2018
in € million

in € million
H1 2018 EBITDA
1500 H1 2019 150

1000 100

500 50

0 0
The Navigator Company [1][6] UPM-Kymmene [2][6] Stora Enso [3][6] Sappi [4][6] Mondi [5][6]

[1] In the absence of more detailed segmental reporting this represents the entire company, where the graphic paper business (uncoated paper) constitutes roughly three-quarters of the
business
[2] The Communication Papers division
[3] The Paper division
[4] Printing and writing paper operations. First half of the calendar year, not of Sappi's fiscal year, which ends in September
[5] Uncoated fine paper division
[6] Represents the EBITDA definition of the issuer in the respective segment, not Moody's definition
Sources: Company financial reports

The weaker trading conditions for fiber based packaging producers in Europe led to mixed reported results from these operations and
differed by grade in the first six months of 2019 (see Exhibit 3). Revenue held up relatively well: Stora Enso was the only company to
report a decline in revenue in their packaging segment of about 1.8% in the first half of 2019 compared with the same period a year
ago. However, only Smurfit Kappa Group plc (Ba1 stable) was able to significantly increase its EBITDA, which rose by 11% compared
with the same period a year ago (excluding benefits from IFRS 16, the new accounting standard for leases),1 while Mondi, reported an
increase in EBITDA of around 3% year on year. The significant declines in EBITDA reported by Metsa Board and Stora Enso are credit-
negative signs for these companies and indicate the current weakness in the paper packaging market. Although we currently expect this
negative trend to decelerate, macroeconomic challenges stemming from global trade tensions and weaker economic growth are likely
to persist for the remainder of 2019 and put pressure on paper packaging producers' full-year operating results, which were very strong
in 2018.

Exhibit 3
Fiber based packaging producers struggled to maintain EBITDA levels with Smurfit Kappa being an outlier
Revenue 1st Half 2018 Revenue 1st Half 2019
5000 1000

4500 EBITDA 900

H1 2019
4000 800
EBITDA
3500 EBITDA 700
H1 2018
H1 2019
3000 EBITDA 600
in € million

in € million

H1 2018
2500 500
EBITDA
2000 H1 2018 400
EBITDA
1500 H1 2019 300
EBITDA
H1 2018
1000 200
EBITDA
500 H1 2019 100

0 0
Mondi [1][4] Metsä Board [4] Stora Enso [2][4] Smurfit Kappa [3][4]

[1] Fiber Packaging and Consumer Packaging divisions

[2] Includes the Consumer Board and the Packaging Solutions divisions
[3] Packaging product category
[4] Represents the EBITDA definition of the issuer in the respective segment, not a Moody's definition
Sources: Company financial reports

14 Credit Outlook: 8 August 2019

 While corrugated packaging benefited from higher prices in the first half of 2019 compared with the same period 2018, in the
containerboard segment results declined because of significantly lower pricing levels for testliner and kraftliner compared to the high
levels reached in October 2018, although demand held up well. We expect pricing levels to stabilise during the second half of 2019,
supported by our expectation that the decrease in pulp prices will slow. No material new pulp capacity is due to arrive on the market
before late 2021 and maintenance shutdowns in the coming months should help Metsa Board and Stora Enso going into 2020 because
of their market pulp exposure.

Endnotes
1 See Non-financial companies – EMEA: Few surprises from early adopters of IFRS 16 Leases; 2018 accounts should reveal more, 7 February 2019.

Dirk Steinicke, Analyst Anke Rindermann, Associate Managing Director

Moody’s Investors Service Moody’s Investors Service
dirk.steinicke@moodys.com anke.rindermann@moodys.com
+49.69.70730.949 +49.69.70730.788

15 Credit Outlook: 8 August 2019

 NEWS AND ANALYSIS CORPORATES

Smurfit Kappa's anti-competition fine is credit negative

Originally published on 07 August 2019

On 6 August, Italy's competition authority notified Smurfit Kappa Group plc (SKG, Ba1 stable) that it imposed a €124 million fine on
SKG subsidiary Smurfit Kappa Italia, S.p.A. for engaging in anti-competitive practices in Italy. The notification followed proceedings
initiated in early 2017 in a market-wide investigation against 50 companies active in Italy. Although SKG said that it will appeal this
decision, the fine nevertheless is credit negative because it will increase SKG's net leverage.

We expect that SKG will fund the fine with cash on the balance sheet, which totaled €234 million as of 30 June 2019, and free cash
flow generation during the second half of 2019 of €300-€350 million. However, we expect that the fine will increase net leverage
by 0.1x to 2.8x net debt/EBITDA pro forma for the last 12 months that ended June 2019. Despite the increase in net leverage, we
expect that SKG will be able to protect its credit metrics at current levels, and that the company will remain strongly positioned in our
quantitative guidance range for a Ba1 rating.

Since this is the first fine for SKG, we expect this to be an isolated event, and note that the company has fully cooperated with the
investigation. Therefore, we do not expect an increased risk to ratings or credit metrics from a corporate governance standpoint with
respect to competition practices.

SKG is Europe's leading manufacturer of containerboard, corrugated containers and specialty packaging, such as bag-in-box packaging
of liquids like water or wine. The group also holds a number of leading positions in its major product lines in Latin America, which
contributes roughly one-quarter of group sales. During the last 12 months that ended June 2019, SKG generated revenue of €9.1 billion.

Dirk Steinicke, Analyst Vasileios Lagoutis, Associate Analyst

Moody’s Investors Service Moody’s Investors Service
dirk.steinicke@moodys.com vasileios.lagoutis@moodys.com
+49.69.70730.949 +49.69.70730.958
Anke Rindermann, Associate Managing Director
Moody’s Investors Service
anke.rindermann@moodys.com
+49.69.70730.788

16 Credit Outlook: 8 August 2019

 NEWS AND ANALYSIS CORPORATES

Bayer's disposal of chemical park operator Currenta is credit positive

Originally published on 07 August 2019

On 6 August, Bayer AG (Baa1 negative) and Lanxess AG (Baa2 stable) said that they would sell their stakes in chemical park operator
Currenta to funds managed by Macquarie Infrastructure and Real Assets (MIRA) for a total enterprise value of €3.5 billion. Bayer's stake
is 60% and Lanxess' stake is 40%.

We estimate that Bayer will receive net proceeds after tax of around €1.1 billion including the sales of real estate and infrastructure
assets worth €180 million to MIRA, and that Lanxess will receive around €625 million from the sale, a credit positive for both
companies. In addition, we estimate that the sale of Bayer's stake in Currenta includes the transfer of up to €1.4 billion in pension
obligations, which will reduce Bayer's pension debt obligations by up to €840 million after application of our 40% equity credit for
unfunded pension obligations.

Adding the combined proceeds of Bayer's previously announced asset sales of around $1.1 billion (€990 million) for Coppertone and Dr.
Scholl's, the company's total proceeds once all three transactions have closed would be more than sufficient to fund the $2.0 billion
(€1.7 billion) of notes maturing October 2019 and support Bayer's commitment to deleverage after the acquisition of Monsanto. The
net proceeds from these asset sales are significantly higher than our initial estimate of €500 million.

Bayer said in November 2018 that it would exit certain activities. Apart from the transactions announced so far this year, the company
is also in the process of exiting Animal Health, a transaction scheduled to close in 2020. We estimate Animal Health's value at 15x
annual EBITDA, or around €5.4 billion based on 2018 EBITDA before special items of €358 million.

