CREDIT MARKET IN 2H CY2017 - MITIGATING RISK …8. Increased M&A activity, sharp rise in sector-specific risk 9. Geopolitical risk: North Korea- US, China-US tensions 10. Japan’s

CREDIT MARKET IN 2H CY2017 - MITIGATING RISK - HOW TO SEE JAPAN’S LOWER HOUSE ELECTION -

BNP Paribas Securities (Japan) LimitedHead of investment research Chief Credit Analyst Mana Nakazora +81-3-6377-1707 [email protected]

This document is provided to you on a confidential basis. It must not be circulated, distributed, reproduced or disclosed to any other person without the prior written consent of BNP Paribas. The attention of the prospective investors is drawn to the disclaimers set out on the last page of this document.

Agenda

1. Global credit market – current status and outlook

2. How might a credit bubble burst? 10 patterns for risk emergence

3. Credit story for Japanese companies

2 October 2017

GLOBAL CREDIT MARKET – CURRENT STATUS AND OUTLOOK

1

3 October 2017

Growth sluggish yet unfaltering, expect gentle recovery leading into 2018 Global growth outlook (YoY, %): update on August 2017

Global credit market – current status and outlook

4 October 2017

Source: IMF, BNP Paribas estimates

Credit market bubble formation tends to be cyclical, with repeated self-correction

⇒Prevailing credit spreads in bubble territory for high-rated Japanese (single-A) and US (single-B) corporate bonds and in Europe irrespective of asset class


Change in credit bubble index (October 6 2017(L) to end January 2016(R))

5 October 2017

Note: At BNP Paribas Securities, we define credit bubble inflation in three distinct stages, as follows: (1) Alert: credit spreads less than 4 S.D. above mean credit costs （μ+4σ） (2) Hazard: credit spreads less than 3 S.D. above mean credit costs （μ+3σ） (3) Critical: credit spreads less than 2 S.D. above mean credit costs （μ+2σ） We define our Credit Bubble Index as follows: 𝐜𝐜𝐜𝐜𝐜𝐜 𝐛𝐛𝐛𝐛𝐛𝐜 𝐜𝐢𝐜𝐜𝐢 = 𝐦𝐦𝐢 𝐢𝐧.𝐦𝐧𝐢𝐜𝐦𝐦 𝐦𝐜 𝐇𝐦𝐇𝐦𝐜𝐜 𝐧𝐜 𝐂𝐜𝐜𝐜𝐜𝐦𝐛

𝟐𝟐，𝐢𝐧.𝐦𝐧𝐢𝐜𝐦𝐦 𝐦𝐜 𝐂𝐜𝐜𝐜𝐜𝐜𝐦𝐛

𝟏𝟐

A credit bubble exists when the Credit Bubble Index equals 100 or higher.

Credit cost treshold level current dulation (month) credit bubble

Alert Hazard Critical phaseHazard、Critical Critical index

Japan AA rating μ+4σ μ+3σ μ+2σ Hazard 32 0 133A rating μ+4σ μ+3σ μ+2σ Critical 34 28 233BBB rating μ+4σ μ+3σ μ+2σ Critical 11 1 46iTraxx Japan μ+4σ μ+3σ μ+2σ - 0 0 0

EU AA rating μ+4σ μ+3σ μ+2σ - 0 0 0A rating μ+4σ μ+3σ μ+2σ - 0 0 0BBB rating μ+4σ μ+3σ μ+2σ Alert 0 0 0iTraxx Eur Main μ+4σ μ+3σ μ+2σ - - - 0XO μ+4σ μ+3σ μ+2σ Hazard 29 0 121

US AA rating μ+4σ μ+3σ μ+2σ - 0 0 0A rating μ+4σ μ+3σ μ+2σ - 0 0 0BBB rating μ+4σ μ+3σ μ+2σ - 0 0 0BB rating μ+3σ μ+2σ μ+1σ Alert 0 0 0B rating μ+2σ μ+1σ μ Hazard 48 0 200CDX.NA.IG μ+4σ μ+3σ μ+2σ - 0 0 0

Source：Bloomberg, BNP Paribas

Credit cost threshold level Current dulation (month) credit bubble

Alert Hazard Critical PhaseHazard、Critical Critical index

Japan AA rating μ+4σ μ+3σ μ+2σ Critical 11 1 46A rating μ+4σ μ+3σ μ+2σ Critical 55 13 229BBB rating μ+4σ μ+3σ μ+2σ Critical 14 4 58iTraxx Japan μ+4σ μ+3σ μ+2σ - 0 0 0

EU AA rating μ+4σ μ+3σ μ+2σ Critical 16 15 125A rating μ+4σ μ+3σ μ+2σ Critical 17 16 133BBB rating μ+4σ μ+3σ μ+2σ Critical 20 17 142iTraxx Eur Main μ+4σ μ+3σ μ+2σ - 0 0 0XO μ+4σ μ+3σ μ+2σ Critical 20 11 92

US AA rating μ+4σ μ+3σ μ+2σ Alert 0 0 0A rating μ+4σ μ+3σ μ+2σ - 0 0 0BBB rating μ+4σ μ+3σ μ+2σ Alert 0 0 0BB rating μ+3σ μ+2σ μ+1σ Critical 15 1 63B rating μ+2σ μ+1σ μ Critical 69 6 288CDX.NA.IG μ+4σ μ+3σ μ+2σ - 0 0 0

Global credit market – current status and outlook Monetary policy remains base factor for credit spread formation…. market driven by credit events

Central bank balance sheets (BoJ/FRB/ECB)

6 October 2017

Policy rates are headed up….

Source: Bloomberg, BNP Paribas estimates

0

100,000

200,000

300,000

400,000

500,000

600,000

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Jan-

06A

ug-0

6M

ar-0

7O

ct-0

7M

ay-0

8D

ec-0

8Ju

l-09

Feb-

10S

ep-1

0A

pr-1

1N

ov-1

1Ju

n-12

Jan-

13A

ug-1

3M

ar-1

4O

ct-1

4M

ay-1

5D

ec-1

5Ju

l-16

Feb-

17S

ep-1

7A

pr-1

8

(JPY bn)(USD, EUR [bn])

ECB FED BOJ (RHS)

Estimate

-1

0

1

2

3

4

5

6

7

Sep-

00Ju

n-01

Mar

-02

Dec-

02Se

p-03

Jun-

04M

ar-0

5De

c-05

Sep-

06Ju

n-07

Mar

-08

Dec-

08Se

p-09

Jun-

10M

ar-1

1De

c-11

Sep-

12Ju

n-13

Mar

-14

Dec-

14Se

p-15

Jun-

16M

ar-1

7De

c-17

ESe

p-18

EJu

n-19

EM

ar-2

0EDe

c-20

E

(%)FED BOE

ECB BOJ

October 2017 7

Our base case is for credit spreads to remain tight

Europe and Japan credit comparison i-Traxx Japan forecast

Note: BNP Paribas estimates

Conditions for alternative scenario (rather than baseline): conservative governments gain power; restricted emergence of populism in Europe; better-than-expected US budget balance; no concerns about Japanese sovereign downgrade. Conditions for risk scenario: further emergence of populism. The predicted turmoil from European elections has so far barely occurred.

