Credit downgrade
limits Daiei’s options

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By Miki Anzai and Noriko Tsutsumi
Bloomberg News

KOBE, JAPAN >> Daiei Inc. has tapped four-fifths of its ¥500 billion ($4.2 billion) bank credit line just as a cut in its credit rating has made it impossible for Japan's No. 2 retailer to raise money by other methods.

Moody's Investors Service cut Daiei's rating two notches from "B2" to "Caa1," seven steps below investment grade, on Sept. 21 amid concern lenders might stop supporting Japan's most-indebted retailer, which operates four stores on Oahu. The lower rating effectively closes the commercial paper market to Daiei, investors said, forcing it to rely more than ever on its banks.

The company doesn't face a cash crunch because "our lenders have repeated they will keep supporting us," Daiei President Kunio Takagi said in an interview. "I want Moody's to raise our rating soonest. I'm angry at their rating action."

Following the rating cut, Daiei used ¥50 billion of its credit line to pay for some of its maturing commercial paper, adding to the ¥350 billion drawn in the six months ended Aug. 31, Takagi said.

Daiei's ¥2.3 trillion in debt is a third more than that of retailer Mycal Corp., which failed in September. While Daiei has been selling shares of subsidiaries and other assets, the company has run out of nonbank financing sources, said Osamu Nakajima, a fund manager with Sumisei Global Investment Management Co., who oversees $1.5 billion in Japanese equities.

"The company has no choice but to rely on financial support from lenders," Nakajima said, adding that he doesn't own any Daiei shares and has no plans to buy any. "I will stay away from debt-ridden companies" such as Daiei.

Daiei's shares have fallen 38 percent to ¥113 this year, while the Topix index of 100 retailers has dropped 9.3 percent for the same period. The stock plunged to a record of ¥94 on Sept. 25 following the Moody's downgrade.

Daiei accumulated debt in the 1980s and early 1990s as it expanded into various businesses, including gas stations, Wendy's Old-Fashioned Hamburger Restaurants, the Fukuoka Daiei Hawks baseball team, and the Ala Moana shopping center.

The company cut 10 percent of its debt, or ¥260 billion, in its fiscal first half as it was granted a ¥500 billion credit line by its main banks: UFJ Holdings Inc., Mizuho Holdings Inc. and Sumitomo Mitsui Banking Corp. By Feb. 28, the end of its fiscal year, Daiei plans to cut an additional ¥60 billion in debt, reducing total debt to ¥2.24 trillion, through property sales, management buyouts, and formation of alliances, Takagi said. The company will announce details of its plan starting next month, he said.