TEXT-Fitch cuts Sharp to 'B-';remains on rating watch negative

Fri Nov 2, 2012 2:56am EDT

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(The following statement was released by the rating agency)

Nov 02 - Fitch Ratings downgraded Japan-based Sharp Corporation's (Sharp) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to 'B-' from 'BBB-'. The ratings remain on Rating Watch Negative (RWN). A full list of rating actions is provided at the end of this commentary.

The downgrade reflects growing risks to Sharp's liquidity position, reinforcing Fitch's view that the technology company will struggle to turn its business around. The RWN reflects potential further weakness in Sharp's liquidity position in the short-term due to the company's upcoming debt maturity and limited access to the capital market.

Sharp's cash balance was JPY221bn as of end-September 2012, significantly short of the JPY898bn debt maturing within the next one year. In addition, Sharp is likely to see the previously agreed capital injection of JPY67bn from Hon-Hai Group reduced following the fall in its share price to around 70% below the JPY550/share agreed with Hon Hai Group. The company is undertaking asset sales to raise cash.

Although Sharp succeeded in raising JPY360bn secured loans from its major banks in September 2012, continuing support from these creditors may not be forthcoming when the loans fall due in June 2013.

Fitch does not foresee any meaningful operational turnaround in the company's core business over the short- to medium-term due to deterioration in its market position as well as in price competitiveness as a result of a high Japanese yen. Its LCD TV shipments have dramatically fallen 43% yoy during H1FY13 (year ending March 2013). In addition, Sharp's advanced technology for small- and medium-sized panels has failed to make any meaningful profit contribution so far.

Sharp posted another record loss during H1FY13 as revenue fell 16% yoy to JPY1,104bn with a negative 15.3% EBIT margin (H1FY12: 2.6%) due to ongoing operational difficulties at its core LCD TV/panel business. In addition, its weak performance was exacerbated by the continuing price decline of solar cells due to intense competition and weak demand. Cash flow from operations (CFO) also fell further to negative JPY104bn (H1FY12: negative JPY28bn).

Fitch has assigned an 'RR4' Recovery Rating to Sharp's local-currency senior unsecured debt rating, which indicates average recovery (31%-50%) in the event of a default. However, this recovery rating may change as the agency undertakes further recovery analysis.

What could trigger a rating action?

Negative: Future developments that may, individually or collectively, lead to negative rating action include

- failure to obtain further sources of liquidity to meet short-term obligations

Positive: The ratings are currently on RWN. As a result, Fitch's sensitivities do not currently anticipate developments with a material likelihood, individually or collectively, of leading to a positive rating action.

List of rating actions:

Long-Term Foreign- and Local-Currency IDRs downgraded to 'B-' from 'BBB-'; remain on RWN

Local-currency senior unsecured rating downgraded to 'B-' from 'BBB-'; remain on RWN. 'RR4' Recovery Rating assigned

Short-Term Foreign- and Local-Currency IDRs downgraded to 'B' from 'F3'; remain on RWN

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