S&P Takes Rtg Actions on 3 Japanese Firms
9 July 1998
S&P Takes Rtg Actions on 3 Japan General Trading Cos
TOKYO--S&P's CreditWire 7/9/98--Standard & Poor's today lowered the long-term and short-term ratings of Mitsubishi Corp. and related entities, as well as the short-term ratings of Sumitomo Corp. and related entities. Standard & Poor's also affirmed the short-term ratings of Mitsui & Co. Ltd. and related entities. All ratings were removed from CreditWatch, where they were placed on June 5, 1998. The outlook for Mitsubishi's long-term rating is negative. Standard & Poor's does not assign long-term ratings to Mitsui and Sumitomo (see ratings list below).The rating actions reflect the Japanese general trading companies' exposure to greater risks from nontrading investments under currently difficult economic and business conditions in Japan and throughout Asia. All three have increased their exposure to nontrading activities, encompassing loans, equity investments, long-term receivables, and guarantees in various projects and ventures, to offset lower earnings growth from traditional trading businesses. Amid recent regional economic conditions in Asia, however, such investments have generally performed poorly and may require further capital commitments. This puts further pressure on the companies' financial profiles, which are already characterized by low profit margins and high debt usage. Still, the credit strength of the companies continues to be supported by the stable performance of their large-scale, diversified trading operations, and the highly liquid nature of their trading assets.
The trading companies maintain strong ties with major Japanese banks, which provide much of their funding. Financial flexibility is further underpinned by sizable unrealized asset gains. However, weakness in the Japanese banking system and the erosion of financial and property asset values in Japan in recent years have impacted the general traders' ability to deal with future write-downs, charges, or commitments. Furthermore, the strong financial positions of the companies relative to their various project partners and to some other members of their industrial groups in Japan could oblige the companies to provide funding or other support that is not in proportion to risks or return prospects.
Mitsubishi's long and short-term ratings were lowered. Risks associated with the company's major nontrading assets in Asia outside Japan, including energy development projects and car trading operations in Indonesia and Thailand, have risen dramatically in the wake of the regional economic crisis. Although Mitsubishi holds the largest amount of unrealized gains on securities among its competitors, the company's financial flexibility is diminishing amid the general decline in asset values and a weakened banking system in Japan. Nevertheless, the company's stable business profile is buttressed by its trading business, with strong performance from food and energy trading businesses in particular.
Sumitomo's short-term ratings were lowered. The company's sizable exposure to nontrading activities in Indonesia is on a par with that of Mitsubishi and Mitsui. Such activities center around export-oriented natural resource development and power generation projects. Sumitomo's equity base is small in relation to that of its major peers, and the company suffers from weakening financial flexibility as it absorbs huge losses from an unauthorized copper trading incident in 1996.
Mitsui's short-term ratings were affirmed. Nonetheless, the company faces considerable challenges from its exposure to nontrading activities in Asia outside Japan, including a large-scale electric power plant construction project in Indonesia, and from mounting pressures on its financial profile. After experiencing extensive losses from an Iranian petrochemical project in the early 1980s, Mitsui adopted relatively conservative investment policies. The company has not had any major investment losses in Japan since the collapse of the bubble economy, Standard & Poor's said.---CreditWire