(The following statement was released by the rating agency)
Oct 10 - =============================================================================== Summary analysis -- Sharp Corp. ----------------------------------- 10-Oct-2012 =============================================================================== CREDIT RATING: BB+/Watch Neg/B Country: Japan Primary SIC: Household appliances, nec Mult. CUSIP6: 819882 =============================================================================== Credit Rating History: Local currency Foreign currency 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 =============================================================================== Rationale
The ratings on Sharp Corp. (BB+/Watch Neg/B) reflect the company's highexposure to volatile liquid-crystal display (LCD)-related business, weakeninginternal cash flow, less-than-adequate liquidity, and an increasinglydifficult external environment for its core business due to fiercetechnological competition, the strong yen, and constant downward pressure onprices. Moderating factors include the company's technological strengths inelectronic components.
We view Sharp's financial risk profile to be "significant." Sharp's internalcash flow has weakened, in our view, due to its weakening earnings. Sharp'sfirst quarter (ended June 30, 2012) earnings results worsened beyond ourexpectations, resulting in JPY94.1 billion operating losses and JPY138.4 billionnet losses. Its flat-panel TV and LCD panel businesses recorded largeoperating losses due to weakened sales in Japan and China, lower capacityutilization at both large and medium-to-small LCD panel facilities, andinventory adjustments. Its smartphone and mobile handset business is alsosuffering from a decline in sales volume due to intense competition withoverseas handset makers and a shortage in supply of key components. Thecompany also revised down its fiscal 2012 (ending March 31, 2013) full-yearforecast to operating losses of JPY100 billion and net losses of JPY250 billion.
On Sept. 28, 2012, Sharp announced that it has signed a JPY360 billionsyndicated 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 termof which ends June 30, 2013, consists of a JPY180 billion term loan and a JPY180billion uncommitted line of credit. In our view, the signing of the loanagreement will not improve the company's debt profile materially, because thecontract term of the agreement is short and Sharp's debt profile is likely toremain largely dependent on short-term debt. Although we believe the signingof the loan agreement confirms our assumptions to some extent that majorcreditor banks will continue to provide Sharp with stable financing and thatthe company does not face serious problems refinancing its debt, we considerthat the factors we will review in resolving the CreditWatch status remainbasically unchanged.
We view Sharp's business risk profile to be "satisfactory." In our view,Sharp's technological strengths in flat-panel TVs, LCD panels, and electronicdevices still support its credit quality. Standard & Poor's expects Sharp'searnings and cash flow to begin to recover in the second half of fiscal 2012because of a likely improvement in operating rates at its key Sakai andKameyama plants. Our current ratings incorporate an assumption that Sharp willreach an agreement with Taiwan-based electronics maker Hon Hai PrecisionIndustry Co. Ltd. (A-/Stable/--) and implement a strategic alliance, althoughterms and conditions of the deal remain uncertain.
Because its current liquidity needs exceed sources, we view Sharp's liquidityposition as "less than adequate." Sharp's liquidity position is weakening, inour view. Internal cash flow remains weak, and financial market conditions forthe company have deteriorated. As of June 30, 2012, Sharp had a highdependence on short-term borrowings. It had JPY336 billion in short-term debtand JPY362 billion in commercial paper. In recent months, the company has facedunfavorable financial market conditions, as evidenced by a recent rise inspreads on credit default swaps, which has added to its difficulty in issuingnew commercial paper. Weak internal cash flow has forced the company to repayits commercial paper primarily with bank borrowings. In our view, the recentsigning of the JPY360 billion loan agreement will not improve the company's debtprofile materially. Still, we incorporate assumptions that major creditorbanks will continue to provide Sharp with stable financing and that thecompany does not face serious problems refinancing its debt.
The ratings on Sharp are on CreditWatch with negative implications. Inresolving the CreditWatch status, we will review the following factors:Ongoing developments regarding a strategic alliance with Hon Hai Precision andhow it would benefit Sharp's business and financial risk profiles; Thecompany's debt profile and how it can secure funding sources with longer termsbeyond June 2013 to meet future debt maturities and reduce its dependence onshort-term debt; and Sharp's business strategy to restore earnings in the nearto medium term, and potential downside risks to earnings. We will considerlowering the ratings if Sharp's earnings in fiscal 2012 and prospects for itsrecovery deteriorate even further or the company's financing environment andrelationships with creditor banks and strategic partners worsen. In addition,given the unfavorable financial market conditions for the company in recentmonths, we will examine if the recently signed JPY360 billion loan agreement isfurther secured with assets held by Sharp, and assess the company's prioritydebt ratio in considering the potential for additional lowering of the issueratings. Specifically, the issue rating will be notched one notch down fromthe corporate rating if we believe the priority debt exceeds the threshold of15% against the company's assets if the long-term rating is 'BB+' or lower. Weaim to resolve the CreditWatch by the end of November 2012, or 90 days fromthe CreditWatch placement of Aug. 31, 2012, as we reassess the company'smedium- to long-term business and alliance strategies, and refinancing plansbeyond June 2013.
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