Cosmo's bonds buck oil industry malaise in Japan on subordin...| MENAFN.COM

Monday, 15 August 2022 03:34 GMT

Cosmo's bonds buck oil industry malaise in Japan on subordinated loan

(MENAFN- Gulf Times) A rally in Cosmo Oil Co's bonds is bucking the bearish sentiment in Japanese refiner notes after the company got a subordinated loan, signalling lenders' support.

The extra yield on Cosmo's 2020 debt dropped 13 basis points to 134 basis points over sovereign notes after the March 24 announcement that the nation's three biggest banks will extend ¥60bn ($501mn) in funds. Spreads on similar-maturity notes of rival JX Holdings rose to 26 basis points on March 30, the highest since 2013.

Japanese refiners are facing the twin challenges of falling domestic demand for oil products as the population shrinks, and a decline in crude prices that cuts into their bottom line.

For Cosmo Oil, the subordinated loan will help avert a downgrade in its BBB score from Japan Credit Rating Agency, two levels above junk grade, according to Bank of America Corp.

"Many investors were worried about the danger that Cosmo's credit rating would be cut if it didn't bolster its capital," said Yusuke Ueda, a Tokyo-based credit analyst at the brokerage.

"The most important thing is that the banks agreed to the subordinated loan, which means they're taking over risks from bondholders."

Mizuho Bank, Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking Corp provided the loan, which is due by March 2075 and can be repaid after March 2020.

Tokyo-based Cosmo Oil said last month it will use ¥40bn of the funds to repay debt during the year started April 1.

The company forecast a net loss of ¥91bn for the 12 months ended March 31, versus an earlier projection of a ¥14bn profit, according to a February statement. It cited inventory write-downs due to falling oil prices.

Cosmo, Japan's fourth-largest refiner by capacity, has lost money in three of the five years through March 2014.

Cosmo Oil considers it positive that the market welcomes the measures it's taking, said Katsuhisa Maeda, a company spokesman.

The refiner's shares jumped 3% to ¥169 on Friday, the biggest increase in seven weeks.US crude oil has tumbled 51% in the past year. Japan's demand for oil products will decrease 7.8% in fiscal 2018 compared with five years earlier as the population decreases and cars become more energy-efficient, the trade ministry said in a report in June last year.

"Aggressive restructuring measures are needed to revive profitability and strengthen the credit profiles of Japanese refiners," Moody's Investors Service said in a report in October.

Excess refining capacity and high costs will exert pressure on industry margins over the next 12 months to 18 months, it said.

TonenGeneral Sekiyu KK, Japan's second-biggest refiner by capacity, agreed with Cosmo Oil in December to link by pipelines their plants in Chiba prefecture near Tokyo.

Idemitsu Kosan Co, the nation's No 3 oil company, and Showa Shell Sekiyu KK, the fifth-ranked, said the same month they are discussing a tie-up.

The spread on 2020 bonds issued by JX Holdings, the nation's biggest refiner, has climbed five basis points in the past year to 25 basis points.

The gap for similar-maturity notes from Cosmo Oil has jumped 36 to 134 during the period, after rising as high as 148 basis points on March 23, according to data compiled by Bloomberg.

Average spreads on Japanese corporate debt dropped two basis points to 23 in the past 12 months, according to Bank of America Merrill Lynch data. Cosmo Oil's biggest shareholder is a unit of Abu Dhabi government-run International Petroleum Investment Co.

The Japanese refiner's Middle East connections help its exploration business, while its refining operations may benefit from allying with other companies, according to Kazuma Ogino, a Tokyo-based credit analyst at Nomura Holdings.

"The possibility that Cosmo will be swallowed up by another company as a result of consolidation has decreased even more" after the subordinated loan, Ogino said. "This represents the megabanks effectively approving Cosmo's plans" to remain independent, he said.

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