Westinghouse bankruptcy filing just the start for Toshiba
Fulfilling loan guarantees could further strain fragile finances
TOKYO -- Toshiba's plan to have Westinghouse Electric file for bankruptcy protection this week is a risky first step in a long and potentially complicated recovery, exposing the parent to a stiff financial blow if loan payments by the American nuclear unit falter.
The Japanese conglomerate's board is to give the okay Wednesday for a Chapter 11 filing that could come as early as Tuesday in the U.S. Toshiba is in late-stage talks with parties contracting Westinghouse to build two American nuclear power plants to have construction continue while the unit is under bankruptcy protection.
Massive losses at Westinghouse, including those linked to the acquisition of a nuclear construction services company, have plunged Toshiba into a financial crisis. Putting the unit under bankruptcy protection would take such future losses as those linked to construction delays off the parent's books. Toshiba cannot begin to improve its own situation "unless progress is made on Westinghouse's problems," said an official at the Ministry of Economy, Trade and Industry.
Westinghouse has asked that the Korea Electric Power group sponsor its recovery. Entities linked to South Korea's government own 51% of the utility, a major player in that country's retail power and transmission sectors. Group members handle power generation, including nuclear plants.
Korea Electric already has reactor technology of its own and seems to view investing in Westinghouse in its current state as a risky bet. But the Toshiba unit's intellectual property and nuclear services businesses, including fuel production and reactor decommissioning, are highly profitable, indicating a large potential upside once noncore assets are sold off and operations are restructured.
Specifics of an overhaul are to be discussed soon. Westinghouse could solicit other sponsors as well, depending on how restructuring plans shape up.
On the hook
Westinghouse was set to notify key creditors Monday that Toshiba will uphold in their entirety guarantees of Westinghouse debt. The parent backed some 793.4 billion yen ($7.17 billion) in liabilities at the unit as of the end of March 2016.
Bankruptcy proceedings will likely put Westinghouse's nuclear construction work and loan payments on pause, and could bring demands for damages. Toshiba will cover those payments up to the guaranteed amount, aiming to minimize the disruption that Westinghouse's bankruptcy filing would cause and so win support for the request.
But the parent could also be forced to cover breach-of-contract penalties and make provisions for the risk of future losses, bringing Toshiba's total costs to around 1 trillion yen, by some estimates. A Toshiba executive has said total liabilities are "tough to calculate at this point," as much regarding Westinghouse's future remains uncertain.
Finding a way forward will require dispelling the concern many in the U.S. feel about working with Toshiba or its nuclear unit. Commerce Secretary Wilbur Ross and Energy Secretary Rick Perry brought up Toshiba's struggles in a March 16 meeting with METI chief Hiroshige Seko in Washington. The Americans "likely have begun to realize that this is a serious issue," another METI official said.
It is unusual for so young an American administration to touch on specific companies in such talks. The two sides have agreed to share information as the case develops. Toshiba's efforts are unlikely to result in full-fledged government negotiations right away. But Washington is watching to see how the situation plays out, including how Westinghouse's reorganization affects employment.
Toshiba is gearing up to sell its valuable memory chip business to cover losses linked to the nuclear unit. The operations will be spun off Saturday as Toshiba Memory. More than 10 companies have expressed interest in the new unit, including rivals seeking a greater share of the memory market, Toshiba customers looking for a stable supply, and well-heeled investment funds.
Toshiba looks to sell a majority stake in Toshiba Memory, which will have around 600 billion yen in net assets. The unit's value is pegged at 1.5 trillion yen to 2 trillion yen, meaning heavy goodwill costs for the buyer.
Bidders are asked to present a purchase price and desired stake size by Wednesday. But Toshiba's first priority is "directing traffic," according to an executive. The interests of the conglomerate, which aims to preserve Japanese plants and close the sale as soon as possible, are in some ways at odds with those of potential buyers, making it unlikely that a deal will be struck after one round of bidding. State-backed financial institutions also are weighing investments.
The government is prepared to order a review of any sale of the unit to a foreign entity. There are concerns that Toshiba's memory technology could be put toward military purposes, particularly in China. The conglomerate will need to walk a narrow, treacherous path between the demands of Tokyo and its own suitors if the sale is to go through.
Toshiba shares hit a roughly one-month high of 232 yen soon after opening Monday but quickly fell, ending the day down 2% from Friday's close at 218.4 yen. The company topped the first section of the Tokyo Stock Exchange in both volume and value of trading.