German State of Saxony-Anhalt 'AA+/A-1+' Ratings Affirmed; Outlook Stable

Research Update: German State of Saxony-Anhalt 'AA+/A-1+' Ratings Affirmed; Outlook Stable Primary Credit Analyst, Sovereigns And International Public Finance: Michael Stroschein, Frankfurt +49 69 33 999 251; michael.stroschein@spglobal.com Secondary Contact, Sovereigns And International Public Finance: Thomas Fischinger, Frankfurt (49) 69-33-999-243; thomas.fischinger@spglobal.com Table Of Contents Overview Rating Action Outlook Rationale Key Statistics Ratings Score Snapshot Key Sovereign Statistics Related Criteria And Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 06, 2017 1

Research Update: German State of Saxony-Anhalt 'AA+/A-1+' Ratings Affirmed; Outlook Stable Overview Strong revenue growth for the State of Saxony-Anhalt is likely to almost fully compensate additional expenditures compared with 2016, which will enable the state to maintain its very strong budgetary performance, make small net debt repayments, and support a solid liquidity position. We are therefore affirming our 'AA+/A-1+' long- and short-term issuer credit ratings on Saxony-Anhalt. The stable outlook reflects our expectation that the reform of the German fiscal equalization mechanism in 2020 will not negatively affect Saxony-Anhalt, and that the state will continue to achieve balanced budgets and meet its debt reduction plans. Rating Action On Oct. 6, 2017, S&P Global Ratings affirmed its 'AA+' long-term and 'A-1+' shortterm issuer credit ratings on the German State of Saxony-Anhalt. The outlook remains stable. At the same time, we affirmed our 'AA+' issue rating on Saxony-Anhalt's senior unsecured debt and our 'A-1+' ratings on the state's short-term debt and commercial paper. Outlook The stable outlook reflects our expectation that, thanks to strong tax and taxrelated revenues, Saxony-Anhalt will continue to achieve balanced budgets and meet its strategy of gradual debt reduction. The outlook also factors in our belief that the new national fiscal equalization system, applicable from 2020, will preserve Germany's extremely supportive institutional framework for its states. Downside Scenario We could lower our ratings if Saxony-Anhalt failed to achieve surpluses after capital accounts, which are needed to reduce its very high amount of outstanding direct debt. Under this scenario, we could also revise our assessment of the state's financial management. Upside Scenario We could raise the ratings if the state managed to close the gap between the German average and the state's key economic figures, such as value added, unemployment, and population growth, while simultaneously reducing debt outstanding. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 06, 2017 2

However, we currently view both the downside and upside scenarios as unlikely. Rationale Our ratings on the State of Saxony-Anhalt continue to benefit decisively from the extremely predictable and supportive institutional framework under which German states operate. In our view, this will remain unchanged also after the upcoming reform of the national fiscal equalization mechanism in 2020. The extensive redistribution of (currently extremely strong) national tax revenues compensates the effects of Saxony-Anhalt's less favorable local socioeconomic and demographic profile. Because of the significant, formula-based transfers, the state will, in our view, continue to post balanced budgets after capital accounts and continue to gradually reduce its currently still very high level of outstanding debt. The flipside of a transfer-heavy fiscal system is weak budgetary flexibility, as the state does not unilaterally control the vast majority of its revenues. The state's strong financial management, excellent access to liquidity, and low contingent liabilities continue to support the ratings. The very likely extraordinary financial support from the federal government or other German states in a stress situation raises our 'aa' stand-alone credit profile assessment by one notch to the resulting 'AA+' long-term rating of Saxony-Anhalt. Strong national economy and supportive fiscal equalization framework compensate less favorable local economic position Saxony-Anhalt's economy displays a roughly similar performance as most of its East German peers. Its 2016 GDP per capita of US$29,200 equivalent is high in an international comparison, but amounts to only 70% of the medium value for the Federal Republic of Germany as a whole. With GDP growth roughly in line with the national average, we expect this gap to persist for the near future. Saxony-Anhalt's unemployment rate has decreased significantly from 18.3% in 2006. However, at 8.2% in August 2017 (German national definition), it is still higher than that of neighboring regions, including the East German states of Saxony (6.4%) and Thuringia (5.9%). Furthermore, Saxony-Anhalt has faced a continuously declining population since the German reunification, not least due to outbound migration of working-age people. While the migration balance has recently turned positive and 2015 witnessed a slight increase in inhabitants, official forecasts continue to project that the state's population will fall by roughly another 10% by 2030, primarily due to a deficit of births over deaths. The fiscal effects of the comparatively less favorable local economic backdrop of Saxony-Anhalt are, however, fully compensated by the German national fiscal equalization mechanism in its current form. This system allows the state to benefit from the comparatively stronger economic position of the wider German economy. In particular, any shortfalls to the nationwide average are largely corrected by an extensive state-to-state and federal-to-state redistribution of tax revenues with the aim of achieving a near-equal per-capita tax revenue endowment among the states. In 2016, fiscal-resource dependent equalization transfers (supplementary value-added tax [VAT] portions, state-to-state redistributions, and general supplementary WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 06, 2017 3

