DBRS Changes Trend to Positive and Confirms Komatsu Ltd.’s Issuer Rating at A (low)

DBRS Limited (DBRS) changed the trend on Komatsu Ltd. (Komatsu or the Company) to Positive from Stable and confirmed the Issuer Rating at A (low). The confirmation recognizes that the combination of Komatsu’s business risk profile, strengthened by the acquisition of Komatsu Mining Corp. (KMC, formerly known as Joy Global Inc.) and its financial risk profile, initially weakened by the debt incurred to partly fund the acquisition, remains compatible with the current rating. The Positive trend reflects that the financial profile, while initially weakened by the additional debt, has recovered at a faster pace than expected by DBRS because of much stronger than anticipated operating results and could allow the Issuer Rating to be upgraded by one notch if Komatsu can further strengthen and stabilize its financial profile in the middle of the “A” rating range.

The acquisition of KMC strengthens Komatsu’s business profile, expands Komatsu’s market coverage to include underground mining and enhances Komatsu’s surface mining product offerings with complementary products such as dragline and shovels. Increased product/market diversity and cross-selling opportunities will improve Komatsu’s competitiveness. The integration of KMC is progressing as planned. DBRS notes that the successful integration of KMC solidifies Komatsu’s business profile in the middle of the “A” range.

The partly debt-financed acquisition of KMC has weakened Komatsu’s financial risk profile. However, DBRS had anticipated only a modest improvement in the equipment market in the latter half of 2017 and Komatsu to report modestly better operating results for F2018 (year ended March 31, 2018) versus F2017 and thus Komatsu’s financial profile to remain at the high end of the BBB rating range. In fact, the construction market strengthened markedly through 2017, especially in North America, China and South Asia. As a result, Komatsu performed well above DBRS’s expectations in F2018 and key credit metrics recovered more quickly to the low end of the “A” range despite higher debt levels. DBRS anticipates market conditions to remain favourable in the near term. Thus, DBRS expects stronger operating results and a modest reduction in debt to strengthen the Company’s financial profile to the middle of the “A” range in the near term, which could support a one-notch upgrade to the Issuer Rating.

However, recent trade tension between the United States and its key trading partners (notably China) are a concern. Further escalation of trade tariffs could slow the global economy, reverse the rising trend in construction activities and derail the nascent recovery in the mining sector. A slowdown in end user demand will likely impede the recovery of Komatsu’s financial profile. DBRS would change the trend back to Stable from Positive if Komatsu cannot maintain its current improving trend. Nevertheless, DBRS notes that Komatsu’s financial profile has a comfortable cushion to weather a meaningful deterioration in operating performance and would remain acceptable for the current rating. DBRS does not anticipate any negative rating action unless Komatsu’s financial profile weakened sharply to the middle of the BBB range for an extended period.

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

The principal methodology is Rating Companies in the Industrial Products Industry (February 7, 2018), which can be found on dbrs.com under Methodologies.

The primary sources of information used for this rating include company disclosures, discussion with the company and other sources such as regulators and Bloomberg. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

The rated entity did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant documents of the rated entity.

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