One day after Toshiba's new CEO, Satoshi Tsunakawa, pulled a page from the book of his ill-fated predecessor Hisao Tanaka who presided over the biggest accounting fraud scandal in the company's history, and bowed down during a press conference to apologize to investors, the company's stock crashed by the limit 20%, bringing its two day loss to 32% and wiping out $5 billion in market cap in two days.
As we noted yesterday, Tsunukawa said that “I apologize to shareholders, business partners and all stakeholders for the trouble we have caused,” after Toshiba said cost overruns at U.S. nuclear reactors it is building were likely to force a write-down of as much as several billion dollars, clouding its turnaround plan after the 2015 accounting scandal. Specifically, the company said it may have to book several billion dollars in charges related to a U.S. nuclear power plant construction company acquisition, rekindling "concerns about its accounting acumen."
The problem is that the nuclear business, together with the semiconductors, has been positioned as one of key pillars underpinning Toshiba's growth which has been trying to shift away from its consumer electronics core. Alas, the latest gaffe now means that much of Toshiba's growth is gone, and the stock price reflect that overnight, when Toshiba's stock plunged by 20%, the most permitted, before it was halted for trading.
The crash wiped out $5 billion off Toshiba's value in two days and prompted a credit rating downgrade on Wednesday, as the company grapples to plug a potential multi-billion dollar hole resulting from cost overrunings from the nuclear business it acquired from Chicago Bridge And Iron. It did not comment on whether that would wipe out its asset value and tip the company into negative net worth. Executives said it could take until February to pinpoint the exact impact.
Toshiba shares, however, took an immediate hit on Wednesday, falling 20 percent to hit the Tokyo exchange's daily downward limit. That follows a 12 percent drop on Monday after initial warnings from the group. As Reuters adds, investors also fretting that a blow to the group's finances could even weaken its competitiveness in its core semiconductor business - specifically investment in 3D NAND, a new advanced type of flash memory - or result in firesales and dilutive share issues.
Adding insult to injury, for the first time in seven years, the value of the group fell below that of tech rival Sharp.
Meanwhile, S&P downgraded Toshiba, already in junk territory, to B- from B, with a "negative" outlook. S&P said it expected shareholder equity to "drastically shrink" as a result of the writedown, eroding the group's resilience, while expected higher working capital would burn more cash. As a result, Toshiba credit default swaps soared by a record 225 bps, surging to an all time wide 370 bps according to a trader quoted by Bloomberg.
"Toshiba's ability to enhance its shareholders' equity is likely to continue to be difficult for the foreseeable future," S&P said, adding it also saw "persistently tough business conditions".
The immediate question for Toshiba's management now is - just like for Monte Paschi - how to plug the capital hole. Credit analysts at SMBC Nikko Securities, cited by Reuters, said that they saw three options as Toshiba deals with the imminent task of enhancing its capital base: making more profits faster, selling assets and increasing capital. Only the middle option is likely in the short term, however.
Toshiba is still burning cash despite a positive bottom line in the first half of the financial year and cannot raise more capital on the stock market while it remains on Tokyo's watch list, where it has been since a 2015 accounting scandal.
"I expect Toshiba to start with asset sales, and then to issue preferred shares if asset sales are not enough. They will start with measures other than (the chip business) listing," one source close to the company said.
Toshiba has said it will consider all options to bolster its finances, even "the positioning" of its nuclear business which is centred around Westinghouse, a U.S. firm bought in 2006. And since investors know a distressed firesale when they see one, Toshiba will be lucky to get anything remotely close to fair market value for the assets it is trying to sell. Our advice, since this could well turn into Japan's "Monte Paschi" debacle, do not retain JPMorgan: after all Dimon's botched recapitalization is one of the main reasons why the third largest Italian bank ended up getting bailed out by Italian taxpayers for the third time in as many years.