MOODY'S DOWNGRADES 4 JAPANESE FIRST-TIER GENERAL CONTRACTORS; KAJIMA, OBAYASHI, SHIMIZU AND TAISEI
Tokyo, 09-21-98 -- Moody's Investors Service downgraded the senior unsecured long-term debt ratings of four first-tier Japanese general construction companies: Kajima Corporation, to Baa3 from Baa1; Obayashi Corporation, to Baa2 from Baa1; Shimizu Corporation, to Baa3 from A3; and Taisei Corporation, to Ba1 from Baa2. The rating outlooks are stable.
The downgrades reflect continued substantial pressures on their earnings, high leverage, decreasing financial cushions, and Moody's concerns about potential further pressures on their asset quality under the deflationary state of the Japanese economy.
Japan's construction market is in a serious, protracted downswing. The rated first-tier contractors have been suffering business volume contraction and profit margin declines. Although the companies are cutting their costs by reducing overexpanded workforces and developing highly efficient construction methods, their cash flows will remain pressured due to weak construction demand from the private sector and the intense competition that results.
The government's policy of increasing public spending to boost the economy is unlikely to significantly improve the first-tier contractors' performances because they have relatively low dependence on public works.
In the first half of this year, Shimizu, Taisei and Kajima announced major asset disposition and write-off packages -- including real estate inventory, dubious receivables from customers, and unprofitable operations of group companies. Each company's aggregate write-offs were large enough to significantly erode their equity positions.
The modest profits expected over the medium term will slow down debt reduction and recovery in their equity positions. Amid growing uncertainty about Japan's economy and the financial system, their weakening capital structure is a significant concern, said Moody's.
The four companies have large marketable securities portfolios, consisting mostly of stock shares with sizable unrealized gains. However, Japan's weak stock market has slashed the values of their portfolios, and financial cushions in the portfolios have been reduced.
Moreover, Moody's is concerned that potential deflation in the Japanese economy may further deteriorate their asset quality, eroding their asset values and/or producing additional credit losses.
In the meantime, Moody's expects that the companies' established franchises and excellent technological backgrounds will sustain their competitive edges and minimize volatility of their operations. The companies have a long-term potential to enhance their market positions as the market requires higher efficiency, said Moody's.
Moody's downgraded Kajima's long-term debt rating to Baa3 from Baa1, and its supported subsidiary, Kajima Capital of America, Inc.'s debt rating to Ba1 from Baa2. The rating outlook is stable. The rating action concludes a review initiated on May 20, 1998.
The downgrade reflects significant deterioration of Kajima's financial profile as a result of its declining profit margins, its substantial asset write-offs, and its high debt. Kajima has a large overseas property investment portfolio, which has burdened Kajima's group-wide debt position and profitability.
Moreover, part of Kajima's domestic real estate inventory carries much higher book values than realizable values in the current market. Kajima plans to write off substantial parts of its unprofitable group operations and high-cost inventory during the fiscal year ending March 31, 1999, which will result in what the company estimates as a Yen 140 billion consolidated net loss for the term (approximately 38% of its equity as of March 31, 1998. Despite the company's policy to cut debt, mainly utilizing asset sales proceeds, the write-off will significantly impair its capital structure.
In the meantime, Moody's expects that Kajima's long-established private- and public-sector franchise and outstanding technological advantage will continue to sustain its competitive strength in the industry. Nonetheless, Kajima's equity position remains vulnerable to additional pressures on Japan's property market and economy, putting its rating at the low end of the investment grade spectrum.
Kajima Corporation, headquartered in Tokyo, is a leading general contractor in Japan, with a consolidated turnover of Yen 1.9 trillion for the fiscal year ending March 31,1998.
Moody's downgraded Obayashi and its supported subsidiary, Obayashi Finance International (Netherlands) B.V.'s long-term debt rating to Baa2 from Baa1. The rating outlook is stable. The rating action concludes a review since June 15, 1998.
The downgrade recognizes Obayashi's continued tough earnings environment, and Moody's expectation that a substantial debt reduction is unlikely over the intermediate term. Obayashi has demonstrated higher profit margins than its peers over the past several years because of its focus on project profitability. However, like its peers, its margins are pressured under intense market competition.
