Toshiba’s Looming Writedown Wipes Out Gain From 2016 Share Rally

EghtesadOnline: Toshiba Corp.’s impending multibillion-dollar writedown has triggered one of the worst-ever share declines for a major Japanese company, with ratings downgrades and investor pessimism erasing almost all of its 87 percent rally this year.

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29 December 2016

Shares in the electronics and industrial conglomerate fell 17 percent to 259 at the close on Thursday. Toshiba said it may write down billions of dollars of an acquisition made by U.S. unit Westinghouse Electric, fueling a share decline this week that has wiped out about 800 billion yen ($6.8 billion) in market value. Moody’s Investors Service, Rating and Investment Information Inc. and S&P Global Ratings all responded by cutting Toshiba’s credit ratings, according to Bloomberg.

“Investor concerns are peaking, given that there are figures running into the several hundred billions of yen and no idea of what the actual losses are,” said Masahiko Ishino, an analyst at Tokai Tokyo Securities. “Amid the uncertainty, the share prices reflect the search for an appropriate level of value.”

Toshiba can’t seem to get past its accounting problems. The Tokyo-based company was recovering from a profit-padding scandal last year that claimed the jobs of three presidents, led to record losses and prompted the company to cut staff and sell off businesses. Toshiba was narrowing the scope of its business lines and counting on its nuclear reactors, which make up about a third of revenue, to fuel growth. A dispute over the value of a nuclear construction business acquired by Westinghouse Electric may result in a loss of as much as $4.3 billion, according to broadcaster NHK.

“We can’t help but determine that the risk of a loss close to the reported figure is possible,” Yukihiko Shimada, an analyst at SMBC Nikko Securities Inc., wrote in a report.

Toshiba said in a statement earlier this week that the writedown would exceed an initially anticipated amount of $87 million, and would probably be in the billions. It didn’t elaborate further. Still, such a loss would eclipse the 168 billion yen in net income that analysts were projecting, on average, for Toshiba’s current fiscal year through March. Hirokazu Tsukimoto, a spokesman for Toshiba, said on Thursday that the company has sufficient funding on hand. “There is no reason to think that there will be an immediate impact on our financing,” he said.

The conglomerate makes everything from refrigerators, chips and computers to nuclear power equipment. The potential writedown is related to a dispute over the value of CB&I Stone & Webster, a nuclear construction and services company that Westinghouse bought in January. It was involved in the building of advanced nuclear reactors at two U.S. facilities, which are behind schedule and over budget.

Toshiba’s financial standing could come under further strain, according to a statement from S&P. The risk that emerged in its nuclear business may negatively impact the evaluation of the company’s risks, R&I said. The agency added that it can’t ignore the fact that being on the Tokyo Stock Exchange’s alert list would limit Toshiba’s means to increase capital.

“The downgrade of Toshiba’s ratings principally reflects Moody’s deepening concerns over the sustainability of Toshiba’s near-term liquidity,” Masako Kuwahara, a Moody’s senior analyst, said in a statement. “The impairment loss could further lead to a breach of Toshiba’s bank debt financial covenants.”

Toshiba was among the three best-performing companies in the Nikkei 225 Stock Average for 2016 before the writedown jolted investors. On Wednesday, Toshiba shares fell by their most since 1974, according to available data. All told, the company’s stock has declined 42 percent this week.

While the shares had reached a peak in mid-December, up 87 percent for the year, they are now up just 3.5 percent in 2016. Still, 11 of the 18 analysts tracking Toshiba have kept their buy recommendations, even as credit-default swap traders have raised the price of insuring against non-payment of the company’s debt. Short selling has been surging on the stock.

“Looking at the profitability and capitalization, there isn’t a big risk that the company will be unable to pay its liabilities,” Ishino said. “But when considering the importance of the nuclear energy and semiconductors businesses, we can expect some support from banks to ensure that it remains a going concern.”