Bloomberg News

Olympus Deemed Riskiest Tech Borrower in Asia: Japan Credit

October 28, 2011

Oct. 28 (Bloomberg) -- The bond market has deemed Olympus Corp. to be the riskiest borrower among its Asian peers amid a scandal tied to fees paid in a corporate takeover.

Credit-default swaps tied to the debt of Tokyo-based Olympus for three years rose to 895 basis points yesterday from 750 basis points on Oct. 21, according to Barclays Plc. That’s the most for a technology company in Asia and nine times the 98.5 average for an index of companies in the region including Canon Inc., data compiled by Bloomberg show.

The maker of cameras and medical-equipment, which has 463.2 billion yen ($6 billion) of bonds and loans outstanding, faces rising financing costs even as the Japan’s manufacturers enjoy yields that are about the lowest in seven months relative to government debt. Olympus has lost more than $4 billion in market value after the Oct. 14 firing of its chief executive officer and the resulting scrutiny of payments made to advisers in the 2008 acquisition of Gyrus Group Plc.

“It’s difficult for institutional investors to justify buying bonds of companies with corporate governance issues,” Takayuki Atake, chief credit analyst at SMBC Nikko Securities Inc., said in a telephone interview from Tokyo on Oct. 21. “These kind of news end up trumping earnings” and other fundamentals, Atake said.

Rating Review

Japan’s Rating and Investment Information Inc. placed Olympus’ A rating on review Oct. 20, saying it has become “increasingly uncertain whether the company will be able to overcome challenges on the financial front.”

Olympus has 110 billion yen of bonds, which were all offered privately between 2005 and 2009, including 25 billion yen of 2.15 percent notes due July 2018, according to data compiled by Bloomberg. It has 352.9 billion yen of loans, including a 33.1 billion yen term loan due in July 2018 with an interest rate of 2.2 percent, according to data compiled by Bloomberg.

“Olympus has huge debt, so there would be creditors who want to hedge the risks,” Taketoshi Tsuchiya, director of credit trading at Barclays Capital Japan Ltd., said in a telephone interview yesterday from Tokyo. “Taking new risks of scandal-related companies is difficult, so there are hardly any offerings.”

Olympus Lenders

Olympus’s biggest lenders are Sumitomo Mitsui Banking Corp. with 90.3 billion yen of loans as of March 31, Bank of Tokyo- Mitsubishi UFJ Ltd., which loaned 77.9 billion yen, and Mizuho Bank Ltd. with 62 billion yen, according to a June 29 filing with the government. Nippon Life Insurance Co. has 24.5 billion yen of loans, it shows.

Shinya Matsumoto, a spokesman for Bank of Tokyo-Mitsubishi UFJ, a spokesman for Sumitomo Mitsui who didn’t want to be identified, and Nariyuki Murakami, a spokesman for Mizuho, all declined to comment.

Elsewhere in Japanese credit markets, Japan Student Services Organization, an agency providing scholarship loans, sold 50 billion yen of three-year 0.278 percent bonds priced to yield 6 basis points more than the similar-maturity government debt, according to data compiled by Bloomberg.

Welfare and Medical Service Agency, a loans provider for private social welfare institutions and private medical institutions, hired Nomura Holdings Inc., Mizuho Financial Group Inc. and Mitsubishi UFJ Morgan Stanley Securities Co. for a sale of three- and 10-year bonds planned for December, Nomura said in an e-mailed statement.

Government Bonds

The yield on the Japanese government benchmark 10-year bond rose 2 basis points to 1.03 percent as of 11:06 a.m. in Tokyo. The extra yield that 10-year U.S. Treasuries pay over similar- maturity Japanese debt increased to 135.9 basis points, and has widened from 90 basis points at the start of the month.

The yen traded at 75.86 against the dollar as of 11:45 a.m. in Tokyo, after European leaders agreed to expand a rescue fund for indebted nations and reached an accord with lenders on writedowns for Greek debt. Japan’s currency strengthened to an all-time high of 75.66 yesterday.

The cost of insuring Japanese corporate debt against non- payment declined today, according to credit-default swap traders. The Markit iTraxx Japan index fell 18 basis points to 157 as of 9:18 a.m. in Tokyo, Deutsche Bank AG prices show.

Olympus Chairman and President Tsuyoshi Kikukawa quit this week, 13 days after Michael C. Woodford was fired for challenging $687 million of fees paid in the 2008 takeover, while the company denied wrongdoing. Woodford made public a PricewaterhouseCoopers report he commissioned that details the allegation and said he will meet with the U.S. Federal Bureau of Investigation and submit documents related to the fees.

Shares Tumble

Shares of Olympus have declined 38 percent since Woodford, the 92-year-old company’s first non-Japanese president, was ousted Oct. 14. The stock jumped as much as 26 percent in Tokyo trading yesterday, following Kikukawa’s resignation.

Investors may become risk-averse as these scandals rock the borrowers, Fumihito Gotoh, head of Japan credit research at UBS Securities Japan Ltd., said in a phone interview from Tokyo yesterday. “Bond spreads of borrowers with weak credit quality are likely to widen,” he said.

Daio Paper Corp., Japan’s third-largest paper-maker, said last month its chairman stepped down after borrowing 5 billion yen from an affiliate. The Tokyo-based company at the time said it created a special commission to look into the matter and expects to release a report later this month.

Wider Spreads

Yields Daio’s 15 billion yen of 1.14 percent five-year notes due December 2015 jumped 119.7 basis points to 183.4 more than government bonds yesterday, from 63.7 before the resignation announcement on Sept. 16, Bloomberg data show. The spread on debt issued by global paper producers narrowed 51 to 266 in the period, Bank of America Merrill Lynch data show.

A former president of a unit company of Kintetsu Corp., a transportation services provider in the region that includes Osaka and Kyoto, was arrested for inflating company earnings and for illegal dividends, Kyodo News reported Oct. 25.

Credit-default swaps tied to the debt of Kintetsu soared to 393.8 basis points Oct. 26 from 290.2 Oct. 21, according to data provider CMA, which is owned by CME Group Inc., and compiles prices quoted by dealers in the privately negotiated market.

The contracts, which pay the buyer face value if a borrower fails to meet its obligations, fall as perceptions of creditworthiness improve and rise as they deteriorate. A basis point, or 0.01 percentage point, equals $1,000 annually on a contract protecting $10 million of bonds and loans.

Recent allegations against listed companies, including compensation paid to advisers on takeovers and unauthorized lending to a director, are “questions of compliance and management ethics at their most basic level,” the Tokyo Stock Exchange said in a statement this week without identifying any companies or investors. Domestic and overseas shareholders were concerned about “underlying problems in the quality of Japanese corporate governance,” according to the statement.

--Editors: Pavel Alpeyev, Beth Thomas

To contact the reporters on this story: Yusuke Miyazawa in Tokyo at ymiyazawa3@bloomberg.net; Emi Urabe in Tokyo at eurabe@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net


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