Fitch Raises Outlook on Kansas City Southern (KSU) to Positive Sep 12, 2014 02:58PM

Fitch Ratings has affirmed the ratings for Kansas City Southern (KCS) (NYSE: KSU) and its primary operating subsidiaries, Kansas City Southern Railway Co. (KCSR), and Kansas City Southern de Mexico S.A. de C.V. (KCSM) at 'BBB-'. The Rating Outlook has been revised to Positive from Stable. Short-term ratings for KCSR and KCSM have been affirmed at 'F3'. A full list of ratings follows at the end of this release.

KSU's investment grade ratings are supported by the company's solid operating margins, steadily increasing revenues, and moderate leverage. The Positive Outlook reflects Fitch's view that KSU's credit profile will continue to improve in the coming years propelled by growth opportunities in Mexico, a healthy operating environment in in the U.S., and further operating margin expansion driven in part by the company's efforts to buy equipment off of operating leases.

Fitch expects leverage metrics to improve incrementally in the near-term due to decreased rental expenses, and growing EBITDA. Debt may also decrease if the company chooses to pay down some of its outstanding CP in the U.S., possibly using repatriated funds from Mexico to do so. Fitch calculates KSU's total adjusted debt/EBITDAR at 2.6x as of June 30, 2014. Near-term concerns include uncertainty around potential legislative changes in Mexico, newly proposed rail safety rules from the DOT, and pressured free cash flow from heavy capital spending.

KEY RATING DRIVERS

Revenue Growth Prospects Remain Healthy

Fitch expects KSU to generate top line growth in the mid-single digits in 2014, primarily driven by the company's five main focus areas: automotive, cross-border intermodal, frac sand, the Port of Lazaro Cardenas, and crude oil. KSU's cross-border business continues to benefit from a growing manufacturing sector in Mexico, a healthy automotive market in the United States, and from further conversion of cargo volumes from truck to rail. Fitch anticipates U.S. light vehicle sales to reach 16 million units in 2014, up from 15.5 million in 2013. Cross-border automotive volumes will be bolstered by a series of new auto manufacturing plants in Mexico that are in the process of coming on-line. Importantly, rising automotive sales also help to drive other industrial and consumer cargo volumes, which make up a much larger portion of KCS total revenue than automotive segment alone.

KCS' intermodal business also continues to show significant positive trends. Intermodal volumes are benefiting from the ongoing shift of cargo volumes coming across the border from Mexico away from trucks and onto the rails. KCS estimates that cross-border cargo is still largely dominated by truck traffic, leaving a significant opportunity for continued growth in intermodal. Domestic intermodal traffic also continues to be a positive for the rail industry as tight trucking supply, high fuel prices, aging highway infrastructure, and increasing rail efficiency makes moving cargo by rail more attractive to shippers. Through the first half of 2014 total revenue in the intermodal segment was up by 12% driven by a 5% increase in total carloads and an 7% increase in revenue/unit.

Energy segment (consisting of coal, crude oil, and frac sand) revenues dropped in the first half of 2014. However, Fitch believes that that this segment represents a growth opportunity over the longer term. Revenue in the first half was hit by a sharp drop in the volume of crude oil, which was impacted by a drop in the amount of crude moving to the Gulf via train due to new pipeline capacity coming on-line. Utility coal was also weak in the first half, partially due to network congestion caused by severe weather.

Crude volumes could see some improvements in the second half when new terminals for Canadian heavy crude begin operating. Longer-term, KSU's crude business should also benefit from the planned Port Arthur Crude Terminal (PACT). KSU signed a deal with Global Partners where Global will construct the facility on land owned by KSU. The unit train terminal is expected to handle two unit trains per day once completed (estimated at the first quarter of 2017). While crude volumes may fluctuate over the longer-term due to pipeline capacity and spread dynamics, demand for frac sand, one of the segments' main growth drivers, is expected to be steadily positive going forward.

In the LTM period ended June 30, 2014 KCS' consolidated revenue grew by 9.5% driven by expansion in cross-border, intermodal and agricultural related volumes. Growth will likely slow in the second half of the year as comps in the agricultural segment become more difficult. Grain volumes were particularly weak in the first half of 2013 due to a severe drought the previous summer.

