MOODYS.COM

4 JUNE 2012

NEWS & ANALYSIS Corporates 2 » GM’s Termination of Salaried Pension Plan, while Aggressive,

Doesn’t Improve its Credit Profile » Ex-Im Bank Charter Renewal Will Benefit Boeing and Other Heavy

Manufacturing Exporters » New York City Floats Ban on Large Sugary Drinks, Taking Fizz Out

of Beverage Companies » Fiat Industrial's Merger with CNH Global Would Be Credit Positive

for Both » Diageo’s Brazilian Acquisition To Add Net Debt, a Credit Negative » Wiggins Island Rail Project Approval Is Credit Positive for

QR National » Sumitomo Chemical’s Follow-on Investment in Saudi Joint Venture

Is Credit Negative » Baosteel's Zhanjiang Project Will Improve Its Competitiveness, a

Credit Positive

Infrastructure 11 » Repeated Shutdowns of Korean Power Plants Weigh on KEPCO

Banks 13 » Slowdown In US Bank Consolidation Is Credit Positive » Russian Banks' Provisioning Falls Behind Growing Delinquent

Loans, a Credit Negative » New Regulatory Limits on Consumer Lending in Oman Are

Credit Positive » Indonesia's Ownership Limit Is Credit Positive for Most Banks,

Except DBS-Danamon » Acquisition of Gavilon Is Credit Negative for Marubeni

Insurers 21 » Swiss Re Sells REALIC to Jackson National; Credit Positive for Both » Japanese Life Insurers Narrow Their Duration Gap, a Credit Positive

Sovereigns 24 » Bulgaria's Exit from the EDP Will Boost Investor Confidence, a

Credit Positive

US Public Finance 25 » Buffalo Fiscal Stability Authority's Switch to Advisory Role Is Credit

Positive for the City » Rhode Island Says ‘No’ to Woonsocket’s Supplemental Tax Levy, a

Credit Negative

RATINGS & RESEARCH Rating Changes 29

Last week we downgraded Franz Haniel & Cie, Brooklyn Navy Yard Cogeneration Partners, nine Danish financial institutions, 13 banks in Jordan, Lebanon, Pakistan and Ukraine; Bank of the Philippine Islands, Clark County School District, 237 tranches in 24 securitizations of small business loans issued by Bayview, covered bonds issued by Danske Bank, DLR Kredit, Nykredit Realkredit, and Totalkredit; and upgraded MEG Energy and Pioneer Natural Resources among other rating actions.

Research Highlights 38

Last week we published on Australian REITS, global beverage, unrated European LBOs, Brazil steelmakers, global shipping, European and US steel, US life science, Ukraine and Korea banks, US HFA delinquencies, North Dakota local governments, Asian structured finance, and US CMBS, among other reports.

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

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NEWS & ANALYSIS Credit implications of recent worldwide news events

2 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

Corporates

GM’s Termination of Salaried Pension Plan, while Aggressive, Doesn’t Improve its Credit Profile

Last Friday, General Motors Company (Ba1 positive) announced that it is terminating its US salaried pension plan and offering retirees an option to receive a lump-sum settlement or an annuity contract from Prudential Insurance Company of America (A2 positive). The transaction is an important step in addressing the automaker’s massive underfunded pension obligations. Although the proposed transaction is an aggressive step forward in de-risking the company’s pensions, we conclude that it does not provide any meaningful improvement to its credit profile.

GM’s termination of salaried pension will be the largest such transaction ever undertaken to our knowledge. About $26 billion of existing plan assets will be transferred to Prudential, along with an additional payment of $3.5-$4.5 billion of GM cash in exchange for Prudential assuming GM’s future obligations for its salaried retirees. This will reduce pension-related volatility in GM’s earnings and balance sheet and will free the company from future pension payments for most of its salaried retirees.

But the use of $3.5-$4.5 billion of existing cash associated with the termination will balance out these benefits. Moreover, we note that the transaction will reduce GM’s $25 billion underfunded pension liability, which we treat as debt in our analysis of the company, by only $1 billion. The bulk of the remaining $24 billion underfunded position relates to GM’s US hourly workers and non-US pension plans, which are not affected by the transaction. Consequently, we don’t believe that the salaried pension plan actions will meaningfully improve GM’s overall credit profile, rating, or prospects for returning to investment grade.

The long-term economic benefits of terminating the salaried pension plan are uncertain. The relative value generated for GM and Prudential will only be determined over time, based on such factors as future investment returns, interest rates, and retiree mortality rates.

The largest and most burdensome element of GM’s pension liability remains its US hourly plan, which is underfunded by $10 billion. If GM pursued the same de-risking approach to its hourly pension obligations as it plans for its salaried obligations, it would require a significant use of the company’s liquidity. The impact of such a move on GM’s credit profile would depend on how the transaction balanced the benefits of de-risking with the decline in liquidity.

Bruce Clark Senior Vice President +1.212.553.4814 bruce.clark@moodys.com

NEWS & ANALYSIS Credit implications of recent worldwide news events

3 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

Ex-Im Bank Charter Renewal Will Benefit Boeing and Other Heavy Manufacturing Exporters

Last Wednesday, US President Barack Obama signed a bill that renewed the charter for the US Export-Import Bank and immediately increased its financing authorization limit by 20% to $120 billion. The Ex-Im Bank, as it is widely known, helps foreign buyers finance their purchases from US companies. The charter renewal is credit positive for aerospace companies like Boeing Co. (A2 stable), the beneficiary of about one third of the bank’s $33 billion in export financings during 2011, General Electric Company (Aa3 stable), Caterpillar Inc. (A2 stable), Deere & Company (A2 stable) and other export-oriented US companies.

Mr. Obama’s signing of the Export-Import Bank Reauthorization Act of 2012 renewed the bank’s charter through fiscal 2014 and will ultimately raise its backstop financing authorization limit to $140 billion. The Ex-Im Bank plays a critical role in supporting the financing of export sales of large-ticket industrial products such as aircraft and heavy equipment. This support has become increasingly important for US companies and prospective buyers, as credit markets have broadly contracted; the pull-back by European banks, a number of which have historically been active in financing aircraft deliveries, is but one example of this tightening. Many non-US capital-goods manufacturers benefit from strong support for export sales from their own countries’ export credit agencies (ECAs).

The bank’s charter renewal is particularly good news for aerospace companies, which rely heavily on Ex-Im-backed financing. ECAs typically account for backstop financing of between 20% and 35% of total aircraft deliveries in any given year. We forecast that this year the two dominant airframers, Boeing and Airbus, a subsidiary of European Aeronautic Defence & Space Co. EADS (A1 stable), will deliver 1,200 large commercial aircraft with a market value of $80 billion. Boeing, which delivers a larger share of higher-value widebody aircraft, will likely account for more than its fair share of that amount. Ex-Im can only support the financing of aircraft exported by Boeing to non-US and non-European airlines. But with US and Europe accounting for a relatively small portion of new aircraft deliveries, Boeing is well positioned to be a major beneficiary of the incremental authorization.

Since Boeing is the US’s largest exporter, the air transportation sector represents Ex-Im Bank’s largest exposure, accounting for nearly 50% of its total financial authorizations. Almost 40% of Ex-Im’s book is geographically concentrated in the Asia-Pacific region, where much of the industry growth in future airplane deliveries is taking place and rising jet fuel costs and market expansion are driving increased demand by both foreign airlines and aircraft operating lessors. Market expansion contributes most significantly to Boeing’s exports, with less developed markets in the Middle East and Asia-Pacific regions poised to realize some of the highest growth in aviation-related expenditures.

The nearly 80-year-old Ex-Im Bank would have reportedly reached its previous $100 billion cap by the time its charter was due to expire on 31 May 2012. With slowing economic growth likely to pressure durable goods orders, the added capacity comes at an opportune time and will support US manufacturers’ export sales initiatives.

Without further support from Ex-Im Bank, Boeing Capital Corporation (A2 stable) would have had to fund a larger share of international deliveries to support Boeing’s growth over the coming years. We expect Boeing aircraft deliveries to increase to almost 600 in 2012 and roughly 750 by 2014 from 477 in 2011, the bulk of which will land overseas.

Russell Solomon Senior Vice President +1.212.553.4301 russell.solomon@moodys.com

NEWS & ANALYSIS Credit implications of recent worldwide news events

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New York City Floats Ban on Large Sugary Drinks, Taking Fizz Out of Beverage Companies

Last Thursday, New York City Mayor Michael Bloomberg proposed limiting the sale of sugary beverages in containers larger than 16 ounces at food-service venues. If passed, the ban could take the fizz out of volume growth for The Coca-Cola Co. (Aa3 stable), PepsiCo Inc. (Aa3 negative), and Dr Pepper Snapple Group Inc.

We don’t expect that profitability would be hurt in 2013 if the proposed ban goes into effect next March, since companies can tweak their prices to maintain profitability from smaller package sizes and New York City alone isn’t large enough to affect profits of the large beverage companies. But we do think that volume and ultimately profit growth would be more limited than without such restrictions. If the proposal were to take effect in New York and be copied across more markets, it would be credit negative. The New York City market is relatively small compared with the national and global reach of Coca-Cola, and PepsiCo, and the North America-focused Dr Pepper Snapple.

(Baa1 stable) and would be credit negative if it sets a precedent that other US markets follow.

It isn’t clear what the effect would be on new delivery mechanisms, such as Coca-Cola’s new Freestyle machine that allows people to mix and match sodas from a self-service beverage dispenser that gives the customer up to 125 soda choices. These machines have only recently been installed in some New York City restaurants and have generally boosted the volume of soda sales in those venues, according to Coca-Cola. Dr Pepper is also distributed in Freestyle machines under an agreement with the Coca-Cola Company.

Coca-Cola would likely feel the effects more than Pepsi and Dr Pepper since its share of the US fountain market is about 70%, according to Beverage Digest (the fountain market includes beverages sold through a fountain machine in bars and many quick-service restaurants, rather than pre-packaged bottles and cans). However, all three companies have increasingly found that more packaging alternatives help drive greater sales, and many 20-ounce or larger bottles are sold at food-service outlets.