We assume that Lanxess will retain a large portion of the Currenta disposal proceeds to fund external growth opportunities in specialty
chemicals, which was among the capital allocation options Lanxess cited in a presentation to investors in conjunction with the
announcement. Following the disposal of its stake in the Arlanxeo joint venture in 2018 for around €1.4 billion, Lanxess bought back
shares for €200 million and made a contribution to its pension fund and has also retained a portion that we believe will be used for
mergers and acquisitions.

Whereas Bayer expects its part of the transaction to close in fourth-quarter 2019, Lanxess expects closing by end of April 2020. Both
companies have signed long-term service and supply agreements with MIRA, which for Lanxess will initially run for 10 years.

Martin Kohlhase, VP-Sr Credit Officer Matthias Hellstern, MD-Corporate Finance

Moody’s Investors Service Moody’s Investors Service
martin.kohlhase@moodys.com matthias.hellstern@moodys.com
+49.69.70730.719 +49.69.70730.745

17 Credit Outlook: 8 August 2019

 NEWS AND ANALYSIS CORPORATES

Economic uncertainty and protests are credit negative for Hong Kong's
retail property operators
Originally published on 06 August 2019

On 1 August, Hong Kong’s Census and Statistics Department released retail sales figures showing a 6.7% decline in June compared
with June 2018. It was the fifth consecutive month of year-on-year declines and the largest (excluding February, which is skewed by
effects of the Chinese New Year holiday). The department said the June decline reflected more cautious local consumer sentiment and
a slowdown in visitors to Hong Kong. The sales declines will constrain revenue growth for retail property operators in Hong Kong, a
credit negative.

We believe the June retail sales decline was driven in large part by mass protests in Hong Kong, which began on 9 June against
a proposed extradition bill and have since escalated. With the expectation that the protests will continue, the Hong Kong Retail
Management Association projects a single- to double-digit percentage drop in sales for July and August 2019 versus the same periods
in 2018.

The declining sales, which reflect economic uncertainty that stems from the US-China trade dispute and is now exacerbated by the
protests, will constrain retail property operators' revenue growth because retail sales and operators' revenue are linked. These operators
generate revenue from the rents they charge retailers. Some operators also receive turnover rent from certain retailers – a percentage
of the retailers' sales. Declining retail sales mean less turnover rent for property operators and less negotiating power to raise rents for
new and renewing retail tenants.

The protests and economic uncertainty, if they continue, will have a bigger effect on Hong Kong’s retail sales than the nearly three
months of protests in late 2014, known as the Occupy Movement, against proposed reforms to the Hong Kong electoral system. Full-
year retail sales declined 0.2% in 2014. This year's retail sales are likely to decline more than that and fall somewhere between the
declines that occurred during China’s anti-corruption campaign: a 3.7% decline in 2015 and an 8.1% decline in 2016 (Exhibit 1).

Exhibit 1
Hong Kong's retail sales this year are likely to decline more than in 2014 but less than in 2016
30.0%
Hong Kong overall retail sales volume year-

25.0%

20.0%
on-year change

15.0%

10.0%

5.0%

0.0%

-5.0%

-10.0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 6M19

Source: Hong Kong Census and Statistics Department

The sales declines in June were steepest for jewelry (17.1%) and electrical goods (16.1%), while sales related to daily necessities such as
those sold in supermarkets were up 1.6%, according to the Census and Statistics Department data (Exhibit 2).

18 Credit Outlook: 8 August 2019

 Exhibit 2
Sales of jewelry and electrical goods in Hong Kong have declined more than overall retail sales
June '19 year-on-year change % January-June '19 year-on-year change %
5.0%

0.0%
Sales value change

-5.0%

-10.0%

-15.0%

-20.0%
Overall retail sales Food & alcoholic Supermarkets Jewelry Department stores Electrical goods Clothing

Source: Hong Kong Census and Statistics Department

However, the effect of the declining retail sales on the credit quality of the retail property operators we rate will be limited, provided
the sales declines do not persist for an extended period. The rated operators have diversified business operations, well-staggered
lease expiries and modest exposure to turnover rents. Also, most of them have solid liquidity, healthy financial metrics and adequate
financial buffers at their respective rating levels.

For instance, a hypothetical 10% decline in 2019 retail sales and rents would reduce the rated property operators' retail revenue by 5%
or less. That is because turnover rents account for just up to 20% of their total retail rents, and leases expiring in the coming 12 months
account for 25%-30% or less of the operators' overall retail portfolio. Rents for their remaining tenants are locked in until their leases
expire.

Property operators with tenants selling discretionary items are more exposed to weakness in consumer sentiment and tourist spending.
These operators typically also have a higher proportion of turnover rents.

Among the rated Hong Kong property operators, Link Real Estate Investment Trust (A2 stable), Wharf Real Estate Investment Company
Limited (A2 stable), IFC Development Limited (A2 stable), Hysan Development Co., Ltd. (A3 stable) and Champion Real Estate
Investment Trust (Baa1 stable) have more exposure to the Hong Kong retail property market than their peers (Exhibit 3).

Exhibit 3
Rated Hong Kong property operators generate 2%-66% of total revenue from Hong Kong retail rentals
70%
Hong Kong retail rental as a % of total

60%

50%

40%
revenue

30%

20%

10%

0%
Sun Hung Kai CK Asset Link REIT Hongkong Land Swire Properties Wharf REIC IFC Development Hysan Champion REIT Nan Fung
Properties

The revenue breakdown reflects our calculations for each rated operator’s most recent fiscal year. Link REIT's and Nan Fung's most recent fiscal year ended on 31 March 2019. Sun Hung Kai
Properties’ and IFC Development’s ended on 30 June 2018. The other companies' ended on 31 December 2018. Sun Hung Kai Properties' metric includes joint ventures and associates.
Sources: Moody's Financial Metrics and Moody’s Investors Service estimates

Wharf REIC and Champion REIT have higher exposure to both retail rental and turnover rents in Hong Kong compared with their peers.
But we expect limited effect on their credit quality because they have sufficient financial buffers within their leverage and interest
coverage ratios, and their retail portfolios have demonstrated resilience through economic cycles.

19 Credit Outlook: 8 August 2019

 Link REIT has the highest retail revenue exposure in Hong Kong. But earnings risks are relatively low given the REIT's well-diversified
portfolio of over 126 retail assets in Hong Kong. Additionally, most of its tenants sell daily necessities, the overall sales of which have
held up better compared with discretionary items. And it has low exposure to turnover rents.

The potential revenue effect on Hysan and IFC Development is mitigated by their well-staggered lease expiries, relatively low turnover
rent exposure and solid financial metrics.

Stephanie Lau, VP-Senior Analyst Keun Woo (Chris) Park, Associate Managing Director
Moody’s Investors Service Moody’s Investors Service
stephanie.lau2@moodys.com chris.park@moodys.com
+852.3758.1343 +852.3758.1366

20 Credit Outlook: 8 August 2019

 NEWS AND ANALYSIS CORPORATES

Seven & i's shutdown of new 7pay mobile app soon after launch
thwarts company's growth strategy
Originally published on 06 August 2019

On 1 August, Seven & i Holdings Co., Ltd. (A1 stable) announced that it would shut down its 7pay mobile cashless payment system
only a month after its 1 July launch. 7pay was hacked soon after its launch, and Seven & i stopped registering new customers in early
July. The company reported 808 cases of unauthorized access and charges amounting to ¥39 million of losses. Seven & i decided to
shut down the service because of the time it would take to remediate the security breach and to restart the service.

The discontinuation of 7pay is a setback for the company’s growth strategy. The financial impact of discontinuing the app is
small compared with Seven & i's consolidated operating income of ¥411.6 billion for the fiscal 2018, which ended February 2019.
Nevertheless, not having its own integrated cashless payment system is a setback for its strategic growth in Japanese retailing, where
having a mobile app is becoming a must to promote sales and keep customers.

