DBRS Places Komatsu Ltd. Under Review with Developing Implications

DBRS Limited (DBRS) has today placed the Issuer Rating of A (low) of Komatsu Ltd. (Komatsu or the Company) Under Review with Developing Implications following the Company’s announcement on July 21, 2016, that it has signed a definitive agreement with Joy Global Inc. (Joy) under which Komatsu America Corp., a wholly owned subsidiary of Komatsu in the United States, will acquire 100% ownership of Joy for USD 28.30 per share, costing approximately USD 2,891.0 million (or ¥303.6 billion at ¥105.00 per U.S. dollar). Komatsu plans to finance the acquisition through funds on hand and bank loans. The acquisition is expected to close mid-2017, subject to the approval of Joy’s shareholders and the receipt of all necessary regulatory approvals under the laws of the relevant countries. DBRS expects to resolve the Under Review with Developing Implications status shortly after the close of the transaction.

The acquisition of Joy is positive for Komatsu’s business profile. The addition of Joy would strengthen Komatsu’s mining equipment business by broadening the surface mining equipment portfolio with complementary products and expanding Komatsu’s coverage to the underground mining equipment segment. Moreover, Joy has expertise in improving productivity and safety and optimizing customer operations using connected data systems, analytics and automation, which should augment similar ongoing efforts at Komatsu to further enhance its competitive position.

DBRS notes that Komatsu will likely show a significant increase in debt post-acquisition and a resultant weakening of its financial profile. Komatsu will assume Joy’s debt, approximately USD 1.0 billion as at April 2016. Komatsu plans to fund the acquisition with cash and bank loans. Even though Komatsu has cash on hand and strong internal cash-generation capacity, the amount of acquisition debt that Komatsu may incur is uncertain in view of the current challenging operating environment. The capital equipment industry, especially the mining sector, is amid a sharp downturn precipitated by weak commodity prices and the resultant curtailment of capital spending by most mining companies. Joy has reported sharply lower operating results since F2013 (the year ended October 26, 2013), and Komatsu has also reported a modest decline in operating results in F2016 (the year ended March 31, 2016). Moreover, DBRS expects (1) equipment market conditions to remain challenging in the near term and (2) the operating performance of both companies not to show meaningful improvements. DBRS also expects Komatsu’s financial profile to be weaker post-acquisition because of higher debt levels. The Under Review with Developing Implications status reflects that the level of deterioration is difficult to assess at this time and that Komatsu’s financial profile has cushion to absorb a moderate deterioration and remain compatible with the current rating. Furthermore, DBRS needs to assess Komatsu’s outlook and recovery potential before taking any rating actions, even if Komatsu’s financial profile is deemed to be aggressive post-acquisition.

Joy, based in Milwaukee, Wisconsin, is a worldwide mining machinery and services company for advanced original equipment and parts for underground- and surface-mining applications as well as for material-handling systems and components used in a variety of applications. The Company reported net sales of USD 3.2 billion and net income before non-recurring items of USD 160.0 million (DBRS adjusted) in F2015 (the year ended October 30, 2015).

Notes:
All figures are in Japanese yen unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Industrial Products Industry, which can be found on our website under Methodologies.

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