(To be sent story daily, click here. For columns, TOP CM.)
Aug. 16 (Bloomberg) -- Isetan Mitsukoshi Holdings Ltd., Japan’s biggest department store operator, is selling its longest bond in 16 years to lock in borrowing costs ahead of Prime Minister Shinzo Abe’s planned consumption tax increase.
The retailer plans an offering of notes maturing in a decade, the company’s longest tenor since a sale of 10-year debt in November 1997, data compiled by Bloomberg show. Marui Group Co., Japan’s fourth-biggest department store by market value, last week paid a yield premium of 21 basis points more than government bonds to sell three-year securities. That compares with an average 33 basis point spread for the country’s corporate notes and 153 in the U.S., Bank of America Merrill Lynch index data show.
Japanese retailers are bracing for the Sept. 9 release of economic growth data that Abe will use to decide whether the stimulus-fueled recovery is strong enough to sustain a 3 percentage point increase in the levy in April. A tax change risks curtailing the longest streak of sales gains at Tokyo’s department stores since 1996 and undermining the prime minister’s efforts to end 15 years of deflation.
“Sales at department stores will slump as an immediate consequence of the consumption tax hike,” said Yusuke Ueda, a Tokyo-based research analyst at Bank of America’s Merrill Lynch unit. “These companies possess considerable fixed assets, and much of that is land, so a payment default is still a distant possibility.”
Isetan Mitsukoshi hired banks for a sale of 10-year bonds, according to an Aug. 12 statement from Mitsubishi UFJ Morgan Stanley Securities Co., one of the four underwriters of the deal. Isetan Co., a retailer that merged with Mitsukoshi Ltd. to form the holding company in 2008, offered 20 billion yen ($204 million) of 2.825 percent, 10-year notes in November 1997, according to data compiled by Bloomberg.
Isetan started as a kimono store in 1886, while Mitsukoshi’s history goes back to 1673, according to the retailers’ websites.
The tax on consumption is due to be raised to 8 percent in April, from the current 5 percent, and to 10 percent in October 2015. Abe’s administration is forming a panel to analyze whether and how to proceed with the increase.
“Barring major remodeling, the retailer’s cash flow should be sufficient enough,” said Taro Sakamoto, a Tokyo-based credit analyst at Mizuho Securities Co. “Looking 10 years ahead, though, it’s difficult to say.”
Isetan Mitsukoshi sold 10 billion yen of 0.594 percent five-year bonds in May at a spread of 18 basis points, the data show. That compares with a 0.97 percent yield for similar-tenor notes in 2010.
“We want to lock in borrowing costs for our long-term funding needs as interest rates may go up,” Motoko Yoshida, manager at Isetan Mitsukoshi’s investor relations department, said in a telephone interview.
Elsewhere in Japan’s credit markets, Jupiter Telecommunications Co. registered to sell as much as 120 billion yen of bonds, according to filing yesterday with the Finance Ministry. The provider of cable television broadcasting services last offered debt in June 2009, raising 10 billion yen via 1.51 percent notes due 2014, data compiled by Bloomberg show.
The country’s corporate bonds have returned 0.09 percent this month, compared with a 0.25 percent gain for the nation’s sovereign notes, according to Bank of America Merrill Lynch index data. Company debt worldwide has lost 0.39 percent.
Japan’s benchmark 10-year yield fell one basis point, or 0.01 percentage point, to 0.74 percent yesterday, the lowest rate in the world. The yen strengthened 0.2 percent to 97.91 per dollar as of 6:08 p.m. in Tokyo yesterday.
Department stores sales in Tokyo, which accounts for 26 percent of the total, jumped 9.4 percent in June from a year earlier to 136.7 billion yen, data compiled by Japan Department Stores Association show. The increase, the biggest since March 2012, follows a 5.1 percent advance in May, according to the industry group, which includes Isetan Mitsukoshi, Takashimaya Co. and J. Front Retailing Co.
Nationwide sales at department stores fell 0.1 percent in 2012, after slumping every year since at least 2004, according to the data. The operators are closing struggling regional outlets and combining retail space with restaurants, art galleries and movie theaters to attract shoppers and fend off competition from online vendors such as Rakuten Inc. and Amazon.com Inc.
“In the mid-term, the whole department store business model is being undercut by price competition from Internet-based retailers,” Merrill Lynch’s Ueda said. “Except for the few stores in central Tokyo, this paradigm is pretty much at an end.”
Rakuten, Japan’s biggest online retailer, reported an operating income of 72.3 billion yen in the fiscal year to Dec. 31 on 443.5 billion yen in sales. The company’s 19 percent profit margin compares with 2.2 percent for Isetan Mitsukoshi, which had 1.24 trillion yen in sales last fiscal year, according to data compiled by Bloomberg.
The department stores are also facing an aging consumer base and expectations salary-earning taxpayers will spend more on supporting dependent seniors. One in four Japanese is over 65. By 2060, the proportion will swell to 40 percent, according to government data.
Isetan Mitsukoshi has 34 billion yen of outstanding bonds, including 12 billion yen of debt maturing next month, data compiled by Bloomberg show. Japan’s Rating and Investment Information Inc. ranks the company A-, its fourth-lowest investment grade, with a stable outlook.
“The department store business requires a certain population density, so areas lacking the concentration of people and those with low economic output can’t support operations,” said Mikihiko Yamato, deputy head of research at JI Asia in Tokyo. “As Japan’s population shrinks, so probably will the number of players in the industry.”
--With assistance from Yuki Yamaguchi in Tokyo. Editors: Pavel Alpeyev, Ken McCallum