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Japan Corporate Credit Spotlight

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Japan Corporate Credit Spotlight Katsuyuki Nakai Japan Corporate Director Corporate Ratings Credit Spotlight Makiko Yoshimura Director October 22, 2020 Corporate Ratings Hiroki Shibata Senior Director Corporate Ratings Capital Goods And Heavy Industries; Automobiles And Components; Shipping; Airlines This report does not constitute a rating action. Japan Corporate Credit Spotlight Sector Comments Pages 3 - 11 Capital Goods And Heavy Industries Automobiles And Components Appendix Shipping Pages 12 - 14 Airlines All graphics show data for companies studied. Sector Comments Pages 3 - 11 Capital Goods And Heavy Industries Outlook: Stable Pressure Mounts Despite COVID-19 Resilience Trend And Changes – Diversification and core stability, strong product competitiveness, and ability to lower costs have tempered deteriorating performance. – Pressure is growing on performance of companies with high shares of sales from economically sensitive products and services. – Heavy investment burdens will likely hurt financial standings for a long time amid current conditions. – Companies studied face less pressure on creditworthiness than rated U.S. and European peers, of which almost half have negative outlooks. Key Assumptions – Many sector subcategories correlate strongly with GDP, except for electric power and agriculture. – New vehicle sales and aircraft production will not recover to 2019 levels even in 2022. – Companies more dependent on autos and aircraft will suffer EBITDA losses of up to 80% in fiscal 2020 and will take longer to recover. – Median debt/EBITDA will worsen to about 2x in fiscal 2020 from about 1x a year earlier, likely improving only to about 1.5x in fiscal 2021. 4 Capital Goods And Heavy Industries Risks And Key Credit Drivers: – Delayed recovery in major markets including autos, aircraft, electronics/semiconductors, and factory automation. – Business management policies and reorganization of portfolios with high economic sensitivity and environmental risk. – Ability to maintain competitiveness and profitability following reorganization and associated costs. – Burden of working capital, investment policies, and measures to reduce financial burdens if orders keep declining. Free operating cash flow (left) Tril. ¥ Revenues (left) EBITDA margin (right) % Bil. ¥ x Debt/EBITDA (right) 35.0 14.0 1,200 3.0 30.0 12.0 1,000 2.5 25.0 10.0 800 2.0 20.0 8.0 600 1.5 15.0 6.0 400 1.0 10.0 4.0 200 0.5 5.0 2.0 0.0 0.0 0 0.0 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 Source: S&P Global Ratings. Source: S&P Global Ratings. 5 Automobiles And Components Outlook: Negative Unit Sales To Remain Low Through 2022 Trend And Changes – COVID-19 has exacerbated problems caused by low demand, fueling a global plunge in unit sales. – Restrictions on movement globally will likely keep capacity utilization at very low levels. – Automakers and suppliers continue to spend heavily on developing next-generation technologies, despite challenging conditions. – We have downgraded many companies, including major Japanese automakers; many outlooks are now negative. Key Assumptions – New unit sales in 2020 will fall at least 20% in both the U.S. and Europe and about 6%-9% in China. – Demand will not recover quickly, with global auto sales in 2022 still below 2019 levels by around 6%. – The average EBITDA margin will fall to about 6% in fiscal 2020 from 9.4% the previous year and remain below pre- pandemic levels in the coming two to three years. – The companies studied will continue to maintain healthier financials than most overseas peers. 6 Automobiles And Components Risks And Key Credit Drivers: – A resurgence of the COVID-19 pandemic further delaying recovery in global auto sales. – A slow return to normal production hindering growth in unit sales and launch of new models. – More aggressive investment and shareholder return policies or a deterioration in captive finance businesses further hurting financial soundness. Free operating cash flow (left) Revenues (left) EBITDA margin (right) Tril. ¥ % Bil. ¥ x Debt/EBITDA (right) 80.0 16.0 5,000 0.5 70.0 14.0 4,000 0.4 60.0 12.0 50.0 10.0 3,000 0.3 40.0 8.0 2,000 0.2 30.0 6.0 20.0 4.0 1,000 0.1 10.0 2.0 0.0 0.0 0 0.0 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 Source: S&P Global Ratings. Source: S&P Global Ratings. 