BOND­HOLD­ERS’ CON­CERNS

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

New Straits Times - - Business -

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.

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