R&I Rating and Investment Information : Credit Rating Changes for 2016

Jan 04, 2017

R&I Credit Rating Changes for 2016

Rating and Investment Information, Inc. (R&I) has compiled a summary of credit rating changes for 2016. The summary encompasses Issuer Ratings or Insurance Claims Paying Abilities of domestic and foreign issuers. For domestic corporations, there were 28 upgrades and 21 downgrades. There were 1 downgrade for a foreign corporation, 2 upgrades and 2 downgrades for sovereigns and 3 upgrades for J-REITs. No rating changes were made for government agencies and local governments. For domestic issuers, the total number of upgrades increased by 6 from the 2015 level, reaching

31, and the total number of downgrades rose by 4 to 21. Upgrades of domestic issuers outnumbered their downgrades for four consecutive years. While upgrades for non-manufacturers were pronounced, the number of upgrades and downgrades was the same for both manufacturers and financial institutions, showing different trends between sectors.

Domestic Foreign

Upgrade	Downgrade	Upgrade	Downgrade
Corporations	28	21	0	1
Government Agencies	0	0	0	0
Local Governments	0	0	0	0
Sovereigns	0	0	2	2
J-REITs	3	0	0	0
Total	31	21	2	3

[Domestic Corporations]

In the manufacturing sector, there were 9 upgrades for 8 issuers and 9 downgrades for 8 issuers. The number of upgrades and downgrades was both fewer than in 2015, which saw 12 upgrades for 12 issuers and 10 downgrades for 7 issuers.

For electrical equipment manufacturers, there were 4 upgrades for 3 issuers and 4 downgrades for 3 issuers. Of these, Sharp Corp. accounted for 2 upgrades and 1 downgrade. After downgraded in January, the company was upgraded in August because of improvement in its financial base with investments from the Taiwan-based Hon Hai Group and also in December, when its revenue/expenditure structure was enhanced. R&I downgraded Toshiba Corp. in February and December. The second downgrade occurred following the company's announcement that it may recognize an impairment loss of several hundred billion yen in its U.S. nuclear power systems business. In contrast, Fuji Electric Co., Ltd. was upgraded, as the company was reaping benefits from initiatives to improve its revenue/expenditure structure and would most likely strengthen its financial base.

For chemicals, there were 2 upgrades for 2 issuers and 1 downgrade for 1 issuer. Sumitomo Chemical Co., Ltd. was upgraded because the company was creating a mechanism that allows it to generate relatively solid profits and cash flow even in the changing management environment, thanks to the successful reform of its business portfolio. The other upgraded issuer is Sumitomo Seika Chemicals Co., Ltd., which increased the stability of its earnings base with the super absorbent polymers business as its core. Tokuyama Corp. was downgraded, on the other hand, as a result of the weakening of its financial base caused by the posting of an impairment loss for its Malaysian plant.

Other upgraded issuers include Olympus Corp., whose financial base improved steadily, and Daihatsu Motor Co., Ltd., which became a wholly-owned subsidiary of Toyota Motor Corp. and gained further importance in the Toyota Group, in R&I's view. Among downgraded issuers were JFE Holdings, Inc. with a declining earning capacity stemming from overcapacity in China and Mitsubishi Motors

Corp., whose series of improper acts in fuel consumption testing showed its corporate governance had not been functioning appropriately for years.

In the non-manufacturing sector, there were 12 upgrades for 12 issuers and 6 downgrades for 6 issuers. Compared to 2015, which saw 4 upgrades for 4 issuers and 4 downgrades for 4 issuers, an increase in upgrades was noticeable.

For land transport & logistics, major private railway companies Nagoya Railroad Co., Ltd., Tobu Railway Co., Ltd., Nankai Electric Railway Co., Ltd. and Sotetsu Holdings, Inc. were upgraded. Their financial positions improved, reflecting a solid rise in railway revenues mainly driven by a growing number of commuters and inbound tourists. In air transport, R&I upgraded ANA Holdings Inc., which benefited from stronger aviation demand resulting from an increase in foreign visitors and other factors. Meanwhile, earnings of shipping firms continued to be squeezed due to weak freight rates on the back of a vessel oversupply and decelerated emerging economies. Therefore, Nippon Yusen K.K., Mitsui

O.S.K. Lines, Ltd. and Kawasaki Kisen Kaisha, Ltd. were downgraded.

