RETURN TORETURN TO ~~~~~~~~~~R E S T R I C T E D

REPORTS DESK RELEASE FORWITHIN ECONOMIC DIEVEL(WPMENT R e p o r t N a. T.O. 125a

ONE WEEK ISTIThW T

JAN 10 1963

' This document was prepared for internal use ir the B-nk. Mn makingit available to others, the Bank assumes no responsibiily to them forthe accuracy or completeness of the information contained herein.

K-f- 'ERNATIONAL 2ANK- FOR RECONSTRUCTION AND DEVELOPMENT

APPRAISAL OF THE

KAWASAKI STEEL CORPORATION STRIP MILL PROJECT

JAPAN

December 3, 1956

9N47.2In 83 78

Department of Technical Operations

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CURRENCY EQUIVALENTS

it US $ Y360

l rnillion Y $ 2,780

All tons are metric tons of 2,200 pounds.

The company's fiscal terms run from May 1to Oct)ober 31 and November 1 to April 30.

2PPRAMSAL 3? 'T-? ;AJ;TASAK 5T SI?,L COPPORATIONSThI? M1LLL PROJECT

TABLE OF CONTvNqIS

Paragraphs

I. Introduction ........... see ....... 0..... 1 - 8

II. The Company ............. , 9 26

III. The Project .... ***.. . .. e* , ..... 27 - 42

IV. Proposed Financing Plan 4............... 43 -58

V. Financial Proje,tions 5......e.... 59 - 68

VI. Conclusions and Recommendations . . 69 - 76

APPBMMI CES

1. Properties taken over by the Kawasa.kiSteel Corporation on its Establishmentin 1950

2. S-nmmary Balance Sheets

.3. Earnings Statements

4. Equipment to be Imported

5. Market Analysis and Sales and Price Fore-casts

6. Financial Projections for Pcviod oJ.gtripMill Construction

APPRAISJL O-F THiE KLWMSKI STEE:L CORPORATIONSITUPi? EILL PROJECT

la IHWCDUCTION

The Kawasaki Steel Corporation is one of the leading Japaneseproducers of plates and sheets. It has a well-established position bothGn the Japanese and the export markets, Ind its management is technically

oMnaetent. Ho{wever, its plate and sheet mills are of obsolete typess andtheir cost s of production are higher than those of modern continuous orsermi- continuous strip mills,

2. In order to modernize their plant and reduce production costspKawasaki began in 1952 to construct a modern, fully integrated mill inta7o stages. The first stage., which includes the necessary steel-makingequipment and a slabbing mill, has been completed; but in order to obtainthe money to complete this stage, the company has been obliged to incur asubstantial debt (rmore than I 10 billion - $30 million equiva'lent) withrelatively short maturities (almost all within five years)* The comApanycannot complete its original plan, which involves the addition of the roll-ing facilities needed to convert the slabs into hot and cold strip, withoutborrowing additional funds. Until it can complete this second phase of itsinvestment program, its facilities will continue to be seriously unbalancedand it will be able to utilize only a small proportion of the capacity ofi=ts new slabbing .mill to produce raw materials for its existing plate andsheet mills.

3. In its original loan application to the Bank in August, 1954 Kawa-saki prcposed an expansion program including fully continuous hot and coldstrip mills with rated annual capacities of 600,000 tons for hot strip and4OOfiO0O tons for cold strip. In order to utilize the full capacity of thesemills, it planned-to expand its existing pig iron and crude steel capacitysubstantially. The total cost of this project was estimated at about $59mallion equivalent.

4.3 lThe company discussed this plan with a Bank mission that visitedJapan in the fall of 1954, and agreed that. the project was too ambitiousboth in terms of the financial resources likely to be available and in termsof the proboable market. In December, 1954 the company.presented its presentproposal for a semi-continuous mill, with a nomina. annual cap,.city of390,000 tons of hot strip and 300,000 tons of cold strip. The cost was thenestimated at 835.3 million equivralent, of which Kawasakfi asked the Bank tofinance the foreign exchange portion, estimated at $13.8 million equivalent.

5. Bank representatives discussed this plan with representatives ofthe company through the fall of 19515 They agreed on important revisionsin the construction cost estimates. the estimated sales receipts, and the

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oro~os Ža f-Lnancing plan. The out-ome was a revised proposal submittedby the com:any in December, 1955 for a project wTith an estimated totalcost of 4i83.8 million equivalent including interest during construction(s>; miillion equivalent) and necessary increases in working capital ($2.2million equivalent). The company requested a Bank loan of tl8,5 millionequivalent to cover the estimated cost of the imported equipment. Thecompany prooosed to borrow another g`l1.l million equivalent from the Japan-ese Development Bank and to contribute 19.2 million equivalent from earn-ings and depreciation allowances.

