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Toshiba must jump through hoops to regain market trust

Credit downgrades, stock delisting risk present dire challenge

HIROTO TANAKA and TAKENORI MIYAMOTO, Nikkei staff writers | Japan

TOKYO -- While it was inevitable given Toshiba's financial implosion, recent credit rating downgrades have made the company's fight for survival even more difficult. As new problems at U.S. nuclear unit Westinghouse Electric continue to surface, the Japanese technology giant faces perils from many directions.

From blue chip to junk

Toshiba has delayed the release of financial results covering the April-December period for the fourth time, pushing it back by four weeks to April 11. The company needs more time to probe inadequate internal controls at Westinghouse.

Despite the delay, Toshiba is expected to maintain its forecast of a 390 billion yen ($3.46 billion) net loss for the current financial year ending March 31, adding to the massive bleeding recorded in fiscal 2015. The group's liabilities are forecast to exceed assets by 150 billion yen. Never before in its history has Toshiba ended a fiscal year in negative net worth.

Toshiba is sitting on a total of 210 billion yen in outstanding bonds, most of which apparently are held in Japan by individuals and financial institutions. The yield on the company's bonds that mature in May 2018 was quoted at 8.875% as of Friday, according to the Japan Securities Dealers Association.

The yield began spiking after Japanese credit ratings agency Rating and Investment Information downgraded the credit standing of Toshiba's bonds to speculative levels in December, as the move forced major asset managers to offload Toshiba bondholdings in accordance with internal investment guidelines. Regional financial houses later followed suit in selling off the bonds.

Outside Japan, fund managers are rushing to pick up Toshiba's short-term debt. The negligible risk of the company going bankrupt within about a year justifies that bet, said a source at a Hong Kong hedge fund.

"We're getting nonstop inquiries from hedge funds all over the world," said Taketoshi Tsuchiya, senior executive at Mizuho Securities' financial markets group. The demand has been fueled by the expectation that Toshiba will sell its memory unit. As long as main lenders keep their credit lines for Toshiba open, fixed-income investors could reap hefty returns with little fear of default.

But it is a different story when it comes to Toshiba bonds with three or more years to redemption. Few people anywhere are touching them, as it remains unclear whether it is possible for Toshiba to sustain growth over the medium to long term and rebuild its shattered business.

Rehabilitation pitfalls

Toshiba needs to clear several steep hurdles to regain its financial footing, the most pressing being the tactical retreat from Westinghouse and other offshore nuclear operations. That business has grown toxic amid the twin pressures of soft demand and the higher costs resulting from stronger safety regulations. It would be nearly impossible for one company to take on nuclear projects independently today. Toshiba is weighing a Chapter 11 bankruptcy protection filing for Westinghouse, with an eye toward making it easier to sell shareholdings in the U.S. unit.

Another hurdle relates to the company's liquefied natural gas operation in Freeport, Texas. Toshiba is on the hook with an American partner for LNG processing rights lasting two decades starting in 2019. If the Japanese group cannot find buyers for the commodity, the losses could reach into the hundreds of billions of yen.

How much Toshiba will fetch by selling its moneymaking memory business is another key issue. The sale needs to cover costs associated with pulling out of U.S. nuclear operations, and also let Toshiba avoid having liabilities in excess of assets again at the end of fiscal 2017.

Toshiba looks to take in 1.5 trillion yen to 2 trillion yen for the memory unit, which the group is to spin off April 1. But setting the asking price at those heights may prolong negotiations with potential buyers. All eyes are on the first round of bidding, which concludes around the end of March.

Losing faith

One last complication involves shedding the "security on alert" designation by the Tokyo Stock Exchange. The TSE went even further this month by labeling Toshiba as a "security under supervision," putting the company a step closer to delisting.

Toshiba resubmitted a report Wednesday on internal management to the TSE amid further examination by the exchange. But the company's repeated delays in releasing financial results and newly uncovered corporate governance issues do not bode well for the TSE's decision. If Toshiba does become unlisted, it would be stuck in a decidedly narrower box in terms of fundraising from financial institutions.

S&P Global Ratings lowered Toshiba two notches from CCC+ to CCC- on Friday. The U.S. ratings agency also kept the Japanese multinational on "CreditWatch with negative implications" for further downgrades. Toshiba is running low on time to regain market trust.

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