TEXT-Fitch affirms Japan's Panasonic at 'BB';outlook negative

Tue Feb 5, 2013 3:10am EST

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(The following statement was released by the rating agency)

Feb 05 - Fitch Ratings has affirmed Japan-based Panasonic Corporation's (Panasonic) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) and local currency senior unsecured ratings at 'BB', respectively. The Outlook on the Long-Term IDRs is Negative. Simultaneously, Panasonic's Short-Term Foreign- and Local-Currency IDRs have been affirmed at 'B'.

The speculative-grade ratings reflect Panasonic's weak competitiveness in its core businesses, particularly in TVs and panels, as well as weak cash generation from operations (CFO). The Negative Outlook 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 heading in the right direction with 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 from intense competition. In particular, the company's market position in its core TV/panel business suffers from strong competition from Korean manufacturers, which has led to Panasonic downsizing its business. Fitch, therefore, forecasts that the company's CFO will remain weak and that 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 gradually help improve operating margins as witnessed in the results for the nine months of the financial year ending March 2013. However, the agency 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.

Revenue contracted 9% yoy to JPY5,440bn for 9MFYE13, due to dampened demand for its major products, with a 2.2% EBIT margin (9MFYE12: 0.7%). Panasonic has kept its FYE13 guidance for JPY7,300bn revenue with a 1.9% EBIT margin. (FYE12: 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 (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 the Outlook to Stable include

- FFO-adjusted leverage falling below 4x on a sustained basis

- EBIT margin above 2.5% on a sustained basis

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