federal grants) amounted to 2.3 billion or about 22% of the Saxony-Anhalt's operating revenues. Despite upcoming changes to the German fiscal equalization mechanism after 2019, we continue to consider the system to be one of the most predictable and supportive worldwide. Saxony-Anhalt will remain a major net beneficiary of the system. In July- August 2017, the German president formally signed into applicable law the reorganization of the national fiscal equalization scheme from 2020. The horizontal equalization among the states will be abolished. Instead, it will be replaced by a more extensive redistribution of VAT revenues by the federal level, which will take the states' diverging original financial resource positions into account. All factors considered, we expect that Saxony-Anhalt will receive marginally higher transfers from the system in 2020 than in 2019 because of the realignments. Therefore, the planned changes to the fiscal equalization framework will, in our view, not negatively affect Saxony-Anhalt's ability to comply with the "debt brake"- rule in the German federal constitution. As of 2020, balanced budgets are generally required and net new borrowings are allowed only under specific, legally defined exceptional circumstances. Despite the current three-party coalition (in place since last year) displaying a slightly less pronounced focus on fiscal austerity than the last administration, we think that Saxony-Anhalt's strong financial management will allow the state to meet these fiscal rules. We forecast slightly smaller budgetary surpluses, further debt repayments, and an exceptional liquidity position overall In our opinion, Saxony-Anhalt will likely continue posting balanced budgets even after a moderate hike in spending. For 2017-2020, we continue to assume tax revenues above budget and financial planning (by more than 200 million per year) and lowerthan-budgeted costs for refugees. However, increased expenditures of about 500 million per year, for example, for infrastructure projects and transfers to municipalities, will likely result in smaller budgetary surpluses after capital accounts in 2017-2020 compared with an average of 4.9% of total revenues in 2015-2016. At the same time, operating surpluses will likely stay strong at about 8% of operating revenues over the medium term. Our forecast for 2019 and 2020 is somewhat complicated by uncertainty about whether, to what extent, and in what form a still-to-be-formed new coalition government at the German national level might lower taxes after the September national general election, as promised by almost all parties in their election programs. Our basecase assumption is that the state might lose a manageable 150 million (1.5% of operating revenue) in those two years. Despite some discretion over capital expenditures, we consider Saxony-Anhalt's overall budgetary flexibility to be weak, and, hence, a constraining rating factor. The vast majority of revenues consist of transfers and shared taxes that the state can influence only through its representation in the Bundesrat (second chamber of federal parliament), but that it does not unilaterally control. Significant easily sellable assets are not available. In the medium-to-long term, this is exacerbated WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 06, 2017 4

by the declining working-age population and other age-related budgetary pressures, in our view. We nonetheless believe that Saxony-Anhalt has the capacity to achieve its stated political objective of reducing outstanding direct debt by 100 million per year as a result of budgetary surpluses. Currently, Saxony-Anhalt's debt burden (about 200% of operating revenues) is still very high in an international comparison, but not out of line when compared with many other German states. We anticipate the debt ratio to fall slowly to below 190% in 2020. In addition to very high direct debt, the state has a high share of unfunded pension liabilities, estimated at significantly more than 100% of operating revenues. However, we note positively that Saxony-Anhalt makes ongoing contributions to a growing pension fund designed to cover pension liabilities for employees hired after 2006, which is fully invested in external assets. Saxony-Anhalt's liquidity is exceptional in an international comparison, particularly when taking into account its access to external liquidity. With maturities somewhat lower than in the recent past (excluding commercial paper, e.g. 2 billion in 2018 versus 3.75 billion in 2016) and a roughly unchanged amount of available liquid assets (cash and other liquid assets, for example, securities allocated to a tax fluctuation reserve of 500 million), the state's debt service coverage ratio has recently improved to almost 100%. Moreover, our assessment of Saxony-Anhalt's liquidity position also rests on the state's excellent access to capital market funding and its ability to tap into liquidity provided by other governmental institutions. The state borrows in "Schuldschein"-format, regularly issues bonds in the capital markets (also in foreign currencies), and maintains a commercial paper program. It can turn to a voluntary platform of short-term funding from the German federal treasury and other states, utilize two smaller credit lines with banks, and has intraday access to funds from the central bank, Deutsche Bundesbank. Including the state's 5.6% minority stake in Norddeutsche Landesbank, we view Saxony-Anhalt's contingent liabilities as being low. Other outstanding guarantees consist mainly of indemnifications for Saxony-Anhalt's economic and social development bank (IB Sachsen-Anhalt) and its promotional lending activities. Yearly losses from these guarantees are minimal. Key Statistics Table 1 State of Saxony - Anhalt Key Statistics --Fiscal year ending Dec. 31-- (Mil. ) 2014 2015 2016 2017bc 2018bc 2019bc 2020bc Operating revenues 9,461 9,824 10,142 10,144 10,229 10,274 10,591 Operating expenditures 8,653 8,888 9,136 9,377 9,383 9,439 9,566 Operating balance 809 937 1,006 767 846 835 1,025 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 06, 2017 5