Seven & i operates a wide range of stores and services, each with its own member application (see Exhibit 1). 7pay sought to
collaborate with these numerous apps and collect customer data across the company to better cross-sell and do more targeted
marketing to customers.

Exhibit 1
Seven & i's group segments each has its own member app
Revenue by segment for fiscal 2018, excluding overseas convenience store operations

Ito-Yokado App
2,000,000

1,500,000
7-Eleven
App
Omni7 App
￥ million

1,000,000

Sogo & Seibu App Akachan Honpo App

Loft App
500,000

0
Domestic Superstore Department Store Finanical Services Specialty Store Others
convenience store

Sources: Company disclosures and Moody’s Investors Service

Competition is intensifying in the Japanese mobile payment applications sector.E-commerce transactions are growing rapidly in Japan
and have prompted retail and e-commerce companies to introduce reward programs and cashless payment platforms. Seven & i is at
a disadvantage to competitors that have already launched mobile payment applications and accumulated customer data, including
Amazon.com, Inc. (A3 positive), Rakuten, Inc. and SoftBank Group Corp. (Ba1 stable), which launched their applications in 2015,
2016 and 2018, respectively (see Exhibit 2). To maintain its leading position in Japan’s retail market, we believe Seven & i will need to
develop another system to better integrate its various mobile applications and online services with its brick-and-mortar retail store
networks.

21 Credit Outlook: 8 August 2019

 Exhibit 2
Seven & i lags its competitors in introducing a mobile payment application
Mobile payment applications launched in the Japanese retail and e-commerce sectors

Sources: Company disclosures and Moody’s Investors Service

Akifumi Fukushi, CPA, VP-Senior Analyst Mihoko Manabe, CFA, Associate Managing Director
Moody’s Japan K.K. Moody’s Japan K.K.
akifumi.fukushi@moodys.com mihoko.manabe@moodys.com
+81.3.5408.4167 +81.3.5408.4033

22 Credit Outlook: 8 August 2019

 NEWS AND ANALYSIS BANKS

Federal Reserve will enable faster payments, a credit positive for US

banks
Originally published on 07 August 2019

On 5 August, the US Federal Reserve (Fed) announced its plan to develop a new real-time payment and settlement service to support
faster payments in the US. The Fed's plan is credit positive for US banks because it will modernize the existing payment networks that
many US banks rely on and further entrench their position in the US payments system.

Furthermore, a Fed-driven modernization will provide equitable access to faster payment services for all US banks, a particular benefit
to midsize US regional and community banks because some large US banks have already developed private sector solutions. A Fed-
driven solution is also positive because having two independent real-time payment systems improves resiliency against cyberattack or
other threats that might leave the financial system more vulnerable without such redundancy.

Such modernization efforts would benefit incumbent banks because it would further entrench their role in the existing US payments
system, which currently has near-universal consumer and merchant acceptance in the US and very broad acceptance globally. Although
we believe the current payment systems favors incumbents, it is not immune from potential disruption from financial technology firms
(fintechs). Indeed, Facebook's recent announcement of Libra, a form of digital currency powered by blockchain technology, is evidence
of interest from interlopers in disrupting existing payment systems looking to take advantage of ever increasing customer expectations
for fast, frictionless ways to transact.

While the Fed's implementation target of 2023-24 leaves some room for innovative new entrants to disrupt the current payment
ecosystem, faster payments would give incumbent banks an advantage in their fight to maintain their existing grip on customer
relationships at a time when fintechs and new payment platforms aim to disrupt or at least gain a foothold in the consumer
and electronic payment landscape. In the US, over $9 trillion in payments pass between consumers and merchants each year.
Technologically innovative new entrants pose a competitive threat to the current US payment ecosystem.

The Fed intends to move toward so-called 24/7/365 real-time interbank settlement to be able to do real-time gross settlements
(RTGS). Real-time settlement would allow interbank payments to be transferred on the same day, including weekends and public
holidays, without a delay of one or more days. An RTGS system would utilize banks’ balances at Federal Reserve district banks to
facilitate faster payments through real-time interbank settlement. RTGS would initially allow consumers and businesses to send and
receive payments up $25,000 through the banking system without any delay. The initial $25,000 limit signals that the Fed's RTGS
system will primarily support faster payments for consumers and small businesses. The Fed's system would also would avoid deferred
settlements, which carry risks during times of stress by relying on end-of-day net settlements.

The move towards modernizing the US payments system is necessary to meet the increasing demands of market participants and
remain globally competitive. In fact, Europe, Mexico and Australia have already implemented real-time interbank clearing and
settlement capabilities. Even so, the evolution of financial technology is not without drawbacks. Faster payments in the US would
reduce banks' ability to generate earnings from inefficiencies1 that exist in the current system and could raise deposit costs if customers
are able to more tightly manage their balances, reducing the excess amount they hold in noninterest bearing transaction accounts.

Endnotes
1 Real-time payments would minimize float, which is duplicate money present in the banking system during the time between when a deposit is made in a
recipient's account and when the money is deducted from a sender's account. Banks generate earnings from float through spread income – the difference
between what they pay depositors and the yield they earn deploying those deposits into earning assets.

23 Credit Outlook: 8 August 2019

 Megan Fox, AVP-Analyst M. Celina Vansetti, MD-Banking
Moody’s Investors Service Moody’s Investors Service
megan.fox@moodys.com celina.vansetti-hutchins@moodys.com
+1.212.553.4986 +1.212.553.4845

24 Credit Outlook: 8 August 2019

 NEWS AND ANALYSIS BANKS

Central Bank of Russia's proposed requirements on collateral reporting

are credit positive
Originally published on 07 August 2019

On 31 July, the Central Bank of Russia (CBR) published a request for comments on a draft regulation that tightens the reporting
requirements for the collateral that banks rely upon in their lending. The proposal is credit positive for Russian banks because
strengthened supervision over collateral would make their lending and provisioning practices more prudent, and reduce fraudulent
activities whereby asset-stripping occurs via nonexistent, inadequately valued or cross-pledged collateral.

According to the proposal, starting from 2020 banks will be required to report monthly to the CBR full details on each item accepted
as collateral, including its owners and valuation. Through the resulting comprehensive database on all collateral held by banks, the
CBR can perform cross-checks on the adequacy of different banks' valuations of identical or similar collateral, as well as reveal cases
in which the same collateral is pledged with different banks simultaneously, which may constitute fraud by the borrowers and/or the
banks.

Despite Russian banks reporting good loan book collateralization, the average recovery rate for failed banks’ loan portfolios was
just 11.4% during 1991-2017 (the latest available CBR data), suggesting the limited economic value of the credit enhancement
supporting the loans as well as widespread fraudulent activity. The new measures build on the CBR's earlier initiatives1 to accelerate the
discounting of illiquid collateral with a view to improve the quality of collateral and incentivize banks to create larger loan-loss reserves.
Indeed, system-wide loan-loss reserve coverage has strengthened in recent years (see Exhibit 1) amid banks' improved profitability and
IFRS 9 implementation.

Exhibit 1
Russian banks' loan-loss reserve coverage system-wide has recently strengthened
90% 85% 86%

80%
71%
69%
70% 65%

60%

50%

40%

30%

20%

10%

0%
2014 2015 2016 2017 2018

Sources: Rated banks' IFRS statements and Moody's Investors Service

Most sensitive to the increased regulatory scrutiny over collateral will be those banks that rely most heavily on collateral for bad loan
recovery and hold relatively low loan-loss reserves against problem loans. Exhibit 2 ranks the largest Moody’s-rated banks (top 10 by
total assets, included in the CBR's list of systemically important financial institutions) by their loan-loss reserve coverage. We expect
that tighter regulatory requirements to collateral will lead those with relatively low coverage to increase it over time.

