Toshiba’s collateral on loans raises bond payment worries

Toshiba Corp. bondholders, who have seen their investments tumble in recent months, have a new reason to worry: they may be paid only after banks in the event of a default.

The concerns surfaced after people familiar with the matter said the Tokyo-based company is offering stock holdings and real estate as collateral to lenders as it seeks additional financial support. While the move would help ensure banks continue to provide financing, if there’s a default the lenders will likely get their money back first, according to Daiwa Securities Group Inc.

Even though the odds of Toshiba failing to pay its debt appear low now, investors may have legitimate reasons to worry about getting their money back in case of default. In the U.S. and Europe, if bonds and loans are both senior grade and unsecured, one creditor typically can’t demand collateral without the other also getting it, according to the Japan Securities Dealers Association. That’s not the case in Japan.

“It isn’t fair for bondholders that only lenders get collateral for the most part, and there’s usually a difference in recovery rates,” said Katsuyuki Tokushima, the chief fixed-income analyst at NLI Research Institute, a unit of Nippon Life Insurance Co. “In Japan, corporate bonds are in effect subordinated bonds.”

In a sign of investor concerns, the yield on Toshiba’s notes due December 2020 has jumped to 5.66 percent from less than 2 percent in December.

In the past, loan issuers to Japanese firms that went bankrupt such as Suruga Corp. and Zephyr Co. secured collateral right before the firms defaulted, while bondholders didn’t, causing recovery rates on corporate notes to be less than expected, according to a report by the JSDA.

Toshiba’s three main banks — Sumitomo Mitsui Banking Corp., Mizuho Bank Ltd. and Sumitomo Mitsui Trust Bank Ltd. — say they plan to continue their financial support, according to the people who said that Toshiba is offering collateral to the firms.

Kaori Hiraki, a Toshiba spokeswoman, said the company is considering various options for fundraising but can’t discuss specifics now. Masako Shiono, a Mizuho spokeswoman, and Takafumi Sasaki, a Sumitomo Mitsui Banking spokesman, both declined to comment. A Sumitomo Mitsui Trust spokesman who asked not to be identified also declined to comment.

The one-year odds of Toshiba neglecting to pay its debt have climbed to about 1.22 percent from less than 0.3 percent in mid-December, according to Bloomberg’s default-risk model, which takes into account stock and debt metrics. The company’s bond yields jumped in the end of December after it said it may need to write down an acquisition made by U.S. unit Westinghouse Electric.

S&P Global Ratings cut the firm’s long-term credit rating by two levels last week to CCC-, a grade it defines as “vulnerable to nonpayment.” Moody’s Investors Service rates Toshiba Caa1, a score that means it sees the debt as a “very high credit risk.”

S&P said that lenders will find it difficult to accept any more requests for further funding, after Japan’s stock exchanges put its shares under supervision due to seeing insufficient improvement in the company’s internal controls.

Click here for a Bloomberg Intelligence primer on Toshiba

Banks tend to get stuck with most of the debt of firms in financial trouble, so they are prone to asking for collateral to ensure they get their money back, said Mana Nakazora, the chief credit analyst at BNP Paribas SA in Tokyo.

Japanese companies rely on loans for the biggest chunk of their debt funding, and that makes their repayment take precedence over bonds, according to Toshiyasu Ohashi, the chief credit analyst in Tokyo at Daiwa Securities Group Inc.

“This shows that relationships with banks are more important and stronger” than with bond investors, he said.

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