Japan Tobacco Sells Bonds to Repay Debt for Gallaher

Source from:  By Junko Fujita and Takashi Ueno July 18 (Bloomberg) 07/20/2007

Japan Tobacco Inc., the world's third-largest publicly traded cigarette maker, raised 150 billion yen ($1.2 billion) selling bonds to repay debt from its purchase of Gallaher Group Plc. The Tokyo-based company sold bonds in three maturities today, tapping demand for highly rated debt even as the risk of owning its securities rose. Credit assessors cut Japan Tobacco's debt ratings in March, citing concerns the company's finances would deteriorate after it agreed to buy Gallaher, the maker of Benson & Hedges cigarettes in Europe, for 7.5 billion pounds ($15.4 billion). ``Still, Japan Tobacco is a highly rated company and we see its potential of generating cash in the future,'' said Fumihito Gotoh, a credit analyst at UBS Securities Japan Ltd. Japan Tobacco's debt is rated Aa3, the fourth-highest investment grade, by Moody's Investors Service, and one step lower at A+ by Standard & Poor's. The rating companies cut the rankings by one level in March. The maker of Camel cigarettes sold 50 billion yen of bonds maturing in three years to yield 16 basis points more than Japanese government debt with similar maturity, said a banker at Nomura Holdings Inc., who asked not to be identified before an announcement. It also priced 40 billion yen of four-year bonds at an extra yield of 17 basis points and 60 billion yen of five-year debt at a premium of 17 basis points to government securities, the banker said. A basis point is 0.01 percentage point. Biggest Takeover Nippon Yusen K.K., Japan's largest shipping line by sales, in June priced 30 billion yen of five-year bonds to yield 12 basis points more than Japanese government debt. Nippon Yusen is rated A3, three levels lower than Japan Tobacco's rating by Moody's. S&P rates the shipping company BBB, four levels lower than the rating it assigned to Japan Tobacco. Investors demanded a higher risk premium to hold Japan Tobacco's bonds because of Gallaher's lower debt rating. Gallaher is rated A2 by Moody's, two steps below Japan Tobacco's. ``Japan Tobacco gave wider yields on its bonds because of the credit quality at Gallaher,'' said Tsutomu Kawasaki, a fund manager who helps oversee the equivalent of about $18.8 billion in Japanese bonds at Pension Fund Association in Tokyo. Bond Risk Rises Credit-default swaps based on 1 billion yen of Japan Tobacco debt rose to a high of 1.57 million yen on July 5, from 1.05 million yen on Feb. 20, when Bloomberg started compiling the data. The five-year contracts, used to speculate on changes in a borrower's ability to repay debt, increase as investors' perceptions of credit quality deteriorate. The contracts traded at 1.4 million yen yesterday. Credit-default swaps were conceived to protect bondholders against default. They pay the buyer face value in exchange for the underlying securities should the company fail to adhere to its debt agreements. Japan Tobacco completed in April its purchase of Gallaher in the biggest international takeover by a Japanese company. The company borrowed 450 billion yen from Mizuho Bank Ltd., part of Mizuho Financial Group Inc. Japan Tobacco also borrowed 1.9 billion pounds from a group of banks led by Merrill Lynch & Co. The borrowing was refinanced on June 26 using cash and loans from banks including Citigroup Inc., ING Groep NV and Royal Bank of Scotland Group Plc. Japan Tobacco last sold yen-denominated bonds in 1999, when it paid $8 billion for international rights to Camel, Winston and other RJR Nabisco Inc. brands. The cigarette maker raised 150 billion yen from the debt sale. To contact the reporter on this story: Junko Fujita at jfujita@bloomberg.net Enditem