Merge-or-Die Choice Cuts Default Risk for Japan Shipping Giants
Merge-or-Die Choice Cuts Default Risk for Japan Shipping Giants
(Bloomberg) -- The president of Japan’s biggest shipper told reporters on Monday it was the sight of container businesses worldwide joining forces or collapsing that encouraged him to team up with his nearest local rivals.
Default risk on the debt of Japan’s top three shippers fell as investors cheered their bid to avoid the fate of failed South Korean operator Hanjin Shipping Co. The planned merger between the container arms of Nippon Yusen KK, Mitsui O.S.K. Lines Ltd. and Kawasaki Kisen Kaisha Ltd. would create a company controlling 7 percent of the world’s box-shipping trade. The companies expect that the move will result in synergy savings of about 110 billion yen ($1.05 billion) a year.
“We saw that a number of companies were collapsing or merging and the size of firms was increasing,” Tadaaki Naito, president of Nippon Yusen, told reporters in Tokyo Monday. “If we don’t have scale, then things aren’t going to look pretty.”
While industry leader A.P. Moller-Maersk A/S has embarked on a restructuring program, companies like Hapag-Lloyd AG and France’s CMA CGM SA have bought out smaller rivals to consolidate. South Korea’s biggest container-shipping line Hanjin Shipping filed for bankruptcy protection in August. Kawasaki Kisen is most heavily dependent on containers for revenue of the three Japanese firms and its credit-default swaps fell the most since April.
“Kawasaki Kisen and Mitsui O.S.K. probably benefit more from the deal, as Nippon Yusen is a pretty good name,” said Tadashi Matsukawa, the Tokyo-based head of fixed-income investment at PineBridge Investments Japan. “The environment for this sector is not very good so this is some good news.”
Mizuho Securities Co. said in a report that the deal is positive for the companies’ credit profiles and it makes sense to seek economies of scale in a business where differentiation is hard. While the merger should take some competitive pressure off the three companies, PineBridge’s Matsukawa said he is still a little skeptical about the benefits from the deal.
The cost to insure Kawasaki Kisen bonds fell 28 basis points to 135 basis points on Monday, according to a CDS trader, who asked not to be identified. That would be the sharpest decline since April 6, according to data provider CMA. Mitsui O.S.K.’s bond risk dropped 26 basis points to 118 basis points, while Nippon Yusen’s decreased 12 points to 67.
“The decision by the three Japanese carriers to merge their container-ship businesses does not come as a complete surprise,” Greg Knowler, a maritime and trade expert at IHS Markit, wrote in a report. “These carrier lines have reported huge losses in some of the past few quarters. What they lack individually is scale, a crucial requirement when competing on the main east-west trades with the big carriers.”
Nippon Yusen’s liner trade business has made a pretax loss for the past three straight quarters, according to a breakdown from the shipping company. Mitsui O.S.K.’s container-ship operations have made a pretax loss for at least the past 20 quarters, while at Kawasaki Kisen, that business has posted a pretax loss for the past five quarters.
“There will obviously be an upside if they are able to rationalize their overlapping shipping routes,” said Hidetoshi Ohashi, the chief credit strategist at Mizuho Securities. “It’s better to do something than not do anything.”
To contact the reporters on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.net, Chris Cooper in Tokyo at ccooper1@bloomberg.net, Tesun Oh in Tokyo at toh15@bloomberg.net. To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net, Andrew Monahan at amonahan@bloomberg.net, Ken McCallum