Sony Downgraded to “Junk” Status by Moody’s ; PS4 Expected to Improve Profitability in Gaming Segment

Sony Downgraded to “Junk” Status by Moody’s ; PS4 Expected to Improve Profitability in Gaming Segment

The leading rating agency Moody’s Investor Service just released a statement downgrading Sony’s debt rating to BA1 (Not Prime) from the previous BAAA3 (Prime 3) rating.

The new rating is explained as “Judged to have speculative elements and a significant credit risk.” BA1 is also the first level defined in industry lingo as “junk” status.

The official statement from Moody’s justifies the choice to downgrade the rating as follows:

The rating actions reflect Moody’s view that while Sony has made progress in its restructuring and benefits from continued profitability in several of its business segments, it still faces challenges to improve and stabilize its overall profitability and, in the near term, to achieve a profile that Moody’s views as consistent with an investment grade rating.

Of primary concern are the challenges facing the company’s TV and PC businesses, both of which face intense global competition, rapid changes in technology, and product obsolescence.

Sony’s profitability is likely to remain weak and volatile, as we expect the majority of its core consumer electronics businesses — such as TVs, mobile, digital cameras and personal computers — to continue to face significant downward earnings pressure.

The primary reason is intense competition and the shrinkage in demand, the result in turn of cannibalization caused by the rapid penetration of smartphones.

Despite that, there’s a glimpse of hope, even if it didn’t prove enough to save Sony from the downgrade, and that’s the PS4:

Profitability in the Games segment is expected to improve with the successful launch of PlayStation IV, but not to the extent seen with the profitability level in 2010.

The outlook is defined “stable,” meaning that Moody’s doesn’t predict the risk of a further downgrade in the near future or the immediate possibility of an upgrade:

The stable outlook is based on our expectations that the company’s overall credit profile will slowly improve. Operating margins are expected to remain in the 0.5% -1.0% range for the next 12 months. Adjusted Debt to EBITDA will decline over time but remain above 4.5x

I’m sure I’m not the only one that finds rather funny the fact that Moody’s called the PS4 “PlayStation IV,” but puns aside, we’ll have to see if Sony’s new console will manage to help the company fix its financial status, that has been in a rather bad shape for a while mainly due to other sectors of the business.