Source: Bloomberg, Markit, BNP Paribas estimates

0

100

200

300

400

500

600

2009

/01

2009

/07

2010

/01

2010

/07

2011

/01

2011

/07

2012

/01

2012

/07

2013

/01

2013

/07

2014

/01

2014

/07

2015

/01

2015

/07

2016

/01

2016

/07

2017

/01

2017

/07

2018

/01

(bp)

Baselinescenario

Worst scenario

Alternativescenario

0

50

100

150

200

250

2011

/10

2012

/01

2012

/04

2012

/07

2012

/10

2013

/01

2013

/04

2013

/07

2013

/10

2014

/01

2014

/04

2014

/07

2014

/10

2015

/01

2015

/04

2015

/07

2015

/10

2016

/01

2016

/04

2016

/07

2016

/10

2017

/01

2017

/04

2017

/07

(bp) Markit iTraxx Japan

Markit iTraxx Europe

Markit CDX North America IG


Credit calendar Key political events and macro policies

8 October 2017

Source: Bloomberg, Nikkei Veritas, BNP Paribas Note: Green = monetary policy-related events; pink = election dates; yellow = other important events


Jul 02 (JP) Tokyo metropolitan assembly electionJul 07 G20 summit (7-8, Humberg, Germany)Jul 17 (EUR) Greek, Redemption period Jul 19 (JP) BOJ Monetary Policy Committee result announcement of Apr to JunJul 20 (Eur) ECB Monetary Policy CommitteeJul 25 (US) FRB FOMC meeting until 27

TBD G20 financial ministers and heads of central banks conference (Baden-Baden, Germany)July (JP) TEPCO, Fuel-debris retrieval

August Economic Symposium, Federal Reserve Bank of Kansas CityAugust (CN) Beidaihe District conference

Sep 07 (Eur) ECB Monetary Policy CommitteeSep 19 (US) FRB FOMC meeting until 21st (ecoomic forecast)Sep 20 (JP) BOJ Monetary Policy Committee until 21stSep 24 (GER) German federal election

Oct 13 IMF・World Bank annual meeting in WashingtonOct 26 (Eur) ECB Monetary Policy Committee Result announcement of Jul to SepOct 30 (JP) BOJ Monetary Policy Committee (Oct 30, 31)Oct 31 (US) FRB FOMC meeting (Oct 31 - Nov 1)

Nov 06 COPS23 (in Germany)November APEC Economic Leaders' Meeting

Autumn (CN) National Congress of the Communist Party

Dec 08 (US) FRB FOMC (12-13)Dec 14 (Eur) ECB Monetary Policy CommitteeDec 20 (JP) BOJ Monetary Policy Committee (20-21)

Nov-Dec (Thai) General electionDec (UK) UK European Union membership referendum, deadlline

in 2017 (IT) Snap general election

October 2017

November 2017

December 2017

July 2017

August 2017

September 2017

22-Jan (JP) BOJ Monetary Policy Committee until 23rd25-Jan (Eur) ECB Monetary Policy Committee30-Jan (US) FRB FOMC meeting until 31st

Jan (JP) Convening of ordinary diet session　　　 Oct-Dec result announcement

9-Feb Olympic Winter Games in Pyeong Chang, South Korea (Feb 9-25)16-Feb (China) Chinese New Year holiday22-Feb (JP) Governor Election in Yamaguchi Pref.

1-Mar (JP) Governor Election in Nagasaki Pref.8-Mar (Eur) ECB Monetary Policy Committee8-Mar (JP) BOJ Monetary Policy Committee until 9th9-Mar Paralympic Winter Games in Pyeong Chang, South Korea (Mar 9-18)

20-Mar (US) FRB FOMC until 21st26-Mar (JP) Governor Election in Ishikawa Pref.

Mar Extended term of cut oil production determined by OPEC general meeting

15-Apr (JP) Governor Election in Kyoto Pref.26-Apr (Eur) ECB Monetary Policy Committee26-Apr (JP) BOJ Monetary Policy Committee until 27th

1-May (US) FRB FOMC until 2nd Jan-Mar result announcement

12-Jun (US) FRB FOMC until 13th14-Jun (Eur) ECB Monetary Policy Committee14-Jun (JP) BOJ Monetary Policy Committee until 15th14-Jun FIFA World Cup in Russia

in 2018 (Russia) Presidential electionin 2018 ZERO custom duty in 10 ASEAN affiliate countriesin 2018 (JP) Termination of a term of the 47th House of Representatives memberin 2018 (JP) Emperor abdicationin 2018 Aramco IPO (estimated)

Nov (US) Midterm election

May 2018

June 2018

January 2018

February 2018

March 2018

April 2018

Limited investment opportunities, but do not overlook potential from credit events Credit investment strategy

Overseas bonds: US Treasuries, sovereigns, US IG issues

Selective exposures (overseas): aircraft leasing, etc.

Credit-linked notes offering good spreads

Investing in bank-issued capital securities: target

European banks

9 October 2017

Source: BNP Paribas


HOW MIGHT A CREDIT BUBBLE BURST? 10 PATTERNS FOR RISK EMERGENCE

2

10 October 2017

Limited investment opportunities, but do not overlook potential from credit events

1. UK: mounting consumer credit balances 2. US: rising auto loan balances and default rates, falling used car prices 3. Sharp rise in lending in Chinese banking sector 4. US tax reform delayed? (equities would rally hard on timely, large-scale tax reform) 5. Complete resolution of European banks’ NPL problem, which will take time, and a

resurgence of populism 6. Increase in cov-lite issues in leveraged loan markets 7. Pressure from falling oil prices, concerns of “Arab Spring” re-igniting 8. Increased M&A activity, sharp rise in sector-specific risk 9. Geopolitical risk: North Korea-US, China-US tensions 10. Japan’s lower house election and economic outlook

11 October 2017

How might a credit bubble burst? 10 patterns for risk emergence

Source: BNP Paribas

October 2017 12


Private-sector lending by banks (US = 100)

0

10

20

30

40

50

60

70

Aust

ralia

Braz

il

Chi

na

Fran

ce

Ger

man

y

Indi

a

Japa

n

Kore

a

Rus

sia

UK

(%) 1998 2008 2016

Source: Fitch Sovereign Data Comparator, BNP Paribas

Private-sector lending by Chinese banks

Private-sector lending by Chinese banks

October 2017

Massive growth in AUM markets Rapid growth in bank assets


13

Bank NPL/SML ratios Wealth management product composition

Source: PBOC, China banking wealth management registration center, CBRC, BNP Paribas

October 2017 14


Primary market – investor composition

Source: Fitch, BNP Paribas

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%19

94

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

LTM

Mar

-201

7

1Q17

US banks Non-US banks Securities firm Institutional investor Finance Co.

