TEXT-Fitch: Sharp's Ratings Still Hinge on Creditors' Support

Sun Feb 3, 2013 11:27pm EST

(The following was released by the rating agency)

SEOUL/SYDNEY/SINGAPORE, February 03 (Fitch) Fitch Ratings says continued support from main creditor banks will be essential for a sustained recovery of Sharp Corporation's (Sharp, 'B-'/Rating Watch Negative) operating performance. The Japanese electronics manufacturer's liquidity position remains vulnerable despite a turnaround to post marginally positive EBIT margins in the third quarter of financial year ending March 2013 (Q3FY13).

Sharp's cash balance of JPY164bn at end-December 2012 is significantly below the company's JPY900bn debt maturing within the next one year. However, Fitch believes that Sharp's ability to post a positive EBIT margin in Q3FY13, which has been a prerequisite for continued borrowing from the banks, is likely to help restore its creditors' confidence in the company.

Fitch believes that Sharp may be able to secure additional funding from its creditor banks to help alleviate its current liquidity crunch. However, this would depend on the company being able to furnish reasonable evidence that its operations are firmly on the recovery path for Q4FY13 and beyond, based on improving utilisation rates at its plants and increasing demand for its key LCD panels.

In March Sharp plans to announce a mid-term business plan which will include an operational and financial restructuring strategy. The Rating Watch will be resolved as soon as Fitch has reviewed the feasibility of the plan and takes into consideration any further clarity on the creditors' commitment toward Sharp. Fitch believes that bank loans may be the only available source of funding for the company at this juncture, as access to the capital markets for bond or commercial paper issuance is likely to remain constrained in light of the operational difficulties the company is experiencing.

Sharp returned to profitability in Q3FY13 for the first time in the last five quarters with an EBIT margin of 0.4%. (H1FY13: -15%) Despite a tough operational environment, its LCD TV business turned profitable while losses at its panel operations narrowed significantly due to cost reduction efforts. However, weakening demand for its small- and medium-size panels in Q4YF13, including iPad panels from Apple, Inc., will be a key risk to its operational recovery.

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