heraeus holding gmbh · dividends to shareholders, despite higher capital spending, heraeus'...

CORPORATES

CREDIT OPINION19 June 2019

Update

RATINGS

Heraeus Holding GmbHDomicile Germany

Long Term Rating Baa1

Type LT Issuer Rating - FgnCurr

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Analyst Contacts

Goetz Grossmann,CFA

+49.69.70730.728

[email protected]

Svitlana Ukrayinets +49.69.70730.920Associate [email protected]

Christian Hendker,CFA

+49.69.70730.735

Associate Managing [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

Heraeus Holding GmbHUpdate to credit analysis

SummaryHeraeus Holding GmbH's (Heraeus) Baa1 rating is underpinned by its diverse product offeringand leading market shares across different business segments. Its market positions are — tosome degree — protected by barriers to entry because of the group's in-depth know-how inprecious metal processing, long-standing customer relationships and numerous patents.

Heraeus' rating is currently adequately positioned, reflecting its sound operating performanceand credit metrics in 2018, which were well in line with our expectations. Sales on a non-precious metals (non-PM) basis rose by 3.4% to almost €2.3 billion in 2018 and Moody's-adjusted EBITA reached €387 million (+4.1% annually). The performance was driven bygrowth across most business units and particularly strong demand in the quartz glasssegment (quartz glass is commonly used to fabricate components for the semiconductorindustry). Thanks to the growth in its earnings, lower working capital consumption and nodividends to shareholders, despite higher capital spending, Heraeus' Moody's-adjusted freecash flow (FCF) turned positive at €150 million in 2018 from negative €26 million in theprevious year. With a stable capital structure, its Moody's-adjusted leverage declined furtherto 1.5x gross debt/EBITDA in 2018, which is a solid measure for the assigned Baa1 rating. Incontrast, the rating also captures Heraeus' historically volatile results and limited visibilityinto earnings and cash flow, which we expect to weaken this year against softening economicgrowth and slowing demand in some business areas. Despite projected weaker profitabilityand higher capital spending, we forecast that Heraeus will continue to generate modestlypositive FCF this year.

The rating further benefits from the group's strong liquidity, underpinned by a sizable cashposition and access to its recently extended €400 million committed syndicated creditfacility, which was fully available as of year-end 2018.

Exhibit 1

Heraeus' leverage will remain below 2x, but FCF slightly weaken over the next 12-18 months

2.3x

3.4x 3.4x

2.4x

1.6x1.5x

1.9%

-0.7%

11.6%

3.6%

-3.4%

20.1%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018 Next 12-18months

Debt / EBITDA Free Cash Flow / Debt

Source: Moody's Financial Metrics™

http://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1179922

https://www.moodys.com/credit-ratings/Heraeus-Holding-GmbH-credit-rating-2359

MOODY'S INVESTORS SERVICE CORPORATES

Credit strengths

» Leading global market positions

» Barriers to entry because of the need for technical knowledge

» Strong balance sheet and liquidity, which are sufficient to absorb earnings volatility and restructuring needs

» Modest financial leverage

Credit challenges

» Profit and cash flow volatility, despite diverse end-market exposure

» Limited earnings visibility because of change in customer preferences or regulations

» Small size and volatile FCF generation, compared with similarly rated industry peers

Rating outlookThe stable outlook reflects our expectation that Heraeus will be able to defend its credit metrics in line with our guidance for theassigned rating over the next two years while maintaining a conservative financial policy and solid liquidity.

