Japan's Mitsubishi UFJ Lease And Hitachi Capital Both Affirmed At 'A-/A-2' On Planned Merger; Outlooks Stable

Stocks and Financial Services Press Releases Friday September 25, 2020 17:32
Bangkok--25 Sep--S and P Global Ratings

TOKYO Sept. 25, 2020--S&P Global Ratings today said it has affirmed its 'A-' long-term and 'A-2' short-term issuer credit ratings on both Japan-based Mitsubishi UFJ Lease & Finance Co. Ltd. (MUL) and Hitachi Capital Corp. (HCC). Outlooks on the long-term issuer credit ratings on both companies remain stable. We are placing our 'BBB-' ratings on Hitachi Capital's hybrid capital issuance on CreditWatch with negative implications.

On Sept. 24, MUL and HCC announced a planned business integration. S&P Global Ratings considers the merged entity would maintain adequate financial profile after integration. As of March 31, 2020, our risk-adjusted capital (RAC) ratio--a key indicator we monitor for many nonbank financial institutions--was 8.0% for MUL and 10.5% for HCC. We expect the merged entity's RAC ratio to remain adequate at 7.0%-10.0% even though the form of company consolidation at the time of merger and details of the entity's post-merger business strategy will affect the ratio. Nevertheless, we expect the merged entity's stand-alone credit profile (SACP) to be closer to MUL's than HCC's. Given that an SACP is a starting point in assigning a hybrid capital issue rating, the maximum downgrade of HCC's hybrid capital is likely to be one notch.

S&P Global Ratings believes integration of the companies may diversify the merged entity's business portfolio, which is likely to help mitigate downside risk to its creditworthiness. Both companies have strong business bases in Japan and overseas, and there is little overlap in businesses such as global assets.

The merged entity will be a strategically important member of the MUFG group, in our opinion, and it is likely to receive extraordinary support from the MUFG group in case of need. Existing close relationships with the major shareholders of both companies, MUFG, Hitachi Ltd., and Mitsubishi Corp., are likely to continue after the merger. We understand the two companies have benefited from their relationships with major shareholders in their respective businesses and funding.

The outlooks on both companies are stable, reflecting our view of the likelihood of group support in times of stress. Meanwhile, the COVID-19 pandemic puts downward pressure on the overall profitability of both companies. The merged entity would hold some businesses that will take time to recover from COVID-19, including aircraft-related business. We may revise downward SACPs for both companies if we see an increased likelihood of deteriorating asset quality or declining profitability as a result of a prolonged recovery from COVID-19. However, if credit quality of the parent groups remains unchanged, we consider a downgrade remote, given the likelihood of stable support from the groups. Conversely, we may consider upgrades, subject to stable operations, if we revise upward the group SACP for MUFG.

S&P Global Rating expects no change to its ratings on Hitachi Capital Insurance Corp. (HCI). Our financial strength rating for HCI reflects the explicit support that it receives from parent company, HCC. HCI receives this support in the form of a guarantee on its claim payments.


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