MOODYS.COM

27 APRIL 2017

NEWS & ANALYSIS Corporates 2 » US Television Broadcasters Will Benefit from Reinstatement of

UHF Discount

» Sinclair’s Acquisition of Bonten Media Group Is Credit Positive » JAB Holding Would Benefit from Jimmy Choo Sale

» Schaeffler’s Prepayment of Its 2021 Bond Is Credit Positive

Banks 6 » Mexico’s Investigation Into Bond Market Manipulation Is Credit

Negative for Financial Institutions

» Peruvian Banks’ Loan Delinquencies Hit 12-Year High

Insurers 9 » Great-West Life Assurance’s Job Cuts Are Credit Positive

Sovereigns 10 » Malta’s Surprise 2016 Budget Surplus Is Credit Positive

US Public Finance 12 » Ohio Teacher Pension System Suspends Benefit Cost

Adjustments, a Credit Positive for Schools

Securitization 14 » Ocwen and Related RMBS Face Credit-Negative Effects from

Regulatory Actions

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Monday’s Credit Outlook 15

» Go to Last Monday’s Credit Outlook

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NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 27 APRIL 2017

Corporates

US Television Broadcasters Will Benefit from Reinstatement of UHF Discount Last Thursday, the US Federal Communications Commission (FCC) voted to reinstate the 50% discount that US TV broadcasters are permitted to apply to their calculation of household penetration for ultra-high frequency (UHF) channels. This reverses an August 2016 repeal of the discount. The reinstatement is credit positive, especially for those companies that are currently at or near the regulatory limit for household penetration, which is currently 39%, without the UHF discount.

The reinstated discount allows companies like these to grow again through acquisition. This is a helpful catalyst amid increasing competition for video subscribers as the market evolves to digital, mobile and so-called over-the-top platforms (which deliver content without cable or satellite boxes). In this environment, increasing scale and diversity should help broadcasters maintain their negotiating leverage with their distributors, defend their market positions from new entrants, and lower operating costs through integration synergies.

Currently, US broadcasters are capped at 39% household penetration, with only a few companies including Tribune Media Company (B1 stable) and Univision Communications, Inc. (B2 stable) grandfathered to exceed the 39% limit. The effect of the reinstatement significantly improves the position of all non-grandfathered companies that own UHF stations, particularly those at or near the 39% cap. These broadcasters include Nexstar Broadcasting, Inc. (B1 stable) and Sinclair Broadcast Group, Inc. (Ba3 stable).

With the discount, we estimate that Nexstar’s calculated household penetration will decline to 27% from 39%, while Sinclair’s will drop to 25% from 38% (see exhibit). We expect the discount to trigger industry consolidation given that it allows broadcasters to transact.

Broadcasters’ Household Penetration Before and After UHF Discount Lower calculated penetration allows for greater industry consolidation.

Sources: The companies and BIA/Kelsey

We expect large broadcasters with the financial capacity and newfound regulatory ability, such as Sinclair and Nexstar, to be the most likely acquirers of smaller, publically held companies such as TEGNA Inc. (Ba1 review for downgrade), Gray Television, Inc. (B1 stable), Entravision Communications Corporation (B1 stable) and Hemisphere Media Holdings, LLC (B2 stable).

To that end, Sinclair last Friday announced that it had agreed to acquire Bonten Media Group, Inc. (B3 stable) and the membership interest in Esteem Broadcasting (unrated) for $240 million, less one day after the FCC reinstated the discount. Bonten owns 14 television stations in eight markets that reach 1% of US households.

44% 44%

39% 38%

31%

18%14%

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27%23%

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27%

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Tribune MediaCompany

UnivisionCommunications,

Inc.

NexstarBroadcasting, Inc.

Sinclair BroadcastGroup, Inc.

TEGNA Inc. Scripps (E.W.)Company (The)

EntravisionCommunications

Corporation

Gray Television,Inc.