Factors that could lead to an upgrade

» EBITA margin, both on non-PM sales and Moody's-adjusted bases, in the high teens on a sustained basis, combined with greaterearnings visibility and predictability

» Consistent positive FCF generation and Moody's-adjusted FCF/debt above 10%

» Moody's-adjusted debt/EBITDA remaining below 2x

» Strong liquidity

Factors that could lead to a downgrade

» Failure to maintain EBITA margin, both on non-PM sales and Moody's-adjusted bases, in the midteens in percentage terms

» Moody's-adjusted debt/EBITDA above 2.5x

» Failure to maintain Moody's-adjusted (RCF-capital spending)/debt of at least 10% on a sustained basis

» A significant deterioration in liquidity

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

2 19 June 2019 Heraeus Holding GmbH: Update to credit analysis


Key indicators

Exhibit 2

Heraeus Holding GmbH

12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018

Revenue (USD Billion) $14.0 $14.4 $23.8 $24.7 $24.0

EBITA Margin 2.5% 1.6% 1.4% 1.7% 1.9%

EBITA margin on non-pm revenues 14.9% 10.6% 15.4% 17.0% 17.1%

EBITA / Interest Expense 5.4x 3.7x 6.7x 7.1x 4.7x

Debt / EBITDA 3.4x 3.4x 2.4x 1.6x 1.5x

Retained Cash Flow / Net Debt 127.7% 195.8% -914.3% 286.4% -572.5%

Free Cash Flow / Debt -0.7% 11.6% 3.6% -3.4% 20.1%

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.[2] EBITA margin is negatively impacted by the group's trading revenue. EBITA margin on non-PM revenue includes contributions from the trading business, but it is viewed as a betterindicator of the underlying performance and the group's manufacturing activities.Source: Moody's Financial Metrics™

ProfileHeraeus Holding GmbH (Heraeus) is a family-owned company headquartered in Hanau, Germany, with around 15,000 employees. Thegroup was founded in 1851 and is a leading provider of diversified high-value technological solutions in the markets of environment,energy, health, mobility, electronics and industrial applications. A large portion of its products contain or use precious metals, such asgold, silver and platinum, in their production process.

Heraeus operates in 11 global business units, which in turn report under five fields of activity: Health, Industrial, Electronics,Environment and Corporate.

In 2018, Heraeus generated non-PM sales of almost €2.3 billion (2017: €2.2 billion) and around €20 billion of total sales, including itsprecious metal trading business and precious metal content of products sold.

The group is one of the top five industrial precious metal trading companies globally. Its trading division supplies to its ownmanufacturing processes, but predominantly procures precious metals for customers, through which it generates a trading fee.

Exhibit 3

2018 revenue, excluding precious metals, by regionExhibit 4

2018 revenue, excluding precious metals, by segment

Germany11%

Europe excl. Germany19%

Americas25%

Asia43%

Other2%

Source: Heraeus' 2018 annual report

Health15%

Electronics33%

Industrials27%

Environmental24%

Corporate1%

Source: Heraeus' 2018 annual report

Detailed credit considerationsLeading market positions and barriers to entry given strong technological know-howHeraeus ranks among the top-three competitors in most of its globally diversified markets, which are considered relatively consolidatedand profitable. In particular, Heraeus is active in melting and processing precious metals for recycling purposes and industrial productsbased on precious metals, such as catalysts for the chemical industry and solder pastes for integrated circuits. Heraeus is also a leadingmanufacturer of sensors for the steel industry, medical components, bone cements for endoprosthetics, quartz glass and specialty lightproducts.



Heraeus is one of the largest industrial precious metal traders worldwide, with its operations including the sourcing, handling andmanagement of precious metals and the control of market risks on behalf of its industry customers. These activities also safeguard thesupply of precious metals for the group's own manufacturing activities. Heraeus' technological expertise in precious metal processing,numerous patents, and close and long-lasting relationships with customers, as well as mining companies, represent solid barriers toentry in its respective niches. With the acquisition of Swiss Argor in July 2017 (€177 million cash consideration), Heraeus has furthercomplemented (1) its business with the recycling and trading of gold and silver, and (2) the geographic footprint of its refinery business.

