MOODYS.COM 27 NOVEMBER 2017 NEWS & ANALYSIS Corporates 2 » ZF Friedrichshafen's bond buyback will reduce leverage » English court ruling is credit positive for Dana Gas' sukuk investors and Islamic finance industry » Shelf Drilling's new contracts in India improve rig utilization, a credit positive » Toshiba's planned equity financing is credit positive » ABM Investama's tap issuance of $50 million is credit negative » Lodha Developers will benefit from reducing short-term debt and Indian government's affordable housing push Banks 9 » Inclusion of IFRS 9 accounting will toughen EBA's 2018 banking stress test » Binding MREL targets for the largest euro-area banks are positive for senior bank creditors » Carige's share issue underwriting agreement is credit positive » Eurobank Ergasias' lowers its target for nonperforming exposures, a credit positive » Turkey's 25-basis-point funding rate increase is credit negative for banks » China's plan to tighten regulations on financial firms' shareholding is credit positive » China's new guidelines on asset management products are credit positive » Malaysia halts new property development amid rising oversupply, a threat to bank asset quality » Pakistani banks will benefit from textile sector's increasing exports » Singapore banks move to facilitate e-payments by adopting common code, a credit positive Sub-sovereigns 26 » Mexican court ruling on Nuevo Leon property tax subsidies is credit positive for municipalities RECENTLY IN CREDIT OUTLOOK » Articles in Last Monday’s Credit Outlook 27 » 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 27 NOVEMBER 2017 Corporates ZF Friedrichshafen’s bond buyback will reduce leverage On 21 November, ZF Friedrichshafen AG (ZF, Ba1 positive) announced a debt buyback of approximately $1.3 billion, comprising a redemption of $425 million of its 2020 notes and a tender offer for up to $900 million of notes of various tranches due 2020-25. The buyback is credit positive because it will reduce gross leverage by approximately 0.25x as of year-end 2017. We expect ZF to finance the transaction with existing cash on its balance sheet and proceeds from the disposal of its Global Body Control Systems (BCS) business unit, which the company announced on 30 August 2017. Consequently, ZF’s gross debt-related credit metrics, such as debt/EBITDA, will improve. We believe that ZF’s choice of using existing cash to buy back bonds rather than undertaking major debt-financed acquisitions, as it has in the past, is also credit positive because prior debt-financed acquisitions increased financial leverage. For example, ZF’s acquisition of TRW in 2015 temporarily raised leverage to almost 5x (see exhibit). ZF Friedrichshafen’s bond buyback will further reduce gross debt/EBITDA Sources: Company data and Moody’s Investors Service Although a successful buyback would add to the existing positive pressure on ZF’s Ba1 rating, which we affirmed in August, the company’s recently revised dividend policy is credit negative and will weigh on retained cash flow/net debt and other credit metrics. However, the overall positive pressure on the rating remains in place. Our positive outlook on ZF’s rating also reflects the gradual deleveraging to below 3.0x of Moody’s-adjusted gross debt/EBITDA. A rating upgrade would be conditional on ZF maintaining debt/EBITDA below 3x (actual was 2.9x at June 2017, while pro forma for the announced bond buyback is 2.7x), EBITA margins above 7%, retained cash flow/net debt above 25% (30% at June 2017) and free cash flow above €500 million (€1.5 billion at June 2017). 0.0x0.5x1.0x1.5x2.0x2.5x3.0x3.5x4.0x4.5x5.0x31-Dec-1331-Dec-1431-Dec-1531-Dec-1612 months to 30-Jun-1731-Dec-17 Estimate31-Dec-18 EstimateMoody's expectation for Ba1: 3.0x-3.5xMatthias Heck Vice President - Senior Analyst +49.69.70730.720 matthias.heck@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 27 NOVEMBER 2017 English court ruling is credit positive for Dana Gas’ sukuk investors and Islamic finance industry On 19 November, United Arab Emirates-based (UAE) Dana Gas PJSC announced that the English High Court of Justice on 17 November ruled that the purchase undertaking attached to the Sukuk Al Mudarabah that it issued is valid and enforceable under English law, which is the governing law of the sukuk documents (other than the Mudarabah agreement, which is governed by UAE law). The ruling is credi