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Moody's investor Services- Credit Implications of the US Election Outcome

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					NOVEMBER 7, 2012




SPECIAL COMMENT                                 Credit Implications of the US Election
                                                Outcome

Analyst Contacts:
                                                The re-election of President Obama in Tuesday’s election, with no change in congressional
                                                control, removes one element of uncertainty that has weighed on investor confidence and
NEW YORK                    +1.212.553.1653     decision-making. However, despite welcome clarity on the administrative and legislative
John Forrey                 +1.212.553.3644     landscape, the credit implications of the US election results for different industries are largely
Managing Director – Global Corp Research        unclear because Congress remains politically divided and thus it remains difficult to
john.forrey@moodys.com                          anticipate what changes in legislation may emerge. This Special Comment outlines our
Chris Holmes                  +1.212.553.3637   conclusions regarding a number of individual sectors.
Director of Public Finance Research
christopher.holmes@moodys.com

LONDON                    +44.20.7772.5454
                                                Sovereign. The political landscape remains highly polarized and unpredictable, perpetuating
Matt Robinson               +44.20.7772.5635    uncertainty about the difficult near- and longer-term issues pressuring U.S. sovereign
Director of Sovereign Research                  creditworthiness. Despite the clarity gained from the election outcome, it remains difficult to
matt.robinson@moodys.com
                                                predict when Congress will conclude negotiations that result in the passage of a budget
                                                package that either avoids or remedies the deleterious economic effects of the imminent fiscal
                                                shock. It is also not clear whether policymakers can reach consensus on measures that would
                                                result in a stable and ultimately declining debt trajectory.

                                                A scenario whereby action on the budget is delayed until sometime in 2013 appears
                                                increasingly likely; for example, via a temporary extension of most measures except the
                                                increase in the payroll tax. Such deferment, if not accompanied by an apparent commitment
                                                to achieving agreement and credible timetable for implementing the necessary reforms to
                                                preserve sovereign creditworthiness, would be inconsistent with maintaining the highest Aaa
                                                rating. (See US Election Outcome Provides Little Clarity On Fiscal Outlook, published
                                                November 7, 2012.)
                                                Steven Hess
                                                Senior Vice President
                                                +1.212.553.4741
                                                steven.hess@moodys.com
                                         Healthcare. With the President’s re-election the main provisions of the Affordable Care Act (ACA) are
                                         more likely to be implemented. The following is a brief summary of our views on the credit impact of
                                         this on various health care sectors:

Stephen Zaharuk                          »   Health Insurers: Overall we believe the ACA has negative credit implications for health insurers
Senior Vice President                        based mainly on the additional regulations and restrictions imposed on insurers, including: 1)
+1.212.553.1634
stephen.zaharuk@moodys.com                   limits on profitability through minimum medical loss ratios, 2) new taxes and assessments that
                                             would exacerbate the affordability issue as insurers seek to pass these costs on to consumers, and 3)
                                             reductions in revenues, both explicit (Medicare Advantage reimbursement reductions) and
                                             implicit (more aggressive review of rate increases). In addition, in our opinion, the penalties that
                                             accompany the mandates for individuals and employers are not sufficiently meaningful to ensure
                                             compliance. As a result, we believe the law will promote anti-selection (with healthy individuals
                                             forgoing coverage and less healthy taking advantage of its availability) and threaten the traditional
                                             employer-provided healthcare structure (as employers eliminate benefit programs).
                                             With President Obama winning a second term, we are now pretty much assured that the ACA
                                             will go forward, however a number of issues, which would have an impact on the credit
                                             implications for health insurers, remain unsettled, such as: potential changes in the
                                             implementation timeline, the specifics in regulations due to be released, and any changes to the
                                             ACA that the health insurance industry can negotiate.

Dean Diaz                                »   For-Profit Hospitals: The ACA is positive for for-profit hospitals as the expansion of healthcare
Vice President – Senior Credit Officer       coverage under the law will lessen for-profit hospital operators’ exposure to bad debts, which in
+1.212.553.4332
dean.diaz@moodys.com                         turn will improve margins and cash flow. However, we expect that the growth rate of Medicare
                                             reimbursements will also slow down, offsetting the benefit of lower bad-debt expense and making
                                             the overall credit impact of the ruling neutral to slightly positive.
Lisa Goldstein                           »   Not-for-profit hospitals. The most favorable component of the ACA–the individual mandate–
Associate Managing Director                  now has a greater chance of being implemented. Nevertheless, the ACA on the whole is a net
+1.212.553.4431
lisa.goldstein@moodys.com                    long-term credit negative for not-for-profit hospitals given the reductions in Medicare and
                                             Medicaid funding. Significant uncertainty remains as to the future of federal healthcare policy
                                             given the scope of the federal deficit, heightening credit risk in an already pressured operating
                                             environment. (See Re-Election of President Barack Obama is Credit Neutral for Not-for-Profit
                                             Hospitals, published November 7, 2012.)

