Billionaire Saji’s Jim Beam Deal Risks Debt Hangover

Billionaire Nobutada Saji’s Suntory Holdings Ltd. got a cool reception for its acquisition of whiskey maker Beam Inc. as rating companies threatened a downgrade and investors predicted rising borrowing costs.

The yield premium on the closely held Japanese company’s 0.74 percent bonds due 2017 climbed half a basis point to 12.9 basis points over sovereign notes yesterday, the widest since Sept. 12, data compiled by Bloomberg show. The average spread on Japanese corporates was 28, one basis point from a six-year low, while the gap on global company debt was 120, the least since October 2007, according to Bank of America Merrill Lynch data.

Moody’s Investors Service and Japan’s Rating & Investment Information Inc. put Suntory on review for a downgrade this week after the 115-year-old maker of Yamazaki whiskey and Premium Malt’s beer said it will buy the U.S. producer of Jim Beam whiskey for $16 billion. Moody’s, which has an A3 rating for Suntory, said the acquisition will significantly increase debt. The company may sell bonds to finance the purchase, according to Daiwa Securities Co.

“No matter how appropriate the investment is, when the scale is this large, it’s going to make people jittery,” said Hiroaki Hayashi, who oversees the equivalent of $15.3 billion of fixed-income as a general manager at Fukokushinrai Life Insurance Co. in Tokyo. “There’s bound to be a reaction,” said Hayashi, who holds Suntory notes.

Bridge Loan

Mitsubishi UFJ Financial Group Inc.’s lending unit has agreed to provide a bridge loan of $10 billion to $12 billion for Suntory’s acquisition, two people said Jan. 14, asking not to be identified because the information is private. Suntory said it will finance the purchase with available cash and borrowings from Mitsubishi UFJ’s main lending unit.

The beverage maker may issue bonds to help fund the acquisition after the bridge loan, and its spreads may widen depending on the size of the sale, said Toshiyasu Ohashi, the chief credit analyst in Tokyo at Daiwa Securities, Japan’s second-largest brokerage.

Suntory’s 2017 bonds, its longest outstanding non-callable notes, had a spread of 10 basis points, or 0.1 percentage point, at the end of last year, according to Bloomberg-compiled data. Japan’s benchmark 10-year yield rose one basis point to 0.67 percent today, compared with 0.735 percent at the end of 2013, while the yen fell 0.1 percent to 104.71 per dollar as of 3:31 p.m. in Tokyo.

Moody’s said this week that the acquisition may push the ratio of Suntory’s adjusted debt to earnings before interest, taxes, depreciation and amortization to around six times, a level that “would not be consistent with an investment grade rating.” Even so, it’s also considering other factors.

Moody’s Assessment

“We don’t just look at the financial metrics,” said Mariko Semetko, the credit analyst at Moody’s overseeing Suntory, in a telephone interview on Jan. 14. “We also look at the qualitative factors as well so we have to balance all of that and come to a conclusion.”

Suntory had 643 billion yen ($6.1 billion) of cash on hand as of the end of September, which is higher than historical levels, according to Moody’s Semetko. The company had 28.1 billion yen of cash in excess of net interest-bearing debt, according to Mitsuyoshi Takahashi, a senior credit analyst at Mizuho Securities Co. in Tokyo.

The acquisition, which Semetko described as expensive “no matter how you look at it,” is the latest overseas purchase by Suntory, which raised almost $4 billion from the listing of its soft-drinks unit last year.

Suntory Holdings spokeswoman Hasumi Ozawa declined to comment, when reached by phone yesterday.

Downgrade Risk

The Beam takeover may result in a two-level downgrade in Suntory’s credit rating at Moody’s to Baa2, according to Mizuho’s Takahashi. That would be two ranks above junk, or non-investment grade. The company’s bond spread will probably widen for now, Takahashi wrote in a report dated Jan. 14.

Suntory’s net debt-to-equity ratio may rise to about 2.2 times as a result of the deal, from zero at present, according to Takahashi.

R&I said Jan. 14 it is placing its AA- ratings on both Suntory Holdings and listed unit Suntory Beverage & Food Ltd. on review for downgrade. AA- is the fourth-highest level for R&I.

Heavy Burden

“The acquisition will be a heavy financial burden,” R&I said in a statement. Suntory has equity capital of just above 700 billion yen and net assets of around 1 trillion yen, according to R&I. Both R&I and Moody’s have said they will probably take ratings action around the planned close of the deal by June-end once Suntory’s new capital structure is clearer.

The Torii and Saji clans, the descendants and in-laws of Suntory’s founder Shinjiro Torii, hold 89 percent of the closely held company through Kotobuki Fudosan K.K., an Osaka, Japan-based asset management company they control.

Saji, who with his wife owns 8.93 percent of the business, has a net worth of $1.6 billion, according to the Bloomberg Billionaires Index. The two also own 5.45 percent of Suntory Beverage & Food, whose initial public offering was Asia’s largest last year.

A shrinking and aging Japanese population is compelling Saji to look beyond Suntory’s home market. The Beam takeover would be the largest overseas acquisition by a Japanese company since SoftBank Corp. bought control of Sprint Corp. for $21.6 billion in a deal announced in 2012.

“As a strategy the acquisition isn’t wrong, so the bonds should gradually recover,” said Fukokushinrai Life’s Hayashi. “There probably isn’t a big risk with Beam, and getting a larger presence in the U.S. whiskey market is something I think will eventually be rated highly.”

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