Japan Corporate Credit Spotlight - October 22, 2020 - S&P Global
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Japan Corporate Katsuyuki Nakai
Director
Corporate Ratings
Credit Spotlight Makiko Yoshimura
Director
Corporate Ratings
October 22, 2020
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.
4Capital 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.
5Automobiles 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.
6Automobiles 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)
Tril. ¥
Revenues (left) EBITDA margin (right) % 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.
7Shipping
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.
8Shipping
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.
9Airlines
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.
10Airlines
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)
Tril. ¥
Revenues (left) EBITDA margin (right) % 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.
11Appendix 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.
13Business 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. X Fair Aggressive - - -
Japan Airlines Co. Ltd. X Fair Intermediate - - -
As of Sept. 30, 2020.
14Related Research
– Japan's Shift From Coal To Pressure Power Providers But Boost Capital Goods Sector, July 15, 2020
– Japan's Capital Goods Industry Enduring COVID-19, So Far…, June 24, 2020
– Hitachi Ltd. Investments Amid Downturn To Weigh On Ratings, June 1, 2020
– Mitsubishi Heavy Industries Downgraded To 'BBB+' On SpaceJet Risk; Outlook Stable, Feb. 19, 2020
– Hitachi's High-Technologies Deal Further Imperils Creditworthiness, Feb. 3, 2020
– Global Auto Sales Forecasts: Hopes Pinned On China, Sept. 17, 2020
– Nissan Downgraded To 'BBB-/A-3' On Growing Impact Of COVID-19; Outlook Negative, July 3, 2020
– Mitsubishi Motors Downgraded To 'BB' On COVID-19 Pandemic; Outlook Negative, June 23, 2020
– Three Toyota-Affiliated Suppliers Downgraded Following Same Action On Toyota Motor; Outlooks Negative, May 28, 2020
– Toyota Motor Downgraded To 'A+' On Adverse Effects Of COVID-19, Outlook Negative; 'A-1+' Short-Term Ratings
Affirmed, May 20, 2020
– Honda Motor Downgraded To 'A-/A-2' As COVID-19 Dims Earnings Prospects; Outlook Negative, May 20, 2020
– Nissan Motor Long-Term Ratings Lowered To 'BBB' As COVID-19 Dims Earnings Prospects; Ratings Remain On Watch
Negative, May 1, 2020
– Ratings On Three Toyota-Affiliated Suppliers Placed On CreditWatch Negative Following Same Action On Toyota Motor,
March 30, 2020
15Related Research
– Toyota Motor 'AA-/A-1+' Ratings Placed On CreditWatch Negative On COVID-19 Pandemic, March 26, 2020
– Nissan Motor 'BBB+/A-2' Ratings Placed On CreditWatch Negative On COVID-19 Pandemic, March 26, 2020
– Japan-Based Aisin Seiki's Subordinated Loans Assessed As Having Intermediate Equity Content, March 26, 2020
– Honda Motor 'A/A-1' Ratings Placed On CreditWatch Negative On COVID-19 Pandemic, March 25, 2020
– Mitsubishi Motors 'BB+' Rating Placed On CreditWatch Negative On COVID-19 Pandemic, March 25, 2020
– Worsening Industry Conditions Further Threaten Nissan Motor's Creditworthiness, Feb. 14, 2020
– Japan-Based Aisin Seiki's Subordinated Bonds Assessed As Having Intermediate Equity Content, Jan. 27, 2020
16Japan Corporate Credit Spotlight 2020 Reports
– Japan Corporate Credit Spotlight: A Rough Road To Recovery: Overview, Oct. 22, 2020
– General Contractors; Real Estate; Electric Utilities And Gas; Railways; Airports, Oct. 22, 2020
– Consumer Products; Retail; Health Care; Oil Refining And Mining; GTICs, Oct. 22, 2020
– Pulp And Paper; Chemicals; Glass; Steel; Nonferrous Metals, Oct. 22, 2020
– Advertising; Electronics; IT Services; E-Commerce; Telecom And IHCs, Oct. 22, 2020
17Contacts
Hiroki Shibata Makiko Yoshimura Katsuyuki Nakai
Senior Director, Analytical
Director Director
Manager
+ 81-03-4550-8437 + 81-03-4550-8368 + 81-03-4550-8748
hiroki.shibata@spglobal.com makiko.yoshimura@spglobal.com katsuyuki.nakai@spglobal.com
Hiroyuki Nishikawa Ryohei Yoshida Taishi Yamazaki
Associate Director Associate Director Associate
+ 81-03-4550-8751 + 81-03-4550-8660 + 81-03-4550-8770
hiroyuki.nishikawa@spglobal.com ryohei.yoshida@spglobal.com taishi.yamazaki@spglobal.com
Kei Ishikawa Asa Watanabe Bumpei Kamishima
Associate Associate Research Assistant
+ 81-03-4550-8769 + 81-03-4550-8771 + 81-03-4550-8661
kei.ishikawa@spglobal.com asa.watanabe@spglobal.com bumpei.kamishima@spglobal.com
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