Shares of Toshiba Inc. (6502) traded down slightly, down 8%, since rumors of the company offering $5.3 billion, or 600 billion yen, of additional shares to raise capital in an effort to avert a possible delisting from the Tokyo Stock Exchange was reported by NHK (Japan Broadcasting Corporation). Toshiba’s shareholder equity has been decreasing for several years, declining from $11.9 billion at the end of 2014 to a negative $1.94 billion at the end of 2016. In September Toshiba’s shareholder equity dropped even further, to negative $5.51 billion, prompting the company’s need to sell assets and seek a capital infusion.
Toshiba’s U.S. nuclear unit, Westinghouse Electric Co. LLC, filed for bankruptcy in March adding 1 trillion yen, or $9 billion, of charges to the current financial year. As a result, Toshiba was forced to put up its memory chip unit up for sale which was bought for $18 billion by a consortium led by Bain Capital. Toshiba may also be forced to sell a substantial stake in its Westinghouse unit to generate even more cash flow and limit future liabilities from the bankrupt nuclear power provider.
Toshiba is the third largest short in the worldwide Industrial Conglomerate Sector, trailing only General Electric Co. (GE) and 3M Co. (MMM). Short sellers have been very active in Toshiba, with short interest increasing by $659 million over the last month with $320 million in the last week alone.
With short selling so active over the past month, stock borrow demand has outstripped lendable supply. Toshiba’s stock borrow rates have increased from 40bp-50bp General Collateral levels, the cheapest borrow cost for the easiest to borrow stocks, to 3% fee on existing shorts and 8.50% fee on new shorts. A recent wave of heavy short selling has taken down virtually all the stock in the lending market, there are only a few million more shares left to borrow on the street, we can expect rates to stay at these high levels, and higher, in the near term.
Shorts that were already in the trade, or recently got into the trade, have done well as Toshiba’s stock price has traded 17% off its year-to-date high of 345 yen on October 17th. Short sellers are up $80 million, or 11.2%, in November as short interest rose 68%.
But, a further drop in Toshiba’s stock price will not be due to short side pressure. With no significant amount of lendable shares left in the cupboards, existing short sellers will not be able to scale up their positions and new short sellers will not be able to enter the trade in size. A drop in Toshiba’s stock price will be due to disenchanted long shareholders selling their existing positions.
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Managing Director Predictive Analytics, S3 Partners, LLC
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