Credit Outlook: Credit Implications of Current Events

MOODYS.COM 5 JUNE 2017 NEWS & ANALYSIS Corporates 2 » Praxair and Linde’s Merger Is Credit Positive for Both Companies » First Data’s Planned Acquisition of CardConnect Is Credit Negative » Worthington’s Acquisition of Amtrol Is Credit Positive » Tatneft’s Growing Exposure to Banking Is Credit Negative » Formosa Begins Steel Operations in Vietnam, a Credit Positive » Tianjin Binhai New Area Construction’s Consent Solicitation Is Credit Positive for Bondholders Banks 8 » Banco Comafi’s Acquisition of Deutsche Bank’s Argentine Subsidiary Is Credit Positive » Banco Macro’s Equity Sale Is Credit Positive » Barclays Sells Another Stake in Its African Business, a Credit Positive » Montepaschi’s Restructuring and Recapitalization Are Credit Positive for Senior Creditors, Negative for Junior Bondholders » Greek Banks’ Reduced Emergency Liquidity Assistance Improves Their Profitability » Swedish Regulator Proposes Stricter Mortgage Amortisation Requirement, a Credit Positive for Banks » Bulgarian Banks Will Benefit from Country’s Highest Credit Growth Since 2009 » Saudi Banks’ Cash Balances with Central Bank Reach Three-Year High, a Credit Positive » Nigerian Banks Will Benefit from Economic Improvement Reflected in May Purchasing Managers Index » SMBC’s Acquisition of American Railcar Leasing Is Credit Positive Exchanges 23 » LSEG’s Acquisition of Citigroup’s Fixed-Income Index Business Increases Leverage Insurers 24 » Japan’s Industry-Wide Premium Rate Reduction Will Hurt P&C Insurers’ Profitability Sovereigns 26 » Bahamas’ Larger-than-Expected Deficit Significantly Weakens Its Fiscal Position » Oman’s Weak Fiscal Performance, Despite Oil-Price Recovery, Is Credit Negative » Philippines’ Passage of Tax Reform Is Credit Positive RECENTLY IN CREDIT OUTLOOK » Articles in the 29 May issue of Credit Outlook 31 » Go to the 29 May issue of 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 5 JUNE 2017 Corporates Praxair and Linde’s Merger Is Credit Positive for Both Companies Last Thursday, US-based Praxair, Inc. (A2 stable) Germany’s Linde AG (A2 stable) confirmed that they had agreed to merge in a $70 billion, all-stock deal that would create the world’s largest industrial gas company. The deal is credit positive for both companies, which estimate that their greater combined scale would produce annual cost savings of $1 billion from new and existing programs, and a further $200 million in capital spending, thereby reducing leverage significantly for both. However, credit metrics are at risk of weakening given that the company expects to spend about $1 billion to achieve these savings over approximately three years. The terms of the proposed deal are close to those that Praxair and Linde announced in a non-binding term sheet in December 2016. The initial terms of the deal did not clarify the combined company’s financial policies, including its dividend policy, but they have indicated that they intend to keep their credit metrics at “strong investment-grade” levels. The combined companies would set up a holding company based in Ireland, but base its executive leadership in the US in Connecticut. The transaction marks the latest of several recent mergers in the consolidating industrial gas industry. Air Liquide S.A. (A3 stable) of France acquired smaller US peer Airgas in May 2016, while a financial buyer bought South Korea’s Daesung Industrial Gas (unrated) earlier this year. US-based Air Products and Chemicals, Inc. (A2 stable) dropped its recent pursuit of a Chinese industrial gas firm. Linde generated €17.2 billion ($19.2 billion) in revenue in the 12 months through 31 March 2017, but with significantly lower profitability and more employees in terms of revenue than Praxair, which generated about $10.8 billion for that period. The combined company will be much larger and will generate much more free cash flow than either Praxair or Linde do today, although integration risk will limit some of its credit-quality improvements. The two companies expect to hit their target synergies within three years. So far, Praxair and Linde have not discussed any divestitures, which they likely will need in order to satisfy regulatory concerns. But their overlapping markets in such countries as Germany, Brazil and the US offer sizable selling opportunities. To meet our quantitative expectations for an A2 rating, the combined company would have to improve its ratio of retained cash flow (RCF) to debt to well above 25%, and reduce its adjusted net financial leverage to a net debt/EBITDA ratio below 2.5x roughly 18-24 months after closing their merger. Praxair in 2016 had roughly an 18% RCF/debt ratio, and an adjusted debt/EBITDA ratio of about 3.0x. Linde’s RCF/debt ratio in 2016 was about