A bailout of Sharp Corp threatens to dent profits of Mizuho Financial Group Inc and Mitsubishi UFJ Financial Group Inc, which are the highest in almost a decade.
A conversion of loans into equity will translate into a write-off for the biggest lenders that could reduce Mizuho’s full-year recurring income by 17 percent and Mitsubishi UFJ’s by 5 percent, Credit Suisse Group AG senior bank analyst Takashi Miura said.
SMBC Nikko Securities Inc senior bank analyst Shinichiro Nakamura said he expects the hit to be 4.8 percent and 3 percent respectively. Default risk on Sharp, a supplier of displays to Apple Inc, jumped to a 22-month high this month, according to CMA prices.
“This is actually a good time for these banks to post this loss on the Sharp loans as their profits are very strong,” Miura said. “This year, the adjustment will not have such a big impact on their books.”
Mitsubishi UFJ reported two consecutive quarters of operating profits higher than ￥500 billion (US$4.1 billion) for the first time in at least 10 years, while Mizuho’s was the best since 2006 for the third quarter last year.
Osaka-based Sharp is considering options to restructure its liabilities, including a debt-for-equity swap, a sale of new shares to business partners and additional bank loans, said people familiar with the matter, who asked not to be identified because the talks are private.
Mizuho and Mitsubishi UFJ lent the company ￥360 billion in September 2012, and ￥150 billion more in 2013, according to its annual report last year.
The manufacturer said in November 2012 there were uncertainties about it being an “assumed going concern.” It removed that reference last year.
Sharp’s short-term debt rose to ￥793.2 billion as of March last year, from ￥598 billion two years earlier, according to Bloomberg-compiled data. Longer liabilities fell to ￥300.3 billion, from ￥529.2 billion during the period.
“For risk management reasons, it is better for the banks to have short-term loans,” Miura said. “These facilities are often reviewed and renewed every month.”
The manufacturer pays less than Apple and Sony Corp for its borrowings, even with a lower credit score than the two.
Sharp had an after-tax cost of debt of 0.08 percent, the data showed. Apple, which is rated “AA+” by Standard & Poor’s, the second-highest grade, paid 1.58 percent on its borrowings using the same measure, while Sony paid 0.44 percent.
S&P downgraded Sharp to “CCC+” with a negative outlook on Tuesday last week, a level deemed vulnerable to nonpayment. Sony has a “BBB-” rating.
Mizuho spokeswoman Masako Shiono said the bank’s basic stance is to support Sharp and it will examine the company’s management plans when completed.
She declined to comment on hypothetical scenarios surroudning the company’s loans or specific matters related to it.
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