Leveraged finance

October 2017 15

Covenant-lite trends Default amount of covenant-lite loan

Leveraged finance


Source: ECB, Bloomberg, BNP Paribas

0

100

200

300

400

500

600

700

800

900

1000

Pre-2014 2014 2015 2016 Apr-17 Total

(USD bn) Covenant-lite Covenants

0

10

20

30

40

50

60

70

80

90

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Mar2017TTM

(USD mn) Covenant-lite Covenants

From M&A?

October 2017

IG debt / EBITDA ratio


16

HY interest coverage ratio IG interest coverage ratio

Source: Bloomberg, BNP Paribas

HY debt / EBITDA ratio

October 2017 17

Financial reconstruction an unrealizable dream?


Source: MOF, BNP Paribas

PB/GDP rate in major advanced countries

(Fiscal year)

Projection (based on long-term economic revival scenario in Cabinet publication from Jan. 2017)

Primary budget balance target for Japan

Japan UK

Germany

Italy

Canada

France

U.S.

Key issues for government finances Financial reconstruction

October 2017 18


Entire revenue increase from consumption tax hike applied to improving and stabilizing social security

Regarding JPY8.2t revenue increase in FY17: (1) JPY3.1b used to fund half of basic pension from tax revenue; (2) remainder to be allocated to “improving social security” in full years and apportioned between increases in social security expenses associated with consumption tax hike and reduction in burden on future generations (roughly 1:2).

If the Abe government stays in power, half of the increased revenue from the consumption tax hike will be used to hold down ballooning government expenditure, but the other half will become debt.

Democratic Party President Maehara has proposed conversion of the entire amount of increased revenue to debt. Party of Hope leader Koike is advocating postponement of the consumption tax hike.

Overall, the LDP comes out winner with respect to financial reconstruction.

Fiscal year 29 Full-year(Consumption tax rate: 8%) (Consumption tax rate: 10%)

(2)

(2)

(1)(1)

Reduction in burden on future generationsIncreases in 4 social security expenses associated with consumption tax hike

Improved social securityHalf of basic pension funded from tax revenues

JPY3.1trn JPY3.2trn

JPY7.3trn

JPY 3.3trnJPY0.8trn

JPY 0.37trnJPY2.8trn

JPY1.35trn

Source: MOF, BNP Paribas

Anomaly in Japan’s lower house election

October 2017 19


Share price rises and falls from notification through polling day House o f Represen tat ives gene ral e le c t ions unde r Japanese const itu t ion

Nikke i 225 Topix

Not ific at io

n to po llin g

Not ific at io

n to po llin g

No. 24 Shigeru Yoshida 1948/12/27 1949/01/23 Democratic Lib 466 264 56.7% Conspiracy dissolution - -No. 25 Shigeru Yoshida 1952/09/05 1952/10/01 Liberal Party 466 240 51.5% Sudden attack dissolution 5 .3% 4 .4%

No. 26 Shigeru Yoshida 1953/03/24 1953/04/19 Yoshida Faction 466 199 42.7% "Idiot" dissolution 0 .4% -4 .7%

No. 27 Ichiro Hatoyama 1955/02/01 1955/02/27 JDP 467 185 39.6% Voice of heaven dissolution -0 .4% 1 .3%

No. 28 Nobusuke Kishi 1958/05/01 1958/05/22 LDP 467 287 61.5% Discussion dissolution 0 .2% 0 .3%

No. 29 Hayato Ikeda 1960/10/30 1960/11/20 LDP 467 296 63.4% Anpo dissolution 2 .0% 1 .3%

No. 30 Hayato Ikeda 1963/10/31 1963/11/21 LDP 467 283 60.6% Income Tax Rise dissolution -4 .5% -4 .3%

No. 31 Eisaku Satou 1966/01/08 1967/01/29 LDP 486 277 57.0% Dark Mist dissolution 0 .6% 1 .8%

No. 32 Eisaku Satou 1969/12/07 1969/12/27 LDP 486 288 59.3% Okinawa dissolution 7 .5% 7 .3%

No. 33 Kakuei Tanaka 1972/11/20 1972/12/10 LDP 491 271 55.2% Sino-Japan dissolution 5 .9% 5 .8%

No. 34 Takeo Miki 1976/11/15 1976/12/05 LDP 511 249 48.7% Lockheed dissolution -0 .2% 0 .2%

No. 35 Masayoshi Ohira 1979/09/17 1979/10/07 LDP 511 248 48.5% Consumption Tax dissolution 2 .0% 1 .1%

No. 36 Masayoshi Ohira 1980/06/02 1980/06/22 LDP 511 284 55.6% Happening dissolution -0 .7% 0 .7%

No. 37 Yasuhiro Nakason1983/12/03 1983/12/18 LDP 511 250 48.9% Tanaka Conviction dissolution 1 .6% 1 .8%

No. 38 Yasuhiro Nakason1986/06/21 1986/07/06 LDP 512 300 58.6% Feigning dead dissolution 1 .1% 0 .8%

No. 39 Toshiki Kaifu 1990/02/03 1990/02/18 LDP 512 275 53.7% 2nd Consumption Tax dissolution -0 .5% -0 .6%

No. 40 Kiichi Miyazawa 1993/07/04 1993/07/18 LDP 511 223 43.6% Liar dissolution 3 .6% 4 .2%

No. 41 Ryutaro Hashimo 1996/10/08 1996/10/20 LDP 500 239 47.8% New Electoral System dissolution 2 .7% 2 .1%

No. 42 Yoshiro Mori 2000/06/13 2000/06/25 LDP 480 233 48.5% Divine Nation dissolution 0 .3% -0 .8%

No. 43 Junichiro Koizum 2003/10/28 2003/11/09 LDP 480 237 49.4% Structural Reform dissolution 0 .6% 0 .0%

No. 44 Junichiro Koizum 2005/08/30 2005/09/11 LDP 480 296 61.7% Postal Reform dissolution 1 .9% 1 .6%

No. 45 Taro Aso 2009/08/18 2009/08/30 DPJ 480 308 64.2% Regime Change dissolution 2 .4% 2 .1%

No. 46 Yoshihiko Noda 2012/12/04 2012/12/16 LDP 480 294 61.3% "Very Soon" dissolution 3 .2% 2 .4%

No. 47 Shinzo Abe 2014/12/02 2014/12/14 LDP 475 291 61.3% Abenomics dissolution -1 .7% -2 .0%

No. 48 Shinzo Abe 2017/10/10 2017/10/22 465Breaking Through

National Difficulties dissolution

Ave rage share pr ic e pe r fo rman 1 .5% 1 .2%

Rises 17 17

Falls 6 6

Pe rcen t r ise s 74% 74%

General

election

number

Cabinet

Prime Minister

Election day

(polling day)

Leading party

after election

Notification

date

Not ific at ion to po llin g

NicknameNo.