7 Shipping Outlook: Slightly Negative Stabilizing Measures Not Enough Trend And Changes – Sea cargo volume has shrunk substantially amid the COVID-19 pandemic. – Earnings from car carrier operations have plunged, while tanker and container operations are relatively steady. – Companies have sought to stabilize earnings by enhancing liquefied natural gas and offshore businesses, and decommissioning old vessels. – Declining earnings continue to weigh on already high debt-to-EBITDA ratios of about 8x. – More diversified businesses and higher proportions of long-term contracts ease pressure on Japanese companies compared with overseas peers. Key Assumptions – Demand for car carrier and tanker operations will remain sluggish. – Container transport volume will decrease about 10%-15% in 2020, but freight rates will fall little thanks to lower transport capacity. – Dry bulk shipping will perform relatively well thanks to China's imports of iron ore and coal. – The average EBITDA margin will slip to about 9% in fiscal 2020 from 11% the previous year, returning to 10% in fiscal 2021 as marine transport volume recovers. – Asset sales and reduced capital expenditure will limit the risk of further deterioration in financials. 8 Shipping Risks And Key Credit Drivers: – A prolonged slump in demand for container, dry bulk, and car carrier operations increasing pressure on earnings. – A heavier cost burden stemming from environmental regulations and safety enhancements. – Pressure on credit quality from potential changes to financial discipline or relationships with banks. Free operating cash flow (left) Tril. ¥ Revenues (left) EBITDA margin (right) % Bil. ¥ x Debt/EBITDA (right) 6.0 12.0 300 10.0 250 9.0 5.0 10.0 200 8.0 150 7.0 4.0 8.0 100 6.0 3.0 6.0 50 5.0 0 4.0 2.0 4.0 -50 3.0 -100 2.0 1.0 2.0 -150 1.0 0.0 0.0 -200 0.0 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 Source: S&P Global Ratings. Source: S&P Global Ratings. 9 Airlines Outlook: Negative Huge Headwinds In The Next Two Years Trend And Changes – Restrictions on movement will likely cause a 60%-70% annual drop in global passenger numbers in 2020. – Many Japan-based airlines are deep in the red. – Major carriers have maintained liquidity via creditor banks, even as their financial health declines. – Creditworthiness of Japan's airlines is under tremendous pressure, as seen in multi-notch downgrades of many overseas peers. Key Assumptions – Travel demand will not recover much in 2021, and passenger numbers will not revisit 2019 levels until at least 2024. – Average revenue per passenger will decline as long-haul and business travel are hit hardest. – Negative free cash flow will continue for a year or two despite lower operating expenses and capital spending. – Total debt at companies studied will grow to about ¥2 trillion in 2021-2022 from about ¥1.2 trillion in 2019. – The companies will maintain moderate interest coverage despite heavy pressure on financial ratios. 10 Airlines Risks And Key Credit Drivers: – A resurgence in COVID-19 or persistent economic decline further hampering a recovery in passenger traffic. – More remote work prolonging weak demand for profitable business travel. – Delays to cost and fleet reductions exacerbating earnings losses. – Material deterioration in financial ratios or increased pressure on liquidity further straining creditworthiness. Free operating cash flow (left) Revenues (left) EBITDA margin (right) Tril. ¥ % Bil. ¥ x Debt/EBITDA (right) 4.0 22.0 400 2.4 300 2.2 3.0 20.0 200 2.0 100 1.8 2.0 18.0 0 1.6 -100 1.4 1.0 16.0 -200 1.2 -300 1.0 0.0 14.0 -400 0.8 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 Source: S&P Global Ratings. Source: S&P Global Ratings. 11 Appendix Pages 12 - 14 Business Risk Profile And Financial Risk Profile Capital goods and heavy industries Rated Business risk profile Financial risk profile Anchor Modifiers or group/govt. Long-term issuer credit rating Mitsubishi Heavy Industries Ltd. O Satisfactory Modest bbb+ - BBB+ Komatsu Ltd. O Strong Modest a - A Hitachi Ltd. O Strong Modest a - A Kubota Corp. X Strong Modest - - - Toshiba Corp. O Fair Intermediate bb+ -1 BB Daikin Industries Ltd. X Strong Modest - - - IHI Corp. X Satisfactory Intermediate - - - Kawasaki Heavy Industries Ltd. X Satisfactory Significant - - - Mitsubishi Electric Corp. O Strong Modest a +1 A+ Automobiles and components Rated Business risk profile Financial risk profile Anchor Modifiers or group/govt. Long-term issuer credit rating Bridgestone Corp. O Strong Modest a - A Denso Corp. O Strong Minimal aa- -1 A+ Nissan Motor Co. Ltd. O Fair Modest bbb- - BBB- Toyota Motor Corp. O Strong Minimal aa- -1 A+ Mitsubishi Motors Corp. O Weak Modest bb+ -1 BB Aisin Seiki Co. Ltd. O Satisfactory Minimal a - A Mazda Motor Corp. X Fair Intermediate - - - Honda Motor Co. Ltd. O Satisfactory Minimal a -1 A- Suzuki Motor Corp. X Satisfactory Modest - - - Subaru Corp. X Fair Modest - - - As of Sept. 30, 2020. 13 Business Risk Profile And Financial Risk Profile Shipping Rated Business risk profile Financial risk profile Anchor Modifiers or group/govt. Long-term issuer credit rating Mitsui O.S.K. Lines Ltd. X Fair Aggressive - - - Nippon Yusen Kabushiki Kaisha X Fair Aggressive - - - Airlines Rated Business risk profile Financial risk profile Anchor Modifiers or group/govt. Long-term issuer credit rating ANA Holdings Inc.
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