In its preliminary appraisal the Bark concluded that the pr6je6t-..s sound but that, because of the large amount of debt falling due duringthe four ye -:construction period, a majjr financial reorganization of thecoz,p&any wc-uld be nece;sdry before -the project cadld he considered further.-In April, 1956 the:pBank totified the company of. these views. and. at thc' sme-time, )utllned the objectives to be. attained in the financial reorganizatiob.

7e In T lay, 1956 Kawasaki submitted a financial plan which differedln detail.fr2om that envisaged by the Bank but appeared likely to achievethe Ba-Is objectives. Accordingly a mission was dispatched to Japan wvhichspenti the period of late July to October 1, 1956 advising with Kawasaki onthe financial elan being w-orked out with its creditors.

8$ This report appraises the project and analyzes the financial plan.

II. THE CW&PAIN

a) Organization

9. Kawasaki began to produce steel in 1918, when the Kawasaki Dock-yards Com.pa:ny (predecessor to the present Kawasaki Heavy Industries Limited)built a plate mill in the city of Kobe at the site of the present Fukiaiplant to manufacture its ow.n ship plates. In 1929, 'pull-over t " type sheetmills were added, and the company became Japants f-rst producer of steelsheets. Until the close of the last war, it maintained its position as aleading (and probably the largest) Japanese producer of plates and sheets.

19, in 1950, as a resalt of the decartelization laws, the steel-makingfacilities were separated from the Kawasaki Dockyards Company and became anindeperndent company kno-wn as the Kawasaki Steel Corporation, The companyhas an authorized share capital at present of ; 6 billion, of which r I bil-lion are fully paid up; arrangements are currently being made to sell anadditional = 2 billion through a rights offering to shareholders. An ex-traordinary shareholders, meeting is to be held in December to increase theauthorized share capital to : 12 billion.

11. The ownership of Kawasaki Steel Corporation is widely distributed.As of April 30, 1956 banks, insurance companies and securities companies held

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about 29% of the stock3 irdustrial and cormercial corporations about 14%,and private irvestcrs 57%. There were over 60,000 individual and over 700cornorate shareholders.

12e The co=mpay has small investments in sorme subsidiary companies,buti these investments are not important. The accounts of the subsidiariesnave n-,: oeen consolidated' with those of the company for the purpose of thisreport,

b3 Position in the Japanese Steel Market

13, In recent years, Cawa saki has produced 7 - 9% of the total Japan-ase output of rolled steel products. out of its total sales of 620,000 tonsof such products in the 12 months ending April 30, 1956, 50% were plates,35% were black,g4lvanized and special sheets, and the remaining 15% were bars,narrow strip, and welded tubes. In earlier years, however, plates and sheetseach accounted for about 40 - 45% of Kawasaki's total output.

1L4 During the last two years, the company's output of steel sheetshas risen, but its share in the Japanese total has declined, and its rela-tive position as a producer of both plates and sheets is now being threat-ened. In plates, the addition of yawatafs new four-high mill to the threeexisting modern xills, will leave Kawasaki's three-high mills at a compe-titive disadvantagea In sheets, the most modern facilities in the industryare Yawatats 3;'t continmous hot and cold strip mi:LI, and Fujits 56" semi-.ontinuous coabined plate and hc t strip mill with attached cold strip facil--,ies . I'odern semi-continuous or continuous strip mills generally havelower production costs than the old reversing hand mills, and turn out aproduct that is superior in quality and fin'zsSh ancl is available in moremarketable dimensions. There should be a market for the company's outputduring the next few years, but if its outm.oded sheet-bar and hand-millfacilities are not replaced soon, the company may be unable to survive asan independent producer,

c) Present Facilities and Recent Growth

15. At the time it was separated from the ICawasaki Dockyards Companyin 1950, the company took over steel plants with a yearly ingot capacity ofwell over 600,000 tons and rolling mill facilities that permitted some flexi-bility in the choice of end products, These faci:Lities are described in Ap-pendix 1,

