Credit Outlook

MOODYS.COM 13 OCTOBER 2016 NEWS & ANALYSIS Corporates 2 » Boeing Lands Significant Order from Qatar Airways, a Credit Positive » EU Tariffs on Chinese Steel Are Credit Positive for European Producers » Misys' Planned IPO and Refinancing Are Credit Positive Infrastructure 6 » Duke Energy's Agreements to Sell Its Latin American Businesses Are Credit Positive Banks 7 » ING's Updated Strategic Plan Is Credit Positive » Portugal's Banco BPI Agrees to Reduce Exposure to Angola, a Credit Positive » Attica Bank's Emergency Liquidity Assistance Increase Is Credit Negative » Norway Proposes Financial Services Tax, a Credit Negative for Banks » Korean Banks' Loan Delinquencies Climb as Shipbuilders and Shippers Restructure » Bank of East Asia's Sale of Tricor Holdings Stake Is Credit Positive Insurers 18 » Penn Mutual's Acquisition of Vantis Life Is Credit Positive RECENTLY IN CREDIT OUTLOOK » Articles in Last Monday’s Credit Outlook 19 » 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 13 OCTOBER 2016 Corporates Boeing Lands Significant Order from Qatar Airways, a Credit Positive Last Friday, The Boeing Company (A2 stable) landed an order for 40 widebody aircraft and a letter of intent for up to 60 narrowbodies from Qatar Airways (unrated). If Qatar Airways exercises all options, the deal would be valued at almost $18 billion (at list prices). The order is credit positive for Boeing because the widebody orders help fill a gap in the production run for 777 aircraft ahead of its transition to a next-generation variant in 2019. Meanwhile, the option suggests a growing likelihood of winning over a big Middle Eastern customer that to date has only ordered competing narrowbody product from Airbus Group SE (A2 stable). Boeing and Airbus compete in a virtual duopoly market for large commercial aircraft, but Airbus has gotten the better of Boeing with its next-generation narrowbody product, the A320neo, over Boeing’s 737 MAX. Even so, Airbus has had issues recently with initial deliveries owing to problems with the new geared turbofan engine, a product of United Technologies Corporation (A3 stable) subsidiary Pratt & Whitney. Similar supply-chain issues have delayed Airbus A350 widebody deliveries to Qatar Airways, eliciting public criticism from the airline’s CEO. We believe this influenced the follow-on order for Boeing widebodies, and that Airbus runs the risk that Qatar Airways cancels its remaining order for 46 Airbus narrowbodies (four have already been canceled). Qatar Airways is a significant customer for both manufacturers and will continue to press both companies for price concessions, including potentially on existing orders in consideration of forestalled cancellations. Cancellation of the bigger order would also constitute another dark mark for United Technologies, and would presumably bolster the opportunity for competing product from General Electric Company (A1 stable) for engines on the A320neo, particularly from carriers that have not yet picked a power source for equipment they have already ordered. Although there is little doubt that the Qatar Airways order constitutes a nice win for Boeing, the large size of the deal, along with the inclusion of current generation equipment, the importance of the customer and a tight pricing environment, collectively imply a high likelihood of very aggressive price discounting from Boeing to secure the deal. Qatar Airways had added negotiating leverage in that Boeing (like Airbus) has received only limited net new orders for widebody aircraft this year, particularly because of a subdued market appetite amid persistently low oil prices. Economic returns to Boeing are therefore likely to be considerably lower than historical norms. It is also noteworthy that Qatar had held off on finalizing the order until after it received approval from the US government for the purchase of F-15 fighter jets. From our perspective, the letter of intent for Boeing narrowbodies looks like a not so subtle warning to all interested parties about the growing amount of optionality available to aerospace customers, in both the civil and defense markets. Political considerations have taken on added importance in recent transactions, with increasing evidence of more onerous offset requirements including greater localization of production facilities and requisite technology transfer. We believe that both Qatar Airways and the Qatari government successfully flexed their collective economic clout to secure these new contracts, just like India likely did earlier this month with its purchase of Rafale fighters. Such trends are likely to be the new norm for conducting business for some time. Russell Solomon Senior Vice P