Tuesday February 19, 5:44 am Eastern Time
Top Japan brokerages hit by Moody's downgrades
By Miki Shimogori

TOKYO, Feb 19 (Reuters) - Moody's Investors Service sent shivers through Japan's ailing brokerage sector on Tuesday by cutting its ratings on second- and third-ranked Daiwa Securities Group and Nikko Cordial Corp to only a notch above junk status.

The downgrade dealt an added blow to a sector hit by the double whammy of dwindling stockbroking and other commissions amid weak Tokyo stocks and painful falls in their own shares.

The move came only hours after Moody's lowered the rating outlook of domestic industry leader Nomura Holdings Inc to stable from positive, citing medium-term challenges faced within its core business, including retail broking.

Shares in Nikko ended down 8.79 percent at 415, taking a 63 percent dive from a 2001 peak marked last May. Daiwa dropped 5.91 percent to 653 yen, while Nomura fell 6.44 percent to 1,352 yen.

The declines led to a 6.17 percent fall in the sector's sub-index, making it the weakest sector on the day.

Moody's said the long-term debt rating of Daiwa Securities Group, the parent holding company, was lowered to Baa3 from Baa2, while that of Nikko Cordial Corp, also the parent holding company, was cut to Baa3 from Baa2.

Moody's kept its rating outlook for Daiwa and Nikko negative, citing uncertainties over whether the two loss-making brokerages will be able to recover their weak profitability in the current negative operating environment.

Moody's has assigned its Baa2 rating to Nomura, signalling the brokerage's relative resilience to depressed market volume.

Still, it said: ``The current and future operating environment for the Japanese securities industry will undermine Nomura's capacity to mitigate the degree of earnings fluctuation.''

DAIWA, NIKKO LOSING MONEY

``The fact the ratings were lowered to only a notch above junk status could cloud investment in their shares, as this could signal the risk of investors getting more choosy on brokerages just like they have already done on banks,'' said Masamitsu Ohki, an analyst at Deutsche Securities in Tokyo.

In the nine months to December, Daiwa lost more than $1 billion, hit by a downturn in its core equities businesses and hefty one-off charges to deal with its loss-making assets.

Nikko, owned 20 percent by U.S. financial giant Citigroup (NYSE:C - news), reported a group net loss of more than $220 million for the nine-month period.

As for Daiwa, Moody's raised a potential liquidity problem arising from the planned purchase of securities from its asset management unit's money management fund (MMF) and refinancing responsibilities arising from its real estate and other units.

``Moody's currently expects DSG (Daiwa Securities Group) will have no significant difficulty in securing additional bank financing, but prospects of weak cash flow contributions from its key operating subsidiaries are a remaining concern,'' it said.

``Also, the weakening financial fundamentals of Japanese banks add to this concern in a stress situation,'' it said.

DAIWA DENIES LIQUIDITY PROBLEM

Daiwa Securities Group, which is in a strategic alliance with the nation's second-biggest bank, Sumitomo Mitsui Banking Corp, denied liquidity problems, saying the group had enough cash at hand and had secured an unused emergency credit line from banks.

``We think the impact on our earnings directly from the downgrade will be marginal. But we will take the downgrade seriously and try to improve our ratings,'' said a spokesman for Daiwa Securities Group.

As for Nikko Cordial -- widely viewed by analysts as the weakest of Japan's Big Three brokerages -- Moody's said its operating earnings remain under great pressure because of the deteriorating operating environment for securities houses in general and its relatively weak domestic retail franchise.

Also casting a long shadow over Nikko's retail business was the shock collapse of U.S. energy trader Enron Corp, which triggered huge cancellations in a domestic fund managed by a Nikko Cordial unit that contained bonds issued by Enron.

Nikko Asset Management Co Ltd saw a flight from its money management fund (MMF) of 3.76 trillion yen -- or 95 percent of the fund -- in the two months to December.

Moody's said Nikko Cordial incurred substantial liquidity pressure as it bought 100 billion yen ($753.6 million) in Japanese banks' subordinated debts from the unit to help it cope with the MMF withdrawals.

Although Nikko's alternate liquidity resources have weakened, they were maintained at adequate levels given the firm's limited external short-term debt obligations, Moody's said.






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