Research: Rating Action: Moody’s Confirms AGC at A2, Changes Outlook to Stable

Tokyo, August 22, 2022 — Moody’s Japan KK has affirmed AGC Inc.’s A2 issuer rating.

At the same time, Moody’s revised AGC’s outlook to stable from negative.

Moody’s also affirmed the Prime-1-backed commercial paper rating of the company’s subsidiary, AGC Capital, Inc.

“AGC’s A2 rating affirmation and outlook change to stable reflects the company’s progress in reducing the debt it incurred at the height of the pandemic and strengthening the credit profile. fundamental in its Chemicals and Glass segments,” said Dean Enjo of Moody’s. Vice President and Principal Analyst.

“AGC’s disciplined financial policy and the growth of its strategic businesses less sensitive to commodity prices will further diversify and improve its credit metrics,” adds Enjo.

RATINGS RATIONALE

AGC’s cash flow has improved more than Moody’s earlier expectations since the 2020 decline due to the pandemic. These improvements were mainly driven by a turnaround in its Chemicals segment with widening spreads and favorable pricing in its chlor-alkali and fluorochemicals/specialty chemicals businesses. Although Moody’s believes commodity prices and spreads will ease, AGC’s overall chemicals segment, which also includes less cyclical chemicals, will remain a major component of its earnings mix.

In addition, the company’s Glass segment, which was previously loss-making, has returned to profitability since 2021. AGC’s architectural glass business has benefited from a rebound in construction globally, as well as from stricter environmental building regulations in key markets such as Europe. Rising demand for its architectural glass has offset weakness in its automotive glass business, where it has less pricing power and remains affected by supply chain shortages.

AGC’s improved operating performance enabled the company to deleverage faster than expected by Moody’s. The company used its discretionary cash flow to pay off about a quarter of its 2020 debt while maintaining excellent liquidity. As a result, Moody’s expects AGC’s debt to EBITDA leverage to remain below 2x, below the peak of 3.7x in 2020 and the low range of 2x in the years before the pandemic.

AGC’s A2 rating is also supported by a well-diversified product portfolio that spans the electronics, glass and chemicals segments, as well as a dominant market share position in Southeast Asia for its chlor-alkali activity. In addition, the growth of its strategic businesses, which include products less sensitive to commodity cycles, will further strengthen and diversify its credit profile.

The A2 rating reflects AGC’s fundamental credit profile. Moody’s perceived a gradual decline in institutional support in Japan, as likely support providers, including Japanese banks, became more selective in supporting companies based on their importance to the Japanese economy.

The Prime-1 rating of AGC Capital, Inc.’s (AGCC) commercial paper program is based on collateral provided by its parent company, AGC.

FACTORS THAT MAY LEAD TO IMPROVEMENT OR DEGRADATION OF RATINGS

The stable outlook reflects Moody’s expectation that AGC will maintain profitability despite a slowdown in commodity prices in its Chemicals segment, driven by growth in its non-commodity-focused products diversified across its Glass, Electronics and Chemicals segments. . The outlook is also based on Moody’s expectation that AGC will maintain its prudent financial policy, including a positive free cash flow position and gradual debt reduction.

Moody’s is unlikely to upgrade AGC given that its A2 rating is one notch lower than Japan’s current sovereign rating. An upgrade may be considered if the company maintains a much lower level of debt throughout the economic cycle and develops a greater level of diversity from the growth of its less cyclical strategic businesses. Upward pressure on the rating could arise, for example, if the company maintains its EBITDA margin above 30% and its debt/EBITDA below 1x.

Moody’s may consider downgrading AGC’s rating if the company is unable to maintain profitability as expected as some of its flagship products hit a cyclical high; sustainably higher leverage resulting from a larger-than-expected acquisition or change in financial policy, such as aggressive shareholder returns; or if the company fails to maintain its positive free cash flow throughout the economic cycle. Credit metrics indicating downward pressure on the rating include an EBITDA margin held well below 20% and a debt-to-EBITDA ratio above 2.2x.

The main methodology used in these ratings was Chemicals (Japanese) published in July 2022 and available at https://ratings.moodys.com/api/rmc-documents/391136. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Based in Tokyo, AGC Inc. is a diversified company with a chemical business in Asia and a leading position among the world’s leading glass manufacturers.

REGULATORY INFORMATION

For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory information regarding each rating of a subsequently issued bond or note of the same series, category/class of debt, security or under a program for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a media provider, this announcement provides certain regulatory information relating to the credit rating action on the media provider and each particular credit rating action for securities whose credit ratings are derived from the support provider’s credit rating. For the provisional ratings, this press release provides certain regulatory information relating to the provisional rating assigned, and to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and conditions of the transaction n have not changed prior to the final rating being assigned in a way that would have affected the rating. For more information, please see the issuer/transaction page of the respective issuer at https://ratings.moodys.com.

For all relevant securities or rated entities receiving direct credit support from the lead entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action , the associated regulatory information will be that of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to the jurisdiction: Ancillary services, Disclosures to the rated entity, Disclosures to be provided by the rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued without modification as a result of such disclosure.

These notes are solicited. Please refer to Moody’s Policy for the Designation and Assignment of Unsolicited Credit Ratings available on its website. https://ratings.moodys.com.

The regulatory information contained in this press release applies to the credit rating and, if applicable, the outlook or rating revision relating thereto.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis are available at https://ratings.moodys.com/documents/PBC_1288235.

The worldwide credit rating on this credit rating announcement was issued by one of Moody’s affiliates outside the EU and is approved by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main. -le-Main 60322, Germany, in accordance with Article 4(3) of Regulation (EC) No 1060/2009 on credit rating agencies. Further information on the EU approval status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

The worldwide credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the UK and is approved by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the United Kingdom. . Further information on the UK endorsement status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and Moody’s legal entity that issued the rating.

Please see the issuer/transaction page at https://ratings.moodys.com for additional regulatory information for each credit rating.

Dean Enjo
Vice President – Senior Analyst
Corporate Finance Group
Moody’s Japan KK
Atago Green Hills Tower Mori 20fl
2-5-1 Atago, Minato-ku
Tokyo, 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Customer service: 81 3 5408 4100

Mihoko Manabe
Associate General Manager
Corporate Finance Group
JOURNALISTS: 81 3 5408 4110
Customer service: 81 3 5408 4100

Release Office:
Moody’s Japan KK
Atago Green Hills Tower Mori 20fl
2-5-1 Atago, Minato-ku
Tokyo, 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Customer service: 81 3 5408 4100

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