(The following statement was released by the rating agency)
Nov 30 -
Summary analysis -- Sharp Corp. ----------------------------------- 30-Nov-2012
CREDIT RATING: B+/Watch Neg/B Country: Japan
Primary SIC: Household
Mult. CUSIP6: 819882
Credit Rating History:
Local currency Foreign currency
05-Nov-2012 B+/B B+/B
31-Aug-2012 BB+/B BB+/B
03-Aug-2012 BBB/A-2 BBB/A-2
03-Feb-2012 BBB+/A-2 BBB+/A-2
11-May-2011 A-/A-2 A-/A-2
Our ratings on Sharp Corp. (B+/Watch Neg/B) reflect the company’s heavy exposure to volatile flat-panel TV and LCD-related businesses, fierce global competition and persistent pressure on prices for consumer electronics, weak internal cash flow, and less-than-adequate liquidity. Factors that support the ratings include the company’s technological strengths in its electronic components business, which features core products such as liquid crystal display (LCD) panels. We also take the view that Sharp’s operating performance is becoming stable following the company’s significant efforts to restructure its businesses.
We view Sharp’s financial risk profile as “highly leveraged.” On Nov. 1, 2012, the company announced a JPY387.5 billion net loss for the first half (ended Sept. 30, 2012) of fiscal 2012 and a JPY450.0 billion forecast net loss for the full year (ending March 31, 2013), both significantly weaker than Standard & Poor’s Ratings Services’ expectations and Sharp’s earlier forecasts. Sharp’s net loss for the first half included JPY84.4 billion in restructuring costs, including a JPY30.1 billion impairment of assets in its solar batteries unit, a JPY53.4 billion write-down on inventory, and a JPY61.0 billion write-down on deferred tax assets. Sharp’s announced losses for fiscal 2012 follow a JPY376.0 billion net deficit in fiscal 2011. In Standard & Poor’s view, losses of this scale for two years running have eroded Sharp’s equity, weaken its capital structure, and are likely to exacerbate difficulties the company faces in restoring its earnings and liquidity. We expect the ratio of the company’s debt to capital to deteriorate from 66% at the end of fiscal 2011 to around 86% at the end of fiscal 2012.
On Sept. 28, 2012, Sharp announced 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). The contract, the term of which ends June 30, 2013, consists of a JPY180 billion term loan and a JPY180 billion uncommitted line of credit. In our view, however, signing of the loan agreement will not improve the company’s debt profile materially, because the contract term is short and Sharp is likely to remain highly dependent on short-term debt.
We view Sharp’s business risk profile as “fair.” In our view, technological strengths in LCD panels and electronic devices continue to support Sharp’s creditworthiness. Standard & Poor’s expects Sharp’s earnings and cash flows to begin to recover in the second half of fiscal 2012 because utilization rates at its key plants in Sakai and Kameyama are likely to improve. Our current ratings also incorporate an assumption that Sharp will reach an agreement to implement a strategic alliance with Taiwan-based electronics maker Hon Hai Precision Industry Co. Ltd. (A-/Stable/--), although terms and conditions of the deal remain uncertain.
Sharp’s liquidity remains “less than adequate” because its upcoming liquidity needs could exceed sources in the next 12 months, in our view. Sharp remained highly dependent on short-term borrowings as of Sept. 30, 2012. 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 due Sept. 30, 2013), and JPY167.5 billion in commercial paper. While Sharp and its main creditor banks signed an agreement in late September on a JPY360 billion syndicated loan, Standard & Poor’s does not consider the deal to have improved the company’s debt profile materially, because the contract term is short, ending June 30, 2013, and the company remains highly dependent on short-term debt. Weak internal cash flow has forced the company to pay off commercial paper primarily with bank borrowings. Still, ongoing support from the banks--together with management’s initiatives, including a slowdown in the use of funds for working capital and capital expenditures and expansion of funding sources through asset disposals--could alleviate pressure on the company’s liquidity.
Our ratings on Sharp are on CreditWatch with negative implications. In resolving the CreditWatch placement, we will reassess Sharp’s liquidity, including how it can secure funding sources with longer durations--extending beyond June 2013--to meet future debt maturities and reduce dependence on short-term debt. We will also examine how the company can rebuild its weakened capital structure. We will consider lowering our ratings on Sharp again 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 improve its capital structure, meet future debt maturities, and reduce dependence on short-term debt.
In addition, 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 long-term issue rating one notch from the long-term issuer rating if we believe Sharp’s priority liabilities exceed a threshold of 15% of the company’s assets if the issuer rating remains below ‘BB+'. As of Sept. 30, 2012, Standard & Poor’s calculated the ratio of Sharp’s priority liabilities at 9%, and we believe the ratio is most likely to remain below the 15% threshold in fiscal 2012.
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
CreditWatch Review Factors For Sharp Corp. Remain Unchanged Following Company’s Syndicated Loan Agreement, Oct. 1, 2012
Ratings On Sharp Corp. Lowered to ‘B+', Remain On CreditWatch Negative, Nov. 5, 2012