Household Penetration Before UHF Discount Household Penetration After UHF Discount

Jason Cuomo Vice President - Senior Credit Officer +1.212.553.7795 jason.cuomo@moodys.com

Justin Remsen Associate Analyst +1.212.553.6936 justin.remsen@moodys.com

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

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 27 APRIL 2017

Sinclair’s Acquisition of Bonten Media Group Is Credit Positive Last Friday, Sinclair Broadcast Group, Inc. (Ba3 stable) announced that it had entered into a definitive agreement to acquire Bonten Media Group, Inc. (B3 stable) for $240 million, using balance sheet cash for a transaction price equal to 6.7x broadcast cash flow. The deal is credit positive for Sinclair because we expect that the company will benefit from a leverage-neutral deal that adds approximately $25 million in cash flow, pro forma for synergies (about 3% of Sinclair’s reported EBITDA). Additionally, Sinclair will reach an additional 1% of US households with Bonten’s 14 stations (and 31 low-power or digital multicast stations) located in eight small and midsize markets.

Bonten’s stations include five ABC affiliates, five FOX affiliates, four NBC affiliates, three Univision/UniMas affiliates and four CW affiliates. Its markets are ranked between 97th and 198th in size and include those operated via joint sales and shared services agreements with Esteem Broadcasting (unrated).

Although Bonten operates in smaller markets, its revenue has been rising from mid-single-digit core ad revenue growth, mid-teen percentage growth in retransmission fees (the fees paid to broadcasters by cable and satellite to carry signals) and political advertising demand. The companies plan to close the deal in the third quarter of 2017, subject to customary closing conditions and regulatory clearance by the US Federal Communications Commission and US Department of Justice.

Hunt Valley, Maryland-based Sinclair is one of the largest US television broadcasters owning, operating or providing services to 171 stations in 89 markets. The company is a leading US provider of local news, as well as a producer of live sports content. The station group reaches roughly 38% of US television households (see exhibit) with diversified network affiliations across primary and digital subchannels, including each of the major networks. The company also owns a Washington, D.C.-based local cable news network. Reported net revenue totaled more than $2.7 billion in 2016.

Sinclair’s and Bonten’s US Television Market Coverage

Source: The companies

Sinclair38%

Bonten1%

Jason Cuomo Vice President - Senior Credit Officer +1.212.553.7795 jason.cuomo@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 27 APRIL 2017

JAB Holding Would Benefit from Jimmy Choo Sale On Monday, Jimmy Choo PLC (unrated), which is 67.66% indirectly controlled by JAB Holding Company S.a r.l. (JAB, Baa1 stable) via JAB Luxury (unrated), announced that it is seeking offers for the company as part of a strategic review to maximize shareholder value. Additionally, JAB Luxury announced that it is considering selling Bally International AG (unrated), which is 100%-owned by JAB Luxury and indirectly owned by JAB.

These announcements are credit positive for JAB because the cash proceeds from the sales of both companies, particularly the publicly traded Jimmy Choo, which has a higher asset value than Bally, will lower JAB’s net market value leverage (MVL, defined as net debt/market value). Before Monday’s announcements, we had forecast that through 2017 JAB’s net leverage would remain elevated and exceed the 15% net MVL that we consider appropriate for a Baa1 rating. As of year-end 2016, net MVL was around 17% and we expected it to surpass 20% following JAB’s 5 April announcement that it was entering into a definitive merger agreement to acquire Panera Bread Company (unrated).

We recognize that the amount of proceeds raised from the sale of both Jimmy Choo and Bally is uncertain, and that there is no guarantee that a sale of all or any of JAB Luxury’s stakes will take place, particularly given that Jimmy Choo reserves the right to alter or terminate a formal sale process at any time. However, Jimmy Choo’s share price has performed well over the past six months, owing to strong sales growth and improving market fundamentals for the overall luxury goods industry.

