Cosmo Oil Co. (5007), a Japanese refiner partly owned by the government of Abu Dhabi, may breach asset reserve covenants on some bank loans and will soon start talks with lenders to resolve the issue.
“We are in talks with financial institutions on the possible breach of some covenants,” Cosmo Oil spokesman Katsuhisa Maeda, said by phone. He declined to give details.
The company is at risk of violating covenants on about 40 percent of 130 billion yen ($1.7 billion) in loans, said two people with direct knowledge of the talks, declining to be identified because the information is private.
Cosmo will ask Mizuho Corporate Bank Ltd. and other lenders to relax the covenants after it releases first-half earnings in November, one of the people said. Cosmo forecast on Sept. 25 a first-half net loss of 81 billion yen, reversing an earlier estimate of a 7 billion yen profit, partly because of an accident that shut its Chiba refinery.
An investigation into an asphalt leak at the refinery has delayed the resumption of operations for two crude distillation units. The company plans to present a plan to restart the facilities when it releases its earnings on Nov. 1, Cosmo Oil President Keizo Morikawa told reporters on Sept. 27.
“Lenders would likely agree to relax the terms if they think there is a prospect of a solution in a short period of time,” Kazuma Ogino, a credit analyst at Nomura Securities Co., said by phone.
Japan’s third-biggest oil refiner by revenue is required to have more than 296 billion yen of net assets at the end of each second quarter and fiscal year under the covenants, it said in a filing submitted to regulators on Aug. 2.
Cosmo’s net assets declined by 72.5 billion yen to 265 billion yen in the first quarter ended June 30, the company’s balance sheet shows.
The accident at Cosmo’s Chiba refinery, which accounts for nearly 35 percent of its capacity, has forced the company to buy oil products from other refiners, eroding profit.
Once the company restarts the refinery, it may raise its earnings outlook and review deferred tax assets, Ogino said.