Sharp Rescue by Foxconn Seen Going Through as Bonds at Year High

  • Foxconn delayed signing deal after learning of liabilities
  • There's a sense `default is no longer a threat,' BNP says

Sharp Corp.’s bonds climbed to a one-year high on prospects its rescue by Taiwan’s Foxconn Technology Group will go through even after talks stalled short of the final agreement.

The Japanese electronic components company’s 1.141 percent notes maturing Sept. 16 rose to 95.87 yen per 100 yen, the highest level since January 2015, according to data compiled by Bloomberg. That’s a 23 percent gain from last year’s low. The cost to insure the notes against nonpayment fell to the lowest in more than a year last month.

Foxconn delayed completion as it learned of liabilities at Sharp, after outbidding Innovation Network Corp. of Japan. Two rating companies put Sharp on watch for an upgrade after the Taiwanese assembler of Apple Inc.’s iPhones and iPads offered about 600 billion yen ($5.3 billion) for a controlling stake, with some proceeds used to repay bonds.

“The investors who still hold Sharp’s bonds must be pretty confident that a rescue is at hand,” said Mana Nakazora, the chief credit analyst in Tokyo at BNP Paribas SA. “With Foxconn and INCJ so eagerly pursuing the company, there is a sense that a default is no longer a threat.”

Sharp has been losing money for years and its need for financial support set off the takeover battle last year. The company’s cash totaled 208.5 billion yen at the end of December, and it is projected to lose more than 100 billion yen in the fiscal year that ends this month, according to data compiled by Bloomberg.

Foxconn, the parent of Hon Hai Precision Industry Co., learned last week about liabilities at Sharp that could exceed 300 billion yen under certain circumstances, according to people familiar with the matter. Triggered by events such as restructuring or layoffs, they could also be much lower, the people said, asking not to be identified because the matter is private.

That delay came just hours after Sharp outlined plans to sell new stock, with 30 billion yen of the proceeds going toward bond repayment. It has 20 billion yen of notes maturing in September this year and 40 billion yen of bonds due 2019, data compiled by Bloomberg show.

Japan Credit Rating Agency Ltd. and Rating & Investment Information Inc. put the company on watch for an upgrade, citing the deal. JCR rates Sharp at B+, its fourth-highest junk level, while R&I’s CCC+ ranking puts it seven steps below investment grade.

Positive Effect

“R&I had assumed that the company will have no choice but to request additional financial assistance including debt restructuring, but such a concern will be dispelled,” the risk assessor said in a statement on Feb. 25. “Becoming a subsidiary of Hon Hai will likely have a positive effect on the creditworthiness of Sharp.”

Sharp’s credit-default swaps dropped 1,179 basis points from last year’s high in November to 474 basis points on Tuesday, according to data provider CMA. The company’s probability of default in the coming year fell to 1.83 percent, from as high as 3.82 percent in January, according to the Bloomberg default-risk model, which considers factors such as share prices, debt levels and interest costs.

Toyodo Uemura, a spokesman for Sharp, declined to comment.

Outstanding bonds are dwarfed by 510 billion yen in credit lines and loans that are set to expire on March 31. The lenders, Mizuho Financial Group Inc. and Mitsubishi UFJ Financial Group Inc., want the company to strike an agreement for a bailout before those loans are renewed, according to people familiar with the matter. 

If the deal isn’t worked out in time to renew the credit lines, the banks will likely provide alternative financing, probably a so-called bridge loan, said the people, who asked not to be named because the matter is private.

“Support from the banks is not contingent on the Foxconn deal,” said Toshiyasu Ohashi, the chief credit analyst in Tokyo at Daiwa Securities Co. “It’s highly unlikely that the lenders would end their financing of the company in the short term.”

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