16, M'any problems faced the company. The main steel mills (Fukiai andHyogo) were quite old. There were no blast furnaces; ingot production wasbased almost entirely upon purchased scrap. The fairly modern electric steelfurnaces at Nishinomiya and Chita operated far be:Low their rated capacities,and the costG of the ordinary steel -Ingots making up the bulk of the companylsoutput was high. Kawasaki, like many other steel producers, found itself ina position where conversion to larger scale and more continuous operationswas essential for a reduction in cost, but expansion at the existing site wasvirtually impossible. This was particularly true for the major productionitems, plates and sheetU3

l7. The company decided, therefore, to constrmct, in tvwo stages, an:L. ntegrated mill at Chiba on Tokyo Bay. The first stage consisted ofintegrated blast furnace, steel furnace, and slabbing mill facilities atChiba w:hich would supply higher quality raw materials at reduced costs forexisting rolling facilities. In the second stages strip mill facilitieswere to be added to make Chiba a modern, fully-integrated steel producer.The cormpany's other plants were to be modernized and reorganized, and theold hand mills gradually abandoned, except for the rolling of special qualitysheets.

180 In line with this program, the following investments have been'*crtaken in recent years:-

Business years ending April 301952 1953 1954 1955 195b- - (million yen~

Chiba plant:Integrated steel facili-

ties 2,980 4,389 4,660 851 273Wire rope plant, hand

sheet mills, etc. 904 505 285 53 61Nishinc_iya plar-t 495 314 25 6 79F7kiai plant 283 126 157 188 68Other plants 120 4lO 245 5 2

Total 4h,762 T71L4 5,377 1,103

19. The first stage of constructiorn at Chiba has been completed. Thisplant now includes one blast furnace with a rated capacity of 250,000 tonsper year (now producing at the rate of 360.000 tons per year), open-hearthsteel furnaces with a rated capacity of 300,000 tons and a slabbing millw:th a rated capacity of 1,200,000 tons designed to handle likely future ex-pansions of ingot capacity, (This is about the minimum economic size.) Inaddition there are auxiliary facilities (ore and coal handling plants, in-cluding a pelletizing plant, coke ovens with by-product plants, power plant,etc.) and small fabricating mills (hand sheel mill, wire rope mill, weldingrod mill, and metal lath mipll). The blast furnace was blowm in in June,1953, the open-hearth furnaces started operations in January/IMay 195h, andthe slabbing mill in September, 1954, Since then, the Chiba mill has beenfeeding substanti-al quantities of pig iron and steel slabs to Fukiai and theother Kfawvyasaki plants. According to A.J. Boynton and Company, Chicago (en-gineering consultants engaged by Kawasaki to reviea. the company s plans fcrstrip mill facilities at Chiba), the location., general layout, existing facil-ities, and provision for future growrth at Chiba a:re all good. The gradualreduction of the coke ratio in the blast furnace to 0.7 at present shows goodoperating efficiency and e-mphasizes the quality of the installations andcompetence of the operating staff.

d) TLanagement

20, The company's cieditors, headed by the Daiichi Bank (traditionallyKawasakits chief bankLng connection) have been very closely associated with

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the direction of its affairs since 19e2, when the Daiichi Bank agreed tohelp finance t'he first stage of construction of the Chiba plant. In 1953,at the su-gestion of the Bank of Japan, IMr,obumori, then the managing dir-ector of the Dajichi Bank, left the bank to become full-time chairman ofthe Kawlasaki board. Mr. Nishiyama, the president, is a very dynamic person.He might be said to have taken a serious ri'sk in constructing thes eel-making facilities and the slabbing mill at Chiba without the assuranceof financing for the complementary rolling facilities. However, it wouldprobably have been fin.ancially -mpossible to launch the whole integratedproject at once, and the companyt s present prospects would have been farmore unfavorable if the first stage had not been carried out. The achieve-ments at Chiba in the new blast furnace and open-hearth departments indicatehigh technical competence.

e) Labor

21a Employment at the company as of September 30, 1956 amounted toabout 16,500 (about 12,900 workers and some 3,600 salaried staff). The per-formance of the workers and staff appears to be satisfactory. The engineer-ing of the first stage at Chiba was done by the companyls staff. There isno record of serious labor trouble in recent years.

f) Financial Results and Methods of Financing Recent Investments

22. Coziparative suwmmaiy- balance sheets for recent years are shown inAppendiy 2, Recent earnings are shown in Appendix 3 and summarized in theflollowing table:-

Profits beforeYear Ended Depreciation, Interest and Net Profits after

April 30 Discount and Income Taxes these Deductions(million Yen)

1952 4,131 1,9891953 2,638 9031954 3,992 4011955 3,566 251956 4,988 3901956 (4 monthsended Aug. 31) 2,699 956

23. The reduction of net profits almLost to the vanishing point in theyear ended April 30, 1955 was the result of the large increase in deprecia-tion charges and interest and discount in that year, The former increasedf:^cm =| h6C million in 19S2 to t 23C2 rmilliorn in 1956 (including in each ofthe last three years substantial amounts of special depreciation on newfacilities) while the latter increased fror 2 7T70 million to i 1979 millionin the sa,me pericd, because of the heavy debt incurred to finance the Chibafaci Lities,

24. The se-vere decline in net profits was reversed in the latter partof the year ended April 30, 1956, and the upward trend has continued in the

present fiscal year, For the four months ending August 31, 1956 net profitsare estimated at about 956 million, corresponding to an annual rate of ap-proximately '- 2800 million. Prices have been rising for some time, and de-.mand reflects the booming condition of the shipbuilding and other industries.