Immediately following Jimmy Choo’s announcement, its share price reached a record high of around 182 pence per share, which implies that JAB should raise proceeds of at least £480 million from a sale. We expect proceeds from Bally to be significantly less given that JAB Luxury, which includes JAB’s investments in Jimmy Choo and Bally, was worth around €770 million as of 2016. However, we note that Bally was valued at cost rather than market value.

JAB’s disposal of its luxury investments make sense because these assets do not offer the same cost synergy advantages as the company’s other businesses in the fast-moving consumer goods sector. Additionally, these investments have not provided JAB with any dividend income. The sale of these assets is consistent with JAB’s investment strategy of shedding assets the company considers non-strategic.

Jeanine Arnold Vice President - Senior Credit Officer +49.69.70730.789 jeanine.arnold@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 27 APRIL 2017

Schaeffler’s Prepayment of Its 2021 Bond Is Credit Positive On Monday, Schaeffler AG (SAG, Baa3 stable) announced that it intended to further reduce debt by fully redeeming its $700 million, 4.25% senior secured notes due in 2021. The redemption, which will be funded from available cash and a partial utilization of SAG’s revolving credit facility, is credit positive because it will reduce gross leverage and likely lead to an improvement in interest coverage.

Following the sizable debt-financed acquisition of a controlling stake in Continental AG (Baa1 stable) in 2008, SAG and its majority shareholder IHO Verwaltungs GmbH (Ba1 stable) have followed conservative financial policies aimed at deleveraging. At the SAG level, its standalone Moody’s-adjusted debt/EBITDA declined to 2.5x in 2016. This positions SAG solidly in the Baa3 rating category, providing headroom for some operational underperformance or debt-funded external growth. The latter is a scenario that SAG might utilize to further strengthen its technological competences, particularly for hybrid and electric cars.

However, even though this repayment would further improve leverage, there is a risk that further sustainable deleveraging might not happen, given that SAG discontinued publicly providing a leverage target in the fourth quarter 2016. Nevertheless, we believe that SAG will aim to maintain its investment-grade rating and to further enhance the quality of its balance sheet because its gearing (Moody’s-adjusted net debt/net book capitalization was around 70% in 2016) is still somewhat higher than that of its main automotive peers. Rated European automotive suppliers’ median and average gearing are both roughly 55%, and SAG has stated recently that improving its gearing is a goal.

An upgrade would require evidence that SAG will deleverage its capital structure sustainably below a Moody’s-adjusted gross debt/EBITDA of 2.5x, while keeping its strong operating performance. SAG has not publicly stated how much cash it will use to redeem the bond. However, at this point its liquidity position is strong and could accommodate such a repayment.

Apart from an undrawn €1.3 billion revolving credit facility, SAG reported around €1 billion cash on its balance sheet as of the end of December 2016 (including roughly one third of that balance in countries with currency restrictions), which is above its working cash needs. There are no material debt maturities until May 2020, when a €400 million bond comes due, and we expect that SAG will continue generating positive free cash flow at around the mid- to high-single-digit-percent range of Moody’s-adjusted debt over the next 12-18 months.

Martin Fujerik Vice President - Senior Analyst +49.69.70730.909 martin.fujerik@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 27 APRIL 2017

Banks

Mexico’s Investigation Into Bond Market Manipulation Is Credit Negative for Financial Institutions On 19 April, Mexico’s Federal Commission for Economic Competition (Cofece) announced that it had launched an official investigation into alleged price manipulation or collusion in the market for government bonds. The commission did not specify which institutions it was targeting in the probe, indicating that all market participants would be included. The probe is credit negative for banks that are among the largest intermediaries of government paper.

Market participants that are found to have engaged in price manipulation or collusion would face fines of up to 10% of their annual income, while individuals who are found guilty may face up to 10 years in prison. The Cofece will focus on trading activity during the 120-working-day period between October 2016 and April 2017 and it can take until September 2018 to announce its findings.

Trading has been an important source of earnings for Mexican banks, contributing, on average, about 10% of their core earnings (pre-provision, pretax income) in the past five years.

