Moody’s changes outlook on Asahi Glass to stable from negative; affirms A2 issuer rating

Moody’s Japan K.K. has changed the ratings outlook on Asahi Glass Co., Ltd. (AGC) to stable from negative, Moody’s has also affirmed AGC’s A2 long-term issuer rating as well as the P-1 commercial paper rating of AGC Capital, Inc.

“The change in outlook to stable from negative principally reflects our view that the company’s profitability has reached an inflexion point and has started to recover. At the same time, its debt is decreasing,” says Takashi Akimoto, a Moody’s Analyst.

“We expect AGC’s profitability will modestly improve during the next 12-18 months, supported by stabilization in its glass business and gradual growth of its chemicals business, and this is reflected in the stable outlook,” says Akimoto who is also the Lead Analyst for the company.

“Our expectation is that the weakness in AGC’s profitability has passed its low point, supported by stabilization in its glass business, which is largely due to restructuring measures, as well as an improved growth outlook for its chemicals business,” says Akimoto.

In addition, Moody’s notes that the pace of deterioration in the profitability of AGC’s electronics business has eased somewhat.

AGC expects consolidated operating profit of JPY62.0 billion, which is almost flat from the previous year, and a 4.4% operating margin in for fiscal year ending December 2015 (FYE12/2015).

“The change in outlook also recognizes the company’s prudent financial discipline and improved financial flexibility as a result of its debt repayments,” says Akimoto.

Moody’s views positively the fact that AGC has successfully reduced debt despite a declining profitability trend.

AGC’s adjusted debt/EBITDA was 2.8x in the twelve months ended March 2015, improved from 3.2x in FYE12/2013. AGC’s cash flows also improved as a result of reduced capital expenditure (capex), R&D expenses and dividends.

On the other hand, Moody’s notes that AGC plans to increase capex, in order to focus on asset efficiency as well as to concentrate its resources in growth areas.

As such, the company plans to increase capex to JPY150 billion in FYE12/2015 from JPY118.2 billion in the previous year.

Moody’s will continue to closely observe the return from these investments, as well as the company’s leverage and any potential for renewed ratings pressure.

The stable outlook reflects our expectation that AGC’s profitability will modestly improve during the next 12-18 months and the company will maintain its current leverage level.

The A2 rating reflects AGC’s strong position in the global glass market for all applications, including glass used for architecture, the automotive and display industries, as well as its geographically diversified revenue mix.

In addition, AGC’s stable and strong relationships with its major banks — a regional factor for Japan results in a two-notch rating uplift from the company’s fundamental creditworthiness.

Upward rating pressure could emerge if AGC improves its cash flow and leverage by boosting profitability.

Upward rating pressure could also emerge if debt/EBITDA falls below 2.0x and retained cash flow/net debt improves to over 35%.

On the other hand, a deterioration in leverage — due to a delay in a recovery of profitability compared to its debt level — could lead to renewed downward rating pressure.

Specifically, the rating will face negative pressure if debt/EBITDA exceeds 3.0x or retained cash flow/net debt is close to 20% for a prolonged period.

The rating could also face renewed negative pressure if the company’s profitability or margins further decline or fail to recover.

The principal methodology used in these ratings was Global Manufacturing Companies (Japanese) published in August 2014. Please see the Credit Policy page on for a copy of this methodology.

Asahi Glass Co., Ltd., headquartered in Tokyo, Japan, is one of the world’s major glass manufacturers.

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