During the five year period ending April 30, 1956 the companyfinanced a capital investment program costing 17.5 billion, from deprecia-tion allow.ances (4 7 ..o billion) retained earnings (O 0.5 billion), new shares(li 3." billion) and borrowings (E 6.,' billion), with terms not exceeding five

years. During this period the total amount paid out in dividends ,was 1sr 1.1billion. A substantial increase in current assets was financed largelythrough a r 7.7 billion increase in current liabilities. The development ofthe company's financial position is showm in the summary balance sheets inAppendix 2,

26. It should be noted that in accordance iith Japanese practice, thecompany's published financial statements are not certified by independentauditors.

III. TXE PROJECT

a) Description and Production Pattern

27, The maia canital works which Kawasaki plans to carry out duringtha- three fiscal years ending April 30, 1959 include, in addition to thehot and cold strilp mills, addi-iional soaking pits, pelletizing equipmentdesigned to permit a higher output from the existing blast furnace, and ex-pansion of service facilities required by the neg rolling mills. Final pay-ments may extend over a fourth year, which will be a starting-up period.

28. The proposed strip mills include the following major items of equip-ment :-

1) a 2-high scale breaker from the Fukiai plant and a new 4-highreversing roughing mill with vertical edger;

2) a 5-stand 561t hot finishing mill, capable of rolling sheetsdown to 1.6 mm. in thickness;

3) a 4-stand 56" cold finishing mill, capable of rolling sheetsdown to 33 gauge (0.25 m), which is normally the lightest gaugerequired for galvanizing and tin plate;

1) a 50" continsuous pickling line;

5) three 50" shiear lines.

29. A detailed list of the equipment to be imported is given in Ap-pendix 4.

T0 The output of the new pl.nt, taking into account the probableprc&:ct pattern, would be 390,0OC tons of hot strip, the bul1 of whichwould be processed into 300,000 tons of cold strip. The compamJ wishesto sell some of its output as hot finished products, a common practice inthe steel industry,

31. Although the new mill is intended to replace the old hand sheetmillsO the iammediate effect would be an expansion in the companyts capacityto produce thin sheets from 215,000 tons (based on present facilities) to315,000 tons by 1961 Ultimately, the nominal capacity of the sheet millscould be increased to 5h0,000 tons of hot rolled strip and 400,000 tons ofcold rolled strip by the addition of one stand each to the hot finishingand cold finishing trains. However, in order to reach this capacity, thecompamy would need to expand its pig iron and steel ingot capacity.

b) Engineering and Construction rIIanagement

32. The drawings and specifications for the new mills have been pre-pared by Hawasaki engineers after consultattons wirth suppliers and visitsto various strip mills abroad, The Bank requested that these plans andspecifications, as well as the construction and operating cost estimates,be reviewed by a consultant satisfactory to the Bank. This review was madein July, 1956 by the A.J. Boynton Company who, after suggesting some changesin layout and some additional equipment, reported that the plan for the roll-ing mills was I'sound in all its technical aspects". The company has adoptedBoynton's suggestions 0

33- Construction will be supervised by Kawasaki's engineers workingclosely with the equipment suppliers, -who wll supply erection supervisors.These arrangements are satisfactory.

c) Cost Estimates and Status of Procurement

34. Taking into account the revisions made in the light of the BoyntonrevieIr, the estimated costs of the project, not including interest duringconstruction or increased working capital requirements, are as follows:-

Local Currency Foreign ExchangeExpenditures Expenditures

(million Yen)

Hot rolling mill 3,580 3,570Cold rolling mill 3,088 2,880Power plant 789 _Heat control system 61 -Pelletizing plant 191 -SoaX ng pits 303 -Oxygen plant 17 -Plant ser-vices 506 -;scelLaneous works 1-h?Spare parts 520Conti-ngencies 318 230

Total ,U0-0 7,200

($ Million Equivalent) (25.0) (20.0)

The cost estinates for the imported equ_pment are based partlyo02 q1otations and partly on conditional orders (amounting to more than$17 mvillion equivalent c.i.,f) for the most part signed in the third quar-ter of 1956. The estimates include the full escalation allowable underthe conditional contracts, and allowance for spare parts in accordanceTiith Boynton;s recommendations, The local currency estimates are basedpartly on firm orders for about i 5 billion, on which there is no escala-tion, and partly on current prices. They include an allowance of about12/ for contingencies. These cost estimates for the project are reasonable.

