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Japanese industrial firms still strong credit bets, despite 2012 outlook

24 Feb 2012

Japanese industrial companies feeling the crunch of a high-yen environment, weakening exports and rising costs stemmed from electric power shortages would do well to issue local debt to meet investor demand, advise credit experts.

Environmental issues such as a strong yen, lacklustre domestic demand and sluggish exports may force down the creditworthiness of Japanese industrial companies as they struggle to maintain their balance sheets, says credit rating agencies. However, experts don’t expect these factors to hinder their ability to get loans and issue bonds in 2012, and, in fact, predict strong appetite for their debt.

Junk Nishioka, head of Japan research and strategy and chief economist at RBS, says the cash-rich position of many of these firms helps to install confidence in their corporate debt, making them appealing bonds for investors to buy into. This may spark a greater volume of bonds issuance by these companies in 2012.

“Their profiles remain quite strong across the board because they’re still in a cash-rich position and they continue to look at M&A activity. This gives them strong future value, and investors are drawn to that,” she said. “Of course it depends on the industry - if we’re talking about the semiconductor industry or some company that provides home appliances, these are relatively high-risk for credit conditions – but when it comes to industrial domestic companies, their competitiveness is still high.”

That outlook comes as both Moody’s Japan and Standard & Poor’s Ratings Services (S&P) released independent reports predicting that Japanese industrial companies’ earnings could stagnate in 2012 due to factors such as the strong yen, weakening overseas exports and demand at home, as well as and rising costs stemming from electric power shortages.

While these factors are expected to put pressure on their balance sheets - undoing much of the recovery growth seen in 2011 after the March 11 2011 disaster – their strong relative position will still lure investors. Credit analysts say that the negative pressure on these sectors’ companies will not affect their ability to get funding from banks, due to their strong liquidity profiles and positive relationships to domestic banks.

“We have very small concerns for the welfare of these companies because Japanese banks, which have ample liquidity, are still very supportive of them. I don’t think Japanese non-financial corporations will face that difficult of a liquidity situation,” Kazusada Hirose, vice president of at Moody’s corporate finance group, told Asiamoney PLUS.

Hirose agrees that 2012 may be a good environment for these companies to issue debt, noting that investors are looking to diversify their portfolios with non-financial corporate debt. This demand will be able to support an even greater rush of issues, though it’s unknown whether these companies will take advantage of the environment.

“We see that newly issued bonds are still issued at very low interested rates, and they’re seeing low spreads,” he said. “Credit default swap spreads are trading around 10 basis points or the low, low teens right now. Six months ago, when we were more concerned about electricity availability, we were seeing spreads at about 20 basis points. There’s very limited risk for Japanese non-financial firms now.”

Whether corporations will take advantage of the environment is yet to be seen, however. Because of their ability to access cash from banks, issuing bonds may not be their top priority, though they may consider it if they look to take advantage of M&A opportunities abroad.

“The strong yen makes M&A activity overseas enticing,” Nishioka concludes. “Issuing debt will be a consideration for companies given these favourable conditions.”

S&P reported that, as of January 31, only 2% of Japanese industrial companies’ annual outlooks was positive, compared to 61% labelled ‘stable’ and 30% that are ‘negative’. One year earlier, 75% of companies had stable outlooks, and only 23% were negative.

Meanwhile, Moody’s found that, by the end of 2011, 26% of these same corporates’ outlooks are negative for 2012, compared to 1% that had positive outlooks and 72% that looked stable. The latter dropped from 81% in 2010.

Broken down by industry, Moody’s found that utilities and manufacturing firms comprise the largest percentage of negative outlooks, while steelmakers, shipping and consumer electronics companies take smaller percentages.

24 Feb 2012