Mexican Energy Reform

In August of this year, Mexican President Enrique Pena Nieto signed a series of energy reforms into law which will open oil and gas exploration to outside investors. The expected increase in foreign direct investment will allow Mexico to tap its harder to access oil stores along with opening up shale formations for fracking. As has been the case in the US, the increase in drilling activity should have positive longer-term implications for rail companies as demand for things like drill cuttings and frac sand increases. The Mexican economy also stands to benefit more broadly from lower energy prices stemming from the break-up of the current monopoly system covering Mexico's energy generation and distribution.

Strong Operating Margins

Kansas City Southern's operating margins have increased every year since 2006, and Fitch believes that the company has opportunities to incrementally expand margins further. The company is reducing its equipment costs by purchasing a significant amount of equipment off of operating leases. Through the first six months of the year KSU spent $294 million to purchase equipment off of lease. KSU is also managing its compensation costs (the company's largest single expense).

Compensation was up 4% through the first six months of the year compared to a 5% increase in carloads hauled. KCS' EBITDA margin in the LTM period ended June 30, 2014 was 42%, up from 40% for the comparable period a year ago reflecting healthy revenue growth and ongoing efforts to improve operating efficiency. KCS' adjusted operating ratio, which is a key metric observed in the rail industry, was 67% in the second quarter of 2014, which is comparable to or better than some of KSU's larger competitors.

Solid Financial Flexibility

The company maintains solid financial flexibility through its cash on hand as well as availability under its two commercial paper programs which total $650 million. Liquidity at the end of the second quarter was sufficient for the rating. Cash on hand totaled $190 million plus $130 million in availability under KCSR's $450 million CP program and the full $200 million available under KCSMs CP program. Upcoming debt maturities are manageable. The company has no significant maturities until KCSM's $250 million floating rate notes mature in October of 2016.

FCF Pressures

KSU consistently generates significant cash flow from operations. While CFFO generation will continue to be strong, Fitch expects free cash flow in the intermediate term to be pressured by relatively heavy capital spending as KCS continues to grow its business, and by increasing in cash taxes and rising dividend payments.

Capital spending may total more than $1.0 billion in 2014, including around $300 million of equipment purchased off of operating leases. Excluding those purchases, which are more one-time in nature, capital spending is expected to total around 28% of KSU's annual revenue, which is notably higher than in previous years. High capex, (excluding lease conversion spending) driven by the company's growth and by some accelerated purchasing of locomotives, will keep FCF minimal or negative in 2014. Higher dividend payments will also impact FCF. The company announced a 30% dividend increase in the first quarter of the year, bringing its annual payout to roughly $120 million. However, Fitch expects FCF to improve in 2015 and remain positive thereafter as capex comes down and operating profit grows.

Credit Metrics Improving

Fitch anticipates that KSU's total adjusted debt/EBITDAR could decrease incrementally over the coming 1 - 2 years as equipment rental expenses decline and as margins expand. KSU's leverage ratio of 2.6x as of June 30, 2014 is down from as high as 5.2x at year end 2009. Coverage ratios have also improved in recent years. As of June 30, 2014 FFO fixed charge coverage stood at 5.7x and FFO interest coverage was more than 12x. KSU's coverage metrics are comparable to companies in Fitch's 'BBB' rated peer group, and are supportive of the positive outlook.

Concerns Around Mexican Rail Legislation

In February of this year, the lower house of the Mexican congress passed legislation that would impact KCSM's business if implemented. The bill calls for; 1) regulation, where necessary, of rates that the railroads are allowed to charge their customers, 2) freedom for competitors to use rail lines which are currently granted to KCSM and its competitor Ferromex under exclusive concessions, and 3) the requirement of smooth interchange between the KCSM and Ferromex networks.

The ability for competitors to utilize KCSM's network presents a risk in that competitors would likely focus on the company's most lucrative contracts, and harm KCSM's profitability. Although this legislation presents a risk, there are several mitigating factors. To date, the legislation has only been considered by the lower house of congress, and may not be passed by the upper house in its current form. Since the initial legislation was passed, both KCSM and Ferromex have made lobbying efforts voicing their concerns over the regulations.

