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Panasonic Swings Ruin Funds’ Appetite for BBB Debt: Japan Credit

December 02, 2012

Panasonic Swings Ruin Funds’ Appetite for BBB Debt

Pedestrians walk past the Panasonic Corp. logo displayed in a window of the company's building in Tokyo. Photographer: Haruyoshi Yamaguchi/Bloomberg

Offerings of Japanese corporate bonds without an A rating dried up last month, as swings in prices of debt in Panasonic Corp. (6752) and Sharp Corp. spoiled investor appetite for riskier securities.

No notes rated BBB+ or lower by domestic assessors were offered in November, the first time in a year, data compiled by Bloomberg show. Such borrowers raised 13.4 billion yen ($163 million) the previous month, including a 7 billion yen sale by Daikyo Inc. The yield on Panasonic’s securities due 2016 reached as high as 3.54 percent, before dropping to 1.89 percent on Nov. 30, according to JS Price data.

Japan’s corporate notes slumped to a 0.07 percent loss last month, the worst return since August, as company notes worldwide gained 0.32 percent, Bank of America Merrill Lynch data show. Panasonic led the declines with a 4.4 percent drop after a worse-than-expected loss forecast, prompting investors to scan the market for the next negative surprise.

“You have companies like Sharp and Panasonic, which just two years ago were major market players with solid AA ratings, slipping” in the rankings, Tetsushi Nagato, a fund manager and credit analyst at Schroder Investment Management (Japan) Ltd., said in a telephone interview from Tokyo Nov. 28. “This is not a market environment where you can justify buying BBB notes.”

Panasonic’s Debt

Panasonic has 930 billion yen of bonds outstanding, or 1.5 percent of Japan’s corporate bond market, according to data compiled by Bloomberg and Japan Securities Dealers Association. The Osaka, Japan-based maker of household appliances and flat- screen televisions last sold bonds March 2011 when it raised 500 billion yen, in Japan’s biggest sale of corporate bonds.

The offering included 200 billion yen of 0.752 percent five-year notes priced to yield 19 basis points more than government debt, the data show. The spread soared to as high as 330 basis points Nov. 8, before falling to 174.5 on Nov. 30, according to JS Price data.

Sharp has 395 billion yen of notes outstanding, including 200 billion yen of convertible bonds due September, data compiled by Bloomberg show. The bonds were quoted at 63.7 yen per face value 100 yen as of 9:35 a.m. in Tokyo today, according to Tokyo Stock Exchange prices.

“Overall, investors’ view toward credit is becoming more severe,” Masanori Azuma, managing director for capital markets at Nomura Securities Co., Japan’s biggest brokerage, said in a telephone interview Nov. 29. “That’s because electronics makers and power companies, whose credit used to be regarded as excellent, have worsened, and the spreads widened as a result.”

Japanese Corporates

Elsewhere in Japan’s credit markets, United Urban Investment Corp. sold 4 billion yen of 0.69 percent five-year bonds, Daiwa Securities Group Inc. said in a statement on Nov. 30. Central Glass Co. offered 10 billion yen of 0.72 percent five-year debt, according to Mizuho Financial Group Inc.

Sanken Electric Co., a chip manufacturer rated BBB+ by Japan’s Rating & Investment Information Inc., started marketing a sale of about 4 billion yen in three-year bonds Nov. 29, according to a person familiar with the matter. The Saitama, Japan-based company told investors it plans to price the notes to yield 140 to 160 basis points more than the yen swap rate this week, the person said, asking not to be identified as the information is private.

Japan’s corporate bonds have handed investors a 0.03 percent loss so far this quarter, compared with a 0.23 percent return for sovereign notes, according to Bank of America Merrill Lynch index data. Company debt worldwide has gained 1.43 percent.

Sovereign Yields

Yields on Japan’s benchmark 10-year government bonds touched 0.695 percent on Nov. 30, the lowest level since June 2003, and were one basis point higher at 0.71 percent at 9:42 a.m. today. The Japanese securities yielded 92 basis points less than similar-maturity U.S. Treasuries, compared with 100 a year earlier, data compiled by Bloomberg show.

Five-year credit-default swaps that insure Japan’s sovereign debt fell 8 basis points to 67.4 last month, their six straight monthly decrease, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. A drop in the contracts signals improving perceptions of creditworthiness.

Kansai Electric

Bonds of Kansai Electric Power Co., which supplies power to Japan’s second-biggest metropolitan area, handed a 1.5 percent loss last month, second only to Panasonic, according to Bank of America Merrill Lynch data. The Osaka-based utility’s rating has been cut a total three steps to A+ by R&I since the March 2011 earthquake and tsunami, which crippled the Fukushima atomic plant.

Japan last month delayed a decision on the future of Kansai Electric’s Ohi nuclear plant, whose two reactors are the only ones running in the country, as seismologists under the Nuclear Regulation Authority debated whether an earthquake fault line under the station is active or not. The company is the nation’s utility most dependent on atomic power.

Top-rated issuers are taking advantage of the vacuum made by the riskier borrowers. Toyota Industries Corp., a parts-and- assembly affiliate of Japan’s largest carmaker, raised 30 billion yen in a three-part offering Nov. 22, including 10 billion yen of five-year 0.265 percent bonds priced to yield 8 basis points more than government debt, according to data compiled by Bloomberg. The manufacturer is rated at AA by R&I, the data show.

Fujifilm Offering

Fujifilm Holdings Corp., a copier maker graded AA by R&I, raised 130 billion yen in its first offering of non-convertible bonds Nov. 27, making it the nation’s biggest sale by a non- financial company since March. The three-tranche offer included 60 billion yen of 0.33 percent five-year notes priced at a 15 basis-point spread, the data show.

“A handful of blue-chip names are able to attract very strong demand,” said Nomura’s Azuma. “They command tight spreads.”

Panasonic reversed on Oct. 31 its full-year profit goal, forecasting a deficit 30 times bigger than analyst estimates as TV sales slumped. The net loss will be 765 billion yen in the 12 months to March 31, compared with a 50 billion yen profit estimated earlier and a 772 billion yen deficit the previous year, the company said at the time.

Moody’s Investors Service changed its outlook on the company to negative the following day and downgraded it by two levels to Baa3 on Nov. 20, data compiled by Bloomberg show. The rating is the credit assessor’s lowest investment rank.

Index Exclusion

Sharp’s notes are ranked BB by R&I, two steps below investment grade, the data show. The company was ousted in August from the Nomura Bond Performance index, which is tracked by some of the country’s largest investors, after R&I cut its bond rating to BBB.

The yen depreciated to 82.84 per dollar last month, the weakest since April 4, and traded at 82.38 as of 9:47 a.m. in Tokyo. The Japanese currency lost 9.3 percent this year, the worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The decline in the currency is boosting the earnings prospects of the nation’s exporters.

“When corporations dependent on overseas demand show prospects for revival,” full-scale sales of BBB bonds will resume, said Nagato at Schroder. “Investors need to know that even at a BBB rating there is some sense of stability in debt.”

To contact the reporter on this story: Yusuke Miyazawa in Tokyo at ymiyazawa3@bloomberg.net

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


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