36. Procurement has been, and will be, to the extent practicable,based on international comipetition. International bids were invited forequipment representing about 94% of the estimated foreign exchange cost(excluding spare parts, freight and unallocated). Most of the remainderrepresents equipment obtainable only from a single source.

37- o Si order to ensure the firmness of prices and delivery schedules,the companzy is making down payments on the conditional foreign orders,amounting to a total of about 84-4 million equivalent, The company is ob-taining funds for this purpose from a special loan from the Daiichi Bankto be repaid out of the proceeds of the proposed Bank loan. The companyhas been advised that the Bank would be prepared to consider applicationsfor withdrawal from the proposed loan for the reimbursement of such payments.

d) Status of !ingineering

38. Selection of the major items of equipment has been completed anddetailed construction plans are being prepared.

e) Construction Schedule and Technical i-ssistance

39. Constructi'on of" the proJect is expected to be completed by April30, l959. It is estimated that the startup and training period will re-quire about one year more, although it may be possible to reduce this timethrough the use in this period of experienced foreign rolling mill operators.The company is at present exploring the possibility of making a contractwith the Republic Steel Corporation of the USA for technical assistance,not only during the initial operating period but also for some years after-wards. Although this schedule is tight, it is not unreasonable, becausemuch of the preliminary work is already completed.

f) Market Outlook and Sales Forecasts

400 A detailed analysis of market and price prospects is given in Ap-pendi: , It see;.is likely that by 1960/1961, the first year of full opera-tion of the proposed Kawasaki mill, the market should be adequate to absorbvirtually the whole productive capacity of the mill. It is therefore con-servative to base forecasts of results, as the colipany has doue, on the a3-sumption of 85% utilization of capacity.

li. With respect to price, it has been assumed that sheet prices willfall gradually, reaching a level some 10% below 1955 prices (which are used

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as a-.se because, present prices aopear to be abno)rnally high) by theti me Haw-zasaki Is new mill comes into operation and that the prices of-lntes and hoops will follow a similar trend. This assumption seemsprudent since the future price level of flat-rolled products will prob-ab]ly tend to reflect the lower production costs of modern equipment.

42. Appendix 5 also includes a forecast of Xawasaki t s future salespattern. This assumes that sales of sheets will rise by about 45% from215000 tons in 1955/1956 to about 315,000 tons in 1960, while sales ofplates may fall from about 210,000 tons to about 170,000 tons in the sameperiod. The quality of the sheets produced would be superior to the pre-sent hand-nmll products, and although the company should be able to finda market for its entire production of cold strip (130,000 tons) in 1960/1961,the demand for high quality products may fall short of the supply.' Kawa-saii may thus have to sell part of its output for uses where second qualitysheets would suffice, at ccrresoondingly lower prices. This possibility istaken into account in the financial projections.

IV. PROPOS M FI!QT1NPNNG PIAN

43. During the period ending April 30, 1960 Kawasaki requires aboutA20 million in foreign exchange to meet the cost, of the project, which itproposes to obta,n from the Bank through the Japan Development Bank, andabout Nr 9 billioi (,;A25 million equivalent) in local. currency, of which itpro-poses to meet e 5 billion f-om cash gereratec from its operations, and=the l ,arIng i L billion by borroiTing =4 3 billion from the Japan Develop-m,ent Bar-k and 7 500 million from each of two other Japanese banks (the In-dustrial Bank of Japan and the Long-Term Credit Bank).

414 Interest during construction on these new loars would be paid outof current earnings and would not be capitalized. Additional working capi-tal woulBd 'ue be provided frr Irterna'l cash gneratiora.

45. The company proposes to make an issue of ordinary shares, to enterinto agreements with certain of it.s creditors modifying the terms of theirloans, and to make arrangements with the Daiichi Bank under which it wouldbe assured of various types of financial assistance from that bank in caseit should need them. This would tend to protect the position of the newlenders, to assure the company of suf-ficient funds to meet its i4nvestmentneeds during the construction period, and generally to enable it to main-tain a sound financial position.

