Wed Nov 20, 2013 5:18am EST
Nov 20 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Sony Corporation's (Sony) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB-' and maintained the Outlooks at Negative. A full list of rating actions is at the end of this release.
KEY RATING DRIVERS
Slow Recovery Expected: Sony's credit ratings are constrained by its low profitability and vulnerability to competition and technology shifts. The ratings reflect Fitch's belief that meaningful recovery in Sony's profitability and cash generation will be slow, given the company's loss of technology leadership and high competition in its key products. In addition, unless there is further depreciation of the yen, we do not expect currency effects to deliver much further growth. Fitch believes that more aggressive reform to revamp the company's product portfolio and to cut fixed costs may be required.
Continued TV Operating Losses: Sony's operating losses in the TV segment are likely to continue, as happened during 2QFYE14 due to intense competition, market saturation of flat-panel TVs in developed countries, and weakened demand in emerging markets as a result of depreciation in their currencies. Further profitability improvement in the TV segment has been slow after the disposal of S-LCD and restructuring in FYE12 and FYE13. The operating loss of the TV segment totalled JPY9bn in 2QFYE14, compared with operating loss of JPY10bn a year earlier.
Slowly Improving Smartphone Margins: Fitch forecasts that improvement in Sony's smartphone margins will be slow but steady, despite improvement in quality and brand recognition. This is because competition is becoming increasingly fierce among second-tier manufacturers as they attempt to close the technological gap with first-tier manufacturers. Fitch expects the industry will remain dominated by Samsung Electronics Co., Ltd. (A+/Stable) and Apple Inc. at least in the short to medium term, making it difficult for Sony to improve its market share significantly.
Heightened Smartphone Substitution: Fitch expects the impact of smartphone substitution on Sony's PCs, digital cameras and camcorders to continue to be a drag on the company's profitability. Higher smartphone profit in 2QFYE13 was unable to offset losses in the PC and digital camera segments. Total shipments of digital cameras produced by Japanese companies contracted 39% yoy in the first nine months of 2013, according to the Camera & Imaging Products Association. During the same period, worldwide PC shipments fell 11% yoy, according to IDC.
High Debt, Slow Deleveraging: Fitch expects that Sony's funds flow from operations (FFO)-adjusted leverage is to likely remain above 5x in the short term. Fitch believes that its bid to achieve a turnaround in its electronics business in FYE14 will be a challenge and the FYE15 outlook remains tough. Deleveraging relying on profitability improvement will be slow. Sony's total debt of JPY1.33bn, excluding Sony Financial Holdings (SFH), was little changed at end-September 2013 from the same period last year.
Liquidity Weakened, Still Adequate: Fitch expects Sony's liquidity to remain adequate, though it has weakened due to continued losses in the electronics business and increased investment in working capital. Sony had a cash balance of JPY528bn at end-September 2013, compared with its debt due within one year of JPY446bn. The company also had unused credit facilities of JPY819bn at end-September 2013.
RATING SENSITIVITIES
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 5.0x.
Positive: Future developments that may, individually or collectively, lead to Fitch revising the Outlook to Stable include (for Sony excluding SFH):
- sustained positive EBIT margins
- FFO-adjusted leverage is sustained below 5.0x
LIST OF RATING ACTIONS:
Long-Term Foreign- and Local-Currency IDRs affirmed at 'BB-' with Negative Outlook
Local-currency senior unsecured rating affirmed at 'BB-'
Short-Term Foreign- and Local-Currency IDRs affirmed at 'B'
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