Moody's Lifts Outlook on Sony (SNE) to Positive; Notes Efforts to Deleverage, Improvement in Operating Performance

Moody's Japan K.K. has changed Sony Corporation's (NYSE: SNE) ratings outlook to positive from stable. At the same time, Moody's has affirmed Sony's Ba1 issuer and long-term senior unsecured bond ratings.

Moody's has also affirmed Not Prime short-term rating of its supported subsidiary, Sony Global Treasury Services Plc.

RATINGS RATIONALE

"The change in Sony's ratings outlook to positive from stable principally reflects the company's efforts in effectively lowering its financial leverage over the past year as well as our view that steady progress in the company's restructuring efforts will help sustain its operating performance over the next 12-18 months," says Takashi Akimoto, a Moody's Analyst.

"The change in Sony's ratings outlook also reflects the alleviation of our concerns over a potential deterioration in its financial leverage, following Sony's announcement today that its recently expanded capex program would be funded by new equity offerings," says Akimoto who is also the Lead Analyst for Sony.

"The company's now lower leverage combined with the benefit of additional equity has provided a more meaningful cushion within its rating to absorb potential volatility in its operating environment and earnings", adds Akimoto.

On 30 June 2015, Sony announced an approximate JPY320 billion issuance of new shares together with a secondary offering of shares and a JPY120 billion issuance of new convertible bonds. Proceeds from the share and bond issuance will be mainly used to expand the company's production capacity and to enhance research and development activities for its image sensors business. In addition, JPY69 billion out of JPY120 billion issuance of convertible bonds will be used for existing debt repayment.

Sony announced in April 2015 that it would more than double its capex for FYE3/2016 to JPY501.0 billion from the JPY243.9 billion notified at FYE3/2015.

Sony's reported total debt for its non-financial services businesses fell by JPY360.8 billion for FYE3/2015 to JPY886.3 billion from JPY1.25 trillion at FYE3/2014.

A recovery in the operating performance of its non-financial services businesses contributed to its improved financial leverage. Specifically, adjusted debt/EBITDA of 2.9x for FYE3/2015 improved materially from the 4.5x for FYE3/2014. We expect that with today's announcement of new equity issuance and taking into account its heightened capex plans, the company's financial profile should be more manageable within the rating.

"Sony's debt reduction efforts and proposed equity issuance are credit positive and indicative of management's greater commitment to restoring its financial strength", adds Akimoto.

The company's mid-range plan — covering the periods from FYE3/2016 to FYE3/2018 — aims to transform its operations by focusing on profitability rather than volume.

In addition, all business segments — except for mobile communications — posted positive operating income at FYE 3/2015, supported by steady progress in the company's restructuring efforts to turn around its unprofitable businesses.

Sony expects to report solid operating performance in FYE3/2016. In particular, the company expects to post operating income of JPY145.0 billion in FYE3/2016; excluding its financial segment.

Sony's forecast for operating income in FYE3/2016 contrasts significantly from its operating loss of JPY124.8 billion in FYE3/2015. Moody's notes that the operating loss in FYE3/2015 includes non-recurring expenses, such as a JPY98.0 billion in restructuring charges and JPY176.0 billion in goodwill impairment charges related to its mobile communications segment.

"Nevertheless, a level of uncertainty remains as to whether or not Sony can achieve sustainable operating performance over the longer term; especially in its consumer electronics-related businesses, where pricing pressures remain strong" Says Akimoto.

For instance, Sony's mobile communications segment will likely incur an operating loss of JPY39.0 billion for FYE3/2016. Moody's will continue to monitor Sony's progress on its restructuring measures for this segment, and whether or not the segment's profitability recovers.

Sony's Ba1 ratings reflect its diversified business portfolio, as seen by its broad range of products; strong brand recognition; large scale and geographically diversified earnings stream. The ratings also incorporate the challenges it faces in stabilizing its profitability.

The positive outlook provides a potential pathway to ratings improvement should debt remain permanently lower and earnings stabilize further in its key operating segments.

Sony's ratings could experience upgrade pressure if its non-financial services businesses maintain: 1) an adjusted debt/EBITDA of 4.0x-4.5x; and 2) an adjusted debt/capitalization below 55%.

On the other hand, downward ratings pressure could emerge if profitability, cash flow, and leverage deteriorate further, and if Sony's non-financial services segments fail to maintain overall operating profit — excluding non-recurring gains and losses, and equity income — or if adjusted debt/EBITDA deteriorates to the 6x-7x range, or adjusted debt/capitalization deteriorates such that the ratio exceeds 65%.

The principal methodology used in these ratings was Global Manufacturing Companies (Japanese) published in August 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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