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Global Credit Research - 22 Jun 2010
JPY 445 billion of long-term debt affected
Tokyo, June 22, 2010 -- Moody's Investors Service has downgraded the senior unsecured long-term
debt ratings of Mitsubishi Estate Co., Ltd. (MEC)
and its supported subsidiary, MEC Finance USA, Inc.
to A1 from Aa3. The rating outlook is stable.
The rating action concludes the review for possible downgrade initiated
on March 30, 2010.
The company's Prime-1 short-term rating is not affected.
The rating action reflects Moody's concern that MEC's degree of
leverage has increased significantly due largely to the sizeable investments
it made two to three years ago.
In addition, earnings volatility has risen, as the company
has expanded its residential and urban development & investment management
A significant amount of its recent investments were debt-funded.
Accordingly, adjusted total debt to gross assets rose to about 40%
in FYE03/2010 from 30% in FYE03/2007, while adjusted total
debt to EBITDA surpassed 10x from about 6-7x.
Operating profit dropped to JPY149.0 billion in FYE03/2010 from
JPY178.0 billion in FYE03/2008, and net income to JPY11.9
billion from JPY87.0 billion, due largely to evaluation losses
in its residential and urban development & investment management businesses.
Sales from these businesses comprised about 40% of total sales
in FYE03/2010, versus 30% some two to three years ago.
The rating outlook is stable, mainly because leverage should improve
due to MEC's countermeasures to lower debt and an expected gradual
recovery in earnings, although this will not be enough to maintain
a Aa3 rating.
MEC had already cut its debt to JPY1.76 trillion in FYE03/2010
from JPY1.83 trillion in FYE03/2009 through the sale of assets
and declines in inventories and investments. It aims to further
lower its debt.
Its earnings will also improve gradually mainly because the contributions
from competitive new buildings in the Tokyo's Marunouchi and Otemachi
business districts will help enhance earnings in the building business.
Further downside risk in the residential and urban development & investment
management businesses has also declined, as the company has already
incurred large evaluation losses in the last two years and market conditions
Accordingly, Moody's expects that adjusted debt/EBITDA will
improve to around 8.5x, while adjusted debt to gross assets
will decline to around 35% over the medium term.
If MEC's attempts to improve leverage do not progress as planned,
or if weak market conditions hinder a recovery in earnings thereby delaying
improvements to cash flow and the balance sheet, MEC's ratings
will be pressured downward.
The rating will also be negatively affected if risk rises due to the company's
growing exposure to its residential and urban development & investment
management businesses, or if its balance sheet worsens further due
to changes in its investment and financial policies.
For example, if it looks to us as if MEC will not be able to improve
its adjusted total debt to EBITDA to about 8.5x and to keep adjusted
total debt to gross assets below 40% in the next 12-18 months,
its ratings could be negatively pressured.
MEC's ratings will be pressured upward if its cash flow and financial
position improve significantly due to 1) stronger profitability in its
major segments, 2) the stabilization of cash flows due to declining
exposures to or improved risk management in the residential and urban
development & investment management businesses, and 3) the acceleration
of cash collections through reductions in inventories and sales of assets,
The ratings could be upgraded if the company can restore its financials
for an adjusted total debt to EBITDA below 7.0 x, and adjusted
total debt to gross assets to around 30%, for example.
Moody's last rating action with regard to MEC was taken on March 30,
2010, when the company's senior unsecured long-term debt
ratings and those of its supported subsidiary, MEC Finance USA,
Inc., were placed under review for possible downgrade.
The principal methodology used in rating this issuer was "Rating Methodology
for REITs and Other Commercial Property Firms" published in January 2006,
which can be found at www.moodys.com in the Research &
Ratings directory, in the Rating Methodologies subdirectory.
Other methodologies and factors that may have been considered in the process
of rating these issuers can also be found in the Rating Methodologies
Mitsubishi Estate Co, Ltd, headquartered in Tokyo, is
a leading real estate operator in Japan and engages in property leasing
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 downgrades Mitsubishi Estate to A1; outlook stable
No Related Data.
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