Toshiba Corp. Upgraded To #BB# On Sale Of Toshiba Memory Corp.; Off C Outlook Positive

Stocks and Financial Services Press Releases Friday June 1, 2018 17:27
TOKYO--1 Jun--S&P Global Ratings

TOKYO (S&P Global Ratings) June 1, 2018--S&P Global Ratings today said it has raised three notches to 'BB' from 'B' its long-term corporate credit and senior unsecured debt ratings on Japan-based capital goods and diversified electronics company Toshiba Corp. We also removed the ratings from CreditWatch with positive implications. We have affirmed our 'B' short-term corporate credit and commercial paper program ratings on Toshiba. The outlook on the long-term corporate credit rating is positive.

We base the upgrades on our view that key financial metrics for Toshiba, together with its liquidity, are likely to improve substantially because it has received about JPY / CNY2 trillion for the sale Toshiba Memory Corp., completed today.

We placed our long- and short-term corporate credit ratings, senior unsecured debt rating, and commercial paper program ratings on Toshiba on CreditWatch with positive implications on Nov. 21, 2017. This reflected our view that the company's decision to conduct a large capital raising heightened its likelihood of avoiding a negative net worth as of the end of fiscal 2017 (ended March 31, 2018) and of substantially improving its financial health. We continued to place the long-term ratings on CreditWatch positive even after raising the long-term ratings on Jan. 19, 2018, and after raising the long- and short-term ratings on May 16, 2018.

Toshiba has drastically improved its financial standing through a large capital infusion and the sale of assets related to its U.S. nuclear power business. As a result, we estimate that its debt to EBITDA was below 5x as of March 31, 2018. Thanks to the recent stable performance of main businesses that Toshiba continues to possess following the sale of its memory business, such as infrastructure and energy, and the relatively low capital intensity of its main businesses, we view Toshiba's financial standing as likely to stabilize. Its financial standing will likely further improve significantly because it has received proceeds from its sale of Toshiba Memory. Even if Toshiba directs a certain amount of funds toward shareholder returns or investments for growth, we believe it can maintain a net cash position (cash and deposits exceeding debt) in the coming year or two. Accordingly, we assess Toshiba's financial risk profile as intermediate.

With the sale of Toshiba Memory, Toshiba's main businesses will center on the relatively stable fields of infrastructure and energy. However, we think the competitiveness and profitability of each business compares very unfavorably with those of its large peers in the capital goods industry. Toshiba's elevator and escalator business and its public infrastructure business enjoy a constant level of market share and competitiveness but are likely to continue to face a fierce struggle for customers globally, in our view. Its energy businesses also face worsening market conditions amid a global shift away from carbon-emitting activities. We also expect a drop in overall demand for hard disk drives to weigh on the earnings of its storage business, separate from the memory business it has sold. We expect Toshiba's EBITDA margin to stabilize, but its absolute EBITDA margin in these businesses, which we assume will be about 6%, is likely to fall short of the industry average, reflecting weak competitiveness of each business. Accordingly, we assess Toshiba's business risk profile as weak.

We assess Toshiba's liquidity as adequate. This assessment reflects our view that its liquidity has improved materially because a capital infusion and the sale of Toshiba Memory are likely to substantially boost its cash and deposits to levels far exceeding its debt.

The outlook is positive. We expect Toshiba to invest in growth fields to boost its business competitiveness and also to swiftly carry out specific measures to improve its business, for example by reducing costs. Accordingly, we see a more than one-in-three chance that Toshiba will improve its EBITDA margin materially.

We will consider upgrading Toshiba in the coming year or two if we see a heightened likelihood that it will focus heavily on reducing costs and improving its operating efficiency, resulting in an EBITDA margin steadily approaching 7%. We will also consider an upgrade if Toshiba demonstrates more stable financial management, including in its approach to growth investments and shareholder returns, and we believe that it will continue to maintain sound financial standing. Conversely, we will consider revising the outlook to stable if we expect its EBITDA margin to hover at about 5% despite various measures to improve its business amid fierce competition.

We rate Toshiba's senior unsecured debt equivalent to our long-term corporate credit rating on the company and remove the rating from CreditWatch with positive implications. We estimate the company's secured debt, which has higher priority than its senior unsecured debt, accounts for slightly more than 50% of Toshiba's total debt on a consolidated basis. Accordingly, we notch down the senior unsecured debt rating one notch from the long-term corporate credit rating. Meanwhile, we believe the company is likely to receive a waiver for borrowings from major creditor banks while continuing to pay other debt in a timely manner. Consequently, we incorporate one notch of uplift in the issue rating on the senior unsecured debt.


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