July 18 -
-- Extended weakness in profits in Asahi Glass' core architectural glass operations in Europe and flat panel display glass operations have reduced the likelihood that the company will swiftly restore its financial soundness to levels commensurate with the current ratings, in our view.
-- We have placed the long- and short-term ratings on Asahi Glass and the rating on a subsidiary's commercial paper program on CreditWatch with negative implications.
-- We intend to resolve the CreditWatch placement in August after assessing new information on the degree of deterioration in the company's earnings and financial standing and their prospects for recovery.
Standard & Poor's Ratings Services today placed its 'A' long-term corporate credit and senior unsecured ratings and 'A-1' short-term corporate credit rating on Asahi Glass Co. Ltd. on CreditWatch with negative implications. We also placed our 'A-1' debt ratings on Asahi Glass' JPY150 billion domestic commercial paper program and subsidiary AGC Capital Inc.'s $300 million commercial paper (CP) program on CreditWatch with negative implications. We believe the likelihood the company will swiftly restore its financial soundness to levels commensurate with the current ratings has fallen because worsening external conditions have extended weakness in the profits of the company's core architectural glass operations in Europe and flat panel display glass operations, in our view. On Feb. 14, 2012, we revised our outlook on Asahi Glass' long-term corporate credit ratings to negative from stable to reflect our view that the company's earnings and financial standing would likely continue to deteriorate. The likelihood of greater deterioration than we had expected in Asahi Glass' earnings and financial standing has put additional pressure on our ratings on the company.
Asahi Glass has recently cut its outlook for consolidated operating profit to JPY100 billion from JPY140 billion for fiscal 2012 (ending Dec. 31, 2012). The company's glass operations face harsher business conditions globally. Economic weakness in Europe has slowed a recovery in demand for the company's architectural glass while receding government subsidiaries in some countries and intensifying competition have worsened its operating environment in glass for solar panels. Recovery in the end-user market for TVs is increasingly likely to take longer than we had assumed, which will affect Asahi Glass' electronics unit, which accounts for more than half the company's operating profit. The company supplies glass substrates for use in liquid crystal displays. We believe the high level of market maturity in Asahi Glass' core businesses has made it more difficult for the company to benefit from its operational and geographical diversification and thus attain steady earnings. We do not expect Asahi Glass to substantially reduce its interest-bearing debt in fiscal 2012, because the company plans to increase capital expenditures in fiscal 2012 despite prospects for weaker profits and cash flows. It also plans to pay a similar dividend to the one it paid in fiscal 2011. Therefore, we believe the ratio of its FFO to total debt for fiscal 2012 will deteriorate from 33% in fiscal 2011.
We intend to resolve the CreditWatch placement in August after assessing business conditions, including the competitive environment surrounding Asahi Glass' core businesses; prospects for a recovery in profits; and its financial policies, including those on capital expenditures and shareholder returns. We may consider downgrading Asahi Glass if we see a high likelihood of the ratio of its funds from operations (FFO, before adjusting for working capital) to total debt staying below 40% over the next one to two years, which may occur if weaker earnings in its core businesses reduce cash flow.
RELATED CRITERIA AND RESEARCH
Principles Of Credit Ratings, Feb. 16, 2011
2008 Corporate Criteria: Analytical Methodology, April 15, 2008