Toshiba Corp. Upgraded To #B/B#; Long-Term Ratings Remain On CreditWatch Short-Term Ratings Off CreditWatch

Stocks and Financial Services Press Releases Wednesday May 16, 2018 17:52
TOKYO--16 May--S&P Global Ratings

TOKYO (S&P Global Ratings) May 16, 2018--S&P Global Ratings today said it has raised two notches to 'B' from 'CCC+' its long-term corporate credit rating and senior unsecured debt rating on Japan-based capital goods and diversified electronics company Toshiba Corp. We also continue to place the ratings on CreditWatch with positive implications. In addition, we have raised to 'B' from 'C' our short-term corporate credit and commercial paper program ratings on Toshiba and at the same time have removed the ratings from CreditWatch with positive implications. (S&P Global Ratings credit analysts will hold a Japanese-language telephone conference on Toshiba on May 17. Please see the teleconference details at the end of this report for more information.)

The upgrades reflect our view that Toshiba's operating performance results announced on Tuesday show a substantial improvement in its financial standing, with the company having slashed debt and increased shareholders' equity. We also believe its financial standing will stabilize because both volatility in its earnings and the capital intensity of its main businesses, excluding Toshiba Memory Corp., are relatively low. We continued to place the ratings on CreditWatch with positive implications because we think the company's financial standing is likely to improve significantly if it sells Toshiba Memory.

We placed our long- and short-term corporate credit ratings, senior unsecured debt rating, and commercial paper program rating on Toshiba on CreditWatch with positive implications on Nov. 21, 2017. This reflected our view that the company's decision to conduct a large capital raising heightened its likelihood of avoiding negative net worth as of the end of fiscal 2017 (ended March 31, 2018) and substantially improved its financial health. We continued to place the long- and short-term ratings on CreditWatch positive even after raising the ratings in January 2018.

In the past few months, Toshiba substantially accumulated shareholders' equity through the capital infusion and the sale of assets related to its U.S. nuclear power business. At the same time, it slashed debt through enhanced working capital management. As a result, we estimate that its debt to EBITDA (as of March 31, 2018) was below 5x. We believe its financial standing is unlikely to deteriorate significantly again in the next year or so because its main businesses, such as infrastructure and energy, have shown stable performance recently. EBITDA and cash flows from its main businesses, centered on infrastructure generate, are substantially lower than those that include Toshiba Memory in the company's overall financial performance. Therefore, Toshiba's cash flow-related ratios are likely to remain weak. But because of the relatively low capital intensity of its main businesses, the ratios are likely to stabilize. As a result, we assess Toshiba's financial risk profile as aggressive.

Toshiba will center its main businesses, excluding Toshiba Memory, in the relatively stable fields of infrastructure and energy. However, the competitiveness and profitability of each business compares very unfavorably to those of its large peers in the capital goods industry, in our view. Toshiba's elevator and escalator business and its public infrastructure business enjoy a constant level of market share and competitiveness but are likely to continue to face a fierce struggle for customers globally, in our view. Its energy businesses also face worsening market conditions amid a global shift away from carbon-emitting activities. We also expect a drop in overall demand for hard disk drives to weigh on the earnings of its storage business, excluding its memory business. As a result, each business' potential to generate earnings is unlikely to improve materially in the coming year or two, in our view. We expect Toshiba's EBITDA margin excluding Toshiba Memory to stabilize because it has sold many businesses, including unprofitable ones, and has restructured itself following revelations of accounting irregularities a few years ago. Nevertheless, its absolute EBITDA margin of about 5%-6% in these businesses falls short of the industry average, reflecting its weak competitiveness. Accordingly, we assess Toshiba's business risk profile as weak.

We continue to regard Toshiba's management and governance as weak. Toshiba has drastically improved its financial standing in recent months. But we need more time to determine whether its risk management regime will function sufficiently and it will practice good governance, resulting in smooth operations.

We base our 'B' short-term corporate credit rating on Toshiba on the 'B' long-term corporate credit rating and our assessment of the company's liquidity as less than adequate. Our assessment reflects our view that the company's liquidity has improved since the capital infusion amplified its cash and deposits. The company is likely to maintain liquidity sources of around 1.1x its liquidity uses over the next year, in our estimate. The company's liquidity sources over the next 12 months will include JPY / CNY500 billion in cash and deposits and about JPY / CNY30 billion in cash flow. We incorporate about JPY / CNY300 billion in debt repayments and about JPY / CNY100 billion in capital expenditures in major uses of liquidity.

In resolving the CreditWatch placements, we will assess Toshiba's progress in selling its memory business. If it completes the sale, we will examine its financial policy and the degree of improvement in its financial standing, given that Toshiba has stated it will enhance returns to shareholders and investment for growth with the proceeds of the Toshiba Memory sale, which is priced at JPY / CNY1.45 trillion. Even so, we believe Toshiba's financial standing will likely improve significantly if it receives the large cash sum from the sale. In addition, we may need to revisit the strategic direction and prospects for competitiveness and profitability of each of its businesses after the sale of Toshiba Memory. If Toshiba reviews the planned sale of Toshiba Memory, we would examine the impact Toshiba Memory might have on Toshiba and incorporate our views into our ratings. Currently, though, we do not expect Toshiba Memory to weigh on Toshiba's credit quality. This is because we view Toshiba Memory as a positive factor in our analysis of Toshiba's business risk profile, despite the business' volatile earnings, because it is more competitive than Toshiba's other businesses. We believe Toshiba could afford the massive capital expenditures that Toshiba Memory requires without substantially hurting its financial standing, because Toshiba Memory currently generates strong cash flows and its financial standing has improved materially.

We rate Toshiba's senior unsecured debt equivalent to our long-term corporate credit rating on the company and we place the rating on this debt on CreditWatch with positive implications. We estimate the company's secured debt, which has higher priority than the senior unsecured debt, accounts for slightly more than 50% of Toshiba's total debt on a consolidated basis. Accordingly, we notch down the senior unsecured debt rating from the long-term corporate credit rating one notch because of Toshiba's high ratio of priority debt. Meanwhile, the company's operational circumstances remain difficult, and we believe the company is likely to receive a waiver for borrowings from major creditor banks while continuing to pay other debt in a timely manner. Consequently, we incorporate one notch of uplift in the issuer rating on the senior unsecured debt.


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