Linda Montag Senior Vice President +1.212.553.1336 linda.montag@moodys.com

NEWS & ANALYSIS Credit implications of recent worldwide news events

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Fiat Industrial’s Merger with CNH Global Would Be Credit Positive for Both

Last Wednesday, Fiat Industrial S.p.A. (Ba1 stable) announced that it proposed to consolidate farm and construction equipment maker CNH Global N.V. (Ba2 stable) into a new holding company.

The transaction would be credit positive for Fiat Industrial as it would further increase its influence on a highly profitable business that generated nearly 70% of Fiat Industrial’s trading profit in 2011 at a limited cash cost of no more than €250 million. In addition, we expect a simplified shareholder structure of the combined entity to improve corporate governance, while a dual listing in New York and Europe would enhance the appeal to equity investors if the enterprise seeks to fund future strategic initiatives. The transaction would be credit positive for CNH by more closely aligning it with the higher-rated Fiat Industrial.

Fiat Industrial currently owns 88% of CNH, and 100% each of Iveco and Fiat Powertrain. The proposed transaction envisages creating a Netherlands-based holding company in which CNH, Iveco and Fiat Powertrain are 100%-owned subsidiaries. This would eliminate CNH’s minority shareholders and would lead to faster decision-making. We also note that with an unadjusted trading margin of 8.3% in 2011, CNH is a highly profitable business and a major contributor to Fiat Industrial’s earnings.

The proposed transaction is based on an exchange of existing shares in Fiat Industrial and CNH for shares in the new holding company that will succeed Fiat Industrial as the ultimate parent company of the group. As CNH’s existing minority shareholders will not be offered to exchange their shares for cash, the cash cost of the transaction will only be minor. We understand that Fiat Industrial would restrict the cash cost of the transaction to a maximum of €250 million, which may need to be paid to Fiat Industrial’s existing shareholders because of their right to withdraw from the proposed transaction under Italian law, and certain creditors’ rights that Fiat Industrial has not specified in more detail. The maximum cash cost of €250 million would raise Fiat Industrial’s adjusted net debt/EBITDA by a mere 0.1x. At the same time, Fiat Industrial has good liquidity to finance the possible cash outflow, as it had around €3.8 billion of cash on its balance sheet and an undrawn committed credit lines of €1.6 billion as of 31 March 2012.

Regarding the financing structure, we assume that bonds issued by Fiat Industrial Finance Europe S.A. and Fiat Industrial Finance North America, Inc. will remain guaranteed by the newly established holding company. We also expect that debt issued by CNH would be supported by the guarantee of the succeeding holding company, which benefits from the business diversification into Iveco, Fiat Powertrain and CNH, and which operate in different industries.

Michael Sonnefeld Associate Analyst +49.69.70730.912 michael.sonnefeld@moodys.com

Bruce Clark Senior Vice President +1.212.553.4814 bruce.clark@moodys.com

NEWS & ANALYSIS Credit implications of recent worldwide news events

6 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

Diageo’s Brazilian Acquisition To Add Net Debt, a Credit Negative

Last Monday, UK-based spirits manufacturer and distributor Diageo PLC (A3 stable) announced it is buying Ypióca (unrated), Brazil's leading brand of premium cachaça, for BRL900 million (approximately £300 million) from Ypióca Agroindustrial Ltd (unrated) in a cash transaction. The deal will increase Diageo’s scale in emerging markets, but is credit negative because it will add to the company’s net debt.

The Ypióca acquisition will increase Diageo’s presence in Brazil, where a youthful population and improving disposable income will boost consumption of alcoholic beverages, helping offset flagging sales in Southern Europe. Diageo targets an increasing contribution to net sales from emerging markets, and expects 50% of its consolidated net sales from emerging markets by 2015, up from about 33% last year (see the exhibit) and around 40% pro forma for the recent acquisitions. Diageo’s purchase of Ypióca will reinforce its local distribution infrastructure, especially in the northeast of Brazil, which should benefit its other brands’ marketing.

Diageo Targets 50% of Consolidated Net Sales from Emerging Markets by 2015

Source: Diageo PLC

However, the moderately sized acquisition is one of several acquisitions Diageo made in this fiscal year, which ends 30 June. These acquisitions, part of Diageo’s strategy to grow operations in developing markets and fuel profit growth, will increase its net debt.

We estimate that Diageo has spent approximately £2 billion in acquisitions so far in fiscal 2012 (including its largest acquisition, Turkish distiller Mey Içki for about £1.3 billion), which compares to about £700 million in free cash flow (after dividends and capital expenditure) the company generated in fiscal 2011. We expect Diageo’s net debt will increase as a consequence of these transactions to above £7.5 billion this year from approximately £6.7 billion in fiscal 2011.

In the 12 months to 31 December 2011, we estimated retained cash flow to net debt was approximately 14% and debt to EBITDA was 3.2x, which is stretched compared to our expectations for the rating at between 14%-16% retained cash flow to net debt and below 3.0x debt to EBITDA. However, we expect some recovery in credit metrics by the end of this fiscal year because Diageo has performed well in the first nine months of its current fiscal year, especially as premium and super premium spirits categories have regained ground in the profitable US market. Moreover, the company will have almost a full year contribution from Mey Içki by end June.

We expect Diageo to pursue selective acquisitions in developing markets that are likely to be of a bolt-on nature. While we expect that these will be accommodated within the company’s A3 rating, negative pressure on the rating would increase if Diageo made a large debt-funded acquisition that resulted in its debt protection ratios remaining below our parameters.

0%

10%

20%

30%

40%

50%

60%

Developed Markets Emerging Markets Distressed EU Markets

Net Sales H1-2011 Projected Net Sales

Yasmina Serghini-Douvin, CFA Vice President - Senior Analyst +33.1.5330.1064 yasmina.serghini-douvin@moodys.com

NEWS & ANALYSIS Credit implications of recent worldwide news events

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Wiggins Island Rail Project Approval Is Credit Positive for QR National

Last Monday, the Queensland Competition Authority approved the construction of the significant Wiggins Island Rail Project (WIRP) linking the new Wiggins Island Coal Export Terminal at the Port of Gladstone and coal mines in Central Queensland. The project will align with the 27 million tonnes per annum (mtpa) of capacity at the Wiggins Island Coal Export Terminal and is scheduled to be completed by March 2015.

The AUD900 million project is credit positive for QR National Ltd.

QRN’s rail network is the largest in Australia, with over 2,000 kilometres of track, and contributes about 28% to QRN’s total revenue (see exhibit). The network business is a monoply service provider that services five distinct systems, all of which are regulated by the Queensland Competition Authority. The stability and predictability of the regulated network services revenue supports QRN’s financial profile amid volatility in other segments, such as the coal haulage business, where, for example, a week-long strike in May at all BHP Billiton – Mitsubishi Alliance mines reduced coal haulage by approximately 1 million tonnes.

(QRN, Baa1 stable) because it will expand the company’s network footprint and earn fixed regulated access revenues from other railroad operators, which we consider highly stable. We estimate that upon completion of the project, QRN’s regulated asset base will expand by about 25%. These credit positive features outweigh the negative effect of the project’s increased financial leverage, which we expect to be mostly debt-funded.

QR National Revenue by Segment - Fiscal 2011

Source: QR National Ltd.

Coal haulage in Queensland is carried out by both QRN and Asciano Ltd.

Australia is the world’s largest coal exporter by tonnage. Thermal coal, used in power stations, and coking coal, used for steel making, largely come from the Bowen Basin in Australia. The coal supply chain, which includes miners, rail network providers (QRN and

(Baa2 Stable). The addition of rail capacity will benefit QRN and Asciano by creating more opportunities to bid for coal haulage capacity. Both companies compete directly with each other for coal haulage contracts. QRN is currently more dominant in Queensland with about 75%-80% of coal haulage market share. Assuming the contract wins are 2:1 in favor of QRN, we estimate that the additional coal volumes will add about AUD40-AUD45million to QRN’s coal segment EBITDA.

Australian Rail Track Corporation (Aa2 Stable)) and railroad operators (QRN, Asciano), and the port operators, must all have matching capacity to meet the growing export demand. Recently, the growth in Australia’s coal exports has been constrained by port and rail infrastructure capacity, and the approval of the Wiggins Island project is

Coal43%

Freight29%

Network Services28%

Saranga Ranasinghe Associate Analyst +612.9270.8155 saranga.ranasinghe@moodys.com

NEWS & ANALYSIS Credit implications of recent worldwide news events

8 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

refreshing news after the Queensland government recently scrapped a major project to expand the Abbott Point coal export terminal.

However, we expect Australia’s east coast port capacity to undergo significant expansion over the next five to seven years, with over 100Mt of expansion planned for Queensland and around 80Mt expected in New South Wales. However, a key downside risk to the expansion is the winding down of investment plans by key miners, such as BHP Billiton Ltd (A1 stable) and Rio Tinto Ltd (A3 stable), owing to global economic uncertainties and rising costs. Rio Tinto’s recent decision to reconsider its coal expansion in Queensland, which contributed to the Queensland government’s decision to scrap a project to expand Abbott Point coal terminal, is a case in point.

NEWS & ANALYSIS Credit implications of recent worldwide news events

9 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

Sumitomo Chemical’s Follow-on Investment in Saudi Joint Venture Is Credit Negative

On 25 May, Japan-based Sumitomo Chemical Company Limited (Baa1 stable) said it would invest in the second phase of its Saudi Arabia-based Rabigh Project (Rabigh II Project) at Rabigh Refining and Petrochemical Company (Petro Rabigh, unrated), a joint venture with state-owned Saudi Arabian Oil Company (Saudi Aramco, unrated). The proposed investment in the Rabigh II Project is credit negative because over the next two to three years it will add to Sumitomo Chemical’s leverage, which was already higher owing to earlier, aggressive capital investments.

Sumitomo Chemical and Saudi Aramco each hold a 37.5% stake in Petro Rabigh, which became fully operational in April 2009, while public investors own the remaining 25%. The total investment for the Rabigh I Project was approximately $10 billion, 60% from loans and 40% from equity, including an initial public offering in Saudi Arabia. To secure project financing, Sumitomo Chemical and Saudi Aramco each provided about half of the necessary financial-completion guarantees covering $5.8 billion in financing. In April 2012, the project achieved agreed-upon milestones, which led to the release of the project finance guarantees and the removal of $2.7 billion in adjustments from Sumitomo Chemical’s consolidated debt.

