Kobe Steel’s bond risk skyrockets to three-year high

Bloomberg

Kobe Steel Ltd.’s bond risk jumped to its highest level in more than three years last quarter as Japan’s fourth-largest steelmaker faces increased competition at home and the rising yen erodes profitability overseas.

The cost to insure the firm’s debt climbed 115 basis points to 305 in the three months to June 30, according to CMA prices.

That’s the highest level since the first quarter of 2009 and more than double the credit-default swaps of South Korea’s Posco, which rose 7.7 in the period, the data show. Contracts for the world leader, Europe-based, ArcelorMittal, gained 73 basis points.

Last week, shareholders of Nippon Steel Corp. and Sumitomo Metal Industries Ltd. approved a merger between the two that will create the world’s second-largest steelmaker. A 3.9 percent advance in the yen against the dollar last quarter crimped Kobe Steel’s overseas earnings.

“The market’s expectations of Kobe Steel’s global potential are falling,” especially when compared with domestic rivals, said Yasuaki Kudamatsu at Mitsubishi UFJ Morgan Stanley Securities Co. “The reliance on long-term clients at home makes it more difficult for the company to improve margins.”

Nippon Steel and Sumitomo Metal together controlled 41 percent of Japan’s crude steel market in the fiscal year that ended March 31, according to SMBC Nikko Securities. That compares with Kobe Steel’s 6.7 percent, the data show.

Kobe Steel’s default swaps rose at triple the pace of domestic rivals and five times that of the Markit iTraxx Japan index in the period, data provider CMA said. An increase in the swaps signals worsening perceptions of creditworthiness, while a decrease suggests the opposite.

Credit-default swaps of Nippon Steel rose 37.5 basis points last quarter to 192.5, while Sumitomo Metal’s bond risk climbed 32.2 to 188.5, according to CMA, which compiles prices quoted by dealers in the privately negotiated market.

The contracts of Posco increased 7.7 to 147.5, while those of ArcelorMittal rose 73 to 547.7, the data show.

Kobe Steel reported in April its first annual loss since the period that ended in March 2009, recording a ¥14.3 billion shortfall as operating income declined 51 percent to ¥60.6 billion.