The cut to below investment grade, the first by a ratings firm, comes as the floundering Japanese tech giants face weak demand and fierce competition from Apple Inc and Samsung Electronics.
A strong yen and bumps in China, where growth has slowed and Japanese goods have been targeted in sometimes violent protests recently, have also weighed on their earnings. The two companies, along with Sharp Corp, racked up combined losses of $20 billion last year.
Both Sony and Panasonic are struggling to generate operating profits, but each is restructuring and I dont envision the current situation continuing, said Masahi Oda, Chief Investment Officer at Sumitomo Mitsui Trust Bank. A collapse of their core business would be a problem, but we are not at the point yet, and to me Fitch looks too negative, Oda added.
Fitch downgraded Sony by three notches to BB-minus from BBB- minus, saying meaningful recovery will be slow. The move came after Sony, the maker of PlayStation game consoles and Vaio laptops, last week announced plans to raise 150 billion yen ($1.82 billion) through the sale of convertible bonds.
Fitch believes that continuing weakness in the home entertainment and sound and mobile products and communications segments will offset the relatively stable music and pictures segments and improvement in the devices segment which makes semiconductors and components, it said in statement.
In a separate statement, Fitch cut Panasonic to BB from BBB-minus, a two-notch downgrade, citing weakened competitiveness in its TVs and display panels as well as weak cash generation from its operations. It has a negative outlook on both the companies.
The downgrade sent Sony's five-year credit default swaps (CDS), insurance-like contracts against debt default or restructuring, 5 basis points wider to 382.5/402.5 basis points. Panasonics CDS for the same maturity were quoted at 295/315 basis points, 15 basis points wider than in Thursday morning Asian trade.
Standard & Poors rates the two consumer electronics makers at BBB, the second lowest of the investment grade, while Moodys Investors Service has Baa3 on them, the lowest of the high-grade category.