Mitsui OSK Cuts Bonds as Default Swaps Beat Yusen: Japan Credit

Mitsui OSK Cuts Bonds as Default Swaps Beat Yusen
Mitsui O.S.K. will reduce debt for the first time in four years as a recovery in global trade boosts cash flow and profit. Photographer: Haruyoshi Yamaguchi/Bloomberg

Dec. 21 (Bloomberg) -- Mitsui O.S.K. Lines Ltd., operator of the world’s largest merchant fleet, is slashing debt as global trade recovers, driving the cost of protecting its bonds against default below the levels of its rivals.

Five-year contracts to insure Mitsui O.S.K. debt declined to 64 basis points on Dec. 17 from 141 at the end of last year, according to CMA prices. Five-year contracts for Nippon Yusen K.K. were 65 basis points, and those for Malaysia’s MISC Bhd., the world’s second-biggest shipper by market capitalization, traded at 75 basis points, down from 91 at the end of 2009.

Mitsui O.S.K. will reduce debt for the first time in four years as a recovery in global trade boosts cash flow and profit, Shugo Aoto, head of finance, said in an interview at the company’s Tokyo headquarters last month. “We’re cash rich,” Aoto said.

Global trade will climb 11.4 percent this year after slumping 11 percent in 2009, the International Monetary Fund forecast on Oct. 6. Mitsui will likely cut interest-bearing debt to 750 billion yen ($8.9 billion) by the end of March, from 775 billion yen a year earlier and below the company’s 770 billion yen target, Aoto said.

The cost of a five-year contract to protect Japanese government bonds rose to 70 basis points, or $70,000 for $10 million of face value, on Dec. 17, from 68 on Dec. 31, 2009. The nation’s public debt rose to 226 percent of gross domestic product in 2010, according to IMF estimates.

Credit-default swaps for German bunds have climbed to 55 basis points from 26 at the end of 2009, while U.S. swaps increased to 40 from 38.

‘Good News’

The extra yield investors demand to hold Mitsui O.S.K. five-year bonds sold in May 2009 instead of the 1.6 percent Japanese government security due June 2014 shrank last week to a record 12 basis points, from 45 when the 1.278 percent debt was sold, according to data compiled by Bloomberg. The gap for A-rated five-year company debt shrank to 65 on Dec. 17 from 173 on June 1, 2009, the data show.

“Mitsui O.S.K.’s credit strategy, cash management and reductions in debt are good news,” said Mana Nakazora, the chief credit analyst at BNP Paribas Securities Japan Ltd. “The strategy is very good for their credit ratings.”

Moody’s Investors Service, which rates Mitsui A3, raised its outlook on the shipping line to stable last month because of the company’s improved profitability, dropping plans for a possible downgrade. The credit rating of rival Nippon Yusen, operator of the world’s second-largest merchant fleet, was cut to Baa1 from A3 in February. Moody’s said the shipping line’s profitability would “only recover gradually.” MISC is rated A3 by Moody’s with a stable outlook.

Continuing Improvement

“We assumed Mitsui O.S.K. would continue to improve when we raised our outlook,” said Mina Sawamura, an analyst in Tokyo at Moody’s Japan K.K.

Moody’s downgraded 51 Japanese companies this year and raised ratings on 11, while Standard & Poor’s cut 63 and upgraded 17, according to data compiled by Bloomberg. Moody’s has downgraded 10 U.S. issuers for every nine upgrades this year, the narrowest margin since 2007. S&P is poised to conduct more increases than decreases on U.S. debt for the first time since at least 2000.

Reducing Debt

Mitsui canceled a fleet expansion plan and returned vessels after the global economy slid into recession following the collapse of Lehman Brothers Holdings Inc. in 2008, Aoto said. The shipping line had 905 vessels at the end of March, compared with earlier plans to boost its fleet to 1,000 ships. Nippon Yusen had 803 ships at that time.

The reductions helped Mitsui report earnings last fiscal year while Nippon Yusen and Kawasaki Kisen Kaisha Ltd., Japan’s third-largest shipping line by sales, posted losses.

Mitsui on Oct. 29 reiterated its forecast that profit will increase to 65 billion yen in the year ending March 2011, from 13 billion yen last fiscal year.

The company’s shares are up 15 percent this year, compared with a 3.3 percent decline in the Nikkei 225 Stock Average. The stock is still down 72 percent from a record high of 2,040 yen touched in October 2007.

Mitsui’s cash from operations jumped 38 percent to 65 billion yen in the three months ended Sept. 30, the most in two years, according to data compiled by Bloomberg. The company plans to repay 49 billion yen of bonds maturing next year and expects to avoid issuing new bonds, Aoto said. It has 225 billion yen of bonds outstanding, data compiled by Bloomberg show.

“Mitsui O.S.K. is bondholder friendly,” said Nakazora at BNP Paribas.

Its debt reduction and improved credit outlook may make it easier for Mitsui to borrow from banks, rather than the bond market, according to Yasuhiro Matsumoto, a credit analyst in Tokyo at Shinsei Securities Co.

‘Favorable Rate’

“Banks lack good lending opportunities,” said Matsumoto. “If a good name comes to Japanese banks they will probably make loans at a very favorable rate.”

Japanese companies reduced borrowing through loans for the past 12 months and have added to cash reserves for eight-straight quarters. Non-financial companies raised currency and deposits 5 percent to 206 trillion yen in the 12 months ended Sept. 30, the largest amount since quarterly data began in 1979, the Bank of Japan said Dec. 17.

Confidence Slump

A BOJ report last week showed confidence among the nation’s largest manufacturers worsened for the first time since the end of the global financial crisis as the yen’s 11 percent climb threatened exporters, the driving force of the economic recovery.

The yen climbed to 80.22 against the dollar on Nov. 1, the highest level since April 1995, and traded at 83.88 at 2:09 p.m. in Tokyo yesterday.

The economy will shrink 1.9 percent this quarter as Prime Minister Naoto Kan’s stimulus spending fades, the government-affiliated Economic Planning Association said last week, citing forecasts from economists. The world’s second-largest economy is struggling to end deflation, an extended decline in prices that deters investment by crimping sales revenue and profit margins while encouraging companies to put off spending to benefit from lower costs in the future.

The difference between yields on five-year Japanese government notes and inflation-linked debt widened one basis point to minus 0.71 percent yesterday, an indication of the annual average drop in prices investors expect over the coming five years.

To contact the reporter on this story: Chris Cooper in Tokyo at; Kiyotaka Matsuda in Tokyo at

To contact the editor responsible for this story: Neil Denslow at