Proposed Issue of Ordinary Shares

46. The company is offering (in December) to its stockholders Y 2billion in new ordinary shares at par, in the ratio of one new share foreach two shares held. Any shares not taken up lby stockholders will beoffered at par fcor public subscription, The shares offered for public sub-scription Tilll be underwritten by the company's investment bankers (theYamaichi Secur iies Cormpany, one of the leading houses in Japan). The pro-c_-eds of the issue wil-lr be available in full before the end of December,1956. The existing shares (par value ^ 50) are presently selling at aboutY 75 ex rights (November 16, 1956).

Proroosed Plan for Debt Reorganization and Financial Facilities from DaiichiB' a1 I

47. As of April 30, 1956 Kaw-asakits indebtedness totalled r 10,822rillion (about >r30.1 million equivalent). Of this total -= 3,210 millionconsisted of short-term bank loans, which represented money raised forcap,ital purposes, and had been usually renewed at maturity. (The DaiichiBank h&d -r 1a,470 million of this short-term debt.) The balance of = 7,612rinlin wuas long-term debt (almost all falling duae within five years) con-sisting of the following (= million):-

Japan Development Bank loan l,420Other bank and trust company loans 2,176Insurance company loans 1,000Mortgage debentures 2,879Housing loans 137

Total 7,612

48. The company proposes to use most of the proceeds of the currentshare issue to repay the Japan Development Bank loan and part of the loansfrom trust and banking companies. It plans also to adjust and consolidatecertain other loans. The net result is shown in the following table (fig-ures in = mill-on) :-

Bank loans 1,h56Insurance company loans 1,250

YKortgage debent-res 2,879Housing loans 137

Total 5,722(To be paid off out of proceeds of

share issue 1,890)

(7,612)

The balance of the proceeds of the share issue would be used to increaseworking capital.

h9. Xawasaki t s plan of debt reorganization, described below, has re-ceived the co-nditional approval of the creditors involved.

a) Proposed Treatment of Capital

50. Short-term debt would if possible be renewed on maturity. TheDaiichi Bank would extend to Kawasaki a 15 year line of credit of up to5 billion (including the 1 l,470 million already held by it), lhich would

be available to refund such short-term debt as could not be renewed, and toprovide additional working capital if required.

51. Long-term bank loans would be frozen until April 30, 1960, andwould be scheduled for payment in equal semi-annual instalments during thefollowing six years.

52. Insurance company loans would also be frozen until April 30,1960, and woula- scheduled- or payment in approximately equal semi-annual instalments during the following 11 years.

53, Both the barnks and the insurance companies would agree to deferany instalments which Kawasaki could not pay (after meeting the service of-t.he new debts /*BoRDo J.D.B., etc.7 incurred for the project, and pro-viding - 50u millicn a year for necessary renewals, etc.), without reducingits c-rrent ratio below 1.8:1, if necessary up to the date of the lastmaturity of the new debts.

g The mortgage debentuIres, consistinfg of 22 separate issues and sub-issues, are held by the public, and it is not practical to attempt to modifytheir terms. Kawasaki proposes to issue new mortgage debentures to refundoutstanding issues as they fall due. The total amount of refunding neededbefore April 30, 1960 is !' 2,300 million. The Daiichi Bank would underwriteall necessary refunding issues during the life of the new debts.

55. The housing loans are small the largest annual maturity beingonly :r 15 -rillion. It is proposed to leave these loans as they are, butif Kawasaki could not pay any maturities after meeting the prior chargesmentioned above, without decreasing its current ratio below the agreedlevel, the Daiichi Bank would advance the amount of the shortfall,

b) Pronosed Treatment of Interest

6, EKawasaki would pay interest on all its debt (including debts owedto the Daiichi Bank) as it fell due. If, howTever, the company's earnings,after meeting prior charges as explained b Iow, fell short of the amountneeded to pay interest, or if the company?s current ratio would be reducedbelow the agreedratio by such payment, the Daiichi Bank would lend Kawasakithe amount needed to meet interest payments or to restore the current ratio.Such loans from the Daiichi Bank would be retired either from surplus earn-ings or out of the proceeds of sale of ordinary shares. Any part of suchloans which could not be retired in these ways would not becore payableuntil a date after the finial date of the new debtL-.

