-- Standard & Poor’s believes that the likelihood of Sony’s sluggish earnings persisting has increased, given an increasingly difficult earnings environment for the company’s core flat panel TV business.
-- We placed our ‘A-’ long-term ratings on Sony on CreditWatch with negative implications.
-- We will resolve the CreditWatch placement upon scrutinizing the prospects for a recovery in earnings from the company’s flat panel TV business as well as its financial soundness.
Standard & Poor’s Ratings Services today placed its ‘A-’ long-term corporate credit and senior unsecured debt ratings on Sony Corp. on CreditWatch with negative implications. At the same time, Standard & Poor’s affirmed its ‘A-2’ short-term corporate credit rating on the company. We also placed our ratings on Sony group companies Sony Capital Corp. and Sony Global Treasury Services PLC on CreditWatch with negative implications.
The CreditWatch listing is based on our view that the likelihood of Sony’s weak earnings persisting has increased as there are no signs of a halt to the deterioration in the earnings of the company’s core flat panel TV business. In addition, Sony’s financial burden is likely to increase in tandem with the company’s making Sony Ericsson a wholly owned subsidiary. Taking these factors into consideration, we have concluded that we need to review the prospects for Sony’s operating and financial performance and verify the effects on the rating.
On Nov. 2, Sony announced that the operating loss from its flat panel TV business would increase to JPY175 billion for fiscal 2011 (ending March 31, 2012). Sony attributes the expected higher loss to planned structural reforms, as well as the strong yen and sluggish sales. Due to the expected increase in losses from the flat panel TV business, Sony is likely to incur overall net losses of JPY90 billion for fiscal 2011, which would represent a fourth straight year in the red. In a bid to improve earnings, Sony intends to reduce expenses, including the purchasing costs of liquid crystal panels, and enhance the competitiveness of its products. Nevertheless, the yen has remained historically high, and competition against domestic and overseas rivals in the digital consumer electronics business is likely to intensify further, in our view. As such, Standard & Poor’s believes it is highly uncertain that Sony can turn around its earnings as planned.
Downward pressure on the company’s financial base, which has underpinned the rating, has been increasing as a result of posting material losses. Standard & Poor’s expects Sony to continue to incur a certain amount of restructuring charges in fiscal 2012 and beyond, in line with its efforts to enhance the earnings of its electronics business. Furthermore, Sony will pay EUR1,050 million (about JPY110 billion) to make Sony Ericsson a wholly owned subsidiary, which it plans to do in January 2012. Sony Ericsson, which will be consolidated if the acquisition materializes, held total debt of EUR718 million (about JPY77 billion) as of Sept. 30, 2011. As such, we hold the view that the acquisition will increase Sony’s financial burden further.
Standard & Poor’s will resolve the CreditWatch listing after meeting with Sony management and verifying the prospects for an earnings recovery in the company’s mainstay electronics business and improvement in its financial soundness for the next few years. We may consider lowering the rating by one notch if we find the possibility remote that Sony’s financial soundness in terms of debt-to-EBITDA ratio and debt-to-total capital will promptly recover to a level consistent with the current rating, based on the expected weak financial performance in fiscal 2012 and beyond.
Principles Of Credit Ratings, published Feb. 16, 2011
2008 Corporate Criteria: Analytical Methodology, published April 15, 2008