TOKYO (S&P Global Ratings) April 23, 2020--S&P Global Ratings today said that downward pressure will mount further on creditworthiness across the Japanese corporate sector, with no end to the COVID-19 pandemic in sight. The automobile, auto-parts, transportation infrastructure, and retail sectors have all been affected directly by a substantial decline in demand, which is in turn hurting suppliers in the materials, electronics, and capital goods sectors. The fall in prices of crude oil and materials and the global economic downturn has hit general trading and investment companies (GTICs) and oil exploration companies. We believe that the performance of entities we rate in various sectors will come under very strong downward pressure in the next one to two years. Even if companies implement short-term cost-cutting measures, a material decrease in revenue will inevitably cause profit levels to fall substantially.

The downward pressure on ratings will likely grow stronger, especially at companies that have taken on increased debt to fund growth investment in the past one to two years, and at companies with low profitability due to weaker competitiveness. Impairment losses from investments and goodwill are another focal point for companies that have invested in resources or conducted large mergers and acquisitions (M&A) in recent years. For companies rated 'BB+' or lower, creditworthiness will depend their ability to maintain sufficient liquidity at hand and stable financing.

On April 16, 2020, we lowered our global economic forecasts. Our current forecasts for real GDP growth include the following:

• Japan: -3.6% in 2020, and 3.0% in 2021
• U.S.: -5.2% in 2020, and 6.2% in 2021
• China: 1.2% in 2020 and 7.4% in 2021
• Global: -2.4% in 2020, and 5.9% in 2021

Our rating surveillance is currently heavily focused on the evolving economic conditions caused by the pandemic, as well as other factors affecting our surveillance priorities, such as the severe decline in oil prices (our assumptions for average Brent crude oil prices are: US$30 per barrel in 2020 and US$50 per barrel in 2021). A global pandemic such as this one is a rare event that brings many uncertainties. In analyzing issuers, we consider both the short-term impact and long-term implications of the pandemic for an industry and a company's business profile.

• As of April 17, 2020, we have taken negative rating actions on about 25% of the corporate issuers we rate globally (about 1,060 entities), due to the impact of the COVID-19 pandemic and the fall in crude oil prices. (Negative rating actions include downgrades, placements of ratings on CreditWatch with negative implications, and downward revisions of outlooks). Issuers with speculative-grade ratings ('BB+' or below) account for about 75% of such issuers.
• We have taken negative rating actions on slightly more than 20%, or 17 entities, of the approximately 80 corporate issuers we rate in Japan (CreditWatch placement of ratings on 12 issuers, and downward revision of outlooks on five issuers). The majority of these issuers were assigned investment-grade ratings ('BBB-' or above). This is because issuers with investment-grade ratings account for more than 90% of all corporate issuers we rate in Japan.

Despite these actions, we believe that most of the Japanese corporate issuers we rate are somewhat resilient to the rapidly deteriorating environment because they have solid business bases and relatively favorable financial health. Specifically, ratings are supported by solid operations and relatively strong competitiveness, as well as favorable relationships with creditor banks, in our opinion. Many rated Japanese corporate issuers also have a strong capability to maintain cash and deposits at hand at an adequate level, even under unstable business conditions. This is made possible by their conservative financial management, as seen in material decreases in: (i) capital expenditure and other cash outlays, (ii) M&A and other investment for growth, and (iii) shareholder returns. In reviewing the creditworthiness of the companies we rate, our analytical focus will be on when business performance is likely to turn upward as the pandemic passes, and the prospects for the speed of recovery.

Some of the six companies we rate with speculative-grade ratings are more vulnerable to changes in the external environment, or have high levels of debt. These companies will be subject to a far greater adverse impact on their liquidity and finance from the turmoil in financial markets and substantial weakening of investor risk tolerance. We will closely watch the impact on the amounts, terms, and costs of financing for companies that have large amounts of debt that needs to be financed continuously.

Auto And Auto-Parts, Transportation Infrastructure

Downward pressure on ratings in the automobile and auto-parts sectors will likely occur alongside a deterioration in performance. Production has been suspended across several regions of the world and demand has dropped significantly. We expect the profitability of many auto and auto-parts companies will take time to recover to levels commensurate with the ratings. This is in line with our assumption that global new car sales will fall by 15% in 2020. Accordingly, we have placed our ratings on the Toyota group companies and other Japanese major automakers we rate on CreditWatch with negative implications (see list of rating actions below). In the transportation infrastructure sector, performance has been hit by restrictions on the flow of people. We have placed on CreditWatch with negative implications our ratings on Narita International Airport Corp., which faces a sharp decline in the number of international passengers. We have taken the same action for Central Japan Railway Co. (JR Central) and East Japan Railway Co. (JR East), which are likely to see a substantial decrease in railway passengers amid the state of emergency declared in Japan. We intend to resolve the CreditWatch placements after examining the degree of deterioration in profitability and cash flow indicators and looking at forecasts for recovery.

