Japan electronics giants headed for junk pile

Wed Feb 15, 2012 9:46am EST

LONDON, Feb 15 (IFR) - Three of Japan's most revered electronics names -- Sony, Sharp and Panasonic -- are headed toward junk-rating status, and their credit spreads are yawning wider with no sign of good news ahead.

Fitch on Wednesday lowered both Sony and Panasonic one notch to BBB-, keeping both on negative outlook, while lowering the outlook on Sharp's BBB- to negative.

The ratings agency is poised to downgrade all three to junk status in the next 12 months, said Matt Jamieson, a Fitch senior director.

"The Japanese consumer electronics industry, and particularly television production, is suffering from huge oversupply and is in need of rationalisation," Jamieson said.

"The flat-panel television operations at all three firms suffer negative profitability, and the strong yen just makes them even less competitive."

The cut had already been priced in by the credit markets, after Fitch warned on Monday that the move was imminent. Sharp's five-year CDS was quoted at 160bp bid on February 15, compared with 152bp on February 10, before Fitch's warning.

But the widening is even sharper when compared with February 2, when Sharp's CDS pushed out 10-15bp to 120bp, after it released a profit warning. Sony's was at 175bp bid, wide from 165bp last Friday.

And there could be more of the same on the way.

All three firms are expected to post huge losses for the current fiscal year ending in March. The "smart" consensus estimates net losses for this year at JPY784bn (US$10.1bn) for Panasonic, JPY293bn for Sharp and JPY200bn for Sony, according to Thomson Reuters Starmine data.

The negative print adds pressure to the large debt burdens already on their balance sheets.

Panasonic is expected to post net debt of JPY1.1trn, Sharp of JPY804bn and Sony of JPY593bn. Their debt burden will not improve much next year, with estimates at JPY962bn for Panasonic, JPY658bn for Sharp and JPY762bn for Sony.

SHARP PAIN

Of the three, Sharp -- which has the largest chunk of its debt in bonds -- could be the most vulnerable.

Sharp could be in a tight spot with bondholders very soon. The company's next maturity is a JPY10bn bond on March 19, followed by a JPY20bn maturity in late June. Then there is a huge JPY199.9bn bond redemption in September 2013.

In the meantime, the company's losses continue -- and it posted cash holdings of just JPY238bn at the end of September 2011.

Despite the dire situation, however, analysts in Tokyo believe Japan's mega-banks will continue to help fund the firms, which are among the country's best-known brands.

"All three should be able to raise debt from banks even if they are relegated to junk," said one Tokyo-based consumer electronics stock analyst.

For now, though, there seems no way the three can escape the shame of losing their investment-grade standing.

The firms must "improve their Ebit margins to at least 1.5% and ensure that their leverage remains below 3.5 times next year," said Jamieson.

Panasonic's forecast Ebit margin for this year is 0.3%, Sharp's is -2.5% and Sony's is -1.0%.

Currently, next year's smart Ebit margin forecast is 2.9% for Panasonic, 1.1% for Sharp and 2.9% for Sony. This is far below the ideal Ebit margins of around 5%-6% for investment-grade technology companies, according to Fitch.

While Sharp may feel the most pain with any downgrade, Jamieson said, Sony could be the company facing the toughest decisions.

"In Sony's case, the company needs to focus on profitable areas and make some hard decisions to cut back on loss-making areas, particularly in the television business, in order to reduce ongoing sizeable losses," Jamieson said.

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