About USD4.2 billion in debt affected
Hong Kong, October 12, 2012 -- Moody's Investors Service has downgraded the issuer and long-term
senior unsecured bond ratings of Sony Corporation to Baa2 from Baa1.
At the same time, Moody's has confirmed the Prime-2
short-term ratings of Sony and its supported subsidiary,
Sony Global Treasury Services Plc.
The ratings outlook is negative.
These actions conclude the review for downgrade initiated on 6 August.
RATINGS RATIONALE
The rating actions consider Sony's weak profitability and cash flow,
its challenges in achieving profitability in the TV and mobile phone segments,
and the erosion in its global competitive position across different product
lines. Weak consumer sentiment, fierce global competition,
and the impact of the strong yen on cost competitiveness will further
hamper its efforts to improve its metrics.
While Sony has undertaken several initiatives -- to improve the efficiency
of its operations, reduce losses in its TV and mobile phone businesses,
and generate stronger profits through new product offerings -- the
negative rating outlook reflects Moody's view that it will be challenging
for the company to achieve sufficient near-term improvement in
earnings and cash flow to maintain the current Baa2 rating.
Moody's expects the operating margin in Sony's non-financial
services businesses (excluding non-recurring expenses and equity
income) to remain at 1-2% over the medium term, because
of the persistent losses in TVs and the highly competitive and volatile
mobile phones business, as well as the modest decline in earnings
from games and digital imaging products.
Sony's TV business -- which accounted for 12% of the
revenues from the non-financial business in Q1 FYE03/2013 --
will continue to face challenges in reducing its large operating losses,
given the maturity and commoditization of flat panel display (FPD) TVs
and the intense competition with Korean and Chinese makers.
Moreover, Sony's presence in the growing smartphones market
is likely to remain weak due to the delay in the expansion of its own
smartphone business in its mobile communications segment (13% of
non-financial revenues, Q1 FYE03/2013) and its lack of differentiating
products.
Moody's expects Sony to narrow its losses through cost cuts in these
businesses, but will continue to experience losses at the operating
level despite its target of achieving profitability in these segments
by FYE03/2014.
At the same time, demand for games consoles and compact digital
cameras is likely to continue to decline due to the integration of gaming
and camera functions into smartphones. Sony maintains leading market
positions in games and digital imaging products (9% and 10%,
respectively, of its non-financial services revenue).
These products have helped offset large operating losses in TVs.
To deal with these challenges, Sony has been trying to expand its
earnings base by improving the sales of single-lens reflex cameras,
mirrorless interchangeable-lens cameras, image sensors,
crowd gaming, and medical devices. However, their earnings
contributions alone will not be sufficient to improve overall earnings
significantly in the short term.
In addition, despite the long-term strategic importance of
the medical devices business, the recent capital and business alliance
with Olympus Corporation (not rated) will further pressure Sony's
cash flow, making it difficult for it to reduce debt without additional
sales of non-core assets.
Although Moody's expects Sony's adjusted debt/EBITDA in its
non-financial services businesses -- which stood at 5.2x
as of FYE03/2012 versus 3.3x in FYE03/2011 -- to decrease,
it is likely to remain at 3.5-4.0x over the medium
term. Such improvement will require a strong recovery in TVs and
mobile phones.
If a significant improvement in the company's financial profile
is not evident in a relatively short time, its ratings will be reviewed
for further downgrade.
On the other hand, Sony's stable relationships with its major
banks are an important ratings 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.
Sony also maintains solid financial flexibility, including its holding
of a large amount of cash (JPY523.1 billion as of June) and committed
lines (about JPY770 billion), as well as a listed financial subsidiary,
where the current market value of Sony's holdings is about JPY350
billion. Its reported total debt was JPY1.2 trillion in
its non-financial services businesses as of June, of which
JPY425.5 billion was short term.
The outlook could return to stable if Sony can substantially improve its
cash flow and leverage. Areas of improvement include: 1)
making its TVs and mobile phone businesses profitable, 2) reversing
declines in earnings from its games and digital imaging products,
and 3) reducing debt through the sales of non-core assets.
A shift in focus away from commoditized consumer products will help diversify
earnings and will be positive for the rating.
Operating margins of more than 2.0% (excluding equity income
and non-recurring expenses) and adjusted debt/EBITDA of less than
3.5x in its non-financial services businesses, in
addition to a strong liquidity profile, would be necessary for the
outlook to return to stable.
Ratings would be pressured downwards if Sony fails to significantly improve
its cash flow and leverage from current levels.
If operating margins (excluding equity income and non-recurring
expenses) remain below 1.0% in FYE03/2013 and 1.5%
in FYE03/2014, or adjusted debt/EBITDA remains above 4.0x
in FYE03/2013 and 3.75x in FYE03/2014 in its non-financial
services businesses, the ratings could be downgraded.
Furthermore, acquisitions, which could change its business
risk materially and adversely, and/or erode its balance sheet and
financial flexibility, could also pressure the ratings.
The principal methodology used in rating Sony Corporation and Sony Global
Treasury Services plc was the Asian Consumer Electronics Industry Methodology
published in December 2010. Please see the Credit Policy page on
www.moodys.com for a copy of this methodology.
Sony Corporation, headquartered in Tokyo, is one of the world's
leading manufacturers of consumer electronics products.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's 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 office
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Yoshio Takahashi
Asst Vice President - Analyst
Corporate Finance Group
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Moody's downgrades Sony to Baa2; outlook negative
