Credit Outlook

MOODYS.COM 6 APRIL 2017 NEWS & ANALYSIS Corporates 2 » Darden’s Acquisition of Cheddar’s Restaurant Is Credit Positive » ABB’s Acquisition of Bernecker + Rainer Industrie-Elektronik Is Credit Positive » Schneider Electric’s Distribution of DTN Sale Proceeds to Shareholders Is Credit Negative » Japan Petroleum Exploration Will Benefit from Power Project’s Financing Deal Infrastructure 6 » Spire’s Equity Issuance Is Credit Positive Banks 7 » Santander Consumer USA’s Settlements over Subprime Auto Loans Are Credit Negative » Argentina’s Central Bank Approves Santander Rio’s Purchase of Citibank’s Local Retail Business, a Credit Positive » HSH Nordbank’s Significant De-risking Progress Is Credit Positive » Azerbaijan’s Bank Resolution Framework Would Be Negative for Related-Party Depositors » Australia’s Limits on Interest-Only Mortgages Will Curb Riskier Lending Sub-sovereigns 15 » Ontario Will Benefit from Canadian Government’s Infrastructure Investment » Mexico’s Pre-Budget Statement Is Credit Positive for States and Municipalities » Mexico’s Implementation of Debt Limit System Is Credit Negative for Sub-sovereigns » Spanish Regions Reduced Deficits in 2016 Securitization 23 » UK Proposes New Rules for Persistent Debtors, a Credit Positive for Credit Card ABS RECENTLY IN CREDIT OUTLOOK » Articles in Last Monday’s Credit Outlook 25 » 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 6 APRIL 2017 Corporates Darden’s Acquisition of Cheddar’s Restaurant Is Credit Positive On 27 March, Darden Restaurants, Inc. (Baa3 positive) said that it had agreed to buy Cheddar’s Scratch Kitchen (unrated) in an all-cash transaction totaling $780 million, or about 10.4x trailing 12-month adjusted EBITDA, net of certain tax benefits. Although Darden will likely have to add a material amount of debt to finance the deal, the acquisition is credit positive because it will further expand Darden’s variety of product offerings, and with about 165 restaurants would place Cheddar’s well ahead of Darden’s fine dining and other concepts by number of locations. We expect Darden to fund the transaction with both debt and cash on hand, with the deal closing during Darden’s fiscal fourth quarter, which ends in May 2017. Separate from the announcement, on 28 March we affirmed Darden’s ratings and changed the company’s outlook to positive because of improved operating performance at Olive Garden and LongHorn. Darden will likely have to add a material amount of new debt to fund the acquisition, given its limited cash balance of about $390 million as of 26 February 2017. Despite higher adjusted debt levels, we expect leverage to remain reasonable. For the latest 12-month period that ended 27 November 2016, Darden’s Moody’s-adjusted leverage was about 2.5x. Over the next 12-18 months, we expect Darden’s leverage to be 2.9x-3.1x. Our ratings outlook change to positive from stable reflects Darden’s steady improvement in earnings and our view that its operating performance will continue to strengthen as the company focuses on driving sales and managing costs, particularly at its two core brands, Olive Garden, which constitutes 58% of the company’s earnings, and LongHorn, which constitutes 21%. After an extended period of operating challenges that saw its average annual restaurant sales fall to $4.4 million in fiscal 2014 (fiscal years end on the last Sunday in May) from $4.9 million in fiscal 2008, Olive Garden’s operating trends reversed starting in fiscal 2016. Additionally, we expect the LongHorn brand to remain well positioned in the steak category and to benefit from commodity deflation. The outlook also factors in management’s adjusted leverage target of 2.0x-2.5x, and the company’s strong liquidity. William Fahy Vice President - Senior Credit Officer +1.212.553.1687 william.fahy@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 6 APRIL 2017 ABB’s Acquisition of Bernecker + Rainer Industrie-Elektronik Is Credit Positive On Tuesday, ABB Ltd. (A2 stable) announced that it had acquired for an undisclosed price Bernecker + Rainer Industrie-Elektronik GmbH (B&R, unrated), a leading independent industrial automation solutions and software provider, in an entirely cash-funded deal. We assume that ABB paid a relatively high price for B&R because of the sector in which B&R operates and our growth expectations for B&R, but we view this transaction as credit positive for ABB. The B&R a