OREANDA-NEWS. S&P Global Ratings today said it has assigned its 'BBB+' long-term issue rating to Japan-based general trading and investment company Mitsui & Co. Ltd.'s (A/Negative/A-1) proposed unsecured subordinated hybrid loan. To arrive at our 'BBB+' issue rating on the proposed loan, we notch down from our 'A' long-term corporate credit rating on Mitsui. The two-notch differential reflects our notching methodology, whereby we deduct one notch for subordination of the loan and an additional notch for the borrower's option to defer interest payments.

We classify the proposed loan as having intermediate equity content until 2028. The loan's characteristics--the borrower's option to defer interest payments, sufficient permanence, and subordination in liquidation or bankruptcy proceedings--meet our standards for intermediate equity content of hybrid capital instruments.

Based on our assessment of intermediate equity content, we add 50% of the proposed loan to adjusted capital. This would moderately increase Mitsui's capital adequacy ratio. Nevertheless, we did not change our assessment of Mitsui's capital adequacy and continue to assess its profitability as weak, leading to our intermediate assessment of its financial risk profile. We thus see no direct impact of the proposed subordinated loan on our corporate credit ratings on Mitsui.

KEY FACTORS IN OUR ASSESSMENT OF THE LOAN'S DEFERABILITYMitsui retains the option to defer interest payments on the proposed loan. Any outstanding deferred interest is cumulative and will be settled in cash if the borrower pays a dividend on its stock or interest on debt that is pari passu with this loan. However, this condition does not affect categorization of the equity content of the loan under our criteria. The proposed loan does not have a look-back period, during which a company is prohibited from deferring interest payments on a loan if it pays a dividend on its stock or interest on debt that is pari passu with the loan.

KEY FACTORS IN OUR ASSESSMENT OF THE LOAN'S PERMANENCE While the proposed subordinated loan will come due in 60 years, interest to be paid on the loan will increase 25 basis points (bps) in 2028 (year 12) and a further 75 bps in 2048 (year 32). Because we consider the cumulative 100 bps for the loan a material step-up under our criteria, we believe the step-up provides an incentive for Mitsui to call the loan on the second step-up date in 2048. Consequently, we will consider the second step-up date the effective maturity date because the borrower has not included intent-based replacement provisions that meet our criteria. We will reclassify the equity content as minimal when the remaining period to effective maturity of this loan shortens to less than 20 years.

Mitsui will have an option to call the loan after the first call date--in 2028. However, we assume the borrower will maintain the loan or will replace it with instruments with intermediate or higher equity content when we reclassify the equity content of the proposed loan as stated above. Mitsui has expressed its intent to replace the loan with hybrid securities with equivalent or higher equity content if it redeems the subordinated loan before it matures unless certain conditions hold true, including that the redemption does not result in the lowering of our corporate credit ratings on the company.

KEY FACTORS IN OUR ASSESSMENT OF THE LOAN'S SUBORDINATIONThe proposed loan (and interest) would constitute unsecured and subordinated obligations of the borrower.