Nippon Yusen Takes Advantage of Bond Rates at Eight-Year Low: Japan Credit

Nippon Yusen K.K. is taking advantage of falling government note yields and a void in corporate debt sales to borrow at the lowest rate in eight years even as global trade growth slows.

The second-largest listed shipping line by sales plans to issue 25 billion yen ($325 million) of bonds maturing in 2021 with a 1.218 percent coupon, the carrier’s lowest for a 10-year security since February 2003, according to data compiled by Bloomberg. A.P. Moeller-Maersk A/S, the biggest shipping line, issued seven-year debt in November with a 4.375 percent coupon.

Demand for corporate debt issues is rising as electric companies retired 905 billion yen more in bonds than they issued since the March 11 quake and nuclear crisis. Japan’s benchmark 10-year bond yield fell to the lowest this year in August, reducing rates for corporate issuers such as Nippon Yusen as investors fled to the safety of fixed-income securities as equity markets plummeted.

“It’s good timing,” said Toshiyasu Ohashi, head of credit research at Daiwa Securities Capital Markets Co. “Companies can get very low rates by issuing bonds now. There’s a worldwide slowdown in growth and a lack of sales by electricity companies is making for very good supply conditions.”

Nippon Yusen’s debt has gained this year, pushing the yield on the 1.782 percent bonds due in August 2019 down to 0.865 percent, the lowest since Oct. 12. The yield has fallen from this year’s high of 1.37 percent on Feb. 16.

Bonds Rally

The decline in yields for the shipping line, rated Baa1 by Moody’s Investors Service, has tracked a rally in government bonds. The yield on Japan’s 10-year sovereign debt fell to 0.97 percent on Aug. 19, the lowest since November, and lost 3 basis points to 0.985 percent in Tokyo yesterday.

Sales of corporate bonds in the three months through June 30 fell 35 percent to 1.82 trillion yen from a year earlier, according to data compiled by Bloomberg. Japanese companies issued 5.33 trillion yen in bonds this year, that’s the lowest amount since 2006. The power companies’ amount of net retired debt is equivalent to 17 percent of corporate issuances this year, according to Bloomberg calculations.

Nippon Yusen will issue 55 billion yen of debt, including five-, 10- and 20-year securities, on Sept. 9, according to the company. It has 305 billion yen of bonds outstanding, including 55 billion yen in convertibles and the new bonds being issued this month, data compiled by Bloomberg show.

Profit to Plunge

The company is raising money to help repay the convertible bonds and to take advantage of low rates, according to a spokesman for the Tokyo-based shipping line.

Nippon Yusen slashed its annual profit forecasts in July as falling rates for transporting containers and commodities drove down sales. The company expects net income to tumble to 5 billion yen for the year ending March 31, compared with 78.5 billion yen a year earlier.

U.S. payrolls were unchanged last month, the weakest reading since September 2010, while the International Monetary Fund on Aug. 29 cut its economic growth outlook for the world’s largest economy to 1.6 percent from 2.5 percent this year.

Japan’s government bonds rallied in August, dragging yields down for a fifth straight month. The Nikkei 225 (NKY) Stock Average tumbled 8.9 percent in August. The Nikkei rose 1.4 percent today, coming off the lowest close since April 2009 yesterday.

The worsening outlook for shipping rates helped push Nippon Yusen’s shares down to 218 yen yesterday, the lowest level since 1984. The stock has dropped 39.4 percent this year.

Holders of the company’s convertible bonds asked for them to be redeemed, in line with a put option on the securities, after the shares tumbled.

The company had 149 billion yen in cash and equivalents as of June 30, compared with 58 billion yen at Mitsui O.S.K. Lines Ltd., Japan’s second-largest shipping line by sales.

Spreads Narrow

The premium investors demand to own Nippon Yusen’s 1.782 percent bonds maturing in August 2019 over similar-maturity government debt shrunk to 19 basis points on Sept. 5, from a peak this year of 24 basis points on June 6, according to Japan Securities Dealers Association prices on Bloomberg.

Contracts to insure Nippon Yusen’s debt against default for five years, known as credit default swaps, climbed to 105 basis points yesterday from 97 at the end of August. Derivative prices are down from this year’s peak of 119 basis points on Aug. 24, according to CMA, which is owned by CME Group Inc. The cost to protect Mitsui O.S.K. debt yesterday was 110 basis points and 110.8 for Japanese government debt.

Credit-default swap contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements.

The Markit iTraxx Japan index of credit-default swaps fell 4 basis points to 151 today, according to the latest CMA prices. The risk gauge advanced from 98 a day before the earthquake, the data show.

The yen reached a post-World War II high of 75.95 versus the dollar in New York trading on Aug. 19, spurring speculation the Bank of Japan will move to weaken the currency. The yen traded at 77.42 per dollar in Tokyo today.

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

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

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