NEWS & ANALYSIS：Credit implications of current events

MOODYS.COM 4 AUGUST 2016 NEWS & ANALYSIS Corporates 2 » Allegiant’s Order for 12 Airbus A320ceo Aircraft Is Credit Negative » Vale’s Gold Stream Transaction with Silver Wheaton Is Credit Positive » Fosun’s International’s Investments in Gland Pharma and Banco Comercial Portugues Are Credit Negative » SOHO China’s Sale of Century Plaza Is Credit Positive Infrastructure 6 » Veolia Announces Credit-Positive Sale of Transdev Stake Banks 7 » Qatar International Islamic Bank’s Additional Tier 1 Sukuk Issuance Is Credit Positive » Chinese Proposal to Regulate Banks’ Wealth-Management Products Is Credit Positive Insurers 11 » CNO Faces Heightened Counterparty Risk on Reinsured Long-Term Care Block, a Credit Negative » Hartford’s Plan to Sell Its UK Property and Casualty Liabilities Is Credit Positive Sovereigns 14 » Nicaraguan Opposition Party’s Ouster Is Credit Negative US Public Finance 15 » Puerto Rico’s Spike in Zika Cases Is Credit Negative for the Island » Kalamazoo, Michigan, Will Benefit from Unrestricted Donations to City RECENTLY IN CREDIT OUTLOOK » Articles in Last Monday’s Credit Outlook 20 » Go to Last Monday’s Credit Outlook Click here for Weekly Market Outlook, our sister publication containing Moody’s Analytics’ review of market activity, financial predictions, and the dates of upcoming economic releases. NEWS & ANALYSIS Credit implications of current events 2 MOODY’S CREDIT OUTLOOK 4 AUGUST 2016 Corporates Allegiant’s Order for 12 Airbus A320ceo Aircraft Is Credit Negative Last Friday, Allegiant Travel Company (Ba3 stable) said that it had agreed to purchase 12 A320ceo aircraft from Airbus Group SE (A2 stable). The order is credit negative for Allegiant because it reflects a more aggressive fleet acquisition strategy that will entail an increased capital investment per aircraft. Allegiant said that it had ordered 12 new A320ceos, which it expects will enter into service in 2017 or 2018. We estimate that the aggregate investment will be $360-$400 million for the 12 aircraft, or $30-$33 million per aircraft – a far higher price tag than the average purchase price of $15 million that Allegiant has been paying for 12-year-old Airbus A319s and A320s. As a result of the increased cost per aircraft, we expect free cash flow to turn negative and the return on capital for these aircraft to be lower. Additionally, this move could be a precursor to broader changes in Allegiant’s operating model. During the past 18 months, Allegiant has initiated or announced service from larger origination cities and to a few larger destination cities as it seeks to grow its franchise. The range of the A320 family aircraft, new or used, allows Allegiant to offer flights with longer ranges, including coast-to-coast flights in the US. Should it choose to do so, it would likely increase the number of routes that would face competition from larger US airlines. New aircraft can have a fuel efficiency advantage of up to 4% relative to a 12-year-old aircraft because of nicks on aircraft surfaces and engine wear. The new deliveries also will require significantly less maintenance. The higher investment will dictate that these aircraft have the highest daily utilization of the entire fleet. Allegiant disclosed in its second-quarter 2016 earnings release that its Airbus aircraft have an average daily utilization of 8.3 block hours per day, versus 4.9 block hours per day for its MD80s. We expect that the new aircraft will operate on the company’s densest or highest-margin routes and at higher daily block hours than the rest of the Airbus fleet. Allegiant’s practice has been to use debt to fund its purchases of Airbus aircraft, either directly or post-acquisition. We estimate that doing so for the entirety of this order would increase funded debt by $300-$400 million to $1.0-$1.1 billion, and debt/EBITDA to about 2.2x from 1.4x for the 12 months that ended 31 March 2016, which is significantly below the median debt/EBITDA for the Ba3 rating category of 3.9x. Buying at a discount to market value could also lead to a cash out financing, which would incrementally increase financial leverage. Jonathan Root, CFA Vice President - Senior Credit Officer +1.212.553.1672 jonathan.root@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 4 AUGUST 2016 Vale’s Gold Stream Transaction with Silver Wheaton Is Credit Positive On Tuesday, Vale S.A. (Ba3 negative) announced that it had entered into a gold stream transaction with Silver Wheaton (Caymans) Ltd. (unrated), a wholly owned subsidiary of Silver Wheaton Corp. (unrated), to sell an additional 25% interest of the gold extracted as a by-product during the estimated