57. The prior charges referred to above are a) during the four yearsending April 30, 1956, interest on the new debt, amounts needed for invest-ment in the project (totalling r 5 billion) r 2GO million a year for re-newals, etc., and service on the 1-Iousing loans; and b) thereafter: debtservice on the new debt and the Housing loans, and 1 500 million a yearfor renewals, etc.

c) The Daiichi Bank58, It is clear that the effectiveness of this plan to protect thecompany's financial position depends largely upon the Daiichi Bank's willingnessand ability to make gocd its undertakings. The standing, financial strengthand business reputation of the Daiichi Bank, and -its relation. with the cnm-pany, are such that there is no reason to doubt either its willingness orits ability to carry oult its proposed obligations if called upon to do so.It will, however, be seen from the analysis of the financial projections givenbelow that in normal circumstances it is not likely that the company wouldneed to have recourse to the Daiichi Bank,

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V . FI1T^NA-'TAL PROJECTIONTS

59. Appendix 6 includes projections, for the construction period andfor the operating period, of the earnings, cash flow and financial situa-tion of the company.

6o. It has been assinied that earnings before depreciation, intereston debt and income taxes will be as follows (s billion):-

Year ending April 30

1957 6.o1958 4.51959 3*51960 3.51961 4.01962 4,51963 and later years 4.8

61. The estimate for the current year is based on actual results forthe first four months and a conservative judgement for the remaining eightrmonths, The estimates for the following four years are conservative. Forthe remaining years the estimates are the same as those used in T.O, 108.

62. These estimates compare as followTs with recent earnings (E billion):-

year ended April 30

1952 4.001953 2.351954 3.171955 2.911956 4.071957 (first four months)2.48

63. These figures are net of bank charges (discount, etc.) and differin this respect from the figures show^;n above in Paragraph 22.

64. The other assumptions on which the .projections. are based ,rn that :-

a) the proposed debt reorganization will be carried out as planned;

b) the Bank will lend the Japan Development Bank $20 million equiva-lent at 5% with a 15 year term (including 321 yearst grace);

c) the Japan Development Bank will relend the proceeds of the Bankloan to the company on similar terms, charging '% per annum forits services;

d) the company will borrow Y 3 billion from the Japan DevelopmentBank at 9% and 7 1 billion from twTo other Japanese banks at 9.1%,with terms and grace periods similar to those of the Bank loan;

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e) interest rates on other debts iTll remain at their presentlevels;

f) taxes mill continue at present levels, equivalent to 43% onnet income;

g) the company will continue to value its inventories accordingto the present system, which is the most conservative permittedby the tax laws;

h) during the four years ending April30, 1961, the company will pay cash dividends at a rate notgreater than 5% per annum, and will distribute stock dividendsto make the total distribution (cash and stock) 10%; and willthereafter pay cash dividends at the rate of 10% per annum;

i) the company will take advantage of special depreciation per-missible during the five initial operating years of the new plant,but only to the extent that by so doing it does not reduce earn-ings below the level adequate to cover a 10% dividend;

j) the current ratio (excluding short-term debt from current liabil-ities) will be maintained at 1.8:1 and current assets will be in-creased 'by !_w 3,000 million during the -three years ending April 30,1963;

k) 't 2CCi million a year during the four years ending April 30,1960, andt r 500 million a year thereafter, will be added to fixedassets by way of renewals, etc,;

1) there will be no further issues of ordinary shares for cash.Any issues thnat may be rnade would of course improve the debt-equitj ratio, especially if the proceeds were used to repay debt;

m) any excess of cash generated from the company's operations overits requirements (including cash dividends) will be used to reduceshort-term debt, and when thsis has been extinguished, will be ac-cumulated as itadditional cash"1 (beyond the current assets requiredto maintain the normal current ratio);

n) the Company will not take advantage of possible tax savings byallocating from earnings any amounts to reserves for future pricefluctuations, worknlents retirement funcl, or bad debts, Any amountso allocated would reduce tax liability and improve the cash posi-tion.

65. It appears from the projections that during the four years endingApril 30, 1960:-

a) the company should be able to meet all its financial obliga-tions and have enough money to complete the project with an ag-gregate cash surplus of z 2,072 million;

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b) interest on all debt, and service on the Housing loans, wouldbe covered by rmargins ranging froin 3.2 to L.4 times;

c) earnings would be adequate to permit payment of cash dividendsof 51" in the first three years, and 3% in the fourth year, Stockdividends would be 5% in each of the first three years, and 7% inthe fourth year;

d) the amount of short-term debt outstanding could have been re-duced (by the application of surplus cash) to - 1, 125 million bythe end of the period;

e) the ratio of total debt to equity would nevertheless rise (byreason of the new debts) from 1.02 to 113.

