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Rating Action:

MOODY'S DOWNGRADES THREE FIRST-TIER JAPANESE TRADING COMPANIES -- MITSUBISHI CORPORATION, MITSUI & CO., LTD., AND SUMITOMO CORPORATION

16 Oct 1998
MOODY'S DOWNGRADES THREE FIRST-TIER JAPANESE TRADING COMPANIES -- MITSUBISHI CORPORATION, MITSUI & CO., LTD., AND SUMITOMO CORPORATION Moody's Investors Service downgraded the debt ratings of three first-tier Japanese trading companies (JTCs) as follows: Mitsubishi Corporation, long-term to A2 from A1, its Prime-1 short-term rating has been confirmed; Mitsui & Co, Ltd. to A3/Prime-2 from A1/Prime-1; and Sumitomo Corporation to Baa1/Prime-2 from A2/Prime-1. The rating outlooks for all three companies are stable.


The downgrades reflect the likelihood of continued pressure on their earnings from various factors such as reduced business volume, high leverage, decreasing financial cushions to absorb potential losses, further stress from emerging markets exposure, and a noticeable change in the behavior of Japanese institutional investors which may adversely the JTC's funding costs. Moody's is also concerned that the companies' large emerging market exposures may come under further pressure amid the deflationary state of the Japanese economy, during a time of global credit contraction. In light of the fact that the JTCs have extensive involvement in the production and distribution of products covering a wide range of industrial sectors through their domestic subsidiaries and affiliates, Moody's is increasingly concerned about the impact of Japan's continued weak economy on the performance of these companies. However, Moody's believes that all three companies have relatively strong operating franchises, economic capitalization and ability to minimize the potential negative effects from these changes.


Mitsubishi Corporation (MC)

Moody's downgraded MC and its supported subsidiaries' senior long-term debt to A2 from A1. Its rating for short-term debt and commercial paper is confirmed at Prime-1. The rating outlook is stable. The rating action concludes a review initiated on July 1, 1998.


The downgrade reflects Moody's concerns over key factors such as 1) depressed domestic and regional transaction volumes, 2) additional pressures on the financial performance of its business investment subsidiaries and affiliates, 3) potential restructuring costs from its large business investment portfolio, 4) potential stress on the company's large emerging markets exposure, and 5) impact of any support that MC may provide to its group members. Moody's believes that MC's efforts to enhance its economic capital from earnings retention may prove to be a significant challenge over the intermediate term.


The company's exposure to Asia in relation to its economic capital is relatively small when compared to that of other top-tier JTCs, and the company's ability to select and structure export-targeted business investment opportunities in Asia will minimize actual losses from its Asia exposure. However, Moody's expects the company's long-term strategic approach to Asian markets involving auto projects in Thailand and Indonesia targeted at the local markets may further constrain the company's financial flexibility.


The rating incorporates MC's strong operating franchise in trade intermediation business, its relative success in transforming its operating franchise into a business investment management house, its level of risk cushion relative to its peers, and its adequate liquidity supported by its strong relationship with Japanese lenders including banks and institutional investors.


The following were downgraded:

Mitsubishi Corporation--the senior debt rating to A2 from A1.

Mitsubishi Corporation Finance PLC--the senior debt rating to A2 from A1, short-term debt and commercial paper ratings confirmed at Prime-1.

Mitsubishi International Corporation--the senior debt rating to A2 from A1, and short-term debt and commercial paper ratings confirmed at Prime-1.

MC Finance International B.V.-- the senior debt rating to A2 from A1, and short-term debt rating confirmed at Prime-1.




Mitsui & Co., Ltd. (Mitsui)

Moody's downgraded Mitsui and its supported subsidiaries' senior debt, short-term debt and commercial paper ratings to A3/Prime-2 from A1/Prime-1. The rating outlook is stable. The rating action concludes a review initiated on July 1, 1998.


The downgrade reflects Moody's expectation that over the intermediate period, Mitsui's key earnings drivers may be negatively impacted by factors such as 1) downward pressure on domestic and regional business volumes affecting both the parent, subsidiaries and affiliates, 2) additional pressure on financial performance of its business investment portfolio, 3) potential restructuring costs from its large business investment portfolio including its leasing arm, 4) potential stress on its large emerging markets exposures, and 5) the need to extend financial assistance to its group members. Moody's believes that the company's need to bolster its economic capital through internal earnings retention may prove to be a significant challenge over the intermediate term.