The Cofece’s power to fight market concentration expanded as part of Mexico’s 2013 economic reforms. Since then, the commission has become more active in seeking to foster increased competition in a country that has long been dominated by large monopolies and oligopolies.

Mexican government debt is among the most heavily traded in emerging markets. Total debt outstanding amounted to about MXN6 trillion pesos ($300 billion) as of year-end 2016, and in the 12 months that ended in March 2017, daily trade of Mexican government bonds averaged around MXN145 billion.

Felipe Carvallo Vice President - Senior Analyst +52.55.1253.5738 felipe.carvallo@moodys.com

Georges Hatcherian Assistant Vice President - Analyst +52.55.1555.5301 georges.hatcherian@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 27 APRIL 2017

Peruvian Banks’ Loan Delinquencies Hit 12-Year High Last Friday, the Asociación de Bancos del Perú announced that loan delinquencies in the country’s banking system rose in March to a 12-year high, with the nonperforming loan (NPL) ratio climbing to 3.01% from 2.72% a year earlier. The rise in delinquencies is credit negative for Peru’s banks because it indicates that soft economic activity is hampering borrowers’ capacity to service their debts, which will lead to higher credit costs.

This comes at a time when banks are facing challenges from the weather phenomenon El Niño, whose heavy rains and flooding last month caused severe damage that will further weigh on growth prospects and increase asset risks for banks with exposures to affected industries, including mining and infrastructure. Peru’s banking regulator recently announced measures to encouraged banks to restructure loans to individuals and small and midsize enterprise (SME) borrowers that were affected by El Niño. Banks are permitted to offer grace periods of up to six months on performing loans, including personal loans, credit cards, mortgages and small-business loans, without having to build additional provisions for them. Additionally, banks will have the option of unwinding pro-cyclical provisions if needed. Although this measure would provide relief to borrowers, it risks leading banks to maintain their exposures to risky market segments.

Together with recent corruption scandals, El Niño has already weighed on Peru’s GDP growth, which rose at an annualized pace of just 0.7% in February, versus 4.8% in January. We now expect that real GDP will rise 3.7% this year, less than the 4.5% we expected at the beginning of the year. Soft economic activity has caused loan growth to slow to a 3.2% annual pace in the 12 months that ended in March 2017, down from 11.9% growth for the year-earlier period.

The increase in delinquencies was largely concentrated in the SME and micro-business segments, which together account for 24% of banks’ total lending portfolio. Although delinquencies in these segments have climbed by 100 basis points over the past year, the overall ratio increased by just 30 basis points. The rise in delinquencies affects the system as a whole, but Banco de Crédito del Peru (Baa1/Baa1 stable, baa21) and Scotiabank Peru (A3/A3 stable, baa3) will be particularly affected because they are most exposed to the SME segment.

EXHIBIT 1

Comparison of Peruvian Banks’ Total Nonperforming Loan Ratio and SME Nonperforming Loan Ratio

Sources: Peru’s Superintendency of Banks, Insurance Companies and Pension Funds and Moody’s Financial Metrics Banking

1 The bank ratings shown in this report are the bank’s local currency deposit rating, senior unsecured debt rating and baseline credit assessment.

3.0%

7.4%

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Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17

Total NPLs SME NPLs

Valeria Azconegui Vice President - Senior Analyst +54.11.5129.2611 valeria.azconegui@moodys.com

Rodrigo Marimon Associate Analyst +54.11.5129.2651 rodrigo.marimon@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 27 APRIL 2017

The increase in credit costs that we expect will follow the recent rise in delinquencies amid slowing loan growth will lead to weaker profitability, although this will remain robust by both global and regional standards. Peruvian banks have sufficient capital and reserves to manage rising asset risks: the system’s average ratio of tangible common equity to risk weighted assets was 12.6% at the end of 2016, up from 10.9% in 2013, and loan-loss provisions were 4.5% of gross loans at year-end 2016 (see Exhibit 2).

