-- The likelihood of a strong recovery in Sony's earnings is low, due to a massive erosion of prices, falling demand, and harsh competition in Sony's mainstay businesses.
-- Standard & Poor's lowered the long-term corporate credit and debt ratings on Sony to 'BBB+' and removed the ratings from CreditWatch. We affirmed the 'A-2' short-term corporate credit rating.
-- The outlook is negative, reflecting our view that we could lower the ratings further if we see no meaningful sign of recovery in Sony's earnings within six to 12 months.
Standard & Poor's Ratings Services today lowered its long-term corporate credit and senior unsecured debt ratings on Sony Corp. to 'BBB+' from 'A-' and removed the ratings from CreditWatch, where we placed them Nov. 4, 2011. The outlook on the long-term corporate credit rating is negative. We base the downgrade on our view that severe circumstances in Sony's mainstay electronics businesses make a strong recovery in earnings unlikely. We base the negative outlook on the long-term corporate credit rating on our expectation that we could lower the ratings further if we see no meaningful sign of a recovery in Sony's earnings within six to 12 months. We affirmed the 'A-2' short-term corporate credit rating on the company.
Sony's TV business has made repeated losses since fiscal 2004 (ended March 31, 2005). The company expects to incur a net loss of JPY220 billion in fiscal 2011. Standard & Poor's believes the major reason for the extended losses is Sony's strategy to aggressively expand its global market share despite strong competition, a massive erosion of prices, and its high cost structure compared with overseas competitors. Massive pressure on the prices of Sony's key products, such as flat-panel TVs and mobile handsets, is likely to continue, and the company's position in the global market is under strong pressure amid severe competition from Korean manufacturers and emerging Chinese companies. In our view, an enhanced focus on profits, rather than on expanding sales, and efforts to lower costs are likely to reduce losses in its TV business. However, circumstances are so severe that Standard & Poor's believes it will be difficult for Sony to return its TV business to profitability even in fiscal 2013. Therefore, we see a low likelihood of a strong recovery in Sony's earnings in the next two years or so.
Because of continuing net losses since fiscal 2008, Sony's profitability looks significantly weaker than that of its global industry peers. In addition, we believe its ratio of adjusted debt to EBITDA is likely to remain high for the next one to two years, even for companies in the 'BBB' category. Standard & Poor's also believes Sony's adjusted total debt to capital (excluding finance operations) will rise to around 40% as of March 31, 2012, from 35% a year earlier. However, we base our one-notch downgrade on our view that Sony's profitability and financial standing will gradually recover in fiscal 2012 because there will be no repeat of one-off expenses due to floods in Thailand and impairment losses on stockholdings. Also, we believe Sony's strong short-term liquidity (excluding finance operations) continues to support its financial stability.
The outlook on the long-term corporate credit rating on Sony is negative, reflecting our view that we could lower the ratings further if we see no meaningful sign of a recovery in earnings within six to 12 months. We expect strong price erosion and a fall in demand may delay a recovery in earnings in the company's TV segment and lead to further expenses in restructuring.
Sony's progress toward a recovery of earnings in its TV business in the coming six to 12 months will be key to our analysis of the company's credit quality. We may consider lowering the ratings on Sony if we see a likelihood of weak performance in the TV business leading to another net loss in fiscal 2012. Adjusted total debt to capital (excluding finance operations) of above 40% for an extended period would also pressure the ratings. To consider upgrading the company, we would need to see Sony stabilize earnings in its core businesses and show stronger prospects for financial improvement. Given the severity of the business environment, though, we consider the possibility of such an outcome low at present.
