DBRS Rates Komatsu Ltd. at A (low), R-1 (low)

Dominion Bond Rating Service (“DBRS”) has today initiated coverage and has assigned ratings of A (low) and R-1 (low) to the Senior Unsecured Debt and Short-Term Debt, respectively, of Komatsu Ltd. The long-term debt rating also applies to Komatsu Finance America Inc. and Komatsu Europe Coordination Center N.V. The ratings and report are based on Komatsu Ltd. and its consolidated subsidiaries, referred to as Komatsu Group (“Komatsu”).

As the second-largest global manufacturer of construction and mining equipment, Komatsu is well positioned in its industry. Komatsu currently benefits from strong global demand for its equipment, and this translates into improved credit metrics as increased business volumes and margins lead to stronger profitability and free cash flow. Consequently, financial flexibility has increased and Komatsu has been in a position to reduce debt levels. Looking forward, DBRS expects this trend will result in further improvement to leverage and coverage metrics and to the overall financial risk profile. Komatsu’s financial risk profile is solid for the rating.

The business risk profile is characterized by its dependency on the economic cycle and commodity prices. DBRS views this as manageable given Komatsu’s recent experience through the prolonged economic downturn in Japan, combined with commodity price weakness.

Domestically, Komatsu has experienced a difficult period since the Japanese economy collapsed in the early 1990s, resulting in an extended period of reduced demand for construction equipment. This 14-year downturn forced Komatsu to lower its cost structure and become more efficient, but now with the domestic economy improving, Komatsu is poised to benefit from its more efficient cost base.

DBRS notes that compared to the industry leader, Caterpillar Inc., Komatsu was later to globalize its operations and does not benefit from the distribution strengths of its main competitor. Komatsu is currently capacity-constrained and is investing to expand its manufacturing capacity to meet the increased demand for its construction and mining equipment and stamping presses.

Komatsu’s modest captive finance operations are not disclosed separately, but DBRS adjusts certain key financial metrics in assessing the core industrial operations.

The rating includes the expectation for continued improvement in Komatsu’s financial metrics and a recovery of the Japanese economy.