TEXT-S&P:Kawasaki Kisen on watch negative on risk to recovery

Mon Nov 5, 2012 3:27am EST

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(The following statement was released by the rating agency)

Nov 05 -

-- We believe weak fundamentals in the shipping industry are likely to slow a recovery in Kawasaki Kisen's financial performance. This could lead us to conclude that Kawasaki Kisen is unlikely to restore its financial standing to a level sufficient for the current rating.

-- We have placed on CreditWatch with negative implications our 'BB' long-term corporate credit and debt ratings on Kawasaki Kisen.

-- We aim to resolve the CreditWatch status within the next 90 days, after examining prospects for a recovery in Kawasaki Kisen's profitability, cash flow, and financial standing. We will focus on the outlook for the shipping market, countermeasures the company is taking, and its plans for capital expenditures and asset sales.

Standard & Poor's Ratings Services today placed on CreditWatch with negative implications its 'BB' long-term corporate credit and debt ratings on Kawasaki Kisen Kaisha Ltd. The CreditWatch placement reflects our opinion that weak fundamentals in the shipping industry may prevent Kawasaki Kisen from restoring its financial standing to a level commensurate with the current rating.

Ongoing weak fundamentals in the shipping industry are likely to slow a recovery in Kawasaki Kisen's financial performance, in our opinion. Kawasaki Kisen recently lowered its earnings forecast for fiscal 2012 (ending March 31, 2013). It now expects to make a JPY16 billion operating profit and a JPY2 billion net profit. The downward revision was primarily a result of a persistently depressed dry bulk market due to structural overcapacity and softening rates for container freight on the Japan-Europe route following a recovery in spring. We see increasing downside risk in our assumptions that Kawasaki Kisen will gradually recover profitability and generate positive free cash flow in fiscal 2012 and 2013 amid economic slowdowns in Europe and China and the persistent strength of the yen. Kawasaki Kisen's downward revision to forecast earnings was moderate compared with those of its Japanese peers. Kawasaki Kisen has also been taking steps to improve profitability and cash flow. Nevertheless, we are skeptical as to whether these measures will be sufficient to absorb pressure from tough market conditions. A slower recovery in profit and cash flow could lead us to conclude that Kawasaki Kisen is unlikely to restore its financial standing to a level sufficient for the current rating. In our base case, we expect the company's EBITDA margin to gradually recover to about 10% and its debt to EBITDA to fall below 5x in fiscal 2013 from a level well above 10x in fiscal 2011.

We aim to resolve the CreditWatch status within the next 90 days, after meeting management and examining prospects for a recovery in Kawasaki Kisen's profitability, cash flow, and financial standing amid harsh business conditions. We will focus on the outlook for the shipping market, countermeasures the company is taking, and its plans for capital expenditures and asset sales. We will also reassess the company's liquidity, which was improved through an equity issue and the company's securing of a subordinated loan in July, in light of harsh business conditions. We may lower the rating on Kawasaki Kisen one to two notches if we conclude that the company's debt to EBITDA is unlikely to fall below 5x in fiscal 2013.

General: 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

General: 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008

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