Due to its less-aggressive asset expansion during the property "bubble", Obayashi suffered smaller asset write-offs than its peers and has maintained acceptable asset quality.
Still, Obayashi is highly leveraged. Moody's expects that its total debt is unlikely to be reduced substantially in the medium term in light of pressures on cash flow from its fundamental operation and the expected moderate pace of its real estate inventory reduction. As a result, improvement in its debt-protection measurements will be constrained.
The rating also incorporates Obayashi's solid franchise primarily in Osaka's civil engineering market, its technological competitiveness in certain fields, and its reasonably conservative financial policies as reflected in its acceptable asset quality.
Obayashi Corporation, headquartered in Osaka, closed fiscal year ending March 31, 1998 with Yen 1.5 trillion consolidated sales.
Moody's downgraded Shimizu and its supported subsidiary, Shimizu Europe B.V.'s senior unsecured long-term debt rating to Baa3 from A3. The rating outlook is stable. The rating action concludes a review initiated on April 1, 1998.
The downgrade reflects Shimizu's significantly impaired capital position as a result of its major asset write-offs, its high debt position, and its weakening fundamental earnings.
Shimizu is implementing a major asset write-off package in the fiscal years ending March 31, 1998 and March 31, 1999, consisting of charge-off of dubious receivables for its construction works, disposition of real estate inventory, and write-down of its problematic domestic affiliates' operations. These write-offs, together with some other charges, will cause Yen 157 billion aggregate consolidated net losses for the two fiscal years (approximately 45% of its equity as of March 31, 1997), as the company estimates.
Shimizu had written off substantial amounts of its overseas investments and domestic real estate inventory since 1993. The additional major write-offs will significantly damage its capital position and will produce yet higher leverage.
Shimizu has a strong building construction operation, backed by its established franchise, technological strength, flexible market coverage, and effective cost management capabilities. However, building construction, mainly from the private sector, generally provides lower profit margins than public civil engineering projects, and is affected by economic conditions.
Shimizu's profit margin has significantly declined in the past several years and is still under pressure. Despite its policy of cutting total debt, Moody's does not expect substantial improvement in its debt-protection measurements in the medium term.
Shimizu Corporation, headquartered in Tokyo, is a leading general construction company is Japan, with a consolidated sales of Yen 1.8 trillion for the most recent fiscal year.
Moody's downgraded the long-term debt ratings of Taisei Corporation and its supported subsidiaries, Taisai Capital L.D.C. and Taisei Holland B.V., to Ba1 from Baa2. The rating outlook is stable. The rating action concludes a review started on June 15, 1998.
The downgrade reflects Moody's concerns about Taisei's high debt burden, erosion of its equity by asset write-offs, continued pressures on the value of its assets and equity, as well as earnings pressures on its fundamental operation and group operations.
In the fiscal year ending March 31, 1998, Taisei registered revaluation losses on its real estate inventory and wrote off dubious receivables, which resulted in Yen 67 billion consolidated net loss for the term (approximately 17% of its equity as of March 31, 1997) after tax allocation. Taisei carries a very high debt position to finance its group-wide operations, including substantial real-estate related operations.
Taisei's inability to reduce its debt position was exacerbated by the write-offs, which increased its high leverage even further. Although Taisei has a policy to substantially reduce consolidated debt over the next few years, its leverage is unlikely to be reduced to a moderate level in the medium term.
Furthermore, Moody's considers its group-wide real-estate related operations to be large relative to its peers, which will keep the company vulnerable to the weak real estate market in Japan until assets are greatly reduced. Such uncertainties will add to continued earnings pressures on Taisei's fundamental operations and some of its subsidiaries' operations.
Although Taisei is affiliated with the Fuyo Group, headed by Fuji Bank, Moody's notes that potential benefits from the group affiliation will be less sustainable than previously, now that the financial and industrial systems in Japan are changing. Still, Moody's expects that Taisei will maintain its distinguished franchise value and technological competitiveness from lower-tier industry players, and it has a long-term potential to enhance its industry position and earnings.
Taisei Corporation is headquartered in Tokyo. Its consolidated sales were Yen 1.8 trillion in the fiscal year ending March 31, 1998.
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