TSE should delist Toshiba now

The bourse should delist Toshiba and fulfil its responsibility to protect small investors. Continued trading is an indictment of Japan’s corporate governance.

The Tokyo Stock Exchange should stop retail investors trading Toshiba’s stock in an information blackout, where powerful, vested interests are building a consensus on the fate of the erstwhile national champion behind the scenes.

When even senior management admits events are transpiring beyond their control, the apocryphal Mr. and Mrs. Watanabes can not make rational investment decisions.

After all, even Toshiba's CEO Satoshi Tsunakawa said repeatedly: "I don't understand quite what is going on" at a board meeting on December 21, according to a February report by the Nikkei business newspaper.

It was over a year and a half ago that TSE put the widely-held stock of Toshiba on its watch list for expulsion if management did not improve their internal controls. Time has run out.

Toshiba’s 400,000 or so shareholders will still own the same percentage of the company after a delisting as they do now, and a delisting would stem more active shareholders stampeding out of the stock. Toshiba has lost about 60% of its value since early 2015, before the accounting scandals started to pile up. 

"Delisting itself is not a major source of concern. It would not mean that Toshiba would
suddenly become unable to operate its businesses," said Toshihiro Uomoto, a credit analyst at brokerage Nomura in a note.

The company could take the time-out to restructure as well as implement a much-needed root-and-branch reform of its corporate governance.

More importantly it will shore up investors’ confidence in other stocks and bolster the TSE's reputation. Allowing Toshiba to continue to trade dilutes the prestige of a listing on the First Section of the Tokyo Stock Exchange.

The fear of a shameful delisting will also prompt other Japanese companies to bolster their own corporate governance.

Yes, a delisting would raise Toshiba’s financing costs as it teeters on the edge of bankruptcy, but the bourse should be more concerned with the integrity of the exchange than the fate of one company. 
An exchange should provide a fair forum for companies to raise capital from investors with access to accurate information.

Toshiba is clearly not being transparent given it admitted in 2015 that it had overstated earnings for years at its US nuclear unit Westinghouse Electric and wrote off some $6.3 billion.

This year, Toshiba delayed announcing its third-quarter results twice, and when it finally released the report on April 11, its auditor, PricewaterhouseCoopers Aarata, refused to sign it off on it.

The auditor has been unable to complete its investigation into when impairment losses should be posted, clearly a key factor for investors.

In the meantime brokers such as Goldman Sachs are advising their clients, professional investors, to dump Toshiba's stock.

Vested Interests
There are many vested interests in the survival of one of Japan’s most storied electronics manufacturers.

As often happens in Japan, stakeholders such as Toshiba’s creditors, Japan’s powerful business lobby the keidanren and the government seem to have the upper hand.

Investors have traditionally ranked low on the list. Activist shareholders that have successfully taken on management in the US and Europe have been spectacularly unsuccessful in Japan. Hedge fund Effissimo is now Toshiba’s biggest shareholder but has made no demands on management, at least publically. 

Toshiba is clearly at the mercy of its main bank lenders. Its Westinghouse unit filed for Chapter 11 bankruptcy protection on March 11 because of a cash crunch at the group. It accepted $800 million in Debtor In Possession (DIP) financing, which is particularly expensive, a sign it is desperate for credit.

Management will be more concerned with maximising cash flows and making interest payments than with creating shareholder value. Toshiba’s annual debt repayments amount to about ¥600 billion, according to credit rating agency Standard & Poor's (S&P).

“There is a growing likelihood that Toshiba will become unable to fulfill its financial obligations in a timely manner or will undertake a debt restructuring we classify as distressed in the next six months,” said Machiko Amano, a credit analyst at ratings agency S&P in a note on March 17.

Toshiba maintains committed lines of more than ¥680 billion at multiple financial institutions. However, after the company breached bank debt financial covenants, its ability to draw on those lines depends on the goodwill of the banks.

“We will continue to focus on whether the company will be able to maintain adequate support from its banks,” said Moody’s credit analyst Masako Kuwahara in a note on April 5.

To be sure, a delisting would weigh on Toshiba's creditworthiness and it might make suppliers shorten the time they give the firm to pay its accounts receivable. Nevertheless other factors are more likely to be decisive.  

"The act of delisting itself is unlikely to become a reason for the banks to make a significant change in their credit decisions," said Nomura's Uomoto. More worrying for bank's would be Toshiba's negative net worth. 

Japan’s megabanks historically have not let customers fail, keeping them going just enough to keep paying interest on loans. This led to a rash of unprofitable, zombie companies in the 1990s and a stock market malaise stretching across two decades.

Banks have outstanding loans of about $7 billion to the company, among them are some of Japan’s largest financial insitutions, Mizuho, SMBC and Sumitomo Mitsui Trust.

To pay the interest on its debt, the company is selling a majority stake in one of its remaining crown jewels, its profitable memory chip business.

This sale will dilute the company’s profits. “We believe this will likely be acknowledged over time,” said Goldman Sachs equity analyst Ikuo Matsuhashi in a note to investors dated March 24.

Another powerful vested interest has asserted itself in this M&A process, to the detriment of shareholders: the government.

It has barred buyers from countries, which are politically sensitive, so Toshiba is unlikely to be able to fetch top-dollar for the asset as it could have with a wider field of bidders.

Prime Minister Shinzo Abe’s administration is doing battle with Japan’s corporate culture of secrecy and hierarchy in the hope of attracting foreign direct investment, boosting share prices and with it, consumer confidence. 

His team presented a new corporate governance code in 2015, laying down rules on disclosure, shareholders’ rights and independent directors.

If Abe wants investors to believe investors are important stakeholders, it should not be hindering value creation in such a widely held stock as Toshiba.

¬ Haymarket Media Limited. All rights reserved.
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