Two Japanese chemical companies have dropped Moody’s as a rater of their creditworthiness after the US agency downgraded its assessment of their financial stability. The companies, Sumitomo Chemical and DIC, will rely instead on more favorable ratings from Japan Credit Rating Agency, the country’s largest rating firm.
Elsewhere, such a move might raise red flags. But stock analysts in Japan see little to worry about because the two companies mostly rely on Japanese funding and thus don’t need a US rating.
The companies, which like all firms pay to be rated, claim they dropped Moody’s to keep investors calm. “A gap in ratings between Moody’s and Japanese rating companies tends to confuse investors,” a spokesperson from Sumitomo’s investor relations department tells C&EN. “We consider the risk related to a gap in ratings much more serious than the risk of affecting our ability to raise money in dollars.” The company isn’t presently raising funds in dollars, he adds.
Moody’s downgraded Sumitomo’s rating in March and DIC’s in May, dropping both to lower scores within the “B” range. The agency said the outlook for both was “negative.” In contrast, Japan Credit Rating Agency, which has a reputation for being soft on Japanese firms, views the two companies’ credit outlook as “stable.” It assigned an A+ rating to Sumitomo and an A to DIC.
SoftBank, a technology-focused Japanese conglomerate, similarly dropped Moody’s in March after a downgrade.
Withdrawing from Moody’s’ scrutiny could impede the chemical companies’ ability to raise funds internationally, says Mikiya Yamada, a stock analyst at Mizuho Securities. “The delisting will be disadvantageous to the two companies when they float bonds overseas,” he says. Until recently, Japanese chemical companies were on an international acquisition spree that was largely financed by funds raised abroad, he adds.
Now, though, Japanese chemical companies have a much-reduced need for cash, Yamada says, because they are doing very little dealmaking in the wake of the COVID-19 pandemic. As a result, “it is not irrational for them to stop obtaining credit ratings from overseas rating agencies.” Besides, major Japanese banks are overflowing with funds they are eager to lend out. DIC, for example, relies almost exclusively on domestic financing, an official says.
In addition, the balance sheets of major Japanese chemical companies have improved compared with 10 years ago, Yamada points out. For example, Sumitomo has lowered its debt-to-equity ratio from 1.5 in 2011 to 0.9 in 2019. “They don’t need to obtain credit ratings from global rating agencies when they consider themselves in good financial shape,” he says.
Only about a quarter of major Japanese chemical firms are currently rated by international agencies like Moody’s, Yamada adds.