Bloomberg News

Canon Swaps Decline as Yen Retreat Boosts Outlook: Japan Credit

October 17, 2011

Oct. 18 (Bloomberg) -- The perceived creditworthiness of Japan’s Canon Inc., which earns a third of its revenue in Europe, is improving at the fastest pace in 19 months on optimism the region’s officials will contain the debt crisis and bolster the euro from a decade low against the yen.

Credit-default swaps tied to Tokyo-based Canon, the world’s biggest camera maker, slid 5.8 basis points to 60.3 basis points in the five days ended Oct. 14, the biggest weekly drop since March 12, 2010, according to CMA data. Contracts on Asian technology companies fell 5.5 to 172 in the period, the steepest decline since the period ended April 29.

Canon, second only to Nippon Sheet Glass Co. on the benchmark Nikkei 225 Stock Average in percentage of revenue generated in Europe, estimates it loses 5.3 billion yen ($69 million) in sales for every 1 yen gain by the Japanese currency against the euro. A weaker yen helps exporters such as Canon because it boosts the value of overseas income.

“The company’s high exposure to the euro means its CDS contracts are overly sensitive” to fluctuations in the European currency, said Mitsushige Akino, who oversees about $600 million in Tokyo at Ichiyoshi Investment Management Co. “Concerns are easing over Europe’s debt crisis and its effect on the global financial system, reducing credit risk in the short-term.”

Richard Berger, a Tokyo-based spokesman for Canon, wasn’t immediately available for comment.

Government Bonds

Elsewhere in Japan’s credit markets, government bonds fell even as Japan’s government downgraded its assessment of the economy for the first time since April. Industrial Bank of Korea is planning to sell as much as 20 billion yen of bonds, known as Samurais, maturing in two to three years next month, said to a person with direct knowledge of the matter.

The yield on Japan’s benchmark 10-year bond was unchanged at 1.02 percent as of 10:37 a.m. Tokyo time today. The difference between the yield and that for similar maturity Treasuries has widened to about 114 basis points from the low this year of 73 basis points on Oct. 3.

Credit-default swaps tied to Japan’s sovereign debt have fallen to 116.5 basis points yesterday from this year’s high of 155 on Oct. 4, CMA prices in New York showed. CMA is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

‘Decelerating’ Growth

“The Japanese economy is still picking up although the pace is decelerating,” the Cabinet Office said in its monthly report yesterday.

Japanese Finance Minister Jun Azumi told his Group of 20 counterparts of his concern about the value of the yen, during a Paris meeting on Oct. 14. The G-20 finance officials said in a statement after the gathering that “disorderly” currency moves may hurt economies and financial markets.

Prime Minister Yoshihiko Noda’s government unveiled measures last month to cope with the yen’s gains, including subsidies for companies struggling to retain workers.

Industrial Bank of Korea, a state-owned lender, plans to set the size and maturity of its bond sale by Oct. 21, the person said, asking not to be identified because the terms are private. Proceeds will likely be used to refinance 19.3 billion yen of two-year Samurai notes that mature on Nov. 9, according to the person. Standard & Poor’s gave an A rating to the bonds at the time, sold at 2.2 percent, or 155 basis points over mid- swap rates, Bloomberg data shows.

Corporate Swaps

The Markit iTraxx Japan index of credit-default swaps for 50 companies has increased 9 basis points to 194.5 as of 9:24 a.m. in Tokyo, Deutsche Bank prices show, down from this year’s high of 233.42 on Oct. 5. The nation’s corporate bonds yield 0.8 percent on average, and have lost 1.41 percent this year, compared with a return of 2.91 percent for the global company debt market, according to Bank of America Merrill Lynch indexes.

The yen has gained about 11 percent in the last six months against a basket of nine other developed nation currencies tracked by Bloomberg Correlation-Weighted Currency Indexes, the most of the group. While the 12-nation euro has weakened about 1.5 percent over that time, it’s up 1.4 percent in the past month as the region’s leaders hammered out a plan to avoid a Greek default, support banks and curb contagion.

G-20 finance ministers and central banks concluded weekend talks in Paris endorsing parts of the emerging plan to end the crisis. They set an Oct. 23 deadline for the plan to be delivered at a summit of European leaders in Brussels. Germany said officials won’t provide the complete fix to the crisis that global policy makers are pushing for at the meeting.

Dreams Damped

German Chancellor Angela Merkel has made it clear that “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Steffen Seibert, Merkel’s chief spokesman, said at a briefing in Berlin yesterday. The search for an end to the crisis “surely extends well into next year.”

“As Europe introduces remedies for the crisis, markets are going through a correction and getting relief,” Kogo Horie, equity analyst at Daiwa Securities Capital Markets, said. “Whether the rebound lasts will depend on economic fundamentals, and the euro will serve as a gauge.”

Canon expects the yen will average 115 per euro in the six months to Dec. 31, the Tokyo-based company said in July. The yen has appreciated 1 percent against the euro this year, touching 100.76 on Oct. 4, the strongest since June 2001.

Currency Fluctuations

The company at the time projected foreign-exchange fluctuations would reduce its sales this fiscal year by 83.8 billion yen and shave 51.3 billion yen from operating profit, or revenue minus the cost of goods sold and administrative expenses.

Canon, which has no bonds outstanding, is rated AA by Standard & Poor’s, a level higher than Japan’s sovereign debt. Only two other companies in the Nikkei index, NTT DoCoMo Inc. and Nippon Telegraph & Telephone Corp., have the same rating as Canon.

The company may also benefit from factory stoppages at Nikon Corp.’s Thailand factories caused by the country’s worst floods in more than five years. Nikon hasn’t been able to determine when it can resume operations at the flooded plant in Ayutthaya, Thailand, its biggest manufacturing base for single- lens reflex cameras, Tokyo-based spokesman Yasuyuki Takeda said Oct. 12.

While Canon also stopped output at two plants in the area, the company may move production to other locations, Berger said.

“The fact that Canon can shift production to other manufacturing locations and limit the damage gives it a relative advantage over Nikon,” bolstering investor sentiment, Akino at Ichiyoshi Investment said.

--With assistance by Monami Yui, Jason Clenfield in Tokyo and Edward Johnson in Sydney. Editors: Pavel Alpeyev, Brian Fowler.

To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Satoshi Kawano in Tokyo at skawano1@bloomberg.net

To contact the editors responsible for this story: Nick Gentle at ngentle2@bloomberg.net


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