WDC Western Digital Corporation

By Kosaku Narioka, Takashi Mochizuki and Peter Landers 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 28, 2017).

TOKYO -- A number of creditors and others involved in Toshiba Corp.'s restructuring are pushing for a Toshiba bankruptcy filing as the best path to rebirth after its effort to raise money through a chip-unit sale stalled.

People involved in talks over Toshiba's workout, including business partners, lawyers and people with ties to the company's main bankers, said bankruptcy is worth serious study. Some of them said it is the best available option and that they are advocating it in discussions with Toshiba or creditors. They said a bankruptcy filing by Toshiba, the core of an industrial conglomerate, could free it of burdens that include lingering liabilities from the March bankruptcy of its Westinghouse Electric Co. nuclear unit in the U.S.

Toshiba's chief executive, Satoshi Tsunakawa, said at a recent news conference that seeking debt relief through the courts isn't an option. A Toshiba spokesman reiterated this week that the company has "no specific plan" to seek bankruptcy protection.

A person familiar with deliberations at one of Toshiba's main lenders compared the conglomerate to a hole that might have treasure at the bottom but also lurking snakes. Bankruptcy, this person said, could kill any snakes and let the lenders access the treasure.

A filing would be among the largest in Japan's history and carry drawbacks including possible political backlash in the U.S. Toshiba has committed $3.68 billion to nuclear-plant operator Southern Co. to cover its Westinghouse-related obligations from an unfinished project in Georgia. On Thursday, it reached a deal with Scana Corp. and a partner to pay $2.17 billion to cover obligations on a second half-completed U.S. nuclear project Westinghouse was building, in South Carolina.

Japanese government officials and Toshiba executives are aware of those drawbacks and may be deterred from a bankruptcy filing, people involved in the discussions said.

Toshiba in June estimated that its liabilities exceeded assets by more than $5 billion as of March 31. That followed its warning in April that it had " substantial doubt" about being able to continue as a going concern because of losses connected to Westinghouse.

Toshiba has said it plans to recover financial health by selling its memory-chip business, which has been booming recently thanks to demand for chips in smartphones and servers. On June 21, Toshiba designated a consortium led by a Japanese government-backed investment fund as the preferred bidder for the unit.

But the sale talks have bogged down since The Wall Street Journal reported earlier this month that the consortium's bid could include an equity stake for SK Hynix Inc. of South Korea. A role for SK Hynix could raise antitrust issues and contradict the government's stance that Toshiba's technology shouldn't fall into foreign rivals' hands. Also, Toshiba's joint-venture partner in the chip business, Western Digital Corp., has filed suit in California to block the sale , arguing that its joint-venture contract with Toshiba gives it veto power over any sale. Toshiba, which rejects that interpretation, is contesting the suit; a hearing is scheduled for Friday in San Francisco.

The stalemate and Toshiba's long battle with its auditors -- who have refused to approve financial statements this year -- are eroding trust among creditors. Japan's three largest banks have taken reserves for a portion of their Toshiba loans, according to bank officials.

Japan has far fewer bankruptcies annually than the U.S., especially among major corporations, in part because of the stigma attached to failure.

Nonetheless, people involved in the discussions described Toshiba as a classic case of a company burdened by obligations with large and uncertain costs that could be lessened under bankruptcy protection. Those obligations include a multibillion-dollar 20-year contract involving liquefied natural gas in the U.S.

One person directly involved in a portion of the Toshiba recovery plan said "everyone thinks" bankruptcy has to be looked at -- but it is difficult to say so publicly.

Two other people familiar with deliberations at one of Toshiba's main lenders said that even if the memory-chip sale were completed, the company would still be likely to run short of funds.

The Toshiba spokesman rejected that view, saying that if the company can sell its chip unit in line with current expectations, "We believe we will be able to secure sufficient funds."

Mitsubishi UFJ Morgan Stanley Securities credit analyst Nobuhiko Ambiru wrote in a July 12 report, "We cannot entirely rule out the possibility that financial institutions will retreat from their supportive position and [Toshiba's] ability to raise funds will be severely impacted, propelling a decision to seek a workout through the courts."

Still, Mr. Ambiru said he expects Toshiba's lenders to continue their support for now. Since it has thousands of suppliers, any halt in payments by Toshiba could have broader economic effects.

There are other potential downsides to a filing for bankruptcy protection.

Southern Co., the U.S. utility for which Westinghouse has been building two nuclear reactors, is counting on the $3.68 billion Toshiba pledged. A Southern spokesman said, "We continue to monitor Toshiba's financial position." The company says it is reviewing whether to go ahead with the reactors.

A Japanese government official said a Toshiba bankruptcy is an option but not a leading choice because of fears Japan would be criticized for breaking its promises over U.S. nuclear projects.

Several people also expressed fears about possible delays at the Fukushima Daiichi nuclear plant because Toshiba's technology is needed to clean up reactors that suffered meltdowns after Japan's 2011 earthquake and tsunami.

--Russell Gold contributed to this article.

Write to Kosaku Narioka at kosaku.narioka@wsj.com, Takashi Mochizuki at takashi.mochizuki@wsj.com and Peter Landers at peter.landers@wsj.com

(END) Dow Jones Newswires

July 28, 2017 02:47 ET (06:47 GMT)

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