In May 2012, Marubeni announced that it will fully acquire Gavilon Holdings for approximately US$3.6 billion. The amount is equivalent to 33% of Marubeni’s total capital as of March 2012. In our view, Marubeni will likely incur a substantial amount of goodwill on the acquisition, which will weaken its capital quality.
Gavilon had total assets of approximately US$6.2 billion as of December 2011. Through the acquisition, those assets will be consolidated into Marubeni and increase its leverage significantly. Marubeni’s debt/equity ratio is likely to exceed 2.2x by March 2013--taking into consideration the acquisition payment, Gavilon’s debt (US$2 billion according to media reports), and other committed investments besides Gavilon--if its capital increases as the company expects as a result of profit accumulation. Marubeni aims to bring down the ratio to 1.8x by March 2013 through measures such as selling its assets. In our opinion, the management’s commitment to manage the ratio is strong.
Marubeni’s earnings are sensitive to fluctuations in crude oil, coal, and copper prices, as well as foreign exchange rates. Marubeni is likely to experience substantial reduction in its coal earnings due to the decline in coal prices. Nevertheless, the impact is likely to be manageable as the coal business accounted for about 13% of its earnings in fiscal 2011 (ended March 31, 2012). Marubeni’s other major earnings sources are oil and copper, and their prices have been relatively stable, although they are hovering at levels that are somewhat lower than Marubeni’s initial price assumptions. Marubeni may find it difficult to achieve its profit target of JPY200 billion for fiscal 2012 (ending March 31, 2013), although the shortfall is likely to be limited at the current price level.
The company’s risk management system measures the risk and return of new investments and manages overall portfolio risk. Investments made by general trading companies (GTCs) are generally characterized by low liquidity, difficulty in measuring market prices, and few data samples, which make it hard to accurately capture associated risks. Although Marubeni calculates its risk assets by taking into account the risk characteristics of each asset, the results obtained from the current method may not sufficiently reflect the potential risks if the business environment deteriorates beyond our expectations. As such, there is still room to enhance and improve the current risk management system through methods such as effective model testing and stress tests.
Funding and liquidity risks
Standard & Poor’s assesses Marubeni’s liquidity as “adequate,” as defined in our criteria. We expect Marubeni’s ratio of liquidity sources to the use of liquidity to exceed 1.2x over the next one to two years. Marubeni’s liquidity is unlikely to deteriorate significantly, given its stable relationships with major lenders including Mizuho Corporate Bank (A+/Negative/A-1), the company’s main bank. The company is able to secure foreign currency from its main bank, among others, if necessary.
The outlook is negative. Although Marubeni aims to lower its increased leverage following the acquisition of Gavilon and it has shown its commitment to the task, Standard & Poor’s believes there is some uncertainty to Marubeni’s deleveraging plan, given that financial markets remain volatile and the global economy is showing signs of weakness. Against this backdrop, a drop in commodity prices and weaker global demand will hurt Marubeni’s financial performance. And in light of its increased leverage, Marubeni’s credit profile will become more susceptible to financial stress. If Marubeni finds difficulty in lowering its leverage and restoring its capitalization, its rating is likely to be lowered. Conversely, we will consider revising the outlook to stable if we see a good likelihood that it will improve its leverage through asset reduction and maintain its improved financial profile at a level that is commensurate with its ratings.
Related Criteria And Research
Principles Of Credit Ratings, Feb. 16, 2011
2008 Corporate Criteria: Analytical Methodology, April 15, 2008