EXHIBIT 2

Peruvian Banks’ Loan Provision Coverage

Sources: Peru’s Superintendency of Banks, Insurance Companies and Pension Funds and Moody’s Financial Metrics Banking

In the coming quarters, we expect reconstruction needs related to El Niño and rising internal demand to support the need for credit from both corporate and consumer borrowers. These factors will help pull the banking system out of its recent slowdown and offset the increase in credit costs that will arise.

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Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016

Loan-Loss Reserves/Gross Loans Nonperforming Loan Ratio

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 27 APRIL 2017

Insurers

Great-West Life Assurance’s Job Cuts Are Credit Positive On Tuesday, Great-West Lifeco (Great-West, unrated), parent of Great-West Life Assurance Company (GWL, financial strength Aa3 stable), announced that it will reduce its Canadian workforce by approximately 1,500 positions, or approximately 13% of its 12,000 employees in Canada, over the next two years. Great-West will record a restructuring charge of CAD172 million pre-tax, or CAD127 million after-tax, reflecting employee severance payments, real estate optimization costs and information systems exit costs. Great-West expects total annual run-rate savings of CAD117 million after-tax.

Although Great-West will book a charge in connection with the cuts, the action is credit positive because it enhances the key pillar supporting GWL’s strong insurance financial strength rating: the recurring earnings power of its Canadian franchise. Like its Canadian peers, GWL has been investing heavily in Internet-based distribution, underwriting and internal processing in order to keep up with the general trends in financial services and to create earnings growth.

GWL’s peer-leading earnings stability and return-on-capital metrics reflect the favorable competitive structure of the Canadian industry and its relatively low exposure to market related charges. In its home market, Great-West is one of three dominant players in a protected oligopoly. The Canadian life insurance industry benefits from a prudent regulatory regime, but is not experiencing rapid top-line growth. Great-West’s pricing power and market presence drive strong profitability and solid capitalization.

Investments in paperless processes create the opportunity to reduce headcount, particularly that related to internal processing and underwriting. Digital enhancements will continue to take place across both group and individual businesses. On the group side, investment in capabilities such as web- and mobile-based claims submission and mobile apps for group plan members to manage prescriptions help drive efficiencies and client engagement. Individual insurance examples include direct-to-consumer and online cross-sell initiatives through group relationships.

Approximately two thirds of the restructuring charge will be related to severance and early retirement costs with the remainder attributable to real estate and information system costs. Approximately 1,000 of the job cuts will occur this year. We expect expense growth, which has been approximately 6%-7% over the past several years (see exhibit), to moderate to 3%-4%. We expect operating earnings, which have been growing at approximately a compound annual growth rate of 4% over the past five years, to accelerate as a result of these initiatives.

Great-West Life Assurance Company’s Revenue and Expenses, 2012-16

Sources: The company and Moody’s Investors Service

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David Beattie Senior Vice President +1.416.214.3867 david.beattie@moodys.com

Ryan Wallace Associate Analyst +1.416.214.3061 ryan.wallace@moodys.com

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 27 APRIL 2017

Sovereigns

Malta’s Surprise 2016 Budget Surplus Is Credit Positive On Monday, Eurostat released fiscal data for European Union (EU) member states showing that Malta’s (A3 stable) general government fiscal balance had registered a surprise surplus of 1% of GDP in 2016, versus our earlier expectations of a 0.8% deficit. The surplus is credit positive because it accelerates the decline in the Maltese government’s debt burden, and confirms that debt has fallen below the European Commission’s (EC) 60% Maastricht threshold one year earlier than forecast.

The result was in part because of stronger tax revenues from companies and households, with the latter most likely reflecting higher non-wage sources of income, including private tourism rentals derived from tourism arrivals growing 10% in 2016. Another factor was stronger-than-expected proceeds from Malta’s individual investor programme (IIP), a program that grants Maltese citizenship based on residency, property ownership and investment criteria. As of the end of June 2016, 316 applicants out of a total target of 1,800 were approved.

