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Rating Action:

RECOVERY OF JAPANESE GENERAL CONSTRUCTION COMPANIES' FINANCIAL HEALTH MAY BE DELAYED, SAYS MOODY'S

28 Apr 1997
RECOVERY OF JAPANESE GENERAL CONSTRUCTION COMPANIES' FINANCIAL HEALTH MAY BE DELAYED, SAYS MOODY'S TOKYO, April 28, 1997 -- The prolonged weakness of the private construction market and the expected slowdown in public construction investment will hamper the recovery of Japanese general construction companies' cash flows and debt positions, pressuring ratings in this sector, notes Moody's Investors Service in a recently published report on Japan's general construction companies. Some general construction companies
also continue to suffer from asset quality problems, leading to delays in restoration of their balance sheets.
Moody's currently rates the long-term debt of 11 Japanese general construction companies. These are in alphabetical order Fujita Corporation,
rated Ba3, Hazama Corporation, rated B2, Kajima Corporation, rated A2, Kumagai Gumi, rated B1, Maeda Construction, rated Baa3, Nishimatsu Construction, rated A3, Obayashi Corporation, rated Baa1, Penta-Ocean Construction, rated Ba2, Shimizu Corporation, rated A2, Taisei Corporation,
rated A3, and Toda Corporation, rated Ba1.
The public sector provided a stable and steadily growing source of earnings for Japanese general construction companies, offsetting volatility
of the private sector. The expected growth in Japan's public construction investment, however, will no longer be achievable due to the necessity to reduce the government's fiscal deficit, and a commitment has been made to lower the cost of public projects. Slowdown in public investment will restrict the country's economic growth, and the grim outlook for the economy will have a negative effect on private construction investment.
The government's cost reduction program may further restrain the margins of construction companies in an increasingly competitive market. "Under weak market conditions, cost management will be a major challenge for contractors," says Moody's, adding that "longer term, stronger companies with more flexible cost positions will be placed in a favorable competitive
position relative to weak players."
The rated construction companies have made gradual progress in disposing of, or writing off their problem assets over the past several years. While companies with moderate exposure relative to their financial capacity to charge off have made steady progress in asset quality management, others with relatively heavy exposures are having difficulty improving their balance sheets. Delays in asset disposal results in increases in loss content, as the property market continues to deteriorate. Stock market volatility reduces the reliability of latent values in marketable securities portfolios as a source of financial capacity.
"Companies that expanded debt-financed operations have not been successful
in adequately reducing debt, even if they have managed to slash problem assets," notes Moody's. As a result, interest rate sensitivity of these companies' profits has increased signficantly from the pre-bubble level. The decline in profit margins from their fundamental operations, as well as
interest burdens and diminishing latent asset values, will further delay the progress in balance sheet improvement, with narrower capacity to charge
off. "Further delays in problem asset disposal and debt reduction will have
a negative rating implication," says Moody's.
The report also expresses Moody's concern over the construction companies'
diminishing financial flexibility, particularly of those in low rating categories. Deterioration of their working capital position, weak cash flows generated from fundamental operations, and a potential increase in interest burden could pose liquidity problems. Some weaker construction companies' access to capital markets may be impaired by the markets' concern over their slow progress in reducing financial exposures. Moody's is concerned that companies at the low end of the rating spectrum could experience refinancing difficulties in the future, and they may have to "rely on external resources, such as their main banks' liquidity support, to meet maturing debt," observes Moody's.
In the report, Moody's categorizes the 11 rated construction companies into three groups according to their risk profile. The first group, consisting of four major general contractors - Kajima, Obayashi, Shimizu, and Taisei - may experience greater downward pressure on their ratings if they fail to improve their profitability and reduce their debt or manage to
lower the existing exposures.
The second group consists of Maeda, Nishimatsu, Penta-Ocean, and Toda. Although these issuers' fundamental profitability is under pressure, Moody's expects that their relatively sound financial profiles will keep their debt-protection measures within the appropriate parameters for each respective rating category over the intermediate term.
Heavy financial burdens continue to depress the financial strength of companies in the third group, which are Fujita, Hazama, and Kumagai Gumi. "Current pressures on their earnings and weak stock portfolio values will further delay the rehabilitation of their balance sheets, and they may have
to rely on external resources to complete the process," says Moody's. Resolution of their problems and their financial flexibility to refinance maturing debt will be they key factors determining the stability of their ratings.
The report, "Japanese General Construction Companies - Margin Pressures May Delay Restoration of Financial Health," was written by Vice President/Senior Credit Officer Tomomichi Nagaoka and Managing Director Julia Turner in Tokyo, and by Managing Director Michael Mulvaney in New York.

* * *

NOTE TO JOURNALISTS: For a copy of this Moody's report, please contact Velvet Yoshinami in Tokyo (03)3593-0734; Katrina Braund in Sydney (2)251-6444; Donna Gee in New York (212)553-0376; Elsa Cheng in Hong Kong (852)2509-0200; Hilary Parkes in Toronto (416)777-6671; Andrew Chmaj in London 44-71-772-5454; Mauricette Salque in Paris 1.53.30.10.20; or Detlef Scholz in Frankfurt (069)24 28 40.
No Related Data.
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