25 Credit Outlook: 8 August 2019

 Exhibit 2
Russian banks with relatively low loan-loss reserve coverage rely more heavily on collateral
Largest Moody’s-rated Russian banks ranked by loan-loss reserve coverage of problem loans
Bank Long-term deposit rating and Baseline Credit Assessment Outlook Loan Loss Reserves / Problem loans
Bank VTB, PJSC Baa3 / b1 Stable 68.1%
Russian Agricultural Bank Ba1 / b3 Stable 69.6%
Gazprombank Ba1 / b1 Stable 74.0%
AO RAIFFEISENBANK Baa3 / ba1 Stable 74.7%
Sector average* 85.5%
Promsvyazbank** Ba3 / caa1 Positive 85.6%
Alfa-Bank Ba1 / ba2 Stable 86.6%
Sberbank Baa3 / ba1 Stable 90.7%
PJSC ROSBANK Baa3 / ba2 Stable 97.8%
Bank Otkritie Financial Corporation PJSC** Ba2 / b3 Stable 98.2%
Credit Bank of Moscow Ba3 / b2 Stable 107.6%

*Weighted average for Moody's-rated banks

**Banks in resolution
Sources: Banks’ 2018 IFRS reports and Moody’s Investors Service

Endnotes
1 See Russia's measures to fight fraudulent banking activity are credit positive, 19 March 2018.

Svetlana Pavlova, CFA, AVP-Analyst Victoria Voronina, Associate Analyst

Moody’s Investors Service Moody’s Investors Service
svetlana.pavlova@moodys.com victoria.voronina@moodys.com
+7.495.228.6052 +7.495.228.6113

26 Credit Outlook: 8 August 2019

 NEWS AND ANALYSIS BANKS

Interest rate drop’s positive effect on Jordanian banks' asset quality

outweighs reduction in lending margins
On 4 August, the Central Bank of Jordan lowered the main interest rate by 25 basis points to 5.25%, following an announcement on
2 August that it would do so. We believe further rate cuts are likely in the next 12-18 months and believe that lower policy rates will
lead to lower lending rates, which will relieve some negative pressure on banks' asset quality by modestly supporting economic activity,
loan growth and borrowers’ loan repayment capacity. Those benefits will outweigh the negative consequence of lower lending rates on
profitability.

The central bank's action marks the first rate cut since July 2015 and follows the US Federal Reserve rate cut on 31 July.1 (Jordanian
authorities typically follow US monetary policy to preserve the Jordanian dinar’s peg to the US dollar). We expect lower policy rate to
lead to lower lending rates for most loans.

A looser monetary policy and lower lending rates will support economic growth and help Jordan's economic recovery. In the four-year
period that ended in July 2019, the repo rate has increased two percentage points, following equivalent increases of the Fed rate, to
preserve the attractiveness of the dinar (see Exhibit 1). The tighter monetary policy posed challenges to an economy already growing
at subpar rates of 2.0%-2.1% during 2016-18 because of regional instability, an influx of Syrian refugees and lower Gulf Cooperation
Council (GCC) growth.

Exhibit 1
Jordan's interest rate evolution
Weighted Average Interest Rates on Loans and Advances (%) CBJ main interest rate (%)
10%
8.74%
9%
8%
7%
5.5%
6%
5%
4%
3%
2%
1%
0%

Source: Central Bank of Jordan statistical database

As the lending rate gradually declines with this and further policy rate cuts, households’ ability to repay loans will improve. Lower loan
growth, higher lending rates and rising unemployment and inflation led banks' nonperforming loans ratio to rise to 4.9% at the end of
2018 from 4.3% at the end of 2016 (see Exhibit 2). Jordanian households are vulnerable to higher rates because the household debt-
to-income ratio rose to 67% in 2017 from 41% in 2008. Lower rates will support households' ability to repay the loans by reducing
loan repayment installments, which will gradually ease some asset quality pressure, particularly given that we expect further rate cuts,
with nonperforming loans to remain broadly stable.

27 Credit Outlook: 8 August 2019

 Exhibit 2
Jordanian banks' asset quality
Nonperforming loans ratio Loan growth rate Weighted average lending rate
10% 9.0% 9.5%
8.8% 8.5% 8.6% 8.7% 8.7%

8%
8.2%
7.8% 8.1%
6%
6.2%
5.5%
4%
1.8% 4.3%

2%

7.0% 5.6% 4.9% 4.3% 4.2% 4.9%

0%
2013 2014 2015 2016 2017 2018 May-19

Source: Central Bank of Jordan monthly statistical bulletin

We expect that the asset quality benefits of rate cuts will outweigh the negative pressure on banks’ lending margins. Although net
interest margins (NIMs) will be squeezed, we expect their profitability to remain solid, as loan loss provisions will remain contained.
Domestically, larger rated banks such as Arab Bank PLC (Ba2 stable, ba22) and The Housing Bank for Trade and Finance (B1 stable,
b1) have historically demonstrated high overall profitability and NIMs (see Exhibit 3), while smaller banks such as Cairo Amman Bank
(B1 stable, b1), whose profitability is slightly weaker, will experience less pressure on NIMs as lower borrowing rates offset lower
lending rates. Smaller banks tend to have a higher percentage of marker funding, which will likely record a larger drop from lower rates,
buffering the negative effect on NIMs. These banks experienced higher funding costs as rates rose since 2015.

Exhibit 3
Jordanian banks' funding and profitability
Deposits % Total assets NIM (RHS) Cost of funding (RHS)
90% 5%

80%

70% 4%

60%
3%
50%

40%
2%
30%

20% 1%
10%

0% 0%
2011 2012 2013 2014 2015 2016 2017 2018 2011 2012 2013 2014 2015 2016 2017 2018 2011 2012 2013 2014 2015 2016 2017 2018
Arab Bank Group Housing Bank for Trade and Finance Cairo Amman Bank

Note: Only about one-third of Arab Bank Group's assets are based in Jordan.
Sources: Banks' financial statements and Moody's Investors Service

Endnotes
1 See Fed rate cut is negative for bank profitability and could prompt further consolidation, 31 July 2019.
2 The bank ratings shown in this report are the bank’s domestic deposit rating and Baseline Credit Assessment.

Christos Theofilou, CFA, VP-Senior Analyst Savina Joseph, Associate Analyst

Moody’s Investors Service Moody’s Investors Service
christos.theofilou@moodys.com savina.joseph@moodys.com
+357.2569.3004 +357.2569.3045

28 Credit Outlook: 8 August 2019

 NEWS AND ANALYSIS FUNDS

Icahn Enterprises' sale of mining segment is credit positive

Originally published on 06 August 2019

On 1 August, Icahn Enterprises L.P. (IEP, Ba3 stable) announced the completion of its sale of Ferrous Resources Limited to Vale S.A. (Ba1
negative) for approximately $550 million. The credit-positive disposition enhances IEP’s liquidity position and sheds a segment that has
required significant capital expenditures over the years without meaningful earnings contribution.

IEP conducts its Mining segment through its 77% majority stake in Ferrous Resources. The company has rights to iron ore mineral
resources in Brazil that enable it to produce and sell iron ore products to the global steel market. Since acquiring Ferrous Resources
in 2015, the segment did not pay dividends or contribute meaningfully to IEP’s earnings until the quarter that ended 30 June 2019. In
2018, the segment contributed less than 1% to IEP's overall earnings of $1.5 billion but accounted for roughly 19% of the company’s
total capital expenditures. However, for the 12 months that ended 30 June 2019, Mining’s contribution to IEP’s net income ($151
million) increased to 24% and its share of capital expenditures dropped to 10%.

