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Japanese markets wary of Toshiba delisting

To investors still betting — either by choice or technical necessity — that Toshiba can pull off a miracle escape act, Monday night produced yet another dispiriting blow.

With just hours left before the troubled Japanese conglomerate was due to submit its audited third-quarter earnings — an already overdue document critical to its continued status as a listed entity — sources close to the company confirmed that it was seeking a new extension to the March 14 filing deadline after also delaying a month ago.

Behind Toshiba’s plea for more time is a swirl of uncertainty — an increasingly negative mixture of conflicting reports, leaks and speculation about how one of Japan’s most famous companies can engineer a survival strategy in the face of bitter internal divisions and the $6.3bn writedown on Westinghouse.

If Toshiba’s latest deadline extension request is not accepted by the Ministry of Finance division in charge, it will have until March 27 to report audited third-quarter numbers or face delisting.

But even if it manages to meet that deadline, it is not out of the woods. Within the past few weeks, the Tokyo Stock Exchange (TSE) has clarified the three main routes (apart from failure to submit audited earnings reports) that would end either in Toshiba’s demotion from the first to the second section of the exchange, or in a full delisting.

At a recent press conference, Akira Kiyota, the CEO of the JPX group that owns the Tokyo Stock Exchange, said that Toshiba risked being demoted to the TSE’s second section if it was in negative shareholder equity by the end of its financial year on March 31.

That is very likely to be the case, say analysts covering Toshiba, unless it manages to sell either a minority or controlling stake in its prized NAND flash memory business which is calculated to have a total value of between $13bn and $20bn. If Toshiba were to drop to the second section, the demotion would not take place until August this year. If the company remains in negative equity value for two straight fiscal years, it could also be delisted.

More immediately, though, looms a second deadline on Wednesday this week that relates to the measures put in place after Toshiba’s 2015 accounting scandal — a demand on Toshiba to submit documentation to show that it has improved its internal controls. Analysts regard it as highly unlikely that regulators will be able to overlook the circumstances surrounding the Westinghouse writedown, even if Toshiba is able to show internal governance improvements elsewhere in the business.

For Toshiba and Japan, any of those outcomes would be a humiliation — one that veteran stock analysts suspect will be avoided for precisely that reason, but which even the Japanese authorities now acknowledge as a possibility. As those risks have grown, brokers have reported huge build-ups of short selling positions, which were estimated by some to have peaked last week at nearly 9 per cent of Toshiba’s free float.

According to Tokyo-based equity strategists, who were unauthorised to comment officially on individual stocks, both a delisting and a demotion to the second section for Toshiba could become a source of substantial market upheaval as one of the country’s biggest names vanished from both the Topix Index and Nikkei 225 Average — benchmarks on which billions of dollars of passive money and exchange traded funds (ETFs) are based. Also heavily affected would be the Government Pension Investment Fund (GPIF), the world’s largest pension fund and, as of last year, a 7.6 per cent holder of Toshiba’s shares

Asked about the extent of the fallout from a delisting or a demotion, Mr Kiyota said that there would “definitely be an impact” as forced selling took over.

In terms of worry, the market has been here before, said UK-based Japan watchers as the reports of Toshiba’s extension request emerged, but that hardly makes matters any easier. The company twice delayed publishing audited earnings reports in 2015 as the company came clean on an accounting scandal in which it had falsely inflated its profits over many years.

But equally, long-time Japan investors have seen the authorities shy away from inflicting delistings on even the most serious offenders. Despite its eye-catching accounting scandal in 2011, Olympus avoided a delisting and even Sharp’s demotion to the TSE second section appears likely to be reversed later this year.

But the risks around Toshiba appear more substantial. Shortly after Toshiba successfully applied for an extension on its earnings filing in mid-February this year, people familiar with the situation revealed what was behind the hold-up — a still unresolved dispute between Toshiba and its auditors over the true extent of crisis at its US nuclear subsidiary, Westinghouse.

The complexity of that dispute has intensified external pressure on Toshiba to file for Chapter 11 bankruptcy protection for Westinghouse — a radical move over which the 80 city and regional banks that lend to Toshiba are said to be strongly divided. Toshiba has hired US bankruptcy lawyers to explore the options for the nuclear business as it simultaneously scrambles to screen potential buyers for its NAND memory business — the most profitable major division within the sprawling conglomerate of 600 companies.

Last Friday, Taro Aso, Japan’s finance minister indirectly linked the Westinghouse issues with the Toshiba delisting risk. Mr Aso publicly urged Westinghouse to decide quickly to file for Chapter 11 protection because, he said, “until they do, it appears difficult for [Toshiba] to file their earnings”.

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