Kobe Steel Joins Ranks of Japan Bonds Reviving After Scandal

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(Bloomberg) -- Kobe Steel Ltd.’s president may be resigning after even more fake data was uncovered at the Japanese steelmaker, but as far as the bond market is concerned the scandal is largely over.

Yield premiums on the company’s debt have fallen to five-month lows since the firm on Tuesday announced a leadership change and steps to prevent more data falsification. The firm said this week that its data fabrications date back decades and an independent investigation found further instances of misconduct. But investors are more likely to focus on Kobe Steel’s improving profit outlook and the decreased risk of massive recalls, according to SMBC Nikko Securities Inc.

The brighter bond market sentiment toward Kobe Steel is the latest instance of a Japanese company whose debt price tumbled after misconducts came to light, only to recover later after investor panic subsided. Toshiba Corp., bogged down in an accounting scandal several years ago, has seen its bonds rebound, while Olympus Corp., which got into trouble for covering up past losses, was able to sell its first notes since 1996 last year. Kobe Steel’s bond premiums are more likely to drop further rather than rise, according to SMBC Nikko.

“It’s kind of natural for people to react sharply when they encounter risks they haven’t factored in,” said Kiichiro Hayashi, a credit analyst SMBC Nikko in Tokyo, referring to previous declines in scandal-hit companies’ bonds. In the case of a raw material maker like Kobe Steel, “it was hard to get a read on the situation because its products are used widely,” he said.

Kobe Steel said on Tuesday its president Hiroya Kawasaki would step down. It also announced prevention measures, including automating product tests.

The debt market took the news in stride. The spread on Kobe Steel’s longest bonds maturing in 2025 has fallen 4 basis points this week to 135, the lowest since before the scandal.

The 112 year-old firm’s bond risk has also come down since October, when it said it had misrepresented the strength and durability of parts sent to hundreds of customers. The cost to insure its notes has dropped to 98 basis points from a four-year high of 385 last year, amid receding expectations the company will have to pay huge compensations.

“It now seems unlikely that things would keep getting worse,’’ said Yoshihiro Nakatani, senior fund manager at Asahi Life Asset Management.

Even so, there is still hesitation among some investors. Asahi Life Asset’s clients are keen for it to invest in companies that are governed well these days, he said -- the steelmaker would be hard for it to buy considering that.

Risks facing Kobe Steel’s creditworthiness include foreign lawsuits against its data fabrication, according to Toshiyasu Ohashi, chief credit analyst at Daiwa Securities Group Inc.

See also: Kobe Steel names Mitsugu Yamaguchi new president

Since the scandal emerged, 30 billion yen ($281 million) of the firm’s notes have matured, and the company has issued no replacement, according to Bloomberg-compiled data. It has 146 billion yen in bonds outstanding, 10 billion yen of which will be due April 24.

Still, Kobe Steel holds plenty of cash: it had 139.7 billion yen in cash and deposits as of Dec. 31. It’s also forecasting a net income of 45 billion yen for the year ending this month, compared with a loss a year earlier.

“Now isn’t the time to worry about the firm’s cash holdings or its ability to repay debt,” Hayashi said.

©2018 Bloomberg L.P.

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