BONDHOLDERS’ CONCERNS

Banks likely to get money back first in event of Toshiba default, warns Daiwa Securities

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 company was offering stock holdings and real estate as collateral to lenders as it sought additional financial support.

While the move would help ensure banks continue to provide financing, if there was a default the lenders would 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 United States and Europe, if bonds and loans were both senior grade and unsecured, one creditor typically couldn’t demand collateral without the other also getting it, according to the Japan Securities Dealers Association (JSDA). 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. “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 per cent from less than two per cent 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 — said they planned to continue their financial support, according to the people who said Toshiba was offering collateral to the firms. Bloomberg

BLOOMBERG PIC Toshiba’s three main banks — Sumitomo Mitsui Banking Corp, Mizuho Bank and Sumitomo Mitsui Trust Bank — have pledged to continue financial support for the firm.