The Mining segment's profitability has emerged with the additional capital expenditures. Following its acquisition by IEP, Ferrous
Resources operated at a loss because performance had been driven by declining global iron ore prices and volume. Investments totaling
about $110 million over IEP’s investment holding period were made toward processing plants that produce higher quality iron ore
products that sell at a premium, driving the positive earnings shown in the exhibit below.

Activist strategy enhances IEP's Mining segment's profitability and value

Cash flows, earnings and equity of Mining segment attributable to IEP
Adjusted EBITDA (LHS) Net Income (LHS) Indicative Net Asset Value (RHS)
$100 $450

$400
$50
$350

$0 $300
$ millions

$ millions
$250
-$50
$200

-$100 $150

$100
-$150
$50

-$200 $0
2015 2016 2017 2018 LTM 2Q18 LTM 2Q19

Source: IEP

The timing of the sale could not have been better for IEP since iron ore supply is likely to keep prices high through 2020. Previously,
we expected prices to moderate from 2018 levels but lower production levels in Brazil, disruptions in the global iron ore supply base
and greater demand from Chinese customers have caused us to revise our price ranges upward. IEP will recognize a book gain of
approximately $264 million.

The gain from the sale of Ferrous Resources will enhance IEP’s already strong liquidity position and enable the company to pursue its
opportunistic investment strategy. We expect the bulk of the proceeds to be held in the holding company until needed to fund new
investments, used for other general limited partnership purposes or the repayment of debt.

Rokhaya Cisse, CFA, AVP-Analyst

Moody’s Investors Service
rokhaya.cisse@moodys.com
+1.212.553.3870

29 Credit Outlook: 8 August 2019

 NEWS AND ANALYSIS SOVEREIGNS

New US sanctions on Russian sovereign debt will mainly weigh on

long-term economic prospects, a credit negative
Originally published on 07 August 2019

On 1 August, US (Aaa stable) President Donald Trump issued an executive order prohibiting US financial institutions from buying
non-ruble-denominated Russian government (Baa3 stable) bonds on the primary market, the first time sanctions have extended
to sovereign debt, and blocking US banks from providing loans to the Russian government. The sanctions also outline the US
government's opposition to any lending or technical assistance to Russia from international financial institutions (IFIs) and restricts
sales of dual-use chemical and biological items to Russian state-affiliated entitites. While the short-term credit implications are limited,
given the government's very low financing needs and reliance on the ruble market, the sanctions will weigh on longer-term growth
prospects through lower than otherwise levels of investment and access to technological transfers.

These sanctions mark the second round of punitive measures mandated by the 1991 Chemical and Biological Weapons Control and
Warfare Elimination Act (the CBW act), which requires the US government to apply sanctions against foreign actors found to have
used chemical weapons in violation of international law. They were triggered when the US government concurred with the conclusions
of the UK government (Aa2 stable) that Russia was involved in the 2018 poisoning of a former Russian intelligence officer and his
daughter on UK soil. The latest round of sanctions follows a limited set of measures imposed in August 2018, which included steps to
restrict US exports of sensitive security goods and official funding by the US government.

The short-term effect on Russia's credit profile will be very limited given the very low gross financing needs for the sovereign: the
government's foreign-currency borrowing plan for 2019 is already fulfilled ($3.8 billion equivalent, or 0.2% of GDP) and the plans for
2020-21 are very modest ($3.0 billion each, or 0.2% of GDP, each year). At the same time, Russia’s fiscal position and funding outlook
has improved markedly in recent years and we expect a fiscal surplus of 2.3% of GDP on average over the next two years, implying
negative net funding requirements and limiting the need for market access. Furthermore, the government's ample liquid resources will
allow it to forgo international bond issues if needed: its deposits with the central bank totaled RUB10.4 trillion as of the end of June
(9.5% of estimated 2019 GDP).

That said, given the wide range of US financial intermediaries affected by the latest order, which also includes securities dealers and
clearing houses, the sanctions will make the issuance of US dollar-denominated debt by the sovereign much more challenging. Russian
government (including the central bank) dollar-denominated debt to non-residents amounted to $18.7 billion, or 1.1% of GDP, as
of year-end 2018, a substantial decline from $30.8 billion as of year-end 2013. In this context, the US sanctions will likely lead to
a continued reduction in dollar-denominated issuances, and the government’s low reliance on US dollar funding further minimizes
government liquidity risks.

It is important to note that the sanctions were more narrow than expected by market participants. Whereas the measures will prohibit
US institutional investors from acquiring any foreign currency Russian sovereign debt on the primary market, they may still provide
funding indirectly by transacting in the secondary market. However, given the compliance risks, a broad interpretation of these
sanctions by US investors risks impeding the intermediation of even secondary-market transactions by such investors, leading to a
temporary dislocation in Russia’s financial markets that risks increasing funding costs for the government and weakening the ruble. That
said, even if US investors were not able to participate in Russian sovereign debt, we would still expect that the sovereign would be able
to attract funding in euro and other reserve currencies from non-US institutions.

Importantly, the sanctions also exclude local-currency bond markets, both domestic and offshore, which are broadly sufficient to meet
current funding needs. Hence, these new sanctions will likely speed up Russia's reorientation toward domestic funding sources: the
government already expects a net repayment of external sovereign debt over 2019-21 (see exhibit). As a result, government external
debt is expected to remain a modest share of total, reaching 22.3% of total (or 3.6% of GDP) by the end of 2021 from 24.3% as of the
end of 2018.

30 Credit Outlook: 8 August 2019

 Russian government's funding plans already assumed a rebalancing away from external funding sources
% of GDP
Net domestic borrowing Net external borrowing Federal budget balance Privatization, use of cash balance
4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

-0.5%
2019F 2020F 2021F

Positive amounts indicate net inflows or surplus.

Sources: Russian Ministry of Finance and Moody's Investors Service

The credit implications from a restriction on IFI financing is also limited in the near term. For example, the European Bank for
Reconstruction and Development (Aaa stable) has anyway not approved new lending to Russia since 2014, while planned drawdowns
from approved World Bank (IBRD, Aaa stable) facilities appropriated in the federal 2019-2021 budget amount to only $35 million.

Nevertheless, the sanctions will have longer-term credit implications. Russian President Vladimir Putin's ambitions to raise the growth
rate and living standards will be harder to achieve with new US sanctions. Even though the country is not cut off from international
capital markets, with sanctions weighing on Russia's funding options, both domestic and foreign investment activity are likely to remain
meaningfully lower than would be the case if sanctions were not present. These and previous sanctions may also limit Russia’s access to
western expertise and financing needed to modernise the economy.

The unexpected timing of the latest sanctions – the second round of measures under the CBW act had been due since November 2018
– outlines the persistent and unpredictable nature of US actions towards Russia. While we expect Russia to remain broadly resilient to
future US sanctions given accumulated financial buffers, low borrowing needs and the policy toolkit developed by Russian authorities,
the ongoing threat will remain a feature of Russia's credit profile and continue to weigh on the economy, its investment perspectives as
well as its longer-term growth potential.

