Westinghouse Electric files for Chapter 11

May 2017 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

Following the loss of billions of dollars due to severe difficulties with a number of key projects, US nuclear company Westinghouse Electric Company (WEC) has resolved to file for a voluntary petition for relief under Chapter 11 of the US Bankruptcy Code.

The filing, announced by Toshiba Corporation, the Japanese owner of the Pittsburgh-based WEC, also encompasses WEC’s US affiliates and Toshiba Nuclear Energy Holdings (UK) Ltd, a holding company for Westinghouse Group operating companies outside the US. In anticipation of the reorganisation of their business lines under Chapter 11, WEC Group companies will continue their ordinary business operations.

As debtor in possession, the WEC Group has received a commitment for Chapter 11 financing of $800m throughout the course of the rehabilitation process. Toshiba has said that it will provide a maximum of $200m as a backstop guarantee of the WEC Group’s Chapter 11 financing. Additionally, Westinghouse, whose technology forms the basis of about half the world’s atomic units, will no longer be under Toshiba’s control and will be deconsolidated from Toshiba Group.

The huge losses at WEC – considered the linchpin of Toshiba’s plans to diversify away from consumer electronics – are being attributed primarily to delays and cost overruns at nuclear plants under construction in Georgia and South Carolina – the latest in a series of crippling blows to have hit Toshiba. Furthermore, the Japanese conglomerate has forecast that its annual loss may widen to a record 1.01 trillion yen ($9.1bn) as a result of the major problems with the two power plant projects. According to data compiled by Bloomberg, Toshiba’s forecasted loss would be a record for a Japanese manufacturer.

With the Westinghouse bankruptcy filing limiting future losses for Toshiba, Satoshi Tsunakawa, the company’s chief executive, stated that there was no risk of additional losses from overseas nuclear projects. “The filing by Westinghouse is an important step toward recovery,” he said. “It is also in-line with our goal of limiting risk from overseas nuclear operations.”

Toshiba’s $5.4bn purchase of Westinghouse in 2006, considered to be a coup at the time, was followed in 2008 by deals to build four reactors – the first US nuclear plants to be approved by regulators since the accident at Three Mile Island in 1979.

Concurrent with bankruptcy proceedings, Toshiba and the WEC Group are working with the owners of the nuclear power projects at the Georgia and South Carolina sites to develop arrangements for the continuation of construction during an interim period. In a statement, Toshiba made it clear that such arrangements would contemplate that the owners would make payments for construction-related costs while the parties continue to explore and assess a comprehensive solution regarding the sites.

In an attempt to shore up its finances, Toshiba announced its intention to sell a significant stake in its highly-regarded memory chips business. Considered to be its crown jewel, Toshiba’s semiconductor business operations – which manufactures the memory chips used in personal computers, smartphones and data centres and which accounted for approximately 25 percent of Toshiba’s 5.67 trillion yen in revenue during the latest fiscal year – has attracted a number of potential bidders, with the Development Bank of Japan said to be considering a joint offer with US financial bidders. Toshiba said it aims to complete the sale of the chips business by March 2018.

While the full impact on Toshiba’s FY2016 business results as a result of the WEC debacle are yet to be determined, the Japanese conglomerate has reaffirmed that it will continue to cooperate with parties to the Chapter 11 rehabilitation process with all sincerity, in order to facilitate smooth proceedings.

Fraser Tennant