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Rating Action:

MOODY'S DOWNGRADES DEBT RATINGS OF FOUR JAPANESE STEEL COMPANIES; PLACES THREE OTHERS ON REVIEW FOR POSSIBLE DOWNGRADE, AND CONFIRMS ONE

03 Jun 1998
MOODY'S DOWNGRADES DEBT RATINGS OF FOUR JAPANESE STEEL COMPANIES; PLACES THREE OTHERS ON REVIEW FOR POSSIBLE DOWNGRADE, AND CONFIRMS ONE Tokyo, 06-03-98 -- Moody's Investors Service downgraded the long-term debt ratings of four Japanese steel companies, three of which continue to be reviewed for possible further downgrade. Moody's also placed debt ratings of three other Japanese steel companies under review for possible downgrade. Furthermore, Moody's confirmed the debt rating of one steel company, but changed the rating outlook from stable to negative.
The rating actions and the rating outlook change reflect growing pressures on the steel companies' earnings under the rapidly deteriorating operating environment for Japanese steel companies, including declining domestic steel demand, decreasing exports to Asia, and weak international steel prices. Weak performances of some rated steel companies' non-steel operations are also recognized. Moreover, the rating actions incorporate the rating agency's view that the risks of a highly leveraged capital structure are increasing amid the dismal economic performance and weakening banking system in Japan. Moody's also expects that a stressful operating environment for Japanese steel companies will continue over the intermediate term.
Moody*s downgraded and continues to review for further downgrade the senior unsecured debt ratings of Nippon Steel Corporation (to Baa1 from A3) and Kawasaki Steel Corporation (to Baa2 from Baa1), along with their supported subsidiaries, and the senior secured debt rating of Tokyo Steel Manufacturing Co., Ltd. (to Ba1 from Baa2). Also downgraded was the senior unsecured debt rating of Sumitomo Metal Industries (to Baa3 from Baa2, supported subsidiaries to Ba1 from Baa3). Sumitomo Metal's rating outlook is stable. Placed under review for possible downgrade were the senior unsecured debt ratings of NKK Corporation (currently Baa2), Kobe Steel, Ltd. (Baa3), and Daido Steel Co., Ltd. (Baa3), and supported subsidiaries. Moody's confirmed Nisshin Steel Co., Ltd.'s Baa2 rating, but changed the rating outlook to negative from stable.
Steel demand in Japan has been rapidly decreasing, due to depressed construction activities and lowering demand from many manufacturing industries. In addition, steel exports to Asia are dropping substantially reflecting the region's economic difficulties. Japanese steel makers have largely curtailed their production, but steel inventory remains high. Furthermore, sales prices are likely to be weak, due to soft export prices, continued pressures on domestic prices and the growing share of commodity product sales in their product mix. Although the rated steel companies achieved sizable cost reductions in the past five years, their profitability again faces major challenges. Some of the rated steel companies' non-steel operations are additional burdens on their profitability. In particular, semiconductor operations are currently a significant drag on their earnings due to depressed memory prices. Many other non-steel operations are also not established as sustainable profit contributors. Most rated steel companies are highly leveraged. Moody's recognizes that the evolution of drastic changes in the Japanese financial system, including the weakening financial fundamentals of the banking sector with asset size restraints, will reduce flexibility in the management of their highly leveraged capital structure.
The downgrade and review for possible further downgrade of the senior unsecured debt rating of Nippon Steel and supported subsidiaries (NS Finance, Inc. and Nippon Steel International Finance Netherlands B.V.) to Baa1 from A3 reflect increasing pressures on Nippon Steel's steel operation's operating margins, depressed profitability and uncertain strategic direction of its electronics device operation, and its highly leveraged financial position. Although Nippon Steel has held substantial latent values in its marketable securities portfolio and land holdings, such additional financial resources have been decreasing due to realization of part of such latent values in the past several years and generally declining stock and property prices in Japan. Its share buyback policy is also a factor negatively affecting its leverage position. However, Moody's recognizes Nippon Steel's strong leadership position in the steel industry, including its influential market shares and competitive advantage in technologies.
