Mitsui O.S.K. to Cut Debt, Strengthen Finances as Shipping Profit Rebounds

Mitsui O.S.K. Lines Ltd., operator of the world’s largest merchant fleet, will reduce debt for the first time in four years as profit rises on increased demand to ship electronics and furniture to the U.S. and Europe.

Interest-bearing debt will drop to as low as 750 billion yen ($9 billion) by the end of March, Shugo Aoto, head of finance, said in an interview in Tokyo on Nov. 24, compared with 775 billion yen at the close of the previous financial year.

Mitsui O.S.K. hasn’t made a strategic investment this year and is focusing on strengthening its finances amid a global container shipping rebound, while Japanese rivals Nippon Yusen K.K. and Kawasaki Kisen Kaisha Ltd. have purchased stakes in a deep-sea oil tanker business and a freight forwarder. Profit is forecast to jump fivefold this year and Mitsui O.S.K. plans to use cash to pay maturing bonds.

“It’s a better strategy than investing in a new field that they’re not confident about,” said Ryota Himeno, an analyst at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “They’re accelerating their emphasis on constraining debt.”

The drive to trim debt has helped Mitsui O.S.K. secure the highest credit ranking among Japan’s three biggest sea carriers.

Improved Ratings

Moody’s Investors Service last month raised Tokyo-based Mitsui O.S.K.’s credit outlook to stable, citing the prospect for an improvement in the company’s financial profile. It rates the company’s A3, its seventh-highest in the investment grade.

Moody’s cut its rating for Nippon Yusen, operator of the world’s second-largest merchant fleet, one step to Baa1 from A3 on Feb. 9. Kawasaki Kisen, Japan’s third-largest shipping line, is ranked BBB- by Standard & Poor’s Ratings Services, the lowest investment grade.

Mitsui O.S.K.’s cash from operations rose to 65 billion yen in the three months ended Sept. 30, the highest level in two years, according to data compiled by Bloomberg.

“We’re cash rich,” said Aoto. “A sharp increase in profits has helped our cash flow.”

Nippon Yusen last week announced plans to buy a 50 percent stake in Knutsen Offshore Tankers ASA to expand into deep-sea oil transport in countries including Brazil. Kawasaki Kisen earlier this year said it had acquired a 51 percent stake in Air Tiger Express Co.

Stake Investment

Mitsui O.S.K. increased its share in Gearbulk Holding Ltd. to 49 percent last year, its most recent stake investment, according to data compiled by Bloomberg.

Nippon Yusen predicts its interest-bearing debt will increase to 1.2 trillion yen by the end of March, compared with 1.1 trillion yen at the end of March this year. Kawasaki Kisen predicts a gain to 560 billion yen, compared with 516 billion yen.

Mitsui O.S.K. plans to use cash to repay 49 billion yen of bonds maturing next year and should be able to avoid issuing new bonds, Aoto said. The company has 225 billion yen of bonds outstanding, according to data compiled by Bloomberg.

The carrier will also rely on short-term loans rather than long-term bonds for any financing needs, as it predicts Japan’s central bank will keep interest rates near zero, Aoto said.

Rate Outlook

“Borrowing at a flexible interest rate works out cheaper than at a long-term fixed rate,” said Aoto. “I don’t think the Bank of Japan is going to raise rates next year or the year after.”

Net income will surge to 65 billion yen in the 12 months ending March 2011, compared with profit of 12.7 billion yen in the year-earlier period, Mitsui O.S.K. said on Oct. 29.

The expected gains are being driven by a return to profit at the shipping line’s container division.

Container shipments to the U.S. from Japan, China, Vietnam and other Asian countries rose for a ninth month in August, surging 18 percent, compared with a year earlier, to 8.5 million boxes, according to the latest available figures from the Japan Maritime Center.

Nippon Yusen predicts a profit of 76 billion yen this fiscal year, compared with a loss of 17 billion yen last year. Kawasaki Kisen is forecasting net income of 32 billion yen, following a loss of 69 billion yen last fiscal year. Mitsui O.S.K. rose 0.5 percent to 584 yen at the 3 p.m. close of trading in Tokyo yesterday. The shares have gained 19 percent this year, compared with a 3.6 percent decline in the Nikkei 225 Stock Average.

Mitsui O.S.K. operated 905 vessels at the end of March, compared with 803 ships at Nippon Yusen.

To contact the reporter on this story: Chris Cooper in Tokyo at ccooper1@bloomberg.net; Kiyotaka Matsuda in Tokyo at kmatsuda@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net

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