Table 1 State of Saxony - Anhalt Key Statistics (cont.) --Fiscal year ending Dec. 31-- (Mil. ) 2014 2015 2016 2017bc 2018bc 2019bc 2020bc Operating balance (% of operating revenues) 8.5 9.5 9.9 7.6 8.3 8.1 9.7 Capital revenues 597 971 670 1,112 1,075 874 558 Capital expenditures 1,264 1,409 1,124 1,796 1,829 1,674 1,476 Balance after capital accounts 142 498 552 83 91 36 108 Balance after capital accounts (% of total revenues) 1.4 4.6 5.1 0.7 0.8 0.3 1.0 Debt repaid 4,617 5,176 5,000 3,420 2,545 2,092 1,295 Gross borrowings 4,542 5,076 4,875 3,320 2,445 1,992 1,195 Balance after borrowings 67 398 427 (18) (9) (64) 8 Modifiable revenues (% of operating revenues) 4.5 4.6 4.4 4.4 4.2 4.1 4.1 Capital expenditures (% of total expenditures) 12.7 13.7 11.0 16.1 16.3 15.1 13.4 Direct debt (outstanding at year-end) 20,521 20,051 20,299 20,199 20,099 19,999 19,899 Direct debt (% of operating revenues) 216.9 204.1 200.2 199.1 196.5 194.7 187.9 Tax-supported debt (outstanding at year-end) 20,521 20,168 20,497 20,397 20,297 20,197 20,097 Tax-supported debt (% of consolidated operating revenues) 216.9 205.3 202.1 201.1 198.4 196.6 189.8 Interest (% of operating revenues) 6.3 5.6 5.0 4.6 3.9 4.1 4.0 Local GDP per capita ( ) 25,031 25,828 26,360 27,201 27,952 28,692 29,444 National GDP per capita ( ) 36,202 37,351 38,122 39,488 40,679 41,820 42,959 The data and ratios above result in part from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. The main sources are the financial statements and budgets, as provided by the issuer. bc--base case: reflects S&P Global Ratings' expectations of the most likely scenario. Ratings Score Snapshot WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 06, 2017 6

Table 2 State of Saxony - Anhalt Ratings Score Snapshot Key rating factors Institutional framework Economy Financial management Budgetary flexibility Budgetary performance Liquidity Debt burden Contingent liabilities Extremely predictable and supportive Strong Strong Weak Very strong Exceptional Very high Low *S&P Global Ratings bases its ratings on local and regional governments on the eight main rating factors listed in the table above. Section A of S&P Global Ratings' "Methodology For Rating Non-U.S. Local And Regional Governments," published on June 30, 2014, summarizes how the eight factors are combined to derive the rating. Key Sovereign Statistics Sovereign Risk Indicators, July 6, 2016. Interactive version available at http://www.spratings.com/sri Related Criteria And Research Related Criteria General Criteria: Methodology For Linking Long-Term And Short-Term Ratings - April 07, 2017 Criteria - Governments - International Public Finance: Methodology For Rating Non- U.S. Local And Regional Governments - June 30, 2014 Criteria - Governments - International Public Finance: Methodology And Assumptions For Analyzing The Liquidity Of Non-U.S. Local And Regional Governments And Related Entities And For Rating Their Commercial Paper Programs - October 15, 2009 General Criteria: Use Of CreditWatch And Outlooks - September 14, 2009 Related Research Institutional Framework Assessments For Non-U.S. Local And Regional Governments - September 21, 2017 Research Update: Germany 'AAA/A-1+' Ratings Affirmed; Outlook Stable April 28, 2017 Refinancing Needs Continue To Dominate German, Swiss, And Austrian Local And Regional Government Borrowing In 2017 - February 23, 2017 Default, Transition, and Recovery: 2016 Annual Non-U.S. Local And Regional Government Default Study And Rating Transitions - May 08, 2017 Public Finance System Overview: German States December 16, 2016 Banking Industry Country Risk Assessment: Germany September 07, 2016 In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 06, 2017 7

experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision. After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts. The committee agreed that liquidity had improved. All other key rating factors were unchanged. Key rating factors are reflected in the Ratings Score Snapshot above. The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action (see 'Related Criteria and Research'). Ratings List Rating To From Saxony-Anhalt (State of) Issuer Credit Rating Foreign and Local Currency AA+/Stable/A-1+ AA+/Stable/A-1+ Senior Unsecured Foreign and Local Currency AA+ AA+ Short-Term Debt Foreign and Local Currency A-1+ A-1+ Commercial Paper Local Currency A-1+ A-1+ Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 06, 2017 8

Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009. Additional Contact: International Public Finance Ratings Europe; PublicFinanceEurope@spglobal.com WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 06, 2017 9

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