The surplus will help Malta to build up its savings buffers, given that the sovereign’s small size and open economy make its credit quality susceptible to external risks. Malta is the smallest of the 28 EU countries and 19 euro area members, and has one of the highest trade openness ratios in our rated universe (98th percentile). The authorities are saving 70% of the proceeds from the IIP in the National Development and Social Fund, which they estimate has a surplus of €163.5 million, or 1.7% of GDP. The Maltese authorities have been successful in reducing public expenditures by around 1.4%, despite increased costs associated with Malta hosting the EC presidency this year (estimated at around €54 million, or 0.5% of GDP in 2016-17), which bodes well for containing expenditure over the course of this year.

Falling below the 60% Maastricht government debt/GDP threshold one year earlier than forecast points to a more rapid fiscal consolidation in the past few years. Notably, the country’s debt burden is now converging more quickly with the median of similarly rated peers (see Exhibit 1).

EXHIBIT 1

Malta’s Debt Burden as Percent of GDP versus A-rated Peers

Sources: Eurostat, national statistical offices and Moody’s Investors Service

The accelerated decline in Malta’s debt burden also reflects significant upward revisions in nominal GDP data for 2014 and 2015, which are a result of higher value added from Malta’s services sector, including

58.3%

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Malta Median A-rated Peers

Nina Delhomme Associate Analyst +44.20.7772.1086 nina.delhomme@moodys.com

Daniela Re Fraschini Assistant Vice President - Analyst +44.20.7772.1063 daniela.refraschini@moodys.com

Evan Wohlmann Vice President - Senior Analyst +44.20.7772.5567 evan.wohlmann@moodys.com

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 27 APRIL 2017

gaming, which has grown rapidly over the past five years. As a result of higher nominal GDP, Malta’s public debt ratio fell by 3.4 percentage points to 60.6% of GDP in 2015.

Despite these notable improvements, Malta’s material exposure to contingent liability risks stemming from public utilities and the government’s track record of support intervention constrain its credit quality. Total general government guaranteed debt, with a large share coming from the energy sector, remained broadly unchanged at the end of 2016 versus a year ago, and these direct government guarantees, even after data revisions, remain at around 14% of GDP (see Exhibit 2).

EXHIBIT 2

Maltese General Government Guarantees as a Share of GDP

Sources: Maltese Ministry of Finance and Moody’s Investors Service

Malta also will continue to face challenges from the EU’s corporate tax reform agenda, given the substantial tax benefits that companies receive there. Its full imputation tax system and associated refunds can lower the effective tax rate to as low as around 5%. This is also important for Malta’s future fiscal performance given its reliance on taxation from the corporate sector is higher than the EU average. Although some initiatives to reduce tax avoidance, such as the automatic exchange of information on tax rulings, have already been adopted at the EU level, any steps by the EU to significantly limit the transfer of profits between jurisdictions would likely harm Malta’s attractiveness as a destination for capital.

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Enemalta Vault Finance Limited Freeport Group CorporationMalta Industrial Parks Water Services Corporation PetromalElectrogas Malta Ltd Others Total as Percent of GDP - right axis

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 27 APRIL 2017

US Public Finance

Ohio Teacher Pension System Suspends Benefit Cost Adjustments, a Credit Positive for Schools Last Thursday, trustees for the State Teachers Retirement System of Ohio (STRS) indefinitely suspended cost-of-living adjustments (COLAs) for retiree pension benefits. The move will reduce STRS’ unfunded pension liabilities and bring its projected funding period within a statutory maximum. The action is credit positive for Ohio (Aa1 stable) school districts, community colleges and public universities, which are collectively responsible for funding STRS, because it avoids a potential increase in their pension contribution requirements.

Ohio law contains minimum funding requirements for its five statewide public pension funds. Each year, plan actuaries calculate the number of years that it will take to amortize unfunded liabilities under the assumptions, contribution rates and benefit provisions in place as of a valuation snapshot. In the event that the funding period exceeds 30 years, plans must propose changes to contributions or benefits to the state legislature to bring funding projections within the 30-year target.

