Nomura, Mizuho see Takata’s distressed debt at bargain price


Takata Corp. may be embroiled in the biggest vehicle recall in U.S. history as its air bags have been linked to 11 deaths, but don’t count it out as an investment, say credit analysts at Mizuho Securities Co. and Nomura Holdings Inc. who are recommending investors buy its bonds.

The company continues to generate cash from products including seat belts, child seats and steering wheels even as air bag recalls widen, according to Taketoshi Tsuchiya, a senior executive in Mizuho’s fixed-income group in Tokyo. Honda Motor Co. and Toyota Motor Corp. remain backers of the auto parts supplier, he said.

“Takata is still generating cash flow and there’s no incentive for Honda or Toyota to push it into bankruptcy,” Tsuchiya said. “From the technology perspective, the alternative of having to rely on foreign air bag suppliers is totally unacceptable” for the carmakers and the Japanese government, he said.

Scandals last year in Japan have created a handful of opportunities for distressed-debt traders as companies including Sharp Corp., Toshiba Corp. and Mitsui OSK Lines Ltd. generate losses. Speculation on Takata’s recall liability has blown its credit spreads to a record high in December in a market that offers near-zero bond yields. Nomura upgraded Takata debt last month on signs of Honda’s support.

Takata’s March 2021 notes have gained 6.7 percent from a record-low to reach 72.49 percent of face value on Feb. 4, according to Bloomberg-compiled prices. The yield fell to 8.21 percent, compared with the 0.17 percent average yield on Japanese corporate bonds according to a Bank of America Merrill Lynch index. The 2021 notes are still down 15 percent in price over the past 12 months.

“Allowing Takata to continue operating and repay the recall costs from future cash flow would be the most economically rational option for carmakers,” said Shintaro Niimura, a credit analyst at Nomura in Tokyo. Automakers won’t be able to receive sufficient recall funds from Takata’s remaining assets if the company goes bankrupt, he said.

The Tokyo-based air bag maker had ¥85 billion ($728 million) of interest-bearing debt and ¥65.6 billion of cash, according to its financial reports for the quarter ended Dec. 31, putting its net debt-to-equity ratio at 0.13 times.

Overall cash flow was negative in 2015 through September, due to one-time provisions for future recalls and legal costs, and will improve with a weaker yen and rising overseas sales, Mizuho predicts.

Takata’s probability of debt nonpayment within one year has risen to 1.17 percent from about 0.64 percent a year earlier, according to the Bloomberg default-risk model, which considers factors such as share prices and debt levels. The gauge suggests the company’s credit rating should be at the second-highest high-yield grade.

Takata posted net income of ¥2.5 billion in the nine months ended Dec. 31, compared with a loss of ¥32.5 billion a year earlier, according to a filing released on Feb. 5. The company’s spokesman was not immediately available for comment.

“People who had concern about its credit risk have already sold off the bonds but there are still buyers coming in,” Mizuho’s Tsuchiya said. “It’s a good buy at the 70s. There is very little volume and we don’t expect an immediate positive catalyst, so you may have to wait for the bond to mature to get repaid at 100.”