About US$5.0 billion in debt affected
Tokyo, January 20, 2012 -- Moody's Japan K.K. has downgraded the long-term senior
unsecured bonds and issuer ratings of Sony Corporation to Baa1 from A3.
At the same time, Moody's has affirmed the Prime-2
short-term ratings of Sony and its supported subsidiary,
Sony Global Treasury Services plc.
The rating outlook is negative.
This action concludes the review for possible downgrade initiated on October
28, 2011.
RATING RATIONALE
The rating action reflects Moody's concern that Sony's earnings
will remain weak and volatile due largely to its loss-making TV
business, which is grappling with severe competition, sharp
price declines, and a strong yen.
As a result, for FYE03/2012, Sony expects to incur an operating
loss of about JPY125 billion and an operating margin loss of about 14%,
excluding one-time expenses of JPY50 billion, in the TV business,
which accounts for over 15% of its non-financial services.
Sony's efforts to reduce variable costs and fixed costs are expected
to decrease its operating loss from FYE03/2013.
By ending its joint venture with Samsung Electronics Co. Ltd.*
(A1 stable) on panels (S-LCD), Sony will be able to purchase
panels more flexibly and based on market prices. However,
Moody's believes that it will still be challenging for the company
to make a profit in the TV segment in the next two years, FYE03/2014.
(*: This Moody's Investors Service's rating is not governed
by Japanese regulation.)
The maturity of major digital products, such as compact digital
cameras and camcorders, is also likely to weigh on earnings over
the medium term. Increasing competition in mature markets is expected
to pressure margins. Moody's notes that these products,
which contributed to about 10% of non-financial services
revenue in FYE03/2011, have been an important contributor to offset
the operating losses in its TV business.
In addition, Sony's presence in the growing smartphones market
will remain weak even after Sony Ericsson Mobile Communications AB (unrated)
becomes a wholly-owned subsidiary. To strengthen its smartphones
business, Sony in October 2011 announced the full acquisition of
Sony Ericsson, a joint venture with Telefonaktiebolaget LM Ericsson*
(A3 stable).
(*: This Moody's Investors Service's rating is not governed
by Japanese regulation.)
However, Sony Ericsson's market share in smartphones is estimated
to be below 5% and it incurred an operating loss and had a negative
free cash flow in FYE12/2011. Thus, Sony is likely to require
time and investments to improve product competiveness, and earnings
and cash flow from Sony Ericsson.
At the same time, the cash payment of EUR1,050 million (about
JPY105 billion) for Ericsson, and the consolidation of Sony Ericsson's
debt of EUR742 million (about JPY 74 billion) as of December 2011,
will delay the improvement in Sony's leverage. At the same
time, the sales of Sony's shares in S-LCD --
amounting to about JPY 76 billion -- will partly offset
the impact.
Moody's expects the operating margin for Sony's non-financial
services businesses, excluding equity income and non-recurring
expenses, to remain at around 2% and adjusted Debt/EBITDA
is likely to stay at around 3.5x over the medium term.
At the same time, Moody's has affirmed its Prime-2
short-term ratings and its supported subsidiary. Although
the amount of its committed facilities is less than the size of its CP
programs, Moody's considers that the company's record
of conservative use of CP funding, its high levels of cash liquidity,
and its continued expected access to Japanese banks will ensure timely
payments on its CP.
The rating outlook is negative as Sony's financial profile is weakly
positioned in the Baa1 rating category even after the downgrade.
The negative outlook represents Moody's concern on whether Sony
will be able to restore earnings and cash flow, given challenging
market conditions. The latter include intense competition and sharp
price declines in the TV business, the maturity of major digital
products, and the rise of smartphones and tablets.
Moody's will continue to monitor Sony's efforts to improve its earnings
and cash flows. If a significant improvement in its financial profile
is unlikely in FYE03/2013, its ratings could be reviewed for further
action in a relatively short time.
On the other hand, Sony's stable relationships with its major
banks are an important rating consideration; one that has lifted
the company's ratings by two notches from its fundamental creditworthiness
as is the case with other leading Japanese companies.
Its ratings are also supported by its diverse business portfolio,
especially the relatively stable earnings from its competitive digital
imaging, games, movies, and music businesses,
as well as its strong financial flexibility, including its holding
of a listed financial subsidiary.
Sony's financial subsidiary is engaged in both insurance and banking,
but its main business is life insurance in Japan, and which is run
by Sony Life Insurance Co. Ltd. (Aa3). Moody's
believes that the assets and cash flow of the financial services business
will not be used to support Sony for regulatory reasons.
Thus, Sony's ratings do not incorporate any notch-up
because of the strong credit of its financial services business.
Nevertheless, the company could, if required, sell the
shares of the financial subsidiary for cash. Thus, Moody's
believes that the financial services business contributes to Sony's
financial flexibility.
If prolonged weakness in the global economy, a stronger yen,
the maturity of major digital products, or greater competition continue
to hurt earnings and the company fails to restore profitability,
then its ratings would be downgraded.
For example, if its operating margin (excluding equity income and
non-recurring expenses) stays below 2%, or adjusted
debt/EBITDA remains above 3.5x on a sustained basis, or if
Sony fails to keep adjusted-debt-to-capitalization
below 50% and maintain a strong liquidity profile in its non-financial
services businesses, then its ratings could be downgraded.
Furthermore, acquisitions, which can change its business risk
materially, and/or erode its balance sheet and financial flexibility,
could also put the rating under pressure.
Given the negative outlook, an upgrade is unlikely in the short
term. The outlook could return to stable if Sony successfully addresses
its structural issues, and restores the profitability of its TV
business and improves earnings from other core businesses.
For instance, if it can improve reported operating margin to more
than 2% (excluding equity income and non-recurring expenses)
and adjusted debt/EBITDA to below 3.5x in its non-financial
services businesses, and maintain adjusted-debt-to-capitalization
at below 50% on a sustained basis, while preserving a strong
liquidity profile, then the ratings outlook could return to stable.
The principal methodology used in this rating was Moody's "Asian
Consumer Electronics" published on January 6, 2011, and available
on www.moodys.co.jp.
Sony Corporation, headquartered in Tokyo, is one of the world's
leading manufacturers of consumer electronics products.
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The Global Scale Credit Ratings on this press release that are issued
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Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
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Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, confidential
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Measures taken to ensure the quality of this information include use of
public information, reviews by a third party and verification by
the lead analyst.
Moody's considers the quality of information available on the issuer
or obligations satisfactory for the purposes of maintaining a credit rating.
Moody's adopts all necessary measures so that the information it uses
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Moody's considers to be reliable including, when appropriate,
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validate information received in the rating process.
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Yoshio Takahashi
Asst Vice President - Analyst
Corporate Finance Group
Moody's Japan K.K.
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Tokyo 105-6220
Japan
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Richard Bittenbender
Associate Managing Director
Corporate Finance Group
JOURNALISTS: (03) 5408-4110
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Releasing Office:
Moody's Japan K.K.
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Moody's downgrades Sony to Baa1; outlook negative