Both companies have stated that new regulations could reduce future investments in Mexican infrastructure, and have threatened potential legal action to stop the bill from passing in its current form. If the rails were to gain an injunction, it could tie up the legislation in court for years. The Mexican legislature may also hesitate to enact a law that is seen as violating its 1997 agreements with the railroads as it may deter other outside investors.

Potential New Safety Regulations

A potential concern around the growth of KSU's crude oil business is the increased focus on safety following several incidents involving crude tanker cars over the past several years. Concerns regarding the safety of shipping crude by rail led the DOT to propose a possible new set of rules in July of this year. The DOT's proposal, which includes several different possible regulations, was made available for public comment in July of this year. The public comment period remains open. Potential regulations include the possibility that older tank cars may have to be retired within two years unless they are retrofitted to comply with updated safety standards. There are also several possible restrictions on speed limits for trains carrying flammable materials.

Regulatory concerns are partially offset by the fact that KSU does not own its tanker cars, which are instead owned by the oil companies. Thus the cost of retrofitting cars or purchasing new ones wouldn't be born directly by Kansas City Southern. The largest direct risk for the rails could come from newly imposed speed limits, as slower tanker trains could lead to increased congestion and reduced operational efficiency.

Kansas City Southern de Mexico

The ratings reflect KCSM's solid business position as a leading provider of railway transportation services in Mexico with a diversified revenue base. The ratings also factor in the company's consistent financial performance, which have resulted in stable low leverage, adequate liquidity, solid cash flow generation, and positive free cash flow. Also incorporated in the ratings is the strong credit linkage between KCSM and its parent company, Kansas City Southern (KCS). The ratings incorporate the high sensitivity of the company's credit profile to change in the macroeconomic environment, as its operational performance is highly related to the strength or weakness of the United States and Mexican economies.

RATING SENSITIVITIES

Fitch generally views KSU's credit profile as improving. A positive rating action could be triggered by a return to solid positive free cash flow, continued operating improvements, and the maintenance of leverage at or below current levels. Fitch would also look for clarification around proposed Mexican rail legislation and around new safety regulations currently being proposed by the DOT.

A negative rating action is not expected at this time. However a downgrade could be precipitated by a severe drop off in demand for cargo flowing between the U.S. and Mexico. Alternatively, a shift in management strategy emphasizing shareholder returns or growth that comes at the expense of a healthy balance sheet could also negatively impact the ratings.

Fitch has affirmed the following ratings:

Kansas City Southern
--Issuer Default Rating (IDR) at 'BBB-'.

Kansas City Southern Railway Co.
--IDR at 'BBB-';
--Short-term IDR at 'F3';
--CP at 'F3'
--Senior unsecured bank facility at 'BBB-';
--Senior unsecured notes at 'BBB-'.

Kansas City Southern de Mexico
--Foreign currency IDR at 'BBB-';
--Local currency IDR at 'BBB-';
--Short-term IDR at 'F3';
--CP at 'F3'
--Senior unsecured notes at 'BBB-'.

The Rating Outlook has been revised to Positive from Stable.


Intrawest Resorts' (SNOW) Blue Mountain Acquisition is Credit-Positive Event - Moody's Sep 12, 2014 02:35PM

Moody's Investors Service said today that Intrawest Resorts (NYSE: SNOW) purchase of the remaining 50% equity interest in Blue Mountain Ski Resorts ("Blue Mountain") that is not already owned by the company is a credit positive, but it does not immediately impact the company's B2 Corporate Family Rating (CFR) or stable outlook.


UPDATE: S&P Upgrades Greece from 'B-' to 'B'; Risks to Fiscal Consolidation Have Faded Sep 12, 2014 11:47AM

(Updated - September 12, 2014 11:47 AM EDT)

On Sept. 12, 2014, Standard & Poor's Ratings Services raised its long-term foreign and local currency sovereign credit ratings on the Hellenic Republic (Greece) to 'B' from 'B-'. At the same time, we affirmed the short-term sovereign credit ratings at 'B'. The outlook is stable.


