TEXT-S&P: Japan's Panasonic Downgraded To 'BBB'; Otlk Stable
(The following was released by the rating agency)
-- Following Panasonic Corp.'s JPY685.2 billion net loss for the first half of fiscal 2012, Standard & Poor's expects the company's profitability and key financial metrics to make a slow recovery in view of the effect on the company's core products of a difficult operating environment, including a prolonged global economic slowdown.
-- Standard & Poor's lowered its long-term corporate credit and debt ratings on Panasonic to 'BBB' from 'A-'. We affirmed our 'A-2' short-term ratings on the company.
-- The outlook is stable, reflecting our expectation that the company's profitability and cash flows should be stable, benefitting from the company's recent restructuring efforts and diverse business portfolio, which includes relatively stable nonconsumer, nondigital electronics businesses.
TOKYO (Standard & Poor's) Nov. 2, 2012--Standard & Poor's Ratings Services today lowered to 'BBB' from 'A-' its long-term corporate credit ratings on Panasonic Corp. and its subsidiaries Panasonic Finance (America) Inc. and Panasonic Finance (Europe) PLC, along with its senior unsecured debt ratings on Panasonic Corp. The outlooks on the long-term corporate credit ratings are stable.
On Oct. 30, 2012, Panasonic Corp. announced a JPY685.2 billion net loss for the six months ended Sept. 30, 2012, and a forecast JPY765.0 billion net loss for fiscal 2012 (ending March 31, 2013).
Standard & Poor's believes such huge losses for the second year in a row weaken the company's financial profile and could further slow its recovery in the next one to two years. We base our stable outlook on the long-term corporate credit rating on Panasonic on our expectation that the company's profitability and cash flows should be stable, benefitting in the next one to two years from the company's recent restructuring efforts and its diverse business portfolio, which includes relatively stable nonconsumer, nondigital electronics businesses.
We affirmed the 'A-2' short-term corporate credit ratings on the companies and their commercial paper programs. Panasonic's net loss for the first half of fiscal 2012 is attributable to JPY355.5 billion in costs related to restructuring--including impairment of goodwill and tangible assets in solar batteries, consumer-use lithium-ion batteries and mobile phones--and JPY412.5 billion in losses due to a rise in valuation allowances on deferred tax assets.
Panasonic's announced losses for fiscal 2012 follow a JPY772.2 billion net loss in fiscal 2011 that reflected JPY267.1 billion in asset impairment losses in its flat-TV business and a JPY249.6 write-down on goodwill primarily related to its acquisition of Sanyo Electric Co. Ltd. In Standard & Poor's view, losses of this scale for two years running hurt the company's financial standing and could set back its recovery in the short term.
We expect the ratio of the company's debt to capital to deteriorate from 51% at the end of fiscal 2011 to around 60% at the end of fiscal 2012 before starting a gradual recovery. Assuming a continuation of the challenging operating environment for Panasonic, an uncertain global economic climate, and the yen's strength against other major currencies, Standard & Poor's base scenario forecasts a slow pace of recovery in the company's profitability and financial standing for the next few years. We incorporate into our base case the assumptions that consolidated sales for the fiscal 2012 will decline 7%, growth will be in the low single digits in fiscal 2013, and Panasonic's EBITDA margin will improve only gradually to 6.3% in fiscal 2012 and 6.6% in fiscal 2013, compared with 5.2% in fiscal 2011.
We think further downside risks related to asset impairment and deferred tax assets have eased following the significant write-downs on goodwill and tangible assets in the areas of flat-panel TVs, solar batteries, consumer-use lithium-ion batteries and mobile phones.
While the ratio of Panasonic's funds from operations (FFO) to debt could decline to 20%-30% in the coming one to two years, we recognize the company should maintain an adequate cash flow profile given that it expects to reduce capital expenditures, allowing it to maintain positive free operating cash flow. The company has already announced it will skip its annual dividend for the first time since 1950.
While we expect Panasonic's operating environment to remain difficult, Standard & Poor's believes the company will maintain relatively stable profitability and financial standing and will stage a gradual recovery in the next few years. Recent signs of improvement in the company's quarterly operating profits together with the company's record of continuous cost reductions and rationalizations support this view, in our opinion. Starting in April 2013, Panasonic plans to streamline its existing 88 business units into 56 units and to include only those capable of achieving at least a 5% operating margin in fiscal 2015. We may lower our ratings on Panasonic if the company fails to steadily improve its EBITDA margin in the coming one to two years by bolstering the competitiveness of its key businesses and making further cost reductions despite an increasingly challenging external environment.
The ratings will also come under pressure if it becomes unlikely that FFO to total debt (adjusted for pension and lease liabilities) will recover to above 30% in the next two to three years or the company fails to maintain positive free operating cash flow.
We do not expect to see potential to raise the ratings until Panasonics demonstrates solid progress in improving earnings and cash flow even under severe circumstances. Standard & Poor's views Panasonic's liquidity as "strong" according to our criteria. As of Sept. 30, 2012, Panasonic had JPY443.9 billion in consolidated total cash equivalents, slightly less than JPY653.5 billion in short-term debt.
However, the company has reiterated its conservative financial policy, including reducing working capital and capital expenditures, and it has good business relationships with financial institutions as demonstrated by the recent establishment of JPY600.0 billion in commitment lines with major financial institutions. Standard & Poor's believes these factors should continue to ensure Panasonic's strong liquidity.
RELATED CRITERIA AND RESEARCH
2008 Corporate Criteria: Analytical Methodology, April 15, 2008
2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
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