Credit Outlook

MOODYS.COM 5 FEBRUARY 2018 NEWS & ANALYSIS Corporates 2 » Apple's plan to become net cash neutral is credit negative » Xerox's merger with Fujifilm joint venture is credit positive » Western Digital's refinancing will reduce gross debt and annual interest expense » HCA's new shareholder dividend is credit negative » Dole Food's planned sale of 45% equity stake to Total Produce is credit positive » Carlisle Companies' sale of its foodservice products unit is credit positive » Fossil's credit facility amendment is credit positive » TMK's deleveraging will accelerate with IPO of US- based subsidiary » Dalian Wanda Commercial Properties' asset disposals and new investor pacts are credit positive » PTTEP's Bongkot gas field acquisition is credit positive Infrastructure 16 » New Jersey rejoins regional effort to reduce greenhouse gas, a credit positive for PSEG Power » State regulators’ use of Spire Missouri parent’s capital structure in gas utility’s rate case would be credit negative Banks 18 » Wells Fargo's consent agreement with the Federal Reserve increases the risk of client attrition » Rising deposit betas at US banks are credit negative » Czech Republic's benchmark rate hike is credit positive for banks » Japan Post Bank plan to invest in private equity will increase asset risks, a credit negative » Japanese securities firms' joint technology effort to improve systems is credit positive » Korea's proposed regulations for financial conglomerates are credit positive » Vietnamese banks' progress in resolving legacy problem assets is credit positive » Rizal Commercial Bank's planned rights issuance is credit positive Insurers 30 » Rakuten's Asahi Fire acquisition is credit negative for Japan's P&C insurers Sovereigns 32 » Venezuela's new exchange rate policy will not address macroeconomic imbalances or improve debt-service capacity » Korea's membership in CABEI will strengthen the development bank's credit quality » Korea's cryptocurrency regulations are credit positive for the sovereign's financial stability Sub-sovereigns 38 » German Laender's financial performance continued to excel in 2017 » France's regional and local governments are being flooded with new costs from severe weather US Public Finance 41 » Declining international student enrollment dampens US universities' tuition revenue growth RECENTLY IN CREDIT OUTLOOK » Articles in Last Thursday’s Credit Outlook 43 » Go to Last Thursday’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 5 FEBRUARY 2018 Corporates Apple’s plan to become net cash neutral is credit negative Last Thursday, Apple Inc. (Aa1 stable) said during its fiscal first-quarter earnings conference call that it plans to become approximately net cash neutral. We view the plan as credit negative because it would signal a substantial weakening of the company’s liquidity. As of 30 December 2017, Apple held a net cash position of $163 billion, composed of $285 billion of cash and investments and $122 billion of debt. Management said it would provide details about its capital allocation plans at a later date. Although a $163 billion reduction in cash and investment balances will deteriorate Apple’s liquidity, the company remains well positioned in the Aa1 rating category given the enduring strength of its underlying business (including a large and global installed base of iPhones), tremendous customer loyalty and our expectation of annual free cash flow of more than $40 billion after dividends. Even with a net debt balance of zero, Apple would still have a robust financial profile with financial metrics that compare favorably with other highly rated companies. We expect Apple to generate at least high-single-digit profit growth over the next year, spurred by demand for the iPhone X, the strength of its services business and the return of growth in the greater China market. As of 30 December 2017, Apple’s adjusted debt/EBITDA was 1.6x, or just over 2.0x including a tax repatriation liability of $38 billion, which will be payable over eight years. With tax reform, Apple will have greater ability to access its offshore cash flow. As a result, Apple likely will cease issuing debt to fund domestic capital allocation and repay maturing debt, leading to significant deleveraging. Within two years, we expect adjusted debt/EBITDA to decrease to the low 1x range, or mid-1x range including the tax liability, which will gradually decline with the required 8% annual payments during the first five years. Stephen Sohn Senior Vice President +1.212.553.2965 stephen.sohn@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