So finally it has happened
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Sony and Panasonic given junk ratings
By Ben McLannahan in Tokyo
Fitch has cut the credit ratings of Sony and Panasonic to junk, saying that the recovery of both companies rests on aggressive and far-reaching restructuring.
On Thursday the credit rating agency docked
Sony three notches to BB-, from BBB-, and Panasonic two notches to BB, from BBB-. Fitch justified the cuts – which made it the first major agency to strip either company of investment-grade ratings – by citing a long list of challenges, including loss of technology leadership in key products and the strong yen.
“This wasn’t an easy decision,” said Matt Jamieson, Seoul-based head of corporate research. “But their reputations have been hit so much that it’ll take a long while to crawl back.”
The downgrades come as both giants of the Japanese consumer electronics sector, with almost 500,000 employees between them, are suffering from falling competitiveness in televisions and other cornerstone products. Last month Panasonic warned it was on course for its second $10bn net loss in two years for the year to March 2013, while Sony posted its seventh consecutive quarterly net loss in the three months to September.
Fitch noted that both companies had solid buffers of cash, and also had profitable, cash-generating units such as Panasonic’s domestic appliance business and Sony’s image-sensing division. If executives can take an axe to the problem areas such as TVs for Sony and personal computers for Panasonic, then the rapid downgrades need not necessarily lead to more, said Mr Jamieson.
“I don’t think the banks will push either of these companies to the wall,” said Damian Thong, an equity analyst at Macquarie Securities in Tokyo. “But they do need to convince people that tough restructuring moves will be done in good time, while minimising unnecessary damage to healthy businesses.”
Sony and Panasonic have been two of the worst seven performers on the Nikkei 225 stock average since the beginning of last year, down 72 per cent and 65 per cent respectively, as investors have weighed the heavy costs of job losses and factory closures.
Over a longer horizon, a revival is possible, said Steve Durose, Fitch’s head of Asia Pacific technology, media and telecoms ratings, especially if the yen continues its recent weakening trend. But he said that the duo’s chances of rediscovering technological leadership to develop “must-have products” were hampered by their inability to invest as much as competitors.
While Sony and Panasonic will average about $2.5bn and $4bn, respectively, in capital spending over the next couple of years, Samsung Electronics and LG Electronics (including LG Display), for example, will spend $22bn and $5.5bn respectively.
“Without a radical change to the structure of their businesses it is difficult to see profitability improving enough for them to regain investment-grade ratings,” said Mr Durose.
According to Fitch’s spectrum, BB ratings indicate that companies are vulnerable to defaulting on debt over time, but have sufficient flexibility for now to keep servicing that debt.
Sony, Panasonic Credit Rating Cut to Speculative Grade
Sony Corp. (6758) and Panasonic Corp. (6752), the Japanese electronics makers reeling from record losses, had their credit ratings cut to junk for the first time by Fitch Ratings amid slumping demand for their televisions.
Sony’s rating was cut by three levels to BB-, three steps below investment grade, and Panasonic by two levels to BB, with the outlook on both companies being negative, Fitch said in separate statements today. Both companies had their short-term ratings reduced to B from F3.
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Sony Corp. and Panasonic Corp., the Japanese electronics makers reeling from losses, had their long-term credit ratings downgraded to junk by Fitch Ratings.
The companies will struggle amid a strong yen and weakened economic conditions at home and overseas, Fitch said. After dominating the consumer-electronics industry since the 1980s, Sony, Panasonic and Sharp Corp. (6753) have resorted to cutting jobs, closing plants and selling assets after failing to come up with hit products to challenge Samsung Electronics Co. and Apple Inc. (AAPL)
“The future of both companies will depend on their ability to curb loss-making segments and rediscover the kind of technological leadership, which historically enabled them to develop must-have products,” Steve Durose, Fitch’s head of technology ratings for the Asia-Pacific region, said in a statement. “Sony is the higher risk of the two, hence its lower rating.”
Yuki Shima, a spokeswoman at Tokyo-based Sony, and Chieko Gyobu, a spokeswoman at Osaka-based Panasonic, said their companies don’t comment on ratings changes.
