OREANDA-NEWS. Fitch Ratings has affirmed Japan-based ORIX Corporation's Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'A-'. The Outlook is Stable. The agency has also affirmed the company's Short-Term Foreign-Currency IDR of 'F2'. ORIX's senior unsecured debt has also been affirmed at 'A-'.

Established in 1964, ORIX is engaged in a wide range of businesses including leasing, banking, life insurance, asset management, principal investments, real estate, and environment and energy-related business segments. It also has an extensive domestic and global operation network.

KEY RATING DRIVERS
IDRs
ORIX's Long-Term IDR reflects its modest level of leverage, adequate liquidity position and long history of profitability, which reflect the company's adequate risk management. The rating also factors in risks embedded in its strategic investments and profit volatility from capital gain/losses on its principal investments, as well as its opportunistic attitude towards growth.

Leverage has been maintained at a modest level (1.9x at end-March 2015, non-USGAAP) and ORIX's management intends to hold down leverage in the short to medium term through less reliance on external funding, and a focus on non-asset usage businesses. This is already evident in ORIX's improved profitability in recent years, with ROA at 2.3% in the financial year ended March 2015. In Fitch's view, ORIX management has maintained a balance of profitability and financial soundness.

We expect ORIX's capital retention through modest dividend pay-out and consistent capital generation to provide a reasonable buffer against any future stressed operating conditions. Capital is likely to adequately mitigate risks prevailing throughout operating cycles.

ORIX's credit risk mainly lies in its corporate loan portfolio in the form of senior lending and non-recourse loans. Due to its strategic focus on the middle-risk market, its overall non-performing loans/total claims ratio (3.3% at end-March 2015) remains high relative to major domestic banks whose exposures to listed companies with a sound financial position account for a large proportion.

Nevertheless, ORIX's overall asset quality compares well with other financial firms and is actively managed through sales/disposals. Fitch expects this to continue, with asset quality to benefit from further diversification of its exposures in terms of borrowers/business sectors and size. Additionally, sufficient margins are likely to further cushion against any impairment losses.

Fitch believes ORIX's liquidity is stable and adequate, given its cash and cash equivalents are nearly three times the company's debts maturing within one year (excluding long-term borrowings maturing within one year) - ORIX has been lengthening its debt maturities over the past few years to stabilise funding. Furthermore, ORIX maintains firm relationships with multiple large domestic financial institutions, which provides access to committed lines of credit. Nevertheless, reliance on wholesale funding may lead to less flexibility relative to the banking sector in an extremely stressed financial market environment.

RATING SENSITIVITIES
IDRs
ORIX's IDRs would be affected by substantial changes in the company's risk appetite, capital and leverage policy, and liquidity position.

An upgrade of ORIX's Long-Term IDRs is unlikely in the medium term, given the still-challenging operating environment and the company's structural complexity potentially arising from opportunistic growth. Substantially reducing such risks and demonstrating sustained improvement in profitability while reducing leverage further would lend support for an upgrade in ORIX's IDRs, although this scenario is unlikely given the company's business model and the sovereign's 'A' rating.

A downgrade of ORIX's IDRs would be considered if the company's risk appetite increases without a corresponding strengthening of capital buffers. This includes large-sized acquisitions which could lead to higher capital usage and/or re-leveraging. Also, an increased risk appetite hampering risk controls, and a substantial deterioration in the company's liquidity position due to internal/external factors such as large cash usages or rapid deterioration in the funding market, could exert negative pressure on ORIX's IDRs.