Retail

The downward pressure on performance and creditworthiness in the retail sector is strongest on companies that depend heavily on discretionary spending, in our view. We revised downward the outlook on Fast Retailing Co. Ltd. to stable from positive on April 14, 2020, and the outlooks on Aeon Co. Ltd. and its subsidiary Aeon Mall Co. Ltd. to negative from stable on April 17, 2020. We see growing downward pressure on the performance and profitability of Fast Retailing, as the company has temporarily closed stores globally. We also believe downward pressure is mounting on the ratings on the Aeon group. This is because the group has temporarily closed large stores and shopping malls in Japan and elsewhere, and the global economic downturn has depressed consumer spending significantly. The group's heavy debt burden also increases the pressure.

Materials, Electronics, And Capital Goods

Many companies in the materials, electronics, and capital goods sectors will likely experience a significant deterioration in performance in the next one to two years, as falling demand is likely to last in key markets. Japanese steelmakers, for which auto companies are often the main customers, will likely continue struggling to generate profit. Downward pressure on the ratings on Nippon Steel Corp. also stems from its growing financial burden after the large-scale acquisition of an Indian steel company in 2019. In the electronics and capital goods sectors, the weight of pressure on performance and creditworthiness will be proportional to the concentration of automobiles and factory automation in companies' business mix, in our view. Heavily affected companies include Panasonic Corp. and Mitsubishi Electric Co. Ltd. For office equipment makers, the rapid increase in the number of people working from home will likely lead to a decrease in demand.

GTICs And Oil Exploration

The financial buffers of GTICs are likely to shrink as their performance will come under strong pressure in the next one to two years due to the plunge in prices of crude oil and raw materials, as well as the global economic recession. The creditworthiness of these companies will likely be affected in a variety of ways, given the differences in their business portfolios, risk management capabilities, and financial strategies. The performance and creditworthiness of Inpex Corp., an oil and gas exploration and production company, will remain under downward pressure due to the investment burden of its flagship projects as well as slumping resource prices.

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Rating actions so far taken on Japanese corporate entities in response to the covid-19 pandemic and the fall in crude oil prices

• Japan Retailer AEON And Subsidiary AEON Mall Outlooks Revised To Negative As COVID-19 Hits Prospects; Ratings Affirmed, April 17, 2020
• JR Central And JR East 'AA-' Ratings Placed On CreditWatch Negative On Drop In Traffic Amid COVID-19, April 15, 2020
• Outlook On Fast Retailing Revised Down To Stable As Pandemic Damages Profitability Prospects; 'A' Rating Affirmed, April 14, 2020
• Narita International Airport 'A+/A-1' Ratings Placed On CreditWatch Negative Amid Sharp Decline In Passengers, April 6, 2020
• Toyota Tsusho And Singapore Unit 'A+' Ratings Placed On CreditWatch Negative Following Similar Action On Toyota Motor, March 31, 2020
• Ratings On Three Toyota-Affiliated Suppliers Placed On CreditWatch Negative Following Same Action On Toyota Motor, March 30, 2020
• Outlook On Marubeni Revised Downward To Stable On Sizeable Net Loss; 'BBB' Ratings Affirmed, March 27, 2020
• Toyota Motor 'AA-/A-1+' Ratings Placed On CreditWatch Negative On COVID-19 Pandemic, March 26, 2020
• Nissan Motor 'BBB+/A-2' Ratings Placed On CreditWatch Negative On COVID-19 Pandemic, March 26, 2020
• Honda Motor 'A/A-1' Ratings Placed On CreditWatch Negative On COVID-19 Pandemic, March 25, 2020
• Mitsubishi Motors 'BB+' Rating Placed On CreditWatch Negative On COVID-19 Pandemic, March 25, 2020
• Japan-Based Universal Entertainment Put On CreditWatch Negative As COVID-19 Pandemic Forces Manila Casino Suspension, March 19, 2020
• Outlook On Nippon Steel Revised To Negative On Weakened Profitability; Ratings Affirmed, March 3, 2020

Related Research

• COVID-19: Coronavirus- And Oil Price-Related Public Rating Actions On Corporations, Sovereigns, And Project Finance To Date, April 20, 2020
• Economic Research: Up Next: The Complicated Transition From COVID-19 Lockdown, April 16, 2020
• Economic Research: COVID-19 Deals A Larger, Longer Hit To Global GDP, April 16, 2020
• Japan's GTICs' Financial Buffers Are Likely To Shrink Due To COVID-19, April 10, 2020
• Credit FAQ: The Ratings Process And The COVID-19 Pandemic, April 2, 2020
• Coronavirus Jeopardizes Creditworthiness At Certain Major Japanese Companies, Feb. 12, 2020

A Japanese-language version of this media release is available on S&P Global Research Online at www.researchonline.jp, or via CreditWire Japan on Bloomberg Professional at SPCJ <GO>.