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Nomura Rating Cut by Moody’s to Lowest Investment Grade

Nomura Debt Rating Cut by Moody’s to Lowest Investment Grade
Pedestrians walk past the Nomura Holdings Inc. headquarters in Tokyo, Japan. Photographer: Kiyoshi Ota/Bloomberg

Nomura Holdings Inc.’s debt rating was cut to the lowest investment grade by Moody’s Investors Service, which said global competition raises questions over the profitability of Japan’s biggest securities firm.

The one-step reduction brings Nomura’s long-term debt rating to Baa3, one level above junk. Moody’s has a “stable” outlook on the rating, it said in a statement.

The cut, which follows a review Moody’s began in November, may raise Nomura’s borrowing costs and oblige the firm to increase collateral to counterparties on derivatives trades. Nomura is trimming $1.2 billion of expenses that mounted since it bought bankrupt Lehman Brothers Holdings Inc.’s Asian and European operations during the 2008 global financial crisis.

“There remains uncertainty about the long-term positioning and profitability of Nomura’s international capital market activities, given its weaker market share compared with those of its global peers,” Moody’s said in the statement yesterday.

The market reacted little to the move, after Moody’s said a month ago that any downgrade would probably be by one level. Shares of Nomura rose 0.3 percent, or 1 yen, to 401 yen as of 1:51 p.m. in Tokyo. The yield premiums on Nomura’s dollar-denominated notes due 2015 relative to Treasuries rose 5.9 basis points to 295.3, according to BNP Paribas SA prices.

Worldwide Scrutiny

Banks worldwide are facing scrutiny by Moody’s. The New York-based company said on Feb. 15 that it may lower ratings of 17 global banks and securities firms, including Nomura, because of challenges including higher borrowing costs, stricter regulatory burdens and lower profitability.

Macquarie Group Ltd., Australia’s largest investment bank, was also downgraded one level, to A3, by Moody’s, which cited “ongoing earnings challenges.”

Moody’s rates Nomura lower than Wall Street rivals including Goldman Sachs Group Inc., whose A1 grade is the fifth highest. BNP Paribas SA, France’s biggest lender, had its rating cut to Aa3 in December after funding costs rose amid the region’s sovereign debt crisis.

Daiwa Securities Group Inc., Nomura’s biggest domestic competitor, was also cut to Baa3 by Moody’s four months ago.

“Management at Nomura is attempting to bring greater focus to its international investment banking activities -- a strategy it has pursued in various forms over a number of years -- but given the competitive position of Nomura’s international capital markets platform we think the Baa3 rating better reflects these risks,” Elisabeth Rudman, a senior vice president at Moody’s, said in the statement.

‘Solid Platform’

The downgrade was “disappointing,” Nomura said.

“Nomura maintains a solid platform across its retail, asset management and wholesale businesses,” the Tokyo-based company said in a statement. “Our robust capital base and abundant liquidity position us well to respond to the ongoing challenges facing the investment banking industry.”

Nomura’s prospects have shown signs of improving since Moody’s announced its review on Nov. 9.

Shares of the Japanese firm have climbed 72 percent this year, the second-biggest gainer on the Nikkei 225 Stock Average. Nomura returned to profit in the three months ended December from a loss in the previous quarter, driven in part by cost-cutting efforts.

The price to insure the bank’s debt against default for five years has tumbled to 260 basis points yesterday from as high as 410 in November, according to data provider CMA. That compares with 225 for credit default swaps on Daiwa bonds and 215 for Goldman Sachs.

Cost-Cutting Progress

Moody’s said Nomura has made “significant progress” on its $1.2 billion expense-reduction plan and that the program will boost Nomura’s future performance.

Chief Executive Officer Kenichi Watanabe’s firm is cutting jobs, trimming personnel expenses by 11 percent in the three months ended December from a year earlier. Nomura will cut about 30 managers in its fixed-income unit, a person briefed on the matter said on March 13.

Two of the highest-ranking former Lehman employees stepped down in January. Jesse Bhattal, who was chief of wholesale banking, left Nomura after his division accumulated losses. Tarun Jotwani’s global markets division was split into equities and fixed income after he resigned.

Chief Operating Officer Takumi Shibata said on Feb. 1 that a credit-rating downgrade would require the firm to supply more collateral for derivatives transactions, adding that the bank has enough cash to withstand it.

Net income climbed 33 percent to 17.8 billion yen ($213 million) in the three months ended Dec. 31 from a year earlier, buoyed by the sale of private-equity investments, earnings figures showed on Feb. 1. Brokerage commissions, investment banking fees and trading profit all fell in the quarter from a year earlier, and pretax losses from operations abroad widened.

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