RATIONALE

The upgrade reflects our view that risks to fiscal consolidation in Greece have abated. We forecast that, from next year, the Greek economy will emerge from seven consecutive years of negative growth. We expect recovering real and nominal GDP will enable Greece to operate average primary surpluses of 2% of GDP during 2014-2017. This is less than the 4.5% of GDP target the government envisioned in its program with the European Union (EU), the European Central Bank (ECB), and the IMF (together, the "Troika"), but we believe the lower estimate is politically more feasible than the government's target and consistent with a modest decline in government debt as a share of GDP.

We expect the government to absorb an increased share of EU funds, further widen its tax base, and improve tax collection. On the other hand, we believe the government has little room for further maneuver on the expenditure side. We believe it will carry out modest tax cuts, and we acknowledge downside risks to our forecast should deflationary pressure in the economy become entrenched.

We also view as low the likelihood of additional step-rises in government debt due to bank recapitalizations: the four largest domestic banks have raised €8.4 billion of capital directly from the markets and the Hellenic Financial Stability Fund has a balance of €11 billion for any capital calls from the public sector. Although the government may receive additional debt relief from official creditors, we do not anticipate it will approach private sector creditors for a third rescheduling. We also assume the government will continue to service the approximately €3 billion of debt held by creditors who did not participate in the two debt exchanges of 2012.

In our view, the Greek government's gross borrowing requirements of about €43 billion (19% of GDP) over the next 15 months will be partly met by Greek banks repaying "pillar-one" bonds back to the government, as well as intergovernment lending within the broader public sector and, more marginally, through privatization. We also expect about €20 billion to be raised in domestic local-law markets, about €12 billion from official lenders, and up to €5 billion from additional foreign bond placements.

As a result, we expect the gross government debt stock to broadly stabilize in nominal terms, declining slightly to 164% of GDP in 2017 from a peak of 177% in 2014. We note, however, that even at this somewhat lower level, Greece's general government debt stock will remain among the highest of all the sovereigns we rate.

That said, since the April and May 2012 public debt restructurings, other aspects of Greece's debt profile have improved. At 15.8 years currently, the average maturity of the Greek government's debt stock has more than doubled (it was 6.3 years in 2011). Of Greek central government debt, 72% is now noncommercial, with interest rates consistently below-market. Furthermore--and partly reflecting the European Financial Stability Facility allowing the Greek government to defer second-program interest payments for the first 10 years--the average interest rate paid on the noncommercial stock of debt is less than 2.0%, compared to our average nominal GDP projection of 2.8% for 2015-2017. Moreover, about 40% of Greece's commercial debt is held by the ECB and the central banks of the Eurosystem. (We classify bonds held by the Eurosystem as commercial debt since we view these holdings as monetary and not fiscal operations.)

We view Greece's economic recovery as gradual but weak, with 2017 real GDP still 20% lower than in 2007. A 16% decrease in unit labor costs between 2008 and 2013 has helped Greece's tourism sector. Its small manufacturing sector, however, has not benefited to the same extent (unlike in Spain, Portugal, or Ireland). Investment, still 40% below the 2007 rate, should pick up but only slowly. We believe investment levels will be constrained by a lack of confidence, an ineffective monetary transmission mechanism, and limited foreign direct investment. Household consumption will only gradually benefit from eventual job market stabilization.

We expect the current account to remain broadly balanced in 2014-2017 against a deficit of 11% of GDP in 2009. Although the services sector has been buoyant, most of the adjustment has taken place through a decrease in imports. Greece's capital and financial accounts have adjusted through strong EU fund inflows, debt forgiveness, and fresh market funding.

Despite this positive shift in external flow dynamics, Greece's external vulnerabilities persist: it has high external debt and limited monetary flexibility. We estimate external debt at about 450% of current account receipts in 2014 (net of public and financial sector external assets). In particular, about half of Greece's gross external debt stock is short term, mostly contracted by Greek banks, and therefore has to be rolled over. We anticipate that cross-border interbank deposits will stabilize, while ECB funding--about 20% of total banking system liabilities--will remain in place.

While we expect the Greek government will broadly adhere to the current policy framework, we view Greece's complicated political and policy environment as a ratings weakness. Even though reforms have so far supported fiscal performance and progress in restructuring of the economy, social tensions and a weak institutional framework remain.