Although Mitsui's exposure to Asia is large when compared to its economic capital and earnings, the company's strategic focus on LNG-related projects and strong risk management may continue to limit the size of losses from its Asia-related exposure. However, Moody's expects that the company's role as project sponsor in an Indonesian project that is targeted at the local market may require additional financing from sponsors including Mitsui and could constrain its financial flexibility. Moody's is also concerned about the gradual erosion of the company's unrealised gains in its investment securities portfolio, which has served as a major cushion against its high leverage.


The rating incorporates Mitsui's strong and diversified operating franchise in trade intermediation business, its ability to focus on business investments in which it has competitive advantages, and its current strong relationship with Japanese lenders including banks and institutional investors.


The following were downgraded:

Mitsui & Co., Ltd.-- the senior debt rating to A3 from A1, and commercial paper rating to Prime-2 from Prime-1.

Mitsui & Co. (Hong Kong)--the commercial paper rating to Prime-2 from Prime-1.

Mitsui & Co. (USA), Inc.-- the senior debt rating to A3 from A1, and short-term debt and commercial paper rating to Prime-2 from Prime-1.

Mitsui & Co. Int'l (Europe) B.V.--commercial paper rating to Prime-2 from Prime-1.

Mitsui & Co. UK PLC-- commercial paper rating to Prime-2 from Prime-1.




Sumitomo Corporation (Sumitomo)

Moody's downgraded Sumitomo and its supported subsidiaries' senior debt, short-term debt and commercial paper ratings to Baa1/Prime-2 from A2/Prime-1. Sumitomo's issuer rating was also lowered to Baa1 from A2. The rating outlook is stable. The rating action concludes a review initiated on July 1, 1998.


The downgrade reflects Moody's expectation that Sumitomo's current economic capitalization will be negatively impacted over the intermediate term by earnings pressure from 1) downward pressure on domestic and regional business volume affecting both the parent and its business investment portfolio, 2) restructuring costs from its business investment portfolio as a result of a strategic review of its overall risk assets, and 3) potential stress on its large emerging markets exposure, especially in Indonesia and Thailand. Sumitomo's economic capital was eroded by copper trading losses in 1996, and Moody's believes that efforts to boost its economic capital to levels comparable to those of other top-tier companies may be a challenge for the company, given the typical characteristics of its business investment portfolio such as high exit barriers and costs and relative lack of liquidity.


Sumitomo's exposure to Asia is large when compared to its economic capital and earnings. The company's economic exposure in those markets are concentrated on projects targeted at the local markets, and the project economics are and will be pressured by the rupiah's devaluation and sharp drop in domestic demand. However, Moody's expects that the company should retain its position as one of the top-tier JTCs. Sumitomo's use of EVA-based risk assessment methodology in its strategic business decisions may be a positive development, but it is too early to assess its impact on the company's risk/return equation. Moody's is also concerned about the gradual erosion of the company's unrealized gains in its investment securities portfolio, which has served as a major cushion against its high leverage.


The rating incorporates Sumitomo's strong and diversified operating franchise in trade intermediation business, its ability to focus on business investments in which it enjoys competitive advantages, and its current strong relationship with Japanese lenders including banks and institutional investors.


The following were downgraded:

Sumitomo Corporation-- the senior debt rating to Baa1 from A2, the issuer rating to Baa1 from A2, and commercial paper rating to Prime-2 from Prime-1.

Sumitomo Corporation Capital Europe PLC-- the senior debt rating to Baa1 from A2 and commercial paper and short-term debt rating to Prime-2 from Prime-1.

Sumitomo Corporation Capital Netherlands B.V.-- the senior debt rating to Baa1 from A2 and short-term debt rating to Prime-2 from Prime-1.

Sumitomo Corporation Overseas Capital Ltd.-- the senior debt rating to Baa1 from A2.

Sumitomo Corporation of America-- the senior debt rating to Baa1 from A2 and commercial paper rating to Prime-2 from Prime-1.

No Related Data.
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