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As Toshiba Weighs Options, Writedown Fears Wipe $5 Billion Off Toshiba's Value

As Toshiba Weighs Options, Writedown Fears Wipe $5 Billion Off Toshiba's Value
As the Japanese conglomerate Toshiba Corp grapples to plug a potential multi-billion dollar hole, a looming writedown at the company has wiped almost $5 billion off its value in two days and prompted a credit rating downgrade on Wednesday.
Toshiba said late on Tuesday that it could face 'several billion dollars' in charges, acknowledging a bruising overpayment  due to cost overruns at a U.S. nuclear business it bought from Chicago Bridge & Iron last year, CB&I Stone & Webster.
It did not comment on whether that would tip the company into negative net worth and would wipe out its asset value. Executives said it could take until February to pinpoint the exact impact.
But falling 20 percent to hit the Tokyo exchange's daily downward limit, Toshiba shares took an immediate hit on Wednesday. That follows a 12 percent drop on Monday after initial warnings from the group.
Investors fretted that a blow to the group's finances could even weaken its competitiveness in its core semiconductor business - specifically investment in 3D NAND, a new advanced type of flash memory - or result in firesales and dilutive share issues.
The value of the group fell below that of tech rival Sharp for the first time in seven years.
With a "negative" outlook, rating agency Standard & Poor's downgraded Toshiba, already in junk territory, to B- from B. S&P said it expected that the group’s resilience would be eroded and shareholder equity to "drastically shrink" as a result of the writedown. It also expected that more cash would be burned due to higher working capital.
It would cost $111,000 - $136,000 per year for five years to insure $10 million in bonds for Toshiba as its credit default swaps, which measure the cost of insuring Toshiba's debt, jumped by 40 basis points (bps) to 111/136 bps.
Thomson Reuters data shows the yield on bonds due 2020 JP00526502=RRPS rose 17 bps to 1.76 percent.
"Toshiba's ability to enhance its shareholders' equity is likely to continue to be difficult for the foreseeable future," S&P said, adding it also saw "persistently tough business conditions".
As Toshiba deals with the imminent task of enhancing its capital base, making more profits faster, selling assets and increasing capital, are the three options for the company, Credit analysts at SMBC Nikko Securities said in a report.
Only the middle option is likely in the short term, however.
Toshiba cannot raise more capital on the stock market while it remains on Tokyo's watch list, where it has been since a 2015 accounting scandal and is still burning cash despite a positive bottom line in the first half of the financial year.
"I expect Toshiba to start with asset sales, and then to issue preferred shares if asset sales are not enough. They will start with measures other than (the chip business) listing," one source close to the company said.
Including "the positioning" of its nuclear business which is centred around Westinghouse, a U.S. firm bought in 2006, Toshiba has said it will consider all options to bolster its finances.

Christopher J. Mitchell

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