Ethane-based, low-cost feedstock makes Petro Rabigh cost competitive. However, currently weak market conditions for refining margins and an anemic global economy mean that it could take years before Sumitomo Chemical realizes adequate returns on its investment in the Rabigh I Project. The $7 billion Rabigh II Project will not begin operations until the first half of 2016.

We expect that Sumitomo Chemical and Saudi Aramco will have to sponsor guarantees until the Rabigh II Project achieves milestones imposed under the project’s debt-financing agreement, which is likely to involve a mix of project finance, bank debt, and the injection of equity into Petro Rabigh. Although the concerned parties have not yet decided on a financing scheme, our measures for Sumitomo Chemical’s debt will increase if the company supports the project with contingent liabilities.

Such liabilities would grow over time, as would the negative implications for Sumitomo Chemical’s credit metrics. If similar in scale to the Rabigh I Project’s guarantees, the implications would be significant, particularly if Sumitomo Chemical’s earnings and cash flow do not improve the way the company expects. Based on as-yet-unaudited financial statements, the company’s adjusted debt/EBITDA for the fiscal year that ended in March 2012 was 5.6x, compared with 2.9x for the fiscal year ended March 2006, while during the same period the company’s adjusted EBITDA margin shrank to 9.8% from 14.7%. By comparison, The Dow Chemical Company (Baa3 positive), a US-based competitor with a similar business portfolio as Sumitomo Chemical,1 had adjusted debt/EBITDA of 3.6x and adjusted EBITDA margin of 10.5% for 2012.

Over the past decade, Sumitomo Chemical has expanded investment in almost all its business segments, including basic chemicals, petrochemicals, IT-related chemicals, health and crop sciences, and pharmaceuticals. The company currently faces difficult market conditions in IT-related chemicals and weak demand for products in its basic chemicals, petrochemical and plastics segments. By contrast, Sumitomo Chemical’s agricultural chemicals and pharmaceuticals remain stable contributors to earnings and cash flow. In fiscal 2012, these latter two businesses delivered over 55% of the company’s consolidated operating profit after accounting for internal transfers.

1 Our corporate ratings in Japan incorporate upward notching to account for support from domestic banks and other potential

supporters to large and systemically important organizations such as Sumitomo Chemical. Without this support, the company’s rating would be Baa3, the same as that of Dow Chemical.

Noriko Kosaka Vice President - Senior Analyst +81.3.5408.4028 noriko.kosaka@moodys.com

Shinya Dejima Associate Analyst +81.3.5408.4209 shinya.dejima@moodys.com

NEWS & ANALYSIS Credit implications of recent worldwide news events

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Baosteel’s Zhanjiang Project Will Improve Its Competitiveness, a Credit Positive

On 25 May, China’s National Development and Reform Commission (NDRC) announced that it gave Shanghai-based Baosteel Group Corp.

Baosteel will benefit from the elimination of 16 mtpa obsolete steel capacity in Guangdong, which has low efficiency and high emission. Once production in the new plant begins, Baosteel’s domestic market share will rise to around 8% from its current 6.5%. The Zhanjiang project fits well into Baosteel’s strategy to strengthen its footprint in the Pearl River Delta, along with the Yangtze River Delta and Northwest region, where Baosteel has existing production facilities.

(A3 stable) the green light to build a 10 million metric tons per annum (mtpa) steel plant in Zhanjiang, Guangdong province at a cost of around $11 billion. The Guangdong government will phase out 16.14 mtpa obsolete crude steel capacity by the time the Zhanjiang project is completed. This new project will improve Baosteel’s business scale, operational efficiency, market position, and ultimately its competitiveness against peers. We believe that the long-term return for Baosteel under supportive government policy outweighs the investment and execution risks of the Zhanjiang project and is credit positive.

Baosteel will produce value-added flat steel products in Zhanjiang to satisfy the strong demand in southern China. Currently, the majority of the steel production is in the north, while demand mainly comes from the south. Compared to peers in northern China such as Hebei Iron and Steel (unrated), Baosteel will be able to lower its production cost with the new steel mill and gain cost advantages thanks to its proximity to clients as well as seaborne iron ore.

The approval for the project comes as the profitability of China’s steel industry has fallen to break-even levels amid slowing growth and oversupply. The NDRC’s decision is pursuant to the government’s 12th five-year plan for the steel industry to accelerate consolidation, improve efficiency, reduce emission, and rebalance regional demand and supply. There will be an accelerated elimination of overcapacity in northern China, given producers’ low efficiency and loss-making position.

The NDRC’s approval for such a large-scale project further underscores Baosteel’s leading market position and its important role in industry consolidation. We expect Baosteel’s improving scale, product quality and access to raw materials and customers to make it more competitive versus international peers.

We anticipate a moderate level of execution risks arising from the construction of the Zhanjiang project scheduled in the next four years. China has a track record of building large steel capacities over the past decade and the Zhanjiang project is well supported by the government as noted in the 12th five-year plan.

The total investment in the Zhanjiang project is worth RMB69.68 billion (about $11 billion). Baosteel will inject cash and contribute existing equipment to the project, including the relocation of certain steel capacity from Shanghai.

We expect that Baosteel’s free cash flow will be negatively affected by the Zhanjiang project in the next four years. However, the company’s ample financial reserves, including RMB54 billion in cash and RMB44 billion in available-for-sale financial instruments as of end-2011, will make up for the shortfall in the cash flow.

Jiming Zou Analyst +852.3758.1343 jiming.zou@moodys.com

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Infrastructure

Repeated Shutdowns of Korean Power Plants Weigh on KEPCO

Last Tuesday, Korea Electric Power Corporation (KEPCO, A1 stable) reported the fourth stoppage of one of its base-load coal or nuclear power plants in less than a year. These repeated shutdowns of KEPCO generators are credit negative because they force the company to increase its reliance on expensive liquefied natural gas (LNG) to maintain its required level of electricity generation.

The stoppage of KEPCO’s power plants and the likely need for an extensive overhaul of its generators will delay the recovery of KEPCO’s credit metrics and weigh on its operating cash flows at a time when strong power demands call for increased capex to build additional power facilities. Likewise, KEPCO’s rising reliance on LNG-fired power plants, brought on by its limited ability to curtail power output amid a tight power supply, combined with increasing costs to overhaul its power plants, will weaken the firm’s profit.

In the latest incident, a coal-fired power plant ceased operation for five hours when a voltage regulator malfunctioned. That followed a fire breaking out in two coal-fired power plants in March, the cessation of output at KEPCO’s Gori-1 nuclear power plant in February after the loss of power at the plant prevented the circulation of a critical water coolant, and a defect in a steam generator causing KEPCO’s Uljin-4 nuclear power plant to cease operations in September 2011.

These four KEPCO power plants, which the company has yet to reactivate, account for about 4% of the firm’s total power-generation capacity. KEPCO has not set a definitive timeframe to restart the two nuclear-power plants, but plans to restart its shuttered coal-fired power plants in June or July.

A tight power supply in Korea is increasing the strain on KEPCO and raising the possibility of a malfunction or accident at KEPCO’s base-load power plants unless the company undertakes a stringent overhaul and maintenance of its power plants to ensure their smooth operation. Another mishap would further increase KEPCO’s reliance on costly LNG-fired power plants that are run by its wholly owned power-generation subsidiaries and privately owned independent power producers.

The exhibit below shows the trend of rising LNG over the last six years in the mix of KEPCO’s power sources.

KEPCO’s Reliance on Liquefied Natural Gas

Source: Korean Electric Power Corporation, Moody’s

38% 38% 40% 42% 46% 43% 42%

41% 40% 37% 37% 35%32% 32%

14% 16% 18% 17% 14% 19% 21%

5% 4% 4% 2% 3% 3% 2%

2005 2006 2007 2008 2009 2010 2011

Coal Nuclear LNG Oil Hydro & Others

Mic Kang Vice President - Senior Analyst +852.3758.1373 mic.kang@moodys.com

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In recent years, KEPCO has increased its reliance on LNG-fired power plants to satisfy growing demand. However, relying on more expensive fuel, combined with a lack of an automatic, transparent mechanism for passing through high fuel costs to customers, has led to a deterioration of KEPCO’s credit metrics, which have steadily worsened over the past four years through year-end 2011. KEPCO’s ratio of retained cash flow to debt of 8.8% in 2011 was substantially below a ratio of more than 25% before 2008, and its ratio of funds from operation to interest expense of 2.7x for 2011 paled in comparison with more than 9x in 2008.

NEWS & ANALYSIS Credit implications of recent worldwide news events

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Banks

Slowdown In US Bank Consolidation Is Credit Positive

On 24 May, the Federal Deposit Insurance Corporation (FDIC) released its quarterly banking profile for the US, which shows that industry consolidation has slowed significantly. Specifically, for the first quarter of 2012, on an annualized basis, industry consolidation, which includes both unassisted mergers and the acquisition of failed banks under FDIC receivership, was 46% lower than the average for 2002-11 (see exhibit). The slowdown reflects not only a decline in bank failures, but also greater discipline by potential acquirers, which is credit positive.

Number of US Bank Consolidations Since 2002

Source: Federal Deposit Insurance Corporation

The FDIC data indicate that from 2002 to 2011 the annual average of bank and thrift mergers, plus failures, was 320, which significantly outpaced the number of new bank charters and has led to a steady decline in the number of banks and thrifts in the US. Although the level of unassisted mergers slowed considerably after 2008, as shown in the exhibit’s green bars, bank consolidation continued to be steady as existing banks, with the assistance of the FDIC, largely absorbed the assets and deposits of failed banks, as reflected by the orange bars. However, in the first quarter of 2012, both mergers and failures materially declined. Seasonal factors do not account for the decline since consolidation in the first quarter of 2012 was down 48% compared with the first quarter of 2011.

We believe that the decline in first quarter 2012 deal volume reflects greater discipline by banks and their regulators in evaluating potential acquisitions compared with previous years. We also note that specific characteristics of the current market also drove the slowdown. First, an uncertain economic environment and persistently low interest rates make banking franchises difficult to value. Second, prospective sellers are not lowering their price in response to the more challenging market. In the future, if there is greater agreement on price, then acquisitions could return to historical levels.

