Toshiba Corp. Long-Term Corporate Credit And Debt Ratings Lowered To #CCC-#; Ratings Still On CreditWatch Negative

Stocks and Financial Services Press Releases Friday March 17, 2017 17:39
TOKYO--17 Mar--S&P Global Ratings

TOKYO (S&P Global Ratings) March 17, 2017--S&P Global Ratings today said it has lowered its long-term corporate credit rating on Japan-based capital goods and diversified electronics company Toshiba Corp. two notches to 'CCC-' from 'CCC+' and lowered the senior unsecured debt rating three notches to 'CCC-' from 'B-'. Both ratings remain on CreditWatch with negative implications. Also, we are keeping our 'C' short-term corporate credit and commercial paper program ratings on the company on CreditWatch negative. The long- and short-term ratings on Toshiba have remained on CreditWatch with negative implications since December 2016, when we also lowered the long-term ratings because of the likelihood that the company might recognize massive losses in its U.S. nuclear power business; we kept them on CreditWatch negative when we lowered the long- and short-term ratings in January 2017.

The downgrade this time reflects our view that absent unanticipated, significantly favorable changes in the issuer's circumstances, there is a growing likelihood that Toshiba will become unable to fulfill its financial obligations in a timely manner or will undertake a debt restructuring we classify as distressed in the next six months. The ratings remain on CreditWatch negative because of an increasing likelihood, in our view, that the heavy losses and financial burden related to Toshiba's U.S. nuclear power business will grow further, increasing uncertainty about Toshiba's prospects for restructuring and bank support.

Since December 2016, Toshiba has been restructuring its businesses to plug its impaired shareholders' equity and stabilize its financial standing.

Specifically, it has sold some assets and plans to sell its core NAND flash memory (semiconductor) business. But it will be some time before Toshiba receives the proceeds of asset sales.The company says it will review the status of its U.S. nuclear power business, Westinghouse Electric Co. LLC, within the Toshiba group and will take steps to isolate risk in its overseas nuclear power business, including possibly deconsolidating Westinghouse by selling a majority stake in Westinghouse.

However, specifics of any sale related to Westinghouse are unclear and we do not rule out the possibility that Westinghouse might file for Chapter 11 bankruptcy under U.S. law. As the parent company, Toshiba is a guarantor for Westinghouse's external debt and, therefore, we see a growing likelihood that the risk of contingent liabilities will materialize in the future. These increased uncertainties lead us to believe pressure on Toshiba's funding ability and liquidity is likely to grow.

The Tokyo Stock Exchange and Nagoya Stock Exchange both designated Toshiba's stock as "securities under supervision (examination)" as of March 15, 2017, because 18 months had elapsed since the bourses designated the stock as "securities on alert" for Toshiba's past accounting improprieties, deeming it highly necessary for the company to improve its internal controls. If in the future the bourses determine that Toshiba has not improved its internal controls, they might decide to delist Toshiba's stock. We expect creditor banks that have pledged to maintain their outstanding balance of lending will support Toshiba's immediate funding needs. But because the bourses this time redesignated the stock based on the view that Toshiba's internal controls have not improved, we believe creditor banks will find it increasingly difficult to accept any potential request from the company for further funding.

Previously, we rated Toshiba's senior unsecured debt one notch higher than our long-term corporate credit rating on the company. However, this time we have equalized the two ratings. At this point, the creditor banks' support stance has not changed substantially. However, we have eliminated the notch difference between the ratings because under our scenario we see a growing likelihood that any debt restructuring might be a court-led procedure. Our view until now was that any default might take the form of main creditor banks providing support that we define as 'SD' (selective default), leading us to believe the company was more likely to fulfill its obligations to bondholders than to lender banks. However, we can no longer maintain this view under these growing uncertainties.

We will resolve the CreditWatch placements after examining Toshiba's liquidity in the next one to two months and the support stance of its creditor banks, such as whether they will maintain outstanding lending balances, developments related to Toshiba's restructuring plan, and the emergence of any new equity investors. We might further downgrade Toshiba if it faces difficulties fulfilling its financial obligations in a timely manner because its restructuring plan does not move forward and no prospects exist for it to receive continued support from its creditor banks. A downgrade is also possible if we determine that debt restructuring we classify as distressed is a virtual certainty.


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