(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 “strong.”
-- 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 financial standing.
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 only moderately.
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