OREANDA-NEWS. Fitch Ratings has upgraded Sony Corporation's (Sony) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) and local-currency senior unsecured ratings to 'BB' from 'BB-'. The Outlook is Stable. Simultaneously, its Short-Term Foreign- and Local-Currency IDRs are affirmed at 'B'. A full list of rating actions is at the end of this release.

The upgrade reflects Fitch's expectations of improved profitability in Sony's core electronics businesses and further deleveraging following the successful execution of its restructuring measures and commitment from management to position profitability and return on equity as the primary key performance indicators.

KEY RATING DRIVERS
Improving Profitability: Fitch expects Sony to continue generating an operating profit from the non-financial businesses with the benefits of cost reduction and restructuring. Downsizing its loss-making smartphone and TV businesses should help the company reduce volatility in earnings. Reduction in restructuring charges and impairment losses should also contribute to steady profits. We expect improved results for the financial year ending March 2016 (FYE16) with an operating EBIT margin of 2.1% (FYE15: -1.1%).

Further Deleveraging: We expect Sony to deleverage over the next 12-24 months, driven mainly by improved profitability and cash generation from its electronics businesses. We expect Sony's funds flow from operations (FFO)-adjusted leverage, excluding Sony Financial Holdings (SFH), to reduce to below 4.0x in FYE16, from 4.4x at end-FYE15. In addition, new share issuance of JPY300bn in August 2015 helped fund the increased capex budget of JPY501bn for FYE16 (FYE15: JPY251bn).

Higher Game Contribution: We expect continued solid revenue from PlayStation 4 (PS4) and enhanced network services to support Sony's overall profitability, mitigating the weaker profitability of its smartphone, TV and component businesses. Sony sold around 36 million PS4 units up to end-December 2015, with substantial sales of its PlayStation 3 over the equivalent period. With stronger PS4 hardware sales, we expect higher PS4 software sales to follow, which should support firmer margins over the next two to three years.

Smartphone Challenges: Slower growth in global smartphone demand coupled with increased competition from low-cost Chinese vendors will not only add further challenges to its Mobile segment, but also to its Device segment, which produces image sensors and camera modules to key global brands. We expect its Mobile profitability to remain fragile as we do not expect Sony's smartphones to improve on their relatively weak market position. Fitch believes its technology leadership in image sensors remains strong, but profitability of its Device segment is likely to be adversely affected by weaker order flow from its major customers.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- low single-digit revenue growth in the next two to three years
- Ex-SFH operating EBIT margin to stay around 2% in the next two to three years
- capex and addition of intangible assets of over JPY500bn in FYE16 and JPY380bn in FYE17
- annual cash dividend of JPY25bn

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include (for Sony excluding SFH):
- sustained EBIT margins lower than 1%
- FFO-adjusted leverage sustained above 4.5x

Positive: Future developments that may, individually or collectively, lead to a positive rating action include (for Sony excluding SFH):
- sustained EBIT margins higher than 2%
- FFO-adjusted leverage sustained below 3.5x

LIQUIDITY
Adequate Liquidity: Fitch expects Sony's liquidity to remain adequate. Excluding SFH, Sony had readily available cash of JPY845bn at end-December 2015, compared with debt due within one year of JPY211bn in the same period. The company also had unused credit facilities of JPY540bn at end-June 2015. The company continues to have good access to local banks and capital markets.

The full list of rating actions is below:
Long-Term Foreign- and Local-Currency IDRs upgraded to 'BB'. Outlook is Stable;
Local-currency senior unsecured rating upgraded to 'BB'; and
Short-Term Foreign- and Local-Currency IDRs affirmed at 'B'.