Yields Falling to Three-Year Low May Fuel Daikin, Asahi Bids: Japan Credit

Japan’s government bond yields, the lowest in the world, are fueling demand for corporate debt, providing companies from Daikin Industries Ltd. to Asahi Breweries Ltd. with financing for international expansion.

Daikin, the second-largest maker of air conditioners, may increase its $3.6 billion bid for Goodman Global Inc., a person familiar with the matter told Bloomberg News last month. Tokyo- based Asahi Breweries Ltd., Japan’s No. 1 brewer, will “aggressively seek acquisitions and alliances” this year, President Naoki Izumiya said on Jan. 6. The nation’s companies increased overseas investments last year by 31 percent to $30.1 billion, according to data compiled by Bloomberg.

The combination of low government bond yields and 35 trillion yen ($424 billion) in Bank of Japan stimulus spending is driving investors to corporate bonds. Yields on corporate notes averaged 28 basis points more than government bonds, the lowest since 2007, according to a Nomura Securities Co. index. The comparable U.S. premium is 163 basis points, the Bank of America Merrill Lynch U.S. Corporate Master Bond Index shows.

“The spreads that the credit market is asking for are lower, and opportunities to invest in corporate debt are scarce, so people these days are happy just to get small returns,” said Yoshihiro Nakatani, a senior fund manager at Asahi Life Asset Management, which has $8 billion of assets under management. “Government bonds have pretty uninteresting yields,” he said.

The extra yield investors demand to hold Daikin’s 1.861 percent bonds maturing in 2019 over similar-dated government notes declined to 17 basis points, or 0.17 percentage point, on Jan. 17 from 18 on Dec. 6, a day before the report of the potential acquisition. The yield on 10-year benchmark government bonds rose one basis point to 1.22 percent today.

Currency Advantage

The yen’s 9.5 percent increase against the dollar in the last 12 months would also make buying a U.S. target cheaper.

“The strong yen is a big support for Daikin to make an overseas acquisition,” said Mana Nakazora, chief credit analyst at BNP Paribas Securities Ltd. “The timing now is very good.”

Daikin, founded in 1924 as a producer of aircraft radiator tubes, is considering buying Houston-based Goodman from buyout firm Hellman & Friedman LLC while also looking at other targets, Chairman Noriyuki Inoue said on Jan. 14.

The Osaka-based company’s bid for Goodman may exceed the 300 billion yen bid that was rejected last June, the person familiar with the talks said last month. Hellman & Friedman acquired Goodman in 2008 for $2.7 billion.

The best way for Daikin to raise funds for a possible overseas acquisition would be through an equal mix of selling new shares and issuing debt and long-term borrowing, Inoue told reporters in Osaka.

Debt Rating

Moody’s Investors Service rates Daikin debt at A3, its fourth-lowest investment grade. Tokyo-based Rating and Investment Information Inc., which ranks Daikin A+, maintained its outlook at “stable” in November.

If Daikin were to issue new notes, the yield would have to be about 20-to-25 basis points higher than five-year JGBs, Nakazora said. Daikin has 100 billion yen worth of bonds outstanding, the second most for Japanese machinery makers.

Daikin’s stock declined 7 percent from Dec. 7, when Bloomberg reported the acquisition talks, to the end of the month. The shares have fallen 17.4 percent in the past 12 months.

“If Daikin funds the acquisition through the stock market, there’s the problem of dilution. If they fund it through debt, their financial health will worsen and they’ll have to raise interests on their bonds,” said Masashi Hayami, a Tokyo-based analyst at JPMorgan Chase & Co. Issuing 50 million new shares would dilute the stock by about 15 percent, Hayami said.

Competition

Buying Goodman would push Daikin past United Technologies Corp.’s Carrier unit, which reported about $11 billion in sales in 2009, bringing them to the top spot in the global air- conditioning industry by revenue. It would also make Daikin the only company in the world manufacturing every type of air- conditioner, Hayami said.

“A varied product lineup would enable Daikin to increase sales in Central and South America, India, developing countries as well as the U.S., and those are all positives for the company,” he said.

Daikin plans to double revenue to at least 2 trillion yen by fiscal 2015, reversing a two-year sales decline, Inoue said.

“Demand for environmental technology and the strong yen make now the perfect chance, but we don’t have cash,” Inoue said. “If we increase our borrowing though, our share price might drop, and that’s the equilibrium. Our rating could be cut.”

Growth by Acquisition

Daikin became the second-biggest air-conditioner maker when it bought Malaysia’s OYL Industries Bhd. in 2006 for 244 billion yen, selling 119 billion yen of shares to fund the purchase. Daikin’s interest-bearing liabilities increased about 2.6 times from the previous year to 456 billion yen after the purchase, according to data compiled by Bloomberg. The amount has since decreased to about 399 billion yen in fiscal 2009.

The company, which reported 179 billion yen in cash as of Sept. 30, has interest-bearing liabilities worth about 34 percent of its total assets, higher than the average 23 percent ratio for manufacturers, he said.

Asahi Breweries Ltd. said it would seek acquisitions and alliances in 2011. Growth in Japan is limited, and the company needs to rapidly expand overseas, Izumiya said.

“We will change our stance to offense from defense,” Izumiya said at a briefing in Tokyo. Asahi shares declined 10.2 percent in the past 12 months.

To contact the reporter on this story: Adam Le in Osaka at ale14@bloomberg.net; Masatsugu Horie in Osaka at mhorie3@bloomberg.net

To contact the editor responsible for this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net

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