of seats

% of total

seats

Seats

held

Note 1: 24th election not included since equity trading was suspended at the time Note 2: 34th election which resulted from expiry of term not included in performance figures Source: BNP Paribas, Ministry of Internal Affairs and Communications, House of Representatives, Bloomberg and Nikkei data


October 2017 20


Nikkei 225 performance from polling date onwards for elections following dissolutions

76

103

124

87

156

109

40

60

80

100

120

140

160

180

0 d

ay

15 d

ays

30 d

ays

45 d

ays

60 d

ays

75 d

ays

90 d

ays

105 d

ays

120 d

ays

135 d

ays

150 d

ays

165 d

ays

180 d

ays

195 d

ays

210 d

ays

225 d

ays

240 d

ays

255 d

ays

270 d

ays

285 d

ays

300 d

ays

315 d

ays

330 d

ays

345 d

ays

360 d

ays

Divine Nation dissolution (Jun.00) Structural Reform dissolution (Nov.03) Postal Reform dissolution (Sep.05)

Regime Change dissolution (Aug.09) "Very Soon" dissolution (Dec.12) Abenomics dissolution (Dec.14)

(Share price of polling date=100）

Note: Indexed to 100 on polling date (day zero) and showing performance for subsequent year Source: Bloomberg, BNP Paribas

October 2017 21


10-year bond yields by country and region: changes indexing yield to 100 on polling day


60

70

80

90

100

110

120

130

-10

days

-9 d

ays

-8 d

ays

-7 d

ays

-6 d

ays

-5 d

ays

-4 d

ays

-3 d

ays

-2 d

ays

- 1

day

Pol

ling

day

+1 d

ay

+2 d

ays

+3 d

ays

+4 d

ays

+5 d

ays

+6 d

ays

+7da

ys

+8 d

ays

+9 d

ays

+10

days

(Japan) House of Representatives Election, 10-yr JGB yields (US) Presidential election, 10-yr US treasury yields(UK) General election, 10-yr gilt yields (UK) Brexit referendum, 10-yr gilt yields(France) Presidential election, 10-yr bond yields (Germany) Federal election, 10-yr bond yields(Italy) General election, 10-yr bond yields (Canada) General election, 10-yr bond yields(EU) European Parliament election, 10-yr bond yields

Note: Yield changes for ten days around election, indexed at 100 on polling day Source: BNP Paribas, Bloomberg

October 2017 22

How might a credit bubble burst? 10 patterns for risk emergence Notification date to polling date: changes in spread on 5-year Sovereign CDS and i-Traxx Japan

Notification date to polling date: changes in 5-year Sovereign CDS spreads


No. 43 Junichiro Koi 2003/10/28 2003/11/09 LDP 0 .0bp -

No. 44 Junichiro Koi 2005/08/30 2005/09/11 LDP -0 .1bp -

No. 45 Taro Aso 2009/08/18 2009/08/30 DPJ -13 .1bp +1 .7bp

No. 46 Yoshihiko Nod2012/12/04 2012/12/16 LDP +6 .0bp +1 .5bp

No. 47 Shinzo Abe 2014/12/02 2014/12/14 LDP +8 .5bp -2 .8bp

No. 48 Shinzo Abe 2017/10/10 2017/10/22

Avg. 0 .1 bp 0 .1bp

Tigh ten in g 2 1

Widen in g 2 2

No Change 1 0

% o f

Tigh ten in g50% 33%

General

election

number

Cabinet

Prime

Minister

Notification

date

Election day

(polling day)

Leading party

after election

Sove re ign

CDS

(5yr)

i-Traxx

Japan

Not ific at ion to po llin g

0

20

40

60

80

100

120

140

160

180

Jan-

03M

ay-0

3Se

p-03

Jan-

04M

ay-0

4Se

p-04

Jan-

05M

ay-0

5Se

p-05

Jan-

06M

ay-0

6Se

p-06

Jan-

07M

ay-0

7Se

p-07

Jan-

08M

ay-0

8Se

p-08

Jan-

09M

ay-0

9Se

p-09

Jan-

10M

ay-1

0Se

p-10

Jan-

11M

ay-1

1Se

p-11

Jan-

12M

ay-1

2Se

p-12

Jan-

13M

ay-1

3Se

p-13

Jan-

14M

ay-1

4Se

p-14

Jan-

15M

ay-1

5Se

p-15

Jan-

16M

ay-1

6Se

p-16

Jan-

17M

ay-1

7Se

p-17

JGB CDS 5yr

No. 43 (notification Oct 2003). Notification to

polling 0.0bp

No. 46 (notification Dec 2012). Notification to polling

+6bp

No. 44 (notification Aug 2005). Notification to

polling -0.1bp

No. 47 (notification Dec 2014). Notification to

polling +8.5bpNo. 45 (notification Aug

2009). Notification to polling -13.1bp

Great Eastern Japan Earthquake

Lehman Shock

Chinese economic slowdown?

Ozawa Shock

(bp)

Reaction to Naoto Kan's victory in DPJ leadership

election

Note: Yield changes for ten days around election, indexed at 100 on polling day Source: BNP Paribas, Bloomberg

Note: Green highlights show narrowing, red highlights show widening of spreads Source: BNP Paribas, Bloomberg and House of Representatives data

CREDIT STORY FOR JAPANESE COMPANIES

3

23 October 2017

Consolidated earnings

CDS spread trends

24

Credit story for Japanese companies

October 2017

[1] Softbank

Source: Company data, Bloomberg, BNP Paribas

(JPY mn) 2016/06 2016/09 2016/12 2017/03 2017/06Net sales 2,126,521 4,271,834 6,581,466 8,901,004 2,186,059

Cost of sales -1,267,273 -2,568,170 -3,990,070 -5,472,238 -1,255,123Gross profit 859,248 1,703,664 2,591,396 3,428,766 930,936

Selling, general and administrativeexpenses -507,841 -1,019,588 -1,594,371 -2,277,251 -589,362

Other operating loss -32,171 -48,319 -65,552 -143,703 32,469Operating income 319,236 653,944 949,660 1,025,999 374,043

Finance cost, net -112,107 -222,022 -343,363 -467,311 -120,870Equity in income (loss) of associates 35,466 105,174 205,988 321,550 1,634

Income before income tax 356,361 665,625 975,257 712,526 77,568Income taxes -144,069 -423,262 -624,628 207,105 -47,028

Net income 212,292 800,948 903,934 1,474,430 30,540

Total comprehensive income -103,069 70,608 951,506 1,433,901 233,569

0

50

100

150

200

250

300

350

400

14/8

14/9

14/1

014

/11

14/1

215

/115

/215

/315

/415

/515

/615

/715

/815

/915

/10

15/1

115

/12

16/1

16/2

16/3

16/4

16/5

16/6

16/7

16/8

16/9

16/1

016

/11

16/1

217

/117

/217

/317

/417

/517

/617

/717

/817

/9

(bp)

Softbank

Focus on Softbank cash flows

Breakdown of Softbank-owned equities (as of July 14)

