Daiei was forced to call a news conference to reassure investors after its share price fell 30%. Investors were scared by Daiei’s profit warning on Friday, an effect that was further compounded when Moody’s downgraded its debt rating. Daiei insisted that the downgrade was inappropriate and relationships with its creditor banks were still solid. While the banks seem to have assured Daiei’s survival for now, the supermarket still has a lot to prove.

Investors were already watching Japanese supermarket stocks closely after the collapse of Mycal earlier this month. On Friday, Daiei released a profit warning. Then credit agency Moody’s downgraded Daiei’s debt rating to junk status. It was too much for investors to bear.

Tuesday morning was relatively calm (Monday was a Japanese bank holiday), but at the first sign of selling, many just couldn’t get Daiei shares out of their hands quickly enough. The stocks plummeted by more than 30% to an all-time low of Y94, although the price rose to Y124 yen by midday Wednesday.

The Japanese supermarket has far higher debts than Mycal did – $19.5 billion compared to Mycal’s $14.4 billion. But Daiei still remains in a more favorable position. Although Daiei’s fate also rests in the hands of its bankers, they still seem to have faith. All four of its main creditor banks have attested that they will not make any changes to their financial support post-downgrading. On Tuesday, 19 other creditor banks also confirmed their continuing support, while Daiei’s business partners also claim to be unworried.

But Daiei needs to put words into action if it is going to maintain this good faith. There is no question over whether or not the banks are eyeing its progress intently. Daiei has a three-year restructuring program, named the Phoenix Plan, to help it slash its debt mountain. While it has hit snags, it is not too far off its target for this year. Interest bearing debts have been reduced by $2.2 billion since February – 80% of the annual target.

Debt reduction is the only place to start (Daiei’s interest payments already eat up all of its profits, and then some) but it is far from the end. Given Japan’s sinking consumer market and ongoing deflationary pressures, it is hard for supermarkets to turn a profit. If Daiei doesn’t find a way to boost its flagging sales in the medium future, its time may be running out as well.

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