Michael Levesque                         »   Pharmaceutical Companies: The credit impact is negative because pharmaceutical companies will
Senior Vice President                        continue to pay for the full adoption of the Affordable Care Act in the form of higher rebates to
+1.212.553.4093
michael.levesque@moodys.com                  the government for Medicaid drug costs, discounts to seniors covered under Medicare Part D
                                             drug plans and a new industry fee.

Diana Lee                                »   Medical Device Companies: A new excise tax on US revenues of medical-device makers is slightly
Vice President – Senior Credit Officer       credit negative. Beginning Jan. 1, 2013, US medical-device product sales will be subject to a 2.3%
+1.212.553.4747
diana.lee@moodys.com
                                             excise tax; the excise tax will be tax-deductible, resulting in an estimated effective tax rate of 1.5%
                                             on US device revenues. Many rated companies are planning cost cuts to help offset the effects of
                                             this tax.
                                         For additional information on the impact of the ACA on for-profit hospitals, pharmaceutical
                                         companies, medical device companies and health insurers please see US Healthcare: Supreme Court
                                         Ruling on Healthcare Law: What It Means for Credit and Supreme Court Ruling Upholding
                                         Healthcare Reform is Credit Negative for Health Insurers, both published June 28, 2012.




   2       NOVEMBER 7, 2012                                                                  SPECIAL COMMENT: CREDIT IMPLICATIONS OF THE US ELECTION OUTCOME
Robert Kurtter                    State and Local Governments. State and local governments are not likely to be directly or immediately
Managing Director                 affected by the outcome of the federal elections. They generally have low dependence on the federal
+1.212.553.4453
robert.kurtter@moodys.com         government for revenue and have self-determination over their own spending so that unilateral
                                  decisions of the President do not affect state and local credit quality. The President in conjunction
                                  with Congress can enact or modify programs for which the federal government shares costs with state
                                  and local governments. With a divided Congress, changes in the benefit and funding structure of
                                  major federal programs funded at the state or local level are likely to be moderate and incremental. The
                                  two main programs of federal support to state and local governments are Medicaid and federal
                                  highway support. Medicaid is a likely key target of federal deficit reduction when the President and
                                  Congress address spending cuts, and many other programs administered by state and local
                                  governments are likely to be trimmed.

Tobias Moerschen                  Banks. The credit implications for banks of federal elections are likely to be marginal at most. With
Vice President - Research         regard to banking regulation, we expect that regulators will continue to implement the Dodd-Frank
+1.212.553.2891
tobias.moerschen@moodys.com       Act. Over time this could lead us to lower our support assumptions for the eight systemically
                                  important US banks, which is already reflected in the negative ratings outlook for those banks.

Karen Kedem                       Higher Education. The continued regulatory pressure to limit tuition increases and the possibility of
Vice President – Senior Analyst   tying funding and aid to tuition increases are credit negative for tuition dependent colleges. There is a
+1.212.553.3614
karen.kedem@moodys.com            high probability that these regulations will be implemented through the Department of Education and
                                  executive order, removing the obstacles of a divided Congress. The regulatory pressure outweighs the
                                  administration’s support of increased student aid (loans and Pell Grants) which could help reduce
                                  pressure on financial aid budgets. The continued scrutiny of for-profit education and renewed efforts
                                  to enact Gainful Employment regulations are credit negative for for-profit universities.

                                  The administration is supportive of research initiatives, but funding is limited. The fiscal cliff could
                                  lead to material cuts for market leading research universities, and congressional gridlock will restrict
                                  the administration’s ability to raise funding for these institutions.

                                  The re-election of President Obama is modestly credit positive for community colleges and state
                                  dependent universities, as the administration has proposed federal funding for these institutions for
                                  career training. However, funding constraints mean there is unlikely to be a material financial benefit
                                  to these colleges.

