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01 Feb 2011
Tokyo, February 01, 2011 -- Moody's Japan K.K. has changed to negative from stable its
outlook for the A3 long-term issuer rating on Hulic Co.,
The change in outlook reflects Moody's concern that the company
may not be able to lower its leverage for some time, given the ongoing
need for capital for its rebuilding projects.
Hulic is a Japanese real estate company, which has a close relationship
with Mizuho Bank Ltd (rated Aa3), to whom it leases office space
for its major branches in the Tokyo area.
The company needs to revitalize its aging asset portfolio while maintaining
its earnings and financial health. To improve the competitiveness
of older assets and broaden its customer and earning base, Hulic
plans to tear down and rebuild 40 properties over ten years starting in
2008, according to its medium-term plan announced in 2010.
Hulic has already launched about 20 projects, for a projected JPY40
billion. The company has also purchased new properties to offset
any decline in earnings while it rebuilds, as well as to pursue
The high level of investments over the last few years has prevented the
company from generating any free cash flow, except for FYE12/2009
when the company sold a major property. Hulic's adjusted
debt/EBITDA increased to over 14x in FYE12/2008 from about 11x in FYE12/2006,
and will not improve significantly in FYE12/2010 due to negative free
Although the rebuilding projects will help the company increase the amount
of rentable space as well as its earnings over the medium term,
Moody's is concerned that, without effective countermeasures,
the company may need a couple of years to generate free cash flows and
bring down its debt.
Moreover, because of the rebuilding and the purchase of new properties,
the number of tenants outside the Mizuho Financial Group, Inc.(rated
P-1) will increase over the medium to long term. The proportion
of consolidated revenues from the Mizuho Financial Group has already declined,
from 69.0% in FYE12/2006 to 57.9% in FYE12/2009,
and Moody's expects that this proportion will only continue to decline.
In Moody's view, the stable relationships with Mizuho Financial
Group have allowed the company to maintain low vacancy rates and stable
rents and tolerate high leverage. However, despite Hulic's
success in retaining tenants in its existing properties and in leasing
its new or rebuilt properties so far -- thus, maintaining low
vacancy rates and stable rents -- the risk of earnings volatility
will rise over the medium to long term due to a greater exposure to non-Mizuho
In Moody's view, Hulic's very strong relationships with
Mizuho Financial Group, especially Mizuho Bank, mitigates
financial risk significantly. Moody's expects that the likelihood
of extraordinary support to Hulic from the group is high, which
uplifts the rating by three notches above the company's fundamental
Mizuho Financial Group is the second-largest financial services
company in Japan. Hulic has had very close business, financial,
and personnel ties with Mizuho Financial Group since its establishment
in 1957. Mizuho Financial Group is the company's largest
tenant and lender, most of Hulic's management and key staff
members come from the Mizuho Financial Group.
Given the negative outlook, the rating is unlikely to be upgraded
in the next 12 to 18 months. However, positive rating action
could occur if the company can generate stable free cash flow by improving
operating cash flows while controlling investments.
The rating outlook could be changed to stable if Hulic's adjusted
debt to EBITDA to improves to below 12.5x and adjusted debt to
gross assets to below 60%, by generating sufficient cash
flow and brining down its debt.
If Hulic cannot improve its leverage in a timely manner due to persistent
negative free cash flow or major adverse changes to its investment and
financial policies, its rating will be downgraded. For example,
if adjusted debt to EBIDA does not seem likely to improve to below 12.5x
and adjusted debt to gross assets to below 60%, the ratings
would be downgraded.
The rating will also be negatively affected if earnings volatility rises
because its rebuilding projects and new asset purchases fail to generate
sufficient earnings or if its relationship with Mizuho Financial Group
The last rating action for Hulic was taken on January 31, 2007,
when Moody's assigned the company A3 long-term and Prime-2
short-term issuer ratings.
The principal methodology used in this rating was Moody's "Global
Rating Methodology for REITs and Other Commercial Property Firms" published
on October 1, 2010 , and available on www.moodys.co.jp
Domiciled in Tokyo in Japan, Hulic Co., Ltd,
is a real estate operator engaged mainly in property leasing.
Asst Vice President - Analyst
Corporate Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100
Senior Vice President - Team Leader
Corporate Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100
Moody's Japan K.K.
Moody's changes Hulic's A3 rating outlook to negative
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100
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