66. During the 12 years following April 30, 1960, the projections in-dicate that:-

a) service on new debt would be covered by ratios varying from3.0 to 2.4. Total debt service would be covered by ratios vary-ing Lrom 2.4 to 13;

b) earnings would be adequate to meet the assumed 10% rate ofcash dividend except in the first year, when 5% could be paid.Thimre would be ample earned surplus to permit a payment of 5%stock dividend in addition in this year;

c) after paying off all debt, there should be an aggregate cashsurplus at the end of the period, amounting to about L 2,900 mil-lion;

d) all short-term debt could be paid off by 1969;

e) the debt-equity ratio would, of course, improve steadily, fall-ing below 50:50 in 1967 and below 25:75 in 1969.

67. It will be seen from the foregoing that the proposed financial ar-rangements should enable the company, on conservative assumptions:-

a) to dispose of sufficient funds to complete the project, and

b) to meet all its liabilities and earn a reasonable Leturn onits equity.

68. At the same time the lenders who are Putting in new money wouldbe given a preferential position over the existing creditors, and the com-pany would be protected by the contemplated financial arrangements frombeing put into difficulties if for some reason its earnings in a given yearwere inadequate to meet its interest requirements, or repayment instalmentson the old debt, or if it were not able to refund its mortgage debenturesby public issue.

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VI. 001JCLUSIO0TS AND HECOYT',TDATIONS

69, The proposed project is well designed to complete the inte-grated rodern facilities which Kawasaki began to construct five yearsago, Uithout it, the company's competitive posit o.on is likely to de-teriorate progressively.

70° The company is well managed and has a competent technical staff.St operates its present plants efficiently. The cost estimates for theproject are reasonable. Ihere should be an adequate market for its product.Arrangements for procurement and for construction management are satisfactory.

71, Tne proposed financial reorganization, together with the financialfacilities proposed to be made available by the Daiichi Bank, should achievethe following objectives:-

a) give the proposed new lenders a preftrential position;

b) ensure that the company has enough money to complete the pro-ject;

c) enable the company to maintain a sound financial position innormal times;

d' protect the company from getting into financial difficultiesduring periods wher± the companyfs earnings may be reduced belowa normal level,

72. The Daiichi Bank should be able to provide the financial assist-ance proposed to be made available by it,

73. Conservative projections indicate that in normal times the companyshould have ino need for ary such assistance from the Daiichi Bank. Itshould be able to cover all debt service with an adequate margin. maintaina sound liquid position, and earn a reasonable return on its shares.

7b. Provided that the proposed protective financial arrangements men-tioned below are made, the project is suitable for a Banlc loan of $20 mil-lion equivalent, with a term of 15 years (including 3- years' grace). Theborrower would be the Japan Development Bank, which would relend the pro-ceeds of the loan to Kawasaki, The loan would be guaranteed by the JapaneseGovernment.

Proposed Protective Financial Arrangements

75. If the Bank makes a loan for this project, the contractual ar-rangements should provide, among other things, that:-

a) the proposed financial reorganization, including the new shareissue and the proposed arrangements with the Daiichi Bank, shallhave been carried out before the Bank loan becomes effective.

VI. C0NqCLuSI.0TS AID RECOM'iaNTDATIONS

69. The proposed project is well designed to complete the integratedmodern 'acilities which Kawasaki began to construct five years ago. Withoutit, the conpanyts comsetitive position is likely to deteriorate progressively.

70. TIe company is well managed and has a competent technical staff.It operates its present plants efficiently. The cost estimates for theproject are reasonable. There sho-ald be an adequate market for its product.Arrangements for procurement and for construction management are satisfactory.

71. The proposed financial reorganization, together with the financialfacilities proposed to be made available by the Elalichi Bank, should achievethe following objectives:-

a) give the proposed new lenders a preferential position;

b) ensure that the company has enough money to completethe project;

c) enable the comna:-y to maintain a sound financial positionin no-rmal timea,;

d) protect the company from getting into financial difficultiesduring periods when the company's earnings may be reducedbelow a normal level.

72. The Dn.iichi ank s'-ould be able to provide the financial assistanceproposed to be made available by it.

73. Conservative projections indicate that ir normal times the companyshould have no need for any such assistarce from tihe Daiichi Bank. It shouldbe able to cover all debt service with an adequate margin, maintain a soundliquid position, and earn a reasonable return on its shares.

74. Since the contractual arrangements set out in the various loandocuments are designed to achieve the objectives mentioned in paragraph 71above, the project is suitable for a Bank loan of $20 million equivalent,with a term of 15 years (including 32- years' grace). The borrower would bethe Japan Development Bank, which wiould relend the proceeds of the loan toKawasaki. The loan would be guaranteed by the Japanese Government.