Business / Corporate

Sharp bond risk jumps as losses over 4½ years top $10 billion

Bloomberg

Sharp Corp.’s default risk jumped to a two-year high as losses in the past 4½ years topped ¥1.2 trillion ($10 billion).

The cost to insure the Osaka-based company’s bonds against default climbed 219 basis points in two weeks to 858 basis points on Oct. 30. The Markit iTraxx Japan credit-default swap index fell five basis points during the period.

The maker of screens for Apple Inc.’s iPhones posted a loss of ¥83.6 billion in the six months ended September as the Chinese smartphone market slowed. Display sales dropped 15 percent.

Sharp has trudged from one crisis to another over the last four years after lower-cost Asian rivals undercut its core business making liquid-crystal display TVs. Banks accepted shares in the company earlier this year after it defaulted on debt payments, and it remains dependent on its main lenders Mizuho Financial Group Inc. and Mitsubishi UFJ Financial Group Inc. for survival.

“The problem with Sharp is it doesn’t have a core business with which it can look to the future,” said Mana Nakazora, the chief credit analyst in Tokyo at BNP Paribas SA. “All it can do is shrink its operations further.”

Sharp said its sales dropped 3.6 percent in the fiscal first half to ¥1.279 trillion as revenue from LCD TVs, tablets and solar batteries all decreased, according to its earning statement released Oct. 30. It has amassed losses totaling ¥1.216 trillion from the year starting April 2011 to the half-year ended Sept. 30.

The company’s probability of debt nonpayment within one year has jumped to 3.3 percent from about 0.24 percent in early May, according to the Bloomberg default-risk model, which considers factors such as share prices and debt levels. The gauge suggests a credit rating four steps below investment grade. The company had ¥583.6 billion in net interest-bearing borrowings at the end of September, ¥23.2 billion more than three months earlier.

“The most important thing in judging Sharp’s creditworthiness is the stance of its banks,” credit analysts Yutaka Ban and Kentaro Harada at SMBC Nikko Securities Inc. wrote in a report this week. Sharp had a ¥510 billion syndicated loan due for payment in March 2016 and if lenders were not to refinance it, the manufacturer’s funding avenues would probably be cut off, they wrote.

While uncertainty has risen about Sharp meeting its latest restructuring plan, announced in May, lenders were probably able to foresee that when drawing up the plan, Ban and Harada wrote. The chances of banks calling the 103-year-old company’s loans are therefore low, according to the report. Sharp said in May it will pare its workforce by 10 percent and withdraw from underperforming businesses, including terminating its TV operations in Europe, Canada and Australia.

Sharp is considering selling a stake in its LCD operations to Foxconn Technology Group unit Hon Hai Precision Industry Co. or the Japanese government-backed Innovation Network Corporation of Japan, people with knowledge of discussions within the companies have said.

Spinning off Sharp’s LCD business “would result in a sharp drop in its operation risk,” said Takao Matsuzaka, a Tokyo-based credit analyst at Daiwa Securities Group Inc. “It needs to take action as fast as possible. The outlook for its panel-related businesses is worsening more rapidly” because Asian competitors will likely boost supply in the next two to three years, he said.

Masako Shiono, a spokesman for Mizuho, said the bank will continue to support Sharp. Taiki Kitaura, a spokesman for Mitsubishi UFJ, declined to comment. Yoshifumi Seki, a spokesman for Sharp, declined to comment on the company’s default swaps.

Japan’s Rating & Investment Information Inc. has a B-rating on Sharp, six levels below investment grade. The ratings company evaluated the company at AA as recently as May 2009.

“It’s impossible to see Sharp’s plan for rebuilding its business,” said BNP’s Nakazora. “Sharp, by right, needed to find its survival plan a lot earlier.”

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