Diverse end-market exposure, but earnings and FCF historically volatileHeraeus' business profile benefits from a diverse range of products and a broad geographic reach. The group operates in differentindustries such as energy, chemicals, healthcare, mobility, communication and steel. Heraeus is not dependent on individual customersand has presence across several economic regions. The diversified product portfolio allows the group to reduce its top-line and earningsvolatility to some degree. For instance, in 2018, Heraeus recorded strong demand and sales growth in its quartz glass business (forexample, products for semiconductors) and for electronic components and temperature sensors in the automotive industry. This morethan offset the weaker demand in the photovoltaics business, with rising competition, especially from Asia, and price pressure leadingto non-PM revenue growing by 3.4% annually in 2018 (5.9% at stable currencies), compared with 9% in the previous year.

The group has developed a less-focused product offering and critical mass over time, which has exacerbated losses in some businessunits and contributed to earnings and FCF volatility in the recent past. After decreasing to a €205 million low point in 2015, Heraeus'Moody's-adjusted EBITA strongly recovered to €387 million in 2018 (€372 million in 2017). Besides the overall improvement in globaleconomic conditions, the semiconductor, medical components and electronics end markets witnessed particularly strong demand,while efficiency improvements also helped to fuel profits during the last few years.

However, we consider the group's volatile FCF generation a key credit challenge and constraining factor for its rating. For instance,Heraeus' average Moody's-adjusted FCF over the last five years was €56 million, including years of negative FCF (2014-17) and a strong€150 million positive FCF in 2018. Such fluctuations illustrate a high level of volatility with the group's FCF comparing also weakly withthat of its investment-grade rated manufacturing peers. In contrast to many peers covered under our Global Manufacturing Companiesrating methodology, Heraeus does not have a sizable order backlog or significant service business, which could provide better revenuevisibility. This, in combination with a number of highly cyclical businesses exposed to different demand drivers, makes forecastingearnings and cash flow difficult.

We also emphasize Heraeus' use of precious metal leases for its trading activities, which exposes it to the volatility of related interestcosts, which partly soared last year (primarily related to palladium leases). While the market value of precious metals leases rose to€2.1 billion in 2018 (€1.6 billion in 2017), associated finance costs surged by €28 million, translating into the group's EBITA / interestcoverage as adjusted by Moody's shrinking to 4.7x in 2018 vs. 7.1x in 2017, besides weighing on FCF.

Recent profitability improvements will not be sustained in 2019 amid slowing economic growth and end-market demandBecause of sustained robust economic conditions across Heraeus' most important regions and strong demand in key end markets, thegroup was able to maintain its recently improved profitability, illustrated by a Moody's-adjusted EBITA margin on a non-PM basis of17.1% in 2018 (2017: 17%).

However, for this year and the next year, it will be difficult for Heraeus to defend this margin, as we expect demand to be dampenedby slowing economic growth in many regions where the company is present. For instance, we project real GDP growth in China, the USand Germany, together accounting for over 50% of the group's non-PM sales, to contract in 2019 to 6.2% (2018: 6.6%), 2.3% (2018:2.9%) and 1.0% (2018: 1.4%), respectively. For the euro area as a whole, we forecast real GDP growth to slow to 1.3% in 2019, 0.5%below the 1.8% in 2018 (all according to our macro outlook update “Global growth prospects at risk from increasingly uncertain UStrade policy”, published 6 June 2019).

We also expect Heraeus to face a decline in demand in some business units, such as telecom fibers, electronics (because of a coolingautomotive industry and rising price pressure) and photovoltaics (because of increased competition from Chinese companies) in 2019.Following the recent change in the distribution model for bone cement in the US from a distributer to direct sales, we also expectHeraeus to temporarily lose some volume and earnings in its medical business this year. However, we see demand in other businessesof the group developing more positively, such as the demand for temperature sensors or the precious metal business where demand


https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1161598



is least dependent on economic cycles. Therefore, we expect Heraeus' earnings to decrease in 2019, translating into narrowing of theMoody's-adjusted EBITA margin on a non-PM basis to midteens in percentage terms, at best, which is at the low end of our guidancefor the Baa1 rating.

