Sharp Boardroom Rescue Deal Clouds Path to Debt Insurance Payout

  • Credit event request for Renesas was dismissed in 2014
  • Public information `important matter' in decision: SMBC Nikko

Investment banks will need to lift the veil on Japanese loan workouts if they’re to determine whether holders of Sharp Corp. default protection should be paid out after its rescue last week.

The International Swaps & Derivatives Association said it has accepted a request to decide whether a so-called restructuring credit event occurred in Sharp’s agreements with its lenders and suitor Foxconn Technology Group. A positive ruling could prompt a settlement. The cost to insure the electronics manufacturer’s debt was 463 basis points on Thursday, down from as high as 1,653 in November.

At stake is how to adapt global credit-default swap rules to boardroom loan workouts, which are common in Japan. ISDA members declined in 2014 to rule on whether a restructuring event occurred at Renesas Electronics Corp., and delayed ruling on the matter four times before dismissing it because of lack of public information.

“The availability of public information is probably going to be an important matter in this case,” said Kentaro Harada, a credit analyst at SMBC Nikko Securities Inc. “If details on Sharp’s loan terms aren’t forthcoming, it may be hard to trigger an event because of a lack of public information.”

Sharp signed an agreement with Taiwan’s Foxconn, which transferred 100 billion yen ($918 million) to the Japanese company on March 31 in the first part of an infusion that will give it a controlling stake.

The Japanese manufacturer said in a statement on April 1 that it reached a basic deal with Bank of Tokyo-Mitsubishi UFJ Ltd. and Mizuho Bank Ltd. “regarding amendments to the terms and conditions of the existing borrowings.” Lenders also extended the due date of 510 billion yen in syndicated loans by one month to April 30. Toyodo Uemura, a spokesman at Sharp, declined to comment on the restructuring.

There are $1.86 billion of outstanding swaps tied to Sharp that would result in a maximum payout of $123.4 million after overlapping trades are accounted for, according to the Depository Trust & Clearing Corp., which runs a central registry for the market. ISDA’s Japan determinations committee postponed a decision after a meeting Thursday, citing the need for more information. It agreed to meet again on April 13, according to its website.

Goldman, Nomura

Members on the Japan panel include Bank of America N.A., Goldman Sachs International, Nomura International Plc, and Citadel LLC, ISDA’s Web page shows. The Japan committee is one of five regional panels charged with judging such matters, and each comprises 10 sell-side dealers and five buy-side voting firms, according to ISDA’s website.

Sharp’s credit-default swaps, which are the highest in Japan, rose six basis points on Thursday, the biggest increase in more than two weeks, after the ISDA agreed to review the request. The company’s 1.604 percent bond due in September 2019 has traded between slightly above 90 yen and par since April 1, up from an almost three-year low of 61.1 yen in December.

Nomura’s chief credit strategist Toshihiro Uomoto reiterated this week a forecast for a significant tightening in credit spreads for Sharp notes in the next six months. He urged more caution on longer-term products from March 2018 on concern over whether the company will break even in the coming two years.

The Japanese manufacturer’s bonds and its ability to raise funds probably won’t be affected either way by ISDA’s ultimate decision, according to Hideki Matsumoto, a credit analyst at Mizuho Securities Co.

“Sharp’s financial aid this time was predicated on it getting support from Foxconn,” said Matsumoto. “It is getting interest repayment relief and its syndicated loan was extended, so in that sense, it already fits the definition of restructuring.”

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