Evan Wohlmann, VP-Sr Credit Officer Matt Kulakovskyi, Associate Analyst

Moody’s Investors Service Moody’s Investors Service
evan.wohlmann@moodys.com matt.kulakovskyi@moodys.com
+44.20.7772.5567 +1.212.553.2755
Dietmar Hornung, Associate Managing Director Yves Lemay, MD-Sovereign Risk
Moody’s Investors Service Moody’s Investors Service
dietmar.hornung@moodys.com yves.lemay@moodys.com
+49.69.70730.790 +44.20.7772.5512

31 Credit Outlook: 8 August 2019

 NEWS AND ANALYSIS SOVEREIGNS

Mozambique's peace agreement reduces political risk and will support

the country’s operating environment
Originally published on 07 August 2019

On 6 August, Mozambique (Caa3 stable) President Filipe Nyusi and Opposition Mozambican National Resistance (Renamo) leader
Ossufo Momade signed a formal peace agreement, marking an official end to almost three decades of hostilities. The peace agreement
is a credit-positive development for political stability ahead of general elections in October 2019.

This third agreement is the culmination of years of negotiations since the civil war ended in 1992. Announced in February 2018, the
final ceasefire deal was conditional to two milestones that have since been addressed: a constitutional amendment allowing provincial
governors to be elected rather than appointed by the president, which the parliament approved on 30 May, and a new amnesty law
for all crimes committed during the conflict since 2014 approved on 29 July. There have already been material steps toward peace,
including the start of Renamo fighters disarming, a condition to be reintegrated into the country’s army and police as planned by the
strategy of disarmament, demobilisation and reintegration enclosed in the agreement.

The official agreement sets the stage for peaceful presidential, parliamentary and provincial elections on 15 October. Historically, polls
have been a trigger for violence, including in 2014, when the opposition claimed that the ruling Frelimo party had rigged the results.
With this peace agreement, Mozambique's political landscape is evolving with the participation of Renamo in provincial elections,
which will contribute to affirming its legitimacy as a political party and decrease the risk of political disruption following the election’s
results. Additionally, the peace agreement is broadly welcomed in a country that has been devastated by civil war: some 65% of the
population was born after the end of the civil war, and now aspires to peace and stability, elements that are crucial for development in
the country.

The foreseen permanent stability will decrease country’s operating environment risk. While Mozambique’s political event risk
assessment is “Low,” persistent political tensions between the Frelimo and the Renamo parties posed a risk to the country’s operating
environment rather than government policy continuity. In that respect, completion of the peace deal will bring a permanent stability
that will support growth and investment in Mozambique by reducing the likelihood of operational risks to large infrastructure projects
underway (notwithstanding the fact that Mozambique remains susceptible to sporadic attack by Islamist groups in the northeast
region).

As the exhibit below shows, although foreign investment historically has been high relative to peers because of Mozambique’s rich
natural resources, it fell between 2013 and 2018 as the country grappled with isolated bouts of violence stemming from political
instability and faced liquidity pressures. Following Anadarko Petroleum Corporation (Ba1 review for upgrade) June 2019 investment,
which moved Mozambique one decisive step closer to producing liquefied natural gas (LNG), the country expects an investment from a
joint venture that includes ExxonMobil Corporation (Aaa stable), ENI S.p.A (Baa1 stable) and China National Petroleum Corporation (A1
stable) for the Rovuma LNG Development Plan.

32 Credit Outlook: 8 August 2019

 Foreign investment in Mozambique outpaces the Sub-Saharan Africa region
Direct investment into economy (flow) as a % of nominal GDP
Mozambique SSA Median
45

40

35

30

25

20

15

10

0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Sources: National authorities and Moody’s Investors Service

The signing of the peace accord is taking place as bondholders of the defaulted 2023 bond vote on a second restructuring deal
presented by the government on 31 May. That agreement already has the approval of members of the Global Group of Mozambique
Bondholders, which represents around 60% of the bondholders, but the government needs additional approvals to meet the 75%
threshold under the collective action clause. The prospects for lasting peace that would promote a more business-friendly environment
may support investor confidence in greater economic and financial stability.

Julie Cocheteux, Associate Analyst Lucie Villa, VP-Sr Credit Officer

Moody’s Investors Service Moody’s Investors Service
julie.cocheteux-ndiaye@moodys.com lucie.villa@moodys.com
+44.207.772.5429 +33.1.5330.1042
Matt Robinson, Associate Managing Director Marie Diron, MD-Sovereign Risk
Moody’s Investors Service Moody’s Investors Service
matt.robinson@moodys.com marie.diron@moodys.com
+44.20.7772.5635 +65.6398.8310

33 Credit Outlook: 8 August 2019

 NEWS AND ANALYSIS SOVEREIGNS

Sustained escalation in Kashmir tensions would weigh on India's and

Pakistan's economies, hampering fiscal consolidation
Originally published on 06 August 2019

On 5 August, India (Baa2 stable) announced that it will revoke constitutional provisions that grant autonomous status to the state of
Jammu & Kashmir (J&K), the India-controlled portion of the Kashmir region which is disputed territory with Pakistan (B3 negative).

The move may face some objections from India’s Supreme Court, but if sustained, it risks prompting an escalation in geopolitical and
military conflict with Pakistan. While such an escalation is not our baseline, it would be credit negative for both India and Pakistan
because weaker economic growth would hamper both governments’ ongoing fiscal consolidation. Both economies are already facing
near-term challenges, and a sustained military conflict would risk resulting in weaker growth through a prolonged hit to consumer and
business confidence, as well as foreign direct investment.

Additionally, while a sustained scenario of conflict would potentially impair Pakistan’s access to external financing and pressure foreign-
exchange reserves, we expect that the recently signed International Monetary Fund (IMF) program and other bilateral and multilateral
borrowings would provide some external buffers.

From a fiscal perspective, military spending in India and Pakistan amounted to approximately 9.1% and 16.7% of central government
expenditures, respectively, compared to global and South Asian averages of 6.0% and 9.8%, respectively, according to the latest World
Bank data. We do not expect military spending to derail the implementation of fiscal policy.

However, a further and more protracted economic slowdown for both economies would make it difficult for both governments to
meet their fiscal consolidation targets. India's real GDP growth decelerated to 6.8% in fiscal 2018 (which ended March 2019), the
slowest rate in five years. Economic growth has moderated amid heightened financial stress among rural households and weak job
creation that is hampering both urban and rural consumption, as well as still-weak private-sector credit growth constraining business
investment. This has been particularly the case in J&K.

Among Indian states, J&K has experienced the highest levels of unemployment over the past three years, with an unemployment rate
of 15%, more than twice the national rate of 6.4%, according to the Centre for Monitoring on the Indian Economy (CMIE). J&K has also
experienced a decline in its share of new investments, partly because its unique political status has posed some hurdles to increased
investment. This has contributed to relatively weak manufacturing activity and agricultural output, while tourism is constrained by
security concerns. A sustained flare-up in border tensions with Pakistan would likely further depress near-term economic outcomes.
Over the longer-term, integration of the northern state could lead to greater economic activity, provided a peaceful resolution is
ultimately reached with Pakistan.

J&K accounts for less than 1.0% of total Indian GDP, therefore weaker growth in the state would have limited direct implications for
the economy as a whole. However, prolonged heightened tensions would likely affect investment and growth across the country.

India’s fiscal dilemma between achieving its fiscal consolidation targets and supporting sustainable job creation and investment would
be further challenged by a more pronounced slowdown in GDP growth. This is particularly the case given ambitious fiscal 2019 revenue
targets that depend on higher GDP growth.

Pakistan's economy has also been slowing, with real GDP growth declining to 3.3% in fiscal 2019 (which ended June 2019) from more
than 5%. Exchange-rate depreciation and monetary policy tightening in response to wider current-account deficits and low foreign-
exchange reserve adequacy have contributed to the decline through weaker domestic demand.

The country recently entered a new IMF program that involves a multi-year revenue mobilization strategy and long-term structural
policy reforms, as well as primary balance targets (currently 0.6% of GDP in fiscal 2020, down from 2.4% of GDP in fiscal 2019).

