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Rating Action:

Moody's downgrades Sony to Baa1; outlook negative

 The document has been translated in other languages

Global Credit Research - 20 Jan 2012

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.

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 that has issued a particular Credit Rating is available on www.moodys.com.

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's information.

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 in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Credit ratings are Moody's current opinions of the relative future credit risk of entities, credit commitments, or debt or debt-like securities. Moody's defines credit risk as the risk that an entity may not meet its contractual, financial obligations as they come due and any estimated financial loss in the event of default. Credit ratings do not address any other risk, including but not limited to: liquidity risk, market value risk, or price volatility. Credit ratings do not constitute investment or financial advice, and credit ratings are not recommendations to purchase, sell, or hold particular securities. No warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such rating or other opinion or information is given or made by Moody's in any form or manner whatsoever. The credit risk of an issuer or its obligations is assessed based on information received from the issuer or from public sources. Moody's may change the rating when it deems necessary. Moody's may also withdraw the rating due to insufficient information, or for other reasons.

Moody's Japan K.K. is a credit rating agency registered with the Japan Financial Services Agency and its registration number is FSA Commissioner (Ratings) No. 2. The Financial Services Agency has not imposed any supervisory measures on Moody's Japan K.K. in the past year.

Please see ratings tab on the issuer/entity page on the Moody's website for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on the Moody's website for further information.

Please see the Credit Policy page on the Moody's website for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Yoshio Takahashi
Asst Vice President - Analyst
Corporate Finance Group
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Richard Bittenbender
Associate Managing Director
Corporate Finance Group
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Releasing Office:
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Moody's downgrades Sony to Baa1; outlook negative
No Related Data.

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