OUTLOOK
The outlook is stable, balancing our view of Greece's progress in fiscal consolidation against the still-weak economic recovery and political resolve to continue with structural and institutional reforms. The outlook also assumes no further distressed exchanges on Greece's remaining stock of commercial debt.

We could raise our long-term ratings on Greece if GDP growth were to increase more than we currently expect, or if the institutional framework were to strengthen significantly. This could result in structural reforms to the labor and product markets bearing fruit more rapidly than we foresee, or the banking system rehabilitating to the extent that it can provide more dynamic credit growth.

We could lower the ratings if the government does not succeed in stabilizing its debt as a share of GDP, due, for example, to greater deflationary pressures than we currently expect. We could also lower the ratings if we believe private creditors will be asked to participate in a third rescheduling, either because of a change in government policy or because of comparability of treatment between official (bilateral and multilateral) and private lenders.

KEY STATISTICS

Table 1

Hellenic Republic of Greece - Selected Indicators
20072008200920102011201220132014201520162017
Nominal GDP (US$ bil)305342322295290248242244240247255
GDP per capita (US$)27,59930,82029,04226,50826,10722,33021,72621,89221,57022,17822,893
Real GDP growth (%)3.5(0.2)(3.1)(4.9)(7.1)(7.0)(3.9)(0.2)1.92.32.7
Real GDP per capita growth (%)3.4(0.4)(3.3)(5.0)(7.2)(7.0)(3.9)(0.2)1.92.32.7
Change in general government debt/GDP (%)6.810.315.813.412.3(26.5)8.10.00.50.70.5
General government balance/GDP (%)(6.8)(9.9)(15.6)(11.0)(9.6)(8.9)(12.7)(2.0)(1.5)(1.2)(1.0)
General government debt/GDP (%)107.2112.9129.7148.3170.3157.2175.1176.7173.2169.1164.4
Net general government debt/GDP (%)105.2110.6128.0143.3166.0150.5167.8169.3166.0162.2157.6
General government interest expenditure/revenues (%)11.812.613.514.717.011.38.79.08.27.97.3
Oth dc claims on resident non-govt. sector/GDP (%)93.897.394.1118.5121.7120.8122.6119.4115.0112.9110.5
CPI growth (%)3.04.21.34.73.11.0(0.9)(0.6)0.30.50.8
Gross external financing needs/CARs +use. res (%)323.9360.7494.5542.8514.1440.1389.9332.5313.6306.8290.0
Current account balance/GDP (%)(14.6)(14.9)(11.2)(10.1)(9.9)(2.4)0.80.70.80.11.5
Current account balance/CARs (%)(54.4)(52.5)(49.7)(41.5)(36.5)(7.9)2.32.12.20.24.1
Narrow net external debt/CARs (%)366.5313.4462.7486.0396.9513.5480.9452.5420.0387.5356.3
Net external liabilities/CARs (%)384.8256.7396.3406.4289.2370.1360.2344.0324.2306.0284.7
Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. CARs--Current account receipts.
The data and ratios above result from S&P’s own calculations, drawing on national as well as international sources, reflecting S&P’s independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.
RATINGS SCORE SNAPSHOT

Table 2

Hellenic Republic of Greece - Ratings Score Snapshot
Key Rating Factors
Institutional and Governance EffectivenessWeakness
Economic Structure and GrowthNeutral
External Liquidity and International Investment PositionWeakness
Fiscal Flexibility and PerformanceNeutral
Debt BurdenWeakness
Monetary FlexibilityNeutral
Standard & Poor's analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional and governance effectiveness; (ii) economic structure and growth prospects; (iii) external liquidity and international investment position; (iv) the average of government debt burden and fiscal flexibility and fiscal performance; and (v) monetary flexibility. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). Section V.B of Standard & Poor's "Sovereign Government Rating Methodology And Assumptions," published on June 24, 2013, summarizes how the various factors are combined to derive the sovereign foreign currency rating, while section V.C details how the scores are derived. The ratings score snapshot summarizes whether we consider that the individual rating factors listed in our methodology constitute a strength or a weakness to the sovereign credit profile, or whether we consider them to be neutral. The concepts of "strength", "neutral", or "weakness" are absolute, rather than in relation to sovereigns in a given rating category. Therefore, highly rated sovereigns will typically display more strengths, and lower rated sovereigns more weaknesses. In accordance with Standard & Poor's sovereign ratings methodology, a change in assessment of the aforementioned factors does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the assessments.


