• Bloomberg


The cost to insure debt of Marubeni Corp. is poised to rise the most this month of any Japanese company besides Tokyo Electric Power Co., reflecting concern an economic slowdown will make it more difficult to meet forecasts for record profit.

Credit-default swaps tied to Marubeni increased to 471 basis points as of Wednesday, from 260 basis points at the start of the month and 170 when the government on Sept. 20 cut its evaluation of corporate earnings.

Five-year swaps on Marubeni, the most indebted of Japan’s major trading houses, are more than twice the average of 215 in an index of its peers in Asia, according to data compiled by Bloomberg. The contracts are also used to speculate on creditworthiness.

“These companies have a zillion counterparties, so if the world goes down, the risk is that there’s going to be a zillion counterparties that can’t pay them,” Penn Bowers, an analyst with CLSA Asia-Pacific Markets, said in an interview in Tokyo on Oct. 19. “Marubeni is the most geared of the group.”

Marubeni has more than twice the amount of leverage relative to equity of its main rivals, and five analysts cut their profit forecasts in the past month amid signs that Europe’s debt crisis will hurt the global economy.

Falling commodities prices may also reduce sales for Marubeni, which got more than half of its profit from metals, energy and food products last year.

Marubeni, the fifth-largest trading house in Japan by market value, had net debt of ¥1.94 trillion, or 218 percent of its equity, last quarter. That compares with 86 percent for Mitsubishi Corp., the country’s biggest trader, and 91 percent for Hong Kong-based rival Noble Group Ltd. The companies typically use credit to fund the purchase of products and commodities before reselling.

The extra yield investors demand to hold Marubeni’s yen-denominated notes due in 2016 instead of comparable Japanese government debt was 27.6 basis points Wednesday, little changed from the start of the month, according to Japan Securities Dealers Association prices. The spread widened from 25.3 basis points on Sept. 9, the narrowest since the notes were sold in July. A basis point is 0.01 percentage point.

The company has ¥166.7 billion in loans and bonds due next year, and has a total of ¥913 billion outstanding, according to data compiled by Bloomberg.

Global industrial bonds with the same BBB rating as Marubeni had a yield premium of 250 basis points more than equivalent sovereign debt on Tuesday, according to Bank of America Merrill Lynch indexes. The extra yield demanded by investors has tightened from 280 on Oct. 1.

Marubeni trades commodities from rare earths to pulp to flour and its reported net income in the year that ended March 31 rose 43 percent to ¥136 billion.

Chief Executive Officer Teruo Asada expects record net income of ¥170 billion in the year ending next March, he said at a news conference May 6.

Credit-default swaps pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements.

The perceived risk of buying Marubeni’s bonds is higher than that of companies that expect losses this year, including Kansai Electric Power Co.

“I can’t believe these prices” for Marubeni, Takayuki Atake, chief credit analyst at SMBC Nikko Securities Inc., said Oct. 21. The jump in the swaps is mostly due to investment banks seeking to hedge their risk of holding trading company debt, Atake said. He recommends selling the swaps and buying Marubeni bonds.

Marubeni’s swaps imply a lower credit rating than its current Baa2 from Moody’s Investors Service, Tetsuya Yamamoto, a senior analyst with the firm, said Monday. Moody’s doesn’t change assessments based on credit swaps, he said. Marubeni holds the second-lowest investment-grade rank from both Moody’s and Standard & Poor’s.

“Marubeni is likely to record a historically high profit, but trouble in the European countries and the slowdown in the economic situation in China may be the reason for their higher credit-default swap prices,” Yamamoto said.

The International Monetary Fund lowered its forecast last month for global economic growth in 2011 to 4 percent from 4.3 percent. China’s expansion moderated to 9.1 percent in the third quarter from a year earlier, the slowest pace since 2009.

Only the swaps of Tepco, which is saddled with a massive nuclear accident, rose more this month. Debt-protection for Tepco, Japan’s biggest nonfinancial borrower, jumped 540 basis points to 1,565, according to Bloomberg data.

Marubeni spokeswoman Kyoko Kawase said Tuesday the company didn’t have any comment on the move in the default swaps.

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