Kobe Steel Faces Key Debt Test

As Kobe Steel Ltd becomes increasingly embroiled in a data falsification scandal, concerns are growing about its outstanding liabilities despite the Japanese company’s sizable cash reserves.

Japan’s third-biggest steelmaker, which posted losses in the last two years, admitted this month it falsified specifications on the strength and durability of aluminum, copper and steel products, along with materials for optical disks, Reuters reported.

The falsifications stretch back for more than 10 years, and the company last week said it had lost some customers to competitors because of the widespread data falsification.

Kobe has nearly $3.3 billion cash in hand, investments in short-term securities and unused credit lines from banks, it said last week. That compares with outstanding debt of $7.01 billion as of end-March, as per its latest annual report.

Investors and analysts said the company was unlikely to face a severe liquidity crunch in the coming months, but the specter of potentially bruising financial and legal fallout could weigh heavily on its balance sheet in the year ahead.

“This will surely have a very big impact on Kobe’s balance sheet going ahead, it’s really difficult to quantify now,” said a Tokyo-based portfolio manager at a mid-sized fund house that has investments in Kobe and some blue-chip Japanese companies. The portfolio manager did not want to be named as he was not authorized to speak to the media on company specific issues.

Kobe Steel’s free cash flow has plummeted to 3.9 billion yen ($34.27 million) in the year ended March 2017 from a high of 132.2 billion yen in 2014, according to the annual report.