Besides the issuers mentioned above, R&I upgraded Tokyo Electric Power Co. Holdings, Inc., whose financial conditions improved through cost structure reforms, Trusco Nakayama Corp., which increased the volume of wholesaling to on-line retailers and electronics mass merchandisers, Nihon Unisys, Ltd., whose cost management structure for preventing unprofitable projects was working, and Transcosmos Inc., which strengthened its customer base for information processing services.

In the financial sector, there were 6 upgrades for 6 issuers and 6 downgrades for 6 issuers. As compared to 7 upgrades for 7 issuers and 3 downgrades for 3 issuers in 2015, a rise in downgrades draws attention.

For banks, the number of downgrades exceeded the number of upgrades, with 2 upgrades for 2 issuers and 5 downgrades for 5 issuers. Due in part to the Bank of Japan's negative interest policy, earnings of regional banks were under stronger downward pressure, resulting in downgrades of The Hyakugo Bank, Ltd., The Yamanashi Chuo Bank, Ltd., The Bank of Saga Ltd. and The Chugoku Bank, Ltd. In connection with the creation of the Mebuki Financial Group, higher rated The Joyo Bank, Ltd. was downgraded, and lower rated The Ashikaga Bank, Ltd. and so forth were upgraded. In life insurance, R&I upgraded 3 T&D insurance group companies.

Kindai University was upgraded. This rating action was driven by further improvements in important rating factors, including comprehensive strength as a university and the ability to attract students, on the back of strong management capabilities, as well as relatively steady progress in the enhancement of revenue/expenditure at affiliated hospitals.

[Foreign Corporations]

With U.S.-based Western Digital Corp. (WDC) making SanDisk Corp. of the U.S. a wholly owned subsidiary, R&I downgraded SanDisk, directly reflecting the creditworthiness of the WDC group, whose financial conditions deteriorated due to borrowing for the acquisition.

[Sovereigns]

Ukraine was upgraded because debt restructuring alleviated the government's external debt burden and the country emerged from its worst economic and fiscal conditions. Hellenic Republic (Greece) was also upgraded, with the economy heading toward a recovery and concern over the government's funding diminishing. R&I downgraded Brazil and South Africa, on the other hand. In a serious recession, the fiscal position of Brazil was rapidly deteriorating. South Africa still saw anemic economic growth, and its policy reliability somewhat waned.

[J-REITs]

Japan Rental Housing Investments Inc. was upgraded, as the change of its main sponsor to Daiwa Securities Group Inc. was expected to bring positive effects on the funding front. R&I also upgraded Japan Hotel REIT Investment Corp., whose earnings from properties remained solid, and MCUBS MidCity Investment Corp., which would likely continuously diversify its portfolio and improve the profitability thereof.

Number of Credit Rating Changes during 2016 by Industry Sector

Domestic		Foreign
Upgrade Downgrade		Upgrade	Downgrade
Manufacturers (Total)	9 9		0	1
Foods
Fiber
Pulp & Paper
Chemicals	2	1
Pharmaceuticals
Rubber	1
Glass & Ceramics	1
Steel	1
Non-ferrous
Metal Products
Machinery	1
Electrical Equipment	4	4	1
Transportation Equipment	1	1
Precision Instruments	1
Other Manufacturing

Non-manufacturers (Total)	12	6	0	0
Construction	1
Land Transport & Logistics	4	1
Shipping	3
Air Transport	1
Information & Telecoms	3
Wholesale	1
Retailing	1
Real Estate
Services	1
Electric Power & City Gas	1	1

Financial Institutions (Total)	6	6	0	0
Banking	2	5
Securities	1
Life Insurance	3
Non-life Insurance
Other Financial Services	1

School Corporations	1	0	0	0
Government Agencies	0	0	0	0
Local Governments	0	0	0	0
Sovereigns	0	0	2	2
J-REITs	3	0	0	0