TEXT-S&P:Ratings on Sharp Corp. lowered to 'B+',on watch neg
Sharp's liquidity remains "less than adequate" in view of upcoming liquidity needs that could exceed sources in the coming 12 months. As of Sept. 30, 2012, Sharp remained highly dependent on short-term borrowings. It had JPY511.2 billion in short-term debt, JPY205.9 billion in bonds due to mature within a year (including JPY200.7 billion in convertible bonds maturing Sept. 30, 2013), and JPY167.5 billion in commercial paper. While Sharp in late September signed a JPY360 billion syndicated loan agreement with Mizuho Corporate Bank Ltd. (A+/Negative/A-1) and Bank of Tokyo-Mitsubishi UFJ Ltd. (A+/Stable/A-1) that consisted of a JPY180 billion term loan and a JPY180 billion uncommitted line of credit, Standard & Poor's does not consider the signing of the loan agreement to have improved the company's debt profile materially, because the contract term is short, ending June 30, 2013, and Sharp's debt profile remains largely dependent on short-term debt. Weak internal cash flow has forced the company to repay its commercial paper primarily with bank borrowings. Still, ongoing support from the banks and from management's initiatives, including to slow funding uses for working capital and capital expenditures and to expand funding sources by disposing of assets, could alleviate pressure on the company's liquidity.
We also lowered Sharp's business risk profile to "fair" from "satisfactory." In our view, Sharp's technological strengths in flat-panel TVs, LCD panels, and electronic devices still provide support for its creditworthiness. Standard & Poor's expects Sharp's earnings and cash flows to begin to recover in the second half of fiscal 2012 because of a likely improvement in operating rates at its key Sakai and Kameyama plants. Our current ratings also incorporate an assumption that Sharp will reach an agreement with Taiwan-based electronics maker Hon Hai Precision Industry Co. Ltd. (A-/Stable/--) to implement a strategic alliance, although terms and conditions of the deal still remain uncertain.
In resolving the CreditWatch placement, we will reassess Sharp's liquidity profile, including how it can secure funding sources with longer durations that extend beyond June 2013 to meet future debt maturities and reduce dependence on short-term debt. We'll also exam how the company can restore its weakened capital structure.
We will consider lowering our ratings on Sharp again in 90 days if the company's financing, relationships with creditor banks, or capital structure worsen. On the other hand, we may affirm the ratings if Sharp produces concrete plans to restore its weakened capital structure as well as measures to meet future debt maturities and reduce dependence on short-term debt. In addition, we will examine whether the loan from Mizuho and Bank of Tokyo-Mitsubishi is secured against Sharp's assets and we will assess the ratio of the company's priority liabilities to total assets in considering the potential to lower the issue ratings further. Specifically, we will lower the issue rating one notch from the issuer rating if we believe Sharp's priority liabilities exceed the threshold of 15% of the company's assets if the issuer rating remains below 'BB+'.
RELATED CRITERIA AND RESEARCH
2008 Corporate Criteria: Analytical Methodology, April 15, 2008
2008 Corporate Criteria: Commercial Paper, April 15, 2008
Methodology: Short-Term/Long-Term Ratings Linkage Criteria For Corporate And Sovereign Issuers, May 15, 2012
Ratings on Sharp Corp. Placed on CreditWatch with Negative Implications, July 27, 2012
Ratings On Sharp Corp. Lowered to 'BBB'; Ratings Remain On CreditWatch With Negative Implications, Aug. 3, 2012
Ratings On Sharp Corp. Lowered to 'BB+', Remain On CreditWatch Negative, Aug. 31, 2012
CreditWatch Review Factors For Sharp Corp. Remain Unchanged Following Company's Syndicated Loan Agreement, Oct. 1, 2012
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