HONG KONG Nov 20 Moody's Investors Service has downgraded the long-term senior unsecured bond and issuer ratings of Panasonic Corporation to Baa3 from Baa1, as well as its shelf registration to (P)Baa3 from (P)Baa1.
The ratings outlook is negative. Moody's has also downgraded the short-term ratings of its supported subsidiaries, Panasonic Finance (America) Inc and Panasonic Finance (Europe) Plc, to Prime-3 from Prime-2. Moody's continues its review for downgrade on the Prime-3 short-term ratings. These rating actions conclude the review for downgrade initiated on 1 November. RATINGS RATIONALE
The rating action reflects Moody's increasing concern that structural challenges in the consumer electronics industry, in particular digital AV products, mobile phones, devices, and batteries, as well as adverse economic conditions, will continue to pressure the earnings and cash flow of Panasonic and other Japanese consumer electronics companies. Panasonic will continue to face challenges to improve its profitability, cash flow, and leverage significantly. Its expected large net loss in FYE03/2013-- due to asset write-offs -- will also damage the company's balance sheet. Moody's expects its consolidated operating margin to stay at around 1% and adjusted debt/EBITDA to exceed 4.5x. Adjusted debt/book capitalization is expected to increase to around 65%. The negative ratings outlook reflects Moody's view that challenging market conditions will continue to hinder the timely recovery of Panasonic's financial profile. Panasonic may need to undertake additional restructuring measures in some of its more difficult business segments to restore its earnings in the coming 12-18 months, which will further pressure its leverage and balance sheet. Moody's expects that the operating margins of Panasonic's digital AV products, systems & communications, devices, and batteries businesses -- representing about 45% of consolidated sales before eliminations in FYE03/2012 -- are likely to stay at 0%-1%. An expected decline in sales -- because of mature key products, weak consumer sentiment, continued price declines, and decreasing market share -- will largely offset the effects of restructuring over the past year, such as the reduction in the number of panel factories and employees in Japan. Panasonic's competitive positions for these products will continue to erode because of their high cost structures, which are primarily the result of a strong yen, robust competition with Korean and Chinese makers, a lack of product differentiation, and their relatively weak presence in the growing emerging markets. Even though the relatively stable home appliances and eco-solutions businesses generate operating margins of over 3% (representing about 30% of consolidated sales in FYE03/2012), the company's consolidated operating margins are likely to stay at around 1%. The company's consolidated operating margin in FYE03/2012 was 0.6%. The boycott of Japanese products by some Chinese consumers due to the recent diplomatic row between China and Japan further increases the uncertainty over Panasonic's ability to restore earnings. Moody's recognizes the positive benefits of Panasonic's plans to focus on appliances and eco-solutions and to reduce its exposure to the more volatile digital products and devices businesses. However, this will involve a fundamental shift in its business models, requiring time, investments, and potentially, additional restructuring costs. Given weak operating cash flow, Panasonic has announced plans to reduce its debt by decreasing capital expenditures, focusing on working capital control, and enhancing sales of its non-core assets. Such deleveraging efforts will help improve its leverage in the coming 1-2 years; adjusted debt/EBITDA is expected to decline to 4.5x-5.0x from over 5.0x in FYE03/2012. The company has adequate liquidity. As of September 2012, Panasonic held about JPY470 billion in cash and deposits as well as JPY600 billion in unused commitment lines against its short-term debt of about JPY650 billion. Nevertheless, its short-term debt remains high, at JPY650 billion, up from about JPY400 billion in September 2011. Its net debt also increased to about JPY1.1 trillion in September 2012 from approximately JPY740 billion in September 2011. Moody's has also downgraded the short-term ratings of the commercial paper (CP) programs of Panasonic's supported foreign financial subsidiaries to Prime-3 from Prime-2 to reflect its weakened financial profile. Moody's will continue its review for downgrade the Prime-3 short-term ratings to assess the strength of credit enhancements and alternate liquidity for the CP programs, although there is no immediate liquidity concern as discussed earlier. The current Prime-3 short-term ratings are fully reflective of the company's long-term Baa3 credit strength. Moody's review will focus on the details of the keepwell or support agreements from Panasonic which are not considered to be as strong as a guarantee, in terms of support. In addition, Moody's will reassess the liquidity arrangements supporting each CP program. Moody's notes that Panasonic's stable relationships with its major banks are also an important rating consideration, leading to a two-notch uplift of its long-term ratings from its fundamental creditworthiness, as is the case with other leading Japanese companies. Given the negative outlook, an upgrade of its long-term ratings is unlikely in the short term. However, the ratings outlook could revert to stable if Panasonic can increase its earnings and cash flow and reduce leverage significantly. The recovery of profitability in its low-margin businesses, such as digital AV products, mobile phones, devices, and batteries, is key to improving the company's financial profile. Moody's will consider changing the outlook to stable if Panasonic can improve its operating margin to over 1.0%, and reduce adjusted debt/EBITDA to less than 4.5x on a sustained basis, as well as generate sustainable and stable free cash flow. The ratings could face downward pressure if the company fails to improve its overall earnings and cash flow as a result of (1) further weaknesses in margins for its digital AV products, mobile phones, devices, and batteries businesses and (2) significant declines in earnings from other core businesses, such as appliances and eco-solutions, or if the company fails to reduce debt substantially. If Panasonic fails to maintain an operating profit and its adjusted debt/EBITDA at below 5.0x, Moody's would consider a further downgrade. In addition, changes in Moody's assessment on the strength of potential extraordinary support as a result of the unique support system in Japan could lead to a downgrade. The principal methodology used in rating Panasonic was the Asian Consumer Electronics Industry Methodology published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology. Panasonic Corporation, headquartered in Osaka, is one of the world's leading manufacturers of consumer electronics products. REGULATORY DISCLOSURES The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com. 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