TOKYO (S&P Global Ratings) June 13, 2018--S&P Global Ratings today said it has revised to positive from stable the outlook on its long-term corporate credit rating on Japan-based general trading and investment company Marubeni Corp. We have affirmed our 'BBB' long-term corporate credit and senior unsecured debt ratings on the company.
The outlook revision reflects our view that there is a heightened likelihood that the company's profitability and capital adequacy will improve at a pace exceeding our previous assumptions. We base this on our view that in the next one to two years, Marubeni's net profit is highly likely to exceed JPY / CNY200 billion annually because prices for commodities such as crude oil and copper are likely to be firm. In addition, nonresource businesses that are relatively unaffected by market swings, such as agricultural chemicals, electric power, and transportation equipment, are likely to continue seeing steady profit growth. Also in the next one to two years, Marubeni is highly likely to maintain positive free cash flow by continuing to uphold its conservative investment policy.
Firm commodity prices are a boon to Marubeni's operating performance because it owns interests in oil and natural gas projects in the Gulf of Mexico, the North Sea, and the Indian Ocean as well as production interests in Chilean copper mines. It has also strengthened its earnings base by restructuring the cargo collection network at its U.S.-based grains subsidiary Gavilon Holdings LLC, which had performed poorly in the past, and by investing in information technology and acquiring new customers at its U.S.-based agricultural chemical subsidiary Helena Agri-Enterprises, LLC. Furthermore, we expect Marubeni to continue steadily raising profit levels at its aircraft and refrigerated trailer leasing businesses in the U.S. and at its power generation business, which is based on long-term sales contracts. As a result, Marubeni's net profit is highly likely to exceed JPY / CNY200 billion in fiscals 2018 (ending March 31, 2019) and 2019, even when taking into account foreign currency risk and uncertainties for its businesses overseas.
Marubeni has focused on enhancing its financial standing in the past three years. Specifically, it has adhered to a conservative investment policy, which calls for curbing fresh investments and maintaining positive free cash flow. It also took out a subordinated loan worth JPY / CNY250 billion in August 2016, which we regard as having intermediate equity content. The company has a stated policy of further improving its ratio of net debt to equity, leading us to believe it is highly likely to maintain conservative financial discipline. We see a heightened likelihood that its adjusted capital (risk buffer) will continue on an improvement track toward the amount of risk-based capital (risk-weighted assets) required under our 'BBB' stress scenario at a pace exceeding our previous assumption, given our expectation of profit levels remaining steady and a conservative investment policy that emphasizes continued positive free cash flow.
We assume the following for Marubeni's profitability and risk assets in our base-case scenario:
- Crude oil will trade at US$65 per barrel in 2018, at US$60 per barrel in 2019, and at U$55 per barrel in 2020.
- Copper will trade at US$6,400 per ton in 2018, at US$6,600 per ton in 2019, and at US$6,800 per ton in 2020; iron ore will trade at US$65 per dry metric ton in 2018, at US$60 per dry metric ton in 2019, and at US$55 per dry metric ton in 2020; and other resources will trade at assumed prices we apply globally in our credit analyses.
Its resource segment will not incur tens of billions of yen in impairment losses or additional large investments.
- It will restrain net investments (investments minus depreciation and divestitures) in fiscals 2018 and 2019, and maintain positive free cash flow.
Given our base-case assumptions, we forecast the following financial metrics for Marubeni:
- Annual net profit exceeding JPY / CNY200 billion in fiscals 2018 and 2019;
- Annual pretax income of at least JPY / CNY250 billion in fiscals 2018 and 2019, and a prospective four-year weighted-average return on risk-weighted assets (RORA; the ratio of pretax net income to risk-based capital) from fiscal 2016 exceeding 10%;
- Shareholders' equity steadily increasing from approximately JPY / CNY1.7 trillion (includes our adjustments) in fiscal 2017, thanks to accumulation of net profit;
- Debt levels (including our adjustments) gradually declining from the fiscal 2017 level of about JPY / CNY2.7 trillion;
- Adjusted ratio of net debt to equity (includes our adjustments) improving from 1.6x as of the end of fiscal 2017; and
- Adjusted capital steadily increasing toward the level of risk-based capital required under our 'BBB' stress scenario.
The positive outlook reflects our view that it is increasingly likely Marubeni's capital adequacy will continue improving toward the amount of risk-based capital required under our 'BBB' stress scenario at a pace exceeding our previous assumptions. We base this view on our assumptions that the company will secure net profit of more than JPY / CNY200 billion annually in the next one to two years and also maintain a conservative investment policy.
We will consider upgrading Marubeni if it increases net profit at a pace exceeding our current assumption, maintains substantial positive free cash flow, and curbs growth of risk assets, thus leading us to see a heightened likelihood that its capital adequacy will reach the level of risk-based capital required under our 'BBB' stress scenario in the coming two to three years. Upon considering any upgrade, we will take into account Marubeni's medium-term business strategy and financial management policy.
Conversely, we might revise down the outlook to stable from positive if Marubeni's net profit falls far below the JPY / CNY150 billion threshold in fiscal 2018, which could occur if it incurs massive impairment losses in its energy or metals and mineral resources divisions owing to a sharp drop in commodity prices. We would also consider revising the outlook to stable if Marubeni shifts to an overly aggressive investment policy, leading us to see a heightened likelihood that its free cash flow will turn significantly negative.