To be sure, bank combinations that make both strategic and financial sense, once properly integrated, can enhance an acquirer’s franchise value. However, we can point to numerous bad acquisitions that undermined an acquirer’s franchise value, the most prominent recent examples being Bank of America Corporation’s (Baa1 review for downgrade) acquisition of Countrywide and Wachovia’s purchase of Golden West. Bank of America continues to suffer from its acquisition of Countrywide and Wachovia nearly failed after Golden West’s pick-a-pay mortgage portfolio deteriorated. Wells Fargo & Co. (A2 negative) eventually acquired Wachovia at a steep discount.

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Annualized

Bank & Thrift Mergers Failed Institutions 10 year average (2002-2011)

Allen Tischler Senior Vice President +1.212.553.4541 allen.tischler@moodys.com

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14 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

In addition, there were a number of ill-timed acquisitions of Florida banks that saddled out-of-state acquirers with threatening amounts of bad commercial and residential real estate assets. In short, history shows that in their zeal to expand, banks often undertake poorly timed or ill-advised acquisitions, and they frequently take on too much leverage in the process.

Therefore, in our evaluation of the transactions announced by rated US banks, we are cautious in examining the potential impact of the acquisition on the acquirer’s credit profile. Although we anticipate that management teams at the healthier regional banks, in particular, will continue to find attractive acquisition targets, we will be specifically focused on large deals that materially impact capital or expand a bank’s franchise into new geographies or business lines.

NEWS & ANALYSIS Credit implications of recent worldwide news events

15 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

Russian Banks’ Provisioning Falls Behind Growing Delinquent Loans, a Credit Negative

On 25 May, Central Bank of Russia (CBR) Deputy Chairman Mikhail Sukhov said that Russian banks’ loan-loss provisions are not keeping pace with growing delinquent loans. Overdue loans increased by $3.5 billion2 during the first four months of 2012, while loan-loss reserves increased by only $1.7 billion. Mr. Sukhov added that during the first quarter, the CBR sent guidance to 115 banks to increase their loan-loss reserves. These developments are credit negative for Russia’s banking sector because under-provisioning coupled with loan growth and increasing loan delinquency decreases the banks’ loss-absorption capacity.

Banks aren’t rushing to increase their loan-loss provisions because if they did, they would lose a portion of their already pressured capital, which is needed for credit growth. The system’s statutory capital adequacy ratio (N1) declined to 14.3% as of 1 May from 14.7% at year-end 2011, and down significantly from 18.1% at year-end 2010. We expect N1 to reach around 13% by year-end 2012.3 If the economic environment becomes less benign, which we expect given our forecast that GDP growth for 2012 will slow to 3.5% from 4.3% in 2011, the asset quality of banks is likely to materially deteriorate and the sector’s currently adequate capital cushion may become insufficient to cope with problem loans.

Russian Banks’ Year-to-Date Growth in Overdue Loans and Loan Loss Reserves; the Sector's Capital Adequacy Ratio

Source: Central Bank of Russia

We believe that the increase in overdue loans reflects the rapid lending growth in 2011 (i.e., 26% in corporate loans and 36% in retail), coupled with banks’ relaxation of credit underwriting standards and their penetration of riskier segments, such as loans to small and medium-sized enterprises (SMEs) and unsecured loans to both corporate and retail clients. Despite some stabilisation of the country’s economic environment in the past two years and relatively good prospects for 2012, we believe that many local borrowers remain financially vulnerable.

New lending supported Russian banks’ revenue generation, which was impaired in the aftermath of the 2008-09 financial crisis. Indeed, in 2011 the sector posted record net profits of $26.5 billion under statutory reporting standards, 1.5x the profits in 2010. However, much of the additional profit was attributable to the fact that the banks’ provisioning did not keep pace with the increase in the loan

2 In accordance with Russian standards, the CBR reports overdue tranches only, which understates the amount of the

problem loan. 3 See also Russian Banks: 2012 CFO Survey Shows Cautious Optimism, 27 March 2012.

14.7%

14.9%

14.7%

14.6%

14.3%

14.2%

14.3%

14.4%

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14.6%

14.7%

14.8%

14.9%

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Dec-11 Jan-12 Feb-12 Mar-12 Apr-12

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Overdue Loans Growth - left axis Loan Loss Reserves Growth - left axis

Top 20 Banks: Overdue Loans Growth - left axis Capital Adequacy Ratio - right axis

Olga Ulyanova Vice President - Senior Analyst +7.495.228.6078 olga.ulyanova@moodys.com

Polina Krivitskaya Associate Analyst +7.495.228.6062 polina.krivitskaya@moodys.com

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16 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

portfolio. As the rapidly augmented loan books start to season, we see the share of delinquent loans in the newly disbursed vintages growing. Overall, the share of delinquencies in the banking sector’s total loan book4 climbed to 5.0% at 1 May from 4.8% at the end of 2011.

4 As per the CBR’s reporting standards of overdue tranches only.

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17 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

New Regulatory Limits on Consumer Lending in Oman Are Credit Positive

On 23 May, the Central Bank of Oman (CBO) issued a circular that imposed new limits on consumer loans. The new requirements set the monthly repayment of consumer loans at a maximum 50% of net salary, with the maximum loan tenor of 10 years. Given the rapid increase in consumer lending, which doubled 2007-11, and our resulting concerns about a deterioration in banks’ asset quality, we consider the new requirement credit positive. The new ceilings will help contain growth in consumer lending and personal indebtedness, and hence will reduce the risks of asset quality deterioration.

The new limits for loan tenors of up to 10 years with a monthly repayment of up to 50% of an individual’s net salary compares with repayment tenors of up to 15 years and a monthly debt burden ratio that reached 65% prior to the new requirement. The new maximum debt burden ratio for housing loans was set at 60% of net salary (covering all debt obligations) for a period of up to 25 years, while any so-called “top ups” for consumer loans would only be made available after 24 months of servicing the loans or after 50% of the existing loan is repaid. The new regulation is applicable to new loans and is effective immediately. At the same time, the regulators have kept caps on consumer and housing loans at 40% and 10%, respectively, of the banks’ total loan portfolio.

The CBO’s move aims to limit the rising level of consumer debt in Oman and curb the fast growth in consumer loans. The lack of official data prevents the accurate measure of household indebtedness in Oman. The International Monetary Fund estimated that the ratio of household debt to disposable income was 138% in 2008, and continued lending growth in this segment indicates that household indebtednesses has increased further. We expect the new loan parameters to significantly reduce growth in consumer lending to 8%-10% per annum versus an annual growth rate of 17% in 2011. We also expect it to contain consumer indebtedness, which will in turn improve consumers’ ability to meet their loan repayments. As a result, the risk of a substantial increase in non-performing loans (NPLs) in the retail sector will be reduced. Retail sector NPLs have historically remained at low levels (i.e., 2% of retail loans in 2011), partly owing to the fact that banks request the pre-assignment of salaries before originating these loans and also the relatively high job security in Oman.

The CBO’s new loan requirements follow similar actions of other Gulf Cooperation Council (GCC) regulators that established limits on loan installments as a percentage of monthly income, as seen in the exhibit below. Qatar introduced caps on consumer loans in 2011, which limit the maximum debt burden ratio at 50% with a maximum six-year tenor (for expatriates5). The ceiling in Saudi Arabia is the lowest of all the GCC with a debt burden ratio of 33%, while Kuwait caps it at 40%.

Monthly Repayment Limits on Consumer Lending in GCC Countries

Oman Bahrain Kuwait Qatar Saudi Arabia United Arab Emirates

50% of net monthly salary and maximum tenor of 10 years. For housing loans, 60% of net salary and a maximum tenor of 25 years.

50% of a borrower's gross salary with maximum tenor of 7 years.

40% of borrower's net salary and 30% of income for pensioners. Housing loans are capped at KWD70,000 per person.

Expats: 50% of gross salary, not to exceed QAR400,000 and maximum tenor of 6 years. Nationals: 75% of gross salary (but excluding additional social benefits), not to exceed QAR2 million and maximum tenor of 4 years.

33% of net monthly salary for both personal loans and credit cards. Personal loan maximum tenor of 5 years.

50% of a borrower's gross salary. Amount should not exceed 20 times the salary or total income of the borrower.

Source: Central Banks' websites and IMF

5 Qatari nationals comprise only 300,000 of Qatar’s 1.9 million population.

Elena Panayiotou Analyst +357.25.586.586 elena.panayiotou@moodys.com

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18 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

Indonesia’s Ownership Limit Is Credit Positive for Most Banks, Except DBS-Danamon

In a conference call with analysts last Thursday, the deputy governor of Indonesia’s central bank, Halim Alamsyah, said that the Bank Indonesia has proposed restricting bank ownership by a single financial institution shareholder to 40% and to 30% for other investors, with some discretion to allow a 50% stake for banks with above average corporate governance. This move is credit positive. The current rules allow a single shareholder to own up to 99%. The revised regulations would not be retroactively applied and would only affect new investments. It is not yet clear when the new ownership limit would officially enter into force, but it could be implemented relatively swiftly, given that the central bank has the authority to go ahead without parliamentary approval.

We consider the new shareholding limit credit positive for the six large banks in the country that already have majority and controlling shareholders because the central bank’s policy stance signals the government’s intention to “grandfather” their ownership structure, which removes the uncertainty and risk of divestment that the widely rumoured regulatory change had raised.

