MOODYS.COM 11 JUNE 2018 NEWS & ANALYSIS Corporates 2 » Chewy's release as guarantor of PetSmart debt is credit negative » Conduent's credit agreement amendment and non-core asset sales are credit positive » Ryerson's plan to purchase Central Steel & Wire is credit negative » Fortive's $2.7 billion offer to buy Johnson & Johnson's Advanced Sterilization Products unit is credit negative » Profesional Telekomunikasi Indonesia's acquisition of tower operator PT Komet Infra Nusantara is credit positive Infrastructure 8 » Entergy Corporation's $1 billion equity issuance is credit positive » Greenko Energy Holdings' equity raise and acquisition are credit positive Banks 12 » Italy's proposal to ring-fence banks' investment banking operations will have limited effects » Italy's proposal to unwind mutual-bank reform is credit negative » MUFG and Mizuho will recover ¥200 billion from Sharp, a credit positive Accounting 16 » FASB moves toward finalizing improved accounting for long-duration insurance contracts Asset Managers 18 » Fortress reprices and pays down outstanding term loan, a credit positive » Invesco's acquisition of Intelliflo is credit positive Sovereigns 20 » Mexico's tariffs on US goods will have marginal macroeconomic impact but signal continued strained bilateral relations » Argentina's preliminary agreement with IMF would support funding, fiscal consolidation and independent monetary policy » Ukraine's passage of anti-corruption court legislation improves prospects for IMF funding, a credit positive US Public Finance 26 » Illinois' pension buyout plan is credit positive, but reliance on savings poses modest budget risk » Illinois Schools' second year of significantly higher state aid is credit positive Structured Finance 30 » Slovakian bank's conversion of old covered bonds is credit positive CREDIT IN DEPTH Problem loans still burden some European banks 32 Nonperforming loans are declining across Europe, but sluggish economic growth in some countries as well as idiosyncratic weaknesses at some banks over recent years have made progress uneven. Four years after the end of the sovereign debt crisis, we sampled 28 of the largest EU banks in various countries and found that large stocks of problem loans continue to weigh on the balance sheets of some European banks, both large and small, undermining their creditworthiness. RECENTLY IN CREDIT OUTLOOK » Articles in Last Thursday’s Credit Outlook 33 » 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 11 JUNE 2018 Corporates Chewy’s release as guarantor of PetSmart debt is credit negative Last Monday, PetSmart Inc. (Caa1 negative) announced that it had completed a series of transactions whereby Chewy is no longer its wholly owned subsidiary and therefore, no longer a guarantor of obligations under PetSmart’s term loan. The release of Chewy’s guarantee under the term loan caused the release of PetSmart’s outstanding senior notes guarantee. Chewy’s release as guarantor is credit negative for PetSmart debtholders. Chewy remains a restricted subsidiary under PetSmart’s credit agreements and the indentures governing its outstanding senior notes, and a guarantor of the obligations under the company's asset-based revolver. PetSmart accomplished the transition by declaring a dividend of 20% of Chewy’s outstanding common stock to its parent company, Argos Holdings, which in turn made a dividend of this Chewy common stock to its parent company. Separately, PetSmart invested 16.5% of Chewy’s outstanding common stock in the form of a capital contribution to a wholly owned unrestricted subsidiary of PetSmart. The development is credit negative for PetSmart’s existing debtholders because it will dilute the collateral pool for PetSmart’s existing secured creditors. We assess that there are no significant restrictions in the credit agreements or indentures for a transfer of assets to non-guarantor restricted subsidiaries. Also, there is no requirement under the bond covenants to repay any debt from the proceeds of the 36.5% Chewy equity that was transferred because the equity will have no restrictions under the asset sale covenants of the bonds. Proceeds from the 20% of Chewy’s equity now held by the company’s parent could remain at that parent entity, or be a dividend to the sponsors. Moreover, the unrestricted subsidiary can issue debt that would be structurally senior to PetSmart debt. Proceeds from new debt issuance at the unrestricted subsidiary could be used to purchase PetSmart debt at a deep discount. Depending on the circumstances of such a purchase, we could deem it a distressed