25


October 2017

[1] Softbank


Currently rated Ba1/BB+/–/–/A- (Moody’s/S&P/Fitch/R&I/JCR), outlook Stable

End-FY2016 total debt of JPY14.9trn (current liabilities JPY2.7trn; non-current liabilities JPY12.2trn), DER 4.16x, net DER 3.54x (after deducting cash and cash equivalents of JPY2.18trn)

Softbank-owned listed equities portfolio worth JPY17.0trn (as of July 14), unrealized net gains JPY14.9trn; net DER falls to 2.15x assuming JPY5trn of cash equivalents from portfolio

(JPY 100mn) Market cap Holding market cap Latent profit/lossYahoo 28,136 12,080 12,019Softbank Technology 443 218 217ITMEDIA 138 71 55VECTOR INC 98 41 26SCIGINEER 44 14 -8

Sprint 37,023 30,737 11,038Alibaba Group Holding 428,228 126,416 126,042Renren 481 189 -228 Baozun Inc 1,799 219 160

Technology sector CDS transition

[2] Toshiba

Electrionics sector ratings

26


October 2017

0

200

400

600

800

1,000

1,200

1,400

1,600

14/6

14/8

14/10

14/12 15

/2

15/4

15/6

15/8

15/10

15/12 16

/2

16/4

16/6

16/8

16/10

16/12 17

/2

17/4

17/6

17/8

17/10

(bp) HitachiToshibaNECFujitsuSonyMitsubishi ElectricPanasonicSharp


Rating Outlook Rating Outlook Rating Outlook Rating OutlookHITACHI LTD A3 STABLE A- POS AAp STABLE A+ STABLETOSHIBA CORP Caa1 NEG CCC- NEG - - B *+ -MITSUBISHI ELECTRIC CORP A1 STABLE A POS - - AA- STABLENEC CORP Baa2 NEG BBB- STABLE - - A- STABLEFUJITSU LTD A3 STABLE BBB+ POS - - A STABLEPANASONIC CORP A3 STABLE A- STABLE - - A STABLESHARP CORP - - B+ STABLE BB STABLE BB- STABLESONY CORP Baa3 STABLE BBB STABLE A STABLE A- STABLE

MDY S&P JCR R&I

CDS spread


Share price

Bond price Rating

October 2017 27

0

100

200

300

400

500

600

Apr-0

9Au

g-09

Dec

-09

Apr-1

0Au

g-10

Dec

-10

Apr-1

1Au

g-11

Dec

-11

Apr-1

2Au

g-12

Dec

-12

Apr-1

3Au

g-13

Dec

-13

Apr-1

4Au

g-14

Dec

-14

Apr-1

5Au

g-15

Dec

-15

Apr-1

6Au

g-16

Dec

-16

Apr-1

7Au

g-17

(bp)

0

100

200

300

400

500

600

Apr-0

9Au

g-09

Dec

-09

Apr-1

0Au

g-10

Dec

-10

Apr-1

1Au

g-11

Dec

-11

Apr-1

2Au

g-12

Dec

-12

Apr-1

3Au

g-13

Dec

-13

Apr-1

4Au

g-14

Dec

-14

Apr-1

5Au

g-15

Dec

-15

Apr-1

6Au

g-16

Dec

-16

Apr-1

7Au

g-17

(JPY)

80

85

90

95

100

Jul-1

4

Sep

-14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep

-15

Nov

-15

Jan-

16

Mar

-16

May

-16

Jul-1

6

Sep

-16

Nov

-16

Jan-

17

Mar

-17

May

-17

Jul-1

7

Sep

-17

(JPY)

[2] Toshiba


3

4

5

6

7

8

9

10

11

12

13

14

15

Jan-

12

Apr-1

2

Jul-1

2

Oct

-12

Jan-

13

Apr-1

3

Jul-1

3

Oct

-13

Jan-

14

Apr-1

4

Jul-1

4

Oct

-14

Jan-

15

Apr-1

5

Jul-1

5

Oct

-15

Jan-

16

Apr-1

6

Jul-1

6

Oct

-16

Jan-

17

Apr-1

7

Jul-1

7

S&P Moody's R&I Fitch

AA-BBB+BBBBBB-BB+BBBB-B+BB-CCC+CCC

Main banks – trend in lending to Toshiba Bond outstanding

28


October 2017


[2] Toshiba

(JPY mn)

Estimates of additional reserves arising on a reclassification to “doubtful assets”

October 2017 29


Toshiba PL

Source: Company data, BNP Paribas

[2] Toshiba

(JPY 100mn) FY3/16 FY3/17 Diff. Diff. against CoEas of June 23rd

Diff. against CoEas of May 15th

FY3/18CoE

Sales 51,548 48,708 -2,840 0 8 49,700OP -4,830 2,708 7,538 0 8 4,300(margin, %) -9.4% 5.6% 8.7%Pre-tax profit -3,994 2,255 6,249 11 -145 4,000(margin, %) -7.7% 4.6% 8.0%

Income/Loss from continuingoperations, before noncontrollinginterests

-6,458 1,199 7,657 -2 -1

Income/Loss from discontinuedoperations, before noncontrollinginterests

1,298 -12,801 -14,099 264 -201

Net profit -4,600 -9,657 -5,057 298 -157 2,300

(margin, %) -8.9% -19.8% 4.6%

EPS (JPY) -108.64 -228.08 -119.44 6.97 -3.71 54.33

FCF 6,522 -448 -6,970 0 0 -3,800

Equity attributable to shareholders ofthe company 3,289 -5,529 -8,818 287 -129 -4,100

Shareholders' equity ratio (%) 6.1% -13.6% -1.0% -1.0% -10.5%Net asset 6,723 -2,757 -9,480 282 -157 -1,900Net interest-bearing debt 4,964 4,961 -3 0 -39 9,400Net D/E ratio 151.0% - - -JPY/USD rate as of the FY end 113 112 -1 0 0 100

October 2017 30


Toshiba balance sheets


[2] Toshiba

1,602 742

681

658

462

658

663

624

1,081

1,122

945

708

FY3/16 FY3/17

(JPY bn) Other assets

Property, plant andequipmentGoodwill, deferred taxassets, etcInventories

Account receivable

Cash and equivalent

5,433

4,270

1,951 2,079

559 531

809 731

1,442 1,204

FY3/16 FY3/17

(JPY bn)

Interest-bearing debt

Notes and accountspayable, trade

Accrued pension andseverance consts

Other liabilities

4,7614,545

October 2017 31


Toshiba’s future path: four potential choices


[2] Toshiba

Survival in slimmed-down form: sale of semiconductors to eliminate excess liabilities; emphasis on heavy machinery franchise; generate cash flows from nuclear reactor decommissioning

Asset sales

Delisting after acquisition by private equity

Default

Asset sell-off Buyer Transfer price (JPY bn)2016 Mar 17 Toshiba Medical Systems Cannon 665.5

Mar 30 Toshiba Lifestyle Products & Services Affiliated company of Midea Group 90.0Aug 24 Toshiba Plant Systems & Services SMBC Nikko 15.7Nov 30 land and building owned by Toshiba America Information Systems LBA Realty LLC 7.0

2017 Feb 21 Toshiba Medical Finance Cannon 3.1Feb 24 coal business operated by consolidated subsidiary Investment fund 10.0Mar 02 Equity share of Toshiba Machine Toshiba Machine 15.3

Whither Toshiba? Four conceivable options [2] Toshiba


Decision to sign share transfer agreement selling Toshiba Memory stock to special purpose entity Pangea Signing of transfer agreement on 28 September Pangea: Will receive JPY212.0b from Bain Capital, JPY27.0b from Hoya, JPY395.0b from SK Hynix, and a total of

JPY415.5b from four US companies (Apple, Seagate, Kingston Technology and Dell Technologies Capital). Financial institutions will lend JPY600.0b. After the transfer, management will largely be in the hands of teams from Bain and Toshiba Memory.

