Sony profitability unstable, credit rating is now “junk”

Business

January 27, 2014

Investment research and analysis firm, Moody’s has downgraded Sony’s credit rating to an effective “junk” status.

To be precise, the Issuer Rating and the long-term senior unsecured bond rating of Sony Corporation has been downgraded to Ba1 from Baa3. With Moody’s anything below a Ba ratingis a non-investment grade bond, hence the “junk” colloquialism.

Moody’s says that while Sony has made progress in its restructuring and benefits from continued profitability in several of its business segments, it still faces challenges to improve and stabilize its overall profitability and, in the near term, to achieve a profile that Moody’s views as consistent with an investment grade rating.

The ratings outlook is stable, based on expectations that the company’s overall credit profile will slowly improve. Operating margins are expected to remain in the 0.5% – 1.0% range for the next 12 months.

The ratings could experience upgrade pressure if Sony improves profitability and cash flow by:

turning around its TV and PC businesses;
reversing declines in earnings from its games and digital imaging products; and
reducing debt.

Sony’s profitability is likely to remain weak and volatile, says Moody’s, as it is expected that the majority of its core consumer electronics businesses (TVs, mobile, digital cameras, and personal computers) will continue to face significant downward earnings pressure, intense global competition, shrinking demand, rapid changes in technology, and product obsolescence.

The four segments of Devices, Imaging Products & Solutions, Music, and Pictures are expected to remain profitable, but not at levels which in aggregate can support an investment grade rating for the overall corporation.

Profitability in the Games segment is expected to improve with the successful launch of PlayStation 4, but not to the extent seen with the profitability level in 2010.

The Music and Pictures segments are expected to remain profitable and supportive of the company’s cash flow.

Moody’s is particularly concerned about weak earnings in the Devices and the Imaging Products & Solutions segments as the rapid decline in demand for compact digital cameras continues to alter the markets for such products and associated imaging sensors.

Moody’s considers that the continued solid operating performance of Devices, Music, and Pictures are particularly important in the midst of the restructuring of Sony’s Home Entertainment & Sound, and Mobile Products and Communications segments.

However, a lack of stability in some of these segments will increase the risk of further delaying the recovery of Sony’s overall profitability.