Google Taking Lehman Space Helps Japan’s Mori Lower Costs

Mori Building Co., whose Roppongi Hills complex this year lured Google Inc. to take office space once occupied by Lehman Brothers Holdings Inc., is cutting costs by replacing hybrid debt sold during the credit crisis.

The owner of the 54-story Mori Tower is taking advantage of monetary stimulus by the Bank of Japan to buy back and retire 110 billion yen ($1.09 billion) of preferred shares on July 29, refinancing 70 billion yen of the paper. The new securities will cost 250 basis points more than the yen Libor, less than the 300 it paid five years ago. That compares with an about 56 basis point premium for Japanese company loans in May and 271 over dollar Libor for U.S. borrowers.

Apple Inc. followed Google into the $2.2 billion complex in May as Tokyo’s office market shows signs of recovery and the BOJ’s plan to defeat inflation within two years improves prospects for property owners. Mori Building joins Sumitomo Realty & Development Co. in taking advantage of balance sheet improvements to reduce hybrid securities, which are used to prop up financial ratios because they are a mix between debt and equity. Japan Credit Rating Agency Ltd. left the rankings of the two companies unchanged in response to the issuance plans.

“The market conditions for borrowers are very favorable now,” allowing companies to retire pricier financial instruments that contribute to equity, said Kozo Nakanishi, a credit analyst at SMBC Nikko Securities Inc. “The impact on credit ratings was a sensitive point in considering the source of funding for both Mori Building and Sumitomo Realty.”

Hybrid Reduction

Mori Building said on June 25 it plans to reduce its outstanding balance of preferred shares by 40 billion yen through the transaction this month. The privately-held company’s ratio of shareholder equity to assets has climbed to 24 percent from 15 percent in March 2007, it said at the time.

The Tokyo-based developer sold 110 billion yen of preferred stock in March 2008 to shore up its balance sheet and the dividend on the securities is scheduled to increase to 420 basis points more than the London interbank offered rate for the yen next month. Twelve-month Libor for the currency traded at 0.42 percent yesterday.

JCR maintained its ranking on the company at A-, the risk assessor’s fourth-lowest investment grade, according to a statement on the same day. “The impact on its financial standing is limited,” Kenji Sumitani, chief analyst at the ratings company, said in a telephone interview.

Profit Jump

Mori Building last month forecast net income will jump to 139 billion yen this fiscal year to March 2014, from 14.5 billion yen in the previous 12 months, after the developer made the special purpose company operating Roppongi Hills into a subsidiary on consolidated basis. The complex will contribute 117 billion yen to profit in the period, it said.

The development, which took two decades to complete, includes four apartment buildings, a movie theater and a hotel, and is home to Goldman Sachs Group Inc., Barclays Plc. and Lenovo Group Ltd. The company in May said its Shanghai World Financial Center, China’s tallest building, is operating at near full capacity, raising the total occupancy rate for its properties to 96 percent, from 90 percent three years earlier.

“The improvement in our capital base due to the annual profit growth and contribution from the increasing value of the Roppongi Hills property are giving investors something to feel pleased about,” said Yuichi Kosaka, the general manager of Mori Building’s accounting department.

ICICI Meetings

Elsewhere in Japan’s credit markets, India’s ICICI Bank Ltd. is planning to meet bond investors in Tokyo on July 8, according to a person familiar with the matter. The lender registered to sell as much as 50 billion yen of debt on the Tokyo Pro-Bond Market, according to a June 18 statement on the Tokyo Stock Exchange’s website.

Tokyo Pro-Bond Market, which started in May 2011, permits issues in any currency and allows documentation in English. While Samurai bonds, which are also issued in yen by overseas borrowers, give issuers access to a bigger market, they require filing financial statements in Japanese with the nation’s Finance Ministry.

Samurais have handed investors a 0.55 percent return this year, compared with a 0.58 percent gain for Japan’s corporate bonds and a 0.25 percent loss for the nation’s sovereign notes, according to Bank of America Merrill Lynch data. Company debt worldwide has lost 1.69 percent.

The yen has tumbled 19 percent against the dollar since Nov. 15 when Prime Minister Shinzo Abe called for “unlimited” money printing by the central bank to end deflation. Elections a month later elevated him to Japan’s highest office. It touched 103.74 per greenback in May, the weakest since October 2008, and was at 100.66 as of 9:37 a.m. in Tokyo today.

Sovereign Rate

Japan’s benchmark 10-year yield fell 1/2 a basis point, or 0.005 percentage point, to 0.885 percent as of 9:37 a.m. in Tokyo. The rate swung between a record low of 0.315 percent on April 5, the day after the Bank of Japan unveiled its stimulus plan, and as high as 1 percent in May.

Five-year credit-default swaps to insure Japan’s sovereign notes rose 1 basis point to 76.5 basis points yesterday, ending five consecutive days of declines, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Narrowing Spread

Mori Building has 132.3 billion yen of outstanding debt, including 10 billion yen of bonds maturing in October, according to Bloomberg data. The company last offered notes on Oct. 26, raising 13 billion yen of 0.97 percent debt maturing October 2017.

The extra yield over the yen swap rate investors demand to own the bonds dropped 20.5 basis points this year to 46.5 basis points yesterday. The premium against the benchmark for Japanese corporate debt dropped 16 to 18 in the period, Bank of America Merrill Lynch index data show.

“On the corporate level, recent improvements in the company’s creditworthiness are a major factor,” said Masahiro Ishibashi, a Tokyo-based credit analyst at Daiwa Securities Co. “On the macro level you have favorable conditions in the real estate and financial markets.”

Sumitomo Realty

JCR in February kept Sumitomo Realty’s rating unchanged at A, its sixth-highest investment-grade, even after the company didn’t honor a promise to renew its 120 billion yen subordinated loan in full. The Tokyo-based developer, which owns Hotel Villa Fontaine and the city’s Izumi Garden Tower, said at the time it plans to refinance only half of the hybrid facility.

Japan’s third-largest real estate company reported total equity climbed 11 percent last fiscal year to 648.9 billion yen as of March 31. That’s a 45 percent increase since the signing of the loan in 2008, according to data compiled by Bloomberg.

Sumitomo Realty’s 120 billion yen subordinated loan is ranked BBB+ by JCR, or three levels above junk and two places below the grade for the issuer. JCR counted 75 percent of that amount toward the company’s equity, according to a filing at the time of issue. Sumitomo Realty said it expects the contribution of the new loan to be 25 percent.

Toshiba Corp., Showa Denko KK and Nisshin Steel Holdings Co. also chose hybrid securities in the past five years. Toshiba’s 180 billion yen of subordinated bonds are due for a 750 basis-point step up over the yen Libor in July 2014, according to a JCR statement in May 2009.

“There are companies out there that may be influenced by the experience at Mori Building and Sumitomo Realty,” SMBC Nikko’s Nakanishi said. “We might see more issuers following their example.”

Before it's here, it's on the Bloomberg Terminal.