SK Hynix plans to invest in a company set up by Bain. However, there is a 10-year firewall between SK Hynix and Toshiba Memory, which limits SK Hynix’s access to Toshiba Memory’s confidential information. Some of SK Hynix’s investment can be converted to stock with the limitation that Hynix cannot hold more than 15% of the voting rights of Toshiba Memory or of Pangea for the next 10 years, but exercise of the conversion right must be approved by the competition enforcement authorities of each country.

The total price of the stock to be transferred is JPY2t (Toshiba Memory’s book value is JPY600.0b, so the other JPY1.4b will be profit).

Western Digital’s legal appeal to the International Court of Arbitration: Toshiba interprets this as a request to stop the individual capital investments in the JV, not to halt the sale of Toshiba Memory per se.

Screening of the deal in accordance with antimonopoly legislation remains a concern. China’s antimonopoly law only came into force on 1 August 2008 but Japanese companies have been subject to relatively many requests for compensation.

Although these issues remain, we think that smooth implementation of the share transfer agreement could eliminate many of Toshiba’s accounting problems.

October 2017 32

October 2017 33

Cyclical analysis: IP shipment / inventory balance

17.3%, -19.4%

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

-20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%

Inve

ntor

y y/

y

Shipment y/y

Quadrant I

QuadrantIII

QuadrantII

QuadrantIV

May 17

Jan.15Jan.13

Jan.12

Jan.16

Jan.14

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

03.1 3 5 7 9 11

04.1 3 5 7 9 11

05.1 3 5 7 9 11

06.1 3 5 7 9 11

07.1 3 5 7 9 11

08.1 3 5 7 9 11

09.1 3 5 7 9 11

10.1 3 5 7 9 11

11.1 3 5 7 9 11

12.1 3 5 7 9 11

13.1 3 5 7 9 11

14.1 3 5 7 9 11

15.1 3 5 7 9 11

16.1 3 5 7 9 11

17.1 3 5

I II III IV TOPIX Electric Appliances (RHS)

IIV I II I II III IV I II III IV IV IIIIVI IV

58.950

100

150

200

250

300

350

Jan-

08M

ay-0

8Se

p-08

Jan-

09M

ay-0

9Se

p-09

Jan-

10M

ay-1

0Se

p-10

Jan-

11M

ay-1

1Se

p-11

Jan-

12M

ay-1

2Se

p-12

Jan-

13M

ay-1

3Se

p-13

Jan-

14M

ay-1

4Se

p-14

Jan-

15M

ay-1

5Se

p-15

Jan-

16M

ay-1

6Se

p-16

Jan-

17M

ay-1

7

Inventory Ratio

Shipment / inventory balance Inventory ratio

Shipment / inventory balance phase, Elec appliance index (TOPIX)


Source: ： METI, Bloomberg, BNP Paribas

Utility sector CDS

[3] TEPCO

Utilities sector ratings

34


October 2017


Rating Outlook Rating Outlook Rating Outlook Rating OutlookTOKYO ELECTRIC POWER COMPANY Ba2 STABLE BB STABLE A STABLE BBB STABLECHUBU ELECTRIC POWER CO INC A3 STABLE NR - AA STABLE A+ STABLEKANSAI ELECTRIC POWER CO INC A3 STABLE NR - AA- STABLE A STABLEHOKURIKU ELECTRIC POWER CO A3 STABLE NR - AAp NEG A+ NEGTOHOKU ELECTRIC POWER CO INC - - NR - AA- POS A STABLESHIKOKU ELECTRIC POWER CO - - A- STABLE AAp STABLE A+ STABLEKYUSHU ELECTRIC POWER CO INC A3 STABLE NR - AA- STABLE A STABLEHOKKAIDO ELECTRIC POWER CO A3 STABLE NR - AA-p NEG A NEGOKINAWA ELECTRIC POWER CO A1 STABLE A+ STABLE AAA NEG AA STABLE

MDY S&P JCR R&I

0

20

40

60

80

100

120

140

2015

/04

2015

/06

2015

/08

2015

/10

2015

/12

2016

/02

2016

/04

2016

/06

2016

/08

2016

/10

2016

/12

2017

/02

2017

/04

2017

/06

2017

/08

2017

/10

(bp) TEPCO Kyushu Elec Chubu Elec

Kansai Elec Tohoku Elec Hokuriku Elec

1F (Fukushima Daiichi) Challenges (TEPCO Committee) overview [3] TEPCO

35

State gives affected operator time and temporary assistance (NDF investments/subsidies), urges operator to take responsibility via management reforms

Operator undertakes reforms and take responsibility, specifically using annual profits to help fund reactor decommissioning and compensation, with regional decontamination through recovery in enterprise value

Government takes lead in reconstruction of affected regions

Reactor decommissioning needs to be fully funded; creation of reactor decommissioning management provisioning system

To support reactor decommissioning, priority given to rationalization of regulated transmission business in addition to affected operator’s power generation and retail operations

Since compensation system was not ready at the time of accident, consider framework to source unfunded portion based on levies spread fairly across all users

October 2017


Source: Company data, METI, BNP Paribas

Revised Comprehensive Special Business Plan [3] TEPCO

36

Announced on May 18, 2017 Fukushima Daiichi: Expansion of required funding relating to stricken plant (from JPY11trn to JPY22trn) Fukushima Daini: Change in conditions in Japanese power market

Plan specifically addresses: (1) Compensation; (2) Reconstruction; (3) Decommissioning; (4) Improving earnings; (5)

Reorganization/integration via establishment of joint entities; (6) State support and recovery of public funds; (7) Collaboration with other stakeholders; (8) Required preparations

Plan contains following positions by TEPCO relating to state support: (1) Compensation: Follow basic policy of compensating damage properly, while giving maximum cooperation to state-sponsored business restart assistance and activities to restore reputation; (2) Decommissioning: Implement reactor decommissioning properly and steadily, while recognizing this complex, multi-layered, large-scale project will require decades to complete; also, Nuclear Damage Compensation and Decommissioning Facilitation Corporation (NDF) concluded in its end-FY2016 evaluation that (a) further involvement in the management of TEPCO would be required, and (b) while reinforcing systems to handle the clean-up at Fukushima, prioritize monitoring to target systems rationalization and promote early self-reliance of other operations; based on the results of monitoring, NDF and government will jointly consider by end-FY2019 what form continued state support might take from FY2020 onwards

