DBRS Maintains Komatsu Ltd. Under Review with Developing Implications

DBRS Limited (DBRS) has today maintained the Issuer Rating of Komatsu Ltd. (Komatsu or the Company) at A (low) and Under Review with Developing Implications pending the completion of the acquisition of Joy Global Inc. (Joy Global) expected by mid-2017. At the time of writing, the transaction was approved by the shareholders of Joy Global, but not by all the necessary regulatory authorities.

On July 21, 2016, Komatsu announced that it had signed a definitive agreement under which Komatsu America Corp., a wholly owned subsidiary of the Company in the United States, will acquire 100% ownership of Joy Global for USD 28.30 per share, costing approximately USD 2,891 million. At the time, DBRS stated that the acquisition of Joy Global is positive for Komatsu’s business profile (see DBRS press release dated July 25, 2016). However, Komatsu’s financial profile will likely weaken from the significant increase in debt levels.

The global capital equipment market has remained soft with varied regional market conditions since the announcement and operating results at both companies were broadly in line with expectations. The Company has reported lower operating results and a weaker financial profile as anticipated in the first nine months of F2017 (year ending March 31, 2017). Development at Joy Global has been more positive. Operating income (excluding restructuring and impairment charges) showed a modest improvement despite continued decline in net sales. Furthermore, gross debt has been relatively steady at approximately USD 1.0 billion, but net debt declined to USD 631 million from USD 846 million.

In the near term, DBRS expects the capital equipment industry to remain challenging even though there are signs of stabilization and a more meaningful recovery in the equipment business is not likely until late 2017. Komatsu has forecasted lower results for 2017, and the year-over-year decline would be similar to the nine month results year-to-date. Nevertheless, DBRS expects the Company to report a modest improvement in F2018, supported by improving market conditions.

Currently, the level of deterioration of Komatsu’s financial profile subsequent to the acquisition remains difficult to assess because of uncertainty regarding the post-acquisition debt level. The eventual amount of acquisition debt, the amount of assumed debt from Joy Global and the relative value of the Japanese yen against the U.S. dollar would all have a meaningful impact on the Company’s capital structure and the resulting financial profile. Nevertheless, DBRS notes that Komatsu’s current financial profile still has cushion to absorb further moderate deterioration and remain compatible with the current rating. Furthermore, DBRS will assess the Company’s outlook and recovery potential, even if Komatsu’s financial profile is deemed to be aggressive for the current rating post-acquisition, in deciding on any rating actions.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.