JPY140 billion of bonds affected
Tokyo, May 24, 2011 -- Moody's Japan K.K. has downgraded the senior unsecured
long-term debt ratings of Mitsui Fudosan Co., Ltd.
to A3 from A2, and its short-term rating to Prime-2
from Prime-1. The rating outlook is stable.
This rating action concludes the review initiated on February 25,
2011.
RATING RATIONALE
This rating action reflects Moody's concern that a quick improvement
in the company's leverage will be difficult due to the slow progress
in its earnings recovery and debt reduction.
Because of the weak earnings from its office leasing and property sales
businesses, Mitsui Fudosan's operating profit decreased from
about JPY180 billion in FYE03/2008 and JPY170 billion in FYE03/2009,
to about JPY120 billion in FYE03/2010. Its operating profit in
FYE03/2011 also stayed at almost the same level.
Moody's does not expect the Mitsui Fudosan's operating profit
to recover strongly in the short-term for a few reasons.
First, the operating profit from its office leasing business (63%
of the total operating profit before eliminations in FYE03/2011) will
not recover strongly due to the high vacancy rates in the Tokyo office
market (currently over 8%) as well as the low level of market rents.
Second, the property sales business (11% of the total profit
before eliminations) will also remain weak due to low profitability in
property sales to both investors and individuals. Property sales
to investors have been recovering; however, the level of capital
gains is still weak. The improvement of margins in condo sales
to individuals has been slow, with the company still holding on
to condos previously developed at high costs.
Lastly, the March 11 earthquake will further delay the improvement
of operating profits in these two businesses as it will negatively affect
demand and prices in office leasing and property sales at least throughout
the first half of FYE03/2012.
Mitsui Fudosan's debt level has not decreased in the last three
years, staying at around JPY1,750 billion. Its debt
level is unlikely to decrease in FYE03/2012 because of the weak recovery
in earnings as well as a high level of investment cash flows planned mainly
for the construction of new office buildings.
Accordingly, Moody's expects that the company's adjusted
debt to EBITDA will remain over 10x in FYE03/2012 and will not return
quickly to the 8-9x range, which the company maintained before
FYE03/2008, and which was appropriate for its A2 ratings in the
past.
The outlook for the company's new A3 ratings is stable, given
its strong franchise and solid balance sheet. Mitsui Fudosan is
-- based on sales -- the largest real estate company
in Japan, commanding leading market positions in a wide variety
of real estate businesses and holding high quality leasing assets.
Its adjusted debt to gross assets remains solid, at around 50%
in FYE03/2011.
Although the weak state of the real estate market will hinder a quick
recovery in the company's leverage, Moody's expects
that it will gradually improve over the medium term. This is due
largely to an expected earnings recovery because of the contribution from
new office buildings and higher margins in newly developed condos.
In addition, the company will try to control its debt level to maintain
its financial health.
Moody's notes that the company's solid relationships with its relationship
banks will contribute to its strong financing. This factor raises
Mitsui Fudosan's rating up by two notches above its fundamental creditworthiness.
Given its weak financial profile, it is unlikely that Mitsui Fudosan's
ratings will be upgraded in the near-term. However,
its ratings could be pressured upward due to 1) stronger profitability
in its major segments; 2) the acceleration of cash collections and
debt reduction; and 3) its maintenance of strong interest coverage.
The ratings would be upgraded if the company improved its financials --
adjusted debt to EBITDA below 9.0x, adjusted debt to gross
assets below 45%, and adjusted EBITDA to interest expenses
around 5x, as an example.
If the significant deterioration in market conditions further damaged
earnings from its office leasing and property sales businesses,
or if its debt level substantially rose due to changes in its investment
and financial policies -- thereby worsening its leverage,
balance sheet, and interest coverage -- Mitsui Fudosan's
ratings would be pressured downward.
For example, if the company was unable to improve its adjusted debt
to EBITDA below 10x and kept adjusted debt to gross assets below 55%
and adjusted EBITDA to interest expenses above 3x, the rating would
be negatively pressured.
The ratings would also be adversely affected if risk increased due to
the company's growing exposure to its property sales businesses.
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, Mitsui Fudosan Co., Ltd.
is the largest real estate operator in Japan and engages in a broad range
of businesses, including property leasing, property development
for sale, property and asset management, real estate brokerage,
housing construction, hotel and leisure operations, and investment
consulting.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's information.
Measures taken to ensure the quality of this information include use of
public information, reviews by a third party and verification by
the lead analyst.
Moody's considers the quality of information available on the issuer or
obligations satisfactory for the purposes of maintaining a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Credit ratings are Moody's current opinions of the relative future credit
risk of entities, credit commitments, or debt or debt-like
securities. Moody's defines credit risk as the risk that an entity
may not meet its contractual, financial obligations as they come
due and any estimated financial loss in the event of default. Credit
ratings do not address any other risk, including but not limited
to: liquidity risk, market value risk, or price volatility.
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rating due to insufficient information, or for other reasons.
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Tokyo
Yoshio Takahashi
Asst Vice President - Analyst
Corporate Finance Group
Moody's Japan K.K.
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Tokyo
Shinsuke Tanimoto
Senior Vice President - Team Leader
Corporate Finance Group
Moody's Japan K.K.
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Moody's downgrades Mitsui Fudosan's ratings to A3/P-2
