(The following statement was released by the rating agency)
SYDNEY, May 14 (Fitch) Fitch Ratings says that Sony Corporation
BB-/Negative) and Panasonic Corporation (Panasonic, BB/Negative)
are slowly on
their way to stabilising their credit profiles, but that Sharp
(Sharp, B-/Rating Watch Negative) liquidity is still a key
credit risk. While
the companies will generally benefit from depreciation in the
yen, this by
itself will be insufficient to return the companies to
In this Fitch Street InterView, Steve Durose, Fitch's Head of
Asia Pacific TMT
ratings, answers some key questions about the latest financial
announcements for the Japanese technology sector for the year
ended March 2013
(FYE13) and the companies' turnaround strategies.
Q How is Sharp going to pay its obligations this year? How is
it trying to turn
its business around?
Sharp's liquidity is precarious as it is currently well short of
meet its short-term obligations. As at 31 March 2013, Sharp had
debt falling due
within one year of JPY924bn, notably including JPY360bn bank
debt falling due in
June 2013 and a JPY200bn convertible bond due September 2013.
The company only
had JPY192bn of cash and other liquidity available on 31 March
However, the company reports that its major creditor banks have
agreed to extend the maturity of the JPY360bn syndicated loan
for another two
years and to provide an additional facility of JPY150bn.
Finalisation of those
agreements, which seems likely, will be a key step in improving
However, even assuming this bank support, Sharp still has an
of debt falling due by March 2014. As we expect post-capex cash
flow to remain
weak, the company's liquidity profile will remain vulnerable.
We believe that developing strategic relationships with major
clients for its
LCD panels will be a key element in Sharp's mid-term strategy
yesterday. Its recent agreement to supply panels to Samsung is a
good example of
securing stable demand which will improve plant utilisation.
The company plans
to gain four major accounts this fiscal year, which if achieved,
significantly help to curb losses in the LCD panel segment.
Q Sony recorded its first annual profit in five years - is the
company on its
Any improvement is good news but we believe Sony's glory days
are well behind
it. It is important to note that, excluding Sony Financial
Holdings (SFH) and
gains on asset sales, the company would have recorded an
operating loss of
JPY148bn in FYE13. Similarly, the electronics business would
have reported an
operating loss of JPY184bn, if exceptional items, such as
due to the Thailand floods in 2011 and the gain on the sale of
products related business, were excluded.
As the company acknowledges, returning the core electronics
profitability is Sony's biggest issue. In FYE13, the electronics
comprised 72% of turnover (excluding SFH) but lost JPY135bn. To
FYE14 profit target of JPY100m for the electronics business,
Sony is relying on
increased sales of high-value added smartphones, PCs and TVs.
However, all these
markets are tough at the moment with either weak/unproven demand
competitors. We believe that the company will struggle to meet
Reportedly Sony's TV business has not been profitable for nine
years, and we are
not convinced that the strategy for higher-end products will be
a success amid
strong competition from Korean brands. Nevertheless, we expect
will lower costs in this segment.
Q Is Panasonic's strategy working?
Yes, we believe Panasonic's restructuring strategy is slowly
business, having raised EBIT margins to 2.2% in FYE13 from only
0.6% in FYE12.
This is largely due to losses in its TV/panel operation
narrowing to JPY86bn in
FYE13 from JPY210bn in FYE12 as the company scaled down its
increased outsourcing to reduce fixed costs. The company will
approach which should help cut losses further. However, we do
not believe it
will achieve profitability in this segment in FYE14 as demand
will remain weak.
Panasonic will spend JPY250bn over the next two financial years
restructuring programme. The company hopes to turn around
businesses including TV/panel, mobile phones, and semiconductors
an asset-light approach - consolidating production sites and
outsourcing. Restructuring to focus on businesses which can
generate cash is
certainly a correct strategy; however, without development of
products, the company will struggle to return to
We believe Panasonic is in a better position than Sharp and Sony
as its other
core businesses, such as appliances and eco solutions, have
remained stable and
fully covered the loss in the TV/panel operation. Therefore,
although it will
take some time, we expect the company's cash flow from
operations to become more
stable if the company can reduce its exposure to loss-making
divisions over the
medium term as planned.
Q How do credit markets regard the relative risks of these three
The credit default swap market agrees with Fitch's view that
Panasonic is the
best credit of the three, marginally stronger than Sony, with
Sharp being the
weakest, by far.
Sharp's 5-year JPY CDS have narrowed significantly to around
550bps from their
all-time high of around 8,000bps in mid-October 2012. However,
improvement, Fitch's CDS implied rating is the same as the
actual credit rating
of 'B-', indicating that material default risk is present and a
of safety remains.
In common with their actual ratings, Panasonic's CDS implied
rating is one notch
above Sony's. However, for both companies, CDS implied ratings
are two notches
above Fitch's credit ratings. We believe this differential
indicates either that
our fundamentals-based analysis of these companies reflects a
greater level of
risk than the market is pricing at the moment or that
supply/demand or other
technical features of the CDS market are causing spreads to
narrow greater than
fundamental cash analysis warrants.
Head of Asia Pacific Telecoms, Media & Technology Ratings
+61 2 8256 0307
Head of APAC Research, Corporate Ratings Group
+61 2 8256 0366
Media Relations: Wai Lun Wan, Hong Kong, Tel: +852 2263 9935,
Additional information is available at www.fitchratings.com.
"Fitch Street InterView: Japanese Tech Giants - Fallen Angels",
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