Sharp’s Default Risk Jumps as Government Rescue Prospects Fade

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Sharp Corp.’s bond risk jumped the most since 2012 on waning prospects for a state-backed rescue.

The cost to insure debt in the Japanese supplier of displays to Apple Inc. rose 210 basis points to 751 on May 21, credit-default swap data from CMA show. That is the highest for a technology company in Asia and compares with the average for such companies of 122. Innovation Network Corp. of Japan plans to reject Sharp’s investment request on concern it would face opposition from Apple and regulators, a person familiar said.

The company, whose debt has ballooned to 1 trillion yen ($8.2 billion) since lower-cost rivals undercut its liquid-crystal display televisions, is also facing obstacles to an investment by Foxconn Technology Group. The Taiwanese maker of electronics including Apple iPhones has sought a more active role in Sharp management should it buy a 10 percent stake.

“There were many people in the market holding on to the hope that INCJ will be the sponsor to help Sharp spin off its LCD business,” said Yusuke Ueda, a Tokyo-based credit analyst at Bank of America Merrill Lynch. “With that possibility gone, Sharp is left with no choice but to ask Foxconn for money.”

Sharp has said it would like to restart talks with Foxconn for an investment at 550 yen per share as agreed in 2012. The stock closed at 166 yen in Tokyo on Friday.

INCJ Rescue

INCJ already supports Japan Display Inc., which competes with Sharp to supply Apple and others. Sharp wanted the fund to invest in the potential spinoff of its LCD unit, a separate person familiar said in April.

The two display makers controlled a combined 25 percent of the global market for smaller panels used in smartphones and tablets last year, according to researcher IHS Inc. The prospect of creating a dominant supplier may trigger opposition from regulators, which last month blocked a $9.39 billion deal between Tokyo Electron Ltd. and Applied Materials Inc.

Miyuki Nakayama, a spokeswoman for Sharp, declined to comment on the company’s default swaps and INCJ’s plan.

Sharp’s probability of debt non-payment within one year has climbed to 1.55 percent from about 0.24 percent two weeks earlier, according to the Bloomberg default-risk model, which considers factors such as share prices and debt. The gauge suggests the third-highest junk level now for the company, compared with the second-lowest investment grade on May 8.

Mid-Term Plan

“The feasibility of an LCD business sale is the focal point of our credit analysis going forward,” Toshihiro Uomoto, the chief credit strategist at Nomura Holdings Inc. in Tokyo, wrote in a report dated May 18. “The company lacks an easy to grasp growth scenario, leaving doubts about its mid-term survival.”

Sharp earlier this month announced plans to pare its workforce 10 percent after reporting a 222.4 billion yen net loss in the year ended March. The company has lost $13.3 billion in the last four financial years, approached the brink of bankruptcy in 2012, and is selling its headquarters, cutting back its solar business and quitting TV markets in Europe, Canada and Australia.

Under the revamp plan, Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc. will each buy 100 billion yen of preferred stock in the Osaka-based company. Sharp said it will use the proceeds to repay debt.

The yield premium investors demand to hold Sharp’s 1.604 percent bonds due 2019 jumped 118 basis points in two days to 789 over sovereign debt on May 22. That’s still down from a record 2,107 in 2012. The 10-year benchmark sovereign yield is 0.415 percent.

“Without a capital infusion and spinoff, the chances of drastic changes that go beyond Sharp’s feeble mid-term plan become slim,” Bank of America’s Ueda said.