34 Credit Outlook: 8 August 2019

 Broadened military conflict would weigh on the effectiveness of revenue-enhancing reforms and the ability of the authorities to meet
program targets, should the macroeconomic environment and growth deteriorate further.

Overall, our geopolitical risk assessments of India and Pakistan account for persistent tensions in bilateral relations between the two
countries, which have, at times, resulted in limited military responses. Our assumption remains that flare-ups will continue to occur at
regular intervals, as they have throughout post-independence history (including the most recent event in February 2019), but that they
will not lead to an outright, broad-based military conflict.

William Foster, VP-Sr Credit Officer Michael S. Higgins, Associate Analyst

Moody’s Investors Service Moody’s Investors Service
william.foster@moodys.com michael.higgins@moodys.com
+1.212.553.4741 +65.6311.2655
Christian Fang, AVP-Analyst Gene Fang, Associate Managing Director
Moody’s Investors Service Moody’s Investors Service
christian.fang@moodys.com gene.fang@moodys.com
+65.6398.3727 +65.6398.8311

35 Credit Outlook: 8 August 2019

 CREDIT IN DEPTH

Credit card standards tighten, while auto and mortgages are stable and
consumer loan demand increases
Originally published on 05 August 2019

Summary
In this pulse of the consumer report1, we provide key take-aways from the latest quarterly Senior Loan Officer Opinion Survey (SLOOS),
released today. The SLOOS report reveals bank underwriting standards for approving credit card loan applications continued to tighten
during Q2 2019. Standards for auto loans tightened very modestly and standards for residential mortgages were largely unchanged.
Consumer demand for credit increased, particularly for residential mortgages.2

Credit card and auto underwriting continued their recent tightening. Credit card underwriting tightened a net 8.5% (by percent of
respondents) and auto loans a very modest net 3.5%. Residential mortgage underwriting standards have been normalizing over the last
several years following tight standards post financial crisis; however, the easing has slowed over the last three quarters.

The results continue to be encouraging. But even though consumers are in better shape than for some time, they may take on too
much credit given their high confidence level. And lenders' may increase the risk in their consumer loan portfolios, given the strength of
the consumer. However, with the poor performance of the financial crisis still in mind, lenders and consumers are displaying discipline.

Exhibit 1 summarizes underwriting standards and trends for credit cards, auto loans and residential mortgages, including the current
quarter SLOOS results and our projections.

Exhibit 1
Credit card underwriting continues to tighten; resi mortgage largely unchanged; auto is weak
Current underwriting standards compared with historical standards

Current underwriting Trend over last two years

Current quarter’s Senior Loan
standards vs. historical Senior Loan Officer Opinion Moody's projected trends
Officer Opinion Survey results
standards* Survey results

Looser end of historically

Credit cards Tightened Tightened Largely stable
average standards

Auto loans Weak Very modest tightening Very modest tightening Remains weak

QM jumbo residential Historically average

Modest loosening Largely unchanged Largely stable
mortgages standards

Legend:

Credit negative Modest credit negative Neutral Modest credit positive Credit positive

*Historical standards from the last twenty-five years or so.

Sources: Federal Reserve and Moody's Investors Service

Underwriting standards tighten for credit cards, tighten very modestly for auto loans, unchanged for
mortgages
Credit Cards: underwriting standards continue net tightening in the quarter
Current results show banks' credit card underwriting standards tightened a net 8.5% in the quarter (Exhibit 2), a credit positive. This
quarter's tightening continues the tightening over the last two years. Among other items, the banks have been employing tighter

36 Credit Outlook: 8 August 2019

 standards for new balance transfers and minimum credit scores as well as focusing on credit card line management, such as reducing
lines on low-activity accounts.

We believe credit card underwriting is currently at the looser end of average historical standards over the last twenty-five years or so.
Given the current economic uncertainty and the length of the economic expansion, we expect underwriting standards to remain largely
stable over the next 12-18 months.

Exhibit 2
Credit cards: underwriting standards continue net tightening in the quarter
Underwriting standards for application approvals for credit cards

Cards: Tightened Somewhat Cards: Tightened Considerably Cards: Eased Somewhat Cards: Eased Considerably Cards: Net
20.00

15.00

10.00

5.00

0.00

-5.00

-10.00

-15.00

-20.00

-25.00
Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

Dec-14

Mar-15

Jun-15

Sep-15

Dec-15

Mar-16

Jun-16

Sep-16

Dec-16

Mar-17

Jun-17

Dec-17

Mar-18

Jun-18

Dec-18

Mar-19

Jun-19
Sep-17

Sep-18
Source: Federal Reserve

Auto Loans: underwriting standards tighten very modestly

Auto loan underwriting standards continued tightening very modestly in Q2 2019 by a net 3.5%. Banks have been tightening auto loan
underwriting standards over the last several years, a credit positive, especially given that auto loan underwriting is already weak. Q2
2018 was the only quarter since Q1 2016 for which banks did not report a net tightening. However, the tightening has slowed over the
last year. Loan losses have been only slightly above historical averages from the last twenty-five years or so, but they should be much
lower given the strong economy. This points to underlying risk in the loan portfolios that is well above historical standards. However,
the tightening and the slowing of loan growth are credit positive.

37 Credit Outlook: 8 August 2019

 Exhibit 3
Auto: underwriting standards tighten very modestly in quarter
Underwriting standards for application approvals for auto loans

Auto: Tightened Somewhat Auto: Tightened Considerably Auto: Eased Somewhat Auto: Eased Considerably Auto: Net
20.00

15.00

10.00

5.00

0.00

-5.00

-10.00

-15.00

-20.00

-25.00
Mar-14

Mar-17
Mar-13

Mar-15

Mar-16

Mar-18

Mar-19
Dec-13

Jun-14

Jun-17

Sep-17

Dec-17
Dec-12

Dec-18
Jun-12

Sep-12

Jun-13

Sep-13

Sep-14

Dec-14

Dec-15

Dec-16
Jun-15

Sep-15

Jun-16

Sep-16

Jun-18

Sep-18

Jun-19
Source: Federal Reserve

QM Jumbo Residential Mortgages: underwriting standards largely unchanged

Banks reported a 0% net change in underwriting standards for QM jumbo residential mortgages during the quarter, a credit positive
after standards eased modestly last quarter, with a net tightening of -4.6% (Exhibit 4).

Results over the last several quarters have swung from a 10% net loosening in Q3 2018, which was the greatest amount of loosening
since 2013-15. That was followed by a very modest 1.7% net tightening in Q4 2018, the first net tightening since 2014. After the
loosening of the last several years, residential mortgage underwriting is now around the historical average standard over the last
twenty-five years or so.

With interest rates falling since the beginning of the year and refinance originations increasing significantly, we expect residential
mortgage underwriting over the next 12-18 months to be largely stable and possibly to tighten modestly. Mortgage originator
profitability has been weak over the last two years as interest rates rose and mortgage origination volumes fell. However, with the
decline in interest rates since the beginning of the year, there has been a significant increase in demand from homeowners to refinance
their current mortgages. The increase in refinance origination volume will result in improved lender profitability, tempering any need to
continue loosening underwriting standards to increase loan volume

Exhibit 4
Residential mortgages: underwriting standards largely unchanged
Underwriting standards for application approvals for prime/QM jumbo residential mortgages

Resi Mtgs:Tightened Somewhat Resi Mtgs: Tightened Considerably Resi Mtgs:Eased Somewhat
Resi Mtgs:Eased Considerably Resi Mtgs: Net
20.00

15.00

10.00

5.00

0.00

-5.00

-10.00

-15.00

-20.00

-25.00
Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19
Dec-12

Dec-13

Dec-14

Dec-16

Dec-17

Dec-18
Sep-12

Sep-13

Sep-14

Sep-15

Dec-15

Sep-16

Sep-17

Sep-18
Jun-12

Jun-13

Jun-15

Jun-16

Jun-18

Jun-19
Jun-14

Jun-17

Source: Federal Reserve

38 Credit Outlook: 8 August 2019

 Consumer loan demand increases, particularly for residential mortgages
Credit Cards: demand for loans increases modestly
Demand for credit card loans improved modestly in the quarter, with a net increase of 6.3%, the first net increase since 2016. Given
the strength of the economy, consumers' demand for credit card loans had declined over the last three years, a credit negative for the
credit card banks. We expect credit card loan demand to improve moderately over the next 12-18 months as job growth slows and
wage growth levels off. Consumers will need to take on modestly more credit card debt to finance spending demand.

