DBRS Upgrades the Issuer Rating on Komatsu Ltd. to “A,” Changes Trend to Stable

DBRS Limited (DBRS) upgraded the Issuer Rating on Komatsu Ltd. (Komatsu or the Company) to “A” from A (low) and changed the trend to Stable from Positive. DBRS notes that the improvement in operating results has strengthened Komatsu’s financial profile to the middle of the “A” rating range in the year ended March 31, 2019 (F2019). This, in conjunction with a solid business profile, supports the one-notch upgrade on Komatsu’s Issuer Rating to “A” from A (low). Furthermore, DBRS expects Komatsu to maintain its financial profile near current levels, despite uncertainty in the global economy brought on by trade tensions between the world’s two largest economies – China and the United States.

The acquisition of Komatsu Mining Corp. (KMC; formerly known as Joy Global Inc.) has strengthened Komatsu’s business profile with a stronger presence in the global mining sector as well as increased product and market diversity. With improving performance at KMC, operating income (as reported by Komatsu) turned positive in F2019, which also reflects solid progress in Komatsu’s efforts to assimilate and streamline KMC’s operations. DBRS’s concern about the Company’s ability to maintain its business risk profile in the “A” rating range has lessened materially because of the diminishing integration risk associated with the KMC acquisition.

DBRS notes that Komatsu’s financial profile weakened as a result of the increase in debt, partly to fund the KMC acquisition completed on April 7, 2017. Since then, improving operating results have enabled Komatsu to gradually restore its financial profile. DBRS changed the trend on the Issuer Rating to Positive from Stable in June 2018, acknowledging the improving trend in Komatsu’s key credit metrics. At that time, DBRS also stated that further strengthening in the financial profile to the middle of the “A” rating range would lead to a one-notch upgrade on the Issuer Rating (see DBRS press release dated June 18, 2018 for details). Despite headwinds from the ongoing trade negotiations between China and the United States, Komatsu reported operating results stronger than anticipated by DBRS in F2019 and restored its financial profile to within the “A” rating range.

Near term, DBRS notes that there is increasing risk to global economic growth as well as the demand for construction and mining equipment. Nevertheless, DBRS expects the trade disputes between China and the United States to be resolved toward the end of 2019 or mid-2020, at the latest, prompted by the grave consequences to the economies of both countries if not resolved. Based on this scenario, DBRS expects Komatsu to continue to report stable operating results in F2020 and modest improvement in the following years while maintaining a stable financial profile, which will continue to support a stable rating. DBRS considers a further rating upgrade to be unlikely in the near term; however, sustained, material weakening of Komatsu’s financial profile toward the low end of the “A” rating range caused by a large increase in debt and/or a sharp deterioration in operating performance would lead to negative rating actions, although this not anticipated at this time.

Notes:
The principal methodology is Rating Companies in the Industrial Products Industry (February 2019), which can be found on dbrs.com under Methodologies & Criteria.

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 under Related Documents or by contacting us at info@dbrs.com.

This rating was not initiated at the request of the rated entity.

The rated entity did participate in the rating process for this rating action. DBRS did not have access to the accounts and other relevant internal documents of the rated entity in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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