UPDATE: S&P Upgrades Greece from 'B-' to 'B'; Risks to Fiscal Consolidation Have Faded Sep 12, 2014 11:47AM

(Updated - September 12, 2014 11:47 AM EDT)

On Sept. 12, 2014, Standard & Poor's Ratings Services raised its long-term foreign and local currency sovereign credit ratings on the Hellenic Republic (Greece) to 'B' from 'B-'. At the same time, we affirmed the short-term sovereign credit ratings at 'B'. The outlook is stable.


RATIONALE

The upgrade reflects our view that risks to fiscal consolidation in Greece have abated. We forecast that, from next year, the Greek economy will emerge from seven consecutive years of negative growth. We expect recovering real and nominal GDP will enable Greece to operate average primary surpluses of 2% of GDP during 2014-2017. This is less than the 4.5% of GDP target the government envisioned in its program with the European Union (EU), the European Central Bank (ECB), and the IMF (together, the "Troika"), but we believe the lower estimate is politically more feasible than the government's target and consistent with a modest decline in government debt as a share of GDP.

We expect the government to absorb an increased share of EU funds, further widen its tax base, and improve tax collection. On the other hand, we believe the government has little room for further maneuver on the expenditure side. We believe it will carry out modest tax cuts, and we acknowledge downside risks to our forecast should deflationary pressure in the economy become entrenched.

We also view as low the likelihood of additional step-rises in government debt due to bank recapitalizations: the four largest domestic banks have raised €8.4 billion of capital directly from the markets and the Hellenic Financial Stability Fund has a balance of €11 billion for any capital calls from the public sector. Although the government may receive additional debt relief from official creditors, we do not anticipate it will approach private sector creditors for a third rescheduling. We also assume the government will continue to service the approximately €3 billion of debt held by creditors who did not participate in the two debt exchanges of 2012.

In our view, the Greek government's gross borrowing requirements of about €43 billion (19% of GDP) over the next 15 months will be partly met by Greek banks repaying "pillar-one" bonds back to the government, as well as intergovernment lending within the broader public sector and, more marginally, through privatization. We also expect about €20 billion to be raised in domestic local-law markets, about €12 billion from official lenders, and up to €5 billion from additional foreign bond placements.

As a result, we expect the gross government debt stock to broadly stabilize in nominal terms, declining slightly to 164% of GDP in 2017 from a peak of 177% in 2014. We note, however, that even at this somewhat lower level, Greece's general government debt stock will remain among the highest of all the sovereigns we rate.

That said, since the April and May 2012 public debt restructurings, other aspects of Greece's debt profile have improved. At 15.8 years currently, the average maturity of the Greek government's debt stock has more than doubled (it was 6.3 years in 2011). Of Greek central government debt, 72% is now noncommercial, with interest rates consistently below-market. Furthermore--and partly reflecting the European Financial Stability Facility allowing the Greek government to defer second-program interest payments for the first 10 years--the average interest rate paid on the noncommercial stock of debt is less than 2.0%, compared to our average nominal GDP projection of 2.8% for 2015-2017. Moreover, about 40% of Greece's commercial debt is held by the ECB and the central banks of the Eurosystem. (We classify bonds held by the Eurosystem as commercial debt since we view these holdings as monetary and not fiscal operations.)

We view Greece's economic recovery as gradual but weak, with 2017 real GDP still 20% lower than in 2007. A 16% decrease in unit labor costs between 2008 and 2013 has helped Greece's tourism sector. Its small manufacturing sector, however, has not benefited to the same extent (unlike in Spain, Portugal, or Ireland). Investment, still 40% below the 2007 rate, should pick up but only slowly. We believe investment levels will be constrained by a lack of confidence, an ineffective monetary transmission mechanism, and limited foreign direct investment. Household consumption will only gradually benefit from eventual job market stabilization.

