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Takata bonds most distressed after air bags tied to five deaths

Takata Corp.'s bonds are Japan's most distressed after its air bags were tied to five deaths, raising the debt risk of its biggest customer, Honda Motor Co.

Takata's notes due 2021 plunged 18 percent since Oct. 20 to 80.69 yen yesterday, the lowest price for a listed Japanese company's debt, after a U.S. recall since last year of almost 8 million cars with defective air bags it made, according to data compiled by Bloomberg. The bond risk of Honda, which built most of the recalled vehicles, is three basis points from a 20-month high of 37 reached on Oct. 31, according to CMA data. The average is 93 basis points for automakers worldwide.

The bonds of the auto parts maker plunged after safety devices on its air bags deploying with too much force were linked to five deaths and 139 injuries, and it was accused in a U.S. lawsuit of a multi-year coverup. Honda, Japan's third- biggest carmaker, has recalled more than 6 million vehicles globally since 2008 because of the flaw.

“We can't touch Takata bonds now, because it doesn't look like things will get better right away, and there will probably be more news,” said Hidetoshi Ohashi, the chief executive officer of Japan Credit Advisory Co. “Honda might have been affected by speculation because its spread was so tight.”

Takata said yesterday it tested air bags in 2004 for an issue separate from the flaw at the center of an auto-safety crisis, disputing a report by the New York Times last week. The results of the tests weren't suppressed or hidden, it said in an e-mailed statement. The New York Times report prompted calls by U.S. senators for the Justice Department to conduct a criminal investigation and was cited in the U.S. lawsuit.

Malaysia Death

Defective Takata air bags caused the July 27 death in Malaysia of a woman in a 2003 City subcompact, Akemi Ando, a Honda spokeswoman, said yesterday. The automaker received notification of the accident a month later and will recall 170,000 additional vehicles worldwide, she said.

The suit in Los Angeles federal court says Takata discovered the flaw in tests about a decade ago and then destroyed records of the study. Honda was also named as a defendant in the Nov. 7 class-action complaint filed by eight consumers.

The price of Takata's 2021 bonds is lower than the 89.63 yen for debt due in 2040 of Tokyo Electric Power Co., whose Fukushima reactors caused the 2011 nuclear crisis, and the 96.09 yen on September 2019 paper of Sharp Corp., which had 921 billion yen ($7.9 billion) in losses in the two years to March 2013, according to data compiled by Bloomberg.

Surging Spread

The yield premium on Takata's notes has surged to 384 basis points over sovereign debt, compared with a 24 basis-point spread when they were issued in March. The jump comes at a time when Bank of Japan monetary stimulus has dragged down Japanese companies' average debt spread to 21 basis points, just shy of a seven-year low, according to Bank of America Merrill Lynch data. A basis point is 0.01 percentage point.

Japan's benchmark 10-year bond yield was at 0.495 percent, the lowest in the world after Switzerland, in the wake of the BOJ's record debt buying. The yen has tumbled 9.3 percent this year to 116.09 per dollar as of 9:46 a.m. in Tokyo.

“Current spreads over JGBs are too wide in our view given the strength of core earnings” of Takata, analysts Takayuki Atake and Kentaro Harada of SMBC Nikko Securities Inc. in Tokyo wrote in a report dated Nov. 7. “While volatile movements are possible, we forecast that spreads will steadily normalize.”

Takata's operating profit rose 81 percent in the year ended March 31 to 26.3 billion yen. The company had a long-term debt- to-equity ratio of 42 percent, in line with its peers, according to data compiled by Bloomberg.

Honda Woes

For Honda, the car recall comes after it already forecast a profit decline due to weakening deliveries to China and Japan. The Tokyo-based automaker expects net income to drop 1.6 percent in the year started April to 565 billion yen, the company said last month.

The seven basis-point increase in Honda's credit-default swaps since the end of September compares with no change in the contract for Toyota Motor Corp., the nation's No. 1 carmaker, and a basis-point decline for Nissan Motor Co., the second- largest auto company, according to CMA data.

Considering past U.S. auto recalls, “it's possible the U.S. Justice Department will seek an appropriate amount” from Honda, said Shintaro Niimura, a credit analyst in Tokyo at Nomura Holdings Inc.

Toyota Recalls

Toyota has had almost $3 billion in legal payouts related to its unintended-acceleration recalls of 10 million vehicles in 2009 and 2010. Settlements include the record $1.2 billion fine paid to end a criminal probe by the U.S. Justice Department in March.

Takata spokeswoman Akiko Watanabe declined to comment on bond prices. She said the company takes the developments seriously and will cooperate with automakers on the recalls. A Honda spokesman, Teruhiko Tatebe, declined to comment.

Honda has an A1 credit rating from Moody's Investors Service and an A+ score from Standard & Poor's, the fifth- highest level for both. Tokyo-based Takata has an A grade from Japan Credit Rating Agency Ltd. with a negative outlook. JCR said on Nov. 6 that it will look at any additional losses from the recalls in coming up with its evaluation.

“We're looking at how much it will be downgraded,” said Ohashi at Japan Credit Advisory, which advises investment funds about the nation's debt market. “We want to see what happens with prices if there are short-term distortions in supply and demand” due to rating moves, he said.

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