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29 Mar 2011
Tokyo, March 29, 2011 -- Moody's Japan K.K. has downgraded the long-term
issuer and senior unsecured debt ratings of Promise Co.,
Ltd. to B1 from Ba1. The ratings outlook is negative.
This rating action concludes the review for possible downgrade initiated
on December 14, 2010.
RATING RATIONALE
The rating downgrade reflects Moody's growing concerns regarding
the deterioration in the operating environment triggered by a bankruptcy
of Takefuji Corporation. In Moody's view, the Takefuji's
bankruptcy will undermine Promise's current risk tolerance for rising
overpaid-interest claims by the overlap in customers with Takefuji.
In addition, there are still uncertainties regarding future claims.
In Moody's view, the company has sufficient reserve (risk
coverage) to absorb overpaid-interest related losses for at least
another year. However, the risk coverage thereafter will
be inadequate to cover any other expected losses or support the current
rating. Promise will need a substantial amount of time to stabilize
its bottom-line profits and to replenish capital.
The downgrade also reflects Moody's reconsideration of support from
Promise's parent bank, Sumitomo Mitsui Banking Corporation
(SMBC) as well as the concern that the persistent and severe operating
environment will result in further deterioration in Promise's operating
franchise and operating revenues/profits in the foreseeable future.
Although Promise's funding environment has not been largely pressured,
the company has increasingly relied on the parent bank, SMBC.
But such persistent deterioration in the operating environment and negative
pressure on Promise's financial fundamentals could result in an
additional burden on the parent and undermine SMBC's ability to
provide the same high level of support.
In Moody's view, incorporating a high support level into Promise's
rating would be unwarranted because of the lack of tangible evidence of
support, such as guarantee or keep-well letter from SMBC
-- other than Promise's affiliate status and business
integration with SMBC, specifically in the guarantee business.
The ratings outlook is negative, due to the considerable uncertainty
in the outlook for the company, as well as concerns that the stabilization
of operations may be further delayed, if overpaid interest claims
payouts remain high.
Downward pressure, could result if 1) the high losses related to
overpaid-interest claims do not decline and the company is unable
to stabilize revenue and operating profits by FYE 3/2013; or 2) balance
sheet liquidity declines because of increased refinancing risk.
Rating pressure will emerge if Promise's cash and expected operating
cash flow are insufficient to cover its maturing debt and overpaid interest
claims over the next 12 months.
A change in the parent banking group's willingness to provide support
would also have a material negative impact on Promise's rating,
and lead to a multiple notch rating change.
The B1 ratings outlook may revert to stable on clear signs that overpaid
interest claims are finally declining, or if the company can stabilize
its asset base, generate revenue growth, and improve its operating
profitability, even if only gradually.
Moody's last rating action with respect to the Promise was taken on December
14, 2010, when the long-term issuer and unsecured debt
ratings were placed on review for possible downgrade.
The principal methodologies used in this rating were "Analyzing the Credit
Risks of Finance Companies: Rating Methodology", published
on September 30, 2010, and available on www.moodys.co.jp.
Promise Co. Ltd., headquartered in Tokyo, is
a major Japanese consumer finance company, with consolidated assets
of around JPY1.2 trillion as of December 31, 2010.
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.
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Tokyo
Naoki Morimura
Analyst
Financial Institutions Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100
Tokyo
Minoru Kubota
MD - Financial Institutions
Financial Institutions Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100
Moody's Japan K.K.
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SUBSCRIBERS: (03) 5408-4100
Moody's downgrades Promise's ratings to B1; assigns negative outlook
No Related Data.
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