Nachum Kaplan, IFR Asia-Pacific Bureau Chief
Sharp owes an asphyxiating ¥2.5trn (US$31.8bn) to banks, bondholders and CB holders. It is in talks with its major creditor banks, including Mizuho Corporate Bank and Mitsubishi UFJ, about getting a ¥150bn loan to keep it afloat while it works out how to restructure its balance sheet. The loan would be an add-on to the ¥66bn facility the company secured in July.
Everything about Sharp and its relationship with its banks shows what is wrong with business in Japan. Mizuho and Mitsubishi UFJ, as well as being Sharp’s biggest creditors, are also shareholders. This obviously makes it hard for them to do the right thing and stop lending the company money.
To show just how detached from reality these banks are in their dealings with Sharp, their idea of playing hardball is merely demanding collateral for extending new loan – a laughably soft position. To be fair to the banks, however, they are in a tough position. They are living the old joke that if you owe the bank under a million dollars you have a problem, but if you owe the bank more than a million dollars it is the bank that has a problem. If they do extend the loan, the two banks’ outstanding exposure to Sharp is estimated at about ¥260bn each. Ouch.
This, however, just illustrates how important it is for Japanese banks to break their bad habit of continually bailing out struggling companies at almost any cost. Japan’s banks are notorious for keeping failing companies hooked up to financial respirators, at great cost, rather than putting them into bankruptcy.
Ending decades-long relationships with big companies that are household names is admittedly not easily done. Culture makes it hard, too. Companies looking after their staff for life has been part of the fabric of modern Japanese society for several generations now, so putting companies into bankruptcy, at some level, undermines part of the social contract. Hence, the temptation to lend money is strong.
Banks, having just returned to profitability after years of posting losses and surviving on government support, know that this has to stop and they showed this back in March when they put memory-chip maker Elpida into bankruptcy. That was the right thing to do, but it was such a rare event that it reverberated through the market.
The problem is that if they bail out Sharp now, the banks are only postponing the problem. The company has ¥362bn of commercial paper redemptions coming soon, which they will meet if the banks stick with them, but that just moves the default equation away from the commercial paper and on to ¥200bn of domestic CB that matures at the end of September next year. Surely postponing the moment of truth is not a satisfactory outcome.
The other piece of the puzzle that both Sharp and its creditor banks are holding on to is the sale of a 9.871% stake to Taiwan’s Hon Hai Precision Engineering for about US$800m, agreed in March. The problem is that Sharp’s share price has lost almost two thirds of its value since then, so the terms of this agreement are being renegotiated.
To be sure, if the stake sale to Hon Hai comes off, Sharp sells its crossholdings Pioneer Corp and Sekisui House, writes down ¥600bn from excessive inventories and factories and disposes of accounts receivables, it will emerge a leaner and cleaner company.
But that achievement will be illusory because it would be the product of financial engineering and not address the company’s underlying problem, which is a lack of growth. Sharp operates in an increasingly competitive market and makes too many products, such as LCD TVs, that have become commoditised, low-margin and, ultimately, unprofitable businesses. Anyone who doubts that this is the case need only look at the ¥250bn loss the company expects to post this year, which will come after it posted a loss of ¥376bn last year. It will take more than a re-engineered balance sheet to turn around losses on that scale.
Japan’s banks need to break with the bad habits of the past and defend their hard-won profitability. If the cost of keeping their balance sheets clean is putting companies like Sharp out of their misery, then that is exactly what they should do. Banks need to show that the Elpida bankruptcy was the beginning of a new era of rational banking. Sharp provides them an opportunity to do that.
Follow @NachumKaplanIFR
