Autos

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Shareholders in Takata are understandably terrified at the prospect that liabilities stemming from the company's occasionally fatal airbag technology will blow up in their faces.

Its shares have fallen almost 70 percent since Nov. 18, 2014, when the U.S. National Highway Traffic Safety Administration ordered a recall of millions of vehicles fitted with Takata's defective inflators. The company's market capitalization of 31 billion yen ($289 million) is now a spare 0.22 times Takata's book value of about 145 billion yen, making it one of just 13 publicly traded businesses globally with more than $1 billion in annual sales and a valuation no greater than 0.25 times book.

Don't Believe Everything You Read
There's a handful of large companies worth less than 25% of their net assets. Takata is one of them
Source: Bloomberg data
Note: Shows only companies with sales of more than $1 billion and price-book ratios below 0.25.

What's surprising is that while equity investors are spooked, bondholders have maintained a distinct sangfroid. The steepest discount among its three outstanding yen-denominated notes is that on its 0.582 percent debentures due 2021, which are trading at about 74 percent of par. Its 1.021 percent securities maturing in 2017 are trading at a discount of less than 8 percent to face value:

Capital Punishment
Takata's share price has slumped as its airbag recall problems grew. Its bonds, not so much
Source: Bloomberg
Note: For shares, Oct. 6, 2014=100.

This is, to put it mildly, not how the debt of companies facing Takata-style problems normally behaves. Take a look at how Sharp's bond yields soared north of 40 percent within months of the electronics company announcing the first job cuts since 1950 amid widening losses in 2012. Or what happened to Peabody's yields after coking coal prices sank to a six-year low in 2014, pushing the U.S. miner toward the Chapter 11 bankruptcy it finally entered last month:

Crash Protection
Takata's bond yields have remained remarkably placid in the face of bad news
Source: Bloomberg
Note: Bonds shown are the most liquid in the case of Sharp and Peabody, and most recent in the case of Takata. Start dates differ for the three companies: Takata is from the Nov. 18, 2014 U.S. vehicle recall. Sharp is from its Aug. 2, 2012 forecast of losses and 5,000 job cuts. Peabody is from the Sept. 25, 2014 decline of coking coal prices to a six-year low. Upper limit has been set at 90% for scaling reasons.

There are a few potential explanations for what may be going on here.

One is that bondholders are betting they'll be left whole, or whole-ish, if the company's customers or other sponsors step in to turn it around. Sharp actually offers an optimistic story in this context: Those 2019 notes that were yielding more than 40 percent a few years back now pay less than 5 percent. Still, given recall costs that could easily run into hundreds of millions of yen or more, and the fact bond haircuts are a pretty standard feature of restructurings, that seems a wager based more on hope than reasonable expectation.

Another is that lawyers will take a long time to argue how the costs of Takata's product recall should be allotted. So long as Takata has sufficient liquidity to pay its interest bills in the short term, a bond maturing in December 2017 that's yielding 6.5 percent might not be such a bad investment.

Of course, that's a big if. With a quick ratio of 0.79, it's questionable whether Takata is in a good position to meet even its short-term liabilities .

There's one more possible explanation. A Japan where the government can sell 10-year bonds with a negative yield is probably not your best yardstick of a well-functioning credit market. When investors are paying money for the privilege of lending it, lots of things that may otherwise seem unappealing start to look more attractive. Takata's 2021 bonds are yielding 8.2 percent at current prices. If you try not to think too hard about the risk of default, that looks almost appetizing.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Also called the acid ratio, the quick ratio gauges a company's short-term liquidity by dividing its current liabilities into its cash, cash equivalents and account receivables. A figure of 1 is usually considered the minimal comfortable level.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net