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Rating Action:

Moody's changes Asahi Glass's A1 rating outlook to stable

16 Jul 2010

JPY 21 billion of debt affected

Tokyo, July 16, 2010 -- Moody's Investors Service has changed to stable from negative the rating outlook for the A1 senior unsecured long-term debt rating of Asahi Glass Company, Ltd. (AGC) and its supported subsidiary, AGC Capital, Inc.

The change in outlook reflects Moody's view that AGC will stabilize its profitability and improve its financial profile, which had worsened during the very difficult operating environment from late 2008 to early 2009.

AGC weathered the downturn by measures such as shifting to demand-based operations, halting or disposing of production facilities, and cutting headcount by about 4,000 globally.

AGC strengthened its cost competitiveness by integrating its flat glass and automotive glass segments. It also implemented measures to enhance its productivity and yield ratio when demand was down, so that it can achieve swift and significant recovery once demand resurges.

These measures -- helped by a sharp turnaround in demand -- led to a recovery in profitability 2H2009. AGC's operating profit margin recovered to 12.6% in 2H2009 (close to the pre-recession level), from 1.4% 1H2009, and maintained that level into CY2010, recording 17.1% in 1Q 2010.

Moody's believes that AGC will maintain an operating margin over 10% over the next few years, albeit with temporary dips due to supply/demand imbalances or seasonality.

AGC's financial leverage was negatively affected by growing debt and a shrinking net worth in 2008 and 2009, due mainly to its large capital expenditures in 2008 and a weak stock market. However, the company cut its capital expenditures from JPY 254.2 billion in 2008 to JPY 133.3 billion in 2009, and recorded positive FCF.

AGC's large investment in the flat panel display glass business during 2006-2008, combined with ongoing productivity improvements, will dispense with the need for further large investments over the next few years. In accordance with its "Grow Beyond-2012" medium-term management plan (covering 2010 to 2012), AGC is budgeting capital expenditures of JPY 450 billion, significantly lower than the JPY 740 billion it spent during 2006-2008.

Moody's believes that AGC is determined to further its improve financial profile while maintaining its profitability, in accordance with the financial targets in its "Grow Beyond-2012" plan of a Debt/Equity ratio of 0.5 or lower.

AGC's A1 rating and stable outlook incorporate Moody's expectation that adjusted Debt/EBITDA will decline to -- possibly even lower than -- 2.0x in the next few years.

AGC's A1 ratings also incorporate the fundamental strength of the company's operations, which are buttressed by 1) a strong market position with high technological capabilities in oligopolistic markets, 2) significant cost competitiveness, and 3) business and geographical diversification.

The A1 rating further reflects other factors, including the company's stable relationships with its main banks, a situation which lifts the rating by two notches from AGC's fundamental creditworthiness.

Upward rating pressure could emerge if AGC improves its cash flow and leverage, as evidenced by adjusted Debt/EBITDA approaching 1.0x and/or adjusted Debt/Book Capitalization declining to lower than 20%. As AGC's profitability depends to a large extent on its display glass segment, further diversifying its profit sources to realize high and stable margins could lead to a ratings upgrade.

Downward rating pressure could emerge if the company's profitability and leverage worsens, as evidenced by adjusted debt/EBITDA higher than 2.5x and/or adjusted Debt/Book Capitalization approaching 50% for a prolonged period. A change in AGC's financial policies, in the form of material debt-financed acquisitions that would lead to the failure to meet financial targets, could generate downward rating pressure.

The last rating action with respect to AGC was taken on April 24, 2009, when the outlook for the A1 senior unsecured long-term debt ratings for AGC and AGC Capital, Inc., were changed to negative from stable.

The principal methodology used in rating this issuer was "Global Manufacturing Industry," published in December 2007, which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab.

Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Asahi Glass Company, Ltd., headquartered in Tokyo, Japan, is one of the world's leading glass manufacturers.

Tokyo
Tadashi Usui
Vice President - Senior Analyst
Corporate Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Tokyo
Shinsuke Tanimoto
Senior Vice President - Team Leader
Corporate Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Moody's changes Asahi Glass's A1 rating outlook to stable
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