Sony Debt Riskier Than Tepco on Looming Downgrade: Japan CreditCheng Leng
Sony Corp.’s bond risk climbed above that of a power company embroiled in the worst nuclear crisis since Chernobyl before earnings results this week that may trigger a ratings cut for the ailing electronics giant.
The cost to insure Sony’s debt against non-payment rose 42 basis points this year to as high as 182 basis points last week, exceeding that of Tokyo Electric Power Co. for the first time since November 2012, CMA data show. The Markit iTraxx Japan credit-default swap index declined 2.5 to 65 since Dec. 31, while the measure for U.S. companies fell 2.9.
Sony Chief Executive Officer Kazuo Hirai apologized to investors last month after forecasting a sixth loss in seven years as competition from Apple Inc. and Samsung Electronics Co. hammers its smartphone and television businesses. The Tokyo-based company is on watch for a downgrade at both Japan Credit Rating Agency Ltd. and Rating & Investment Information Inc. Bloomberg’s default-risk reading suggests it’s poised for a cut of as many as four levels to the bottom of investment grade.
“The risk of another loss has skyrocketed and so have the concerns about the company’s credit rating,” said Yoshihiro Nakatani, a senior fund manager at Asahi Life Asset Management Co. “The upcoming earnings will determine the course of bond risk going forward.”
Sony is scheduled to report results for the fiscal first quarter on July 31. Estimates for the net loss in the period range from about 7 billion yen ($69 million) to 14 billion yen, according to data compiled by Bloomberg.
The company in May forecast a loss of 50 billion yen in the year to March 2015, citing 135 billion yen in costs related to restructuring and exiting the personal computer business. Sony’s TV unit, which invented the Trinitron cathode-ray tube in the 1960s, hasn’t made money since 2004. The operations hemorrhaged more than 790 billion yen in the past 10 years, according to the company.
“Large-screen TV sales domestically can be expected to take a hit from higher sales tax” in effect since April, said Yusuke Ueda, a credit analyst at Bank of America Merrill Lynch in Tokyo. “That drag on earnings is likely to last through the first half.”
Sony is poised to be rejected from JPX-Nikkei Index 400, Japan’s government-backed stock index started in January, according to UBS AG, Goldman Sachs Group Inc. and at least four other brokerages. The losses create negative return on equity that dwindling operating income and market value no longer counter, they said.
George Boyd, a spokesman at Sony, declined to comment on the company’s bond risk and credit ratings.
The company’s debt is ranked A by JCR, the risk assessor’s sixth-highest investment grade, while R&I rates it a level lower at A-. The Bloomberg default-risk model, which considers factors such as share prices, debt levels and interest expenses, suggests the 10th-lowest rating, matching that of Standard & Poor’s at BBB-.
Moody’s Investors Service has rated Sony at its highest junk grade since January and has a stable outlook on the company. S&P put it on watch for downgrade in February.
“There are expectations that Sony won’t be able to hold on to its A level rating from R&I,” Ueda said. “The bets on whether R&I will downgrade or not are reflected” in CDS price moves, Ueda said.
When Sony’s bond risk last exceeded that of Tepco in November 2012, it faced a downgrade to junk by Moody’s, which warned then that Hirai’s strategy for reviving the electronics business may take longer than expected. R&I also put the company on negative watch at the time after a surprise quarterly loss that sent shares to the lowest since 1980 the following month.
Tepco’s contracts are down 155 basis points this year at 175 as of yesterday, helped by state and bank support that led S&P to raise its outlook to stable in April. The operator of the crippled Fukushima Dai-Ichi nuclear power plant is Japan’s second-riskiest company on the iTraxx index, with Sony trailing by three basis points at 173, according to CMA data. SoftBank Corp. tops the list at 185.
The bond risk of Tepco was as high as 1,762 basis points in October 2011, seven months after the nuclear crisis that forced the evacuation of about 160,000 people.
The yield premium investors demand to own Sony’s 10 billion yen of 1.41 percent notes due 2022 rose 18 basis points this year to 83 basis points over government debt. The securities, the last offered by the company to institutional investors, were issued at 43 basis points in March 2012, Bloomberg-compiled data show. A basis point is 0.01 percentage point.
Sony’s spreads have climbed even as borrowing costs fall in Japan in reaction to the central bank’s monthly buying of an unprecedented 7 trillion yen of notes. Japan’s 10-year benchmark yield has dropped 21 basis points this year to 0.525 percent. The yen has risen 3.4 percent to 101.89 against the dollar as of 12:26 p.m. in Tokyo today.
“The market is bracing for another loss in the electronics segment,” Nakatani at Asahi Life Asset Management said. “Even if no such deficit materializes, it would take really good earnings results to wipe away investors’ fears.”