Exhibit 5

Heraeus' adjusted EBITA margin over non-PM sales remained stable in 2018, but will weaken this year as market conditions soften

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Next 12-18months

No

n-P

M R

even

ues

Non-PM Revenues EBITA margin on non-pm revenues

Sources: Company data, Moody's Investors Service estimates

Nevertheless, we continue to expect Heraeus to achieve positive FCF this year and in the next year, although significantly below thestrong level in 2018. With projected funds from operations in the €300 million-€350 million range, capital spending in excess of lastyear's €255 million because of ongoing investments in new production capacity, especially in Germany and China, and no materialworking capital needs and dividends, we forecast modest positive FCF of up to €25 million in 2019. That said, we recognize the group'sdecision to abstain from dividend payments last year and no intention of substantial shareholder distributions in the near term, whichwill partly compensate for its increasing capital spending and the expected earnings decline.

Exhibit 6

Historically volatile FCF expected to remain modestly positive in 2019

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

-50

-30

-10

10

30

50

70

90

110

130

150

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Next 12-18months

FCF

FCF adjusted FCF/Debt

Sources: Company data, Moody's Investors Service estimates

Strong balance sheet and liquidity help absorb earnings volatility and fund high investments and potential add-onacquisitionsHeraeus' strong balance sheet and conservative financial policy firmly support its Baa1 rating and the stable outlook. In particular,during times of weaker economic conditions, as currently foreseen for this year, this allows the group to continue to focus on itsefficiency and process optimization actions, aimed at improving the stability in earnings and cash flow. It also enables the group to fundthe ongoing and planned sizable investments in innovation, infrastructure and digital transformation projects (€600 million plannedover 2018-19), as well as potential bolt-on acquisitions.



With the redemption of the €250 million senior notes in May 2017, Heraeus' Moody's-adjusted leverage markedly declined to 1.5xgross debt/EBITDA as of year-end 2018 (1.6x in 2017). After a period of elevated leverage for the Baa1 rating (3.4x debt/EBITDA in2014 and 2015), the current ratio strongly supports Heraeus' rating, although we expect it to increase slightly this year. This increasewill be driven mainly by the projected drop in earnings, while its total outstanding debt should remain broadly stable, with short-termmaturities of less than €30 million as of 31 December 2018. However, potential large-scale and debt-funded acquisitions could lead toa swift increase in the group's leverage, which we do not expect at this stage and did not incorporate in the assigned rating.

We continue to adjust Heraeus' total reported debt of €149 million as of 31 December 2018 for pension obligations (€500 milliondeficit in 2018), operating leases (€92 million) and precious metal loans related to its product business (€7 million).

As of 31 December 2018, Heraeus had €818 million of cash and short-term marketable securities, translating into an adjusted netcash position and Moody's-adjusted net debt/EBITDA of -0.1x, after 0.2x in the previous year and 0.1x on average over the last fiveyears. This demonstrates the group's commitment to a conservative financial policy and sound liquidity. After available cash sourcestemporarily declined with the acquisition of Argor Heraeus SA in 2017 (funded by existing liquidity), the group maintained an averagecash position of €700 million during the last five years, while its increased €400 million syndicated credit line remained fully undrawnas of year-end 2018.

We also acknowledge Heraeus' prudent dividend policy, with a dividend payout ratio of around 25% of net income historically and nospecial dividend following the sale of the dental business in 2013. This, together with a so-far-thoughtful approach toward acquisitions,strongly supports our view of Heraeus' prudent cash flow and liquidity management.

Well-managed metal trading risks, but trading operations distort financialsHeraeus has substantial precious metal trading activities. These are used to hedge and physically secure precious metals needed forthe group's own manufacturing of its products, as well as for providing services to industrial customers. Trading activities operate as aprofit center, but risks are controlled through spot pricing, rigid trading limits and the close monitoring of counterparty risk. Risks fromvolatile precious metal prices are typically borne by customers or are hedged back-to-back.

