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Rating Action:

Moody's downgrades Promise to Ba1; outlook negative

28 May 2010

Tokyo, May 28, 2010 -- Moody's Investors Service has downgraded the long-term issuer and senior unsecured debt ratings of Promise Co., Ltd., (Promise) to Ba1 from Baa2. The ratings outlook is negative.

This rating action concludes the review for possible downgrade initiated on February 23, 2010.

The rating downgrade primarily reflects two factors : 1) the persistent pressure on the company's business model, which will lead to further declines in its revenue and asset base for the foreseeable future; and 2) the considerable uncertainty about profitability due to growing credit costs stemming from overpaid interest claims as well as the introduction of loan amount caps (LAC). This will also hamper its ability to replenish its diminished capital base.

Moody's notes that the challenges Promise faces are the same for the entire consumer loan industry in Japan -- as evidenced by the de facto default of independent consumer loan specialists in 2009.

The rating would be much lower but for Moody's assessment of the benefits of the company's association as an equity method affiliate with the Sumitomo Mitsui Financial Group (SMFG) -- in Moody's view, a key reason Promise's funding is still stable. Promise's business integration with SMFG -- specifically through its guarantee business -- provides comfort that the company will likely be supported by the group if required. This is further evidenced by the steady lending from Sumitomo Mitsui Banking Corporation (SMBC; the group's core bank) as well as the sharing of directors, personnel exchanges, and SMBC's involvement in Promise's business restructuring. As a result of this assessment of support, Promise's rating is a number of notches higher than it would be otherwise.

Moody's also notes that the support remains indirect and optional-- for example, the level of equity ownership is around 20%. In addition, the scale of the SMFG group's association with Promise -- whilst strategic in supporting the group's focus on Japan's consumer lending sector -- remains small in the context of the group. For these reasons, Moody's considers the level of support evidenced insufficient to lift the rating further.

The ratings outlook is negative, in light of the considerable uncertainty in the company's business outlook, as well as concerns that the process of stabilizing operations may be prolonged if overpaid interest claims payouts remain high.

Thus, absent evidence of further tangible support from the SMFG group -- such as additional material equity investment -- the prospects for upward rating pressure are limited.

Downward pressure, on the other hand, would result from 1) actual losses (annual overpaid interest payouts plus loan principal write-offs, including LAC) higher than Moody's assumed risk amounts; and 2) difficulties obtaining refinancing that would lead to significant deterioration in Promise's financial flexibility. A change to SMBC ratings or in the support evidenced towards Promise would also have a negative impact on Promise's rating.

The ratings outlook may revert to stable 1) on clear signs of a steady decline in overpaid-interest claims; or if Promise can 2) improve its liquidity, by reducing the amount of short term debt relative to its current liquidity position; and 3) stabilize its asset base and generate revenue growth as well as improve its operating profitability, however gradually.

Moody's last rating action with respect to the Promise was taken on February 23, 2010, when the long-term issuer and senior unsecured debt ratings were lowered to Baa2 from Baa1 and placed under further review for possible further downgrade.

Promise's rating was assigned by evaluating factors Moody's considers relevant to the company's credit profile, such as franchise value, risk positioning, the operating and regulatory environment, and financial fundamentals in comparison with its competitors, as well as the company's projected performance for the near to medium term. These attributes were compared to those of other issuers both inside and outside its core industry. Thus, Moody's believes Promise's rating to be comparable to those of other issuers with similar credit risk.

Promise Co., Ltd., headquartered in Tokyo, was established in 1962. It is one of the largest consumer finance specialists in Japan, with total consolidated assets of about JPY 1.6 trillion as of March 31, 2010.

Tokyo
Naoki Morimura
Analyst
Financial Institutions Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Tokyo
Minoru Kubota
Managing Director
Financial Institutions Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Moody's downgrades Promise to Ba1; outlook negative
No Related Data.
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