(The following statement was released by the rating agency)
Nov 22 - Fitch Ratings has downgraded Sony Corporation’s (Sony) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to ‘BB-’ from ‘BBB-’ and maintained the Outlooks at Negative. A full list of rating actions is at the end of this release.
The downgrade reflects Fitch’s belief that meaningful recovery will be slow, given the company’s loss of technology leadership in key products, high competition, weak economic conditions in developed markets and the strong yen. Excluding Sony Financial Holdings (SFH), for the financial years ending March 2013 and March 2014 (FYE13, FYE14), Fitch expects operating EBIT margins to be negative or minimal and funds flow from operations (FFO)-adjusted leverage to be above 4.5x. Significant recovery in FYE15 will depend on the success of the turnaround plan which will be a challenge given the company’s circumstances.
Fitch believes that continuing weakness in the home entertainment & sound and mobile products & communications segments will offset the relatively stable music and pictures segments and improvement in the devices segment which makes semiconductors and components.
The 60%-owned, fully consolidated SFH remains relatively stable and has a significantly stronger credit profile than the rest of the Sony group. However this business is highly regulated and Sony’s ability to receive support from SFH is restricted by guidelines issued by Japanese regulatory agencies. For example, Sony received just JPY5.3bn in dividends from SFH in FYE12. Therefore in its analysis of Sony, Fitch deconsolidates SFH.
While SFH remains a valuable capital asset, Fitch believes that Sony would only sell down its stake if other sources of liquidity were not available. The prevailing market value of Sony’s equity in SFH is around JPY380bn, which compares with the September 2012 debt of JPY1,253bn in the Sony group excluding SFH.
Fitch believes that the strategic initiatives announced in April 2012 to turn around the company’s electronics business are the right approach, but execution is a risk and macro headwinds and intense competition across almost all of Sony’s key products may delay the recovery.
The company has invested to expand capacity of complementary metal-oxide semiconductor (CMOS) image sensors, a product where the company retains market and technology leadership. Sony estimates that the global image sensor market will increase from JPY460bn in FYE12 to JPY602bn in FYE14, a 7.5% compound annual growth rate in global units shipped, driven by demand from phones and digital SLR cameras. Fitch believes this product is one of the most profitable in Sony’s portfolio. It is also likely that Sony will use its strength in imagine sensors to promote its next range of smartphones as best-in-category for photography.
What could trigger a rating action?
Negative: Future developments that may, individually or collectively, lead to negative rating action include (for Sony excluding SFH):
- sustained negative EBIT margins
- FFO-adjusted leverage sustained above 4.5x.
Positive: Future developments that may, individually or collectively, lead to Fitch revising the Outlook to Stable include (for Sony excluding SFH):
- sustained EBIT margins of greater than 1%.
- FFO-adjusted leverage is sustained below 4x
List of rating actions:
Long-Term Foreign- and Local-Currency IDRs downgraded to ‘BB-’ from ‘BBB-’ with Negative Outlook maintained
Local-currency senior unsecured rating downgraded to ‘BB-’ from ‘BBB-’
Short-Term Foreign- and Local-Currency IDR downgraded to ‘B’ from ‘F3’