UPDATE 3-IHI issued bonds despite losses -paper; IHI denies

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By Edwina Gibbs

TOKYO, Feb 27 (Reuters) - Top executives at Japanese heavy machinery maker IHI Corp (7013.T: Quote, Profile, Research, Stock Buzz) knew of losses at a key division before it issued corporate bonds last year, the Asahi newspaper said, but the company quickly rejected the report.

IHI's stock slid 12 percent to 205 yen, but regained some ground after the denial, and was trading down 7.3 percent at 216 yen at the end of the morning session.

The paper, citing unidentified sources, said IHI President Kazuaki Kama had received internal reports about worsening profitability at its energy division between April and June, before the firm issued $280 million in corporate bonds in June.

IHI said in a statement that it stood by an internal investigation report published in December that said it first became aware of worsening earnings in its energy division's boiler business in July.

Although it had received reports about risks that its energy division might not achieve its profit goals between April and June, it felt that those goals were still attainable if corrective steps were taken, the company said.

IHI shocked investors in September when it warned of a loss in the year to March 31 due to deterioriating margins on plant and engineering projects for which costs had spiralled out of control.

It now expects an operating loss of 15 billion yen compared with its initial estimate of a 40 billion yen profit.