(The following statement was released by the rating agency)
Aug 09 -
-- Prospects of weakness in the profits of Asahi Glass' core
architectural glass operations in Europe and flat panel display glass
operations continuing for longer than we have expected reduce the likelihood
of the company swiftly improving its financial standing, in our view.
-- We have lowered the financial risk profile for the company from
"modest" to "intermediate" and maintained the business risk profile at
-- We have lowered the long-term corporate credit rating on Asahi Glass
to 'A-' and the short-term corporate credit rating to 'A-2.' We have also
lowered our debt ratings on Asahi Glass and a subsidiary. We resolved our
CreditWatch placement on our ratings.
-- The outlook is stable, reflecting our expectation that the company's
business performance will recover moderately after bottoming in fiscal 2012,
leading to gradual improvement in the company's financial standing.
On Aug. 9, 2012, Standard & Poor's Ratings Services lowered to 'A-' its
long-term corporate credit and senior unsecured debt ratings on Asahi Glass
Co. Ltd. and lowered to 'A-2' its short-term corporate credit rating on the
company. We also lowered to 'A-2' our debt ratings on Asahi Glass' JPY150
billion domestic commercial paper (CP) program and subsidiary AGC Capital
Inc.'s (not rated) $300 million CP program. The outlook is stable. We removed
the ratings from CreditWatch, where we had placed them with negative
implications on July 18, 2012.
The downgrades reflect our view that the company has become less likely to
swiftly restore its financial soundness, because we believe worsening external
conditions are likely to cause profits in the company's core operations to
remain weak for longer than we have expected. At the same time, we have
lowered our financial risk profile for the company from "modest" to
"intermediate" and maintained the business risk profile at "strong." The
outlook is stable in accordance with our baseline expectation that Asahi
Glass' business performance will improve moderately after bottoming in fiscal
2012 (ending Dec. 31, 2012), leading to gradual improvement in the company's
Asahi Glass' glass operations made an operating loss in the April-to-June 2012
quarter owing to economic deterioration in Europe, which has hurt the
company's architectural glass business, and a weaker operating environment for
glass for solar panels because of shrinking government subsidies in some
countries and intensifying competition. The company continues to reduce costs,
including by halting operation of some of its glass furnaces. Nevertheless,
our outlook for Europe's economy suggests the profitability of Asahi Glass'
core glass operations in Europe will be unlikely to recover to fiscal 2010
levels in the next one to two years. In addition, recovery in the end-user
market for TVs is taking longer than we had assumed, affecting Asahi Glass'
electronics business, which accounts for more than half the company's
operating profit. The company supplies glass substrates for use in liquid
crystal displays. Operating profit in the electronics business recovered
slightly during the April-to-June 2012 quarter because falling prices for
glass substrates eased while volumes recovered moderately and because the
company reduced costs. However, the recovery is more fragile than we had
assumed at the beginning of 2012. Also, we believe maturing markets for Asahi
Glass' core businesses make it harder to generate steady earnings from
operational and geographical diversification.
We expect Asahi Glass' discretionary cash flow (free operating cash flow minus
dividends) to be negative for fiscal 2012 because the company plans to
increase capital expenditures despite prospects of weaker profits and cash
flows. As a result, we believe the ratio of its funds from operations (FFO;
before adjustments for working capital) to total debt for fiscal 2012 will
deteriorate slightly from 33% in fiscal 2011. Despite the company's plan to
pay the same dividend per share for fiscal 2012 as for fiscal 2011, our base
case suggests gradual improvement in cash flow will turn Asahi Glass'
discretionary cash flow positive. Nevertheless, the volume of discretionary
cash flow will be small, and the company is unlikely to substantially reduce
its interest-bearing debt, in our opinion. Accordingly, we believe the ratio
of its FFO to total debt is unlikely to recover to 40% in fiscal 2013.
We base our 'A-2' short-term corporate credit rating on Asahi Glass on the
'A-' long-term corporate credit rating and our assessment of the company's
liquidity as adequate. The company's liquidity sources include about JPY180
billion in FFO, more than JPY120 billion in cash and cash equivalents, and
credit facilities with both domestic and overseas banks. Its primary uses of
liquidity include about JPY90 billion in annual debt repayments (in our
analysis, we halve the total amount of debt repayment because of the company's
strong credit quality); required capital investments, including for mergers
and acquisitions; and more than JPY30 billion in dividend payments. Asahi Glass
has solid relationships with financial institutions, including Mitsubishi UFJ
Financial Group Inc. (A/Stable/--), which also support its liquidity.
The outlook is stable. Our base case is for Asahi Glass' business performance
in both the glass and display operations to improve moderately, spurring a
gradual improvement in the company's financial standing. Therefore, we would
consider lowering the ratings if a sustained recovery became less likely in
sales and profits in glass operations, primarily in Europe, and the
electronics business. This would likely cause consolidated profitability to
worsen further, continuing negative discretionary cash flow. FFO to total debt
below 35% beyond the first half of 2013 would also pressure the ratings. We
may consider raising the ratings if the company were to improve its earnings
and financial soundness, including lifting FFO to total debt above 45% on a
sustainable basis. The possibility of an upgrade is low for the time being,
however, because we believe the company's business performance will improve
Related Criteria And Research
Principles Of Credit Ratings, Feb. 16, 2011
2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Asahi Glass Co. Ltd.
Long-term corporate credit rating A- A
Senior unsecured debt rating A- A
Short-term corporate credit rating A-2 A-1
JPY150 billion domestic commercial paper program A-2 A-1
AGC Capital Inc.
$300 million U.S. commercial paper program A-2 A-1