TRIS Rating affirms the “AAA” rating with “stable” outlook on the guaranteed debentures issued by Bangkok Mitsubishi UFJ Lease Co., Ltd. (BMUL). The debentures are fully guaranteed by BMUL’s parent company in Japan, Mitsubishi UFJ Lease & Finance Co., Ltd. (MUL), a company rated “A-/Stable” by S&P Global Ratings and “A3/Stable” by Moody’s Investors Service (Moody’s). The rating of the guaranteed debentures is based on the credit quality of the guarantor and the fact that the guarantee is unconditional and irrevocable.
KEY RATING CONSIDERATIONS
Unconditional and irrevocable guarantee
Under the terms of the guarantee agreement, which is governed by the laws of Japan, the guarantor unconditionally and irrevocably guarantees to pay promptly to the debentureholders all sums payable by BMUL under the obligations of the rated debentures in the event that BMUL has no ability to pay.
In addition, if there is any merger or consolidation of MUL, the successor of MUL shall assume these guaranteed obligations. In case the guarantor fails to pay the amount due after receiving notice, the debentureholders’ representatives can commence legal action against the guarantor in a court in Japan for the amount in default. The guarantee cannot be amended or terminated without the unanimous consent of the debentureholders.
MUFG and MC will continue to support MUL
We expect Mitsubishi UFJ Financial Group Inc. (MUFG) and Mitsubishi Corporation (MC) will continue to support MUL’s business as we view that MUL is a strategically important subsidiary of MUFG. MUL is an affiliate of both MUFG, which holds a 23.4% stake in MUL, and MC, which holds 20.0%.
MUL has a solid customer base because it receives referrals from MUFG and MC. The experience and customer networks of MUFG and MC have helped MUL expand businesses including equipment leases, installment sales and loans to corporate customers, financial services, eco-related services, used equipment trading, and other loan services such as real estate finance.
Sustainable profits
We expect MUL to be able to sustain its profitability in the medium term. The company has been expanding in Japan and abroad, continually diversifying business and increasing efficiency. Net income was 68.7 billion yen in fiscal year 2019 (FY2019), up 8% year-on-year (y-o-y). At the end of March 2019, total operating assets were 5.0 trillion yen, up 3% y-o-y.
MUL’s continuous expansion of operating lease business in the overseas market has resulted in larger asset base. At the end of March 2019, its subsidiaries abroad owned operating assets of 1,912 billion yen, or 38% of MUL’s operating assets, up from 34% last year.
MUL is striving to improve profits by enhancing efficiency in Japan, its home market, while maintaining a broad customer base. MUL announced the three-year Mid-Term Management Plan with a goal of reaching about 70 billion yen in profit by FY2020. MUL expects to achieve this goal by expanding asset finance business in Japan and abroad, via organic growth. In the overseas markets, MUL aims to sustain profitability partly through vendor finance working with Japanese manufacturers abroad.
According to the plan, MUL identifies key segments as the profit drivers, which include various industrial segments, for example, energy and healthcare. The expansion plans also emphasize aviation-related segments including aircraft engine leasing and marine container leasing.
Thus far, the businesses in overseas markets have grown more rapidly than the domestic market. Despite the positive benefits from the overseas expansion efforts seen in sustainable growth and profits, the expansion plans carry some risks. The aggressive expansion into higher-risk countries and new market segments may at times negatively affect MUL’s financial performance.
Acceptable liquidity
In addition to the high probability of receiving extraordinary support from MUFG when needs arise, we believe MUL has the ability to mitigate liquidity risk from asset-liability mismatch derived from reliance on short-term borrowings. This is due to its access to credit facilities from various financial institutions. Apart from bank loans, MUL can issue bonds and commercial papers (CPs) or use securitization to support funding needs.
Leverage remains moderate
In TRIS Rating’s view, MUL’s leverage is moderate. The debt to equity (D/E) ratio averaged 7 times from FY2016-FY2018. At the end of March 2019, the D/E ratio was 7.1 times. The need to fund new opportunities may lead to rapid rise in borrowing and push leverage higher in the future. Nonetheless, we expect MUL will try to maintain leverage at a moderate level as a result of solid profits which strengthen the capital base.
BASE-CASE ASSUMPTIONS
• MUL’s credit ratings assigned by S&P Global Ratings and Moody’s will still be maintained.
• The unconditional and irrevocable guarantee undertaken by MUL on BMUL’s debentures will remains intact.
RATING OUTLOOK
The “stable” outlook for BMUL’s guaranteed debentures reflects the creditworthiness of its guarantor, MUL, a strategically important affiliate of MUFG. MUL has an “A-” rating with a “stable” outlook from S&P Global Ratings and an “A3” rating with a “stable” outlook from Moody’s.
RATING SENSITIVITIES
The rating and/or outlook on BMUL’s guaranteed debentures could be revised downward should there be deterioration in MUL’s creditworthiness.
COMPANY OVERVIEW
MUL was established in 1971 as Diamond Lease Co., Ltd. After a merger with UFJ Central Leasing Co., Ltd. in April 2007, the company was renamed MUL. As of 31 March 2019, MUFG and its affiliated banks, including MUFG Bank and Mitsubishi UFJ Trust and Banking Corp., owned a combined 23.4% stake in MUL. MC owned a 20.0% stake.
MUL sees Thailand as a growing market. BMUL, a subsidiary, is the means to capture new opportunities in Thailand. BMUL has a long track record as a machinery and equipment leasing company in Thailand. BMUL was established in 1991, as a cooperative effort with Bangkok Bank PLC (BBL) in Thailand. BMUL has two major business segments: machinery and equipment leasing, and automobile maintenance leasing. BMUL’s major shareholder is MUL. MUL owns 44.0% of BMUL while BBL and its affiliated companies together hold 34.0%. At the end of March 2019, BMUL’s operating assets accounted for 3.0% of MUL’s overseas operating assets.
MUL provides extensive business and financial support to BMUL. For example, MUL provides operating procedures and risk management practices, plus new innovative products. The debt guarantee such as the guarantee for the debentures, is one example of the kind of financial support BMUL receives as MUL’s strategic subsidiary.
The strong support BMUL receives from its parent company is expected to continue for the foreseeable future. This support is consistent with MUL’s emphasis on new opportunities overseas.
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