Japan Credit Market Update: Spreads rise on weak stocks and rating downgrades

The cost of credit protection on Japanese companies continued to rise this week, as weakness in the stock market prompted many players to hedge their credit exposure.

“People are getting nervous and reconsidering their positions,” said one trader.

Equity markets in Japan are still on a downward slope because of declining US stocks, weak economic data and a stronger yen against the US dollar. Market observers say the combination of all three factors is increasing concern that Japanese exporters may suffer from falling demand in the US.

Japanese stocks had recovered during the week, but by Friday, the Nikkei 225 average index dropped below the 10,000-level again. The index was trading around 9,681 Friday, compared with 9,793 Thursday and 9,591 last Friday.

Electronics sector names were among the hardest hit, given that most of Japan’s electronics revenues come from overseas. Computer maker NEC Corp, for instance, saw its stock drop to ¥671, below its 52-week low of ¥700. Protection on the name rose to around 200 basis points on Friday, after already rising by about 20bp last week to 195bp. NEC’s credit default swap spread was around 130bp two months ago.

To make things worse for electronics company Fujitsu, credit ratings agency Standard & Poor’s downgraded the firm’s rating to triple-B-minus from triple-B due to “weakness in earnings from its mainstay telecommunication equipment and semiconductor businesses, and a deterioration in its financial profile caused by increased debt usage,” according to the ratings report. Protection on Fujitsu was quoted at 220bp Friday, up from 170bp Thursday, 155bp a week ago and 95bp two months ago.

“And this is not the end (of the rise in cost of protection) because the market is short on protection,” said another trader.