Tags: japan | takata | air bags | investor

Takata Routed by Air-Bag Crisis Shows Concerns of Investors

Friday, 07 Nov 2014 12:22 PM

Takata Corp. investors are growing increasingly concerned the air-bag maker will be unable to contain a safety crisis that’s begun to take a toll on its financial health.

Investors are demanding record spreads to hold Takata debt and have cut its stock-market value by half this year. The company said it’s having difficulty estimating the liabilities it faces, and it reported negative cash flow from operations for just the second semi-annual period since it went public in 2006.

“The market has a consensus that their financial situation will worsen three to five years down the road,” said Yusuke Ueda, a Tokyo-based credit analyst at Bank of America Merrill Lynch.

There’s “high possibility” of “snowballing penalties and costs in the U.S., carmakers abandoning Takata for the next generation of models, and impairment from a loss of market share and production,” he said.

With its air bags spurring almost 8 million vehicle recalls and linked to 139 injuries and four deaths, Takata is under tremendous pressure. That doesn’t mean the 81-year-old company needs to take measures such as spending cuts, share sales or restructuring, Hitoshi Sano, its head of investor relations, said.

Shares Plunged

Takata plunged 7.3 percent to 1,416 yen, bringing its year-to-date slump to 53 percent. The shares reversed gains in Tokyo trading after the New York Times reported that executives ordered the disposal of air-bag inflators and deletion of data after testing the components in 2004. The newspaper cited interviews with two former employees it didn’t identify.

Three U.S. senators called for the Justice Department to open a criminal investigation into the story’s allegations.

“If the reports are true, the company must be held accountable for the horrific deaths and injuries that its wrongdoing caused,” Democratic Senators Richard Blumenthal of Connecticut and Edward Markey of Massachusetts said in a statement. “These allegations are credible and shocking — plainly warranting a prompt and aggressive criminal probe.”

Claire McCaskill, a Missouri Democrat and chairman of the Senate’s panel on consumer protection, issued a separate statement saying the Justice Department should consider criminal charges.

Growing pressure on carmakers by members of Congress and auto-safety advocates to expand U.S. air-bag recalls could add to costs for Takata, which yesterday widened its annual loss forecast and cut an interim dividend for the first time in eight years. The company had 89.4 billion yen ($778 million) in cash as of Sept. 30 after spending 3 billion yen more on operations than it brought in during the previous six months.

No Restructuring

“We are not losing cash for now, so we can operate the company at the current debt levels,” Sano, the Takata investor relations official, said in an e-mail. The company is “conducting R&D and cap-ex as planned” and has no plans to sell shares or restructure, he said.

The yield premium investors demand to buy Takata’s seven-year bond sold in March rose to a record high of 350 basis points on Nov. 6, up 285 basis points in the last month, almost 15 times the 24 basis-point spread at the time of sale. The spread is the widest on any Japanese bond sold publicly in the last two years by more than 150 basis points, according to data compiled by Bloomberg.

The Japan Credit Rating Agency put Takata’s A rating on negative watch on July 18, after the company booked a one-time charge of 45 billion yen in the first quarter. The agency said in a statement that its decision was prompted by concerns about “additional product failure and uncertainty about future trades with automakers.”

Watching Bonds

“There are a lot of hedge funds who are interested in buying Takata bonds, and they are just waiting for further drop in the bond prices,” said Taketoshi Tsuchiya, a senior executive at Mizuho Securities Co. who heads a team dealing with distressed debt.

Any selling after a ratings downgrade would trigger hedge funds to buy, “because the hedge funds don’t believe Takata will ever file for bankruptcy,” Tsuchiya said.

Takata is an outlier in Japan’s corporate credit market, where companies are borrowing money at 11-year low interest rates of 0.33 percent on average, according to Bank of America Merrill Lynch data. Investors are demanding a 4.3 percent rate to buy Takata’s bonds, the most on any bond sold in the country in the last two years.

NHTSA Actions

The U.S. National Highway Traffic Safety Administration issued a rare public advisory last month urging motorists to act with urgency and have Takata air bags replaced in almost 8 million cars recalled by 10 automakers.

The allegations in the Times’s story “have raised additional concerns about Takata’s handling of air-bag issues and are one of the reasons we’re compelling them to produce documents and answer questions,” Brian Farber, a U.S. Transportation Department spokesman said in an e-mailed statement.

The regulator set a Dec. 1 deadline for Takata to answer questions and turn over materials detailing how it’s handled its air-bag problems. It’s seeking information under oath going back to 2000 for Takata and to 1998 for Honda Motor Co., which owns 1.2 percent of the parts maker and is its biggest customer.

Takata faces fines of as much as $35 million if its response is late or incomplete. The information NHTSA is seeking includes details of quality control at the company’s factories, use of contaminated or improperly formulated propellant and a complete accounting of deaths and injuries.

Other Expenses

While $35 million is the stiffest penalty the U.S. Transportation Department can command, automakers have racked up far-larger costs from recall-related charges and legal settlements in recent years.

Toyota Motor Corp. has had almost $3 billion in legal payouts related to its unintended-acceleration recalls of 10 million vehicles in 2009 and 2010. Settlements include the record $1.2 billion fine paid to end a criminal probe by the U.S. Justice Department in March, and a $1.63 billion accord reached in July 2013 with U.S. consumers who claimed their cars lost value.

General Motors Co. this week urged a judge to reject lawsuits demanding $10 billion for the lost value of millions of cars recalled this year for ignition-switch fixes and other flaws. The Detroit-based company charged off $2.7 billion for recalls of 32 million cars through September.

Takata said it expects a 25 billion yen loss this fiscal year, compared with its August forecast for a record 24 billion yen net loss.

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Takata Corp. investors are growing increasingly concerned the air-bag maker will be unable to contain a safety crisis that's begun to take a toll on its financial health. Investors are demanding record spreads to hold Takata debt and have cut its stock-market value by half...
japan, takata, air bags, investor
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2014-22-07
Friday, 07 Nov 2014 12:22 PM
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