Sharp Default Odds Seen at 94.9% as Panasonic Cut: Japan Credit

Sharp (6753) Corp.’s bond risk is signaling a 94.9 percent chance of default in five years as the yen near postwar highs swells losses at Japanese electronics companies, prompting Standard & Poor’s to cut Panasonic Corp. (6752)’s rating.

The cost of insuring 1 billion yen ($12.4 million) of Sharp’s debt for five years rose by 125 million yen in the past month to 680 million yen in advance and 10 million yen annually, according to data provider CMA. Credit-default swaps of Panasonic and Sony Corp. (6758) have also surged, with contracts pricing in a non-payment risk of about 30 percent. Those for South Korea’s Samsung Electronics Co. were little changed in the period, the data show.

Fitch Ratings cut Sharp from one level above junk, or non- investment grade, by six steps to B-, after the company forecast last week a record $5.6 billion full-year loss and said there’s “material doubt” about its ability to survive. Panasonic, Japan’s No. 2 TV maker, had its debt rating lowered two levels by S&P on Nov. 2 after predicting it’ll lose 30 times as much money as analysts estimated.

“It won’t be easy for Japanese electronics companies to recover because the center of gravity in the industry is shifting to developing Asia,” Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd., which has the equivalent of $411 billion in assets, said on Nov. 2. “If the Japanese companies don’t do anything, their brand value will fade away.”

‘Extreme Danger’

Japanese technology companies including Sharp are failing to come up with hit products to challenge Samsung and Apple Inc. The yen trading about 6 percent from its post-World War II high is also weighing on earnings by making their products more expensive abroad. Elpida Memory Inc., the last major Japanese maker of computer-memory chips, filed for bankruptcy in February.

“From the market’s perspective, Sharp is in extreme danger of going out of business,” Taketoshi Tsuchiya, Tokyo-based director of credit trading at Barclays Plc., said on Nov. 2.

Sharp’s 94.9 percent chance of default in five years is based on the assumption that investors would recover 27 percent of the bonds’ value if the company fails to adhere to its debt commitments, an expectation that CMA lowered from 30 percent a month ago.

“We’ve cleared concerns over our funding in the immediate future by getting syndicated lending,” said Miyuki Nakayama, a spokeswoman for Sharp. “Our two main banks have also made clear their willingness to support us. We’ll continue making efforts to improve our financing situation.”

Nakayama declined to comment on Sharp’s CDS prices and default risk. Mami Imada, a Tokyo-based spokeswoman for Sony, and Chieko Gyobu, a Panasonic spokeswoman in Tokyo, also declined to comment on the market moves.

Poland Samurai

Elsewhere in Japan’s credit markets, Poland sold 56 billion yen of five-year, 1.05 percent Samurai notes and 10 billion yen of 15-year, 2.5 percent bonds, Nomura Holdings Inc. said in a statement on Nov. 2. The eastern European government last offered yen-denominated debt in the Japanese markets in May, according to data compiled by Bloomberg.

Sekisui House Ltd., an Osaka, Japan-based home builder, sold 20 billion yen of five-year, 0.311 percent securities, Mitsubishi UFJ Morgan Stanley Securities Co. said in a statement last week.

Japanese corporate bonds have handed investors a 1.27 percent return this year, compared with a 4.30 percent gain for Samurai notes, according to Bank of America Merrill Lynch index data. Company debt worldwide has returned 10.1 percent during the period, the data show.

Statement Revised

Yields on Japan’s benchmark 10-year government bonds were little changed at 0.77 percent in Tokyo today, near the nine- year low of 0.72 percent reached July 23. The bonds yielded 94 basis points, or 0.94 percentage point, less than similar- maturity U.S. Treasuries, compared with 99 basis points a year earlier, according to data compiled by Bloomberg.

Sharp revised the English version of its quarterly earnings statement to remove the words “material doubt” in describing its status as an assumed going concern. “There exist conditions which might raise uncertainties about Sharp being an assumed going concern,” the nation’s largest maker of liquid-crystal- display panels said in a statement today. Sharp is trying to describe its status “more precisely,” it said.

Panasonic Risk

Panasonic’s credit-default swaps jumped 91 basis points to a record 472 on Nov. 1, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The contracts are signaling a 29.9 percent probability of non-payment in five years assuming investors would recover 35 percent of the notes’ value.

The bond risk of Sony, Japan’s biggest consumer-electronics exporter, rose 32 basis points to an all-time high of 488 on Nov. 1, according to CMA. That indicates a 30.4 percent probability of default through 2017, assuming that holders get back 35 percent of the value of the debt.

Not all Japanese electronics companies are seeing their credit risk increase. Swaps of Canon Inc., the world’s largest camera maker, fell nine basis points to 50 last month, according to CMA. A decrease in the contracts signals improving perceptions of creditworthiness, while an increase suggests the opposite.

Outstanding Debt

Sharp needs to repay 565 billion yen of debt in 2013 and 130 billion yen the following year, data compiled by Bloomberg News show. The maker of Aquos TVs secured 360 billion yen of funding from its lenders last month.

Osaka, Japan-based Sharp has failed to win a planned 67 billion yen investment from Taiwan’s Foxconn Technology Group. Sharp is in talks with Apple, Google Inc. and Microsoft Corp. to form partnerships, Kyodo News said Oct. 29, without saying where it got the information. Sharp declined to comment on the report at the time.

Fitch cited “growing risks” to the company’s liquidity as a reason for the downgrade, according to a Nov. 2 statement

Panasonic projected its net loss for the year ending March 2013 may be 765 billion yen, which would be the second-highest shortfall in its history. That prompted the Osaka-based company to skip a dividend for the first time since 1950 because of an “urgent need” to improve its financial position.

S&P reduced Panasonic’s rating to BBB, two levels above junk grade, saying in a Nov. 2 statement that the TV maker’s recovery to profitability will be slow.

Panasonic’s cash and cash equivalents fell to 443.9 billion yen as of the end of September from 536.7 billion yen in June, while current liabilities slid to 2.75 trillion yen from 2.82 trillion, according to data compiled by Bloomberg News. The company also needs to repay 610 billion yen of debts in the next two years, the data show.

“Japanese electronics makers have lost superiority because they are competing in markets where the advantage goes to whoever can mass-produce products at cheaper prices,” said Koji Toda, Tokyo-based chief fund manager at Resona Bank Ltd., which oversees about $75 billion.

To contact the reporters on this story: Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net; Emi Urabe in Tokyo at eurabe@bloomberg.net; Jonathan Burgos in Singapore at jburgos4@bloomberg.net

To contact the editors responsible for this story: Shelley Smith at ssmith118@bloomberg.net; Nick Gentle at ngentle2@bloomberg.net

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