Fitch Downgrades Panasonic and Sony to Junk Status
Fitch Ratings have cut the debt ratings of Panasonic and Sony to ‘junk’ status citing “weak demand… as well as continuing price competition from overseas companies.” The ratings agency acknowledges that Panasonic is “in the right direction in its restructuring efforts” but remains “cautious that the benefits of the restructuring may be marred by the weak performance in Panasonic’s electronics products and components businesses and lead to a slow recovery in profitability.” With respect to Sony, Fitch points out “continuing weakness in the home entertainment & sound and mobile products & communications segments will offset the relatively stable music and pictures segments and improvement in the devices segment which makes semiconductors and components.” From a photography point of view it’s interesting that the ratings firm believes CMOS image sensors are among the most profitable products in Sony’s portfolio and finds it “likely that Sony will use its strength in imaging sensors to promote its next range of smartphones as best-in-category for photography.”
Fitch Press Releases
Fitch Downgrades Panasonic to Speculative Grade; Outlook Negative Ratings Endorsement Policy
22 Nov 2012 1:50 AM (EST)
Fitch Ratings-Seoul/Sydney/Singapore-22 November 2012: Fitch Ratings has downgraded Panasonic Corporation’s (Panasonic) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) and local currency senior unsecured ratings to ‘BB’ from ‘BBB-’. The Outlook on the Long-Term IDRs is Negative. Simultaneously, its Short-Term Foreign- and Local-Currency IDRs have been downgraded to ‘B’ from ‘F3’.
The downgrade reflects Panasonic’s weakened competitiveness in its core businesses, particularly in TVs and panels, as well as weak cash generation from operations (CFO). It also reflects the agency’s view that the company’s financial profile is not likely to show a material improvement in the short- to medium-term. Fitch acknowledges that the company is in the right direction in its restructuring efforts which could potentially lead to margin recovery over the long-term. However, the company’s turnaround programme remains exposed to execution risk.
Fitch believes that Panasonic will continue to suffer from frail economic conditions in both Japan and overseas and resultant weak demand for its products, as well as continuing price competition from overseas companies not hampered by the high value of the yen. In particular, the company’s market position in its core business suffered from strong competition from Korean manufacturers, which led to a subsequent downsizing of the business. Fitch, therefore, forecasts that the company’s CFO will remain weak and any significant reduction in gross debt is unlikely in the short- to medium-term.
Fitch believes that Panasonic’s restructuring efforts, principally through consolidation of its manufacturing facilities and labour force rationalisation, will help gradually improve operating margins as witnessed in the first half of the financial year ending March 2013 (H1FYE13) results. However, the agency remains cautious that the benefits of the restructuring may be marred by as the weak performance in Panasonic’s electronics products and components businesses and lead to a slow recovery in profitability.
Revenue contracted 9% yoy to JPY3,638bn H1FYE13 with a 2.4% EBIT margin (H1FYE12: 1.2%). This is mainly due to dampened demand for its major products as well as the negative impact from the high yen. Panasonic also revised down its FYE13 forecast, reflecting the tough operating outlook. The company now forecasts JPY7,300bn revenue with a 1.9% EBIT margin in FY13. (FY12: JPY7,846bn revenue with a 0.6% EBIT margin)
What could trigger a rating action?
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- Funds flow from operations (FFO)-adjusted leverage remaining over 4.5x (end-FYE12: 14x) on a sustained basis
- EBIT margin below 2% on a sustained basis
Positive: Future developments that may, individually or collectively, lead to a revision of Outlook to Stable include
- FFO-adjusted leverage falling below 4x on a sustained basis
- EBIT margin above 2.5% on a sustained basis
Fitch Downgrades Sony to Speculative Grade; Outlook Negative Ratings Endorsement Policy
22 Nov 2012 2:01 AM (EST)
Fitch Ratings-Hong Kong/Sydney/Singapore-22 November 2012: Fitch Ratings has downgraded Sony Corporation’s (Sony) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to ‘BB-’ from ‘BBB-’ and maintained the Outlooks at Negative. A full list of rating actions is at the end of this release.
The downgrade reflects Fitch’s belief that meaningful recovery will be slow, given the company’s loss of technology leadership in key products, high competition, weak economic conditions in developed markets and the strong yen. Excluding Sony Financial Holdings (SFH), for the financial years ending March 2013 and March 2014 (FYE13, FYE14), Fitch expects operating EBIT margins to be negative or minimal and funds flow from operations (FFO)-adjusted leverage to be above 4.5x. Significant recovery in FYE15 will depend on the success of the turnaround plan which will be a challenge given the company’s circumstances.
Fitch believes that continuing weakness in the home entertainment & sound and mobile products & communications segments will offset the relatively stable music and pictures segments and improvement in the devices segment which makes semiconductors and components.
The 60%-owned, fully consolidated SFH remains relatively stable and has a significantly stronger credit profile than the rest of the Sony group. However this business is highly regulated and Sony’s ability to receive support from SFH is restricted by guidelines issued by Japanese regulatory agencies. For example, Sony received just JPY5.3bn in dividends from SFH in FYE12. Therefore in its analysis of Sony, Fitch deconsolidates SFH.
While SFH remains a valuable capital asset, Fitch believes that Sony would only sell down its stake if other sources of liquidity were not available. The prevailing market value of Sony’s equity in SFH is around JPY380bn, which compares with the September 2012 debt of JPY1,253bn in the Sony group excluding SFH.
Fitch believes that the strategic initiatives announced in April 2012 to turn around the company’s electronics business are the right approach, but execution is a risk and macro headwinds and intense competition across almost all of Sony’s key products may delay the recovery.
The company has invested to expand capacity of complementary metal-oxide semiconductor (CMOS) image sensors, a product where the company retains market and technology leadership. Sony estimates that the global image sensor market will increase from JPY460bn in FYE12 to JPY602bn in FYE14, a 7.5% compound annual growth rate in global units shipped, driven by demand from phones and digital SLR cameras. Fitch believes this product is one of the most profitable in Sony’s portfolio. It is also likely that Sony will use its strength in imagine sensors to promote its next range of smartphones as best-in-category for photography.
What could trigger a rating action?
Negative: Future developments that may, individually or collectively, lead to negative rating action include (for Sony excluding SFH):
- sustained negative EBIT margins
- FFO-adjusted leverage sustained above 4.5x.
Positive: Future developments that may, individually or collectively, lead to Fitch revising the Outlook to Stable include (for Sony excluding SFH):
- sustained EBIT margins of greater than 1%.
- FFO-adjusted leverage is sustained below 4x
List of rating actions:
Long-Term Foreign- and Local-Currency IDRs downgraded to ‘BB-’ from ‘BBB-’ with Negative Outlook maintained
Local-currency senior unsecured rating downgraded to ‘BB-’ from ‘BBB-’
Short-Term Foreign- and Local-Currency IDR downgraded to ‘B’ from ‘F3’