As of the initial 1 July 2016 actuarial valuation, STRS’ unfunded liabilities were $31 billion on a reported basis, and its funding period was projected at roughly 27 years. In March of this year, the board updated plan mortality assumptions and lowered the assumed rate of investment return, also used as the discount rate to value reported liabilities, to 7.45% from 7.75%. Based on data from STRS, revised unfunded liabilities as of July 2016 increased to $37 billion on a reported basis, or 20% higher than the initial actuarial valuation.

According to STRS, the higher reported liabilities pushed its projected funding period to 58 years, well beyond the 30-year maximum, prompting the STRS board to indefinitely suspend COLAs. The decision will reduce the plan’s funding period to approximately 20 years, and will leave STRS with a reported unfunded liability of approximately $25 billion. The action marks the second time since 2012 that reforms have reduced both unfunded liabilities and STRS’ projected funding period (see exhibit).

Ohio State Teachers Retirement System Reported Unfunded Liabilities and Projected Funding Periods Pension system’s action will reduce unfunded liabilities and bring plan funding period below 30-year maximum.

Note: Funding period in 2012 was reported as “infinite,” and thus there is no data point in the exhibit. The effect of the last round of pension reforms are shown in the reduced unfunded actuarial accrued liability in 2013. Sources: State Teachers Retirement System of Ohio and Moody’s Investors Service

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Tom Aaron Vice President - Senior Analyst +1.312.706.9967 thomas.aaron@moodys.com

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 27 APRIL 2017

STRS’ moves to update mortality assumptions and lower its assumed rate of investment return follow a national trend among US public pension plans. However, its action to suspend COLAs highlights the flexible legal framework surrounding public pension benefits in Ohio. Instead of lower investment return assumptions driving higher contribution requirements for participating governments, as in most other states, the Ohio system’s benefit change spares participating employers from a potential hike in annual costs.

In 2012, Ohio enacted various changes to benefits, employee contribution requirements and the allocation of contributions to pensions rather than retiree medical benefits for each of its plans. These changes were triggered by the maximum 30-year funding target. If STRS had been forced again to submit a funding improvement plan, the state legislature may have decided to hike school district contributions, rather than solely focusing on benefit changes. The board’s decision does not require approval by the state legislature, and school district contributions will remain at their current level of 14% of payroll.

Despite the positive board action at this time, large unfunded liabilities for STRS will remain a broad credit challenge for Ohio school districts, community college districts and public universities. The plan’s new 7.45% assumed rate of investment return remains higher than the 7.0% rate recommended by its actuarial consultants in response to capital markets expectations. In our view, further downward revisions in the investment return assumption, or other adverse developments such as poor investment performance, would raise the chances of a state-mandated increase in contribution requirements for participating employers.

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 27 APRIL 2017

Securitization

Ocwen and Related RMBS Face Credit-Negative Effects from Regulatory Actions Last Thursday, the North Carolina Commissioner of Banks and 21 other US state mortgage regulators filed cease-and-desist orders against Ocwen Financial Corporation (B3 review for downgrade) for improper handling of consumer escrow accounts. In separate actions, the US Consumer Financial Protection Bureau (CFPB) and the State of Florida sued Ocwen for allegedly faulty mortgage servicing practices. These actions are negative for Ocwen’s credit and servicing quality because they expose the company to potential monetary penalties and business restrictions that would affect its financial stability. If resulting consequences are severe enough to affect Ocwen’s ability to service loans, the actions would negatively affect the private-label residential mortgage-backed securities backed by loans that Ocwen services.

Following the regulatory actions, we placed on review for downgrade Ocwen’s corporate family, senior secured bank credit facility, senior unsecured and senior secured debt ratings. We also placed on review for downgrade Ocwen’s master servicer of residential mortgage loans, primary servicer of prime residential mortgage loans, primary servicer of subprime residential mortgage loans, primary servicer of second lien loans and special servicer assessments because the penalties and business restrictions that could result from the regulatory actions risk adversely affecting Ocwen’s servicing operations.

