Toshiba’s delayed results and ¥700 billion US nuclear impairment add to its woes

ON February 14, Toshiba Corporation (Caa1 review for downgrade) postponed the release of its third-quarter earnings results, but provided a provisional forecast of a ¥390 billion ($3.4 billion) net loss for fiscal 2016, which ends 31 March 2017. At the same time, Toshiba said it will post an impairment loss of more than ¥700 billion ($6 billion) mainly related to its nuclear projects in the US. Without fresh funds to bolster its equity position, Toshiba estimated the impairment charge would result in negative shareholder equity of ¥150 billion.

Toshiba’s delayed results and ¥700 billion write-down are credit negative and stress a company whose financial position is already tenuous. We downgraded Toshiba’s ratings on 28 December 2016 to Caa1 from B3 and put its ratings on review for further downgrade to reflect our questions about Toshiba’s near-term liquidity, as well as the substantive and rapid erosion of its equity base.

 

We believe Toshiba’s reporting delay reflects poor internal controls at its US nuclear-power subsidiary, Westinghouse Electric Corporation (unrated). When results are released, we expect them to indicate manifestly inadequate due diligence and governance framework following the acquisition of nuclear construction and services provider CB&I Stone & Webster (unrated) in 2015, an issue that has plagued Toshiba. The delay reporting third-quarter results highlights the company’s challenge to implement a corporate governance framework that can function adequately and effectively for its complex global interests.

 

Additionally, even though Toshiba intends to cease its business of constructing new nuclear plants overseas, it is committed to completing four remaining projects in the US. Toshiba estimates cost overruns at $6.1 billion, but we see an increasing potential for escalating costs from US nuclear generation regulations.

 

Toshiba’s plan to spin off its profitable flash memory business and potentially dispose of more than 50% of it would strengthen its capital structure. Although this would help underwrite the company’s very weak balance sheet position, it would materially erode the significant earnings contribution of its one remaining profitable business of any scale. Toshiba’s ratings remain on review for downgrade following its announcements. Our review of

 

Toshiba’s ratings will include consideration of the following: Toshiba’s ability to maintain adequate near-term liquidity; the relationship between the company and its main banks; the magnitude of potential impairment losses related to the acquisition of CB&I Stone & Webster Inc., the extent of erosion in its balance sheet; and the adequacy of the company’s governance including the timeliness of financial reporting.