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Sony, beloved in share market, may have peaked for bonds

Sony Corp’s better-than-expected earnings this month have boosted investor optimism towards its shares, but in the bond market some analysts say its debt price may have peaked barring a credit-rating upgrade.
The yield premium on Sony’s 1.41% yen notes due in March 2022 has decreased 38 basis points in the past year to about 38 basis points more than sovereign notes on Wednesday, near the lowest since their issuance in 2012, according to Bloomberg-compiled prices. The company’s shares have climbed about 29% in the past 12 months, outpacing the 23% gain in the Topix share index.
The Tokyo-based electronics and entertainment company posted quarterly profit that topped analyst estimates on August 1, and about 86% of the financial firms polled by Bloomberg consider Sony shares worth buying. In the debt market, the focus is more on its credit score, and by that metric its bond gains may be overdone, according to BNP Paribas SA. Sony has a Baa3 grade from Moody’s Investors Service and a BBB score from S&P Global Ratings, both with a stable outlook.
“While the company’s growth momentum isn’t bad at all, the bond market has already fully priced that in,” said Hidetoshi Ohashi, the chief credit strategist at Mizuho Securities Co in Tokyo. “If there are credit-rating upgrades, that would create upside potential for the debt. But it may take a bit more time.”
Sony’s operating profit more than doubled to ¥157.6bn ($1.4bn) in the fiscal first quarter that ended in June, thanks to demand for smartphone camera chips and PlayStation 4 consoles and games, and a healthy music business.
Moody’s finds its current score on Sony “appropriate” and isn’t ready to change it soon, according to senior credit analyst Masako Kuwahara.
A risk to Sony is instability inherent in the video-game industry and semiconductor-manufacturing, she said. “The gaming business isn’t quite as stable as to generate cash flows on a consistent basis,” partly because a company needs to invest periodically to renew hardware to satisfy consumers, Kuwahara said.
 The latest earnings figures were in line with S&P’s expectations, according to credit analyst Makiko Yoshimura, who declined to comment on whether a rating change is under consideration.
The rating company will weigh an upgrade if the possibility grows that Sony’s earnings before interest, taxes, depreciation and amortisation as a ratio of sales stabilise above 11%, she said. The profitability measure, which excludes Sony’s financial services segment and one-off items, was recently at 10.25%.

An upgrade may also be possible if the company keeps its leverage ratio down around recent levels, according to Yoshimura. Risks facing Sony include a potential intensification of competition in the digital consumer electronics industry and worsening in its movie business, she said.
Sony will continue to work to strengthen its finances and keep in close communication with the market and credit-rating firms, said company spokesman Haruka Kitagawa. He declined to comment on the company’s debt scores.
Bond investors already expect Sony’s credit fundamentals to improve, so even if that happens the firm’s bond spreads probably won’t tighten much, according to Takao Matsuzaka, a credit analyst at Daiwa Securities Group.
The market’s optimism about the company’s creditworthiness is reflected in the drop in the cost to insure its bonds against nonpayment, he said.
Sony credit-default swaps were at 35 basis points, after dropping to 33 basis points last month, the least since 2008, according to CMA data.
“Based on the latest earnings, it’s possible for investors that already hold Sony to keep on holding” its debt, BNP Paribas chief credit analyst Mana Nakazora wrote in a report dated August 8. “But they lack the incentive to increase holdings at current spreads.”


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