MOODYS.COM 15 AUGUST 2016 NEWS & ANALYSIS Corporates 2 » Perrigo’s Lower Guidance Signals a Deleveraging Delay and Raises Event Risk » Macy’s Closure of 100 Stores Is Credit Positive » SM Energy’s Permian Acquisition Broadens Portfolio, a Credit Positive » Hoover’s Credit-Positive Merger Will Double Its Size and Lower Leverage » Russian Property Developer LSR Group Will Benefit from Revival in Mortgage Volume Infrastructure 8 » CELESC D Will Recognize a BRL256 Million Extraordinary Loss in 2016 » Western Power Distribution’s Lower Dividends and Target Gearing Are Credit Positive » Dalrymple Bay Coal Terminal Will Likely See More Volatile Cash Flow with Peabody Energy’s Restructuring Banks 12 » Germany’s Bail-in Guidance on Bank Debt Removes Uncertainty, but Contrasts with the Rest of Europe » SpareBank 1 SR’s Increased Problem Loans and Impairments Signify Credit-Negative Risks in Oil-Related Exposures » European Bank Regulators Recommend EU Reciprocity of Estonia’s Risk Buffer, a Credit Positive » Bank Hapoalim Acquires Credit Insurance Against Guarantees, a Credit Positive Insurers 19 » Aegon’s Weak US Results Offset Its Credit-Positive Acquisition of Cofunds Sovereigns 21 » Flaring Russia-Ukraine Tensions Threaten Russia’s Incipient Recovery, a Credit Negative » South Africa Sanctions Five Banks to Curb Money Laundering, a Credit Positive for Sovereign » Tanzania Will Benefit from Railway Linking It with Land-Locked Eastern African Countries RECENTLY IN CREDIT OUTLOOK » Articles in Last Thursday’s Credit Outlook 26 » Go to Last Thursday’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 15 AUGUST 2016 Corporates Perrigo’s Lower Guidance Signals a Deleveraging Delay and Raises Event Risk Last Wednesday, Perrigo Company plc (Baa3 negative) cut its earnings guidance for 2016 for the second time this year. The revised guidance is credit negative because it signals delayed deleveraging following Perrigo’s acquisition of Omega Pharma NV in April 2015, which nearly doubled its debt. Continued operating underperformance also raises event risk for Perrigo because shareholders will likely pressure the company to increase the stock’s value and take actions that may be credit negative. Perrigo’s stock has fallen nearly 60% over the past year. Following Perrigo’s announcement, we affirmed its Baa3 ratings but changed its outlook to negative from stable. The midpoint of Perrigo’s 2016 operating profit guidance is $1.4 billion, down 15% from the midpoint of its May guidance and down 22% from the midpoint of its February guidance. Perrigo’s main struggles are in its prescription generics drug business, where increased competition has accelerated negative pricing pressure on older products and the company has not launched enough new products to offset the declines. New competitors on Perrigo’s generic drugs, which in the past have had limited competition, means Perrigo must drop its price significantly or lose market share. Weakness in Perrigo’s branded consumer unit also contributes to the underperformance. The unit is essentially the European over-the-counter brand-name drug business it acquired with Omega in April 2015. Then, revenues were roughly $1.6 billion and operating profit was around $275 million; now, Perrigo is guiding to 2016 revenue of $1.3 billion and profit margins are tracking in the single digits, versus the high teens at the time of the acquisition. We attribute part of the underperformance to the fact that the Omega assets are a new geography and business for Perrigo; that Omega was highly decentralized, with each country manager having significant discretion around spending and headcount; and that Perrigo was integrating Omega while simultaneously fending off a $40 billion hostile bid from Mylan N.V. (Baa3 stable). Consequently, we expect flat to declining EBITDA over the next several quarters. Acquisitions and share repurchases have also delayed deleveraging. After rejecting Mylan’s bid, Perrigo completed a $500 million share buyback in late 2015 and closed another $1.2 billion in acquisitions after Omega, largely funded with debt. Leverage, which increased to 4.0x at the time of the Omega acquisition, remains at around 4.0x today and will likely stay in this range over the next 12 months. However, we believe that Perrigo is committed to deleveraging in order to remain investment grade. The company said that it will suspend share buybacks and make only tuck-in acquisitions in order to focus on improving operations and debt repayment. It also accelerated repayment of $500 million of notes to demonstrate its desire to reduce debt and said that it will use cash flow to repay more than $550 million of 2017 debt maturities. Even with flat earnings in 2017