Shares Collapse
Shares of Sony, Panasonic and Sharp sank to their lowest levels in more than 30 years in Tokyo this year as investors remain unconvinced the companies can rebound from mounting losses without hit products. The three companies combined are valued at $24 billion, compared with $528 billion for Apple and $192 billion for Suwon, South Korea-based Samsung.
Sony, founded in 1946 and the inventor of the Walkman player that revolutionized the music industry in the 1980s, was worth more than $120 billion in 2000. Its shares gained 1.8 percent to 834 yen in Tokyo trading today before the downgrade. The stock has lost 40 percent this year.
Panasonic, founded in 1918, rose 0.7 percent to close at 407 yen, trimming its loss this year to 38 percent.
“The downgrades may put pressure on shares,” said Mitsuo Shimizu, a Tokyo-based analyst at Iwai Cosmo Holdings Inc. (8707) “No measures to revive these companies have been found yet.”
Extra Yield
The extra yield investors demand to own Panasonic debt over similar-maturity sovereign bonds has fallen from 354 basis points on Nov. 7 to 197 basis points as of 5:14 p.m. in Tokyo, according to the Japan Securities Dealers Association. Investors demanded a premium of 63 basis points on Oct. 31, the data show.
The extra yield investors demand to own Sony’s 45 billion yen ($544 million) of 0.664 percent bonds due March 2017 rather than government debt fell six basis points to 116 today, according to JSDA prices. The notes were priced in March at a spread of 36 basis points, according to data compiled by Bloomberg.
Borrowing costs in the corporate-bond market have climbed for the three Japanese electronics makers as record losses and widening deficit forecasts sapped investor confidence.
Sony posted a net loss of 15.5 billion yen for the quarter ended Sept. 30, compared with the 15.6 billion-yen average profit of three analyst estimates compiled by Bloomberg before the Nov. 1 announcement. The company, which has reported losses in each of the past four years, retained its forecast for full- year net income of 20 billion yen.
Meaningful Recovery
Sony was downgraded to the lowest investment grade on Nov. 9 by Moody’s Investors Service, which cited falling demand for the company’s TVs and cameras. Moody’s cut Panasonic to the same level on Nov. 20.
Sony Chief Executive Officer Kazuo Hirai is cutting 10,000 jobs and selling assets as he focuses on mobile devices, games and digital imaging to revive the company. Sony sold a chemical- products making unit, stakes in two display-making ventures and invested in Olympus Corp. (7733) after racking up 692 billion yen in losses selling TVs in the past eight years.
“Meaningful recovery will be slow, given the company’s loss of technology leadership in key products, high competition, weak economic conditions in developed markets and the strong yen,” Fitch said in today’s ratings statement.
Continuing weakness at Sony’s home entertainment, mobile and communications businesses will offset its “relatively stable” music and movie operations and improvements at its components businesses, Fitch said today.
Market Share
Sony had 7 percent of the global TV market in the quarter ended Sept. 30, down from 8.4 percent the previous quarter, according to DisplaySearch. Panasonic dropped to 6.2 percent from 6.8 percent in the same period. Samsung remained No. 1 with 25.2 percent, according to the researcher’s website.
Net debt for Sony’s non-financial services businesses increased by 400 billion yen from March to September, partly because of higher financial needs, Moody’s has said. Gross debt for Sony’s non-financial services businesses increased to about 1.25 trillion yen in September from 1.15 trillion yen in March. Cash and deposits decreased to about 420 billion yen from about 720 billion yen.
Panasonic, the maker of Viera televisions and Lumix cameras, forecast a 765 billion-yen net loss for the year ending March 31. That would be the second-biggest loss in company history after the 772 billion-yen net loss the previous year.
Today’s downgrade “reflects Panasonic’s weakened competitiveness in its core businesses, particularly in TVs and panels, as well as weak cash generation from operations,” Fitch said. “Panasonic will continue to suffer from frail economic conditions in both Japan and overseas and resultant weak demand for its products, as well as continuing price competition from overseas companies.”
Sharp, the Osaka-based maker of Aquos TVs, was downgraded to junk by Fitch earlier this month.