Each of the six banks -- Bank Central Asia Tb (Baa3 stable; D+/ba1 stable)6, k PT Bank CIMB-Niaga Tbk (Baa3 stable; D/ba2 stable), Bank Danamon Indonesia Tbk (Baa3 stable; D/ba2 positive), Bank Internasional Indonesia (not rated), Bank Permata Tbk (Baa3 stable; D-/ba3 positive), and Pan Indonesia Bank Tb (Baa3 stable; D/ba2 stable) -- is closely held by a non-government shareholder, and four are controlled by foreign strategic shareholders. The exhibit below details the six banks, their shareholders and their percentage stakes as of 31 March 2012.

k

Indonesia's Six Largest Private Banks' Major Shareholders at 31 March

Indonesian Bank Shareholders Ownership

Percent

Bank Central Asia Messrs. Budi & Bambang Hartono 47%

Baa3 stable; D+/ba1 stable

Bank CIMB-Niaga CIMB Group Sdn Bhd, Malaysia 97%

Baa3 stable; D/ba2 stable

Bank Danamon Indonesia Temasek Holding, Singapore(Aaa stable) through Asia Financial (Indonesia)

67% Baa3 stable; D/ba2 positive

Bank Internasional Indonesia Malayan Banking Berhad, Malaysia(A3 stable; C/a3 stable) through Sorak Financial Holding (54.33%) and Mayban Offshore Corporate Services (Labuan) Sdn Bhd (42.99%)

97% Unrated

Bank Permata PT Astra International Tbk 45% Baa3 stable; D-/ba3 positive Standard Chartered Bank, UK(A1 stable; B-/a1 stable) 45%

Pan Indonesia Bank ANZ Bank, Australia(Aa2 stable; B/aa3 stable) through Votraint No. 1103 PTY Ltd

39% Baa3 stable; D/ba2 stable

Source: Company reports

Because these banks’ shareholders will not be forced to divest their holdings, the banks can continue to employ long-term strategies and investments. In particular, we think the franchises of banks managed by strategic bank shareholders are enhanced through backing from their parents. In Indonesia’s case, all the strategic bank shareholders have stronger creditworthiness than their subsidiary banks.

6 The bank ratings shown in this report are the bank’s deposit rating, its standalone bank financial strength rating/baseline

credit assessment and the corresponding rating outlooks.

Beatrice Woo Vice President - Senior Credit Officer +65.6398.8332 beatrice.woo@moodys.com

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19 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

However, the proposed changes in bank ownership levels casts uncertainty over the biggest acquisition in the country. On 2 April, Temasek Holdings (Private) Ltd (Aaa stable) announced it was selling its majority 67% stake in Bank Danamon Indonesia to Singapore’s DBS Group Holdings (unrated). The transaction has been stalled by Indonesian politicians who complain about the lack of reciprocity in the bank ownership rules of neighbouring countries, including Singapore. In last Thursday’s announcement, the central bank did not clarify how it would treat the pending DBS-Danamon transaction.

In comparison, Malaysia has a foreign shareholding limit of 30% in a bank while Singapore requires the approval of the central bank for a single shareholder beginning at the 5% level.

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20 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

Acquisition of Gavilon Is Credit Negative for Marubeni

Last Tuesday, Marubeni Corporation (Baa2 stable), a leading Japanese trading company, announced that it would acquire 100% of The Gavilon Group LLC (Ba3 review for upgrade), the third-largest merchandiser and distributor of agricultural commodities in the US. The acquisition, for approximately $3.6 billion (¥290 billion), is credit negative for Marubeni. We placed Gavilon’s rating on review for upgrade as a result of the agreement, which would give the company a strategic owner with access to substantial capital.

Marubeni has not disclosed details about how it will fund the acquisition, which it expects to close around September, pending regulatory approvals. Although Marubeni’s strong capital base of ¥910 billion ($11.3 billion) and its liquidity position comprising cash and deposits of ¥720 billion ($8.9 billion) as of end-March mitigate the negative financial effect of this transaction, we think the acquisition is credit negative for Marubeni for the following reasons:

1) The transaction involves a significant cash outlay. The ¥290 billion acquisition cost exceeds the ¥240 billion that Marubeni budgeted for new investments in fiscal 2013.7 As a result, the deal would sharply increase the company’s investment outlays and put negative pressure on its free cash flow. We estimate that this transaction, together with the addition of Gavilon’s net debt of approximately ¥150 billion, would exceed Marubeni’s budgeted investment plan by approximately ¥200 billion.

2) Marubeni will need to sell other assets or reduce its working capital needs in order to meet its stated target of keeping its net debt/equity ratio to 1.8x at its March 2013 fiscal year-end. Without such remedial measures and assuming the purchase price is fully financed by additional borrowing, we estimate that the net debt-to-equity ratio would weaken to 2.2x from 1.9x as of March 2013.

3) Marubeni faces risk management challenges in its enlarged trading or derivative business, but Gavilon's risk management policies appear to have been effective in limiting trading and derivative losses over the past several years.

Strategically, the acquisition moves Marubeni closer to its ambition of building a vertically integrated grains business from sourcing to distribution, which would enhance its future profits and operating franchise.

We expect Marubeni's handling volume of grains to increase to 55 million tons of agricultural commodities annually post-acquisition, up from its current 25 million tons. The increased capacity would make Marubeni comparable in size to major global grain companies such as Cargill Incorporated (A2 stable) and Archer-Daniels-Midland Company (A2 stable).

However, these benefits, plus management’s cost-cutting pledges, are subject to considerable uncertainty in the current volatile market environment and are unambiguously outweighed by the acquisition’s financial burden.

7 Marubeni outlined planned investment of ¥900 billion in its three-year plan for fiscal years 2011-13 (Japan’s fiscal year ends

31 March). It utilized ¥420 billion in fiscal 2011-12 and internally approved ¥240 billion in fiscal 2013, leaving ¥240 billion of budgeted new investments for the rest of this fiscal year.

Tetsuya Yamamoto Vice President - Senior Analyst +81.3.5408.4053 tetsuya.yamamoto@moodys.com

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21 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

Insurers

Swiss Re Sells REALIC to Jackson National; Credit Positive for Both

Last Thursday, Swiss Re Group announced it would sell SRLC America Holding Corp., whose primary operating company is Reassure America Life Insurance Company (REALIC, financial strength A1 stable), to Prudential Plc’s (A2 stable) Jackson National Life Insurance Company (financial strength A1 stable) subsidiary for a cash payment of approximately $600 million. The deal is credit positive for both parties.

For Swiss Re, whose main operating company is Swiss Reinsurance Company Ltd. (financial strength A1 positive), the transaction frees up capital that it had allocated to a low-return business. For Jackson National, the acquisition provides earnings diversification by adding businesses, such as traditional life insurance, to offset the company’s rapidly growing equity-based business, although the payment of the purchase price temporarily reduces the operating company’s statutory capitalization.

The transaction, which the companies expect to close by the end of the third quarter, remains subject to regulatory approvals. Swiss Re will retain certain blocks of the business.

Jackson is well established in the variable annuity businesses and has experienced strong growth and improving market share in recent years. Notwithstanding the company’s solid hedging program, the rapid growth over the past several years of its variable annuity business, with its guaranteed benefits, has placed some negative pressure on the company’s intrinsic credit profile. The financial performance of variable annuities with guarantees is closely linked to equity market performance and the hedging of guarantees entails the use of a sophisticated derivatives program.

The acquisition of REALIC would diversify Jackson’s business by adding a significant block of individual life insurance liabilities to its large block of inforce variable annuities. Furthermore, we expect the transaction will improve Jackson’s profitability by adding a relatively stable, although modest, stream of earnings that complements the company’s fee-based income from variable annuities. Somewhat offsetting these benefits, the transaction replaces about $430 million of liquid, cash and invested assets with an illiquid intangible asset, the value of the business it is acquiring. Furthermore, the transaction results in a modest decline, at least temporarily, in Jackson’s National Association of Insurance Commissioners risk-based capital ratio, a regulatory capital ratio that can be used to assess capital adequacy.

Meanwhile, the transaction enables Swiss Re to reduce its credit and mortality risk, which we expect will benefit its solvency position. We also believe that Swiss Re is well placed to redeploy the freed up capital to more profitable business lines.

Notwithstanding the credit positive aspects of this transaction, Swiss Re estimates that the sale of the business will result in a US GAAP loss of approximately $900 million that it will book in second-quarter 2012.

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

Dominic Simpson Vice President - Senior Credit Officer +44.20.7772.1647 dominic.simpson@moodys.com

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22 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

Japanese Life Insurers Narrow Their Duration Gap, a Credit Positive

On 25 May, Japanese life insurers released their financial results for the fiscal year ended 31 March 2012. One notable observation is a shift in insurers’ investment portfolios toward long-term Japanese government bonds (JGBs) and away from European Union (EU) sovereign bonds. This trend is credit positive for life insurers, including the eight insurers we rate (see Exhibit 1), since their investments in JGBs, particularly “super-long” JGBs, which have maturities of longer than 10 years, will help narrow their duration gap.

EXHIBIT 1

Insurers’ Key Financial Results for the Fiscal Year Ended March 2012

Solvency Margin Ratio

Net Asset Value (¥ billions)

Exposure to Distressed European Sovereigns

(¥ billions) Moody's

Insurance Financial Strength Mar 2011 Mar 2012 Mar 2011 Mar 2012 Sept 2011 Mar 2012

Nippon 529% 567% ¥6,393 ¥7,153 ¥489 ¥296 Aa3

Dai-ichi 547% 575% ¥3,066 ¥3,670 ¥160 ¥106 A1

Meiji Yasuda 663% 749% ¥3,422 ¥4,024 ¥120 ¥14 A1

Sumitomo 636% 708% ¥1,937 ¥2,527 ¥19 ¥19 A2

Taiyo 670% 747% ¥453 ¥577 ¥26 ¥0 A2

Fukoku 668% 741% ¥578 ¥706 ¥21 ¥11 A2

Mitsui 425% 486% ¥385 ¥474 ¥27 ¥0 Baa2

Sony 1720% 1980% ¥606 ¥871 ¥0 ¥0 Aa3

Source: The issuers, Moody’s

Most Japanese life insurers underwrite products, such as term life, endowments, annuities, and whole life, with tenors of 20-30 years and even longer which is longer than the maturity of their investment assets. Although insurers do not disclose duration information, our current assumption, based on their disclosed data on securities by maturity date, is that the average duration on their assets is around 10 years, while we assume their liabilities are longer than 15 years.

For the past several years, insurers have sought to improve their asset liability management in response to higher regulatory requirements on risk management and risk control. As shown in Exhibit 2, insurers continued to increase the share of long-tenor bonds in their bond holdings in the past fiscal year. This increase implies a further lengthening of the average duration of their assets, which will help narrow the duration gap with their liabilities. We believe insurers that are the heaviest underwriters of long-tail products will benefit most from the current shift to long- maturity JGBs.

