Sharp Corp’s bond risk is signaling a 94.9 percent chance of default in five years as the yen, near post-war highs, swells losses at Japanese electronics companies, prompting Standard & Poor’s to cut Panasonic Corp’s rating.
The cost of insuring ￥1 billion (US$12.4 million) of Sharp’s debt for five years rose by ￥125 million last month to ￥680 million in advance and ￥10 million annually, according to data provider CMA.
Credit-default swaps of Panasonic and Sony Corp have also surged, with contracts pricing in a non-payment risk of about 30 percent. Those for South Korea’s Samsung Electronics Co were little changed in the period, data show.
Fitch Ratings cut Sharp from one level above junk, or non-investment grade, by six steps to “B-,” after the company forecast last week a record US$5.6 billion full-year loss and said there’s “material doubt” about its ability to survive. Panasonic, Japan’s No. 2 television maker, had its debt rating lowered two levels by S&P on Friday after predicting it will lose 30 times as much money as analysts estimated.
“From the market’s perspective, Sharp is in extreme danger of going out of business,” Taketoshi Tsuchiya, Tokyo-based director of credit trading at Barclays PLC, said on Friday.
Sharp’s 94.9 percent chance of default in five years is based on the assumption that investors would recover 27 percent of the bonds’ value if the company fails to adhere to its debt commitments, an expectation that CMA lowered from 30 percent a month ago.
“We’ve cleared concerns over our funding in the immediate future by getting syndicated lending,” Sharp spokeswoman Miyuki Nakayama said. “Our two main banks have also made clear their willingness to support us. We’ll continue making efforts to improve our financing situation.”
However, Sharp revised the English version of its quarterly earnings statement to remove the words “material doubt” in describing its status as an assumed going concern.
“There exist conditions which might raise uncertainties about Sharp being an assumed going concern,” Japan’s largest maker of LCD panels said in a statement yesterday.
Sharp is trying to describe its status “more precisely,” it said.
Panasonic’s credit-default swaps jumped 91 basis points to a record 472 on Thursday, according to CMA. The contracts are signaling a 29.9 percent probability of non-payment in five years, assuming investors would recover 35 percent of the notes’ value.
Sony’s bond risk rose 32 basis points to an all-time high of 488 on Thursday, CMA said. That indicates a 30.4 percent probability of default through 2017, assuming that holders get back 35 percent of the value of the debt.
Not all Japanese electronics companies are seeing their credit risk increase. Swaps of Canon Inc, the world’s largest camera maker, fell nine basis points to 50 last month, CMA said. A decrease in the contracts signals improving perceptions of creditworthiness, while an increase suggests the opposite.