The state regulators’ cease-and-desist orders can weaken Ocwen’s financial strength because those orders seek to restrict Ocwen’s business activities to varying degrees. They generally prohibit Ocwen from acquiring new mortgage servicing rights and originating new loans serviced by Ocwen until the company can prove that its escrow accounts are properly managed and reconciled. Some states are seeking to restrict Ocwen’s business even further: South Dakota and Montana, for example, are demanding that Ocwen cease foreclosures in their states, while Massachusetts has directed Ocwen to transfer the servicing of its loans in that state to other servicers.

The CFPB and Florida suits against Ocwen also threaten its financial strength because they could result in financial penalties, monetary liabilities for consumer relief and increased costs related to monitoring and complying with mortgage servicing law. The CFPB’s allegations against Ocwen include the application of inaccurate and incomplete data in its servicing platform, initiation of wrongful foreclosure proceedings, failure to cancel borrowers’ private mortgage insurance in a timely fashion, and failure to adequately respond to borrower complaints.

If the actions result in foreclosure delays or servicing transfers, they will be credit negative for private-label residential mortgage-backed securities that contain loans that Ocwen services. Foreclosure delays harm bondholders because servicers must make additional advances of delinquent principal and interest and will accrue legal and property-related expenses that will reduce overall cash to the securitization trusts. Servicing transfers can delay cash flows to transactions backed by the serviced loans and can increase the potential for errors and servicing disruptions as loan files are transferred from one servicer to another.

Peter McNally Vice President - Senior Analyst +1.212.553.3610 peter.mcnally@moodys.com

Gene Berman Assistant Vice President - Analyst +1.212.553.4139 gene.berman@moodys.com

Francis Wissman Vice President - Senior Analyst +1.212.553.2808 francis.wissman@moodys.com

Mark Branton Vice President - Senior Analyst +1.212.553.4175 mark.branton@moodys.com

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

15 MOODY’S CREDIT OUTLOOK 27 APRIL 2017

NEWS & ANALYSIS Corporates 2 » Post Holdings’ Purchase of Weetabix Is Credit Positive

» PetSmart’s Acquisition of Chewy Will Increase Leverage

» Bright Food’s Sale of Its Stake in Weetabix Is Credit Positive » Fujifilm Holdings’ Accounting Irregularities at Subsidiary and

Delayed Financial Reporting Are Credit Negative

Infrastructure 6 » Kansas Regulator Rejects Great Plains Energy’s Acquisition of

Westar Energy, a Credit Positive » AES Tietê Energia’s Alto Sertão II Acquisition Is Credit

Positive Despite Higher Leverage

Banks 8 » Ontario’s Foreign Buyer Tax Is Credit Positive for

Canadian Banks » Russia’s First Large-Scale Bank Bail-in Is Credit Negative for

Senior Creditors

» Nomura’s Plan to Expand US Staff Again Is Credit Negative

» Daewoo Shipbuilding & Marine Engineering’s Third Round of Restructuring Is Credit Negative for KDB and KEXIM

Insurers 16 » Western & Southern’s Acquisition of National Life’s Retail

Mutual Funds Business Is Credit Positive

» National Life’s Sale of Its Retail Mutual Fund Business Is Credit Positive

» Mexican Regulator Confirms that Virtually All Insurers Comply with Solvency II Standards, a Credit Positive

Sovereigns 20 » Panama’s Measures to Control Wage Bill Growth Are

Credit Positive

» Turkey’s Narrow Approval of Referendum on Executive Presidency Reveals Polarized Electorate, a Credit Negative

» Côte d’Ivoire and Ghana’s Increased Cooperation on Cocoa Production Is Credit Positive

» Mongolia’s Supplementary Budget Sets Stage for IMF Funding, a Credit Positive

Securitization 27 » US Wireless Tower Securitizations Will Benefit from T-

Mobile’s Spectrum Auction Purchase

MOODYS.COM

Report: 195432

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