S&P Cuts Sony Credit Rating

Standard & Poors has lowered Sony's SNE credit rating by one level after SNE widened its loss forecast for the current fiscal year due to falling prices, demand reduction and increasing competition. According to Bloomberg, Sony's long-term ratings were lowered to BBB+ from A-. BBB+ is the ratings company's third-lowest grade. The downgrade follows downgrades by Moody's and Fitch over the past two months, as Sony endured an end to 2011 and start to 2012 that it would like to put behind it. Last week saw SNE more than double its annual loss forecast to 220 billion yen ($2.9 billion). Moody's gave Sony a Baa1 grade, also its third-lowest investment grade. Fitch gave it a BBB- grade, which is one level above junk. Times are tough when a once-great company is now considered slightly better than garbage. J.P. Morgan pointed out that the natural disasters had hit SNE hard, but there was a decline in competitiveness. “Even excluding the impairment loss on Sony's S-LCD stake (¥63.4 billion) and valuation allowance for deferred tax assets at Sony Ericsson (¥33.0 billion), operating profit was still down sharply YoY at only ¥4.7 billion. We attribute this mainly to widening losses in the TV business (to ¥35 billion vs. year-earlier loss of ¥22 billion), plus margin erosion in the digital camera, PC, component, and professional solutions businesses owing to yen appreciation and the floods in Thailand. On the other hand, operating loss in the LCD TV business was roughly ¥10 billion narrower than plan, thanks to management's policy of not chasing market share.” On Thursday last week, Sony hosted a conference call for overseas investors. SVP Sam Levenson said that, “During the third quarter, we saw the continuation of a number of trends recorded during the first half of the year; notably, a competitive operating environment and an even stronger yen. Nevertheless, operating results in nearly every segment improved as compared with the forecast we shared with you in November when reporting last quarter's results. During the quarter, there were three notable events which significantly impacted our operating results. First, as previously announced, we recorded a JPY63.4 billion impairment loss resulting from the re-measurement of our shares in the S-LCD joint venture. As you know, we agreed with Samsung to close this joint venture, and we received proceeds in excess of JPY72 billion in exchange for our shares.” Talking of the forecast, Levenson said, “Consolidated sales for the fiscal year ending March 31, 2012 are expected to be JPY100 billion below our November forecast. This change is primarily due to deterioration in the operating environment in developed countries. Consolidated operating loss is expected to be JPY95 billion, compared to the JPY20 billion in operating income announced in November. The primary reasons for the downward revision are the JPY63.4 billion impairment loss resulting from the sale of our shares in S-LCD and approximately JPY45 billion revision in our expected impact from the Thai floods, and approximately JPY20 billion in negative impact from exchange rates. These factors together total approximately JPY130 billion.” Deutsche Bank said that SNE's results were in line with expectations. “Sony lowered full-year sales guidance from ¥6.5trn to ¥6.4trn (-11% YoY), OP from ¥20.0bn to - ¥95.0bn, and NP from -¥90.0bn to -¥220.0bn. The OP revision was as we expected. Most of the downward revision is due to external factors, including an impairment loss on its stake in S-LCD (-¥63.4bn), forex (-¥20bn), and the Thai floods (-¥45bn). For mainstream businesses there were some positives including ¥10bn outperformance for PDS (components/B2B), and losses on TVs were ¥10bn lower. However, volume guidance for all core products was lowered: DSC from 23m to 21m, camcorders from 4.8m to 4.4m, PS3 from 15m to 14m, and PC from 9.4m to 8.4m. Supply problems from the Thai floods are having a significant impact but there is also uncertainty on demand, particularly in Europe and the US. At this point Sony appears to be staving off further earnings deterioration by cost reductions.”