Sharp Drops After Saying Material Doubt on Survival

Sharp Corp. (6753), the world’s worst- performing major stock, fell in Tokyo after forecasting a record $5.6 billion loss and saying there is “material doubt” about its ability to survive. The company’s credit was downgraded to junk by Fitch Ratings.

The shares dropped 2.4 percent to 165 yen, extending this year’s decline to 75 percent, the worst performer among more than 1,600 companies in the MSCI World (MXWO) Index of developed nations. Fitch downgraded Sharp six levels to B- today, citing growing liquidity risks.

Sharp’s warning came a day after a surprise $9.6 billion loss forecast by Panasonic Corp. (6752), which was downgraded two levels today by Standard & Poor’s, as the companies lose ground to Samsung Electronics Co. (005930) in TVs. Osaka, Japan-based Sharp has failed to win a planned 67 billion-yen ($835 million) investment from Taiwan’s Foxconn Technology Group and has had difficulty selling commercial paper as it burns through cash.

“Fitch does not foresee any meaningful operational turnaround in the company’s core business over the short- to medium-term,” the ratings company said in its statement today. Fitch kept the company on a negative ratings watch.

The net loss will probably be 450 billion yen in the year ending March 31, Sharp said in a statement yesterday, scrapping its earlier projection for a 250 billion-yen loss.

Sharp’s convertible bonds maturing in September 2013 fell 6.85 percent to 50.30 yen per 100 yen face value as of 10:15 a.m. in Tokyo. That’s the biggest drop since Oct. 18, when the notes fell to an all-time low of 43.10 yen.

‘Material Doubt’

Sharp’s new loss forecast compares with the 296 billion-yen loss average of 17 analyst estimates, according to data compiled by Bloomberg before yesterday’s statement.

“Sharp is in circumstances in which material doubt about its assumed going concern is found,” the company said in a statement to the Tokyo Stock Exchange after the market closed yesterday.

In contrast, Sony Corp. (6758) reiterated its forecast for a first annual profit in five years after slashing costs, exiting panel ventures and trimming its TV lineup.

Panasonic shares fell 0.7 percent to 411 yen, after a 19 percent slump yesterday. Sony rose 2.1 percent to 934 yen.

S&P downgraded Panasonic’s long-term debt to BBB, the second-lowest investment grade, from A-, with a stable outlook. The ratings company cited “huge” losses and a slow recovery outlook.

Sharp has been hit by falling prices for liquid-crystal- display panels, delays at an LCD factory and declining sales in Japan and China.

Turnaround Plan

The company’s turnaround plan includes seeking voluntary retirements, cutting salaries, selling assets and reducing capital investments, it said. Japan’s largest maker of liquid- crystal displays also is considering several partnerships as talks with Foxconn continue, President Takashi Okuda said.

“We think time is running out for the company and believe an earnings rebound hinges on how quickly it can increase capacity utilization,” Shunsuke Tsuchiya, an analyst at Credit Suisse Group AG, wrote in a report to clients. “We also see further risk of capital erosion and a remaining need for fresh capital.”

Panasonic, Japan’s second-biggest TV maker, said Oct. 31 it expected a 765 billion-yen full-year net loss, or 30 times bigger than analysts had estimated, citing restructuring costs and falling demand for its products. Osaka-based Panasonic said it won’t pay a dividend for the first time since 1950 because of an “urgent need” to improve its financial position.

Sony Forecast

Sony, Japan’s biggest consumer-electronics exporter, kept its full-year net-income forecast unchanged at 20 billion yen even as it unexpectedly posted a seventh straight quarterly loss on slumping demand for Bravia TVs and Cyber-shot cameras.

Sharp widened its full-year forecast for operating loss for LCDs to 132 billion yen from 105 billion yen, saying it took a 53.5 billion-yen writedown on its large LCD inventory and sales of small LCDs fell below estimates.

Global TV demand is expected to remain little changed in 2013 after shipments of all TV types declined more than 4 percent this year, researcher DisplaySearch said.

Sharp also posted a 61 billion-yen charge on deferred tax assets and took a 30.1 billion-yen writedown on equipment for solar-panel production.

“Sharp must take drastic measures or else banks will give up on it,” said Makoto Kikuchi, chief executive officer at Myojo Asset Management Japan Co., a Tokyo-based hedge fund advisory firm.

Elpida Echoes

The company’s warning echoes that made by chipmaker Elpida Memory Inc. before it filed for bankruptcy in February.

Elpida lost money for five straight quarters before filing for bankruptcy with liabilities of 448 billion yen after falling prices for its computer-memory chips and a stronger yen eroded earnings and left it unable to pay debt.

Elpida said Feb. 14 it wasn’t making enough progress in obtaining needed financing, and “therefore, material uncertainty about its assumed going concern is found.” That note was added to financial results for the previous quarter.

Sharp, the century-old inventor of mechanical pencils, has put up properties, including its headquarters, as collateral to raise funds. Sharp turned to its main banks Mizuho Financial Group Inc. (8411) and Mitsubishi UFJ Financial Group Inc. as it struggled to refinance debt after Standard & Poor’s and Moody’s Investors Service cut its credit ratings to junk.

The banks contributed to a total of about 360 billion yen in loans by the end of September, Sharp said.

The electronics maker has been renegotiating terms for a proposed stake sale to Taipei-based Foxconn after widening its full-year loss forecast eightfold in August, triggering a slide in its share price. Foxconn agreed in March to invest 67 billion yen for a 9.9 percent stake in Sharp at 550 yen a share.

Sharp assumes a deal can be reached, Okuda said.

Sharp sold a stake in an LCD factory in central Japan to Foxconn founder Terry Gou earlier this year to jointly run the facility, considered the most advanced in the industry.

To contact the reporters on this story: Mariko Yasu in Tokyo at myasu@bloomberg.net; Naoko Fujimura in Tokyo at nfujimura@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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