We expect the current account to remain broadly balanced in 2014-2017 against a deficit of 11% of GDP in 2009. Although the services sector has been buoyant, most of the adjustment has taken place through a decrease in imports. Greece's capital and financial accounts have adjusted through strong EU fund inflows, debt forgiveness, and fresh market funding.

Despite this positive shift in external flow dynamics, Greece's external vulnerabilities persist: it has high external debt and limited monetary flexibility. We estimate external debt at about 450% of current account receipts in 2014 (net of public and financial sector external assets). In particular, about half of Greece's gross external debt stock is short term, mostly contracted by Greek banks, and therefore has to be rolled over. We anticipate that cross-border interbank deposits will stabilize, while ECB funding--about 20% of total banking system liabilities--will remain in place.

While we expect the Greek government will broadly adhere to the current policy framework, we view Greece's complicated political and policy environment as a ratings weakness. Even though reforms have so far supported fiscal performance and progress in restructuring of the economy, social tensions and a weak institutional framework remain.


OUTLOOK
The outlook is stable, balancing our view of Greece's progress in fiscal consolidation against the still-weak economic recovery and political resolve to continue with structural and institutional reforms. The outlook also assumes no further distressed exchanges on Greece's remaining stock of commercial debt.

We could raise our long-term ratings on Greece if GDP growth were to increase more than we currently expect, or if the institutional framework were to strengthen significantly. This could result in structural reforms to the labor and product markets bearing fruit more rapidly than we foresee, or the banking system rehabilitating to the extent that it can provide more dynamic credit growth.

We could lower the ratings if the government does not succeed in stabilizing its debt as a share of GDP, due, for example, to greater deflationary pressures than we currently expect. We could also lower the ratings if we believe private creditors will be asked to participate in a third rescheduling, either because of a change in government policy or because of comparability of treatment between official (bilateral and multilateral) and private lenders.

KEY STATISTICS

Table 1

Hellenic Republic of Greece - Selected Indicators
20072008200920102011201220132014201520162017
Nominal GDP (US$ bil)305342322295290248242244240247255
GDP per capita (US$)27,59930,82029,04226,50826,10722,33021,72621,89221,57022,17822,893
Real GDP growth (%)3.5(0.2)(3.1)(4.9)(7.1)(7.0)(3.9)(0.2)1.92.32.7
Real GDP per capita growth (%)3.4(0.4)(3.3)(5.0)(7.2)(7.0)(3.9)(0.2)1.92.32.7
Change in general government debt/GDP (%)6.810.315.813.412.3(26.5)8.10.00.50.70.5
General government balance/GDP (%)(6.8)(9.9)(15.6)(11.0)(9.6)(8.9)(12.7)(2.0)(1.5)(1.2)(1.0)
General government debt/GDP (%)107.2112.9129.7148.3170.3157.2175.1176.7173.2169.1164.4
Net general government debt/GDP (%)105.2110.6128.0143.3166.0150.5167.8169.3166.0162.2157.6
General government interest expenditure/revenues (%)11.812.613.514.717.011.38.79.08.27.97.3
Oth dc claims on resident non-govt. sector/GDP (%)93.897.394.1118.5121.7120.8122.6119.4115.0112.9110.5
CPI growth (%)3.04.21.34.73.11.0(0.9)(0.6)0.30.50.8
Gross external financing needs/CARs +use. res (%)323.9360.7494.5542.8514.1440.1389.9332.5313.6306.8290.0
Current account balance/GDP (%)(14.6)(14.9)(11.2)(10.1)(9.9)(2.4)0.80.70.80.11.5
Current account balance/CARs (%)(54.4)(52.5)(49.7)(41.5)(36.5)(7.9)2.32.12.20.24.1
Narrow net external debt/CARs (%)366.5313.4462.7486.0396.9513.5480.9452.5420.0387.5356.3
Net external liabilities/CARs (%)384.8256.7396.3406.4289.2370.1360.2344.0324.2306.0284.7
Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. CARs--Current account receipts.
The data and ratios above result from S&P’s own calculations, drawing on national as well as international sources, reflecting S&P’s independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.
RATINGS SCORE SNAPSHOT

