Sharp Risk Drops on Step Toward Japan Bond Market Return

Sharp Corp. (6753)’s bond risk, the highest among Japanese credit-default swaps, is falling as the supplier of displays for iPhones takes steps that may allow a return to the bond market for the first time since 2009.

The company may raise about 200 billion yen ($2 billion) through a public share sale in the year to March 2015, doubling its capital-to-asset ratio to as much as 20 percent, the Asahi newspaper reported on April 13. The cost to insure Sharp’s debt against non-payment dropped 45 basis points to 330 after the report, matching the lowest level since April 2012, CMA prices show. An index for Japanese companies’ bond risk was unchanged at 87 on the day and a gauge the U.S. fell 1 to 68.

Sharp is forecasting a return to annual profit in the year ended March 31 after it cut costs, focused on panels for smartphones and benefited from demand for solar panels. The company still has a way to go to meet the 30 percent capital adequacy ratio needed for a ratings upgrade and to match the levels of Panasonic Corp. and Sony Corp., Mitsubishi UFJ Morgan Stanley Securities Co. said.

“Getting past the 20 percent mark would bring a rating upgrade in sight,” said Toshihiro Uomoto, chief credit analyst at Nomura Holdings Inc. in Tokyo. “This fiscal year Sharp gets another chance to show the world it is a viable company.”

New Plan

The maker of Aquos TVs plans to unveil a new restructuring plan to help convince potential investors among financial institutions, Asahi said in the report. The strategy will focus on cutting production costs at its Kameyama flat-panel factory in central Japan to expand into the market for lower-priced smartphones, it said.

Sharp said in a statement to the Tokyo Stock Exchange on April 13 that it’s considering various options to increase capital and hasn’t decided on a method. Spokesman Yoshifumi Seki declined to comment on credit-default swaps when reached by telephone yesterday.

The Osaka-based company in February forecast net income will reach 5 billion yen in the 12 months to March 31, rebounding from a combined 921 billion yen of losses in the previous two years. Profit may climb to 28 billion yen in the current period, according to a median estimate of 14 analysts compiled by Bloomberg.

Capital Raising

Sharp last year raised 137.7 billion yen through public and secondary offerings, including stock sales to Makita Corp., Denso Corp. and Lixil Group Corp., according to an earnings statement on Feb. 4.

“Increasing capital is one of the most important challenges for Sharp’s management,” Yasuaki Kudamatsu, a credit analyst in Tokyo at Mitsubishi UFJ Morgan Stanley, wrote in a report dated April 15. “The credit market’s caution over Sharp is subsiding as improvements in the liquid-crystal display make a steady profit and boosting of capital possible.”

The yield premium investors demand to own Sharp’s 30 billion yen of 1.604 percent notes due 2009 fell to 346 basis points yesterday, down from a record 2,108 in November 2012. It offered the securities in September 2009 at a 28-basis point spread. A basis point is 0.01 percentage point.

Japan’s benchmark 10-year bonds yielded 0.61 percent as of 10:34 a.m. in Tokyo today, down 19 basis points since the end of 2012. The yen fetched 102.50 against the dollar.

The company’s surprise loss forecast in August 2012 sent its shares plunging and sparked ratings downgrades, making it difficult to raise money and pushing Sharp to the brink of default.

Bank Loans

Since then, it has been surviving on bank loans. In May, the company said it had an informal agreement with lenders Mizuho Financial Group Inc. and Mitsubishi UFJ Financial Group Inc. to continue 360 billion yen of loans. The company agreed to get a 150 billion-yen loan from lenders to redeem convertible bonds, Tetsuo Onishi, a senior executive, said at the time.

Sharp has also sold stakes to Foxconn Technology Group, Samsung Electronics Co. and Qualcomm Inc. to shore up its finances.

“We can invest in credit-default swaps, but it will take a little longer to get back to triple B level for Sharp,” said Mana Nakazora, the chief credit analyst at BNP Paribas SA in Tokyo. “The rating agencies’ judgments are time-delayed” and make take one or two years, Nakazora said.

Japan’s Rating & Investment Information Inc. downgraded Sharp two steps to BBB in August 2012, while Standard & Poor’s lowered it three ranks that month to BB+, below investment grade. Both risk assessors have reduced their ratings since to rank Sharp at the fourth-highest junk rating grade, data compiled by Bloomberg show.

Nomura Index

The company was ousted from the benchmark Nomura Bond Performance Index in August 2012 after the R&I downgrade. The gauge, which is tracked by some of the country’s largest investors, requires its members to have ratings higher than A-by at least one of four assessors.

Nakazora, Nomura’s Uomoto and Mitsubishi UFJ Morgan Stanley’s Kudamatsu expect Sharp to report an 8 percent capital adequacy ratio in the year just ended when it releases full-year earnings results next month. That’s down from 13.1 percent as of Dec. 31 and compares with 15.5 percent for Sony and 29.9 percent for Panasonic.

“A capital increase is one important milestone toward a rating upgrade, but there also has to be definitive evidence of improving business conditions demonstrated by higher profits,” Uomoto said. “This year the company has a chance to deliver both.”

To contact the reporters on this story: Takashi Amano in Tokyo at tamano6@bloomberg.net; Marco Lui in Tokyo at mlui11@bloomberg.net

To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net; Michael Tighe at mtighe4@bloomberg.net Pavel Alpeyev, Ken McCallum

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