New | Citic stake purchase adds to Itochu default risk
Japanese trading house faces threats of ratings downgrade as the purchase raises its debt level
Itochu's US$5 billion purchase of a stake in China's Citic Ltd has almost doubled the Japanese trading house's default risk amid threats of a ratings downgrade.
Itochu's credit-default swaps jumped to 79.5 basis points on Monday from 47 early last month, when reports appeared about it being in talks to invest in the Chinese conglomerate with Thailand's Charoen Pokphand.
Yen corporate credit-default swaps cost 66.5 basis points on average on Monday, down from a two-month high of 76.5 in mid-December, according to the Markit iTraxx Japan index.
Moody's Investors Service and Standard & Poor's placed Itochu on review for a possible downgrade last week, saying they might lower its rating by one level on the increasing debt load as exposure to the Chinese market rose to a fifth of equity.
Details remain scant on how Itochu and its Thai partner plan to make a return on their 20.6 per cent stake in Citic, built on the base of a Hong Kong unit that has suffered derivatives losses and business disputes on Australian iron ore investments.
"The worsening debt-equity ratios, uncertain business investment strategy going forward and the record outlay for a single investment may cause some negative sentiment," said Hiroki Shibata, an analyst at S&P. "We still cannot determine if the companies' synergies and profit projections through this equity investment will be realised."