Mitsui, Mitsubishi Debt Risk Spike on Loss Outlook Seen Overdone

  • Mitsui default swaps rise most in six months on loss forecast
  • `Trading companies have saved up a lot,' BNP Paribas says

The perceptions of debt risk at two of Japan’s top trading houses may have overshot reality, as their balance sheets remain solid even after they forecast annual losses, according to Mizuho Financial Group Inc. and BNP Paribas SA.

The cost to insure Mitsui & Co. debt jumped 13 basis points to 80.5 on March 23, the biggest increase in six months, after the company predicted its first net loss, according to CMA data. Mitsubishi Corp.’s credit-default swaps climbed eight basis points to 71.5 on March 24 after the trader forecast its first annual net loss on a group basis.

Japan’s five biggest trading firms including Mitsui and Mitsubishi are expecting to book combined writedowns equivalent to at least $8.6 billion as the global commodity market rout wrecks their profits on resources from shale gas to copper mines. Even so, the trillions of yen in shareholder equity held by each of the two industry leaders will continue to support their books, and their net debt-equity ratios will probably stay around 1 time if write-offs next fiscal year are less than this year, according to Mizuho.

“Trading companies have saved up a lot already, and there’s no problem if they use their savings to cover losses,” said Mana Nakazora, the chief credit analyst in Tokyo at BNP Paribas. “When spreads widen on one-off factors it may be a good investment opportunity.”

Mitsui, Japan’s second-largest trading company by market capitalization, said on March 23 that it expects a 70 billion yen ($617 million) net loss in the year ending March. It booked 260 billion yen in one-time charges on its commodities businesses, adding to an earlier announcement of a 20 billion yen writedown. Mitsubishi, the biggest, said the following day that it expects a 150 billion yen net loss after booking an impairment charge of 430 billion yen on its metals and energy businesses.

In the fiscal year ended March 2015, Mitsubishi earned about a quarter of its profit from its resources business, such as oil and gas exploration and copper and coal mining. Mitsui derived more than two-thirds.

Mitsui’s credit rating was cut to A from A+ last week by Standard & Poor’s, which predicted a worsening in its capital adequacy amid a prolonged slump in commodity prices.

Declining Profits

“The company has a larger portion of resource-related businesses than its peers, forcing it to incur a large impairment loss,” S&P said in a statement. Even though Mitsui has been expanding its non-resource operations, it’s “still unable to make up for the profit declines in its resource businesses.”

A Mitsui spokesman who asked not to be named said that while the environment is severe, there’s no concern about the company’s ability to raise funds because it has steady cash flow. A Mitsubishi spokesman who asked not be identified declined to comment.

The bond risk of trading companies Sumitomo Corp. and Marubeni Corp. may still also have room to drop, according to Takayuki Atake, the chief credit analyst in Tokyo at SMBC Nikko Securities Inc. Prices on Sumitomo’s default swaps have come down to 78 basis points compared with 148 in January, while Marubeni’s CDS has dropped to 111.5 from 202.5 in January, according to CMA data.

Their swaps have “tightened quite a bit” due to a rebound in commodity prices, Atake said. Even so, “compared with other sectors, it’s worth considering investment,” he said.

Balance Sheets

The forecast losses probably won’t have a big impact on the credit quality of Mitsui and Mitsubishi because of their strong balance sheets, said Shogo Tono, a senior credit analyst at Mizuho Securities Co.

Mitsui had 3.85 trillion yen in shareholder equity at the end of December, while Mitsubishi had 5.51 trillion yen, according to Tono. Mizuho is bullish on credit investment in Japan’s trading companies, and sees room for spreads on the companies’ bonds and default swaps to narrow.

Prices on Mitsui’s CDS have risen 28 basis points in the past year, while Mitsubishi’s swaps have climbed 29.5, according to CMA data. The extra yield on Mitsui’s 1.187 percent bonds due in 2029 was 46 basis points more than sovereign notes on Monday, compared with 23 basis points a year earlier. Spreads on Mitsubishi notes have also widened in the past 12 months.

“What’s most notable is that there’s plenty of shareholder equity” at Mitsui and Mitsubishi, Tono said. “Even with big losses like these, they don’t even come to 10 percent of their equity.”

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