The downgrade of Kawasaki Steel and its supported subsidiary, KSC Capital of America, Inc.'s senior unsecured debt rating to Baa2 from Baa1, and review for possible further downgrade, incorporate the significantly deteriorating operating environment for its steel operation, poor performance of its non-steel operations, and its highly leveraged financial profile. Moody's will review Kawasaki's ability to manage its profitability by capitalizing on its competitive production facilities, further cost reductions, and the degree to which the company can realize meaningful debt reduction.
In its review for possible downgrade of NKK and its supported subsidiary, NKK Capital of America, Inc.'s Baa2 senior unsecured debt rating, Moody's will assess NKK's strategies to establish sustainable profitability in each of its steel and additional operations in the stressful business environment, including the mini mill operation of its subsidiary, Toa Steel Co., its engineering operation, and its electronics device operation. Moody*s will also assess strategies to improve its highly leveraged capital position with substantial debt reduction.
The downgrades of Sumitomo Metal Industries' (SMI) senior unsecured debt rating to Baa3 from Baa2 and its supported subsidiary, Sumitomo Metal International Finance Netherland's debt rating to Ba1 from Baa3 reflect pressures on SMI's earnings under the sluggish domestic economy and deteriorating Asian export environment. The rating outlook is stable. The rating action also incorporates SMI's highly leveraged capital structure and modest coverage measurements. Although Moody's recognizes that SMI's seamless pipe operation is competitive, overall performance of its steel operation will be pressured. Its ongoing capital investment programs for the steel operation and its expected investment in the silicon wafer operation, to be merged as of October 1998, will restrain significant improvement in its leverage position over the medium term, although such investments will add to its steel operation's cost and quality competitiveness and its electronics operation's sales growth. Furthermore, its share buyback policy is also a factor negatively affecting its leverage position. The review for possible downgrade of Kobe Steel and its supported subsidiary, Kobe Steel International Netherlands B,V.'s Baa3 senior unsecured debt rating will focus on Kobe's ability to manage its diversified business segments and improve overall profitability in the stressful operating environment for many of its businesses, including steel, engineering and machinery, electronics devices, and aluminum and copper products. Moody's will also review Kobe's capital strategy in the context of its weak capitalization and its financing plans with regard to its IPP and other investments over the intermediate term.
Moody's confirmed Nisshin Steel's Baa2 senior unsecured debt rating. However, the rating outlook has been changed to negative from stable. The rating confirmation is based on Nisshin's moderate debt position, leading to reasonable debt-protection measurements, its strong product development capabilities and niche position in certain products, and concentration of its resources on relatively high-value-added products. The rating outlook change, however, reflects sluggish demand and increasing price pressures on its products. If Nisshin fails to adequately mitigate these negative factors on its earnings through additional cost reduction, downward pressure on its rating will increase.
The review for possible downgrade of Daido Steel's Baa3 senior unsecured debt rating reflects Moody's concern that demand for specialty steel, Daido's main product, from automobile industry and other main customers will remain weak, and Daido's profitability will be pressured. Moody's will review Daido's ability to implement further cost reduction programs for its specialty steel operation, to realize meaningful profit contribution from its non-steel operations, and to cut its debt over the medium term.
The downgrade of the senior secured debt rating of Tokyo Steel, an electric furnace structural steel manufacturer, to Ba1 from Baa2, and review for possible further downgrade, reflect continued substantial pressures on Tokyo Steel's profitability due to prolonged stagnant demand for structural steel products from the construction industry, depressed prices of its main products, and volatile cost of steel scrap, its main raw material. The review will assess Tokyo Steel's ability to implement adequate strategies to improve profitability in the continued stressful operating environment, its capital expenditure and working capital requirements, and resulting potential changes in its capitalization.

No Related Data.
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