MOODYS.COM 14 MAY 2018 NEWS & ANALYSIS Corporates 2 » Walmart's planned $16 billion acquisition of India's Flipkart is credit positive » Nestlé's transaction with Starbucks is credit negative » Swire Pacific's asset disposal would enhance its capital structure Infrastructure 5 » Gener and AES will benefit from restructured agreements for Chilean hydroelectric project Alto Maipo Banks 6 » US banks report modestly tighter underwriting standards for credit cards and auto loans, a credit positive » RBS' settlement with US Department of Justice removes a large litigation risk » Potential CYBG and Virgin Money merger is credit positive » UniCredit accelerates problem-loan disposal, a credit positive » Public bailout of Bangladesh's Farmers Bank is credit positive Insurers 17 » MetLife's $6 billion pension risk transfer deal with FedEx is credit positive » AXA's IPO of US unit will improve capitalization and help secure funding for XL acquisition Sovereigns 20 » Indonesia's currency and interest rate weaknesses, if persistent, would be credit negative » Malaysian opposition's electoral win creates economic policy uncertainty US Public Finance 24 » Proposed de-annexation of Stockbridge, Georgia, is a potential blow to municipalities in the state Securitization 25 » California's proposed building standards are credit negative for the state's utilities, credit positive for solar ABS CREDIT IN DEPTH For governments and corporates, marijuana brings possible gains and pressures 26 Ongoing legalization in some US states and likely legalization in Canada nationwide would be slightly beneficial for local government revenues, while alcoholic beverage, tobacco, consumer products and pharmaceutical companies would likely gain if they innovatively expand into the market. In this report, we examine the credit implications and challenges of marijuana legalization in the US and Canada. RECENTLY IN CREDIT OUTLOOK » Articles in Last Thursday’s Credit Outlook 27 » 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 14 MAY 2018 Corporates Walmart’s planned $16 billion acquisition of India’s Flipkart is credit positive Last Wednesday, Walmart Inc. (Aa2 stable) said that it is buying a 77% stake in Indian e-commerce retailer Flipkart for about $16 billion, but it has yet to disclose financing plans. We expect the deal to initially weaken Walmart’s credit metrics, with retained cash flow (RCF)/net debt likely dropping to the low-30% range from 40% currently and debt/EBITDA likely rising above 2.0x from 1.6x currently. Despite this deterioration (see exhibit), the acquisition is credit positive because it provides immediate scale in India’s burgeoning retail e-commerce sector and we expect that a combination of increased cash flow and debt reduction will push the RCF/net debt ratio back above our 35% quantitative guideline for its Aa2 rating in due course. Following the announcement, we affirmed Walmart’s Aa2 rating and stable outlook. The Flipkart deal will initially weaken Walmart’s credit metrics Sources: Walmart and Moody’s Investors Service This acquisition – Walmart’s biggest ever – is a continuation of efforts to rebalance its international division to shift assets and focus to higher-growth segments and geographies. Although we expect that Flipkart will continue to generate losses for the next few years, our credit-positive view is based on India’s compelling features, including its 1.2 billion residents and an economy that generates more than 7% annual GDP growth. India has more than 400 million millennials, a growing middle class and exploding smartphone penetration, all of which are critical as shopping continues to shift online. The deal comes on the heels of Walmart’s announcement on 30 April that it is selling a majority stake in its Asda UK food retailer to J Sainsbury plc for $10 billion. Walmart’s exit from the mature UK grocery market follows its 2006 exit from Germany, another former European hub. Walmart has been embracing a more acquisitive approach to ramping up online growth, rather than attempting to do so organically, given the importance of rapidly building scale as other fast-growing online competitors such as Amazon.com, Inc. (Baa1 positive) keep expanding. In August 2016, Walmart acquired US-based Jet.com for about $3.3 billion. 21,910 21,960 20,277 20,753 22,576 63,682 56,940 59,644 54,421 56,315 34.4%38.6%34.0%38.1%40.1%0%5%10%15%20%25%30%35%40%45%$0$10,000$20,000$30,000$40,000$50,000$60,000$70,000Jan-14Jan-15Jan-16Jan-17Jan-18$ millionsRetained cash flow - left axisNet debt - left axisRetained cash flow/net debt - right axisCharlie O’Shea Vice President - Senior Credit Officer +1.212.553.3722 charles.o’shea@moodys.com This publ