TOKYO - When Sony Corp. revealed plans to transfer 65 billion yen ($539 million) worth of cross-shareholdings to its pension program, the payoff came quickly.
The day news of the arrangement became public, the Tokyo arm of Moody's Investors Service sent out a press release confirming an Aa3 rating for the long-term debt of Sony and its supported subsidiaries, and citing the transfer as prompting its decision.
"Moody's believes this action reflects Sony's conservative accounting policies and sufficient financial resources in view of the need to cope with burgeoning pension liabilities," the news release read.
That reaction was precisely what Sony was looking for.
"Because foreign investors are significant shareholders for Sony, the company may be putting more emphasis on the soundness of its FASB (U.S. Federal Accounting Standards Board) figures by reducing the shortfall in its projected benefit obligation," speculated an executive at the Tokyo office of a foreign-based asset-management company, who asked not to be named.
Terry Hasegawa, assistant manager of Sony's Finance Division, agreed one factor in the decision was that it would be "appealing to foreign investors and ratings agencies. We had many discussions on how to make good use of our stocks, including cross-shareholdings, without actually selling the stock. We found a good way to use that stock by segregating it for pension assets."
As of March, Sony had a worldwide pension funding shortfall of 270 billion yen. Injecting 65 billion yen worth of shareholdings into the pension program will, as Moody's put it, "mitigate Sony's future financial burden."
The deal might not be a free lunch for the company, however. Sony will have to realize a capital gain of about 40 billion yen - the difference between the book and market value of the stock - and post deferred tax on the gain under FASB rules. The company did not consult Japanese tax authorities before deciding on the transfer.
Sony believes, Mr. Hasegawa said, there is no tax obligation on the transfer under current Japanese tax and accounting rules, and has no plans to appeal for a tax exemption related to the move.
"This was solely an internal company decision, and we consulted our own accountants in making it," he said.
As of mid-November, Sony was still working out details of a plan to put the stock into a trust fund to be managed by IBJ Trust & Banking Corp., and could give no firm date for concluding the transfer.
According to Mr. Hasegawa, however, the deal will be structured so as to effectively leave the stock booked on Sony's balance sheet, with control of proxy voting rights remaining in Sony's hands. IBJ Trust cannot comment on the possible terms of the arrangement until all details have been finalized, said Satoshi Nomura, senior manager of the bank's corporate finance and trust department.
In addition to pleasing foreign investors who have been abandoning Japanese equities, Sony has taken a big step toward preparing for fiscal 2000, when Japan will implement accounting rules that treat pension benefit obligations very similarly to FASB standards. Current Japanese rules distinguish between employee benefit plans - which are regulated by the Ministry of Health and Welfare with liability recognized by actuarial rules and reviewed every five years - and a separate retirement benefit typically paid in a lump sum. Assets assigned to this retirement benefit are regulated by the Ministry of Finance; there is no actuarial review of these assets, although they typically are managed just like the assets in benefit plans.
The key difference is the lack of any tax advantage in segregating assets for the retirement benefit; the assets are carried on the balance sheet, and most companies prefer to use this cash as operating assets. The new rules coming in fiscal 2000 will change this, and most Japanese companies likely will have to scramble to make up shortfalls in their pension plan funding that will come to light then.
Because Sony lists American depository receipts in the United States, it already complies with FASB rules on disclosing overall pension assets. But the coming change to Japanese accounting standards also was a factor in the decision, Mr. Hasegawa said.
There might be more behind this transfer of stock than Sony is saying at the moment, however. The issue of tax treatment for such a move could come under review by the Ministry of Finance, and while Mr. Hasegawa said the idea was not to sell the stock, many Japanese corporations have begun unwinding their massive cross-shareholdings and there could be benefits to Sony in allowing IBJ Trust to liquidate the positions rather than doing so itself, the asset-management company executive said.
There is an obvious precedent for Sony's decision to pump up its pension funding with a transfer of shareholdings. In 1995, General Motors Corp. partially offset an $18 billion shortfall in its defined benefit pension plan by effectively contributing to it $5.5 billion worth of stock in then wholly owned subsidiary Electronic Data Systems Corp.
Given the parallels between GM's position at that time and the ubiquitous combination of pension funding shortages and huge cross-shareholdings at Japanese corporations today, the most interesting aspect of Sony's move may be whether it serves as an omen of things to come in Japan.