The group's trading activities are inherently lower margin because earnings reflect the charge of trading fees only. These distortthe overall group margin and, therefore, in our view, EBITA margin calculated on a non-PM basis is a better performance indicator.While the margin still includes contributions from the trading business, it provides better insight into the profitability of the group'smanufacturing activities. Revenue excluding precious metal content disregards a substantial portion of the group’s cost of goods sold,but at the same time allows for monitoring of revenue growth, independent of fluctuations in precious metal prices.

Heraeus also uses precious metal loans (PM loans) as a short-term financing tool. Within such loan transactions, Heraeus receivesfrom lenders (for example, banks) a fixed quantity of precious metal for a certain period and in return pays interest for borrowingthe precious metal. We include these off-balance-sheet PM loans in our adjusted gross debt figure. Depending on Heraeus' choiceto directly use cash to temporarily buy (hedged) precious metal or enter into PM loans, the group faces higher working capitalconsumption in the first case and higher adjusted debt in the latter. In addition, volatility in precious metal prices affects group salesand inventory levels, as well as the absolute amount of PM loans.

We understand that Argor uses precious metal loans as part of its refining operations. Following a review of contracts related to Argor’sPM loans, we do not treat these as debt for the purpose of monitoring Heraeus’ credit quality. The same applies for the precious metalloans Heraeus uses for its refinery and trading business. This is because PM loans related to the refinery and trading business carrysignificantly lower risk than regular cash loans because they are self-liquidating in nature. We also take into account the short cycletimes and the more service-oriented nature of the refinery business. However, we regard PM loans related to Heraeus’ product businessas debt, consistent with our general treatment of other forms of working capital financing.

Liquidity analysisHeraeus' liquidity is solid. As of December 2018, the group had cash and cash equivalents of around €818 million and access to €400million under its fully undrawn syndicated credit facility. The facility will mature in December 2023 and is considered a strong liquiditysource because it contains neither financial covenants nor a repeating material adverse change (MAC) clause. Together with expectedfunds from operations, Heraeus' cash sources more than sufficiently cover moderate swings in working capital, projected capital



spending in 2019 (in the range of €200 million-€300 million), restructuring costs and short-term debt maturities of around €31 millionas of 31 December 2018.

In addition, Heraeus benefits from a few bilateral credit facilities, most of which are not considered in our liquidity assessment becauseof their short-term nature. The group also has access to a €500 million commercial paper program, which is used infrequently giventhe company's ample cash position.

Rating methodology and scorecard factorsThe principal methodology used in this rating was the Global Manufacturing Companies rating methodology, published in June 2017.The scorecard-indicated outcome, reflecting the company's 2018 ratios, is Baa1. Ratios based on our forward-looking view indicatea Baa2 score, one notch below the assigned Baa1 rating. The gap mainly reflects (1) the Business Profile score, which we considerborderline Ba or Baa; and (2) Heraeus' strong liquidity, which is not captured by the scorecard. Heraeus' trading operations alsonegatively distort its operating margins. On a more significant product revenue-only basis, we expect Heraeus' Moody’s-adjusted EBITAmargin to be around the midteens in percentage terms (17% in 2018; scoring A in the methodology), although the Revenue score isoverstated by the trading business (product-only Revenue score Ba).

