Moody's Lowers Sony's (SNE) L-T Unsecured Bonds from Baa1 to Baa2, Outlook Negative

October 12, 2012 7:48 AM EDT
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Moody's Investors Service has downgraded the issuer and long-term senior unsecured bond ratings of Sony Corporation (NYSE: SNE) to Baa2 from Baa1.

At the same time, Moody's has confirmed the Prime-2 short-term ratings of Sony and its supported subsidiary, Sony Global Treasury Services Plc.

The ratings outlook is negative.

These actions conclude the review for downgrade initiated on 6 August.


The rating actions consider Sony's weak profitability and cash flow, its challenges in achieving profitability in the TV and mobile phone segments, and the erosion in its global competitive position across different product lines. Weak consumer sentiment, fierce global competition, and the impact of the strong yen on cost competitiveness will further hamper its efforts to improve its metrics.

While Sony has undertaken several initiatives -- to improve the efficiency of its operations, reduce losses in its TV and mobile phone businesses, and generate stronger profits through new product offerings -- the negative rating outlook reflects Moody's view that it will be challenging for the company to achieve sufficient near-term improvement in earnings and cash flow to maintain the current Baa2 rating.

Moody's expects the operating margin in Sony's non-financial services businesses (excluding non-recurring expenses and equity income) to remain at 1-2% over the medium term, because of the persistent losses in TVs and the highly competitive and volatile mobile phones business, as well as the modest decline in earnings from games and digital imaging products.

Sony's TV business -- which accounted for 12% of the revenues from the non-financial business in Q1 FYE03/2013 -- will continue to face challenges in reducing its large operating losses, given the maturity and commoditization of flat panel display (FPD) TVs and the intense competition with Korean and Chinese makers.

Moreover, Sony's presence in the growing smartphones market is likely to remain weak due to the delay in the expansion of its own smartphone business in its mobile communications segment (13% of non-financial revenues, Q1 FYE03/2013) and its lack of differentiating products.

Moody's expects Sony to narrow its losses through cost cuts in these businesses, but will continue to experience losses at the operating level despite its target of achieving profitability in these segments by FYE03/2014.

At the same time, demand for games consoles and compact digital cameras is likely to continue to decline due to the integration of gaming and camera functions into smartphones. Sony maintains leading market positions in games and digital imaging products (9% and 10%, respectively, of its non-financial services revenue). These products have helped offset large operating losses in TVs.

To deal with these challenges, Sony has been trying to expand its earnings base by improving the sales of single-lens reflex cameras, mirrorless interchangeable-lens cameras, image sensors, crowd gaming, and medical devices. However, their earnings contributions alone will not be sufficient to improve overall earnings significantly in the short term.

In addition, despite the long-term strategic importance of the medical devices business, the recent capital and business alliance with Olympus Corporation (not rated) will further pressure Sony's cash flow, making it difficult for it to reduce debt without additional sales of non-core assets.

Although Moody's expects Sony's adjusted debt/EBITDA in its non-financial services businesses -- which stood at 5.2x as of FYE03/2012 versus 3.3x in FYE03/2011 -- to decrease, it is likely to remain at 3.5-4.0x over the medium term. Such improvement will require a strong recovery in TVs and mobile phones.

If a significant improvement in the company's financial profile is not evident in a relatively short time, its ratings will be reviewed for further downgrade.

On the other hand, Sony's stable relationships with its major banks are an important ratings consideration -- one that has lifted the company's ratings by two notches from its fundamental creditworthiness as is the case with other leading Japanese companies.

Sony also maintains solid financial flexibility, including its holding of a large amount of cash (JPY523.1 billion as of June) and committed lines (about JPY770 billion), as well as a listed financial subsidiary, where the current market value of Sony's holdings is about JPY350 billion. Its reported total debt was JPY1.2 trillion in its non-financial services businesses as of June, of which JPY425.5 billion was short term.

The outlook could return to stable if Sony can substantially improve its cash flow and leverage. Areas of improvement include: 1) making its TVs and mobile phone businesses profitable, 2) reversing declines in earnings from its games and digital imaging products, and 3) reducing debt through the sales of non-core assets. A shift in focus away from commoditized consumer products will help diversify earnings and will be positive for the rating.

Operating margins of more than 2.0% (excluding equity income and non-recurring expenses) and adjusted debt/EBITDA of less than 3.5x in its non-financial services businesses, in addition to a strong liquidity profile, would be necessary for the outlook to return to stable.

Ratings would be pressured downwards if Sony fails to significantly improve its cash flow and leverage from current levels.

If operating margins (excluding equity income and non-recurring expenses) remain below 1.0% in FYE03/2013 and 1.5% in FYE03/2014, or adjusted debt/EBITDA remains above 4.0x in FYE03/2013 and 3.75x in FYE03/2014 in its non-financial services businesses, the ratings could be downgraded.

Furthermore, acquisitions, which could change its business risk materially and adversely, and/or erode its balance sheet and financial flexibility, could also pressure the ratings.

The principal methodology used in rating Sony Corporation and Sony Global Treasury Services plc was the Asian Consumer Electronics Industry Methodology published in December 2010. Please see the Credit Policy page on for a copy of this methodology.

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