Takata's 10% Bond Yield Deemed Insufficient After Honda Rebuke

  • Default risk on air-bag maker has jumped to speculative grade
  • `We may be into 2017' before many cases resolved: professor

Takata Corp.’s bond yield tripled this month after a rebuke by its biggest customer Honda Motor Co. overshadowed a settlement with U.S. regulators over faulty air bags.

The yield on Takata’s December 2017 bond climbed to a record 10.4 percent last week from 3.05 percent at the end of October. Honda said Nov. 3 it was “deeply troubled” by evidence suggesting the auto parts maker may have misrepresented test data.

“I’ve lost confidence in Takata,” said Christoph Hilfiker, a senior fund manager at Liechtensteinische Landesbank AG, who has exited investment in the parts supplier. Even yielding 10 percent, he isn’t interested and says Honda’s action means Takata will have trouble repaying the bond and staying in business.

Chief Executive Officer Shigehisa Takada acknowledged at a press conference on Nov. 4 the risk to the company’s survival as carmakers led by Honda and Toyota Motor Corp. replace 23 million of its air-bag inflators in the U.S. Takata faces potentially billions of dollars in air bag replacement fees and legal costs from class actions suits in the U.S. and Canada as the cost of dealing with the crisis already pushes up debt levels.

Takata spokesman Hideyuki Matsumoto said that while the company is aware of the potential for future replacement and legal costs, it hasn’t booked them because it can’t make a rational estimate.

Default Risk

The risk that Takata may default on debt in the next 12 months has jumped to 0.77 percent from about 0.43 percent at the start of the month, according to the Bloomberg default-risk model, which considers factors such as share prices and debt levels. The gauge suggests the carrier’s credit rating has dropped to speculative grade, based on the data.

“You have personal injury cases, economic loss cases and all of the recall and replacement costs, which could run into the billions,” said Carl Tobias, a professor of law at the University of Richmond. “We may be into 2017 before many are resolved.”

Plaintiffs are also suing carmakers including Honda, Toyota, Ford Motor Co. and BMW AG with Takata in cases taken in the U.S. by owners of cars with the parts supplier’s air bags. Nissan Motor Co. joined Toyota and Honda in saying this month they won’t use inflators containing ammonium nitrate in air bags following an agreement between Takata and the U.S.’s National Highway Traffic Safety Administration to phase out the suspected propellant.

Reduced Forecast

“Honda has reviewed millions of pages of Takata internal documents produced by Takata in relation to litigation regarding Takata air-bag inflators,” the automaker said in a statement after the announcement of the settlement. “As a result of our review of these documents, we have become aware of evidence that suggests that Takata misrepresented and manipulated test data for certain airbag inflators.”

Tokyo-based Takata posted an 8.66 billion yen ($70 million) loss in the second quarter, and cut its full-year net income forecast to 5 billion yen, a quarter of its earlier estimate after incurring losses related to recalls.

Chief Financial Officer Yoichiro Nomura told reporters at an earnings briefing Nov. 6 the company has no cash flow difficulties, and automakers including Honda have said they will stop using only the company’s ammonium nitrate inflators, which are being phased out anyway.

Takata hasn’t provisioned for more than 300 billion yen in potential inflator replacement costs, according to estimates by Nomura Holdings Inc. Unless the parts supplier can get automakers to bear the majority of those charges, it is difficult to see how Takata can avoid a court-led restructuring, said Shintaro Niimura, a credit analyst at Nomura in Tokyo. Discovering who is at fault for the airbag-related defects will be crucial for determining the sharing of replacement costs, he said.

Legal Costs

Even amid the company’s recall woes, its sales climbed 19 percent to 359.4 billion yen in the six months ended Sept. 30 from a year earlier, buoyed by increased demand for product lines including seat belts and air bags.

Because automakers have limited their criticism to Takata’s ammonium nitrate inflators and they may ultimately provide it financial support, the probability of the company failing isn’t high, according to Takahiro Kusakari, chief investment officer at Sawakami Asset Management.

“Legal costs will probably be large and pressure on its finances severe as its business looks set to shrink,” said Kusakari, who sold his holdings in the stock in October. “Takata may be pushed to the edge of negative net worth.”

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