Kenji Kawada Vice President - Senior Analyst +81.3.5408.4056 kenji.kawada@moodys.com

Eiji Kubo Associate Analyst +81.3.5408.4038 eiji.kubo@moodys.com

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23 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

EXHIBIT 2

Proportion of Insurers’ Total Domestic Bond Holdings with Maturities of at Least 10 Years

Source: The issuers

Amid escalating risks in the euro area, this shift marks a further retreat by insurers from riskier asset classes. Insurers’ investments in equities fell to 8% of their general account assets in the fiscal year ended March 2012, from a peak of 14% in the fiscal year ended March 2008, while foreign bonds increased marginally to 14% from 13%. Such a reduction in equities will reduce volatility in the investment performance of the insurers, and contribute to asset quality improvement, investment income stability, and liquidity.

Furthermore, we expect this shift towards JGBs and away from domestic equity or unhedged foreign denominated bonds will improve insurers’ solvency margin ratio (see Exhibit 1) and lead to stronger capitalization. By shifting more of their investments into assets like JGBs, which have a smaller risk charge (risk coefficient), insurers can reduce the investment risk components in their total risk charges, which goes into the denominators of their solvency margin ratios. The shift will enable insurers to respond to tighter solvency regulation.

We acknowledge that life insurers’ increasing holdings of JGBs carry risks, including a potential JGB selloff prompted by investors rethinking their current “flight to quality” sentiment or concerns over the Japanese government’s finances. However, insurers are protected by their inherent duration matching needs, and we expect that the benefits to their credit profile will outweigh the impact of any JGB volatility.

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30%

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50%

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80%

Nippon Dai-ichi Meiji Yasuda Sumitomo Taiyo Fukoku Mitsui

Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

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24 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

Sovereigns

Bulgaria’s Exit from the EDP Will Boost Investor Confidence, a Credit Positive

Last Wednesday, the European Commission (EC) recommended that Bulgaria’s Excessive Deficit Procedure (EDP) be abrogated. The announcement underscores the Bulgarian government’s commitment to fiscal consolidation. The abrogation will make Bulgaria (Baa2 stable) one of only six countries in the 27-member European Union (EU) that is not in an EDP and will boost investor confidence in its debt, a credit positive.

Bulgaria went on the EDP in the second quarter of 2009: its end acknowledges that the country’s fiscal profile fits within the boundaries of the EC’s Stability and Growth Pact, which mandates that budget deficits remain below 3% of GDP or the state must enter an EDP. In fact, the general government deficit shrank to 2.1% of GDP in 2011 (from 4.3% of GDP in 2009 and 3.1% in 2010). The EC expects Bulgaria’s deficit to remain below 3% of GDP and we expect it to fall to 2.0% in 2012 and 1.8% in 2013. The decline in 2011 reflected a combination of continued nominal GDP growth, rising revenue and the government’s success in containing spending. These factors will drive the improvement this year as well.

Improved investor confidence in the country’s fiscal position comes as Bulgaria is attempting to tap the international debt market: the government is pre-funding a euro-denominated bond that matures in January 2013. Public finances and investor confidence are further bolstered by Bulgaria’s low public debt level, which stood at 16.3% of GDP in 2011, and a fiscal reserve fund that has a legal minimum amount of BGN2.5 billion (equivalent to 3.3% of 2011 GDP).

Cyclical and structural weaknesses remain a problem for the sovereign. Although we expect Bulgaria’s GDP to grow 0.9% in 2012 and 2% in 2013, the country would likely be affected by trade and market shocks if Greece exits the euro area. Key export markets would probably suffer economic downturns. Greek parent institutions control several Bulgarian banks, which could be sold in order to raise funds for the parent. The EC remains concerned about several structural issues, including a high unemployment rate (12.8% in first-quarter 2012) and the need to improve the effectiveness and efficiency of how public money is spent. The EC also wants to see an improvement in the budgetary framework and business environment, structural issues that have a direct impact on an economy’s growth potential and thus the sovereign’s ability to generate revenues over the long term.

Kilbinder Dosanjh Vice President - Senior Analyst +44.20.7772.1376 kilbinder.dosanjh@moodys.com

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25 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

US Public Finance

Buffalo Fiscal Stability Authority’s Switch to Advisory Role Is Credit Positive for the City

Last Tuesday, the Buffalo Fiscal Stability Authority (BFSA, sales tax and state aid revenue rated Aa1) voted 6 to 1 to become an “advisory” control board from the “hard” control board it has been. The change means the BFSA will exert less control over the financial affairs of the City of Buffalo, New York (A1 stable), a credit-positive endorsement of the city’s improved ability to manage its own finances.

The state established the BFSA in fiscal 2003 after Buffalo experienced several years of financial deterioration and bestowed the authority with strong oversight over the city’s finances. BFSA took control of the city’s borrowing and had approval authority over any expense exceeding $50,000. With these powers, BFSA aided in the city’s development and implementation of stricter policies and froze all contractual salary increases, prompting several city employee bargaining groups to file a lawsuit that persists today. The city’s fund balances have increased steadily since the Authority’s establishment (see exhibit), and in fiscal 2007, BFSA lifted the wage freeze. In last week’s vote, the BFSA board cited the strength of the current management and its financial policies as the rationale for paring back its control.

City of Buffalo, New York, Operating Fund Balance as Percent of Revenue

2003: Control board established Source: City of Buffalo, New York, comprehensive annual financial reports

Despite improving finances, the city continues to face challenges. Its employee bargaining groups continue to pursue their lawsuit despite state court rulings in the city’s favor. If those legal challenges were to succeed, the city would need to make back payments for the years of the wage freeze, 2003-07, which would result in a significant drain on city resources. In addition, several of the city’s contracts with employee bargaining groups remain unsettled, with some dating back to 2004. Management has also noted that significant budget gaps exist in future years, especially for the school district, which is a component unit of the city.

Control boards overseeing several other municipalities in New York have shifted between an advisory capacity and more active control. The state in 2000 established the Nassau County Interim Finance Authority (NIFA, sales tax revenue rated Aa1 stable) as an advisory board for Nassau County (A1 negative). NIFA converted to a “hard” control board in January 2011 after it asserted that the county’s

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Robert Weber Assistant Vice President - Analyst +1.212.553.7280 robert.weber@moodys.com

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26 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

budget was not balanced. The control board continues to be actively involved in the county’s financial planning, working with county management to return the county to fiscal health.

New York State in 2005 created the Erie County Fiscal Stability Authority (ECFSA, sales tax and state aid revenue rated Aa1 stable), which was originally an advisory entity for Erie County (A2 stable). The authority converted to a “hard” control board after it rejected the county’s fiscal 2007 budget and multi-year plan. Both NIFA and ECFSA instituted similar financial controls to those that BFSA placed on Buffalo, including the wage freeze. In June 2009, ECFSA reverted back to an advisory board and since then Erie County has produced two audited financial statements (2009 and 2010) and improved its reserves and liquidity. The positive trend of improving financial performance, which began under the “hard” control board in fiscal 2005, indicates that Erie has adopted the policies and budgeting practices that the control board instituted.

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27 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

Rhode Island Says ‘No’ to Woonsocket’s Supplemental Tax Levy, a Credit Negative

Last Tuesday, the State of Rhode Island (Aa2 negative) appointed a budget commission to take over the finances of Woonsocket City (B2 review for downgrade) after the state legislature declined to pass a supplemental property tax levy to address the city’s financial distress, a credit negative for the city. Woonsocket had planned to borrow against receipts from the proposed tax to continue to finance its operations.

The supplemental tax levy would have generated approximately $6.6 million in additional ongoing revenue, a 13% increase to the city’s property tax revenue. Approval of the supplemental tax was also a condition for the city’s depository bank to finance $3.2 million in cash flow borrowing while revenue from the new tax was collected. Without the new levy, the bank will not provide the city with the additional liquidity and, in the absence of state intervention, the city projects that it will run out of cash by the first week of July.

However, the state’s appointment of the budget commission enhances the city’s ability to address its fiscal issues. For instance, the budget commission has the authority to request an advance of state education aid of the $3.3 million currently scheduled for disbursement in late June, addressing the city’s immediate cash shortfall. It can also request an advance of next year’s aid once the state’s new fiscal year begins on 1 July. Without such advances, issuance of a cash flow note, the eventual passage of the supplemental tax, or some other way to conserve funds (e.g., deferral of payments to vendors), the city would lack sufficient funds to make a $4.6 million debt service payment on 15 July.

The commission will serve as a budgetary advisor to the city, and has the power to enforce fiscal discipline. However, the budget commission is also one step from the appointment of a receiver, which, among other powers, can recommend a Chapter 9 bankruptcy filing.

Woonsocket is the third Rhode Island local government placed under fiscal oversight since the passage of the Fiscal Stability Act of 2010, following Central Falls (Caa1 negative) and East Providence (Ba1 stable). The act authorizes the state to implement various levels of local government oversight depending on the degree of fiscal stress that a community is experiencing (Exhibit 1).

EXHIBIT 1

Levels of State Oversight of Local Governments in Rhode Island Oversight Level Prerequisites Overseer Authority

Level I - Fiscal Overseer Consecutive operating deficits, cash flow challenges, failure to file timely audits, recent downgrade by a nationally recognized rating agency, inability to reasonably access debt markets or does not promptly respond to requests made by the state; or by request of municipality.

Overseer acts in advisory capacity, approving budgets and reporting progress to state officials.

Level II - Budget Commission

If level I oversight proves insufficient, or by request of municipality.

Amend and execute budgets, reorganize or consolidate departments or functions, accelerate state aid, and issue deficit funding bonds.

Level III - Receiver If level II oversight proves insufficient. Receiver is empowered to excercise any function of any municipal officer, employee or commission, including filing for Chapter 9 bankruptcy.

Source: Rhode Island Fiscal Stability Act of 2010

Vito Galluccio Analyst +1.212.553.2738 vito.galluccio@moodys.com

Geordie Thompson Vice President +1.212.553.0321 geordie.thompson@moodys.com

NEWS & ANALYSIS Credit implications of recent worldwide news events

28 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

The budget commission appointment for Woonsocket is the culmination of several years of strained financial operations (Exhibit 2), largely reflecting ongoing significant overspending by the school department, stagnant revenues, and a heavy burden of debt service and other fixed costs.