Exhibit 5
Credit Cards: demand for loans strengthens
Borrowers’ demand for credit card loans

Cards: Moderately Stronger Cards: Substantially Stronger Cards: Moderately Weaker Cards: Substantially Weaker Cards: Net
60.00

50.00

40.00

30.00

20.00

10.00

0.00

-10.00

-20.00

-30.00

-40.00

-50.00
Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19
Jun-13

Jun-15

Jun-18
Jun-12

Jun-14

Jun-16

Jun-17

Jun-19
Dec-12

Dec-15

Dec-17
Sep-12

Sep-13

Dec-13

Dec-14

Sep-15

Dec-16

Sep-17

Sep-18

Dec-18
Sep-14

Sep-16

Source: Federal Reserve

Auto loans: demand for loans increases

Auto loan demand for the quarter improved, with a net increase of 10.5%. Results over the last several quarters have swung back from
18.2% net weakening in Q4 2018, the greatest weakening in auto loan demand since 2012. We expect demand for auto loans to be
largely unchanged over the next 12-18 months as job growth slows and wage growth levels off.

Exhibit 6
Auto loans: demand for loans increases
Borrowers’ demand for auto loans

Auto: Moderately Stronger Auto: Substantially Stronger Auto: Moderately Weaker Auto: Substantially Weaker Auto: Net
60.00

50.00

40.00

30.00

20.00

10.00

0.00

-10.00

-20.00

-30.00

-40.00

-50.00
Mar-13

Mar-15

Mar-17

Mar-19
Mar-14

Mar-16

Mar-18
Jun-12

Jun-13

Dec-13

Jun-14

Jun-15

Dec-15

Jun-16

Jun-17

Dec-17

Jun-18

Jun-19
Sep-12

Dec-12

Sep-14

Dec-14

Sep-16

Dec-16

Sep-18

Dec-18
Sep-13

Sep-15

Sep-17

Source: Federal Reserve

39 Credit Outlook: 8 August 2019

 QM Jumbo Residential Mortgages: demand for loans increases substantially
With interest rates falling considerably since the beginning of the year, banks reported a very large increase in demand for QM jumbo
residential mortgages, with a net 39.4% of banks reporting an increase in demand in the quarter, the most since 2014. This follows the
tepid demand as rates rose over the last two years. We expect continued solid demand for residential mortgage loans over the next 12
months as homeowners again look to refinance their existing mortgages, and as new and existing home sales rise moderately because
of the decline in interest rates.

Exhibit 7
Residential mortgages: demand for loans strengthens considerably
Borrowers’ demand for prime/QM jumbo residential mortgages

Resi Mtgs: Moderately Stronger Resi Mtgs: Substantially Stronger Resi Mtgs: Moderately Weaker Resi Mtgs: Substantially Weaker Resi Mtgs: Net

60.00

50.00

40.00

30.00

20.00

10.00

0.00

-10.00

-20.00

-30.00

-40.00

-50.00
Mar-15

Mar-18
Mar-13

Mar-14

Mar-16

Mar-17

Mar-19
Jun-14

Jun-18
Jun-12

Jun-13

Jun-15

Jun-16

Jun-17

Jun-19
Sep-14

Dec-14

Dec-17
Sep-12

Dec-12

Sep-13

Dec-13

Sep-15

Dec-15

Sep-16

Dec-16

Sep-17

Sep-18

Dec-18
Source: Federal Reserve

Endnotes
1 Each quarter we publish three pulse of the US consumer reports analyzing: 1) consumer loan performance in the current quarter for the largest US banks, 2)
senior loan officer survey results and 3) the New York Federal Reserve Bank's Household Debt and Credit report results
2 Two caveats to the implications of the survey responses are that they reflect only the banks’ own view of their underwriting and that non-banks, which are
not surveyed, have material market shares in auto loans and residential mortgages.

Warren Kornfeld, Senior Vice President Waseema Bhura, Associate Analyst

Moody’s Investors Service Moody’s Investors Service
warren.kornfeld@moodys.com waseema.bhura@moodys.com
+1.212.553.1932 +1.212.553.9561
Andrea Usai, Associate Managing Director Ana Arsov, MD-Financial Institutions
Moody’s Investors Service Moody’s Investors Service
andrea.usai@moodys.com ana.arsov@moodys.com
+1.212.553.7857 +1.212.553.3763

40 Credit Outlook: 8 August 2019

 RECENTLY IN CREDIT OUTLOOK

Articles in last Monday's Credit Outlook

NEWS & ANALYSIS
Trade Tariffs

» New US tariffs will weigh on global economy and be negative for tech, manufacturing and retail sectors

» New tariffs on China's products are credit negative for US apparel companies

Corporates

» Changes in scale and diversity make Upjohn separation negative for Pfizer and positive for Mylan

» McDermott Technology's revised guidance and lower asset sales proceeds are credit negative

» Economic headwinds, trade tensions weaken outlook for connector industry

» Ecopetrol’s deal with Occidental Petroleum in the US supports reserve replacement targets, a credit positive

» Brazilian airline Gol's strong second-quarter 2019 results are credit positive

» Ladbrokes Coral's social responsibility failings are credit negative for GVC

» Weaker demand in the UK and EMEA is credit negative for Aston Martin Lagonda

» Schaeffler's margins are under continued pressure, a credit negative

» Sappi's proposed acquisition of a Quebec pulp mill is credit positive

» Japan’s removal of Korea from “whitelist” is credit negative for many Korean companies

» Mineral Resources' proposed amendments to deal with Albemarle reduces execution risk, a credit positive

Fintech

» Entry of internet-only banks is credit negative for Taiwan's banks

Banks

» Increased risk-taking is credit negative for Mexico's development banks

» Brazil's record-low SELIC rate is negative for banks' margins

» Itau cuts branches and personnel amid narrowing margins in Brazil, a credit positive

» First Bank of Nigeria reduces its nonperforming loans, a credit positive

Exchanges

» Transformative Refinitiv acquisition increases credit and execution risks for London Stock Exchange Group

Asset Managers

» Brazil’s rate cut is credit positive for equity and multimarket fund managers, particularly independents

41 Credit Outlook: 8 August 2019

 Sovereigns

» US budget deal and debt limit suspension avert fiscal cliff

US Public Finance

» Massachusetts' strong revenue growth paves way for increased reserves and education spending

Covered Bonds

» Canada's new covered bond rules limit banks' ability to add enhancement, but support issuance

CREDIT IN DEPTH

» Deepfake disinformation campaigns pose reputational risks to businesses

Click here for last Monday's Credit Outlook.

42 Credit Outlook: 8 August 2019

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

Production Specialist
Sol Vivero

43 Credit Outlook: 8 August 2019

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44 Credit Outlook: 8 August 2019