CreditOutlook

MOODYS.COM 3 JULY 2017 NEWS & ANALYSIS Corporates 2 » Walgreens and Rite Aid’s Merger Termination Is Credit Positive » Demise of Walgreens-Rite Aid Merger Has Different Credit Implications for Distributors » UPS’ Plan to Freeze Pension Benefits Is Credit Positive » HC2’s $38 Million Tack-on Offering Increases Leverage » Nestlé’s Planned Share Buybacks Will Weaken Its Credit Metrics » Philips’ Acquisition and Buyback Will Increase Leverage » Seizure of Sistema’s Stake in MTS Is Credit Negative for Sistema, Neutral for MTS Banks 11 » Guatemala’s and Panama’s Improving International Tax Transparency Is Credit Positive for Banks » Europe’s Ban on Money Market Fund External Support Is Credit Positive for Banks » UK’s Financial Policy Committee Strengthens Countercyclical Capital Buffer, a Credit Positive » Switzerland’s Proposed Gone-Concern Capital Rules for D-SIBs Are Credit Positive » Commerzbank’s Lower Restructuring Charges and Higher Capital Ratio Are Credit Positive » National Bank of Greece’s Sale of Stake in Insurance Subsidiary Is Credit Positive » Ghana’s Loan Review Process and Provisioning Clarifications Will Strengthen Banks Sovereigns 21 » Chance of Brazil’s Social Security Reform Wanes after President Is Charged with Corruption » Bangladesh’s Delayed VAT Implementation Stalls Revenue Reform, a Credit Negative » Taiwan Passes Public Pension Reform Bills, a Credit Positive US Public Finance 25 » Kentucky Gives Green Light to Charter Schools, a Credit Negative for Public School Districts CREDIT IN DEPTH Federal Reserve’s Review of Bank Capital Plans Is Credit Positive Despite Payout Increases 26 Results of the 2017 Comprehensive Capital Analysis and Review for 34 of the largest US bank holding companies were credit positive in that all the banks passed the test on a quantitative basis, illustrating their capital resilience. Approved capital returns to shareholders were more aggressive than in prior years, but we expect that banks’ capital ratios will remain stable over the next year. RECENTLY IN CREDIT OUTLOOK » Articles in Last Thursday’s Credit Outlook 31 » Go to Last Thu rsday’s Credit Outlook The next issue of Moody’s Credit Outlook is 10 July 2017 NEWS & ANALYSIS Credit implications of current events 2 MOODY’S CREDIT OUTLOOK 3 JULY 2017 Corporates Walgreens and Rite Aid’s Merger Termination Is Credit Positive Last Thursday, Walgreens Boots Alliance, Inc. (WBA, Baa2 review for downgrade) and Rite Aid Corporation (B2 review direction uncertain) announced that they had terminated their previous merger agreement under which WBA was to acquire all outstanding shares of Rite Aid. Under a new asset purchase agreement, and pending approval by the US Federal Trade Commission (FTC), WBA will now acquire 2,186 Rite Aid stores and related Rite Aid distribution assets and inventory for an all-cash purchase price of $5.175 billion, and will pay Rite Aid a $325 million termination fee. Rite Aid intends to use the proceeds to reduce its debt burden. We view the new transaction as credit positive for Walgreens because it will result in a much smaller debt burden and lower financial leverage than we had previously expected. The new asset purchase agreement will not require WBA to issue any incremental debt because it has sufficient cash balances to finance the transaction and continues to generate healthy free cash flow. The company had $12.2 billion in cash at 31 May 2017. Our estimate of the purchase price that WBA had to pay to acquire all of Rite Aid under the previously contemplated deal was $14.5-$15 billion, depending on the number of store divestitures required by the FTC, and the acquisition would have been financed with a significant amount of new debt. Walgreens has already repaid $3.5 billion of the debt issued for the acquisition, and now that the agreement has been terminated, we expect that the company will further reduce its debt burden through cash accumulated on its balance sheet. The new asset purchase agreement will not require any incremental debt and the company expects about $400 million in synergies. As a result, we now expect WBA’s pro forma post asset purchase transaction debt/EBITDA for fiscal 2017 (which ends 28 February 2018) to be in the 3.6x-3.8x range, versus our previous pro forma estimate based on the merger transaction of around 4.5x. Debt/EBITDA for the last-12-month period that ended 31 May 2017 was about 4.2x. However, the company’s credit metrics will also depend on its financial policies, especially as they relate to share repurchases. The company has pared back it share repurchases since it announced the merger with Rite Aid. However, we expect share repurchases to increase in 2017-18 because the company has accumulated cash on its balance sheet and will have a lower debt burden. WBA’s credit quality reflects its large scale and the strong market positions of its three divisions: US retail pharmacy, international retail pharmacy and pharmaceutical w