Fitch Downgrades Panasonic to Speculative Grade; Outlook Negative Ratings Endorsement Policy
Fitch Ratings-Seoul/Sydney/Singapore-22 November 2012: Fitch Ratings has downgraded Panasonic Corporation’s (Panasonic) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) and local currency senior unsecured ratings to ‘BB’ from ‘BBB-’. The Outlook on the Long-Term IDRs is Negative. Simultaneously, its Short-Term Foreign- and Local-Currency IDRs have been downgraded to ‘B’ from ‘F3’.
The downgrade reflects Panasonic’s weakened competitiveness in its core businesses, particularly in TVs and panels, as well as weak cash generation from operations (CFO). It also reflects the agency’s view that the company’s financial profile is not likely to show a material improvement in the short- to medium-term. Fitch acknowledges that the company is in the right direction in its restructuring efforts which could potentially lead to margin recovery over the long-term. However, the company’s turnaround programme remains exposed to execution risk.
Fitch believes that 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 not hampered by the high value of the yen. In particular, the company’s market position in its core business suffered from strong competition from Korean manufacturers, which led to a subsequent downsizing of the business. Fitch, therefore, forecasts that the company’s CFO will remain weak and any significant reduction in gross debt is unlikely in the short- to medium-term.
Fitch believes that Panasonic’s restructuring efforts, principally through consolidation of its manufacturing facilities and labour force rationalisation, will help gradually improve operating margins as witnessed in the first half of the financial year ending March 2013 (H1FYE13) results. However, the agency remains cautious that the benefits of the restructuring may be marred by as the weak performance in Panasonic’s electronics products and components businesses and lead to a slow recovery in profitability.
Revenue contracted 9% yoy to JPY3,638bn H1FYE13 with a 2.4% EBIT margin (H1FYE12: 1.2%). This is mainly due to dampened demand for its major products as well as the negative impact from the high yen. Panasonic also revised down its FYE13 forecast, reflecting the tough operating outlook. The company now forecasts JPY7,300bn revenue with a 1.9% EBIT margin in FY13. (FY12: JPY7,846bn revenue with a 0.6% EBIT margin)
What could trigger a rating action?
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- Funds flow from operations (FFO)-adjusted leverage remaining over 4.5x (end-FYE12: 14x) on a sustained basis
- EBIT margin below 2% on a sustained basis
Positive: Future developments that may, individually or collectively, lead to a revision of Outlook to Stable include
- FFO-adjusted leverage falling below 4x on a sustained basis
- EBIT margin above 2.5% on a sustained basis