(The following statement was released by the rating agency)
Aug 06 -
Summary analysis -- ACOM Co. Ltd. --------------------------------- 06-Aug-2012
CREDIT RATING: BB+/Stable/B Country: Japan
Primary SIC: Personal credit
Mult. CUSIP6: 310860
Credit Rating History:
Local currency Foreign currency
08-Jun-2011 BB+/B BB+/B
11-Jan-2011 BBB-/A-3 BBB-/A-3
02-Nov-2009 BBB/A-2 BBB/A-2
The ratings on ACOM Co. Ltd. (BB+/Stable/B) reflect its solid business franchise in Japan’s unsecured consumer loans market, as well as a strong likelihood of support from Mitsubishi UFJ Financial Group Inc. (MUFG; A/Stable/--), given its status as a consolidated subsidiary. On the other hand, these factors are offset by flagging profitability due to large claims for refunds of overpaid interest and the amended Money Lending Business Law.
The company’s operating receivables totaled JPY867.5 billion on a consolidated basis at the end of fiscal 2011 (ended March 31, 2012), ranking top in the industry. The loan business accounted for 81% of its operating revenue in fiscal 2011. ACOM’s outstanding guarantees on loans for associated banks have expanded to nearly JPY500 billion, and the company has been focusing on consumer loan businesses in Southeast Asia.
The amended Money Lending Business Law went into full effect in June 2010 and led to the introduction of the following measures:
-- Lowering of the interest rate ceiling to the level under the Interest Rate Restrictions Law, which is a maximum of 18% for loans of over JPY100,000 to less than JPY1 million; and
-- Restricting total lending amount per consumer to not more than one-third of a borrower’s annual income.
Supreme Court rulings have virtually denied consumer finance loan companies the ability to employ so-called gray zone interest rates, which exceed the maximum rates stipulated by the Interest Limitation Law. As a result, the number of claimants demanding refunds from ACOM of overpaid interest has increased rapidly since 2006.
In fiscal 2011, ACOM halved its operating revenue from its peak in fiscal 2005 (ended March 31, 2006). The decline was due to significant reductions in its average loan yield and operating loan balance on the back of tightened regulations in line with the full enactment of the amended Money Lending Business Law. The number of claimants demanding refunds of overpaid interest from ACOM fell 36.5% in fiscal 2011 from the previous fiscal year, which saw a sharp rise in refund claims. However, the sum of the interest refund-related forgiven principal and cash-out amount (actual refunds) was equivalent to about 62% of its total operating revenue in fiscal 2011. That is similar to the level seen in the previous fiscal year and remains a significant burden for ACOM.
Standard & Poor’s Ratings Services believes that ACOM will see a halt in the decline of its loans outstanding in about a year. We think the number of claimants demanding refunds of overpaid interest from ACOM has peaked. ACOM’s asset quality is also improving since the company tightened its credit evaluation standards in line with the amendment of the Money Lending Business Law. On the other hand, we think it is unlikely for interest refunds to experience a rapid decline. This is because refund amounts per claimant are rising, given the increasing ratio of claimants who had long revolving loan transaction periods with ACOM in the past. Standard & Poor’s does not expect ACOM to post substantial net losses due to provisions for losses on interest refunds as it did in fiscal 2010 (ended March 2011). However, ACOM’s financial performance is highly likely to remain weak for the next year or two, in our view.
The ‘BB+’ long-term counterparty credit rating on ACOM incorporates a three-notch uplift, based on possible extraordinary support from MUFG. This is based on our assessment that ACOM is a “strategically important” subsidiary to MUFG under our group methodology for banking groups. Although MUFG holds a minority 40% stake in ACOM, the consumer finance company’s operational and financial alliance with the group is solid. This can be seen in ACOM’s loan guarantee business alliance with MUFG and the transfer of assets and businesses between ACOM and other MUFG group companies. On the other hand, we currently see the following as constraining factors for ACOM to be regarded as a “core” or “highly strategic” subsidiary of MUFG: the relatively high-risk nature of ACOM’s unsecured consumer loan business; ACOM’s expected limited profit contribution to the group; and ACOM’s relative independence from MUFG in terms of its risk management and business operations.
In our view, ACOM’s financing structure has a relatively good balance between direct and indirect financing, and maintains a high percentage of long-term financing. As of March 31, 2012, ACOM’s total amount of liquidity on hand and unused commitment lines exceeded its debts that are scheduled to be repaid within the next 12 months. ACOM currently has no major problems in terms of liquidity. It has no issuance of commercial paper, and its short-term borrowings are limited to JPY4 billion. Nevertheless, given that cash flow from operating activities (excluding any increase or decrease in total loans outstanding) remains negative, a key credit issue will be whether the company can maintain its stable relationships with investors, MUFG, and other financial institutions.
Direct financing from MUFG and MUFG’s credit quality have continued to support ACOM’s funding base, in our view. ACOM’s borrowing from the group banks-- Mitsubishi UFJ Trust And Banking Corp. (A+/Stable/A-1) and Bank of Tokyo-Mitsubishi UFJ Ltd. (A+/Stable/A-1)--amounts to JPY224.9 billion. This mainly consists of long-term loans and accounted for about 34% of the company’s consolidated debt as of March 31, 2012.
The outlook on the long-term rating is stable. We believe that ACOM will maintain its business and financial profiles in the next six months to two years, despite a difficult operating environment. Our assessment of the company incorporates existing and extraordinary group support for ACOM. We think that it will take another one to two years before ACOM’s operating cash flow, adjusted for changes in outstanding loan balance, turns positive. This is because market conditions have remained difficult as outstanding operating loans decline under new regulations, amid a high level of refunds for overcharged interest. Nevertheless, the consumer finance market has recently shown signs of stabilizing. For example, interest refund claims in the fourth quarter of fiscal 2011 (January to March 2012) declined 50% year on year, while an increased number of new loan applicants has slowed market contraction. We think that ACOM’s funding position will remain fairly stable, thanks to ongoing support from the parent banking group.
Related Criteria And Research
Group Rating Methodology And Assumptions, Nov. 9, 2011 Rating Finance Companies, March 18, 2004