Tokyo, December 05, 2012 -- Moody's Japan K.K. has assigned A3 long-term domestic and foreign currency issuer ratings to Daikin Industries, Ltd.

Moody's has also assigned a (P)A3 rating to Daikin's JPY 100 billion domestic shelf registration, effective September 6, 2012, and an A3 rating to the senior unsecured bonds issued by Daikin. These bonds are takedowns from the shelf registration.

The rating outlook is negative.

The specific bonds issue rated are:

o JPY 10 billion Series 17 senior unsecured bonds, due 2017

o JPY 10 billion Series 18 senior unsecured bonds, due 2019

o JPY 30 billion Series 19 senior unsecured bonds, due 2022

RATINGS RATIONALE

The A3 rating reflects Daikin's: (1) relatively stable earnings and cash flow through the business cycle (2) leading position in the global market for air-conditioning products, (3) dominant position in Japan's commercial air-conditioning systems sector, (4) leading position in the global fluoro-chemical products market, and (5) high level of business diversification geographically.

The rating also takes into consideration the factors inherent in Japan's air-conditioning market: market maturity; severe price competition; weak outlook for new housing starts and building/construction; and greater competition overseas.

The rating further incorporates the increase in profits from the fluoro-chemical business, supported by strong cost restructuring.

Daikin's acquisition of Goodman Global Group Inc. -- a leading maker of heating, ventilation and air conditioning (HVAC) products for residential and light commercial use, based on unit sales -- in 2012 will enhance its presence in the US as well as its product range.

But, the acquisition will also increase financial leverage. We expect leverage to improve over the medium term on the back of stronger earnings and profitability. This expectation is reflected in its current rating.

The A3 rating also takes into account Daikin's stable and strong relationships with its major banks (a regional support factor in Japan), and which provides an uplift of two notches from its fundamental level of credit worthiness.

The negative outlook reflects Daikin's reduced financial flexibility, the potential for volatility in its earnings and cash flow given the greater uncertainty in the global economy, especially as related to China and Europe, and the risks associated with its integration and business plan.

The company's business and integration plan draws on the strengths of both Daikin and Goodman and includes cross-sharing of markets, product strengths and best practices. The negative outlook also reflects Moody's concern that the benefits may take longer than expected.

Over time, Upward rating pressure will be limited as the rating outlook is negative. However, the outlook could revert to stable if the company can return adjusted debt/EBITDA to 3.5x or lower in FYE3/2014, and then near 3.0X in FYE3/2015. At the same time, it will need to keep its adjusted EBITA margin above 8% from FYE3/2014. Such trends should be supported by a successful integration with Goodman.

A significant erosion in the market share of its air-conditioning business, and delays in realizing synergies from the acquisition, or a lack of timely improvement in its earnings and cash flow would pressure the rating downwards. This trend would be evidenced by adjusted EBITA margin below 7%, or adjusted debt/EBTDA higher than 3.5x.

Further large debt-financed acquisitions that hamper the expected improvement in financial leverage, or signs of negative free cash flow would also pressure the rating.

The principal methodology used in this rating was Moody's "Global Manufacturing," published on December 29, 2010, and available on www.moodys.co.jp.

Headquartered in Osaka, Daikin Industries, Ltd. is a leading manufacturer of industrial-use air-conditioners and fluorochemical products. Its consolidated sales were JPY1.2 trillion in FYE03/2012.

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Noriko Kosaka Vice President - Senior Analyst Corporate Finance Group Moody's Japan K.K. Atago Green Hills Mori Tower 20fl 2-5-1 Atago, Minato-ku Tokyo 105-6220 Japan JOURNALISTS: (03) 5408-4110 SUBSCRIBERS: (03) 5408-4100 Richard C Bittenbender Associate Managing Director Corporate Finance Group JOURNALISTS: (03) 5408-4110 SUBSCRIBERS: (03) 5408-4100 Releasing Office: Moody's Japan K.K. Atago Green Hills Mori Tower 20fl 2-5-1 Atago, Minato-ku Tokyo 105-6220 Japan JOURNALISTS: (03) 5408-4110 SUBSCRIBERS: (03) 5408-4100 Copyright 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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