Stance towards major lenders: TEPCO Holdings will consult with NDF to ensure the company stops using private bond placements to raise new funds as soon as possible

October 2017


Source: Company data, METI, BNP Paribas

Revised Comprehensive Special Business Plan

37 October 2017

Credit story for Japanese companies [3] TEPCO


1,100

567 2,000程度

1,400程度

3,000程度 Over 5,000

2,276

1,600-2,150

Over 3,000

2016 actual 10 year average(2017-2026)

After 10 years(2027-)

Profit at thelevel of450 billion yen

Secure500 billion yen

Within ten years,over 300 billion yenof consolidatedordinary profit fou

r main

co

mpan

ies

子会社

関連会社持

分利益

Compensation/DecommissioningApprox.500 billion yen

子会社

関連会社持

分利益

Efforts in the RevisedComprehensive SpecialBusiness Plan

Equity profits ofSubsidiaries andAffiliatedcompanies

Compensation/DecommissioningApprox. 300 billion yen

- Improvement in profitability through productivityreform (rationalization of network business) - Restart of Kashiwazaki–Kariwa Nuclear Power Station - Increase in profits at subsidiaries and affiliated companies

<Revenue forecast in the Revisedcomprehensive special business plan>*

Restructuring/integration

Ordinary profit

DecommissioningCosts

Generalcontribution

Specialcontribution

5,350

Cons

olid

ated(JPY 100mn)

Revenue trends by 6 scenarios

38 October 2017

Credit story for Japanese companies [3] TEPCO


Operating CF trends by 6 scenarios

5,700

5,750

5,800

5,850

5,900

5,950

6,000

FY3/19 FY3/20 FY3/21 FY3/22 FY3/23 FY3/24 FY3/25 FY3/26 FY3/27

(JPY bn)

Asumming resuming operations after FY2019; Not factoring in Kashiwazaki Kariwa 2-4 line

Asumming resuming operations after FY2019; Factoring in Kashiwazaki Kariwa 2-4 line





500

550

600

650

700

750

800

850

900

FY3/19 FY3/20 FY3/21 FY3/22 FY3/23 FY3/24 FY3/25 FY3/26 FY3/27

(JPY bn)







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Research Disclaimers BNP Paribas and/or its affiliates understand the importance of protecting confidential information and maintain a “need to know” approach when dealing with any confidential information. Information barriers are a key arrangement we have in place in this regard. Such arrangements, along with embedded policies and procedures, provide that information held in the course of carrying on one part of its business to be withheld from and not to be used in the course of carrying on another part of its business. It is a way of managing conflicts of interest whereby the business of the bank is separated by physical and non-physical information barriers. The Control Room manages this information flow between different areas of the bank where confidential information including inside information and proprietary information is safeguarded. There is also a conflict clearance process before getting involved in a deal or transaction. In addition, there is a mitigation measure to manage conflicts of interest for each transaction with controls put in place to restrict the information flow, involvement of personnel and handling of client relations between each transaction in such a way that the different interests are appropriately protected. Gifts and Entertainment policy is to monitor physical gifts, benefits and invitation to events that is in line with the firm policy and Anti-Bribery regulations. BNP Paribas maintains several policies with respect to conflicts of interest including our Personal Account Dealing and Outside Business Interests policies which sit alongside our general Conflicts of Interest Policy, along with several policies that the firm has in place to prevent and avoid conflicts of interest. The remuneration of the individual producer of the investment recommendation may be linked to trading or any other fees in relation to their global business line received by BNP Paribas and/or affiliates. IMPORTANT DISCLOSURES by disseminators of investment recommendations for the purposes of the Market Abuse Regulation: The BNP Paribas disseminator of the investment recommendation is identified above including information regarding the relevant competent authorities which regulate the disseminator. The name of the individual producer within BNP Paribas or an affiliate and the legal entity the individual producer is associated with are identified above in this document, The date and time of the first dissemination of this investment recommendation by BNP Paribas or an affiliate is addressed above. Where this investment recommendation is communicated by Bloomberg chat or by email by an individual within BNP Paribas or an affiliate, the date and time of the dissemination by the relevant individual is contained in the communication by that individual disseminator. The disseminator and producer of the investment recommendations are part of the same group, i.e. the BNP Paribas group. The relevant Market Abuse Regulation disclosures required to be made by producers and disseminators of investment recommendations are provided by the producer for and on behalf of the BNP Paribas Group legal entities disseminating those recommendations and the same disclosures also apply to the disseminator. If an investment recommendation is disseminated by an individual within BNP Paribas or an affiliate via Bloomberg chat or email, the disseminator’s job title is available in their Bloomberg profile or bio. If an investment recommendation is disseminated by an individual within BNP Paribas or an affiliate via email, the individual disseminator’s job title is available in their email signature. For further details on the basis of recommendation specific disclosures available at this link (e.g. valuations or methodologies, and the underlying assumptions, used to evaluate financial instruments or issuers, interests or conflicts that could impair objectivity recommendations or to 12 month history of recommendations history) are available at https://globalmarkets.bnpparibas.com/gmportal/private/globalTradeIdea. If you are unable to access the website please contact your BNP Paribas representative for a copy of this document.

