ANA Beating JAL in Tokyo Flights Triples Bond Sale

ANA Holdings Inc.’s victory over rival Japan Airlines Co. in bidding for international flight slots from downtown Tokyo helped the nation’s largest carrier triple the size of its first bond sale in two years.

Demand for the 10-year bond offering on Feb. 28 exceeded expectations, helping the company raise 30 billion yen ($293 million) at a record-low yield of 1.22 percent, versus the originally planned issuance of 10 billion yen, ANA’s spokesman Hideya Oishi said. That compares with a 1.46 percent average for similar-maturity debt sold by Japanese corporate borrowers, while companies worldwide pay 4.7 percent, according to Bank of America Merrill Lynch index data.

The carrier forecasts profit will double next fiscal year as it adds flights to London, Paris, Vancouver and other overseas destinations from Tokyo’s Haneda airport this month. ANA won more than double the amount of new international slot pairs as JAL from Asia’s second-largest air hub, helping make up for tax breaks for the rival which emerged from bankruptcy in March 2011. Prime Minister Shinzo Abe earlier this week said the government’s aid for JAL won’t damage industry competition.

“ANA is expanding international flights at Haneda, which is going to help profits,” said Yusuke Ueda, a Tokyo-based credit analyst at Bank of America Merrill Lynch. “They have exceptionally good cash flow and are close with the ruling Liberal Democratic Party. That makes their bonds good to buy.”

Looking Abroad

The Tokyo-based airline will get 11 new daytime take-off and landing slots from Haneda at the end of March, compared with five for Japan Airlines, the Transport Ministry said in October. JAL protested the decision but was unable to win more. ANA, seeking to ease its dependence on domestic operations, is also expanding its fleet of Boeing Co.’s more fuel-efficient 787 planes for international routes.

ANA cited the Haneda flights in targeting 60 billion yen of net income in the year to March 2017, from 30 billion yen next fiscal year and 15 billion yen in the current period, according to the company’s mid-term business plan released Feb. 14. It forecasts operating margin will increase to 7 percent from 3.8 percent as the airline reduces costs by 50 billion yen, adding to 86 billion yen in savings over the past four years.

“The company has entered a cycle where high level investments into business growth can be compatible with maintaining fiscal health,” Kazuma Ogino, a credit analyst at Nomura Securities Co., wrote in a report dated Feb. 20. “Concerns about its financial standing are on the decline.”

Haneda, Narita

Tokyo’s Haneda airport restarted intercontinental flights three years ago after opening a new international terminal. The country moved overseas flights to Narita, 70 kilometers (40 miles) east of Japan’s capital, more than three decades earlier to cut down on overcrowding.

The cost to insure the debt of ANA has retreated 22 basis points in the past month to 157 yesterday, according to data provider CMA. That compared with the 8.5 basis-point decline for the Markit iTraxx Japan index, while the gauge for North American companies slid 10.5 in the period.

Japan Airlines, the nation’s second-largest carrier, emerged from bankruptcy after cutting about a third of its staff, grounding 103 planes and reducing its flight network. Its monopoly on flights out of Japan ended in 1986, when a crash that claimed 520 lives prompted the government to grant ANA its international license.

Tax Breaks

JAL received 35 billion yen of tax relief in its first full year after exiting bankruptcy and may not have to pay corporate levies until 2020, according to the Liberal Democratic Party. The government is considering tightening restrictions on corporate-tax breaks on losses and shortening the number of years they apply, the Nikkei newspaper reported on Feb. 4.

Prime Minister Abe’s stimulus policies backed by the Bank of Japan’s about 7 trillion yen in monthly bond purchases aimed at spurring economic growth and defeating inflation have lowered borrowing costs for Japanese companies to the least since August 2007, Bank of America Merrill Lynch index data show. At the same time, last year’s 18 percent plunge in the yen against the dollar raised the cost of imported fuel for air carriers.

Japan’s benchmark 10-year bonds yielded 0.61 percent today, after touching 0.57 percent on March 3, the lowest since May. The yen has climbed about 3 percent this year against the greenback and traded at 102.34 as of 9:50 a.m. in Tokyo.

Narrowing Spread

ANA last offered 10-year debt in May 2008, selling 10 billion yen of 2.45 percent bonds at a 45 basis point yield premium over yen swap rate, data compiled by Bloomberg show. The spread narrowed to 25 basis points yesterday and compares with 38 paid at the most recent sale. A basis point is 0.01 percentage point.

The company has 145 billion yen of outstanding bonds, including 20 billion yen maturing this year, data compiled by Bloomberg show. Its weighted average fixed coupon declined to 1.81 percent from 2.26 percent in the last three months of 2011.

Japan Credit Rating Agency Ltd. ranks ANA at A-, its fourth-lowest investment grade and a level above Rating & Investment Information Inc.’s BBB+. It isn’t rated by Moody’s Investors Service or Standard & Poor’s.

“There’s increasing demand for investment grade corporate bonds as yields on government bonds have declined,” said Toshiyasu Ohashi, the head of credit research in Tokyo at Daiwa Securities Capital Markets Co. “It’s not unusual for companies to increase their sales in this low-interest environment with strong demand. Investors are being selective. There are no special concerns about ANA.”

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