Exhibit 7

Rating factorsHeraeus Holding GmbH

Manufacturing Industry Grid [1][2]

Factor 1 : Business Profile (20%) Measure Score Measure Score

a) Business Profile Ba Ba Ba Ba

Factor 2 : Scale (20%)

a) Revenue (USD Billion) $24.0 Aa $24.0 Aa

Factor 3 : Profitability (10%)

a) EBITA Margin 1.9% Caa 1% - 2% Caa

Factor 4 : Coverage and Leverage (40%)

a) EBITA / Interest Expense 4.7x Ba 3.5x - 4.5x Ba

b) Debt / EBITDA 1.5x A 1.5x - 1.7x A

c) Retained Cash Flow / Net Debt -572.5% Aaa Aaa Aaa

d) Free Cash Flow / Debt 20.1% Aa 3% - 6% B

Factor 5 : Financial Policy (10%)

a) Financial Policy A A A A

Rating:

a) Scorecard-indicated outcome Baa1 Baa2

b) Actual Rating Assigned Baa1

Current

FY 12/31/2018

Moody's 12-18 Month Forward View

As of 6/6/2019 [3]

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.[2] As of 12/31/2018.[3] This represents Moody's forward view, not the view of the issuer, and unless noted in the text, does not incorporate significant acquisitions and divestituresSource: Moody's Financial Metrics™




Appendix

Exhibit 8

Peer comparison

(in USD millions)FYE

Dec-17

FYE

Dec-18

LTM

Dec-18

FYE

Sep-17

FYE

Sep-18

LTM

Sep-18

FYE

Dec-17

FYE

Dec-18

LTM

Mar-19

FYE

Dec-17

FYE

Dec-18

LTM

Mar-19

FYE

Jul-17

FYE

Jul-18

LTM

Jan-19

Revenue $24,680 $23,967 $23,967 $4,668 $5,009 $5,009 $10,116 $11,290 $11,602 $7,011 $8,202 $8,294 $4,157 $4,332 $4,306

EBITDA $544 $595 $595 $369 $370 $370 $2,997 $3,325 $3,462 $1,749 $2,093 $2,136 $819 $847 $783

Total Debt $926 $855 $855 $1,948 $1,682 $1,682 $6,324 $7,313 $7,345 $4,162 $4,172 $4,082 $2,645 $2,443 $2,191

Cash & Cash Equiv. $808 $935 $935 $1,399 $1,115 $1,115 $4,317 $2,355 $1,456 $1,719 $1,279 $970 $1,031 $941 $631

EBITA Margin 1.7% 1.9% 1.9% 4.2% 3.9% 3.9% 17.7% 17.6% 18.3% 21.7% 21.5% 21.6% 16.8% 16.7% 15.4%

EBITA / Int. Exp. 7.1x 4.7x 4.7x 1.6x 3.2x 3.2x 7.8x 6.8x 7.3x 14.2x 14.4x 14.2x 7.1x 7.1x 6.5x

Debt / EBITDA 1.6x 1.5x 1.5x 4.9x 4.7x 4.7x 2.1x 2.2x 2.1x 2.4x 2.0x 1.9x 3.1x 3.0x 2.8x

RCF / Net Debt 286.4% -572.5% -572.5% 38.8% 10.6% 10.6% 75.3% 34.7% 34.6% 46.4% 46.0% 43.4% 25.1% 21.7% 22.8%

FCF / Debt -3.4% 20.1% 20.1% 0.7% -6.1% -6.1% -7.1% -0.6% -3.6% 16.8% 15.1% 18.1% 15.0% 8.9% 6.1%

Smiths Group plc

Baa2 Stable

Heraeus Holding GmbH Voith GmbH & Co. KGaA Corning Incorporated Amphenol Corporation

Baa1 Stable Baa3 Stable Baa1 Stable Baa1 Stable

Source: Moody's Financial Metrics™

Ratings

Exhibit 9Category Moody's RatingHERAEUS HOLDING GMBH

Outlook StableIssuer Rating Baa1

Source: Moody's Investors Service



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Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (includingcorporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any rating,agreed to pay to Moody’s Investors Service, Inc. for ratings opinions and services rendered by it fees ranging from $1,000 to approximately $2,700,000. MCO and MIS also maintainpolicies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO andrated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually atwww.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

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Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’sOverseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a NationallyRecognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by anentity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registeredwith the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferredstock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for ratings opinions and services rendered by it feesranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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