-- In our view, the pace of recovery in earnings of Sony's mainstay consumer electronics businesses will remain slow in fiscal 2012, and a strong recovery is not likely to occur until at least fiscal 2013.
-- Standard & Poor's lowered the long-term corporate credit and debt ratings on Sony to 'BBB' and removed the ratings from CreditWatch. We affirmed our 'A-2' short-term corporate credit rating on the company.
-- The outlook is negative, reflecting our expectation that we could lower the ratings further if Sony fails to demonstrate solid signs of recovery in weakened measures of its credit quality within the next 12 months.
TOKYO (Standard & Poor's) Sept. 25, 2012--Standard & Poor's Ratings Services today lowered its long-term corporate credit ratings on Sony Corp. and its subsidiaries Sony Capital Corp. and Sony Global Treasury Services PLC, as well as senior unsecured debt ratings on Sony Corp., to 'BBB' from 'BBB+'.
At the same time, we removed the ratings from CreditWatch, where we placed them Aug. 10, 2012. The outlook on the long-term corporate credit ratings is negative.
We base the downgrades on our view that the pace of recovery in earnings of Sony's mainstay consumer electronics businesses in fiscal 2012 (ending March 31, 2013) will remain slow, and a strong recovery is not likely to occur until at least fiscal 2013.
We base our negative outlook on the long-term corporate credit rating on our expectation that we could lower the ratings further if Sony fails to demonstrate solid signs of recovery in weakened measures of its credit quality within the next 12 months. We affirmed the 'A-2' short-term corporate credit ratings on the companies.
In Standard & Poor's view, prospects that Sony will restore profitability in its mainstay consumer electronics businesses remain low in fiscal 2012. Excluding its financial services operations, Sony made a JPY21.9 billion operating loss (after depreciation) in the fiscal 2012 first quarter (ended June 30, 2012), following a JPY201.2 billion operating loss in fiscal 2011.
The first-quarter loss was due to weak sales of key electronics products, such as flat panel TVs, compact digital cameras, and PCs. Assuming persistent pressure on the price of key Sony products, an uncertain global economic climate, and the yen's continued strength against other major currencies, Standard & Poor's base scenario projects Sony (excluding financial services operations) will make a small but continued operating loss in fiscal 2012 and will not return to operating profit until fiscal 2013.
While Sony no longer regards its struggling flat panel TV operation as its core business, we believe the company's mainstay consumer electronics businesses will be key to a recovery in profits, and we still see some downside risk in the businesses.
We remain neutral on Sony's acquisition strategy. Historically, Sony has made active strategic investments to maintain competitiveness and realign its business portfolios, in our view. Most recently, Sony completed a tender offer to acquire all outstanding shares of subsidiary So-net Entertainment Corporation (So-net), requiring a cash outflow of up to about JPY60 billion, and is also reportedly discussing a strategic alliance with Olympus Corporation.
We believe Sony has satisfactory financial flexibility through, for example, asset sales to at least partially offset cash outflows related to its strategic investment activities. But we also recognize the risk that more active strategic investments may further delay an improvement in debt and cash flow ratios for the company in the near term.
Standard & Poor's believes the pace of Sony's recovery in earnings in its mainstay electronics businesses in the next 12 months will be key to analysis of the company's credit quality. In our base case assumptions, we expect Sony's EBITDA margin (excluding financial service operations, and before other adjustments) to improve to 4.3% in fiscal 2012 and 5.6% in fiscal 2013, compared with 1.1% in fiscal 2011, along with management's initatives to proactively restructure its main business, including making its TV business and mobile business profitable or least break even by the end of fiscal 2013. We expect the company to maintain a prudent capital expenditure and acqusition strategy, allowing for improvement in the ratio of its debt to EBITDA (excluding financial service operations, and before other adjustments) to 4.3x in fiscal 2012 and 3.1x in fiscal 2013.
We may consider lowering the ratings on Sony further if the company fails to demonstrate solid signs of recovery in weakened measures of its credit quality, such as EBITDA margin and debt to EBITDA, within the next 12 months.
In order for us to consider revising the outlook on the long-term issuer credit rating on Sony to stable, we would first need to see Sony demonstrate solid prospects of faster financial improvement than we have included in our base case assumptions.
Given the challenging business environment for the company, however, we believe this is unlikely at least in the the next 12 months.
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