TOKYO Ratings agency Fitch downgraded the debt ratings of Japan's Sony Corp (6758.T) and Panasonic Corp (6752.T) to "junk" status citing weakness in their consumer electronics and TV operations, further diminishing the luster of the once-great Japanese brands.
The cut to below investment grade, the first by a ratings firm, comes as the floundering Japanese tech giants face weak demand and fierce competition from Apple Inc (AAPL.O) and Samsung Electronics (005930.KS).
A strong yen and bumps in China, where growth has slowed and Japanese goods have been targeted in sometimes violent protests recently, have also weighed on their earnings.
The two companies, along with Sharp Corp (6753.T), racked up combined losses of $20 billion last year, leading them to axe jobs, sell assets and close facilities.
"Both Sony and Panasonic are struggling to generate operating profits, but each is restructuring and I don't envision the current situation continuing," said Masahi Oda, Chief Investment Officer at Sumitomo Mitsui Trust Bank.
"A collapse of their core business would be a problem, but we are not at the point yet, and to me Fitch looks too negative," Oda added.
Fitch downgraded Sony by three notches to BB-minus from BBB- minus, saying meaningful recovery will be slow. The move came after Sony, the maker of PlayStation game consoles and Vaio laptops, last week announced plans to raise 150 billion yen through the sale of convertible bonds.
"Fitch believes that continuing weakness in the home entertainment and sound and mobile products and communications segments will offset the relatively stable music and pictures segments and improvement in the devices segment which makes semiconductors and components," it said in statement.
In a separate statement, Fitch cut Panasonic to BB from BBB-minus, a two-notch downgrade, citing weakened competitiveness in its TVs and display panels as well as weak cash generation from its operations. It has a negative outlook on both the companies.
The downgrade sent Sony's five-year credit default swaps (CDS), insurance-like contracts against debt default or restructuring, 5 basis points wider to 382.5/402.5 basis points.
Panasonic's CDS for the same maturity were quoted at 295/315 basis points, 15 basis points wider than in Thursday morning Asian trade.
Standard & Poor's rates the two consumer electronics makers at BBB, the second lowest of the investment grade, while Moody's Investors Service has Baa3 on them, the lowest of the high-grade category.
With two of the three major ratings agencies still having the two companies as investment grade, institutional investors won't face too great a pressure to cut their debt holdings in them, analysts said.
SONY SHARES TUMBLE
Sony shares shed 4.4 percent in Frankfurt (6758.F) on Thursday. The shares ended 1.8 percent higher at 834 yen in Tokyo before the Fitch announcement, trading not too far from their 32-year closing low of 793 yen hit on November 15. Sony stock is down 40 percent so far this year.
Panasonic shares were down 0.6 percent in Frankfurt (MCa.F) in low volume. The stock inched up 0.7 percent to close at 407 yen in Tokyo trading, near its 34-year closing low of 385 yen reached on November 13.
Last month, Panasonic cut its forecast and warned it will lose close to $10 billion in the year to March, as it writes off billions of yen in tax-deferred assets and goodwill related to its mobile phone, solar panel and small lithium battery businesses.
Ahead of its earnings revision, Panasonic won $7.6 billion in loan commitments in October from banks including Sumitomo Mitsui Financial Group (8316.T) and Mitsubishi UFJ Financial Group (8306.T), a funding backstop it says will help it avoid having to seek capital from credit markets.
Sony made a small operating profit in the July-September quarter, helped by the sale of a non-core chemicals business, and kept its forecast for a full-year profit of $1.63 billion.
(Additional reporting by Dominic Lau in Tokyo and Umesh Desai in Hong Kong; Editing by Muralikumar Anantharaman)