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Announcement:

Moody's: Toshiba's delay in reporting results and large impairment loss highlight poor internal controls

16 Feb 2017

Tokyo, February 16, 2017 -- Moody's Japan K.K. says that Toshiba Corporation's (CFR, Caa1, review for downgrade) delay in releasing its earnings report for the quarter ended December 2016, and announcement of an impairment loss of more than JPY700 billion (in excess of $6 billion) — mainly related to its nuclear projects in the US — is credit negative.

"Toshiba is already in a deleterious financial position," says Masako Kuwahara, a Moody's Vice President and Senior Analyst. "The delay in reporting its results and the substantial impairment charge pose further credit negatives for the company."

Moody's points out that on 14 February 2017, Toshiba postponed the release of its earnings report for the quarter ended December 2016, but later provided a provisional forecast of a Yen390 billion net loss for the year to March 2017. At the same time, it announced more than JPY700 billion (over $6 billion) impairment loss.

Without fresh funds to bolster its equity position, Toshiba estimated the impairment charge would result in a Yen150 billion negative shareholders' equity position.

"We believe Toshiba's delay in reporting its financial results is due to poor internal controls at its US nuclear-power subsidiary, Westinghouse Electric Corporation," adds Kuwahara. "The poor internal controls likely indicate manifestly inadequate processes for the acquisition of nuclear construction and services provider, CB&I Stone & Webster, in 2015."

Moody's also says that the delay highlights the challenges that Toshiba faces in effecting a proper corporate governance framework, adequate to control complex global interests.

Moody's is increasingly concerned over the possibility of escalating costs for current projects. Even though Toshiba intends to cease its business of constructing new nuclear plants overseas, it is committed to completing the four remaining projects in the US. Toshiba has estimated cost overruns at $6.1 billion, but this figure could rise depending on US regulations for nuclear generation.

Toshiba's plan to spin off its profitable memory business and potential disposal of more than 50% will, once successfully completed, strengthen its capital structure, a credit positive. While this scenario could assist in underwriting the company's present very weak balance sheet position, it would nevertheless materially erode the earnings contribution of its one remaining profitable business of any scale.

Reflecting these mounting challenges for the company, Moody's downgraded Toshiba's CFR and senior unsecured debt ratings to Caa1 on 28 December 2016 over Moody's concerns as to the sustainability of Toshiba's near-term liquidity, as well as the substantive and rapid erosion of its equity base. The company's ratings continue to be under review for downgrade following Toshiba's announcements.

Moody's review of Toshiba's ratings will include consideration of the following main aspects:

(1) Toshiba's ability to maintain adequate near-term liquidity;

(2) The relationship between the company and its main banks;

(3) The magnitude of potential impairment losses related to the acquisition of CB&I Stone & Webster Inc. in the fiscal year ending 31 March 2017, along with the extent of erosion in its balance sheet; and

(4) The adequacy of the company's governance, including the timeliness of financial reporting.

Upward ratings pressure is extremely unlikely over the next 12-18 months, due to the material challenges the company is facing.

Nevertheless, the ratings outlook could change to stable, if Toshiba can stabilize earnings and cash flow along with its very weak financial profile.

Evidence that its liquidity is sustainable over the immediate and longer term and that it can maintain adequate support from its main banks would also be a prerequisite for changing the ratings outlook to stable.

On the other hand, Toshiba could face renewed downward ratings pressure, if a potential impairment loss related to goodwill is beyond Moody's expectations, and/or its earnings stay weak, possibly due to a significant deterioration in the memory business beyond Moody's current expectations.

In addition, further evidence of a challenged liquidity position or a non-curable breach in its bank debt covenants would also likely place immediate pressure on Toshiba's ratings.

The principal methodology used in these ratings was Global Manufacturing Companies (Japanese) published in August 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Toshiba Corporation, headquartered in Tokyo and founded in 1875, is one of the largest integrated electronics companies in Japan.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Masako Kuwahara
Vice President - Senior Analyst
Corporate Finance Group
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 813-5408-4110
SUBSCRIBERS: 813-5408-4100

Ian Lewis
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 813-5408-4110
SUBSCRIBERS: 813-5408-4100

Releasing Office:
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 813-5408-4110
SUBSCRIBERS: 813-5408-4100

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