IPhone Taking Nikon Share Masked in Bond Offering: Japan Credit

Prime Minister Shinzo Abe’s weakening of the yen is capping Nikon Corp.’s borrowing costs even as camera shipments shrink due to competition from devices such as Apple Inc.’s iPhone.

Nikon raised 20 billion yen ($194 million) in a bond sale on March 7 that included 10-year notes priced at a 24 basis point premium over government debt. That’s two basis points more than the record low in its previous offering of similar-maturity securities in January 2011. Japanese borrowers pay an average spread of 19 basis points for debentures due in seven years to a decade, while U.S. corporates offer 148, Bank of America Merrill Lynch indexes show.

The race to add more sophisticated lenses and sensors by smartphone makers such as Apple and Samsung Electronics Co. has eroded demand for traditional point-and-shoots and is threatening the high-end market for single-lens reflex cameras. Nikon last month reiterated its forecast for an 18 percent increase in annual net income, citing a currency windfall helping offset worse-than-expected demand in China and Europe.

“A weakening yen versus the dollar and euro is one factor supporting improved earnings this fiscal year,” said Takao Matsuzaka, a credit analyst in Tokyo at Daiwa Securities Co. “The environment surrounding the camera business is severe and Nikon’s dependence on it remains high.”

Provided Nikon can maintain profits by controlling costs, the credit outlook for company in the near future is neutral, Matsuzaka said.

Profit Forecast

Net income at the company will probably climb to 50 billion yen in the year to March 31, even as sales remain little changed at about 1.02 trillion yen, Nikon said on Feb. 6. The Tokyo-based manufacturer of Coolpix and D800 cameras said it expects to meet the 20 billion yen in targeted savings this year and that it’s boosting the profitability of its camera business amid a “favorable exchange rate.”

Currency fluctuations contributed 27.8 billion yen to Nikon’s operating profit of 39.3 billion yen in the nine months to Dec. 31, it said. The yen plunged 11 percent against the dollar in the period and declined 17 percent versus the euro amid Prime Minister Abe’s stimulus policies backed by about 7 trillion yen in monthly bond purchases by the Bank of Japan. It traded at 103.31 per dollar and 143.21 per euro as of 4:19 p.m. in Tokyo today.

“The interest rate environment is favorable and we received strong demand for the offering,” said Ryota Satake, a spokesman for Nikon. “We were able to sell the bonds at the lower end of the marketing range.”

Bond Demand

The offering, split between the 10-year bonds and debt due in eight years, was marketed at a spread of as much as 27 basis points and 24 basis points respectively, a person familiar with the matter said on March 4. The 0.652 percent 2022 securities priced at a yield premium of 20 basis points, or 0.2 percentage point, data compiled by Bloomberg show.

Investors demanded a 19 basis point extra yield over government debt to own Nikon’s 1.434 percent notes due 2021, down from 22 at the time of offering in 2011. Japan’s benchmark 10-year bonds yielded 0.625 percent today.

“That Nikon could sell 10-year bonds at such a tight premium is a sign that the company’s business model is considered quite unique, and that investors put value on that,” said Yusuke Ueda, a Tokyo-based credit analyst at Bank of America Merrill Lynch. “Nikon is financially a strong company and there are few concerns from a credit perspective.”

The company is rated A+ by Japan Credit Rating Agency Ltd., its fifth-highest investment grade rating, and one level lower by Rating & Investment Information Inc. It isn’t rated by Moody’s Investors Service or Standard & Poor’s.

Camera Slump

Annual sales of compact digital cameras will fall 33 percent from a year earlier to 11.5 million units, while those of the SLR variety will slump 14 percent to 6 million, Nikon forecasts. The business, which also includes interchangeable lenses, accounts for about 75 percent of the company’s revenue. Its operating profit margin was 11 percent in the third quarter.

Canon Inc., the world’s largest camera maker, missed estimates for annual net income in January when it forecast 240 billion yen, compared with a 267 billion yen average of 22 analysts compiled by Bloomberg.

For its fiscal first quarter ended Dec. 28, Apple said it sold a record 51 million iPhones, the company’s biggest source of revenue. Global mobile phone shipments increased 5 percent last year to 1.7 billion, led by Samsung’s 451.7 million, according to researcher Strategy Analytics. Apple shipped a record 153.4 million mobile phones, the data show.

“The low-cost digital camera market is shrinking rapidly as smartphones can cover that segment,” Bank of America Merrill Lynch’s Ueda said. “The profit margins in the imaging business are quite high, leaving sufficient room to endure a squeeze.”

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