S&P: Panasonic Corp. Upgraded To 'BBB+'; Outlook Stable
The following is a press release from Standard & Poor's:
-- We expect Panasonic to sustain the improved profitability it has
achieved over the past two years through drastic structural reforms and cost
reductions, including shrinking its commoditized digital product businesses
significantly.
-- Panasonic has slashed its debt thanks to a recovery in its business
performance and asset sales. We expect more stable profitability to keep key
financial ratios, including debt to EBITDA, at healthy levels.
-- We are raising our long-term credit rating on Panasonic to 'BBB+', and
the outlook on the long-term corporate credit rating is stable. We are
affirming the 'A-2' short-term rating.
TOKYO (Standard & Poor's) July 17, 2014--Standard & Poor's Ratings Services
today raised its long-term corporate credit ratings on Japan-based appliance
and electronics manufacturer Panasonic Corp. and its subsidiaries by one notch
to 'BBB+'. We also raised the long-term debt rating on Panasonic and the
long-term corporate ratings on its overseas subsidiaries a notch to 'BBB+'. We
affirmed all short-term ratings (see list below). The outlook on the long-term
ratings is stable.
The upgrade reflects our opinion that drastic structural reforms and cost
reductions will enable Panasonic to sustain or slightly improve its
profitability, which has improved significantly over the past two years. It
also reflects the fact the company has slashed debt thanks to a recovery in
business performance as well as asset sales and a likelihood that strong
business performance will keep key financial ratios, including debt to EBITDA,
at healthy levels.
We assess Panasonic's business risk profile as "satisfactory," supported by
the company's good branding power and a diverse mix of products, despite
fierce competition in its main business segments, including electronic devices
and other technology hardware products. Even though the competitive
environment has been tight, the company's profitability has recovered
following a well-executed restructuring of its businesses, including
significant reductions in commoditized electronics products such as plasma
display panels. We expect the company's focus on housing equipment and
automotive businesses to stabilize its earnings because we see smaller swings
in the earnings of these businesses than of those producing digital products.
Nonetheless, competition is stiff and we think the positive impact in terms of
a boost to earnings is likely to be limited in the next 12-18 months.
We view Panasonic's profitability as still weaker than that of industry peers,
reflecting intense competition and the company's higher cost structure even
after significant restructurings and cost reductions. Its EBITDA margin
increased to 8.9% in fiscal 2013 (ended March 31, 2014) from 7.6% in 2012.
Under our base-case scenario, we assume Panasonic will maintain its EBITDA
margin at the current level in the next 12-18 months despite still-intense
competition, our expectation that demand will slow following the April 2014
hike in sales tax, and the company's discontinuation of extraordinary wage
cuts.
We revised our assessment of the company's financial risk profile to "modest"
from "intermediate." The revision reflects a faster than expected reduction in
the company's outstanding debt. The company cut debt a hefty 44% from the end
of fiscal 2012 to the end of fiscal 2013, thanks to better-than-expected
profits, reduced capital expenditures, and asset disposals. In our base case,
we expect the company to keep its ratio of debt to EBITDA comfortably below
1.5x over the next two years even if Panasonic makes some investments in
pursuit of growth. However, we believe volatility in the company's cash
flow/leverage ratios has the potential to be relatively high for an
electronics manufacturer, because the highly volatile nature of the technology
(hardware and semiconductor) industry and intense competition Panasonic faces
could produce large swings in the company's cash flows. This is despite our
view that the company's restructurings and its focus on more stable sectors
may reduce its business volatility slightly over the next two to three years.
As a result, we assess Panasonic's financial risk profile as "modest."
The combination of a "satisfactory" business risk profile and "modest"
financial risk profile results in a 'bbb+' anchor. For
diversification/portfolio effect, we assess Panasonic as "moderately
diversified," to reflect diversification benefits from a varied mix of
businesses with low correlations, including technology hardware and
semiconductors, auto supplies, and capital goods (housing equipment and
energy-solutions). For comparable rating analysis, we make a "negative"
assessment. The negative assessment is based on our view that Panasonic's
profitability is weaker than that of its industry peers and that improvement
in its profitability is uncertain while it pursues its growth strategy. These
two modifiers raise and lower the anchor one notch respectively, resulting in
a final rating of 'BBB+'.
We assess Panasonic's liquidity as "strong." We expect sources of liquidity to
exceed 1.5x uses for the next 24 months. We expect the company's sources of
liquidity over the next 12 months to include about JPY600 billion in cash and
deposits and about JPY500 billion in funds from operations. The company's
primary uses of liquidity for the period include about JPY84.7 billion in debt
repayments, about JPY255 billion in capital investments on both tangible and
intangible assets, and a certain amount for strategic investments, among other
items.
The stable outlook reflects our view that the company will likely improve its
business performance gradually over the next 12 to 18 months after having
carried out drastic structural reforms and cost reductions. We also expect
Panasonic to maintain positive free cash flow and low use of debt even after
factoring investments for growth into our base-case assumptions.
We may consider raising our ratings if we believe Panasonic will complete its
restructurings successfully and improve competitiveness and, in turn, its
profitability in its main businesses, including electronics devices and other
technology hardware products, and automotive and housing equipment businesses.
Specifically, we may consider an upgrade if we believe the company's EBITDA
margin will constantly exceed 9.5%. Conversely, we may consider lowering the
ratings if we see a greater likelihood of debt to EBITDA rising to 2x or above
on a sustained basis, due to, for instance, a significant deterioration in
EBITDA or aggressive investment in pursuit of growth. However, given the
company's restructuring of its businesses to improve its profitability and its
healthy financial standing, we believe a downgrade in the near future is
remote.
RELATED CRITERIA AND RESEARCH
Related Criteria
-- Key Credit Factors For The Consumer Durables Industry, Dec. 12, 2013
-- Corporate Methodology, Nov. 19, 2013
-- General Criteria: Group Rating Methodology, Nov. 19, 2013
-- Key Credit Factors For The Auto Suppliers Industry, Nov. 19, 2013
-- Key Credit Factors For The Capital Goods Industry, Nov. 19, 2013
-- Key Credit Factors For The Technology Hardware And Semiconductors
Industry, Nov. 19, 2013
-- 2008 Corporate Criteria: Commercial Paper, April 15, 2008
A Japanese-language version of this media release is available on Standard &
Poor's Research Online at www.researchonline.jp, or via CreditWire Japan on
Bloomberg Professional at SPCJ . Complete ratings information is available
to subscribers of RatingsDirect at www.globalcreditportal.com and at
spcapitaliq.com. All ratings affected by this rating action can be found on
Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings
search box located in the left column.
Primary Credit Analyst: Makiko Yoshimura, Tokyo (81) 3-4550-8368;
makiko.yoshimura@standardandpoors.com
Secondary Contact: Hiroki Shibata, Tokyo (81) 3-4550-8437;
hiroki.shibata@standardandpoors.com
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(MORE TO FOLLOW) Dow Jones Newswires
July 17, 2014 02:25 ET (06:25 GMT)- - 02 25 AM EDT 07-17-14
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