EXHIBIT 2

History of Operating Fund Imbalance

*2011 includes the issuance of deficit funding bonds and 2012 reflects management’s projections which include the passage of the $6.6 million supplemental tax and the successful sale of $3.2 million tax anticipation notes. Source: Audited Financial Statements, Moody's MFRA Analyst Adjusted Data

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RATING CHANGES Significant rating actions taken the week ending 1 June 2012

29 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

Corporates

CVS/Caremark Corp.

Outlook Change

24 Nov ‘09 31 May ‘12

Senior Unsecured Rating Baa2 Baa2

Short-Term Issuer Rating P-2 P-2

Outlook Stable Positive

The outlook change recognizes the strong operating performance at CVS Caremark's pharmacy benefits manager and retail drug stores. The pharmacy benefits manager is generating sizable growth on strong contract renewals and the on-boarding of the Aetna contract, and the drugstore segment is generating healthy comparable store sales, bolstered by the contract impasse between Walgreen and ExpressScripts. The outlook change also acknowledges the closing of the FTC investigation into CVS Caremark's business practices, with only a minor $5 million fine for practices at Long's Drugstore prior to its acquisition by CVS Caremark.

Franz Haniel & Cie. GmbH Downgrade

5 May ‘09 1 Jun ‘12

Corporate Family Rating Ba1 Ba2

Outlook Negative Stable

The downgrade is due to ongoing material declines in Haniel’s portfolio valuation during the last several months, primarily from the development of Metro's share price. Our estimate for Haniel's market leverage has risen beyond 50% based on spot prices and including Moody's debt adjustments, with a 200 day average price also trending towards this level. This leverage materially exceeds our rating trigger of 40%, and there is limited visibility as to the catalyst allowing for material deleveraging in the short-term, as was the case with Metro's planned Kaufhof disposal.

Gavilon Group LLC Review for Upgrade

13 Jun ‘08 30 May ‘12

Corporate Family Rating Ba3 Ba3

Outlook Stable Review for Upgrade

The review for upgrade follows the announcement that Marubeni Corporation was acquiring Gavilon in a transaction valued at $5.7 billion. Even if Marubeni does not guarantee Gavilon’s debt, the acquisition would be credit positive, as it gives Gavilon a strategic owner with access to substantial capital.

RATING CHANGES Significant rating actions taken the week ending 1 June 2012

30 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

Lamar Advertising Company Outlook Change

19 Mar ‘09 29 May ‘12

Corporate Family Rating Ba3 Ba3

Outlook Stable Positive

The change in outlook reflects Lamar’s improved earnings and material debt reductions. We expect leverage to continue to decline throughout 2012 because of modest growth in EBITDA and ongoing dept payments – the company paid down more than $250 million of debt in 2011. The ability to transition from traditional static to digital billboards will also provide growth opportunities, although the transition will make Lamar more sensitive to short-term changes in advertising demand.

Kraft Foods Inc. Outlook Change

4 Aug ‘11 31 May ‘12

Long-Term Issuer Rating Baa2 Baa2

Short-Term Issuer Rating P-2 P-2

Outlook Developing Positive

The change in outlook reflects our view that following the spin-off of its Kraft Foods Group grocery subsidiary, the credit profile of the remaining global snacks business will be somewhat stronger than Kraft’s current profile. After the spin-off, each company– the remaining $38 billion global snack business, as Mondelez International Inc., and the spin-off, Kraft Foods Group, Inc., the $18 billion North American grocery business – will have a solid investment-grade credit profile, with a large revenue scale, a top-tier brand portfolio, strong margins and cash flows, and moderate leverage. Mondelez will operate in faster growing global markets such as India and Brazil; because of its focus on the expanding international snacks category, its earnings growth potential, balanced against acquisition event risk, make it a somewhat stronger credit than the mature North American grocery business.

Magellan Midstream Partners, L.P. Outlook Change

31 Jul ‘07 29 May ‘12

Senior Unsecured Rating Baa2 Baa2

Outlook Stable Positive

The change in outlook reflects Magellan’s strong earnings performance and conservative management and financial policies, low business risk, and a strong financial profile relative to peers. The outlook also reflects future growth in crude-related projects and ongoing conservative management of distribution coverage.

RATING CHANGES Significant rating actions taken the week ending 1 June 2012

31 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

MEG Energy Corp.

Upgrade

2 Apr ‘12 29 May ‘12

Corporate Family Rating B1 Ba3

Outlook Review for Upgrade Stable

The upgrade reflects MEG’s 100% bitumen production and reserves, strong operational performance, and cash holdings sufficient to complete its Phase 2B of the Christina Lake oil sands property, which will expand production significantly. MEG benefits from its ownership of significant best-in-class reserves in the heart of the SAGD Athabasca oil sands region.

Pioneer Natural Resources Company Upgrade

30 Jun ‘10 30 May ‘12

Long-Term Issuer Rating Ba1 Baa3

Outlook Stable Stable

The upgrade reflects Pioneer’s embrace of less aggressive financial policies while implementing an ambitious growth strategy, anchored by production from its prolific Spraberry oil field in West Texas. Pioneer is committed to maintaining a stronger balance sheet, funding its growth with internally generated cash flow, supplemented by potential asset monetization, if necessary, while restricting its use of incremental debt.

ThyssenKrupp AG Outlook Change

8 Dec ‘10 30 May ‘12

Long-Term Issuer Rating Baa3 Baa3

Short-Term Issuer Rating P-3 P-3

Outlook Stable Negative

The negative outlook reflects ThyssenKrupp’s (TK) worse-than-expected performance through the first six months of fiscal 2012 (ending September 2012) and the execution risk associated with the potential disposal of its Steel Americas business and the merger of Stainless Global (now, Inoxum) with Outokumpu. However, the strategic review it announced 15 May will be credit positive if TK decides to dispose of its Americas-based steel operations.

RATING CHANGES Significant rating actions taken the week ending 1 June 2012

32 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

Infrastructure

Brooklyn Navy Yard Cogeneration Partners L.P. Downgrade

12 June ‘09 29 May ‘12

Senior Secured Rating Ba3 B1

Outlook Negative Negative

The downgrade is due to a history of volatile financial performance, with the project's debt service coverage ratio measuring less than 1.0 times since 2008. We attribute the persistent financial underperformance to poor operating performance in some years, higher than anticipated operating and maintenance costs, and warm winter weather in 2010 and 2012, which hurt steam sales. High gas transportation costs have also eroded the plant's operating margins of late.

Financial Institutions

Danish Financial Institutions

Downgrades

30 May ‘12

We downgraded the ratings on nine Danish financial institutions and those of one foreign subsidiary of a Danish group by one to three notches as part of as part of our review for downgrade of various European financial institutions, initiated on 15 February 2012. The magnitude of some of the downgrades reflects a range of concerns, including the risk that some of the institutions' concentrated loan books will deteriorate amidst difficult domestic and European conditions, which will affect the ability to refinance maturing debt. Although we still believe that financial institutions will be somewhat resilient to what will likely be a prolonged difficult environment – and the revised rating levels for most Danish financial institutions continue to reflect low credit risks to creditors – our actions reflect our view that these risks have increased. For more information, see Key Drivers of Rating Actions on Danish Financial Institutions and the complete Danish Bank Rating List.

RATING CHANGES Significant rating actions taken the week ending 1 June 2012

33 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

OP-Pohjola Group

Downgrade

10 Aug ‘11 30 May ‘12

Standalone Bank Financial Strength / Baseline Credit Assessment B- / a1 C / a3

Outlook Review for Downgrade Stable

Senior Debt & Deposits

Pohjola Bank Plc

Aa2 Aa3

Standalone Bank Financial Strength / Baseline Credit Assessment C- / baa1 C- / baa2

Outlook Review for Downgrade Stable

Insurance Financial Strength Rating

Pohjola Insurance Limited

A2 A3

Outlook Review for Downgrade Stable

The downgrades to Pohjola Bank's and the cooperative OP-Pohjola Group's standalone ratings are due to 1) both entities' reliance on market funding; 2) high sector concentration risks, related mainly to real estate; and 3) weakened earnings capacity compared with the pre-crisis period. We expect that earnings will be vulnerable to increased funding costs as a result of pressures from the ongoing euro area crisis.

Australian Mortgage Insurers

Review for Downgrade

31 May ‘12

The rating review reflects our ongoing concerns about Australian mortgage insurers' exposure to tail-end outcomes in the Australian housing market. Although we expect the Australian housing market to remain relatively stable, our latest modeling indicates that potential losses in the event of an unexpectedly severe downturn would negatively affect these companies' capital levels. The mortgage insurers are exposed to high LTV value mortgages and would bear the heaviest losses in such a scenario.

RATING CHANGES Significant rating actions taken the week ending 1 June 2012

34 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

Banks in Jordan, Lebanon, Pakistan, Ukraine

Downgrades

31 May ‘12

We downgraded our standalone assessments of 13 banks in Jordan, Lebanon, Pakistan and Ukraine. The actions concluded the review we initiated on 5 April 2012 that was part of our ongoing global review of all banks whose standalone assessments are higher than the rating on the government where they are domiciled. The revisions to the standalone assessments take into account 1) the degree to which their businesses depend on the domestic macroeconomic and financial environment; 2) the extent of reliance on market-based funding, which is typically more confidence-sensitive; and 3) their direct or indirect exposures to domestic sovereign debt relative to their capital cushions. Because of these factors, we lowered the standalone ratings of all 13 affected banks one to three notches.

Bank of the Philippine Islands

Downgrade

18 Apr ‘12 29 May ‘12

Local Currency Deposits Baa2 / Prime-2 Review for Downgrade Ba1 / Not-Prime Stable

Foreign Currency Deposits Ba2 Stable Ba2 Positive

Standalone Bank Financial Strength / Baseline Credit Assessment

C- / baa2 Review for Downgrade D / ba2 Stable

The downgrade to BPI's standalone rating is the result of our ongoing global review of all banks whose standalone ratings are higher than the rating of the country where they are domiciled. The standalone rating is now at the same level as that of the government of the Philippines.

