JPY900 billion of bonds affected
Tokyo, January 20, 2012 -- Moody's Japan K.K. has downgraded the long-term senior
unsecured bonds and issuer ratings of Panasonic Corporation to A2 from
A1. In addition, Moody's has downgraded the rating
on Panasonic's shelf registration to (P)A2 from (P)A1.
At the same time, Moody's has affirmed the Prime-1
short-term ratings of Panasonic's supported subsidiaries,
Panasonic Finance (America) Inc. and Panasonic Finance (Europe)
plc.
The rating outlook is negative.
This action concludes the review for possible downgrade initiated on November
1, 2011.
RATING RATIONALE
The rating action reflects Moody's concern that the weakness in
Panasonic's financial profile will continue, given the challenging
operating environment.
The company's financial profile has deteriorated since it acquired
the remaining stakes in its two major consolidated subsidiaries,
Panasonic Electric Works Co. Ltd. (unrated) and Sanyo Electric
Co. Ltd (unrated), effective April 2011.
Panasonic's net debt rose to about JPY550 billion in FYE03/2011
from about JPY100 billion in the prior year, while its adjusted-debt-to-capitalization
increased to about 45% from about 35%.
The previous ratings of A1 incorporated the expectation that the company
would hold a net cash position and that its adjusted-debt-to-book-capitalization
would improve to the low 30%-range by FYE03/2013.
This has not occurred.
In Moody's opinion, Panasonic is unlikely to restore its financial
profile in a timely manner. Among the most prominent reasons are
continued losses in its TV business and declines in earnings from its
semiconductor business, which accounted for about 15% of
consolidated sales in FYE03/2011 in total, as well as the weak earnings
of Sanyo's electronic devices and energy businesses, which
contributed to about 7% of consolidated sales.
Panasonic estimates that its consolidated operating profit will decline
to JPY130 billion in the current fiscal year, from JPY305 billion
in the prior year, while its operating margin will decrease to 1.6%
from 3.5%.
A portion of this decline is due to non-recurring events --
specifically, the March 11 earthquake in Japan --
but a significant portion is also recurring.
Panasonic further expects to incur a net loss of about JPY420 billion
in FYE03/2012 due to large restructuring costs mainly associated with
its TV business, although most of these expenses are non-cash
charges for impairment losses.
Moody's believes that Panasonic's operating profit in FYE03/2012
will be under further pressure, given weak market conditions and
supply chain disruptions after the floods in Thailand. Panasonic's
net loss may increase if the company is required to write-off deferred
tax assets due to the government's recent decision to reduce corporate
income tax rates. Weak earnings from some of Sanyo's businesses
could even lead to the write-off of Sanyo's goodwill.
Therefore, Moody's believes the company is unlikely to meet
its performance forecast and generate free cash flow in FYE03/2012.
Net debt could increase meaningfully by the end of March 2012.
Moody's estimates that it is possible that adjusted-debt-to-book-capitalization
could exceed 45%.
On the other hand, Panasonic is focused on reducing fixed costs
by JPY146 billion through restructuring. It has also stated that
it expects synergies of JPY40 billion after the integration with Panasonic
Electric Works and Sanyo in January 2012. These factors,
along with the recovery from the March 11 earthquake, would boost
its operating profit for FYE03/2013.
In addition, free cash flow may temporarily improve and debt fall
because of reductions in capital expenditures and an expansion in the
sales of non-core assets.
However, weak demand, intense competition, and a strong
yen will, in Moody's opinion, continue to hurt the company's
primary operations.
The A2 ratings is supported by the relatively stable earnings from the
information and communication equipments business, home appliances,
and Panasonic Electric Works' building-related products business.
Moody's expects earnings and cash flow from these business segments
will continue to provide Panasonic with a base upon which to restructure
its more problematic businesses.
In aggregate, Moody's expects the next two to three years
will see adjusted-debt-to-book-capitalization
at approximately 40%, and adjusted-debt-to-EBITDA
of approximately 2.5x.
At the same time, Moody's has affirmed the Prime-1
short-term ratings of Panasonic's supported subsidiaries.
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 Panasonic's financial profile
is still weakly positioned even after the downgrade to A2. The
negative outlook represents Moody's concern that challenging operating
environments may adversely affect the company's ability to improve earnings
and cash flow, especially from the TV business, and reduce
debt in a timely manner.
Moody's will continue to monitor Panasonic's efforts to improve
its financial profile. If significant improvement looks unlikely
in FYE03/2013, the ratings could be reviewed for further action
in a relatively short time. Moody's notes that further downward
rating movement would also negatively affect short-term ratings.
Moody's notes that Panasonic's stable relationships with its
major banks are an important rating consideration, one that has
contributed to lifting the company's ratings by two notches from its fundamental
creditworthiness as is the case with other leading Japanese companies.
If a prolonged weakness in the global economy, a stronger yen,
or greater competition continue to weigh on Panasonic's earnings,
leverage, and balance sheet and if it fails to restore its financial
profile, the ratings would be downgraded.
For example, if its operating margin stays below 3%,
or adjusted debt/EBITDA remains above 2.5x on a sustained basis,
or if adjusted-debt-to-capitalization does not stay
below 40%, Moody's would consider a ratings downgrade.
Given the negative outlook, an upgrade is unlikely in the short
term. The outlook could return to stable if the company can increase
earnings and cash flow, while reducing debt. This is most
likely to occur through an unexpectedly rapid restoration of the profitability
of its low-margin businesses, such as TV and semiconductors,
while earnings from other core businesses are maintained.
For instance, if Panasonic can improve its operating margin to 3%-4%
and adjusted-debt-to-EBITDA to 2.0x-2.5x,
and keep adjusted-debt-to-capitalization at less
than 40% on a sustained basis, the 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.
Panasonic Corporation, headquartered in Osaka, 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.
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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.
Atago Green Hills Mori Tower 20fl
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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:
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Moody's downgrades Panasonic to A2; outlook negative