Table 2

Hellenic Republic of Greece - Ratings Score Snapshot
Key Rating Factors
Institutional and Governance EffectivenessWeakness
Economic Structure and GrowthNeutral
External Liquidity and International Investment PositionWeakness
Fiscal Flexibility and PerformanceNeutral
Debt BurdenWeakness
Monetary FlexibilityNeutral
Standard & Poor's analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional and governance effectiveness; (ii) economic structure and growth prospects; (iii) external liquidity and international investment position; (iv) the average of government debt burden and fiscal flexibility and fiscal performance; and (v) monetary flexibility. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). Section V.B of Standard & Poor's "Sovereign Government Rating Methodology And Assumptions," published on June 24, 2013, summarizes how the various factors are combined to derive the sovereign foreign currency rating, while section V.C details how the scores are derived. The ratings score snapshot summarizes whether we consider that the individual rating factors listed in our methodology constitute a strength or a weakness to the sovereign credit profile, or whether we consider them to be neutral. The concepts of "strength", "neutral", or "weakness" are absolute, rather than in relation to sovereigns in a given rating category. Therefore, highly rated sovereigns will typically display more strengths, and lower rated sovereigns more weaknesses. In accordance with Standard & Poor's sovereign ratings methodology, a change in assessment of the aforementioned factors does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the assessments.


Moody's Raises GEO Group's (GEO) Unsecured Rating to 'Ba3'; Notes High Fixed-Charge Coverage, Robust Op. Margins Sep 12, 2014 11:29AM

Moody's Investors Service upgraded GEO Group's (NYSE: GEO) senior unsecured rating to Ba3, from B1. The rating outlook is stable. Moody's also affirmed, with a stable outlook, GEO Group's corporate family at Ba3 as the preponderance of the REIT's debt is currently unsecured debt.

The following ratings were upgraded with a stable outlook:

GEO Group, Inc. - senior unsecured rating to Ba3, from B1; senior secured credit facility to Ba2, from Ba3

The following rating was affirmed with a stable outlook:

GEO Group, Inc. - corporate family rating at Ba3

RATINGS RATIONALE

Today's rating action reflects GEO's sound operational performance, continued improvement in operating margins, ample liquidity position, and high fixed charge coverage at 2.5x as of 2Q14. While the REIT's core business is highly vulnerable to government budgetary restraints, Moody's believes GEO's operating platform is diverse enough to absorb periods of modest deterioration in earnings without too much strain on its current rating.

In the last year, GEO has expanded its footprint in the US and abroad, enhancing its position as a leader in the private corrections industry; most notably, its recent announcement to develop and operate a new 1,000 bed corrections facility in Ravenhall, Australia. This unique opportunity presents the REIT with an additional avenue of growth and utilizes the REIT's expertise in providing services across its full GEO Continuum of Care which includes rehabilitation and community re-entry programs. This project coupled with newly awarded contracts reflect the continued need for prison privatization at the federal and state levels.

Moody's notes that GEO Group has negligible amounts of debt maturing through 2019 with no more than 1.2% of total debt maturing in any given year. It recently amended its $700 million credit revolver, extending its maturity date to August 2019. As outlined to Moody's, the REIT also added a A$225 million letter of credit facility maturing in August 2017 for its Ravenhall project in Australia.

The stable outlook reflects Moody's expectation that GEO Group will continue to grow while maintaining its solid credit metrics and adequate liquidity profile.

Moody's indicated that upward ratings movement would be dependent upon GEO Group achieving closer to $5 billion in gross assets, fixed charge coverage (EBITDAR/fixed charges (inclusive of interest expense, capitalized interest, principal amortization and rent expense)) above 2.5x on a sustainable basis, effective leverage below 40%, and operating margins above 25%.

Ratings pressure would likely result from secured debt levels above 20%, net debt to EBITDA above 5.5x, fixed charge coverage below 2.0x, and or a stall in revenue growth due to major client loss.

Moody's last rating action with respect to GEO Group was on March 12, 2013 when Moody's assigned a B1 to GEO's senior unsecured notes and revised the outlook to positive from stable.


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