In just 2 months, Toshiba stock price tanks, pops by 50!

Today, February the 14th, St. Valentine was beheaded in 278 A.D. In 1900, South Africa was invaded by 20,000 British troops during the second Boer war. And in 1919, President Wilson presented the draft covenant for the League of Nations.

Source: Bloomberg, thebullishbearblogger

Source: Bloomberg, thebullishbearblogger

In Japan, Toshiba’s stock price plummeted by 50% from ¥454 on 13th Dec, 2016 to ¥227 on 14th Feb, 2017 after it was apparent that the Company was seeking an extension to its result declaration date and could possibly announce bankruptcy.

Toshiba’s management of Westinghouse Electric Co., the US nuclear power business acquisition from a decade ago, is the source of the problems. Westinghouse faces spiraling cost overruns at nuclear plant projects in the United States, and Toshiba has repeatedly failed in its efforts to offload a portion of its shares in the subsidiary.

Source: Bloomberg

Source: Bloomberg

A write off worth several billions of dollars is expected. According to Reuters (See the link in the recommended reading section below), the final charge, to be detailed alongside quarterly earnings, will be ¥700 billion ($6.2 billion). This would wipe out the company’s shareholder equity. All this will spur trouble for the creditor banks. According to BNP Paribas analyst Toyoki Sameshima, the top four Japanese banks (Mizuho, SMFG, SMTH, MUFG) have already supported increased lending to Toshiba, their loans to Toshiba accounting for 41.5% of its total borrowing. Below is a break up of the loans to Toshiba by these banks:

Source: Companies, BNP Paribas

Source: Companies, BNP Paribas

Earlier, on January 27, 2017, Toshiba announced plans to spin off its semiconductor memory business. Management suggested the possibility of a future IPO, which could yield a value of around ¥1.5-2 trillion.

The sheer size and legacy of Toshiba may mean it is too big to fail (TBTF) at the moment. A bailout from the big Japanese banks is on the cards by way of debt-to-equity swaps (DES), underwriting of common/preferred stock, and subordinated loans. The stock market prices and analyst views are instructive: Over half the analysts do not think that the stock is worth selling at this stage.

Source: Bloomberg

Source: Bloomberg

But what Toshiba urgently needs is to strengthen governance of overseas subsidiary Westinghouse. Arguably, the biggest reason that the stock exchange regulators postponed judgement on a designation change from TE1 was that subsidiary Toshiba EI Control Systems reported inflated sales.

Recommended readings:

Toshiba prepares to unveil nuclear hole, other perils threaten >> Reuters (Feb, 2017)
Toshiba’s nuclear reactor mess winds back to a Louisiana swamp >> Bloomberg (Feb, 2017)

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