Bloomberg News

Marubeni Swaps Show Biggest Increase After Tepco: Japan Credit

November 02, 2011

Oct. 27 (Bloomberg) -- The cost to insure debt of Marubeni Corp., Japan’s biggest grain trader, is poised to rise the most this month of any Japanese company after Tokyo Electric Power Co., reflecting concern an economic slowdown will make it more difficult to meet forecasts for record profit.

Credit-default swaps tied to Marubeni increased to 447.5 basis points as of 3:30 p.m. in Tokyo. They traded at 454.5 basis points in New York yesterday, from 260 at the start of the month and 170 when Japan’s government on Sept. 20 cut its evaluation of corporate earnings. Five-year swaps on Marubeni, the most indebted of Japan’s major trading houses, are more than twice the average of 207 in an index of its peers in Asia, according to data compiled by Bloomberg. The contracts are also used to speculate on creditworthiness.

“These companies have a zillion counterparties, so if the world goes down the risk is that there’s going to be a zillion counterparties that can’t pay them,” Penn Bowers, an analyst with CLSA Asia-Pacific Markets, said in an interview in Tokyo on Oct. 19. “Marubeni is the most geared of the group.”

Marubeni has more than twice the amount of leverage relative to equity of its main rivals, and five analysts cut their profit forecasts in the past month amid signs that Europe’s debt crisis will hurt the global economy. Falling commodities prices may also reduce sales for Marubeni, which got more than half of its profit from metals, energy and food products last year.

Debt Levels

Marubeni, the fifth largest of Japan’s trading houses by market value, had net debt of 1.94 trillion yen ($25.6 billion), or 218 percent of its equity last quarter. That compares with 86 percent for Mitsubishi Corp., the country’s biggest trader, and 91 percent for Hong Kong-based rival Noble Group Ltd. The companies typically use credit to fund the purchase of products and commodities before reselling.

The extra yield investors demand to hold Marubeni’s yen- denominated notes due in 2016 instead of comparable Japanese government debt was little changed at 28 basis points of as 5:30 p.m. in Tokyo, about the same as at the start of the month, according to Japan Securities Dealers Association prices on Bloomberg. The spread widened from 25.3 basis points on Sept. 9, the narrowest since the notes were sold in July. A basis point is 0.01 percentage point.

The company has 166.7 billion yen in loans and bonds due next year, and has a total of 913 billion yen outstanding, according to data compiled by Bloomberg.

Relative Spreads

Global industrial bonds with the same BBB rating as Marubeni had a yield premium of 250 basis points more than equivalent sovereign debt yesterday, according to Bank of America Merrill Lynch indexes. The extra yield demanded by investors has tightened from 280 on Oct. 1.

Marubeni trades commodities from rare earths to pulp to flour and reported net income in the year ended March 31 rose 43 percent to 136 billion yen. Chief Executive Officer Teruo Asada expects record net of 170 billion yen in the year ending March 2012, he said at a press conference in Tokyo on May 6.

Elsewhere in Japan’s credit markets, Kansai International Airport Co. hired Mizuho Financial Group Inc., SMBC Nikko Securities Inc., Daiwa Securities Group Inc., and Citigroup Inc. to sell bonds in December, and Japan Housing Finance Agency plans to issue 39 billion yen of notes in mid-November.

The yield on the Japanese government benchmark 10-year bond rose 2.5 basis points to 1.01 percent as of 5:30 p.m. in Tokyo. The extra yield that 10-year U.S. Treasuries pay over similar- maturity Japanese debt increased to 127 basis points, and has widened from 90 basis points at the start of the month.

Europe Summit

The yen traded at 75.84 against the dollar as of 5:30 p.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 touched a record high of 75.74 in New York on Oct. 25, and has strengthened 1.7 percent this month.

The cost of insuring Japanese corporate debt against non- payment declined today, according to credit-default swap traders. The Markit iTraxx Japan index fell 15 basis points to 178 as of 5:40 p.m. in Tokyo, Deutsche Bank AG prices show, signaling increasing perceptions of creditworthiness.

Credit-default swaps pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements.

The perceived risk of buying Marubeni’s bonds is higher than that of companies that expect losses this year, including Mazda Motor Corp. Marubeni’s swaps increased to as much as 471.3 basis points on Oct. 21, the most since May 25, 2009.

Bank Hedging

“I can’t believe these prices” for Marubeni, Takayuki Atake, chief credit analyst in Tokyo at SMBC Nikko Securities Inc., said in a telephone interview on Oct. 21. The jump in the swaps is mostly due to investment banks seeking to hedge their risk of holding trading company debt, Atake said. He recommends selling the swaps and buying Marubeni bonds.

Marubeni’s swaps imply a lower credit rating than its current Baa2 from Moody’s Investors Service, Tetsuya Yamamoto, a senior analyst with the firm said in a telephone interview on Oct. 24 from Tokyo. Moody’s doesn’t change assessments based on credit swaps, he said. Marubeni holds the second-lowest investment-grade rank from both Moody’s and Standard & Poor’s.

“Marubeni is likely to record a historically high profit, but trouble in the European countries and the slowdown in the economic situation in China may be the reason for their higher credit-default swap prices,” Yamamoto said.

China, IMF

China’s Premier Wen Jiabao said yesterday that the government is studying measures to stimulate growth amid concern that the country’s expansion will be slowed by a sluggish global economy. Policy makers are also curbing lending in order to rein in inflation in the world’s fastest-growing major economy.

The International Monetary Fund lowered its forecast last month for global economic growth in 2011 to 4 percent from 4.3 percent. China’s expansion moderated to 9.1 percent in the third quarter from a year earlier, the slowest pace since 2009.

Only the swaps of Tokyo Electric, or Tepco, whose crippled Fukushima atomic plant is leaking radiation following the record earthquake and tsunami, rose more this month. Debt-protection for Tepco, Japan’s biggest non-financial borrower, jumped 477 basis points to 1,502, according to Bloomberg data.

Kyoko Kawase, a spokeswoman for Marubeni in Tokyo, said Oct. 25 in an e-mailed response to questions that the company didn’t have any comment on the move in the default swaps.

Japan’s government last month lowered its evaluation of corporate profits for the first time since May, saying that earnings have deteriorated. The average forecast for Marubeni’s earnings per share has been cut by 1.4 percent to 103.11 yen in the past month, according to Bloomberg data.

Commodities Prices

The London Metal Exchange Index of prices for six metals, including copper and aluminum, which Marubeni trades, dropped 23 percent in the three months ended Sept. 30, the biggest plunge in almost three years. The S&P Agricultural Commodities Index fell for two consecutive quarters through Sept. 30, the longest losing streak in two years.

With profit margins traditionally less than 5 percent, trading companies rely on rising volumes as well as higher prices to boost profit.

“In the good times Marubeni performs well, but in the bad times it’ll do badly,” Tadashi Matsukawa, head of fixed income at PineBridge Investments Japan Co. in Tokyo, who helps manage about 130 billion yen in bonds, said in a telephone interview on Oct. 24. “Marubeni has to take on more risks as it aims to beat its rivals.”

--With assistance from Emi Urabe in Tokyo. Editors: Beth Thomas, Pavel Alpeyev

To contact the reporters on this story: Yuriy Humber in Tokyo at yhumber@bloomberg.net; Yusuke Miyazawa in Tokyo at ymiyazawa3@bloomberg.net

To contact the editors responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net; Shelley Smith at ssmith118@bloomberg.net


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