Tokyo, April 09, 2020 -- Moody's Japan K.K. has downgraded to Baa3 from Baa2
JFE Holdings, Inc.'s (JFE) issuer rating, senior
unsecured rating and backed senior unsecured rating on the bonds guaranteed
by JFE Steel Corporation, JFE's steelmaking subsidiary.
In addition, Moody's has downgraded JFE's senior unsecured
domestic shelf registration rating to (P)Baa3 from (P)Baa2 and subordinate
loan rating to Ba2 from Ba1.
The rating outlook remains negative.
RATINGS RATIONALE
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented. The steel sector has been
significantly affected by the shock given its sensitivity to consumer
demand and sentiment. More specifically, the weaknesses in
JFE's credit profile, including its exposure to steel demand
for manufacturing and rising material costs, have left it vulnerable
to shifts in market sentiment in these unprecedented operating conditions
and JFE remains vulnerable to the outbreak continuing to spread.
Moody's regards the coronavirus outbreak as a social risk under
its ESG framework, given the substantial implications for public
health and safety. Today's action reflects the impact on
JFE of the breadth and severity of the shock, and the broad deterioration
in credit quality it has triggered.
"The downgrade reflects the profit squeeze on JFE from structural changes
in the Japanese steel industry," says Motoki Yanase, a Moody's
Vice President and Senior Credit Officer.
This action follows JFE's announcement on 27 March 2020 that it
will take a JPY220 billion impairment loss on its East Japan Works to
shut down one of its blast furnaces and its upstream steelmaking operations
considering the social risk of a secular decline in domestic demand from
falling demographics. As a result of this impairment, JFE
has revised down its guidance for the fiscal year ending 31 March 2020
(fiscal 2019) to a net loss of JPY190 billion [1].
The announcement follows the company's November 2019 revision to
a JPY60 billion business profit [2] and August 2019 revision to a
JPY140 billion profit, from a JPY232 billion profit in fiscal 2018
[3]. Moody's changed its outlook on JFE to negative
following the November announcement.
The company's weakening profits reflect the challenging conditions
for Japan's steel industry, where Chinese demand is driving
up input costs such as iron ore prices, while falling domestic orders
are dampening sales. The profitability of steel exports is also
declining, as excess supply from Indian and Russian mills lowers
market prices as a result of weaker demand in these countries.
The announced downward revision this time is due to non-cash impairment
loss rather than the company's weakening profits. However,
the company's downsizing of its domestic production capacity points
to a secular decline in JFE's business position and future sales.
The negative outlook reflects the challenge JFE faces due to the coronavirus-led
economic downturn. The company's revenue and profit will
be pressured by declining demand from its end-users in Japan's
manufacturing and automotive industries, which are suffering from
the outbreak.
Moody's expects JFE's total debt to increase, as its
capital spending remains high to improve production efficiency and renew
aging facilities. Its leverage, as measured by debt/EBITDA,
is now estimated to rise to about 6.5x for fiscal 2019 from 3.5x
in fiscal 2018, and could remain elevated into fiscal 2020.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OT THE RATINGS
Given the negative outlook, JFE's ratings are unlikely to be upgraded
in the near term. However, the outlook could return to stable
if debt/EBITDA falls below the mid to high 5x range on a sustained basis.
In the longer term, the ratings could be upgraded if the company
materially improves its profitability and financial leverage through the
steel business cycle, where its debt/EBITDA remains below 5.5x.
On the other hand, JFE's ratings could be downgraded if its profits
continue to weaken, or if it undertakes leveraged M&A or share
repurchases, elevating debt/EBITDA above 5.8x on a sustained
basis.
The principal methodology used in these ratings was Steel Industry (Japanese)
published in October 2017 and available at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1096464.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Headquartered in Tokyo, JFE Holdings, Inc. is a holding
company with subsidiaries engaged in steelmaking, engineering,
and trading.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
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For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
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These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating outcome
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
REFERENCES / CITATIONS
[1] Company Press Releases, March 27, 2020
[2] Company Press Release, November 12, 2019
[3] Company Press Release, August 9, 2019
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Motoki Yanase
VP - Senior Credit Officer
Corporate Finance Group
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100
Mihoko Manabe
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100
Releasing Office:
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100