Jonathan Polansky                 Structured Finance. The election outcome is less significant to the credit quality of structured finance
Managing Director
+1.212.553.1657
                                  transactions than what the coming year will bring as the president and Congress struggle to address the
jonathan.polansky@moodys.com      nation’s economic woes. Of greatest significance to structured finance are the federal budget crisis,
Claire Robinson                   economic growth, housing policy, interest rates and Dodd-Frank regulations. (See US Election Less
Managing Director                 Significant for Structured Finance than Negotiations Between President Obama and Congress on
+1.212.553.1436
claire.robinson@moodys.com        Fundamental Economic and Regulatory Issues, published November 7, 2012.)

Steven Wood                       Oil & Gas. The election results have at the margin credit negative implications for the oil and gas
Managing Director
+1.212.553.0591
                                  sector because regulatory pressure in this sector will continue under President Obama and the master
steven.wood@moodys.com            limited trust structure commonly used in this sector is likely to come under threat. On the positive
                                  side, we expect the Keystone XL pipeline from Canada is likely to be eventually approved.
                                  (See Regulatory Pressure on Oil and Natural Gas To Continue Under President Obama, published
                                  November 7, 2012.)




   3       NOVEMBER 7, 2012                                                           SPECIAL COMMENT: CREDIT IMPLICATIONS OF THE US ELECTION OUTCOME
Russell Solomon              Aerospace & Defense. The aerospace and defense industry faces continued uncertainty following the
Senior Vice President        re-election of Barack Obama. The ongoing budgetary pressures and President Obama’s efforts to rein
+1.212.553.4301
russell.solomon@moodys.com   in defense spending pose increased risks for defense contractors. Mitt Romney had stated his intention
                             to reverse military spending cuts included in 2011’s Budget Control Act and National Defense
                             Authorization Act ($497 billion over 10 years) and the looming sequestration (another $500+ billion
                             over 10 years), while establishing longer-term minimum defense spending levels equivalent to 4% of
                             US gross domestic product. While it isn’t clear that Romney would have accomplished these goals, a
                             Republican victory in Tuesday’s presidential election would have been a decidedly more positive
                             outcome for aerospace and defense companies than Obama’s re-election.

                             The Office of Management and Budget request of February 2012 highlighted a shift in US military
                             strategic priorities over the coming years, including a down-sized military with troop reductions of up
                             to 15% or more (mostly Army and Marines) that are due to take hold beginning in 2014. This was
                             mainly evidenced by a reduced presence in Europe and a shift to the Pacific region. We commented
                             then that US defense outlays, which still comprise an estimated 40% to 45% of global military
                             expenditures, could drop below $500 billion by 2015, a level not seen since 2005 (see “Global
                             Aerospace and Defense – No Surprises in Relatively Benign US Defense Budget for Fiscal Year 2013”).
                             The 2013 budget request itself had already incorporated a 5% reduction, albeit just 1% for “base” level
                             expenditures stemming from efficiency savings and some modest slow-downs in program acquisitions,
                             and the bulk of cuts coming from reduced supplemental spending or “overseas contingency
                             operations” related to the shrinking war-time efforts in the Middle East.

                             Now, with virtually the same players remaining in place (also incorporating mostly similar political
                             stances in Congress), the uncertainty which has been pervasive in the industry all year will linger
                             further into next year. We don’t anticipate that much will be accomplished in the lame-duck session as
                             there is little political incentive for Congress to do so. That leaves the 2 January 2013 sequestration
                             trigger date as likely to arrive before any resolution is reached on an alternative. Obama has vowed to
                             veto any bill that removes the sequestration-driven cuts if new federal revenue streams (i.e., taxes) are
                             not identified as an offset, so the political standstill remains. The government is already operating
                             under a Continuing Resolution through March 2013, which has stalled new contract processions and
                             caused the industry to slow infrastructure investments and shrink labor forces. While sequestration is
                             still likely to get legislated away early next year, we continue to believe the “big” cuts in US defense
                             budgets and spending will come. The only real question is the degree and timing ofT the same.




  4      NOVEMBER 7, 2012                                                       SPECIAL COMMENT: CREDIT IMPLICATIONS OF THE US ELECTION OUTCOME
                       Report Number: 147150



                       Senior Production Associate
                       Judy Torre




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5   NOVEMBER 7, 2012                                                              SPECIAL COMMENT: CREDIT IMPLICATIONS OF THE US ELECTION OUTCOME

				
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