October 2017 40

https://globalmarkets.bnpparibas.com/gmportal/private/globalTradeIdea








EXPLANATORY NOTE ON NON-REGISTERED CREDIT RATING From the viewpoint of ensuring fairness and transparency in the markets, the Financial Instruments and Exchange Law has introduced a registration system for credit rating agencies. In accordance with this regulation, financial instruments firms are required to inform customers of the fact that the rating is not registered and the rationale for the registration system, etc. whenever marketing any financial products which are rated by non-registered credit rating agencies. Rationale for the Registration System Registered credit rating agencies are subject to regulations such as: (1) the duty of good faith; (2) the duty to maintain an operational management system which prevents conflicts of interest and ensures the fairness of the credit rating process, etc.; (3) the prohibition on giving a credit rating to a security which they hold; and (4) the duty to disclose information including to prepare and make available for public inspection the policies for credit ratings and the documents for public release and explanation. Registered credit rating agencies are also subject to supervision by the Financial Services Agency, including orders to submit information, onsite inspections and business improvement orders. However, non-registered credit rating agencies are not subject to such regulation or supervision. Name of the Credit Rating Agency Group, etc. Name of the Credit Rating Agency Group: S&P Global Ratings (“S&P”) Name of the Registered Credit Rating Agency within the Group and its Registration Number: S&P Global Ratings Japan K.K. (FSA Commissioner (Rating) No. 5) Method of Obtaining the Information about the Summaries of the Policies and Criteria for Credit Rating The information is published in the “Non-Registered Rating Information” (「無登録格付け情報」http://www.standardpoors.co.jp/unregistered) which can be found in the menu under “Library/Regulation Related” (「ライブラリ･規制関連」) on the website of S&P Global Ratings Japan K.K. (http://www.standardpoors.co.jp). Assumptions, Significance and Limitations of the Rating Credit ratings assigned by S&P Global Ratings (“S&P”) are opinions of the future credit quality of specific issuers or issues as of the date they are expressed and it is not an index which shows the probability of the occurrence of the failure to pay by the issuer or a particular debt and do not guarantee the credit worthiness. Credit ratings are not a recommendation to purchase, sell or hold any securities, or a statement of market liquidity or prices in the secondary market of any issues. Credit ratings may change depending on various factors, including issuers' performance, changes in external environment, performance of underlying assets, creditworthiness of counterparties and others. S&P conducts rating analysis based on information it believes to be provided by the reliable source in terms of quality and quantity. However, S&P does not perform an audit, due diligence or independent verification of any information it receives from the issuer or a third party, or guarantees its accuracy, completeness or timeliness of the results gained from the information. Moreover it needs to be noted that it may incur a potential risk due to limitation of the historical data that are available for use depending on the rating. This information is prepared based on sources which we believe is reliable, but we do not guarantee its accuracy or completeness. For details, please refer to the above mentioned website of S&P Global Ratings Japan K.K. For Moody’s Investors Service, Inc. From the viewpoint of ensuring fairness and transparency in the markets, the Financial Instruments and Exchange Law has introduced a registration system for credit rating agencies. In accordance with this regulation, financial instruments firms are required to inform customers of the fact that the rating is not registered and the rationale for the registration system, etc. whenever marketing any financial products which are rated by non-registered credit rating agencies. Rationale for the Registration System Registered credit rating agencies are subject to regulations such as: (1) the duty of good faith; (2) the duty to maintain an operational management system which prevents conflicts of interest and ensures the fairness of the credit rating process, etc.; (3) the prohibition on giving a credit rating to a security which they hold; and (4) the duty to disclose information including to prepare and make available for public inspection the policies for credit ratings and the documents for public release and explanation. Registered credit rating agencies are also subject to supervision by the Financial Services Agency, including orders to submit information, onsite inspections and business improvement orders. However, non-registered credit rating agencies are not subject to such regulation or supervision. Name of the Credit Rating Agency Group, etc. Name of the Credit Rating Agency Group: Moody’s Investors Service, Inc. (“Moody’s”) Name of the Registered Credit Rating Agency within the Group and its Registration Number: Moody’s Japan K.K. (FSA Commissioner (Rating) No. 2) Method of Obtaining the Information about the Summaries of the Policies and Criteria for Credit Rating The information is published in the “Matters Related to the Explanation of Non-Registered Ratings” (「無登録格付説明関連」) in the page of “Use of Credit Ratings Given by Non-registered Companies” (「無登録業者の格付の利用」) which is displayed after clicking “Credit Rating Business” on the website of Moody’s Japan K.K. (https://www.moodys.com/pages/default_ja.aspx). Assumptions, Significance and Limitations of the Rating Credit ratings are Moody’s Investors Service, Inc.'s ("MIS") current opinions of the relative future credit risk of entities, credit commitments, or debt or debt-like securities. MIS defines credit risk as the risk that an entity may not meet its contractual, financial obligations as they come due and any estimated financial loss in the event of default. Credit ratings do not address any other risk, including but not limited to: liquidity risk, market value risk, or price volatility. Credit ratings do not constitute investment or financial advice, and credit ratings are not recommendations to purchase, sell, or hold particular securities. No warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such rating or other opinion or information is given or made by MIS in any form or manner whatsoever. Based on the information received from issuers or from public sources, the credit risks of the issuers or obligations are assessed. MIS adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MIS considers to be reliable. However, MIS is not an auditor and cannot in every instance independently verify or validate information received in the rating process. This information is prepared based on sources which we believe are reliable, but we do not guarantee its accuracy or completeness. For details, please refer to the above website of Moody’s Japan K.K.

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EXPLANATORY NOTE ON NON-REGISTERED CREDIT RATING For Fitch Ratings From the viewpoint of ensuring fairness and transparency in the markets, the Financial Instruments and Exchange Law has introduced a registration system for credit rating agencies. In accordance with this regulation, financial instruments firms are required to inform customers of the fact that the rating is not registered and the rationale for the registration system, etc. whenever marketing any financial products which are rated by non-registered credit rating agencies. Rationale for the Registration System Registered credit rating agencies are subject to regulations such as: (1) the duty of good faith; (2) the duty to maintain an operational management system which prevents conflicts of interest and ensures the fairness of the credit rating process, etc.; (3) the prohibition on giving a credit rating to a security which they hold; and (4) the duty to disclose information including to prepare and make available for public inspection the policies for credit ratings and the documents for public release and explanation. Registered credit rating agencies are also subject to supervision by the Financial Services Agency, including orders to submit information, onsite inspections and business improvement orders. However, non-registered credit rating agencies are not subject to such regulation or supervision. Name of the Credit Rating Agency Group, etc. Name of the Credit Rating Agency Group: Fitch Ratings (“Fitch”) Name of the Registered Credit Rating Agency within the Group and its Registration Number: Fitch Ratings Japan Limited (FSA Commissioner (Rating) No. 7) Method of Obtaining the Information about the Summaries of the Policies and Criteria for Credit Rating The information is published in the “Overview of Policies etc. for Credit Rating” (｢格付方針等の概要｣) in the “Regulation Related” (｢規制関連」) section on the website of Fitch Ratings Japan Limited (http://www.fitchratings.co.jp/web/). Assumptions, Significance and Limitations of the Rating Ratings assigned by Fitch are opinions based on established criteria and methodologies. Ratings are not facts, and therefore cannot be described as being "accurate" or "inaccurate". Credit ratings do not directly address any risk other than credit risk. Credit ratings do not comment on the adequacy of market price or market liquidity for rated instruments. Ratings are relative measures of risk; as a result, the assignment of ratings in the same category to entities and obligations may not fully reflect small differences in the degrees of risk. Credit ratings, as opinions on relative ranking of vulnerability to default, do not imply or convey a specific statistical probability of default. In issuing and maintaining its ratings, Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The assignment of a rating to any issuer or any security should not be viewed as a guarantee of the accuracy, completeness, or timeliness of the information relied on in connection with the rating or the results obtained from the use of such information. If any such information should turn out to contain misrepresentations or to be otherwise misleading, the rating associated with that information may not be appropriate. Despite any verification of current facts, ratings can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed. The detailed explanation for assumptions, significance and limitations of the rating is available under ｢格付及びその他の形態の意見に関する定義｣ on the Japanese website of Fitch. This information is prepared based on sources which we believe are reliable, but we do not guarantee its accuracy or completeness. For details, please refer to the above mentioned website of Fitch Ratings Japan Limited.

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