3i Group Plc

Review for Downgrade

7 Dec ‘11 28 May ‘12

Long Term Rating Baa1 Baa1

Outlook Negative Review for Downgrade

The review will focus on the ongoing challenges in the firm's businesses including 1) the negative pressure on the value of its underlying investments given the weakening economic outlook; 2) the group's new strategy to increase dividend payments while maintaining strong liquidity and gearing metrics; 3) the pace of the contribution of debt management and infrastructure businesses to its diversification strategy; and 4) the overall management strategy regarding new investments.

RATING CHANGES Significant rating actions taken the week ending 1 June 2012

35 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

Sub-sovereigns

Astana, City of (Kazakhstan) Initial Rating

24 May ‘12

Issuer Rating Baa3

Outlook Stable

The rating reflects Astana’s improving operating margins and consistently low financing deficits, due to the city's dynamic and diversified economy and a benign fiscal framework. Its low debt burden is another credit positive. At the same time, the rating is constrained by rigidity on both the revenue and expenditure sides of the municipal budget. Municipal revenues are highly exposed to economic cycles, which are influenced by volatile oil prices. Moreover, the city's liquidity is typically weak, largely reflecting national regulation, which is not in favour of municipalities maintaining substantial cash reserves.

Piedmont, Region of (Italy ) Confirmation

30 Jan ‘12 1 June ‘12

Issuer Rating Baa1 Baa1

Outlook Review for Downgrade Negative

The confirmation of the rating reflects that the ongoing swap dispute has not affected the region’s current payments on financial debt and debt-like transactions, nor do we expect the dispute to impair Piedmont's debt service capacity. Furthermore, after the swap cancellation, Piedmont continued to set aside sums due under the original interest-rate swaps as a precautionary measure in the event of an unfavourable legal outcome and has established an in-house sinking fund for the payment of its bullet bonds, thereby protecting against refinancing risk at maturity. The outlook is negative, pending the conclusion of the swap dispute with bank counterparties, and mirrors the negative outlook on Italy's sovereign rating.

RATING CHANGES Significant rating actions taken the week ending 1 June 2012

36 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

US Public Finance

Fort Belvoir Family Housing Project, V A Outlook Change

20 May ‘11 31 May ‘12

Revenue Bond Rating - Class I A1 A1

Revenue Bond Rating- Class II A3 A3

Revenue Bond Rating - Class III Baa3 Baa3

Outlook Negative Stable

The affirmation and change in outlook reflect the improved debt service coverage for the bonds as of the 2011 audit, a BAH increase of 10.4% in 2012, the completion of the initial development plan (IDP), and strong occupancy. These factors will offset the impending increase in debt service due to principal amortization of the Class II and III bonds in 2012. The ratings also reflect the credit quality of AIG (Baa1, stable), which provides the debt service reserve surety policies for all three classes of debt.

Clark County School District, NV Downgrade

22 Feb ‘11 31 May ‘12

General Obligation Limited Tax Bond Rating Aa2 Aa3

Outlook No Outlook Stable

The downgrade reflects the district's weakened financial position in comparison to large school districts nationwide, including ongoing operational imbalance, thin coverage of limited tax debt service from property tax levies, and declining enrollment, which limits district operational flexibility. The rating also reflects the district's favorable long-term credit characteristics, including a substantial tax base, moderate debt burden, rapid amortization of principal, and sizable but declining debt service reserves.

RATING CHANGES Significant rating actions taken the week ending 1 June 2012

37 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

Structured Finance

On 31 May, we downgraded the ratings on 237 tranches in 24 securitizations of small business loans issued by Bayview Commercial Asset Trusts and Bayview Commercial Mortgage Pass-Through Trusts, in an action on approximately $4.9 billion of US asset-backed securities. Three factors prompted the downgrades: 1) persistently high delinquency levels, high volumes of modified loans with higher delinquency rates than non-modified loans, and increased loss severities, which together led us to increase our loss expectations; 2) a decrease in credit enhancement resulting from losses on loans;; and 3) ongoing interest shortfalls in ten of the securitizations.

Bayview's Small Business ABS Downgraded

We downgraded the covered bonds issued by

Danish Covered Bonds Downgraded

Danske Bank A/S, DLR Kredit A/S, Nykredit Realkredit A/S, and Totalkredit following our downgrade of these institutions’ ratings on 30 May. Because we incorporate an issuer's credit strength into our expected loss analysis, any downgrade of an issuer's rating increases the expected loss on the covered bonds.

RESEARCH HIGHLIGHTS Notable research published the week ending 1 June 2012

38 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

Corporates

The stable outlook for Australia’s REIT sector is based on the expectation of a stable operating environment over the next 12-18 months. We expect moderate increases in underlying net operating income and upward revaluations of assets. Ongoing growth in GDP, the generally restrained supply of new properties, and fixed contractual rent increases should support the positive momentum in rentals and valuations. These factors outweigh the negatives, namely, subdued business confidence, patchy demand for white-collar employment, and a challenging retail environment.

Stable Outlook for Australian Real-Estate Investment Trusts (A-REITs)

Our stable view of the industry is based on our expectation that operating profit growth will range from 3% to 6%, for the next 12 to 18 months. Growth will be fueled by somewhat slower sales-volume growth than last year in the emerging markets, offset by soft consumption and flat to even slightly declining volumes in some segments in the developed markets. Price increases will boost revenues but operating profits will rise more slowly owing to commodity-cost pressures.

Global Beverage Industry - Price Increases, Emerging-Market Growth Will Help Sustain Operating-Profit Growth

With 254 unrated European leveraged buyouts (LBOs) facing €133 billion of debt maturing through 2015, and given the weak macroeconomic environment, the 2014-2015 refinancing peak remains worrisome. We believe at least a quarter of these companies will default, with the number doubling if the high-yield market freezes.

Unrated European LBOs Remain Under Pressure from Refinancing Burden

A rise in steel imports in recent years has caused fundamental and structural changes in the market for Brazil’s steel producers. Domestic steel prices are converging with international prices. Producers’ pricing power will continue to diminish amid weak industry fundamentals. The structural changes in the industry are forcing steelmakers to direct more capital towards greater self-sufficiency in iron ore and electricity for the near and medium terms.

Brazil's Steelmakers Adjust Business Model Amid Changes in Industry Conditions

The negative outlook reflects our view that persistent oversupply of vessels and high bunker oil prices will pressure margins in most shipping segments. Uncertainty about the depth and duration of the recession in the euro area and resurfacing geopolitical tensions in the Persian Gulf pose further downside risks to the industry.

Global Shipping Industry: Outlook Remains Negative as Oversupply and High Bunker Oil Prices Constrain Performance

Our outlook for the sector remains negative. Since our last forecast in October 2011, we have narrowed the range for the decline in steel demand in 2012 to 1% to 3.5% for the EU’s 27 countries. Prospects for end-market sectors, such as capital goods manufacturing, which had shown some strength in fourth-quarter 2011, have faded, and there are no bright spots among the major users of steel in western Europe.

European Steel Industry: Treading Water and No Lifeboat in Sight

RESEARCH HIGHLIGHTS Notable research published the week ending 1 June 2012

39 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

The US steel industry’s revenues and earnings will continue to improve in 2012, but the pace of improvement will remain slow and a full recovery remains remote. The industry is still facing an uphill struggle owing to a sluggish and uneven recovery. Sector performance has been healthier than we expected, however, and has largely stabilized since weakening in late 2011.

US Steel Industry - Developing Headwinds Present Challenges, but Improvement from 2011 Still Anticipated

The stable outlook reflects our view that the sector’s revenue and operating profit will rise despite challenges: The life science industry will continue to post modest yet steady organic revenue and operating profit growth of 2% to 4% over the next 12 to 18 months. This projection is lower than the performance of the past two years, because we expect weakness in US academic and government spending, austerity measures in Europe, and more difficult year-over-year comparisons.

US Life Science Profits Will Rise Modestly Despite Weak Spending By Research Market

Financial Institutions

Our outlook on Korea’s banking system is stable, as we expect a relatively stable operating environment to support asset quality and loan demand despite economic headwinds. We expect the domestic economy to expand at a slower but comparatively robust rate of about 3% in 2012, increasing to 3.5% in 2013.

Korea Banking System Outlook

Our outlook on Ukraine’s banking system remains negative, and reflects the challenging operating environment, with sluggish economic growth expected; the significant stock of non-performing loans, the limited availability of local-currency funding; and the banks’ weak profitability.

Ukraine Banking System Outlook

US Public Finance

Delinquency and foreclosure rates in the Housing Finance Agency’s (HFA) single family whole loan programs are still high. Still, even though weak loan performance exerts negative pressure on HFA single family whole loan portfolios, we do not expect a substantial number of downgrades to result solely because of an increase in delinquencies.

Semiannual State HFA Delinquency Report: Seriously Delinquent Single Family Loans Continue to Rise

If voters pass Measure 2 on 12 June, North Dakota will become the only state in the US without the option to levy a property tax at any level of government. Passage would be a near-term credit negative for local government entities, as it would eliminate a major revenue stream currently available for operations.

Proposed Elimination of Property Taxes Would Pressure North Dakota Local Governments

RESEARCH HIGHLIGHTS Notable research published the week ending 1 June 2012

40 MOODY’S WEEKLY CREDIT OUTLOOK 4 JUNE 2012

Structured Finance

Our May issue reviews the updated mortgage loss model that we use in rating Australian RMBS and its rating implications. It also discusses our request for comment on the proposed updated approach to mortgage insurance in Australian RMBS. We also look at CMBS in Hong Kong and the new government fund to revive SME in Japan, among other topics.

Structured Thinking: Asia Pacific Newsletter

US CMBS loss severity declined slightly in first quarter as the historical weighted average loss severity for all conduit loans liquidated at a loss slipped to 40.5% from 41.0% the previous quarter. Loans backed by retail properties had the highest severity, at 45.2%, while loans backed by office properties had the lowest, at 35.8%.

US CMBS Loss Severities, Q1 2012 Update

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EDITORS PRODUCTION ASSOCIATE News & Analysis: Elisa Herr, Jay Sherman and Amitha Rajan

David Dombrovskis

Rating Changes & Research Highlights: Alexis Alvarez

Final Production: Barry Hing