Central Japan Railway Co. (9022)’s bond risk fell to a six-year low as record earningshelp pay for the $47 billion needed to build the world’s fastest train line.
The cost to insure its debt against default fell to 18 basis points this month, a level unseen since January 2008. The yield on 15 billion yen ($137 million) of 18-year bonds sold by the operator has dropped about eight basis points since they were sold on Sept. 12. Work starts this fiscal year on the magnetic levitation train link between Tokyo and Nagoya, which will run at 500 kilometers (311 miles) per hour.
Central Japan’s debt protection cost is less than a quarter of the peak in March 2009, when the global financial crisis exacerbated concerns over the company’s plan to spend 5.1 trillion yen on the maglev line. Sentiment toward the company’s debt, rated fourth-highest Aa3 by Moody’s Investors Service, improved after a report this month showed bullet train passengers rose to a record since April 1.
“The increase in passengers is helping drive up operating cash flow,” said Yusuke Ueda, a Tokyo-based credit analyst at Bank of America Merrill Lynch. “Looking at cash flow, JR Central isn’t going to have a problem paying for the maglev, which was a concern. Its earnings are very reliable.”
The maglev will more than halve travel time between Tokyo and Nagoya, Japan’s third-largest city, to 40 minutes for the 286-kilometer journey when it opens in 2027. The line uses magnetic power to propel trains that float above the ground, traveling at almost double the 270 kph of current bullet trains between the two cities.
To make the line straight enough for that speed, the company has to dig 248 kilometers of tunnels, or almost five times the length of Europe’s 50-kilometer Channel Tunnel.
The Nagoya-based railway operator will use cash flow, the highest of any railway operator in the world, and issue five-year, 10-year and 20-year bonds in equal amounts to help finance the project. The line won’t rely on government funds.
“JR Central is taking advantage of investor demand for longer maturities given its high credit rating,” Bank of America’s Ueda said. “By issuing longer bonds now it also helps it in the future, as there are less concerns it will run out of cash repaying debt.”
The company’s free cash flow per basic share rose to a record last fiscal year, according to data compiled by Bloomberg going back to 2000. The company’s stock traded at 14,845 yen as of 10:16 a.m. in Tokyo today. Free cash flow is money from operations minus capital spending.
JR Central had 2.4 trillion yen in interest-bearing debt at the end of March and has said it plans to ensure total borrowings don’t exceed 5 trillion yen. They peaked at 5.5 trillion yen in fiscal 1991. So far this year, it has issued three sets of 20-year notes and this month’s 18-year bonds.
“We’re taking advantage of the low-interest environment to issue long bonds,” said Yohei Hamasaki, a Tokyo-based spokesman for JR Central. “We haven’t decided our issuance schedule to fund the maglev link yet.”
Japanese 10-year government bond yields are the world’s lowest after Switzerland as the Bank of Japan carries out unprecedented monetary easing to spur economic growth. The stimulus has pushed the yen to a six-year low versus the dollar.
JR Central predicts net income will increase 3.6 percent to 265 billion yen in the fiscal year started April 1, after reaching a record last business year. The train operator has made a profit every year since it was listed in 1997.
“The current financial funding structure is very, very easy,” said Mana Nakazora, chief credit analyst at BNP Paribas Securities Japan Ltd. in Tokyo. “They have great profitability. Maybe all banks would want to lend to them.” Bloomberg