Shares of Toshiba Corp tumbled 6 percent on Monday after media reports that it would raise $5 billion in capital to shore up a balance sheet battered by steep losses in the chip market.

The fund-raising will include some 300 billion yen ($3 billion) worth of new shares, Japanese media reported over the weekend, diluting the value of existing shares by roughly 30 percent at Monday's midday price of 312 yen.

The company, the world's second-largest maker of NAND flash memory chips, will also sell 200 billion yen in subordinated bonds, according to the media reports.

Toshiba did not deny or confirm the reports, reiterating that it was considering ways to strengthen its finances.

Analysts and investors have been widely expecting Toshiba to raise capital to offset a massive loss in the financial year ended March 31, which will tear into a balance sheet already weighed down by 1.8 trillion yen in interest-bearing debt.

But some analysts said $5 billion may not be enough and it may be forced to tap a government scheme to raise more.

Even if Toshiba raises the reported amount of capital, that would not be enough to restore its balance sheet to good health in our view, so it may still seek to sell preferred shares to the government, Goldman Sachs analyst Ikuo Matsuhashi said in a note to clients.

Toshiba has suffered along with other semiconductor makers from sharp declines in demand and prices amid the global economic slowdown. Some chip makers have been pushed into bankruptcy while others are looking to merge.

But Toshiba's shares have recovered about 45 percent since hitting a 28-year low in late February, with investors encouraged by more stable prices for NAND chips, used in mobile phones and portable music players like Apple Inc's iPod.

NAND chip prices prompted Toshiba to say on Friday its operating loss for last business year would be 11 percent smaller than it previously forecast, though a write-down of tax credits would widen its net loss by a quarter to 350 billion yen.

The loss will push shareholders' equity ratio to 8.2 percent, less than half its level the previous year and the first time the key gauge of financial health has fallen below 10 percent.

DWINDLING CHOICES

Toshiba, which trails South Korea's Samsung Electronics Co <005930.KS> in the NAND chip market, has mapped out plans to cut $3 billion in costs and has said it aims for an operating profit for the current financial year to March 2010.

In addition to raising funds, Toshiba also needs to find a partner for its chip operations to ensure survival over the long term, some analysts said.

Toshiba has said it may spin off its system and discrete chip operations and aimed to lead a sector reorganization because too many chip makers, especially those who make system chips, are fighting it out in Japan.

But its choices may be narrowing as sources said last week NEC Electronics <6723.T> and Renesas Technology are in the final stage of merger talks in a move to surpass Toshiba as Japan's biggest chipmaker.

System chips control multiple functions in electronics or cars and look like a maze of circuits on a single sliver of silicon, while discrete chips are simpler semiconductors and control functions inside bigger integrated microchips.

It will be hard to achieve a recovery in its earnings on its own in the next few years if the company keeps doing what it has been doing, said an industry analyst who declined to be named because the fundraising plan has not yet been announced by the company.

Like Toshiba has said, it has to seek to improve the overall sector's profitability through an industry reorganization, the analyst said.

(Additional reporting by Mayumi Negishi; Editing by Michael Watson)

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